Archrock, Inc. — 2011 Third-Quarter Form 10-Q Summary
Entity identification: The supplied filing is for Exterran Holdings, Inc., not Archrock, Inc. Investors should verify that this is the intended filing. The unaudited reporting period ended September 30, 2011; results are compared with 2010. Unless stated otherwise, amounts below are in U.S. dollars.
Business context and reporting period
Exterran provided natural-gas compression and related contract operations, aftermarket services, and equipment fabrication. It consolidated Exterran Partners, L.P.; public unitholders held 65% of the Partnership at quarter-end. The filing reports four operating segments: North America contract operations, international contract operations, aftermarket services, and fabrication.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2011 | $704.5 million | $1,980.5 million |
| Revenue, 2010 | $625.6 million | $1,845.8 million |
| Net income (loss) attributable to Exterran stockholders, 2011 | $(216.0) million | $(274.0) million |
| Net income (loss) attributable to Exterran stockholders, 2010 | $(18.0) million | $16.2 million |
| Adjusted EBITDA, 2011 | $99.7 million | $280.0 million |
| Adjusted EBITDA, 2010 | $104.6 million | $349.0 million |
| Gross margin, 2011 | $189.4 million | $551.0 million |
| Gross margin, 2010 | $195.0 million | $615.0 million |
Revenue rose about 13% in the quarter and 7% year to date, chiefly on higher North American fabrication sales. Gross margin declined about 3% in the quarter and 10% year to date; adjusted EBITDA fell about 5% and 20%, respectively. Adjusted EBITDA and gross margin are non-GAAP measures.
- Segment trends: Q3 aftermarket services revenue increased 30% and gross margin increased 140%, including a $3.9 million retroactive contract-rate adjustment in Gabon. Fabrication revenue rose 19%, but gross margin fell 38% and its margin rate declined from 17% to 9%. North America contract operations revenue and gross margin were essentially flat. International contract operations gross margin rose 1% in Q3, but year-to-date revenue and gross margin fell 6% and 14%.
- Cash flow: Nine-month operating cash flow was $74.5 million, down from $248.2 million. Capital expenditures were $178.9 million; investing cash flow was $150.8 million, supported by $289.9 million of net Partnership-unit sale proceeds. Financing used $237.8 million. Cash declined $15.0 million to $29.6 million.
- Balance sheet: At September 30, total debt was $1.709 billion, down from $1.897 billion at December 31, 2010. Total assets were $4.437 billion and total equity $1.742 billion. Working capital was $451.0 million; unrestricted cash was $29.6 million.
- Borrowing capacity and covenants: The new five-year, $1.1 billion secured revolver had $375.5 million drawn and $507.9 million undrawn, but leverage limits left only $196.4 million available for additional borrowing. Exterran reported compliance with its covenants; its consolidated debt-to-adjusted-EBITDA ratio was 4.3x against a 5.0x maximum, and interest coverage was 3.8x against a 2.25x minimum. The Partnership separately reported 3.7x debt-to-EBITDA against a temporarily permitted 5.25x ceiling.
- Margins and unusual charges: Q3 included a $196.1 million goodwill impairment, fully impairing goodwill in aftermarket services and fabrication after a stock-price and market-capitalization decline. Nine-month interest expense was $110.4 million, up 12%; foreign-currency losses contributed to higher other expense. The reported net loss also includes discontinued-operation losses related to Venezuela.
Outlook, risks, and contingencies
- Management expected operating cash flow and credit availability to fund operations, capital expenditures, interest, and scheduled debt repayments through December 31, 2011, while noting it might seek financing if needed. Planned 2011 net capital expenditures were approximately $230–$240 million.
- Management described increased North American drilling and fabrication orders, but said idle compression supply and low natural-gas prices could constrain utilization and pricing. It had not seen a 2011 recovery in international fabrication bookings and warned this could weigh on 2012 revenue.
- An October 10, 2011 workforce-cost program was expected to produce $20–$25 million of annual savings. The company estimated a further $11–$14 million of restructuring charges, mostly cash costs, with implementation extending into the first half of 2012.
- Venezuelan authorities took control of substantially all Exterran operations and assets there in 2009. Exterran had received $50 million in expropriation insurance proceeds and was pursuing ICSID arbitration; a hearing was scheduled for July 2012. The company said it could not predict whether or how much additional compensation it would receive.
- Other disclosed risks included energy-market and customer demand, competition, currency movements, customer credit, execution and workforce risks, access to capital, debt covenant compliance, and environmental regulation. New or proposed emissions rules could require equipment or compliance spending; the cost and final requirements were uncertain. The filing states ordinary-course litigation was not expected to have a material effect, but cannot assure outcomes.
- The filing said no material off-balance-sheet arrangements existed. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Exterran Holdings, Inc.’s 2011 10-Q is actually the intended filing for Archrock, Inc.
- The drivers and cash-flow implications of the $196.1 million goodwill impairment and continuing gross-margin and adjusted-EBITDA pressure.
- Actual liquidity under the revolver after covenant restrictions, and ongoing compliance with both Exterran and Partnership debt covenants.
- Whether the planned workforce savings are achieved and whether restructuring costs remain within the estimated range.
- Progress and potential recovery from the Venezuela arbitration, and the ultimate cost of environmental compliance.