Archrock, Inc. quarterly report, Q3 FY2014

Business context and reporting period

This is Exterran Holdings, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2014, filed November 4, 2014. The request identifies Archrock, Inc., but the supplied filing names Exterran Holdings, Inc. as the registrant. Exterran provides natural-gas compression and related contract operations, aftermarket services, and fabrication. Results exclude Venezuela, Canadian operations, and the contract water-treatment business, which are reported as discontinued operations.

Financial performance

Amounts below are in millions of U.S. dollars unless noted.

• Q3 revenue fell 7%, mainly because fabrication revenue declined 23%; North America contract operations revenue increased 25%. Nine-month revenue fell 13%, mainly because fabrication revenue declined 30%.
• Q3 gross margin improved despite lower revenue; gross margin percentage was approximately 36.8%, compared with 31.6% a year earlier. Nine-month gross margin rose, but net income and adjusted EBITDA were lower year over year.
• For the nine months, operating cash flow was $280.1 million, capital expenditures were $385.7 million, and investing cash flow was negative $796.6 million, including $494.8 million for MidCon acquisitions. Financing cash flow was positive $518.4 million. Cash ended at $33.8 million, versus $35.7 million at year-end 2013.
• At September 30, 2014, total debt was $1.958 billion, up from $1.502 billion at December 31, 2013. Working capital was $617.9 million. Exterran had $387.1 million of available capacity under its revolving facility; the Partnership had $270.0 million available under its revolver.
• The company declared and paid dividends of $0.15 per share in each of the first three quarters of 2014. A further $0.15 quarterly dividend was declared after quarter-end.

Material changes and business developments

• The Partnership acquired compression assets from MidCon in April and August 2014 for reported consideration of $352.9 million and $130.1 million, respectively. The acquired fleets added approximately 444,000 and 110,000 horsepower. The April acquisition included a seven-year service agreement with Access; the August acquisition included a five-year agreement with BHP Billiton.
• North America operating horsepower increased, reflecting the acquisitions and organic growth; total period-end horsepower utilization was 84%, compared with 82% a year earlier. Fabrication backlog was $839.9 million at September 30, up from $619.4 million a year earlier.
• Debt increased to fund acquisitions and other needs. The company redeemed its 4.25% convertible notes in June for $370 million in cash and 6.8 million shares, financed the cash portion with revolver borrowings, and issued treasury shares upon warrant exercises.
• Q3 long-lived asset impairment was $12.4 million. Nine-month impairment was $26.0 million, including charges related to idle compressor units. The company also recorded $5.4 million of nine-month restructuring charges after centralizing make-ready operations and closing several shops.

Outlook, risks, and contingencies

• Management expected operating cash flow and credit availability to fund operating and capital spending, scheduled debt service, and anticipated dividends through December 31, 2014. 2014 net capital expenditure guidance was approximately $500–$550 million, including $100–$110 million of maintenance capital. These are forward-looking estimates, not guarantees.
• Management cited steady activity in North American shale and liquids-focused areas, but noted declines in mature dry-gas markets and recent weakness in oil prices. North American fabrication bookings and backlog improved, although management did not expect backlog to return to 2012 highs.
• Access represented approximately 14% of the Partnership’s revenue during the six months ended September 30, 2014. The filing identifies dependence on Access and successful integration and performance of the MidCon acquisitions as risks that could affect Partnership distributions to Exterran.
• Payments due from PDVSA Gas for the Venezuelan asset sale included approximately $133 million of remaining principal at September 30, 2014, payable through Q3 2016. The company had not recorded this as a receivable and recognizes future installments as income when collected. A further approximately $26 million was due to Venezuelan joint ventures through Q1 2016, also recognized as received.
• Texas ad valorem tax litigation remained unresolved. The company recorded an $8.8 million benefit in the first nine months of 2014; $17.4 million of the cumulative benefit was disputed. An adverse outcome could require repayment, penalties and interest, and higher future tax expense.
• Other exposures include foreign-exchange restrictions and losses in Argentina, interest-rate changes, customer and counterparty credit risk, operating hazards, and potential acquisition liabilities. The company reported compliance with its and the Partnership’s financial covenants at quarter-end; disclosure controls were assessed as effective.

Important facts for investors to verify

1. Confirm the intended issuer: the supplied 10-Q is for Exterran Holdings, Inc., not Archrock, Inc.
2. Track fabrication revenue and margins, and whether the reported backlog converts into profitable work.
3. Assess acquisition integration, leverage and interest costs, and the Partnership’s dependence on Access and its distributions.
4. Monitor cash generation relative to the $500–$550 million capital-spending outlook, dividends, and debt maturities and covenant headroom.
5. Verify collections from PDVSA Gas and the outcome of the Texas ad valorem tax litigation.