Archrock, Inc. — 2014 Q1 filing summary
Filing identity: The supplied filing is Exterran Holdings, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2014—not a filing under the name Archrock, Inc. The summary below reflects the filing as submitted.
Business context and reporting period
Exterran provides natural-gas compression services, aftermarket services, and fabricated equipment for the oil and gas industry. Its four reportable segments are North America contract operations, international contract operations, aftermarket services, and fabrication. Results compare the three months ended March 31, 2014 with the same period in 2013. Venezuelan, Canadian, and contract water-treatment operations are reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $643.0 million | $809.9 million |
| Gross margin (non-GAAP) | $233.5 million; 36.3% of revenue | $224.7 million; 27.7% of revenue |
| Income from continuing operations | $16.2 million | $25.3 million |
| Net income attributable to Exterran stockholders | $32.6 million | $50.2 million |
| Diluted EPS | $0.47 | $0.76 |
| Adjusted EBITDA (non-GAAP) | $144.8 million | $146.1 million |
| Operating cash flow | $53.9 million | $22.7 million |
| Capital expenditures | $99.2 million | $107.0 million |
| Cash and cash equivalents | $61.5 million | $35.7 million at Dec. 31, 2013 |
| Total debt | $1.585 billion | $1.502 billion at Dec. 31, 2013 |
| Working capital | $651.9 million | $580.4 million at Dec. 31, 2013 |
Net cash used in investing activities was $83.9 million; financing activities provided $60.3 million. Cash from continuing operating activities less capital expenditures was negative $46.4 million. The company reported $704.4 million of available capacity under its revolving credit facility, after letters of credit. It reported compliance with its financial covenants; the filing gives covenant ratios within their specified limits.
Material changes versus the prior comparable period
- Revenue fell 21%, primarily because fabrication revenue declined 37% to $287.4 million. Fabrication gross margin nevertheless increased to $57.8 million from $56.4 million, with margin rising to 20% from 12%, reflecting improved pricing and product mix and prior-year project cost overruns.
- International contract operations gross margin increased 10% to $70.0 million, while North America contract operations gross margin declined 2% to $85.4 million. Aftermarket services gross margin rose 11% to $20.2 million.
- Net income attributable to stockholders declined mainly because discontinued-operations income was lower and SG&A increased. SG&A rose 9% to $92.6 million, including an $8.6 million increase in compensation and benefits; SG&A was 14% of revenue versus 10%.
- Operating cash flow improved, primarily because of lower working-capital outflows and improved international contract-operations gross margin. Debt increased by about $83 million from year-end.
- Period-end horsepower utilization was 82%, versus 84% a year earlier. Fabrication backlog was $669.1 million, down from $994.0 million a year earlier.
Outlook, commentary, risks, and unusual items
- Management expected 2014 net capital expenditures of approximately $500–$550 million, including $100–$110 million for contract-operations maintenance. It anticipated spending more on contract-operations capital in 2014 than in 2013.
- Management said operating cash flow and credit availability were expected to fund operating needs, capital expenditures, scheduled interest, and debt repayments through December 31, 2014, while noting additional financing could be sought if needed. It expected further positive effects from profitability initiatives during 2014.
- In January 2014, Exterran began centralizing make-ready operations and planned to close several shops, with completion expected by mid-2014. Q1 restructuring charges were $4.8 million; approximately $0.8 million of additional charges were estimated.
- The $349.9 million carrying amount of 4.25% convertible notes matured in June 2014 and became convertible at holders’ discretion from March 15 through June 12. Management stated it intended and was able to refinance the maturity using credit-facility borrowings and/or conversion into shares. This was a significant near-term refinancing or dilution consideration.
- After quarter-end, the Partnership completed the $362.8 million MidCon acquisition on April 10, funded partly through an equity offering and $350 million of new 6% notes due 2022. The acquired fleet was covered by a seven-year services agreement with Access; Access was expected to represent approximately 15% of Partnership revenue, creating customer-concentration exposure. Acquisition integration and realization risks were disclosed.
- PDVSA Gas owed approximately $166 million of principal for the Venezuelan asset sale, payable through Q3 2016; the amount was not recorded as a receivable, and future installments would be recognized as received. Venezuela joint ventures separately had about $35 million of principal due through Q1 2016, also not recorded as a receivable.
- Exterran recorded a $2.3 million Q1 ad valorem tax benefit under a disputed Texas appraisal methodology. Of $17.1 million in cumulative benefits recorded since 2012, $13.8 million was disputed and in litigation. An adverse outcome could require repayment, potentially with interest and penalties, and increase future costs.
- The company initiated a quarterly dividend of $0.15 per share, paying $10.0 million in Q1; a further $0.15 dividend was declared after quarter-end. Management cautioned future dividends were discretionary and subject to financial and contractual conditions.
- Other disclosed risks include energy-market demand and commodity-price changes, foreign-exchange exposure, customer credit, access to capital, safety and operating hazards, and counterparty performance. A 1% rise in effective rates on floating-rate debt was estimated to increase annual interest expense by approximately $2.9 million.
Most important facts for investors to verify
- Confirm the issuer and reporting entity: the source document names Exterran Holdings, Inc., despite the request identifying Archrock, Inc.
- Review the outcome and settlement method for the June 2014 convertible-note maturity, including any refinancing, cash needs, or share dilution.
- Track PDVSA installment collections and the status of the Texas ad valorem tax litigation and recorded benefits.
- Assess the MidCon acquisition’s financing, integration, returns, and Access concentration, including subsequent-period results.
- Compare actual 2014 capital spending and cash generation with management’s $500–$550 million capex plan and liquidity outlook.