Business context and reporting period
Archrock, Inc. (then Exterran Holdings, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Results for these periods include the international contract operations, aftermarket services and fabrication businesses that were spun off on November 3, 2015 as Exterran Corporation. Archrock retained the U.S. contract operations and U.S. aftermarket services businesses and continues to own interests in Archrock Partners, L.P. Accordingly, historical results in this filing are not directly representative of Archrock’s post-spin business.
Financial results and key metrics
Third quarter 2015, versus third quarter 2014: Revenue was $649.5 million, down 10% from $723.8 million. Gross margin was $239.8 million versus $266.5 million. Net loss attributable to Exterran stockholders was $6.3 million, compared with net income of $34.1 million; diluted loss per share was $0.09 versus diluted earnings per share of $0.48. Adjusted EBITDA, a non-GAAP measure, was $155.1 million versus $170.6 million.
First nine months of 2015, versus first nine months of 2014: Revenue was $2.062 billion, down 2% from $2.106 billion. Gross margin was $755.6 million, approximately flat with $755.9 million. Income from continuing operations was $6.9 million versus $43.4 million; net income attributable to Exterran stockholders, including discontinued operations, was $24.4 million versus $79.0 million. Diluted earnings per share were $0.35 versus $1.12. Adjusted EBITDA was $499.5 million versus $476.6 million.
Business lines: Third-quarter revenue declined in international contract operations (8%), aftermarket services (14%) and fabrication (16%); North America contract operations revenue was roughly flat. Fabrication gross margin fell 44% to $34.3 million and its margin rate declined to 13% from 20%. For the nine months, North America contract operations gross margin increased 17% to $350.4 million, while international contract operations gross margin declined 6% to $219.8 million and fabrication gross margin declined 23% to $125.1 million.
Cash flow and investment: Nine-month cash from operating activities was $315.8 million, including $312.4 million from continuing operations. Capital expenditures were $350.3 million, versus $385.7 million in the prior-year period. Investing activities used $274.8 million, compared with $796.6 million, which included prior-year acquisition spending. Cash and cash equivalents were $32.5 million at September 30, down from $39.7 million at December 31, 2014. Working capital was $705.4 million, up from $655.0 million.
Debt and liquidity: Long-term debt was $2.076 billion at September 30, 2015, compared with $2.027 billion at year-end 2014. The company had $461.5 million of undrawn availability under its credit facility; the Partnership had $346.0 million available on its revolver. Both were in compliance with financial covenants. The company reported $534.0 million of debt effectively subject to floating rates after swaps; a 1 percentage-point rate increase was estimated to add about $5.3 million to annual interest expense. The quarterly dividend remained $0.15 per share.
Material changes, outlook and notable items
- Management attributed weaker results mainly to lower fabrication and international margins, a $35.6 million nine-month foreign-currency remeasurement loss on intercompany obligations, higher impairment and restructuring charges, and lower Venezuelan installment receipts. The currency losses were substantially affected by the Brazilian real devaluation.
- Long-lived asset impairment charges were $51.9 million for the nine months, including write-downs associated with retiring or reducing the expected proceeds from idle compressor units. Restructuring and other charges were $36.4 million, including spin-off costs and a cost-reduction program. Management expected an additional $20–$30 million of spin-off costs and approximately $2.5 million of further cost-reduction charges.
- Lower commodity prices and customer budget cuts pressured activity and pricing. North American operating horsepower decreased 3% during the nine months; total horsepower utilization was 83% at quarter-end versus 84% a year earlier. Fabrication backlog was $516.2 million, down 39% year over year. Management said 2016 fabrication bookings could be comparable to or below 2015 if low customer spending persists.
- Management expected 2015 net capital expenditures of approximately $380–$410 million, including $260–$280 million for contract-operations growth and $95–$105 million for contract-operations maintenance. It expected operating cash flow and credit availability to cover operating costs, capital spending, scheduled debt service and anticipated dividends through year-end 2015, subject to market conditions.
- Following the spin-off, Archrock received $532.6 million from Exterran Corporation subsidiaries. On November 3, 2015, it terminated its former credit facility and repaid its outstanding borrowings; it called its $350 million 7.25% notes on November 4, with redemption expected 30 days after the call. A new $350 million Archrock revolving facility became available after the spin-off.
- The company had not recorded as a receivable approximately $83 million of remaining principal due from PDVSA Gas for previously nationalized Venezuelan assets; future receipts are recognized when received. It received a further $19.1 million installment in October 2015. The filing also disclosed a potential $45–$65 million fourth-quarter valuation allowance for foreign tax credit carryforwards following the spin-off.
- A Texas ad valorem tax appraisal dispute is material: the company had recorded $38.3 million of cumulative tax benefits, of which $28.1 million was disputed. An adverse outcome could require repayment, potentially with penalties and interest, and could increase future costs. Other disclosed risks include weak energy markets, customer spending reductions, foreign-exchange and repatriation restrictions, counterparty performance, leverage and the collectability of Venezuelan payments. A further $25 million payment to Archrock is contingent on Exterran Corporation completing a qualifying capital raise under the separation arrangements.
Important facts for investors to verify
- Review post-spin financial statements and debt allocation to distinguish Archrock’s continuing U.S. businesses from the pre-spin consolidated results summarized here.
- Confirm the completed use of the $532.6 million separation proceeds, the status and final cost of redeeming the 7.25% notes, and borrowing levels under the new credit facility.
- Track fabrication bookings, backlog, margins and compressor utilization against management’s outlook, as well as actual 2015 capital expenditures.
- Monitor cash conversion, covenant headroom and Partnership distributions, including the Partnership’s leverage relative to its covenant limits.
- Verify collections of remaining PDVSA installments and whether the contingent $25 million payment and foreign-tax-credit valuation allowance are realized as described.
- Follow outcomes of the Texas appraisal litigation and any related tax repayment, penalties, interest or changes to ongoing tax expense.