To our Stockholders,
In 2016, the oil and gas industry completed its second full year of a deep cyclical downturn. The year started with
Brent crude prices, the international benchmark for oil prices, dropping to $26 per barrel, extending the
commodity’s steepest decline in 30 years, while natural gas prices were also lower than the prior year. As a result,
energy producers continued to drive down costs, investing only in basins where high returns for production
growth could be quickly maximized. Internationally, many national oil companies focused on lowering internal
costs and sought alternative sources of capital and partnering to develop their projects.
Global oil and gas spending dropped 42% over the past two years, including 62% in North America. The industry
experienced significant bankruptcies and layoffs. The impact of this severe downturn made its way to midstream
infrastructure companies, including Exterran. Revenue of $1,029.3 million in 2016 represented a decline of 43%,
most of which came from our oil and gas product sales segment as customers worked through their inventory and
curtailed spending on new equipment.
Our service-oriented contract operations business, a recurring, fixed-fee base business focused on owning and
operating natural gas-oriented, midstream infrastructure assets for international energy producers, shielded us
from the deepest troughs of this downturn. Despite a 16% decline in our contract operations segment revenue,
most of which came from the early termination of one project in early 2016, this business outperformed several
industry activity indicators. For instance, international upstream spending by resource holders declined 25% to
30%, based on various industry estimates. This speaks to the relative resiliency and stability of our service
business model, as well as our exposure to required natural gas infrastructure investment and initiatives taking
place around the world.
2016: A year to “Restore,” Manage Cash, Reduce Debt
Managing through the ongoing market downturn was only one challenge. We also focused on completing a
financial restatement. On April 26, 2016, we announced that senior management had identified errors relating to
the application of percentage-of-completion accounting principles to certain non-core business lines. We named
our financial restatement process “Project Restore” as we sought to not only restore our financial statements, but
restore stakeholder trust and implement a culture of accountability, credibility and responsibility. We met all the
challenges head on, restoring our financials, charting a course for stiffer internal controls and process
improvements, and sizing our Company for the market ahead.
The restatement was successfully completed when the Company became current with its financial reporting and
stock exchange filing requirements on January 4, 2017. We continue to actively address our operating structure
and staffing, controls and processes. Importantly, we have taken actions and identified additional remediation
steps to create an enhanced internal control environment stressing accountability, competence, transparency and
coordination. We believe our financial, accounting and reporting infrastructure and processes will be stronger,
and our internal controls more rigorous, as we prioritize the highest standards of financial reporting and ethical
behavior across the Company.
Concurrent with the financial restatement process, we implemented plans and strategies to partially offset reduced
revenue and profit opportunities. Our overriding goals were to maximize cash flow and prioritize debt reduction.
We reduced working capital through improved planning, lower inventory levels, better visibility to cash
collections and improved vendor terms. We also reduced overall costs through headcount reductions, idling or
closing non-strategic manufacturing facilities, and lowering, deferring and eliminating expenses in several non-
compensation cost categories. Base pay merit increases were suspended, and participation in both our short-term
and long-term incentive plans were reduced or eliminated. We changed our incentive compensation plans to align
with goals and metrics that would support our 2016 objectives.
To position the Company for long-term success, we enhanced organizational capabilities and leadership across
key operational, management and support functions. We added new talent to positions integral to our success and
vision, implemented a solutions-selling approach to sales and initiated cultural changes throughout our operational
functions to align with our customer-first focus. We are also resetting our safety culture and philosophy, re-
enforcing our commitment to safety discipline.
Several positive outcomes came from our efforts. We increased operating cash flows to $263.5 million in 2016 as
compared with $130.5 million in 2015, as working capital was reduced by 56% from December 31, 2015 levels.
We utilized this cash to reduce $177 million of debt in 2016. Long-term debt at December 31, 2016 was $349
million, a 34% reduction from long-term debt of $526 million at December 31, 2015. As a result, we maintained a
leverage ratio (debt-to-EBITDA) of between 2.0 and 2.3 times by virtually matching the dollar-for-dollar
reduction in EBITDA due to market conditions, with debt reduction made possible by generating cash through the
initiatives and results highlighted above. Selling, general and administrative (SG&A) expense in 2016 was
reduced by 25% from 2015. We enter 2017 as a leaner company. Our fourth quarter 2016 SG&A expense of $41.7
million is 21% lower than fourth quarter 2015 SG&A expense of $52.9 million.
From an operational perspective, we maintained a gross margin percentage of 63% in our contract operations
segment as we protected profitability by lowering costs and changing project scale and scope. Orders for our oil
and gas products increased throughout the year, culminating in oil and gas product sales bookings of $231 million
for the fourth quarter of 2016, the third consecutive quarter of increased bookings. We also completed the sale of a
non-core product sales business unit during the third quarter of 2016, and began executing a plan to exit certain
other non-core business lines.
2017: A year of “One Exterran”
We learned a great deal about ourselves in 2016. We benefitted from teamwork, communications, shared values
and the importance of a culture that our stakeholders can rely upon. We accomplished critical business objectives,
controlled outcomes we could control and built a foundation for greater success. That’s what a year like 2016 can
do for an organization. It was the springboard to “One Exterran.”
Looking into 2017, in our service business, we expect our contract operations segment to continue to provide
stable revenue, profitability and cash flow as we seek to extend contracts and bid on new projects. While Latin
America is our largest region, in 2016 we signed two long-term contract extensions in the Middle East, and in
2017 we anticipate further project awards from customers in that region. Our goal is to continue to capitalize on
global long-term fundamentals and requirements for new infrastructure, faster monetization of hydrocarbon assets,
natural gas power generation, and technical expertise to manage midstream infrastructure assets. With 67% of our
2016 revenue sourced from international market areas, we believe our experience and reputation for service,
quality and reliability will allow us to grow our contract operations and aftermarket service businesses.
In our oil and gas product sales business, we are well positioned to benefit from increasing U.S. demand. Market
areas like the west Texas Permian and the Oklahoma SCOOP/STACK are economically viable for new production
and will require midstream infrastructure.
As industry fundamentals show early signs of improvement and momentum builds to what many believe will be
an industry recovery, we remained focused on maximizing our profitability in growing geographic markets where
infrastructure is needed, managing costs and cash, executing our plan for enhanced controls and processes, and
building our long-term strategy.
We thank our fellow employees and stockholders, as well as our lenders and all stakeholders for their
contributions and support in 2016.
Mark R. Sotir
Executive Chairman
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file no. 001-36875
Exterran Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
47-3282259
(I.R.S. Employer
Identification No.)
4444 Brittmoore Road, Houston, Texas 77041
(Address of principal executive offices, zip code)
(281) 836-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
m
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the common stock of the registrant held by non-affiliates as of June 30, 2016 was $266,744,579. For purposes
of this disclosure, common stock held by persons who hold more than 5% of the outstanding voting shares and common stock held by
executive officers and directors of the registrant have been excluded in that such persons may be deemed to be “affiliates” as that term is
defined under the rules and regulations promulgated under the Securities Act of 1933, as amended. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Number of shares of the common stock of the registrant outstanding as of March 2, 2017: 35,582,110 shares.
Portions of the registrant’s definitive proxy statement for the 2017 Meeting of Stockholders, which is expected to be filed with the Securities
and Exchange Commission within 120 days after December 31, 2016, are incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
SIGNATURES
Exhibits and Financial Statement Schedules
PART IV
Page
2
10
24
25
25
25
26
28
33
60
60
61
61
67
67
67
67
67
68
69
73
[This page intentionally left blank]
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report
are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), including, without limitation, statements regarding our business growth strategy and projected costs; future
financial position; the sufficiency of available cash flows to fund continuing operations; the expected amount of our capital
expenditures; expenditures related to the restatement of our financial statements and current governmental investigation;
anticipated cost savings, future revenue, gross margin and other financial or operational measures related to our business and
our primary business segments; the future value of our equipment and non-consolidated affiliates; and plans and objectives of
our management for our future operations. You can identify many of these statements by looking for words such as “believe,”
“expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ
materially from those anticipated as of the date of this report. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove
to be correct. Known material factors that could cause our actual results to differ from those in these forward-looking
statements include those described below, in Part I, Item 1A (“Risk Factors”) and Part II, Item 7 (“Management’s Discussion
and Analysis of Financial Condition and Results of Operations”) of this report. Important factors that could cause our actual
results to differ materially from the expectations reflected in these forward-looking statements include, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
conditions in the oil and natural gas industry, including a sustained imbalance in the level of supply or demand for
oil or natural gas or a sustained low price of oil or natural gas, which could depress or reduce the demand or pricing
for our natural gas compression and oil and natural gas production and processing equipment and services;
reduced profit margins or the loss of market share resulting from competition or the introduction of competing
technologies by other companies;
our reliance on Archrock, Inc. (named Exterran Holdings, Inc. prior to November 3, 2015) (“Archrock”) and its
affiliates for recurring oil and gas product sales revenues and our ability to secure new oil and gas product sales
customers;
economic or political conditions in the countries in which we do business, including civil developments such as
uprisings, riots, terrorism, kidnappings, violence associated with drug cartels, legislative changes and the
expropriation, confiscation or nationalization of property without fair compensation;
changes in currency exchange rates, including the risk of currency devaluations by foreign governments, and
restrictions on currency repatriation;
risks associated with our operations, such as equipment defects, malfunctions and natural disasters;
the risk that counterparties will not perform their obligations under our financial instruments;
the financial condition of our customers;
the impact of exiting our Belleli EPC product sales business;
our ability to timely and cost-effectively obtain components necessary to conduct our business;
employment and workforce factors, including our ability to hire, train and retain key employees;
our ability to implement our business and financial objectives, including:
•
•
•
•
•
•
winning profitable new business;
timely and cost-effective execution of projects;
enhancing our asset utilization, particularly with respect to our fleet of compressors;
integrating acquired businesses;
generating sufficient cash; and
accessing the financial markets at an acceptable cost;
liability related to the use of our products and services;
changes in governmental safety, health, environmental or other regulations, which could require us to make
significant expenditures;
our ability to successfully remediate each of the material weaknesses in our internal control environment as
disclosed in this report within the time periods and in the manner currently anticipated;
1
•
•
•
•
•
the effectiveness of our internal control environment, including the identification of additional control deficiencies;
the results of governmental actions relating to current investigations;
the results of shareholder actions, if any, relating to the restatement of our financial statements;
the agreements related to the Spin-off (see “Spin-off” below under Part I, Item 1 “Business”) and the anticipated
effects of restructuring our business; and
our level of indebtedness and ability to fund our business.
All forward-looking statements included in this report are based on information available to us on the date of this report. Except
as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this
report.
Item 1. Business
Exterran Corporation (together with its subsidiaries, “Exterran Corporation,” “our,” “we” or “us”), a Delaware corporation
formed in March 2015, is a market leader in the provision of compression, production and processing products and services that
support the production and transportation of oil and natural gas throughout the world.
Spin-off
On November 3, 2015, Archrock, Inc. (named Exterran Holdings, Inc. prior to November 3, 2015) completed the spin-off (the
“Spin-off”) of its international contract operations, international aftermarket services (the international contract operations and
international aftermarket services businesses combined are referred to as the “international services businesses” and include
such activities conducted outside of the United States of America (“U.S.”)) and global fabrication businesses into an
independent, publicly traded company named Exterran Corporation. We refer to the global fabrication business previously
operated by Archrock as our product sales businesses (including our oil and gas product sales and Belleli EPC product sales
segments). To effect the Spin-off, on November 3, 2015, Archrock distributed, on a pro rata basis, all of our shares of common
stock to its stockholders of record as of October 27, 2015 (the “Record Date”). Archrock shareholders received one share of
Exterran Corporation common stock for every two shares of Archrock common stock held at the close of business on the
Record Date. Pursuant to the separation and distribution agreement with Archrock and certain of our and Archrock’s respective
affiliates, on November 3, 2015, we transferred cash of $532.6 million to Archrock. Our Registration Statement on Form 10, as
amended, was declared effective on October 21, 2015. On November 4, 2015, Exterran Corporation common stock began
“regular-way” trading on the New York Stock Exchange under the stock symbol “EXTN.” Following the completion of the
Spin-off, we and Archrock became and continue to be independent, publicly traded companies with separate boards of directors
and management.
General
We provide our products and services to a global customer base consisting of companies engaged in all aspects of the oil and
natural gas industry, including large integrated oil and natural gas companies, national oil and natural gas companies,
independent oil and natural gas producers and oil and natural gas processors, gatherers and pipeline operators. We operate in
four primary business lines: contract operations, aftermarket services, oil and gas product sales and Belleli EPC product sales.
In our contract operations business, which accounted for approximately 38% of our revenue and 81% of our gross margin in
2016, we own and operate natural gas compression equipment and crude oil and natural gas production and processing
equipment on behalf of our customers outside of the U.S. Our services can include engineering, design, procurement, on-site
construction and operation of natural gas compression and crude oil or natural gas production and processing facilities for our
customers. Our contract operations business is underpinned by long-term commercial contracts with large customers, including
several national oil and natural gas companies, which we believe provide us with relatively stable cash flows due to our limited
exposure to the production phase of oil and gas development, particularly when compared to drilling and completion related
energy services and product providers. We believe our contract operations services generally allow our customers to achieve
higher production rates than they would achieve with their own operations, resulting in increased revenue for our customers. In
addition, outsourcing allows our customers flexibility for their compression and production and processing needs while limiting
their capital requirements. These contracts generally involve initial terms ranging from three to five years, and in some cases, in
excess of 10 years. In many instances, we are able to renew those contracts prior to the expiration of the initial term; in some
cases, we may sell the underlying assets to our customers pursuant to purchase options or otherwise.
2
In our aftermarket services business, which accounted for approximately 12% of our revenue and 11% of our gross margin in
2016, we provide operations, maintenance, overhaul and reconfiguration services outside of the U.S. to support our customers
who own their own compression, production, processing, treating and related equipment. Our services range from routine
maintenance services and parts sales to the full operation and maintenance of customer-owned assets. We seek to couple our
aftermarket services with our oil and gas product sales business to provide ongoing services to customers who buy equipment
from us and to sell those services to customers who have bought equipment from other companies.
In our oil and gas product sales business, which accounted for approximately 38% of our revenue and 9% of our gross margin
in 2016, we design, engineer, manufacture, install and sell natural gas compression packages as well as equipment used in the
production, treating and processing of crude oil and natural gas to customers both in the U.S. and internationally. Furthermore,
we combine our products into an integrated solution that we design, engineer, procure and, in certain cases, construct on-site for
sale to our customers. We believe the broad range of products we sell through our global platform enables us to take advantage
of the ongoing, worldwide energy infrastructure build-out.
In our Belleli EPC product sales business, which accounted for approximately 12% of our revenue in 2016, we have historically
provided engineering, procurement and construction for the manufacture of tanks for tank farms and the manufacture of
evaporators and brine heaters for desalination plants in the Middle East (referred to as “Belleli EPC” or the “Belleli EPC
business” herein). As part of our commitment to focus on our oil and gas businesses and optimize our portfolio, in the first
quarter of 2016, we began executing a plan to exit our Belleli EPC business. As of December 31, 2016, we had five significant
contracts in this business remaining and currently expect to have substantially exited this business by the first half of 2018.
Competitive Strengths
We believe we have the following key competitive strengths:
• Global platform and expansive service and product offerings poised to capitalize on the global energy
infrastructure build-out. Despite the decline in oil and natural gas prices in recent years and its impact on demand
for our products and services, we expect that global oil and natural gas infrastructure will continue to be built out
and provide us with opportunities for growth, as we believe our global customer base will continue to invest in
infrastructure projects based on longer-term fundamentals that are less tied to near-term commodity prices. We
believe our size, geographic scope and broad customer base provide us with a unique advantage in meeting our
customers’ needs, particularly with regard to large-scale project construction and development, and will allow us to
capture future opportunities. We provide our customers with a broad variety of products and services in
approximately 30 countries worldwide, including outsourced compression, production and processing services, as
well as natural gas compression and oil and natural gas production and processing equipment and installation
services. By offering a broad range of products and services that leverage our core strengths, we believe we provide
unique integrated solutions that meet our customers’ needs. We believe the breadth and quality of our products and
services, the depth of our customer relationships and our presence in many major oil and natural gas-producing
regions place us in a position to capture additional business on a global basis.
• High-quality products and services. We have built a network of high-quality energy infrastructure assets that are
strategically deployed across our global platform. Through our history of operating a wide variety of products in
many energy-producing markets around the world, we have developed the technical expertise and experience that
we believe is required to understand the needs of our customers and to meet those needs through a range of
products and services. These products and services include highly customized compression, production and
processing solutions as well as standard products based on our expertise, in support of a range of projects, from
those requiring quick completion to those that may take several years to fully develop. Additionally, our experience
has enabled us to develop efficient systems and processes and a skilled workforce that allow us to provide high-
quality services throughout international markets. We seek to continually improve our products and services to
enable us to provide our customers with high-quality, comprehensive oil and natural gas infrastructure support
worldwide.
3
• Complementary businesses enable us to offer customers integrated infrastructure solutions. We aim to provide
our customers with a single source to meet their energy infrastructure needs, and we believe we have the ability to
serve our customers’ changing needs in a variety of ways. For customers that seek to limit capital spending on
energy infrastructure projects, we offer our full operations services through our contract operations business. For
customers that prefer to develop and acquire their own infrastructure assets, we are able to sell equipment and
facilities for their operations and, following the sale of our equipment to them, we can also provide through our
aftermarket services business operations, maintenance, overhaul and reconfiguration services. Furthermore, we
combine our products into an integrated solution that we design, engineer, procure and, in some cases, construct on-
site for sale to our customers. Because of the breadth of our products and our ability to deliver those products
through our different delivery models, we believe we are able to provide the solution that is most suitable to our
customers in the markets in which they operate. We believe this ability to provide our customers with a variety of
products and services provides us with more business opportunities, as we are able to adjust the products and
services we provide to reflect our customers’ changing needs.
• Cash flows from contract operations business supported by long-term contracts with diverse customer base. We
provide contract operations services to customers located in approximately 15 countries. Within our contract
operations business, we seek to enter into long-term contracts with a diverse collection of customers, including
large integrated oil and natural gas companies and national energy companies. These contracts generally involve
initial terms ranging from three to five years, and in some cases, in excess of 10 years, and typically require our
customers to pay our monthly service fee even during periods of limited or disrupted oil or natural gas flows. In
addition, our large, international customer base provides a diversified revenue stream, which we believe reduces
customer and geographic concentration risk. Furthermore, our customer base includes several companies that are
among the largest and most well-known companies within their respective regions throughout our global platform.
• Experienced management team. We have an experienced and skilled management team with a long track record
of driving growth through organic expansion and selective acquisitions. The members of our management team
have strong relationships in the oil and gas industry and have operated through numerous commodity price cycles
throughout our areas of operations. Members of our management team have spent a significant portion of their
respective careers at highly regarded energy and manufacturing companies.
• Well-balanced capital structure with sufficient liquidity. We intend to maintain a capital structure with an appropriate
amount of leverage and the financial flexibility to invest in our operations and pursue attractive growth opportunities
that we believe will increase the overall earnings and cash flow generated by our business. At December 31, 2016,
taking into account guarantees through letters of credit, we had undrawn capacity of $504.9 million under our
revolving credit facility, of which $226.9 million was available for additional borrowings as a result of the covenant
restriction on our Total Debt (as defined in the credit agreement) to EBITDA (as defined in the credit agreement) ratio.
In addition, as of December 31, 2016, we had $35.7 million of cash and cash equivalents on hand.
Business Strategies
We intend to continue to capitalize on our competitive strengths to meet our customers’ needs through the following key
strategies:
•
Strategically grow our business. Our primary strategic focus involves the growth of our business through
expanding our product and services offerings, growing our customer base and expanding relationships with existing
customers by leveraging our portfolio of products and services. Additionally, our strategic focus includes targeting
redevelopment opportunities in the U.S. energy market and expansions into new international markets benefiting
from the global energy infrastructure build-out. We believe our diverse product and service portfolio allows us to
readily respond to changes in industry and economic conditions. We believe our global footprint allows us to
provide the prompt product availability our customers require, and we can construct projects in new locations as
needed to meet customer demand. We have the ability to readily deploy our capital to construct new or
supplemental projects that we build, own and operate on behalf of our customers through our contract operations
business. In addition, we seek to provide our customers with integrated infrastructure solutions by combining
product and service offerings across our businesses. We plan to supplement our organic growth with select
acquisitions, partnerships and other commercial arrangements in key markets to further enhance our geographic
reach, product offerings and other capabilities. We believe these arrangements will allow us to generate incremental
revenues from existing and new customers and obtain greater market share.
4
• Expand customer base and deepen relationships with existing customers. We believe the uniquely broad range of
services we offer, the quality of our products and services and our diverse geographic footprint position us to attract
new customers and cross-sell our products and services to existing customers. In addition, we have a long history
and significant experience providing our products and services to our customers which, coupled with the technical
expertise of our experienced engineering personnel, enables us to understand and meet our customers’ needs,
particularly as those needs develop and change over time. We intend to continue to devote significant business
development resources to market our products and services, leverage existing relationships and expedite our growth
potential. We also seek to provide supplemental projects and services to our customers as their needs evolve over
time.
• Enhance our safety performance. We believe our safety performance and reputation help us to attract and retain
customers and employees. We have adopted rigorous processes and procedures to facilitate our compliance with
safety regulations and policies. We work diligently to meet or exceed applicable safety regulations, and intend to
continue to focus on our safety monitoring function as our business grows and operating conditions change.
• Continue to optimize our global platform, products and services and enhance our profitability. We regularly
review and evaluate the quality of our operations, products and services. This process includes customer review
programs to assess the quality of our performance. In addition, we intend to use our global platform to reach a wide
variety of customers, which we believe can enable us to achieve cost savings in our operations. We believe our
ongoing focus on improving the quality of our operations, products and services results in greater satisfaction
among our customers, which we believe results in greater profitability and value for our shareholders.
Our Businesses
We conduct our operations through four businesses: contract operations, aftermarket services, oil and gas product sales and
Belleli EPC product sales. For financial data relating to our business segments or geographic regions that accounted for 10% or
more of our revenue in any of the last three fiscal years or 10% or more of our property, plant and equipment, net, as of
December 31, 2016 or December 31, 2015, see Part II, Item 7 (“Management’s Discussion and Analysis of Financial Condition
and Results of Operations”) and Note 22 to our Consolidated and Combined Financial Statements included in Part IV, Item 15
(collectively referred to as “Financial Statements,” and individually referred to as “balance sheets,” “statements of operations,”
“statements of comprehensive income,” “statements of stockholders’ equity” and “statements of cash flows” herein).
Contract Operations
We provide comprehensive contract operations services to customers outside of the U.S. based on each customer’s needs and
operating specifications. These services include the provision of personnel, equipment, tools, materials and supplies to meet our
customers’ natural gas compression or oil or natural gas production or processing service needs, as well as designing, sourcing,
owning, installing, operating, servicing, repairing and maintaining equipment owned by us necessary to provide these services.
We generally enter into contracts with our contract operations customers with initial terms between three to five years, and in
some cases, in excess of 10 years. These contracts may require us to provide complete engineering, design and installation
services and to make a significant investment in equipment, facilities and related installation costs. These projects may include
several compressor units on one site or entire facilities designed to process and treat oil or natural gas to make it suitable for end
use. Our customers generally are required to pay a monthly service fee even during periods of limited or disrupted oil or natural
gas flows, which enhances the stability and predictability of our cash flows. Additionally, because we typically do not take title
to the oil or natural gas we compress, process or treat and because the natural gas we use as fuel for our equipment is supplied
by our customers, we have limited direct exposure to commodity price fluctuations.
Our equipment is maintained in accordance with established maintenance schedules. These maintenance procedures are updated
as technology changes and as our operations team develops new techniques and procedures. In addition, because our field
technicians provide maintenance on our contract operations equipment, they are familiar with the condition of our equipment
and can readily identify potential problems. In our experience, these maintenance procedures maximize equipment life and unit
availability, minimize avoidable downtime and lower the overall maintenance expenditures over the equipment life.
During the year ended December 31, 2016, approximately 38% of our revenue and 81% of our gross margin was generated
from contract operations. As of December 31, 2016, our contract operations business provided contract operations services
using a fleet of 853 natural gas compression units with an aggregate capacity of approximately 1,138,000 horsepower and a
fleet of production and processing equipment.
5
We believe that our aftermarket services and oil and gas product sales businesses, described below, provide opportunities to
cross-sell our contract operations services.
Aftermarket Services
Our aftermarket services business sells parts and components and provides operation, maintenance, overhaul and
reconfiguration services to customers outside of the U.S. who own compression, production, processing and treating equipment.
We believe that we are particularly well qualified to provide these services because of our highly experienced operating
personnel and technical and engineering expertise. In addition, our aftermarket services business is a component of our ability
to provide integrated infrastructure solutions to our customers because it enables us to continue to serve our customers after the
sale of any assets or facilities manufactured through our oil and gas product sales business. As a result, we seek to couple
aftermarket services with our other businesses to maintain and develop our relationships with our customers.
During the year ended December 31, 2016, approximately 12% of our revenue and 11% of our gross margin was generated
from aftermarket services.
Oil and Gas Product Sales
We design, engineer, manufacture, sell and, in certain cases, install a broad range of oil and natural gas production and
processing equipment designed to heat, separate, dehydrate and condition crude oil and natural gas to make them suitable for
end use. Our products include line heaters, oil and natural gas separators, glycol dehydration units, condensate stabilizers, dew
point control plants, water treatment, mechanical refrigeration and cryogenic plants and skid-mounted production packages
designed for both onshore and offshore production facilities. We sell standard production and processing equipment, which is
used for processing wellhead production from onshore or shallow-water offshore platform production. In addition, we sell
custom-engineered, built-to-specification production and processing equipment, including designing facilities comprised of a
combination of our products integrated into a solution that meets our customers’ needs. Some of these projects are in remote
areas and in developing countries with limited oil and natural gas industry infrastructure. To meet most customers’ rapid
response requirements and minimize customer downtime, we maintain an inventory of standard products and long delivery
components used to manufacture our products to our customers’ specifications. Typically, we expect our oil and gas production
and processing equipment backlog to be produced within a three to 24 month period.
We also design, engineer, manufacture, sell and, in certain cases, install, skid-mounted natural gas compression equipment to
meet standard or unique customer specifications. Generally, we assemble compressors sold to third parties according to each
customer’s specifications. We purchase components for these compressors from third party suppliers including several major
engine and compressor manufacturers in the industry. We also sell pre-packaged compressor units designed to our standard
specifications. Typically, we expect our compressor equipment backlog to be produced within a three to 12 month period.
We sell our compression and production and processing equipment primarily to major and independent oil and natural gas
producers as well as national oil and natural gas companies in the countries where we operate, both within the U.S. and
internationally.
During the year ended December 31, 2016, approximately 38% of our revenue and 9% of our gross margin was generated from
oil and gas product sales. As of December 31, 2016, our backlog in oil and gas product sales was $306.2 million, of which
approximately $14.0 million of future revenue is expected to be recognized after December 31, 2017. Our product sales backlog
consists of unfilled orders based on signed contracts and does not include potential product sales pursuant to letters of intent
received from customers.
Belleli EPC Product Sales
As part of our commitment to focus on our oil and gas businesses and optimize our portfolio, in the first quarter of 2016, we
began executing a plan to exit our Belleli EPC business that has historically been comprised of engineering, procurement and
construction for the manufacture of tanks for tank farms and the manufacture of evaporators and brine heaters for desalination
plants in the Middle East. We ceased the booking of new orders for our Belleli EPC business during the first quarter of 2016.
During the year ended December 31, 2016, approximately 12% of our revenue was generated from Belleli EPC product sales.
As of December 31, 2016, our backlog in Belleli EPC product sales was $63.6 million, of which approximately $4.3 million of
future revenue is expected to be recognized after December 31, 2017. We currently expect to have substantially exited this
business by the first half of 2018.
6
Industry Overview
Natural Gas Compression
The international compression business is comprised primarily of large horsepower compressors that are typically deployed in
facilities comprised of several compressors on one site. A significant portion of this business involves comprehensive projects
that require the design, engineering, manufacture, delivery and installation of several compressors on one site along with related
natural gas treating and processing equipment. We are able to serve our customers’ needs for such projects through our oil and
gas product sales business and after that through our aftermarket services business, or through the provision of our contract
operations services.
Natural gas compression is a mechanical process whereby the pressure of a given volume of natural gas is increased to a desired
higher pressure for transportation from one point to another and is essential to the production and transportation of natural gas.
Compression is typically required several times during the natural gas production and transportation cycle, including (i) at the
wellhead, (ii) throughout gathering and distribution systems, (iii) into and out of processing and storage facilities and (iv) along
pipelines.
Production and Processing
Crude oil and natural gas are generally not marketable as produced at the wellhead and must be processed or treated before they
can be transported to market. Production and processing equipment is used to separate and treat oil and natural gas as they are
produced to achieve a marketable quality of product. Production processing typically involves the separation of oil and natural
gas and the removal of contaminants. The end result is “pipeline” or “sales” quality oil and natural gas. Further processing or
refining is almost always required before oil or natural gas is suitable for use as fuel or feedstock for petrochemical production.
Production processing normally takes place in the “upstream” and “midstream” segments, while refining and petrochemical
processing is referred to as the “downstream” segment. Wellhead or upstream production and processing equipment include a
wide and diverse range of products.
We manufacture and stock standard production equipment based on historical product mix and expected customer purchases
following general trends of oil and natural gas production. In addition, we sell custom-engineered, built-to-specification
production and processing equipment. We also provide integrated solutions comprised of a combination of our products into a
single offering, which typically consists of much larger equipment packages than standard equipment and is generally used in
much larger scale production operations. The custom equipment segment is primarily driven by global economic trends, and the
specifications for purchased equipment can vary significantly. Technology, engineering capabilities, project management,
available manufacturing space and quality control standards are the key drivers in the custom equipment segment.
Outsourcing
Natural gas producers, transporters and processors choose to outsource their operations due to the benefits and flexibility of
contract operations. In particular, we believe outsourcing compression, production and processing operations to us offers
customers:
•
access to our specialized personnel and technical skills, including engineers and field service and maintenance
employees, which we believe generally leads to improved production rates and increased throughput and higher
revenues;
•
•
the ability to increase their profitability by transporting or producing a higher volume of natural gas through decreased
equipment downtime and reduced operating, maintenance and equipment costs by allowing us, as the service provider,
to efficiently manage their operations; and
the flexibility to deploy their capital on projects more directly related to their primary business by reducing their
investment in compression, production and processing equipment and related maintenance capital requirements.
Oil and Natural Gas Industry Cyclicality and Volatility
Changes in oil and natural gas exploration and production spending normally result in changes in demand for our products and
services. However, we believe our contract operations business is less impacted by commodity prices than certain other energy
service products and services because compression, production and processing services are necessary for oil and natural gas to
be delivered from the wellhead to end users. Furthermore, our contract operations business is tied primarily to oil and natural
gas production and consumption, which are generally less cyclical in nature than exploration activities.
7
Demand for oil and natural gas is cyclical and subject to fluctuations. This is primarily because the industry is driven by
commodity demand and corresponding price movements. When oil and natural gas price increases occur, producers typically
increase their capital expenditures, which generally results in greater activity levels and revenues for equipment providers to the
oil and gas industry. During periods of lower oil or natural gas prices, producers typically decrease their capital expenditures,
which generally results in lower activity levels and revenues for equipment providers to the oil and gas industry.
Seasonal Fluctuations
Our results of operations have not historically reflected any material seasonal tendencies and we do not believe that seasonal
fluctuations will have a material impact on us in the foreseeable future.
Markets, Customers and Competition
Our global customer base consists primarily of companies engaged in all aspects of the oil and natural gas industry, including
large integrated oil and natural gas companies, national energy companies, independent producers and natural gas processors,
gatherers and pipeline operators.
During the year ended December 31, 2016, Petroleo Brasileiro S.A. (“Petrobras”) accounted for approximately 10% of our
revenues. During the years ended December 31, 2015 and 2014, Archrock and Archrock Partners, L.P. (named Exterran
Partners, L.P. prior to November 3, 2015) (“Archrock Partners”) accounted for approximately 11% of our total revenues. No
other customer accounted for more than 10% of our revenues in 2016, 2015 and 2014. In connection with the completion of the
Spin-off, we entered into a supply agreement pursuant to which we provide Archrock and its affiliates with manufactured
equipment. We expect to continue providing Archrock with certain manufactured products that will result in recurring oil and
gas product sales revenue for us. The loss of our business with Petrobras or Archrock, unless offset by additional sales to other
customers, or the inability or failure of Petrobras or Archrock to meet its payment obligations could have an adverse effect on
our business, results of operations and financial condition. See Note 16 to the Financial Statements for further discussion on
transactions with affiliates.
We currently operate in approximately 30 countries. We have product sales facilities in the U.S., Singapore and the United Arab
Emirates.
The businesses in which we operate are highly competitive. Overall, we experience considerable competition from companies
that may be able to more quickly adapt to changes within our industry and changes in economic conditions as a whole and to
more readily take advantage of available opportunities. We believe we are competitive with respect to price, equipment
availability, customer service, flexibility in meeting customer needs, technical expertise, quality and reliability of our
compression, production and processing equipment and related services. We face vigorous competition throughout our
businesses, with some firms competing with us in multiple businesses. In our oil and gas product sales business, we have
different competitors in the standard and custom-engineered equipment segments. Competitors in the standard equipment
segment include several large companies and a large number of small, regional fabricators. Our competition in the custom-
engineered segment consists mainly of larger companies with the ability to provide integrated projects and product support after
the sale.
We expect to face increased competition as we seek to diversify our customer base and increase utilization of our service
offerings.
The separation and distribution agreement contains certain noncompetition provisions addressing restrictions for a limited
period of time after the Spin-off on our ability to provide contract operations services in the U.S. and on Archrock’s ability to
provide contract operations services outside of the U.S. and product sales to customers worldwide, subject to certain exceptions.
Sources and Availability of Raw Materials
We manufacture natural gas compression and oil and natural gas production and processing equipment to provide contract
operations services and to sell to third parties from components which we acquire from a wide range of vendors. These
components represent a significant portion of the cost of our compressor and production and processing equipment products.
Increases in raw material costs cannot always be offset by increases in our products’ sales prices. While many of our materials
and components are available from multiple suppliers at competitive prices, we obtain some of the components, including
compressors and engines, used in our products from a limited group of suppliers. We occasionally experience long lead times
for components, including compressors and engines, from our suppliers and, therefore, we may at times make purchases in
anticipation of future orders.
8
Environmental and Other Regulations
Government Regulation
Our operations are subject to stringent and complex U.S. federal, state, local and international laws and regulations that could
have a material impact on our operations or financial condition. Our operations are regulated under a number of laws
governing, among other things, discharges of substances into the air, ground and regulated waters, the generation,
transportation, treatment, storage and disposal of hazardous and non-hazardous substances, disclosure of information about
hazardous materials used or produced in our operations, and occupational health and safety.
Compliance with these environmental laws and regulations may expose us to significant costs and liabilities and cause us to
incur significant capital expenditures in our operations. Failure to comply with these laws and regulations may result in the
assessment of administrative, civil and criminal penalties, imposition of investigatory and remedial obligations, and the
issuance of injunctions delaying or prohibiting operations. In certain circumstances, laws may impose strict, joint and several
liability without regard to fault or the legality of the original conduct on classes of persons who are considered to be responsible
for the release of hazardous substances into the environment. In addition, it is not uncommon for third parties to file claims for
personal injury, property damage and recovery of response costs allegedly caused by hazardous substances or other pollutants
released into the environment. We currently own or lease, and in the past have owned or leased, a number of properties that
have been used in support of our operations for a number of years. Although we have utilized operating and disposal practices
that were standard in the industry at the time, hydrocarbons, hazardous substances, or other regulated wastes may have been
disposed of or released on or under the properties owned or leased by us or on or under other locations where such materials
have been taken for disposal by companies sub-contracted by us. In addition, many of these properties have been previously
owned or operated by third parties whose treatment and disposal or release of hydrocarbons, hazardous substances or other
regulated wastes was not under our control. These properties and the materials released or disposed thereon may be subject to
various laws that could require us to remove or remediate historical property contamination, or to perform certain operations to
prevent future contamination. We are not currently under any order requiring that we undertake or pay for any cleanup
activities. However, we cannot provide any assurance that we will not receive any such order in the future.
The clear trend in environmental regulation is to place more restrictions on activities that may affect the environment, and thus,
any changes in these laws and regulations that result in more stringent and costly waste handling, storage, transport, disposal,
emission or remediation requirements could have a material adverse effect on our results of operations and financial position.
Employees
As of December 31, 2016, we had approximately 5,100 employees. Many of our employees outside of the U.S. are covered by
collective bargaining agreements. We generally consider our relationships with our employees to be satisfactory.
Available Information
Our website address is www.exterran.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports are available on our website, without charge, as soon as reasonably practicable
after they are filed electronically with the Securities and Exchange Commission (“SEC”). Information on our website is not
incorporated by reference in this report or any of our other securities filings. Paper copies of our filings are also available,
without charge, from Exterran Corporation, 4444 Brittmoore Road, Houston, Texas 77041, Attention: Investor Relations.
Alternatively, the public may read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street,
NE, Washington, DC 20549.
Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC
also maintains a website that contains reports, proxy and information statements and other information regarding issuers who
file electronically with the SEC. The SEC’s website address is www.sec.gov.
Additionally, we make available free of charge on our website:
•
•
•
our Code of Business Conduct;
our Corporate Governance Principles; and
the charters of our audit, compensation and nominating and corporate governance committees.
9
Item 1A. Risk Factors
As described in Part I (“Disclosure Regarding Forward-Looking Statements”), this report contains forward-looking statements
regarding us, our business and our industry. The risk factors described below, among others, could cause our actual results to
differ materially from the expectations reflected in the forward-looking statements. If any of the following risks actually occurs,
our business, financial condition, results of operations and cash flows could be negatively impacted.
Low oil and natural gas prices could depress or reduce demand or pricing for our natural gas compression and oil and
natural gas production and processing equipment and services and, as a result, adversely affect our business.
Our results of operations depend upon the level of activity in the global energy market, including oil and natural gas
development, production, processing and transportation. Oil and natural gas exploration and development activity and the
number of well completions typically decline when there is a sustained reduction in oil or natural gas prices or significant
instability in energy markets. Even the perception of longer-term lower oil or natural gas prices by oil and natural gas
exploration, development and production companies can result in their decision to cancel, reduce or postpone major
expenditures or to reduce or shut in well production.
Oil and natural gas prices and the level of drilling and exploration activity can be volatile. For example, the Henry Hub spot
price for natural gas was $2.28 per MMBtu at December 31, 2015, which was approximately 27% and 47% lower than prices at
December 31, 2014 and 2013, respectively, and the U.S. natural gas liquid composite price was approximately $4.72 per
MMBtu for the month of November 2015, which was approximately 16% and 56% lower than prices for the months of
December 2014 and 2013, respectively. During periods of lower oil or natural gas prices, our customers typically decrease their
capital expenditures, which generally results in lower activity levels. A reduction in demand for our products and services could
also force us to reduce our pricing substantially, which could have a material adverse effect on our business, financial
condition, results of operations and cash flows. As a result of the low oil and natural gas price environment during 2015 and the
majority of 2016, our customers sought to reduce their capital and operating expenditure requirements, and as a result, the
demand and pricing for the equipment we manufacture was adversely impacted. Moreover, a reduction in demand for our
products and services could result in our customers seeking to preserve capital by canceling contracts, canceling or delaying
scheduled maintenance of their existing natural gas compression and oil and natural gas production and processing equipment,
determining not to enter into new contract operations service contracts or purchase new compression and oil and natural gas
production and processing equipment, or canceling or delaying orders for our products and services, any of which could have a
material adverse effect on our business, financial condition, results of operations and cash flows. In periods of volatile
commodity prices, the timing of any change in activity levels by our customers is difficult to predict. As a result, our ability to
project the anticipated activity level for our business, and particularly our oil and gas product sales segment, in 2017 and
beyond is limited. If reduced booking levels persist for a sustained period, we could experience a material adverse effect on our
business, financial condition, results of operations and cash flows.
The erosion of the financial condition of our customers could adversely affect our business.
Many of our customers finance their exploration and development activities through cash flow from operations, the incurrence
of debt or the issuance of equity. During times when the oil or natural gas markets weaken, our customers are more likely to
experience a downturn in their financial condition. A reduction in borrowing bases under reserve-based credit facilities, the lack
of availability of debt or equity financing or other factors that negatively impact our customers’ financial condition could result
in our customers seeking to preserve capital by reducing prices under or cancelling contracts with us, determining not to renew
contracts with us, cancelling or delaying scheduled maintenance of their existing natural gas compression and oil and natural
gas production and processing equipment, determining not to enter into contract operations agreements or not to purchase new
compression and oil and natural gas production and processing equipment, or determining to cancel or delay orders for our
products and services. Any such action by our customers would reduce demand for our products and services. Reduced demand
for our products and services could adversely affect our business, financial condition, results of operations and cash flows. In
addition, in the event of the financial failure of a customer, we could experience a loss on all or a portion of our outstanding
accounts receivable associated with that customer.
Failure to timely and cost-effectively execute on larger projects could adversely affect our business.
Some of our projects have a relatively larger size and scope than the majority of our projects, which can translate into more
technically challenging conditions or performance specifications for our products and services. Contracts with our customers
for these projects typically specify delivery dates, performance criteria and penalties for our failure to perform. Any failure to
estimate the cost of and execute such larger projects in a timely and cost effective manner could have a material adverse effect
on our business, financial condition, results of operations and cash flows.
10
We have incurred and may in the future incur losses on fixed-price contracts, which constitute a significant portion of our
product sales businesses.
In connection with projects and services performed under fixed-price contracts, we generally bear the risk of cost over-runs,
operating cost inflation, labor availability and productivity, and supplier and subcontractor pricing and performance, unless
additional costs result from customer-requested change orders. Under both our fixed-price contracts and our cost-reimbursable
contracts, we may rely on third parties for many support services, and we could be subject to liability for their failures. For
example, we have experienced losses on certain large manufacturing projects that have negatively impacted our product sales
results. Any failure to accurately estimate our costs and the time required for a fixed-price manufacturing project at the time we
enter into a contract could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
There are many risks associated with conducting operations in international markets.
Our contract operations, aftermarket services and Belleli EPC product sales businesses, and a portion of our oil and gas product
sales business, are conducted in countries outside the U.S. We currently operate in approximately 30 countries. The countries
with our largest contract operations businesses include Mexico, Brazil and Argentina. We are exposed to risks inherent in doing
business in each of the countries where we operate. Our operations are subject to various risks unique to each country that
could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, in
2009 Petroleos de Venezuela S.A. (“PDVSA”), the Venezuelan state-owned oil company, assumed control over substantially all
of our assets and operations in Venezuela.
The countries with our largest contract operations businesses include Mexico, Brazil and Argentina. We generate a significant
portion of our revenue in these countries from national oil companies, including Yacimientos Petroliferos Fiscales (“YPF”) in
Argentina, Petroleos Mexicanos (“Pemex”) in Mexico and Petrobras in Brazil.
In April 2012, Argentina assumed control over its largest oil and gas producer, YPF. We are unable to predict what effect, if any,
the nationalization of YPF will have on our business in Argentina going forward, or whether Argentina will nationalize
additional businesses in the oil and gas industry; however, the nationalization of YPF, the nationalization of additional
businesses or the taking of other actions listed below by Argentina could have a material adverse effect on our business,
financial condition, results of operations and cash flows. More generally in Argentina, the ongoing social, political, economic
and legal climate has given rise to significant uncertainties about the country’s economic and political future. The Argentine
government may adopt additional regulations or policies in the future that may impact, among other things, (i) the timing of
and our ability to repatriate cash from Argentina to the U.S. and other jurisdictions, (ii) the value of our assets and business in
Argentina and (iii) our ability to import into Argentina the materials necessary for our operations. Any such changes could have
a material adverse effect on our operations in Argentina and may negatively impact our business, results of operations, financial
condition and cash flows.
Pemex is a decentralized public entity of the Mexican government, and, therefore, the Mexican government controls Pemex, as
well as its annual budget, which is approved by the Mexican Congress. The Mexican government may cut spending in the
future. These cuts could adversely affect Pemex’s annual budget and its ability to engage us in the future or compensate us for
our services. In 2014, the Mexican government implemented an energy industry reform that will allow the government to grant
non-Mexican companies the opportunity to enter into contracts and licenses to explore and drill for oil and natural gas in
Mexico. Any impact from this reform on our business in Mexico is uncertain. Also, during the past several years, incidents of
security disruptions in many regions of Mexico have increased, including drug cartel related activity. Certain incidents of
violence have occurred in regions we serve and have resulted in the temporary disruption of our operations. These disruptions
could continue or increase in the future. To the extent that such security disruptions continue or increase, our operations will
continue to be affected, and the levels of revenue and operating cash flow from our Mexican operations could be reduced.
A significant number of senior executives at Petrobras, a government-controlled energy company, have resigned their positions
in connection with a widely publicized corruption investigation. In addition, Petrobras recently announced further reductions to
its long-term capital expenditures budget. We expect these developments to disrupt Petrobras’ operations in the near term,
which could in turn adversely affect our business and results of operations in Brazil.
11
We also have operations in Nigeria, a business environment which has and may experience, among other things, work
stoppages, negative corporate payment behavior, currency controls or restrictions, uncertainty in its institutional framework,
political unrest, corruption and civil uprisings.
With respect to any particular country in which we operate, the risks inherent in our activities may include the following, the
occurrence of any of which could have a material adverse effect on our business, financial condition, results of operations and
cash flows:
•
•
difficulties in managing international operations, including our ability to timely and cost effectively execute projects;
unexpected changes in regulatory requirements, laws or policies by foreign agencies or governments;
• work stoppages;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
training and retaining qualified personnel in international markets;
the burden of complying with multiple and potentially conflicting laws and regulations;
tariffs and other trade barriers;
actions by governments or national oil companies that result in the nullification or renegotiation on less than favorable
terms of existing contracts, or otherwise result in the deprivation of contractual rights, and other difficulties in
enforcing contractual obligations;
governmental actions that: result in restricting the movement of property or that impede our ability to import or export
parts or equipment; require a certain percentage of equipment to contain local or domestic content; or require certain
local or domestic ownership, control or employee ratios in order to do business in or obtain special incentives or
treatment in certain jurisdictions;
potentially longer receipt of payment cycles;
changes in political and economic conditions in the countries in which we operate, including general political unrest,
the nationalization of energy related assets, civil uprisings, riots, kidnappings, violence associated with drug cartels
and terrorist acts;
potentially adverse tax consequences or tax law changes;
currency controls or restrictions on repatriation of earnings;
expropriation, confiscation or nationalization of property without fair compensation;
the risk that our international customers may have reduced access to credit because of higher interest rates, reduced
bank lending or a deterioration in our customers’ or their lenders’ financial condition;
complications associated with installing, operating and repairing equipment in remote locations;
limitations on insurance coverage;
inflation;
the geographic, time zone, language and cultural differences among personnel in different areas of the world; and
difficulties in establishing new international offices and the risks inherent in establishing new relationships in foreign
countries.
In addition, we may expand our business in international markets where we have not previously conducted business. The risks
inherent in establishing new business ventures, especially in international markets where local customs, laws and business
procedures present special challenges, may affect our ability to be successful in these ventures or avoid losses that could have a
material adverse effect on our business, financial condition, results of operations and cash flows.
12
We are exposed to exchange rate fluctuations in the international markets in which we operate. A decrease in the value of
any of these currencies relative to the U.S. dollar could reduce profits from international operations and the value of our
international net assets.
We operate in many international countries. We anticipate that there will be instances in which costs and revenues will not be
exactly matched with respect to currency denomination. We have not historically entered into significant hedges to limit our
exposure to the risk of exchange rate losses. Gains and losses from the remeasurement of assets and liabilities that are
receivable or payable in currency other than our subsidiaries’ functional currency are included in our statements of operations.
In addition, currency fluctuations cause the U.S. dollar value of our international results of operations and net assets to vary
with exchange rate fluctuations. This could have a negative impact on our business, financial condition or results of operations.
Our material exchange rate exposure relates to intercompany loans to subsidiaries whose functional currency is the Brazilian
Real, which loans carried balances of $41.0 million U.S. dollars as of December 31, 2016. As we expand geographically, we
may experience economic loss and a negative impact on earnings or net assets solely as a result of foreign currency exchange
rate fluctuations. Further, the markets in which we operate could restrict the removal or conversion of the local or foreign
currency, resulting in our inability to hedge against these risks.
The restatement of our prior financial statements may lead to additional risks and uncertainties, including loss of investor
and counterparty confidence.
We have restated our financial statements for the years ended December 31, 2015, 2014 and 2013 (including the unaudited
quarterly periods within 2015 and 2014) to correct accounting errors primarily related to our Belleli EPC product sales segment
and non-income-based tax receivables in Brazil. As a result of the circumstances giving rise to the restatement, we have
become subject to a number of additional costs and risks, including unanticipated costs for accounting and legal fees in
connection with or related to the restatement and the remediation of our ineffective disclosure controls and procedures and
material weaknesses in internal control over financial reporting. In addition, the attention of our management team was diverted
by these efforts. The SEC is conducting an investigation into the circumstances giving rise to the restatement. We could be
subject to further regulatory, or stockholder or other actions in connection with the restatement in the future. The current SEC
investigation and any future proceedings will, regardless of the outcome, continue to consume management’s time and attention
and may result in additional legal, accounting, insurance and other costs. In addition, the restatement and related matters could
impair our reputation and could cause our current and potential lenders, investors and counterparties to lose confidence in us.
Each of these occurrences could have an adverse effect on our business, results of operations and financial condition.
We are involved in governmental and internal investigations, which are costly to conduct and may result in substantial
financial and other penalties, as well as adverse effects on our business and financial condition.
In March 2016, the Audit Committee of the Board of Directors retained legal counsel to conduct an internal investigation
related to the application of percentage-of-completion accounting principles to specific Belleli EPC product sales projects in
the Middle East. On April 26, 2016, we filed a Form 8-K reporting the errors and possible irregularities at Belleli EPC.
Contemporaneously with filing the Form 8-K, we self-reported these issues to the SEC. We are cooperating with the SEC in its
investigation of this matter, including responding to a subpoena for documents related to the circumstances giving rise to the
restatement as well as documents related to our compliance with the U.S. Foreign Corrupt Practices Act (“FCPA”), which are
also being provided to the Department of Justice (“DOJ”) at its request. The FCPA related requests in the SEC subpoena pertain
to our policies and procedures, information about our third-party sales agents, and documents related to historical internal
investigations completed prior to November 2015. We also have made the SEC and DOJ aware of our internal investigation
regarding prior year non-income-based tax receivables due to us from the Brazilian government.
The government investigations are continuing, and we are presently unable to predict the duration, scope or results of them or
whether the SEC or DOJ will commence any legal actions. If we are found to have violated securities laws or other federal
statutes, including the FCPA, we may be subject to criminal and civil penalties and other remedial measures, including, but not
limited to injunctive relief, disgorgement, civil and criminal fines and penalties, modifications to business practices including
the termination or modification of existing business relationships, modifications of compliance programs and the retention of a
monitor to oversee compliance. The imposition of any of these sanctions or remedial measures could have a material adverse
impact on our reputation, business, results of operations, financial condition, liquidity and stock price.
13
We have identified material weaknesses in our internal control over financial reporting that, if not remediated, could result
in additional material misstatements in our financial statements.
As described in “Part II, Item 9A — Controls and Procedures,” management has identified and evaluated control deficiencies
that gave rise to the accounting errors related to Belleli EPC product sales projects and non-income-based tax receivables in
Brazil, and has concluded that those deficiencies represent material weaknesses in our internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. As a result of these material weaknesses, management has concluded that we did not maintain
effective internal control over financial reporting or effective disclosure controls and procedures as of December 31, 2016.
We are in the process of implementing a remediation plan to address these material weaknesses. If our remediation efforts are
insufficient or not completed in a timely manner, or if additional material weaknesses in our internal control over financial
reporting are identified or occur in the future, our financial statements may contain material misstatements and we could be
required to restate our financial results, which could materially and adversely affect our business, results of operations and
financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the
material weaknesses, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in lender,
investor and counterparty confidence.
Our outstanding debt obligations could limit our ability to fund future growth and operations and increase our exposure to
risk during adverse economic conditions.
At December 31, 2016, we had approximately $351.3 million in outstanding debt obligations. Many factors, including factors
beyond our control, may affect our ability to make payments on our outstanding indebtedness. These factors include those
discussed elsewhere in these Risk Factors and those listed in the Disclosure Regarding Forward-Looking Statements section
included in Part I of this report.
Our debt and associated commitments could have important adverse consequences. For example, these commitments could:
• make it more difficult for us to satisfy our contractual obligations;
•
•
•
•
•
•
increase our vulnerability to general adverse economic and industry conditions;
limit our ability to fund future working capital, capital expenditures, acquisitions or other corporate requirements;
increase our vulnerability to interest rate fluctuations because the interest payments on our debt are based upon
variable interest rates and can adjust based upon our credit statistics;
limit our flexibility in planning for, or reacting to, changes in our business and our industry;
place us at a disadvantage compared to our competitors that have less debt or less restrictive covenants in such
debt; and
limit our ability to refinance our debt in the future or borrow additional funds.
If we are unable to refinance our term loan when due on acceptable terms, we may experience a material adverse effect on
our liquidity and financial condition.
Of the $351.3 million in outstanding debt obligations that we had at December 31, 2016, $232.8 million represents the principal
amount outstanding under our term loan facility that is due in November 2017. At or prior to the time the term loan matures, we
will be required to refinance it and may enter into one or more new facilities, which could result in higher borrowing costs,
issue equity, which would dilute our existing shareholders, repay with borrowings under our revolving credit facility, issue
bonds with restrictive covenants that could impact our business flexibility or otherwise raise the funds necessary to repay the
outstanding principal amount under the term loan. We have the intent and ability to refinance the principal amount due under
the term loan with borrowings under our existing revolving credit facility. In connection with the Spin-off, our wholly owned
subsidiary, Exterran Energy Solutions, L.P. (“EESLP”), contributed to a subsidiary of Archrock the right to receive, promptly
following the occurrence of a qualified capital raise, a $25.0 million cash payment. No assurance can be given that we will be
able to enter into new facilities or issue equity or bonds in the future on attractive terms or at all. If we are unable to obtain
financing on acceptable terms, or at all, to refinance the remaining principal amount outstanding under our term loan, we would
need to take other actions, including selling assets or seeking strategic investments from third parties, potentially on
unfavorable terms, and deferring capital expenditures or other discretionary uses of cash. To the extent that we are unable to
refinance our term loan or are required to take any such other action, we would experience a material adverse effect on our
liquidity and financial condition.
14
Covenants in our credit agreement may impair our ability to operate our business.
Our credit agreement, consisting of a $680.0 million revolving credit facility expiring in November 2020 and a $232.8 million
term loan facility expiring in November 2017, contains various covenants with which we, EESLP and our respective restricted
subsidiaries must comply, including, but not limited to, limitations on the incurrence of indebtedness, investments, liens on
assets, repurchasing equity, making distributions, transactions with affiliates, mergers, consolidations, dispositions of assets and
other provisions customary in similar types of agreements. Additionally, we are required to maintain certain financial covenant
ratios. If we fail to remain in compliance with these restrictions and financial covenants, we would be in default under our
credit agreement. In addition, if we experience a material adverse effect on our assets, liabilities, financial condition, business
or operations that, taken as a whole, impact our ability to perform our obligations under our credit agreement, this could lead to
a default. If the repayment obligations on any of our indebtedness were to be accelerated, we may not be able to repay the debt
or refinance the debt on acceptable terms, and our financial position would be materially adversely affected. As of
December 31, 2016, we were in compliance with all financial covenants under our credit agreement.
Additionally, our credit agreement limits our Total Debt (as defined in the credit agreement) to EBITDA (as defined in the
credit agreement) ratio on the last day of the fiscal quarter to not greater than 3.75 to 1.0 (which will increase to 4.50 to 1.0
following the completion of a qualified capital raise (as defined in the credit agreement)). As a result of this limitation, $226.9
million of the $504.9 million of undrawn capacity under our revolving credit facility was available for additional borrowings as
of December 31, 2016. Because this limitation considers all of our outstanding debt obligations, the additional borrowings
available to us are in excess of borrowings needed under our revolving credit facility to refinance the current principal amount
due under the term loan facility.
We may be vulnerable to interest rate increases due to our floating rate debt obligations.
As of December 31, 2016, we had $350.8 million of outstanding borrowings that are subject to floating interest rates. Changes
in economic conditions outside of our control could result in higher interest rates, thereby increasing our interest expense and
reducing the funds available for capital investment, operations or other purposes. A 1% increase in the effective interest rate on
our outstanding debt subject to floating interest rates at December 31, 2016 would result in an annual increase in our interest
expense of approximately $3.5 million.
The termination of or any price reductions under certain of our contract operations services contracts could have a material
impact on our business.
The termination of or a demand by our customers to reduce prices under certain of our contract operations services contracts
may lead to a reduction in our revenues and net income, which could have a material adverse effect upon our business,
financial condition, results of operations and cash flows. In addition, we may be unable to renew, or enter into new, contracts
with customers on favorable commercial terms, if at all. To the extent we are unable to renew our existing contracts or enter
into new contracts on terms that are favorable to us or to successfully manage our overall contract mix over time, our business,
results of operations and cash flows may be adversely impacted.
Our product sales backlog may be subject to unexpected adjustments and cancellations.
The revenues projected in our product sales backlog may not be realized or, if realized, may not result in profits. Because of
project cancellations or changes in project scope and schedule, we cannot predict with certainty when or if backlog will be
performed. In addition, even where a project proceeds as scheduled, it is possible that contracted parties may default and fail to
pay amounts owed to us or poor project performance could increase the cost associated with a project. Delays, suspensions,
cancellations, payment defaults, scope changes and poor project execution could materially reduce the revenues and reduce or
eliminate profits that we actually realize from projects in backlog. We may be at greater risk of delays, suspensions and
cancellations in the current low oil price environment.
Reductions in our product sales backlog due to cancellation or modification by a customer or for other reasons may adversely
affect, potentially to a material extent, the revenues and earnings we actually receive from contracts included in our backlog.
Many of the contracts in our product sales backlog provide for cancellation fees in the event customers cancel projects. These
cancellation fees usually provide for reimbursement of our out-of-pocket costs, revenues for work performed prior to
cancellation and a varying percentage of the profits we would have realized had the contract been completed. However, we
typically have no contractual right upon cancellation to the total revenues reflected in our backlog. Projects may remain in our
backlog for extended periods of time. If we experience significant project terminations, suspensions or scope adjustments to
contracts reflected in our backlog, our financial condition, results of operations and cash flows may be adversely impacted.
15
From time to time, we are subject to various claims, litigation and other proceedings that could ultimately be resolved
against us, requiring material future cash payments or charges, which could impair our financial condition or results of
operations.
The size, nature and complexity of our business make us susceptible to various claims, both in litigation and binding arbitration
proceedings. We are currently, and may in the future become, subject to various claims, which, if not resolved within amounts
we have accrued, could have a material adverse effect on our financial position, results of operations or cash flows. Similarly,
any claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public,
and make it more difficult for us to compete effectively or obtain adequate insurance in the future.
We depend on particular suppliers and may be vulnerable to product shortages and price increases.
Some of the components used in our products are obtained from a single source or a limited group of suppliers. Our reliance on
these suppliers involves several risks, including price increases, quality and a potential inability to obtain an adequate supply of
required components in a timely manner. We do not have long-term contracts with some of these sources, and the partial or
complete loss of certain of these sources could have a negative impact on our results of operations and could damage our
customer relationships. Further, a significant increase in the price of one or more of these components could have a negative
impact on our results of operations.
We face significant competitive pressures that may cause us to lose market share and harm our financial performance.
Our businesses face intense competition and have low barriers to entry. Our competitors may be able to adapt more quickly to
technological changes within our industry and changes in economic and market conditions and more readily take advantage of
acquisitions and other opportunities. Our ability to renew or replace existing contract operations service contracts with our
customers at rates sufficient to maintain current revenue and cash flows could be adversely affected by the activities of our
competitors. If our competitors substantially increase the resources they devote to the development and marketing of
competitive products, equipment or services or substantially decrease the price at which they offer their products, equipment or
services, we may not be able to compete effectively.
In addition, we could face significant competition from new entrants into the compression services and product sales
businesses. Some of our existing competitors or new entrants may expand or develop new compression units that would create
additional competition for the products, equipment or services we provide to our customers.
We also may not be able to take advantage of certain opportunities or make certain investments because of our debt levels and
our other obligations. As a U.S.-domiciled company, we may also face a higher corporate tax rate than our competitors that are
domiciled in other jurisdictions. Any of these competitive pressures could have a material adverse effect on our business,
financial condition and results of operations.
Our ability to manage and grow our business effectively may be adversely affected if we lose management or operational
personnel.
We believe that our ability to hire, train and retain qualified personnel will continue to be challenging and important. The
supply of experienced operational and field personnel, in particular, decreases as other energy and manufacturing companies’
needs for the same personnel increase. Our ability to grow and to continue our current level of service to our customers will be
adversely impacted if we are unable to successfully hire, train and retain these important personnel.
16
Our operations entail inherent risks that may result in substantial liability. We do not insure against all potential losses and
could be seriously harmed by unexpected liabilities.
Our operations entail inherent risks, including equipment defects, malfunctions and failures and natural disasters, which could
result in uncontrollable flows of natural gas or well fluids, fires and explosions. These risks may expose us, as an equipment
operator and developer, to liability for personal injury, wrongful death, property damage, pollution and other environmental
damage. The insurance we carry against many of these risks may not be adequate to cover our claims or losses. In addition, we
are substantially self-insured for workers’ compensation, employer’s liability, property, auto liability, general liability and
employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance
arrangements for these risks. Further, insurance covering the risks we expect to face or in the amounts we desire may not be
available in the future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial
liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a
time when we are not able to obtain liability insurance, our business, financial condition and results of operations could be
negatively impacted.
Our exit from our Belleli EPC business involves numerous risks that may adversely affect our results of operations,
financial condition or liquidity.
We are in the process of executing a plan to exit the Belleli EPC business to focus on our core oil and gas businesses. While we
have ceased booking new orders for our Belleli EPC business, our ultimate exit from this business involves numerous risks and
uncertainties that could adversely affect our results of operations, financial condition or liquidity. In particular, our exit from the
Belleli EPC business may take longer or cost more than we currently anticipate. In addition, the reinvestment of any capital
received in excess of the costs to complete our exit, and the reallocation of any resources following this process, may not
ultimately yield investment returns in line with our internal or external expectations. Other parts of our ongoing business could
be negatively impacted as we complete the exit of this business, including through the diversion of resources and management
attention from our ongoing business and other strategic matters, or through the disruption of relationships with our employees,
customers or vendors. Further, we may incur indemnity or other obligations in connection with the business that we are exiting
that may cause us to recognize additional expenses in the future.
Cyber-attacks or terrorism could affect our business.
We may be adversely affected by problems such as cyber-attacks, computer viruses or terrorism that may disrupt our operations
and harm our operating results. Our industry requires the continued operation of sophisticated information technology systems
and network infrastructure. Despite our implementation of security measures, our technology systems are vulnerable to
disability or failures due to hacking, viruses, acts of war or terrorism and other causes. If our information technology systems
were to fail and we were unable to recover in a timely way, we might be unable to fulfill critical business functions, which
could have a material adverse effect on our business, financial condition and results of operations.
In addition, our assets may be targets of terrorist activities that could disrupt our ability to service our customers. We may be
required by our regulators or by the future terrorist threat environment to make investments in security that we cannot currently
predict. The implementation of security guidelines and measures and maintenance of insurance, to the extent available,
addressing such activities could increase costs. These types of events could materially adversely affect our business and results
of operations. In addition, these types of events could require significant management attention and resources, and could
adversely affect our reputation among customers and the public.
We could be adversely affected by violations of the FCPA, similar worldwide anti-bribery laws and trade control laws. If we
are found to have violated the FCPA or other legal requirements, we may be subject to criminal and civil penalties and other
remedial measures, which could materially harm our reputation, business, results of operations, financial condition and
liquidity.
Our international operations require us to comply with U.S. and international laws and regulations, including those involving
anti-bribery and anti-corruption. For example, the FCPA and similar laws and regulations prohibit improper payments to
foreign officials for the purpose of obtaining or retaining business or gaining any business advantage.
17
We operate in many parts of the world that experience high levels of corruption, and our business brings us in frequent contact
with foreign officials. Our compliance policies and programs mandate compliance with all applicable anti-corruption laws but
may not be completely effective in ensuring our compliance. Our training and compliance program and our internal control
policies and procedures may not always protect us from violations committed by our employees or agents. Actual or alleged
violations of these laws could disrupt our business and cause us to incur significant legal expenses, and could result in a
material adverse effect on our reputation, business, results of operations, financial condition and liquidity. As noted above, in
connection with our self-reporting of accounting errors related to our Belleli EPC product sales business to the SEC, we are
responding to a subpoena for documents related to that as well as documents related to our compliance with the FCPA, which
are also being provided to the DOJ at its request. The FCPA related requests in the SEC subpoena pertain to our policies and
procedures, information about our third-party sales agents and documents related to historical internal investigations completed
prior to November 2015. If we are found to be liable for FCPA or other anti-bribery law violations due to our own acts or
omissions or due to the acts or omissions of others (including our joint venture partners, agents or other third party
representatives), we could suffer from severe civil and criminal penalties or other sanctions, which could materially harm our
reputation, business, results of operations, financial condition and liquidity. Separately, we may face competitive disadvantages
if our competitors are able to secure business, licenses or other advantages by making payments or using other methods that are
prohibited by U.S. and international laws and regulations.
We also are subject to other laws and regulations governing our operations, including regulations administered by the U.S.
Department of Treasury’s Office of Foreign Asset Control and various non-U.S. government entities, including applicable
export control regulations, economic sanctions on countries and persons and customs requirements. Trade control laws are
complex and constantly changing. Our compliance policies and programs increase our cost of doing business and may not work
effectively to ensure our compliance with trade control laws. If we undergo an investigation of potential violations of trade
control laws by U.S. or foreign authorities or if we fail to comply with these laws, we may incur significant legal expenses or
be subject to criminal and civil penalties and other sanctions and remedial measures, which could have a material adverse
impact on our reputation, business, results of operations, financial condition, liquidity and stock price.
Tax legislation and administrative initiatives or challenges to our tax positions could adversely affect our results of
operations and financial condition.
We operate in locations throughout the U.S. and internationally and, as a result, we are subject to the tax laws and regulations
of U.S. federal, state, local and foreign governments. From time to time, various legislative or administrative initiatives may be
proposed that could adversely affect our tax positions. For example, there have been proposals from Congress to change U.S.
tax laws that would significantly impact how U.S. multinational corporations are taxed on foreign earnings. There can be no
assurance that our tax provision or tax payments will not be adversely affected by these initiatives. In addition, U.S. federal,
state and local and foreign tax laws and regulations are extremely complex and subject to varying interpretations. Moreover,
economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes favorably
more difficult. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we
would be successful in any such challenge. Changes to our tax positions resulting from tax legislation and administrative
initiatives or challenges from taxing authorities could adversely affect our results of operations and financial condition.
U.S. federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing as well as governmental
reviews of such activities could result in increased costs and additional operating restrictions or delays in the completion of
oil and natural gas wells, and adversely affect demand for our products.
Hydraulic fracturing is an important and common practice that is used to stimulate production of natural gas and/or oil, from
dense subsurface rock formations. Hydraulic fracturing involves the injection of water, sand or alternative proppant and
chemicals under pressure into target geological formations to fracture the surrounding rock and stimulate production. Hydraulic
fracturing is typically regulated by state agencies, but recently, there has been increased public concern regarding an alleged
potential for hydraulic fracturing to adversely affect drinking water supplies, and proposals have been made to enact separate
U.S. federal, state and local legislation that would increase the regulatory burden imposed on hydraulic fracturing.
18
For example, at the U.S. federal level, the U. S. Environmental Protection Agency (“EPA”) issued an Advance Notice of
Proposed Rulemaking to collect data on chemicals used in hydraulic fracturing operations under Section 8 of the Toxic
Substances Control Act, and proposed regulations under the CWA governing wastewater discharges from hydraulic fracturing
and certain other natural gas operations. Also, the U.S. Department of the Interior released a final rule that updates existing
regulation of hydraulic fracturing activities on U.S. federal lands, including requirements for chemical disclosure, wellbore
integrity and handling of flowback water. The final rule was expected to be effective on June 24, 2015, but, on September 30,
2015, a federal district court issued a preliminary injunction preventing implementation of the rule. In addition, several
governmental reviews are underway that focus on environmental aspects of hydraulic fracturing activities. In June 2015, the
EPA released its draft report on the potential impacts of hydraulic fracturing on drinking water resources, which concluded that
hydraulic fracturing activities have not led to widespread, systemic impacts on drinking water sources in the U.S., although
there are above and below ground mechanisms by which hydraulic fracturing activities have the potential to impact drinking
water sources. The draft report is expected to be finalized after a public comment period and a formal review by EPA’s Science
Advisory Board. In addition, the White House Council on Environmental Quality is coordinating an administration-wide
review of hydraulic fracturing practices. The results of this study or similar governmental reviews could spur initiatives to
further regulate hydraulic fracturing under the Safe Drinking Water Act of 1974 or otherwise.
At the state level, several states have adopted or are considering legal requirements that could impose more stringent
permitting, disclosure, and well construction requirements on hydraulic fracturing activities. For example in May 2013, the
Texas Railroad Commission adopted new rules governing well casing, cementing and other standards for ensuring that
hydraulic fracturing operations do not contaminate nearby water resources. Local governments may also seek to adopt
ordinances within their jurisdictions regulating the time, place and manner of, or prohibiting the performance of, drilling
activities in general or hydraulic fracturing activities in particular. If new or more stringent federal, state or local legal
restrictions relating to the hydraulic fracturing process are adopted in areas where our natural gas exploration and production
customers operate, those customers could incur potentially significant added costs to comply with such requirements,
experience delays or curtailment in the pursuit of exploration, development or production activities and perhaps even be
precluded from drilling wells. Any such restrictions could reduce demand for our products, and as a result could have a material
adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to a variety of governmental regulations; failure to comply with these regulations may result in
administrative, civil and criminal enforcement measures and changes in these regulations could increase our costs or
liabilities.
We are subject to a variety of U.S. federal, state, local and international laws and regulations relating to, for example, export
controls, currency exchange, labor and employment and taxation. Many of these laws and regulations are complex, change
frequently, are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase
over time. From time to time, as part of our operations we may be subject to compliance audits by regulatory authorities in the
various countries in which we operate. Our failure to comply with these laws and regulations may result in a variety of
administrative, civil and criminal enforcement measures, including assessment of monetary penalties, imposition of remedial
requirements and issuance of injunctions as to future compliance, any of which may have a negative impact on our financial
condition, profitability and results of operations.
We are subject to a variety of environmental, health and safety regulations. Failure to comply with these regulations may
result in administrative, civil and criminal enforcement measures and changes in these regulations could increase our costs
or liabilities.
We are subject to a variety of U.S. federal, state, local and international laws and regulations relating to the environment, and
worker health and safety. These laws and regulations are complex, change frequently, are becoming increasingly stringent, and
the cost of compliance with these requirements can be expected to increase over time. Failure to comply with these laws and
regulations may result in administrative, civil and criminal enforcement measures, including assessment of monetary penalties,
imposition of remedial requirements and issuance of injunctions as to future compliance. Certain of these laws also may impose
joint and several and strict liability for environmental contamination, which may render us liable for remediation costs, natural
resource damages and other damages as a result of our conduct that may have been lawful at the time it occurred or the conduct
of, or conditions caused by, prior owners or operators or other third parties. In addition, where contamination may be present, it
is not uncommon for neighboring land owners and other third parties to file claims for personal injury, property damage and
recovery of response costs. Remediation costs and other damages arising as a result of environmental laws and regulations, and
costs associated with new information, changes in existing environmental laws and regulations or the adoption of new
environmental laws and regulations could be substantial and could negatively impact our financial condition, profitability and
results of operations.
19
We may need to apply for or amend facility permits or licenses from time to time with respect to storm water or wastewater
discharges, waste handling, or air emissions relating to manufacturing activities or equipment operations, which subjects us to
new or revised permitting conditions. These permits and authorizations may contain numerous compliance requirements,
including monitoring and reporting obligations and operational restrictions, such as emission limits, which may be onerous or
costly to comply with. In addition, certain of our customer service arrangements may require us to operate, on behalf of a
specific customer, petroleum storage units such as underground tanks or pipelines and other regulated units, all of which may
impose additional compliance and permitting obligations. Given the large number of facilities in which we operate, and the
numerous environmental permits and other authorizations that are applicable to our operations, we may occasionally identify or
be notified of technical violations of certain requirements existing in various permits or other authorizations. Occasionally, we
have been assessed penalties for our non-compliance, and we could be subject to such penalties in the future.
The modification or interpretation of existing environmental, health and safety laws or regulations, the more vigorous
enforcement of existing laws or regulations, or the adoption of new laws or regulations may also negatively impact oil and
natural gas exploration and production, gathering and pipeline companies, including our customers, which in turn could have a
negative impact on us.
Climate change policies, laws and regulations focused on reduction of greenhouse gas emissions could increase operating
costs or reduced the demand for our products and services.
There has been an increased focus in the last several years on climate change and the possible role that emissions of greenhouse
gases such as carbon dioxide and methane play in climate change. In the U.S., the EPA has begun to regulate greenhouse gas
emissions under the federal Clean Air Act and regulatory agencies and legislative bodies in other countries where we operate
have adopted greenhouse gas emission reduction programs. The adoption of new or more stringent legislation or regulatory
programs restricting greenhouse gas emissions could require us to incur higher operating costs or increase the cost of, and thus
reduce the demand for, the hydrocarbon products of our customers. These increased costs or reduced demand could have an
adverse effect on our business, profitability or results of operations. Further, some scientists have concluded that increasing
greenhouse gas concentrations in the atmosphere may produce physical effects, such as increased severity and frequency of
storms, droughts, floods and other climate events. Such climate events have the potential to adversely affect our operations or
those of our clients, which in turn could have a negative effect on us.
We may not realize some or all of the benefits we expected to achieve from our separation from Archrock.
The expected benefits from our separation from Archrock include the following:
•
•
•
•
•
focusing on profitable growth in strategic markets and positioning us and our shareholders to benefit from the
continued build-out of the global energy infrastructure and the redevelopment currently underway in North America;
in our international services businesses, relatively stable cash flows due to our limited exposure to the production
phase of oil and gas development, particularly when compared to drilling and completion related energy service and
product providers;
limited capital expenditures in our product sales business;
financial flexibility to enable investment in value-creating contract operations projects; and
expanding our potential product sales customer base to include companies in the U.S. contract compression business
that have historically been Archrock’s competitors.
We may not achieve the anticipated benefits from our separation for a variety of reasons. For example, we may be unsuccessful
in executing our strategy of expanding our product sales customer base to include competitors of Archrock because these
prospective customers may have long-standing relationships with existing providers of similar products or services. The
availability of shares of our common stock for use as consideration for acquisitions also will not ensure that we will be able to
successfully pursue acquisitions or that any acquisitions will be successful. We also may not fully realize the anticipated
benefits from our separation if any of the matters identified as risks in this “Risk Factors” section were to occur. If we do not
realize the anticipated benefits from our separation for any reason, our business may be materially adversely affected.
20
As a result of the Spin-off, we and Archrock are subject to certain noncompetition restrictions, which may limit our ability
to grow our business.
In connection with the completion of the Spin-off, we entered into a separation and distribution agreement with Archrock that
contains certain noncompetition provisions addressing restrictions for a limited period of time after the Spin-off on our ability
to provide contract operations and aftermarket services in the U.S. and on Archrock’s ability to provide contract operations and
aftermarket services outside of the U.S. and product sales to customers worldwide, subject to certain exceptions. These
restrictions limit our ability to attract new contract operations and aftermarket services customers in the U.S., which will limit
our ability to grow our business.
In addition, if we are unable to enforce the limitations on Archrock’s ability to provide certain contract operations, aftermarket
services and product sales, we may lose prospective customers to Archrock, which could cause our results of operations and
cash flows to suffer.
We provide Archrock and its affiliates with certain manufactured products that we expect will generate recurring oil and gas
product sales revenues for us.
As a result of the Spin-off, Archrock and its affiliates are among our largest customers and are expected to generate recurring
oil and gas product sales revenues for us. Therefore, we are indirectly subject to the operational and business risks of Archrock
and its affiliates. If Archrock and its affiliates are unable to satisfy its obligations or reduces its demand under our commercial
agreements for any reason, our revenues would decline and our financial condition, results of operations and cash flows could
be adversely affected. Further, we have no control over Archrock and its affiliates, and Archrock and its affiliates may elect to
pursue a business strategy that does not favor us or our business.
We may increase our debt or raise additional capital in the future, which could affect our financial condition, may decrease
our profitability or could dilute our shareholders.
We may increase our debt or raise additional capital in the future, subject to restrictions in our credit agreement. If our cash
flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more
financing. However, debt or equity financing may not be available to us on terms acceptable to us, if at all. If we incur
additional debt or raise equity through the issuance of preferred stock, the terms of the debt or preferred stock issued may give
the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of
liquidation. The terms of the debt may also impose additional and more stringent restrictions on our operations than we
currently have. If we raise funds through the issuance of additional equity, our shareholders’ ownership in us would be diluted.
If we are unable to raise additional capital when needed, it could affect our financial health, which could negatively affect our
shareholders.
We are subject to continuing contingent tax liabilities of Archrock.
Certain tax liabilities of Archrock may become our obligations. Under the Code and the related rules and regulations, each
corporation that was a member of the Archrock consolidated U.S. federal income tax reporting group during any taxable period
or portion of any taxable period ending on or before the effective time of the Spin-off is jointly and severally liable for the U.S.
federal income tax liability of the entire Archrock consolidated tax reporting group for that taxable period. In connection with
the Spin-off, we entered into a tax matters agreement with Archrock that allocates the responsibility for prior period taxes of the
Archrock consolidated tax reporting group between us and Archrock. If Archrock is unable to pay any prior period taxes for
which it is responsible, we could be required to pay the entire amount of such taxes.
The tax treatment of the Spin-off is subject to uncertainty. If the Spin-off does not qualify as a transaction that is tax-free
for U.S. federal income tax purposes, we, Archrock and our shareholders could be subject to significant tax liability and, in
certain circumstances, we could be required to indemnify Archrock for material taxes pursuant to indemnification
obligations under the tax matters agreement.
If the Spin-off is determined to be taxable for U.S. federal income tax purposes, then we, Archrock and/or our shareholders
could be subject to significant tax liability. Archrock obtained an opinion of external legal counsel substantially to the effect
that, for U.S. federal income tax purposes, the Spin-off should qualify as a reorganization under Sections 355 and 368(a)(1)(D)
of the Code, subject to certain qualifications and limitations. Accordingly, for U.S. federal income tax purposes, Archrock
should not recognize any material gain or loss and our shareholders generally should recognize no gain or loss or include any
amount in taxable income (other than with respect to cash received in lieu of fractional shares) as a result of the Spin-off.
21
Notwithstanding the opinion, the Internal Revenue Service (the “IRS”) could determine on audit that the Spin-off should be
treated as a taxable transaction if it determines that any of the facts, assumptions, representations or undertakings we or
Archrock has made is not correct or has been violated, or that the Spin-off should be taxable for other reasons, including as a
result of a significant change in stock or asset ownership after the Spin-off. If the Spin-off ultimately is determined to be
taxable, the Spin-off could be treated as a taxable dividend or capital gain to shareholders for U.S. federal income tax purposes,
and shareholders could incur significant U.S. federal income tax liabilities. In addition, Archrock would recognize gain in an
amount equal to the excess of the fair market value of shares of our common stock distributed to Archrock shareholders on the
Spin-off date over Archrock’s tax basis in such shares of our common stock, and Archrock could incur other significant U.S.
federal income tax liabilities.
Under the terms of the tax matters agreement that we entered into with Archrock in connection with the Spin-off, if the Spin-off
were determined to be taxable, we may be responsible for all taxes imposed on Archrock as a result thereof if such
determination was the result of actions taken after the Spin-off by or in respect of us, any of our affiliates or our shareholders
and we may be responsible for 50% of such taxes imposed on Archrock as a result thereof if such determination was not the
result of actions taken by us or Archrock. Our obligations under the tax matters agreement are not limited in amount or subject
to any cap. Further, even if we are not responsible for tax liabilities of Archrock and its subsidiaries under the tax matters
agreement, we nonetheless could be liable under applicable tax law for such liabilities if Archrock were to fail to pay them. If
we are required to pay any liabilities under the circumstances set forth in the tax matters agreement or pursuant to applicable
tax law, the amounts may be significant.
We might not be able to engage in desirable strategic transactions and equity issuances because of certain restrictions
relating to requirements for a tax-free Spin-off.
Our ability to engage in significant equity transactions could be limited or restricted in order to preserve, for U.S. federal
income tax purposes, the tax-free nature of the Spin-off. Even if the Spin-off otherwise qualifies for tax-free treatment under
Section 355 of the Code, it may result in corporate-level taxable gain to Archrock under Section 355(e) of the Code if there is a
50% or greater change in ownership, by vote or value, of shares of our stock, Archrock’s stock or the stock of a successor of
either occurring as part of a plan or series of related transactions that includes the Spin-off. Any acquisitions or issuances of our
stock or Archrock’s stock within two years after the Spin-off are generally presumed to be part of such a plan.
Under the tax matters agreement that we entered into with Archrock, we are prohibited from taking or failing to take any action
that prevents the Spin-off from being tax-free. Further, during the two-year period following the Spin-off, without obtaining the
consent of Archrock, a private letter ruling from the IRS or an unqualified opinion of a nationally recognized law firm, we may
be prohibited from taking certain specified actions that could impact the treatment of the Spin-off.
These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may
maximize the value of our business. Moreover, the tax matters agreement also provides that we are responsible for any taxes
imposed on Archrock or any of its affiliates as a result of the failure of the Spin-off to qualify for favorable treatment under the
Code if such failure is attributable to certain actions taken after the Spin-off by or in respect of us, any of our affiliates or our
shareholders.
Our prior and continuing relationship with Archrock exposes us to risks attributable to businesses of Archrock.
Archrock is obligated to indemnify us for losses that third parties may seek to impose upon us or our affiliates for liabilities
relating to the business of Archrock that are incurred through a breach of the separation and distribution agreement or any
ancillary agreement by Archrock or its affiliates other than us, or losses that are attributable to Archrock in connection with the
Spin-off or are not expressly assumed by us under our agreements with Archrock. Any claims made against us that are properly
attributable to Archrock in accordance with these arrangements would require us to exercise our rights under our agreements
with Archrock to obtain payment from Archrock. We are exposed to the risk that, in these circumstances, Archrock cannot, or
will not, make the required payment.
22
In connection with our separation from Archrock, Archrock will indemnify us for certain liabilities, and we will indemnify
Archrock for certain liabilities. If we are required to act on these indemnities to Archrock, we may need to divert cash to
meet those obligations, and our financial results could be negatively impacted. In the case of Archrock’s indemnity, there
can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or as to
Archrock’s ability to satisfy its indemnification obligations.
Pursuant to the separation and distribution agreement and other agreements with Archrock, Archrock has agreed to indemnify
us for certain liabilities, and we have agreed to indemnify Archrock for certain liabilities, in each case for uncapped amounts, as
discussed further in our Registration Statement. Under the separation and distribution agreement, we and Archrock will
generally release the other party from all claims arising prior to the Spin-off that relate to the other party's business, subject to
certain exceptions. Also pursuant to the separation and distribution agreement, we have agreed to use our commercially
reasonable efforts to remove Archrock as a party to certain of our contracts with third parties, which may result in a
renegotiation of such contracts on terms that are less favorable to us. In the event that Archrock remains as a party, we expect to
indemnify Archrock for any liabilities relating to such contracts. Indemnities that we may be required to provide Archrock will
not be subject to any cap, may be significant and could negatively impact our business, particularly indemnities relating to our
actions that could impact the tax-free nature of the Spin-off.
With respect to Archrock’s, agreement to indemnify us, there can be no assurance that the indemnity from Archrock will be
sufficient to protect us against the full amount of such liabilities, or that Archrock will be able to fully satisfy its
indemnification obligations. Moreover, even if we ultimately succeed in recovering from Archrock any amounts for which we
are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our
business, cash flows, results of operations and financial condition.
The Spin-off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal
dividend requirements.
The Spin-off is subject to review under various state and federal fraudulent conveyance laws. Under these laws, if a court in a
lawsuit by an unpaid creditor or an entity vested with the power of such creditor (including without limitation a trustee or
debtor-in-possession in a bankruptcy by us or Archrock or any of our respective subsidiaries) were to determine that Archrock
or any of its subsidiaries did not receive fair consideration or reasonably equivalent value for distributing our common stock or
taking other action as part of the Spin-off, or that we or any of our subsidiaries did not receive fair consideration or reasonably
equivalent value for incurring indebtedness, including the borrowings incurred by us under the new credit facility in connection
with the Spin-off, transferring assets or taking other action as part of the Spin-off and, at the time of such action, we, Archrock
or any of our respective subsidiaries (i) was insolvent or would be rendered insolvent, (ii) lacked reasonably sufficient capital to
carry on its business and all business in which it intended to engage or (iii) intended to incur, or believed it would incur, debts
beyond its ability to repay such debts as they would mature, then such court could void the Spin-off as a constructive fraudulent
transfer. If such court made this determination, the court could impose a number of different remedies, including without
limitation, voiding our liens and claims, if any, against Archrock, or providing Archrock with a claim for money damages
against us in an amount equal to the difference between the consideration received by Archrock and the fair market value of our
company at the time of the Spin-off.
The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction’s law is
applied. Generally, however, an entity would be considered insolvent if the present fair saleable value of its assets is less than
(i) the amount of its liabilities (including contingent liabilities) or (ii) the amount that will be required to pay its probable
liabilities on its existing debts as they become absolute and mature. No assurance can be given as to what standard a court
would apply to determine insolvency or that a court would determine that we, Archrock or any of our respective subsidiaries
were solvent at the time of or after giving effect to the Spin-off, including the distribution of our common stock.
Under the separation and distribution agreement, each of Archrock and we are responsible for the debts, liabilities and other
obligations related to the business or businesses which it owns and operates following the consummation of the Spin-off.
Although we do not expect to be liable for any such obligations not expressly assumed by us pursuant to the separation and
distribution agreement, it is possible that a court would disregard the allocation agreed to between the parties, and require that
we assume responsibility for obligations allocated to Archrock, particularly if Archrock were to refuse or were unable to pay or
perform the subject allocated obligations.
23
The market price and trading volume of our common stock may be volatile.
The market price of our stock may be influenced by many factors, some of which are beyond our control, including the
following:
•
•
•
•
•
•
•
•
•
the inability to meet the financial estimates of analysts who follow our common stock;
strategic actions by us or our competitors;
announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint
ventures or capital commitments;
variations in our quarterly operating results and those of our competitors;
general economic and stock market conditions;
risks relating to our business and our industry, including those discussed above;
changes in conditions or trends in our industry, markets or customers;
cyber-attacks or terrorist acts;
future sales of our common stock or other securities;
• material weaknesses in our internal control over financial reporting; and
•
investor perceptions of the investment opportunity associated with our common stock relative to other investment
alternatives.
These broad market and industry factors may materially reduce the market price of our common stock, regardless of our
operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock
is low.
We were not in compliance with the New York Stock Exchange’s requirements for continued listing and as a result our
common stock may be delisted from trading, which would have a material effect on us and our stockholders.
We were delinquent in the filing of our periodic reports with the SEC, as a result of which we were not in compliance with the
rules of the New York Stock Exchange (“NYSE”). By filing our quarterly reports on Form 10-Q for the quarters ended March
31, 2016, June 30, 2016 and September 30, 2016, we have been advised by the NYSE that we have adequately remediated our
non-compliance with the NYSE’s rules. However, we delayed our annual meeting of stockholders as a result of the restatement,
and to the extent we cannot hold our annual meeting before the end of 2017, our stock may again be subject to delisting from
trading on the NYSE. If our common stock is delisted, there can be no assurance as to whether or when our common stock
would again be listed for trading on NYSE or any other exchange. The market price of our shares may also decline and become
more volatile if our common stock is delisted, and our stockholders may find that their ability to trade in our stock will be
adversely affected. Furthermore, institutions whose charters do not allow them to hold securities in unlisted companies might
sell our shares, which could have a further adverse effect on the price of our stock.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole
and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could
limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or other employees.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternate
forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a
claim of breach of a fiduciary duty owed by any director, officer or other employee to us or our stockholders, (iii) any action
asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated
certificate of incorporation or our bylaws, in each case, as amended from time to time, or (iv) any action asserting a claim
governed by the internal affairs doctrine, shall be the Court of Chancery of the State of Delaware, in all cases subject to the
court’s having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or
otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the
foregoing provision. This forum selection provision may limit a stockholder’s ability to bring a claim in a judicial forum that it
finds favorable or cost-effective for disputes with us or our directors, officers or other employees, which may discourage such
lawsuits against us and our directors, officers and employees.
Item 1B. Unresolved Staff Comments
None.
24
Item 2. Properties
The following table describes the material facilities we owned or leased as of December 31, 2016:
Location
Houston, Texas
Camacari, Brazil
Neuquen, Argentina
Reynosa, Mexico
Santa Cruz, Bolivia
Bangkok, Thailand
Port Harcourt, Nigeria
Houston, Texas
Columbus, Texas
Broken Arrow, Oklahoma
Singapore, Singapore
Hamriyah Free Zone, UAE
Item 3. Legal Proceedings
Status
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Owned
Owned
Owned
Leased
Leased
Square Feet
261,600
86,112
43,233
28,912
22,017
36,611
19,031
343,750
219,552
141,549
111,693
212,742
Uses
Corporate office, oil and gas product sales
Contract operations and aftermarket services
Contract operations and aftermarket services
Contract operations and aftermarket services
Contract operations and aftermarket services
Aftermarket services
Aftermarket services
Oil and gas product sales
Oil and gas product sales
Oil and gas product sales
Oil and gas product sales
Oil and gas product sales and Belleli EPC product
sales
In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable
to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these actions will not
have a material adverse effect on our financial position, results of operations or cash flows. However, because of the inherent
uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or
proceeding to which we are a party will not have a material adverse effect on our financial position, results of operations or
cash flows.
Contemporaneously with filing the Form 8-K on April 26, 2016, we self-reported the errors and possible irregularities at Belleli
EPC to the SEC. Since then, we have been cooperating with the SEC in its investigation of this matter, including responding to
a subpoena for documents related to the restatement and of our compliance with the FCPA, which are also being provided to
the Department of Justice at its request. The FCPA related requests in the SEC subpoena pertain to our policies and procedures,
information about our third-party sales agents, and documents related to historical internal investigations completed prior to
November 2015.
Item 4. Mine Safety Disclosures
Not applicable.
25
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed and traded on the New York Stock Exchange under the stock symbol “EXTN.” Our common stock
was traded on a “when-issued” basis starting on October 26, 2015, and started “regular-way” trading on the NYSE on
November 4, 2015. Prior to November 4, 2015, there was no public market for our common stock. The following table sets
forth the range of high and low sale prices for our common stock for the period indicated.
Year Ended December 31, 2015
Fourth Quarter (beginning on November 4, 2015)
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range
High
Low
$
$
$
$
$
18.90
16.99
17.13
15.90
24.84
$
$
$
$
$
13.29
12.07
10.83
11.87
14.51
On March 2, 2017, the closing price of our common stock was $30.04 per share. As of March 2, 2017, there were
approximately 1,055 holders of record of our common stock.
We have not paid, and we do not currently anticipate paying cash dividends on our common stock. Instead, we intend to retain
our future earnings to support the growth and development of our business. The declaration of any future cash dividends and, if
declared, the amount of any such dividends, will be subject to our financial condition, earnings, capital requirements, financial
covenants, applicable law and other factors our board of directors deems relevant. Therefore, there can be no assurance as to
what level of dividends, if any, will be paid in the future.
For disclosures regarding securities authorized for issuance under our equity compensation plans, see Part III, Item 12
(“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”) of this report.
26
Comparison of Cumulative Total Return
The performance graph below shows the cumulative total stockholder return on our common stock, compared with the S&P
500 Composite Stock Price Index (the “S&P 500 Index”) and the Oilfield Service Index (the “OSX Index”) over the period
from November 4, 2015, the first day of trading volume, to December 31, 2016. The results are based on an investment of $100
in each of our common stock, the S&P 500 Index and the OSX Index. The graph assumes the reinvestment of dividends and
adjusts all closing prices and dividends for stock splits.
The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference
this Annual Report on Form 10-K into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed
under those Acts.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Repurchase of Equity Securities
The following table summarizes our repurchases of equity securities during the three months ended December 31, 2016:
Period
October 1, 2016 - October 31, 2016
November 1, 2016 - November 30, 2016
December 1, 2016 - December 31, 2016
Total
Total Number of
Shares Repurchased
(1)
Average
Price Paid
Per Unit
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number of Shares
yet to be Purchased Under the
Publicly Announced Plans or
Programs
— $
—
43,511
160
14.78
23.90
43,671
$
14.81
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Represents shares withheld to satisfy employees’ tax withholding obligations in connection with vesting of restricted stock
awards during the period.
27
Item 6. Selected Financial Data
The table below presents certain selected historical consolidated and combined financial information as of and for each of the
years in the five-year period ended December 31, 2016. The selected historical consolidated financial data as of December 31,
2016 and 2015 and the selected historical consolidated and combined financial data for the years ended December 31, 2016,
2015 and 2014 has been derived from our audited Financial Statements included elsewhere in this report. The selected
historical combined financial data as of December 31, 2014, 2013 and 2012 and for the years ended December 31, 2013 and
2012 has been derived from our financial statements not included in this report.
Our Spin-off from Archrock was completed on November 3, 2015. Selected financial data for periods prior to the Spin-off
represent the combined results of Archrock’s international services and product sales businesses. The combined financial data
may not be indicative of our future performance and does not necessarily reflect the financial condition and results of
operations we would have realized had we operated as a separate, stand-alone entity during the periods presented, including
changes in our operations as a result of our Spin-off from Archrock. As discussed in Note 3 to our Financial Statements, in the
first quarter of 2016, we began executing a plan to exit the Belleli CPE business comprising of engineering, procurement and
manufacturing services related to the manufacture of critical process equipment for refinery and petrochemical facilities
(referred to as “Belleli CPE” or the “Belleli CPE business” herein). The results from continuing operations for all periods
presented exclude the results of our Venezuelan contract operations business, Canadian contract operations and aftermarket
services businesses (“Canadian Operations”) and Belleli CPE business. Those results are reflected in discontinued operations
for all periods presented. The selected financial data presented below should be read together with Management’s Discussion
and Analysis of Financial Condition and Results of Operations and the Financial Statements contained in this report.
28
(in thousands, except per share data)
2016
2015
2014
2013
2012
Years Ended December 31,
Statement of Operations Data:
Revenues
$ 1,029,253
$ 1,790,485
$ 2,101,663
$ 2,324,537
$ 1,987,392
Cost of sales (excluding depreciation and
amortization expense)
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restatement charges
Restructuring and other charges
Interest expense
Equity in income of non-consolidated affiliates
Other (income) expense, net
Provision for income taxes
Income (loss) from continuing operations
Income (loss) from discontinued operations,
net of tax
Net income (loss)
Income (loss) from continuing operations per
common share (1):
722,728
165,985
137,974
15,146
18,879
27,457
34,181
(10,403)
(13,088)
124,760
(194,366)
(33,571)
(227,937)
1,324,207
1,543,877
1,772,633
1,502,310
220,396
154,801
20,788
—
31,315
7,272
(15,152)
35,438
39,546
(28,126)
54,774
26,648
263,170
170,088
3,851
—
—
1,878
(14,553)
6,201
79,042
48,109
67,183
115,292
259,801
136,607
11,941
—
—
3,523
(19,000)
(3,385)
97,195
65,222
58,495
123,717
264,970
163,829
5,197
—
3,892
5,310
(51,483)
7,541
26,917
58,909
59,914
118,823
Basic
Diluted
$
(5.62) $
(5.62)
(0.82) $
(0.82)
$
1.40
1.40
$
1.90
1.90
1.72
1.72
Weighted average common shares outstanding
used in income (loss) from continuing
operations per common share (1):
Basic
Diluted
Other Financial Data:
Total gross margin (2)
EBITDA, as adjusted (2)
Capital expenditures:
Contract Operations Equipment:
Growth (3)
Maintenance (4)
Other
Balance Sheet Data:
Cash and cash equivalents
Working capital (5)
Property, plant and equipment, net
Total assets
Long-term debt (6)
Total stockholders’ equity (6)
34,568
34,568
34,288
34,288
34,286
34,286
34,286
34,286
34,286
34,286
$
306,525
$
466,278
$
557,786
$
551,904
$
485,082
145,069
240,571
292,990
299,801
219,977
$
53,005
$
105,169
$
97,931
$
36,468
$
107,658
14,440
6,880
27,282
24,294
24,377
34,294
21,591
34,109
22,530
29,716
$
35,678
$
29,032
$
39,361
$
35,194
$
34,167
177,824
797,809
408,488
858,188
366,135
908,590
305,848
911,257
303,267
984,069
1,374,778
1,788,396
1,999,303
1,973,622
2,105,744
348,970
556,771
525,593
805,936
1,107
1,539
—
1,364,335
1,321,160
1,380,975
(1) For the periods prior to November 3, 2015, the average number of common shares outstanding used to calculate basic and
diluted net income (loss) from continuing operations per common share was based on 34,286,267 shares of our common
stock that were distributed by Archrock in the Spin-off on November 3, 2015.
(2) Total gross margin and EBITDA, as adjusted, are non-GAAP financial measures. Total gross margin and EBITDA, as
adjusted, are defined, reconciled to income (loss) before income taxes and net income (loss), respectively, and discussed
further below under “Non-GAAP Financial Measures.”
29
(3) Growth capital expenditures are made to expand or to replace partially or fully depreciated assets or to expand the
operating capacity or revenue generating capabilities of existing or new assets, whether through construction, acquisition
or modification. The majority of our growth capital expenditures are related to the acquisition cost of new compressor
units and processing and treating equipment that we add to our contract operations fleet and installation costs on
integrated projects. In addition, growth capital expenditures can include the upgrading of major components on an
existing compressor unit where the current configuration of the compressor unit is no longer in demand and the
compressor unit is not likely to return to an operating status without the capital expenditures. These latter expenditures
substantially modify the operating parameters of the compressor unit such that it can be used in applications for which it
previously was not suited.
(4) Maintenance capital expenditures are made to maintain the existing operating capacity of our assets and related cash
flows further extending the useful lives of the assets. Maintenance capital expenditures are related to major overhauls of
significant components of a compressor unit, such as the engine, compressor and cooler, that return the components to a
“like new” condition, but do not modify the applications for which the compressor unit was designed.
(5) Working capital is defined as current assets minus current liabilities.
(6) Pursuant to the separation and distribution agreement with Archrock and certain of our and Archrock’s respective
affiliates, on November 3, 2015, we transferred $532.6 million of net proceeds from borrowings under our credit facility
to Archrock to allow it to repay a portion of its indebtedness in connection with the Spin-off.
30
Non-GAAP Financial Measures
We define gross margin as total revenue less cost of sales (excluding depreciation and amortization expense). We evaluate the
performance of each of our segments based on gross margin. Total gross margin is included as a supplemental disclosure
because it is a primary measure used by our management to evaluate the results of revenue and cost of sales (excluding
depreciation and amortization expense), which are key components of our operations. We believe gross margin is important
because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs
of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our selling, general
and administrative (“SG&A”) activities, the impact of our financing methods and income taxes. Depreciation and amortization
expense may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore
may not portray the costs from current operating activity. As an indicator of our operating performance, total gross margin
should not be considered an alternative to, or more meaningful than, income (loss) before income taxes as determined in
accordance with accounting principles generally accepted in the U.S. (“GAAP”). Our gross margin may not be comparable to a
similarly titled measure of another company because other entities may not calculate gross margin in the same manner.
Total gross margin has certain material limitations associated with its use as compared to income (loss) before income taxes.
These limitations are primarily due to the exclusion of interest expense, depreciation and amortization expense, SG&A
expense, impairments and restructuring and other charges. Each of these excluded expenses is material to our statements of
operations. Because we intend to finance a portion of our operations through borrowings, interest expense is a necessary
element of our costs and our ability to generate revenue. Additionally, because we use capital assets, depreciation expense is a
necessary element of our costs and our ability to generate revenue, and SG&A expenses are necessary to support our operations
and required corporate activities. To compensate for these limitations, management uses total gross margin, a non-GAAP
measure, as a supplemental measure to other GAAP results to provide a more complete understanding of our performance.
The following table reconciles our net income (loss) before income taxes to total gross margin (in thousands):
Income (loss) before income taxes
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restatement charges
Restructuring and other charges
Interest expense
Equity in income of non-consolidated affiliates
Other (income) expense, net
Total gross margin
$
2016
(69,606) $
165,985
137,974
15,146
18,879
27,457
34,181
(10,403)
(13,088)
$ 306,525
Years Ended December 31,
2015
2014
2013
2012
11,420
$
127,151
$
162,417
$
85,826
220,396
154,801
20,788
—
31,315
7,272
(15,152)
35,438
263,170
170,088
3,851
—
—
1,878
(14,553)
6,201
$
466,278
$
557,786
$
259,801
136,607
11,941
—
—
3,523
(19,000)
(3,385)
551,904
264,970
163,829
5,197
—
3,892
5,310
(51,483)
7,541
$
485,082
We define EBITDA, as adjusted, as net income (loss) excluding income (loss) from discontinued operations (net of tax),
cumulative effect of accounting changes (net of tax), income taxes, interest expense (including debt extinguishment costs),
depreciation and amortization expense, impairment charges, restructuring and other charges, non-cash gains or losses from
foreign currency exchange rate changes recorded on intercompany obligations, expensed acquisition costs and other items. We
believe EBITDA, as adjusted, is an important measure of operating performance because it allows management, investors and
others to evaluate and compare our core operating results from period to period by removing the impact of our capital structure
(interest expense from our outstanding debt), asset base (depreciation and amortization), our subsidiaries’ capital structure
(non-cash gains or losses from foreign currency exchange rate changes on intercompany obligations), tax consequences,
impairment charges, restructuring and other charges, expensed acquisition costs and other items. Management uses EBITDA,
as adjusted, as a supplemental measure to review current period operating performance, comparability measures and
performance measures for period to period comparisons. In addition, the compensation committee has used EBITDA, as
adjusted, in evaluating the performance of the Company and management and in evaluating certain components of executive
compensation, including performance-based annual incentive programs. Our EBITDA, as adjusted, may not be comparable to a
similarly titled measure of another company because other entities may not calculate EBITDA in the same manner.
31
EBITDA, as adjusted, is not a measure of financial performance under GAAP, and should not be considered in isolation or as
an alternative to net income (loss), cash flows from operating activities and other measures determined in accordance with
GAAP. Items excluded from EBITDA, as adjusted, are significant and necessary components to the operation of our business,
and, therefore, EBITDA, as adjusted, should only be used as a supplemental measure of our operating performance.
The following table reconciles our net income (loss) to EBITDA, as adjusted (in thousands):
Net income (loss)
(Income) loss from discontinued operations, net of tax
Depreciation and amortization
Long-lived asset impairment
Restatement charges
Restructuring and other charges
Investment in non-consolidated affiliates impairment
Proceeds from sale of joint venture assets
Interest expense
(Gain) loss on currency exchange rate remeasurement of
intercompany balances
Loss on sale of businesses
Provision for income taxes
EBITDA, as adjusted
Years Ended December 31,
2016
2015
2014
2013
2012
$ (227,937) $
33,571
137,974
15,146
18,879
27,457
—
(10,403)
34,181
26,648
(54,774)
154,801
20,788
—
31,315
33
(15,185)
7,272
(8,559)
—
30,127
—
124,760
39,546
$ 115,292
(67,183)
170,088
$ 123,717
(58,495)
136,607
$ 118,823
(59,914)
163,829
3,851
11,941
—
—
197
(14,750)
1,878
3,614
961
79,042
—
—
—
(19,000)
3,523
4,313
—
97,195
5,197
—
3,892
224
(51,707)
5,310
7,406
—
26,917
$ 145,069
$ 240,571
$ 292,990
$ 299,801
$ 219,977
32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with
our Financial Statements, the notes thereto, and the other financial information appearing elsewhere in this report. The
following discussion includes forward-looking statements that involve certain risks and uncertainties. See Part I (“Disclosure
Regarding Forward-Looking Statements”) and Part I, Item 1A (“Risk Factors”) in this report.
Overview
We are a market leader in the provision of compression, production and processing products and services that support the
production and transportation of oil and natural gas throughout the world. We provide these products and services to a global
customer base consisting of companies engaged in all aspects of the oil and natural gas industry, including large integrated oil
and natural gas companies, national oil and natural gas companies, independent oil and natural gas producers and oil and
natural gas processors, gatherers and pipeline operators. We operate in four primary business lines: contract operations,
aftermarket services, oil and gas product sales and Belleli EPC product sales. In our contract operations business line, we have
operations outside of the United States of America (“U.S.”) where we own and operate natural gas compression equipment and
crude oil and natural gas production and processing equipment on behalf of our customers. In our aftermarket services business
line, we primarily have operations outside of the U.S. where we provide operations, maintenance, overhaul and reconfiguration
services to customers who own their own compression, production, processing, treating and related equipment. In our oil and
gas product sales business line, we manufacture natural gas compression packages and oil and natural gas production and
processing equipment for sale to our customers throughout the world and for use in our contract operations business line. In our
Belleli EPC product sales business line that we are exiting, we have historically provided engineering, procurement and
construction for the manufacture of tanks for tank farms and the manufacture of evaporators and brine heaters for desalination
plants. As of December 31, 2016, we had five significant contracts in this business remaining and currently expect to have
substantially exited this business by the first half of 2018. We also offer our customers, on either a contract operations basis or a
sale basis, the engineering, design, project management, procurement and construction services necessary to incorporate our
products into production, processing and compression facilities, which we refer to as integrated projects.
As discussed in Note 22 to the Financial Statements, we changed our reporting segments in the third quarter of 2016 to split our
previously disclosed product sales segment into the following two new reportable segments: “oil and gas product sales” and
“Belleli EPC product sales.” The contract operations and aftermarket services segments were not impacted by this change. The
change in our reportable segments is reflected in this Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Spin-off
On November 3, 2015, Archrock, Inc. (named Exterran Holdings, Inc. prior to November 3, 2015) (“Archrock”) completed the
spin-off (the “Spin-off”) of its international contract operations, international aftermarket services (the international contract
operations and international aftermarket services businesses combined are referred to as the “international services businesses”
and include such activities conducted outside of the U.S.) and global fabrication businesses into an independent, publicly traded
company (“Exterran Corporation,” “our,” “we” or “us”). To effect the Spin-off, on November 3, 2015, Archrock distributed, on
a pro rata basis, all of our shares of common stock to its stockholders of record as of October 27, 2015 (the “Record Date”).
Archrock shareholders received one share of Exterran Corporation common stock for every two shares of Archrock common
stock held at the close of business on the Record Date. Pursuant to the separation and distribution agreement with Archrock and
certain of our and Archrock’s respective affiliates, on November 3, 2015, we transferred cash of $532.6 million to Archrock.
Following the completion of the Spin-off, we and Archrock became and continue to be independent, publicly traded companies
with separate boards of directors and management.
33
Basis of Presentation
The accompanying Financial Statements in Part IV, Item 15, have been prepared in accordance with GAAP. All financial
information presented for periods after the Spin-off represents our consolidated results of operations, financial position and
cash flows (referred to as the “consolidated financial statements”) and all financial information for periods prior to the Spin-off
represents our combined results of operations, financial position and cash flows (referred to as the “combined financial
statements”). Accordingly:
• Our consolidated and combined statements of operations, comprehensive income, cash flows and stockholders’ equity
for the year ended December 31, 2015 consist of (i) the combined results of Archrock’s international services and
product sales businesses for the period between January 1, 2015 and November 3, 2015 and (ii) the consolidated
results of Exterran Corporation for periods subsequent to November 3, 2015. Our combined statements of operations,
comprehensive income, cash flows and stockholders’ equity for the year ended December 31, 2014 consist entirely of
the combined results of Archrock’s international services and product sales businesses.
• Our consolidated balance sheets at December 31, 2016 and 2015 consist entirely of our consolidated balances.
The combined financial statements were derived from the accounting records of Archrock and reflect the combined historical
results of operations, financial position and cash flows of Archrock’s international services and product sales businesses. The
combined financial statements were presented as if such businesses had been combined for periods prior to November 4, 2015.
All intercompany transactions and accounts within these statements have been eliminated. Affiliate transactions between the
international services and product sales businesses of Archrock and the other businesses of Archrock have been included in the
combined financial statements, with the exception of oil and gas product sales within our wholly owned subsidiary, Exterran
Energy Solutions, L.P. (“EESLP”). Prior to the closing of the Spin-off, EESLP also had a fleet of compression units used to
provide compression services in the U.S. services business of Archrock. Revenue has not been recognized in the combined
statements of operations for the sale of compressor units by us that were used by EESLP to provide compression services to
customers of the U.S. services business of Archrock. See Note 16 to the Financial Statements for further discussion on
transactions with affiliates.
The combined statements of operations for periods prior to the Spin-off include expense allocations for certain functions
historically performed by Archrock and not allocated to its operating segments, including allocations of expenses related to
executive oversight, accounting, treasury, tax, legal, human resources, procurement and information technology. See Note 16 to
the Financial Statements for further discussion regarding the allocation of corporate expenses. Additionally, third party debt of
Archrock, other than debt attributable to capital leases, was not allocated to us for any of the periods prior to the Spin-off as we
were not the legal obligor of the debt and Archrock’s borrowings were not directly attributable to our business.
We refer to the consolidated and combined financial statements collectively as “financial statements,” and individually as
“balance sheets,” “statements of operations,” “statements of comprehensive income (loss),” “statements of stockholders’
equity” and “statements of cash flows” herein.
Exit of our Belleli Businesses
In the first quarter of 2016, we began executing a plan to exit certain Belleli businesses to focus on our core oil and gas
businesses. Specifically, we began marketing for sale the Belleli CPE business comprising of engineering, procurement and
manufacturing services related to the manufacture of critical process equipment for refinery and petrochemical facilities
(referred to as “Belleli CPE” or the “Belleli CPE business” herein). In addition, we began executing our exit of the Belleli EPC
business that has historically been comprised of engineering, procurement and construction for the manufacture of tanks for
tank farms and the manufacture of evaporators and brine heaters for desalination plants in the Middle East (referred to as
“Belleli EPC” or the “Belleli EPC business” herein). Belleli CPE met the held for sale criteria and is reflected as discontinued
operations in our financial statements for all periods presented. In August 2016, we completed the sale of our Belleli CPE
business to Tosto S.r.l. for cash proceeds of $5.5 million. Belleli CPE was previously included in our former product sales
segment. In conjunction with the planned disposition of Belleli CPE, we recorded impairments of long-lived assets and current
assets that totaled $68.8 million during the year ended December 31, 2016. The impairment charges are reflected in income
(loss) from discontinued operations, net of tax. In accordance with GAAP, Belleli EPC will be reflected as discontinued
operations upon the substantial cessation of the remaining non-oil and gas business. During the first quarter of 2016, we ceased
the booking of new orders for our Belleli EPC business. Our plan to exit our Belleli EPC business resulted in a reduction in the
remaining useful lives of the assets that are currently used in the Belleli EPC business and a long-lived asset impairment charge
of $0.7 million impacting results from continuing operations during the year ended December 31, 2016. Belleli EPC is
represented by our Belleli EPC product sales segment.
34
The following table summarizes the operating results of our core oil and gas businesses and our Belleli businesses (in
thousands):
Year Ended December 31, 2016
Revenue
Cost of sales (excluding depreciation and amortization
expense)
Depreciation and amortization
Loss from continuing operations
Income (loss) from discontinued operations, net of tax (1)
Net loss
Product sales backlog (at period end)
Third party bookings
Year Ended December 31, 2015
Revenue
Cost of sales (excluding depreciation and amortization
expense)
Depreciation and amortization
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax (1)
Net income (loss)
Product sales backlog (at period end)
Third party bookings
Year Ended December 31, 2014
Revenue
Cost of sales (excluding depreciation and amortization
expense)
Depreciation and amortization
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax (1)
Net income (loss)
Product sales backlog (at period end)
Third party bookings
___________________
Exterran
Corporation
Excluding
Belleli
Belleli
CPE
EPC
Exterran
Corporation
Consolidated
and Combined
$
905,397
$
— $
123,856
$
1,029,253
596,406
130,731
(173,354)
39,036
(134,318)
306,222
431,188
—
—
—
(72,607)
(72,607)
—
—
126,322
7,243
(21,012)
—
(21,012)
63,578 (2)
25,010 (2)
722,728
137,974
(194,366)
(33,571)
(227,937)
369,800
456,198
$
1,687,264
$
— $
103,221
$
1,790,485
1,189,361
144,123
26,049
56,132
82,181
267,418
437,250
—
—
—
(1,358)
(1,358)
—
—
134,846
10,678
(54,175)
—
(54,175)
162,424
80,907
1,324,207
154,801
(28,126)
54,774
26,648
429,842
518,157
$
1,986,184
$
— $
115,479
$
2,101,663
1,395,007
161,071
103,104
73,198
176,302
765,463
1,420,799
—
—
—
(6,015)
(6,015)
—
—
148,870
9,017
(54,995)
—
(54,995)
184,738
99,473
1,543,877
170,088
48,109
67,183
115,292
950,201
1,520,272
(1) See Note 3 to the Financial Statements for further discussion regarding discontinued operations. As Belleli CPE is no
longer a part of our continuing operations, Belleli CPE’s product sales backlog and third party bookings have been
excluded from all periods presented. We completed the sale of Belleli CPE in August 2016.
(2) During the first quarter of 2016, we ceased the booking of new orders for our Belleli EPC business. Changes in our Belleli
EPC backlog since March 31, 2016 reflect revenue recognized and change orders booked on existing contracts.
35
Industry Conditions and Trends
Our business environment and corresponding operating results are affected by the level of energy industry spending for the
exploration, development and production of oil and natural gas reserves. Spending by oil and natural gas exploration and
production companies is dependent upon these companies’ forecasts regarding the expected future supply, demand and pricing
of oil and natural gas products as well as their estimates of risk-adjusted costs to find, develop and produce reserves. Although
we believe our contract operations business, and to a lesser extent our oil and gas product sales business, is typically less
impacted by commodity prices than certain other energy products and service providers, changes in oil and natural gas
exploration and production spending normally result in changes in demand for our products and services.
Natural gas consumption in the U.S. for the twelve months ended November 30, 2016 decreased by approximately 0.6%
compared to the twelve months ended November 30, 2015. The U.S. Energy Information Administration (“EIA”) forecasts that
total U.S. natural gas consumption will increase by 0.4% in 2017 compared to 2016. As reported by the BP Energy Outlook
2017 edition (“BP Energy Outlook 2017”), North American natural gas consumption and worldwide natural gas consumption is
expected to grow annually by an average of approximately 1.4% and 1.9%, respectively, per year between 2015 and 2035.
Natural gas marketed production in the U.S. for the twelve months ended November 30, 2016 decreased by approximately
1.2% compared to the twelve months ended November 30, 2015. The EIA forecasts that total U.S. natural gas marketed
production will increase by 2% in 2017 compared to 2016. In addition, according to the BP Energy Outlook 2017, North
American natural gas production and worldwide natural gas production is expected to grow annually by an average of
approximately 2.4% and 1.8%, respectively, per year between 2015 and 2035.
Global oil and U.S. natural gas prices declined significantly from the third quarter of 2014 through the middle of 2016, which
led to declines in U.S. and worldwide capital spending for drilling activity in 2015. Given recent improvements in late 2016 to
the market environment, we anticipate industry spending to increase in the U.S. with flat to slight declines in international
spending in 2017.
Our Performance Trends and Outlook
Our revenue, earnings and financial position are affected by, among other things, market conditions that impact demand and
pricing for natural gas compression and oil and natural gas production and processing and our customers’ decisions among
using our products and services, using our competitors’ products and services or owning and operating the equipment
themselves.
Due to a significant decrease in oil and natural gas prices since the third quarter of 2014, overall market activity in North
America remained at depressed levels for the majority of 2016. Low commodity prices in 2015 and the majority of 2016 have
led to reduced drilling of oil and gas wells in North America. Oil and natural gas prices in North America improved late in 2016
over the lows experienced in the earlier part of the year, however, we believe higher commodity prices for a sustained period
are necessary to encourage meaningful increases in customer spending. The Henry Hub spot price for natural gas was $3.71 per
MMBtu at December 31, 2016, which was approximately 63% and 18% higher than prices at December 2015 and 2014,
respectively, and the U.S. natural gas liquid composite price was approximately $5.45 per MMBtu for the month of November
2016, which was approximately 29% higher and 3% lower than prices for the months of December 2015 and 2014,
respectively. In addition, the West Texas Intermediate crude oil spot price as of December 31, 2016 was approximately 45%
and 1% higher than prices at December 31, 2015 and 2014, respectively. During periods of lower oil or natural gas prices, our
customers typically decrease their capital expenditures, which generally results in lower activity levels. As a result of the low
oil and natural gas price environment in North America during 2015 and the majority of 2016, our customers sought to reduce
their capital and operating expenditure requirements, and as a result, the demand and pricing for the equipment we manufacture
in North America was adversely impacted. Third party booking activity levels for our manufactured oil and gas products in
North America during the year ended December 31, 2016 were $343.7 million, which represents a decline of approximately
12% and 68% compared to the years ended December 31, 2015 and 2014, respectively, and our North America oil and gas
product sales backlog as of December 31, 2016 was $237.7 million, which represents an increase of approximately 6% and a
decline of approximately 56% compared to December 31, 2015 and 2014, respectively. We believe these booking levels reflect
both our customers’ reduced activity levels in response to the decline in commodity prices and caution on the part of our
customers as they sought to reduce costs.
Similarly, in international markets, lower oil and natural gas prices have had a negative impact on the amount of capital
investment by our customers in new projects. Our customers sought to reduce their capital and operating expenditure
requirements due to lower oil and natural gas prices. As a result, the demand and pricing for our products and services in
international markets was adversely impacted.
36
Industry forecasts indicate a sharp rise in U.S. shale fields spending is expected for 2017 with continued underinvestment in
international markets. We believe international spending will recover more slowly than spending in North America, as the
largest-in-class energy producers with more international exposure focus on debt reduction and returning cash to shareholders,
while smaller, U.S.-centric resource holders invest to increase production in lower-cost shale plays. Demand for our oil and gas
product sales in the U.S. could benefit from increased customer spending.
Despite the anticipated slower recovery internationally, longer-term fundamentals in our international markets depends in part
on international oil and gas infrastructure projects, many of which are based on longer-term plans of our customers that can be
driven by their local market demand and local pricing for natural gas. As a result, we believe our international customers make
decisions based on longer-term fundamentals that can be less tied to near term commodity prices than our North American
customers. Therefore, we believe the demand for our products and services in international markets will continue, and we
expect to have opportunities to grow our international businesses over the long term. Third party booking activity levels for our
manufactured oil and gas products in international markets during the year ended December 31, 2016 were $87.5 million,
which represents an increase of approximately 87% and a decline of approximately 76% compared to the years ended
December 31, 2015 and 2014, respectively, and our international market oil and gas product sales backlog as of December 31,
2016 was $68.5 million, which represents an increase of approximately 57% and a decline of approximately 70% compared to
December 31, 2015 and 2014, respectively. The fluctuations in the size of our bid proposals for new contracts tend to create
variability in booking activity levels in international markets from period to period.
Aggregate third party booking activity levels for our manufactured oil and gas products in North America and international
markets during the year ended December 31, 2016 were $431.2 million, which represents a decline of approximately 1% and
70% compared to the years ended December 31, 2015 and 2014, respectively. The aggregate oil and gas product sales backlog
for our manufactured products in North America and international markets as of December 31, 2016 was $306.2 million, which
represents an increase of approximately 15% and a decline of approximately 60% compared to December 31, 2015 and 2014,
respectively.
Since the first quarter of 2016, we have been executing activities necessary to exit the Belleli EPC product sales business. At
December 31, 2016, we had five significant contracts in the remaining business and expect to have substantially exited the
business by the first half of 2018. Based on contractual requirements, the progress on the projects and the status of negotiations
with the related customers, as of December 31, 2016, a liability for estimated penalties for liquidated damages of $18.3 million
has been included in our financial statements primarily due to our actual or projected failure to meet certain specified
contractual milestone dates. We have asserted claims, or intend to assert claims, and are negotiating change orders, that if
settled favorably, could result in recoveries for us, including a release of such claims in exchange for release of liquidated
damages.
The timing of any change in activity levels by our customers is difficult to predict. As a result, our ability to project the
anticipated activity level for our business, and particularly our oil and gas product sales segment, is limited. In the latter part of
2016, we experienced an increase in oil and gas product sales bookings. However, volatility in commodity prices could delay
investments by our customers in significant projects, which could result in a material adverse effect on our business, financial
condition, results of operations and cash flows.
Our level of capital spending depends on our forecast for the demand for our products and services and the equipment required
to provide services to our customers. Based on demand we see for contract operations, we anticipate investing more capital in
our contract operations business in 2017 than we did in 2016.
Certain Key Challenges and Uncertainties
Market conditions and competition in the oil and natural gas industry and the risks inherent in international markets continue to
represent key challenges and uncertainties. In addition to these challenges, we believe the following represent some of the key
challenges and uncertainties we will face in the future:
37
Global Energy Markets and Oil and Natural Gas Pricing. Our results of operations depend upon the level of activity in the
global energy markets, including oil and natural gas development, production, processing and transportation. Oil and natural
gas prices and the level of drilling and exploration activity can be volatile and have fallen significantly in recent years. As a
result, many producers in the U.S. and other parts of the world, including our customers, significantly reduced their capital and
operating spending in 2015 and 2016. If oil and natural gas exploration and development activity and the number of well
completions continue to decline due to the reduction in oil and natural gas prices or significant instability in energy markets, we
would anticipate a continued decrease in demand and pricing for our natural gas compression and oil and natural gas
production and processing equipment and services. For example, unfavorable market conditions or financial difficulties
experienced by our customers may result in cancellation of contracts or the delay or abandonment of projects, which could
cause our cash flows generated by our product sales and international services to decline and have a material adverse effect on
our results of operations and financial condition.
Execution on Larger Contract Operations and Product Sales Projects. Some of our projects are significant in size and scope,
which can translate into more technically challenging conditions or performance specifications for our products and services.
Contracts with our customers generally specify delivery dates, performance criteria and penalties for our failure to perform.
Any failure to execute such larger projects in a timely and cost effective manner could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
Maintaining Expense Levels in Line with Activity Decreases. Given the volatility of the global energy markets and industry
capital spending activity levels, we have and will continue to monitor and control our expense levels, including personnel head
count and costs, to protect our profitability. Some of these expenses are difficult to reduce, and if we are not able to reduce
them commensurate with activity decreases, our profitability will be negatively impacted. Any failure to reduce costs in a
timely manner could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Summary of Results
As discussed in Note 3 to the Financial Statements, the results from continuing operations for all periods presented exclude the
results of our Venezuelan contract operations and Belleli CPE businesses. Those results are reflected in discontinued operations
for all periods presented.
Revenue. Revenue during the years ended December 31, 2016, 2015 and 2014 was $1,029.3 million, $1,790.5 million and
$2,101.7 million, respectively. The decrease in revenue during the year ended December 31, 2016 compared to the year ended
December 31, 2015 was primarily caused by revenue decreases in our oil and gas product and contract operations segments.
The decrease in revenue during the year ended December 31, 2015 compared to the year ended December 31, 2014 was caused
by revenue decreases in all four of our segments.
Net income. We generated net loss of $227.9 million during the year ended December 31, 2016, and net income of $26.6
million and $115.3 million during the years ended December 31, 2015 and 2014, respectively. The decrease in net income
during the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily due to a decrease in
gross margin in our oil and gas product sales and contract operations segments, non-cash valuation allowances of $119.8
million recorded against U.S. deferred tax assets during 2016, impairment charges reflected in loss from discontinued
operations, net of tax, of $68.8 million related to Belleli CPE during 2016 and increases in interest expense and restatement
charges. These activities were partially offset by a decrease in SG&A expense, foreign currency gains of $6.4 million during
2016 compared to foreign currency losses of $35.8 million during 2015, estimated loss contract provisions of $30.1 million
recorded on significant Belleli EPC product sales projects during 2015 and a decrease in depreciation and amortization
expense. Net loss during the year ended December 31, 2016 included loss from discontinued operations, net of tax, of $33.6
million and net income during the year ended December 31, 2015 included income from discontinued operations, net of tax, of
$54.8 million. The decrease in net income during the year ended December 31, 2015 compared to the year ended December 31,
2014 was primarily due to a decrease in gross margin in our oil and gas product sales and contract operations segments, an
increase in restructuring and other charges, a $26.5 million increase in translation losses related to the functional currency
remeasurement of our foreign subsidiaries’ non-functional currency denominated intercompany obligations, an increase in
long-lived asset impairment and a $16.0 million decrease in proceeds received from the sale of our Venezuelan subsidiary’s
assets to PDVSA Gas S.A. (“PDVSA Gas”). These activities were partially offset by decreases in SG&A expense, income tax
expense and depreciation and amortization expense. Net income during the years ended December 31, 2015 and 2014 included
income from discontinued operations, net of tax, of $54.8 million and $67.2 million, respectively.
38
EBITDA, as adjusted. Our EBITDA, as adjusted, was $145.1 million, $240.6 million and $293.0 million during the years
ended December 31, 2016, 2015 and 2014, respectively. EBITDA, as adjusted, during the year ended December 31, 2016
compared to the year ended December 31, 2015 decreased primarily due to a decrease in gross margin in our oil and gas
product sales and contract operations segments, partially offset by a decrease in SG&A expense and estimated loss contract
provisions of $30.1 million recorded on significant Belleli EPC product sales projects during 2015. EBITDA, as adjusted,
during the year ended December 31, 2015 compared to the year ended December 31, 2014 decreased primarily due to a
decrease in gross margin in our oil and gas product sales and contract operations segments, partially offset by a decrease in
SG&A expense. For a reconciliation of EBITDA, as adjusted, to net income (loss), its most directly comparable financial
measure calculated and presented in accordance with GAAP, please read Part II, Item 6 (“Selected Financial Data — Non-
GAAP Financial Measures”) of this report.
Results by Business Segment. The following table summarizes revenue, gross margin and gross margin percentages for each of
our business segments (dollars in thousands):
Revenue:
Contract Operations
Aftermarket Services
Oil and Gas Product Sales
Belleli EPC Product Sales
Gross Margin (1):
Contract Operations
Aftermarket Services
Oil and Gas Product Sales
Belleli EPC Product Sales
Gross Margin percentage (2):
Contract Operations
Aftermarket Services
Oil and Gas Product Sales
Belleli EPC Product Sales
Years Ended December 31,
2016
2015
2014
$
392,463
$
469,900
$
493,853
120,550
392,384
123,856
127,802
1,089,562
103,221
162,724
1,329,607
115,479
$ 1,029,253
$ 1,790,485
$ 2,101,663
$
248,793
$
297,509
$
308,445
33,208
26,990
(2,466)
36,569
163,825
(31,625)
42,543
240,189
(33,391)
$
306,525
$
466,278
$
557,786
63 %
28 %
7 %
(2)%
63 %
29 %
15 %
(31)%
62 %
26 %
18 %
(29)%
(1) Gross margin is defined as revenue less cost of sales, excluding depreciation and amortization expense. We evaluate the
performance of each of our segments based on gross margin. Total gross margin, a non-GAAP financial measure, is
reconciled, in total, to income (loss) before income taxes, its most directly comparable financial measure calculated and
presented in accordance with GAAP in Part II, Item 6 (“Selected Financial Data — Non-GAAP Financial Measures”) of
this report.
(2) Gross margin percentage is defined as gross margin divided by revenue.
39
Operating Highlights
The following tables summarize our total available horsepower, total operating horsepower, average operating horsepower,
horsepower utilization percentages and product sales backlog (in thousands, except percentages):
Contract Operations Horsepower
Total Available Horsepower (at period end)
Total Operating Horsepower (at period end)
Average Operating Horsepower
Horsepower Utilization (at period end)
Product Sales Backlog (1)
Oil and Gas Product Sales Backlog (2):
Compressor and Accessory Backlog
Production and Processing Equipment Backlog
Installation Backlog
Belleli EPC Backlog (3)
Total Product Sales Backlog
Years Ended December 31,
2016
2015
2014
1,138
936
953
82%
1,181
964
959
1,236
976
969
82%
79%
December 31,
2016
2015
2014
$
160,006
$
141,059
$
144,252
1,964
63,578
118,914
7,445
162,424
$
369,800
$
429,842
$
270,297
373,415
121,751
184,738
950,201
(1) Our product sales backlog consists of unfilled orders based on signed contracts and does not include potential product
sales pursuant to letters of intent received from customers. As Belleli CPE is no longer a part of our continuing
operations, Belleli CPE’s product sales backlog has been excluded from all periods presented.
(2) We expect that approximately $14.0 million of our oil and gas product sales backlog as of December 31, 2016 will be
recognized after December 31, 2017.
(3)
Prior to change in our reporting segments, our Belleli EPC product sales backlog was previously included in our
production and processing equipment product sales backlog. During the first quarter of 2016, we ceased the booking of
new orders for our Belleli EPC business. Changes in our Belleli EPC backlog since March 31, 2016 reflect revenue
recognized and change orders booked on existing contracts. We expect that approximately $4.3 million of our Belleli
EPC product sales backlog as of December 31, 2016 will be recognized after December 31, 2017.
40
Results of Operations
The Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
Contract Operations
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization expense)
Gross margin
Gross margin percentage
Years Ended December 31,
2016
392,463
143,670
248,793
$
$
2015
469,900
172,391
297,509
$
$
63%
63%
Increase
(Decrease)
(16)%
(17)%
(16)%
— %
The decrease in revenue during the year ended December 31, 2016 compared to the year ended December 31, 2015 was
primarily due to a decrease in revenue of $34.3 million resulting from an early termination of a project in the Eastern
Hemisphere in January 2016 that had been operating since the third quarter of 2009, a $33.0 million decrease in revenue in
Mexico primarily driven by projects that terminated operations in 2015 and a reduction of recognized deferred revenue
resulting from contract extensions and a $17.7 million decrease in revenue in Argentina primarily due to a devaluation of the
Argentine peso since the prior year period. These decreases were partially offset by an $18.3 million increase in revenue in
Brazil primarily driven by the start-up of a project during the second half of 2015. Gross margin decreased during the year
ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to the revenue decrease described
above, excluding the devaluation of the Argentine peso as the impact on gross margin was insignificant. Gross margin
percentage during the year ended December 31, 2016 compared to the year ended December 31, 2015 remained flat. The early
termination of a project in the Eastern Hemisphere resulted in additional costs during the years ended December 31, 2016 and
2015 in the form of depreciation expense, which is excluded from gross margin. Additionally, excluded from cost of sales and
recorded to restructuring and other charges in our statements of operations during the year ended December 31, 2015 were non-
cash inventory write-downs of $4.2 million associated with the Spin-off primarily related to the decentralization of shared
inventory components between Archrock’s North America contract operations business and our international contract
operations business.
Aftermarket Services
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization expense)
Gross margin
Gross margin percentage
Years Ended December 31,
2016
120,550
87,342
33,208
$
$
2015
127,802
91,233
36,569
$
$
28%
29%
Increase
(Decrease)
(6)%
(4)%
(9)%
(1)%
The decrease in revenue during the year ended December 31, 2016 compared to the year ended December 31, 2015 was
primarily due to a decrease in revenue of $7.1 million in Gabon driven by our cessation of activities in the Gabon market
during the first quarter of 2015. Gross margin decreased during the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to the revenue decreased discussed above. Gross margin percentage during the year ended
December 31, 2016 compared to the year ended December 31, 2015 decreased primarily due to the receipt of a settlement from
a customer in Gabon during the year ended December 31, 2015, which positively impacted revenue and gross margin by $3.7
million and $2.2 million, respectively.
41
Oil and Gas Product Sales
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization expense)
Gross margin
Gross margin percentage
Years Ended December 31,
2016
2015
Increase
(Decrease)
$
$
392,384
$ 1,089,562
365,394
925,737
26,990
$
163,825
7%
15%
(64)%
(61)%
(84)%
(8)%
Overall, the recent declines in our oil and gas product sales bookings and backlog driven by the market downturn have resulted
in revenue decreases in each of the regions where we operate. During the year ended December 31, 2016 compared to the year
ended December 31, 2015, revenue decreased by $528.2 million, $101.4 million and $67.6 million in North America, the
Eastern Hemisphere and Latin America, respectively. The decrease in revenue in North America was due to decreases of $270.8
million, $212.1 million and $45.3 million in production and processing equipment revenue, compression equipment revenue
and installation revenue, respectively. The decrease in the Eastern Hemisphere revenue was due to decreases of $40.4 million,
$31.3 million and $29.7 million in installation revenue, compression equipment revenue and production and processing
equipment revenue, respectively. The decrease in Latin America revenue was due to decreases of $35.6 million, $24.2 million
and $7.8 million in compression equipment revenue, installation revenue and production and processing equipment revenue,
respectively. The decreases in gross margin and gross margin percentage were primarily caused by the revenue decrease
explained above, continued weakening market conditions resulting in a competitive pricing environment and an increase in
under-absorption caused by reduced activities and management’s decision to maintain a certain level of manufacturing capacity.
Excluded from cost of sales and recorded to restructuring and other charges in our statements of operations during the year
ended December 31, 2015 were non-cash inventory write-downs of $4.5 million primarily related to our decision to exit the
manufacturing of cold weather packages, which had historically been performed at an oil and gas product sales facility in North
America we decided to close.
Belleli EPC Product Sales
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization expense)
Gross margin
Gross margin percentage
Years Ended December 31,
2016
123,856
126,322
(2,466)
$
$
2015
103,221
134,846
(31,625)
$
$
(2)%
(31)%
Increase
(Decrease)
20 %
(6)%
(92)%
29 %
The increase in revenue during the year ended December 31, 2016 compared to the year ended December 31, 2015 was
primarily driven by schedule delays on significant projects during the prior year that resulted in increases to cost-to-complete
estimates on each of the related projects, which adversely impacted revenue recognized under the percentage-of-completion
accounting principles in the prior year. The increases in gross margin and gross margin percentage were primarily caused by
estimated loss contract provisions of $30.1 million recorded on significant projects during 2015 driven by project execution
delays, partially offset by additional costs charged to one project related to a warranty expense accrual of $1.5 million during
2016. See “—Exit of our Belleli Businesses” for further discussion regarding Belleli.
42
Costs and Expenses
(dollars in thousands)
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restatement charges
Restructuring and other charges
Interest expense
Equity in income of non-consolidated affiliates
Other (income) expense, net
Years Ended December 31,
2016
2015
Increase
(Decrease)
$
165,985
$
137,974
15,146
18,879
27,457
34,181
(10,403)
(13,088)
220,396
154,801
20,788
—
31,315
7,272
(15,152)
35,438
(25)%
(11)%
(27)%
N/A
(12)%
370 %
(31)%
(137)%
Selling, general and administrative
The decrease in SG&A expense during the year ended December 31, 2016 compared to the year ended December 31, 2015 was
driven by our cost reduction plan and included a $15.3 million decrease in compensation and benefits costs in the Eastern
Hemisphere and Latin America and a $13.1 million decrease in corporate expenses. SG&A expense as a percentage of revenue
was 16% and 12% during the years ended December 31, 2016 and 2015, respectively. The increase in SG&A expense as a
percentage of revenue was primarily due to a significant decrease in oil and gas product sales revenue during the year ended
December 31, 2016 compared to the year ended December 31, 2015. For the periods prior to the Spin-off, SG&A expense
includes expense allocations for certain functions, including allocations of expenses related to executive oversight, accounting,
treasury, tax, legal, human resources, procurement and information technology services performed by Archrock on a centralized
basis that historically have not been recorded at the segment level. These costs were allocated to us systematically based on
specific department function and revenue. Included in SG&A expense during the year ended December 31, 2015 was $46.9
million of allocated corporate expenses incurred by Archrock. The actual costs we would have incurred if we had been a stand-
alone public company would depend on multiple factors, including organizational structure and strategic decisions made in
various areas, including information technology and infrastructure.
Depreciation and amortization
Depreciation and amortization expense during the year ended December 31, 2016 compared to the year ended December 31,
2015 decreased primarily due to a decrease of $16.5 million in depreciation expense on certain contract operations projects in
Latin America primarily related to capitalized installation costs that were fully depreciated during 2016 and 2015. Capitalized
installation costs, included, among other things, civil engineering, piping, electrical instrumentation and project management
costs.
Long-lived asset impairment
We regularly review the future deployment of our idle compression assets used in our contract operations segment for units that
are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. During the year
ended December 31, 2016, we determined that 62 idle compressor units totaling approximately 65,000 horsepower would be
retired from the active fleet. The retirement of these units from the active fleet triggered a review of these assets for
impairment, and as a result, we recorded a $12.7 million asset impairment to reduce the book value of each unit to its estimated
fair value. During the year ended December 31, 2015, we determined that 93 idle compressor units totaling approximately
72,000 horsepower would be retired from the active fleet. The retirement of these units from the active fleet triggered a review
of these assets for impairment, and as a result, we recorded a $19.4 million asset impairment to reduce the book value of each
unit to its estimated fair value.
As discussed in Note 3 to the Financial Statements, in the first quarter of 2016, we began executing a plan to exit our Belleli
EPC business to focus on our core oil and gas businesses. Because we ceased the booking of new orders for the manufacture of
tanks for tank farms and the manufacture of evaporators and brine heaters for desalination plants, customer relationship
intangible assets related to our Belleli EPC business were assessed to have no future benefit to us. As a result, we recorded a
long-lived asset impairment charge of $0.7 million during the year ended December 31, 2016. In addition, the property, plant
and equipment of our Belleli EPC business was reviewed for recoverability. As a result, the remaining useful lives of Belleli
EPC non-oil and gas property, plant and equipment were reduced to reflect their estimated cessation date.
During the year ended December 31, 2016, we evaluated other assets for impairment and recorded long-lived asset impairments
of $1.7 million on these assets.
43
During the first quarter of 2015, we evaluated a long-term note receivable from the purchaser of our Canadian Operations for
impairment. This review was triggered by an offer from the purchaser of our Canadian Operations to prepay the note receivable
at a discount to its then current book value. The fair value of the note receivable as of March 31, 2015 was based on the amount
offered by the purchaser of our Canadian Operations to prepay the note receivable. The difference between the book value of
the note receivable at March 31, 2015 and its fair value resulted in the recording of an impairment of long-lived assets of $1.4
million. In April 2015, we accepted the offer to early settle this note receivable.
Restatement charges
As discussed in Note 13 to the Financial Statements, during the first quarter of 2016, our senior management identified errors
relating to the application of percentage-of-completion accounting principles to specific Belleli EPC product sales projects. As
a result, the Audit Committee of the Company’s Board of Directors initiated an internal investigation, including the use of
services of a forensic accounting firm. Management also engaged a consulting firm to assist in accounting analysis and
compilation of restatement adjustments. During the year ended December 31, 2016, we incurred $30.1 million of costs
associated with the restatement of our financial statements and current SEC investigation, of which $11.2 million of cash was
recovered from Archrock in the fourth quarter of 2016 pursuant to the separation and distribution agreement.
Restructuring and other charges
In the second quarter of 2015, we announced a cost reduction plan, primarily focused on workforce reductions and the
reorganization of certain facilities. These actions were in response to unfavorable market conditions in North America
combined with the impact of lower international activity due to customer budget cuts driven by lower oil prices. During the
year ended December 31, 2016, we incurred $23.5 million of restructuring and other charges as a result of this plan, which
were primarily related to $19.9 million of employee termination benefits and a $2.9 million charge for the exit of a corporate
building under an operating lease. During the year ended December 31, 2015, we incurred $15.6 million of restructuring and
other charges as a result of this plan, which were primarily related to $9.6 million of employee termination benefits and $4.0
million of non-cash write-downs of inventory. The non-cash inventory write-downs were the result of our decision to exit the
manufacturing of cold weather packages, which had historically been performed at an oil and gas product sales facility in North
America we decided to close in 2015. Additionally, we incurred restructuring and other charges associated with the Spin-off.
During the year ended December 31, 2016, we incurred $3.9 million of costs associated with the Spin-off, which were
primarily related to expenses of $3.1 million for retention awards to certain employees. During the year ended December 31,
2015, we incurred $15.7 million of costs associated with the Spin-off, which were primarily related to non-cash inventory
write-downs of $4.7 million, financial advisor fees of $4.6 million paid at the completion of the Spin-off, expenses of $3.1
million for retention awards to certain employees and a one-time cash signing bonus of $2.0 million paid to our new Chief
Executive Officer. Non-cash inventory write-downs were primarily related to the decentralization of shared inventory
components between Archrock’s North America contract operations business and our international contract operations business.
The charges incurred in conjunction with the cost reduction plan and Spin-off are included in restructuring and other charges in
our statements of operations. See Note 14 to the Financial Statements for further discussion of these charges.
Interest expense
The increase in interest expense during the year ended December 31, 2016 compared to the year ended December 31, 2015 was
primarily due to borrowings under our revolving credit facility and term loan facility (collectively, the “Credit Facility”) that
became available on November 3, 2015. During the year ended December 31, 2016, the average daily outstanding borrowings
under the Credit Facility were $422.9 million. Prior to the Spin-off, third party debt of Archrock, other than debt attributable to
capital leases, was not allocated to us as we were not the legal obligor of the debt and Archrock’s borrowings were not directly
attributable to our business.
Equity in income of non-consolidated affiliates
In March 2012, our Venezuelan joint ventures sold their assets to PDVSA Gas. We received installment payments, including an
annual charge, of $10.4 million and $15.2 million during the years ended December 31, 2016 and 2015, respectively. As of
December 31, 2016, the remaining principal amount due to us was approximately $4 million. Payments we receive from the
sale will be recognized as equity in income of non-consolidated affiliates in our statements of operations in the periods such
payments are received.
44
Other (income) expense, net
The change in other (income) expense, net, during the year ended December 31, 2016 compared to the year ended
December 31, 2015 was primarily due to foreign currency gains, net of losses on foreign currency derivatives, of $5.7 million
during the year ended December 31, 2016 compared to foreign currency losses of $35.8 million during the year ended
December 31, 2015. Our foreign currency gains and losses included translation gains, net of losses on foreign currency
derivatives, of $8.6 million during the year ended December 31, 2016 compared to translation losses of $30.1 million during
the year ended December 31, 2015 related to the currency remeasurement of our foreign subsidiaries’ non-functional currency
denominated intercompany obligations. Of the foreign currency losses recognized during the year ended December 31, 2015,
$29.7 million was attributable to our Brazil subsidiary’s U.S. dollar denominated intercompany obligations and were the result
of a currency devaluation in Brazil and increases in our Brazil subsidiary’s intercompany payables during the prior year. The
change in other (income) expense, net, was also due to a $4.9 million loss recognized during the prior year on short-term
investments related to the purchase of $18.4 million of Argentine government issued U.S. dollar denominated bonds using
Argentine pesos.
Income Taxes
(dollars in thousands)
Provision for income taxes
Effective tax rate
Years Ended December 31,
2016
2015
$
124,760
$
39,546
(179.2)%
346.3%
Increase
(Decrease)
215 %
(525.5)%
For the year ended December 31, 2016, our effective tax rate of (179.2)% was adversely impacted by valuation allowances
recorded against U.S. deferred tax assets and activity at our non-U.S. subsidiaries, which included valuation allowances against
certain deferred tax assets, foreign currency devaluations and the settlement of a foreign audit. These negative impacts were
partially offset by nontaxable Venezuelan joint venture proceeds and a net nontaxable capital contribution related to the Spin-
off.
For the year ended December 31, 2015, our effective tax rate of 346.3% was adversely impacted by activity at our non-U.S.
subsidiaries, which included valuation allowances recorded against certain net operating losses, foreign currency devaluations,
foreign dividend withholding taxes and deemed distributions to the U.S. These negative impacts were partially offset by tax
benefits related to claiming the research and development credit (the “R&D Credit”) and nontaxable Venezuelan joint venture
proceeds.
Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income
we earn, or losses we incur, in those jurisdictions. It is also affected by discrete items that may occur in any given year but are
not consistent from year to year. In addition to net state income taxes, the following items had the most significant impact on
the difference between our statutory U.S. federal income tax rate of 35.0% and our effective tax rate.
For the year ended December 31, 2016:
• A $123.9 million increase (178.0% reduction) resulting from valuation allowances primarily recorded against U.S.
deferred tax assets and certain deferred tax assets of our subsidiaries in Nigeria and Italy.
• A $38.2 million increase (54.9% reduction) resulting primarily from foreign withholding taxes, negative impacts of
foreign currency devaluations in Argentina and Mexico, settlement of a Nigeria tax audit and deemed distributions to
the U.S. from certain of our non-U.S. subsidiaries. The increase includes a reduction resulting from rate differences
between U.S. and foreign jurisdictions primarily related to income we earned in Oman and Mexico where the rates are
12.0% and 30.0%, respectively.
• A $9.5 million reduction (13.6% increase) resulting from claiming foreign taxes as credits primarily for foreign
withholding taxes. The foreign tax credits are available to offset future payments of U.S. federal income taxes.
• A $4.1 million increase (5.8% reduction) resulting from unrecognized tax benefits primarily from additions based on
tax positions related to the current year.
• A $3.6 million reduction (5.2% increase) due to $10.4 million of nontaxable proceeds from sale of joint venture assets
in Venezuela.
• A $2.9 million reduction (4.1% increase) primarily due to $11.2 million of cash recovered from Archrock with respect
to our restatement charges. Payments between Archrock and us are treated as nontaxable capital contributions or
distributions pursuant to the tax matters agreement.
45
For the year ended December 31, 2015:
• A $38.1 million (333.2%) increase resulting primarily from foreign withholding taxes, negative impacts of foreign
currency devaluations in Argentina and Mexico and deemed distributions to the U.S. from certain of our non-U.S.
subsidiaries. The increase includes a reduction resulting from rate differences between U.S. and foreign jurisdictions
primarily related to income we earned in Oman, Mexico and Thailand where the rates are 12.0%, 30.0% and 20.0%,
respectively.
• A $38.3 million (335.2%) increase resulting from valuation allowances primarily recorded against deferred tax assets
of our subsidiaries in Brazil, Italy and the Netherlands.
• A $24.9 million (218.4%) reduction resulting from claiming the R&D Credit for years 2009 through 2013. The R&D
Credits are available to offset future payments of U.S. federal income taxes.
• A $17.4 million (152.3%) reduction resulting from claiming foreign taxes as credits primarily for foreign withholding
taxes. The foreign tax credits are available to offset future payments of U.S. federal income taxes.
• A $6.2 million (54.2%) increase resulting from unrecognized tax benefits primarily related to additions based on tax
positions related to 2015.
• A $5.3 million (46.5%) reduction due to $15.2 million of nontaxable proceeds from sale of joint venture assets in
Venezuela.
Discontinued Operations
(dollars in thousands)
Years Ended December 31,
2016
2015
Increase
(Decrease)
Income (loss) from discontinued operations, net of tax
$
(33,571) $
54,774
(161)%
Income (loss) from discontinued operations, net of tax, during the years ended December 31, 2016 and 2015 includes our
operations in Venezuela that were expropriated in June 2009, including compensation for expropriation and costs associated
with our arbitration proceeding, and our Belleli CPE business.
As discussed in Note 3 to the Financial Statements, in August 2012, our Venezuelan subsidiary sold its previously nationalized
assets to PDVSA Gas. We received installment payments, including an annual charge, totaling $38.8 million and $56.6 million
during the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, the remaining principal amount
due to us was approximately $33 million. We have not recognized amounts payable to us by PDVSA Gas as a receivable and
will therefore recognize payments received in the future as income from discontinued operations in the periods such payments
are received. The proceeds from the sale of the assets are not subject to Venezuelan national taxes due to an exemption allowed
under the Venezuelan Reserve Law applicable to expropriation settlements. In addition, and in connection with the sale, we and
the Venezuelan government agreed to waive rights to assert certain claims against each other.
As discussed in Note 3 to the Financial Statements, in the first quarter of 2016, we began executing a plan to exit our Belleli
CPE business, which provided engineering, procurement and manufacturing services related to the manufacture of critical
process equipment for refinery and petrochemical facilities. We completed the sale of Belleli CPE in August 2016. Our Belleli
CPE business was previously included in our former product sales segment. In conjunction with the planned disposition, we
recorded impairments of long-lived assets and current assets that totaled $68.8 million during the year ended December 31,
2016. The impairment charges are reflected in income (loss) from discontinued operations, net of tax.
46
The Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
Contract Operations
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization expense)
Gross margin
Gross margin percentage
Years Ended December 31,
2015
469,900
172,391
297,509
$
$
2014
493,853
185,408
308,445
$
$
63%
62%
Increase
(Decrease)
(5)%
(7)%
(4)%
1 %
The decrease in revenue during the year ended December 31, 2015 compared to the year ended December 31, 2014 was
primarily due to a $19.9 million decrease in revenue in Brazil primarily related to a project which had little incremental costs
that commenced and terminated operations in 2014 partially offset by the start-up of new projects during 2015 and a $7.4
million decrease in revenue in the Eastern Hemisphere primarily driven by a decrease in Nigeria. These decreases were
partially offset by a $6.8 million increase in revenue in Mexico primarily driven by contracts that commenced or were
expanded in scope in 2014 and 2015. Gross margin decreased during the year ended December 31, 2015 compared to the year
ended December 31, 2014 primarily due to the revenue decrease explained above. Gross margin percentage during the year
ended December 31, 2015 compared to the year ended December 31, 2014 increased primarily due to a reduction in operating
expenses in Latin America driven by our cost reduction plan during 2015 and the devaluation of the Brazilian Real in 2015
which had a positive impact on gross margin percentage, partially offset by the revenue decrease explained above. While our
gross margin during the year ended December 31, 2014 benefited from the start-up of a Brazilian project, our contract
operations business is capital intensive, and as such, we did have additional costs in the form of depreciation expense, which is
excluded from gross margin. Additionally, excluded from cost of sales and recorded to restructuring and other charges in our
statements of operations during the year ended December 31, 2015 were non-cash inventory write-downs of $4.2 million
associated with the Spin-off primarily related to the decentralization of shared inventory components between Archrock’s North
America contract operations business and our international contract operations business.
Aftermarket Services
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization expense)
Gross margin
Gross margin percentage
Years Ended December 31,
2015
127,802
91,233
36,569
$
$
2014
162,724
120,181
42,543
$
$
29%
26%
Increase
(Decrease)
(21)%
(24)%
(14)%
3 %
The decrease in revenue during the year ended December 31, 2015 compared to the year ended December 31, 2014 was
primarily due to decreases in revenue in the Eastern Hemisphere and Latin America of $24.6 million and $10.8 million,
respectively. The decrease in revenue in the Eastern Hemisphere was primarily caused by a decrease in revenue of $9.3 million
as a result of the sale of our Australian business in December 2014, an $8.0 million decrease in revenue in Gabon driven by our
cessation of activities in the Gabon market in 2015 and a decrease of $4.4 million in part sales in China. The decrease in
revenue in Latin America was primarily caused by a decrease of $8.3 million in Bolivia driven by the termination of parts,
services and maintenance contracts during 2015. Gross margin decreased during the year ended December 31, 2015 compared
to the year ended December 31, 2014 primarily due to decreases in gross margin in Latin America and the Eastern Hemisphere
of $3.0 million and $2.7 million, respectively. Gross margin percentage during the year ended December 31, 2015 compared to
the year ended December 31, 2014 increased primarily due to the receipt of a settlement from a customer in Gabon during the
year ended December 31, 2015, which positively impacted revenue and gross margin by $3.7 million and $2.2 million,
respectively, and a decrease of $0.8 million in expense for inventory reserves.
47
Oil and Gas Product Sales
(dollars in thousands)
Years Ended December 31,
2015
2014
Increase
(Decrease)
Revenue
$ 1,089,562
$ 1,329,607
Cost of sales (excluding depreciation and amortization expense)
925,737
1,089,418
Gross margin
Gross margin percentage
$
163,825
$
240,189
15%
18%
(18)%
(15)%
(32)%
(3)%
The decrease in revenue during the year ended December 31, 2015 compared to the year ended December 31, 2014 was due to
a decrease in revenue in North America and the Eastern Hemisphere of $194.0 million and $82.3 million, respectively, partially
offset by higher revenue in Latin America of $36.3 million. The decrease in revenue in North America was due to decreases of
$109.2 million and $92.6 million in compression equipment revenue and production and processing equipment revenue,
respectively, partially offset by an increase of $7.8 million in installation revenue. The decrease in the Eastern Hemisphere
revenue was due to decreases of $33.7 million, $28.6 million and $20.0 million in compression equipment revenue, installation
revenue and production and processing equipment revenue, respectively. The increase in Latin America revenue was primarily
due to increases of $25.9 million and $10.1 million in compression equipment revenue and installation revenue, respectively.
The decreases in gross margin and gross margin percentage were primarily caused by the revenue decrease explained above,
weakening market conditions resulting in lower bookings at more competitive prices in North America and an increase of $3.2
million in expense for inventory reserves in North America. These decreases were partially offset by costs charged to one
project in North America related to a warranty expense accrual of approximately $7.0 million during the year ended December
31, 2014. Excluded from cost of sales and recorded to restructuring and other charges in our statements of operations during the
year ended December 31, 2015 were non-cash inventory write-downs of $4.5 million primarily related to our decision to exit
the manufacturing of cold weather packages, which had historically been performed at a product sales facility in North America
we decided to close.
Belleli EPC Product Sales
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization expense)
Gross margin
Gross margin percentage
Years Ended December 31,
2015
103,221
134,846
(31,625)
$
$
2014
115,479
148,870
(33,391)
$
$
(31)%
(29)%
Increase
(Decrease)
(11)%
(9)%
(5)%
(2)%
The decrease in revenue during the year ended December 31, 2015 compared to the year ended December 31, 2014 was
primarily driven by schedule delays on significant projects during 2015 that resulted in increases to cost-to-complete estimates
on each related projects, which adversely impacted revenue recognized under the percentage-of-completion accounting
principles in 2015. Project execution delays on significant projects during the years ended December 31, 2015 and 2014
resulted in estimated loss contract provisions of $30.1 million and $36.6 million, respectively, which negatively impacted gross
margin percentage for each period. See “—Exit of our Belleli Businesses” for further discussion regarding Belleli.
48
Costs and Expenses
(dollars in thousands)
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restructuring and other charges
Interest expense
Equity in income of non-consolidated affiliates
Other (income) expense, net
Years Ended December 31,
2015
2014
Increase
(Decrease)
$
220,396
$
154,801
20,788
31,315
7,272
(15,152)
35,438
263,170
170,088
3,851
—
1,878
(14,553)
6,201
(16)%
(9)%
440 %
N/A
287 %
4 %
471 %
Selling, general and administrative
For the periods prior to the Spin-off, SG&A expense includes expense allocations for certain functions, including allocations of
expenses related to executive oversight, accounting, treasury, tax, legal, human resources, procurement and information
technology services performed by Archrock on a centralized basis that historically have not been recorded at the segment level.
These costs were allocated to us systematically based on specific department function and revenue. Included in SG&A expense
during the years ended December 31, 2015 and 2014 were corporate expenses incurred by Archrock prior to the Spin-off. The
actual costs we would have incurred if we had been a stand-alone public company would depend on multiple factors, including
organizational structure and strategic decisions made in various areas, including information technology and infrastructure. The
decrease in SG&A expense during the year ended December 31, 2015 compared to the year ended December 31, 2014 was
attributable to an $11.2 million decrease in compensation and benefits costs in the Eastern Hemisphere and Latin America
primarily driven by our cost reduction plan during 2015, a $9.8 million decrease in selling expenses relating to our product
sales business in North America, a $6.2 million decrease in corporate expenses and a $3.1 million decrease in non-income-
based local taxes in Brazil. SG&A expense as a percentage of revenue was 12% and 13% during the years ended December 31,
2015 and 2014, respectively.
Depreciation and amortization
Depreciation and amortization expense during the year ended December 31, 2015 compared to the year ended December 31,
2014 decreased primarily due to $26.4 million in depreciation of installation costs recognized during the year ended
December 31, 2014 on a contract operations project in Brazil that commenced and terminated operations in 2014. Prior to the
start-up of this project, we capitalized $1.9 million and $24.5 million of installation costs during the years ended December 31,
2014 and 2013, respectively. In late 2015, we received a customer notice of early termination on a contact operations project in
the Eastern Hemisphere specifying an end date of January 2016. The project had been operating since the third quarter of 2009.
As a result, we recorded additional depreciation expense of $10.8 million in the fourth quarter of 2015 primarily related to
capitalized installation costs. Capitalized installation costs, included, among other things, civil engineering, piping, electrical
instrumentation and project management costs.
Long-lived asset impairment
We regularly review the future deployment of our idle compression assets used in our contract operations segment for units that
are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. During the year
ended December 31, 2015, we determined that 93 idle compressor units totaling approximately 72,000 horsepower would be
retired from the active fleet. The retirement of these units from the active fleet triggered a review of these assets for
impairment, and as a result, we recorded a $19.4 million asset impairment to reduce the book value of each unit to its estimated
fair value. During the year ended December 31, 2014, we determined that 20 idle compressor units totaling approximately
18,000 horsepower would be retired from the active fleet, and as a result, we performed an impairment review and recorded a
$2.8 million asset impairment to reduce the book value of each unit to its estimated fair value. In connection with our fleet
review during the year ended December 31, 2014, we evaluated for impairment idle units that had been culled from our fleet in
prior years and were available for sale. Based upon that review, we reduced the expected proceeds from disposition for certain
of the remaining units. This resulted in an additional impairment of $1.1 million to reduce the book value of each unit to its
estimated fair value during the year ended December 31, 2014.
49
During the first quarter of 2015, we evaluated a long-term note receivable from the purchaser of our Canadian Operations for
impairment. This review was triggered by an offer from the purchaser of our Canadian Operations to prepay the note receivable
at a discount to its then current book value. The fair value of the note receivable as of March 31, 2015 was based on the amount
offered by the purchaser of our Canadian Operations to prepay the note receivable. The difference between the book value of
the note receivable at March 31, 2015 and its fair value resulted in the recording of an impairment of long-lived assets of $1.4
million during the year ended December 31, 2015. In April 2015, we accepted the offer to early settle this note receivable.
Restructuring and other charges
In the second quarter of 2015, we announced a cost reduction plan, primarily focused on workforce reductions and the
reorganization of certain product sales facilities. These actions were in response to market conditions in North America
combined with the impact of lower international activity due to customer budget cuts driven by lower oil prices. As a result of
this plan, during the year ended December 31, 2015, we incurred $15.6 million of restructuring and other charges, of which
$9.6 million related to termination benefits, $4.0 million related to non-cash write-downs of inventory and $1.9 million related
to consulting fees. The non-cash inventory write-downs were the result of our decision to exit the manufacturing of cold
weather packages, which had historically been performed at a product sales facility in North America we decided to close.
Additionally, during the year ended December 31, 2015, we incurred $15.7 million of costs associated with the Spin-off which
were related to non-cash inventory write-downs of $4.7 million, financial advisor fees of $4.6 million paid at the completion of
the Spin-off, expenses of $3.1 million for retention awards to certain employees, a one-time cash signing bonus paid to our new
Chief Executive Officer of $2.0 million and costs to start-up certain stand-alone functions of $1.3 million. Non-cash inventory
write-downs were primarily related to the decentralization of shared inventory components between Archrock’s North America
contract operations business and our international contract operations business. The charges incurred in conjunction with the
cost reduction plan and Spin-off are included in restructuring and other charges in our statements of operations. See Note 14 to
the Financial Statements for further discussion of these charges.
Interest expense
The increase in interest expense during the year ended December 31, 2015 compared to the year ended December 31, 2014 was
primarily due to borrowings under our Credit Facility that became available on November 3, 2015. During the period between
November 3, 2015 and December 31, 2015, the average daily outstanding borrowings under the Credit Facility were $557.0
million. Prior to the Spin-off, third party debt of Archrock, other than debt attributable to capital leases, was not allocated to us
as we were not the legal obligor of the debt and Archrock’s borrowings were not directly attributable to our business.
Equity in income of non-consolidated affiliates
In March 2012, our Venezuelan joint ventures sold their assets to PDVSA Gas. We received installment payments, including an
annual charge, of $15.2 million and $14.7 million during the years ended December 31, 2015 and 2014, respectively. Payments
we receive from the sale will be recognized as equity in income of non-consolidated affiliates in our statements of operations in
the periods such payments are received.
Other (income) expense, net
The change in other (income) expense, net, was primarily due to foreign currency losses of $35.8 million and $7.8 million
during the years ended December 31, 2015 and 2014, respectively. Our foreign currency losses included translation losses of
$30.1 million and $3.6 million during the years ended December 31, 2015 and 2014, respectively, related to the currency
remeasurement of our foreign subsidiaries’ non-functional currency denominated intercompany obligations. Of the foreign
currency losses recognized during the year ended December 31, 2015, $29.7 million was attributable to our Brazil subsidiary’s
U.S. dollar denominated intercompany obligations and were the result of a currency devaluation in Brazil and increases in our
Brazil subsidiary’s intercompany payables during 2015.
50
Income Taxes
(dollars in thousands)
Provision for income taxes
Effective tax rate
Years Ended December 31,
2015
39,546
$
2014
79,042
$
346.3%
62.2%
Increase
(Decrease)
(50)%
284.1 %
For the year ended December 31, 2015, our effective tax rate of 346.3% was adversely impacted by activity at our non-U.S.
subsidiaries, which included valuation allowances recorded against certain net operating losses, foreign currency devaluations,
foreign dividend withholding taxes and deemed distributions to the U.S. These negative impacts were partially offset by tax
benefits related to claiming the research and development credit (the “R&D Credit”) and nontaxable Venezuelan joint venture
proceeds.
Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income
we earn, or losses we incur, in those jurisdictions. It is also affected by discrete items that may occur in any given year but are
not consistent from year to year. In addition to net state income taxes, the following items had the most significant impact on
the difference between our statutory U.S. federal income tax rate of 35.0% and our effective tax rate.
For the year ended December 31, 2015:
• A $38.1 million (333.2%) increase resulting primarily from foreign withholding taxes, negative impacts of foreign
currency devaluations in Argentina and Mexico and deemed distributions to the U.S. from certain of our non-U.S.
subsidiaries. The increase includes a reduction resulting from rate differences between U.S. and foreign jurisdictions
primarily related to income we earned in Oman, Mexico and Thailand where the rates are 12.0%, 30.0% and 20.0%,
respectively.
• A $38.3 million (335.2%) increase resulting from valuation allowances primarily recorded against deferred tax assets
of our subsidiaries in Brazil, Italy and the Netherlands.
• A $24.9 million (218.4%) reduction resulting from claiming the R&D Credit for years 2009 through 2013. The R&D
Credits are available to offset future payments of U.S. federal income taxes.
• A $17.4 million (152.3%) reduction resulting from claiming foreign taxes as credits primarily for foreign withholding
taxes. The foreign tax credits are available to offset future payments of U.S. federal income taxes.
• A $6.2 million (54.2%) increase resulting from unrecognized tax benefits primarily related to additions based on tax
positions related to 2015.
• A $5.3 million (46.5%) reduction due to $15.2 million of nontaxable proceeds from sale of joint venture assets in
Venezuela.
For the year ended December 31, 2014:
• A $33.0 million (25.9%) increase resulting primarily from foreign withholding taxes, decreases in available net
operating losses mostly related to our subsidiaries in the Netherlands and negative impacts of foreign currency
devaluations in Argentina and Mexico. The increase includes a reduction resulting from rate differences between U.S.
and foreign jurisdictions primarily related to income we earned in Oman, Mexico and Thailand where the rates are
12.0%, 30.0% and 20.0%, respectively.
• A $17.8 million (14.0%) increase resulting from valuation allowances primarily recorded against deferred tax assets of
our subsidiaries in Brazil, Italy and the Netherlands. The increase includes a reduction in valuation allowances related
to decreases in available net operating losses mostly related to our subsidiaries in the Netherlands.
• A $10.9 million (8.6%) reduction resulting from claiming foreign taxes as credits primarily for foreign withholding
taxes. The foreign tax credits are available to offset future payments of U.S. federal income taxes.
• A $5.2 million (4.1%) reduction due to $14.7 million of nontaxable proceeds from sale of joint venture assets in
Venezuela.
51
Discontinued Operations
(dollars in thousands)
Years Ended December 31,
2015
2014
Income from discontinued operations, net of tax
$
54,774
$
67,183
Increase
(Decrease)
(18)%
Income from discontinued operations, net of tax, during the years ended December 31, 2015 and 2014 includes our operations
in Venezuela that were expropriated in June 2009, including compensation for expropriation and costs associated with our
arbitration proceeding, and our Belleli CPE business.
As discussed in Note 3 to the Financial Statements, in August 2012, our Venezuelan subsidiary sold its previously nationalized
assets to PDVSA Gas. We received installment payments, including an annual charge, totaling $56.6 million and $72.6 million
during the years ended December 31, 2015 and 2014, respectively. The proceeds from the sale of the assets are not subject to
Venezuelan national taxes due to an exemption allowed under the Venezuelan Reserve Law applicable to expropriation
settlements. In addition, and in connection with the sale, we and the Venezuelan government agreed to waive rights to assert
certain claims against each other.
Liquidity and Capital Resources
Our unrestricted cash balance was $35.7 million at December 31, 2016 compared to $29.0 million at December 31, 2015.
Working capital decreased to $177.8 million at December 31, 2016 from $408.5 million at December 31, 2015. The decrease in
working capital was primarily due to a concerted effort to reduce working capital levels and a decrease in oil and gas product
sales activity. The decrease in working capital included decreases in accounts receivable, inventory, costs and estimated
earnings in excess of billings on uncompleted contracts and current assets associated with discontinued operations, partially
offset by a decrease in current liabilities associated with discontinued operations. The decrease in accounts receivable was
primarily driven by lower oil and gas product sales activity in North America and the timing of payments received from
customers during the current year. The decreases in current assets and liabilities associated with discontinued operations were
primarily due to the sale of Belleli CPE in August 2016. The decrease in inventory was primarily driven by a decrease in raw
materials and finished goods largely resulting from lower oil and gas product sales activity in North America. The decrease in
costs and estimated earnings in excess of billings on uncompleted contracts was primarily driven by lower oil and gas product
sales activity in North America and the timing of billings on Belleli EPC product sales projects.
Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized
in the table below (in thousands):
Net cash provided by (used in) continuing operations:
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Discontinued operations
Net change in cash and cash equivalents
Years Ended December 31,
2016
2015
$
$
265,702
(60,998)
(230,747)
(1,832)
34,521
$
6,646
$
130,915
(129,611)
(55,002)
(3,716)
47,085
(10,329)
Operating Activities. The increase in net cash provided by operating activities during the year ended December 31, 2016
compared to the year ended December 31, 2015 was primarily attributable to working capital decreases in the current year
compared to working capital increases in the prior year and lower SG&A expense during the current year, partially offset by a
decrease in gross margin in our oil and gas product sales and contract operations segments and an increase in interest paid.
Working capital changes during the year ended December 31, 2016 included a decrease of $135.9 million in accounts
receivable, a decrease of $49.7 million in inventory, a decrease of $37.6 million in costs and estimated earnings versus billings
on uncompleted contracts. Working capital changes during the year ended December 31, 2015 included a decrease of $82.7
million in accounts payable and other liabilities and a decrease of $80.4 million in inventory.
52
Investing Activities. The decrease in net cash used in investing activities during the year ended December 31, 2016 compared
to the year ended December 31, 2015 was primarily attributable to an $82.4 million decrease in capital expenditures, partially
offset by $5.4 million of net proceeds received from the settlement of our outstanding note receivable for the sale of our
Canadian Operations in the prior year, a $4.8 million decrease in cash payments received from the sale of our Venezuelan joint
ventures’ previously nationalized assets and a $3.8 million decrease in proceeds from the sale of property, plant and equipment.
The decrease in capital expenditures was primarily driven by installation costs incurred during the year ended December 31,
2015 on contract operations projects in Brazil and Bolivia that began operations during the second half of 2015 and first quarter
of 2016, respectively, and a decrease in maintenance capital expenditures.
Financing Activities. The increase in net cash used in financing activities during the year ended December 31, 2016 compared
to the year ended December 31, 2015 was primarily attributable to net repayments of $179.5 million on our Credit Facility
during the current year, a transfer of cash during the current year of $49.2 million to Archrock pursuant to the separation and
distribution agreement, partially offset by net distributions to parent of $39.0 million and $13.3 million in payments of debt
issuance costs related to the Credit Facility during the year ended December 31, 2015. The transfer of cash to Archrock during
the year ended December 31, 2016 was triggered by our receipt of payments from PDVSA Gas in respect of the sale of our and
our joint ventures’ previously nationalized assets. Additionally, during the year ended December 31, 2015, we transferred
$532.6 million of net proceeds from borrowings under the Credit Facility to Archrock pursuant to the separation and
distribution agreement.
Discontinued Operations. The decrease in net cash provided by discontinued operations during the year ended December 31,
2016 compared to year ended December 31, 2015 was primarily attributable to $17.8 million decrease in proceeds received
from the sale of our Venezuelan subsidiary’s assets to PDVSA Gas, partially offset by cash proceeds of $5.5 million received
from the sale of our Belleli CPE business in August 2016.
Capital Requirements. Our contract operations business is capital intensive, requiring significant investment to maintain and
upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services
and the availability of the type of equipment required for us to render those contract operations services to our customers. Our
capital requirements have consisted primarily of, and we anticipate will continue to consist of, the following:
•
growth capital expenditures, which are made to expand or to replace partially or fully depreciated assets or to expand
the operating capacity or revenue generating capabilities of existing or new assets, whether through construction,
acquisition or modification; and
• maintenance capital expenditures, which are made to maintain the existing operating capacity of our assets and related
cash flows further extending the useful lives of the assets.
The majority of our growth capital expenditures are related to the acquisition cost of new compressor units and processing and
treating equipment that we add to our contract operations fleet and installation costs on integrated projects. In addition, growth
capital expenditures can include the upgrading of major components on an existing compressor unit where the current
configuration of the compressor unit is no longer in demand and the compressor unit is not likely to return to an operating
status without the capital expenditures. These latter expenditures substantially modify the operating parameters of the
compressor unit such that it can be used in applications for which it previously was not suited. Maintenance capital
expenditures are related to major overhauls of significant components of a compressor unit, such as the engine, compressor and
cooler, that return the components to a “like new” condition, but do not modify the applications for which the compressor unit
was designed.
Growth capital expenditures were $53.0 million, $105.2 million and $97.9 million during the years ended December 31, 2016,
2015 and 2014, respectively. The decrease in growth capital expenditures during the year ended December 31, 2016 compared
to the year ended December 31, 2015 was primarily due to a decrease in installation expenditures on integrated projects in
Bolivia and Brazil. The increase in growth capital expenditures during the year ended December 31, 2015 compared to the year
ended December 31, 2014 was primarily due to an increase in installation expenditures on integrated projects in Bolivia and
Brazil during 2015, partially offset by investments in new compression equipment in Latin America in 2014 and installation
expenditures on integrated projects in Brazil and Mexico during 2014.
53
Maintenance capital expenditures were $14.4 million, $27.3 million and $24.4 million during the years ended December 31,
2016, 2015 and 2014, respectively. The decrease in maintenance capital expenditures during the year ended December 31, 2016
compared to the year ended December 31, 2015 was primarily due to delayed discretionary spending as a result of the market
downturn. Historically, maintenance capital expenditures have remained relatively flat from year to year primarily as a result of
routine scheduled overhaul activities. We intend to grow our business both organically and through third-party acquisitions. If
we are successful in growing our business in the future, we would expect our maintenance capital expenditures to increase over
the long term.
We generally invest funds necessary to manufacture contract operations fleet additions when our idle equipment cannot be
reconfigured to economically fulfill a project’s requirements and the new equipment expenditure is expected to generate
economic returns over its expected useful life that exceeds our targeted return on capital. We currently plan to spend
approximately $150 million to $180 million in capital expenditures during 2017, including (1) approximately $125 million to
$145 million on contract operations growth capital expenditures and (2) approximately $15 million to $20 million on
equipment maintenance capital related to our contract operations business.
Long-Term Debt. On July 10, 2015, we and our wholly owned subsidiary, EESLP, entered into a $750.0 million credit
agreement (the “Credit Agreement”) with Wells Fargo, as the administrative agent, and various financial institutions as lenders.
On October 5, 2015, the parties amended and restated the Credit Agreement to provide for a $925.0 million credit facility,
consisting of a $680.0 million revolving credit facility and a $245.0 million term loan facility (collectively, the “Credit
Facility”). The Credit Facility became available to us on November 3, 2015 (referred to as the “Initial Availability Date”). On
November 3, 2015, EESLP incurred approximately $300.0 million of indebtedness under the revolving credit facility and
$245.0 million of indebtedness under the term loan facility. Pursuant to the separation and distribution agreement with
Archrock and certain of our and Archrock’s respective affiliates, on November 3, 2015, EESLP transferred $532.6 million of
net proceeds from borrowings under the Credit Facility to Archrock to allow it to repay a portion of its indebtedness in
connection with the Spin-off. In accordance with the Credit Agreement, we are required to repay borrowings outstanding under
the term loan facility on each anniversary of the Initial Availability Date in an amount equal to the lesser of (i) $12.3 million
and (ii) the outstanding principal balance of the term loan facility. In November 2016, we repaid $12.3 million of borrowings
outstanding under the term loan facility. The principal amount of $232.8 million due in November 2017 under the term loan
facility is classified as long-term in our balance sheet at December 31, 2016 because we have the intent and ability to refinance
the current principal amount due with borrowings under our existing revolving credit facility. On April 22, 2016, June 17, 2016,
August 24, 2016 and November 22, 2016, we and our wholly owned subsidiary, EESLP, entered into amendments to the Credit
Agreement with Wells Fargo, as the administrative agent, and various financial institutions as lenders. See Note 10 to the
Financial Statements for further discussion regarding these amendments.
During the year ended December 31, 2016, the average daily borrowings under the Credit Facility were $422.9 million. During
the period between November 3, 2015 and December 31, 2015, the average daily borrowings under the Credit Facility were
$557.0 million. The weighted average annual interest rate on outstanding borrowings under the revolving credit facility at
December 31, 2016 and 2015 was 5.0% and 3.1%, respectively. The annual interest rate on the outstanding balance of the term
loan facility at December 31, 2016 and 2015 was 6.8%.
As of December 31, 2016, we had $118.0 million in outstanding borrowings and $57.1 million in outstanding letters of credit
under our revolving credit facility. At December 31, 2016, taking into account guarantees through letters of credit, we had
undrawn capacity of $504.9 million under our revolving credit facility. Our Credit Agreement limits our Total Debt (as defined
in the Credit Agreement) to EBITDA (as defined in the Credit Agreement) ratio on the last day of the fiscal quarter to not
greater than 3.75 to 1.0 (which will increase to 4.50 to 1.0 following the completion of a qualified capital raise). As a result of
this limitation, $226.9 million of the $504.9 million of undrawn capacity under our revolving credit facility was available for
additional borrowings as of December 31, 2016. Because this limitation considers all of our outstanding debt obligations, the
additional borrowings available to us are in excess of borrowings needed under our revolving credit facility to refinance the
current principal amount due under the term loan facility.
We are required to prepay borrowings outstanding under the term loan facility with the net proceeds of certain asset sales,
equity issuances, debt incurrences and other events (subject to, in certain circumstances, our right to reinvest the proceeds
within a specified period). In addition, if the total leverage ratio (as defined in the Credit Agreement) as of the last day in any
fiscal year is greater than 2.50 to 1.00, we are required to prepay borrowings outstanding under the term loan facility with a
portion of Excess Cash Flow (as defined in the Credit Agreement) for that fiscal year equal to (a) 50% of Excess Cash Flow if
the total leverage ratio is greater than 3.00 to 1.00 or (b) 25% of Excess Cash Flow if the total leverage ratio is greater than 2.50
to 1.00 but less than or equal to 3.00 to 1.00.
54
The Credit Agreement contains various covenants with which we, EESLP and our respective restricted subsidiaries must
comply, including, but not limited to, limitations on the incurrence of indebtedness, investments, liens on assets, repurchasing
equity, making distributions, transactions with affiliates, mergers, consolidations, dispositions of assets and other provisions
customary in similar types of agreements. We are required to maintain, on a consolidated basis, a minimum interest coverage
ratio (as defined in the Credit Agreement) of 2.25 to 1.00; a maximum total leverage ratio (as defined in the Credit Agreement)
of 3.75 to 1.00 prior to the completion of a qualified capital raise and 4.50 to 1.00 thereafter; and, following the completion of a
qualified capital raise, a maximum senior secured leverage ratio (as defined in the Credit Agreement) of 2.75 to 1.00. As of
December 31, 2016, Exterran Corporation maintained a 5.5 to 1.0 interest coverage ratio, a 2.3 to 1.0 total leverage ratio and a
2.3 to 1.0 senior secured leverage ratio. As of December 31, 2016, we were in compliance with all financial covenants under
the Credit Agreement.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity
securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will
depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts
involved may be material.
Historically, we have financed capital expenditures primarily with net cash provided by operating activities. Our ability to
access the capital markets may be restricted at a time when we would like, or need, to do so, which could have an adverse
impact on our ability to maintain our operations and to grow. If any of our lenders become unable to perform their obligations
under our Credit Facility, our borrowing capacity under our revolving credit facility could be reduced. Inability to borrow
additional amounts under our revolving credit facility could limit our ability to fund our future growth and operations. Based on
current market conditions, we expect that net cash provided by operating activities and borrowings under our revolving credit
facility will be sufficient to finance our operating expenditures, capital expenditures and scheduled interest and debt
repayments through December 31, 2017; however, to the extent they are not, we may seek additional debt or equity financing.
Additionally, our term loan facility matures in November 2017. At or prior to the time the term loan matures, we will be
required to refinance it and may enter into one or more new facilities, which could result in higher borrowing costs, issue
equity, which would dilute our existing shareholders, repay with borrowings under our revolving credit facility, issue bonds
with restrictive covenants that could impact our business flexibility or otherwise raise the funds necessary to repay the
outstanding principal amount under the term loan.
Contingencies to Archrock. Pursuant to the separation and distribution agreement, EESLP contributed to a subsidiary of
Archrock the right to receive payments based on a notional amount corresponding to payments received by our subsidiaries
from PDVSA Gas in respect of the sale of our and our joint ventures’ previously nationalized assets promptly after such
amounts are collected by our subsidiaries until Archrock’s subsidiary has received an aggregate amount of such payments up to
the lesser of (i) $125.8 million, plus the aggregate amount of all reimbursable expenses incurred by Archrock and its
subsidiaries in connection with recovering any PDVSA Gas default installment payments following the completion of the Spin-
off or (ii) $150.0 million. Our balance sheets do not reflect this contingent liability to Archrock or the amount payable to us by
PDVSA Gas as a receivable. Pursuant to the separation and distribution agreement, we transferred cash of $49.2 million to
Archrock during the year ended December 31, 2016. The transfer of cash was recognized as a reduction to additional paid-in
capital in our financial statements. As of December 31, 2016, the remaining principal amount due to us from PDVSA Gas in
respect of the sale of our and our joint ventures’ previously nationalized assets was approximately $37 million.
Pursuant to the separation and distribution agreement, EESLP (in the case of debt offerings) or Exterran Corporation (in the
case of equity issuances) will use its commercially reasonable efforts to complete one or more unsecured debt offerings or
equity issuances resulting in aggregate gross cash proceeds of at least $250.0 million on the terms described in the Credit
Agreement (such transaction, a “qualified capital raise”) on or before the maturity date of our term loan facility. In connection
with the Spin-off, EESLP contributed to a subsidiary of Archrock the right to receive, promptly following the occurrence of a
qualified capital raise, a $25.0 million cash payment.
Unrestricted Cash. Of our $35.7 million unrestricted cash balance at December 31, 2016, $19.4 million was held by our non-
U.S. subsidiaries. We have not provided for U.S. federal income taxes on indefinitely (or permanently) reinvested cumulative
earnings of approximately $545.5 million generated by our non-U.S. subsidiaries as of December 31, 2016. In the event of a
distribution of earnings to the U.S. in the form of dividends, we may be subject to both foreign withholding taxes and U.S.
federal income taxes net of allowable foreign tax credits. We do not believe that the cash held by our non-U.S. subsidiaries has
an adverse impact on our liquidity because we expect that the cash we generate in the U.S. and the available borrowing
capacity under our revolving credit facility, as well as the repayment of intercompany liabilities from our non-U.S. subsidiaries,
will be sufficient to fund the cash needs of our U.S. operations for the foreseeable future.
55
Dividends. We do not currently anticipate paying cash dividends on our common stock. We currently intend to retain our future
earnings to support the growth and development of our business. The declaration of any future cash dividends and, if declared,
the amount of any such dividends, will be subject to our financial condition, earnings, capital requirements, financial
covenants, applicable law and other factors our board of directors deems relevant.
Contractual Obligations. The following table summarizes our cash contractual obligations as of December 31, 2016 and the
effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
Total
2017
2018-2019
2020-2021
Thereafter
Long-term debt (1):
Revolving credit facility due November 2020
$
118,000
$
— $
— $
118,000
$
Term loan facility due November 2017 (2)
232,750
232,750
Other
Total long-term debt
Interest on long-term debt (3)
Purchase commitments
Facilities and other operating leases
Total contractual obligations
583
351,333
54,227
119,734
27,541
—
232,750
25,636
118,990
6,176
—
506
506
20,127
744
5,956
—
77
118,077
8,464
—
3,465
$
552,835
$
383,552
$
27,333
$
130,006
$
—
—
—
—
—
—
11,944
11,944
(1)
(2)
For more information on our long-term debt, see Note 10 to the Financial Statements.
The principal amount of $232.8 million due in November 2017 under the term loan facility is classified as long-term in
our balance sheet at December 31, 2016 because we have the intent and ability to refinance the current principal amount
due with borrowings under our existing revolving credit facility. Amounts represent the full face value of the term loan
facility and are not reduced by the aggregate unamortized debt financing costs of $2.4 million as of December 31, 2016.
(3)
Interest amounts were calculated using interest rates in effect as of December 31, 2016.
At December 31, 2016, $18.2 million of unrecognized tax benefits (including discontinued operations) have been recorded as
liabilities in accordance with the accounting standard for income taxes related to uncertain tax positions, and we are uncertain
as to if or when such amounts may be settled. Related to these unrecognized tax benefits, we have also recorded a liability for
potential penalties and interest (including discontinued operations) of $3.0 million.
Indemnifications. In conjunction with, and effective as of the completion of, the Spin-off, we entered into the separation and
distribution agreement with Archrock, which governs, among other things, the treatment between Archrock and us of aspects
relating to indemnification, insurance, confidentiality and cooperation. Generally, the separation and distribution agreement
provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our
business with us and financial responsibility for the obligations and liabilities of Archrock’s business with Archrock. Pursuant
to the agreement, we and Archrock will generally release the other party from all claims arising prior to the Spin-off that relate
to the other party’s business, subject to certain exceptions. Additionally, in conjunction with, and effective as of the completion
of, the Spin-off, we entered into the tax matters agreement with Archrock. Under the tax matters agreement and subject to
certain exceptions, we are generally liable for, and indemnify Archrock against, taxes attributable to our business, and Archrock
is generally liable for, and indemnify us against, all taxes attributable to its business. We are generally liable for, and indemnify
Archrock against, 50% of certain taxes that are not clearly attributable to our business or Archrock’s business. Any payment
made by us to Archrock, or by Archrock to us, is treated by all parties for tax purposes as a nontaxable distribution or capital
contribution, respectively, made immediately prior to the Spin-off.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Effects of Inflation
Our revenues and results of operations have not been materially impacted by inflation in the past three fiscal years.
56
Critical Accounting Policies, Practices and Estimates
This discussion and analysis of our financial condition and results of operations is based upon the Financial Statements, which
have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates and accounting policies, including those related to bad
debt, inventories, fixed assets, intangible assets, income taxes, revenue recognition and contingencies and litigation. We base
our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances. The
results of this process form the basis of our judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these
differences can be material to our financial condition, results of operations and liquidity. We describe our significant accounting
policies more fully in Note 2 to our Financial Statements.
Allowances and Reserves
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make
required payments. The determination of the collectability of amounts due from our customers requires us to use estimates and
make judgments regarding future events and trends, including monitoring our customers’ payment history and current
creditworthiness to determine that collectibility is reasonably assured, as well as consideration of the overall business climate in
which our customers operate. Inherently, these uncertainties require us to make judgments and estimates regarding our
customers’ ability to pay amounts due to us in order to determine the appropriate amount of valuation allowances required for
doubtful accounts. We review the adequacy of our allowance for doubtful accounts quarterly. We determine the allowance
needed based on historical write-off experience and by evaluating significant balances aged greater than 90 days individually
for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. During the years ended December 31, 2016, 2015 and 2014, we recorded bad
debt expense of $3.0 million, $3.3 million and $0.7 million, respectively. Our allowance for doubtful accounts was
approximately 2% and 1% of our gross accounts receivable balance at December 31, 2016 and 2015, respectively.
Inventory is a significant component of current assets and is stated at the lower of cost or market. This requires us to record
provisions and maintain reserves for obsolete and slow moving inventory. To determine these reserve amounts, we regularly
review inventory quantities on hand and compare them to estimates of future product demand, market conditions and
production requirements. These estimates and forecasts inherently include uncertainties and require us to make judgments
regarding potential outcomes. During 2016, 2015 and 2014, we recorded $0.8 million, $15.6 million and $3.2 million,
respectively, in inventory write-downs and reserves for inventory which was obsolete or slow moving. As discussed further in
Note 14 to the Financial Statements, during the year ended December 31, 2015, we recorded restructuring and other charges of
$8.7 million related to inventory write-downs associated with restructuring activities. Significant or unanticipated changes to
our estimates and forecasts could impact the amount and timing of any additional provisions for obsolete or slow moving
inventory that may be required. Our reserve for obsolete and slow moving inventory was approximately 11% and 10% of our
gross raw materials inventory balance at December 31, 2016 and 2015, respectively.
Depreciation
Property, plant and equipment are carried at cost. Depreciation for financial reporting purposes is computed on the straight-line
basis using estimated useful lives and salvage values, including idle assets in our active fleet. The assumptions and judgments
we use in determining the estimated useful lives and salvage values of our property, plant and equipment reflect both historical
experience and expectations regarding future use of our assets. We periodically analyze our estimates of useful lives of our
property, plant and equipment to determine if the depreciable periods and salvage value continue to be appropriate. The use of
different estimates, assumptions and judgments in the establishment of property, plant and equipment accounting policies,
especially those involving their useful lives, would likely result in significantly different net book values of our assets and
results of operations. For example, if the useful lives of compressor units in our active fleet with a net book value of
approximately $452.9 million were reduced by five years on January 1, 2016, our depreciation expense for the year ended
December 31, 2016 would have increased by approximately $12 million.
57
Long-Lived Assets
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for
impairment whenever events or changes in circumstances, including the removal of compressor units from our active fleet,
indicate that the carrying amount of an asset may not be recoverable. Compressor units in our active fleet that were idle as of
December 31, 2016 comprise approximately 202,000 horsepower with a net book value of approximately $73.1 million. The
determination that the carrying amount of an asset may not be recoverable requires us to make judgments regarding long-term
forecasts of future revenue and costs related to the assets subject to review. Specifically for idle compression units that are
removed from the active fleet and that will be sold to third parties as working compression units, significant assumptions
include forecasted sale prices based on future market conditions and demand, forecasted cost to maintain the assets until sold
and the forecasted length of time necessary to sell the assets. These forecasts are uncertain as they require significant
assumptions about future market conditions. Significant and unanticipated changes to these assumptions could require a
provision for impairment in a future period. Given the nature of these evaluations and their application to specific assets and
specific times, it is not possible to reasonably quantify the impact of changes in these assumptions. An impairment loss exists
when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its
carrying amount. When necessary, an impairment loss is recognized and represents the excess of the asset’s carrying value as
compared to its estimated fair value and is charged to the period in which the impairment occurred.
Income Taxes
Our income tax provision, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s
best assessment of estimated current and future taxes to be paid. We operate in approximately 30 countries and, as a result, we
and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state and
foreign jurisdictions. In addition, certain of our operations were historically included in Archrock’s consolidated income tax
returns in the U.S. federal and state jurisdictions. Our tax provision for periods prior to the Spin-off was determined on a
separate return, stand-alone basis. Differences between the separate return method utilized and Archrock’s U.S. income tax
returns and cash flows attributable to income taxes for our U.S. operations were recognized as distributions to, or contributions
from, parent within parent equity. Significant judgments and estimates are required in determining our consolidated income tax
provision.
Deferred income taxes arise from temporary differences between the financial statement carrying amounts and the tax basis of
assets and liabilities. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise,
we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected
future taxable income, tax-planning strategies and results of recent operations. In projecting future taxable income, we begin
with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate
assumptions including the amount of future U.S. federal, state and foreign pretax operating income, the reversal of temporary
differences and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant
judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage
the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of
cumulative operating income (loss).
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not
aware of any such changes that would have a material effect on the Company’s financial position, results of operations or cash
flows. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and
regulations in a multitude of jurisdictions across our global operations.
The accounting standard for income taxes provides that a tax benefit from an uncertain tax position is only recognized when it
is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or
litigation processes, on the basis of the technical merits. In addition, guidance is provided on measurement, derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. We adjust reserves for
unrecognized tax benefits when our judgment changes as a result of the evaluation of new information not previously available.
Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially
different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income
tax provision in the period in which new information is available.
58
We consider the earnings of our non-U.S. subsidiaries to be indefinitely invested outside the U.S. on the basis of estimates that
future domestic cash generation and available borrowing capacity under our revolving credit facility, as well as the repayment
of intercompany liabilities from our non-U.S. subsidiaries, will be sufficient to meet future domestic cash needs. We have not
recorded a deferred tax liability related to these unremitted foreign earnings as it is not practicable to estimate the amount of
unrecognized deferred tax liabilities. Should we decide to repatriate any unremitted foreign earnings, we would have to adjust
the income tax provision in the period we determined that such earnings will no longer be indefinitely invested outside the U.S.
Revenue Recognition — Percentage-of-Completion Accounting
We recognize revenue and profit for our product sales operations as work progresses on long-term contracts using the
percentage-of-completion method when the applicable criteria are met. During the years ended December 31, 2016, 2015 and
2014, we recognized approximately 84%, 74% and 73%, respectively, of our total product sales revenues from third parties
using the percentage-of-completion method. The percentage-of-completion method depends largely on the ability to make
reasonably dependable estimates related to the extent of progress toward completion of the contract, contract revenues and
contract costs. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income in the period in which the facts that give rise to the revision become known. The typical
duration of these projects is three to 24 months. If we determine that a contract will result in a loss, we record a provision for
the entire amount of the estimated loss in the period in which such loss is identified. Due to the long-term nature of some of our
jobs, developing the estimates of cost often requires significant judgment.
We estimate percentage-of-completion for oil and gas compressor and production and processing equipment product sales on a
direct labor hour to total labor hour basis. This calculation requires management to estimate the number of total labor hours
required for each project and to estimate the profit expected on the project. We estimate percentage-of-completion for Belleli
EPC product sales on a cost to total cost basis. The cost to total cost basis requires us to estimate the amount of total costs
(labor and materials) required to complete each project. Because we have many product sales projects in process at any given
time, we do not believe that materially different results would be achieved if different estimates, assumptions or conditions
were used for any single project.
Factors that must be considered in estimating the work to be completed and ultimate profit include labor productivity and
availability, the nature and complexity of work to be performed, the impact of change orders, availability of raw materials and
the impact of delayed performance. Although we continually strive to accurately estimate our progress toward completion and
profitability, adjustments to overall contract revenue and contract costs could be significant in future periods due to several
factors including but not limited to, settlement of claims against customers, vendor claims against us, customer change orders,
changes in cost estimates, changes in project contingencies and settlement of customer claims against us, such as liquidated
damage claims. If the aggregate combined cost estimates for uncompleted contracts that are recognized using the percentage-
of-completion method in our product sales businesses had been higher or lower by 5% in 2016, our income before income taxes
would have decreased or increased by approximately $27.9 million. As of December 31, 2016, we had realized approximately
$33.3 million in estimated earnings on uncompleted oil and gas product sales contracts and $43.7 million in estimated losses on
uncompleted Belleli EPC product sales contracts. Estimated accrued loss contract provisions of $28.6 million at December 31,
2016 were recognized but not realized on uncompleted Belleli EPC product sales contracts. Accrued loss contract provisions
are included in accrued liabilities in our balance sheets.
Contingencies and Litigation
We are substantially self-insured for workers’ compensation, employer’s liability, property, auto liability, general liability and
employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance
arrangements for these risks. Losses up to deductible amounts are estimated and accrued based upon known facts, historical
trends and industry averages. We review these estimates quarterly and believe such accruals to be adequate. However,
insurance liabilities are difficult to estimate due to unknown factors, including the severity of an injury, the determination of
our liability in proportion to other parties, the timeliness of reporting of occurrences, ongoing treatment or loss mitigation,
general trends in litigation recovery outcomes and the effectiveness of safety and risk management programs. Therefore, if our
actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and
would be recorded in the period in which the difference becomes known. As of December 31, 2016 and 2015, we had recorded
approximately $1.1 million and $1.5 million, respectively, in insurance claim reserves.
59
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to
predict the ultimate outcome of these actions, the accounting standard for contingencies requires management to make
judgments about future events that are inherently uncertain. We are required to record (and have recorded) a loss during any
period in which we believe a loss contingency is probable and can be reasonably estimated. In making determinations of likely
outcomes of pending or threatened legal matters, we consider the evaluation of counsel knowledgeable about each matter.
We regularly assess and, if required, establish accruals for income tax as well as non-income-based tax contingencies pursuant
to the applicable accounting standards that could result from assessments of additional tax by taxing jurisdictions in countries
where we operate. Tax contingencies are subject to a significant amount of judgment and are reviewed and adjusted on a
quarterly basis in light of changing facts and circumstances considering the outcome expected by management. As of
December 31, 2016 and 2015, we had recorded approximately $24.3 million and $21.1 million, respectively, of accruals for tax
contingencies (including penalties and interest and discontinued operations). Of these amounts, $21.2 million and $18.0
million, respectively, are accrued for income taxes as of December 31, 2016 and 2015, respectively, and $3.1 million as of both
periods are accrued for non-income-based taxes. Furthermore, as of December 31, 2016 and 2015, we had an indemnification
receivable from Archrock related to non-income-based taxes of $1.7 million and $1.5 million, respectively. If our actual
experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and would
be recorded in the period in which the difference becomes known.
Recent Accounting Pronouncements
See Note 2 to the Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks associated with changes in foreign currency exchange rates. We have significant international
operations. The net assets and liabilities of these operations are exposed to changes in currency exchange rates. These
operations may also have net assets and liabilities not denominated in their functional currency, which exposes us to changes in
foreign currency exchange rates that impact income. We currently do not have any derivative financial instruments outstanding
to mitigate foreign currency risk. In the future, we may utilize derivative instruments to manage the risk of fluctuations in
foreign currency exchange rates related to the potential impact these changes could have on future earnings and forecasted cash
flows. We recorded foreign currency gains of $6.4 million and foreign currency losses of $35.8 million in our statements of
operations during the years ended December 31, 2016 and 2015, respectively. Our foreign currency gains and losses are
primarily due to exchange rate fluctuations related to monetary asset balances denominated in currencies other than the
functional currency, including foreign currency exchange rate changes recorded on intercompany obligations. Our material
exchange rate exposure relates to intercompany loans to a subsidiary whose functional currency is the Brazilian Real, which
loans carried balances of $41.0 million U.S. dollars as of December 31, 2016. Our foreign currency gains and losses included
translation gains of $9.3 million and translation losses of $30.1 million during the years ended December 31, 2016 and 2015,
respectively, related to the functional currency remeasurement of our foreign subsidiaries’ non-functional currency
denominated intercompany obligations. Of the foreign currency losses recognized during the year ended December 31, 2015,
$29.7 million was attributable to our Brazil subsidiary’s U.S. dollar denominated intercompany obligations and were the result
of a currency devaluation in Brazil and increases in our Brazil subsidiary’s intercompany payables during 2015. Additionally,
during the year ended December 31, 2016, we recognized a loss of $0.7 million on forward currency exchange contracts that
offset exchange rate exposure related to intercompany loans to a subsidiary whose functional currency is the Brazilian Real.
Changes in exchange rates may create gains or losses in future periods to the extent we maintain net assets and liabilities not
denominated in the functional currency.
As of December 31, 2016, we had $350.8 million of outstanding borrowings that are subject to floating interest rates. Changes
in economic conditions outside of our control could result in higher interest rates, thereby increasing our interest expense and
reducing the funds available for capital investment, operations or other purposes. A 1% increase in the effective interest rate on
our outstanding debt subject to floating interest rates at December 31, 2016 would result in an annual increase in our interest
expense of approximately $3.5 million.
Item 8. Financial Statements and Supplementary Data
The consolidated and combined financial statements and supplementary information specified by this Item are presented in
Part IV, Item 15 (“Exhibits and Financial Statement Schedules”) of this report.
60
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
This Item 9A includes information concerning the controls and controls evaluation referred to in the certifications of our Chief
Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Exchange Act included in this Annual Report as
Exhibits 31.1 and 31.2.
Overview
As previously announced on April 26, 2016 our Audit Committee of our Board of Directors determined that it would be
necessary for us to restate our consolidated and combined financial statements. The Audit Committee made this determination
following consultation with and upon the recommendation of management. Refer to Amendment No. 1 to the Company’s
Annual Report on Form 10-K/A for the year ended December 31, 2015 for a more detailed description of the financial
statement restatement.
Notwithstanding the existence of the material weaknesses described below, we believe that the consolidated and combined
financial statements in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of
operations and cash flows as of the dates, and for the periods, presented, in conformity with GAAP.
Management’s Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to
ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated
and communicated to management to allow timely decisions regarding required disclosures.
In connection with the preparation of this Annual Report on Form 10-K, our management, under the supervision and with the
participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2016. Based on that evaluation, our principal executive
officer and principal financial officer concluded that, due to the existence of the material weaknesses in internal control over
financial reporting described below (which we view as an integral part of our disclosure controls and procedures), our
disclosure controls and procedures were not effective as of December 31, 2016. Based on the completion of the review of the
Belleli EPC product sales projects and non-income-based tax receivables in Brazil that led to the restatement and the
performance of additional procedures designed to ensure the reliability of our financial reporting, we believe that the
consolidated and combined financial statements included in this Annual Report on Form 10-K fairly present, in all material
respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in
conformity with GAAP.
Management’s Annual Report on Internal Control Over Financial Reporting
Management, under the supervision of our principal executive officer and principal financial officer, is responsible for
establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d(f) under
the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP, and
includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors of the
Company; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use
or disposition of the Company’s assets that could have a material effect on the financial statements.
61
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis.
In connection with the preparation of this Annual Report on Form 10-K, our management, under the supervision and with the
participation of our principal executive officer and principal financial officer, conducted an assessment of the effectiveness of
our internal control over financial reporting as of December 31, 2016 based on the criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that assessment, our principal executive officer and principal financial officer concluded that, due to the material
weaknesses described below (which were not remediated as of December 31, 2016), we did not maintain effective internal
control over financial reporting as of December 31, 2016.
Control Environment, Risk Assessment, Control Activities, Information and Communication and Monitoring
We did not maintain effective internal control over financial reporting related to the following areas: control environment, risk
assessment, control activities, information and communication and monitoring. In particular, controls related to the following
were not designed or operating effectively:
• There was not adequate integration, emphasis of local senior management accountability and management oversight
of accounting and financial reporting activities in implementing and maintaining certain accounting practices at
Belleli EPC to conform to the Company’s policies and GAAP.
• The Company did not modify its controls and testing procedures to sufficiently address its assessment of risks
related to Belleli EPC that could significantly impact internal control over financial reporting by modifying its
approach to how those risks should be addressed.
• The Company did not implement and maintain the same accounting controls at Belleli EPC, including information
and communication controls, as those maintained in the Company’s other operating locations, resulting in internal
controls that were not adequate to prevent or detect instances of intentional override of controls, intentional
misconduct, or manipulation of cost-to-complete estimates by, or at the direction of, certain former members of
Belleli EPC local senior management.
• The Company did not maintain a sufficient complement of personnel with appropriate levels of accounting
knowledge, experience and training commensurate with the nature and complexity of Belleli EPC’s business.
• Corporate monitoring controls over certain foreign operations were not adequate to detect inappropriate accounting
practices and were not designed to operate at a sufficient level of precision to detect material misstatements.
The above material weaknesses contributed to material weaknesses at the control-activity level.
Revenue Recognition of Belleli EPC Percentage-of-Completion Projects
We did not design and maintain effective procedures or controls over accurate recording, presentation and disclosure of revenue
and related costs in the application of percentage-of-completion accounting principles to our engineering, procurement and
construction projects by Belleli EPC. Various deficiencies were identified in the process that aggregated to a material weakness.
Controls relating to the following areas were not designed or operating effectively:
• Controls over the determination of estimated cost-to-complete, including the assessment of contingencies and
impact of project uncertainties; and
• Controls to address the accuracy and completeness of information used to estimate revenue and related costs in the
application of percentage-of-completion accounting principles.
The Company also identified material weaknesses in the control environment relating to risk assessment, control activities,
information and communication and monitoring controls which contributed to this material weakness.
Existence and Recovery of Brazil Non-Income-Based Tax Receivables
The Company’s controls and procedures around the existence and recovery of Brazilian non-income-based tax receivables were
not designed to review the Brazilian non-income-based tax receivables on a regular basis by personnel with appropriate
expertise.
62
The Company also identified material weaknesses in the control environment and corporate monitoring controls, which
contributed to this material weakness.
All of the material weaknesses identified by the Company resulted in misstatements to product sales, product sales cost of
sales, accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, billings on uncompleted
contracts in excess of costs and estimated earnings, accrued liabilities, intangibles and other assets, net, and other income.
Remediation of Material Weakness in Internal Control Over Financial Reporting
Our management is committed to the planning and implementation of remediation efforts to address all material weaknesses, as
well as to foster continuous improvement in the Company’s internal controls. These remediation efforts, summarized below, are
implemented, in the process of being implemented or are planned for implementation, and are intended to address the identified
material weaknesses and enhance our overall financial control environment.
In the first quarter of 2016, our management made a decision to exit the Belleli EPC business, which includes Belleli EPC’s
engineering, procurement and construction for the manufacture of tanks for tank farms and the manufacture of evaporators and
brine heaters for desalination plants. Accordingly, Belleli EPC will not enter into any new contracts or orders from any new or
existing customers relating to the Belleli EPC business. This departure decision is considered in determining the nature and
extent of our Belleli EPC remediation efforts. In addition, Belleli EPC’s prior local senior management responsible for the
intentional override of controls and misconduct are no longer employees of Belleli EPC or its affiliates.
During 2016, we made numerous changes throughout our organization and took significant actions to reinforce the importance
of a strong control environment, including training and other steps designed to strengthen and enhance our control culture.
To remediate the deficiencies identified herein, our leadership team, including the principal executive officer and current
principal financial officer, has reaffirmed and reemphasized the importance of internal control, control consciousness and a
strong control environment.
To date we have implemented the following remediation efforts at Belleli EPC:
• Restructured the Company’s Executive Leadership Team (ELT), including designating responsibility of overseeing
Belleli EPC projects to an ELT member who then reports directly to the Exterran Corporation principal executive
officer;
• Appointed experienced professionals to key finance and operational leadership positions within Belleli EPC,
including the hiring of a new Finance Manager and assigning a Managing Director to lead the operations
organization;
•
Integrated oversight of Belleli EPC operating, finance and manufacturing personnel by certain members of the
Exterran Corporation ELT and the Exterran Corporation chief financial officer’s leadership team, including
implementing regular meetings, to ensure sufficient oversight of project performance;
• Established a direct functional reporting structure between Belleli EPC and Exterran Corporation with more clearly
defined responsibilities;
•
Provided enhanced training on our policies and ethical requirements in English, and in Italian where necessary,
including the emphasis of our hotline, the importance of reporting unethical actions and the Company’s zero
tolerance for retaliation of any kind;
• Engaged a third-party consultant to accelerate redesigning the Belleli EPC project and contract management
processes and controls; and
• Enhanced the accuracy and visibility of Belleli EPC financial results by improving the integrity of the monthly data
interface.
Our management believes that meaningful progress has been made against remaining remediation efforts; although timetables
vary, management regards successful completion as an important priority. Remaining remediation activities include:
•
Instituting enhanced review of estimated costs at completion as part of the quarterly close process;
• Reviewing and redesigning internal controls, including spreadsheet controls, to ensure that the control objectives
mitigate the identified risks;
• Assessing and redesigning, as necessary, systems and related processes at Belleli EPC to ensure information
technology oversight matches the operations of the business;
63
•
Integrating accounting, manufacturing and operations functions and revising organizational structures to enhance
accurate reporting and ensure appropriate review and accountability;
• Assessing current staffing levels and competencies to ensure the optimal complement of personnel with appropriate
backgrounds and skill sets;
• Enhancing our Sarbanes-Oxley (SOX) compliance procedures, including designing controls to respond to our risk
assessment processes, implementing walkthroughs and performing risk responsive testing on our internal controls;
and
•
Implementing a corporate review of non-income-based tax receivables globally.
Management believes the measures, when fully implemented and operational, will remediate the control deficiencies we have
identified and strengthen our internal control over financial reporting. We are committed to improving our internal control
processes and intend to continue to review and improve our financial reporting controls and procedures. As we continue to
evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control
deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures
described above.
Changes in Internal Control over Financial Reporting
Other than those noted above, there were no changes in our internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte &
Touche, LLP, an independent registered public accounting firm, as stated in their attestation report that follows.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Exterran Corporation
Houston, Texas
We have audited Exterran Corporation and subsidiaries (the “Company’s”) internal control over financial reporting as of
December 31, 2016 based on the criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s
assessment: an ineffective control environment, risk assessment, control activities, information and communication,
monitoring, ineffective design and maintaining of controls over accurate recording, presentation and disclosure of revenue and
related costs in the application of percentage-of-completion accounting principles to the Company’s engineering, procurement
and construction projects by Belleli EPC, and ineffective design of controls addressing the existence and recovery of Brazilian
non-income-based tax receivables including the review on a regular basis by personnel with appropriate expertise. These
material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the
consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2016, of the
Company and this report does not affect our report on such financial statements and financial statement schedule.
In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the
control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2016,
based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
65
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2016, of the
Company and our report dated March 9, 2017 expressed an unqualified opinion on those financial statements and financial
statement schedule.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
March 9, 2017
66
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required in Part III, Item 10 of this report is incorporated by reference to the sections entitled “Election of
Directors,” “Corporate Governance,” “Executive Officers” and “Beneficial Ownership of Common Stock” in our definitive
proxy statement, to be filed with the SEC within 120 days of the end of our fiscal year.
Item 11. Executive Compensation
The information required in Part III, Item 11 of this report is incorporated by reference to the sections entitled “Compensation
Discussion and Analysis” and “Information Regarding Executive Compensation” in our definitive proxy statement, to be filed
with the SEC within 120 days of the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
See the table below for securities authorized for issuance under our equity compensation plans. Other information required in
Part III, Item 12 of this report are incorporated by reference to the section entitled “Beneficial Ownership of Common Stock” in
our definitive proxy statement, to be filed with the SEC within 120 days of the end of our fiscal year.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of December 31, 2016, with respect to the Exterran Corporation compensation
plans under which our common stock is authorized for issuance, aggregated as follows:
(a)
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
Plan Category
(#)
($)
(#)
Equity compensation plans approved by security
holders (1)
Equity compensation plans not approved by
security holders
Total
295,661
$
17.44
—
295,661
—
0
2,233,492
—
2,233,492
(1) Comprised of (i) the Exterran Corporation 2015 Stock Incentive Plan, the (“2015 Plan”) and (ii) the Exterran
Corporation 2015 Directors’ Stock and Deferral Plan. The 2015 Plan also governs awards originally granted by Archrock
under the Archrock, Inc. 2013 Stock Incentive Plan, the Archrock, Inc. 2007 Amended and Restated Stock Incentive Plan
and the Universal Compression Holdings, Inc. Incentive Stock Option Plan. In addition to the outstanding options, as of
December 31, 2016, there were 389,085 restricted stock units outstanding, payable in common stock upon vesting,
outstanding under the 2015 Plan.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required in Part III, Item 13 of this report is incorporated by reference to the sections entitled “Certain
Relationships and Related Transactions” and “Corporate Governance” in our definitive proxy statement, to be filed with the
SEC within 120 days of the end of our fiscal year.
67
Item 14. Principal Accountant Fees and Services
The information required in Part III, Item 14 of this report is incorporated by reference to the section entitled “Ratification of
the Appointment of Independent Registered Public Accounting Firm” in our definitive proxy statement, to be filed with the
SEC within 120 days of the end of our fiscal year.
68
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as a part of this report.
PART IV
1. Financial Statements. The following financial statements are filed as a part of this report.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated and Combined Statements of Operations
Consolidated and Combined Statements of Comprehensive Income (Loss)
Consolidated and Combined Statements of Stockholders’ Equity
Consolidated and Combined Statements of Cash Flows
Notes to Consolidated and Combined Financial Statements
2. Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required under the relevant instructions.
3. Exhibits
F-1
F-2
F-3
F-4
F-5
F-6
F-8
S-1
69
Exhibit No.
2.1
2.2
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
Description
Separation and Distribution Agreement, dated as of November 3, 2015, by and among Exterran Holdings, Inc.,
Exterran General Holdings LLC, Exterran Energy Solutions, L.P., Exterran Corporation, AROC Corp., EESLP LP
LLC, AROC Services GP LLC, AROC Services LP LLC and Archrock Services, L.P., incorporated by reference
to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
First Amendment to Separation and Distribution Agreement, dated as of December 15, 2015, by and among
Archrock, Inc., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., Exterran Corporation, AROC
Corp., EESLP LP LLC, AROC Services GP LLC, AROC Services LP LLC and Archrock Services, L.P.,
incorporated by reference to Exhibit 2.2 to the Registrant’s Original Annual Report on Form 10-K for the year
ended December 31, 2015 filed on February 26, 2016
Amended and Restated Certificate of Incorporation of Exterran Corporation, incorporated by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
Amended and Restated Bylaws of Exterran Corporation, incorporated by reference to Exhibit 3.2 to the
Registrant’s Current Report on Form 8-K filed on November 5, 2015
Employee Matters Agreement, dated as of November 3, 2015, by and between Exterran Holdings, Inc. and
Exterran Corporation, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on November 5, 2015
Tax Matters Agreement, dated as of November 3, 2015, by and between Exterran Holdings, Inc. and Exterran
Corporation, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on
November 5, 2015
Transition Services Agreement, dated as of November 3, 2015, by and between Exterran Holdings, Inc. and
Exterran Corporation, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
filed on November 5, 2015
Supply Agreement, dated as of November 3, 2015, by and among Archrock Services, L.P., EXLP Operating LLC
and Exterran Energy Solutions, L.P., incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report
on Form 8-K filed on November 5, 2015
Form of Indemnification Agreement, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report
on Form 8-K filed on November 5, 2015
Amended and Restated Credit Agreement, dated as of October 5, 2015, by and among Exterran Holdings, Inc.,
Exterran Energy Solutions, L.P., the lenders signatory thereto and Wells Fargo Bank, National Association, as
administrative agent, incorporated by reference to Exhibit 4.2 to Amendment No. 5 to the Company’s
Registration Statement on Form 10-12B, as filed on October 6, 2015
Exterran Corporation 2015 Stock Incentive Plan, incorporated by reference to Exhibit 99.1 to the Company’s
Registration Statement on Form S-8, as filed on November 2, 2015
Form of Award Notice and Agreement for Incentive Stock Options pursuant to the 2015 Stock Incentive Plan,
incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed on November 5,
2015
Form of Award Notice and Agreement for Nonqualified Stock Options pursuant to the 2015 Stock Incentive Plan,
incorporated by reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K filed on November 5,
2015
Form of Award Notice and Agreement for Performance Units pursuant to the 2015 Stock Incentive Plan,
incorporated by reference to Exhibit 10.10 to the Registrant’s Current Report on Form 8-K filed on November 5,
2015
Form of Award Notice and Agreement for Restricted Stock pursuant to the 2015 Stock Incentive Plan,
incorporated by reference to Exhibit 10.11 to the Registrant’s Current Report on Form 8-K filed on November 5,
2015
Form of Award Notice and Agreement for Cash-Settled Restricted Stock Units pursuant to the 2015 Stock
Incentive Plan, incorporated by reference to Exhibit 10.12 to the Registrant’s Current Report on Form 8-K filed
on November 5, 2015
Form of Award Notice and Agreement for Stock-Settled Restricted Stock Units pursuant to the 2015 Stock
Incentive Plan, incorporated by reference to Exhibit 10.13 to the Registrant’s Current Report on Form 8-K filed
on November 5, 2015
Form of Award Notice and Agreement for Common Stock Award for Non-Employee Directors pursuant to the
2015 Stock Incentive Plan, incorporated by reference to Exhibit 10.14 to the Registrant’s Current Report on
Form 8-K filed on November 5, 2015
10.15†
Exterran Corporation Directors’ Stock and Deferral Plan, incorporated by reference to Exhibit 99.2 to the
Company’s Registration Statement on Form S-8, as filed on November 2, 2015
70
Exhibit No.
10.16†
10.17†
10.18†
10.19†
10.20†
10.21†
10.22
10.23
10.24
10.25
10.26†
10.27†
10.28†
Description
Form of Employment Letter, incorporated by reference to Exhibit 10.16 to the Registrant’s Current Report on
Form 8-K filed on November 5, 2015
Form of Severance Benefit Agreement, incorporated by reference to Exhibit 10.11 to Amendment No. 4 to the
Company’s Registration Statement on Form 10-12B, as filed on August 5, 2015
Form of Change of Control Agreement, incorporated by reference to Exhibit 10.11 to Amendment No. 4 to the
Company’s Registration Statement on Form 10-12B, as filed on August 5, 2015
Exterran Corporation Deferred Compensation Plan, incorporated by reference to Exhibit 10.19 to the Registrant’s
Current Report on Form 8-K filed on November 5, 2015
Exterran Corporation Amended and Restated Directors’ Stock and Deferral Plan, incorporated by reference to
Exhibit 10.20 to the Registrant’s Original Annual Report on Form 10-K for the year ended December 31, 2015
filed on February 26, 2016
Separation Letter between the Company and Daniel K. Schlanger, dated as of March 7, 2016, incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 8, 2016
First Amendment, Consent and Waiver, dated April 22, 2016, to Amended and Restated Credit Agreement by and
among Exterran Energy Solutions, L.P., Exterran Corporation, Wells Fargo Bank, National Association, as
administrative agent, and the lenders party thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on April 26, 2016
Second Amendment, Consent and Waiver, dated June 17, 2016, to Amended and Restated Credit Agreement and
First Amendment to Guaranty and Collateral Agreement by and among Exterran Energy Solutions, L.P., Exterran
Corporation, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto,
incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 23, 2016
Third Amendment, Consent and Waiver, dated August 24, 2016, to Amended and Restated Credit Agreement by
and among Exterran Energy Solutions, L.P., Exterran Corporation, Wells Fargo Bank, National Association, as
administrative agent, and the lenders party thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on August 29, 2016
Fourth Amendment, Consent and Waiver, dated November 22, 2016, to Amended and Restated Credit Agreement
by and among Exterran Energy Solutions, L.P., Exterran Corporation, Wells Fargo Bank, National Association, as
administrative agent, and the lenders party thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on November 22, 2016
First Amendment, Exterran Corporation Deferred Compensation Plan, incorporated by reference to Exhibit 10.3
of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 filed on January 4,
2017
2016 Form of Severance Benefit Agreement, incorporated by reference to Exhibit 10.3 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 filed on January 4, 2017
2016 Form of Change of Control Agreement, incorporated by reference to Exhibit 10.3 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 filed on January 4, 2017
10.29†*
Form of Award Notice and Agreement for Performance Units pursuant to the 2015 Stock Incentive Plan
10.30†*
Form of Award Notice and Agreement for Restricted Stock pursuant to the 2015 Stock Incentive Plan
10.31†*
10.32†*
10.33†*
21.1*
23.1*
24.1*
31.1*
31.2*
32.1**
32.2**
Form of Award Notice and Agreement for Cash-Settled Restricted Stock Units pursuant to the 2015 Stock
Incentive Plan
Form of Award Notice and Agreement for Stock-Settled Restricted Stock Units pursuant to the 2015 Stock
Incentive Plan
Form of Award Notice and Agreement for Common Stock Award for Non-Employee Directors pursuant to the
2015 Stock Incentive Plan
List of Subsidiaries
Consent of Deloitte & Touche LLP
Powers of Attorney (included on the signature page to this Report)
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101.1*
Interactive data files pursuant to Rule 405 of Regulation S-T
71
†
*
**
Management contract or compensatory plan or arrangement.
Filed herewith.
Furnished, not filed, herewith.
72
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Exterran Corporation
/s/ ANDREW J. WAY
Name: Andrew J. Way
Title: President and Chief Executive Officer
Date: March 9, 2017
73
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew
J. Way, David A. Barta, Valerie L. Banner and Raymond L. Carney Jr., and each of them, his or her true and lawful attorneys-
in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all
said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on March 9, 2017.
Signature
Title
/s/ ANDREW J. WAY
Andrew J. Way
/s/ DAVID A. BARTA
David A. Barta
/s/ RAYMOND L. CARNEY JR.
Raymond L. Carney Jr.
/s/ WILLIAM M. GOODYEAR
William M. Goodyear
/s/ JOHN P. RYAN
John P. Ryan
/s/ CHRISTOPHER T. SEAVER
Christopher T. Seaver
/s/ RICHARD R. STEWART
Richard R. Stewart
/s/ IEDA GOMES YELL
Ieda Gomes Yell
/s/ JAMES C. GOUIN
James C. Gouin
/s/ MARK R. SOTIR
Mark R. Sotir
President and Chief Executive Officer and Director
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Exterran Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Exterran Corporation and subsidiaries (the “Company”) as
of December 31, 2016 and 2015, and the related consolidated and combined statements of operations, comprehensive income
(loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also
included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedule when considered in relation to the basic
consolidated and combined financial statements taken as a whole, presents fairly, in all material respects, the information set
forth therein.
As described in Note 1, prior to November 3, 2015 the accompanying consolidated and combined financial statements were
derived from the consolidated financial statements and accounting records of Archrock, Inc. The combined financial statements
also include expense allocations for certain corporate functions historically provided by Archrock, Inc. These allocations may
not be reflective of the actual expense which would have been incurred had the Company operated as a separate entity apart
from Archrock, Inc. during the periods prior to November 3, 2015.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 9, 2017 expressed an adverse opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
March 9, 2017
F-1
EXTERRAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance of $5,383 and $2,868, respectively
Inventory, net (Note 4)
Costs and estimated earnings in excess of billings on uncompleted contracts
(Note 5)
Other current assets
Current assets associated with discontinued operations (Note 3)
Total current assets
Property, plant and equipment, net (Note 6)
Deferred income taxes (Note 15)
Intangible and other assets, net (Note 7)
Long-term assets associated with discontinued operations (Note 3)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade
Accrued liabilities (Note 9)
Deferred revenue
Billings on uncompleted contracts in excess of costs and estimated earnings
(Note 5)
Current liabilities associated with discontinued operations (Note 3)
Total current liabilities
Long-term debt (Note 10)
Deferred income taxes (Note 15)
Long-term deferred revenue
Other long-term liabilities
Long-term liabilities associated with discontinued operations (Note 3)
Total liabilities
Commitments and contingencies (Note 21)
Stockholders’ equity:
Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; zero
issued
Common stock, $0.01 par value per share; 250,000,000 shares authorized;
35,641,113 and 35,153,358 shares issued, respectively
Additional paid-in capital
Accumulated deficit
Treasury stock — 202,430 and 5,776 common shares, at cost, respectively
Accumulated other comprehensive income
Total stockholders’ equity (Note 17)
Total liabilities and stockholders’ equity
$
$
$
$
December 31,
2016
2015
$
35,678
671
230,607
157,516
31,956
55,516
14
511,958
797,809
6,015
58,996
—
29,032
1,490
363,581
208,081
65,311
53,866
32,923
754,284
858,188
86,110
51,533
38,281
1,374,778
$
1,788,396
$
95,959
162,792
32,154
42,116
1,113
334,134
348,970
11,700
98,964
24,237
2
818,007
86,727
175,841
31,675
37,908
13,645
345,796
525,593
22,519
59,769
22,708
6,075
982,460
—
—
356
768,304
(257,252)
(2,145)
47,508
556,771
1,374,778
$
352
805,755
(29,315)
(54)
29,198
805,936
1,788,396
The accompanying notes are an integral part of these consolidated and combined financial statements.
F-2
EXTERRAN CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Revenues:
Contract operations
Aftermarket services
Oil and gas product sales—third parties
Oil and gas product sales—affiliates (Note 16)
Belleli EPC product sales
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Contract operations
Aftermarket services
Oil and gas product sales
Belleli EPC product sales
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment (Note 12)
Restatement charges (Note 13)
Restructuring and other charges (Note 14)
Interest expense
Equity in income of non-consolidated affiliates (Note 8)
Other (income) expense, net
Income (loss) before income taxes
Provision for income taxes (Note 15)
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax (Note 3)
Net income (loss)
Basic net income (loss) per common share (Note 19):
Income (loss) from continuing operations per common share
Income (loss) from discontinued operations per common share
Net income (loss) per common share
Diluted net income (loss) per common share (Note 19):
Income (loss) from continuing operations per common share
Income (loss) from discontinued operations per common share
Net income (loss) per common share
Years Ended December 31,
2016
2015
2014
$
392,463
120,550
392,384
—
123,856
1,029,253
$
469,900
127,802
935,295
154,267
103,221
1,790,485
$
493,853
162,724
1,096,638
232,969
115,479
2,101,663
143,670
87,342
365,394
126,322
165,985
137,974
15,146
18,879
27,457
34,181
(10,403)
(13,088)
1,098,859
(69,606)
124,760
(194,366)
(33,571)
(227,937)
(5.62)
(0.97)
(6.59)
(5.62)
(0.97)
(6.59)
$
$
$
$
$
172,391
91,233
925,737
134,846
220,396
154,801
20,788
—
31,315
7,272
(15,152)
35,438
1,779,065
11,420
39,546
(28,126)
54,774
26,648
(0.82)
1.60
0.78
(0.82)
1.60
0.78
$
$
$
$
$
185,408
120,181
1,089,418
148,870
263,170
170,088
3,851
—
—
1,878
(14,553)
6,201
1,974,512
127,151
79,042
48,109
67,183
115,292
1.40
1.96
3.36
1.40
1.96
3.36
$
$
$
$
$
Weighted average common shares outstanding used in net income (loss)
per common share (Note 19):
Basic
Diluted
34,568
34,568
34,288
34,288
34,286
34,286
The accompanying notes are an integral part of these consolidated and combined financial statements.
F-3
EXTERRAN CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net income (loss)
Other comprehensive income (loss):
Foreign currency translation adjustment
Comprehensive income (loss)
Years Ended December 31,
2016
(227,937) $
2015
2014
26,648
$
115,292
18,310
(209,627) $
2,453
29,101
$
(12,147)
103,145
$
$
The accompanying notes are an integral part of these consolidated and combined financial statements.
F-4
EXTERRAN CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Treasury Stock
Shares
Amount
Parent
Equity
Accumulated
Other
Comprehensive
Income
Total
Balance at January 1, 2014
— $
— $
— $
—
— $
— $ 1,282,268
$
38,892
$ 1,321,160
Net income
Net distributions to parent
Foreign currency translation
adjustment
115,292
(59,970)
115,292
(59,970)
—
(12,147)
(12,147)
Balance at December 31, 2014
— $
— $
— $
—
— $
— $ 1,337,590
$
26,745
$ 1,364,335
Net income (loss)
Foreign currency translation
adjustment
Net distributions to parent
Cash transfer to Archrock, Inc. at
Spin-off (Note 17)
Conversion of parent equity to
additional paid-in capital
34,286,267
343
802,997
(29,315)
Conversion of stock-based
compensation awards at Spin-off
505,512
Treasury stock purchased
Stock-based compensation, net of
forfeitures
361,579
Income tax benefit from stock-
based compensation expenses
5
4
(5)
2,115
648
(3,389)
(54)
(2,387)
2,453
55,963
(57,635)
(532,578)
(803,340)
26,648
2,453
(57,635)
(532,578)
—
—
(54)
2,119
648
Balance at December 31, 2015
35,153,358
$
352
$
805,755
$
(29,315)
(5,776)
$
(54)
$
— $
29,198
$
805,936
Net loss
Options exercised
Foreign currency translation
adjustment
Cash transfer to Archrock, Inc.
(Note 21)
Treasury stock purchased
Stock-based compensation, net of
forfeitures
Other
61,177
786
(227,937)
(49,176)
(196,654)
(2,091)
426,578
4
10,962
(23)
(227,937)
786
18,310
18,310
(49,176)
(2,091)
10,966
(23)
Balance at December 31, 2016
35,641,113
$
356
$
768,304
$
(257,252)
(202,430)
$
(2,145)
$
— $
47,508
$
556,771
The accompanying notes are an integral part of these consolidated and combined financial statements.
F-5
EXTERRAN CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Years Ended December 31,
2016
2015
2014
$
(227,937) $
26,648
$
115,292
Depreciation and amortization
Long-lived asset impairment
Amortization of deferred financing costs
(Income) loss from discontinued operations, net of tax
Provision for doubtful accounts
Gain on sale of property, plant and equipment
Equity in income of non-consolidated affiliates
(Gain) loss on remeasurement of intercompany balances
Loss on foreign currency derivatives
Loss on sale of businesses
Stock-based compensation expense
Deferred income tax provision (benefit)
Changes in assets and liabilities:
Accounts receivable and notes
Inventory
Costs and estimated earnings versus billings on uncompleted contracts
Other current assets
Accounts payable and other liabilities
Deferred revenue
Other
Net cash provided by continuing operations
Net cash provided by (used in) discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of property, plant and equipment
Proceeds from sale of businesses
Return of investments in non-consolidated affiliates
Proceeds received from settlement of note receivable
Settlement of foreign currency derivatives
(Increase) decrease in restricted cash
Cash invested in non-consolidated affiliates
Net cash used in continuing operations
Net cash provided by discontinued operations
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from borrowings of long-term debt
Repayments of long-term debt
Cash transfer to Archrock, Inc.
Net distributions to parent
F-6
137,974
15,146
4,584
33,571
2,972
(2,986)
(10,403)
(9,268)
709
—
10,966
71,591
135,934
49,705
37,551
1,593
(9,684)
24,414
(730)
154,801
20,788
702
170,088
3,851
—
(54,774)
(67,183)
3,326
(1,805)
(15,152)
30,127
—
—
8,184
(26,923)
14,211
80,416
(14,461)
(5,474)
(82,705)
(2,428)
(4,566)
679
(1,752)
(14,553)
3,614
—
961
5,288
11,338
(51,234)
(11,855)
(21,376)
(3,888)
24,855
(9,913)
(19,709)
134,503
16,462
150,965
265,702
130,915
(2,213)
(412)
263,489
130,503
(74,325)
(156,745)
(156,602)
2,814
—
10,403
—
(709)
819
—
6,625
—
15,185
5,357
—
—
(33)
12,219
1,516
14,750
—
—
(221)
(197)
(60,998)
(129,611)
(128,535)
36,734
(24,264)
47,497
(82,114)
64,958
(63,577)
430,758
(610,261)
(49,176)
—
673,500
(143,500)
(532,578)
(39,025)
—
—
—
(79,296)
Payments for debt issuance costs
Proceeds from stock options exercised
Purchases of treasury stock
Other
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Income taxes paid, net
Interest paid, net of capitalized amounts
Supplemental disclosure of non-cash transactions:
Net transfers of property, plant, and equipment from parent prior to the Spin-off
Transfer of net deferred tax liabilities from parent at Spin-off
Accrued capital expenditures
Non-cash proceeds from the sale of a plant
(779)
786
(2,091)
16
(13,345)
—
(54)
—
—
—
—
—
(230,747)
(55,002)
(79,296)
(1,832)
6,646
29,032
(3,716)
(10,329)
39,361
35,678
$
29,032
$
(3,925)
4,167
35,194
39,361
57,580
29,046
$
$
64,683
4,141
$
$
63,349
1,905
— $
— $
5,985
7,000
$
$
(7,627) $
(17,472)
29,203
2,743
$
$
— $
—
15,426
—
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated and combined financial statements.
F-7
EXTERRAN CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. Description of Business, Spin-Off and Basis of Presentation
Description of Business
Exterran Corporation (together with its subsidiaries, “Exterran Corporation,” “our,” “we” or “us”), a Delaware corporation
formed in March 2015, is a market leader in the provision of compression, production and processing products and services that
support the production and transportation of oil and natural gas throughout the world. We provide these products and services
to a global customer base consisting of companies engaged in all aspects of the oil and natural gas industry, including large
integrated oil and natural gas companies, national oil and natural gas companies, independent oil and natural gas producers and
oil and natural gas processors, gatherers and pipeline operators. We operate in four primary business lines: contract operations,
aftermarket services, oil and gas product sales and Belleli EPC product sales. In our contract operations business line, we have
operations outside of the United States of America (“U.S.”) where we own and operate natural gas compression equipment and
crude oil and natural gas production and processing equipment on behalf of our customers. In our aftermarket services business
line, we primarily have operations outside of the U.S. where we provide operations, maintenance, overhaul and reconfiguration
services to customers who own their own compression, production, processing, treating and related equipment. In our oil and
gas product sales business line, we manufacture natural gas compression packages and oil and natural gas production and
processing equipment for sale to our customers throughout the world and for use in our contract operations business line. In our
Belleli EPC product sales business line that we are exiting, we have historically provided engineering, procurement and
construction for the manufacture of tanks for tank farms and the manufacture of evaporators and brine heaters for desalination
plants. We also offer our customers, on either a contract operations basis or a sale basis, the engineering, design, project
management, procurement and construction services necessary to incorporate our products into production, processing and
compression facilities, which we refer to as integrated projects.
Spin-off
On November 3, 2015, Archrock, Inc. (named Exterran Holdings, Inc. prior to November 3, 2015) (“Archrock”) completed the
spin-off (the “Spin-off”) of its international contract operations, international aftermarket services (the international contract
operations and international aftermarket services businesses combined are referred to as the “international services businesses”
and include such activities conducted outside of the U.S.) and global fabrication businesses into an independent, publicly traded
company named Exterran Corporation. We refer to the global fabrication business previously operated by Archrock as our
product sales businesses (including our oil and gas product sales and Belleli EPC product sales segments). To effect the Spin-
off, on November 3, 2015, Archrock distributed, on a pro rata basis, all of our shares of common stock to its stockholders of
record as of October 27, 2015 (the “Record Date”). Archrock shareholders received one share of Exterran Corporation common
stock for every two shares of Archrock common stock held at the close of business on the Record Date. Pursuant to the
separation and distribution agreement with Archrock and certain of our and Archrock’s respective affiliates, on November 3,
2015, we transferred cash of $532.6 million to Archrock. Our Registration Statement on Form 10, as amended, was declared
effective on October 21, 2015. On November 4, 2015, Exterran Corporation common stock began “regular-way” trading on the
New York Stock Exchange under the stock symbol “EXTN.” Following the completion of the Spin-off, we and Archrock
became and continue to be independent, publicly traded companies with separate boards of directors and management.
Basis of Presentation
The accompanying consolidated and combined financial statements of Exterran Corporation included herein have been
prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). All financial information
presented for periods after the Spin-off represents our consolidated results of operations, financial position and cash flows
(referred to as the “consolidated financial statements”) and all financial information for periods prior to the Spin-off represents
our combined results of operations, financial position and cash flows (referred to as the “combined financial statements”).
Accordingly:
• Our consolidated and combined statements of operations, comprehensive income, cash flows and stockholders’ equity
for the year ended December 31, 2015 consist of (i) the combined results of Archrock’s international services and
product sales businesses for the period between January 1, 2015 and November 3, 2015 and (ii) the consolidated
results of Exterran Corporation for periods subsequent to November 3, 2015. Our combined statements of operations,
comprehensive income, cash flows and stockholders’ equity for the year ended December 31, 2014 consist entirely of
the combined results of Archrock’s international services and product sales businesses.
F-8
• Our consolidated balance sheets at December 31, 2016 and 2015 consist entirely of our consolidated balances.
The combined financial statements were derived from the accounting records of Archrock and reflect the combined historical
results of operations, financial position and cash flows of Archrock’s international services and product sales businesses. The
combined financial statements were presented as if such businesses had been combined for periods prior to November 4, 2015.
All intercompany transactions and accounts within these statements have been eliminated. Affiliate transactions between the
international services and product sales businesses of Archrock and the other businesses of Archrock have been included in the
combined financial statements, with the exception of oil and gas product sales within our wholly owned subsidiary, Exterran
Energy Solutions, L.P. (“EESLP”). Prior to the closing of the Spin-off, EESLP also had a fleet of compression units used to
provide compression services in the U.S. services business of Archrock. Revenue has not been recognized in the combined
statements of operations for the sale of compressor units by us that were used by EESLP to provide compression services to
customers of the U.S. services business of Archrock. See Note 16 for further discussion on transactions with affiliates.
The combined statements of operations for periods prior to the Spin-off include expense allocations for certain functions
historically performed by Archrock and not allocated to its operating segments, including allocations of expenses related to
executive oversight, accounting, treasury, tax, legal, human resources, procurement and information technology. See Note 16
for further discussion regarding the allocation of corporate expenses. Additionally, third party debt of Archrock, other than debt
attributable to capital leases, was not allocated to us for any of the periods prior to the Spin-off as we were not the legal obligor
of the debt and Archrock’s borrowings were not directly attributable to our business.
We refer to the consolidated and combined financial statements collectively as “financial statements,” and individually as
“balance sheets,” “statements of operations,” “statements of comprehensive income (loss),” “statements of stockholders’
equity” and “statements of cash flows” herein.
Investments in affiliated entities in which we own more than a 20% interest and do not have a controlling interest are accounted
for using the equity method.
2. Significant Accounting Policies
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amount of assets, liabilities, revenue and expenses, as well as the disclosures of contingent assets and
liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the
reporting date. Significant estimates are required for contracts within our oil and gas products sales and Belleli EPC product
sales segments that are accounted for under the percentage-of-completed method. As of December 31, 2016, we have provided
for our estimated costs-to-complete on all of our ongoing contracts. However, it is possible that current estimates could change
due to unforeseen events, which could result in adjustments to overall contract costs. Variations from estimated contract
performance could result in material adjustments to operating results. Management believes that the estimates and assumptions
used are reasonable.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash as of December 31, 2016 and 2015 consists of cash that contractually is not available for immediate use.
Restricted cash is presented separately from cash and cash equivalents in our balance sheets and statements of cash flows.
Revenue Recognition
Contract operations revenue is recognized when earned, which generally occurs monthly when service is provided under our
customer contracts. Aftermarket services revenue is recognized as products are delivered and title is transferred or services are
performed for the customer.
F-9
Product sales revenue from third parties is recognized using the percentage-of-completion method when the applicable criteria
are met. We estimate percentage-of-completion for oil and gas compressor and production and processing equipment product
sales on a direct labor hour to total labor hour basis. We estimate percentage-of-completion for Belleli EPC product sales on a
cost to total cost basis. The duration of these projects is typically between three and 24 months. Product sales revenue is
recognized using the completed contract method when the applicable criteria of the percentage-of-completion method are not
met. Product sales revenue under the completed contract method is recognized upon either delivery to the customer or
achievement of substantial completion in accordance with the specifications within the underlying contract, which generally
occurs when all significant attributes and components of the product are completed. Prior to the Spin-off, product sales revenue
from affiliates was recognized using the completed contract method as the equipment was not guaranteed to be sold to the
affiliate until the entities entered into a bill of sale for such equipment which occurred at the completion of the manufacturing
process. Subsequent to November 3, 2015, sales to Archrock and Archrock Partners, L.P. (named Exterran Partners, L.P. prior
to November 3, 2015) (“Archrock Partners”) are considered sales to third parties. Product sales revenue from a claim is
recognized to the extent that costs related to the claim have been incurred, when collection is probable and can be reliably
estimated. We estimate the future costs and gross margin on uncompleted contracts related to our product sales contracts. If we
determine that a contract will result in a loss, we record a provision for the entire amount of the estimated loss in the period in
which such loss is identified.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and
accounts receivable. We believe that the credit risk in temporary cash investments is limited because our cash is held in
accounts with multiple financial institutions. Trade accounts receivable are due from companies of varying size engaged
principally in oil and natural gas activities throughout the world. We review the financial condition of customers prior to
extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in
accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the
nature of products and services we provide and the terms of our contract operations customer service agreements.
We maintain allowances for doubtful accounts for estimated losses resulting from our customers’ inability to make required
payments. The determination of the collectibility of amounts due from our customers requires us to use estimates and make
judgments regarding future events and trends, including monitoring our customers’ payment history and current
creditworthiness to determine that collectibility is reasonably assured, as well as consideration of the overall business climate in
which our customers operate. Inherently, these uncertainties require us to make judgments and estimates regarding our
customers’ ability to pay amounts due to us in order to determine the appropriate amount of valuation allowances required for
doubtful accounts. We review the adequacy of our allowance for doubtful accounts quarterly. We determine the allowance
needed based on historical write-off experience and by evaluating significant balances aged greater than 90 days individually
for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. During the years ended December 31, 2016, 2015 and 2014, we recorded bad
debt expense of $3.0 million, $3.3 million and $0.6 million, respectively.
Inventory
Inventory consists of parts used for manufacturing or maintenance of natural gas compression equipment and facilities and
processing and production equipment and also includes new compression units and production equipment that are held for sale.
Inventory is stated at the lower of cost or market using the average-cost method. A reserve is recorded against inventory
balances for estimated obsolescence and slow moving items based on specific identification and historical experience.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful
lives as follows:
Compression equipment, facilities and other fleet assets
Buildings
Transportation, shop equipment and other
3 to 30 years
20 to 35 years
3 to 12 years
F-10
Installation costs capitalized on contract operations projects are generally depreciated over the life of the underlying contract.
Major improvements that extend the useful life of an asset are capitalized. Repairs and maintenance are expensed as incurred.
When property, plant and equipment is sold, retired or otherwise disposed of, the gain or loss is recorded in other (income)
expense, net. Interest is capitalized during the construction period on equipment and facilities that are constructed for use in our
operations. The capitalized interest is included as part of the cost of the asset to which it relates and is amortized over the
asset’s estimated useful life.
Computer Software
Certain costs related to the development or purchase of internal-use software are capitalized and amortized over the estimated
useful life of the software, which ranges from three to five years. Costs related to the preliminary project stage and the post-
implementation/operation stage of an internal-use computer software development project are expensed as incurred.
Capitalized software costs are included in property, plant and equipment, net, in our balance sheets.
Long-Lived Assets
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for
impairment whenever events or changes in circumstances, including the removal of compressor units from our active fleet,
indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted
cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. When
necessary, an impairment loss is recognized and represents the excess of the asset’s carrying value as compared to its estimated
fair value and is charged to the period in which the impairment occurred. Identifiable intangibles are amortized over the assets’
estimated useful lives.
Deferred Revenue
Deferred revenue is primarily comprised of upfront billings on contract operations jobs, milestone billings related to jobs where
revenue is recognized on the completed contract method and billings related to jobs that have not begun where revenue is
recognized on the percentage-of-completion method. Upfront payments received from customers on contract operations jobs
are generally deferred and amortized over the life of the underlying contract.
Other (Income) Expense, Net
Other (income) expense, net, is primarily comprised of gains and losses from the remeasurement of our international
subsidiaries’ net assets exposed to changes in foreign currency rates, short-term investments and the sale of used assets.
Income Taxes
Our operations are subject to U.S. federal, state and local and foreign income taxes. We and our subsidiaries file consolidated
and separate income tax returns in the U.S. federal jurisdiction and in numerous state and foreign jurisdictions. In addition,
certain of our operations were historically included in Archrock’s consolidated income tax returns in the U.S. federal and state
jurisdictions. Our tax provision for periods prior to the Spin-off was determined on a separate return, stand-alone basis. Prior to
the Spin-off, differences between the separate return method utilized and Archrock’s U.S. income tax returns and cash flows
attributable to income taxes for our U.S. operations were recognized as distributions to, or contributions from, parent within
parent equity.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events included in the financial statements. Under this method, deferred
tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax
basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The
effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the
enactment date.
We record net deferred tax assets to the extent we believe these assets will more-likely-than-not be realized. In making such a
determination, we consider all available positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. In the event we
were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded
amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for
income taxes.
F-11
We record uncertain tax positions in accordance with the accounting standard on income taxes under a two-step process
whereby (1) we determine whether it is more-likely-than-not that the tax positions will be sustained based on the technical
merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the
largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax
authority.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S., except those for which we have determined that the U.S. dollar is the
functional currency, are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries
are translated at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at average
monthly rates of exchange. The resulting gains and losses from the translation of accounts into U.S. dollars are included in
accumulated other comprehensive income in our balance sheets. For all subsidiaries, gains and losses from remeasuring foreign
currency accounts into the functional currency are included in other (income) expense, net, in our statements of operations. We
recorded foreign currency gains of $6.4 million and foreign currency losses of $35.8 million and $7.8 million during the years
ended December 31, 2016, 2015 and 2014, respectively. Included in our foreign currency gains and losses were non-cash gains
of $9.3 million and non-cash losses of $30.1 million and $3.6 million during the years ended December 31, 2016, 2015 and
2014, respectively, from foreign currency exchange rate changes recorded on intercompany obligations. Of the foreign currency
losses recognized during the year ended December 31, 2015, $29.7 million was attributable to our Brazil subsidiary’s U.S.
dollar denominated intercompany obligations and were the result of a currency devaluation in Brazil and increases in our Brazil
subsidiary’s intercompany payables during 2015.
During the second quarter of 2016, we entered into forward currency exchange contracts with a total notional value of $11.3
million that expired over varying dates through October 31, 2016. We entered into these foreign currency derivatives to offset
exchange rate exposure related to intercompany loans to a subsidiary whose functional currency is the Brazilian Real. We did
not designate these forward currency exchange contracts as hedge transactions. Changes in fair value and gains and losses on
settlement on these forward currency exchange contracts were recognized in other (income) expense, net, in our statements of
operations. During the year ended December 31, 2016, we recognized a loss of $0.7 million on forward currency exchange
contracts. All of the forward currency exchange contracts that we entered into were settled prior to December 31, 2016.
Argentina’s regulations have at times restricted foreign exchange, including exchanging Argentine pesos for U.S. dollars, and
during these periods we were unable to freely repatriate cash generated in Argentina to fund our other operations. In late 2015,
following the election of a new president, some of the currency restrictions were lifted and we have been able to exchange
Argentine pesos for U.S. dollars at market rates. Prior to the currency restrictions being lifted in Argentina in late 2015, we
used Argentine pesos to purchase certain short-term investments in Argentine government issued U.S. dollar denominated
bonds. The effective peso to U.S. dollar exchange rate embedded in the purchase price of these bonds resulted in our
recognition of a loss during the years ended December 31, 2015 and 2014 of $4.9 million and $6.5 million, respectively, which
is included in other (income) expense, net, in our statements of operations.
Financial Instruments
Our financial instruments consist of cash, restricted cash, receivables, payables and debt. At December 31, 2016 and 2015, the
estimated fair values of these financial instruments approximated their carrying amounts as reflected in our balance sheets. See
Note 11 for additional information regarding the fair value hierarchy. Due to the variable rate nature of our long-term debt, the
carrying values approximate their fair values as the rates on our long-term debt are comparable to current market rates at which
debt with similar terms could be obtained.
F-12
Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606). The update outlines a single comprehensive model for companies to use
in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance,
including industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. The update also requires disclosures enabling users of financial statements
to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In
March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net),
which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU
2016-10, Identifying Performance Obligations and Licensing, which provides guidance in accounting for immaterial
performance obligations and shipping and handling activities. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope
Improvements and Practical Expedients, which provides clarification on assessing the collectibility criterion, presentation of
sales taxes, measurement date for noncash consideration and completed contracts at transition. The updates will be effective for
reporting periods beginning after December 15, 2017, including interim periods within the reporting period. Early adoption is
permitted for reporting periods beginning after December 15, 2016. Companies may use either a full retrospective or a
modified retrospective approach to adopt the updates. We intend to adopt the new guidance on January 1, 2018 using the
modified retrospective approach. In preparation for our adoption of the new standard, we have obtained representative samples
of contracts and other forms of agreements with our customers in the U.S. and international locations and are evaluating the
provisions contained therein in light of the five-step model specified by the new guidance. This update could impact the timing
and amounts of revenue recognized.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which will require an entity to
measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in
the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This update will
be effective on a prospective basis for interim and annual periods beginning after December 15, 2016, with early adoption
permitted. We do not believe the adoption of this update will have a material impact on our financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update requires lessees to recognize assets and
liabilities on the balance sheet for the rights and obligations created by long-term leases. Leases will be classified as either
finance or operating, with classification affecting the pattern of expense recognition in the income statement. The update also
requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from
leases. Accounting by lessors will remain largely unchanged. This update is effective for annual and interim periods beginning
after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective approach beginning
with the earliest period presented. We are currently evaluating the potential impact of the update on our financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). The update covers such
areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement
of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and
still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update will
be effective for reporting periods beginning after December 15, 2016, including interim periods within the reporting period.
Early adoption is permitted. Upon adoption of this update, we currently plan to account for forfeitures as they occur rather than
applying an estimated forfeiture rate. Additionally, the adoption of this update will impact our reported income taxes and cash
flows from operating activities; however, the amount of such impacts is dependent upon the underlying vesting or exercise
activity and related future stock prices.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the
impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-
maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the
earlier recognition of allowance for losses. This update is effective for annual and interim periods beginning after December 15,
2019, with early adoption permitted. Adoption will require a modified retrospective approach beginning with the earliest period
presented. We are currently evaluating the potential impact of the update on our financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The update addresses eight specific cash
flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. This update will be effective for reporting periods beginning after December 15, 2017,
including interim periods within the reporting period. Early adoption is permitted. We are currently evaluating the potential
impact of the update on our financial statements.
F-13
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory. The update requires a reporting entity to recognize the tax expense from intra-entity asset transfers of assets other
than inventory in the selling entity’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction
are eliminated in consolidation. Any deferred tax asset that arises in the buying entity’s jurisdiction would also be recognized at
the time of the transfer. This update will be effective for reporting periods beginning after December 15, 2017, including
interim periods within the reporting period. Early adoption is permitted. Adoption will require a modified retrospective
approach beginning with the earliest period presented. We are currently evaluating the potential impact of the update on our
financial statements.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash. The guidance requires that a statement of cash flows
explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or
restricted cash equivalents. This update will be effective for reporting periods beginning after December 15, 2017, including
interim periods within the reporting period. Early adoption is permitted. The new guidance is effective for interim and annual
periods beginning after December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively.
We have evaluated the effect that this guidance will have on our financial statement, and will result in the inclusion of our
restricted cash balances with cash and cash equivalents to reflect total cash on our statements of cash flows.
3. Discontinued Operations
In June 2009, Petroleos de Venezuela S.A. (“PDVSA”) commenced taking possession of our assets and operations in a number
of our locations in Venezuela, and by the end of the second quarter of 2009, PDVSA had assumed control over substantially all
of our assets and operations in Venezuela. The expropriation of our business in Venezuela meets the criteria established for
recognition as discontinued operations under GAAP. Therefore, our Venezuelan contract operations business is reflected as
discontinued operations in our financial statements.
In March 2010, our Spanish subsidiary filed a request for the institution of an arbitration proceeding against Venezuela with the
International Centre for Settlement of Investment Disputes (“ICSID”) related to the seized assets and investments under the
agreement between Spain and Venezuela for the Reciprocal Promotion and Protection of Investments and under Venezuelan
law. The arbitration hearing occurred in July 2012.
In August 2012, our Venezuelan subsidiary sold its previously nationalized assets to PDVSA Gas, S.A. (“PDVSA Gas”) for a
purchase price of approximately $441.7 million. We received an initial payment of $176.7 million in cash at closing, of which
we remitted $50.0 million to repay the amount we collected in January 2010 under the terms of an insurance policy we
maintained for the risk of expropriation. We received installment payments, including an annual charge, totaling $38.8 million,
$56.6 million and $72.6 million during the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31,
2016, the remaining principal amount due to us was approximately $33 million. We have not recognized amounts payable to us
by PDVSA Gas as a receivable and will therefore recognize payments received in the future as income from discontinued
operations in the periods such payments are received. The proceeds from the sale of the assets are not subject to Venezuelan
national taxes due to an exemption allowed under the Venezuelan Reserve Law applicable to expropriation settlements. In
addition, and in connection with the sale, we and the Venezuelan government agreed to waive rights to assert certain claims
against each other.
In connection with the sale of these assets, we have agreed to suspend the arbitration proceeding previously filed by our
Spanish subsidiary against Venezuela pending payment in full by PDVSA Gas of the purchase price for these nationalized
assets.
In accordance with the separation and distribution agreement, a subsidiary of Archrock has the right to receive payments from
EESLP based on a notional amount corresponding to payments received by our subsidiaries from PDVSA Gas in respect of the
sale of our previously nationalized assets promptly after such amounts are collected by our subsidiaries. Pursuant to the
separation and distribution agreement, we transferred cash of $38.8 million to Archrock during the year ended December 31,
2016. The transfer of cash was recognized as a reduction to additional paid-in capital in our financial statements. See Note 21
for further discussion related to our contingent liability to Archrock.
F-14
In the first quarter of 2016, we began executing a plan to exit certain Belleli businesses to focus on our core oil and gas
businesses. Specifically, we began marketing for sale the Belleli CPE business comprising of engineering, procurement and
manufacturing services related to the manufacture of critical process equipment for refinery and petrochemical facilities
(referred to as “Belleli CPE” or the “Belleli CPE business” herein). In addition, we began executing our exit of the Belleli EPC
business that has historically been comprised of engineering, procurement and construction for the manufacture of tanks for
tank farms and the manufacture of evaporators and brine heaters for desalination plants in the Middle East (referred to as
“Belleli EPC” or the “Belleli EPC business” herein). Belleli CPE met the held for sale criteria and is reflected as discontinued
operations in our financial statements for all periods presented. In August 2016, we completed the sale of our Belleli CPE
business to Tosto S.r.l. for cash proceeds of $5.5 million. Belleli CPE was previously included in our former product sales
segment. In conjunction with the planned disposition of Belleli CPE, we recorded impairments of long-lived assets and current
assets that totaled $68.8 million during the year ended December 31, 2016. The impairment charges are reflected in income
(loss) from discontinued operations, net of tax. In accordance with GAAP, Belleli EPC will be reflected as discontinued
operations upon the substantial cessation of the remaining non-oil and gas business. During the first quarter of 2016, we ceased
the booking of new orders for our Belleli EPC business. Our plan to exit our Belleli EPC business resulted in a reduction in the
remaining useful lives of the assets that are currently used in the Belleli EPC business and a long-lived asset impairment charge
of $0.7 million impacting results from continuing operations during the year ended December 31, 2016. Belleli EPC is
represented by our Belleli EPC product sales segment.
The following table summarizes the operating results of discontinued operations (in thousands):
2016
Belleli
CPE
Venezuela
Total
Venezuela
2015
Belleli
CPE
Total
Venezuela
2014
Belleli
CPE
Total
Years Ended December 31,
Revenue
$
— $
28,469
$
28,469
$
— $
60,138
$
60,138
$
— $
42,947
$
42,947
27,323
27,323
—
55,169
55,169
—
41,494
41,494
Cost of sales (excluding
depreciation and amortization
expense)
Selling, general and
administrative
Depreciation and amortization
Long-lived asset impairment
Recovery attributable to
expropriation
Interest expense
—
54
—
—
4,229
861
4,283
861
68,780
68,780
185
—
—
(33,124)
—
—
17
(33,124)
(50,074)
17
—
3,396
3,388
—
—
(1)
3,581
3,388
—
479
—
—
(50,074)
(66,040)
(1)
—
4,323
4,103
—
—
27
4,802
4,103
—
(66,040)
27
Other (income) expense, net
(5,966)
(134)
(6,100)
(6,243)
(456)
(6,699)
(7,637)
(985)
(8,622)
Income (loss) from discontinued
operations, net of tax
$
39,036
$ (72,607)
$ (33,571)
$
56,132
$
(1,358)
$
54,774
$
73,198
$
(6,015)
$
67,183
F-15
The following table summarizes the balance sheet data for discontinued operations (in thousands):
December 31, 2016
December 31, 2015
Venezuela
Belleli CPE
Total
Venezuela
Belleli CPE
Total
$
$
$
Cash
Accounts receivable
Inventory
Costs and estimated earnings in excess of billings on
uncompleted contracts
Other current assets
Total current assets associated with discontinued
operations
Property, plant and equipment, net
Intangible and other assets, net
Total assets associated with discontinued operations
Accounts payable
Accrued liabilities
Billings on uncompleted contracts in excess of costs
and estimated earnings
Total current liabilities associated with discontinued
operations
Other long-term liabilities
Total liabilities associated with discontinued
operations
4. Inventory, net
11
—
—
—
3
14
—
—
14
$
— $
—
—
—
—
—
—
—
$
— $
11
—
—
—
3
14
—
—
14
$
177
$
— $
—
—
—
14
191
—
—
7,810
431
17,666
6,825
32,732
38,274
7
$
191
$
71,013
— $
— $
— $
— $
906
—
906
2
207
—
207
—
1,113
1,249
—
1,113
2
—
1,249
158
7,839
2,556
2,001
12,396
5,917
177
7,810
431
17,666
6,839
32,923
38,274
7
71,204
7,839
3,805
2,001
13,645
6,075
$
$
$
908
$
207
$
1,115
$
1,407
$
18,313
$
19,720
Inventory, net of reserves, consisted of the following amounts (in thousands):
Parts and supplies
Work in progress
Finished goods
Inventory, net
December 31,
2016
2015
104,897
$
133,558
32,167
20,452
41,184
33,339
157,516
$
208,081
$
$
During the years ended December 31, 2016, 2015 and 2014 we recorded $0.8 million, $15.6 million and $3.2 million,
respectively, in inventory write-downs and reserves for inventory which was obsolete or slow moving. As of December 31,
2016 and 2015, we had inventory reserves of $12.9 million and $14.5 million, respectively. As discussed further in Note 14,
during the year ended December 31, 2015, we recorded restructuring and other charges of $8.7 million related to inventory
write-downs associated with restructuring activities.
F-16
5. Product Sales Contracts
Costs, estimated earnings (losses) and billings on uncompleted contracts that are recognized using the percentage-of-
completion method consisted of the following (in thousands):
Costs incurred on uncompleted contracts
Estimated earnings (losses) on uncompleted contracts (1)
Less — billings to date on uncompleted contracts
December 31,
2016
2015
$
558,274
(10,370)
547,904
(558,064)
(10,160) $
664,229
44,915
709,144
(681,741)
27,403
$
$
(1)
Estimated earnings (losses) on uncompleted contracts includes $56.4 million and $40.9 million of cumulative losses
realized on uncompleted Belleli EPC product sales contracts as of December 31, 2016 and 2015, respectively. Estimated
earnings (losses) on uncompleted contracts as of December 31, 2016 and 2015 excludes estimated accrued loss contract
provisions on uncompleted Belleli EPC product sales contracts recognized but not realized of $28.6 million and $43.7
million, respectively. Accrued loss contract provisions are included in accrued liabilities in our balance sheets.
Costs, estimated earnings and billings on uncompleted contracts are presented in the accompanying financial statements as
follows (in thousands):
Costs and estimated earnings in excess of billings on uncompleted contracts
Billings on uncompleted contracts in excess of costs and estimated earnings
6. Property, Plant and Equipment, net
Property, plant and equipment, net, consisted of the following (in thousands):
Compression equipment, facilities and other fleet assets
Land and buildings
Transportation and shop equipment
Other
Accumulated depreciation
Property, plant and equipment, net
December 31,
2016
2015
$
$
$
31,956
(42,116)
(10,160) $
65,311
(37,908)
27,403
December 31,
2016
2015
$
1,480,568
$
1,527,328
110,378
140,128
95,817
117,247
144,413
99,035
1,826,891
(1,029,082)
797,809
$
1,888,023
(1,029,835)
858,188
$
Depreciation expense was $134.2 million, $149.5 million and $163.7 million during the years ended December 31, 2016, 2015
and 2014, respectively. During the year ended December 31, 2016, we retired $81.9 million of fully depreciated capitalized
installation costs relating to a contract operations project in the Eastern Hemisphere that early terminated operations in January
2016. Assets under construction of $39.6 million and $65.6 million were primarily included in compression equipment,
facilities and other fleet assets at December 31, 2016 and 2015, respectively. We capitalized $0.3 million and $0.1 million of
interest related to construction in process during the years ended December 31, 2016 and 2015, respectively.
F-17
7. Intangible and Other Assets, net
Intangible and other assets, net, consisted of the following (in thousands):
Intangible assets, net
Recoverable foreign social security tax
Deferred financing costs
Notes receivable
Other
Intangibles and other assets, net
December 31,
2016
2015
$
12,945
$
17,809
8,174
6,475
4,849
26,553
$
58,996
$
5,086
7,399
1,279
19,960
51,533
Intangible assets and deferred financing costs consisted of the following (in thousands):
December 31, 2016
December 31, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Deferred financing costs (1)
Marketing related (20 year life)
Customer related (17-20 year life)
Technology based (20 year life)
Contract based (2-11 year life)
$
8,368
$
582
76,674
3,381
43,921
Intangible assets and deferred financing costs
$
132,926
$
(1,893) $
(541)
(64,151)
(3,155)
(43,766)
(113,506) $
7,673
$
2,537
78,271
3,252
43,930
135,663
$
(274)
(1,759)
(61,888)
(3,014)
(43,520)
(110,455)
(1) Represents debt issuance costs relating to our revolving credit facility. See Note 10 for further discussion regarding our
revolving credit facility.
Amortization of deferred financing costs related to our revolving credit facility totaled $1.6 million and $0.3 million during the
years ended December 31, 2016 and 2015, respectively, and was recorded to interest expense in our statements of operations.
Amortization of intangible assets totaled $3.8 million, $5.3 million and $6.4 million during the years ended December 31,
2016, 2015 and 2014, respectively.
Estimated future intangible amortization expense is as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
$
3,058
2,331
1,881
1,559
1,269
2,847
$
12,945
8. Investments in Non-Consolidated Affiliates
Investments in affiliates that are not controlled by us where we have the ability to exercise significant influence over the
operations are accounted for using the equity method.
F-18
We own a 30.0% interest in WilPro Energy Services (PIGAP II) Limited and 33.3% interest in WilPro Energy Services (El
Furrial) Limited which are joint ventures that provided natural gas compression and injection services in Venezuela. In
May 2009, PDVSA assumed control over the assets of our Venezuelan joint ventures and transitioned the operations, including
the hiring of their employees, to PDVSA. In March 2011, our Venezuelan joint ventures, together with the Netherlands’ parent
company of our joint venture partners, filed a request for the institution of an arbitration proceeding against Venezuela with
ICSID related to the seized assets and investments.
In March 2012, our Venezuelan joint ventures sold their assets to PDVSA Gas. We received an initial payment of $37.6 million
in March 2012, and received installment payments, including an annual charge, totaling $10.4 million, $15.2 million and $14.7
million during the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, the remaining
principal amount due to us was approximately $4 million. We have not recognized amounts payable to us by PDVSA Gas as a
receivable and will therefore recognize payments received in the future as equity in income of non-consolidated affiliates in our
statements of operations in the periods such payments are received. In connection with the sale of our Venezuelan joint
ventures’ assets, the joint ventures and our joint venture partners have agreed to suspend their previously filed arbitration
proceeding against Venezuela pending payment in full by PDVSA Gas of the purchase price for the assets.
In accordance with the separation and distribution agreement, a subsidiary of Archrock has the right to receive payments from
EESLP based on a notional amount corresponding to payments received by our subsidiaries from PDVSA Gas in respect of the
sale of our joint ventures’ previously nationalized assets promptly after such amounts are collected by our subsidiaries.
Pursuant to the separation and distribution agreement, we transferred cash of $10.4 million to Archrock during the year ended
December 31, 2016. The transfer of cash was recognized as a reduction to additional paid-in capital in our financial statements.
See Note 21 for further discussion related to our contingent liability to Archrock.
9. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
Accrued salaries and other benefits
Accrued income and other taxes
Accrued loss contract provisions
Accrued warranty expense
Accrued interest
Accrued start-up and commissioning expenses
Accrued other liabilities
Accrued liabilities
December 31,
2016
2015
$
52,247
$
43,336
31,452
4,412
2,889
1,055
27,401
48,440
37,046
45,422
7,873
2,454
2,695
31,911
$
162,792
$
175,841
Our warranty expense was $3.2 million, $3.6 million and $10.7 million during the years ended December 31, 2016, 2015 and
2014, respectively. During 2014, we accrued $7.0 million of warranty expense on one project for a single customer.
F-19
10. Long-Term Debt
Long-term debt consisted of the following (in thousands):
Revolving credit facility due November 2020
Term loan facility due November 2017
Other, interest at various rates, collateralized by equipment and other assets
Unamortized deferred financing costs
Long-term debt
Revolving Credit Facility and Term Loan
December 31,
2016
2015
$
118,000
$
232,750
583
(2,363)
348,970
$
$
285,000
245,000
836
(5,243)
525,593
On July 10, 2015, we and our wholly owned subsidiary, EESLP, entered into a $750.0 million credit agreement (the “Credit
Agreement”) with Wells Fargo, as the administrative agent, and various financial institutions as lenders. On October 5, 2015,
the parties amended and restated the Credit Agreement to provide for a $925.0 million credit facility, consisting of a $680.0
million revolving credit facility and a $245.0 million term loan facility (collectively, the “Credit Facility”). The Credit Facility
became available to us on November 3, 2015 (referred to as the “Initial Availability Date”). On November 3, 2015, EESLP
incurred approximately $300.0 million of indebtedness under the revolving credit facility and $245.0 million of indebtedness
under the term loan facility. Pursuant to the separation and distribution agreement with Archrock and certain of our and
Archrock’s respective affiliates, on November 3, 2015, EESLP transferred $532.6 million of net proceeds from borrowings
under the Credit Facility to Archrock to allow it to repay a portion of its indebtedness in connection with the Spin-off. In
accordance with the Credit Agreement, we are required to repay borrowings outstanding under the term loan facility on each
anniversary of the Initial Availability Date in an amount equal to the lesser of (i) $12.3 million and (ii) the outstanding principal
balance of the term loan facility. In November 2016, we repaid $12.3 million of borrowings outstanding under the term loan
facility. The principal amount of $232.8 million due in November 2017 under the term loan facility is classified as long-term in
our balance sheet at December 31, 2016 because we have the intent and ability to refinance the current principal amount due
with borrowings under our existing revolving credit facility.
On April 22, 2016, June 17, 2016, August 24, 2016 and November 22, 2016, we and our wholly owned subsidiary, EESLP,
entered into amendments to the Credit Agreement with Wells Fargo, as the administrative agent, and various financial
institutions as lenders. These amendments to the Credit Agreement, among other things:
• waived any potential event of default arising under the Credit Agreement as a result of the potential inaccuracy of
certain representations and warranties regarding our prior period financial information and previously delivered
compliance certificate for the 2015 fiscal year;
•
•
•
provides that LIBOR loans will bear interest at LIBOR plus 2.75% and base rate loans will bear interest at the Base
Rate plus 1.75% until January 4, 2017;
adds a condition precedent to the borrowing of loans that, after giving effect to the application of the proceeds of each
borrowing, our consolidated cash balance of group members (as defined in the amended Credit Agreement) will not
exceed $30,000,000 plus certain other amounts; and
amends the definition of EBITDA to allow adjustments for certain Restructuring Costs and Restatement Costs (in each
case as defined in the amended Credit Agreement) to the extent such costs were incurred during the years ending
December 31, 2016 and 2017.
As of December 31, 2016, we had $118.0 million in outstanding borrowings and $57.1 million in outstanding letters of credit
under our revolving credit facility. At December 31, 2016, taking into account guarantees through letters of credit, we had
undrawn capacity of $504.9 million under our revolving credit facility. Our Credit Agreement limits our Total Debt (as defined
in the Credit Agreement) to EBITDA (as defined in the Credit Agreement) ratio on the last day of the fiscal quarter to not
greater than 3.75 to 1.0 (which will increase to 4.50 to 1.0 following the completion of a qualified capital raise). As a result of
this limitation, $226.9 million of the $504.9 million of undrawn capacity under our revolving credit facility was available for
additional borrowings as of December 31, 2016. Because this limitation considers all of our outstanding debt obligations, the
additional borrowings available to us are in excess of borrowings needed under our revolving credit facility to refinance the
current principal amount due under the term loan facility.
F-20
Revolving borrowings under the Credit Facility bear interest at a rate equal to, at our option, either the Base Rate or LIBOR (or
EURIBOR, in the case of Euro-denominated borrowings) plus the applicable margin. The applicable margin for revolving
borrowings varies (i) in the case of LIBOR loans, from 1.50% to 2.75% and (ii) in the case of Base Rate loans, from 0.50% to
1.75%, and will be determined based on our total leverage ratio pricing grid. “Base Rate” means the highest of the prime rate,
the federal funds effective rate plus 0.50% and one-month LIBOR plus 1.00%. Until the term loan facility is refinanced in full
with the proceeds of a qualified capital raise (as defined in the Credit Agreement), the applicable margin for borrowings under
the revolving credit facility will be increased by 1.00% until the first anniversary of the Initial Availability Date and by 1.50%
following the first anniversary of the Initial Availability Date. Term loan borrowings under the Credit Facility will bear interest
at a rate equal to, at our option, either (1) the Base Rate plus 4.75%, or (2) the greater of LIBOR or 1.00%, plus 5.75%. The
weighted average annual interest rate on outstanding borrowings under the revolving credit facility at December 31, 2016 and
2015 was 5.0% and 3.1%, respectively. The annual interest rate on the outstanding balance of the term loan facility at
December 31, 2016 and 2015 was 6.8%.
We guarantee EESLP’s obligations under the Credit Facility. In addition, EESLP’s obligations under the Credit Facility are
secured by (1) substantially all of our assets and the assets of EESLP and our Significant Domestic Subsidiaries (as defined in
the Credit Agreement), including certain real property, and (2) all of the equity interests of our U.S. restricted subsidiaries
(other than certain excluded subsidiaries) (as defined in the Credit Agreement) and 65% of the voting equity interests in certain
of our first-tier foreign subsidiaries.
We are required to prepay borrowings outstanding under the term loan facility with the net proceeds of certain asset sales,
equity issuances, debt incurrences and other events (subject to, in certain circumstances, our right to reinvest the proceeds
within a specified period). In addition, if the total leverage ratio (as defined in the Credit Agreement) as of the last day in any
fiscal year is greater than 2.50 to 1.00, we are required to prepay borrowings outstanding under the term loan facility with a
portion of Excess Cash Flow (as defined in the Credit Agreement) for that fiscal year equal to (a) 50% of Excess Cash Flow if
the total leverage ratio is greater than 3.00 to 1.00 or (b) 25% of Excess Cash Flow if the total leverage ratio is greater than 2.50
to 1.00 but less than or equal to 3.00 to 1.00.
Unamortized Debt Financing Costs
During the year ended December 31, 2015, we incurred transaction costs of $13.3 million related to our Credit Agreement, of
which $7.7 million and $5.6 million related to our revolving credit facility and term loan facility, respectively. Debt issuance
costs relating to our term loan facility are presented as a direct deduction from the carrying value of the facility, and are being
amortized over the term of the facility. Amortization of deferred financing costs relating to the term loan facility totaled $2.9
million and $0.4 million during the years ended December 31, 2016 and 2015, respectively, and was recorded to interest
expense in our statements of operations. During the year ended December 31, 2016, we incurred transaction costs of
approximately $0.8 million related to our revolving credit facility. Debt issuance costs relating to our revolving credit facility
are included in intangible and other assets, net, and are being amortized over the term of the facility. See Note 7 for further
discussion regarding the amortization of deferred financing costs relating to our revolving credit facility.
Debt Compliance
The Credit Agreement contains various covenants with which we, EESLP and our respective restricted subsidiaries must
comply, including, but not limited to, limitations on the incurrence of indebtedness, investments, liens on assets, repurchasing
equity, making distributions, transactions with affiliates, mergers, consolidations, dispositions of assets and other provisions
customary in similar types of agreements. We are required to maintain, on a consolidated basis, a minimum interest coverage
ratio (as defined in the Credit Agreement) of 2.25 to 1.00; a maximum total leverage ratio (as defined in the Credit Agreement)
of 3.75 to 1.00 prior to the completion of a qualified capital raise and 4.50 to 1.00 thereafter; and, following the completion of a
qualified capital raise, a maximum senior secured leverage ratio (as defined in the Credit Agreement) of 2.75 to 1.00. As of
December 31, 2016, we were in compliance with all financial covenants under the Credit Agreement.
F-21
Long-Term Debt Maturity Schedule
Contractual maturities of long-term debt (excluding interest to be accrued thereon) at December 31, 2016 are as follows (in
thousands):
2017
2018
2019
2020
2021
Thereafter
Total debt
December 31,
2016
$
232,750
(1)
253
253
118,077
—
—
$
351,333
(1)
(1) The principal amount of $232.8 million due in November 2017 under the term loan facility is classified as long-term in
our balance sheet at December 31, 2016 because we have the intent and ability to refinance the current principal amount
due with borrowings under our existing revolving credit facility. These amounts include the full face value of the term
loan facility and have not been reduced by the aggregate unamortized debt financing costs of $2.4 million as of
December 31, 2016.
11. Fair Value Measurements
The accounting standard for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into the following three broad categories:
•
•
•
Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of
measurement.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers
are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices
are not current, little public information exists or prices vary substantially over time or among brokered market
makers.
Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are
unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market
participants would price the asset or liability based on the best available information.
The following table presents our assets and liabilities measured at fair value on a nonrecurring basis during the years ended
December 31, 2016 and 2015, with pricing levels as of the date of valuation (in thousands):
Impaired long-lived assets (1)
$
— $
— $
3,109
$
— $
— $
995
Year Ended December 31, 2016
Year Ended December 31, 2015
(Level 1)
(Level 2)
(Level 3)
(Level 1)
(Level 2)
(Level 3)
Impaired assets—Discontinued operations
(2)
Note receivable from the sale of a plant (3)
Liability to exit the use of a corporate
operating lease—restructuring and other
charges (4)
Long-term receivable from the sale of our
Canadian Operations (5)
—
—
—
—
—
—
—
—
13,859
7,037
3,580
—
—
—
—
—
—
—
—
—
—
—
—
5,100
F-22
(1) Our estimate of the impaired long-lived assets’ fair value during the years ended December 31, 2016 and 2015 was
primarily based on either the expected net sale proceeds compared to other fleet units we recently sold and/or a review of
other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.
(2) Our estimate of the fair value of the impaired assets of Belleli CPE, which were classified as discontinued operations,
during the year ended December 31, 2016 was based on the proceeds received from the sale of Belleli CPE, net of
selling costs.
(3) Our estimate of the fair value of the note receivable from the sale of our plant in Argentina during the year ended
December 31, 2016 was discounted based on a settlement period, with annual payments, of 2.6 years and a discount rate
of 5%.
(4)
(5)
The fair value of our liability to exit the use of a corporate operating lease relating to restructuring activities during the
second quarter of 2016 was estimated based on an incremental borrowing rate of 3% and remaining lease payments, net
of estimated sublease rentals, through February 2018.
In April 2015, we accepted an offer to early settle the outstanding note receivable due to us relating to the previous sale
of our Canadian contract operations and aftermarket services businesses (“Canadian Operations”) for $5.1 million.
12. Long-Lived Asset Impairment
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for
impairment whenever events or changes in circumstances, including the removal of compressor units from our active fleet,
indicate that the carrying amount of an asset may not be recoverable.
We regularly review the future deployment of our idle compression assets used in our contract operations segment for units that
are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. During the year
ended December 31, 2016, we determined that 62 idle compressor units totaling approximately 65,000 horsepower would be
retired from the active fleet. The retirement of these units from the active fleet triggered a review of these assets for
impairment. As a result, we recorded a $12.7 million asset impairment to reduce the book value of each unit to its estimated fair
value during the year ended December 31, 2016. During the year ended December 31, 2015, we determined that 93 idle
compressor units totaling approximately 72,000 horsepower would be retired from the active fleet. The retirement of these units
from the active fleet triggered a review of these assets for impairment. As a result, we recorded a $19.4 million asset
impairment to reduce the book value of each unit to its estimated fair value during the year ended December 31, 2015. During
the year ended December 31, 2014, we evaluated the future deployment of our idle fleet and determined to retire approximately
20 idle compressor units, representing approximately 18,000 horsepower, previously used to provide services in our contract
operations segment. As a result, we performed an impairment review and recorded a $2.8 million asset impairment to reduce
the book value of each unit to its estimated fair value during the year ended December 31, 2014. In connection with our fleet
review during 2014, we evaluated for impairment idle units that had been culled from our fleet in prior years and were
available for sale. Based upon that review, we reduced the expected proceeds from disposition for certain of the remaining
units. This resulted in an additional impairment of $1.1 million to reduce the book value of each unit to its estimated fair value
during the year ended December 31, 2014. The fair value of each unit was estimated based on either the expected net sale
proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties,
or the estimated component value of the equipment on each compressor unit that we plan to use.
As discussed in Note 3, in the first quarter of 2016, we began executing a plan to exit our Belleli EPC business to focus on our
core oil and gas businesses. Because we ceased the booking of new orders for the manufacture of tanks for tank farms and the
manufacture of evaporators and brine heaters for desalination plants, customer relationship intangible assets related to our
Belleli EPC business were assessed to have no future benefit to us. As a result, we recorded a long-lived asset impairment
charge of $0.7 million during the year ended December 31, 2016. In addition, the property, plant and equipment of our Belleli
EPC business was reviewed for recoverability. As a result, the remaining useful lives of Belleli EPC non-oil and gas property,
plant and equipment were reduced to reflect their estimated cessation date.
During the year ended December 31, 2016, we evaluated other assets for impairment and recorded long-lived asset impairments
of $1.7 million on these assets.
F-23
During the first quarter of 2015, we evaluated a long-term note receivable from the purchaser of our Canadian Operations for
impairment. This review was triggered by an offer from the purchaser of our Canadian Operations to prepay the note receivable
at a discount to its then current book value. The fair value of the note receivable as of March 31, 2015 was based on the amount
offered by the purchaser of our Canadian Operations to prepay the note receivable. The difference between the book value of
the note receivable at March 31, 2015 and its fair value resulted in the recording of an impairment of long-lived assets of $1.4
million. In April 2015, we accepted the offer to early settle this note receivable.
13. Restatement Charges
During the first quarter of 2016, our senior management identified errors relating to the application of percentage-of-
completion accounting principles to specific Belleli EPC product sales projects. As a result, the Audit Committee of the
Company’s Board of Directors initiated an internal investigation, including the use of services of a forensic accounting firm.
Management also engaged a consulting firm to assist in accounting analysis and compilation of restatement adjustments.
During the year ended December 31, 2016, we incurred $30.1 million of costs associated with the restatement of our financial
statements and current SEC investigation, of which $11.2 million of cash was recovered from Archrock in the fourth quarter of
2016 pursuant to the separation and distribution agreement. We expect that we will incur additional cash expenditures in
subsequent periods related to external legal counsel costs associated with the current SEC investigation surrounding the
restatement of our financial statements, some portion of which might be recoverable from Archrock.
The following table summarizes the changes to our accrued liability balance related to restatement charges for the year ended
December 31, 2016 (in thousands):
Beginning balance at January 1, 2016
Additions for costs expensed, net
Reductions for payments, net
Ending balance at December 31, 2016
Restatement Charges
$
$
—
18,879
(16,667)
2,212
The following table summarizes the components of charges included in restatement charges in our statements of operations for
the year ended December 31, 2016 (in thousands):
External accounting costs
External legal costs
Other
Recoveries from Archrock
Total restatement charges
14. Restructuring and Other Charges
Year Ended
December 31, 2016
$
$
21,073
7,565
1,448
(11,207)
18,879
We incurred restructuring and other charges associated with the Spin-off of $3.9 million and $15.7 million during the years
ended December 31, 2016 and 2015, respectively. Costs incurred during the year ended December 31, 2016 were primarily
related to retention awards to certain employees of $3.1 million, which are being amortized over the required service period of
each applicable employee. Costs incurred during the year ended December 31, 2015 were related to non-cash inventory write-
downs, financial advisor fees of $4.6 million paid at the completion of the Spin-off, expenses of $3.1 million for retention
awards to certain employees, a one-time cash signing bonus paid to our new Chief Executive Officer of $2.0 million and costs
to start-up certain stand-alone functions of $1.3 million. Non-cash inventory write-downs primarily related to the
decentralization of shared inventory components between Archrock’s North America contract operations business and our
international contract operations business totaled $4.7 million during the year ended December 31, 2015, of which
approximately $4.2 million related to our international contract operations segment and $0.5 million related to our oil and gas
product sales segment. The charges incurred in conjunction with the Spin-off are included in restructuring and other charges in
our statements of operations. We currently estimate that we will incur additional one-time expenditures of approximately $1.9
million related to retention awards to certain employees in the form of cash and stock-based compensation through November
2017.
F-24
As a result of unfavorable market conditions in North America, combined with the impact of lower international activity due to
customer budget cuts driven by lower oil prices, in the second quarter of 2015, we announced a cost reduction plan primarily
focused on workforce reductions and the reorganization of certain facilities. We incurred restructuring and other charges
associated with the cost reduction plan of $23.5 million and $15.6 million during the years ended December 31, 2016 and 2015,
respectively. Restructuring and other charges incurred during the year ended December 31, 2016 were primarily related to
employee termination benefits and the exit from a leased corporate building. Costs incurred for employee termination benefits
during the year ended December 31, 2016 were $19.9 million, of which $9.0 million related to our oil and gas product sales
segment and $5.4 million related to our Belleli EPC product sales segment. We ceased the use of a corporate building under an
operating lease in the second quarter of 2016, and as a result, recorded net charges of $2.9 million during the year ended
December 31, 2016. Restructuring and other charges incurred during the year ended December 31, 2015 were primarily related
to employee termination benefits, non-cash inventory write-downs and consulting fees. Costs incurred for employee
termination benefits during the year ended December 31, 2015 were $9.6 million, of which $6.4 million related to our oil and
gas product sales business. The non-cash inventory write-downs of $4.0 million were the result of our decision to exit the
manufacturing of cold weather packages, which had historically been performed at an oil and gas product sales facility in North
America we decided to close in 2015. The charges incurred in conjunction with the cost reduction plan are included in
restructuring and other charges in our statements of operations. Accrued liabilities related to the cost reduction plan, which are
expected to be settled within the next twelve months with cash payments, are based on estimates that may vary significantly
from actual costs depending, in part, upon factors that may be beyond our control. We will continue to review the status of our
restructuring obligations on a quarterly basis and, if appropriate, record changes to these obligations in current operations based
on management’s most current estimates.
The following table summarizes the changes to our accrued liability balance related to restructuring and other charges for the
years ended December 31, 2015 and 2016 (in thousands):
Spin-off
Cost Reduction
Plan
Total
Beginning balance at January 1, 2015
$
— $
— $
Additions for costs expensed
Less non-cash expense
Reductions for payments
Ending balance at December 31, 2015
Additions for costs expensed
Deductions for gains realized
Less non-cash expense
Less non-cash income
Reductions for payments
Ending balance at December 31, 2016
$
15,749
(4,843)
(9,823)
1,083
3,943
—
(896)
—
(3,196)
934
$
15,566
(4,007)
(11,334)
225
24,386
(872)
(437)
872
(16,289)
7,885
$
—
31,315
(8,850)
(21,157)
1,308
28,329
(872)
(1,333)
872
(19,485)
8,819
The following table summarizes the components of charges included in restructuring and other charges in our statements of
operations for the years ended December 31, 2016 and 2015 (in thousands):
Financial advisor fees related to the Spin-off
Consulting fees
Start-up of stand-alone functions
Retention awards to certain employees
Chief Executive Officer signing bonus
Non-cash inventory write-downs
Employee termination benefits
Net charges to exit the use of a corporate operating lease
Other
Total restructuring and other charges
Years Ended December 31,
2016
2015
$
— $
22
887
3,056
—
—
19,892
2,904
696
4,598
1,932
1,332
3,121
2,000
8,707
9,625
—
—
$
27,457
$
31,315
F-25
Additionally, in the first quarter of 2016, we began executing a plan to exit our Belleli EPC business to focus on our core oil
and gas businesses. Our plan to exit our Belleli EPC business resulted in a reduction in the remaining useful lives of the assets
that are currently used in the Belleli EPC business and a long-lived asset impairment charge of $0.7 million impacting results
from continuing operations during the year ended December 31, 2016. See Note 12 for further discussion relating to this
impairment charge and Note 3 for further discussion related to our plan to exit our Belleli businesses.
15. Income taxes
Prior to the Spin-off, certain of our operations in the U.S. were included in Archrock’s consolidated federal and state tax
returns, and therefore our current and deferred tax provision for applicable periods was computed on a separate return basis.
Subsequent to the Spin-off, we file our own consolidated federal and state tax returns in the U.S.
The components of income (loss) before income taxes were as follows (in thousands):
$
$
$
Years Ended December 31,
2016
(129,864) $
60,258
(69,606) $
2015
2014
(7,702) $
19,122
84,161
42,990
11,420
$
127,151
Years Ended December 31,
2016
2015
2014
(131) $
(792)
54,076
53,153
62,672
2,306
6,629
71,607
383
$
1,201
63,692
65,276
(29,962)
(484)
4,716
(25,730)
39,546
$
6,105
2,136
56,029
64,270
12,434
(753)
3,091
14,772
79,042
$
124,760
$
United States
Foreign
Income (loss) before income taxes
The provision for income taxes consisted of the following (in thousands):
Current tax provision (benefit):
U.S. federal
State
Foreign
Total current
Deferred tax provision (benefit):
U.S. federal
State
Foreign
Total deferred
Provision for income taxes
F-26
The provision for income taxes for 2016, 2015 and 2014 resulted in effective tax rates on continuing operations of (179.2)%,
346.3% and 62.2%, respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of
35% are as follows (in thousands):
Years Ended December 31,
2016
2015
2014
Income taxes at U.S. federal statutory rate of 35%
$
3,998
$
44,503
Net state income taxes
Foreign taxes
Foreign tax credits
Research and development credits
Unrecognized tax benefits
Valuation allowances
Proceeds from sale of joint venture assets
Capital contributions or distributions related to Spin-off
Other
Provision for income taxes
(24,362) $
(1,841)
38,211
(9,492)
(1,024)
4,051
123,892
(3,641)
(2,887)
1,853
466
38,052
(17,398)
(24,938)
6,187
38,284
(5,315)
(77)
287
$
124,760
$
39,546
$
976
32,991
(10,942)
—
403
17,846
(5,162)
—
(1,573)
79,042
Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts
and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are as follows
(in thousands):
Deferred tax assets:
Net operating loss carryforwards
Foreign tax credit carryforwards
Research and development credit carryforwards
Alternative minimum tax credit carryforwards
Deferred revenue
Other
Subtotal
Valuation allowances
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
December 31,
2016
2015
$
172,851
$
134,448
81,510
31,251
5,055
52,229
50,797
393,693
(318,887)
74,806
(64,876)
(15,615)
(80,491)
(5,685) $
$
72,019
31,251
5,145
44,821
46,045
333,729
(186,993)
146,736
(73,491)
(9,654)
(83,145)
63,591
At December 31, 2016, we had U.S. federal net operating loss carryforwards of approximately $159.1 million that are available
to offset future taxable income. If not used, the carryforwards begin to expire in 2024. We also had approximately $394.6
million of net operating loss carryforwards in certain foreign jurisdictions (excluding discontinued operations), approximately
$256.4 million of which has no expiration date, $67.8 million of which is subject to expiration from 2017 to 2021, and the
remainder of which expires in future years through 2036. Foreign tax credit carryforwards of $81.5 million, research and
development credits carryforwards of $31.3 million and alternative minimum tax credit carryforwards of $5.1 million are
available to offset future payments of U.S. federal income tax. The foreign tax credits will expire in varying amounts beginning
in 2020 and research and development credits will expire in varying amounts beginning in 2028, whereas the alternative
minimum tax credits may be carried forward indefinitely under current U.S. tax law.
F-27
We record valuation allowances when it is more-likely-than-not that some portion or all of our deferred tax assets will not be
realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the
appropriate character and in the appropriate taxing jurisdictions in the future. If we do not meet our expectations with respect to
taxable income, we may not realize the full benefit from our deferred tax assets which would require us to record a valuation
allowance in our tax provision in future years. Management assesses all available positive and negative evidence to estimate
our ability to generate sufficient future taxable income of the appropriate character, and in the appropriate taxing jurisdictions,
to permit use of our existing deferred tax assets. A significant piece of objective negative evidence is a cumulative loss incurred
over a three-year period in a taxing jurisdiction. Prevailing accounting practice is that such objective evidence would limit the
ability to consider other subjective evidence, such as our projections for future growth.
We incurred a three-year cumulative loss in the U.S. during 2016. Due to this significant negative evidence of cumulative
losses, which outweighs the positive evidence of firm sales backlog and projected future taxable income, we are no longer able
to support that it is more-likely-than-not that we will have sufficient taxable income of the appropriate character in the future
that will allow us to realize our U.S. deferred tax assets. During the year ended December 31, 2016, we recorded a full
valuation allowance against our U.S. deferred tax assets resulting in an additional charge of $119.8 million, of which $65.5
million related to U.S. deferred tax assets that existed at December 31, 2015.
As of December 31, 2015, we had $72.0 million in foreign tax credit carryforward deferred tax assets primarily allocated to us
from Archrock. Since we do not expect to generate sufficient taxable income and foreign source taxable income following the
Spin-off, the foreign tax credit carryforwards will ultimately expire unused. Archrock recorded a valuation allowance to fully
offset the foreign tax credit carryforward deferred tax assets they allocated to us.
Pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), utilization of loss
carryforwards and credit carryforwards, such as foreign tax credits, will be subject to annual limitations due to the ownership
changes of both Hanover Compressor Company (“Hanover”) and Universal Compression Holdings, Inc. (“Universal”). In
general, an ownership change, as defined by Section 382 of the Code, results from transactions increasing the ownership of
certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.
The merger of Hanover and Universal to form Archrock in August 2007 resulted in such an ownership change for both Hanover
and Universal. Our ability to utilize loss carryforwards and credit carryforwards against future U.S. federal income tax may be
limited. The limitations may cause us to pay U.S. federal income taxes earlier; however, we do not currently expect that any
loss carryforwards or credit carryforwards will expire as a result of these limitations.
We have not provided U.S. federal income taxes on indefinitely (or permanently) reinvested cumulative earnings of
approximately $545.5 million generated by our non-U.S. subsidiaries as of December 31, 2016. Such earnings are from
ongoing operations which will be used to fund international growth. We have not recorded a deferred tax liability related to
these unremitted foreign earnings as it is not practicable to estimate the amount of unrecognized deferred tax liabilities. In the
event of a distribution of those earnings to the U.S. in the form of dividends, we may be subject to both foreign withholding
taxes and U.S. federal income taxes net of allowable foreign tax credits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (including discontinued operations) is shown
below (in thousands):
Years Ended December 31,
2016
2015
2014
Beginning balance
$
14,943
$
8,356
$
Additions based on tax positions related to prior years
Additions based on tax positions related to current year
Reductions based on lapse of statute of limitations
Reductions based on tax positions related to prior years
3,140
256
(102)
—
6,448
261
(122)
—
Ending balance
$
18,237
$
14,943
$
9,033
—
—
(215)
(462)
8,356
F-28
We had $18.2 million, $14.9 million and $8.4 million of unrecognized tax benefits at December 31, 2016, 2015 and 2014,
respectively, which if recognized, would affect the effective tax rate (except for amounts that would be reflected in income
(loss) from discontinued operations, net of tax). We also have recorded $3.0 million, $3.0 million and $3.2 million of potential
interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions (including
discontinued operations) as of December 31, 2016, 2015 and 2014, respectively. To the extent interest and penalties are not
assessed with respect to unrecognized tax benefits, amounts accrued will be reduced and reflected as reductions in income tax
expense.
We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state
and foreign jurisdictions. Certain of our operations were historically included in Archrock’s consolidated income tax returns in
the U.S. federal and state jurisdictions. In addition, certain of Archrock’s operations were historically included in our separate
income tax returns in state jurisdictions. Under the Code and the related rules and regulations, each corporation that was a
member of the Archrock consolidated U.S. federal income tax reporting group during any taxable period or portion of any
taxable period ending on or before the effective time of the Spin-off is jointly and severally liable for the U.S. federal income
tax liability of the entire Archrock consolidated tax reporting group for that taxable period. In connection with the Spin-off, we
entered into a tax matters agreement with Archrock that allocates the responsibility for prior period taxes of the Archrock
consolidated tax reporting group between us and Archrock.
State income tax returns are generally subject to examination for a period of three to five years after filing the returns.
However, the state impact of any U.S. federal audit adjustments and amendments remains subject to examination by various
states for up to one year after formal notification to the states. As of December 31, 2016, we did not have any state audits
underway that would have a material impact on our financial position or results of operations.
We are subject to examination by taxing authorities throughout the world, including major foreign jurisdictions such as
Argentina, Brazil and Mexico. With few exceptions, we and our subsidiaries are no longer subject to foreign income tax
examinations for tax years before 2006. Several foreign audits are currently in progress and we do not expect any tax
adjustments that would have a material impact on our financial position or results of operations.
We believe it is reasonably possible that a decrease of up to approximately $8 million in unrecognized tax benefits may be
necessary on or before December 31, 2017 due to the settlement of audits and the expiration of statutes of limitations. However,
due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of these matters may
result in liabilities which could materially differ from these estimates.
16. Related Party Transactions
Spin Agreements
In connection with the completion of the Spin-off, on November 3, 2015, we entered into several agreements with Archrock
and certain subsidiaries of Archrock and, with respect to certain agreements, a subsidiary of Archrock Partners, that govern the
Spin-off and the relationship among the parties following the Spin-off, including the following (collectively, the “Spin
Agreements”):
• The separation and distribution agreement contains the key provisions relating to the separation of our business from
Archrock’s business and the distribution of our common stock to its stockholders. The separation and distribution
agreement identifies the assets and rights that were transferred, liabilities that were assumed or retained and contracts
and related matters that were assigned to us by Archrock or by us to Archrock in the Spin-off and describes how these
transfers, assumptions and assignments occurred. Pursuant to the separation and distribution agreement, on November
3, 2015, we transferred net proceeds of $532.6 million from borrowings under the Credit Facility to Archrock to allow
for its repayment of a portion of its indebtedness. In addition, the separation and distribution agreement contains
certain noncompetition provisions addressing restrictions for three years after the Spin-off on our ability to provide
contract operations and aftermarket services in the U.S. and on Archrock’s ability to provide contract operations and
aftermarket services outside of the U.S. and to provide products for sale worldwide that compete with our current
product sales business, subject to certain exceptions. The separation and distribution agreement also governs the
treatment of aspects relating to indemnification, insurance, confidentiality and cooperation. Additionally, the
separation and distribution agreement specifies the right of a subsidiary of Archrock to receive payments from EESLP
based on a notional amount corresponding to payments received by our subsidiaries from PDVSA Gas in respect of
the sale of our and our joint ventures’ previously nationalized assets promptly after such amounts are collected by our
subsidiaries and a $25.0 million cash payment from EESLP promptly following the occurrence of a qualified capital
raise (as defined in the Credit Agreement). See Note 21 for additional discussion on such contingent liabilities.
F-29
• The tax matters agreement governs the respective rights, responsibilities and obligations of Archrock and us with
respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and
other tax proceedings and certain other matters regarding taxes.
• The employee matters agreement governs the allocation of liabilities and responsibilities between Archrock and
Exterran Corporation relating to employee compensation and benefit plans and programs, including the treatment of
retirement, health and welfare plans and equity and other incentive plans and awards. The agreement contains
provisions regarding stock-based compensation. See Note 18 for additional information relating to the Exterran
Corporation Stock Incentive Plan.
• The transition services agreement sets forth the terms on which Archrock provides to us, and we provide to Archrock,
on a temporary basis, certain services or functions that the companies historically have shared. During the year ended
December 31, 2016, we recorded selling, general and administrative expense of $0.7 million and other income of $1.3
million associated with services under the transition services agreement. For the period from November 4, 2015
through December 31, 2015, we recorded selling, general and administrative expense of $0.2 million and other income
of $0.2 million associated with services under the transition services agreement.
• The supply agreement sets forth the terms under which we provide manufactured equipment, including the design,
engineering, manufacturing and sale of natural gas compression equipment, on an exclusive basis to Archrock and
Archrock Partners. This supply agreement has an initial term of two years, subject to certain cancellation clauses, and
is extendable for additional one year terms by mutual agreement of the parties. Pursuant to the supply agreement, each
of Archrock and Archrock Partners is required to purchase their requirements of newly-manufactured compression
equipment from us, subject to certain exceptions. Subsequent to November 3, 2015, sales to Archrock and Archrock
Partners are considered sales to third parties.
• The storage agreements set forth the terms under which we provide each of Archrock and Archrock Partners with
storage space for equipment purchased under the supply agreement, as well as the terms under which Archrock
provides storage space to us for certain of our equipment.
• The services agreements set forth the terms under which we provide Archrock (or Archrock’s customers on its behalf)
with engineering, preservation and installation and commissioning services and Archrock provides us (or our
customers on our behalf) with make-ready, parts sales, preservation and installation and commissioning services.
These services agreements will continue in effect until terminated by either party on 30 days’ written notice.
Transactions with Affiliates
All intercompany transactions and accounts within these financial statements have been eliminated. All affiliate transactions
occurring prior to the Spin-off between the international services and product sales businesses of Archrock and the other
businesses of Archrock have been included in these financial statements. Prior to the Spin-off, sales of newly-manufactured
compression equipment from the oil and gas product sales business of EESLP to Archrock Partners were used in the U.S.
services business of Archrock and were made pursuant to an omnibus agreement between the parties and other affiliates of
both entities. Through November 3, 2015, per the omnibus agreement, revenue was determined by the cost to manufacture
such equipment plus a fixed margin. During the years ended December 31, 2015 and 2014, we recorded oil and gas product
sales revenue from affiliates of $154.3 million and $233.0 million, respectively, and cost of sales of $141.9 million and
$212.2 million, respectively, from the sale of newly-manufactured compression equipment to Archrock Partners. Subsequent
to November 3, 2015, sales to Archrock Partners are considered sales to third parties.
Prior to the closing of the Spin-off, EESLP also had a fleet of compression units used to provide compression services in the
U.S. services business of Archrock. Revenue prior to the Spin-off was not recognized in our statements of operations for the
sale of compressor units by us that were used by EESLP to provide compression services to customers of the U.S. services
business of Archrock. The costs of these units were treated as a reduction of parent equity in the balance sheets and a
distribution to parent in the statements of cash flows and totaled $32.3 million and $59.1 million during the years ended
December 31, 2015 and 2014, respectively. Subsequent to November 3, 2015, sales to Archrock are considered sales to third
parties.
F-30
Allocation of Expenses
For the periods prior to the Spin-off, the statements of operations also includes expense allocations for certain functions
performed by Archrock which have not been historically allocated to its operating segments, including allocations of expenses
related to executive oversight, accounting, treasury, tax, legal, human resources, procurement and information technology.
Included in our selling, general and administrative expense during the years ended December 31, 2015 and 2014 were $46.9
million and $68.3 million, respectively, of allocated corporate expenses incurred by Archrock prior to the Spin-off. These costs
were allocated to us systematically based on specific department function and revenue. Management believes the assumptions
underlying the financial statements, including the assumptions regarding allocating expenses from Archrock, are reasonable.
Nevertheless, the financial statements may not be representative of all of the actual expenses that would have been incurred had
we been a stand-alone public company during the periods presented and, consequently, may not reflect our combined results of
operations, financial position and cash flows had we been a stand-alone public company during the periods presented. Actual
costs that would have been incurred if we had been a stand-alone public company would depend on multiple factors, including
organizational structure and strategic decisions made in various areas, including information technology and infrastructure.
Cash Management
Prior to the closing of the Spin-off, EESLP provided centralized treasury functions for Archrock’s U.S. operations, whereby
EESLP regularly transferred cash both to and from U.S. subsidiaries of Archrock, as necessary. In conjunction therewith, the
intercompany transactions between our U.S. subsidiaries and the other U.S. subsidiaries of Archrock were considered to be
effectively settled in cash in these financial statements for the periods prior to the Spin-off. Intercompany receivables/payables
from/to related parties arising from transactions with affiliates and expenses allocated from Archrock described above were
included in net distributions to parent in the financial statements.
Net Distributions to Parent
Parent equity, which included retained earnings prior to the Spin-off, represents Archrock’s interest in our recorded net assets.
Prior to the Spin-off, all transactions between us and Archrock were presented in the accompanying statements of stockholders’
equity as net distributions to parent. As of November 3, 2015, parent equity was converted to common stock and additional
paid-in capital. A reconciliation of net distributions to parent in the statements of stockholders’ equity to the corresponding
amount presented in the statements of cash flows for the years ended December 31, 2015 and 2014 is provided below (in
thousands):
Net distributions to parent per the statements of stockholders’ equity
Stock-based compensation expenses prior to the Spin-off
Stock-based compensation excess tax benefit prior to the Spin-off
Net transfers of property, plant and equipment from parent prior to the Spin-off
Transfer of net deferred tax liabilities from parent at Spin-off
Transfer of other net assets to parent at Spin-off
Net distributions to parent per the statements of cash flows
17. Stockholders’ Equity
Years Ended December 31,
2015
$ (57,635)
(6,066)
1,193
(7,627)
29,203
1,907
$ (39,025)
2014
(59,970)
(5,288)
3,434
(17,472)
—
—
(79,296)
$
$
The Exterran Corporation amended and restated certificate of incorporation authorizes 250.0 million shares of common stock
and 50.0 million shares of preferred stock, each with a par value of $0.01 per share. To effect the Spin-off, on November 3,
2015, Archrock distributed 34,286,267 shares of our common stock to its shareholders. Archrock shareholders received one
share of Exterran Corporation common stock for every two shares of Archrock common stock held at the close of business on
the Record Date. Additionally, certain of Archrock’s common stock awards that were outstanding prior to the Spin-off were
converted to Exterran Corporation’s common stock awards on November 3, 2015. The conversion of Archrock restricted stock
into Exterran Corporation restricted stock resulted in the issuance of 505,512 shares of our common stock. See Note 18 for
further discussion regarding stock-based compensation.
Pursuant to the separation and distribution agreement with Archrock and certain of our and Archrock’s respective affiliates, on
November 3, 2015, EESLP transferred $532.6 million of net proceeds from borrowings under the Credit Facility to Archrock to
allow it to repay a portion of its indebtedness in connection with the Spin-off.
F-31
Parent equity, which included retained earnings prior to the Spin-off, represents Archrock’s interest in our recorded net assets.
Prior to the Spin-off, all transactions between us and Archrock were presented in the accompanying statements of stockholders’
equity as net distributions to parent. As of November 3, 2015, parent equity was converted to common stock and additional
paid-in capital.
Comprehensive Income (Loss)
Components of comprehensive income (loss) are net income (loss) and all changes in stockholders’ equity during a period
except those resulting from transactions with owners. Our accumulated other comprehensive income consists of foreign
currency translation adjustments.
The following table presents the changes in accumulated other comprehensive income, net of tax, during the years ended
December 31, 2014, 2015 and 2016 (in thousands):
Accumulated other comprehensive income, January 1, 2014
Loss recognized in other comprehensive income (loss)
Income reclassified from accumulated other comprehensive income (1)
Accumulated other comprehensive income, December 31, 2014
Income recognized in other comprehensive income (loss)
Accumulated other comprehensive income, December 31, 2015
Income recognized in other comprehensive income (loss)
Loss reclassified from accumulated other comprehensive income (2)
Accumulated other comprehensive income, December 31, 2016
Foreign Currency
Translation
Adjustment
38,892
(9,370)
(2,777)
26,745
2,453
29,198
3,151
15,159
47,508
$
$
(1) During the year ended December 31, 2014, we reclassified a gain of $2.8 million related to foreign currency translation
adjustments to other (income) expense, net, in our statements of operations. This amount represents cumulative foreign
currency translation adjustments associated with our contract operations and aftermarket services businesses in Australia,
which were sold in December 2014, that previously had been recognized in accumulated other comprehensive income.
(2) During the year ended December 31, 2016, we reclassified a loss of $15.2 million related to foreign currency translation
adjustments to income (loss) from discontinued operations in our statement of operations. This amount represents
cumulative foreign currency translation adjustments associated with our Belleli CPE business that previously had been
recognized in accumulated other comprehensive income. See Note 3 for further discussion of the sale of our Belleli CPE
business.
18. Stock-Based Compensation and Awards
2015 Stock Incentive Plan
On October 30, 2015, our compensation committee and board of directors each approved the Exterran Corporation 2015 Stock
Incentive Plan (the “2015 Plan”) to provide for the granting of stock options, stock appreciation rights, restricted stock,
restricted stock units, performance awards, other stock-based awards and dividend equivalents rights to employees, directors
and consultants of Exterran Corporation. The 2015 Plan became effective on November 1, 2015. The 2015 Plan also governs
awards granted under the Archrock, Inc. 2013 Stock Incentive Plan and the Archrock, Inc. 2007 Amended and Restated Stock
Incentive Plan which were adjusted into awards denominated in our common stock in accordance with the terms of the
employee matters agreement and/or actions taken by our board of directors or the Archrock board of directors.
F-32
Awards granted by Archrock prior to the Spin-off (referred to as “Archrock awards”), which consisted of stock options,
restricted stock, restricted stock units and performance units, were generally treated as follows in connection with the Spin-off:
• Pre-2015 Awards. Immediately prior to the Spin-off, each outstanding Archrock stock option, restricted stock award,
restricted stock unit award and performance unit award granted prior to January 1, 2015, whether vested or unvested,
were split into two awards, consisting of an Archrock award and an Exterran Corporation award. For Archrock
“incentive stock options” (within the meaning of Section 422 of the Code), the holder of the award had the option to
elect, prior to the Spin-off, to convert such options into options denominated in shares of common stock of the
applicable holder’s post-spin employer.
•
2015 Awards. Each Archrock stock option, restricted stock award, restricted stock unit award and performance unit
award that was (i) granted in calendar year 2015 and (ii) held by an individual who became our employee or is
engaged by us following the Spin-off were converted solely into an Exterran Corporation award. Archrock did not
grant any stock options in the calendar year 2015 prior to the Spin-off.
In accordance with the anti-dilution provisions set forth in the individual Archrock award agreements, adjustments to the
awards were made to ensure, to the extent possible, that the fair value of each award immediately prior to the Spin-off equaled
the fair value of each such award immediately following the Spin-off. Adjustment and substitution of awards did not result in
additional compensation expense.
Equity awards that were adjusted as described above are generally subject to the same vesting, expiration, performance
conditions and other terms and conditions as applied to the underlying Archrock awards immediately prior to the Spin-off.
Stock-based compensation expense prior to the Spin-off only related to employees directly involved in our operations, and
therefore, excluded stock-based compensation expense related to Archrock employees that supported both the international
services and product sales businesses and the other businesses of Archrock that it retained after the Spin-off. Stock-based
compensation expense subsequent to the Spin-off relates to employees, directors and consultants of Exterran Corporation, and
as discussed above, such awards may consist of awards for either our common stock or Archrock’s common stock. The
following table presents the stock-based compensation expense included in our results of operations (in thousands):
Stock options
Restricted stock, restricted stock units, performance units, cash settled
restricted stock units and cash settled performance units
Restructuring and other charges—stock-based compensation expense
Total stock-based compensation expense
Stock Options
Years Ended December 31,
2016
2015
2014
115
$
348
$
496
13,188
1,333
7,871
143
14,636
$
8,362
$
7,922
—
8,418
$
$
Stock options are granted at fair market value at the grant date, are exercisable according to the vesting schedule established
and generally expire no later than ten years after the grant date. Stock options generally vest one-third per year on each of the
first three anniversaries of the grant date.
The weighted average grant date fair value for stock options granted during the year ended 2014 was $14.47, and was estimated
using the Black-Scholes option valuation model with the weighted average assumptions in the table below. There were no stock
options granted during the years ended December 31, 2016 and 2015. As there were no stock option awards for Exterran
Corporation’s common stock granted subsequent to the Spin-off, the significant assumptions presented below are the inputs
Archrock used to calculate the grant date fair values of stock options granted prior to the Spin-off.
Expected life in years
Risk-free interest rate
Volatility
Dividend yield
Years Ended December 31,
2015
2014
N/A
N/A
N/A
N/A
4.5
1.33%
46.51%
1.5%
2016
N/A
N/A
N/A
N/A
F-33
The risk-free interest rate was based on the U.S. Treasury yield curve in effect on the grant date for a period commensurate with
the estimated expected life of the stock options. Expected volatility was based on the historical volatility of Archrock’s
common stock over the period commensurate with the expected life of the stock options and other factors. The dividend yield
was based on Archrock’s annualized dividend rate in effect during the quarter in which the grant was made.
The table below presents the changes in stock option awards for our common stock during the year ended December 31, 2016.
Options outstanding on the Spin-off date, November 3, 2015, related to employees, directors and consultants of us and
Archrock.
Stock
Options
(in thousands)
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding, January 1, 2016
Granted
Exercised
Cancelled
Options outstanding, December 31, 2016
Options exercisable, December 31, 2016
434
$
—
(61)
(77)
296
284
18.53
—
12.88
27.20
17.44
16.80
$
2.2
2.1
2,572
2,572
Intrinsic value is the difference between the market value of our common stock and the exercise price of each stock option
multiplied by the number of stock options outstanding for those stock options where the market value exceeds their exercise
price. The total intrinsic value of stock options exercised to purchase our common stock during the year ended December 31,
2016 was $0.1 million. As of December 31, 2016, we expect to recognize less than $0.1 million of additional compensation
cost related to unvested stock options issued to our employees, directors and consultants, related to options to purchase either
our common stock or Archrock’s common stock.
Restricted Stock, Restricted Stock Units, Performance Units, Cash Settled Restricted Stock Units and Cash Settled Performance
Units
For grants of restricted stock, restricted stock units and performance units, we recognize compensation expense over the vesting
period equal to the fair value of our common stock at the grant date. We remeasure the fair value of cash settled restricted stock
units and cash settled performance units and record a cumulative adjustment of the expense previously recognized. Our
obligation related to the cash settled restricted stock units and cash settled performance units is reflected as a liability in our
balance sheets. Grants of restricted stock, restricted stock units, performance units, cash settled restricted stock units and cash
settled performance units generally vest one-third per year on each of the first three anniversaries of the grant date.
The table below presents the changes in restricted stock, restricted stock units, performance units, cash settled restricted stock
units and cash settled performance units for our common stock during the year ended December 31, 2016. Non-vested awards
relate to employees, directors and consultants of us and Archrock. Awards granted subsequent to November 3, 2015 only relate
to our employees, directors and consultants.
Non-vested awards, January 1, 2016
Granted
Vested
Change in expected vesting of performance units
Cancelled
Non-vested awards, December 31, 2016 (1)
Weighted
Average
Grant-Date
Fair Value
Per Share
22.17
15.46
21.60
15.46
22.03
17.68
Shares
(in thousands)
1,004
$
773
(526)
138
(97)
1,292
(1) Non-vested awards as of December 31, 2016 are comprised of 182,000 cash settled restricted stock units and cash settled
performance units and 1,110,000 restricted shares, restricted stock units and performance units.
F-34
As of December 31, 2016, we expect $15.5 million of unrecognized compensation cost related to unvested restricted stock,
restricted stock units, performance units, cash settled restricted stock units and cash settled performance units issued to our
employees, in the form of either our common stock or Archrock’s common stock, to be recognized over the weighted-average
vesting period of 1.8 years.
Directors’ Stock and Deferral Plan
On October 30, 2015, our compensation committee and board of directors each approved the Exterran Corporation 2015
Directors’ Stock and Deferral Plan (the “Director Plan”). Under the Director Plan, which became effective on October 30,
2015, members of our board of directors may elect, on an annual basis, to receive 25%, 50%, 75% or 100% of their retainer and
meeting fees (the “Retainer Fees”) in shares of our common stock in lieu of cash. The number of shares of our common stock
issued to each director who elects to have a portion of their Retainer Fees paid in shares in lieu of cash is determined by
dividing the applicable dollar amount of such portion by the closing sales price per share of our common stock on the last
trading day of the quarter. Any portion of the Retainer Fees paid in cash will be paid to the director following the close of the
calendar quarter for which such Retainer Fees were earned. Under the Director Plan, members of the board of directors may
also elect to defer until a later date the receipt of the Retainer Fees that such director has elected to receive in the form of
shares. The maximum aggregate number of shares of our common stock that may be issued under the Director Plan is 125,000
shares. The board of directors will administer the Director Plan and has the authority to make certain equitable adjustments
under the Director Plan in the event of certain corporate transactions.
19. Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed using the two-class method, which is an earnings allocation formula
that determines net income (loss) per share for each class of common stock and participating security according to dividends
declared and participation rights in undistributed earnings. Under the two-class method, basic net income (loss) per common
share is determined by dividing net income (loss) after deducting amounts allocated to participating securities, by the weighted
average number of common shares outstanding for the period. Participating securities include our unvested restricted stock and
certain stock settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether
paid or unpaid. During periods of net loss from continuing operations, no effect is given to participating securities because they
do not have a contractual obligation to participate in our losses.
Diluted net income (loss) per common share is computed using the weighted average number of common shares outstanding
adjusted for the incremental common stock equivalents attributed to outstanding options to purchase common stock and non-
participating restricted stock units, unless their effect would be anti-dilutive.
To effect the Spin-off, on November 3, 2015, Archrock distributed 34,286,267 shares of our common stock to its stockholders.
For the periods prior to November 3, 2015, the average number of common shares outstanding used to calculate basic and
diluted net income per common share was based on the shares of our common stock that were distributed on November 3,
2015. The same number of shares was used to calculate basic and diluted net income per common share for these periods since
we had no equity awards outstanding prior to November 3, 2015 and we were a wholly owned subsidiary of Archrock prior to
the Spin-off date.
F-35
The following table presents a reconciliation of basic and diluted net income (loss) per common share for the years ended
December 31, 2016, 2015 and 2014 (in thousands, except per share data):
Years Ended December 31,
2016
2015
2014
Numerator for basic and diluted net income (loss) per common share:
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax
Less: Net income attributable to participating securities
$
(194,366) $
(33,571)
—
(28,126) $
54,774
—
48,109
67,183
—
Net income (loss) — used in basic and diluted net income (loss) per
common share
$
(227,937) $
26,648
$
115,292
Weighted average common shares outstanding including participating
securities
Less: Weighted average participating securities outstanding
Weighted average common shares outstanding — used in basic net income
(loss) per common share
Net dilutive potential common shares issuable:
35,489
(921)
34,437
(149)
34,568
34,288
34,286
—
34,286
On exercise of options and vesting of restricted stock units
*
*
—
Weighted average common shares outstanding — used in diluted net
income (loss) per common share
34,568
34,288
34,286
Net income (loss) per common share:
Basic
Diluted
$
$
(6.59) $
(6.59) $
0.78
0.78
$
$
3.36
3.36
* Excluded from diluted net income (loss) per common share as their inclusion would have been anti-dilutive.
The following table shows the potential shares of common stock issuable that were excluded from computing diluted net
income (loss) per common share as their inclusion would have been anti-dilutive (in thousands):
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average
market value for the period
On exercise of options and vesting of restricted stock units
Net dilutive potential common shares issuable
* Not applicable for the period.
20. Retirement Benefit Plan
Years Ended December 31,
2016
2015
2014
225
50
275
62
16
78
*
*
—
Our 401(k) retirement plan provides for optional employee contributions for certain employees who are U.S. citizens up to the
Internal Revenue Service limit and discretionary employer matching contributions. We make discretionary matching
contributions to each participant’s account at a rate of (i) 100% of each participant’s first 1% of contributions plus (ii) 50% of
each participant’s contributions up to the next 5% of eligible compensation. For the periods prior to the Spin-off, we were
allocated costs incurred by Archrock for employer matching contributions. Costs incurred for employer matching contributions
of $2.4 million, $3.6 million and $4.5 million during 2016, 2015 and 2014, respectively, are presented as selling, general and
administrative expense in our statements of operations.
F-36
21. Commitments and Contingencies
Rent expense for 2016, 2015 and 2014 was approximately $9.9 million, $13.1 million and $15.4 million, respectively.
Commitments for future minimum rental payments with terms in excess of one year at December 31, 2016 are as follows (in
thousands):
2017
2018
2019
2020
2021
Thereafter
Total
Guarantees
December 31,
2016
$
$
6,176
3,825
2,131
1,736
1,729
11,944
27,541
We have issued the following guarantees that are not recorded on our accompanying balance sheet (dollars in thousands):
Performance guarantees through letters of credit (1)
Standby letters of credit
Commercial letters of credit
Bid bonds and performance bonds (1)
Maximum potential undiscounted payments
Maximum Potential
Undiscounted
Payments as of
December 31, 2016
Term
2017-2020
$
121,645
2017
2017
2017-2023
$
545
671
42,483
165,344
(1) We have issued guarantees to third parties to ensure performance of our obligations, some of which may be fulfilled by
third parties.
Contingencies
See Note 3 and Note 8 for a discussion of our gain contingencies related to assets that were expropriated in Venezuela.
Pursuant to the separation and distribution agreement, EESLP contributed to a subsidiary of Archrock the right to receive
payments based on a notional amount corresponding to payments received by our subsidiaries from PDVSA Gas in respect of
the sale of our and our joint ventures’ previously nationalized assets promptly after such amounts are collected by our
subsidiaries until Archrock’s subsidiary has received an aggregate amount of such payments up to the lesser of (i) $125.8
million, plus the aggregate amount of all reimbursable expenses incurred by Archrock and its subsidiaries in connection with
recovering any PDVSA Gas default installment payments following the completion of the Spin-off or (ii) $150.0 million. Our
balance sheets do not reflect this contingent liability to Archrock or the amount payable to us by PDVSA Gas as a receivable.
Pursuant to the separation and distribution agreement, we transferred cash of $49.2 million to Archrock during the year ended
December 31, 2016. The transfer of cash was recognized as a reduction to additional paid-in capital in our financial statements.
As of December 31, 2016, the remaining principal amount due to us from PDVSA Gas in respect of the sale of our and our
joint ventures’ previously nationalized assets was approximately $37 million. In subsequent periods, the recognition of a
liability, if applicable, resulting from this contingency to Archrock is expected to impact equity, and as such, is not expected to
have an impact on our statements of operations.
F-37
Pursuant to the separation and distribution agreement, EESLP (in the case of debt offerings) or Exterran Corporation (in the
case of equity issuances) will use its commercially reasonable efforts to complete one or more unsecured debt offerings or
equity issuances resulting in aggregate gross cash proceeds of at least $250.0 million on the terms described in the Credit
Agreement (such transaction, a “qualified capital raise”) on or before the maturity date of our term loan facility. In connection
with the Spin-off, EESLP contributed to a subsidiary of Archrock the right to receive, promptly following the occurrence of a
qualified capital raise, a $25.0 million cash payment. Our balance sheets do not reflect this contingent liability to Archrock. In
subsequent periods, the recognition of a liability, if applicable, resulting from this contingency to Archrock is expected to
impact equity, and as such, is not expected to have an impact on our statements of operations.
In addition to U.S. federal, state and local and foreign income taxes, we are subject to a number of taxes that are not income-
based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional
taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we
can reasonably estimate the amount of the liability. As of both December 31, 2016 and 2015, we had accrued $3.1 million for
the outcomes of non-income-based tax audits and had related indemnification receivables from Archrock of $1.7 million and
$1.5 million, respectively. We do not expect that the ultimate resolutions of these audits will result in a material variance from
the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is
probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of
the claim. We do not have any unasserted claims from non-income-based tax audits that we have determined are probable of
assertion. We also believe the likelihood is remote that the impact of potential unasserted claims from non-income-based tax
audits could be material to our financial position, but it is possible that the resolution of future audits could be material to our
results of operations or cash flows for the period in which the resolution occurs.
Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids
and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance
against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and
commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is
customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would
increase our costs.
Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the
relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible
amounts are estimated and accrued based upon known facts, historical trends and industry averages.
Contracts Containing Liquidated Damages Provisions
Some of our product sales contracts have schedule dates and performance obligations that if not met could subject us to
penalties for liquidated damages. These generally relate to specified activities that must be completed by a set contractual date
or by achievement of a specified level of output or throughput. Each contract defines the conditions under which a customer
may make a claim for liquidated damages. However, in some instances, liquidated damages are not asserted by the customer,
but the potential to do so is used in negotiating or settling claims and closing out the contract. As of December 31, 2016,
estimated penalties for liquidated damages of $22.3 million have been recorded in our financial statements, based on our actual
or projected failure to meet certain specified contractual milestone dates. We believe that we will be successful in obtaining
schedule extensions or other customer-agreed changes that should resolve the potential for additional liquidated damages.
Accordingly, we believe that no amounts for these potential liquidated damages in excess of the amounts currently reflected in
our financial statements are probable of being incurred by us. However, we may not achieve relief on some or all of the issues
involved and, as a result, could be subject to higher liquidated damages amounts. Additionally, we have asserted claims, or
intend to assert claims, against certain customers that, if settled, could result in a release of such claims in exchange for release
of certain liquidated damages currently recorded in our financial statements. We recognize claims for recovery of incurred cost
when it is probable that the claim will result in additional contract revenue and when the amount of the claim can be reliably
estimated. These requirements are satisfied when the contract or other evidence provides a legal basis for the claim, additional
costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in our
performance, claim-related costs are identifiable and considered reasonable in view of the work performed, evidence
supporting the claim is objective and verifiable and collection is probable. These assessments require judgments concerning
matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims and
the cost of both pending and future claims.
F-38
Litigation and Claims
In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable
to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these actions will not
have a material adverse effect on our financial position, results of operations or cash flows. However, because of the inherent
uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or
proceeding to which we are a party will not have a material adverse effect on our financial position, results of operations or
cash flows.
Contemporaneously with filing the Form 8-K on April 26, 2016, we self-reported the errors and possible irregularities at Belleli
EPC to the SEC. Since then, we have been cooperating with the SEC in its investigation of this matter, including responding to
a subpoena for documents related to the restatement and of our compliance with the U.S. Foreign Corrupt Practices Act
(“FCPA”), which are also being provided to the Department of Justice at its request. The FCPA related requests in the SEC
subpoena pertain to our policies and procedures, information about our third-party sales agents, and documents related to
historical internal investigations completed prior to November 2015.
Indemnifications
In conjunction with, and effective as of the completion of, the Spin-off, we entered into the separation and distribution
agreement with Archrock, which governs, among other things, the treatment between Archrock and us of aspects relating to
indemnification, insurance, confidentiality and cooperation. Generally, the separation and distribution agreement provides for
cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us
and financial responsibility for the obligations and liabilities of Archrock’s business with Archrock. Pursuant to the agreement,
we and Archrock will generally release the other party from all claims arising prior to the Spin-off that relate to the other
party’s business, subject to certain exceptions. Additionally, in conjunction with, and effective as of the completion of, the
Spin-off, we entered into the tax matters agreement with Archrock. Under the tax matters agreement and subject to certain
exceptions, we are generally liable for, and indemnify Archrock against, taxes attributable to our business, and Archrock is
generally liable for, and indemnify us against, all taxes attributable to its business. We are generally liable for, and indemnify
Archrock against, 50% of certain taxes that are not clearly attributable to our business or Archrock’s business. Any payment
made by us to Archrock, or by Archrock to us, is treated by all parties for tax purposes as a nontaxable distribution or capital
contribution, respectively, made immediately prior to the Spin-off.
22. Reportable Segments and Geographic Information
We manage our business segments primarily based upon the type of product or service provided. We have four reportable
segments: contract operations, aftermarket services, oil and gas product sales and Belleli EPC product sales. The contract
operations segment primarily provides natural gas compression services, production and processing equipment services and
maintenance services to meet specific customer requirements on assets owned by us. The aftermarket services segment
provides a full range of services to support the surface production, compression and processing needs of customers, from parts
sales and normal maintenance services to full operation of a customer’s owned assets. The oil and gas product sales segment
provides design, engineering, manufacturing, installation and sale of natural gas compression units and accessories and
equipment used in the production, treating and processing of crude oil and natural gas. The Belleli EPC product sales segment,
which comprises the operations of our Belleli EPC subsidiary that we are exiting, has historically provided engineering,
procurement and construction for the manufacture of tanks for tank farms and the manufacture of evaporators and brine heaters
for desalination plants.
In the third quarter of 2016, we changed our reporting segments to better align with the Company’s organizational structure and
reflect the way in which the Chief Operating Decision Maker now reviews the Company’s operating results. The change in
structure had the impact of splitting our previously disclosed product sales segment into the following two new reportable
segments: “oil and gas product sales” and “Belleli EPC product sales.” The contract operations and aftermarket services
segments were not impacted by this change. The changes in our reportable segments, including the reclassification of the
related revenues and costs of sales (excluding depreciation and amortization) in our statements of operations, have been made
to all periods presented within this Annual Report on Form 10-K.
We evaluate the performance of our segments based on gross margin for each segment. Revenue includes sales to external
customers and affiliates. We do not include intersegment sales when we evaluate our segments’ performance.
F-39
During the year ended December 31, 2016, Petroleo Brasileiro S.A. accounted for approximately 10% of our total revenues.
During the years ended December 31, 2015 and 2014, Archrock Partners and Archrock accounted for approximately 11% of
our total revenues. See Note 16 for further discussion on transactions with affiliates. No other customer accounted for more
than 10% of our total revenues in 2016, 2015 and 2014.
The following table presents revenues and other financial information by reportable segment during the years ended
December 31, 2016, 2015 and 2014 (in thousands):
Contract
Operations
Aftermarket
Services
Oil and Gas
Product Sales
Belleli EPC
Product
Sales
Reportable
Segments
Total
Other (1)
Total (2)(3)
2016:
Revenue
Gross margin (4)
Total assets
Capital expenditures
2015:
Revenue
Gross margin (4)
Total assets
Capital expenditures
2014:
Revenue
Gross margin (4)
Total assets
Capital expenditures
$ 392,463
$ 120,550
$
392,384
248,793
745,752
69,946
33,208
28,421
332
$ 123,856
(2,466)
27,928
26,990
159,172
790
1,236
$ 1,029,253
$
— $ 1,029,253
306,525
961,273
72,304
—
306,525
413,491
1,374,764
2,021
74,325
$ 469,900
297,509
$ 127,802
36,569
$ 1,089,562
163,825
790,957
138,171
31,614
709
230,947
5,001
$ 103,221
(31,625)
46,592
$ 1,790,485
466,278
$
— $ 1,790,485
466,278
—
1,100,110
617,082
1,717,192
1,713
145,594
11,151
156,745
$ 493,853
$ 162,724
$ 1,329,607
308,445
809,122
130,248
42,543
37,200
1,095
240,189
334,401
10,954
$ 115,479
(33,391)
63,304
$ 2,101,663
$
— $ 2,101,663
557,786
—
557,786
1,244,027
686,083
1,930,110
10,462
152,759
3,843
156,602
(1)
(2)
(3)
Includes corporate related items.
Totals exclude assets, capital expenditures and the operating results of discontinued operations.
Total gross margin, a non-GAAP financial measure, is reconciled, in total, to income (loss) before income taxes, its most
directly comparable measure calculated and presented in accordance with GAAP, below.
(4) Gross margin is defined as total revenue less cost of sales (excluding depreciation and amortization expense).
The following table presents assets from reportable segments to total assets as of December 31, 2016 and 2015 (in thousands):
Assets from reportable segments
Other assets (1)
Assets associated with discontinued operations
Total assets
(1)
Includes corporate related items.
December 31,
2016
2015
$
961,273
$
1,100,110
413,491
14
617,082
71,204
$
1,374,778
$
1,788,396
F-40
The following tables present geographic data as of and during the years ended December 31, 2016, 2015 and 2014 (in
thousands):
Revenue:
U.S.
United Arab Emirates
Argentina
Brazil
Mexico
Other international
Total
Property, plant and equipment, net:
U.S.
Argentina
Brazil
Mexico
Other international
Total
Years Ended December 31,
2016
2015
2014
$
335,268
$
858,409
$
1,051,824
137,247
151,374
85,831
90,876
228,657
1,029,253
$
135,623
172,004
68,578
125,972
429,899
1,790,485
$
131,392
172,492
91,433
119,953
534,569
2,101,663
$
2016
December 31,
2015
2014
$
84,669
$
90,976
$
222,548
157,139
167,279
166,174
239,226
128,032
198,641
201,313
$
797,809
$
858,188
$
87,093
246,410
119,795
238,661
216,631
908,590
We evaluate the performance of each of our segments based on gross margin. Total gross margin is included as a supplemental
disclosure because it is a primary measure used by our management to evaluate the results of revenue and cost of sales
(excluding depreciation and amortization expense), which are key components of our operations. We believe gross margin is
important because it focuses on the current operating performance of our operations and excludes the impact of the prior
historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our
selling, general and administrative activities, the impact of our financing methods and income taxes. Depreciation and
amortization expense may not accurately reflect the costs required to maintain and replenish the operational usage of our assets
and therefore may not portray the costs from current operating activity. As an indicator of our operating performance, total
gross margin should not be considered an alternative to, or more meaningful than, income (loss) before income taxes as
determined in accordance with GAAP. Our gross margin may not be comparable to a similarly titled measure of another
company because other entities may not calculate gross margin in the same manner.
The following table reconciles income (loss) before income taxes to total gross margin (in thousands):
Years Ended December 31,
2016
2015
2014
Income (loss) before income taxes
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restatement charges
Restructuring and other charges
Interest expense
Equity in income of non-consolidated affiliates
Other (income) expense, net
Total gross margin
$
(69,606) $
165,985
137,974
15,146
18,879
27,457
34,181
(10,403)
(13,088)
306,525
$
F-41
11,420
$
220,396
154,801
20,788
—
31,315
7,272
(15,152)
35,438
127,151
263,170
170,088
3,851
—
—
1,878
(14,553)
6,201
$
466,278
$
557,786
23. Selected Quarterly Financial Data (Unaudited)
In management’s opinion, the summarized quarterly financial data below (in thousands, except per share amounts) contains all
appropriate adjustments, all of which are normally recurring adjustments, considered necessary to present fairly our financial
position and results of operations for the respective periods.
Year Ended December 31, 2016:
Revenue
Gross profit (1)
Loss from continuing operations
Income (loss) from discontinued operations, net of tax
Net loss
Net loss per common share:
Basic (2)
Diluted (2)
Year Ended December 31, 2015:
Revenue
Gross profit (1)
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Net income (loss)
Net income (loss) per common share:
Basic (2)
Diluted (2)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
306,630
35,634
(28,830)
(64,127)
(92,957)
$
262,147
54,647
(106,582)
11,036
(95,546)
$
229,158
44,886
(32,312)
19,652
(12,660)
231,318
32,059
(26,642)
(132)
(26,774)
(2.70) $
(2.70)
(2.76) $
(2.76)
(0.37) $
(0.37)
(0.77)
(0.77)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
519,820
97,839
18,545
17,932
36,477
$
460,781
45,960
(14,630)
207
(14,423)
$
411,173
58,578
(9,598)
18,275
8,677
398,711
47,006
(22,443)
18,360
(4,083)
$
1.06
1.06
(0.42) $
(0.42)
$
0.25
0.25
(0.12)
(0.12)
$
$
$
$
(1) Gross profit is defined as revenue less cost of sales, direct depreciation and amortization expense and direct long-lived
asset impairment charges.
(2) For the periods prior to November 3, 2015, the average number of common shares outstanding used to calculate basic and
diluted net income (loss) per common share was based on 34,286,267 shares of our common stock that were distributed
by Archrock in the Spin-off on November 3, 2015.
Additional Notes:
•
In conjunction with the planned disposition of Belleli CPE, we recorded impairments of long-lived assets and current
assets that totaled $61.6 million and $7.1 million during the first quarter of 2016 and second quarter of 2016,
respectively. We completed the sale of Belleli CPE in August 2016 for cash proceeds of $5.5 million. Belleli CPE is
reflected as discontinued operations in our financial statements for all periods presented (see Note 3).
• Due to significant negative evidence of cumulative losses in the U.S., we are no longer able to support that it is more-
likely-than-not that we will have sufficient taxable income of the appropriate character in the future that will allow us
to realize our U.S. deferred tax assets. As a result, we recorded a full valuation allowance against our U.S. deferred tax
assets resulting in additional charges of $88.0 million, $13.6 million and $18.2 million during the second quarter of
2016, third quarter of 2016 and fourth quarter of 2016, respectively (see Note 15).
• During the second quarter of 2016, third quarter of 2016 and fourth quarter of 2016, we incurred costs of $7.9 million,
$12.3 million and $9.9 million, respectively, associated with the restatement of our financial statements and current
SEC investigation, of which $11.2 million of cash was recovered from Archrock in the fourth quarter of 2016 pursuant
to the separation and distribution agreement (see Note 13).
F-42
• Our Spin-off from Archrock was completed on November 3, 2015. In conjunction with the Spin-off, we incurred
approximately $300.0 million of indebtedness under the revolving credit facility and $245.0 million of indebtedness
under the term loan facility. Pursuant to the separation and distribution agreement with Archrock and certain of our
and Archrock’s respective affiliates, on November 3, 2015, we transferred cash of $532.6 million to Archrock. Prior to
the Spin-off, third party debt of Archrock, other than debt attributable to capital leases, was not allocated to us as we
were not the legal obligor of the debt and Archrock’s borrowings were not directly attributable to our business (see
Note 10).
24. Subsequent Events
In January 2017, we received an additional installment payment, including an annual charge, from PDVSA Gas relating to the
2012 sale of our previously nationalized assets of $19.7 million. As we have not recognized amounts payable to us by PDVSA
Gas relating to the 2012 sale of our previously nationalized assets as a receivable but rather as income in the periods such
payments are received, the installment payments received in January 2017 relating to our previously nationalized assets will be
recognized as income from discontinued operations in the first quarter of 2017. Pursuant to the separation and distribution
agreement, a notional amount corresponding to the cash we received from the PDVSA Gas installment payment was transferred
to Archrock in January 2017. The transfer of cash will be recognized as a reduction to stockholders’ equity in the first quarter of
2017.
F-43
[This page intentionally left blank]
EXTERRAN CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Description
Allowance for doubtful accounts deducted from accounts
receivable in the balance sheets
December 31, 2016
December 31, 2015
December 31, 2014
Allowance for obsolete and slow moving inventory deducted
from inventories in the balance sheets
December 31, 2016
December 31, 2015
December 31, 2014
Allowance for deferred tax assets not expected to be realized
December 31, 2016
December 31, 2015
December 31, 2014
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Deductions
Balance at
End of
Period
$
2,868
$
2,133
7,381
2,972
3,292
641
$
457 (1) $
2,557 (1)
5,889 (1)
$
14,486
$
756
$
2,365 (2) $
8,660
8,231
15,590
3,186
9,764 (2)
2,757 (2)
5,383
2,868
2,133
12,877
14,486
8,660
$ 186,993
$ 147,558
$
15,664 (4) $
318,887
132,021
120,958
94,026 (3)
41,820
39,054 (4)
30,757 (4)
186,993
132,021
(1) Uncollectible accounts written off.
(2) Obsolete inventory written off at cost, net of value received.
(3)
Includes $45.0 million in allowance against foreign tax credits transferred from Archrock pursuant to the Spin-off.
(4) Reflects expected realization of deferred tax assets and amounts credited to other accounts for stock-based compensation
excess tax benefits, expiring net operating losses, changes in tax rates and changes in currency exchange rates.
S-1
DIRECTORS
CORPORATE INFORMATION
Mark R. Sotir
Executive Chairman of the Board
Andrew J. Way
President and Chief Executive Officer
William M. Goodyear
James C. Gouin
John P. Ryan
Christopher T. Seaver
Richard R. Stewart
Ieda Gomes Yell
EXECUTIVE OFFICERS
Andrew J. Way
President and Chief Executive Officer
Mark R. Sotir
Executive Chairman
David A. Barta
Senior Vice President and
Chief Financial Officer
Roger George
Senior Vice President
Global Engineering and Product Lines
Christine M. Michel
Senior Vice President
Global Human Resources and Communication
Girish K. Saligram
Senior Vice President
Global Services
Valerie L. Banner
Vice President
General Counsel and Corporate Secretary
Annual Meeting
2017 Annual Meeting will be held April 27, 2017
at 8:30 a.m. central time at Exterran’s Corporate Office
Stock Trading
New York Stock Exchange symbol: EXTN
Stockholder Information Website
Additional information on Exterran, including securities filings,
press releases, Code of Business Conduct, Corporate Governance
Principles and Board Committee Charters, is available on our
website at www.exterran.com.
Transfer Agent-Registrar
American Stock Transfer and Trust Company LLC
6201 15th Avenue
Brooklyn, New York 11219 USA
(800) 937-5449 or (718) 921-8124
Independent Public Accounting Firm
Deloitte & Touch LLP
Houston, Texas USA
10-K/Investor Contact
Stockholders may obtain a copy, without charge, of Exterran’s
2016 Form 10-K, filed with the Securities and Exchange
Commission, by visiting our website at www.exterran.com or by
requesting a copy in writing to investor.relations@exterran.com
or Exterran’s Corporate Office, Attention: Investor Relations.
The certifications by our Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 are filed as exhibits to our 2016 Form 10-K. We
have also filed with the New York Stock Exchange the written
affirmation certifying that we are not aware of any violations by
Exterran of NYSE Corporate Governance Listing Standards.
Contact Board of Directors
To report a concern about Exterran’s accounting, internal
controls or auditing matters, or any other matter, to the Audit
Committee or non-management members of the Board of
Directors, send a detailed note, with relevant documents, to
Exterran’s Corporate Office, Attention: Mark R. Sotir, Executive
Chairman of the Board, or leave a message at 1-800-281-5439
(U.S. and Canada) or 1-832-554-4859 (outside U.S. and Canada),
request reverse charges.
Forward-Looking Statements
Certain statements contained in this Annual Report may
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
statements involve a number of risks, uncertainties and other
factors that could cause actual results to be materially different,
as discussed more fully elsewhere in this Annual Report and in
our filing with the Securities and Exchange Commission,
including our 2016 Form 10-K filed on March 10, 2017. Except
as required by law, we expressly disclaim any intention or
obligation to revise or update any forward looking statements
whether as a result of new information, future or otherwise.
Exterran Corporation
www.exterran.com