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Background and Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2013
Background and Significant Accounting Policies |
Background and Significant Accounting Policies | 1. Background and Significant Accounting Policies Exterran Holdings, Inc., together with its subsidiaries (“Exterran”, “our”, “we” or “us”) is a global market leader in the full service natural gas compression business and a premier provider of operations, maintenance, service and equipment for oil and natural gas production, processing and transportation applications. Our global customer base consists 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 producers and natural gas processors, gatherers and pipelines. We operate in three primary business lines: contract operations, aftermarket services and fabrication. In our contract operations business line, we use our fleet of natural gas compression equipment and crude oil and natural gas production and processing equipment to provide operations services to our customers. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression, production, processing, treating and other equipment. In our fabrication business line, we fabricate compression and oil and natural gas production and processing equipment for sale to our customers and for use in our contract operations services. In addition, our fabrication business line provides engineering, procurement and fabrication services related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the fabrication of tank farms and the fabrication of evaporators and brine heaters for desalination plants. We 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 were incorporated in February 2007 as a wholly-owned subsidiary of Universal Compression Holdings, Inc. (“Universal”). On August 20, 2007, in accordance with their merger agreement, Universal and Hanover Compressor Company (“Hanover”) merged into our wholly-owned subsidiaries, and we became the parent entity of Universal and Hanover. Immediately following the completion of the merger, Universal merged with and into us. Principles of Consolidation The accompanying consolidated financial statements include Exterran and its wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliated entities in which we own more than a 20% interest and do not have a controlling interest are accounted for using the equity method. For financial reporting purposes, we consolidate the financial statements of Exterran Partners, L.P. (together with its subsidiaries, the “Partnership”) with those of our own and reflect its operations in our North America contract operations business segment. We control the Partnership through our ownership of its general partner. Public ownership of the Partnership’s net assets and earnings is presented as a component of noncontrolling interest in our consolidated financial statements. The borrowings of the Partnership are presented as part of our consolidated debt. However, we do not have any obligation for the payment of interest or repayment of borrowings incurred by the Partnership. Use of Estimates in the Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses, as well as the disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date. Management believes that the estimates and assumptions used are reasonable. Cash and Cash Equivalents We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash as of December 31, 2013 and 2012 consists of cash that contractually is not available for immediate use. Restricted cash is presented separately from cash and cash equivalents in the balance sheet and statement of cash flows. Revenue Recognition Contract operations revenue is recognized when earned, which generally occurs monthly when service is provided under our customer contracts. Aftermarket services revenue is recognized 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. We estimate production and processing equipment fabrication percentage-of-completion using the direct labor hour to total labor hour basis 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. Concentrations of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. We believe that the credit risk in temporary cash investments is limited because our cash is held in accounts with multiple financial institutions. Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the world. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of products and services we provide and the terms of our contract operations customer service agreements. We maintain allowances for doubtful accounts for estimated losses resulting from our customers’ inability to make required payments. The determination of the collectibility of amounts due from our customers requires us to use estimates and make judgments regarding future events and trends, including monitoring our customers’ payment history and current creditworthiness to determine that collectibility is reasonably assured, as well as consideration of the overall business climate in which our customers operate. Inherently, these uncertainties require us to make judgments and estimates regarding our customers’ ability to pay amounts due to us in order to determine the appropriate amount of valuation allowances required for doubtful accounts. We review the adequacy of our allowance for doubtful accounts quarterly. We determine the allowance needed based on historical write-off experience and by evaluating significant balances aged greater than 90 days individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. During the years ended December 31, 2013, 2012 and 2011, we recorded bad debt expense of $2.2 million, $8.8 million and $1.5 million, respectively. Inventory Inventory consists of parts used for fabrication or maintenance of natural gas compression equipment and facilities, processing and production equipment and also includes compression units and production equipment that are held for sale. Inventory is stated at the lower of cost or market using the average-cost method. A reserve is recorded against inventory balances for estimated obsolescence based on specific identification and historical experience. Property, Plant and Equipment Property, plant and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives as follows:
Compression equipment, facilities and other fleet assets |  | 3 to 30 years |
Buildings |  | 20 to 35 years |
Transportation, shop equipment and other |  | 3 to 12 years |
Major improvements that extend the useful life of an asset are capitalized. Repairs and maintenance are expensed as incurred. When property, plant and equipment is sold, retired or otherwise disposed of, the gain or loss is recorded in other (income) expense, net. Interest is capitalized during the construction period on equipment and facilities that are constructed for use in our operations. The capitalized interest is included as part of the cost of the asset to which it relates and is amortized over the asset’s estimated useful life. Computer software Certain costs related to the development or purchase of internal-use software are capitalized and amortized over the estimated useful life of the software, which ranges from three to five years. Costs related to the preliminary project stage and the post-implementation/operation stage of an internal-use computer software development project are expensed as incurred. Long-Lived Assets 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 indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. When necessary, an impairment loss is recognized and represents the excess of the asset’s carrying value as compared to its estimated fair value and is charged to the period in which the impairment occurred. Identifiable intangibles are amortized over the assets’ estimated useful lives. Deferred Revenue Deferred revenue is primarily comprised of billings related to jobs where revenue is recognized on the percentage-of-completion method that have not begun, milestone billings related to jobs where revenue is recognized on the completed contract method and deferred revenue on contract operations jobs. Other (Income) Expense, Net Other (income) expense, net, is primarily comprised of gains and losses from the remeasurement of our international subsidiaries’ net assets exposed to changes in foreign currency rates and on the sale of used assets. Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions in accordance with the accounting standard on income taxes under a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Foreign Currency Translation The financial statements of subsidiaries outside the U.S., except those for which we have determined that the U.S. dollar is the functional currency, are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resulting gains and losses from the translation of accounts into U.S. dollars are included in accumulated other comprehensive income (loss) on our consolidated balance sheets. For all subsidiaries, gains and losses from remeasuring foreign currency accounts into the functional currency are included in other (income) expense, net, on our consolidated statements of operations. We recorded a foreign currency loss of $3.0 million, $8.2 million and $16.5 million during the years ended December 31, 2013, 2012 and 2011, respectively. Included in our foreign currency loss was $4.3 million, $7.4 million and $14.2 million of non-cash losses from foreign currency exchange rate changes recorded on intercompany obligations during the years ended December 31, 2013, 2012 and 2011, respectively. Hedging and Use of Derivative Instruments We use derivative financial instruments to minimize the risks and/or costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We also use derivative financial instruments to minimize the risks caused by currency fluctuations in certain foreign currencies. We do not use derivative financial instruments for trading or other speculative purposes. We record interest rate swaps and foreign currency hedges on the balance sheet as either derivative assets or derivative liabilities measured at their fair value. The fair value of our derivatives is estimated using a combination of the market and income approach based on forward LIBOR curves. Changes in the fair value of the derivatives designated as cash flow hedges are deferred in accumulated other comprehensive income (loss), net of tax, to the extent the contracts are effective as hedges until settlement of the underlying hedged transaction. To qualify for hedge accounting treatment, we must formally document, designate and assess the effectiveness of the transactions. If the necessary correlation ceases to exist or if the anticipated transaction becomes improbable, we would discontinue hedge accounting and apply mark-to-market accounting. Amounts paid or received from interest rate swap agreements are charged or credited to interest expense and matched with the cash flows and interest expense of the debt being hedged, resulting in an adjustment to the effective interest rate. Amounts paid or received from foreign currency derivatives designated as hedges are recorded against revenue and matched with the revenue recognized on the related contract being hedged. 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 with nonforfeitable rights to receive 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 with nonforfeitable rights to 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 following table summarizes net income (loss) attributable to Exterran stockholders (in thousands):
|  | Years Ended December 31, |
|  | 2013 |  | 2012 |  | 2011 |
Income (loss) from continuing operations attributable to Exterran stockholders |  | $ | 59,150 |  | $ | (75,462 | ) | $ | (332,564 | )
Income (loss) from discontinued operations, net of tax |  | 64,014 |  | 35,976 |  | (8,044 | )
Net income (loss) attributable to Exterran stockholders |  | $ | 123,164 |  | $ | (39,486 | ) | $ | (340,608 | )
The following table shows the potential shares of common stock that were included in computing diluted income (loss) attributable to Exterran stockholders per common share (in thousands):
|  | Years Ended December 31, |
|  | 2013 |  | 2012 |  | 2011 |
Weighted average common shares outstanding — used in basic income (loss) per common share |  | 65,655 |  | 63,436 |  | 62,624 |
Net dilutive potential common shares issuable: |  |  |  |  |  |  |
On exercise of options and vesting of restricted stock and restricted stock units |  | 547 |  | ** |  | ** |
On settlement of employee stock purchase plan shares |  | 2 |  | ** |  | ** |
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 outstanding — used in diluted income (loss) per common share |  | 66,204 |  | 63,436 |  | 62,624 |
** Excluded from diluted income (loss) per common share as their inclusion 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 during the years ended December 31, 2013, 2012 and 2011. The following table shows the potential shares of common stock issuable that were excluded from computing diluted income (loss) attributable to Exterran stockholders per common share as their inclusion would have been anti-dilutive (in thousands):
|  | Years Ended December 31, |
|  | 2013 |  | 2012 |  | 2011 |
Net dilutive potential common shares issuable: |  |  |  |  |  |  |
On exercise of options where exercise price is greater than average market value for the period |  | 734 |  | 1,858 |  | 2,533 |
On exercise of options and vesting of restricted stock and restricted stock units |  | — |  | 1,466 |  | 675 |
On settlement of employee stock purchase plan shares |  | — |  | 9 |  | 23 |
On exercise of warrants |  | 12,426 |  | 12,426 |  | 12,426 |
On conversion of 4.25% convertible senior notes due 2014 |  | 15,334 |  | 15,334 |  | 15,334 |
On conversion of 4.75% convertible senior notes due 2014 |  | 119 |  | 3,114 |  | 3,114 |
Net dilutive potential common shares issuable |  | 28,613 |  | 34,207 |  | 34,105 |
Comprehensive Income (Loss) Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss) consists of foreign currency translation adjustments, changes in the fair value of derivative financial instruments, net of tax, that are designated as cash flow hedges and to the extent the hedge is effective and adjustments related to changes in our ownership of the Partnership. The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax and excluding noncontrolling interest, during the years ended December 31, 2013, 2012 and 2011:
|  | Derivatives - |  | Foreign Currency |  |  |
|  | Cash Flow Hedges |  | Translation Adjustment |  | Total |
Accumulated other comprehensive income (loss), December 31, 2012 |  | $ | (2,984 | ) | $ | 26,893 |  | $ | 23,909 |
Loss recognized in other comprehensive income (loss), net of tax |  | (476 | )(1) | (2,960 | )(3) | (3,436 | )
Loss reclassified from accumulated other comprehensive income (loss), net of tax |  | 2,114 | (2) | 7,491 | (4) | 9,605 |
Other comprehensive income attributable to Exterran stockholders |  | 1,638 |  | 4,531 |  | 6,169 |
Accumulated other comprehensive income (loss), December 31, 2013 |  | $ | (1,346 | ) | $ | 31,424 |  | $ | 30,078 |
(1) During the year ended December 31, 2013, we recognized a loss of $0.5 million and a tax benefit of $0.1 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments. (2) During the year ended December 31, 2013, we reclassified a $3.2 million loss and a tax benefit of $1.1 million, to interest expense and provision for (benefit from) income taxes, respectively, in our consolidated statements of operations from accumulated other comprehensive income (loss). (3) During the year ended December 31, 2013, we recognized a loss of $3.0 million in other comprehensive income (loss), net of tax, related to changes in foreign currency translation adjustment. (4) During the year ended December 31, 2013, we reclassified losses of $5.1 million and $2.4 million related to foreign currency translation adjustments to income from discontinued operations, net of tax, and long-lived asset impairment, respectively, in our consolidated statements of operations. These amounts represent cumulative foreign currency translation adjustments associated with our contract operations and aftermarket services businesses in Canada (“Canadian Operations”) and a United Kingdom entity that previously had been recognized in accumulated other comprehensive income (loss). See Note 2 for further discussion of the sale of our Canadian Operations. Additionally, as discussed in Note 13, we sold the entity that owned our fabrication facility in the United Kingdom in July 2013 and, we recognized an impairment during the year ended December 31, 2013 based on the net transaction value set forth in our agreement to sell this entity.
|  | Derivatives - |  | Foreign Currency |  |  |
|  | Cash Flow Hedges |  | Translation Adjustment |  | Total |
Accumulated other comprehensive income (loss), December 31, 2011 |  | $ | (17,072 | ) | $ | 23,131 |  | $ | 6,059 |
Income (loss) recognized in other comprehensive income (loss), net of tax |  | (879 | )(1) | 3,762 | (3) | 2,883 |
Loss reclassified from accumulated other comprehensive income (loss), net of tax |  | 14,967 | (2) | — |  | 14,967 |
Other comprehensive income attributable to Exterran stockholders |  | 14,088 |  | 3,762 |  | 17,850 |
Accumulated other comprehensive income (loss), December 31, 2012 |  | $ | (2,984 | ) | $ | 26,893 |  | $ | 23,909 |
(1) During the year ended December 31, 2012, we recognized a loss of $1.5 million and a tax benefit of $0.6 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments. (2) During the year ended December 31, 2012, we reclassified a $23.0 million loss and a tax benefit of $8.0 million, to interest expense and provision for (benefit from) income taxes, respectively, in our consolidated statements of operations from accumulated other comprehensive income (loss). (3) During the year ended December 31, 2012, we recognized a gain of $3.8 million in other comprehensive income (loss), net of tax, related to changes in foreign currency translation adjustment.
|  | Derivatives - |  | Foreign Currency |  |  |
|  | Cash Flow Hedges |  | Translation Adjustment |  | Total |
Accumulated other comprehensive income (loss), December 31, 2010 |  | $ | (40,013 | ) | $ | 19,788 |  | $ | (20,225 | )
Income (loss) recognized in other comprehensive income (loss), net of tax |  | (1,634 | )(1) | 3,343 | (3) | 1,709 |
Loss reclassified from accumulated other comprehensive income (loss), net of tax |  | 24,575 | (2) | — |  | 24,575 |
Other comprehensive income attributable to Exterran stockholders |  | 22,941 |  | 3,343 |  | 26,284 |
Accumulated other comprehensive income (loss), December 31, 2011 |  | $ | (17,072 | ) | $ | 23,131 |  | $ | 6,059 |
(1) During the year ended December 31, 2011, we recognized a loss of $2.7 million and a tax benefit of $1.1 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments. (2) During the year ended December 31, 2011, we reclassified a $38.2 million loss and a tax benefit of $13.3 million, to interest expense and provision for (benefit from) income taxes, respectively, and a $0.4 million gain and a tax provision of $0.1 million, to fabrication revenue and provision for (benefit from) income taxes, respectively, in our consolidated statements of operations from accumulated other comprehensive income (loss). (3) During the year ended December 31, 2011, we recognized a gain of $3.3 million in other comprehensive income (loss), net of tax, related to changes in foreign currency translation adjustment. Financial Instruments Our financial instruments consist of cash, restricted cash, receivables, payables, interest rate swaps and debt. At December 31, 2013 and 2012, the estimated fair values of these financial instruments approximated their carrying amounts as reflected in our consolidated balance sheets. The fair value of our fixed rate debt was estimated based on quoted market yields in inactive markets or model derived calculations using market yields observed in active markets, which are Level 2 inputs. The fair value of our floating rate debt was estimated using a 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 12 for additional information regarding the fair value hierarchy. The following table summarizes the carrying amount and fair value of our debt as of December 31, 2013 and 2012 (in thousands):
|  | December 31, 2013 |  | December 31, 2012 |
|  | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value |
Fixed rate debt |  | $ | 1,040,155 |  | $ | 1,070,000 |  | $ | 814,423 |  | $ | 857,000 |
Floating rate debt |  | 462,000 |  | 462,000 |  | 750,500 |  | 761,000 |
Total debt |  | $ | 1,502,155 |  | $ | 1,532,000 |  | $ | 1,564,923 |  | $ | 1,618,000 |
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.

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- Definition The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity. + References No definition available. + Details
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