EXTERRAN CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of Exterran's financial
statements with a narrative from the perspective of management. The following
discussion and analysis of our financial condition and results of operations
should be read in conjunction with our unaudited financial statements and the
notes thereto included in the Condensed Consolidated Financial Statements in
Part I, Item 1 ("Financial Statements") of this report and in conjunction with
our Annual Report on Form 10-K for the year ended December 31, 2020 .
Disclosure Regarding Forward-Looking Statements
This report contains "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, without limitation, statements regarding our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations; the expected amount of our capital expenditures; anticipated cost savings, future revenue, adjusted gross margin and other financial or operational measures related to our business and our primary business segments; the future value of our equipment; and plans and objectives of our management for our future operations. You can identify many of these statements by looking for words such as "believe," "expect," "intend," "project," "anticipate," "estimate," "will continue" or similar words or the negative thereof. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Known material factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include the risk factors described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , and those set forth from time to time in our filings with theSecurities and Exchange Commission ("SEC"), which are available through our website at www.exterran.com and through theSEC's website at www.sec.gov, as well as the following risks and uncertainties:
•
conditions in the oil and natural gas industry, including a sustained imbalance
in the level of supply or demand for oil or natural gas or a sustained low price
of oil or natural gas, which could depress or reduce the demand or pricing for
our natural gas compression and oil and natural gas production and processing
equipment and services;
•
reduced profit margins or the loss of market share resulting from competition or
the introduction of competing technologies by other companies;
•
economic or political conditions in the countries in which we do business,
including civil developments such as uprisings, riots, terrorism, kidnappings,
violence associated with drug cartels, legislative changes and the
expropriation, confiscation or nationalization of property without fair
compensation;
•
risks associated with natural disasters, pandemics and other public health
crisis and other catastrophic events outside our control, including the impact
of, and the response to, the ongoing COVID-19 pandemic;
•
changes in currency exchange rates, including the risk of currency devaluations
by foreign governments, and restrictions on currency repatriation;
•
risks associated with cyber-based attacks or network security breaches;
•
changes in international trade relationships, including the imposition of trade
restrictions or tariffs relating to any materials or products (such as aluminum
and steel) used in the operation of our business;
•
risks associated with our operations, such as equipment defects, equipment
malfunctions and environmental discharges;
•
the risk that counterparties will not perform their obligations under their
contracts with us or other changes that could impact our ability to recover our
fixed asset investment;
•
the financial condition of our customers;
•
our ability to timely and cost-effectively obtain components necessary to
conduct our business;
•
employment and workforce factors, including our ability to hire, train and
retain key employees;
•
our ability to implement our business and financial objectives, including:
•
winning profitable new business;
•
timely and cost-effective execution of projects;
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•
enhancing or maintaining our asset utilization, particularly with respect to our fleet of compressors and other assets; • integrating acquired businesses; • generating sufficient cash to satisfy our operating needs, existing capital commitments and other contractual cash obligations, including our debt obligations; and • accessing the financial markets at an acceptable cost; • our ability to accurately estimate our costs and time required under our fixed price contracts; • liability related to the use of our products, solutions and services; • changes in governmental safety, health, environmental or other regulations, which could require us to make significant expenditures; and • risks associated with our level of indebtedness, inflation and our ability to fund our business. All forward-looking statements included in this report are based on information available to us on the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report. GeneralExterran Corporation (together with its subsidiaries, "Exterran Corporation ," the "Company," "our," "we" or "us"), aDelaware corporation formed inMarch 2015 , is a global sustainable systems and process company offering solutions in the oil, gas, water and power markets. We are a leader in natural gas processing and treatment, produced water treatment and compression products, solutions and services, providing critical midstream infrastructure solutions to customers throughout the world while helping them reduce their flaring, emissions and fresh water usage. Our manufacturing facilities are located inthe United States of America ("U.S."),Singapore and theUnited Arab Emirates . We provide our products, solutions and services to a global customer base consisting of companies engaged in all aspects of the oil and natural gas industry, including large integrated oil and natural gas companies, national oil and natural gas companies, independent oil and natural gas producers and oil and natural gas processors, gatherers and pipeline operators. We operate in three primary business lines: contract operations, aftermarket services and product sales. The nature and inherent interactions between and among our business lines provide us with opportunities to cross-sell and offer integrated product and service solutions to our customers. In our contract operations business line, we provide processing, treating, compression and water treatment services through the operation of our natural gas and crude oil production and process equipment, natural gas compression equipment and water treatment equipment for our customers. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, repair, overhaul, upgrade, startup and commissioning and reconfiguration services to customerswho own their own oil and natural gas compression, production, processing, treating and related equipment. In our product sales business line, we design, engineer, manufacture, install and sell equipment used in the treating and processing of crude oil, natural gas and water as well as natural gas compression packages to our customers throughout the world and for use in our contract operations business line. We also offer our customers, on either a contract operations basis or a sale basis, the engineering, design, project management, procurement and construction services necessary to incorporate our products into production, processing and compression facilities, which we refer to as integrated projects. We have continued to work toward our strategy to be a company that leverages our sustainable technology offering in treating natural gas and produced water to help our customers better utilize their natural resources while enhancing our operational excellence to provide complete systems and process solutions in energy and industrial applications. Over the past several years, we have made significant progress in this journey by taking actions to protect our core business, develop important organizational capabilities, commercialize new products, solutions and services and implement new processes to positionExterran for success. We have optimized our portfolio of products, solutions and services to better serve our global customers and help them improve their environmental impacts while providing a more attractive investment option for our investors. As we continue on this path, we decided that ourU.S. compression fabrication business was non-core to our strategy, and during the third quarter of 2020, we entered into an agreement to sell the business which closed onNovember 2, 2020 . We did not sell certain items in inventory, which we expect to liquidate over time. During the third quarter of 2020, this business met the held for sale criteria and is also now reflected as discontinued operations in our financial statements for all periods presented. TheU.S. compression fabrication business was 23
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previously included in our product sales segment and had been reclassified to discontinued operations in our financial statements for all periods presented. Compression revenue from sales to international customers continues to be included in our product sales segment. Our chief operating decision maker manages business operations, evaluates performance and allocates resources based on the Company's three primary business lines, which are also referred to as our segments. In order to more efficiently and effectively identify and serve our customer needs, we classify our worldwide operations into four geographic regions. TheNorth America region is primarily comprised of our operations in theU.S. TheLatin America region is primarily comprised of our operations inArgentina ,Bolivia ,Brazil andMexico . TheMiddle East andAfrica region is primarily comprised of our operations inBahrain ,Iraq ,Oman ,Nigeria and theUnited Arab Emirates . TheAsia Pacific region is primarily comprised of our operations inChina ,Indonesia ,Singapore andThailand .
We refer to the condensed consolidated financial statements collectively as "financial statements," and individually as "balance sheets," "statements of operations," "statements of comprehensive income (loss)," "statements of stockholders' equity" and "statements of cash flows" herein.
Financial Results of Operations
Overview
Industry Conditions and Trends
Our business environment and corresponding operating results are affected by the level of energy industry spending for the exploration, development and production of oil and natural gas reserves along with spending within the midstream space. Spending by oil and natural gas exploration and production companies and midstream providers is dependent upon these companies' forecasts regarding the expected future supply, demand and pricing of oil and natural gas products as well as their estimates of risk-adjusted costs to find, develop, produce, transport and treat these reserves. Although we believe our contract operations business is typically less impacted by short-term commodity prices than certain other energy products, solutions and service providers, changes in oil and natural gas exploration and production spending normally result in changes in demand for our products, solutions and services. Beginning in 2019, there has been a shift in the industry that was exacerbated by the COVID-19 pandemic. The COVID-19 pandemic created a demand shock to the system that further exacerbated the supply demand imbalance that was already taking place. In response, exploration and production producers and midstream providers have shifted their focus from growth to one emphasizing cash flow and returns. This has caused a significant reduction in their capital spending plans in order to drive incremental cash flow and has put constraints on the amount of new projects that customers sanction. We believe this is likely to continue to persist throughout the remainder of 2021, particularly in theU.S. While the exact timing of the rebalancing of supply and demand remains uncertain, macro indicators (including favorable commodity prices) suggest this is beginning to improve, and the number of opportunities available to us is also increasing.
Our Performance Trends and Outlook
Our revenue, earnings and financial position are affected by, among other things, market conditions that impact demand and pricing for natural gas compression, oil and natural gas production and processing and produced water treatment solutions along with our customers' decisions to use our products, solutions and services, use our competitors' products and services or own and operate the equipment themselves. Aggregate booking activity levels for our product sales segment inNorth America and international markets during the nine months endedSeptember 30, 2021 were$12.5 million , which represents a decrease of 97% compared to the nine months endedSeptember 30, 2020 . The decrease in bookings was primarily driven by the impact of energy industry conditions and the COVID-19 pandemic. During the first quarter of 2020, we recorded a large processing plant booking in theMiddle East . Fluctuations in the size and timing of customers' requests for bid proposals and awards of new contracts tend to create variability in booking activity levels from period to period. Historically, oil, natural gas and natural gas liquids prices and the level of drilling and exploration activity inNorth America have been volatile. The Henry Hub spot price for natural gas was$5.94 per MMBtu atSeptember 30, 2021 , which was 152% and 258% higher than the prices atDecember 31, 2020 andSeptember 30, 2020 , respectively, and theU.S. natural gas liquid composite price was$8.44 per MMBtu for the month ofSeptember 2021 , which was 47% and 78% higher than the prices for the month ofDecember 2020 andSeptember 2020 , respectively. In addition, the West Texas Intermediate crude oil spot price as ofSeptember 30, 2021 was 52% and 83% higher than the price atDecember 31, 2020 and atSeptember 30, 2020 , respectively. Volatility in demand for energy and in commodity prices as well as an industry trend towards 24
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disciplined capital spending and improving returns have caused timing uncertainties in demand for our products recently. These uncertainties have caused delays in the timing of new equipment orders and lower bookings in our product sales segment. Booking activity levels for our product sales segment inNorth America during the nine months endedSeptember 30, 2021 were$5.6 million , up from$1.3 million in nine months endedSeptember 30, 2020 . Longer-term fundamentals in our international markets partially depend on international oil and gas infrastructure projects, many of which are based on the longer-term plans of our customers that can be driven by their local market demand and local pricing for natural gas. As a result, we believe our international customers make decisions based more on longer-term fundamentals that may be less tied to near term commodity prices than our North American customers. We believe the demand for our products, solutions and services in international markets will continue, and we expect to have opportunities to grow our international businesses. Booking activity levels for our product sales segment in international markets during the nine months endedSeptember 30, 2021 were$6.9 million , down from$449.2 million in the nine months endedSeptember 30, 2020 . The timing of customer orders and change in activity levels by our customers is difficult to predict given our customers longer-term decision making. As a result, our ability to project the anticipated activity level and timing of awards for our business, and particularly our product sales segment, is limited. We continue to monitor the global energy markets and industry capital spending levels, and will continue to control our expense levels as necessary to protect our profitability. Additionally, volatility in commodity prices could continue to delay investments by our customers in significant projects, which could result in a material adverse effect on our business, financial condition, results of operations and cash flows. Our level of capital spending largely depends on the demand for our contract operations services and the equipment required to provide such services to our customers. Based on opportunities we anticipate in international markets, we expect to invest more capital in our contract operations business in 2021 than we did in 2020. A decline in demand for oil and natural gas or prices for those commodities, or instability and rationalization of capital funding in the global energy markets could continue to cause a reduction in demand for our products and services. We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressor units from our active fleet, indicate that the carrying amount of an asset may not be recoverable.
Impact of COVID-19 on our Business
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption across most industries. Efforts to mitigate the spread of COVID-19 have also resulted in decreased energy demand and additional weakness in energy pricing.
The Company took proactive steps earlier in the first quarter of 2020 to enable and verify the ability to ensure the safety of our employees while still carrying on the majority of business functions. These steps included:
•
Establishing a daily global operating process to identify, monitor and discuss impacts to our business whether originating from governmental actions or as a direct result of employee illness; • Investing in additional IT capabilities to enable employees to work remotely; • Closing operations where and until assessments were completed to ensure we could operate in a safe manner; and • Reestablishing operations once safety mechanisms were in place. This included the acquisition of additional personal protective equipment and establishing screening and other workplace processes.
To date our actions in response to the pandemic and the primary impacts on our business are summarized below:
•
As most of our operations are considered essential by local government authorities, our service operations that are provided under long-term contracts have to a large extent continued to operate under substantially normal conditions; • We are following local governmental guidance for viral spread mitigation, including having many of our employeeswho would traditionally work in an office work from home; • We have put in place additional health and safety measures to protect our employees, customers and other partieswho are working at our operating sites; 25
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•
Although early in 2020 we recorded significant new product sales bookings, more recently we have seen a decrease in purchasing activity from our customers which we believe is due to both the work at home mitigation measures our customers are also taking and uncertainty in commodity prices, causing us to lower our expectations for additional new bookings in the near term; • Given travel restrictions and other mitigation efforts, certain of our employees were not able to travel to work assignments, therefore although we have taken additional steps to be able to continue to provide services required by our customers, some services were delayed until mitigation measures were eased; • As our operations have been impacted by lower product sale bookings in 2019 and 2020, we started cost reduction efforts even prior to the current pandemic and have continued our efforts to optimize our cost structure to align with the expected demand in our business including making work force reductions; • We are continuing to have discussions with customers at their request to reduce their costs by collaborating with them on how we can manage costs and/or optimize the projects performance to potentially improve our and their results; • We evaluated our accounts receivable and given the current energy environment and expected impact to the financials of our customers, we increased our reserve for uncollectible accounts by$4.8 million during the year endedDecember 31, 2020 ; • Given COVID-19's impact on demand for energy and decreased commodity prices which impact our customer's capital spending, during the three months endedMarch 31, 2020 , we tested our long-term assets for impairment and concluded that no impairment was indicated; • As many of our suppliers increased delivery times including as a result of disruptions, we are working with customers on revising expected due-dates for delivery, and have pushed out the timing of our recognition of revenue and adjusted gross margin on certain projects as a result of these and other delays caused by the pandemic; and • We have participated in certain COVID-19 tax incentive programs in certain jurisdictions in which we operate. These primarily allowed a delay in filing and/or paying of taxes for short periods of time. In theU.S. , we filed a request for refund and received a$4.9 million Alternative Minimum Tax refund in 2020, which was earlier than originally scheduled due to the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). We have not participated in any government sponsored loan programs under the CARES Act. We are unable to predict the impact that COVID-19 and the governmental and third party response to the COVID-19 pandemic and its variant strains will have on our long-term financial position and operating results due to numerous uncertainties. The long-term impact of the pandemic on our customers and the global economy will depend on various factors, including the scope, severity and duration of the pandemic. A prolonged economic downturn or recession resulting from the pandemic could adversely affect many of our customers which could, in turn, adversely impact our business, financial condition and results of operations. We will continue to assess the evolving impact of the COVID-19 pandemic; whether due to the spread of any variants of the virus or otherwise; and intend to make adjustments to its responses accordingly.
Operating Highlights
The following table summarizes our contract operations and product sales backlog
(in thousands):
September December 31, September
30, 2021 2021 30, 2020
Contract Operations Backlog:
Contract operations services $ 1,433,310 $ 1,100,929 $ 1,208,139
Product Sales Backlog:
Compression equipment(1) 6,291 10,218 18,165
Processing and treating equipment 334,406 425,292 447,109
Other product sales 24,487 29,835 31,380
Total product sales backlog $ 365,184 $ 465,345 $ 496,654
(1)
Compression equipment includes sales to customers outside of the
Summary of Results
As discussed in Note 3 to the Financial Statements, the results from continuing
operations for all periods presented exclude the results of our Belleli EPC
business and our
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Table of Contents Revenue. Revenue during the three months endedSeptember 30, 2021 and 2020 was$161.3 million and$169.5 million , respectively. The decrease in revenue during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was due to decreases in revenue in the aftermarket services and product sales segments, partially offset by an increase in the contract operations segment. The increase in our contract operations segment was primarily due to an increase in the acceleration of deferred revenue due to a contract change inLatin America , partially offset by a decrease in theAsia Pacific region due to contract stops. The decrease in aftermarket services revenue was primarily due to decreases in revenue in theAsia Pacific region related to part sales. The decrease in our product sales segment was primarily due to decreases in compression revenue, partially offset by increases in processing and treating revenue. Revenue during the nine months endedSeptember 30, 2021 and 2020 was$443.7 million and$461.4 million , respectively. The decrease in revenue during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was due to decreases in revenue in all three segments. The decrease in our contract operations segment was primarily due to a decrease in revenue in theLatin America region, partially offset by an increase in revenue in theMiddle East andAfrica region. The overall decrease in contract operations revenue was due to contract stops, the sale of equipment pursuant to a purchase option exercised by a customer during the prior year period, partially offset by the acceleration of deferred revenue on two separate contracts due to a change in the terms. The decrease in our product sales segment was primarily due to decreases in compression and water revenue partially offset by increases in processing and treating revenue. The decrease in aftermarket services revenue was primarily due to decreases in revenue related to operation and maintenance and overhaul services partially offset by increases in part sales. Net loss. We generated a net loss of$16.3 million and$17.7 million during the three months endedSeptember 30, 2021 and 2020, respectively. The decrease in net loss during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to decreases in income taxes, impairment expense and restructuring expense and increases in adjusted gross margin for our product sales segment and in other income. This was partially offset by increases in depreciation and amortization expense, selling, general and administrative ("SG&A") expense and interest expense and decreases in adjusted gross margin for our contract operations and aftermarket services segments and a decrease in the gain on extinguishment of debt. We generated a net loss of$81.4 million and$67.9 million during the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in net loss during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to increases in depreciation and amortization expense, SG&A expense and interest expense, an$8.0 million impairment recognized in the current year period, a decrease in adjusted gross margin of our aftermarket service and contract operations segments and a decrease in gain on extinguishment of debt. This was partially offset by a decrease in loss from discontinued operations, net of tax, an increase in adjusted gross margin for our product sales segment and a decrease in income taxes and restructuring expense. Net loss during the nine months endedSeptember 30, 2021 included loss from discontinued operations, net of tax, of$1.7 million and net loss during the nine months endedSeptember 30, 2020 included loss from discontinued operations, net of tax, of$15.8 million due to ourU.S. compression fabrication business activity.
EBITDA, as adjusted.
Our EBITDA, as adjusted, was$35.1 million and$35.8 million during the three months endedSeptember 30, 2021 and 2020, respectively. EBITDA, as adjusted, during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 decreased primarily due to an increase in SG&A expense and decreases in adjusted gross margin for our contract operations and aftermarket segments, partially offset by an increase in adjusted gross margin for our product sales segment. Our EBITDA, as adjusted, was$103.3 million and$95.0 million during the nine months endedSeptember 30, 2021 and 2020, respectively. EBITDA, as adjusted, during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 increased primarily due to an increase in adjusted gross margin for our product sales segment, partially offset by a decrease in adjusted gross margin for our contract operations and aftermarket service segments and an increase in SG&A expense. 27
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EBITDA, as adjusted, is a non-GAAP financial measure. For a reconciliation of EBITDA, as adjusted, to net loss, its most directly comparable financial measure calculated and presented in accordance with GAAP, please read "- Non-GAAP Financial Measures" included elsewhere in this Quarterly Report. The Three Months EndedSeptember 30, 2021 Compared to the Three Months EndedSeptember 30, 2020 Contract Operations (dollars in thousands) Three Months Ended September 30, 2021 2020 Change % Change Revenue$ 83,362 $ 81,679 $ 1,683 2 % Cost of sales (excluding depreciation and amortization expense) 27,790 24,548 3,242 13 % Adjusted gross margin$ 55,572 $ 57,131 $ (1,559 ) (3 )% Adjusted gross margin percentage (1) 67 % 70 % (3 )% (4 )% (1)
Defined as adjusted gross margin divided by revenue.
The increase in revenue during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to an increase of$3.1 million due to the start-up of a project that was not operating in the prior year period and an increase of$5.2 million primarily driven by the acceleration of deferred revenue recognized resulting from a change in the remaining term of a contract in the third quarter of 2020. These revenue increases were partially offset by decreases of approximately$4.2 million due to contract stops primarily in theMiddle East andAfrica region and$1.5 million impact of devaluation on the Argentine Peso during the current year period. Adjusted gross margin decreased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 primarily due to repairs and maintenance incurred in theLatin America region. The change in the remaining term of the contract noted above resulted in additional costs during the three months endedSeptember 30, 2021 in the form of depreciation expense, which is excluded from adjusted gross margin. Adjusted gross margin percentage during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 decreased primarily due to an increase in operating expenditures in the current year period as explained above, partially offset by the increase in deferred revenue recognized resulting from the change in the remaining terms of the contracts noted above. Aftermarket Services (dollars in thousands) Three Months Ended September 30, 2021 2020 Change % Change Revenue$ 24,633 $ 30,435 $ (5,802 ) (19 )% Cost of sales (excluding depreciation and amortization expense) 19,379 23,135 (3,756 ) (16 )% Adjusted gross margin$ 5,254 $ 7,300 $ (2,046 ) (28 )% Adjusted gross margin percentage 21 % 24 % (3 )% -13 % The decrease in revenue during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to a decrease in part sales in theAsia Pacific region and a decrease in overhaul services in theMiddle East andAfrica region. Adjusted gross margin during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 decreased primarily due to the revenue decreases explained above. Adjusted gross margin percentage during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 decreased primarily due to the product mix. Product Sales (dollars in thousands) 28
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Three Months Ended
September 30,
2021 2020 Change % Change
Revenue $ 53,304 $ 57,397 $ (4,093 ) (7 )%
Cost of sales (excluding depreciation
and amortization expense) 46,755 54,263 (7,508 ) (14 )%
Adjusted gross margin $ 6,549 $ 3,134 $ 3,415 109 %
Adjusted gross margin percentage 12 % 5 % 7 % 140 %
The decrease in revenue during the three months ended September 30, 2021
compared to the three months ended September 30, 2020 was primarily due to a
decrease of $30.9 million in compression revenue mainly in the Middle East and
Africa and in the Asia Pacific regions due to the completion of projects prior
to the current quarter. This was partially offset by increases of $27.6 million
in processing and treating revenue. The increase in processing and treating
revenue was due to an increase of $37.5 million for a project in the Middle East
and Africa region, partially offset by a decrease of $9.9 million in the North
America region due to a decrease in activity. Adjusted gross margin increased
during the three months ended September 30, 2021 compared to the three months
ended September 30, 2020 due to higher expenses on a specific project in the
prior year period. Adjusted gross margin percentage increased during the three
months ended September 30, 2021 compared to the three months ended September 30,
2020 due to the higher expenses discussed above during the prior year period and
a shift in product mix during the current year period.
Costs and Expenses
(dollars in thousands)
Three Months Ended
September 30,
2021 2020 Change % Change
Selling, general and administrative $ 34,938 $ 29,959 $ 4,979 17 %
Depreciation and amortization 43,889 36,630 7,259 20 %
Impairment - 1,695 (1,695 ) (100 )%
Restructuring and other charges (62 ) 238 (300 ) (126 )%
Interest expense 10,479 9,623 856 9 %
Gain on extinguishment of debt - (780 ) 780 (100 )%
Other (income) expense, net (1,074 ) 1,178 (2,252 ) (191 )%
Selling, general and administrative
SG&A expense increased during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 primarily due to increases in compensation, legal expenses and network related expenses in the current year period. SG&A expense as a percentage of revenue was 22% and 18% during the three months endedSeptember 30, 2021 and 2020, respectively.
Depreciation and amortization
Depreciation and amortization expense during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 increased primarily due to approximately$5.7 million of additional depreciation expense recognized in the current year period on a contract operations project due to changes in the remaining terms of a contract during the third quarter of the prior year and approximately$2.2 million in depreciation for equipment on a contract operations project that was not operating in the prior year. This was partially offset by a decrease of$1.7 million in theMiddle East andAfrica region for a project that ended. Additionally, in the first quarter of 2021, we evaluated the salvage values of our property, plant and equipment. As a result of this evaluation, we changed the salvage values for our compression equipment to a maximum salvage value of 5% from 15%. During the three months endedSeptember 30, 2021 , we recorded an increase to depreciation expense of approximately$1.0 million as a result of this change in salvage value.
Impairment
During the third quarter of 2020, we impaired certain assets due to the termination of a contract operations project where it was not cost effective to move the assets and attempt to utilize them with a different customer. As a result, we removed these assets from the fleet and recorded an impairment of$1.7 million during the three months endedSeptember 30, 2020 .
Restructuring and other charges
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The energy industry's focus on capital discipline and improving returns has caused delays in the timing of new equipment orders. As a result, in the third quarter of 2019, we announced a cost reduction plan primarily focused on workforce reductions. During the three months endedSeptember 30, 2021 , we released an unused portion of previously expensed restructuring charges of$0.1 million and during the three months endedSeptember 30, 2020 , we incurred restructuring and other charges of$0.2 million associated with these activities. Interest expense The increase in interest expense during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to a higher average balance of long-term debt. During the three months endedSeptember 30, 2021 and 2020, the average daily outstanding borrowings of long-term debt were$575.8 million and$503.4 million , respectively.
Extinguishment of debt
During the third quarter of 2020, we purchased and retired$5.0 million principal amount of our 8.125% senior unsecured notes due 2025 (the "2017 Notes"). for$4.3 million including$0.1 million of accrued interest. During the three months endedSeptember 30, 2020 , we recognized a gain on extinguishment of debt of$0.8 million , which was calculated as the difference between the repurchase price and the carrying amount of the 2017 Notes.
Other (income) expense, net
The change in other (income) expense, net, was primarily due to an increase in interest income of$3.5 million in the current year period. This was partially offset by foreign currency losses of$3.2 million during the three months endedSeptember 30, 2021 compared to foreign currency losses of$2.3 million during the three months endedSeptember 30, 2020 . Foreign currency losses included translation losses of$1.6 million and gains of$0.6 million during the three months endedSeptember 30, 2021 and 2020, respectively, related to the currency remeasurement of our foreign subsidiaries' non-functional currency denominated intercompany obligations. Income Taxes (dollars in thousands) Three Months Ended September 30, 2021 2020 Change Provision for (benefit from) income taxes$ (5,187 ) $ 5,745 $ (10,932 ) (190 )% Effective tax rate 24.9 % (52.3 )% 77.2 % (148 )% Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn, or losses we incur, in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Our effective tax rate is also affected by valuation allowances recorded against loss carryforwards in theU.S. and certain other jurisdictions, foreign withholding taxes and changes in foreign currency exchange rates. The following items had the most significant impact on the difference between our statutoryU.S. federal income tax rate of 21% and our effective tax rate of 24.9% for the three months endedSeptember 30, 2021 : (i) a 16.2% positive impact resulting from foreign currency devaluations inArgentina , (ii) a (4.3)% negative impact resulting from foreign taxes in excess of theU.S. tax rate and other rate drivers, (iii) a 4.3% positive impact resulting from deemed inclusions in theU.S. and (iv) a (9.8)% negative impact resulting from an addition of valuation allowances againstU.S. deferred tax assets. Discontinued Operations (dollars in thousands) Three Months Ended September 30, 2021 2020 Change % Change Loss from discontinued operations, net of tax$ (695 ) $ (998 ) $ 303 (30 )% 30
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Loss from discontinued operations, net of tax, includes our Belleli EPC business
and our
Loss from discontinued operations, net of tax, during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was flat overall, however there was a$1.4 million decrease in loss forU.S. compression and a$1.1 million increase in loss for Belleli EPC. For further details on our discontinued operations, see Note 3 to the Financial Statements. The Nine Months EndedSeptember 30, 2021 Compared to the Nine Months EndedSeptember 30, 2020 Contract Operations (dollars in thousands) Nine Months Ended September 30, 2021 2020 Change % Change Revenue$ 251,874 $ 254,412 $ (2,538 ) (1 )% Cost of sales (excluding depreciation and amortization expense) 78,898 79,754 (856 ) (1 )% Adjusted gross margin$ 172,976 $ 174,658 $ (1,682 ) (1 )% Adjusted gross margin percentage (1) 69 % 69 % 0 % 0 % ___________________ (1)
Defined as adjusted gross margin divided by revenue.
The decrease in revenue during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to approximately$21.5 million in contract stops,$5.3 million impact of devaluation on the Argentine Peso during the current year period and$10.0 million from the sale of equipment pursuant to a purchase option exercised by a customer during the prior year period. These revenue decreases were partially offset by an increase of$9.0 million due to the start-up of a project that was not operating in the prior year period, and an increase of$25.1 million primarily driven by an increase of deferred revenue recognized resulting from a change in the remaining term of a contract in the third quarter of 2020 and the early termination of a contract in the current year period. Adjusted gross margin decreased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 due to the revenue changes explained above. The change in the remaining terms of the contracts noted above resulted in additional costs during the nine months endedSeptember 30, 2021 in the form of depreciation expense, which is excluded from adjusted gross margin. Adjusted gross margin percentage during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 remained flat. Aftermarket Services (dollars in thousands) Nine Months Ended September 30, 2021 2020 Change % Change Revenue$ 79,154 $ 83,337 $ (4,183 ) (5 )% Cost of sales (excluding depreciation and amortization expense) 62,813 63,336 (523 ) (1 )% Adjusted gross margin$ 16,341 $ 20,001 $ (3,660 ) (18 )% Adjusted gross margin percentage 21 % 24 % (3 )% -13 % The decrease in revenue during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to a decrease in operation and maintenance and overhaul services in theMiddle East andAfrica region, partially offset by an increase in part sales in theAsia Pacific region. Adjusted gross margin and adjusted gross margin percentage during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 decreased primarily due to the product mix with part sales historically having lower margins than other areas of our aftermarket services business. Product Sales (dollars in thousands) 31
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Nine Months Ended
September 30,
2021 2020 Change % Change
Revenue $ 112,634 $ 123,613 $ (10,979 ) (9 )%
Cost of sales (excluding depreciation
and amortization expense) 99,437 125,581 (26,144 ) (21 )%
Adjusted gross margin $ 13,197 $ (1,968 ) $ 15,165 (771 )%
Adjusted gross margin percentage 12 % (2 )% 14 % (700 )%
The decrease in revenue during the nine months ended September 30, 2021 compared
to the nine months ended September 30, 2020 was primarily due to decreases of
$54.9 million and $9.0 million in compression revenue and water solutions
revenue, respectively, partially offset by an increase of $50.9 million in
processing and treating equipment revenue. The decrease in compression revenue
was mainly due to a decrease in revenue in the Middle East and Africa region in
the current year period and the completion of projects in the Asia Pacific
region during the first quarter of 2021. The decrease in water solutions revenue
was due to projects in the Middle East and Africa region. The increase in
processing and treating equipment revenue were due to projects in the Middle
East and Africa region partially offset by a decrease in the North America
region due to less activity. Adjusted gross margin increased during the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020 due to higher expenses on a specific project in the prior year period.
Adjusted gross margin percentage increased during the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 due to
the higher expenses discussed above during the prior year period and a shift in
product mix during the current year period.
Costs and Expenses
(dollars in thousands)
Nine Months Ended
September 30,
2021 2020 Change % Change
Selling, general and administrative $ 101,199 $ 95,049 $ 6,150 6 %
Depreciation and amortization 132,097 100,887 31,210 31 %
Impairment 7,959 1,695 6,264 370 %
Restructuring and other charges 192 3,550 (3,358 ) (95 )%
Interest expense 30,800 29,214 1,586 5 %
Gain on extinguishment of debt - (3,424 ) 3,424 (100 )%
Other (income) expense, net (1,172 ) (1,169 ) (3 ) -
Selling, general and administrative
SG&A expense increased during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to increases in compensation, legal and network related expenses in the current year period, partially offset by a decrease in allowance for doubtful accounts recorded during the prior year period primarily due to the expected impact of COVID-19 on our customers. SG&A expense as a percentage of revenue was 23% and 21% during the nine months endedSeptember 30, 2021 and 2020, respectively.
Depreciation and amortization
Depreciation and amortization expense during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 increased primarily due to approximately$23.6 million of additional depreciation expense recognized in the current year period on two contract operations projects due to changes in the remaining terms of a contract during the third quarter of 2020 and the early termination of a contract in the current year period, and approximately$6.2 million in depreciation for equipment on a contract operations project that was not operating in the prior year period. This was partially offset by a decrease of$1.7 million in theMiddle East andAfrica region for a project that ended. Additionally, in the first quarter of 2021, we evaluated the salvage values of our property, plant and equipment. As a result of this evaluation, we changed the salvage values for our compression equipment to a maximum salvage value of 5% from 15%. During the nine months endedSeptember 30, 2021 , we recorded an increase to depreciation expense of approximately$3.1 million as a result of this change in salvage value. The estimated increase in depreciation expense during 2021 will be approximately$5 million .
Impairment
During the nine months endedSeptember 30, 2021 , we determined that there was no visibility to continuing a contract with a customer in theLatin America region. This contract included installation costs, deferred start-up costs and demobilization costs that were previously capitalized 32
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where it is highly unlikely we will generate future cash flows. As a result, we
recorded an
Restructuring and other charges
The energy industry's focus on capital discipline and improving returns has caused delays in the timing of new equipment orders. As a result, in the third quarter of 2019, we announced a cost reduction plan primarily focused on workforce reductions. We incurred restructuring and other charges associated with these activities of$0.2 million and$3.6 million during the nine months endedSeptember 30, 2021 and 2020, respectively.
Interest expense
The increase in interest expense during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to a higher average balance of long-term debt. During the nine months endedSeptember 30, 2021 and 2020, the average daily outstanding borrowings of long-term debt were$580.1 million and$496.7 million , respectively.
Extinguishment of debt
During the nine months endedSeptember 30, 2020 , we purchased and retired$24.0 million principal amount of our 2017 Notes for$20.6 million including$0.3 million of accrued interest. During the nine months endedSeptember 30, 2020 , we recognized a gain on extinguishment of debt of$3.4 million , which was calculated as the difference between the repurchase price and the carrying amount of the 2017 Notes, partially offset by$0.2 million in related deferred financing costs. Other (income) expense, net The change in other expense, net, was primarily due to an increase of$8.4 million in interest income in the current year period. This is almost fully offset by foreign currency losses$8.2 million during the nine months endedSeptember 30, 2021 compared to foreign currency losses of$2.0 million during the nine months endedSeptember 30, 2020 as well as an increase of$2.1 million in derivative losses in the current year period. Foreign currency losses included translation losses of$0.8 million and gains of$3.8 million during the nine months endedSeptember 30, 2021 and 2020, respectively, related to the currency remeasurement of our foreign subsidiaries' non-functional currency denominated intercompany obligations. Income Taxes (dollars in thousands) Nine Months Ended September 30, 2021 2020 Change % Change Provision for income taxes$ 11,105 $ 18,970 $ (7,865 ) (41 )% Effective tax rate (16.2 )% (57.3 )% 41.1 % (72 )% Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn, or losses we incur, in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Our effective tax rate is also affected by valuation allowances recorded against loss carryforwards in theU.S. and certain other jurisdictions, foreign withholding taxes and changes in foreign currency exchange rates. The following items had the most significant impact on the difference between our statutoryU.S. federal income tax rate of 21% and our effective tax rate of (16.2)% for the nine months endedSeptember 30, 2021 : (i) a (3.1)% negative impact resulting from foreign currency devaluations inArgentina , (ii) a (15.2)% negative impact resulting from foreign taxes in excess of theU.S. tax rate and other rate drivers, (iii) a (7.1)% negative impact resulting from deemed inclusions in theU.S. and (iv) a (7.5)% negative impact resulting from an addition of valuation allowances againstU.S. deferred tax assets. Discontinued Operations (dollars in thousands) 33
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Nine Months Ended
September 30,
2021 2020 Change % Change
Loss from discontinued operations, net
of tax $ (1,724 ) $ (15,833 ) $ 14,109 (89 )%
Loss from discontinued operations, net of tax, includes our Belleli EPC business
and our
Loss from discontinued operations, net of tax, during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 decreased due to a$15.4 million decrease in loss fromU.S. compression. The decrease in loss inU.S. compression business was primarily driven by the decrease in activity for the business, and$6.5 million impairment recorded during the nine months endedSeptember 30, 2020 . This was partially offset by a$1.3 million increase in loss from Belleli EPC. For further details on our discontinued operations, see Note 3 to the Financial Statements.
Liquidity and Capital Resources
Our unrestricted cash balance was$57.5 million atSeptember 30, 2021 compared to$40.3 million atDecember 31, 2020 . Working capital increased to$164.4 million atSeptember 30, 2021 from$154.7 million atDecember 31, 2020 . The increase in working capital was primarily due to decreases in contract liabilities and current liabilities associated with discontinued operations, and increases in cash and contract assets, partially offset by an increase in accrued liabilities and decreases in accounts receivable and inventory. The decrease in contract liabilities was primarily driven by the progression of product sales projects and the timing of milestones billings in theMiddle East andAfrica region. The decrease in current liabilities associated with discontinued operations was driven by the decrease in activities in ourU.S. compression fabrication business. The increase in cash is explained below within the operating, investing and financing activities. The increase in contract assets is due to the timing of milestone billings in theMiddle East andAfrica region. The increase in accrued liabilities was primarily due to progression of product sales projects in theMiddle East andAfrica region. The decrease in accounts receivables was due to timing of collections primarily in theMiddle East andAfrica region. The decrease in inventory was primarily driven by the progression of product sales activity. Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized in the following table (in thousands): Nine Months Ended September 30, 2021 2020 Net cash provided by (used in) continuing operations: Operating activities$ 39,232 $ 25,672 Investing activities (22,741 ) (65,612 ) Financing activities 9,797 74,583 Effect of exchange rate changes on cash, cash equivalents and restricted cash (422 ) (750 ) Discontinued operations (9,614 ) (20,766 ) Net change in cash, cash equivalents and restricted cash$ 16,252 $ 13,127 Operating Activities. The increase in net cash provided by operating activities during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily attributable to improved working capital and improved adjusted gross margin for our product sales segment. Working capital changes during the nine months endedSeptember 30, 2021 included an increase of$17.3 million in accounts receivable and notes, an increase of$5.7 million in inventory, a decrease of$61.0 million in contract assets and contract liabilities, net, and an increase of$7.2 million in accounts payable and accrued liabilities. Working capital changes during the nine months endedSeptember 30, 2020 included a decrease of$18.2 million in contract assets and contract liabilities, net, a decrease of$10.8 million in accounts receivable and notes and a decrease of$13.5 million in accounts payable and accrued liabilities.
Investing Activities. The decrease in net cash used in investing activities
during the nine months ended
Financing Activities. The decrease in net cash provided by financing activities
during the nine months ended
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Discontinued Operations. The decrease in net cash used in discontinued operations during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily attributable to working capital changes related to ourU.S. compression fabrication business. Capital Requirements. Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of equipment required for us to render those contract operations services to our customers. Our capital requirements have consisted primarily of, and we anticipate will continue to consist of, the following: • growth capital expenditures, which are made to expand or to replace partially or fully depreciated assets or to expand the operating capacity or revenue generating capabilities of existing or new assets, whether through construction, acquisition or modification; and • maintenance capital expenditures, which are made to maintain the existing operating capacity of our assets and related cash flows further extending the useful lives of the assets. The majority of our growth capital expenditures are related to installation costs on contract operations services projects and acquisition costs of new compressor units and processing and treating equipment that we add to our contract operations fleet. In addition, growth capital expenditures can include the upgrading of major components on an existing compressor unit where the current configuration of the compressor unit is no longer in demand and the compressor unit is not likely to return to an operating status without the capital expenditures. These latter expenditures substantially modify the operating parameters of the compressor unit such that it can be used in applications for which it previously was not suited. Maintenance capital expenditures are related to major overhauls of significant components of a compressor unit, such as the engine, compressor and cooler, that return the components to a "like new" condition, but do not modify the applications for which the compressor unit was designed. We generally invest funds necessary to manufacture contract operations fleet additions when our idle equipment cannot be reconfigured to economically fulfill a project's requirements and the new equipment expenditure is expected to generate economic returns over its expected useful life that exceeds our targeted return on capital. We currently plan to spend approximately$55 million to$65 million in capital expenditures during 2021, including (1) approximately$35 million to$45 million on contract operations growth capital expenditures based on contracts currently in our backlog and (2) approximately$20 million on equipment maintenance capital related to our contract operations business and other capital expenditures. Historically, we have financed capital expenditures with a combination of net cash provided by operating and financing activities. Our ability to access the capital markets may be restricted at the time when we would like, or need, to do so, which could have an adverse impact on the cost and access to capital and our ability to maintain our operations and to grow. For example, COVID-19 disrupted the broader financial markets and the capital markets for energy service related companies continue to be impacted. If any of our lenders become unable to perform their obligations under the Amended Credit Agreement, our borrowing capacity under our revolving credit facility could be reduced. Inability to borrow additional amounts under our revolving credit facility could limit our ability to fund our future growth and operations. Based on current market conditions, we expect that net cash provided by operating activities and borrowings under our revolving credit facility will be sufficient to finance our operating expenditures, capital expenditures and other contractual cash obligations, including our debt obligations. However, if net cash provided by operating activities and borrowings under our revolving credit facility are not sufficient, we may seek additional debt or equity financing. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and financial markets and created significant volatility and disruption across most industries. Efforts to mitigate the spread of COVID-19 have also resulted in decreased energy demand and additional weakness in energy pricing. The broader implications of COVID-19 on our customers and our long-term future results of operations and overall financial condition remains uncertain. Long-Term Debt. We and our wholly owned subsidiary,Exterran Energy Solutions, L.P. ("EESLP"), are parties to an amended and restated credit agreement (the "Amended Credit Agreement") consisting of a$650.0 million revolving credit facility expiring inOctober 2023 . During the nine months endedSeptember 30, 2021 and 2020, the average daily borrowings of long-term debt were$580.1 million and$496.7 million , respectively. The weighted average annual interest rate on outstanding borrowings under our revolving credit facility atSeptember 30, 2021 and 2020 was 3.1% and 2.4%, respectively. LIBOR and certain other "benchmarks" have been subject of national, international and other regulatory guidance and proposals for reform. In particular, onJuly 27, 2017 , theUnited Kingdom's Financial Conduct Authority (the "FCA"), 35
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which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. OnMarch 5, 2021 , theFCA announced that USD LIBOR will no longer be published afterJune 30, 2023 . It is unclear whether, at that time, LIBOR will cease to exist or if new methods of calculating LIBOR will be established. Central banks and regulators in a number of major jurisdictions (for example,U.S. ,United Kingdom ,European Union ,Switzerland , andJapan ) have convened working groups to find and implement the transition to suitable replacement benchmarks. The Alternative Reference Rates Committee, a steering committee consisting of largeU.S. financial institutions convened by theU.S. Federal Reserve Board and theFederal Reserve Bank of New York , has recommended replacing LIBOR with the Secured Overnight Financing Rate ("SOFR"), an index supported by short-termTreasury repurchase agreements. We are continuing to evaluate and monitor financial and non-financial impacts and risks that may result when LIBOR rates are no longer published. As ofSeptember 30, 2021 , we had$53.4 million in outstanding letters of credit under our revolving credit facility, and taking into account guarantees through outstanding letters of credit, we had undrawn capacity of$370.6 million under our revolving credit facility. Our Amended Credit Agreement limits our Total Debt to EBITDA ratio (as defined in the Amended Credit Agreement) on the last day of the fiscal quarter to no greater than 4.50 to 1.0. As a result of this limitation,$143.3 million of the$370.6 million of undrawn capacity under our revolving credit facility was available for additional borrowings as ofSeptember 30, 2021 . We have agreements with financial institutions under which approximately$47.5 million of letters of credit or bank guarantees were outstanding as ofSeptember 30, 2021 . These are put in place in certain situations to guarantee our performance obligations under contracts with counterparties. The Amended Credit Agreement contains various covenants with which we, EESLP and our respective restricted subsidiaries must comply, including, but not limited to, limitations on the incurrence of indebtedness, investments, liens on assets, repurchasing equity, making distributions, transactions with affiliates, mergers, consolidations, dispositions of assets and other provisions customary in similar types of agreements. We are required to maintain, on a consolidated basis, a minimum interest coverage ratio (as defined in the Amended Credit Agreement) of 2.25 to 1.00; a maximum total leverage ratio (as defined in the Amended Credit Agreement) of 4.50 to 1.00; and a maximum senior secured leverage ratio (as defined in the Amended Credit Agreement) of 2.75 to 1.00. As ofSeptember 30, 2021 , we maintained a 6.3 to 1.0 interest coverage ratio, a 3.6 to 1.0 total leverage ratio and a 1.4 to 1.0 senior secured leverage ratio. As ofSeptember 30, 2021 , we were in compliance with all financial covenants under the Amended Credit Agreement. InApril 2017 , our 100% owned subsidiariesEESLP and EES Finance Corp. issued the 8.125% senior unsecured notes due 2025 (the "2017 Notes"), which consisted of$375.0 million aggregate principal amount of the senior unsecured notes which have$350.0 million outstanding as ofSeptember 30, 2021 . We guarantee the 2017 Notes on a senior unsecured basis. We may redeem the 2017 Notes at any time in cash, in whole or part, at certain redemption prices, including the applicable make-whole premium plus accrued and unpaid interest, if any, to the date of redemption. During the nine months endedSeptember 30, 2020 , we purchased and retired$24.0 million principal amount of our 2017 Notes for$20.6 million including$0.3 million of accrued interest. During the nine months endedSeptember 30, 2020 , we recognized a gain on extinguishment of debt of$3.4 million , which was calculated as the difference between the repurchase price and the carrying amount of the 2017 Notes, partially offset by$0.2 million in related deferred financing costs. We may from time to time seek to retire, extend or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such extensions, repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Unrestricted Cash. Of our$57.5 million unrestricted cash balance atSeptember 30, 2021 ,$56.2 million was held by our non-U.S. subsidiaries. In the event of a distribution of earnings to theU.S. in the form of dividends, we may be subject to foreign withholding taxes. We do not believe that the cash held by our non-U.S. subsidiaries has an adverse impact on our liquidity because we expect that the cash we generate in theU.S. , the available borrowing capacity under our revolving credit facility and the repayment of intercompany liabilities from our non-U.S. subsidiaries will be sufficient to fund the cash needs of ourU.S. operations for the foreseeable future. Share Repurchase Program. OnFebruary 20, 2019 , our board of directors approved a share repurchase program under which the Company is authorized to purchase up to$100.0 million of its outstanding common stock throughFebruary 2022 . The timing and method of any repurchases under the program will depend on a variety of factors, including prevailing market conditions among others. Purchases under the program may be suspended or discontinued at any time and we have no obligation to repurchase any amount of our common shares under the program. 36
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Shares of common stock acquired through the repurchase program are held in treasury at cost. During the nine months endedSeptember 30, 2021 and 2020, we did not repurchase any shares under this program. As ofSeptember 30, 2021 , the remaining authorized repurchase amount under the share repurchase program was$57.7 million . Dividends. We do not currently anticipate paying cash dividends on our common stock. We currently intend to retain our future earnings to support the growth and development of our business. The declaration of any future cash dividends and, if declared, the amount of any such dividends, will be subject to our financial condition, earnings, capital requirements, financial covenants, applicable law and other factors our board of directors deems relevant.
Supplemental Guarantor Financial Information
In
•
Senior unsecured obligations of each of the Issuers and the Parent, as applicable; • Equal in right of payment with all of the existing and future senior unsecured indebtedness and senior unsecured guarantees of each of the Issuers and the Parent, as applicable; • Senior in right of payment to all subordinated indebtedness and subordinated guarantees of each of the Issuers and the Parent, as applicable; • Effectively junior in right of payment to all existing and future secured indebtedness and secured guarantees of each of the Issuers and the Parent, as applicable, to the extent of the value of the assets securing such indebtedness or guarantees; and • Structurally junior in right of payment to all existing and future indebtedness, guarantees and other liabilities (including trade payables) and any preferred equity of each of the Parent's subsidiaries (other than the Issuers) that are not guarantors of the 2017 Notes. Parent's guarantee will be automatically and unconditionally released and discharged upon (i) the merger of the Parent into the Issuers, (ii) a legal defeasance, covenant defeasance or satisfaction and discharge of the indenture governing the 2017 Notes or (iii) the liquidation or dissolution of the Parent, provided in each case no default or event of default has occurred and is continuing under the indenture governing the 2017 Notes. Federal bankruptcy and state fraudulent transfer laws permit a court to void all or a portion of the obligations of the Parent pursuant to its guarantee, or to subordinate the Parent's obligations under its guarantee to claims of the Parent's other creditors, reducing or eliminating the ability to recover under the guarantee. Although laws differ among jurisdictions, in general, under applicable fraudulent transfer or conveyance laws, the guarantee could be voided as a fraudulent transfer or conveyance if (i) the guarantee was incurred with the intent of hindering, delaying or defrauding creditors or (ii) the Parent received less than reasonably equivalent value or fair consideration in return for incurring the guarantee and either (x) the Parent was insolvent or rendered insolvent by reason of the incurrence of the guarantee or subsequently became insolvent for other reasons, (y) the incurrence of the guarantee left the Parent with an unreasonably small amount of capital to carry on the business, or (z) the Parent intended to, or believed that it would, incur debts beyond its ability to pay such debts as they mature. A court would likely find that Parent did not receive reasonably equivalent value or fair consideration for its guarantee if it determined that the Parent did not substantially benefit directly or indirectly from the issuance of the 2017 Notes. If a court were to void a guarantee, noteholders would no longer have a claim against the Parent. In addition, the court might direct noteholders to repay any amounts that you already received from the Parent. Parent's guarantee contains a provision intended to limit the Parent's liability under the guarantee to the maximum amount that the Parent could incur without causing the incurrence of obligations under its guarantee to be deemed a fraudulent transfer. This provision may not be effective to protect the guarantee from being voided under fraudulent transfer law. All consolidated subsidiaries ofExterran other than the Issuers are collectively referred to as the "Non-Guarantor Subsidiaries." The 2017 Notes are structurally subordinated to any indebtedness and other liabilities (including trade payables) of any of the Non-Guarantor Subsidiaries. The Non-Guarantor Subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the 2017 Notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Holders of the 2017 Notes will have no claim as a creditor against any Non-Guarantor Subsidiaries. In the event of bankruptcy, liquidation or 37
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reorganization of any of the Non-Guarantor Subsidiaries, such subsidiaries will pay current outstanding obligations to the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Parent or the Issuers. As a result, in the context of a bankruptcy, liquidation or reorganization, holders of the 2017 Notes would likely receive less, ratably, than holders of indebtedness and other liabilities (including trade payables of such entities). The Parent and EESLP are also parties to our credit agreement, which covenants with which the Parent, EESLP and our respective restricted subsidiaries must comply, including, but not limited to, limitations on the incurrence of indebtedness, investments, liens on assets, repurchasing equity, making distributions, transactions with affiliates, mergers, consolidations, dispositions of assets and other provisions customary in similar types of agreements. These covenants may impact the ability of the Parent and EESLP to repay the 2017 Notes or amounts owing under Parent's guarantee.
Summarized Financial Information (in thousands)
As a result of the Parent's guarantee, we are presenting the following summarized financial information for the Issuers' and Parent (collectively referred to as the "Obligated Group ") pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Parent and the Issuers, presented on a combined basis, have been eliminated and information for the Non-Guarantor Subsidiaries have been excluded. Amounts due from or due to the Non-Guarantor Subsidiaries and other related parties, as applicable, have been separately presented within the summarized financial information. September 30, 2021 Summarized Statement of Operations: Revenues(1)$ 69,139 Cost of sales(1) 46,016 Loss from continuing operations (159,986 ) Net loss (161,262 ) (1) Includes$0.1 million of revenue for intercompany sales from theObligated Group the Non-Guarantor Subsidiaries during the nine months endedSeptember 30, 2021 . September 30, 2021 December 31, 2020 Summarized Balance Sheet: ASSETS
Intercompany receivables due from non-guarantors
206,267
Total current assets 333,536 334,675
Total long-term assets 198,174 230,334
LIABILITIES AND STOCKHOLDERS' EQUITY
Intercompany payables due to non-guarantors $ 361,832 $ 362,221
Total current liabilities 456,765 439,707 Long-term liabilities 623,399 613,994
Non-GAAP Financial Measures
We define EBITDA, as adjusted, as net income (loss) excluding income (loss) from
discontinued operations (net of tax), cumulative effect of accounting changes
(net of tax), income taxes, interest expense (including debt extinguishment
costs), depreciation and amortization expense, impairment charges, restructuring
and other charges, non-cash gains or losses from foreign currency exchange rate
changes recorded on intercompany obligations, expensed acquisition costs, gain
on extinguishment of debt, and other items. We believe EBITDA, as adjusted, is
an important measure of operating performance because it allows management,
investors and others to evaluate and compare our core operating results from
period to period by removing the impact of our capital structure (interest
expense from our outstanding debt), asset base (depreciation and amortization),
our subsidiaries' capital structure (non-cash gains or losses from foreign
currency exchange rate changes on intercompany obligations), tax consequences,
impairment charges, restructuring and other charges, expensed acquisition costs,
gain on extinguishment of debt, and other items. Management uses EBITDA, as
adjusted, as a supplemental measure to review current period operating
performance, comparability measures and performance measures for period to
period comparisons. In addition, the compensation committee has used EBITDA, as
adjusted, in evaluating the performance of the Company and management and in
evaluating certain components of
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executive compensation, including performance-based annual incentive programs.
Our EBITDA, as adjusted, may not be comparable to a similarly titled measure of
another company because other entities may not calculate EBITDA in the same
manner.
EBITDA, as adjusted, is not a measure of financial performance under GAAP, and
should not be considered in isolation or as an alternative to net income (loss),
cash flows from operating activities or any other measure determined in
accordance with GAAP. Items excluded from EBITDA, as adjusted, are significant
and necessary components to the operation of our business, and, therefore,
EBITDA, as adjusted, should only be used as a supplemental measure of our
operating performance.
The following table reconciles our net loss to EBITDA, as adjusted (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net loss $ (16,303 ) $ (17,721 ) $ (81,390 ) $ (67,914 )
Loss from discontinued operations, net
of tax 695 998 1,724 15,833
Depreciation and amortization 43,889 36,630 132,097 100,887
Impairment - 1,695 7,959 1,695
Restructuring and other charges (62 ) 238 192 3,550
Interest expense 10,479 9,623 30,800 29,214
Gain on extinguishment of debt - (780 ) - (3,424 )
(Gain) loss on currency exchange rate
remeasurement of intercompany balances 1,620 (624 ) 810 (3,822 )
Provision for (benefit from) income
taxes (5,187 ) 5,745 11,105 18,970
EBITDA, as adjusted $ 35,131 $ 35,804 $ 103,297 $ 94,989
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