EXTERRAN CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of Exterran's financial
statements with a narrative from the perspective of management. The following
discussion and analysis of our financial condition and results of operations
should be read in conjunction with our unaudited financial statements and the
notes thereto included in the Condensed Consolidated Financial Statements in
Part I, Item 1 ("Financial Statements") of this report and in conjunction with
our Annual Report on Form 10-K for the year ended December 31, 2021 .
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; anticipated cost savings, future revenue, adjusted gross margin and other financial or operational measures related to our business and our primary business segments; the future value of our equipment; 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. The forward-looking statements also include assumptions about our proposed Merger with Enerflex (as described in greater detail within the 10-K and below). 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 materially from the expectations reflected in these forward-looking statements include the risk factors described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , and those set forth from time to time in our filings with theSecurities and Exchange Commission ("SEC"), which are available through our website at www.exterran.com and through theSEC's website at www.sec.gov, as well as the following risks and uncertainties:
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the potential impact of, and any potential developments related to, the proposed merger with Enerflex (defined below), including the risk that the conditions to the consummation of the Merger are not satisfied or waived, litigation challenging the Merger, the impact on our stock price, business, financial condition and results of operations if the Merger is not consummated, and the potential negative impact to our business and employee relationships due to the Merger; • 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;
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reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies;
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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;
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risks associated with natural disasters, pandemics and other public health crisis and other catastrophic events outside our control, including the impact of, and the response to, the ongoing COVID-19 pandemic;
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changes in currency exchange rates, including the risk of currency devaluations by foreign governments, and restrictions on currency repatriation;
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risks associated with cyber-based attacks or network security breaches;
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changes in international trade relationships, including the imposition of trade restrictions or tariffs relating to any materials or products (such as aluminum and steel) used in the operation of our business;
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risks associated with our operations, such as equipment defects, equipment malfunctions and environmental discharges;
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the risk that counterparties will not perform their obligations under their contracts with us or other changes that could impact our ability to recover our fixed asset investment;
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the financial condition of our customers;
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our ability to timely and cost-effectively obtain components necessary to conduct our business;
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employment and workforce factors, including our ability to hire, train and retain key employees;
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our ability to implement our business and financial objectives, including:
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winning profitable new business;
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timely and cost-effective execution of projects;
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enhancing or maintaining our asset utilization, particularly with respect to our fleet of compressors and other assets;
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integrating acquired businesses;
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generating sufficient cash to satisfy our operating needs, existing capital commitments and other contractual cash obligations, including our debt obligations; and
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accessing the financial markets at an acceptable cost;
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our ability to accurately estimate our costs and time required under our fixed price contracts;
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liability related to the use of our products, solutions and services;
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changes in governmental safety, health, environmental or other regulations, which could require us to make significant expenditures; and
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risks associated with our level of indebtedness, inflation and our 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.
OnJanuary 24, 2022 , we entered into an agreement and plan of merger withEnerflex US Holdings Inc. , aDelaware corporation and a wholly owned subsidiary of Enerflex Ltd., a Canadian corporation. For details regarding the merger, refer to Note 1, Description of Business and Basis of Presentation, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. GeneralExterran Corporation (together with its subsidiaries, "Exterran Corporation ," the "Company," "our," "we" or "us"), aDelaware corporation formed inMarch 2015 , is a global sustainable systems and process company offering solutions in the oil, gas, water and power markets. We are a leader in natural gas processing and treatment, produced water treatment and compression products, solutions and services, providing critical midstream infrastructure solutions to customers throughout the world while helping them reduce their flaring, emissions and fresh water usage. Our manufacturing facilities are located inthe United States of America ("U.S."),Singapore and theUnited Arab Emirates . Our compressor fleet has an available horsepower base of 908,866 hp, with 673,938 hp currently operating. We provide our products, solutions 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 three primary business lines: contract operations, aftermarket services and product sales. The nature and inherent interactions between and among our business lines provide us with opportunities to cross-sell and offer integrated product and service solutions to our customers. In our contract operations business line, we provide processing, treating, compression and water treatment services through the operation of our natural gas and crude oil production and process equipment, natural gas compression equipment and water treatment equipment for our customers. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, repair, overhaul, upgrade, startup and commissioning and reconfiguration services to customerswho own their own oil and natural gas compression, production, processing, treating and related equipment. In our product sales business line, we design, engineer, manufacture, install and sell equipment used in the treating and processing of crude oil, natural gas and water as well as natural gas compression packages to our customers throughout the world and for use in our contract operations business line. 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. 25
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We have continued to work toward our strategy to be a company that leverages our sustainable technology offering in treating natural gas and produced water to help our customers better utilize their natural resources while enhancing our operational excellence to provide complete systems and process solutions in energy and industrial applications. Over the past several years, we have made significant progress in this journey by taking actions to protect our core business, develop important organizational capabilities, commercialize new products, solutions and services and implement new processes to positionExterran for success. We have optimized our portfolio of products, solutions and services to better serve our global customers and help them improve their environmental impacts while providing a more attractive investment option for our investors. Our chief operating decision maker manages business operations, evaluates performance and allocates resources based on the Company's three primary business lines, which are also referred to as our segments. In order to more efficiently and effectively identify and serve our customer needs, we classify our worldwide operations into four geographic regions. TheNorth America region is primarily comprised of our operations in theU.S. TheLatin America region is primarily comprised of our operations inArgentina ,Bolivia ,Brazil andMexico . TheMiddle East andAfrica region is primarily comprised of our operations inBahrain ,Iraq ,Oman ,Nigeria and theUnited Arab Emirates . TheAsia Pacific region is primarily comprised of our operations inChina ,Indonesia ,Singapore andThailand .
We refer to the condensed consolidated 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.
Financial Results of Operations
Overview
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 along with spending within the midstream space. Spending by oil and natural gas exploration and production companies and midstream providers 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, produce, transport and treat these reserves. Although we believe our contract operations business is typically less impacted by short-term commodity prices than certain other energy products, solutions and service providers, changes in oil and natural gas exploration and production spending normally result in changes in demand for our products, solutions and services. Beginning in 2019, there has been a shift in the industry that was exacerbated by the COVID-19 pandemic. The industry has seen a structural change in the behavior of exploration and production producers and midstream providers, predominately in theU.S. , but internationally as well, to change their focus from growth to one emphasizing cash flow and returns. This has caused a significant reduction in their capital spending plans in order to drive incremental cash flow and has put constraints on the amount of new projects that customers sanction. In 2020 the COVID-19 pandemic created a demand shock to the system that further exacerbated the supply demand imbalance that was already taking place. As the global economy improved in 2021, commodity pricing improved due to increased demand and still constrained supplies as a result of the 2020 demand shock. In 2022, we are seeing increased interest inExterran products and services, but the landscape is still volatile, due to the continued uncertainty around COVID-19 and its variants as well as geopolitical events that have and may continue to impact oil and gas prices.
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, oil and natural gas production and processing and produced water
treatment solutions along with our customers' decisions to use our products,
solutions and services, use our competitors' products and services or own and
operate the equipment themselves.
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Aggregate booking activity levels for our product sales segment inNorth America and international markets during the six months endedJune 30, 2022 were$341.7 million , which represents an increase of 7040% compared to the six months endedJune 30, 2021 . The increase in bookings was primarily driven by the increased interest inExterran products and services as the global economy has started to see improvements post pandemic. Historically, oil, natural gas and natural gas liquids prices and the level of drilling and exploration activity inNorth America have been volatile. The Henry Hub spot price for natural gas was$6.54 per MMBtu atJune 30, 2022 , which was 71% and 73% higher than the prices atDecember 31, 2021 andJune 30, 2021 , respectively, and theU.S. natural gas liquid composite price was$12.62 per MMBtu for the month ofJune 2022 , which was 36% and 50% higher than the prices for the month ofDecember 2021 andJune 2021 , respectively. In addition, the West Texas Intermediate crude oil spot price as ofJune 30, 2022 was 43% and 47% higher than the price atDecember 31, 2021 and atJune 30, 2021 , respectively. Increased demand for energy and increases in commodity prices have caused increased demand for our products recently. Booking activity levels for our product sales segment inNorth America during the six months endedJune 30, 2022 were$62.2 million , up from$3.5 million in six months endedJune 30, 2021 . Longer-term fundamentals in our international markets partially depend on international oil and gas infrastructure projects, many of which are based on the 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 more on longer-term fundamentals that may be less tied to near term commodity prices than our North American customers. We believe the demand for our products, solutions and services in international markets will continue, and we expect to have opportunities to grow our international businesses. Booking activity levels for our product sales segment in international markets during the six months endedJune 30, 2022 were$279.5 million , up from$1.3 million in the six months endedJune 30, 2021 . The timing of customer orders and change in activity levels by our customers is difficult to predict given our customers longer-term decision making. As a result, our ability to project the anticipated activity level and timing of awards for our business, and particularly our product sales segment, is limited. We continue to monitor the global energy markets and industry capital spending levels, and will continue to control our expense levels as necessary to protect our profitability. Our level of capital spending largely depends on the demand for our contract operations services and the equipment required to provide such services to our customers. Based on opportunities we anticipate in international markets, we expect to invest more capital in our contract operations business in 2022 than we did in 2021. A decline in demand for oil and natural gas or prices for those commodities, or instability and rationalization of capital funding in the global energy markets could cause a reduction in demand for our products and services. 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.
Impact of COVID-19 on our Business
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption across most industries. Efforts to mitigate the spread of COVID-19 have also resulted in decreased energy demand and additional weakness in energy pricing in 2020. In 2021 energy demand and energy pricing improved as the world economies began to recover; demand forExterran products began to show improvement in late 2021 and has continued during the first half of 2022.
The Company took proactive steps earlier in the first quarter of 2020 to enable and verify the ability to ensure the safety of our employees while still carrying on the majority of business functions. These steps included:
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Establishing a daily global operating process to identify, monitor and discuss impacts to our business whether originating from governmental actions or as a direct result of employee illness;
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Investing in additional IT capabilities to enable employees to work remotely;
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Closing operations where and until assessments were completed to ensure we could operate in a safe manner; and
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Reestablishing operations once safety mechanisms were in place. This included
the acquisition of additional personal protective equipment and establishing
screening and other workplace processes.
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To date our actions in response to the pandemic and the primary impacts on our business are summarized below:
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As most of our operations are considered essential by local government authorities, our service operations that are provided under long-term contracts have to a large extent continued to operate under substantially normal conditions;
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We are following local governmental guidance for viral spread mitigation,
including having many of our employees
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We have put in place additional health and safety measures to protect our
employees, customers and other parties
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Although early in 2020 we recorded significant new product sales bookings, as 2020 and 2021 progressed, we saw decreased purchasing activity from our customers which we believe was due to both the work at home mitigation measures our customers are also taking and uncertainty in commodity prices. With the improvements in energy pricing and energy demand we have seen improved booking activity beginning in late 2021 and continuing during the first half of 2022;
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Given travel restrictions and other mitigation efforts, certain of our employees were not able to travel to work assignments, therefore although we have taken additional steps to be able to continue to provide services required by our customers, some services were delayed until mitigation measures were eased;
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While our operations have been impacted by lower product sales bookings in recent years, we have continued our cost reduction efforts which began prior to the current pandemic. We have continued our efforts to optimize our cost structure to align with the expected demand in our business including making work force reductions;
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As many of our suppliers increased delivery times including as a result of disruptions, we are working with customers on revising expected due-dates for delivery, and have pushed out the timing of our recognition of revenue and adjusted gross margin on certain projects as a result of these and other delays caused by the pandemic; and
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We have participated in certain COVID-19 tax incentive programs in certain jurisdictions in which we operate. These primarily allowed a delay in filing and/or paying of taxes for short periods of time. In theU.S. , we filed a request for refund and received a$4.9 million Alternative Minimum Tax refund in 2020, which was earlier than originally scheduled due to the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). We have not participated in any government sponsored loan programs under the CARES Act. We are unable to predict the impact that COVID-19 and the governmental and third party response to the COVID-19 pandemic and its variant strains will have on our long-term financial position and operating results due to numerous uncertainties. The long-term impact of the pandemic on our customers and the global economy will depend on various factors, including the scope, severity and duration of the pandemic. A prolonged economic downturn or recession resulting from the pandemic could adversely affect many of our customers which could, in turn, adversely impact our business, financial condition and results of operations. We will continue to assess the evolving impact of the COVID-19 pandemic; whether due to the spread of any variants of the virus or otherwise; and intend to make adjustments to its responses accordingly.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in accordance with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements included in the Form 10-K for the year endedDecember 31, 2021 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The Company's critical accounting policies that are impacted by judgments, assumptions and estimates are described in Part II, Item 7,Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . SinceDecember 31, 2021 , with exception to sales-type lease recognition, there have been no material changes in the Company's accounting policies that are impacted by judgments, assumptions and estimates.
Operating Highlights
The following table summarizes our contract operations and product sales backlog (in thousands):
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December 31,
June 30, 2022 2021 June 30, 2021
Contract Operations Backlog:
Contract operations services $ 1,518,934 $ 1,399,858 $ 1,186,943
Product Sales Backlog:
Processing and treating equipment 449,557 289,718 374,173
Compression equipment(1) 39,145 4,036 5,800
Other product sales 23,133 22,616 30,817
Total product sales backlog $ 511,835 $ 316,370 $ 410,790
(1)
Compression equipment includes sales to customers outside of the
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 Belleli EPC
business and our
Revenue.
Revenue during the three months endedJune 30, 2022 and 2021 was$221.3 million and$146.2 million , respectively. The increase in revenue during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was due to increases in revenue in all three segments. The increase in our contract operations segment was primarily due to sales-type lease recognition of contract operations contracts inLatin America andMiddle East andAfrica regions, partially offset by decreases in theLatin America andMiddle East andAfrica regions due to contract stops. The increase in aftermarket services revenue was primarily due to increases in revenue in theNorth America andLatin America regions related to part sales and overhaul services. The increase in our product sales segment was primarily due to increases in processing and treatment revenue as well as compression revenue. Revenue during the six months endedJune 30, 2022 and 2021 was$413.0 million and$282.4 million , respectively. The increase in revenue during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was due to increases in revenue in all three segments. The increase in our contract operations segment was primarily due sales-type lease recognition of contract operations contracts inLatin America andMiddle East andAfrica regions, partially offset by a decrease in revenue due to contract stops primarily in theMiddle East andAfrica region. The increase in our product sales segment was primarily due to increases in processing and treatment equipment revenue, partially offset by decreases in water solutions revenue. The increase in aftermarket services revenue was primarily due to an increase in revenue related to part sales in theNorth America region, partially offset by a decrease in part sales in theAsia Pacific region.
Net loss.
We generated a net loss of$7.7 million and$35.2 million during the three months endedJune 30, 2022 and 2021, respectively. The decrease in net loss during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was primarily due to decreases in depreciation and amortization expense and impairment expense and increases in adjusted gross margin for our contract operations and aftermarket services segment. This was partially offset by increases in, selling, general and administrative ("SG&A") expense, other expenses and interest expense and decreases in adjusted gross margin for our product sales segments. We generated a net loss of$37.3 million and$65.1 million during the six months endedJune 30, 2022 and 2021, respectively. The decrease in net loss during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily due to decreases in depreciation and amortization expense and impairment expense and increases in adjusted gross margin for all three segments. This was partially offset by increases in SG&A expense, merger expenses and interest expense. Net loss during the six months endedJune 30, 2022 included loss from discontinued operations, net of tax, of$0.1 million and net loss during the six months endedJune 30, 2021 included loss from discontinued operations, net of tax, of$1.0 million due to ourU.S. compression fabrication business activity.
EBITDA, as adjusted.
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Our EBITDA, as adjusted, was$53.8 million and$35.1 million during the three months endedJune 30, 2022 and 2021, respectively. EBITDA, as adjusted, during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 increased primarily due to an increase in adjusted gross margin for our contract operations and aftermarket segments, partially offset by an increase in SG&A expense and other expenses. Our EBITDA, as adjusted, was$83.5 million and$68.2 million during the six months endedJune 30, 2022 and 2021, respectively. EBITDA, as adjusted, during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 increased primarily due to increases in adjusted gross margin for all three segments, partially offset by an increase in SG&A expense. EBITDA, as adjusted, is a non-GAAP financial measure. For a reconciliation of EBITDA, as adjusted, to net loss, its most directly comparable financial measure calculated and presented in accordance with GAAP, please read "- Non-GAAP Financial Measures" included elsewhere in this Quarterly Report. The Three Months EndedJune 30, 2022 Compared to the Three Months EndedJune 30, 2021 Contract Operations (dollars in thousands) Three Months Ended June 30, 2022 2021 Change % Change Revenue$ 120,463 $ 87,498 $ 32,965 38 % Cost of sales (excluding depreciation and amortization expense) 37,938 27,764 10,174 37 % Adjusted gross margin$ 82,525 $ 59,734 $ 22,791 38 % Adjusted gross margin percentage (1) 69 % 68 % 1 % 1 % (1)
Defined as adjusted gross margin divided by revenue.
The increase in revenue during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was primarily due to an increase of$36.4 million due to sales-type lease recognition of contract operations contracts in theLatin America andMiddle East andAfrica and an increase of$4.4 million due to a project in theMiddle East andAfrica region that was not operating in the prior year period. These revenue increases were partially offset by decreases of$5.6 million due to contract stops primarily in theMiddle East andAfrica andLatin America regions, a decrease of$1.4 million due to the impact of devaluation on the Argentine Peso during the current period and a decrease of$1.4 million due to deferred revenue recognition adjustment as a result of a contract extension in theLatin America region. Adjusted gross margin increased during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 primarily due to the revenue increases explained above, which were offset by cost of sales increases due to the book value of assets related to sales-type leases in theLatin America andMiddle East andAfrica regions and increases in labor costs and repairs and maintenance incurred in theLatin America region. Adjusted gross margin percentage during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 increased primarily due to sales-type lease recognition in the current period as explained above. Aftermarket Services (dollars in thousands) Three Months Ended June 30, 2022 2021 Change % Change Revenue$ 36,179 $ 29,401 $ 6,778 23 % Cost of sales (excluding depreciation and amortization expense) 27,204 23,422 3,782 16 % Adjusted gross margin$ 8,975 $ 5,979 $ 2,996 50 % Adjusted gross margin percentage 25 % 20 % 5 % 25 % The increase in revenue during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was primarily due to an increase in part sales in theNorth America region and an increase in overhaul services in theLatin America region, partially offset by decreases in part sales in theAsia Pacific region. Adjusted gross margin and adjusted gross margin percentage during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 increased primarily due to the revenue increases explained above. 30
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Product Sales
(dollars in thousands)
Three Months Ended
June 30,
2022 2021 Change % Change
Revenue $ 64,626 $ 29,300 $ 35,326 121 %
Cost of sales (excluding depreciation
and amortization expense) 62,840 27,109 35,731 132 %
Adjusted gross margin $ 1,786 $ 2,191 $ (405 ) (18 )%
Adjusted gross margin percentage 3 % 7 % (4 )% (57 )%
The increases in revenue during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was primarily due to increases of$33.9 million in processing and treating revenue and$4.5 million compression revenue mainly in theMiddle East andAfrica due to further project progress and in theNorth America regions due to projects that were not operating in the prior period. This was partially offset by decreases of$3.2 million in other product sales revenue. Adjusted gross margin and adjusted gross margin percentage decreased during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 due to higher expenses on a specific project in the current period. Costs and Expenses (dollars in thousands) Three Months Ended June 30, 2022 2021 Change % Change Selling, general and administrative$ 38,125 $ 33,630 $ 4,495 13 % Depreciation and amortization 36,877 45,709 (8,832 ) (19 )% Impairment - 7,959 (7,959 ) (100 )% Merger expenses 1,045 - 1,045 - Restructuring and other charges (182 ) (370 ) 188 (51 )% Interest expense 11,897 10,357 1,540 15 % Other (income) expense, net 2,295 (3,159 ) 5,454 (173 )%
Selling, general and administrative
SG&A expense increased during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 primarily due to an estimated legal liability and increases in network related expenses recorded in the current year period. SG&A expense as a percentage of revenue was 17% and 23% during the three months endedJune 30, 2022 and 2021, respectively.
Depreciation and amortization
Depreciation and amortization expense during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 decreased primarily due to the reversal of demobilization expense due to a contractual change in theMiddle East andAfrica region, assets fully depreciating in theMiddle East andAfrica andLatin America regions, and due to a change in contract terms in the Latin American region. InMiddle East andAfrica the reversal of the demobilization expense drove a decrease of approximately$4 million . The decrease due to assets fully depreciating in theMiddle East andAfrica andLatina America regions drove a decrease of$6.5 million . Changes in contract terms in theLatin America region drove a change of$1.4 million . This was partially offset by an increase of$3.4 million in depreciation for equipment on a contract operations project in theMiddle East andAfrica region that was not operating in the prior year.
Impairment
No impairment expense was recorded during the three months endedJune 30, 2022 . During the three months endedJune 30, 2021 , we determined that there was no visibility to continuing a contract with a customer in theLatin America region. This contract included installation costs, deferred start-up costs and demobilization costs that were previously capitalized where it is highly unlikely we will generate future cash flows. As a result, we recorded an$8.0 million asset impairment to reduce the book value of these assets to zero, which is its estimated fair value as ofJune 30, 2021 . 31
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Merger Expenses, Restructuring and other charges
The energy industry's focus on capital discipline and improving returns has caused delays in the timing of new equipment orders. As a result, in the third quarter of 2019, we announced a cost reduction plan primarily focused on workforce reductions. During the three months endedJune 30, 2022 , we released an unused portion of previously expensed restructuring charges of$0.2 million and during the three months endedJune 30, 2021 , we released unused portion of these charges of$0.4 million . InJanuary 2022 , Enerflex andExterran announced a proposed merger to create an integrated global provider of energy infrastructure. As a result of this deal, we have incurred legal and other costs and will continue to incur such costs until the deal is finalized, which we expect to happen in the third quarter of 2022. We incurred merger expenses associated with these activities of$1.0 million for the three months endedJune 30, 2022 . These charges are reflected as merger expenses in our statements of operations and accrued liabilities on our balance sheets. We estimate the total merger expenses will be approximately$18 - 23 million and represents our best estimate based on the facts and circumstances known at this time.
Interest expense
The increase in interest expense during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was primarily due to a higher average balance of long-term debt. During the three months endedJune 30, 2022 and 2021, the average daily outstanding borrowings of long-term debt were$669.9 million and$586.8 million , respectively.
Other (income) expense, net
The change in other (income) expense, net, was primarily due to foreign currency losses of$7.2 million during the three months endedJune 30, 2022 compared to foreign currency gains of$0.1 million during the three months endedJune 30, 2021 . Foreign currency losses included translation losses of$0.9 million and gains of$2.3 million during the three months endedJune 30, 2022 and 2021, respectively, related to the currency remeasurement of our foreign subsidiaries' non-functional currency denominated intercompany obligations. This was partially offset by an increase in interest income of$1.5 million in the current period. Income Taxes (dollars in thousands) Three Months Ended June 30, 2022 2021 Change % Change Provision for (benefit from) income taxes$ 11,379 $ 8,836 $ 2,543 29 % Effective tax rate 352.4 % (33.7 )% 386.0 % (1146 )% 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. Our effective tax rate is also affected by valuation allowances recorded against loss carryforwards in theU.S. and certain other jurisdictions, foreign withholding taxes and changes in foreign currency exchange rates. The following items had the most significant impact on the difference between our statutoryU.S. federal income tax rate of 21% and our effective tax rate of 352.4% for the three months endedJune 30, 2022 : (i) a 220.9% positive impact resulting from foreign currency devaluations inArgentina , (ii) an (89)% negative impact resulting from foreign taxes in excess of theU.S. tax rate and other rate drivers, (iii) a 10.1% positive impact resulting from deemed inclusions in theU.S. , (iv) a 63% positive impact resulting from unrecognized tax benefits and (v) an 88.8% positive impact resulting from an addition of valuation allowances againstU.S. deferred tax assets. Discontinued Operations (dollars in thousands) 32
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Three Months Ended
June 30,
2022 2021 Change % Change
Loss from discontinued operations, net
of tax $ 490 $ (156 ) $ 646 (414 )%
Loss from discontinued operations, net of tax, includes our Belleli EPC business
and our
Loss from discontinued operations, net of tax, during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 was a$0.3 million decrease in loss forU.S. compression and a$0.9 million increase in income for Belleli EPC. For further details on our discontinued operations, see
Note 3 to the Financial Statements.
The Six Months EndedJune 30, 2022 Compared to the Six Months EndedJune 30, 2021 Contract Operations (dollars in thousands) Six Months Ended June 30, 2022 2021 Change % Change Revenue$ 204,264 $ 168,512 $ 35,752 21 % Cost of sales (excluding depreciation and amortization expense) 67,265 51,108 16,157 32 % Adjusted gross margin$ 136,999 $ 117,404 $ 19,595 17 % Adjusted gross margin percentage (1) 67 % 70 % (3 )% (4 )% ___________________ (1)
Defined as adjusted gross margin divided by revenue.
The increase in revenue during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily due to$36.4 million in sales-type lease recognition of contract operations contracts in theLatin America andMiddle East andAfrica and$8.8 million attributed to a project in theMiddle East andAfrica region that was not operating in the prior period. These revenue increases were partially offset by a decrease of$10.5 million in contract stops, primarily in theMiddle East andAfrica region. Adjusted gross margin increased during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 due to the revenue changes explained above, partially offset by cost of sales increases in labor costs incurred in theLatin America region, increases due to the derecognition of assets related to the sales-type leases in theLatin America andMiddle East andAfrica regions, and increases in operating expenditures. Adjusted gross margin percentage during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 decreased primarily due to an increase in cost of sales in the current year period as explained above, partially offset by increases in revenue noted above. Aftermarket Services (dollars in thousands) Six Months Ended June 30, 2022 2021 Change % Change Revenue$ 62,442 $ 54,521 $ 7,921 15 % Cost of sales (excluding depreciation and amortization expense) 47,025 43,434 3,591 8 % Adjusted gross margin$ 15,417 $ 11,087 $ 4,330 39 % Adjusted gross margin percentage 25 % 20 % 5 % 25 % The increase in revenue during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily due to increases in part sales in theNorth America region and overhaul services in theLatin America region, partially offset by a decrease in part sales in theAsia Pacific andMiddle East andAfrica regions. Adjusted gross margin and adjusted gross margin percentage during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 increased primarily due to the revenue increases explained above. Product Sales (dollars in thousands) 33
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Six Months Ended
June 30,
2022 2021 Change % Change
Revenue $ 146,310 $ 59,330 $ 86,980 147 %
Cost of sales (excluding depreciation
and amortization expense) 133,155 52,682 80,473 153 %
Adjusted gross margin $ 13,155 $ 6,648 $ 6,507 98 %
Adjusted gross margin percentage 9 % 11 % (2 )% (18 )%
The increase in revenue during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily due to an increase of$91.5 million in processing and treating equipment revenue, partially offset by a decrease of$4.5 million in water solutions revenue. The increase in processing and treating equipment revenue was mainly due to the increase in revenue in theMiddle East andAfrica ,North America , andLatin America regions in the current year period. The decrease in water solutions revenue was due to lower project activity in theMiddle East andAfrica region. Adjusted gross margin increased during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 due to revenue increases explained above. Adjusted gross margin percentage decreased during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 due to the higher process and treating equipment expenses for a project in theMiddle East andAfrica region during the current year period. Costs and Expenses (dollars in thousands) Six Months Ended June 30, 2022 2021 Change % Change Selling, general and administrative$ 80,005 $ 66,261 $ 13,744 21 % Depreciation and amortization 77,232 88,208 (10,976 ) (12 )% Impairment - 7,959 (7,959 ) (100 )% Merger expenses 5,033 - 5,033 - Restructuring and other charges (182 ) 254 (436 ) (172 )% Interest expense 22,946 20,321 2,625 13 % Other (income) expense, net 665 (98 ) 763 (779 )%
Selling, general and administrative
SG&A expense increased during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily due to increases in compensation, legal and network related expenses in the current year period, in addition to an estimated legal liability recorded in the second quarter of 2022. SG&A expense as a percentage of revenue was 19% and 23% during the six months endedJune 30, 2022 and 2021, respectively.
Depreciation and amortization
Depreciation and amortization expense during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 decreased primarily due to the reversal of demobilization expense due to a contractual change in theMiddle East andAfrica region, assets fully depreciating in theMiddle East andAfrica andLatin America regions, and due to a change in contract terms in the Latin American region. InMiddle East andAfrica the reversal of the demobilization expense drove a decrease of approximately$3.8 million . The decrease due to assets fully depreciating in theMiddle East andAfrica andLatin America regions drove a decrease of$10.9 million , and in theLatin American Region changes in contract terms drove a change of approximately$2.6 million . This was partially offset by an increase of$6.8 million in depreciation for equipment on a contract operations project in theMiddle East andAfrica region that was not operating in the prior year.
Impairment
No impairment expense was recorded during the six months endedJune 30, 2022 . During the six months endedJune 30, 2021 , we determined that there was no visibility to continuing a contract with a customer in theLatin America region. This contract included installation costs, deferred start-up costs and demobilization costs that were previously capitalized where it is highly unlikely we will generate future cash flows. As a result, we recorded an$8.0 million asset impairment to reduce the book value of these assets to zero, which is its estimated fair value as ofJune 30, 2021 . 34
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Merger Expenses, Restructuring and other charges
The energy industry's focus on capital discipline and improving returns has caused delays in the timing of new equipment orders. As a result, in the third quarter of 2019, we announced a cost reduction plan primarily focused on workforce reductions. During the six months endedJune 30, 2021 , we incurred restructuring and other charges of$0.3 million associated with these activities. We released an unused portion of previously expensed restructuring charges of$0.2 million during the six months endedJune 30, 2022 . InJanuary 2022 , Enerflex andExterran announced a proposed merger to create an integrated global provider of energy infrastructure. As a result of this deal, we have incurred legal and other costs and will continue to incur such costs until the deal is finalized, which we expect to happen in the third quarter of 2022. We incurred merger expenses associated with these activities of$5.0 million for the six months endedJune 30, 2022 . These charges are reflected as merger expenses in our statements of operations and accrued liabilities on our balance sheets. We estimate the total merger expenses will be approximately$18 - 23 million and represents our best estimate based on the facts and circumstances known at this time.
Interest expense
The increase in interest expense during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily due to a higher average balance of long-term debt. During the six months endedJune 30, 2022 and 2021, the average daily outstanding borrowings of long-term debt were$637.5 million and$582.6 million , respectively.
Other (income) expense, net
The change in other expense, net, was primarily due to an increase of$2.8 million in interest income in the current year period. This is almost fully offset by foreign currency losses$9.1 million during the six months endedJune 30, 2022 compared to foreign currency losses of$5.0 million during the six months endedJune 30, 2021 . Foreign currency losses and gains included translation gains of$1.4 million and$0.8 million during the six months endedJune 30, 2022 and 2021, respectively, related to the currency remeasurement of our foreign subsidiaries' non-functional currency denominated intercompany obligations. Income Taxes (dollars in thousands) Six Months Ended June 30, 2022 2021 Change % Change Provision for income taxes$ 17,148 $ 16,292 $ 856 5 % Effective tax rate (85.2 )% (34.1 )% (51.1 )% 150 % 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. Our effective tax rate is also affected by valuation allowances recorded against loss carryforwards in theU.S. and certain other jurisdictions, foreign withholding taxes and changes in foreign currency exchange rates. The following items had the most significant impact on the difference between our statutoryU.S. federal income tax rate of 21% and our effective tax rate of (85.2)% for the six months endedJune 30, 2022 : (i) a (47.8)% negative impact resulting from foreign currency devaluations inArgentina , (ii) a 10.5% positive impact resulting from foreign taxes in excess of theU.S. tax rate and other rate drivers, (iii) a (4.0)% negative impact resulting from deemed inclusions in theU.S. , (iv) a (15.1)% negative impact resulting from unrecognized tax benefits and (v) a (36.7)% negative impact resulting from an addition of valuation allowances againstU.S. deferred tax assets. Discontinued Operations (dollars in thousands) 35
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Six Months Ended
June 30,
2022 2021 Change % Change
Loss from discontinued operations, net
of tax $ (29 ) $ (1,029 ) $ 1,000 (97 )%
Loss from discontinued operations, net of tax, includes our Belleli EPC business
and our
Loss from discontinued operations, net of tax, during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 decreased due to a$1.1 million decrease in loss from Belleli EPC. The decrease in loss in Belleli EPC was primarily driven by an income tax benefit recorded in the current year period. This was partially offset by the increase in loss inU.S. compression business, primarily driven by the decrease in activity for the business. For further details on our discontinued operations, see Note 3 to the Financial Statements.
Liquidity and Capital Resources
Our unrestricted cash balance was$57.1 million atJune 30, 2022 compared to$56.3 million atDecember 31, 2021 . Working capital decreased to$96.1 million atJune 30, 2022 from$118.3 million atDecember 31, 2021 . The decrease in working capital was primarily due to increases in contract liabilities, decreases in inventory and increases in accounts payable, partially offset by increases in accounts receivable, cash and current investment in sales-type lease. The decrease in contract liabilities was primarily driven by deferred revenue recognition of a contract operations project in theLatin America region. The decrease in inventory was primarily driven by the progression of product sales activity. The increase in accounts payable was driven by the increase in project activity in theMiddle East andAfrica ,Latin America andNorth America regions. The increase in accounts receivables was due to the timing of collections. The increase in cash is explained below within the operating, investing and financing activities. The increase in current investment in sales-type leases is due to the recognition of sales type leases in theMiddle East andAfrica andLatin America regions.. Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized in the following table (in thousands): Six Months Ended June 30, 2022 2021 Net cash provided by (used in) continuing operations: Operating activities$ (36,980 ) $ 11,023 Investing activities (63,664 ) (11,626 ) Financing activities 109,627 11,475 Effect of exchange rate changes on cash, cash equivalents and restricted cash (558 ) (136 ) Discontinued operations (1,361 ) (7,993 ) Net change in cash, cash equivalents and restricted cash$ 7,064 $ 2,743 Operating Activities. The increase in net cash used in operating activities during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily attributable to changes in assets and liabilities. Asset and liability changes during the six months endedJune 30, 2022 included an increase of$23.2 million in accounts receivable and notes, a decrease of$22.2 million in inventory, an increase of$35.5 million in current investment in sales-type leases, a decrease of$56.7 million in contract assets and contract liabilities, net, and a decrease of$10.6 million in accounts payable and accrued liabilities. Asset and liability changes during the six months endedJune 30, 2021 included a decrease of$13.0 million in contract assets and contract liabilities, net, an increase of$5.5 million in accounts receivable and notes and an increase of$11.4 million in accounts payable and accrued liabilities. Investing Activities. The increase in net cash used in investing activities during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily attributable to a$51.4 million increase in capital expenditures. The increase in capital expenditures was primarily driven by the timing of awards and growth in capital expenditures for new contract operations projects. Financing Activities. The increase in net cash provided by financing activities during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily attributable to increases in net borrowings of$99.3 million on our long-term debt.
Discontinued Operations. The decrease in net cash used in discontinued
operations during the six months ended
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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 installation costs on contract operations services projects and acquisition costs of new compressor units and processing and treating equipment that we add to our contract operations fleet. 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. 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$195 million to$210 million in capital expenditures during 2022, including (1) approximately$175 million to$185 million on contract operations growth capital expenditures based on contracts currently in our backlog and (2) approximately$20 million to$25 million on equipment maintenance capital related to our contract operations business and other capital expenditures. Historically, we have financed capital expenditures with a combination of net cash provided by operating and financing activities. Our ability to access the capital markets may be restricted at the time when we would like, or need, to do so, which could have an adverse impact on the cost and access to capital and our ability to maintain our operations and to grow. For example, COVID-19 disrupted the broader financial markets and the capital markets for energy service related companies continue to be impacted. If any of our lenders become unable to perform their obligations under the Amended Credit Agreement, 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 other contractual cash obligations, including our debt obligations. However, if net cash provided by operating activities and borrowings under our revolving credit facility are not sufficient, we may seek additional debt or equity financing. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and financial markets and created significant volatility and disruption across most industries. The broader implications of COVID-19 on our customers and our long-term future results of operations and overall financial condition remains uncertain. Long-Term Debt. We and our wholly owned subsidiary,Exterran Energy Solutions, L.P. ("EESLP"), are parties to an amended and restated credit agreement (the "Amended Credit Agreement") consisting of a$650.0 million revolving credit facility expiring inOctober 2023 . During the six months endedJune 30, 2022 and 2021, the average daily borrowings of long-term debt were$637.5 million and$582.6 million , respectively. The weighted average annual interest rate on outstanding borrowings under our revolving credit facility atJune 30, 2022 and 2021 was 4.3% and 3.1%, respectively. LIBOR and certain other "benchmarks" have been subject of national, international and other regulatory guidance and proposals for reform. In particular, onJuly 27, 2017 , theUnited Kingdom's Financial Conduct Authority (the "FCA"), which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. OnMarch 5, 2021 , theFCA announced that USD LIBOR will no longer be published afterJune 30, 2023 . It is unclear whether, at that time, LIBOR will cease to exist or if new methods of calculating LIBOR will be established. Central banks and regulators in a number of major jurisdictions (for example,U.S. ,United Kingdom ,European Union ,Switzerland , andJapan ) have convened working groups to find and implement the transition to suitable replacement benchmarks. The Alternative Reference Rates Committee, a steering committee consisting of largeU.S. financial institutions 37
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convened by theU.S. Federal Reserve Board and theFederal Reserve Bank of New York , has recommended replacing LIBOR with the Secured Overnight Financing Rate ("SOFR"), an index supported by short-termTreasury repurchase agreements. We are continuing to evaluate and monitor financial and non-financial impacts and risks that may result when LIBOR rates are no longer published. As ofJune 30, 2022 , we had$52.4 million in outstanding letters of credit under our revolving credit facility, and taking into account guarantees through outstanding letters of credit, we had undrawn capacity of$261.6 million under our revolving credit facility. Our Amended Credit Agreement limits our Total Debt to EBITDA ratio (as defined in the Amended Credit Agreement) on the last day of the fiscal quarter to no greater than 4.50 to 1.0. As a result of this limitation,$146.3 million of the$261.6 million of undrawn capacity under our revolving credit facility was available for additional borrowings as ofJune 30, 2022 . We have agreements with financial institutions under which approximately$47.0 million of letters of credit or bank guarantees were outstanding as ofJune 30, 2022 . These are put in place in certain situations to guarantee our performance obligations under contracts with counterparties. The Amended 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 Amended Credit Agreement) of 2.25 to 1.00; a maximum total leverage ratio (as defined in the Amended Credit Agreement) of 4.50 to 1.00; and a maximum senior secured leverage ratio (as defined in the Amended Credit Agreement) of 2.75 to 1.00. As ofJune 30, 2022 , we maintained a 7.4 to 1.0 interest coverage ratio, a 3.7 to 1.0 total leverage ratio and a 1.8 to 1.0 senior secured leverage ratio. As ofJune 30, 2022 , we were in compliance with all financial covenants under the Amended Credit Agreement. InApril 2017 , our 100% owned subsidiariesEESLP and EES Finance Corp. issued the 8.125% senior unsecured notes due 2025 (the "2017 Notes"), which consisted of$375.0 million aggregate principal amount of the senior unsecured notes which have$350.0 million outstanding as ofJune 30, 2022 . We guarantee the 2017 Notes on a senior unsecured basis. We may redeem the 2017 Notes at any time in cash, in whole or part, at certain redemption prices, including the applicable make-whole premium plus accrued and unpaid interest, if any, to the date of redemption. We may from time to time seek to retire, extend or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such extensions, 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. Unrestricted Cash. Of our$57.1 million unrestricted cash balance atJune 30, 2022 ,$56.2 million was held by our non-U.S. subsidiaries. In the event of a distribution of earnings to theU.S. in the form of dividends, we may be subject to foreign withholding taxes. 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 theU.S. , the available borrowing capacity under our revolving credit facility and the repayment of intercompany liabilities from our non-U.S. subsidiaries will be sufficient to fund the cash needs of ourU.S. operations for the foreseeable future. Share Repurchase Program. OnFebruary 20, 2019 , our board of directors approved a share repurchase program under which the Company is authorized to purchase up to$100.0 million of its outstanding common stock throughFebruary 2022 . Shares of common stock acquired through the repurchase program are held in treasury at cost. During the six months endedJune 30, 2022 and 2021, we did not repurchase any shares under this program. 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.
Supplemental Guarantor Financial Information
In
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Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis byExterran Corporation ("Parent"). The 2017 Notes and Parent's guarantee are:
•
Senior unsecured obligations of each of the Issuers and the Parent, as applicable;
•
Equal in right of payment with all of the existing and future senior unsecured indebtedness and senior unsecured guarantees of each of the Issuers and the Parent, as applicable;
•
Senior in right of payment to all subordinated indebtedness and subordinated guarantees of each of the Issuers and the Parent, as applicable;
•
Effectively junior in right of payment to all existing and future secured indebtedness and secured guarantees of each of the Issuers and the Parent, as applicable, to the extent of the value of the assets securing such indebtedness or guarantees; and
•
Structurally junior in right of payment to all existing and future indebtedness, guarantees and other liabilities (including trade payables) and any preferred equity of each of the Parent's subsidiaries (other than the Issuers) that are not guarantors of the 2017 Notes. Parent's guarantee will be automatically and unconditionally released and discharged upon (i) the merger of the Parent into the Issuers, (ii) a legal defeasance, covenant defeasance or satisfaction and discharge of the indenture governing the 2017 Notes or (iii) the liquidation or dissolution of the Parent, provided in each case no default or event of default has occurred and is continuing under the indenture governing the 2017 Notes. Federal bankruptcy and state fraudulent transfer laws permit a court to void all or a portion of the obligations of the Parent pursuant to its guarantee, or to subordinate the Parent's obligations under its guarantee to claims of the Parent's other creditors, reducing or eliminating the ability to recover under the guarantee. Although laws differ among jurisdictions, in general, under applicable fraudulent transfer or conveyance laws, the guarantee could be voided as a fraudulent transfer or conveyance if (i) the guarantee was incurred with the intent of hindering, delaying or defrauding creditors or (ii) the Parent received less than reasonably equivalent value or fair consideration in return for incurring the guarantee and either (x) the Parent was insolvent or rendered insolvent by reason of the incurrence of the guarantee or subsequently became insolvent for other reasons, (y) the incurrence of the guarantee left the Parent with an unreasonably small amount of capital to carry on the business, or (z) the Parent intended to, or believed that it would, incur debts beyond its ability to pay such debts as they mature. A court would likely find that Parent did not receive reasonably equivalent value or fair consideration for its guarantee if it determined that the Parent did not substantially benefit directly or indirectly from the issuance of the 2017 Notes. If a court were to void a guarantee, noteholders would no longer have a claim against the Parent. In addition, the court might direct noteholders to repay any amounts that you already received from the Parent. Parent's guarantee contains a provision intended to limit the Parent's liability under the guarantee to the maximum amount that the Parent could incur without causing the incurrence of obligations under its guarantee to be deemed a fraudulent transfer. This provision may not be effective to protect the guarantee from being voided under fraudulent transfer law. All consolidated subsidiaries ofExterran other than the Issuers are collectively referred to as the "Non-Guarantor Subsidiaries." The 2017 Notes are structurally subordinated to any indebtedness and other liabilities (including trade payables) of any of the Non-Guarantor Subsidiaries. The Non-Guarantor Subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the 2017 Notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Holders of the 2017 Notes will have no claim as a creditor against any Non-Guarantor Subsidiaries. In the event of bankruptcy, liquidation or reorganization of any of the Non-Guarantor Subsidiaries, such subsidiaries will pay current outstanding obligations to the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Parent or the Issuers. As a result, in the context of a bankruptcy, liquidation or reorganization, holders of the 2017 Notes would likely receive less, ratably, than holders of indebtedness and other liabilities (including trade payables of such entities). The Parent and EESLP are also parties to our credit agreement, which covenants with which the Parent, 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. These covenants may impact the ability of the Parent and EESLP to repay the 2017 Notes or amounts owing under Parent's guarantee.
Summarized Financial Information (in thousands)
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As a result of the Parent's guarantee, we are presenting the following summarized financial information for the Issuers' and Parent (collectively referred to as the "Obligated Group ") pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Parent and the Issuers, presented on a combined basis, have been eliminated and information for the Non-Guarantor Subsidiaries have been excluded. Amounts due from or due to the Non-Guarantor Subsidiaries and other related parties, as applicable, have been separately presented within the summarized financial information. June 30, 2022 Summarized Statement of Operations: Revenues(1)$ 113,490 Cost of sales(1) 83,916 Loss from continuing operations (72,573 ) Net loss (73,338 ) (1) Includes revenue and cost of sales for intercompany sales from theObligated Group the Non-Guarantor Subsidiaries during the six months endedJune 30, 2022 . June 30, 2022 December 31, 2021 Summarized Balance Sheet: ASSETS Intercompany receivables due from non-guarantors$ 281,907 $ 184,071 Total current assets 414,935 306,396 Total long-term assets 171,660 189,508 LIABILITIES AND STOCKHOLDERS' EQUITY Intercompany payables due to non-guarantors$ 320,580 $ 337,898 Total current liabilities 448,204 422,162 Long-term liabilities 725,615 622,040
Non-GAAP Financial Measures
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, gain
on extinguishment of debt, 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,
gain on extinguishment of debt, 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.
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 or any other measure 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.
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The following table reconciles our net loss to EBITDA, as adjusted (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net loss $ (7,660 ) $ (35,214 ) $ (37,305 ) $ (65,087 )
Loss from discontinued operations, net
of tax (490 ) 156 29 1,029
Depreciation and amortization 36,877 45,709 77,232 88,208
Impairment - 7,959 - 7,959
Merger expenses 1,045 - 5,033 -
Restructuring and other charges (182 ) (370 ) (182 ) 254
Interest expense 11,897 10,357 22,946 20,321
(Gain) loss on currency exchange rate
remeasurement of intercompany balances 906 (2,321 ) (1,432 ) (810 )
Provision for (benefit from) income
taxes 11,379 8,836 17,148 16,292
EBITDA, as adjusted $ 53,772 $ 35,112 $ 83,469 $ 68,166
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