Edgar Filing: Exterran Corp

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2016

o 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		47-3282259
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		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)

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 x No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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. (Check one):



Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares of the common stock of the registrant outstanding as of December 28, 2016: 35,438,843 shares.

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TABLE OF CONTENTS



	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated and Combined Statements of Operations	4
Condensed Consolidated and Combined Statements of Comprehensive Income (Loss)	5
Condensed Consolidated and Combined Statements of Stockholders’ Equity	6
Condensed Consolidated and Combined Statements of Cash Flows	7
Notes to Unaudited Condensed Consolidated and Combined Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
Item 4. Controls and Procedures	49
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	53
Item 1A. Risk Factors	53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3. Defaults Upon Senior Securities	53
Item 4. Mine Safety Disclosures	53
Item 5. Other Information	53
Item 6. Exhibits	54
SIGNATURES	55

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXTERRAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

(unaudited)



	March 31, 2016			December 31, 2015
				As Restated (Note 2)
ASSETS

Current assets:
Cash and cash equivalents	$	38,985		$	29,032
Restricted cash	1,490			1,490
Accounts receivable, net of allowance of $3,614 and $2,868, respectively	283,256			363,581
Inventory (Note 4)	194,641			208,081
Costs and estimated earnings in excess of billings on uncompleted contracts (Note 5)	52,129			65,311
Other current assets	50,496			53,866
Current assets associated with discontinued operations (Note 3)	15,706			32,923
Total current assets	636,703			754,284
Property, plant and equipment, net (Note 6)	824,818			858,188
Deferred income taxes (Note 12)	96,076			86,110
Intangible and other assets, net	50,905			51,533
Long-term assets associated with discontinued operations (Note 3)	—			38,281
Total assets	$	1,608,502		$	1,788,396

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable, trade	$	86,761		$	86,727
Accrued liabilities	167,760			175,841
Deferred revenue	24,778			31,675
Billings on uncompleted contracts in excess of costs and estimated earnings (Note 5)	37,558			37,908
Current liabilities associated with discontinued operations (Note 3)	20,260			13,645
Total current liabilities	337,117			345,796
Long-term debt (Note 8)	431,222			525,593
Deferred income taxes	22,274			22,519
Long-term deferred revenue	76,024			59,769
Other long-term liabilities	22,078			22,708
Long-term liabilities associated with discontinued operations (Note 3)	6,617			6,075
Total liabilities	895,332			982,460
Commitments and contingencies (Note 17)
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; 35,625,158 and 35,153,358 shares issued, respectively	356			352
Additional paid-in capital	805,043			805,755
Accumulated deficit	(122,272		)	(29,315		)
Treasury stock — 115,624 and 5,776 common shares, at cost, respectively	(1,468		)	(54		)
Accumulated other comprehensive income	31,511			29,198
Total stockholders’ equity (Note 14)	713,170			805,936
Total liabilities and stockholders’ equity	$	1,608,502		$	1,788,396

The accompanying notes are an integral part of these unaudited condensed consolidated and combined financial statements.

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EXTERRAN CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)



	Three Months Ended March 31,
	2016			2015
				As Restated (Note 2)
Revenues:
Contract operations	$	104,759		$	120,691
Aftermarket services	30,241			36,244
Product sales—third parties	171,630			307,047
Product sales—affiliates (Note 13)	—			55,838
	306,630			519,820
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Contract operations	38,498			44,339
Aftermarket services	22,300			25,157
Product sales	161,892			307,625
Selling, general and administrative	45,738			57,816
Depreciation and amortization	50,933			38,015
Long-lived asset impairment (Note 10)	651			4,579
Restructuring and other charges (Note 11)	12,567			—
Interest expense	8,463			507
Equity in income of non-consolidated affiliates (Note 7)	(5,174		)	(5,006		)
Other (income) expense, net	(4,417		)	7,788
	331,451			480,820
Income (loss) before income taxes	(24,821		)	39,000
Provision for income taxes (Note 12)	4,009			20,455
Income (loss) from continuing operations	(28,830		)	18,545
Income (loss) from discontinued operations, net of tax (Note 3)	(64,127		)	17,932
Net income (loss)	$	(92,957	)	$	36,477

Basic net income (loss) per common share (Note 16):
Income (loss) from continuing operations per common share	$	(0.84	)	$	0.53
Income (loss) from discontinued operations per common share	(1.86		)	0.53
Net income (loss) per common share	$	(2.70	)	$	1.06

Diluted net income (loss) per common share (Note 16):
Income (loss) from continuing operations per common share	$	(0.84	)	$	0.53
Income (loss) from discontinued operations per common share	(1.86		)	0.53
Net income (loss) per common share	$	(2.70	)	$	1.06

Weighted average common shares outstanding used in net income (loss) per common share (Note 16):
Basic	34,459			34,286
Diluted	34,459			34,286

The accompanying notes are an integral part of these unaudited condensed consolidated and combined financial statements.

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EXTERRAN CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(unaudited)



	Three Months Ended March 31,
	2016			2015
				As Restated (Note 2)
Net income (loss)	$	(92,957	)	$	36,477
Other comprehensive income (loss):
Foreign currency translation adjustment	2,313			(7,745		)
Comprehensive income (loss)	$	(90,644	)	$	28,732

The accompanying notes are an integral part of these unaudited condensed consolidated and combined financial statements.

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EXTERRAN CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)



	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Treasury Stock			Parent Equity		Accumulated Other Comprehensive Income			Total
Balance, January 1, 2015 (As Restated)	$	—	$	—		$	—		$	—		$	1,337,590	$	26,745		$	1,364,335
Net income (As Restated)												36,477					36,477
Net contributions from parent (As Restated)												10,298					10,298
Foreign currency translation adjustment (As Restated)														(7,745		)	(7,745		)
Balance, March 31, 2015 (As Restated)	$	—	$	—		$	—		$	—		$	1,384,365	$	19,000		$	1,403,365

Balance, January 1, 2016 (As Restated)	$	352	$	805,755		$	(29,315	)	$	(54	)	$	—	$	29,198		$	805,936
Net loss						(92,957		)									(92,957		)
Options exercised			694														694
Foreign currency translation adjustment														2,313			2,313
Cash transfer to Archrock, Inc. (Note 17)			(5,153		)												(5,153		)
Treasury stock purchased									(1,414		)						(1,414		)
Stock-based compensation, net of forfeitures	4		4,389														4,393
Income tax benefit from stock-based compensation expenses			(642		)												(642		)
Balance, March 31, 2016	$	356	$	805,043		$	(122,272	)	$	(1,468	)	$	—	$	31,511		$	713,170

The accompanying notes are an integral part of these unaudited condensed consolidated and combined financial statements.

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EXTERRAN CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)



	Three Months Ended March 31,
	2016			2015
				As Restated (Note 2)
Cash flows from operating activities:
Net income (loss)	$	(92,957	)	$	36,477
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	50,933			38,015
Long-lived asset impairment	651			4,579
Amortization of deferred financing costs	1,080			—
(Income) loss from discontinued operations, net of tax	64,127			(17,932		)
Provision for doubtful accounts	763			176
Gain on sale of property, plant and equipment	(101		)	(125		)
Equity in income of non-consolidated affiliates	(5,174		)	(5,006		)
(Gain) loss on remeasurement of intercompany balances	(4,610		)	7,508
Stock-based compensation expense	4,393			2,015
Deferred income tax provision (benefit)	(8,927		)	4,602
Changes in assets and liabilities:
Accounts receivable and notes	80,402			32,172
Inventory	13,789			(26,397		)
Costs and estimated earnings versus billings on uncompleted contracts	12,829			14,391
Other current assets	4,274			(12,346		)
Accounts payable and other liabilities	(6,853		)	(47,295		)
Deferred revenue	6,190			(3,571		)
Other	(103		)	(3,202		)
Net cash provided by continuing operations	120,706			24,061
Net cash provided by discontinued operations	2,187			271
Net cash provided by operating activities	122,893			24,332

Cash flows from investing activities:
Capital expenditures	(14,451		)	(40,523		)
Proceeds from sale of property, plant and equipment	85			3,600
Return of investments in non-consolidated affiliates	5,174			5,006
Net cash used in continuing operations	(9,192		)	(31,917		)
Net cash provided by (used in) discontinued operations	(1,827		)	16,504
Net cash used in investing activities	(11,019		)	(15,413		)

Cash flows from financing activities:
Proceeds from borrowings of long-term debt	157,500			—
Repayments of long-term debt	(252,563		)	—
Cash transfer to Archrock, Inc. (Note 17)	(5,153		)	—
Net contributions from parent	—			3,401
Proceeds from stock options exercised	694			—
Purchase of treasury stock	(1,414		)	—
Net cash provided by (used in) financing activities	(100,936		)	3,401

Effect of exchange rate changes on cash and cash equivalents	(985		)	(231		)
Net increase in cash and cash equivalents	9,953			12,089
Cash and cash equivalents at beginning of period	29,032			39,361
Cash and cash equivalents at end of period	$	38,985		$	51,450

The accompanying notes are an integral part of these unaudited condensed consolidated and combined financial statements.

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EXTERRAN CORPORATION

NOTES TO UNAUDITED CONDENSED 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 three primary business lines: contract operations, aftermarket services and product sales.

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 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 business. 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. 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 are independent, publicly traded companies with separate boards of directors and management.

Basis of Presentation

The accompanying unaudited condensed 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”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished includes all adjustments, consisting only of normal recurring adjustments, that are necessary to present fairly our consolidated and combined financial position, results of operations and cash flows for the periods indicated. 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 “condensed 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 “condensed combined financial statements”). Accordingly:

•

Our condensed consolidated statements of operations, comprehensive income (loss), cash flows and stockholders’ equity for the three months ended March 31, 2016 consist entirely of our consolidated results. Our condensed combined statements of operations, comprehensive income (loss), cash flows and stockholders’ equity for the three months ended March 31, 2015 consist entirely of the combined results of Archrock’s international services and product sales businesses.


•	Our condensed consolidated balance sheets at March 31, 2016 and December 31, 2015 consist entirely of our consolidated balances.

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The condensed 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 condensed 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 condensed combined financial statements, with the exception of 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 condensed 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 13 for further discussion on transactions with affiliates.

The condensed combined statements of operations 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 13 for further discussion regarding the allocation of corporate expenses.

The accompanying unaudited condensed consolidated and combined financial statements should be read in conjunction with the consolidated and combined financial statements presented in Amendment No. 1 to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2015 (the “2015 Form 10-K/A”). That report contains a comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year.

We refer to the condensed 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.

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 are currently evaluating the potential impact of the updates on our financial statements.

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. 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.

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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. 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.

2. Restatement of Previously Reported Consolidated and Combined Financial Statements

Subsequent to the filing of our Annual Report on Form 10-K for the year ended December 31, 2015, originally filed with the SEC on February 26, 2016, our senior management identified errors relating to the application of percentage-of-completion accounting principles to certain business lines of our subsidiary, Belleli Energy S.r.l. (subsequently renamed Exterran Italy S.r.l.). Such business lines comprise 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 Energy S.r.l. is headquartered in Mantova, Italy, and its operations are based in Dubai, United Arab Emirates. Management promptly reported the matter to the Audit Committee of the Company’s Board of Directors, which immediately retained counsel, who in turn retained a forensic accounting firm, to initiate an internal investigation.

As a result of the internal investigation, management identified inaccuracies related to Belleli EPC projects within our product sales segment in estimating the total costs required to complete projects impacting the years ended December 31, 2015, 2014, 2013, 2012 and 2011 (including the unaudited quarterly periods within 2015 and 2014). The application of percentage-of-completion accounting principles on Belleli EPC projects is estimated using the cost to total cost basis, which requires an estimate of total costs (labor and materials) required to complete each project. The cost-to-complete estimates for Belleli EPC projects were incorrectly estimated and at times manipulated by or at the direction of certain former members of Belleli EPC local senior management, resulting in a misstatement of product sales revenue. The inaccurate cost-to-complete estimates for some Belleli EPC projects also resulted in the need to establish and/or increase contract loss provisions for certain projects, and as a result, product sales cost of sales was misstated. Additionally, penalties for liquidated damages on certain projects were not correctly estimated. Furthermore, other errors within product sales cost of sales on Belleli EPC projects were identified, primarily relating to vendor claims, customer warranties and costs being charged to incorrect projects. As a result of the errors and conduct identified, our product sales revenue and cost of sales were overstated by $6.9 million and $6.1 million, respectively, during the three months ended March 31, 2015. These errors and inaccuracies also resulted in the misstatement of 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 and related income tax effects for each of the periods impacted.

We separately identified prior period errors related to the miscalculation and recovery of non-income-based tax receivables owed to us from the Brazilian government as of December 31, 2011. As a result of these errors and since relevant prior periods were being restated, we recorded adjustments to decrease intangible and other assets, net, beginning parent equity and other income by approximately $26.1 million, $17.5 million and $10.7 million, respectively, as of and for the year ended December 31, 2011 and increase other comprehensive income by approximately $2.1 million as of December 31, 2011. These errors also resulted in the misstatement of intangible and other assets, net, other (income) expense, net, and accumulated other comprehensive income in periods subsequent to December 31, 2011.

Along with restating our financial statements to correct the errors discussed above, we recorded adjustments for certain immaterial accounting errors as of December 31, 2015 and for the three months ended March 31, 2015.

We delayed the filing of this Quarterly Report on Form 10-Q pending the completion of the internal investigation, including the completion of the restatement. As a result of that investigation, the historical financial statements included in this Form 10-Q have been restated to reflect the adjustments described above. The restatement has been set forth below for the periods presented and in its entirety in the 2015 Form 10-K/A which the Company has filed with the SEC concurrently with this Form 10-Q.

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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 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.

The tables below summarize the effects of the restatement on our (i) balance sheet at December 31, 2015, (ii) statement of operations for the three months ended March 31, 2015, (iii) statement of comprehensive income for the three months ended March 31, 2015, (iv) statement of stockholders’ equity for the three months ended March 31, 2015 and (v) statement of cash flows for the three months ended March 31, 2015.

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The effects of the restatement on our balance sheet as of December 31, 2015 are set forth in the following table (in thousands):



	December 31, 2015
	As Previously Reported			Restatement Adjustments			Reclassification Adjustments (1)			As Restated and Reclassified
ASSETS

Current assets:
Cash and cash equivalents	$	29,032		$	—		$	—		$	29,032
Restricted cash	1,490			—			—			1,490
Accounts receivable, net of allowance	372,105			(714		)	(7,810		)	363,581
Inventory	210,554			(2,042		)	(431		)	208,081
Costs and estimated earnings in excess of billings on uncompleted contracts	119,621			(36,644		)	(17,666		)	65,311
Other current assets	60,896			(205		)	(6,825		)	53,866
Current assets associated with discontinued operations	191			—			32,732			32,923
Total current assets	793,889			(39,605		)	—			754,284
Property, plant and equipment, net	899,402			(2,940		)	(38,274		)	858,188
Deferred income taxes	86,807			(697		)	—			86,110
Intangible and other assets, net	62,261			(10,721		)	(7		)	51,533
Long-term assets associated with discontinued operations	—			—			38,281			38,281
Total assets	$	1,842,359		$	(53,963	)	$	—		$	1,788,396

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable, trade	$	94,353		$	213		$	(7,839	)	$	86,727
Accrued liabilities	129,880			48,517			(2,556		)	175,841
Deferred revenue	31,675			—			—			31,675
Billings on uncompleted contracts in excess of costs and estimated earnings	38,666			1,243			(2,001		)	37,908
Current liabilities associated with discontinued operations	1,249			—			12,396			13,645
Total current liabilities	295,823			49,973			—			345,796
Long-term debt	525,593			—			—			525,593
Deferred income taxes	22,531			(13		)	1			22,519
Long-term deferred revenue	59,769			—			—			59,769
Other long-term liabilities	28,626			—			(5,918		)	22,708
Long-term liabilities associated with discontinued operations	158			—			5,917			6,075
Total liabilities	932,500			49,960			—			982,460

Stockholders’ equity:
Common stock	352			—			—			352
Additional paid-in capital	932,058			(126,303		)	—			805,755
Accumulated deficit	(36,483		)	7,168			—			(29,315		)
Treasury stock	(54		)	—			—			(54		)
Accumulated other comprehensive income	13,986			15,212			—			29,198
Total stockholders’ equity	909,859			(103,923		)	—			805,936
Total liabilities and stockholders’ equity	$	1,842,359		$	(53,963	)	$	—		$	1,788,396

(1)

As discussed in Note 3, in the first quarter of 2016, we committed to a plan to exit the critical process equipment business, which provides 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). We completed the sale of our Belleli CPE business in August 2016. The results of our Belleli CPE business have been reclassified to discontinued operations in our financial statements for all periods presented.

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The effects of the restatement on our statement of operations for the three months ended March 31, 2015 are set forth in the following table (in thousands, except per share data):



	Three Months Ended March 31, 2015
	As Previously Reported			Restatement Adjustments			Reclassification Adjustments (1)			As Restated and Reclassified
Revenues:
Contract operations	$	120,691		$	—		$	—		$	120,691
Aftermarket services	36,244			—			—			36,244
Product sales—third parties	319,274			(6,932		)	(5,295		)	307,047
Product sales—affiliates	55,838			—			—			55,838
	532,047			(6,932		)	(5,295		)	519,820
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Contract operations	44,339			—			—			44,339
Aftermarket services	25,157			—			—			25,157
Product sales	318,486			(6,087		)	(4,774		)	307,625
Selling, general and administrative	58,566			—			(750		)	57,816
Depreciation and amortization	38,795			97			(877		)	38,015
Long-lived asset impairment	4,579			—			—			4,579
Interest expense	507			—			—			507
Equity in income of non-consolidated affiliates	(5,006		)	—			—			(5,006		)
Other (income) expense, net	8,391			(898		)	295			7,788
	493,814			(6,888		)	(6,106		)	480,820
Income before income taxes	38,233			(44		)	811			39,000
Provision for income taxes	19,384			1,071			—			20,455
Income from continuing operations	18,849			(1,115		)	811			18,545
Income from discontinued operations, net of tax	18,743			—			(811		)	17,932
Net income	$	37,592		$	(1,115	)	$	—		$	36,477

Basic net income per common share:
Income from continuing operations per common share	$	0.55		$	(0.04	)	$	0.02		$	0.53
Income from discontinued operations per common share	0.55			—			(0.02		)	0.53
Net income per common share	$	1.10		$	(0.04	)	$	—		$	1.06

Diluted net income per common share:
Income from continuing operations per common share	$	0.55		$	(0.04	)	$	0.02		$	0.53
Income from discontinued operations per common share	0.55			—			(0.02		)	0.53
Net income per common share	$	1.10		$	(0.04	)	$	—		$	1.06

(1)

As discussed in Note 3, in the first quarter of 2016, we committed to a plan to exit our Belleli CPE business, which provides engineering, procurement and manufacturing services related to the manufacture of critical process equipment for refinery and petrochemical facilities. We completed the sale of our Belleli CPE business in August 2016. The results of our Belleli CPE business have been reclassified to discontinued operations in our financial statements for all periods presented.

The effects of the restatement on our statement of comprehensive income for the three months ended March 31, 2015 are set forth in the following table (in thousands):



	Three Months Ended March 31, 2015
	As Previously Reported			Restatement Adjustments			Reclassification Adjustments		As Restated and Reclassified
Net income	$	37,592		$	(1,115	)	$	—	$	36,477
Other comprehensive loss:
Foreign currency translation adjustment	(10,362		)	2,617			—		(7,745		)
Comprehensive income	$	27,230		$	1,502		$	—	$	28,732

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The effects of the restatement on our statement of stockholders’ equity for the three months ended March 31, 2015 are set forth in the following table (in thousands):



	Three Months Ended March 31, 2015
	As Previously Reported			Restatement Adjustments			Reclassification Adjustments		As Restated and Reclassified
Balance, January 1, 2015	$	1,451,822		$	(87,487	)	$	—	$	1,364,335
Net income	37,592			(1,115		)	—		36,477
Net contributions from parent	10,311			(13		)	—		10,298
Foreign currency translation adjustment	(10,362		)	2,617			—		(7,745		)
Balance, March 31, 2015	$	1,489,363		$	(85,998	)	$	—	$	1,403,365

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The effects of the restatement on our statement of cash flows for the three months ended March 31, 2015 are set forth in the following table (in thousands):



	Three Months Ended March 31, 2015
	As Previously Reported			Restatement Adjustments			Reclassification Adjustments (1)			As Restated and Reclassified
Cash flows from operating activities:
Net income	$	37,592		$	(1,115	)	$	—		$	36,477
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	38,795			97			(877		)	38,015
Long-lived asset impairment	4,579			—			—			4,579
Income from discontinued operations, net of tax	(18,743		)	—			811			(17,932		)
Provision for doubtful accounts	324			—			(148		)	176
Gain on sale of property, plant and equipment	(130		)	—			5			(125		)
Equity in income of non-consolidated affiliates	(5,006		)	—			—			(5,006		)
Loss on remeasurement of intercompany balances	7,508			—			—			7,508
Stock-based compensation expense	2,015			—			—			2,015
Deferred income tax provision	3,532			1,070			—			4,602
Changes in assets and liabilities:
Accounts receivable and notes	28,369			(5,213		)	9,016			32,172
Inventory	(26,388		)	—			(9		)	(26,397		)
Costs and estimated earnings versus billings on uncompleted contracts	12,304			12,145			(10,058		)	14,391
Other current assets	(15,883		)	(40		)	3,577			(12,346		)
Accounts payable and other liabilities	(40,480		)	(6,104		)	(711		)	(47,295		)
Deferred revenue	(3,571		)	—			—			(3,571		)
Other	(2,738		)	(827		)	363			(3,202		)
Net cash provided by continuing operations	22,079			13			1,969			24,061
Net cash provided by discontinued operations	2,240			—			(1,969		)	271
Net cash provided by operating activities	24,319			13			—			24,332

Cash flows from investing activities:
Capital expenditures	(40,549		)	—			26			(40,523		)
Proceeds from sale of property, plant and equipment	3,600			—			—			3,600
Return of investments in non-consolidated affiliates	5,006			—			—			5,006
Net cash used in continuing operations	(31,943		)	—			26			(31,917		)
Net cash provided by discontinued operations	16,530			—			(26		)	16,504
Net cash used in investing activities	(15,413		)	—			—			(15,413		)

Cash flows from financing activities:
Net contributions from parent	3,414			(13		)	—			3,401
Net cash provided by financing activities	3,414			(13		)	—			3,401

Effect of exchange rate changes on cash and cash equivalents	(231		)	—			—			(231		)
Net increase in cash and cash equivalents	12,089			—			—			12,089
Cash and cash equivalents at beginning of period	39,361			—			—			39,361
Cash and cash equivalents at end of period	$	51,450		$	—		$	—		$	51,450

(1)

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3. Discontinued Operations

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 installment payment, including an annual charge, totaling $18.7 million during the three months ended March 31, 2015. The remaining principal amount due to us of approximately $66 million as of March 31, 2016, is payable in quarterly cash installments through the third quarter of 2016. 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 the first quarter of 2016, we committed to a plan to exit our Belleli CPE and Belleli EPC businesses (collectively, “Belleli businesses”) to focus on our core oil and gas businesses. Belleli CPE provides engineering, procurement and manufacturing services related to the manufacture of critical process equipment for refinery and petrochemical facilities. Belleli EPC provides engineering, procurement and construction for the manufacture of tanks for tank farms and the manufacture of evaporators and brine heaters for desalination plants. Belleli CPE met the held for sale criteria and is reflected as discontinued operations in our financial statements for all periods presented. As discussed in Note 19, we completed the sale of our Belleli CPE business in August 2016. Belleli CPE was previously included in our product sales segment. In conjunction with the planned disposition of Belleli CPE, we recorded impairments of long-lived assets, costs and estimated earnings in excess of billings on uncompleted contracts and other current assets, that totaled $61.6 million during the three months ended March 31, 2016. The impairment charges are reflected in income (loss) from discontinued operations, net of tax. In accordance with GAAP, Belleli EPC will not be reflected as discontinued operations until 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. Belleli EPC is included in our product sales segment. 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 three months ended March 31, 2016.

The following table summarizes the operating results of discontinued operations (in thousands):



	Three Months Ended March 31, 2016									Three Months Ended March 31, 2015
	Venezuela			Belleli CPE			Total			Venezuela			Belleli CPE			Total
Revenue	$	—		$	11,929		$	11,929		$	—		$	5,295		$	5,295
Cost of sales (excluding depreciation and amortization expense)	—			11,674			11,674			—			4,774			4,774
Selling, general and administrative	38			1,893			1,931			84			750			834
Depreciation and amortization	—			861			861			—			877			877
Long-lived asset impairment	—			61,636			61,636			—			—			—
Recovery attributable to expropriation	(6		)	—			(6		)	(16,506		)	—			(16,506		)
Interest expense	—			8			8			—			—			—
Other (income) expense, net	(268		)	220			(48		)	(2,321		)	(295		)	(2,616		)
Income (loss) from discontinued operations, net of tax	$	236		$	(64,363	)	$	(64,127	)	$	18,743		$	(811	)	$	17,932

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The following table summarizes the balance sheet data for discontinued operations (in thousands):



	March 31, 2016						December 31, 2015
	Venezuela		Belleli CPE		Total		Venezuela		Belleli CPE		Total
Cash	$	48	$	—	$	48	$	177	$	—	$	177
Accounts receivable	—		14,545		14,545		—		7,810		7,810
Inventory	—		436		436		—		431		431
Costs and estimated earnings in excess of billings on uncompleted contracts	—		—		—		—		17,666		17,666
Other current assets	1		676		677		14		6,825		6,839
Total current assets associated with discontinued operations	49		15,657		15,706		191		32,732		32,923
Property, plant and equipment, net	—		—		—		—		38,274		38,274
Intangible and other assets, net	—		—		—		—		7		7
Total assets associated with discontinued operations	$	49	$	15,657	$	15,706	$	191	$	71,013	$	71,204

Accounts payable	$	—	$	8,217	$	8,217	$	—	$	7,839	$	7,839
Accrued liabilities	1,013		2,082		3,095		1,249		2,556		3,805
Billings on uncompleted contracts in excess of costs and estimated earnings	—		8,948		8,948		—		2,001		2,001
Total current liabilities associated with discontinued operations	1,013		19,247		20,260		1,249		12,396		13,645
Other long-term liabilities	9		6,608		6,617		158		5,917		6,075
Total liabilities associated with discontinued operations	$	1,022	$	25,855	$	26,877	$	1,407	$	18,313	$	19,720

4. Inventory

Inventory consisted of the following amounts (in thousands):



	March 31, 2016		December 31, 2015
			As Restated
Parts and supplies	$	123,522	$	133,558
Work in progress	36,828		41,184
Finished goods	34,291		33,339
Inventory	$	194,641	$	208,081

5. Product Sales Contracts

Costs, estimated earnings and billings on uncompleted contracts that are recognized using the percentage-of-completion method consisted of the following (in thousands):



	March 31, 2016			December 31, 2015
				As Restated
Costs incurred on uncompleted contracts	$	649,922		$	664,229
Estimated earnings	27,564			44,915
	677,486			709,144
Less — billings to date	(662,915		)	(681,741		)
	$	14,571		$	27,403

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Costs, estimated earnings and billings on uncompleted contracts are presented in the accompanying financial statements as follows (in thousands):



	March 31, 2016			December 31, 2015
				As Restated
Costs and estimated earnings in excess of billings on uncompleted contracts	$	52,129		$	65,311
Billings on uncompleted contracts in excess of costs and estimated earnings	(37,558		)	(37,908		)
	$	14,571		$	27,403

6. Property, Plant and Equipment, net

Property, plant and equipment, net, consisted of the following (in thousands):



	March 31, 2016			December 31, 2015
				As Restated
Compression equipment, facilities and other fleet assets (1)	$	1,462,323		$	1,527,328
Land and buildings	114,003			117,247
Transportation and shop equipment	145,730			144,413
Other	102,679			99,035
	1,824,735			1,888,023
Accumulated depreciation (1)	(999,917		)	(1,029,835		)
Property, plant and equipment, net	$	824,818		$	858,188

___________________


(1)	During the three months ended March 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.

7. 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.

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, Petroleos de Venezuela S.A. (“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 the International Centre for Settlement of Investment Disputes related to the seized assets and investments.

In March 2012, our Venezuelan joint ventures sold their assets to PDVSA Gas. We received an installment payment, including an annual charge, of $5.2 million and $5.0 million during the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the remaining principal amount due to us was approximately $9 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.

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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 $5.2 million to Archrock during the three months ended March 31, 2016. The transfer of cash was recognized as a reduction to additional paid-in capital in our financial statements. See Note 17 for further discussion related to our contingent liability to Archrock.

8. Long-Term Debt

Long-term debt consisted of the following (in thousands):



	March 31, 2016			December 31, 2015
Revolving credit facility due November 2020	$	190,000		$	285,000
Term loan facility due November 2017	245,000			245,000
Other, interest at various rates, collateralized by equipment and other assets	773			836
Unamortized deferred financing costs	(4,551		)	(5,243		)
Long-term debt	$	431,222		$	525,593

Revolving Credit Facility and Term Loan

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”). Availability under the Credit Facility was subject to the satisfaction of certain conditions precedent, including the consummation of the Spin-off on or before January 4, 2016 (the date on which those conditions were satisfied, November 3, 2015, is referred to as the “Initial Availability Date”). 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. The principal amount of $12.3 million due in November 2016 under the term loan facility is classified as long-term in our balance sheet at March 31, 2016 because we have the intent and ability to refinance the current principal amount due with borrowings under our existing revolving credit facility.

As of March 31, 2016, we had $190.0 million in outstanding borrowings and $80.2 million in outstanding letters of credit under our revolving credit facility. At March 31, 2016, taking into account guarantees through letters of credit, we had undrawn capacity of $409.8 million under our revolving credit facility. Our Credit Agreement limits our Total Debt (as defined in the Credit Agreement) to EBITDA ratio (as defined in the Credit Agreement) 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, $337.9 million of the $409.8 million of undrawn capacity under our revolving credit facility was available for additional borrowings as of March 31, 2016.

In connection with the restatement, we entered into amendments to our Credit Agreement subsequent to March 31, 2016 which are discussed in more detail in Note 19.

9. 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.

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•	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 three months ended March 31, 2016 and 2015, with pricing levels as of the date of valuation (in thousands):



	Three Months Ended March 31, 2016						Three Months Ended March 31, 2015
	(Level 1)		(Level 2)		(Level 3)		(Level 1)		(Level 2)		(Level 3)
Impaired long-lived assets	$	—	$	—	$	—	$	—	$	—	$	—
Impaired assets—Discontinued operations	—		—		15,657		—		—		—
Long-term receivable from the sale of our Canadian Operations	—		—		—		—		—		5,100

Our estimate of the fair value of the impaired assets of Belleli CPE, which are classified as discontinued operations, during the three months ended March 31, 2016 was based on our expected proceeds from the sale of Belleli CPE, net of selling costs. Our estimate of the impaired long-lived assets’ fair value for the three months ended March 31, 2015 was primarily based on the estimated component value of the equipment on each compressor unit that we plan to use. 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.

Financial Instruments

Our financial instruments consist of cash, restricted cash, receivables, payables and debt. At March 31, 2016 and December 31, 2015, the estimated fair values of these financial instruments approximated their carrying amounts as reflected in our balance sheets. 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.

10. 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.

As discussed in Note 3, in the first quarter of 2016, we committed to 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 three months ended March 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 date of the cessation.

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 three months ended March 31, 2015, we determined that six idle compressor units totaling approximately 7,000 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 $3.2 million asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit was estimated based on the estimated component value of the equipment on each compressor unit that we plan to use.

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.

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11. Restructuring and Other Charges

During the three months ended March 31, 2016, we incurred $1.6 million of costs associated with the Spin-off related to retention awards to certain employees of $1.3 million and the start-up of certain stand-alone functions. Retention awards are being amortized over the required service period of each applicable employee. 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 $2.6 million related to retention awards to certain employees in the form of cash and stock-based compensation through November 2017.

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. During the three months ended March 31, 2016, we incurred $11.0 million of restructuring and other charges as a result of this plan for employee termination benefits and related consulting fees. Costs incurred for employee termination benefits during the three months ended March 31, 2016 were $10.7 million, of which $8.1 million related to our product sales business. These charges are reflected as restructuring and other charges in our statements of operations. We currently estimate that we will incur additional charges with respect to this cost reduction plan of approximately $11.0 million. We expect the majority of the estimated additional charges will result in cash expenditures. Accrued liabilities related to the cost reduction plan 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 three months ended March 31, 2016 (in thousands):



	Spin-off			Cost Reduction Plan			Total
Beginning balance at January 1, 2016	$	1,083		$	565		$	1,648
Additions for costs expensed	1,602			10,965			12,567
Less non-cash expense	(604		)	(437		)	(1,041		)
Reductions for payments	(879		)	(3,161		)	(4,040		)
Ending balance at March 31, 2016	$	1,202		$	7,932		$	9,134

The following table summarizes the components of charges included in restructuring and other charges in our statements of operations for the three months ended March 31, 2016 (in thousands):



	Three Months Ended March 31, 2016
Consulting fees	$	22
Start-up of stand-alone functions	277
Retention awards to certain employees	1,325
Employee termination benefits	10,721
Other	222
Total restructuring and other charges	$	12,567

Additionally, in the first quarter of 2016, we committed to 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 three months ended March 31, 2016. See Note 10 for further discussion relating to this impairment charge and Note 3 for further discussion related to our plan to exit our Belleli businesses.

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12. Deferred Income Taxes

As of December 31, 2015, we had approximately $152.0 million of U.S. deferred tax assets. These deferred tax assets primarily related to U.S. federal net operating loss carryforwards of $65.9 million that can be used to offset future U.S. federal taxable income, and carryforwards for foreign tax credits of $72.0 million, research and development credits of $31.3 million and alternative minimum tax credits of $5.1 million that can reduce our U.S. federal income taxes payable in future periods. Most of these carryforwards will expire if they are not used within certain periods. At this time, we consider it more-likely-than-not that we will have sufficient taxable income of the appropriate character in the future that will allow us to realize these U.S. deferred tax assets, other than in cases where valuation allowances were previously recorded. As of December 31, 2015, approximately $49.7 million of valuation allowances were recorded against our U.S. deferred tax assets.

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. If we were to incur a three-year cumulative loss in the U.S. at some point during 2016, additional valuation allowances of approximately $65 million could be required against our U.S. deferred tax assets that existed at December 31, 2015, which would materially increase our income tax expense in the period the valuation allowances are recognized.

13. 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 (named Exterran Partners, L.P. prior to November 3, 2015) (“Archrock Partners”), that govern the Spin-off and the relationship among the parties following the Spin-off, including the following agreements (collectively, the “Spin Agreements”): separation and distribution agreement, tax matters agreement, employee matters agreement, transition services agreement, supply agreement, storage agreements and services agreements. Pursuant to the transition services agreement, we recorded selling, general and administrative expense of $0.3 million and other income of $0.7 million during the three months ended March 31, 2016.

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 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 three months ended March 31, 2015, we recorded product sales revenue from affiliates of $55.8 million and cost of sales of $51.3 million 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 $16.5 million during the three months ended March 31, 2015. Subsequent to November 3, 2015, sales to Archrock are considered sales to third parties.

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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 three months ended March 31, 2015 were $14.9 million 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 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 contributions from parent in the financial statements.

Net Contributions from 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 contributions from parent. A reconciliation of net contributions from parent in the statements of stockholders’ equity to the corresponding amount presented in the statements of cash flows for the three months ended March 31, 2015 as follows (in thousands):



	Three Months Ended March 31, 2015
	As Restated
Net contributions from parent per the statements of stockholders’ equity	$	10,298
Stock-based compensation expenses prior to the Spin-off	(2,015		)
Stock-based compensation excess tax benefit prior to the Spin-off	764
Net transfers of property, plant and equipment from parent prior to the Spin-off	(5,646		)
Net contributions from parent per statements of cash flows	$	3,401

14. Stockholders’ Equity

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.

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The following table presents the changes in accumulated other comprehensive income, net of tax, during the three months ended March 31, 2015 and 2016 (in thousands):



	Foreign Currency Translation Adjustment
Accumulated other comprehensive income, January 1, 2015 (As Restated)	$	26,745
Loss recognized in other comprehensive income (loss) (As Restated)	(7,745		)
Accumulated other comprehensive income, March 31, 2015 (As Restated)	$	19,000

Accumulated other comprehensive income, January 1, 2016	$	29,198
Income recognized in other comprehensive income (loss)	2,313
Accumulated other comprehensive income, March 31, 2016	$	31,511

15. Stock-Based Compensation

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 will also govern 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.

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 such awards may consist of awards for either our common stock or Archrock’s common stock.

Stock Options

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 table below presents the changes in stock option awards for our common stock during the three months ended March 31, 2016. Options outstanding relate 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	434		$	18.53
Granted	—		—
Exercised	(56	)	12.40
Cancelled	(20	)	36.86
Options outstanding, March 31, 2016	358		18.46		2.5	$	888
Options exercisable, March 31, 2016	346		17.97		2.4	888

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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 three months ended March 31, 2016 was $0.1 million. As of March 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 unit, performance unit, cash settled restricted stock unit and cash settled performance unit for our common stock during the three months ended March 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.



	Shares (in thousands)		Weighted Average Grant-Date Fair Value Per Share
Non-vested awards, January 1, 2016	1,004		$	22.17
Granted	763		15.46
Vested	(397	)	22.98
Cancelled	(29	)	24.87
Non-vested awards, March 31, 2016 (1)	1,341		18.05

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(1)	Non-vested awards as of March 31, 2016 are comprised of 27,000 cash settled restricted stock units and cash settled performance units and 1,314,000 restricted shares, restricted stock units and performance units.

As of March 31, 2016, we expect $23.5 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 2.3 years.

16. 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.

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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.

The following table presents a reconciliation of basic and diluted net income (loss) per common share for the three months ended March 31, 2016 and 2015 (in thousands, except per share data):



	Three Months Ended March 31,
	2016			2015
				As Restated
Numerator for basic and diluted net income (loss) per common share:
Income (loss) from continuing operations	$	(28,830	)	$	18,545
Income (loss) from discontinued operations, net of tax	(64,127		)	17,932
Less: Net income attributable to participating securities	—			—
Net income (loss) — used in basic and diluted net income (loss) per common share	$	(92,957	)	$	36,477

Weighted average common shares outstanding including participating securities	35,404			34,286
Less: Weighted average participating securities outstanding	(945		)	—
Weighted average common shares outstanding — used in basic net income (loss) per common share	34,459			34,286
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock units	*			—
Weighted average common shares outstanding — used in diluted net income (loss) per common share	34,459			34,286

Net income (loss) per common share:
Basic