Filing summary
Entity identification: The request metadata names Archrock, Inc., but the supplied filing is an unaudited Form 10-Q filed by Exterran Holdings, Inc. for the quarter ended June 30, 2010. Confirm that this is the intended filing before relying on this summary.
Business context and reporting period
Exterran provides natural-gas compression services and equipment, production and processing services, fabrication, and aftermarket support. It reports four operating segments: North America contract operations, international contract operations, aftermarket services, and fabrication. The filing covers the three and six months ended June 30, 2010, with comparisons to 2009; amounts below are in U.S. dollars.
Financial performance and liquidity
- Q2 revenue: $643.8 million, down 5% from $678.0 million. Gross margin, defined by the company as revenue less cost of sales excluding depreciation and amortization, was $209.5 million versus $228.3 million. Segment gross margins were 51% in North America contract operations, 67% in international contract operations, 16% in aftermarket services, and 11% in fabrication.
- Q2 earnings: Net income attributable to Exterran stockholders was $17.5 million, or $0.28 per diluted share, compared with a $530.8 million loss, or $8.66 per diluted share, in Q2 2009. Continuing operations recorded a $22.3 million loss; discontinued operations contributed $39.0 million of income.
- First-half results: Revenue was $1.220 billion, down from $1.381 billion. Gross margin was $420.0 million versus $468.5 million. Net income attributable to stockholders was $34.2 million, or $0.55 per diluted share, compared with a $590.2 million loss, or $9.63 per diluted share, in the prior-year period.
- Cash flow, first half: Operating cash flow was $191.8 million ($195.7 million from continuing operations), compared with $141.7 million. Capital expenditures were $109.4 million, down from $228.6 million. Financing activities used $194.6 million, principally reflecting net debt repayments. Cash and cash equivalents fell to $73.8 million from $83.7 million at year-end 2009.
- Balance sheet and debt: Total assets were $4.973 billion and total liabilities were $3.139 billion at June 30. Debt was $2.081 billion, down from $2.261 billion at year-end 2009. Working capital from continuing operations was $535.8 million. Reported borrowing capacity was subject to covenant and asset-based limits: $585.1 million of combined capacity under the company’s revolving and ABS facilities was available, and the Partnership reported approximately $79.3 million available under its facilities.
Material changes versus the prior comparable period
- North America contract operations revenue fell 15% in Q2; average operating horsepower declined 12% and revenue per average operating horsepower declined 3%. Period-end utilization was 65%, versus 72% a year earlier.
- International contract operations revenue rose 37% in Q2, driven by new projects in Indonesia and Brazil and a $19.2 million revenue item from early termination of a Brazilian project. That termination item also lifted the segment’s gross margin percentage.
- Fabrication revenue fell 15% in Q2 and 22% for the first half, reflecting weaker bookings and market conditions. Q2 fabrication margin was also affected by cost overruns on certain compressor and accessory jobs. Backlog was $749.7 million at June 30, down from $944.4 million a year earlier.
- Aftermarket-services Q2 revenue increased 6%, but gross margin declined 22%; management cited more competitive market conditions. First-half revenue was essentially flat and gross margin declined 18%.
- Reported earnings improved markedly from 2009, when results included major impairment charges. The 2010 first-half discontinued-operations income included $40.9 million of payments from PDVSA related to Venezuelan fixed assets and a $12.2 million foreign-exchange translation gain. The 2009 comparison included $377.9 million of Venezuelan expropriation-related impairments.
- Interest expense rose 12% in Q2 and 17% for the first half, despite lower average debt, as the effective borrowing rate increased. Depreciation and amortization also increased, partly due to accelerated depreciation of $11.6 million of installation costs on an early-terminated project.
Outlook, risks, and unusual items
- Management reported improving overall North American activity but said idle and underutilized compression equipment and uncertainty over gas supply, demand, and prices could constrain utilization, pricing, and near-term revenue. It expected international project start-ups to support higher 2010 international contract-operations revenue than in 2009.
- Management expected 2010 net capital expenditures of $225 million to $250 million, including $70 million to $80 million of maintenance capital. Based on then-current conditions, it expected operating cash flow to cover operating needs, capital expenditures, and scheduled debt repayments through December 31, 2010.
- The company stated it was in compliance with its financial covenants at June 30. Its reported covenant ratios were 5.3x EBITDA to interest, 3.7x total debt to EBITDA, and 2.8x senior secured debt to EBITDA. Exterran Partners was also compliant, but its 4.7x debt-to-EBITDA ratio was close to the permitted ceiling; the Partnership warned that, if demand deteriorated and planned transactions or other remedies did not occur, it could breach its covenant as early as 2010. A default could trigger cross-defaults and accelerated repayment.
- In July 2010, Exterran announced a planned sale to its Partnership of customer agreements and approximately 580 compressor units for about $214 million, expected to close in August. Consideration included Partnership units. The transaction and related covenant relief were prospective, not completed as of the reporting date.
- Exterran’s Venezuelan assets and operations had been taken over by PDVSA. The company filed for ICSID arbitration and said ultimate compensation was uncertain; it recorded no gain for the unresolved compensation claim. It had collected $50 million under political-risk insurance in January 2010.
- Other risks include potential additional borrowing limits, higher refinancing costs for the Partnership’s October 2011 facility, oil-and-gas market exposure, foreign-exchange movements, operational hazards, and proposed air-emissions and greenhouse-gas rules that could raise compliance costs. The filing identifies maximum potential payments of $420.6 million under specified letters of credit and bonds; these are guarantees, not reported liabilities.
Most important facts for investors to verify
- Confirm the registrant and ticker: the filing is for Exterran Holdings, Inc., not identified in the filing as Archrock, Inc.
- Assess recurring operating performance separately from the $40.9 million Venezuelan project payment and the $12.2 million currency gain; discontinued-operations results are not a straightforward measure of ongoing earnings.
- Review North American compressor utilization, pricing, fabrication bookings and backlog, and whether international project growth can offset weakness elsewhere.
- Check actual borrowing availability, covenant headroom, and the Partnership’s ability to complete the planned acquisition and address its debt-to-EBITDA limits.
- Verify the August 2010 Partnership transaction’s closing, consideration, and covenant effects, and monitor the unresolved Venezuelan compensation claim and potential regulatory compliance costs.