Business context and reporting period
Filing identity: The supplied filing is Exterran Holdings, Inc.’s Form 10-K, ticker EXH—not an Archrock filing. It covers the fiscal year ended December 31, 2011; it is not a standalone Q4 report. The filing also provides unaudited quarterly results.
Exterran provides natural-gas compression and oil and gas production, processing, fabrication, and aftermarket services. Its four reporting segments are North America contract operations, international contract operations, aftermarket services, and fabrication. It consolidates Exterran Partners, L.P.; public unitholders held 65% of the Partnership at year-end.
Financial performance and liquidity
Amounts below are in U.S. dollars; annual figures are for 2011 versus 2010 unless otherwise stated.
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Revenue | $2,683.5 million | $2,461.5 million | Up 9% |
| Gross margin | $738.1 million | $804.5 million | Down 8%; margin was approximately 27.5% versus 32.7%. Gross margin is non-GAAP. |
| Net loss attributable to Exterran stockholders | $340.6 million | $101.8 million | Loss widened; 2011 included $196.8 million goodwill impairment. |
| Adjusted EBITDA | $398.7 million | $448.3 million | Down 11%; non-GAAP. |
| Cash from operating activities | $120.3 million | $364.4 million | Continuing-operations cash flow was $119.0 million versus $368.3 million. |
| Capital expenditures | $282.8 million | $236.0 million | Approximate continuing-operations cash flow less capex was negative $163.8 million. |
| Cash / working capital at year-end | $22.0 million / $454.0 million | $44.6 million / $402.4 million | Cash declined; working capital increased. |
| Debt at year-end | $1,773.0 million carrying value | $1,897.1 million | Contractual debt obligations were $1,827.9 million at face value, including convertible-note discount differences. |
The company reported $449.9 million of undrawn capacity under its revolver, but covenant limits left $190.3 million available for additional borrowing. It was in compliance with debt covenants at year-end. The current ratio, as a specific reported metric, is not provided in the filing text.
Segment results
| Segment | 2011 revenue | 2011 gross margin | 2010 gross margin |
|---|---|---|---|
| North America contract operations | $603.5 million | $293.5 million (49%) | $307.4 million (51%) |
| International contract operations | $445.1 million | $260.7 million (59%) | $289.8 million (62%) |
| Aftermarket services | $409.4 million | $60.8 million (15%) | $45.8 million (14%) |
| Fabrication | $1,225.5 million | $123.2 million (10%) | $161.5 million (15%) |
Material changes versus the prior comparable period
- Revenue increased, driven in part by stronger North American fabrication activity and higher aftermarket services revenue. Fabrication margin fell as costs rose faster than revenue, including weaker margins at Belleli and on certain Eastern Hemisphere projects.
- Contract operations margins declined in both North America and internationally. North America cited higher lube oil and fuel costs and costs to deploy idle equipment; international results were affected by inflation and the absence of a prior-year Brazilian project termination benefit.
- Operating cash flow fell sharply, principally due to greater working-capital use and lower operating gross margin. The company also spent more on capital expenditures.
- Debt declined from 2010, while interest expense rose 10% to $149.5 million, reflecting refinancing at higher rates, partly offset by lower average debt.
- Fabrication backlog was $665.7 million at year-end, down from $703.5 million. Compressor and accessory backlog rose to $249.7 million; production and processing equipment backlog fell to $416.0 million.
- North America available horsepower declined, while year-end utilization was 78% overall, unchanged from 2010. North America utilization improved from 77% to 79%; international utilization fell from 82% to 76%.
Outlook, risks, contingencies, and unusual items
- Management expected 2012 net capital expenditures of $325–$375 million, including $105–$115 million of contract-operations maintenance capital. It expected operating cash flow and credit availability to cover operating needs, capex, scheduled interest, and debt repayments through December 31, 2012; additional financing could be sought if needed.
- A workforce cost-reduction program was expected to generate $20–$25 million of annual savings. The company recorded $11.6 million of 2011 restructuring charges and estimated a further $3.1 million of charges.
- Management cited low North American natural-gas prices, high storage, and production exceeding consumption as risks to drilling and demand, particularly in dry-gas areas. Other key risks include competition and pricing, short initial terms on many North American contracts, fixed-price project overruns, customer credit, international political and currency risks, supplier constraints, regulation, and substantial leverage.
- Goodwill impairment was $196.8 million in 2011, fully impairing goodwill in the aftermarket services and fabrication reporting units. Long-lived asset impairment was $7.0 million. In 2010, the company had recorded a $136.0 million impairment on idle compressor units it planned to sell; further impairment remained possible if sale proceeds were below estimates.
- Venezuela operations were expropriated in 2009 and are reported as discontinued operations. Exterran’s arbitration against Venezuela was scheduled for July 2012; the company said compensation, if any, and its timing were uncertain. 2011 discontinued-operations loss was $6.0 million.
- Foreign-currency loss was $17.1 million in 2011, compared with a $5.4 million gain in 2010. After interest-rate swaps, $264.0 million of debt was effectively floating-rate; a 1 percentage-point rate increase was estimated to add about $2.6 million in annual interest expense.
- Environmental rules, including engine-emissions requirements, could increase compliance costs; the company could not reliably estimate some future costs. It reported ordinary-course litigation and stated that it did not expect aggregate outcomes to materially affect its financial position, results, or cash flows, while noting litigation uncertainty. No material off-balance-sheet arrangements were reported.
- For Q4 2011, revenue was $702.9 million and net loss attributable to stockholders was $66.6 million; the third-quarter loss was $216.0 million, largely reflecting the goodwill impairment. The company reported no cash dividends on its common stock and did not expect to pay them in the foreseeable future.
Most important facts for investors to verify
- Confirm the issuer and period: this is Exterran Holdings’ 2011 annual filing, not an Archrock filing or a Q4-only filing.
- Review the full audited statements and notes for debt maturities, covenant calculations, and the difference between carrying-value debt and contractual face obligations; roughly $499 million of debt was due in 2014.
- Assess whether operating cash generation can support the planned $325–$375 million of 2012 capex and scheduled debt service, given year-end cash of $22 million and covenant-limited revolver availability.
- Track fabrication margins and backlog conversion, contract-operations utilization, and whether the announced cost savings are achieved without weakening service capacity.
- Monitor the Venezuela arbitration, potential environmental compliance spending, customer and foreign-exchange exposures, and the realization of estimated proceeds from idle fleet sales.
The filing reports an unqualified audit opinion on the consolidated financial statements and states that internal control over financial reporting was effective as of December 31, 2011.