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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2012

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Correction of Misclassification in the Statement of Cash Flows

Correction of Misclassification in the Statement of Cash Flows

We received $162.2 million of net proceeds from the sale of common units of Exterran Partners, L.P. (together with its subsidiaries, the “Partnership”) in the first quarter of 2011. These net proceeds were previously reported in our consolidated statement of cash flows as cash flows from investing activities. We have subsequently determined that the net proceeds from the sale of Partnership common units in the first quarter of 2011 should have been reported as cash flows from financing activities. This correction had no impact on cash flows from operating activities. The impact of the reclassification on the statement of cash flows for the first quarter of 2011 is shown below (in thousands):

		Three Months Ended March 31, 2011
		Investing			Financing
Net Cash Provided By (Used In)		Activities			Activities
As previously reported		$	138,627		$	(170,208	)
Increase (decrease)		(162,236		)	162,236
As corrected		$	(23,609	)	$	(7,972	)

Correction of Misclassification in the Supplemental Guarantor Financial Information Footnote

Correction of Misclassification in the Supplemental Guarantor Financial Information Footnote

We identified misclassifications in our cash flow schedules included in our supplemental guarantor financial information footnote primarily related to how we accounted for changes in investments in consolidated subsidiaries (see Note 16). These errors had no impact on our consolidated financial statements. We have made conforming changes to the cash flow schedules included in our supplemental guarantor financial information footnote for the three months ended March 31, 2011 to conform to our current presentation. Subsequent to March 31, 2011, there were changes to the guarantor subsidiaries and other subsidiaries for our 4.75% Notes due 2014 which impacted the presentation in our supplemental guarantor financial information footnote. Therefore, the table below only shows the impact to the cash flow schedules for the parent and subsidiary issuer, included in our supplemental guarantor financial information footnote for three months ended March 31, 2011 (in thousands):

As Reported		Parent			Subsidiary Issuer
Net cash provided by (used in) continuing operating activities		$	463,138		$	334
Net cash provided by (used in) continuing investing activities		(144,883		)	13,330
Net cash provided by (used in) financing activities		(318,382		)	(13,664		)

As Corrected		Parent			Subsidiary Issuer
Net cash provided by (used in) continuing operating activities		$	2,063		$	(68	)
Net cash provided by (used in) continuing investing activities		53,966			87,419
Net cash provided by (used in) financing activities		(56,156		)	(87,351		)

Revenue Recognition

Revenue Recognition

Revenue from contract operations is recorded when earned, which generally occurs monthly at the time the monthly service is provided to customers in accordance with the contracts. Aftermarket services revenue is recorded as products are delivered and title is transferred or services are performed for the customer.

Fabrication revenue is recognized using the percentage-of-completion method when the applicable criteria are met. We estimate percentage-of-completion for compressor and accessory fabrication on a direct labor hour to total labor hour basis. Production and processing equipment fabrication percentage-of-completion is estimated using the direct labor hour to total labor hour and the cost to total cost basis. The duration of these projects is typically between three and 36 months. Fabrication revenue is recognized using the completed contract method when the applicable criteria of the percentage-of-completion method are not met. Fabrication revenue from a claim is recognized to the extent that costs related to the claim have been incurred, when collection is probable and can be reliably estimated.

Earnings (Loss) Attributable to Exterran Stockholders Per Common Share

Earnings (Loss) Attributable to Exterran Stockholders Per Common Share

Basic income (loss) attributable to Exterran stockholders per common share is computed by dividing income (loss) attributable to Exterran common stockholders by the weighted average number of shares outstanding for the period. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and are included in the computation of earnings (loss) per share following the two-class method. Therefore, restricted share awards that contain the right to vote and receive dividends are included in the computation of basic and diluted earnings (loss) per share, unless their effect would be anti-dilutive.

Diluted income (loss) attributable to Exterran stockholders per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options and warrants to purchase common stock, restricted stock, restricted stock units, stock to be issued pursuant to our employee stock purchase plan and convertible senior notes, unless their effect would be anti-dilutive.

The table below summarizes income (loss) attributable to Exterran stockholders (in thousands):

		Three Months Ended March 31,
		2012			2011
Income (loss) from continuing operations attributable to Exterran stockholders		$	6,120		$	(27,892	)
Loss from discontinued operations, net of tax		(625		)	(2,138		)
Net income (loss) attributable to Exterran stockholders		$	5,495		$	(30,030	)

The table below indicates the potential shares of common stock that were included in computing the dilutive potential shares of common stock used in diluted income (loss) attributable to Exterran stockholders per common share (in thousands):

		Three Months Ended March 31,
		2012		2011
Weighted average common shares outstanding-used in basic income (loss) per common share		64,515		62,418
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock units		54		**
On settlement of employee stock purchase plan shares		27		**
On exercise of warrants		**		**
On conversion of 4.25% convertible senior notes due 2014		**		**
On conversion of 4.75% convertible senior notes due 2014		**		**
Weighted average common shares and dilutive potential common shares-used in diluted income per common share		64,596		62,418

** Excluded from diluted income (loss) per common share as the effect would have been anti-dilutive.

There were no adjustments to net income (loss) attributable to Exterran stockholders for the diluted earnings (loss) per share calculation for the three months ended March 31, 2012 and 2011.

The table below indicates the potential shares of common stock issuable that were excluded from net dilutive potential shares of common stock issuable as their effect would have been anti-dilutive (in thousands):

		Three Months Ended March 31,
		2012		2011
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average market value for the period		2,510		1,320
On exercise of options and vesting of restricted stock and restricted stock units		—		836
On settlement of employee stock purchase plan shares		—		11
On exercise of warrants		2,808		2,808
On conversion of 4.25% convertible senior notes due 2014		15,334		15,334
On conversion of 4.75% convertible senior notes due 2014		3,114		3,114
Net dilutive potential common shares issuable		23,766		23,423

Financial Instruments

Financial Instruments

Our financial instruments include cash, restricted cash, receivables, payables, interest rate swaps and debt. At March 31, 2012 and December 31, 2011, the estimated fair value of these financial instruments approximated their carrying value as reflected in our condensed consolidated balance sheets. We estimate the fair value of our fixed rate debt based on quoted market yields in inactive markets or model derived calculations using market yields observed in active markets, which are Level 2 inputs. We estimate the fair value of our floating rate debt using discounted cash flow analysis based on interest rates offered on loans with similar terms to borrowers of similar credit quality, which are Level 3 inputs. See Note 8 for additional information regarding the fair value hierarchy. A summary of the fair value and carrying value of our debt as of March 31, 2012 and December 31, 2011 is shown in the table below (in thousands):

		As of March 31, 2012						As of December 31, 2011
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Fixed rate debt		$	798,951		$	825,000		$	794,039		$	792,000
Floating rate debt		910,500			914,000			979,000			989,000
Total debt		$	1,709,451		$	1,739,000		$	1,773,039		$	1,781,000

GAAP requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings (loss) unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

Disclosure of accounting policy for computing basic and diluted earnings or loss per share for each class of common stock and participating security. Addresses all significant policy factors, including any antidilutive items that have been excluded from the computation and takes into account stock dividends, splits and reverse splits that occur after the balance sheet date of the latest reporting period but before the issuance of the financial statements.

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Disclosure of accounting policy for revenue recognition. If the entity has different policies for different types of revenue transactions, the policy for each material type of transaction is generally disclosed. If a sales transaction has multiple element arrangements (for example, delivery of multiple products, services or the rights to use assets) the disclosure may indicate the accounting policy for each unit of accounting as well as how units of accounting are determined and valued. The disclosure may encompass important judgment as to appropriateness of principles related to recognition of revenue. The disclosure also may indicate the entity's treatment of any unearned or deferred revenue that arises from the transaction.

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