Archrock, Inc. quarterly report, Q3 FY2013

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Business context and reporting period

This is Exterran Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company provides natural-gas compression services, fabrication, and aftermarket services. The filing names Exterran Holdings, not Archrock; verify that this is the intended filing for the requested company.

Financial results and liquidity

Unless noted otherwise, amounts are in U.S. dollars. Quarterly and year-to-date comparisons are with the corresponding 2012 periods.

  • Revenue: Q3 revenue was $776.0 million, up 8% from $718.7 million. Nine-month revenue was $2.425 billion, up 23% from $1.965 billion; fabrication accounted for most of the increase.
  • Profit: Net income attributable to Exterran stockholders was $41.0 million in Q3, versus $113.4 million; nine-month income was $100.5 million, versus a $33.7 million loss. Continuing-operations income attributable to stockholders was $23.5 million in Q3 and $51.3 million year to date. Total net income comparisons were materially affected by discontinued operations, including Venezuela-related payments.
  • EPS and adjusted EBITDA: Diluted EPS was $0.62 for Q3 and $1.51 year to date, versus $1.74 and a $0.53 loss, respectively. Adjusted EBITDA, a non-GAAP measure, was $155.9 million in Q3 and $479.3 million year to date, up from $126.4 million and $324.0 million.
  • Margins: Q3 gross margin was $244.8 million, versus $210.7 million. Fabrication margin rose to 19% from 14%; North America contract operations margin rose to 53% from 50%. Nine-month fabrication margin was 16%, versus 12%, while international contract operations and aftermarket services margins weakened.
  • Cash flow and investment: Nine-month operating cash flow was $228.2 million, versus $144.4 million. Capital expenditures were $307.9 million, versus $328.7 million; cash and cash equivalents ended the period at $37.1 million. Working capital was $570.1 million, up from $463.4 million at year-end 2012.
  • Debt and liquidity: Debt totaled $1.564 billion. Exterran reported $629.8 million of available capacity under its revolver; the Partnership separately reported $425.0 million available. Both were in compliance with financial covenants. The company had $337.7 million of 4.25% convertible notes due June 2014, classified as long-term based on management’s stated intent and ability to refinance or convert.

Material changes and unusual items

  • Fabrication revenue increased 48% for the first nine months, and its gross margin doubled to $206.1 million. Management cited higher project revenue, improved project margins, and cost-efficiency initiatives, partly offset by overruns on three large turnkey projects.
  • Q3 stockholder income declined largely because discontinued-operations income was lower than in 2012. Nine-month improvement reflected higher fabrication and North America contract operations margins and substantially lower impairment charges.
  • Fabrication backlog fell to $619.4 million at September 30, from $1.066 billion at December 31, 2012 and $1.240 billion a year earlier. Management said 2013 North America fabrication revenue was expected to exceed 2012 despite lower bookings and backlog.
  • The company completed the sale of its Canadian contract operations and aftermarket services businesses in July 2013, receiving $12.4 million cash plus a note and contingent consideration. It also sold its U.K. fabrication-facility entity and recorded a $11.9 million impairment. Nine-month long-lived asset impairment was $27.1 million, compared with $135.9 million in 2012; the company also continued plans to exit contract water treatment.
  • Venezuela-related receipts remain contingent on future installments: approximately $199 million of principal from the asset sale was due through Q3 2016. The company had not recorded this amount as a receivable and recognizes payments when received. Approximately $44 million due to its Venezuelan joint ventures was also payable through Q1 2016.

Outlook, risks, and contingencies

  • Management expected 2013 net capital expenditures of approximately $300–$325 million, including $100–$110 million of contract-operations maintenance capital. It expected operating cash flow and available credit to fund operations, capital spending, interest, and scheduled debt repayments through December 31, 2014, subject to market conditions.
  • Management cited steady North American activity in shale and liquids-focused areas, offset by declines in mature dry-gas markets. Low natural-gas prices and competitor investment could constrain demand. Profitability initiatives were expected to provide further benefit in 2014.
  • Key exposures include energy-market and customer demand, project execution and cost overruns, foreign exchange and political risk, access to financing, indebtedness, and the Partnership’s distributions. A 1% rise in effective rates on floating-rate debt would increase annual interest expense by approximately $2.8 million, after swaps.
  • A Texas court held the revised heavy-equipment tax statutes unconstitutional as applied to natural-gas compressors; the company intended to appeal. Of $12.8 million in cumulative ad valorem tax benefits recorded, $9.5 million remained disputed, with possible additional payments, penalties, and interest if the company is unsuccessful.
  • Outstanding guarantees had maximum potential undiscounted payments of $290.2 million. The company also disclosed ordinary-course litigation, tax-audit exposure, and substantial self-insurance for workers’ compensation and employee health claims. Management said there were no material changes to previously disclosed risk factors.

Most important facts for investors to verify

  1. Confirm that the Exterran Holdings, Inc. filing is the intended filing for the Archrock request.
  2. Assess how much reported earnings and cash generation depend on future Venezuela installment payments, which were not recorded as a receivable.
  3. Review the sharp decline in fabrication backlog alongside project margins and reported turnkey-project cost overruns.
  4. Confirm refinancing or conversion plans for the $337.7 million convertible notes due in 2014 and monitor covenant headroom.
  5. Track the Texas ad valorem tax appeal and the $9.5 million disputed benefit, including potential penalties and interest.