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

6 Months Ended

Jun. 30, 2015

Basis of Presentation and Summary of Significant Accounting Policies

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Income (loss) from continuing operations attributable to Exterran stockholders	$	(1,643	)	$	(5,392	)	$	11,786		$	8,477
Income from discontinued operations, net of tax	254			17,769			18,967			36,496
Less: Net income attributable to participating securities	(126		)	(122		)	(505		)	(803		)

Net income (loss) attributable to Exterran common stockholders	$	(1,515	)	$	12,255		$	30,248		$	44,170

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Weighted average common shares outstanding including participating securities	69,503		66,826		69,339		66,579
Less: Weighted average participating securities outstanding	(989	)	(936	)	(958	)	(1,004	)

Weighted average common shares outstanding — used in basic income (loss) per common share	68,514		65,890		68,381		65,575

Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock units	*		*		286		556
On settlement of employee stock purchase plan shares	*		*		—		1
On exercise of warrants	**		*		—		2,640
On conversion of 4.25% convertible senior notes due 2014	**		*		**		*

Weighted average common shares outstanding — used in diluted income (loss) per common share	68,514		65,890		68,667		68,772

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

**Not applicable as these instruments were not outstanding during the period.

There were no adjustments to net income (loss) attributable to Exterran common stockholders for the diluted earnings (loss) per common share calculation during the three and six months ended June 30, 2015 and 2014.

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

	Three Months Ended June 30,		Six Months Ended June 30,
	2015	2014	2015	2014
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average market value for the period	374	497	471	541
On exercise of options and vesting of restricted stock units	290	497	—	—
On settlement of employee stock purchase plan shares	1	—	—	—
On exercise of warrants	*	12,426	—	—
On conversion of 4.25% convertible senior notes due 2014	*	12,900	*	14,146

Net dilutive potential common shares issuable	665	26,320	471	14,687

Not applicable as these instruments were not outstanding during the period.

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 six months ended June 30, 2014 and 2015 (in thousands):

	Derivatives Cash Flow Hedges			Foreign Currency Translation Adjustment			Total
Accumulated other comprehensive income (loss), January 1, 2014	$	(1,346	)	$	31,424		$	30,078
Loss recognized in other comprehensive income (loss), net of tax	(639		)(1)	(269		)(3)	(908		)
Loss reclassified from accumulated other comprehensive income (loss), net of tax	823		(2)	—			823

Other comprehensive income (loss) attributable to Exterran stockholders	184			(269		)	(85		)

Accumulated other comprehensive income (loss), June 30, 2014	$	(1,162	)	$	31,155		$	29,993


Accumulated other comprehensive income (loss), January 1, 2015	$	(911	)	$	16,776		$	15,865
Loss recognized in other comprehensive income (loss), net of tax	(1,943		)(4)	(6,703		)(6)	(8,646		)
Loss reclassified from accumulated other comprehensive income (loss), net of tax	1,030		(5)	—			1,030

Other comprehensive income (loss) attributable to Exterran stockholders	(913		)	(6,703		)	(7,616		)

Accumulated other comprehensive income (loss), June 30, 2015	$	(1,824	)	$	10,073		$	8,249

(1)

During the three months ended June 30, 2014, we recognized a loss of $0.6 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 six months ended June 30, 2014, we recognized a loss of $1.0 million and a tax benefit of $0.4 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 June 30, 2014, we reclassified a $0.6 million loss to interest expense and a tax benefit of $0.2 million to provision for income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss). During the six months ended June 30, 2014, we reclassified a $1.2 million loss to interest expense and a tax benefit of $0.4 million to provision for income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss).

(3)

During the three and six months ended June 30, 2014, we recognized a loss of $1.4 million and $0.3 million, respectively, in other comprehensive income (loss), net of tax, related to changes in foreign currency translation adjustment.

(4)

During the three months ended June 30, 2015, we recognized a loss of $0.6 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. During the six months ended June 30, 2015, we recognized a loss of $2.9 million and a tax benefit of $1.0 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments.

(5)

During the three months ended June 30, 2015, we reclassified a $0.9 million loss to interest expense and a tax benefit of $0.4 million to provision for income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss). During the six months ended June 30, 2015, we reclassified a $1.6 million loss to interest expense and a tax benefit of $0.6 million to provision for income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss).

(6)

During the three and six months ended June 30, 2015, we recognized a gain of $3.7 million and a loss of $6.7 million, respectively, 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 June 30, 2015 and December 31, 2014, 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, 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 10 for additional information regarding the fair value hierarchy.

The following table summarizes the carrying amount and fair value of our debt as of June 30, 2015 and December 31, 2014 (in thousands):

	June 30, 2015				December 31, 2014
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Fixed rate debt	$	1,041,762	$	1,043,000	$	1,041,402	$	960,000
Floating rate debt	1,048,000		1,049,000		985,500		986,000

Total debt	$	2,089,762	$	2,092,000	$	2,026,902	$	1,946,000

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.