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 June 30, 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	34
Item 3. Quantitative and Qualitative Disclosures About Market Risk	58
Item 4. Controls and Procedures	58
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	63
Item 1A. Risk Factors	63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3. Defaults Upon Senior Securities	63
Item 4. Mine Safety Disclosures	63
Item 5. Other Information	63
Item 6. Exhibits	64
SIGNATURES	65

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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)



	June 30, 2016			December 31, 2015
				As Restated (Note 2)
ASSETS

Current assets:
Cash and cash equivalents	$	33,420		$	29,032
Restricted cash	1,490			1,490
Accounts receivable, net of allowance of $4,117 and $2,868, respectively	240,625			363,581
Inventory (Note 4)	172,185			208,081
Costs and estimated earnings in excess of billings on uncompleted contracts (Note 5)	49,870			65,311
Other current assets	45,415			53,866
Current assets associated with discontinued operations (Note 3)	13,897			32,923
Total current assets	556,902			754,284
Property, plant and equipment, net (Note 6)	816,597			858,188
Deferred income taxes (Note 13)	7,418			86,110
Intangible and other assets, net	61,076			51,533
Long-term assets associated with discontinued operations (Note 3)	—			38,281
Total assets	$	1,441,993		$	1,788,396

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable, trade	$	69,074		$	86,727
Accrued liabilities	158,741			175,841
Deferred revenue	29,929			31,675
Billings on uncompleted contracts in excess of costs and estimated earnings (Note 5)	26,076			37,908
Current liabilities associated with discontinued operations (Note 3)	18,591			13,645
Total current liabilities	302,411			345,796
Long-term debt (Note 8)	398,929			525,593
Deferred income taxes	17,394			22,519
Long-term deferred revenue	95,744			59,769
Other long-term liabilities	22,559			22,708
Long-term liabilities associated with discontinued operations (Note 3)	6,491			6,075
Total liabilities	843,528			982,460
Commitments and contingencies (Note 18)
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; 35,635,771 and 35,153,358 shares issued, respectively	356			352
Additional paid-in capital	784,011			805,755
Accumulated deficit	(217,818		)	(29,315		)
Treasury stock — 144,207 and 5,776 common shares, at cost, respectively	(1,481		)	(54		)
Accumulated other comprehensive income	33,397			29,198
Total stockholders’ equity (Note 15)	598,465			805,936
Total liabilities and stockholders’ equity	$	1,441,993		$	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 June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
				As Restated (Note 2)						As Restated (Note 2)
Revenues:
Contract operations	$	94,689		$	115,250		$	199,448		$	235,941
Aftermarket services	34,668			34,031			64,909			70,275
Product sales—third parties	132,790			257,626			304,420			564,673
Product sales—affiliates (Note 14)	—			53,874			—			109,712
	262,147			460,781			568,777			980,601
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Contract operations	36,401			44,745			74,899			89,084
Aftermarket services	24,137			24,327			46,437			49,484
Product sales	123,048			291,511			284,940			599,136
Selling, general and administrative	40,648			55,434			86,386			113,250
Depreciation and amortization	27,417			36,053			78,350			74,068
Long-lived asset impairment (Note 10)	—			5,910			651			10,489
Restatement charges (Note 11)	7,851			—			7,851			—
Restructuring and other charges (Note 12)	10,636			10,547			23,203			10,547
Interest expense	8,879			319			17,342			826
Equity in income of non-consolidated affiliates (Note 7)	(5,229		)	(5,062		)	(10,403		)	(10,068		)
Other (income) expense, net	(5,394		)	3,390			(9,811		)	11,178
	268,394			467,174			599,845			947,994
Income (loss) before income taxes	(6,247		)	(6,393		)	(31,068		)	32,607
Provision for income taxes (Note 13)	100,335			8,237			104,344			28,692
Income (loss) from continuing operations	(106,582		)	(14,630		)	(135,412		)	3,915
Income (loss) from discontinued operations, net of tax (Note 3)	11,036			207			(53,091		)	18,139
Net income (loss)	$	(95,546	)	$	(14,423	)	$	(188,503	)	$	22,054

Basic net income (loss) per common share (Note 17):
Income (loss) from continuing operations per common share	$	(3.08	)	$	(0.42	)	$	(3.92	)	$	0.11
Income (loss) from discontinued operations per common share	0.32			—			(1.54		)	0.53
Net income (loss) per common share	$	(2.76	)	$	(0.42	)	$	(5.46	)	$	0.64

Diluted net income (loss) per common share (Note 17):
Income (loss) from continuing operations per common share	$	(3.08	)	$	(0.42	)	$	(3.92	)	$	0.11
Income (loss) from discontinued operations per common share	0.32			—			(1.54		)	0.53
Net income (loss) per common share	$	(2.76	)	$	(0.42	)	$	(5.46	)	$	0.64

Weighted average common shares outstanding used in net income (loss) per common share (Note 17):
Basic	34,618			34,286			34,529			34,286
Diluted	34,618			34,286			34,529			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 June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
				As Restated (Note 2)						As Restated (Note 2)
Net income (loss)	$	(95,546	)	$	(14,423	)	$	(188,503	)	$	22,054
Other comprehensive income (loss):
Foreign currency translation adjustment	1,886			3,325			4,199			(4,420		)
Comprehensive income (loss)	$	(93,660	)	$	(11,098	)	$	(184,304	)	$	17,634

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)												22,054					22,054
Net contributions from parent (As Restated)												1,963					1,963
Foreign currency translation adjustment (As Restated)														(4,420		)	(4,420		)
Balance, June 30, 2015 (As Restated)	$	—	$	—		$	—		$	—		$	1,361,607	$	22,325		$	1,383,932

Balance, January 1, 2016 (As Restated)	$	352	$	805,755		$	(29,315	)	$	(54	)	$	—	$	29,198		$	805,936
Net loss						(188,503		)									(188,503		)
Options exercised			694														694
Foreign currency translation adjustment														4,199			4,199
Cash transfer to Archrock, Inc. (Note 18)			(29,662		)												(29,662		)
Treasury stock purchased									(1,427		)						(1,427		)
Stock-based compensation, net of forfeitures	4		7,252														7,256
Income tax benefit from stock-based compensation expenses			(28		)												(28		)
Balance, June 30, 2016	$	356	$	784,011		$	(217,818	)	$	(1,481	)	$	—	$	33,397		$	598,465

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)



	Six Months Ended June 30,
	2016			2015
				As Restated (Note 2)
Cash flows from operating activities:
Net income (loss)	$	(188,503	)	$	22,054
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	78,350			74,068
Long-lived asset impairment	651			10,489
Amortization of deferred financing costs	2,321			—
(Income) loss from discontinued operations, net of tax	53,091			(18,139		)
Provision for doubtful accounts	1,394			1,026
Gain on sale of property, plant and equipment	(2,301		)	(1,028		)
Equity in income of non-consolidated affiliates	(10,403		)	(10,068		)
(Gain) loss on remeasurement of intercompany balances	(7,546		)	7,999
Loss on foreign currency derivatives	546			—
Stock-based compensation expense	7,256			3,756
Deferred income tax provision (benefit)	72,802			(176		)
Changes in assets and liabilities:
Accounts receivable and notes	124,865			55,652
Inventory	36,742			2,385
Costs and estimated earnings versus billings on uncompleted contracts	3,597			(22,839		)
Other current assets	10,696			(3,775		)
Accounts payable and other liabilities	(36,396		)	(60,523		)
Deferred revenue	23,581			(2,931		)
Other	3,538			(15,370		)
Net cash provided by continuing operations	174,281			42,580
Net cash provided by (used in) discontinued operations	(3,163		)	5,074
Net cash provided by operating activities	171,118			47,654

Cash flows from investing activities:
Capital expenditures	(30,787		)	(81,459		)
Proceeds from sale of property, plant and equipment	899			5,086
Return of investments in non-consolidated affiliates	10,403			10,068
Proceeds received from settlement of note receivable	—			5,357
Settlement of foreign currency derivatives	(53		)	—
Net cash used in continuing operations	(19,538		)	(60,948		)
Net cash provided by discontinued operations	14,637			15,348
Net cash used in investing activities	(4,901		)	(45,600		)

Cash flows from financing activities:
Proceeds from borrowings of long-term debt	284,258			—
Repayments of long-term debt	(412,385		)	—
Cash transfer to Archrock, Inc. (Note 18)	(29,662		)	—
Net distributions to parent	—			(17,583		)
Payments for debt issuance costs	(779		)	—
Proceeds from stock options exercised	694			—
Purchase of treasury stock	(1,427		)	—
Stock-based compensation excess tax benefit	16			—
Net cash used in financing activities	(159,285		)	(17,583		)

Effect of exchange rate changes on cash and cash equivalents	(2,544		)	(783		)
Net increase (decrease) in cash and cash equivalents	4,388			(16,312		)
Cash and cash equivalents at beginning of period	29,032			39,361
Cash and cash equivalents at end of period	$	33,420		$	23,049

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 and comprehensive income (loss) for the three and six months ended June 30, 2016 and our condensed consolidated statements of cash flows and stockholders’ equity for the six months ended June 30, 2016 consist entirely of our consolidated results. Our condensed combined statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2015 and our condensed combined statements of cash flows and stockholders’ equity for the six months ended June 30, 2015 consist entirely of the combined results of Archrock’s international services and product sales businesses.


•	Our condensed consolidated balance sheets at June 30, 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 14 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 14 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 was overstated by $5.3 million and $12.3 million during the three and six months ended June 30, 2015, respectively, and our product sales cost of sales was understated by $16.6 million and $10.5 million during the three and six months ended June 30, 2015, respectively. 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 and six months ended June 30, 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. The Company is also concurrently filing a Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.

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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) statements of operations for the three and six months ended June 30, 2015, (iii) statements of comprehensive income (loss) for the three and six months ended June 30, 2015, (iv) statement of stockholders’ equity for the six months ended June 30, 2015 and (v) statement of cash flows for the six months ended June 30, 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.

Table of Contents

The effects of the restatement on our statements of operations for the three and six months ended June 30, 2015 are set forth in the following table (in thousands, except per share data):



	Three Months Ended June 30, 2015												Six Months Ended June 30, 2015
	As Previously Reported			Restatement Adjustments			Reclassification Adjustments (1)			As Restated and Reclassified			As Previously Reported			Restatement Adjustments			Reclassification Adjustments (1)			As Restated and Reclassified
Revenues:
Contract operations	$	115,250		$	—		$	—		$	115,250		$	235,941		$	—		$	—		$	235,941
Aftermarket services	34,031			—			—			34,031			70,275			—			—			70,275
Product sales—third parties	279,489			(5,344		)	(16,519		)	257,626			598,763			(12,276		)	(21,814		)	564,673
Product sales—affiliates	53,874			—			—			53,874			109,712			—			—			109,712
	482,644			(5,344		)	(16,519		)	460,781			1,014,691			(12,276		)	(21,814		)	980,601
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Contract operations	44,745			—			—			44,745			89,084			—			—			89,084
Aftermarket services	24,327			—			—			24,327			49,484			—			—			49,484
Product sales	290,418			16,590			(15,497		)	291,511			608,904			10,503			(20,271		)	599,136
Selling, general and administrative	55,764			—			(330		)	55,434			114,330			—			(1,080		)	113,250
Depreciation and amortization	36,786			97			(830		)	36,053			75,581			194			(1,707		)	74,068
Long-lived asset impairment	5,910			—			—			5,910			10,489			—			—			10,489
Restructuring and other charges	10,547			—			—			10,547			10,547			—			—			10,547
Interest expense	319			—			—			319			826			—			—			826
Equity in income of non-consolidated affiliates	(5,062		)	—			—			(5,062		)	(10,068		)	—			—			(10,068		)
Other (income) expense, net	3,487			(63		)	(34		)	3,390			11,878			(961		)	261			11,178
	467,241			16,624			(16,691		)	467,174			961,055			9,736			(22,797		)	947,994
Income (loss) before income taxes	15,403			(21,968		)	172			(6,393		)	53,636			(22,012		)	983			32,607
Provision for income taxes	7,418			819			—			8,237			26,802			1,890			—			28,692
Income (loss) from continuing operations	7,985			(22,787		)	172			(14,630		)	26,834			(23,902		)	983			3,915
Income from discontinued operations, net of tax	379			—			(172		)	207			19,122			—			(983		)	18,139
Net income (loss)	$	8,364		$	(22,787	)	$	—		$	(14,423	)	$	45,956		$	(23,902	)	$	—		$	22,054

Basic net income (loss) per common share:
Income (loss) from continuing operations per common share	$	0.23		$	(0.66	)	$	0.01		$	(0.42	)	$	0.78		$	(0.70	)	$	0.03		$	0.11
Income from discontinued operations per common share	0.01			—			(0.01		)	—			0.56			—			(0.03		)	0.53
Net income (loss) per common share	$	0.24		$	(0.66	)	$	—		$	(0.42	)	$	1.34		$	(0.70	)	$	—		$	0.64

Diluted net income (loss) per common share:
Income (loss) from continuing operations per common share	$	0.23		$	(0.66	)	$	0.01		$	(0.42	)	$	0.78		$	(0.70	)	$	0.03		$	0.11
Income from discontinued operations per common share	0.01			—			(0.01		)	—			0.56			—			(0.03		)	0.53
Net income (loss) per common share	$	0.24		$	(0.66	)	$	—		$	(0.42	)	$	1.34		$	(0.70	)	$	—		$	0.64

(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.

Table of Contents

The effects of the restatement on our statements of comprehensive income (loss) for the three and six months ended June 30, 2015 are set forth in the following table (in thousands):



	Three Months Ended June 30, 2015										Six Months Ended June 30, 2015
	As Previously Reported		Restatement Adjustments			Reclassification Adjustments		As Restated and Reclassified			As Previously Reported			Restatement Adjustments			Reclassification Adjustments		As Restated and Reclassified
Net income (loss)	$	8,364	$	(22,787	)	$	—	$	(14,423	)	$	45,956		$	(23,902	)	$	—	$	22,054
Other comprehensive income (loss):
Foreign currency translation adjustment	3,659		(334		)	—		3,325			(6,703		)	2,283			—		(4,420		)
Comprehensive income (loss)	$	12,023	$	(23,121	)	$	—	$	(11,098	)	$	39,253		$	(21,619	)	$	—	$	17,634

The effects of the restatement on our statement of stockholders’ equity for the six months ended June 30, 2015 are set forth in the following table (in thousands):



	Six Months Ended June 30, 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	45,956			(23,902		)	—		22,054
Net contributions from parent	1,963			—			—		1,963
Foreign currency translation adjustment	(6,703		)	2,283			—		(4,420		)
Balance, June 30, 2015	$	1,493,038		$	(109,106	)	$	—	$	1,383,932

Table of Contents

The effects of the restatement on our statement of cash flows for the six months ended June 30, 2015 are set forth in the following table (in thousands):



	Six Months Ended June 30, 2015
	As Previously Reported			Restatement Adjustments			Reclassification Adjustments (1)			As Restated and Reclassified
Cash flows from operating activities:
Net income	$	45,956		$	(23,902	)	$	—		$	22,054
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	75,581			194			(1,707		)	74,068
Long-lived asset impairment	10,489			—			—			10,489
Income from discontinued operations, net of tax	(19,122		)	—			983			(18,139		)
Provision for doubtful accounts	1,174			—			(148		)	1,026
Gain on sale of property, plant and equipment	(1,046		)	—			18			(1,028		)
Equity in income of non-consolidated affiliates	(10,068		)	—			—			(10,068		)
Loss on remeasurement of intercompany balances	7,999			—			—			7,999
Stock-based compensation expense	3,756			—			—			3,756
Deferred income tax benefit	(2,065		)	1,889			—			(176		)
Changes in assets and liabilities:
Accounts receivable and notes	40,241			2,038			13,373			55,652
Inventory	2,392			—			(7		)	2,385
Costs and estimated earnings versus billings on uncompleted contracts	(22,438		)	10,238			(10,639		)	(22,839		)
Other current assets	(6,288		)	(37		)	2,550			(3,775		)
Accounts payable and other liabilities	(63,843		)	10,490			(7,170		)	(60,523		)
Deferred revenue	(2,931		)	—			—			(2,931		)
Other	(14,223		)	(910		)	(237		)	(15,370		)
Net cash provided by continuing operations	45,564			—			(2,984		)	42,580
Net cash provided by discontinued operations	2,090			—			2,984			5,074
Net cash provided by operating activities	47,654			—			—			47,654

Cash flows from investing activities:
Capital expenditures	(82,671		)	—			1,212			(81,459		)
Proceeds from sale of property, plant and equipment	5,086			—			—			5,086
Return of investments in non-consolidated affiliates	10,068			—			—			10,068
Proceeds received from settlement of note receivable	5,357			—			—			5,357
Net cash used in continuing operations	(62,160		)	—			1,212			(60,948		)
Net cash provided by discontinued operations	16,560			—			(1,212		)	15,348
Net cash used in investing activities	(45,600		)	—			—			(45,600		)

Cash flows from financing activities:
Net distributions to parent	(17,583		)	—			—			(17,583		)
Net cash used in financing activities	(17,583		)	—			—			(17,583		)

Effect of exchange rate changes on cash and cash equivalents	(783		)	—			—			(783		)
Net decrease in cash and cash equivalents	(16,312		)	—			—			(16,312		)
Cash and cash equivalents at beginning of period	39,361			—			—			39,361
Cash and cash equivalents at end of period	$	23,049		$	—		$	—		$	23,049

(1)

Table of Contents

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 $19.3 million during the three and six months ended June 30, 2016, and $18.7 million during the six months ended June 30, 2015. The remaining principal amount due to us of approximately $50 million as of June 30, 2016, is payable in 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 accordance with the separation and distribution agreement, a subsidiary of Archrock has the right to receive payments from EESLP based on a notional amount corresponding to payments received by our subsidiaries from PDVSA Gas in respect of the sale of our previously nationalized assets promptly after such amounts are collected by our subsidiaries. Pursuant to the separation and distribution agreement, we transferred cash of $19.3 million to Archrock during the six months ended June 30, 2016. The transfer of cash was recognized as a reduction to additional paid-in capital in our financial statements. See Note 18 for further discussion related to our contingent liability to Archrock.

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 20, 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 and current assets, that totaled $7.1 million and $68.8 million during the three and six months ended June 30, 2016, respectively. 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 six months ended June 30, 2016.

The following tables summarize the operating results of discontinued operations (in thousands):



	Three Months Ended June 30, 2016									Three Months Ended June 30, 2015
	Venezuela			Belleli CPE			Total			Venezuela			Belleli CPE			Total
Revenue	$	—		$	12,164		$	12,164		$	—		$	16,519		$	16,519
Cost of sales (excluding depreciation and amortization expense)	—			11,762			11,762			—			15,497			15,497
Selling, general and administrative	40			1,548			1,588			150			330			480
Depreciation and amortization	—			—			—			—			830			830
Long-lived asset impairment	—			7,144			7,144			—			—			—
Recovery attributable to expropriation	(16,551		)	—			(16,551		)	(476		)	—			(476		)
Interest expense	—			7			7			—			—			—
Other (income) expense, net	(2,753		)	(69		)	(2,822		)	(53		)	34			(19		)
Income (loss) from discontinued operations, net of tax	$	19,264		$	(8,228	)	$	11,036		$	379		$	(172	)	$	207

Table of Contents



	Six Months Ended June 30, 2016									Six Months Ended June 30, 2015
	Venezuela			Belleli CPE			Total			Venezuela			Belleli CPE			Total
Revenue	$	—		$	24,093		$	24,093		$	—		$	21,814		$	21,814
Cost of sales (excluding depreciation and amortization expense)	—			23,436			23,436			—			20,271			20,271
Selling, general and administrative	78			3,441			3,519			234			1,080			1,314
Depreciation and amortization	—			861			861			—			1,707			1,707
Long-lived asset impairment	—			68,780			68,780			—			—			—
Recovery attributable to expropriation	(16,557		)	—			(16,557		)	(16,982		)	—			(16,982		)
Interest expense	—			15			15			—			—			—
Other (income) expense, net	(3,021		)	151			(2,870		)	(2,374		)	(261		)	(2,635		)
Income (loss) from discontinued operations, net of tax	$	19,500		$	(72,591	)	$	(53,091	)	$	19,122		$	(983	)	$	18,139

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



	June 30, 2016						December 31, 2015
	Venezuela		Belleli CPE		Total		Venezuela		Belleli CPE		Total
Cash	$	37	$	—	$	37	$	177	$	—	$	177
Accounts receivable	—		13,859		13,859		—		7,810		7,810
Inventory	—		—		—		—		431		431
Costs and estimated earnings in excess of billings on uncompleted contracts	—		—		—		—		17,666		17,666
Other current assets	1		—		1		14		6,825		6,839
Total current assets associated with discontinued operations	38		13,859		13,897		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	$	38	$	13,859	$	13,897	$	191	$	71,013	$	71,204

Accounts payable	$	—	$	7,983	$	7,983	$	—	$	7,839	$	7,839
Accrued liabilities	1,006		2,645		3,651		1,249		2,556		3,805
Billings on uncompleted contracts in excess of costs and estimated earnings	—		6,957		6,957		—		2,001		2,001
Total current liabilities associated with discontinued operations	1,006		17,585		18,591		1,249 </