17. Restatement of Previously Reported Consolidated Financial Statements

On November 3, 2015, we completed the Spin-off of our international contract operations, international aftermarket services and global fabrication businesses into a standalone public company operating as Exterran Corporation. Since the completion of the Spin-off, Archrock and Exterran Corporation have been independent, publicly traded companies.

Subsequent to the filing of our Annual Report on Form 10-K for the year ended December 31, 2015, originally filed with the SEC on February 29, 2016, we were notified that senior management of Exterran Corporation identified errors relating to the application of percentage-of-completion accounting principles to certain engineering, procurement and construction (“EPC”) projects in the Middle East by its Belleli subsidiary. As a result of an internal investigation, Exterran Corporation’s management identified inaccuracies related to Belleli EPC projects in estimating the total costs required to complete projects, estimating penalties for liquidated damages and cost of sales amounts charged to projects impacting the years ended December 31, 2015, 2014 and 2013 (including the unaudited quarterly periods within 2015 and 2014). Additionally, prior period errors were separately identified related to the miscalculation and recovery of non-income-based tax receivables owed to Exterran Corporation from the Brazilian government as of December 31, 2011.

Along with restating its financial statements to correct the errors discussed above, Exterran Corporation recorded adjustments for certain immaterial accounting errors related to the periods covered in its Form 10-K/A amending its Annual Report on Form 10-K for the year ended December 31, 2015.

Our management and the Audit Committee of our Board of Directors conducted a review of the errors and inaccuracies that were identified by Exterran Corporation in order to determine the impacts of such matters on our pre-Spin-off historical financial statements. None of the errors and inaccuracies identified relate to our ongoing operations. The international contract operations, international aftermarket services and global fabrication results of operations have been reported as discontinued operations, net of tax, in our consolidated statement of operations for all periods presented and were previously included in the international contract operations segment, aftermarket services segment and fabrication segment prior to the Spin-off. Subsequent to the Spin-off, we no longer operate in the international contract operations, international aftermarket services or fabrication businesses.

Our consolidated financial statements as of and for the year ended December 31, 2015 and related financial information have been restated to reflect the adjustments described above. The restatement has been set forth in its entirety in our 2015 Form 10-K/A which we have filed with the SEC concurrently with this Form 10-Q. As a result of the errors and inaccuracies related to Belleli EPC projects, as described above, our net income was overstated by $22.9 million resulting in a net loss and our net income was overstated by $24.0 million during the three and six months ended June 30, 2015, respectively.

We delayed the filing of this Quarterly Report on Form 10-Q pending the completion of our review of the errors and inaccuracies described above, including the completion of the restatement, and after considering conclusions reached by Exterran Corporation described above. We also concurrently filed a Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.

The tables below summarize the effects of the restatement on our (i) balance sheet at December 31, 2015 and January 1, 2016, (ii) statement of operations for the three and six months ended June 30, 2015, (iii) statement of comprehensive income for the three and six months ended June 30, 2015, (iv) statement of equity at June 30, 2015 and (v) statement of cash flows for the six months ended June 30, 2015.

The effects of the restatement on our condensed consolidated balance sheet as of December 31, 2015 and January 1, 2016 are set forth in the following table (in thousands):



	December 31, 2015 and January 1, 2016
	As Previously Reported			Restatement Adjustments		As Restated
Additional paid-in capital	$	2,820,958		123,939		$	2,944,897
Accumulated deficit	(2,013,799		)	(123,939	)	(2,137,738		)

The effects of the restatement on our condensed consolidated statements of operations for the three and six months ended June 30, 2015 are set forth in the following table (in thousands, except per share amounts):



	Three Months Ended June 30, 2015										Six Months Ended June 30, 2015
	As Previously Reported		Restatement Adjustments			Reclassification Adjustments⁽¹⁾			As Restated and Reclassified		As Previously Reported		Restatement Adjustments			Reclassification Adjustments⁽¹⁾			As Restated and Reclassified
Revenues:
North America contract operations	$	198,259	$	—		$	—		$	198,259	$	400,520	$	—		$	—		$	400,520
International contract operations	115,250		—			(115,250		)	—		235,941		—			(235,941		)	—
Aftermarket services	90,834		—			(34,031		)	56,803		177,690		—			(70,275		)	107,415
Fabrication	279,489		(5,344		)	(274,145		)	—		598,763		(12,276		)	(586,487		)	—
	683,832		(5,344		)	(423,426		)	255,062		1,412,914		(12,276		)	(892,703		)	507,935
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
North America contract operations	81,221		—			—			81,221		163,900		—			—			163,900
International contract operations	44,745		—			(44,745		)	—		89,084		—			(89,084		)	—
Aftermarket services	70,171		—			(24,327		)	45,844		136,105		—			(49,484		)	86,621
Fabrication	240,854		16,590			(257,444		)	—		507,972		10,503			(518,475		)	—
Selling, general and administrative	83,874		—			(52,517		)	31,357		170,560		—			(106,635		)	63,925



Depreciation and amortization	94,325			97			(36,883		)	57,539			190,133			194			(75,775		)	114,552
Long-lived asset impairment	15,420			—			(5,910		)	9,510			28,152			—			(10,489		)	17,663
Restructuring and other charges	19,604			—			(18,411		)	1,193			24,394			—			(23,201		)	1,193
Interest expense	28,398			—			(319		)	28,079			55,696			—			(826		)	54,870
Equity in income of non-consolidated affiliates	(5,062		)	—			5,062			—			(10,068		)	—			10,068			—
Other income, net	1,005			(63		)	(3,424		)	(2,482		)	8,846			(961		)	(10,917		)	(3,032		)
	674,555			16,624			(438,918		)	252,261			1,364,774			9,736			(874,818		)	499,692
Income before income taxes	9,277			(21,968		)	15,492			2,801			48,140			(22,012		)	(17,885		)	8,243
Provision for (benefit from) income taxes	1,742			819			(4,090		)	(1,529		)	18,233			1,890			(22,392		)	(2,269		)
Income from continuing operations	7,535			(22,787		)	19,582			4,330			29,907			(23,902		)	4,507			10,512
Income (loss) from discontinued operations, net of tax	254			—			(19,582		)	(19,328		)	18,967			—			(4,507		)	14,460
Net income (loss)	7,789			(22,787		)	—			(14,998		)	48,874			(23,902		)	—			24,972
Less: Net income attributable to the noncontrolling interest	(9,178		)	—			—			(9,178		)	(18,121		)	—			—			(18,121		)
Net income (loss) attributable to Archrock stockholders	$	(1,389	)	$	(22,787	)	$	—		$	(24,176	)	$	30,753		$	(23,902	)	$	—		$	6,851

Basic income (loss) per common share:
Income (loss) from continuing operations attributable to Archrock common stockholders	$	(0.03	)	$	(0.33	)	$	0.29		$	(0.07	)	$	0.17		$	(0.35	)	$	0.07		$	(0.11	)
Income (loss) from discontinued operations attributable to Archrock common stockholders	0.01			—			(0.29		)	(0.28		)	0.27			—			(0.06		)	0.21
Net income (loss) attributable to Archrock common stockholders	$	(0.02	)	$	(0.33	)	$	—		$	(0.35	)	$	0.44		$	(0.35	)	$	0.01		$	0.10

Diluted income (loss) per common share:
Income (loss) from continuing operations attributable to Archrock common stockholders	$	(0.03	)	$	(0.33	)	$	0.29		$	(0.07	)	$	0.17		$	(0.35	)	$	0.07		$	(0.11	)
Income (loss) from discontinued operations attributable to Archrock common stockholders	0.01			—			(0.29		)	(0.28		)	0.27			—			(0.06		)	0.21
Net income (loss) attributable to Archrock common stockholders	$	(0.02	)	$	(0.33	)	$	—		$	(0.35	)	$	0.44		$	(0.35	)	$	0.01		$	0.10

Weighted average common shares outstanding used in income (loss) per common share:
Basic	68,514			—			—			68,514			68,381			—			—			68,381
Diluted	68,514			—			—			68,514			68,667			—			(286		)	68,381

Dividends declared and paid per common share	$	0.15		$	—		$	—		$	0.15		$	0.30		$	—		$	—		$	0.30


⁽¹⁾	As discussed in Note 3, in November 2015, we completed the Spin-off of our international contract operations, international aftermarket services and global fabrication businesses into a standalone public company operating as Exterran Corporation. The results of these businesses have been reclassified to discontinued operations in our financial statements for all periods presented.

The effects of the restatement on our condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2015 are set forth in the following table (in thousands):



	Three Months Ended June 30, 2015									Six Months Ended June 30, 2015
	As Previously Reported			Restatement Adjustments			As Restated			As Previously Reported			Restatement Adjustments			As Restated
Net income (loss)	$	7,789		$	(22,787	)	$	(14,998	)	$	48,874		$	(23,902	)	$	24,972
Other comprehensive income (loss), net of tax:
Derivative gain (loss), net of reclassifications to earnings	1,422			—			1,422			(3,228		)	—			(3,228		)
Adjustments from changes in ownership of Partnership	(223		)	—			(223		)	(223		)	—			(223		)
Amortization of terminated interest rate swaps	590			—			590			1,225			—			1,225
Foreign currency translation adjustment	3,659			(334		)	3,325			(6,703		)	2,283			(4,420		)
Total other comprehensive income (loss)	5,448			(334		)	5,114			(8,929		)	2,283			(6,646		)
Comprehensive income (loss)	13,237			(23,121		)	(9,884		)	39,945			(21,619		)	18,326
Less: Comprehensive income attributable to the noncontrolling interest	(10,838		)	—			(10,838		)	(16,808		)	—			(16,808		)
Comprehensive income (loss) attributable to Archrock stockholders	$	2,399		$	(23,121	)	$	(20,722	)	$	23,137		$	(21,619	)	$	1,518

The effects of the restatement on our condensed consolidated statement of equity as of June 30, 2015 are set forth in the following table (in thousands):



	June 30, 2015
	As Previously Reported		Restatement Adjustments		As Restated
Accumulated Other Comprehensive Income
Balance at January 1, 2015	15,865		9,969		25,834
Comprehensive loss	(7,616	)	2,283		(5,333	)
Balance at June 30, 2015	8,249		12,252		20,501

Accumulated Deficit
Balance at January 1, 2015	(1,866,397	)	(97,208	)	(1,963,605	)
Comprehensive income	30,753		(23,902	)	6,851
Balance at June 30, 2015	(1,856,387	)	(121,110	)	(1,977,497	)

Total
Balance at January 1, 2015	1,953,045		(87,239	)	1,865,806
Comprehensive income	39,945		(21,619	)	18,326
Balance at June 30, 2015	1,931,522		(108,858	)	1,822,664

The effects of the restatement on our condensed consolidated statement of cash flows for the six months ended June 30, 2015 are set forth in the following table (in thousands):



	Six Months Ended June 30, 2015
	As Previously Reported			Restatement Adjustments			Reclassification Adjustments⁽¹⁾			As Restated and Reclassified
Cash flows from operating activities:
Net income	$	48,874		$	(23,902	)	$	—		$	24,972
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	190,133			194			(75,775		)	114,552
Long-lived asset impairment	28,152			—			(10,489		)	17,663
Amortization of deferred financing costs	3,127			—			—			3,127
Income from discontinued operations, net of tax	(18,967		)	—			4,507			(14,460		)
Amortization of debt discount	576			—			—			576
Provision for doubtful accounts	1,496			—			(1,174		)	322
Gain on sale of property, plant and equipment	(2,891		)	—			1,046			(1,845		)
Equity in income of non-consolidated affiliates	(10,068		)	—			10,068			—
Amortization of terminated interest rate swaps	1,884			—			—			1,884
Interest rate swaps	(7		)	—			—			(7		)
Loss on remeasurement of intercompany balances	7,999			—			(7,999		)	—
Stock-based compensation expense	9,722			—			(4,716		)	5,006
Non-cash restructuring charges	—			—			1,000			1,000
Deferred income tax provision	(13,234		)	1,889			5,711			(5,634		)
Changes in assets and liabilities:
Accounts receivable and notes	51,147			2,038			(42,279		)	10,906
Inventory	2,595			—			(4,312		)	(1,717		)
Costs and estimated earnings versus billings on uncompleted contracts	(22,438		)	10,238			12,200			—
Other current assets	(6,945		)	(37		)	6,325			(657		)
Accounts payable and other liabilities	(73,079		)	10,490			53,363			(9,226		)
Deferred revenue	(2,986		)	—			2,931			(55		)
Other	(9,129		)	(910		)	15,122			5,083
Net cash provided by continuing operations	185,961			—			(34,471		)	151,490
Net cash provided by discontinued operations	1,351			—			34,471			35,822
Net cash provided by operating activities	187,312			—			—			187,312

Cash flows from investing activities:
Capital expenditures	(254,180		)	—			93,232			(160,948		)
Proceeds from sale of property, plant and equipment	19,348			—			(5,212		)	14,136
Return of investments in non-consolidated affiliates	10,068			—			(10,068		)	—
Proceeds received from settlement of note receivable	5,357						(5,357		)	—
Net cash used in continuing operations	(219,407		)	—			72,595			(146,812		)
Net cash provided by (used in) discontinued operations	16,560			—			(72,595		)	(56,035		)
Net cash used in investing activities	(202,847		)	—			—			(202,847		)

Cash flows from financing activities:
Proceeds from borrowings of long-term debt	765,500			—			—			765,500
Repayments of long-term debt	(703,000		)	—			—			(703,000		)
Payments for debt issuance costs	(1,311		)	—			—			(1,311		)
Payments for settlement of interest rate swaps that include financing elements	(1,877		)	—			—			(1,877		)
Net proceeds from the sale of Partnership units	1,268									1,268
Proceeds from stock options exercised	1,005			—			—			1,005
Proceeds from stock issued pursuant to our employee stock purchase plan	910			—			—			910
Purchases of treasury stock	(3,736		)	—			—			(3,736		)
Dividends to Archrock stockholders	(20,743		)	—			—			(20,743		)
Stock-based compensation excess tax benefit	2,379			—			(799		)	1,580
Distributions to noncontrolling partners in the Partnership	(40,491		)	—			—			(40,491		)
Net cash used in continuing operations	(96		)	—			(799		)	(895		)
Net cash provided by discontinuing operations	—			—			799			799
Net cash used in financing activities	(96		)	—			—			(96		)

Effect of exchange rate changes on cash and cash equivalents	(783		)	—			—			(783		)
Net increase in cash and cash equivalents - total operations	(16,414		)	—			—			(16,414		)
Less: Net decrease in cash and cash equivalents - discontinued operations	—			—			(16,312		)	(16,312		)
Cash and cash equivalents at beginning of period	39,739			—			(39,361		)	378
Cash and cash equivalents at end of period	$	23,325		$	—		$	(23,049	)	$	276


⁽¹⁾	As discussed in Note 3, in November 2015, we completed the Spin-off of our international contract operations, international aftermarket services and global fabrication businesses into a standalone public company operating as Exterran Corporation. The results of these businesses have been reclassified to discontinued operations in our financial statements for all periods presented.