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, 2018

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 July 31, 2018: 36,125,135 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 Statements of Operations	4
Condensed Consolidated Statements of Comprehensive Income (Loss)	5
Condensed Consolidated Statements of Stockholders’ Equity	6
Condensed Consolidated Statements of Cash Flows	7
Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3. Quantitative and Qualitative Disclosures About Market Risk	54
Item 4. Controls and Procedures	54
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	55
Item 1A. Risk Factors	55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3. Defaults Upon Senior Securities	55
Item 4. Mine Safety Disclosures	55
Item 5. Other Information	55
Item 6. Exhibits	56
SIGNATURES	57

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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, 2018			December 31, 2017
ASSETS

Current assets:
Cash and cash equivalents	$	18,192		$	49,145
Restricted cash	546			546
Accounts receivable, net of allowance of $5,829 and $5,388, respectively	261,914			266,052
Inventory, net (Note 4)	161,208			107,909
Costs and estimated earnings in excess of billings on uncompleted contracts	—			40,695
Contract assets (Note 2)	72,374			—
Other current assets	30,104			38,707
Current assets held for sale (Note 6)	—			15,761
Current assets associated with discontinued operations (Note 3)	15,029			23,751
Total current assets	559,367			542,566
Property, plant and equipment, net (Note 5)	838,055			822,279
Deferred income taxes	12,477			10,550
Intangible and other assets, net	100,958			76,980
Long-term assets held for sale (Note 6)	—			4,732
Long-term assets associated with discontinued operations (Note 3)	2,577			3,700
Total assets	$	1,513,434		$	1,460,807

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable, trade	$	190,613		$	148,744
Accrued liabilities	112,512			114,336
Deferred revenue	—			23,902
Billings on uncompleted contracts in excess of costs and estimated earnings	—			89,565
Contract liabilities (Note 2)	105,298			—
Current liabilities associated with discontinued operations (Note 3)	20,705			31,971
Total current liabilities	429,128			408,518
Long-term debt (Note 7)	401,119			368,472
Deferred income taxes	6,206			9,746
Long-term deferred revenue	—			92,485
Long-term contract liabilities (Note 2)	85,062			—
Other long-term liabilities	39,073			20,272
Long-term liabilities associated with discontinued operations (Note 3)	5,895			6,528
Total liabilities	966,483			906,021
Commitments and contingencies (Note 15)
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; 36,740,016 and 36,193,930 shares issued, respectively	367			362
Additional paid-in capital	746,780			739,164
Accumulated deficit	(228,119		)	(223,510		)
Treasury stock — 618,919 and 453,178 common shares, at cost, respectively	(10,418		)	(6,937		)
Accumulated other comprehensive income	38,341			45,707
Total stockholders’ equity	546,951			554,786
Total liabilities and stockholders’ equity	$	1,513,434		$	1,460,807

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

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EXTERRAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018		2017
Revenues (Note 2):
Contract operations	$	91,487		$	95,341		$	187,980	$	187,386
Aftermarket services	32,267			24,244			58,638		46,768
Product sales	219,717			198,116			447,236		328,972
	343,471			317,701			693,854		563,126
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Contract operations	32,372			34,691			67,757		65,489
Aftermarket services	23,706			17,278			42,603		33,890
Product sales	191,762			178,025			392,098		297,562
Selling, general and administrative	44,382			44,564			88,624		88,975
Depreciation and amortization	30,184			26,348			61,213		51,100
Long-lived asset impairment (Note 9)	—			—			1,804		—
Restatement related charges (recoveries), net (Note 10)	(597		)	(1,158		)	24		1,014
Restructuring and other charges (Note 11)	1,422			310			1,422		2,618
Interest expense	6,883			12,382			14,102		19,469
Other (income) expense, net	5,204			2,731			6,624		912
	335,318			315,171			676,271		561,029
Income before income taxes	8,153			2,530			17,583		2,097
Provision for (benefit from) income taxes (Note 12)	9,622			(640		)	15,114		11,250
Income (loss) from continuing operations	(1,469		)	3,170			2,469		(9,153		)
Income from discontinued operations, net of tax (Note 3)	1,544			374			2,943		33,018
Net income	$	75		$	3,544		$	5,412	$	23,865

Basic net income per common share (Note 14):
Income (loss) from continuing operations per common share	$	(0.04	)	$	0.09		$	0.07	$	(0.26	)
Income from discontinued operations per common share	0.04			0.01			0.08		0.94
Net income per common share	$	—		$	0.10		$	0.15	$	0.68

Diluted net income per common share (Note 14):
Income (loss) from continuing operations per common share	$	(0.04	)	$	0.09		$	0.07	$	(0.26	)
Income from discontinued operations per common share	0.04			0.01			0.08		0.94
Net income per common share	$	—		$	0.10		$	0.15	$	0.68

Weighted average common shares outstanding used in net income per common share (Note 14):
Basic	35,455			35,018			35,376		34,913
Diluted	35,455			35,094			35,446		34,913

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

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EXTERRAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net income	$	75		$	3,544		$	5,412		$	23,865
Other comprehensive loss:
Foreign currency translation adjustment	(8,123		)	(2,669		)	(7,366		)	(1,026		)
Comprehensive income (loss)	$	(8,048	)	$	875		$	(1,954	)	$	22,839

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

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EXTERRAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)



	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income			Total
Balance, January 1, 2018	$	362	$	739,164	$	(223,510	)	$	(6,937	)	$	45,707		$	554,786
Cumulative-effect adjustment from adoption of ASC Topic 606 (Note 1)					(10,021		)							(10,021		)
Net income					5,412									5,412
Options exercised			563											563
Foreign currency translation adjustment											(7,366		)	(7,366		)
Treasury stock purchased								(3,481		)				(3,481		)
Stock-based compensation, net of forfeitures	5		7,053											7,058
Balance, June 30, 2018	$	367	$	746,780	$	(228,119	)	$	(10,418	)	$	38,341		$	546,951

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

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EXTERRAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)



	Six Months Ended June 30,
	2018			2017
Cash flows from operating activities:
Net income	$	5,412		$	23,865
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	61,213			51,100
Long-lived asset impairment	1,804			—
Amortization of deferred financing costs	1,342			3,375
Income from discontinued operations, net of tax	(2,943		)	(33,018		)
Provision for doubtful accounts	606			953
Gain on sale of property, plant and equipment	(348		)	(1,245		)
(Gain) loss on remeasurement of intercompany balances	4,081			(26		)
Loss on sale of business	1,714			111
Stock-based compensation expense	7,058			8,561
Deferred income tax benefit	(3,366		)	(7,081		)
Changes in assets and liabilities:
Accounts receivable and notes	(3,875		)	(40,893		)
Inventory	(70,126		)	6,001
Costs and estimated earnings versus billings on uncompleted contracts	—			31,841
Contract assets	(21,582		)	—
Other current assets	9,325			(5,901		)
Accounts payable and other liabilities	39,587			23,313
Deferred revenue	—			(5,338		)
Contract liabilities	(3,746		)	—
Other	1,984			(14		)
Net cash provided by continuing operations	28,140			55,604
Net cash provided by discontinued operations	881			2,498
Net cash provided by operating activities	29,021			58,102

Cash flows from investing activities:
Capital expenditures	(94,234		)	(44,216		)
Proceeds from sale of property, plant and equipment	2,372			6,427
Proceeds from sale of business	5,000			894
Net cash used in continuing operations	(86,862		)	(36,895		)
Net cash provided by discontinued operations	66			19,164
Net cash used in investing activities	(86,796		)	(17,731		)

Cash flows from financing activities:
Proceeds from borrowings of debt	255,000			488,000
Repayments of debt	(222,758		)	(463,877		)
Cash transfer to Archrock, Inc. (Note 15)	—			(44,720		)
Payment for debt issuance costs	(47		)	(7,606		)
Proceeds from stock options exercised	563			684
Purchases of treasury stock	(3,481		)	(3,124		)
Net cash provided by (used in) financing activities	29,277			(30,643		)

Effect of exchange rate changes on cash, cash equivalents and restricted cash	(2,455		)	(42		)
Net increase (decrease) in cash, cash equivalents and restricted cash	(30,953		)	9,686
Cash, cash equivalents and restricted cash at beginning of period	49,691			36,349
Cash, cash equivalents and restricted cash at end of period	$	18,738		$	46,035

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

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EXTERRAN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Description of Business 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 global systems and process company offering solutions in the oil, gas, water and power markets. We are a leader in natural gas processing and treatment and compression products and services, providing critical midstream infrastructure solutions to customers throughout the world. Outside the United States of America (“U.S.”), we are a leading provider of full-service natural gas contract compression, and a supplier of aftermarket parts and services. 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.

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 and global fabrication businesses into an independent, publicly traded company named Exterran Corporation.

Basis of Presentation

The accompanying unaudited condensed consolidated 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 of a normal recurring nature that are necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2017. 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. Certain reclassifications resulting from the adoption of ASU 2016-18, Restricted Cash have been made to the statement of cash flows for the prior year period to conform to the current year presentation.

We refer to the condensed consolidated financial statements collectively as “financial statements,” and individually as “balance sheets,” “statements of operations,” “statements of comprehensive income,” “statements of stockholders’ equity” and “statements of cash flows” herein.

Recent Accounting Pronouncements

We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our financial statements.

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Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued 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 when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled 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. On January 1, 2018, we adopted this update using the modified retrospective approach to all contracts that were not completed as of January 1, 2018. As a result of this adoption, we recorded a net increase to the accumulated deficit of $10.0 million as of January 1, 2018 and an increase of $3.5 million in revenue for the six months ended June 30, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 2 for the required disclosures related to the impact of adopting this standard and a discussion of our updated policies related to revenue recognition.

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As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to the balance sheet as of January 1, 2018 (in thousands):



	Impact of Changes in Accounting Policies
	December 31, 2017			Adjustments			January 1, 2018
ASSETS

Current assets:
Cash and cash equivalents	$	49,145		$	—		$	49,145
Restricted cash	546			—			546
Accounts receivable, net of allowance	266,052			(4,801		)	261,251
Inventory, net	107,909			(124		)	107,785
Costs and estimated earnings in excess of billings on uncompleted contracts	40,695			(40,695		)	—
Contract assets	—			50,824			50,824
Other current assets	38,707			(179		)	38,528
Current assets held for sale	15,761			—			15,761
Current assets associated with discontinued operations	23,751			—			23,751
Total current assets	542,566			5,025			547,591
Property, plant and equipment, net	822,279			(2,029		)	820,250
Deferred income taxes	10,550			404			10,954
Intangible and other assets, net	76,980			18,273			95,253
Long-term assets held for sale	4,732			—			4,732
Long-term assets associated with discontinued operations	3,700			—			3,700
Total assets	$	1,460,807		$	21,673		$	1,482,480

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable, trade	$	148,744		$	—		$	148,744
Accrued liabilities	114,336			16,044			130,380
Deferred revenue	23,902			(23,902		)	—
Billings on uncompleted contracts in excess of costs and estimated earnings	89,565			(89,565		)	—
Contract liabilities	—			112,244			112,244
Current liabilities associated with discontinued operations	31,971			—			31,971
Total current liabilities	408,518			14,821			423,339
Long-term debt	368,472			—			368,472
Deferred income taxes	9,746			(1,908		)	7,838
Long-term deferred revenue	92,485			(92,485		)	—
Long-term contract liabilities	—			89,004			89,004
Other long-term liabilities	20,272			22,262			42,534
Long-term liabilities associated with discontinued operations	6,528			—			6,528
Total liabilities	906,021			31,694			937,715

Stockholders’ equity:
Preferred stock	—			—			—
Common stock	362			—			362
Additional paid-in capital	739,164			—			739,164
Accumulated deficit	(223,510		)	(10,021		)	(233,531		)
Treasury stock	(6,937		)	—			(6,937		)
Accumulated other comprehensive income	45,707			—			45,707
Total stockholders’ equity	554,786			(10,021		)	544,765
Total liabilities and stockholders’ equity	$	1,460,807		$	21,673		$	1,482,480

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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. On January 1, 2018, we adopted this update. The adoption of this update did not have an impact on our statements of cash flows.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The update requires a reporting entity to recognize the tax expense from intra-entity asset transfers of assets other than inventory in the selling entity’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buying entity’s jurisdiction would also be recognized at the time of the transfer. On January 1, 2018, we adopted this update using a modified retrospective approach. The impact of this adoption was immaterial to our financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. On January 1, 2018, we adopted this update retrospectively. As a result of this adoption, $0.7 million of restricted cash has been included in the cash and cash equivalent balances in the statement of cash flows for the prior year period. At December 31, 2017, the $49.7 million of cash, cash equivalents and restricted cash on our statement of cash flows is composed of $49.1 million of cash and cash equivalents and $0.5 million of restricted cash. At June 30, 2018, the $18.7 million of cash, cash equivalents and restricted cash on our statement of cash flows is composed of $18.2 million of cash and cash equivalents and $0.5 million of restricted cash. The impact of this adoption was immaterial to our financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718). This update provides guidance that clarifies that changes to the terms or conditions of a share-based payment award should be accounted for as modifications. On January 1, 2018, we adopted this update using a prospective approach. The impact of this adoption was immaterial to our financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The update also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. Lessor accounting will be similar to the current model except for changes made to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance will be replaced with a new model applicable to both lessees and lessors. 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. In preparation for our adoption of the new standard, we are analyzing and updating data previously collected to evaluate the impact the adoption will have on our financial statements. Additionally, we are assessing our use of practical expedients and the systems required to capture the increased reporting and disclosure requirements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Adoption will require a modified retrospective approach beginning with the earliest period presented. We are currently evaluating the potential impact of the update on our financial statements.

Note 2 - Revenue

On January 1, 2018, we adopted Topic 606 applying the modified retrospective method to all contracts that were not completed as of the date of adoption. For contracts that were modified before the effective date, we reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with a Topic 606 practical expedient. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a net increase to accumulated deficit of $10.0 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606. Revenues for the three and six months ended June 30, 2018 increased by $2.6 million and $3.5 million, respectively, as a result of adopting Topic 606.

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Disaggregation of Revenue

The following tables present disaggregated revenue by products and services lines and by geographical regions for the three and six months ended June 30, 2018 (in thousands):



Revenue by Products and Services	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Contract Operations Segment:
Contract operations services ⁽¹⁾	$	91,487	$	187,980

Aftermarket Services Segment:
Operation and maintenance services ⁽¹⁾	$	14,722	$	28,597
Part sales ⁽²⁾	11,077		20,210
Other services ⁽¹⁾	6,468		9,831
Total aftermarket services	$	32,267	$	58,638

Product Sales Segment:
Compression equipment ⁽¹⁾	$	129,436	$	260,995
Processing and treating equipment ⁽¹⁾	79,407		165,522
Production equipment ⁽²⁾	6,782		14,780
Other product sales ^{(1) (2)}	4,092		5,939
Total product sales revenues	$	219,717	$	447,236

Total revenues	$	343,471	$	693,854


⁽¹⁾	Revenue recognized over time.


⁽²⁾	Revenue recognized at a point in time.



Revenue by Geographical Regions	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
North America	$	222,357	$	454,205
Latin America	72,638		140,589
Middle East and Africa	31,353		57,478
Asia Pacific	17,123		41,582
Total revenues	$	343,471	$	693,854

The North America region is primarily comprised of our operations in Mexico and the U.S. The Latin America region is primarily comprised of our operations in Argentina, Bolivia and Brazil. The Middle East and Africa region is primarily comprised of our operations in Bahrain, Iraq, Oman, Nigeria and the United Arab Emirates. The Asia Pacific region is primarily comprised of our operations in China, Indonesia, Thailand and Singapore.

Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. The following is a description of principal activities from which we generate revenue.

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Contract Operations Segment

In our contract operations segment, we provide compression or processing and treating services through operating our natural gas compression equipment and crude oil and natural gas production and process equipment on behalf of our customers. Our services include the provision of personnel, equipment, tools, materials and supplies to meet our customers’ natural gas compression or oil and natural gas production and processing service needs. Activities we may perform in meeting our customers’ needs include engineering, designing, sourcing, constructing, installing, operating, servicing, repairing, maintaining and demobilizing equipment owned by us necessary to provide these services. Contract operation services represent a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer. Because our customers benefit equally throughout the service period and our efforts in providing contract operation services are incurred relatively evenly over the period of performance, revenue is recognized over time using a time based measure as we provide our services to the customer. Our contracts generally require customers to pay a monthly service fee, which may contain variable consideration such as production or volume based fees, guaranteed run rates, performance bonuses or penalties, liquidated damages and standby fees. Variable considerations included in our contracts are typically resolved on a monthly basis, and as such, variable considerations included in our contracts are generally allocated to each distinct month in the series within the contract. In addition, our contracts may include billings prior to or after the performance of our contract operation services that are recognized as revenue on a straight-line basis over the contract term as we perform our services and the customer receives and consumes the benefits of the services we provide.

We generally enter into contracts with our contract operations customers with initial terms ranging between three to five years, and in some cases, in excess of 10 years. In many instances, we are able to renew those contracts prior to the expiration of the initial term and in other instances, we may sell the underlying assets to our customers pursuant to purchase options or negotiated sale. As of June 30, 2018, we had contract operation services contracts with unsatisfied performance obligations (commonly referred to as backlog) extending through the year 2028. The total aggregate transaction price allocated to the unsatisfied performance obligations as of June 30, 2018 was approximately $1.4 billion, of which approximately $139 million is expected to be recognized during the remainder of 2018 and approximately $260 million is expected to be recognized in 2019. Our contracts are subject to cancellation or modification at the election of the customer; however, due to the level of capital deployed by our customers on underlying projects, we have not been materially adversely affected by contract cancellations or modifications in the past.

Aftermarket Services Segment

In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul, upgrade, commissioning and reconfiguration services to customers who own their own compression, production, processing, treating and related equipment. Our services range from routine maintenance services and parts sales to the full operation and maintenance of customer-owned equipment.

Operations and maintenance services: Operation and maintenance services include personnel to run the equipment and monitor the outputs of the equipment, along with performing preventative or scheduled maintenance on customer-owned equipment. Operation and maintenance services represent a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer. Because our customers benefit equally throughout the service period and our efforts in providing operation and maintenance services are incurred relatively evenly over the period of performance, revenue is recognized over time using a time based measure as we provide our services to the customer. Our contracts generally require customers to pay a monthly service fee, which may contain variable consideration such as production or volume based fees and performance bonuses or penalties. Variable considerations included in our contracts are typically resolved on a monthly basis, and as such, variable considerations included in our contracts are generally allocated to each distinct month in the series within the contract. We generally enter into contracts with our operation and maintenance customers with initial terms ranging between two to four years, and in some cases, in excess of six years. In many instances, we are able to renew those contracts prior to the expiration of the initial term.

Parts sales: We offer our customers a full range of parts needed for the maintenance, repair and overhaul of oil and natural gas equipment, including natural gas compressors, industrial engines and production and processing equipment. We recognize revenue for parts sales at a point in time following the transfer of control of such parts to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contract. Our contracts require customers to pay a fixed fee upon shipment or delivery of the parts.

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Other services: Within our aftermarket services segment we also provide a wide variety of other services such as overhaul, commissioning, upgrade and reconfiguration services on customer-owned equipment. Overhaul services provided to customers are intended to return the major components to a “like new” condition without significantly modifying the applications for which the units were designed. Commissioning services that we provide to our customers generally include supervision and the introduction of fluids or gases into the systems to test vibrations, pressures and temperatures to ensure that customer-owned equipment is operating properly and is ready for start-up. Upgrade and reconfiguration services modify the operating parameters of customer-owned equipment such that the equipment can be used in applications for which it previously was not suited. Generally, the wide array of other services provided within the aftermarket services segment are expected to be completed within a six month period. Individually these services are generally distinct within the context of the contract and are not highly interdependent or interrelated with other service offerings. We recognize revenue from these services over time based on the proportion of labor hours expended to the total labor hours expected to complete the contract performance obligation. Our contracts generally require customers to pay a service fee that is either fixed or on a time and materials basis, which may include progress billings.

Our aftermarket services contracts are subject to cancellation or modification at the election of the customer.

Product Sales Segment

In our product sales segment, we design, engineer, manufacture, install and sell natural gas compression packages as well as equipment used in the production, treating and processing of crude oil and natural gas primarily to major and independent oil and natural gas producers as well as national oil and natural gas companies in the countries where we operate.

Compression equipment: We design, engineer, manufacture and sell skid-mounted natural gas compression equipment to meet standard or unique customer specifications. We recognize revenue from the sale of compression equipment over time based on the proportion of labor hours expended to the total labor hours expected to complete the contract performance obligation. Compression equipment manufactured for our customers are specifically designed and engineered to our customers’ specification and do not have an alternative use to us. Our contracts include a fixed fee and require our customers to make progress payments based on completion of contractual milestones during the life cycle of the manufacturing process. Our contracts provide us with an enforceable right to payment for work performed to date. Components of variable considerations exist in certain of our contracts and may include unpriced change orders, liquidated damages and performance bonuses or penalties. Typically, we expect the manufacturing of our compressor equipment to be completed within a three to 12 month period.

Processing and treating equipment: Processing and treating equipment sold to our customers consists of custom-engineered processing and treating plants, such as refrigeration, amine, cryogenic and natural gas processing plants. The manufacturing of processing and treating equipment generally represents a single performance obligation within the context of the contract. We recognize revenue from the sale of processing and treating equipment over time based on the proportion of labor hours expended to the total labor hours expected to complete the contract performance obligation. Processing and treating equipment manufactured for our customers are specifically designed and engineered to our customers’ specification and do not have an alternative use to us. Our contracts include a fixed fee and require our customers to make progress payments based on our completion of contractual milestones during the life cycle of the manufacturing process. Our contracts provide us with an enforceable right to payment for work performed to date. Components of variable considerations exist in certain of our contracts and may include unpriced change orders, liquidated damages and performance bonuses or penalties. Typically, we expect the manufacturing of our processing and treating equipment to be completed within a six to 24 month period.

Production equipment: In June 2018, we completed the sale of our North America production equipment assets (“PEQ assets”), which included $12.0 million in unsatisfied performance obligations. See Note 6 for further details on the sale of our PEQ assets. We previously manufactured standard production equipment used for processing wellhead production from onshore or shallow-water offshore platform production. The manufacturing of production equipment generally represented a single performance obligation within the context of the contract. We recognized revenue from the sale of production equipment at a point in time following the transfer of control of the equipment to the customer, which typically occurred upon completion of the manufactured equipment, depending on the terms of the underlying contract. Our contracts generally required customers to pay a fixed fee upon completion.

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Other product sales: Within our product sales segment we also provide for the sale of standard and custom water treatment equipment and floating production storage and offloading equipment and supervisor site work services. We recognize revenue from the sale of standard water treatment equipment at a point in time following the transfer of control of such equipment to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contract. We recognize revenue from the sale of custom water treatment equipment over time based on the proportion of costs expended to the total costs expected to complete the contract performance obligation. We recognize revenue from the sale of custom water treatment equipment and floating production storage and offloading equipment and supervisor site work services over time based on the proportion of labor costs expended to the total labor costs expected to complete the contract performance obligation.

Product sales contracts that include engineering, design, project management, procurement, construction and installation services necessary to incorporate our products into production, processing and compression facilities are treated as a single performance obligation due to the services that significantly integrate each piece of equipment into the combined output contracted by the customer.

We provide assurance-type warranties on certain equipment in our product sales contracts. These warranties generally do not constitute a separate performance obligation. Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized, or in the period that a specific issue arises as to the functionality of a product. The determination of such reserves requires that we make estimates of expected costs to repair or to replace the products under warranty. The amounts of the reserves are based on established terms and our best estimate of the amounts necessary to settle future and existing claims on product sales as of the balance sheet date. If actual repair and replacement costs differ significantly from estimates, adjustments to recognize additional cost of sales may be required in future periods.

As of June 30, 2018, the total aggregate transaction price allocated to the unsatisfied performance obligations for product sales contracts was approximately $635 million, of which approximately $379 million is expected to be recognized during the remainder of 2018 and approximately $256 million is expected to be recognized in 2019. Our contracts are subject to cancellation or modification at the election of the customer; however, due to our enforceable right to payment for work performed, we have not been materially adversely affected by contract cancellations or modifications in the past.

Significant Estimates

The recognition of revenue over time based on the proportion of labor hours expended to the total labor hours expected to complete depends largely on our ability to make reasonable dependable estimates related to the extent of progress toward completion of the contract, contract revenues and contract costs. Recognized revenues and profits are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known using the cumulative catch-up method. Due to the nature of some of our contracts, developing the estimates of costs often requires significant judgment. To calculate the proportion of labor hours expended to the total labor hours expected to complete the contract performance obligation, management uses significant judgment to estimate the number of total hours and profit expected for each project.

Variable Consideration

The nature of our contracts gives rise to several types of variable consideration. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Additionally, we include in our contract estimates additional revenue for unapproved change orders or claims against customers when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and historical, current and forecasted information that is reasonably available to us.

Contracts with Multiple Performance Obligations

Some of our contracts have multiple performance obligations. For instance, some of our product sales contracts include commissioning services or the supply of spare parts. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

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Contract Assets and Contract Liabilities

The following table provides information about accounts receivables, net, contract assets and contract liabilities from contracts with customers (in thousands):



	As of June 30, 2018		As of January 1, 2018
Accounts receivables, net	$	261,914	$	261,251
Contract assets and contract liabilities:
Current contract assets	72,374		50,824
Long-term contract assets	10,766		11,835
Current contract liabilities	105,298		112,244
Long-term contract liabilities	85,062		89,004

Accounts receivables are recorded when the right to consideration becomes unconditional. Our contract assets include amounts related to revenue that has been recognized in advance of billing the customer. The contract assets in our balance sheets include costs in excess of billings and unbilled receivables. When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of the contract, we record a contract liability. Our contract liabilities include payments received in advance of performance under the contract. The contract liabilities in our balance sheets include billings in excess of costs and deferred revenue. Billings in excess of costs primarily relate to billings that have not been recognized as revenue on product sales jobs where the transfer of control to the customer occurs over time. Deferred revenue is primarily comprised of upfront billings on contract operations jobs and billings related to product sales jobs that have not begun where revenue is recognized over time. Upfront payments received from customers on contract operations jobs are generally deferred and amortized over the contract term as we perform our services and the customer receives and consumes the benefits of the services we provide. Contract assets and liabilities are reported in our balance sheets on a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.

During the six months ended June 30, 2018, revenue recognized from contract operations services included $10.4 million of revenue deferred in previous periods. Revenue recognized during the six months ended June 30, 2018 from product sales performance obligations partially satisfied in previous periods was $360.5 million, of which $78.4 million was included in billings in excess of costs at the beginning of the period. Additionally, during the six months ended June 30, 2018, we recognized $4.1 million in revenue from contract operations services performance obligations that were satisfied in a previous period. The increase in our contract assets during the six months ended June 30, 2018 was primarily driven by progression of product sales projects and the timing of milestone billings.

Costs to Fulfill a Contract

We capitalize costs incurred to fulfill our revenue contracts that (i) relate directly to the contract (ii) are expected to generate resources that will be used to satisfy the performance obligation under the contract and (iii) are expected to be recovered through revenue generated under the contract. As of June 30, 2018, we had capitalized fulfillment costs of $8.2 million related to contractual obligations incurred at the completion of the commissioning phase and prior to providing services on contracts within our contract operations segment. Contract fulfillment costs are expensed to cost of sales as we satisfy our performance obligations by transferring contract operation services to the customer. During the three and six months ended June 30, 2018, we recorded amortization expense for capitalized fulfillment costs of $0.5 million and $1.1 million, respectively. Capitalized fulfillment costs are included in intangible and other assets, net, in the balance sheets.

Costs to Obtain a Contract

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain commissions paid to internal sales representatives and third party agents meet the requirements to be capitalized. The amount capitalized for incremental costs to obtain contracts as of June 30, 2018 was $6.6 million. The judgments made in determining the amount of costs incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract. Capitalized costs to obtain a contract are included in intangible and other assets, net, in the balance sheets and are amortized to selling, general and administrative expense over the expected period of benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. During the three and six months ended June 30, 2018, we recorded amortization expense for capitalized costs to obtain a contract of $0.4 million and $0.8 million, respectively.

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Practical Expedients and Exemptions

We have elected the following practical expedients:


•	We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less.


•	We treat shipping and handling activities that occur after the transfer of control as costs to fulfill a contract rather than a separate performance obligation.


•	We record taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from our customers on a net basis, and thus, such taxes are excluded from the measurement of a performance obligation’s transaction price.


•	We expense sales commissions as incurred when we expect that the amortization period of such costs will be one year or less.

Impact of New Revenue Recognition Guidance on Financial Statement Line Items

The following tables summarize the impacts of the adoption of the new revenue recognition guidance on our balance sheet as of June 30, 2018 and statements of operations and cash flows for the applicable periods during the three and six months ended June 30, 2018 (in thousands):



	June 30, 2018
	As Reported			Adjustments			Balances Without Adoption of Topic 606
ASSETS

Accounts receivable, net of allowance	$	261,914		$	221		$	262,135
Inventory, net	161,208			1,183			162,391
Contract assets	72,374			(17,311		)	55,063
Other current assets	30,104			9,160			39,264
Property, plant and equipment, net	838,055			1,942			839,997
Deferred income taxes	12,477			(1,571		)	10,906
Intangible and other assets, net	100,958			(17,592		)	83,366
Total assets	1,513,434			(23,968		)	1,489,466

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accrued liabilities	$	112,512		$	(15,554	)	$	96,958
Contract liabilities	105,298			1,625			106,923
Deferred income taxes	6,206			(3,764		)	2,442
Long-term contract liabilities	85,062			3,476			88,538
Other long-term liabilities	39,073			(18,076		)	20,997
Total liabilities	966,483			(32,293		)	934,190
Accumulated deficit	(228,119		)	8,325			(219,794		)
Total stockholders’ equity	546,951			8,325			555,276
Total liabilities and stockholders’ equity	1,513,434			(23,968		)	1,489,466

The adoption of the new revenue recognition guidance resulted in increases in total assets and liabilities of $24.0 million and $32.3 million, respectively. This was primarily due to capitalized contract fulfillment and obtainment costs and related liabilities recorded associated with contracts within our contract operations segment.

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	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
	As Reported			Adjustments			Balances Without Adoption of Topic 606			As Reported		Adjustments			Balances Without Adoption of Topic 606
Revenues:
Contract operations	$	91,487		$	(690	)	$	90,797		$	187,980	$	(1,459	)	$	186,521
Aftermarket services	32,267			(1,909		)	30,358			58,638		(2,079		)	56,559
Cost of sales (excluding depreciation and amortization expense):
Contract operations	32,372			(501		)	31,871			67,757		(1,101		)	66,656
Aftermarket services	23,706			(1,363		)	22,343			42,603		(1,406		)	41,197
Selling, general and administrative	44,382			6,627			51,009			88,624		6,627			95,251
Depreciation and amortization	30,184			(659		)	29,525			61,213		(1,368		)	59,845
Income before income taxes	8,153			(6,703		)	1,450			17,583		(6,290		)	11,293
Provision for income taxes	9,622			(5,334		)	4,288			15,114		(4,594		)	10,520
Income (loss) from continuing operations	(1,469		)	(1,369		)	(2,838		)	2,469		(1,696		)	773
Net income (loss)	75			(1,369		)	(1,294		)	5,412		(1,696		)	3,716

Basic net income (loss) per common share	$	—		$	(0.04	)	$	(0.04	)	$	0.15	$	(0.05	)	$	0.10
Diluted net income (loss) per common share	—			(0.04		)	(0.04		)	0.15		(0.05		)	0.10

The adoption of the new revenue recognition guidance resulted in an increase in net income of $1.4 million and $1.7 million for the three and six months ended June 30, 2018, respectively. Most notably, costs to obtain a contract during the three and six months ended June 30, 2018 would have resulted in an increase in selling, general and administrative expense under previous accounting standards.



	Six Months Ended June 30, 2018
	As Reported			Adjustments			Balances Without Adoption of Topic 606
Cash flows from operating activities:
Net income	$	5,412		$	(1,696	)	$	3,716
Depreciation and amortization	61,213			(1,368		)	59,845
Deferred income tax benefit	(3,366		)	(4,594		)	(7,960		)
Changes in assets and liabilities:
Inventory	(70,126		)	(1,059		)	(71,185		)
Contract assets	(21,582		)	6,576			(15,006		)
Other current assets	9,325			(4,401		)	4,924
Accounts payable and other liabilities	39,587			4,887			44,474
Contract liabilities	(3,746		)	171			(3,575		)
Other	1,984			1,484			3,468
Net cash provided by continuing operations	28,140			—			28,140

The adoption of the new revenue recognition guidance resulted in offsetting shifts in cash flows within cash flows from operating activities and did not have an impact on our total cash flows from operations.

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Note 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 $19.7 million during the six months ended June 30, 2017. As of June 30, 2018, the remaining principal amount due to us was approximately $17 million. We have not recognized amounts payable to us by PDVSA Gas as a receivable and will therefore recognize payments received in the future as income from discontinued operations in the periods such payments are received. The proceeds from the sale of the assets are not subject to Venezuelan national taxes due to an exemption allowed under the Venezuelan Reserve Law applicable to expropriation settlements. In addition, and in connection with the sale, we and the Venezuelan government agreed to waive rights to assert certain claims against each other.

In accordance with the separation and distribution agreement from the Spin-off, a subsidiary of Archrock has the right to receive payments from our wholly owned subsidiary, Exterran Energy Solutions, L.P. (“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 $19.7 million to Archrock during the six months ended June 30, 2017. The transfer of cash was recognized as a reduction to additional paid-in capital in our financial statements. See Note 15 for further discussion related to our contingent liability to Archrock.

In the first quarter of 2016, we began executing the exit of our Belleli EPC business that has historically been comprised of engineering, procurement and construction for the manufacture of tanks for tank farms and the manufacture of evaporators and brine heaters for desalination plants in the Middle East (referred to as “Belleli EPC” or the “Belleli EPC business” herein) by ceasing the bookings of new orders. As of the fourth quarter of 2017, we had substantially exited our Belleli EPC business and, in accordance with GAAP, it is reflected as discontinued operations in our financial statements for all periods presented. Although we have reached mechanical completion on all remaining Belleli EPC contracts, we are still subject to risks and uncertainties potentially resulting from warranty obligations, customer or vendors claims against us, settlement of claims against customers, completion of demobilization activities and litigation developments. The facility previously utilized to manufacture products for our Belleli EPC business has been repurposed to manufacture product sales equipment. As such, certain personnel, buildings, equipment and other assets that were previously related to our Belleli EPC business remain a part of our continuing operations. As a result, activities associated with our ongoing operations at our repurposed facility are included in continuing operations.

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



	Three Months Ended June 30, 2018									Three Months Ended June 30, 2017
	Venezuela			Belleli EPC			Total			Venezuela			Belleli EPC			Total
Revenue	$	—		$	2,915		$	2,915		$	—		$	12,885		$	12,885
Cost of sales (excluding depreciation and amortization expense)	—			2,808			2,808			—			8,064			8,064
Selling, general and administrative	29			127			156			32			1,520			1,552
Depreciation and amortization	—			52			52			—			3,099			3,099
Other (income) expense, net	—			(1,689		)	(1,689		)	—			970			970
Provision for (benefit from) income taxes	—			44			44			—			(1,174		)	(1,174		)
Income (loss) from discontinued operations, net of tax	$	(29	)	$	1,573		$	1,544		$	(32	)	$	406		$	374

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	Six Months Ended June 30, 2018									Six Months Ended June 30, 2017
	Venezuela			Belleli EPC			Total			Venezuela			Belleli EPC			Total
Revenue	$	—		$	7,882		$	7,882		$	—		$	48,159		$	48,159
Cost of sales (excluding depreciation and amortization expense)	—			5,211			5,211			—			26,063			26,063
Selling, general and administrative	61			187			248			65			2,506			2,571
Depreciation and amortization	—			480			480			—			4,227			4,227
Recovery attributable to expropriation	—			—			—			(16,514		)	—			(16,514		)
Restructuring and other charges	—			—			—			—			(439		)	(439		)
Other (income) expense, net	1			(1,090		)	(1,089		)	(3,157		)	455			(2,702		)
Provision for income taxes	—			89			89			—			1,935			1,935
Income (loss) from discontinued operations, net of tax	$	(62	)	$	3,005		$	2,943		$	19,606		$	13,412		$	33,018

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



	June 30, 2018						December 31, 2017
	Venezuela		Belleli EPC		Total		Venezuela		Belleli EPC		Total
Cash	$	1	$	—	$	1	$	3	$	—	$	3
Accounts receivable	—		6,022		6,022		—		14,770		14,770
Costs and estimated earnings in excess of billings on uncompleted contracts	—		8,549		8,549		—		7,786		7,786
Other current assets	3		454		457		2		1,190		1,192
Total current assets associated with discontinued operations	4		15,025		15,029		5		23,746		23,751
Property, plant and equipment, net	—		91		91		—		1,054		1,054
Intangible and other assets, net	—		2,486		2,486		—		2,646		2,646
Total assets associated with discontinued operations	$	4	$	17,602	$	17,606	$	5	$	27,446	$	27,451

Accounts payable	$	—	$	4,046	$	4,046	$	—	$	9,253	$	9,253
Accrued liabilities	63		11,726		11,789		59		15,617		15,676
Billings on uncompleted contracts in excess of costs and estimated earnings	—		4,870		4,870		—		7,042		7,042
Total current liabilities associated with discontinued operations	63		20,642		20,705		59		31,912		31,971
Other long-term liabilities	—		5,895		5,895		1		6,527		6,528
Total liabilities associated with discontinued operations	$	63	$	26,537	$	26,600	$	60	$	38,439	$	38,499

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Note 4 - Inventory, net

Inventory, net of reserves, consisted of the following amounts (in thousands):



	June 30, 2018		December 31, 2017
Parts and supplies	$	82,744	$	79,803
Work in progress	54,906		21,853
Finished goods ⁽¹⁾	23,558		6,253
Inventory, net	$	161,208	$	107,909

⁽¹⁾

The increase in finished goods inventory during the six months ended June 30, 2018 was primarily due to a nonmonetary agreement that we entered into with an existing customer to receive an idle processing and treating plant from the customer in exchange for an identical processing and treating plant to be manufactured by us. We recorded the finished goods inventory received and our corresponding liability to the customer at fair value based on the estimated resale price of the processing and treating plant received. The liability resulting from this transaction is included within accounts payable, trade, in our balance sheet and will be extinguished upon our delivery of the replacement processing and treating plant to the customer.

Note 5 - Property, Plant and Equipment, net

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



	June 30, 2018			December 31, 2017
Compression equipment, facilities and other fleet assets ⁽¹⁾	$	1,621,706		$	1,577,052
Land and buildings	98,516			96,463
Transportation and shop equipment	81,968			82,240
Other	94,823			90,395
	1,897,013			1,846,150
Accumulated depreciation	(1,058,958		)	(1,023,871		)
Property, plant and equipment, net	$	838,055		$	822,279

⁽¹⁾

In the fourth quarter of 2017, we evaluated the estimated useful lives and salvage values of our property, plant and equipment. As a result of this evaluation, we changed the useful lives and salvage values for our compression equipment from a maximum useful life of 30 years to 23 years and a maximum salvage value of 20% to 15% based on expected future use. During the three and six months ended June 30, 2018, we recorded increases in depreciation expense of $2.0 million and $5.1 million, respectively, as a result of these changes in useful lives and salvage values which impacted our diluted net income per share by $0.06 and $0.14, respectively.

Note 6 - Sale of PEQ Assets

In the fourth quarter of 2017, we classified certain current and long-term assets primarily related to inventory and property, plant and equipment, net, within our product sales business as assets held for sale in our balance sheets. In April 2018, we entered into a definitive agreement for the sale of these assets to Titan Production Equipment Acquisition, LLC, an affiliate of Castle Harlan, Inc. During the six months ended June 30, 2018, we recorded an additional impairment of $1.8 million to reduce these assets to their approximate fair values based on the expected net proceeds. The impairment charges are reflected in long-lived asset impairment in our statements of operations.

In June 2018, we completed the sale of our PEQ assets. The sale of our PEQ assets resulted in a loss of $1.7 million during the three and six months ended June 30, 2018, which is reflected in other (income), expense, net, in our statements of operations.

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Note 7 - Debt

Debt consisted of the following (in thousands):



	June 30, 2018			December 31, 2017
Revolving credit facility due November 2020	$	32,500		$	—
8.125% senior notes due May 2025	375,000			375,000
Other debt	912			1,171
Unamortized deferred financing costs of 8.125% senior notes	(6,844		)	(7,250		)
Total debt	401,568			368,921
Less: Amounts due within one year ⁽¹⁾	(449		)	(449		)
Long-term debt	$	401,119		$	368,472

⁽¹⁾Short-term debt and the current portion of long-term debt are included in accrued liabilities in our balance sheets.

Revolving Credit Facility

We and our wholly owned subsidiary, EESLP, are parties to an amended and restated credit agreement (the “Credit Agreement”) consisting of a $680.0 million revolving credit facility expiring in November 2020 and previously included a term loan facility. In April 2017, we paid the remaining principal amount of $232.8 million due under the term loan facility with proceeds from the 2017 Notes (as defined below) issuance. As a result of the repayment of the term loan facility, we expensed $1.7 million of unamortized deferred financing costs in the second quarter of 2017, which is reflected in interest expense in our statements of operations.

As of June 30, 2018, we had $32.5 million in outstanding borrowings and $57.3 million in outstanding letters of credit under our revolving credit facility. At June 30, 2018, taking into account guarantees through letters of credit, we had undrawn capacity of $590.2 million under our revolving credit facility. Our Credit Agreement limits our senior secured leverage ratio (as defined in the Credit Agreement) on the last day of the fiscal quarter to no greater than 2.75 to 1.0. As a result of this limitation, $566.3 million of the $590.2 million of undrawn capacity under our revolving credit facility was available for additional borrowings as of June 30, 2018.

8.125% Senior Notes Due May 2025

In April 2017, our 100% owned subsidiaries EESLP and EES Finance Corp. issued $375.0 million aggregate principal amount of 8.125% senior unsecured notes due 2025 (the “2017 Notes”). The 2017 Notes are guaranteed by us on a senior unsecured basis. Pursuant to the separation and distribution agreement from the Spin-off, EESLP used proceeds from the issuance of the 2017 Notes to pay a subsidiary of Archrock $25.0 million in satisfaction of EESLP’s obligation to pay that sum following the occurrence of a qualified capital raise. The transfer of cash to Archrock’s subsidiary was recognized as a reduction to additional paid-in capital in the second quarter of 2017.

In connection with the issuance of the 2017 Notes, we incurred transaction costs of $8.1 million related to the issuance of the 2017 Notes. These costs are presented as a direct deduction from the carrying value of the 2017 Notes and are being amortized over the term of the 2017 Notes.

In April 2018, the 2017 Notes were exchanged for notes with substantially identical terms and registered under the Securities Act of 1933, as amended.

Note 8 - 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 categories:


•	Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.

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•

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered market makers.


•	Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information.

Nonrecurring Fair Value Measurements

The following table presents our assets and liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2018, with pricing levels as of the date of valuation (in thousands):



	Six Months Ended June 30, 2018
	(Level 1)		(Level 2)		(Level 3)
Impaired assets—assets held for sale ⁽¹⁾	$	—	$	—	$	21,026
Long-term note receivable ⁽²⁾	—		—		14,573


⁽¹⁾	Our estimate of the fair value of the impaired PEQ assets, which were classified as assets held for sale as of March 31, 2018, was based on the expected net proceeds from the sale of the assets.


⁽²⁾	Our estimate of the fair value of a note receivable was discounted based on a settlement period of eight years and a discount rate of 5.2%.

Financial Instruments

Our financial instruments consist of cash, restricted cash, receivables, payables and debt. At June 30, 2018 and December 31, 2017, the estimated fair values of cash, restricted cash, receivables and payables approximated their carrying amounts as reflected in our balance sheets due to the short-term nature of these financial instruments.

The fair value of the 2017 Notes was estimated based on model derived calculations using market yields observed in active markets, which are Level 2 inputs. As of June 30, 2018 and December 31, 2017, the carrying amount of the 2017 Notes, excluding unamortized deferred financing costs, of $375.0 million was estimated to have a fair value of $399.0 million and $404.0 million, respectively. Due to the variable rate nature of our revolving credit facility, the carrying value as of June 30, 2018 approximated the fair value as the rate was comparable to the then-current market rate at which debt with similar terms could have been obtained.

Note 9 - 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.

In the fourth quarter of 2017, we classified our PEQ assets primarily related to inventory and property, plant and equipment, net, within our product sales business as assets held for sale in our balance sheets. As described in Note 6, in June 2018, we completed the sale of our PEQ assets. During the six months ended June 30, 2018, we recorded an impairment of $1.8 million to reduce these assets to their approximate fair values based on the expected net proceeds.

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Note 10 - Restatement Related Charges (Recoveries), net

During the first quarter of 2016, our senior management identified errors relating to the application of percentage-of-completion accounting principles to specific Belleli EPC product sales projects. We incurred restatement related charges of $1.6 million during the three months ended June 30, 2017, and $0.6 million and $3.8 million during the six months ended June 30, 2018 and 2017, respectively. The costs incurred were external costs associated with an SEC investigation and remediation activities related to the restatement of our financial statements. During the three and six months ended June 30, 2018 and 2017, we recorded recoveries from Archrock pursuant to the separation and distribution agreement of $0.6 million and $2.8 million, respectively, for previously incurred restatement related costs. We may incur additional cash expenditures related to external legal counsel costs associated with an ongoing SEC investigation surrounding the restatement of our financial statements, of which a portion may be recoverable from Archrock.

The following table summarizes the changes to our accrued liability balance related to restatement charges, net, for the six months ended June 30, 2017 and 2018 (in thousands):



	Restatement Related Charges
Beginning balance at January 1, 2017	$	2,212
Additions for costs expensed, net	1,014
Reductions for payments, net	(1,472		)
Ending balance at June 30, 2017	$	1,754

Beginning balance at January 1, 2018	$	579
Additions for costs expensed, net	24
Reductions for payments, net	(367		)
Ending balance at June 30, 2018	$	236

The following table summarizes the components of charges included in restatement related charges (recoveries), net, in our statements of operations for the three and six months ended June 30, 2018 and 2017 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
External accounting costs	$	—		$	108		$	—		$	754
External legal costs	—			1,449			533			2,692
Other	18			86			106			369
Recoveries from Archrock	(615		)	(2,801		)	(615		)	(2,801		)
Total restatement related charges (recoveries), net	$	(597	)	$	(1,158	)	$	24		$	1,014

Note 11 - Restructuring and Other Charges

In the second quarter of 2018, we initiated a relocation plan in the North America region to better align our contract operations business with our customers. As a result of this plan, during the three and six months ended June 30, 2018, we incurred restructuring and other charges of $1.4 million primarily related to employee termination benefits. As of June 30, 2018, the accrued liability balance related to this plan was $1.0 million. The charges incurred in conjunction with this relocation plan are included in restructuring and other charges in our statements of operations. We currently estimate that we will incur additional charges with respect to this relocation plan of approximately $1.5 million. We expect the majority of the estimated additional charges will result in cash expenditures.

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In connection with the Spin-off, we incurred restructuring and other charges of $0.3 million during the six months ended June 30, 2017 primarily related to retention awards to certain employees. During the three months ended June 30, 2017, we recorded a restructuring benefit of $0.1 million related to changes in estimated retention awards to be paid for certain employees. Additionally, we announced a cost reduction plan primarily focused on workforce reductions and the reorganization of certain facilities in the second quarter of 2015. We incurred restructuring and other charges associated with the cost reduction plan of $0.4 million and $2.4 million during the three and six months ended June 30, 2017, respectively, of which $0.4 million and $1.9 million, respectively, related to employee termination benefits. The charges incurred in conjunction with the Spin-off and cost reduction plan are reflected as restructuring and other charges in our statements of operations. In 2017, we completed restructuring activities related to the Spin-off and cost reduction plan.

The following table summarizes the components of charges included in restructuring and other charges in our statements of operations for the three and six months ended June 30, 2018 and 2017 (in thousands):



	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018		2017
Retention awards to certain employees	$	—	$	(92	)	$	—	$	253
Employee termination benefits	1,356		361			1,356		1,894
Other	66		41			66		471
Total restructuring and other charges	$	1,422	$	310		$	1,422	$	2,618

Note 12 - Provision for Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). Additionally, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB118”) in December 2017, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Reform Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

For the year ended December 31, 2017, our provision for income tax included the impact of decisions regarding the various impacts of tax reform and related disclosures. In some cases where the guidance in SAB118 applied, we disclosed in our financial statements those cases where the accounting could be completed, and for matters that have not been completed, we recognized provisional amounts to the extent that they are reasonably estimable and will adjust them over time as more information becomes available. Specifically, we recorded provisional amounts associated with the transition tax on undistributed earnings, the re-measurement of deferred tax assets and liabilities due to the reduction in the corporate tax rate and the transition tax, and the tax benefit associated with the reduction of the valuation allowance. The provisional amounts incorporate assumptions made based upon our current interpretation of the Tax Reform Act and may change as we receive additional clarification and implementation guidance. We are continuing to analyze additional information to determine the final impact as well as other impacts of the Tax Reform Act. Any adjustments recorded to the provisional amounts will be included in income from operations as an adjustment to our 2018 financial statements.

The provision for income taxes for the three and six months ended June 30, 2018 includes $5.7 million related to income tax on income in Argentina recorded as a result of foreign exchange rate movements.

During the second quarter of 2017, our Brazil subsidiary entered the Tax Regularization Program (the “Program”) pursuant to Brazil Provisional Measure No. 766 issued on January 4, 2017. The Program allows for the partial settling of debts, both income tax debts and non-income-based tax debts, due by November 30, 2016 to Brazil’s Federal Revenue Service with the use of tax credits, including income tax loss carryforwards. An $11.9 million income tax benefit was recorded during the three and six months ended June 30, 2017 attributable to the reversal of valuation allowances against certain deferred tax assets related to income tax loss carryforwards that were utilized under the Program, including interest income. Additionally, during the three and six months ended June 30, 2017, we incurred $1.5 million in penalties, which is reflected in other (income) expense, net, in our statements of operations, and $2.4 million in interest expense, which is reflected in interest expense in our statements of operations, attributable to the settling of non-income-based tax debts in connection with the Program.

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Note 13 - Stock-Based Compensation

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. There were no stock options granted during the six months ended June 30, 2018.

Restricted Stock, Restricted Stock Units and Performance Units

For grants of restricted stock, restricted stock units and performance units, we recognize compensation expense over the applicable vesting period equal to the fair value of our common stock at the grant date. Grants of restricted stock, restricted stock units and performance units generally vest one third per year on each of the first three anniversaries of the grant date. Certain grants of restricted stock vest on the third anniversary of the grant date and certain grants of performance units vest on the second anniversary of the grant date.

The table below presents the changes in restricted stock, restricted stock units and performance units for our common stock during the six months ended June 30, 2018.



	Shares (in thousands)		Weighted Average Grant-Date Fair Value Per Share
Non-vested awards, January 1, 2018	1,165		$	23.93
Granted	558		26.25
Vested	(444	)	23.24
Cancelled	(75	)	25.36
Non-vested awards, June 30, 2018	1,204		25.17

As of June 30, 2018, we estimate $24.7 million of unrecognized compensation cost related to unvested restricted stock, restricted stock units and performance units issued to our employees to be recognized over the weighted-average vesting period of 1.8 years.

Note 14 - 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 unvested restricted stock and restricted stock units that have non-forfeitable 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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The following table presents a reconciliation of basic and diluted net income per common share for the three and six months ended June 30, 2018 and 2017 (in thousands, except per share data):



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Numerator for basic and diluted net income per common share:
Income (loss) from continuing operations	$	(1,469	)	$	3,170		$	2,469		$	(9,153	)
Income from discontinued operations, net of tax	1,544			374			2,943			33,018
Less: Net income attributable to participating securities	—			(102		)	(143		)	—
Net income — used in basic and diluted net income per common share	$	75		$	3,442		$	5,269		$	23,865

Weighted average common shares outstanding including participating securities	36,447			36,057			36,340			35,967
Less: Weighted average participating securities outstanding	(992		)	(1,039		)	(964		)	(1,054		)
Weighted average common shares outstanding — used in basic net income per common share	35,455			35,018			35,376			34,913
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock units	*			76			70			*
Weighted average common shares outstanding — used in diluted net income per common share	35,455			35,094			35,446			34,913

Net income per common share:
Basic	$	—		$	0.10		$	0.15		$	0.68
Diluted	$	—		$	0.10		$	0.15		$	0.68


*	Excluded from diluted net income per common share as their inclusion would have been anti-dilutive.

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income per common share as their inclusion would have been anti-dilutive for the three and six months ended June 30, 2018 and 2017 (in thousands):



	Three Months Ended June 30,			Six Months Ended June 30,
	2018		2017	2018	2017
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average market value	35	<