Basis of Presentation and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2014

Basis of Presentation and Summary of Significant Accounting Policies

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. During the nine months ended September 30, 2014, we recorded $3.5 million of revenue related to a claim on a contract that was determined to be probable of collection.

Earnings (Loss) Attributable to Exterran Common Stockholders Per Common Share

Earnings (Loss) Attributable to Exterran Common Stockholders Per Common Share

Basic income (loss) attributable to Exterran common stockholders per common share is computed using the two-class method, which is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic income (loss) attributable to Exterran common stockholders per common share is determined by dividing income (loss) attributable to Exterran common stockholders after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include our unvested restricted stock and certain stock settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, no effect is given to participating securities because they do not have a contractual obligation to participate in our losses.

Diluted income (loss) attributable to Exterran common 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 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 attributable to Exterran common stockholders used in the calculation of basic and diluted income per common share (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Income from continuing operations attributable to Exterran stockholders	$	16,047		$	25,856		$	24,524		$	52,986
Income from discontinued operations, net of tax	18,003			15,121			54,499			47,531
Less: Net income attributable to participating securities	(448		)	(754		)	(1,157		)	(2,793		)
Net income attributable to Exterran common stockholders	$	33,602		$	40,223		$	77,866		$	97,724

The following table shows the potential shares of common stock that were included in computing diluted income attributable to Exterran common stockholders per common share (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Weighted average common shares outstanding including participating securities	67,347		65,780		66,820		66,218
Less: Weighted average participating securities outstanding	(915	)	(1,211	)	(959	)	(1,840	)
Weighted average common shares outstanding — used in basic income per common share	66,432		64,569		65,861		64,378
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock units	468		565		527		537
On settlement of employee stock purchase plan shares	—		2		—		2
On exercise of warrants	3,506		**		2,929		**
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 per common share	70,406		65,136		69,317		64,917

* Not applicable as the debt instrument was not outstanding during the period.

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

There were no adjustments to net income attributable to Exterran common stockholders for the diluted earnings per common share calculation during the three and nine months ended September 30, 2014 and 2013.

The following table shows the potential shares of common stock issuable that were excluded from computing diluted income attributable to Exterran common stockholders per common share as their inclusion would have been anti-dilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2014	2013	2014	2013
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average market value for the period	326	681	470	783
On exercise of options and vesting of restricted stock units	—	—	—	—
On settlement of employee stock purchase plan shares	—	—	—	—
On exercise of warrants	—	12,426	—	12,426
On conversion of 4.25% convertible senior notes due 2014	—	15,334	9,431	15,334
On conversion of 4.75% convertible senior notes due 2014	—	—	—	160
Net dilutive potential common shares issuable	326	28,441	9,901	28,703

Comprehensive Income (Loss)

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, amortization of terminated interest rate swaps and adjustments related to changes in our ownership of Exterran Partners, L.P. (the “Partnership”).

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, and excluding noncontrolling interest, during the nine months ended September 30, 2013 and 2014 (in thousands):

	Derivatives Cash Flow Hedges			Foreign Currency Translation Adjustment			Total
Accumulated other comprehensive income (loss), January 1, 2013	$	(2,984	)	$	26,893		$	23,909
Loss recognized in other comprehensive income (loss), net of tax	(633		)(1)	(3,640		)(3)	(4,273		)
Loss reclassified from accumulated other comprehensive income (loss), net of tax	1,643		(2)	7,491		(4)	9,134
Other comprehensive income attributable to Exterran stockholders	1,010			3,851			4,861
Accumulated other comprehensive income (loss), September 30, 2013	$	(1,974	)	$	30,744		$	28,770

Accumulated other comprehensive income (loss), January 1, 2014	$	(1,346	)	$	31,424		$	30,078
Loss recognized in other comprehensive income (loss), net of tax	(439		)(5)	(6,519		)(7)	(6,958		)
Loss reclassified from accumulated other comprehensive income (loss), net of tax	1,243		(6)	—			1,243
Other comprehensive income (loss) attributable to Exterran stockholders	804			(6,519		)	(5,715		)
Accumulated other comprehensive income (loss), September 30, 2014	$	(542	)	$	24,905		$	24,363

(1) During the three months ended September 30, 2013, we recognized a loss of $0.9 million and a tax benefit of $0.3 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments. During the nine months ended September 30, 2013, we recognized a loss of $0.8 million and a tax benefit of $0.2 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments.

(2) During the three months ended September 30, 2013, we reclassified a $0.8 million loss to interest expense and a tax benefit of $0.3 million to provision for income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss). During the nine months ended September 30, 2013, we reclassified a $2.5 million loss to interest expense and a tax benefit of $0.9 million to provision for income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss).

(3) During the three and nine months ended September 30, 2013, we recognized a gain of $2.5 million and a loss of $3.6 million, respectively, in other comprehensive income (loss), net of tax, related to changes in foreign currency translation adjustment.

(4) During the three months ended September 30, 2013, we reclassified a loss of $5.1 million related to foreign currency translation adjustment to income from discontinued operations, net of tax, in our condensed consolidated statement of operations. During the nine months ended September 30, 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 condensed 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 10, we sold the entity that owned our fabrication facility in the United Kingdom in July 2013 and, we recognized an impairment during the nine months ended September 30, 2013 based on the net transaction value set forth in our agreement to sell this entity.

(5) During the three months ended September 30, 2014, we recognized a gain of $0.3 million and a tax provision of $0.1 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments. During the nine months ended September 30, 2014, we recognized a loss of $0.7 million and a tax benefit of $0.3 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments.

(6) During the three months ended September 30, 2014, we reclassified a $0.7 million loss to interest expense and a tax benefit of $0.3 million to provision for income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss). During the nine months ended September 30, 2014, we reclassified a $1.9 million loss to interest expense and a tax benefit of $0.7 million to provision for income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss).

(7) During the three and nine months ended September 30, 2014, we recognized a loss of $6.3 million and $6.5 million, respectively, in other comprehensive income (loss), net of tax, related to changes in foreign currency translation adjustment.

Financial Instruments

Financial Instruments

Our financial instruments consist of cash, restricted cash, receivables, payables, interest rate swaps and debt. At September 30, 2014 and December 31, 2013, the estimated fair values of these financial instruments approximated their carrying amounts as reflected in our condensed 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 9 for additional information regarding the fair value hierarchy.

The following table summarizes the carrying amount and fair value of our debt as of September 30, 2014 and December 31, 2013 (in thousands):

	September 30, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Fixed rate debt	$	1,041,233	$	1,049,000	$	1,040,155	$	1,070,000
Floating rate debt	916,500		917,000		462,000		462,000
Total debt	$	1,957,733	$	1,966,000	$	1,502,155	$	1,532,000

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.

- Definition

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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- Definition

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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