Business context and reporting period
This unaudited Form 10-Q is for the quarter and nine months ended September 30, 2010. The filing’s registrant is Exterran Holdings, Inc., not Archrock, Inc.; investors should verify that this is the intended filing. Exterran provides natural-gas compression, production and processing equipment and services, aftermarket services, and fabrication. Results exclude the expropriated Venezuelan contract operations and aftermarket businesses from continuing operations and report them as discontinued operations.
Financial and operating metrics
Dollar amounts below are in millions unless otherwise stated.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $625.6 | $679.7 | $1,845.8 | $2,060.9 |
| Gross margin (non-GAAP) | $195.0 | $229.9 | $615.0 | $698.5 |
| Gross margin as % of revenue | 31.2% | 33.8% | 33.3% | 33.9% |
| Income (loss) from continuing operations | $(17.0) | $22.6 | $(33.0) | $(223.7) |
| Net income (loss) attributable to Exterran stockholders | $(18.0) | $18.2 | $16.2 | $(572.0) |
| Basic EPS | $(0.29) | $0.30 | $0.26 | $(9.33) |
- Revenue fell 8% in Q3 and 10% year to date. In Q3, international contract operations revenue rose 16%, but North America contract operations fell 9%, aftermarket services gross margin fell 47%, and fabrication revenue fell 18%.
- For the nine months, international contract operations revenue rose 25%, while North America contract operations fell 15%, aftermarket gross margin fell 27%, and fabrication revenue fell 21%.
- Q3 SG&A was $88.2 million (14% of revenue); depreciation and amortization was $98.5 million; interest expense was $33.1 million. Nine-month interest expense was $98.6 million.
- Nine-month net income includes $48.1 million of income from discontinued operations, including $40.9 million of PDVSA-related asset payments and approximately $12.2 million of Venezuelan bolivar remeasurement gain. Continuing operations remained loss-making.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $248.2 million, down from $324.5 million. Capital expenditures were $168.5 million, versus $303.6 million; the filing reports $63.0 million of net investing cash inflow and $311.6 million of financing cash outflow.
- Cash and cash equivalents were $81.4 million at September 30, versus $83.7 million at year-end 2009; restricted cash was $7.4 million. Working capital from continuing operations was $530.9 million.
- Total debt was $1,971.3 million, down from $2,260.9 million at year-end 2009. Total assets were $5,004.9 million and total equity was $1,921.0 million.
- At September 30, the company reported $449.1 million of combined additional borrowing capacity under its revolving credit and ABS facilities, subject to covenant limits. It was in compliance with its financial covenants; total debt/EBITDA was 3.9x, senior secured debt/EBITDA 2.9x, and EBITDA/interest 4.6x.
Material changes, outlook and risks
- North American contract operations remained pressured: average operating horsepower and pricing declined year over year, and management cited idle competitor and customer equipment as obstacles to near-term utilization and pricing improvement. Total fleet utilization was 69% at quarter-end, down from 72% a year earlier.
- Fabrication backlog was $690.9 million at September 30, down from $812.5 million at December 31, 2009. Management attributed lower fabrication revenue and backlog to weaker bookings and market conditions. Competition also pressured fabrication margins.
- Management expected 2010 net capital expenditures of $200–$220 million, including $70–$80 million for maintenance. Based on then-current conditions, it expected operating cash flow to cover operating needs, capital expenditures, and scheduled debt repayments through December 31, 2010. This is a dated expectation, not a current forecast.
- On August 20, the Partnership acquired 43 customer agreements and approximately 580 compressor units (about 255,000 horsepower) from Exterran for approximately $214 million, paid through issuance of Partnership units. Exterran also sold Partnership units for $109.4 million net and used the proceeds to repay its own debt.
- On November 3, 2010, after quarter-end, the Partnership refinanced with a five-year, $550 million secured credit facility, repaid its prior credit and ABS facilities, and paid $14.8 million to terminate interest-rate swaps. Management noted the new facility increased borrowing rates; new swaps were planned but not assured.
- Exterran had filed an ICSID arbitration claim against Venezuela over seized assets and investments. Ultimate compensation remained uncertain and no gain contingency was recorded. The company had collected $50 million under political-risk insurance in January 2010; certain future recoveries may first reimburse the insurer.
- Risk factors include energy-market demand and pricing, customer contract renewals and credit, leverage and refinancing access, foreign exchange and political risk, and potential costs from new or proposed air-emissions and greenhouse-gas regulation. The company challenged aspects of an EPA rule and said compliance costs were not yet predictable.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material off-balance-sheet arrangements were reported.
Most important facts to verify
- Confirm the registrant identity: this filing is for Exterran Holdings, Inc., despite the request identifying Archrock, Inc.
- Assess recurring continuing-operations performance separately from the Venezuela-related discontinued-operations gains and recoveries.
- Review debt-covenant headroom, borrowing availability, refinancing terms, and the effects of higher Partnership borrowing costs and swap termination.
- Track North American horsepower utilization, segment margins, fabrication backlog, and whether the stated capital-spending and cash-flow expectations were achieved.
- Verify the status and potential financial impact of the Venezuela arbitration, environmental regulations, guarantees, and other disclosed contingencies.