Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
Form 10-Q
(MARK ONE)
 
☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED September 30, 20192020
OR
☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM                   TO                  
 
Commission File No. 001-36875
 
EXTERRAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware47-3282259
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
11000 Equity Drive
HoustonTexas77041
(Address of principal executive offices)(Zip Code)
(281) (281) 836-7000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTicker symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareEXTNNew York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒☐Accelerated filer☐☒
Non-accelerated filer☐Smaller reporting company☐☒
Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
Number of shares of the common stock of the registrant outstanding as of October 30, 2019: 33,495,52026, 2020: 33,126,975 shares.




Table of Contents

TABLE OF CONTENTS
 
Page
Item 1. Financial Statements (unaudited)
3
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Operations
4
Condensed Consolidated Statements of Comprehensive Income (Loss)Loss
5
Condensed Consolidated Statements of Stockholders’ Equity
6
Condensed Consolidated Statements of Cash Flows
7
Notes to Unaudited Condensed Consolidated Financial Statements
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
3122
Item 3. Quantitative and Qualitative Disclosures About Market Risk
4641
Item 4. Controls and Procedures
4641
Item 1. Legal Proceedings
4842
Item 1A. Risk Factors
4842
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
4843
Item 3. Defaults Upon Senior Securities
4843
Item 4. Mine Safety Disclosures
4843
Item 5. Other Information
4843
Item 6. Exhibits
4944
5045


2

Table of Contents

PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
EXTERRAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
(unaudited)

September 30, 2019
December 31, 2018September 30, 2020December 31, 2019
ASSETS




ASSETS






Current assets:




Current assets:
Cash and cash equivalents$21,979

$19,300
Cash and cash equivalents$28,159 $16,683 
Restricted cash19

178
Restricted cash1,670 19 
Accounts receivable, net of allowance of $5,305 and $5,474, respectively231,220

248,467
Inventory, net (Note 5)170,399

150,689
Accounts receivable, net of allowance of $10,473 and $6,019, respectivelyAccounts receivable, net of allowance of $10,473 and $6,019, respectively183,620 179,158 
Inventory (Note 4)Inventory (Note 4)114,520 119,358 
Contract assets (Note 2)37,207

91,602
Contract assets (Note 2)49,092 36,997 
Other current assets25,882

44,234
Other current assets19,333 22,003 
Current assets associated with discontinued operations (Note 4)4,028

11,605
Current assets associated with discontinued operations (Note 3)Current assets associated with discontinued operations (Note 3)28,491 61,705 
Total current assets490,734

566,075
Total current assets424,885 435,923 
Property, plant and equipment, net (Note 6)931,603

901,577
Operating lease right-of-use assets (Note 3)29,293

—
Property, plant and equipment, net (Note 5)Property, plant and equipment, net (Note 5)770,421 824,194 
Operating lease right-of-use assetsOperating lease right-of-use assets26,204 26,227 
Deferred income taxes10,314

11,370
Deferred income taxes12,331 13,994 
Intangible and other assets, net85,671

86,371
Intangible and other assets, net75,775 93,924 
Long-term assets held for sale (Note 7)2,142
 —
Long-term assets associated with discontinued operations (Note 4)2,979

1,661
Long-term assets associated with discontinued operations (Note 3)Long-term assets associated with discontinued operations (Note 3)20,877 23,742 
Total assets$1,552,736

$1,567,054
Total assets$1,330,493 $1,418,004 






LIABILITIES AND STOCKHOLDERS’ EQUITY





LIABILITIES AND STOCKHOLDERS’ EQUITY






Current liabilities:




Current liabilities:
Accounts payable, trade$90,975

$165,744
Accounts payable, trade$59,230 $82,864 
Accrued liabilities111,864

123,335
Accrued liabilities99,976 92,641 
Contract liabilities (Note 2)105,788

153,483
Contract liabilities (Note 2)105,736 66,695 
Current operating lease liabilities (Note 3)6,547

—
Current liabilities associated with discontinued operations (Note 4)9,803

14,767
Current operating lease liabilitiesCurrent operating lease liabilities6,051 5,819 
Current liabilities associated with discontinued operations (Note 3)Current liabilities associated with discontinued operations (Note 3)37,355 78,626 
Total current liabilities324,977

457,329
Total current liabilities308,348 326,645 
Long-term debt (Note 8)495,347

403,810
Long-term debt (Note 6)Long-term debt (Note 6)516,584 443,587 
Deferred income taxes1,869

6,005
Deferred income taxes1,483 993 
Long-term contract liabilities (Note 2)165,188

101,363
Long-term contract liabilities (Note 2)93,643 156,262 
Long-term operating lease liabilities (Note 3)30,256

—
Long-term operating lease liabilitiesLong-term operating lease liabilities30,646 30,189 
Other long-term liabilities45,383

39,812
Other long-term liabilities51,514 48,749 
Long-term liabilities associated with discontinued operations (Note 4)617

5,914
Long-term liabilities associated with discontinued operations (Note 3)Long-term liabilities associated with discontinued operations (Note 3)2,299 2,041 
Total liabilities1,063,637

1,014,233
Total liabilities1,004,517 1,008,466 
Commitments and contingencies (Note 16)





Commitments and contingencies (Note 14)Commitments and contingencies (Note 14)
Stockholders’ equity:




Stockholders’ equity:
Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; zero issued—

—
Common stock, $0.01 par value per share; 250,000,000 shares authorized; 37,498,361 and 36,868,066 shares issued, respectively375

369
Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; 0 issuedPreferred stock, $0.01 par value per share; 50,000,000 shares authorized; 0 issued0 0 
Common stock, $0.01 par value per share; 250,000,000 shares authorized; 37,782,196 and 37,508,286 shares issued, respectivelyCommon stock, $0.01 par value per share; 250,000,000 shares authorized; 37,782,196 and 37,508,286 shares issued, respectively378 375 
Additional paid-in capital745,229

734,458
Additional paid-in capital749,694 747,622 
Accumulated deficit(237,401)
(208,677)Accumulated deficit(385,152)(317,238)
Treasury stock — 3,997,484 and 721,280 common shares, at cost, respectively(53,156)
(11,560)
Treasury stock — 4,651,961 and 4,467,600 common shares, at cost, respectivelyTreasury stock — 4,651,961 and 4,467,600 common shares, at cost, respectively(57,424)(56,567)
Accumulated other comprehensive income34,052

38,231
Accumulated other comprehensive income18,480 35,346 
Total stockholders’ equity (Note 13)489,099

552,821
Total stockholders’ equity (Note 11)Total stockholders’ equity (Note 11)325,976 409,538 
Total liabilities and stockholders’ equity$1,552,736

$1,567,054
Total liabilities and stockholders’ equity$1,330,493 $1,418,004 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

Table of Contents

EXTERRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 Three Months Ended September 30, Nine Months Ended September 30,
 2019
2018 2019 2018
Revenues (Note 2):       
Contract operations$96,261
 $84,828
 $271,645
 $272,808
Aftermarket services34,893
 29,993
 92,308
 88,631
Product sales171,277
 220,028
 680,798
 667,264
 302,431
 334,849
 1,044,751
 1,028,703
Costs and expenses:        
Cost of sales (excluding depreciation and amortization expense):        
Contract operations34,356
 27,768
 93,283
 95,525
Aftermarket services26,079
 22,138
 67,814
 64,741
Product sales153,011
 188,206
 603,152
 580,304
Selling, general and administrative37,702
 45,103
 126,790
 133,727
Depreciation and amortization42,133
 31,108
 116,669
 92,321
Long-lived asset impairment (Note 10)2,970
 2,054
 8,889
 3,858
Restatement related charges (recoveries), net—
 (342) 20
 (318)
Restructuring and other charges (Note 11)1,794
 264
 7,966
 1,686
Interest expense10,103
 7,685
 28,194
 21,787
Other (income) expense, net2,101
 (285) 379
 6,339
 310,249
 323,699
 1,053,156
 999,970
Income (loss) before income taxes(7,818) 11,150
 (8,405) 28,733
Provision for income taxes (Note 12)477
 7,954
 20,209
 23,068
Income (loss) from continuing operations(8,295) 3,196
 (28,614) 5,665
Income (loss) from discontinued operations, net of tax (Note 4)(1,546) 2,173
 6,074
 5,116
Net income (loss)$(9,841) $5,369
 $(22,540) $10,781
        
Basic net income (loss) per common share (Note 15):       
Income (loss) from continuing operations per common share$(0.25) $0.09
 $(0.82) $0.16
Income (loss) from discontinued operations per common share(0.04) 0.06
 0.17
 0.14
Net income (loss) per common share$(0.29) $0.15
 $(0.65) $0.30
        
Diluted net income (loss) per common share (Note 15):       
Income (loss) from continuing operations per common share$(0.25) $0.09
 $(0.82) $0.16
Income (loss) from discontinued operations per common share(0.04) 0.06
 0.17
 0.14
Net income (loss) per common share$(0.29) $0.15
 $(0.65) $0.30
        
Weighted average common shares outstanding used in net income (loss) per common share (Note 15):       
Basic33,783
 35,480
 34,839
 35,402
Diluted33,783
 35,544
 34,839
 35,469
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues (Note 2):
Contract operations$81,679 $96,261 $254,412 $271,645 
Aftermarket services30,435 34,893 83,337 92,308 
Product sales57,397 54,796 123,613 254,367 
169,511 185,950 461,362 618,320 
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Contract operations24,548 34,356 79,754 93,283 
Aftermarket services23,135 26,079 63,336 67,814 
Product sales54,263 48,187 125,581 217,073 
Selling, general and administrative29,959 32,308 95,049 108,902 
Depreciation and amortization36,630 41,106 100,887 113,450 
Impairments (Note 8)1,695 2,970 1,695 8,889 
Restructuring and other charges (Note 9)238 1,257 3,550 6,342 
Interest expense9,623 10,103 29,214 28,194 
Gain on extinguishment of debt (Note 6)(780)0 (3,424)0 
Other (income) expense, net1,178 2,101 (1,169)399 
180,489 198,467 494,473 644,346 
Loss before income taxes(10,978)(12,517)(33,111)(26,026)
Provision for income taxes (Note 10)5,745 477 18,970 20,209 
Loss from continuing operations(16,723)(12,994)(52,081)(46,235)
Income (loss) from discontinued operations, net of tax (Note 3)(998)3,153 (15,833)23,695 
Net loss$(17,721)$(9,841)$(67,914)$(22,540)
Basic and diluted net loss per common share (Note 13):
Loss from continuing operations per common share$(0.51)$(0.38)$(1.59)$(1.33)
Income (loss) from discontinued operations per common share(0.03)0.09 (0.48)0.68 
Net loss per common share$(0.54)$(0.29)$(2.07)$(0.65)
Weighted average common shares outstanding used in net loss per common share (Note 13):
Basic and diluted32,806 33,783 32,742 34,839 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

Table of Contents

EXTERRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(In thousands)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
Three Months Ended September 30, Nine Months Ended September 30,2020201920202019
2019
2018 2019 2018
Net income (loss)$(9,841) $5,369
 $(22,540) $10,781
Net lossNet loss$(17,721)$(9,841)$(67,914)$(22,540)
Other comprehensive loss:       Other comprehensive loss:
Foreign currency translation adjustment(3,631) (2,673) (4,179) (10,039)Foreign currency translation adjustment(2,080)(3,631)(16,866)(4,179)
Comprehensive income (loss)$(13,472) $2,696
 $(26,719) $742
Comprehensive lossComprehensive loss$(19,801)$(13,472)$(84,780)$(26,719)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5

Table of Contents

EXTERRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(unaudited)
Common StockAdditional Paid-in CapitalAccumulated DeficitTreasury StockAccumulated
Other
Comprehensive
Income		Total
Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock 
Accumulated
Other
Comprehensive
Income
 Total
Balance, January 1, 2018$362
 $739,164
 $(223,510) $(6,937) $45,707
 $554,786
Cumulative-effect adjustment from adoption of ASC 606 (Note 2)

 

 (10,021) 

 

 (10,021)
Net income

 

 5,337
 

 

 5,337
Options exercised

 428
 

 

 

 428
Foreign currency translation adjustment

 

 

 

 757
 757
Treasury stock purchased

 

 

 (3,440) 

 (3,440)
Stock-based compensation, net of forfeitures5
 3,599
 

 

 

 3,604
Balance, March 31, 2018$367
 $743,191
 $(228,194) $(10,377) $46,464
 $551,451
Net income

 

 75
 

 

 75
Options exercised

 135
 

 

 

 135
Foreign currency translation adjustment

 

 

 

 (8,123) (8,123)
Treasury stock purchased

 

 

 (41) 

 (41)
Stock-based compensation, net of forfeitures

 3,454
 

 

 

 3,454
Balance, June 30, 2018$367
 $746,780
 $(228,119) $(10,418) $38,341
 $546,951
Net income    5,369
     5,369
Options exercised  (15)       (15)
Foreign currency translation adjustment        (2,673) (2,673)
Treasury stock purchased      (299)   (299)
Stock-based compensation, net of forfeitures1
 3,772
       3,773
Balance, September 30, 2018$368
 $750,537
 $(222,750) $(10,717) $35,668
 $553,106
           
Balance, January 1, 2019$369
 $734,458
 $(208,677) $(11,560) $38,231
 $552,821
Balance, January 1, 2019$369 $734,458 $(208,677)$(11,560)$38,231 $552,821 
Cumulative-effect adjustment from adoption of ASC 842 (Note 1)

 

 (6,184) 

 

 (6,184)
Cumulative-effect adjustment from adoption of ASC 842 LeasesCumulative-effect adjustment from adoption of ASC 842 Leases(6,184)(6,184)
Net loss

 

 (5,394) 

 

 (5,394)Net loss(5,394)(5,394)
Foreign currency translation adjustment

 

 

 

 (968) (968)Foreign currency translation adjustment(968)(968)
Treasury stock purchased

 

 

 (7,087) 

 (7,087)Treasury stock purchased(7,087)(7,087)
Stock-based compensation, net of forfeitures6
 3,990
 

 

 

 3,996
Stock-based compensation, net of forfeitures6 3,990 3,996 
Balance, March 31, 2019$375
 $738,448
 $(220,255) $(18,647) $37,263
 $537,184
Balance, March 31, 2019$375 $738,448 $(220,255)$(18,647)$37,263 $537,184 
Net loss    (7,305)     (7,305)Net loss(7,305)(7,305)
Foreign currency translation adjustment        420
 420
Foreign currency translation adjustment420 420 
Transfers from Archrock, Inc.  420
       420
Transfers from Archrock, Inc.420 420 
Treasury stock purchased      (14,224)   (14,224)Treasury stock purchased(14,224)(14,224)
Stock-based compensation, net of forfeitures  3,487
       3,487
Stock-based compensation, net of forfeitures3,487 3,487 
Balance, June 30, 2019$375
 $742,355
 $(227,560) $(32,871) $37,683
 $519,982
Balance, June 30, 2019$375 $742,355 $(227,560)$(32,871)$37,683 $519,982 
Net loss

 

 (9,841) 

 

 (9,841)Net loss(9,841)(9,841)
Foreign currency translation adjustment

 

 

 

 (3,631) (3,631)Foreign currency translation adjustment(3,631)(3,631)
Treasury stock purchased

 

 

 (20,285) 

 (20,285)Treasury stock purchased(20,285)(20,285)
Stock-based compensation, net of forfeitures

 2,874
 

 

 

 2,874
Stock-based compensation, net of forfeitures2,874 2,874 
Balance, September 30, 2019$375
 $745,229
 $(237,401) $(53,156) $34,052
 $489,099
Balance, September 30, 2019$375 $745,229 $(237,401)$(53,156)$34,052 $489,099 
Balance, January 1, 2020Balance, January 1, 2020$375 $747,622 $(317,238)$(56,567)$35,346 $409,538 
Net lossNet loss(18,304)(18,304)
Foreign currency translation adjustmentForeign currency translation adjustment(11,056)(11,056)
Treasury stock purchasedTreasury stock purchased(835)(835)
Stock-based compensation, net of forfeituresStock-based compensation, net of forfeitures2 283 285 
Balance, March 31, 2020Balance, March 31, 2020$377 $747,905 $(335,542)$(57,402)$24,290 $379,628 
Net lossNet loss(31,889)(31,889)
Foreign currency translation adjustmentForeign currency translation adjustment(3,730)(3,730)
Treasury stock purchasedTreasury stock purchased(10)(10)
Stock-based compensation, net of forfeituresStock-based compensation, net of forfeitures1 1,120 1,121 
Balance, June 30, 2020Balance, June 30, 2020$378 $749,025 $(367,431)$(57,412)$20,560 $345,120 
Net lossNet loss(17,721)(17,721)
Foreign currency translation adjustmentForeign currency translation adjustment(2,080)(2,080)
Treasury stock purchasedTreasury stock purchased(12)(12)
Stock-based compensation, net of forfeituresStock-based compensation, net of forfeitures669 669 
Balance, September 30, 2020Balance, September 30, 2020$378 $749,694 $(385,152)$(57,424)$18,480 $325,976 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



6

Table of Contents

EXTERRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 Nine Months Ended September 30,
 2019 2018
Cash flows from operating activities:   
Net income (loss)$(22,540) $10,781
Adjustments to reconcile net income (loss) to cash provided by operating activities:   
Depreciation and amortization116,669
 92,321
Long-lived asset impairment8,889
 3,858
Amortization of deferred financing costs1,884
 2,014
Income from discontinued operations, net of tax(6,074) (5,116)
Provision for doubtful accounts—
 658
Gain on sale of property, plant and equipment(1,361) (345)
(Gain) loss on remeasurement of intercompany balances(153) 4,245
Loss on foreign currency derivatives794
 —
Loss on sale of business—
 1,714
Stock-based compensation expense10,357
 10,831
Deferred income tax benefit(5,812) (4,727)
Changes in assets and liabilities:   
Accounts receivable and notes20,582
 14,126
Inventory(24,086) (51,067)
Contract assets49,290
 (16,263)
Other current assets16,537
 5,073
Accounts payable and other liabilities(63,268) 29,116
Contract liabilities24,072
 (11,937)
Other(4,785) 3,511
Net cash provided by continuing operations120,995
 88,793
Net cash provided by discontinued operations1,967
 1,144
Net cash provided by operating activities122,962
 89,937
    
Cash flows from investing activities:   
Capital expenditures(172,118) (152,226)
Proceeds from sale of property, plant and equipment4,282
 2,430
Settlement of foreign currency derivatives(794) —
Proceeds from sale of business—
 5,000
Net cash used in continuing operations(168,630) (144,796)
Net cash provided by discontinued operations—
 66
Net cash used in investing activities(168,630) (144,730)
    
Cash flows from financing activities:   
Proceeds from borrowings of debt530,000
 415,000
Repayments of debt(439,338) (365,371)
Transfer from Archrock, Inc.420
 —
Payments for debt issuance costs—
 (92)
Proceeds from stock options exercised—
 548
Purchases of treasury stock (Note 13)(41,596) (3,780)
Net cash provided by financing activities49,486
 46,305
    
Effect of exchange rate changes on cash, cash equivalents and restricted cash(1,298) (3,691)
Net increase (decrease) in cash, cash equivalents and restricted cash2,520
 (12,179)
Cash, cash equivalents and restricted cash at beginning of period19,478
 49,691
Cash, cash equivalents and restricted cash at end of period$21,998
 $37,512

Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net loss$(67,914)$(22,540)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization100,887 113,450 
Impairments1,695 8,889 
Amortization of deferred financing costs1,871 1,884 
(Income) loss from discontinued operations, net of tax15,833 (23,695)
Provision for doubtful accounts4,449 0 
Gain on sale of property, plant and equipment(269)(1,361)
Gain on remeasurement of intercompany balances(3,822)(153)
(Gain) loss on foreign currency derivatives(27)794 
Gain on extinguishment of debt(3,424)0 
Stock-based compensation expense2,075 10,357 
Deferred income tax expense (benefit)2,779 (5,812)
Changes in assets and liabilities:
Accounts receivable and notes(10,777)21,101 
Inventory3,695 (18,305)
Contract assets(12,561)23,939 
Other current assets5,271 16,560 
Accounts payable and other liabilities(13,517)(31,255)
Contract liabilities(5,669)68,004 
Other5,097 (4,396)
Net cash provided by continuing operations25,672 157,461 
Net cash used in discontinued operations(19,884)(34,499)
Net cash provided by operating activities5,788 122,962 
Cash flows from investing activities:
Capital expenditures(65,852)(169,969)
Proceeds from sale of property, plant and equipment240 4,282 
Settlement of foreign currency derivatives0 (794)
Net cash used in continuing operations(65,612)(166,481)
Net cash used in discontinued operations(882)(2,149)
Net cash used in investing activities(66,494)(168,630)
Cash flows from financing activities:
Proceeds from borrowings of debt305,000 530,000 
Repayments of debt(229,560)(439,338)
Transfer from Archrock, Inc.0 420 
Purchases of treasury stock (Note 11)(857)(41,596)
Net cash provided by financing activities74,583 49,486 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(750)(1,298)
Net increase in cash, cash equivalents and restricted cash13,127 2,520 
Cash, cash equivalents and restricted cash at beginning of period16,702 19,478 
Cash, cash equivalents and restricted cash at end of period$29,829 $21,998 
Supplemental disclosure of non-cash transactions:
Accrued capital expenditures$2,529 $6,358 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7

Table of Contents

EXTERRAN CORPORATION
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

Note 1 - Description of Business and Basis of Presentation
 
Description of Business

Exterran Corporation (together with its subsidiaries, “Exterran Corporation,” “the Company,the “Company,” “our,” “we” or “us”), a Delaware corporation formed in March 2015, is a global systems and process company offering solutions in the oil, gas, water and power markets. We are a leader in natural gas processing and treatment and compression products and services, providing critical midstream infrastructure solutions to customers throughout the world. We provide our products and services to a global customer base consisting 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 oil and natural gas producers and oil and natural gas processors, gatherers and pipeline operators. Our manufacturing facilities are located in the U.S., Singapore and the United Arab Emirates. We operate in three3 primary business lines: contract operations, aftermarket services and product sales.

On November 3, 2015, Archrock, Inc. (named Exterran Holdings, Inc. prior to November 3, 2015) (“Archrock”) completed the spin-off (the ‘‘Spin-off”) of its international contract operations, international aftermarket services and global fabrication businesses into an independent, publicly traded company named Exterran Corporation.
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Exterran Corporation included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.”) (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished includes all adjustments of a normal recurring nature that are necessary to fairly presentstate our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. That report contains a comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year. Certain reclassifications have been made for the prior year period to conform to the current year presentation.

We refer to the condensed consolidated financial statements collectively as “financial statements,” and individually as “balance sheets,” “statements of operations,” “statements of comprehensive income (loss),” “statements of stockholders’ equity” and “statements of cash flows” herein.

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption across most industries. Efforts to mitigate the spread of COVID-19 have also resulted in decreased energy demand and additional weakness in energy pricing. To help control the spread of the virus and protect the health and safety of our employees and customers, we began temporarily closing our locations or modifying operating hours in our locations around the world. This was in response to governmental requirements including “stay-at-home” orders and similar mandates and in some of our locations we voluntarily went beyond the requirements of local government authorities. The broader implications of COVID-19 on our long-term future results of operations and overall financial condition remains uncertain. Due to the rapid market deterioration during the three months ended March 31, 2020, we concluded that a trigger existed and that we should evaluate our long-term assets for impairment. Therefore, we updated our impairment analysis and concluded that no impairment existed during the three months ended March 31, 2020.

Recent Accounting Pronouncements

We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be not applicable.

8

Table of Contents

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842”). The update requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases. Leases are now classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. The update also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. On January 1, 2019, we adopted the standard using the transition method that allows us to initially apply ASC 842 as of January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, we elected certain practical expedients permitted by ASC 842 in applying the lease standard upon adoption. Upon implementation of the new lease standard, we did not reassess whether a contract is or contains a lease at the date of initial application. For contracts entered into before the transition date, we used the lease classification under the accounting standards in effect prior to adoption. We also excluded initial direct costs for the measurement of the right-of-use asset at the date of initial application. As a result of this adoption, as a lessee, we recorded operating lease assets and lease liabilities of $21.2 million and $26.5 million, respectively, as of January 1, 2019. The difference between the lease assets and lease liabilities, including prepayments, was recorded as an adjustment to retained earnings. The adoption of this standard did not have a material effect on our statements of operations and cash flows. See Note 3 for the required disclosures related to the impact of adopting this standard.

As a result of the adoption of the new lease guidance, the following adjustments were made to the balance sheet as of January 1, 2019 (in thousands):
 Impact of Changes in Accounting Policies
 December 31, 2018
Adjustments
January 1, 2019
ASSETS     
      
Other current assets$44,234
 $(506) $43,728
Operating lease right-of-use assets—
 21,181
 21,181
Intangible and other assets, net86,371
 (353) 86,018
Total assets$1,567,054
 $20,322
 $1,587,376
      
LIABILITIES AND STOCKHOLDERS’ EQUITY
     
      
Current operating lease liabilities$—
 $6,769
 $6,769
Long-term operating lease liabilities—
 19,737
 19,737
Total liabilities1,014,233
 26,506
 1,040,739
Accumulated deficit(208,677) (6,184) (214,861)
Total stockholders’ equity552,821
 (6,184) 546,637
Total liabilities and stockholders’ equity$1,567,054
 $20,322
 $1,587,376


From a lessor perspective, new customer contracts entered into or modified on or after January 1, 2019 have been assessed in accordance with ASC 842 and ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), as applicable and will be assessed accordingly in future periods. Additionally, for contracts determined to have lease and nonlease components, we have elected to apply the practical expedient to not separate the components and account for those components as a single component, if the applicable conditions are met. Furthermore, for contracts where the nonlease component is determined to be the predominant component, revenue will continue to be recognized in accordance with ASC 606.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. ThisOn January 1, 2020, we adopted this update is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Adoption will requireusing a modified retrospective approach beginning with the earliest period presented. We are currently evaluating the potential impactapproach. The adoption of thethis update onwas immaterial to our financial statements. For more information regarding the allowance for doubtful accounts, see Note 2.


Table of Contents

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The update modifies the disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements. ThisOn January 1, 2020, we adopted this update. The adoption of this update was immaterial to our financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update simplifies the accounting for income taxes and is effective for annual and interim periods beginning after December 15, 2019. Early2020, with early adoption is permitted for any removed or modified disclosures upon issuance of the guidance and delayed adoption of the additional required disclosures is permitted until the effective date. Adoption will require a prospective or retrospective approach based on the specific amendments.permitted. We are currently evaluating the potential impact of the update on our financial statements.


Note 2 - Revenue

On January 1, 2018, we adopted ASC 606 applying the modified retrospective method to all contracts that were not completed as of the date of adoption. We recorded a net increase to accumulated deficit of $10.0 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606.

Disaggregation of Revenue

The following tables present disaggregated revenue by products and services lines and by geographical regions for the three and nine months ended September 30, 20192020 and 20182019 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
Revenue by Products and Services2020201920202019
Contract Operations Segment:
Contract operations services (1)
$81,679 $96,261 $254,412 $271,645 
Aftermarket Services Segment:
Operation and maintenance services (1)
$12,966 $14,069 $38,184 $40,844 
Part sales (2)
11,490 10,208 31,999 32,197 
Other services (1)
5,979 10,616 13,154 19,267 
Total aftermarket services$30,435 $34,893 $83,337 $92,308 
Product Sales Segment(3):
Compression equipment (1)
$40,300 $4,764 $73,654 $10,516 
Processing and treating equipment (1)
14,220 47,843 34,836 236,926 
Production equipment (2)
0 0 578 2,458 
Other product sales (1) (2)
2,877 2,189 14,545 4,467 
Total product sales revenues$57,397 $54,796 $123,613 $254,367 
Total revenues$169,511 $185,950 $461,362 $618,320 
  Three Months Ended September 30, Nine Months Ended September 30,
Revenue by Products and Services 2019
2018 2019
2018
Contract Operations Segment:        
Contract operations services (1)
 $96,261
 $84,828
 $271,645
 $272,808
         
Aftermarket Services Segment:        
Operation and maintenance services (1)
 $14,069
 $14,215
 $40,844
 $42,812
Part sales (2)
 10,208
 11,301
 32,197
 31,511
Other services (1)
 10,616
 4,477
 19,267
 14,308
Total aftermarket services $34,893
 $29,993
 $92,308
 $88,631
         
Product Sales Segment:        
Compression equipment (1)
 $121,245
 $106,140
 $436,947
 $367,135
Processing and treating equipment (1)
 47,843
 104,739
 236,926
 270,261
Production equipment (2)
 —
 1,084
 2,458
 15,864
Other product sales (1) (2)
 2,189
 8,065
 4,467
 14,004
Total product sales revenues $171,277
 $220,028
 $680,798
 $667,264
         
Total revenues $302,431
 $334,849
 $1,044,751
 $1,028,703

(1)
(1)Revenue recognized over time.
Revenue recognized over time.
(2)
Revenue recognized at a point in time.

(2)Revenue recognized at a point in time.
  Three Months Ended September 30, Nine Months Ended September 30,
Revenue by Geographical Regions 2019
2018 2019 2018
North America $157,010
 $215,015
 $577,405
 $669,220
Latin America 67,406
 64,960
 185,415
 205,549
Middle East and Africa 66,601
 41,653
 249,861
 99,131
Asia Pacific 11,414
 13,221
 32,070
 54,803
Total revenues $302,431
 $334,849
 $1,044,751
 $1,028,703
(3)Compression equipment includes sales to customers outside of the U.S. The compression fabrication business for sales to U.S. customers, that was previously included in our product sales segment, is now included in discontinued operations.

9


Table of Contents
Three Months Ended September 30,Nine Months Ended September 30,
Revenue by Geographical Regions2020201920202019
North America$13,364 $22,007 $31,694 $95,813 
Latin America60,302 85,928 195,451 240,576 
Middle East and Africa69,682 66,601 177,768 249,861 
Asia Pacific26,163 11,414 56,449 32,070 
Total revenues$169,511 $185,950 $461,362 $618,320 

The North America region is primarily comprised of our operations in Mexico and the U.S. The Latin America region is primarily comprised of our operations in Argentina, Bolivia, Brazil and Brazil.Mexico. The Middle East and Africa region is primarily comprised of our operations in Bahrain, Iraq, Oman, Nigeria and the United Arab Emirates. The Asia Pacific region is primarily comprised of our operations in China, Indonesia, Singapore and Thailand.

The following table summarizes the expected timing of revenue recognition from unsatisfied performance obligations (commonly referred to as backlog) as of September 30, 20192020 (in thousands):
Contract Operations SegmentProduct Sales Segment
Remainder of 2020$75,935 $46,284 
2021283,571 177,333 
2022224,186 200,041 
2023165,739 34,681 
2024144,456 9,000 
Thereafter314,252 29,315 
Total backlog$1,208,139 $496,654 
 Contract Operations Segment Product Sales Segment
Remainder of 2019$91,930
 $137,302
2020210,164
 164,101
2021198,640
 7,091
2022157,871
 —
2023139,920
 —
Thereafter411,662
 —
Total backlog$1,210,187
 $308,494


OurCertain of our aftermarket services contracts are subject to cancellation or modification at the election of the customer.

If the primary component of our contract operations contracts is the lease component, the contracts are accounted for as operating leases. For these contracts, revenues are recognized on a straight-line basis. As of September 30, 2020, the total value of our contracts operations backlog accounted for as operating leases was approximately $158 million, of which $9 million is expected to be recognized in the remainder of 2020, $33 million is expected to be recognized in 2021, $44 million is expected to be recognized in 2022, $44 million is expected to be recognized in 2023 and $28 million is expected to be recognized in 2024. Contract operations revenue recognized as operating leases for the nine months ended September 30, 2020 was approximately $26 million. Our product sales backlog includes contracts where there is a significant financing component. As of September 30, 2020, we had approximately $43 million expected to be recognized in future periods as interest income within our product sales segment.

Contract Assets and Contract Liabilities

The following table provides information about accounts receivables, net, contract assets and contract liabilities from contracts with customers (in thousands):
September 30, 2020December 31, 2019
Accounts receivables, net$183,620 $179,158 
Contract assets and contract liabilities:
Current contract assets49,092 36,997 
Long-term contract assets7,701 16,280 
Current contract liabilities105,736 66,695 
Long-term contract liabilities93,643 156,262 

10
  September 30, 2019 December 31, 2018
Accounts receivables, net $231,220
 $248,467
Contract assets and contract liabilities:    
Current contract assets 37,207
 91,602
Long-term contract assets 5,396
 5,430
Current contract liabilities 105,788
 153,483
Long-term contract liabilities 165,188
 101,363


Table of Contents
During the nine months ended September 30, 2019,2020, revenue recognized from contract operations services included $17.0$25.9 million of revenue deferred in previous periods. Revenue recognized during the nine months ended September 30, 20192020 from product sales performance obligations partially satisfied in previous periods was $515.6$84.1 million, of which $102.8$28.6 million was included in billings in excess of costs at the beginning of the period. The decreasesincrease in current contract assets and current contract liabilities during the nine months ended September 30, 2019 were2020 was primarily driven by the progression of product sales projects and the timing of milestone billings on product sales projects in the North AmericaMiddle East and Africa region. The increase in current contract liabilities and decrease in long-term contract liabilities during the nine months ended September 30, 20192020 was primarily driven by advanced billings tothe change in the remaining term of a contract operations customersoperation services contract in the Latin America region.

Allowance for Doubtful Accounts
Note 3 - Leases

As discussed in Note 1, on January 1, 2019, we adopted ASC 842 retrospectively through a cumulative-effect adjustment as permitted underThe Company estimates its reserves using information about past events, current conditions and risk characteristics of each customer, and reasonable and supportable forecasts relevant to assessing risk associated with the specific transitional provisions in ASC 842. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts have not been adjusted and continue to be reported under the accounting standards in effect for the prior period.

We primarily lease various offices, warehouses, equipment and vehicles. A right-of-use asset represents our right to use an underlying asset for the lease term and a lease liability represents our obligation to make lease payments arising from the lease. Our operating lease right-of-usecollectability of accounts receivables, contract assets and lease liabilities are recognized atlong-term note receivables. The Company’s customer base have generally similar collectability risk characteristics, although larger customers may have lower risk than smaller independent customers. Primarily as a result of the present value of lease payments over the lease term at the time of lease commencement, adjusted to include theexpected impact of any lease incentives. Leases with initial terms of 12 months or less are not recordedCOVID-19 on our balance sheets and leases that contain non-lease components are combined with the lease components and accounted for as a single lease component.


Table of Contents

Our lease agreements are negotiated on an individual basis and contain a variety of different terms and conditions. They generally do not contain any material residual value guarantees or material restrictive covenants. Certain lease agreements include rental payments adjusted periodically for inflation. Additionally, some of our leases include one or more options to renew, with renewal terms that can extend the lease term from one month to 10 years. Options to renew our lease terms are includedcustomers, in determining the right-of-use asset and lease liability when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. During the three and nine months ended September 30, 2019, we recorded expenses of $1.7 million and $6.0 million for our operating leases, respectively, of which $0.1 million and $0.4 million of expenses related to operating leases with initial terms of 12 months or less, respectively. We do not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. We used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date. As of September 30, 2019, the weighted average remaining lease term and weighted average discount rate applied for our operating leases were nine years and 7%, respectively.

As of September 30, 2019, our lease assets and lease liabilities consisted of the following (in thousands):
Leases Classification September 30, 2019
Assets    
Operating lease assets Operating lease right-of-use assets $29,293
     
Liabilities    
Operating - current Current operating lease liabilities $6,547
Operating - noncurrent Long-term operating lease liabilities 30,256
Total lease liabilities   $36,803


As of September 30, 2019, maturities of our operating lease liabilities consisted of the following (in thousands):
Maturity of Operating Lease Liabilities September 30, 2019
Remainder of 2019 (1)
 $(39)
2020 7,768
2021 6,729
2022 5,774
2023 5,039
Thereafter 26,268
Total lease payments 51,539
Less: Imputed interest (14,736)
Present value of lease liabilities $36,803

(1)    Includes lease incentives of $1.9 million expected to be received in the fourth quarter of 2019.

As of December 31, 2018, commitments for future minimum rental payments with terms in excess of one year were as follows (in thousands):
Future Minimum Rental Payments December 31, 2018
2019 $6,076
2020 5,929
2021 4,583
2022 3,756
2023 3,038
Thereafter 11,615
Total lease payments $34,997



Table of Contents

The following table provides supplemental cash flow information related to leases for the nine months ended September 30, 20192020, we recorded an additional allowance for doubtful accounts of approximately $4.5 million. The allowance for doubtful accounts as of September 30, 2020 and changes for the nine months then ended are as follows (in thousands):
Cash Flow Information Classification Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities Net cash provided by operating activities $(137)
Leased assets obtained in exchange for new operating lease liabilities Non-cash 297


Balance at December 31, 2019$6,019 
Current period provision for expected credit losses4,454 
Balance at September 30, 2020$10,473 

Note 43 - Discontinued Operations

We have continued to work toward our strategy to be a company that leverages technology and operational excellence to provide complete systems and process solutions in energy and industrial applications. Over the past several years, we have made significant progress in this journey by taking actions to protect our core business, develop important organizational capabilities, commercialize new products and services and implement new processes to position Exterran for success. We are focused on optimizing our portfolio of products and services to better serve our global customers while providing a more attractive investment option for our investors. As we continue on this path, we decided that our U.S. compression fabrication business is non-core to our strategy going forward and during the third quarter of 2020, we entered into an agreement to sell the business which closed on November 2, 2020. During the third quarter of 2020, this business met the held for sale criteria and is also now reflected as discontinued operations in our financial statements for all periods presented. The U.S. compression fabrication business was previously included in our product sales segment and has been reclassified to discontinued operations in our financial statements for all periods presented. Compression revenue from sales to international customers continues to be included in our product sales segment.

In the first quarter of 2016, we began executing the exit of our Belleli EPC business that has historically been comprised of engineering, procurement and construction for the manufacture of tanks for tank farms and the manufacture of evaporators and brine heaters for desalination plants in the Middle East (referred to as “Belleli EPC” or the “Belleli EPC business” herein) by ceasing the bookings of new orders. As of the fourth quarter of 2017, we had substantially exited our Belleli EPC business and, in accordance with GAAP, it is reflected as discontinued operations in our financial statements for all periods presented. Although we have reached mechanical completion on all remaining Belleli EPC contracts, we are still subject to risks and uncertainties potentially resulting from warranty obligations, customer or supplier claims against us, settlement of claims against customers, completion of demobilization activities and litigation developments. The facility previously utilized to manufacture products for our Belleli EPC business has been repurposed to manufacture product sales equipment. As such, certain personnel, buildings, equipment and other assets that were previously related to our Belleli EPC business remain a part of our continuing operations. As a result, activities associated with our ongoing operations at our repurposed facility are included in continuing operations.

11

Table of Contents
The following table summarizes the operating results of discontinued operations (in thousands):
Three Months Ended September 30, 2020Three Months Ended September 30, 2019
Belleli EPCUS CompressionTotalBelleli EPCUS CompressionOther discoTotal
Revenue$1,100 $27,434 $28,534 $31 $116,481 $0 $116,512 
Cost of sales (excluding depreciation and amortization expense)84 25,371 25,455 1,204 104,824 0 106,028 
Selling, general and administrative(70)1,387 1,317 231 5,394 114 5,739 
Depreciation and amortization0 443 443 0 1,027 0 1,027 
Restructuring and other charges0 2,336 2,336 0 537 0 537 
Other (income) expense, net(52)0 (52)28 0 0 28 
Provision for income taxes33 0 33 0 0 0 0 
Income (loss) from discontinued operations, net of tax$1,105 $(2,103)$(998)$(1,432)$4,699 $(114)$3,153 
 Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
 Venezuela Belleli EPC Total Venezuela Belleli EPC Total
Revenue$—
 $31
 $31
 $—
 $7,654
 $7,654
Cost of sales (excluding depreciation and amortization expense)—
 1,204
 1,204
 —
 3,587
 3,587
Selling, general and administrative114
 231
 345
 35
 742
 777
Other (income) expense, net—
 28
 28
 —
 537
 537
Provision for income taxes—
 —
 —
 —
 580
 580
Income (loss) from discontinued operations, net of tax$(114) $(1,432) $(1,546) $(35) $2,208
 $2,173


Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
Belleli EPCUS CompressionTotalBelleli EPCUS CompressionOther discoTotal
Revenue$1,224 $117,565 $118,789 $265 $426,431 $0 $426,696 
Cost of sales (excluding depreciation and amortization expense)268 109,316 109,584 (395)386,079 0 385,684 
Selling, general and administrative144 8,743 8,887 921 17,888 182 18,991 
Depreciation and amortization0 1,767 1,767 0 3,219 0 3,219 
Impairments0 6,512 6,512 0 0 0 0 
Restructuring and other charges0 7,889 7,889 0 1,624 0 1,624 
Other income, net(3)0 (3)(304)0 0 (304)
Benefit from income taxes(14)0 (14)(6,213)0 0 (6,213)
Income (loss) from discontinued operations, net of tax$829 $(16,662)$(15,833)$6,256 $17,621 $(182)$23,695 
 Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
 Venezuela Belleli EPC Total Venezuela Belleli EPC Total
Revenue$—
 $265
 $265
 $—
 $15,536
 $15,536
Cost of sales (excluding depreciation and amortization expense)—
 (395) (395) —
 8,798
 8,798
Selling, general and administrative182
 921
 1,103
 96
 929
 1,025
Depreciation and amortization—
 —
 —
 —
 480
 480
Other (income) expense, net—
 (304) (304) 1
 (553) (552)
Provision for (benefit from) income taxes—
 (6,213) (6,213) —
 669
 669
Income (loss) from discontinued operations, net of tax$(182) $6,256
 $6,074
 $(97) $5,213
 $5,116


Table of Contents

The following table summarizes the balance sheet data for discontinued operations (in thousands):
September 30, 2020December 31, 2019
Belleli EPCUS CompressionTotalBelleli EPCUS CompressionTotal
Accounts receivable$1,891 $8,492 $10,383 $3,990 $23,179 $27,169 
Inventory0 15,213 15,213 0 24,180 24,180 
Contract assets114 2,304 2,418 46 9,540 9,586 
Other current assets0 477 477 296 474 770 
Total current assets associated with discontinued operations2,005 26,486 28,491 4,332 57,373 61,705 
Property, Plant, and Equipment0 18,438 18,438 0 20,216 20,216 
Intangible and other assets, net1,994 445 2,439 2,970 556 3,526 
Total assets associated with discontinued operations$3,999 $45,369 $49,368 $7,302 $78,145 $85,447 
Accounts payable$295 $21,908 $22,203 $1,503 $40,580 $42,083 
Accrued liabilities4,313 8,656 12,969 5,959 11,889 17,848 
Contract liabilities956 1,227 2,183 2,536 16,159 18,695 
Total current liabilities associated with discontinued operations5,564 31,791 37,355 9,998 68,628 78,626 
Other long-term liabilities994 1,305 2,299 758 1,283 2,041 
Total liabilities associated with discontinued operations$6,558 $33,096 $39,654 $10,756 $69,911 $80,667 
 September 30, 2019 December 31, 2018
 Venezuela Belleli EPC Total Venezuela Belleli EPC Total
Cash$—
 $—
 $—
 $3
 $—
 $3
Accounts receivable—
 3,720
 3,720
 —
 11,509
 11,509
Contract assets—
 308
 308
 —
 —
 —
Other current assets—
 —
 —
 7
 86
 93
Total current assets associated with discontinued operations—
 4,028
 4,028
 10
 11,595
 11,605
Property, plant and equipment, net—
 —
 —
 —
 28
 28
Intangible and other assets, net—
 2,979
 2,979
 —
 1,633
 1,633
Total assets associated with discontinued operations$—
 $7,007
 $7,007
 $10
 $13,256
 $13,266
            
Accounts payable$—
 $1,449
 $1,449
 $—
 $4,382
 $4,382
Accrued liabilities108
 5,710
 5,818
 12
 7,831
 7,843
Contract liabilities—
 2,536
 2,536
 —
 2,542
 2,542
Total current liabilities associated with discontinued operations108
 9,695
 9,803
 12
 14,755
 14,767
Other long-term liabilities—
 617
 617
 —
 5,914
 5,914
Total liabilities associated with discontinued operations$108
 $10,312
 $10,420
 $12
 $20,669
 $20,681


12

Table of Contents
Note 54 - Inventory Net

Inventory net of reserves, consisted of the following amounts (in thousands):
September 30, 2020December 31, 2019
Parts and supplies$66,809 $76,398 
Work in progress44,470 39,719 
Finished goods3,241 3,241 
Inventory$114,520 $119,358 
 September 30, 2019 December 31, 2018
Parts and supplies$111,372
 $92,016
Work in progress51,033
 49,547
Finished goods7,994
 9,126
Inventory, net$170,399
 $150,689


Note 65 - Property, Plant and Equipment, Net

Property, plant and equipment, net, consisted of the following (in thousands):
September 30, 2020December 31, 2019
Compression equipment, processing facilities and other fleet assets$1,580,483 $1,607,769 
Land and buildings50,488 51,062 
Transportation and shop equipment54,219 57,469 
Computer software51,004 50,091 
Other41,501 37,716 
1,777,695 1,804,107 
Accumulated depreciation(1,007,274)(979,913)
Property, plant and equipment, net$770,421 $824,194 
 September 30, 2019 December 31, 2018
Compression equipment, processing facilities and other fleet assets$1,806,860
 $1,713,153
Land and buildings106,849
 101,571
Transportation and shop equipment78,627
 82,960
Computer software58,401
 54,572
Other41,235
 47,210
 2,091,972
 1,999,466
Accumulated depreciation(1,160,369) (1,097,889)
Property, plant and equipment, net$931,603
 $901,577


Note 7 - Assets Held for Sale

In the second quarter of 2019, we classified certain long-lived assets as assets held for sale in our balance sheets. In conjunction with the planned disposition of these units, during the three and nine months ended September 30, 2019, we recorded impairment charges of $3.0 million and $8.9 million, respectively, to reduce these assets to their approximate fair values based on the expected net proceeds. The impairment charges are reflected in long-lived asset impairment in our statements of operations. As of September 30, 2019, the fair value of these long-lived assets after impairment was $2.1 million.

Table of Contents


Note 86 - Debt

Debt consisted of the following (in thousands):
 September 30, 2019 December 31, 2018
Revolving credit facility due October 2023$126,000
 $35,000
8.125% senior notes due May 2025375,000
 375,000
Other debt350
 687
Unamortized deferred financing costs of 8.125% senior notes(5,667) (6,428)
Total debt495,683
 404,259
Less: Amounts due within one year (1)
(336) (449)
Long-term debt$495,347
 $403,810

September 30, 2020December 31, 2019
Revolving credit facility due October 2023$170,000 $74,000 
8.125% senior notes due May 2025351,000 375,000 
Other debt13 132 
Unamortized deferred financing costs of 8.125% senior notes(4,416)(5,413)
Total debt516,597 443,719 
Less: Amounts due within one year (1)
(13)(132)
Long-term debt$516,584 $443,587 
(1)    Short-term debt and the current portion of long-term debt are included in accrued liabilities in our balance sheets.

Revolving Credit Facility Due October 2023

We and our wholly owned subsidiary, Exterran Energy Solutions, L.P. (“EESLP”), are parties to an amended and restated credit agreement (the “Credit Agreement”) consisting of a $700.0 million revolving credit facility expiring in October 2023.

As of September 30, 2019,2020, we had $126.0$170.0 million in outstanding borrowings and $23.0$11.8 million in outstanding letters of credit under our revolving credit facility. At September 30, 2019,2020, taking into account guarantees through letters of credit, we had undrawn capacity of $551.0$518.2 million under our revolving credit facility. Our Credit Agreement limits our senior secured leverageTotal Debt to EBITDA ratio (as defined in the Credit Agreement) on the last day of the fiscal quarter to no greater than 2.754.50 to 1.0. As a result of this limitation, $472.9$145.9 million of the $551.0$518.2 million of undrawn capacity under our revolving credit facility was available for additional borrowings as of September 30, 2019.2020.

13

Table of Contents
8.125% Senior Notes Due May 2025

In April 2017, our 100% owned subsidiaries EESLP and EES Finance Corp. issued $375.0 million aggregate principal amount of 8.125% senior unsecured notes due 2025 (the “2017 Notes”). We guarantee the 2017 Notes on a senior unsecured basis. We may redeem the 2017 Notes at any time in cash, in whole or part, at certain redemption prices, including the applicable make-whole premium plus accrued and unpaid interest, if any, to the date of redemption. During the nine months ended September 30, 2020, we purchased and retired $24.0 million principal amount of our 2017 Notes for $20.6 million (including $0.3 million of accrued interest) resulting in a gain on extinguishment of debt of $3.4 million. The gain was calculated as the difference between the repurchase price and the carrying amount of the 2017 Notes, partially offset by $0.2 million in related deferred financing costs. The gain on extinguishment of debt is included as a separate item in our statements of operations. During October 2020, we purchased and retired an additional $1.0 million of our 2017 Notes for $0.9 million including accrued interest.

Note 97 - Fair Value Measurements

The accounting standard for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three categories:
 
•
•Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.

•Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered market makers.

•Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information.

Recurring Fair Value Measurements

The following table presents our assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, with pricing levels as of the date of valuation (in thousands):
 September 30, 2020December 31, 2019
 (Level 1)(Level 2)(Level 3)(Level 1)(Level 2)(Level 3)
Foreign currency derivatives assets$0 $8 $0 N/AN/AN/A

We are exposed to market risks associated with changes in foreign currency exchange rates, including foreign currency exchange rate changes recorded on intercompany obligations. From time to time, we may enter into foreign currency hedges to manage existing exposures to foreign exchange risk related to assets and liabilities recorded on our balance sheets including intercompany activity. As of September 30, 2020, we were a party to forward currency exchange contracts to mitigate exposures to the Argentine Peso and Indonesian Rupiah with a total notional value of $13.5 million. These contracts expire at varying dates through December 2020. We did not designate these forward currency exchange contracts as hedge transactions. Changes in fair value and gains and losses on settlement on these forward currency exchange contracts are recognized in other (income) expense, net, in our statements of operations. Our estimate of the fair value of foreign currency derivatives as of September 30, 2020 was determined using quoted forward exchange rates in active markets at September 30, 2020. Foreign currency derivative assets are included in other current assets in our balance sheets.

 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.

•
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered market makers.

•
Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information.

14

Table of Contents

Nonrecurring Fair Value Measurements

The following table presents our assets and liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 20192020 and 2018,2019, with pricing levels as of the date of valuation (in thousands):
 Nine months ended September 30, 2019 Nine months ended September 30, 2018
 (Level 1) (Level 2) (Level 3) (Level 1) (Level 2) (Level 3)
Impaired long-lived assets (1)
$—
 $—
 $—
 $—
 $—
 $550
Impaired assets—assets held for sale (2) (3)
—
 —
 2,142
 —
 —
 21,026
Long-term note receivable (4)
—
 —
 15,104
 —
 —
 14,573

 Nine months ended September 30, 2020Nine months ended September 30, 2019
 (Level 1)(Level 2)(Level 3)(Level 1)(Level 2)(Level 3)
Impaired long-lived assets (1)
$0 $0 $0 $0 $0 $0 
Impaired assets- assets held for sale (2)
0 0 0 0 0 2,142 
Long-term note receivable (3)
0 0 11,165 0 0 15,104 
(1)
(1)Our estimate of the fair value of the impaired long-lived assets as of September 30, 2020 were primarily based on the expected proceeds to be received from the customer.
(2)Our estimated fair value of the impaired assets held for sale during the nine months ended September 30, 2019 was based on the expected proceeds from the sale of the assets.
(3)Our estimate of the fair value of a note receivable was discounted based on a settlement period of eight years and a discount rate of 6.2%. The undiscounted value of the note receivable, including interest, as of September 30, 2020 was $15.7 million.

Our estimate of the fair value of the impaired long-lived assets during the nine months ended September 30, 2018 was primarily based on the expected net sale proceeds compared to other fleet units we sold and/or a review of other units offered for sale by third parties.
(2)
Our estimate of the fair value of the impaired assets, which were classified as held for sale as of September 30, 2019, was based on the expected net proceeds from the sale of the assets.
(3)
Our estimate of the fair value of the impaired North America production equipment assets (“PEQ assets”), which were classified as assets held for sale as of March 31, 2018 and sold in June 2018, was based on the expected net proceeds from the sale of the assets.
(4)
Our estimate of the fair value of a note receivable was discounted based on a settlement period of eight years and a discount rate of 5.2%

Financial Instruments
 
Our financial instruments consists of cash, restricted cash, receivables, payables and debt. At September 30, 20192020 and December 31, 2018,2019, the estimated fair values of cash, restricted cash, receivables and payables approximated their carrying amounts as reflected in our balance sheets due to the short-term nature of these financial instruments.
The fair value of the 2017 Notes was estimated based on model derived calculations using market yields observed in active markets, which are Level 2 inputs. As of September 30, 20192020 and December 31, 2018,2019, the carrying amount of the 2017 Notes, excluding unamortized deferred financing costs, of $351.0 million and $375.0 million was estimated to have a fair value of $374.0$300.0 million and $362.0$371.0 million, respectively. Due to the variable rate nature of our revolving credit facility, the carrying value as of September 30, 20192020 and December 31, 20182019 approximated the fair value as the rate was comparable to the then-current market rate at which debt with similar terms could have been obtained.

Note 8 - Impairments
Note 10 - Long-Lived Asset Impairment

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, including the removal of compressor units from our active fleet, indicate that the carrying amount of an asset may not be recoverable.

InDuring the third quarter of 2020, we impaired certain assets in Argentina due to the termination of a contract operations project where it was not cost effective to move the assets and try to utilize them with a different customer. As a result, we removed them from the fleet and recorded an impairment of $1.7 million to write-down these assets to their approximate fair values for the three and nine months ended September 30, 2020.

During the second quarter of 2019, we classified certain long-lived assets as assets held for sale in our balance sheets. As described in Note 7, inIn conjunction with the planned disposition of these units, we recorded impairment charges of $3.0 million and $8.9 million to write-down these assets to their approximate fair values duringfor the three and nine months ended September 30, 2019, based on the expected net proceeds, respectively.

During the third quarter of 2018, we evaluated idle units that had been previously culled from our fleet and were available for sale for impairment. Based upon that review, we reduced the expected proceeds from disposition for certain units. This resulted in an additional impairment of $2.1 million to reduce the book value of each unit to its estimated fair value during the three and nine months ended September 30, 2018. The fair value of each unit was estimated based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties.

In the fourth quarter of 2017, we classified our PEQ assets primarily related to inventory and property, plant and equipment, net, within our product sales business as assets held for sale in our balance sheets. In June 2018, we completed the sale of our PEQ assets. During the nine months ended September 30, 2018, we recorded an impairment of $1.8 million to reduce these assets to their approximate fair valuesrespectively, based on the expected net proceeds.


15

Table of Contents

Note 119 - Restructuring and Other Charges

The energy industry’s focus on cash flow, capital discipline and improving returns has caused delays in the timing of new equipment orders. As a result, in the secondthird quarter of 2019, we began the consolidation of two of our manufacturing facilities located in Houston, Texas into one facility and announced a cost reduction plan primarily focused on workforce reductions. We incurred restructuring and other charges associated with these activities of $1.8$0.2 million and $7.7$1.3 million for the three months ended September 30, 2020 and 2019, respectively, and $3.6 million and $6.1 million for the nine months ended September 30, 2020 and 2019, respectively. These charges are reflected as restructuring and other charges in our statements of operations and accrued liabilities on our balance sheets. WeThe cost reduction plan is expected to be completed in the first half of 2021 and we expect to settle these charges within the next twelve months in cash. At this time, we cannot currently estimate the total restructuring costs that will be incurred as a result of this cost reduction plan.

In the second quarter of 2018, we initiated a relocation plan in the North AmericaLatin American region to better align our contract operations business with our customers. As a result of this plan, during the nine months ended September 30, 2019, we incurred restructuring and other charges of $0.2 million related to relocation costs. During the three and nine months ended September 30, 2018, we incurred restructuring and other charges of $0.3 million and $1.7 million, respectively, primarily related to employee termination benefits. The charges incurred in conjunction with this relocation plan are included in restructuring and other charges in our statements of operations. In the second quarter of 2019, we completed restructuring activities related to the relocation plan.
The following table summarizes the changes to our accrued liability balance related to restructuring and other charges for the nine months ended September 30, 2020 and 2019 (in thousands):
Cost
Reduction Plan		Relocation PlanTotal
Beginning balance at January 1, 2019$0 $309 $309 
Additions for costs expensed6,049 293 6,342 
Reductions for payments(2,873)(602)(3,475)
Ending balance at September 30, 2019$3,176 $0 $3,176 
Beginning balance at January 1, 2020$2,281 $0 $2,281 
Additions for costs expensed, net3,550 0 3,550 
Reductions for payments(3,791)0 (3,791)
Foreign exchange impact(393)0 (393)
Ending balance at September 30, 2020$1,647 $0 $1,647 
 Cost
Reduction Plan		 Relocation Plan Total
Beginning balance at January 1, 2018$—
 $—
 $—
Additions for costs expensed—
 1,422
 1,422
Reductions for payments—
 (409) (409)
Ending balance at September 30, 2018$—
 $1,013
 $1,013
      
Beginning balance at January 1, 2019$—
 $309
 $309
Additions for costs expensed, net7,673
 293
 7,966
Reductions for payments(3,633) (602) (4,235)
Ending balance at September 30, 2019$4,040
 $—
 $4,040

The following table summarizes the components of charges included in restructuring and other charges in our statements of operations for the three and nine months ended September 30, 20192020 and 20182019 (in thousands):
 Three Months Ended September 30,
Nine Months Ended September 30,
 2019
2018
2019
2018
Employee termination benefits$1,549
 $33
 $7,477
 $1,389
Relocation costs245
 231
 489
 297
Total restructuring and other charges$1,794
 $264
 $7,966
 $1,686


Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Employee termination benefits$238 $1,257 $986 $6,098 
Consulting fees0 0 2,564 0 
Relocation costs0 0 0 244 
Total restructuring and other charges$238 $1,257 $3,550 $6,342 

The following table summarizes the components of charges included in restructuring and other charges incurred since the announcement of the cost reduction plan in the second quarter of 2019 (in thousands):

Total
Employee termination benefits$6,243 
Consulting fees3,205 
Total restructuring and other charges$9,448 

16

Table of Contents
Note 1210 - Provision for Income Taxes

Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn, or losses we incur, in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Our effective tax rate is also affected by valuation allowances recorded against loss carryforwards in the U.S. and certain other jurisdictions, foreign withholding taxes and changes in foreign currency exchange rates.

The following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21.0% and our effective tax rate of (6.1)(52.3)% for the three months ended September 30, 2019:2020: (i) a $0.8 million favorable(49.9)% negative impact resulting primarily from rate differences between U.S. and foreign jurisdictions including foreign withholding taxes,unrecognized tax benefits under FASB’s Interpretation No. 48 of Financial Accounting Standard 109 (“FIN 48”), (ii) a $0.6 million(22.4)% negative impact resulting from foreign currency devaluations in Argentina, and (iii) a $2.5 million(29.1)% negative impact resulting from foreign taxes in excess of the recordingU.S. tax rate and other rate drivers, and (iv) a 31.7% positive impact resulting from a release of valuation allowances recorded against U.S. deferred tax assets.


Table of Contents

The following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21.0%21% and our effective tax rate of (240.4)(57.3)% for the nine months ended September 30, 2019:2020: (i) a $6.6 million(27.7)% negative impact resulting primarily from rate differences between U.S. and foreign jurisdictions including foreign withholding taxes, (ii) a $7.4 million(26.7)% negative impact resulting from unrecognized tax benefits under FIN 48, (iii) a (15.6)% negative impact resulting from foreign currency devaluations in Argentina, and (iii)(iv) a $7.3 million(2.7)% negative impact resulting from the recording of valuation allowances recorded against U.S. deferred tax assets.

Our effective tax rate decreased for the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 primarily due to a decrease in income before income taxes, an increase in valuation allowances recorded in the U.S., a decrease in foreign withholding tax, an increase in the FIN 48 reserve and a decrease in tax related to foreign exchange movement in Argentina in 2019.Argentina.

During the nine months ended September 30, 2019, we recorded a $6.5 million tax benefit (recognized in income from discontinued operations, net of tax), related to a settlement of Italian tax litigation previously recorded as an unrecognized tax benefit.

Note 1311 - Stockholders’ Equity

Share Repurchase Program

On February 20, 2019, our board of directors approved a share repurchase program under which the Company is authorized to purchase up to $100.0 million of its outstanding common stock through February 2022. The timing and method of any repurchases under the program will depend on a variety of factors, including prevailing market conditions among others. Purchases under the program may be suspended or discontinued at any time and we have no obligation to repurchase any amount of our common shares under the program. Shares of common stock acquired through the repurchase program are held in treasury at cost. During the nine months ended September 30, 2019, we repurchased 3,054,338 shares of our common stock for $38.9 million in connection with our share repurchase program. During the nine months ended September 30, 2020, we did 0t repurchase any shares under this program. As of September 30, 2019,2020, the remaining authorized repurchase amount under the share repurchase program was $61.1$57.7 million.

Additionally, treasury stock purchased during the nine months ended September 30, 20192020 and 20182019 included shares withheld to satisfy employees’ tax withholding obligations in connection with vesting of restricted stock awards.

Note 1412 - Stock-Based Compensation

Stock Options

There were 0 stock options granted during the nine months ended September 30, 2020 and 2019.

Restricted Stock, Restricted Stock Units and Performance Units

For grants of restricted stock, restricted stock units and performance units, we recognize compensation expense over the applicable vesting period equal to the fair value of our common stock at the grant date. Grants of restricted stock, restricted stock units and performance units generally vest one third per year on each of the first three anniversaries of the grant date. Certain grants of restricted stock vest on the third anniversary of the grant date and certain grants of performance units vest on the second anniversary of the grant date.

17

Table of Contents
The table below presents the changes in restricted stock, restricted stock units and performance units for our common stock during the nine months ended September 30, 2019.2020.
Equity AwardsLiability Awards
Shares
(in thousands)		Weighted Average
Grant-Date Fair 
Value Per Share		Shares
(in thousands)		Weighted Average
Grant-Date Fair 
Value Per Share
Non-vested awards, January 1, 2020842 $22.79 318 $17.01 
Granted167 6.91 1,182 8.54 
Vested(440)20.59 (80)26.24 
Cancelled(242)28.07 (207)9.90 
Non-vested awards, September 30, 2020327 13.73 1,213 9.36 
 
Shares
(in thousands)
 
Weighted Average
Grant-Date Fair 
Value Per Share
Non-vested awards, January 1, 20191,044
 $25.89
Granted826
 16.90
Vested(502) 23.20
Cancelled(128) 22.05
Non-vested awards, September 30, 2019 (1)
1,240
 21.39

(1)
As of September 30, 2019, 329,000 of the non-vested awards are presented within our balance sheets as liabilities due to their expected cash settlement.

Table of Contents


As of September 30, 2019,2020, we estimate $15.2$9.4 million of unrecognized compensation cost related to unvested restricted stock, restricted stock units and performance units issued to our employees to be recognized over the weighted-average vesting period of 1.61.5 years.

Note 1513 - Net Income (Loss) Per Common Share

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

Diluted net income (loss) per common share is computed using the weighted average number of common shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options to purchase common stock and non-participating restricted stock units, unless their effect would be anti-dilutive.

18

Table of Contents
The following table presents a reconciliation of basic and diluted net income (loss)loss per common share for the three and nine months ended September 30, 20192020 and 20182019 (in thousands, except per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Numerator for basic and diluted net loss per common share:
Loss from continuing operations$(16,723)$(12,994)$(52,081)$(46,235)
Income (loss) from discontinued operations, net of tax(998)3,153 (15,833)23,695 
Less: Net income attributable to participating securities0 0 0 0 
Net loss — used in basic and diluted net loss per common share$(17,721)$(9,841)$(67,914)$(22,540)
Weighted average common shares outstanding including participating securities33,152 34,523 33,147 35,623 
Less: Weighted average participating securities outstanding(346)(740)(405)(784)
Weighted average common shares outstanding — used in basic net loss per common share32,806 33,783 32,742 34,839 
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock units****
Weighted average common shares outstanding — used in diluted net loss per common share32,806 33,783 32,742 34,839 
Net loss per common share:
Basic and diluted$(0.54)$(0.29)$(2.07)$(0.65)
 Three Months Ended September 30, Nine Months Ended September 30,
 2019
2018 2019
2018
Numerator for basic and diluted net income (loss) per common share:       
Income (loss) from continuing operations$(8,295) $3,196
 $(28,614) $5,665
Income (loss) from discontinued operations, net of tax(1,546) 2,173
 6,074
 5,116
Less: Net income attributable to participating securities—
 (140) —
 (284)
Net income (loss) — used in basic and diluted net income (loss) per common share$(9,841) $5,229
 $(22,540) $10,497
        
Weighted average common shares outstanding including participating securities34,523
 36,430
 35,623
 36,361
Less: Weighted average participating securities outstanding(740) (950) (784) (959)
Weighted average common shares outstanding — used in basic net income (loss) per common share33,783
 35,480
 34,839
 35,402
Net dilutive potential common shares issuable:       
On exercise of options and vesting of restricted stock units*
 64
 *
 67
Weighted average common shares outstanding — used in diluted net income (loss) per common share33,783
 35,544
 34,839
 35,469
 

      
Net income (loss) per common share:       
Basic$(0.29) $0.15
 $(0.65) $0.30
Diluted$(0.29) $0.15
 $(0.65) $0.30

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


Table of Contents

The following table shows the potential shares of common stock issuable for the three and nine months ended September 30, 20192020 and 20182019 that were excluded from computing diluted net income (loss)loss per common share as their inclusion would have been anti-dilutive (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average market value30 69 39 70 
Net dilutive potential common shares issuable30 69 39 70 
 Three Months Ended September 30, Nine Months Ended September 30,
 2019
2018 2019 2018
Net dilutive potential common shares issuable:       
On exercise of options where exercise price is greater than average market value69
 35
 70
 35
Net dilutive potential common shares issuable69
 35
 70
 35


Note 1614 - Commitments and Contingencies

Contingencies

In addition to U.S. federal, state and local and foreign income taxes, we are subject to a number of taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of September 30, 20192020 and December 31, 2018,2019, we had accrued $5.1$3.5 million and $3.7 million, respectively, for the outcomes of non-income-based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We do not have any unasserted claims from non-income based tax audits that we have determined are probable of assertion. We also believe the likelihood is remote that the impact of potential unasserted claims from non-income-based tax audits could be material to our financial position, but it is possible that the resolution of future audits could be material to our results of operations or cash flows for the period in which the resolution occurs.
19

Table of Contents
 
Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability, commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.

Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.
Litigation and Claims

In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these actions will not have a material adverse effect on our financial position, results of operations or cash flows. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our financial position, results of operations or cash flows.
Contemporaneously with filing the Form 8-K on April 26, 2016, we self-reported the errors and possible irregularities at Belleli EPC to the SEC. On April 8, 2019, the SEC provided written notice to us stating that based on the information they have as of this date, they have concluded their investigation and do not intend to recommend enforcement action by the SEC against us in connection with this matter.


Table of Contents

Indemnifications

On November 3, 2015, Archrock, Inc. (named Exterran Holdings, Inc. prior to November 3, 2015) (“Archrock”) completed the spin-off (the ‘‘Spin-off”) of its international contract operations, international aftermarket services and global fabrication businesses into an independent, publicly traded company named Exterran Corporation.

In conjunction with, and effective as of the completion of, the Spin-off, we entered into the separation and distribution agreement with Archrock, which governs, among other things, the treatment between Archrock and us relating to certain aspects of indemnification, insurance, confidentiality and cooperation. Generally, the separation and distribution agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of Archrock’s business with Archrock. Pursuant to the agreement, we and Archrock will generally release the other party from all claims arising prior to the Spin-off that relate to the other party’s business, subject to certain exceptions. Additionally, in conjunction with, and effective as of the completion of, the Spin-off, we entered into the tax matters agreement with Archrock. Under the tax matters agreement and subject to certain exceptions, we are generally liable for, and indemnify Archrock against, taxes attributable to our business, and Archrock is generally liable for, and indemnify us against, all taxes attributable to its business. We are generally liable for, and indemnify Archrock against, 50% of certain taxes that are not clearly attributable to our business or Archrock’s business. Any payment made by us to Archrock, or by Archrock to us, is treated by all parties for tax purposes as a nontaxable distribution or capital contribution, respectively, made immediately prior to the Spin-off.

Note 1715 - Reportable Segments

Our chief operating decision maker manages business operations, evaluates performance and allocates resources based upon the type of product or service provided. We have 3 reportable segments: contract operations, aftermarket services and product sales. In our contract operations segment, we provide compression, processing, treating, compression and water treatment services through the operation of our natural gas compression equipment, crude oil and natural gas production and process equipment and water treatment equipment for our customers. In our aftermarket services segment, we sell parts and components and provide operations, maintenance, repair, overhaul, upgrade, startup and commissioning and reconfiguration services to customers who own their own oil and natural gas compression, production, processing, treating and related equipment. In our product sales segment, we design, engineer, manufacture, install and sell natural gas compression packages as well as equipment used in the treating and processing of crude oil, natural gas and water as well natural gas compression packages to our customers throughout the world and for use in our contract operations business line.

We evaluate the performance of our segments based on gross margin for each segment. Revenue only includes sales to external customers. We do not include intersegment sales when we evaluate our segments’ performance.

20

Table of Contents
The following table presents revenue and other financial information by reportable segment for the three and nine months ended September 30, 20192020 and 20182019 (in thousands):
Three Months Ended
Contract
Operations		Aftermarket Services
Product Sales(2)
Reportable
Segments
Total
September 30, 2020:
Revenue$81,679 $30,435 $57,397 $169,511 
Gross margin (1)
57,131 7,300 3,134 67,565 
September 30, 2019:
Revenue$96,261 $34,893 $54,796 $185,950 
Gross margin (1)
61,905 8,814 6,609 77,328 
Three Months Ended 

Contract
Operations
 Aftermarket Services Product Sales Reportable
Segments
Total
September 30, 2019:        
Revenue $96,261
 $34,893
 $171,277
 $302,431
Gross margin (1)
 61,905
 8,814
 18,266
 88,985
September 30, 2018:        
Revenue $84,828
 $29,993
 $220,028
 $334,849
Gross margin (1)
 57,060
 7,855
 31,822
 96,737

Nine Months EndedContract OperationsAftermarket Services
Product Sales(2)
Reportable Segments Total
September 30, 2020:
Revenue$254,412 $83,337 $123,613 $461,362 
Gross margin (1)
174,658 20,001 (1,968)192,691 
September 30, 2019:
Revenue$271,645 $92,308 $254,367 $618,320 
Gross margin (1)
178,362 24,494 37,294 240,150 
Nine Months Ended 

Contract
Operations
 Aftermarket Services Product Sales Reportable
Segments
Total
September 30, 2019:        
Revenue $271,645
 $92,308
 $680,798
 $1,044,751
Gross margin (1)
 178,362
 24,494
 77,646
 280,502
September 30, 2018:        
Revenue $272,808
 $88,631
 $667,264
 $1,028,703
Gross margin (1)
 177,283
 23,890
 86,960
 288,133

(1)
(1)    Gross margin is defined as revenue less cost of sales (excluding depreciation and amortization expense).
Gross margin is defined as revenue less cost of sales (excluding depreciation and amortization expense).

Table of Contents(2)
    The U.S. compression fabrication business that was previously included in our product sales segment is now included in discontinued operations.


The following table reconciles income (loss)loss before income taxes to total gross margin (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Loss before income taxes$(10,978)$(12,517)$(33,111)$(26,026)
Selling, general and administrative29,959 32,308 95,049 108,902 
Depreciation and amortization36,630 41,106 100,887 113,450 
Impairments1,695 2,970 1,695 8,889 
Restructuring and other charges238 1,257 3,550 6,342 
Interest expense9,623 10,103 29,214 28,194 
Gain on extinguishment of debt(780)0 (3,424)0 
Other (income) expense, net1,178 2,101 (1,169)399 
Total gross margin$67,565 $77,328 $192,691 $240,150 
 Three Months Ended September 30, Nine Months Ended September 30,
 2019
2018 2019
2018
Income (loss) before income taxes$(7,818) $11,150
 $(8,405) $28,733
Selling, general and administrative37,702
 45,103
 126,790
 133,727
Depreciation and amortization42,133
 31,108
 116,669
 92,321
Long-lived asset impairment2,970
 2,054
 8,889
 3,858
Restatement related charges (recoveries), net—
 (342) 20
 (318)
Restructuring and other charges1,794
 264
 7,966
 1,686
Interest expense10,103
 7,685
 28,194
 21,787
Other (income) expense, net2,101
 (285) 379
 6,339
Total gross margin$88,985
 $96,737
 $280,502
 $288,133


21

Note 18 - Supplemental Guarantor Financial Information

In April 2017, our 100% owned subsidiaries EESLP and EES Finance Corp. (together, the “Issuers”) issued the 2017 Notes, which consists of $375.0 million aggregate principal amount senior unsecured notes. The 2017 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by Exterran Corporation (the “Parent Guarantor” or “Parent”). All other consolidated subsidiaries of Exterran are collectively referred to as the “Non-Guarantor Subsidiaries.” As a result of the Parent’s guarantee, we are presenting the following condensed consolidating financial information pursuant to Rule 3-10 of Regulation S-X, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. These schedules are presented using the equity method of accounting for all periods presented. For purposes of the following condensed consolidating financial information, the Parent Guarantor’s investments in its subsidiaries, the Issuers’ investments in the Non-Guarantors Subsidiaries and the Non-Guarantor Subsidiaries’ investments in the Issuers are accounted for under the equity method of accounting. Under this method, investments in subsidiaries are recorded at cost and adjusted for our share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions.



Table of Contents

Condensed Consolidating Balance Sheet
September 30, 2019
(In thousands)

     Non- Guarantor Subsidiaries    
 Parent Guarantor Issuers  Eliminations Consolidation
ASSETS         
          
Cash and cash equivalents$57
 $905
 $21,017
 $—
 $21,979
Restricted cash—
 —
 19
 —
 19
Accounts receivable, net—
 61,031
 170,189
 —
 231,220
Inventory, net—
 98,056
 72,343
 —
 170,399
Contract assets—
 12,479
 24,728
 —
 37,207
Intercompany receivables—
 248,420
 389,860
 (638,280) —
Other current assets—
 10,142
 15,740
 —
 25,882
Current assets associated with discontinued operations—
 —
 4,028
 —
 4,028
Total current assets57
 431,033
 697,924
 (638,280) 490,734
Property, plant and equipment, net—
 250,813
 680,790
 —
 931,603
Operating lease right-of-use assets—
 11,677
 17,616
 —
 29,293
Investment in affiliates528,740
 900,022
 (371,282) (1,057,480) —
Deferred income taxes—
 3,343
 6,971
 —
 10,314
Intangible and other assets, net—
 30,817
 54,854
 —
 85,671
Long-term assets held for sale—
 2,142
 —
 —
 2,142
Long-term assets associated with discontinued operations—
 —
 2,979
 —
 2,979
Total assets$528,797
 $1,629,847
 $1,089,852
 $(1,695,760) $1,552,736
          
LIABILITIES AND EQUITY         
          
Accounts payable, trade$—
 $61,419
 $29,556
 $—
 $90,975
Accrued liabilities—
 38,831
 73,033
 —
 111,864
Contract liabilities—
 61,861
 43,927
 —
 105,788
Current operating lease liabilities—
 1,922
 4,625
 —
 6,547
Intercompany payables39,698
 389,860
 208,722
 (638,280) —
Current liabilities associated with discontinued operations—
 —
 9,803
 —
 9,803
Total current liabilities39,698
 553,893
 369,666
 (638,280) 324,977
Long-term debt—
 495,347
 —
 —
 495,347
Deferred income taxes—
 —
 1,869
 —
 1,869
Long-term contract liabilities—
 21,957
 143,231
 —
 165,188
Long-term operating lease liabilities—
 18,128
 12,128
 —
 30,256
Other long-term liabilities—
 11,782
 33,601
 —
 45,383
Long-term liabilities associated with discontinued operations—
 —
 617
 —
 617
Total liabilities39,698
 1,101,107
 561,112
 (638,280) 1,063,637
Total equity489,099
 528,740
 528,740
 (1,057,480) 489,099
Total liabilities and equity$528,797
 $1,629,847
 $1,089,852
 $(1,695,760) $1,552,736



Table of Contents

Condensed Consolidating Balance Sheet
December 31, 2018
(In thousands)

     Non- Guarantor Subsidiaries    
 Parent Guarantor Issuers  Eliminations Consolidation
ASSETS         
          
Cash and cash equivalents$46
 $1,185
 $18,069
 $—
 $19,300
Restricted cash—
 —
 178
 —
 178
Accounts receivable, net—
 92,880
 155,587
 —
 248,467
Inventory, net—
 87,972
 62,717
 —
 150,689
Contract assets—
 67,323
 24,279
 —
 91,602
Intercompany receivables—
 158,977
 379,628
 (538,605) —
Other current assets—
 7,744
 36,490
 —
 44,234
Current assets associated with discontinued operations—
 —
 11,605
 —
 11,605
Total current assets46
 416,081
 688,553
 (538,605) 566,075
Property, plant and equipment, net—
 303,813
 597,764
 —
 901,577
Investment in affiliates554,207
 870,959
 (316,752) (1,108,414) —
Deferred income taxes—
 5,493
 5,877
 —
 11,370
Intangible and other assets, net—
 32,046
 54,325
 —
 86,371
Long-term assets associated with discontinued operations—
 —
 1,661
 —
 1,661
Total assets$554,253
 $1,628,392
 $1,031,428
 $(1,647,019) $1,567,054
          
LIABILITIES AND EQUITY         
          
Accounts payable, trade$—
 $133,291
 $32,453
 $—
 $165,744
Accrued liabilities—
 47,012
 76,323
 —
 123,335
Contract liabilities—
 82,367
 71,116
 —
 153,483
Intercompany payables1,432
 379,628
 157,545
 (538,605) —
Current liabilities associated with discontinued operations—
 —
 14,767
 —
 14,767
Total current liabilities1,432
 642,298
 352,204
 (538,605) 457,329
Long-term debt—
 403,810
 —
 —
 403,810
Deferred income taxes—
 —
 6,005
 —
 6,005
Long-term contract liabilities—
 17,226
 84,137
 —
 101,363
Other long-term liabilities—
 10,851
 28,961
 —
 39,812
Long-term liabilities associated with discontinued operations—
 —
 5,914
 —
 5,914
Total liabilities1,432
 1,074,185
 477,221
 (538,605) 1,014,233
Total equity552,821
 554,207
 554,207
 (1,108,414) 552,821
Total liabilities and equity$554,253
 $1,628,392
 $1,031,428
 $(1,647,019) $1,567,054



Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss
Three Months Ended September 30, 2019
(In thousands)
     Non- Guarantor Subsidiaries    
 Parent Guarantor Issuers  Eliminations Consolidation
Revenues$—
 $163,061
 $158,436
 $(19,066) $302,431
Cost of sales (excluding depreciation and amortization expense)—
 139,270
 93,242
 (19,066) 213,446
Selling, general and administrative344
 19,201
 18,157
 —
 37,702
Depreciation and amortization—
 14,286
 27,847
 —
 42,133
Long-lived asset impairment—
 2,970
 —
 —
 2,970
Restructuring and other charges—
 956
 838
 —
 1,794
Interest expense—
 10,024
 79
 —
 10,103
Intercompany charges, net—
 (361) 361
 —
 —
Equity in (income) loss of affiliates9,497
 (104,869) 115,002
 (19,630) —
Other (income) expense, net—
 91,950
 (89,849) —
 2,101
Loss before income taxes(9,841) (10,366) (7,241) 19,630
 (7,818)
Provision for (benefit from) income taxes—
 (233) 1,346
 (636) 477
Loss from continuing operations(9,841) (10,133) (8,587) 20,266
 (8,295)
Loss from discontinued operations, net of tax—
 —
 (1,546) —
 (1,546)
Net loss(9,841) (10,133) (10,133) 20,266
 (9,841)
Other comprehensive loss(3,631) (3,631) (3,631) 7,262
 (3,631)
Comprehensive loss attributable to Exterran stockholders$(13,472) $(13,764) $(13,764) $27,528
 $(13,472)



Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three Months Ended September 30, 2018
(In thousands)
     Non- Guarantor Subsidiaries    
 Parent Guarantor Issuers  Eliminations Consolidation
Revenues$—
 $223,429
 $129,517
 $(18,097) $334,849
Cost of sales (excluding depreciation and amortization expense)—
 183,640
 72,569
 (18,097) 238,112
Selling, general and administrative285
 23,035
 21,783
 —
 45,103
Depreciation and amortization—
 9,015
 22,093
 —
 31,108
Long-lived asset impairment—
 1,277
 777
 —
 2,054
Restatement related recoveries, net—
 (342) —
 —
 (342)
Restructuring and other charges—
 —
 264
 —
 264
Interest expense—
 8,941
 (1,256) —
 7,685
Intercompany charges, net—
 1,880
 (1,880) —
 —
Equity in (income) loss of affiliates(5,654) (4,186) 15,774
 (5,934) —
Other (income) expense, net—
 (477) 192
 —
 (285)
Income (loss) before income taxes5,369
 646
 (799) 5,934
 11,150
Provision for income taxes—
 12,234
 12,962
 (17,242) 7,954
Income (loss) from continuing operations5,369
 (11,588) (13,761) 23,176
 3,196
Income from discontinued operations, net of tax—
 —
 2,173
 —
 2,173
Net income (loss)5,369
 (11,588) (11,588) 23,176
 5,369
Other comprehensive loss(2,673) (2,673) (2,673) 5,346
 (2,673)
Comprehensive income (loss) attributable to Exterran stockholders$2,696
 $(14,261) $(14,261) $28,522
 $2,696



Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss
Nine Months Ended September 30, 2019
(In thousands)
     Non- Guarantor Subsidiaries    
 Parent Guarantor Issuers  Eliminations Consolidation
Revenues$—
 $627,895
 $504,165
 $(87,309) $1,044,751
Cost of sales (excluding depreciation and amortization expense)—
 545,260
 306,298
 (87,309) 764,249
Selling, general and administrative885
 64,650
 61,255
 —
 126,790
Depreciation and amortization—
 43,525
 73,144
 —
 116,669
Long-lived asset impairment—
 8,889
 —
 —
 8,889
Restatement related charges—
 20
 —
 —
 20
Restructuring and other charges—
 4,375
 3,591
 —
 7,966
Interest expense—
 28,293
 (99) —
 28,194
Intercompany charges, net—
 3,584
 (3,584) —
 —
Equity in (income) loss of affiliates21,655
 (50,473) 82,164
 (53,346) —
Other (income) expense, net—
 3,618
 (3,239) —
 379
Loss before income taxes(22,540) (23,846) (15,365) 53,346
 (8,405)
Provision for income taxes—
 7,845
 22,400
 (10,036) 20,209
Loss from continuing operations(22,540) (31,691) (37,765) 63,382
 (28,614)
Income from discontinued operations, net of tax—
 —
 6,074
 —
 6,074
Net loss(22,540) (31,691) (31,691) 63,382
 (22,540)
Other comprehensive loss(4,179) (4,179) (4,179) 8,358
 (4,179)
Comprehensive loss attributable to Exterran stockholders$(26,719) $(35,870) $(35,870) $71,740
 $(26,719)



Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Nine Months Ended September 30, 2018
(In thousands)
     Non- Guarantor Subsidiaries    
 Parent Guarantor Issuers  Eliminations Consolidation
Revenues$—
 $722,078
 $369,209
 $(62,584) $1,028,703
Cost of sales (excluding depreciation and amortization expense)—
 600,393
 202,761
 (62,584) 740,570
Selling, general and administrative920
 65,152
 67,655
 —
 133,727
Depreciation and amortization—
 27,030
 65,291
 —
 92,321
Long-lived asset impairment—
 3,081
 777
 —
 3,858
Restatement related recoveries, net—
 (318) —
 —
 (318)
Restructuring and other charges—
 —
 1,686
 —
 1,686
Interest expense—
 21,438
 349
 —
 21,787
Intercompany charges, net—
 4,953
 (4,953) —
 —
Equity in (income) loss of affiliates(11,548) (13,817) 5,932
 19,433
 —
Other (income) expense, net(153) (1,846) 8,338
 —
 6,339
Income before income taxes10,781
 16,012
 21,373
 (19,433) 28,733
Provision for income taxes—
 8,127
 18,604
 (3,663) 23,068
Income from continuing operations10,781
 7,885
 2,769
 (15,770) 5,665
Income from discontinued operations, net of tax—
 —
 5,116
 —
 5,116
Net income10,781
 7,885
 7,885
 (15,770) 10,781
Other comprehensive loss(10,039) (10,039) (10,039) 20,078
 (10,039)
Comprehensive income (loss) attributable to Exterran stockholders$742
 $(2,154) $(2,154) $4,308
 $742



Table of Contents

Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2019
(In thousands)
     Non- Guarantor Subsidiaries    
 Parent Guarantor Issuers  Eliminations Consolidation
Cash flows from operating activities:         
Net cash provided by (used in) continuing operations$683
 $(8,442) $128,754
 $—
 $120,995
Net cash provided by discontinued operations—
 —
 1,967
 —
 1,967
Net cash provided by (used in) operating activities683
 (8,442) 130,721
 —
 122,962
          
Cash flows from investing activities:         
Capital expenditures—
 (69,290) (102,828) —
 (172,118)
Proceeds from sale of property, plant and equipment—
 731
 3,551
 —
 4,282
Intercompany transfers—
 (38,268) (27,357) 65,625
 —
Settlement of foreign currency derivatives—
 (794) —
 —
 (794)
Net cash used in investing activities—
 (107,621) (126,634) 65,625
 (168,630)
          
Cash flows from financing activities:         
Proceeds from borrowings of debt—
 530,000
 —
 —
 530,000
Repayments of debt—
 (439,338) —
 —
 (439,338)
Intercompany transfers38,268
 27,357
 —
 (65,625) —
Transfers from Archrock, Inc.—
 420
 —
 —
 420
Purchases of treasury stock(38,939) (2,657) —
 —
 (41,596)
Net cash provided by (used in) financing activities(671) 115,782
 —
 (65,625) 49,486
          
Effect of exchange rate changes on cash, cash equivalents and restricted cash—
 —
 (1,298) —
 (1,298)
Net increase (decrease) in cash, cash equivalents and restricted cash12
 (281) 2,789
 —
 2,520
Cash, cash equivalents and restricted cash at beginning of period45
 1,186
 18,247
 —
 19,478
Cash, cash equivalents and restricted cash at end of period$57
 $905
 $21,036
 $—
 $21,998



Table of Contents

Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2018
(In thousands)
     Non- Guarantor Subsidiaries    
 Parent Guarantor Issuers  Eliminations Consolidation
Cash flows from operating activities:         
Net cash provided by (used in) continuing operations$(386) $(7,525) $96,704
 $—
 $88,793
Net cash provided by discontinued operations—
 —
 1,144
 —
 1,144
Net cash provided by (used in) operating activities(386) (7,525) 97,848
 —
 89,937
          
Cash flows from investing activities:         
Capital expenditures—
 (54,713) (97,513) —
 (152,226)
Proceeds from sale of property, plant and equipment—
 51
 2,379
 —
 2,430
Proceeds from sale of business—
 5,000
 —
 —
 5,000
Intercompany transfers—
 5
 6,562
 (6,567) —
Net cash used in continuing operations—
 (49,657) (88,572) (6,567) (144,796)
Net cash provided by discontinued operations—
 —
 66
 —
 66
Net cash used in investing activities—
 (49,657) (88,506) (6,567) (144,730)
          
Cash flows from financing activities:         
Proceeds from borrowings of debt—
 415,000
 —
 —
 415,000
Repayments of debt—
 (365,371) —
 —
 (365,371)
Intercompany transfers(5) (6,562) —
 6,567
 —
Payments for debt issuance costs—
 (92) —
 —
 (92)
Proceeds from stock options exercised—
 548
 —
 —
 548
Purchases of treasury stock—
 (3,780) —
 —
 (3,780)
Net cash provided by (used in) financing activities(5) 39,743
 —
 6,567
 46,305
          
Effect of exchange rate changes on cash, cash equivalents and restricted cash—
 —
 (3,691) —
 (3,691)
Net increase (decrease) in cash, cash equivalents and restricted cash(391) (17,439) 5,651
 —
 (12,179)
Cash, cash equivalents and restricted cash at beginning of period397
 24,195
 25,099
 —
 49,691
Cash, cash equivalents and restricted cash at end of period$6
 $6,756
 $30,750
 $—
 $37,512



Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the Condensed Consolidated Financial Statements in Part I, Item 1 (“Financial Statements”) of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
 
Disclosure Regarding Forward-Looking Statements
 
This report contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, without limitation, statements regarding our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations; the expected amount of our capital expenditures; anticipated cost savings, future revenue, gross margin and other financial or operational measures related to our business and our primary business segments; the future value of our equipment; and plans and objectives of our management for our future operations. You can identify many of these statements by looking for words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.
 
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Known material factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, and those set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”), which are available through our website at www.exterran.com and through the SEC’s website at www.sec.gov, as well as the following risks and uncertainties:
•conditions in the oil and natural gas industry, including a sustained imbalance in the level of supply or demand for oil or natural gas or a sustained low price of oil or natural gas, which could depress or reduce the demand or pricing for our natural gas compression and oil and natural gas production and processing equipment and services;
•reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies;
•economic or political conditions in the countries in which we do business, including civil developments such as uprisings, riots, terrorism, kidnappings, violence associated with drug cartels, legislative changes and the expropriation, confiscation or nationalization of property without fair compensation;
•risks associated with natural disasters, pandemics and other public health crisis and other catastrophic events outside our control, including the continued spread and impact of, and the response to, the novel coronavirus (“COVID-19”) pandemic which began in late 2019;
•changes in currency exchange rates, including the risk of currency devaluations by foreign governments, and restrictions on currency repatriation;
•risks associated with cyber-based attacks or network security breaches;
•changes in international trade relationships, including the imposition of trade restrictions or tariffs relating to any materials or products (such as aluminum and steel) used in the operation of our business;
•risks associated with our operations, such as equipment defects, equipment malfunctions and environmental discharges and natural disasters;discharges;
•the risk that counterparties will not perform their obligations under their contracts with us or other changes that could impact our ability to recover our fixed asset investment;
•the financial condition of our customers;
•our ability to timely and cost-effectively obtain components necessary to conduct our business;
•employment and workforce factors, including our ability to hire, train and retain key employees;
•our ability to implement our business and financial objectives, including:
•winning profitable new business;
•timely and cost-effective execution of projects;
22

Table of Contents
•enhancing or maintaining our asset utilization, particularly with respect to our fleet of compressors and other assets;
•integrating acquired businesses;

Table of Contents•

generating sufficient cash to satisfy our operating needs, existing capital commitments and other contractual cash obligations, including our debt obligations; and
•accessing the financial markets at an acceptable cost;
•our ability to accurately estimate our costs and time required under our fixed price contracts;
•liability related to the use of our products and services;
•changes in governmental safety, health, environmental or other regulations, which could require us to make significant expenditures; and
•risks associated with our level of indebtedness and our ability to fund our business.
 
All forward-looking statements included in this report are based on information available to us on the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.
 
General

Exterran Corporation (together with its subsidiaries, “Exterran Corporation,” “the Company,the “Company,” “our,” “we” or “us”), a Delaware corporation formed in March 2015, is a global systems and process company offering solutions in the oil, gas, water and power markets. We are a leader in natural gas processing and treatment and compression products and services, providing critical midstream infrastructure solutions to customers throughout the world. Our manufacturing facilities are located in the United States of America (“U.S.”), Singapore and the United Arab Emirates.

We provide our products and services to a global customer base consisting 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 oil and natural gas producers and oil and natural gas processors, gatherers and pipeline operators. We operate in three primary business lines: contract operations, aftermarket services and product sales. The nature and inherent interactions between and among our business lines provide us with opportunities to cross-sell orand offer integrated product and service solutions to our customers.

In our contract operations business line, we provide compression, processing, treating, compression and water treatment services through the operation of our natural gas compression equipment, crude oil and natural gas production and process equipment and water treatment equipment for our customers. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, repair, overhaul, upgrade, startup and commissioning and reconfiguration services to customers who own their own oil and natural gas compression, production, processing, treating and related equipment. In our product sales business line, we design, engineer, manufacture, install, sell and sell natural gas compression packages as well asfinance equipment used in the treating and processing of crude oil, natural gas and water as well as natural gas compression packages to our customers throughout the world and for use in our contract operations business line. We also 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 have continued to work toward our strategy to be a company that leverages technology and operational excellence to provide complete systems and process solutions in energy and industrial applications. Over the past several years, we have made significant progress in this journey by taking actions to protect our core business, develop important organizational capabilities, commercialize new products and services and implement new processes to position Exterran for success. We are focused on optimizing our portfolio of products and services to better serve our global customers while providing a more attractive investment option for our investors. As we continue on this path, we decided that our U.S. compression fabrication business is non-core to our strategy going forward and during the third quarter of 2020, we entered into an agreement to sell the business which closed on November 2, 2020. During the third quarter of 2020, this business met the held for sale criteria and is also now reflected as discontinued operations in our financial statements for all periods presented. The U.S. compression fabrication business was previously included in our product sales segment and has been reclassified to discontinued operations in our financial statements for all periods presented. Compression revenue from sales to international customers continues to be included in our product sales segment.

23

Table of Contents
Our chief operating decision maker manages business operations, evaluates performance and allocates resources based on the Company’s three primary business lines, which are also referred to as our segments. In order to more efficiently and effectively identify and serve our customer needs, we classify our worldwide operations into four geographic regions. The North America region is primarily comprised of our operations in Mexico and the U.S. The Latin America region is primarily comprised of our operations in Argentina, Bolivia, Brazil and Brazil.Mexico. The Middle East and Africa region is primarily comprised of our operations in Bahrain, Iraq, Oman, Nigeria and the United Arab Emirates. The Asia Pacific region is primarily comprised of our operations in China, Indonesia, Singapore and Thailand.

We refer to the condensed consolidated financial statements collectively as “financial statements,” and individually as “balance sheets,” “statements of operations,” “statements of comprehensive income (loss),” “statements of stockholders’ equity” and “statements of cash flows” herein.


24

Table of Contents
Financial Results of Operations

Overview

Industry Conditions and Trends
 
Our business environment and corresponding operating results are affected by the level of energy industry spending for the exploration, development and production of oil and natural gas reserves.reserves along with spending within the midstream space. Spending by oil and natural gas exploration and production companies and midstream providers is dependent upon these companies’ forecasts regarding the expected future supply, demand and pricing of oil and natural gas products as well as their estimates of risk-adjusted costs to find, develop, produce, transport and producetreat these reserves. Although we believe our contract operations business, and to a lesser extent our product sales business is typically less impacted by short-term commodity prices than certain other energy products and service providers, changes in oil and natural gas exploration and production spending normally result in changes in demand for our products and services.

FromBeginning in 2019, there have been a long-term perspective,shifts in the industry observers anticipate strong global demand for hydrocarbons, including demand for liquefied natural gas. However, customer cash flowsthat have been exacerbated by the COVID-19 Pandemic. The industry has seen a structural change in the behavior of exploration and production producers and midstream providers to change their focus on returns on capital could drive customer investment priorities. Industry observers believe shareholders are encouraging management teams of energy companiesfrom growth to focus operational and compensation strategies on returns andone emphasizing cash flow generation rather than solely on growth. To accomplish these strategies, energy companies may need to better prioritizeand returns. This has caused a significant reduction in their capital spending which could continueplans in order to impact resource allocationdrive incremental cash flow and ultimatelyhas put constraints on the amount of new projects that customers sanction. We believe this is likely to continue to persist into the coming year. In addition, the oil price war that took place earlier this year drove the price of oil and capital spending bynatural gas lower further limiting the industries cash flow generating ability and put incremental pressure on our customers. The COVID-19 pandemic created a demand shock to the system that further exacerbated the supply demand imbalance that was already taking place. The timing of the rebalancing of supply and demand and improvement of pricing for crude oil and natural gas resulting in increased spending on new projects remains uncertain.

Our Performance Trends and Outlook
 
Our revenue, earnings and financial position are affected by, among other things, market conditions that impact demand and pricing for natural gas compression, and oil and natural gas production and processing and produced water treatment solutions along with our customers’ decisions to use our products and services, use our competitors’ products and services or own and operate the equipment themselves.

We have continued to work toward our strategy to be a company that leverages technology and operational excellence to providing complete systems and process solutions in energy and industrial applications. Over the past several years, we have made significant progress in this journey by taking actions to protect our core business, develop important organizational capabilities and implement new processes to position Exterran for success. We are focused on optimizing our portfolio of products and services to better serve our global customers while providing a more attractive investment option for our investors. As we continue on this path, we are also reviewing options for our U.S. compression fabrication business to be a positive contributor to our strategy. This business has performed well over the past year despite difficult market conditions as we worked to maximize margins and returns. We will fully explore our options and we are committed to supporting our customers, employees and other stakeholders throughout the process.
Historically, oil, natural gas and natural gas liquids prices and the level of drilling and exploration activity in North America have been volatile. The Henry Hub spot price for natural gas was $2.37$1.66 per MMBtu at September 30, 2019,2020, which was 27%21% and 21%30% lower than the prices at December 31, 20182019 and September 30, 2018,2019, respectively, and the U.S. natural gas liquid composite price was $4.62$4.54 per MMBtu for the month of July 2019,2020, which was 28%15% and 56%10% lower than the prices for the month of December 20182019 and September 2018,2019, respectively. In addition, the West Texas Intermediate crude oil spot price as of September 30, 20192020 was 20% higher than the price at December 31, 201834% and 26% lower than the price at December 31, 2019 and at September 30, 2018.2019, respectively. Volatility in demand for energy and in commodity prices andas well as an industry trend towards disciplined capital spending and improving returns have caused timing uncertainties in demand for our products recently. These uncertainties have caused delays in the timing of new equipment orders and lower bookings in our product sales segment. Booking activity levels for our product sales segment in North America during the nine months ended September 30, 20192020 were $143.5$1.4 million, which represents a decrease of 81%96% compared to the nine months ended September 30, 2018.2019.
 
Longer-term fundamentals in our international markets partially depend on international oil and gas infrastructure projects, many of which are based on the longer-term plans of our customers that can be driven by their local market demand and local pricing for natural gas. As a result, we believe our international customers make decisions based on longer-term fundamentals that may be less tied to near term commodity prices than our North American customers. Over the long-term, we believe the demand for our products and services in international markets will continue, and we expect to have opportunities to growcontinue to invest in our international businesses. Booking activity levels for our product sales segment in international markets during the nine months ended September 30, 20192020 were $140.0$449.2 million, which represents a decreasean increase of 35%221% compared to the nine months ended September 30, 2018.2019.

Table of Contents

Aggregate booking activity levels for our product sales segment in North America and international markets during the nine months ended September 30, 20192020 were $283.5$450.6 million, which represents a decreasean increase of 71%164% compared to the nine months ended September 30, 2018,2019, respectively. The increase in bookings was primarily driven by a large processing plant order in the Middle East. Fluctuations in the size and timing of customers’ requests for bid proposals and awards of new contracts tend to create variability in booking activity levels from period to period.

25

Table of Contents
The timing of anycustomer order and change in activity levels by our customers is difficult to predict. As a result, our ability to project the anticipated activity level for our business, and particularly our product sales segment, is limited. Given the volatility of the global energy markets and industry capital spending activity levels, we plan to monitor and continue to control our expense levels as necessary to protect our profitability. Additionally, volatility in commodity prices could continue to delay investments by our customers in significant projects, which could result in a material adverse effect on our business, financial condition, results of operations and cash flows.
 
Our level of capital spending largely depends on the demand for our contract operations services and the equipment required to provide such services to our customers. Based on orders awarded for contract operations,our current backlog of contracts, we currently expect to invest moreless capital in our contract operations business in 20192020 than we did in 2018.2019.

A decline in demand for oil and natural gas or prices for those commodities, or instability and prioritizationrationalization of capital funding in the global energy markets could continue to cause a reduction in demand for our products and services. 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, including the removal of compressor units from our active fleet, indicate that the carrying amount of an asset may not be recoverable.

Impact of COVID-19 on our Business

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption across most industries. Efforts to mitigate the spread of COVID-19 have also resulted in decreased energy demand and additional weakness in energy pricing.

The Company took proactive steps earlier in the first quarter to enable and verify the ability to ensure the safety of our employees while still carrying on the majority of business functions. These steps included:
•Establishing a daily global operating process to identify, monitor and discuss impacts to our business whether originating from governmental actions or as a direct result of employee illness;
•Investing in additional IT capabilities to enable employees to work remotely;
•Closing operations where and until assessments were completed to ensure we could operate in a safe manner; and
•Reestablishing operations once safety mechanisms were in place. This included the acquisition of additional personal protective equipment and establishing screening and other workplace processes.

To date our actions in response to the pandemic and the primary impacts on our business are summarized below:
•As most of our operations are considered essential by local government authorities, our service operations that are provided under long-term contracts have to a large extent continued to operate under substantially normal conditions;
•We are following local governmental guidance for viral spread mitigation, including having many of our employees who would traditionally work in an office work from home;
•We have put in place additional health and safety measures to protect our employees, customers and other parties who are working at our operating sites;
•Although early in the year we recorded significant new product sales bookings, more recently we have seen a decrease in purchasing activity from our customers which we believe is due to both the work at home mitigation measures our customers are also taking and weakness in commodity prices, causing us to lower our expectations for additional new bookings in 2020;
•Given travel restrictions and other mitigation efforts, certain of our employees have not been able to travel to work assignments, therefore although we have taken additional steps to be able to continue to provide services required by our customers, some services will be delayed until mitigation measures are eased;
•While our operations have been impacted by lower product sale bookings in 2019 and we started cost reduction efforts even prior to the current pandemic, we have continued our efforts to optimize our cost structure to align with the expected demand in our business including making work force reductions and/or managing work hours at some of our manufacturing facilities;
•We are continuing to have discussions with customers at their request to save them costs by collaborating with them on how we can manage costs and/or optimize the projects performance to potentially improve our and their results;
•We evaluated our accounts receivable and given the current energy environment and expected impact to the financials of our customers, we increased our reserve for uncollectible accounts by $4.5 million;
•Given COVID-19’s impact on demand for energy and decreased commodity prices which impact our customer’s capital spending, during the three months ended March 31, 2020, we tested our long-term assets for impairment and concluded that no impairment was indicated;
26

Table of Contents
•As many of our suppliers have increased delivery times including as a result of disruptions in shipping, we are working with customers on revising expected due-dates for delivery, and expect to push out the timing of our recognition of revenue and gross margin on certain projects as a result of these and other delays caused by the pandemic; and
•We have participated in certain COVID-19 tax incentive programs in certain jurisdictions in which we operate. These primarily allowed a delay in filing and/or paying of taxes for short periods of time. In the U.S., we filed a request for refund and received a $2.5 million Alternative Minimum Tax refund in June 2020, which was earlier than originally scheduled due to the provisions of the CARES Act. We have not participated in any government sponsored loan programs under the CARES Act.

We are unable to predict the impact that COVID-19 will have on our long-term financial position and operating results due to numerous uncertainties. The long-term impact of the pandemic on our customers and the global economy will depend on various factors, including the scope, severity and duration of the pandemic. A prolonged economic downturn or recession resulting from the pandemic could adversely affect many of our customers which could, in turn, adversely impact our business, financial condition and results of operations. We will continue to assess the evolving impact of the COVID-19 pandemic and intend to make adjustments to its responses accordingly.

Operating Highlights
 
The following table summarizes our contract operations and product sales backlog (in thousands):
September 30, 2020December 31, 2019September 30, 2019
Contract Operations Backlog:
Contract operations services$1,208,139 $1,252,001 $1,210,187 
Product Sales Backlog:
Compression equipment(1)
$18,165 $54,541 $40,899 
Processing and treating equipment447,109 69,912 50,176 
Other product sales31,380 47,094 62,174 
Total product sales backlog$496,654 $171,547 $153,249 
 September 30, 2019 December 31, 2018 September 30, 2018
Contract Operations Backlog:     
Contract operations services$1,210,187
 $1,398,644
 $1,357,283
      
Product Sales Backlog:     
Compression equipment$196,144
 $471,827
 $464,866
Processing and treating equipment50,176
 229,258
 284,943
Production equipment—
 2,438
 5,450
Other product sales62,174
 2,246
 3,879
Total product sales backlog$308,494
 $705,769
 $759,138


(1)Compression equipment includes sales to customers outside of the U.S. The compression fabrication business for sales to U.S. customers, that was previously included in our product sales segment, is now included in discontinued operations.
Financial Results of Operations

Summary of Results

As discussed in Note 3 to the Financial Statements, the results from continuing operations for all periods presented exclude the results of our Belleli EPC business and our U.S. compression fabrication business. Those results are reflected in discontinued operations for all periods presented.

Revenue. 
Revenue during the three months ended September 30, 2020 and 2019 and 2018 was $302.4$169.5 million and $334.8$186.0 million, respectively. The decrease in revenue during the three months ended September 30, 20192020 compared to the three months ended September 30, 20182019 was due to a decrease in revenue in our product sales segment, partially offset by increasesdecreases in revenue in our contract operations and aftermarket services segments.segments, partially offset by an increase in our product sales segment.

Revenue during the nine months ended September 30, 2020 and 2019 and 2018 was $1,044.8$461.4 million and $1,028.7$618.3 million, respectively. The increasedecrease in revenue during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 was due to increasesdecreases in revenue in our product sales, and aftermarket services segments, partially offset by aand contract operations segments. The decrease in our contract operations segment.product sales segment was primarily due to an overall decline in bookings as a consequence of market conditions in North America.

27

Table of Contents

Net income (loss).loss.  
We generated a net loss of $9.8$17.7 million and net income of $5.4$9.8 million during the three months ended September 30, 20192020 and 2018,2019, respectively. The decreaseincrease in net incomeloss during the three months ended September 30, 20192020 compared to the three months ended September 30, 20182019 was primarily due to a decreasedecreases in gross margin for our contract operations, product sales segment and aftermarket services segments, an increase in income taxes and a decrease in income from discontinued operations, net of tax, partially offset by a decrease in depreciation and amortization expense, partially offset by decreasesa decrease in income taxes and selling, general and administrative (“SG&A”) expense.expense, a decrease in impairments and a decrease in restructuring and other charges. Net loss during the three months ended September 30, 2020 included loss from discontinued operations, net of tax, of $1.0 million and net loss during the three months ended September 30, 2019 included income from discontinued operations, net of tax, of $3.2 million due to the recognition of our U.S. compression fabrication business as discontinued operations.

We generated a net loss of $67.9 million and $22.5 million during the nine months ended September 30, 2020 and 2019, respectively. The increase in net loss during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to decreases in gross margin for our product sales, aftermarket services and contract operations segments, a decrease in income from discontinued operations, net of tax, and an increase in interest expense, partially offset by decreases in SG&A expense, depreciation and amortization expenses, impairments, income taxes and restructuring and other charges, a gain on extinguishment of debt of $3.4 million and a decrease in foreign currency losses of $1.5 million. Net loss during the nine months ended September 30, 2020 included loss from discontinued operations, net of tax, of $1.5$15.8 million and net income during the three months ended September 30, 2018 included income from discontinued operations, net of tax, of $2.2 million.

We generated net loss of $22.5 million and net income of $10.8 million during the nine months ended September 30, 2019 and 2018, respectively. The decrease in net income during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to an increase in depreciation and amortization expense, a decrease in gross margin for our product sales segment and increases in interest expense and restructuring and other charges, partially offset by a decrease in SG&A expenses, a decrease in foreign currency losses of $2.9 million and a loss of $1.7 million on the sale of our North America production equipment assets (“PEQ assets”) in the prior year period. Net loss during the nine months ended September 30, 2019 included income from discontinued operations, net of tax of $6.1$23.7 million and net income duringdue to the nine months ended September 30, 2018 included income fromrecognition of our U.S. compression fabrication business as discontinued operations netand a $6.5 million tax benefit in Belleli EPC related to a settlement of Italian tax of $5.1 million.litigation previously recorded as an unrecognized tax benefit.

EBITDA, as adjusted. 
Our EBITDA, as adjusted, was $50.1$35.8 million and $52.1$43.8 million during the three months ended September 30, 20192020 and 2018,2019, respectively. EBITDA, as adjusted, during the three months ended September 30, 20192020 compared to the three months ended September 30, 20182019 decreased primarily due to a decreasedecreases in gross margin for our contract operations, product sales segment,and aftermarket services segments, partially offset by a decrease in SG&A and an increase in gross margin for our contract operations segment.expense.

Our EBITDA, as adjusted, was $153.4$95.0 million and $154.0$130.9 million during the nine months ended September 30, 20192020 and 2018,2019, respectively. EBITDA, as adjusted, during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 decreased primarily due to a decreasedecreases in gross margin for our product sales, segment,aftermarket services and contract operations segments, partially offset by a decrease in SG&A and increases in gross margin for our contract operations and aftermarket services segments.expense.

EBITDA, as adjusted, is a non-GAAP financial measure. For a reconciliation of EBITDA, as adjusted, to net income (loss),loss, its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “— Non-GAAP Financial Measures” included elsewhere in this Quarterly Report.


28

Table of Contents

The Three Months Ended September 30, 20192020 Compared to the Three Months Ended September 30, 20182019
 
Contract Operations
(dollars in thousands)
Three Months Ended
September 30,		  Three Months Ended
September 30,
2019
2018 Change % Change20202019Change% Change
Revenue$96,261
 $84,828
 $11,433
 13 %Revenue$81,679 $96,261 $(14,582)(15)%
Cost of sales (excluding depreciation and amortization expense)34,356
 27,768
 6,588
 24 %Cost of sales (excluding depreciation and amortization expense)24,548 34,356 (9,808)(29)%
Gross margin$61,905
 $57,060
 $4,845
 8 %Gross margin$57,131 $61,905 $(4,774)(8)%
Gross margin percentage (1)
64% 67% (3)% (4)%
Gross margin percentage (1)
70 %64 %6 %9 %
___________________
(1) Defined as gross margin divided by revenue.

The increasedecrease in revenue during the three months ended September 30, 20192020 compared to the three months ended September 30, 20182019 was primarily due to increasesdecreases of approximately $9.8 million for changes in revenue of $10.4 million and $1.6rates, $4.8 million in contract stops, $2.4 million impact of foreign currency exchange rates in Brazil, $2.1 million impact of devaluation on the Middle EastArgentine Peso during the current year period and Africa region and$2.1 million from the North America region, respectively,sale of equipment pursuant to a purchase option exercised by a customer during the fourth quarter of 2019. These revenue decreases were partially offset by a decrease in revenuean increase of $1.1$5.5 million in the Asia Pacific region. The revenue increase in the Middle East and Africa region was primarily due to the start-up of a projectprojects that waswere not operating in the prior year period, and the start-upan increase of a project that commenced August 2018. The revenue increase in the North America region was primarily due to a contract amendment that resulted in higher revenue in the current year period. The revenue decrease in the Asia Pacific region was$3.2 million primarily driven by projects that terminatedan increase of deferred revenue recognized resulting from a change in the fourth quarterremaining term of 2018.a contract that will result in our recognizing approximately $87 million of remaining deferred revenue previously received from the customer over two remaining years instead of eight years. Gross margin increased decreased during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to the revenue increases explained above. Gross margin percentage decreased during the three months ended September 30, 20192020 compared to the three months ended September 30, 20182019 due to higher maintenance expensesthe revenue decreases explained above. The change in the current year period resultingremaining term of the contract resulted in additional costs during the three months ended September 30, 2020 in the form of depreciation expense, which is excluded from delayed maintenance expenditures ingross margin. Gross margin percentage during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 increased primarily due to reduced operating expenses relative to the prior year periodand the increase on deferred revenue recognized resulting from changes in the remaining term of a contract.
.
Aftermarket Services
(dollars in thousands)
Three Months Ended
September 30,
20202019Change% Change
Revenue$30,435 $34,893 $(4,458)(13)%
Cost of sales (excluding depreciation and amortization expense)23,135 26,079 (2,944)(11)%
Gross margin$7,300 $8,814 $(1,514)(17)%
Gross margin percentage24 %25 %(1)%(4)%

The decrease in revenue during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due a decrease in installation services, offset by an increase in part sales. Gross margin during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 decreased primarily due to the revenue decrease explained above. Gross margin percentage during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 remained relatively flat.

29

Table of Contents
 Three Months Ended
September 30,		  
 2019 2018 Change % Change
Revenue$34,893
 $29,993
 $4,900
 16 %
Cost of sales (excluding depreciation and amortization expense)26,079
 22,138
 3,941
 18 %
Gross margin$8,814
 $7,855
 $959
 12 %
Gross margin percentage25% 26% (1)% (4)%
Product Sales
(dollars in thousands)
Three Months Ended
September 30,
20202019Change% Change
Revenue$57,397 $54,796 $2,601 5 %
Cost of sales (excluding depreciation and amortization expense)54,263 48,187 6,076 13 %
Gross margin$3,134 $6,609 $(3,475)(53)%
Gross margin percentage5 %12 %(7)%(58)%

The increase in revenue during the three months ended September 30, 20192020 compared to the three months ended September 30, 20182019 was primarily due to an increase of $35.5 million in installation services,compression revenue, partially offset by a decrease of $33.6 million in part sales.processing and treating equipment revenue due to nearing completion on a specific project and a decline in bookings. The decline in bookings is due to volatility in demand for energy and in commodity prices as well as an industry trend towards disciplined capital spending. Gross margin increaseddecreased during the three months ended September 30, 20192020 compared to the three months ended September 30, 2018 primarily2019 due to the revenue increase explained above.higher expenses on a specific project. Gross margin percentage decreased during the three months ended September 30, 20192020 compared to the three months ended September 30, 2018 remained relatively flat.


Table of Contents

Product Sales
(dollars in thousands)
 Three Months Ended
September 30,		  
 2019 2018 Change % Change
Revenue$171,277
 $220,028
 $(48,751) (22)%
Cost of sales (excluding depreciation and amortization expense)153,011
 188,206
 (35,195) (19)%
Gross margin$18,266
 $31,822
 $(13,556) (43)%
Gross margin percentage11% 14% (3)% (21)%

The decrease in revenue during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily due to a decrease in revenue of $59.8 million in the North America region, partially offset by an increase in revenue of $12.6 million in the Middle East and Africa region. The decrease in revenue in the North America region was primarily due to a decrease of $71.4 million in processing and treating equipment revenue, partially offset by an increase of $12.5 million in compression equipment revenue. The increase in revenue in the Middle East and Africa region was primarily due to an increase of $14.5 million in processing and treating equipment revenue. Gross margin decreased during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to the revenue decrease explained above and higher expenses on a specific project in the North America region. Gross margin percentage during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 decreased primarily due to the higher expenses discussed above and a shift in product mix in the North America region during the current year period.

Costs and Expenses
(dollars in thousands)
Three Months Ended
September 30,		  Three Months Ended
September 30,
2019 2018 Change % Change20202019Change% Change
Selling, general and administrative$37,702
 $45,103
 $(7,401) (16)%Selling, general and administrative$29,959 $32,308 $(2,349)(7)%
Depreciation and amortization42,133
 31,108
 11,025
 35 %Depreciation and amortization36,630 41,106 (4,476)(11)%
Long-lived asset impairment2,970
 2,054
 916
 45 %
Restatement related recoveries, net—
 (342) 342
 (100)%
ImpairmentsImpairments1,695 2,970 (1,275)(43)%
Restructuring and other charges1,794
 264
 1,530
 580 %Restructuring and other charges238 1,257 (1,019)(81)%
Interest expense10,103
 7,685
 2,418
 31 %Interest expense9,623 10,103 (480)(5)%
Gain on extinguishment of debtGain on extinguishment of debt(780)— (780)N/A
Other (income) expense, net2,101
 (285) 2,386
 (837)%Other (income) expense, net1,178 2,101 (923)(44)%
 
Selling, general and administrative
SG&A expense decreased during the three months ended September 30, 20192020 compared to the three months ended September 30, 20182019 primarily due to a decrease in compensation and associated costs and a decrease in third-party professional expenses.costs. SG&A expense as a percentage of revenue was 12%18% and 13%17% during the three months ended September 30, 20192020 and 2018,2019, respectively.

Depreciation and amortization
Depreciation and amortization expense during the three months ended September 30, 20192020 compared to the three months ended September 30, 2018 increased2019 decreased primarily due to an increasea decrease in depreciation expense of $5.4approximately $9.5 million in the current year period resulting from an amendment tothe sale of equipment on a contract operations contract in the fourth quarter of 2018. Additionally,2019. This decrease was partially offset by an increase of approximately $3.1 million in depreciation expense of capitalized installation costs increased by $7.1 million primarily due to additional depreciationfor equipment on projectsa contract operations project that werewas not operating in the prior year period. Capitalized installation costs included, among other things, civil engineering, piping, electrical instrumentationperiod and additional depreciation expense of $2.6 million recognized during the three months ended September 30, 2020 on a contract operations project management costs.due to changes in the terms of a contract.

Long-lived assetImpairments
During the third quarter of 2020, we impaired certain assets due to the termination of a contract operations project where it was not cost effective to move the assets and try to utilize them with a different customer. As a result, we removed them from the fleet and recorded an impairment of $1.7 million during the three months ended September 30, 2020.
In
During the secondthird quarter of 2019, we classified certain long-lived assets as assets held for sale in our balance sheets. In conjunction with the planned disposition of these units, we recorded an additional impairment chargecharges of $3.0 million to write-down these assets to their approximate fair values duringfor the three months ended September 30, 2019 based on the expected net proceeds.

30

Table of Contents

We regularly review the future deployment of our idle compression assets used in our contract operations segment for units that are not the type, configuration, condition, make or model that are cost efficient to maintain and operate. During the third quarter 2018, we evaluated idle units that had been previously culled from our fleet and were available for sale for impairment. Based upon that review, we reduced the expected proceeds from disposition for certain units. This resulted in an additional impairment of $2.1 million to reduce the book value of each unit to its estimated fair value during the three months ended September 30, 2018. The fair value of each unit was estimated based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties.

Restructuring and other charges
The energy industry’s focus on capital discipline and improving returns has caused delays in the timing of new equipment orders. As a result, in the secondthird quarter of 2019, we began the consolidation of two of our manufacturing facilities located in Houston, Texas into one facility and announced a cost reduction plan primarily focused on workforce reductions. We incurred restructuring and other charges associated with these activities of $1.8$0.2 million and $1.3 million during the three months ended September 30, 2019.2020 and 2019, respectively.

In the second quarter of 2018, we initiated a relocation plan in the North America region to better align our contract operations business with our customers. As a result of this plan, during the three months ended September 30, 2018, we incurred restructuring and other charges of $0.3 million primarily related to relocation costs.

Interest expense
The increasedecrease in interest expense during the three months ended September 30, 20192020 compared to the three months ended September 30, 20182019 was primarily due to a decrease in capitalizedlower average interest and a higher average balance ofrate on the long-term debt. During the three months ended September 30, 20192020 and 2018,2019, the average daily outstanding borrowings of long-term debt were $519.9$503.4 million and $453.0$519.9 million, respectively.

Extinguishment of debt
During the third quarter of 2020, we purchased and retired $5.0 million principal amount of our 8.125% senior unsecured notes due 2025 (the “2017 Notes”). for $4.3 million including $0.1 million of accrued interest. During the three months ended September 30, 2020, we recognized a gain on extinguishment of debt of $0.8 million, which was calculated as the difference between the repurchase price and the carrying amount of the 2017 Notes.

Other (income) expense, net
The change in other (income) expense, net, was primarily due to foreign currency losses of $2.2 million during the three months ended September 30, 2020 compared to foreign currency losses of $3.1 million during the three months ended September 30, 2019 compared to2019. Foreign currency losses and gains included translation gains, net of gains on foreign currency derivatives, of $0.6 million and translation losses of $0.8$0.9 million during the three months ended September 30, 2018. Foreign currency losses included translation losses of $0.9 million2020 and $0.2 million during the three months ended September 30, 2019, and 2018, respectively, related to the currency remeasurement of our foreign subsidiaries’ non-functional currency denominated intercompany obligations.

Income Taxes
(dollars in thousands)
Three Months Ended
September 30,		  Three Months Ended
September 30,
2019 2018 Change % Change20202019Change% Change
Provision for income taxes$477
 $7,954
 $(7,477) (94)%Provision for income taxes$5,745 $477 $5,268 1,104 %
Effective tax rate(6.1)% 71.3% (77.4)% (109)%Effective tax rate(52.3)%(3.8)%(48.5)%1,276 %
 
Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn, or losses we incur, in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Our effective tax rate is also affected by valuation allowances recorded against loss carryforwards in the U.S. and certain other jurisdictions, foreign withholding taxes and changes in foreign currency exchange rates.

The following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21.0% and our effective tax rate for the three months ended September 30, 2019:2020: (i) a $0.8 million favorable(49.9)% negative impact resulting primarily from rate differences between U.S. and foreign jurisdictions including foreign withholding taxes,unrecognized tax benefits under FASB’s Interpretation No. 48 of Financial Accounting Standard 109 (“FIN 48”), (ii) a $0.6 million(22.4)% negative impact resulting from foreign currency devaluations in Argentina, and (iii) a $2.5 million(29.1)% negative impact resulting from foreign taxes in excess of the recordingU.S. tax rate and other rate drivers, and (iv) a 31.7% positive impact resulting from a release of valuation allowances recorded against U.S. deferred tax assets.
31


Table of Contents

Discontinued Operations
(dollars in thousands)
 Three Months Ended
September 30,		  
 2019 2018 Change % Change
Income (loss) from discontinued operations, net of tax$(1,546) $2,173
 $(3,719) (171)%
Three Months Ended
September 30,
20202019Change% Change
Income (loss) from discontinued operations, net of tax$(998)$3,153 $(4,151)(132)%
 
Income (loss) from discontinued operations, net of tax, includes our Venezuelan subsidiary’s operations that were expropriated in June 2009Belleli EPC business and our Belleli EPCU.S. compression fabrication business.
 
Income (loss) from discontinued operations, net of tax, during the three months ended September 30, 20192020 compared to the three months ended September 30, 20182019 decreased primarily due to a $3.6$6.8 million decrease in income from U.S. compression, partially offset by a $2.5 million increase in income from Belleli EPCEPC. The decrease in income in U.S. compression business was primarily driven by decreased activity as we continued to close outthe decrease in orders for the business. The increase in income in Belleli EPC was primarily driven by payment received from a customer for amounts that were previously reserved. For further details on our discontinued operations, see Note 43 to the Financial Statements.

The Nine Months Ended September 30, 20192020 Compared to the Nine Months Ended September 30, 20182019
 
Contract Operations
(dollars in thousands)
Nine Months Ended September 30,  Nine Months Ended
September 30,
2019 2018 Change % Change20202019Change% Change
Revenue$271,645
 $272,808
 $(1,163) — %Revenue$254,412 $271,645 $(17,233)(6)%
Cost of sales (excluding depreciation and amortization expense)93,283
 95,525
 (2,242) (2)%Cost of sales (excluding depreciation and amortization expense)79,754 93,283 (13,529)(15)%
Gross margin$178,362
 $177,283
 $1,079
 1 %Gross margin$174,658 $178,362 $(3,704)(2)%
Gross margin percentage (1)
66% 65% 1% 2 %
Gross margin percentage (1)
69 %66 %3 %5 %
___________________
(1) Defined as gross margin divided by revenue.

The decrease in revenue during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to decreases of approximately $22.9 million for changes in rates, $12.6 million in contract stops, $8.1 million impact of devaluation on the Argentine Peso during the current year period, $6.6 million impact of foreign currency exchange rates in Brazil, and $6.2 million from the sale of equipment pursuant to a purchase option exercised by customers during the fourth quarter of 2019. These revenue decreases were partially offset by an increase of $29.9 million due to the start-up of projects that were not operating in the prior year period, an increase of $10.3 million from the sale of equipment pursuant to a purchase option exercised by customers during the first quarter of 2020 and an increase of $3.2 million primarily driven by an increase of deferred revenue recognized resulting from a change in the remaining term of a contract that will result in our recognizing $87 million of remaining deferred revenue previously received from the customer over two remaining years instead of eight years. Gross margin decreased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to the revenue decreases explained above. The change in the remaining term of the contract resulted in additional costs during the nine months ended September 30, 2020 in the form of depreciation expense, which is excluded from gross margin. Gross margin percentage during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 increased primarily due to reduced operating expenses relative to the prior year.

32

Table of Contents
Aftermarket Services
(dollars in thousands)
Nine Months Ended
September 30,
20202019Change% Change
Revenue$83,337 $92,308 $(8,971)(10)%
Cost of sales (excluding depreciation and amortization expense)63,336 67,814 (4,478)(7)%
Gross margin$20,001 $24,494 $(4,493)(18)%
Gross margin percentage24 %27 %(3)%(11)%

The decrease in revenue during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 was primarily due to decreases in revenue of $16.8 millioninstallation services and $6.2 million in the Latin America regionoperation and Asia Pacific region, respectively, partially offset by increases in revenue of $19.3 million and $2.5 million in the Middle East and Africa region and the North America region, respectively. The revenue decrease in the Latin America region was primarily driven by a decrease of $11.2 million in Argentina largely resulting from the current year impact of the devaluation of the Argentine Peso and projects that terminated operations in 2018 and a $9.0 million decrease in Brazil primarily driven by projects that terminated in 2018 and 2019 and the impact of foreign currency exchange rates. These revenue decreases in the Latin America region were partially offset by an increase of $3.8 million due to the start-up of a project that was not operating in the prior year period. The revenue decrease in the Asia Pacific region was primarily driven by a $2.8 million recovery of an early termination fee in the first quarter of 2018 for a contract that terminated in January 2016 and projects that terminated in the fourth quarter of 2018. The revenue increase in the Middle East and Africa region was primarily due to the start-up of a project that was not operating in the prior year period and the start-up of a project that commenced August 2018. The increase of revenue in the North America region was primarily due to a renegotiation of a contract in the fourth quarter that resulted in higher revenue in the current year period.maintenance services. Gross margin and gross margin percentage remained relatively flatdecreased during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 2018.2019 primarily due to the revenue decrease explained above and the product mix during the current year period.


Table of Contents

Aftermarket ServicesProduct Sales
(dollars in thousands)
Nine Months Ended
September 30,
20202019Change% Change
Revenue$123,613 $254,367 $(130,754)(51)%
Cost of sales (excluding depreciation and amortization expense)125,581 217,073 (91,492)(42)%
Gross margin$(1,968)$37,294 $(39,262)(105)%
Gross margin percentage(2)%15 %(17)%(113)%
 Nine Months Ended September 30,  
 2019 2018 Change % Change
Revenue$92,308
 $88,631
 $3,677
 4%
Cost of sales (excluding depreciation and amortization expense)67,814
 64,741
 3,073
 5%
Gross margin$24,494
 $23,890
 $604
 3%
Gross margin percentage27% 27% —% —%

The increasedecrease in revenue during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 was primarily due to a decrease of $202.1 million in processing and treating equipment revenue due to nearing completion on a specific project and a decline in bookings. The decline in bookings is due to volatility in demand for energy and in commodity prices as well as an increase in installation services,industry trend towards disciplined capital spending. This decrease was partially offset by a decreaseincreases of $63.2 million and $11.1 million in operationcompression revenue and maintenance services.water solutions revenue, respectively. Gross margin decreased during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 2018 was primarily2019 due to the revenue increasedecrease explained above.above and higher expenses on a specific project. Gross margin percentage remained flat during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 2018.

Product Sales
(dollars in thousands)
 Nine Months Ended September 30,  
 2019 2018 Change % Change
Revenue$680,798
 $667,264
 $13,534
 2 %
Cost of sales (excluding depreciation and amortization expense)603,152
 580,304
 22,848
 4 %
Gross margin$77,646
 $86,960
 $(9,314) (11)%
Gross margin percentage11% 13% (2)% (15)%

The increase in revenue during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to an increase in revenue of $129.1 million in the Middle East and Africa region, partially offset by decreases in revenue of $95.3 million and $16.5 million in the North America and Asia Pacific regions, respectively. The increase in revenue in the Middle East and Africa region was primarily due to an increase of $131.0 million in processing and treating equipment revenue. The decrease in revenue in the North America region was primarily due to decreases of $164.4 million and $12.5 million in processing and treating equipment revenue and production equipment revenue, respectively, partially offset by an increase of $81.6 million in compression equipment revenue. In June 2018, we completed the sale of our PEQ assets. The decrease in revenue in the Asia Pacific region was primarily due to a decrease of $12.9 million in compression equipment revenue. Gross margin decreased during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 due to higher expenses on a specific project in the North America region. Gross margin percentage during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 decreased primarily due to the higher expenses discussed above and a shift in product mix in the North America region during the current year period.


Table of Contents

Costs and Expenses
(dollars in thousands)
Nine Months Ended September 30,  Nine Months Ended
September 30,
2019 2018 Change % Change20202019Change% Change
Selling, general and administrative$126,790
 $133,727
 $(6,937) (5)%Selling, general and administrative$95,049 $108,902 $(13,853)(13)%
Depreciation and amortization116,669
 92,321
 24,348
 26 %Depreciation and amortization100,887 113,450 (12,563)(11)%
Long-lived asset impairment8,889
 3,858
 5,031
 130 %
Restatement related charges20
 (318) 338
 (106)%
ImpairmentsImpairments1,695 8,889 (7,194)(81)%
Restructuring and other charges7,966
 1,686
 6,280
 372 %Restructuring and other charges3,550 6,342 (2,792)(44)%
Interest expense28,194
 21,787
 6,407
 29 %Interest expense29,214 28,194 1,020 4 %
Gain on extinguishment of debtGain on extinguishment of debt(3,424)— (3,424)N/A
Other (income) expense, net379
 6,339
 (5,960) (94)%Other (income) expense, net(1,169)399 (1,568)(393)%
 
Selling, general and administrative
SG&A expense decreased during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 primarily due to a decrease in compensation and associated costs, and a decreasepartially offset by the increase in third-party professional expenses.allowance for doubtful accounts primarily due to the expected impact of COVID-19 on our customers. SG&A expense as a percentage of revenue was 12%21% and 13%18% during the nine months ended September 30, 20192020 and 2018,2019, respectively.

33

Table of Contents
Depreciation and amortization
Depreciation and amortization expense during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 2018 increased2019 decreased primarily due to an increasea decrease in depreciation expense of $15.9approximately $27.9 million in the current year period resulting from an amendment tothe sale of equipment on a contract operations contract in the fourth quarter of 2018. Additionally,2019. This decrease was partially offset by an increase of approximately $16.3 million in depreciation expense of capitalizedfor installation costs increased by $8.1 million primarily due to additional depreciationand equipment on contract operations projects that were not operating in the prior year period. Capitalized installation costs included, among other things, civil engineering, piping, electrical instrumentationperiod and an additional depreciation expense of $2.6 million recognized during the nine months ended September 30, 2020 on a contract operations project management costs.due to changes in the remaining term of a contract.

Long-lived assetImpairments
During the third quarter of 2020, we impaired certain assets due to the termination of a contract operations project where it was not cost effective to move the assets and try to utilize them with a different customer. As a result, we removed them from the fleet and recorded an impairment of $1.7 million during the nine months ended September 30, 2020.
In
During the second quarter of 2019, we classified certain long-lived assets as assets held for sale in our balance sheets. In conjunction with the planned disposition of these units, we recorded impairment charges of $8.9 million to write-down these assets to their approximate fair values duringfor the nine months ended September 30, 2019 based on the expected net proceeds.

During the third quarter 2018, we evaluated idle units that had been previously culled from our fleet and were available for sale for impairment. Based upon that review, we reduced the expected proceeds from disposition for certain units. This resulted in an additional impairment of $2.1 million to reduce the book value of each unit to its estimated fair value during the nine months ended September 30, 2018. The fair value of each unit was estimated based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties.

In the fourth quarter of 2017, we classified certain PEQ assets primarily related to inventory and property, plant and equipment, net, within our product sales business as assets held for sale in our balance sheets. In June 2018, we completed the sale of our PEQ assets. During the nine months ended September 30, 2018, we recorded an impairment of $1.8 million to reduce these assets to their approximate fair values based on the expected net proceeds.

Restructuring and other charges
The energy industry’s focus on capital discipline and improving returns has caused delays in the timing of new equipment orders. As a result, in the second quarter of 2019, we began the consolidation of two of our manufacturing facilities located in Houston, Texas into one facility and announced a cost reduction plan primarily focused on workforce reductions. We incurred restructuring and other charges associated with these activities of $7.7$3.6 million and $6.1 million during the nine months ended September 30, 2019.2020 and 2019, respectively.

In the second quarter of 2018, we initiated a relocation plan in the NorthLatin America region to better align our contract operations business with our customers. As a result of this plan, during the nine months ended September 30, 2019, and 2018, we incurred restructuring and other charges of $0.2 million and $1.7 million, respectively,primarily related to relocation costs and employee termination benefits.costs.


Table of Contents

Interest expense
The increase in interest expense during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 was primarily due to a decrease in capitalized interest and a higher average balance of long-term debt.interest. During the nine months ended September 30, 20192020 and 2018,2019, the average daily outstanding borrowings of long-term debt were $508.8$496.7 million and $455.3$508.8 million, respectively.

Extinguishment of debt
During the nine months ended September 30, 2020, we purchased and retired $24.0 million principal amount of our 2017 Notes for $20.6 million including $0.3 million of accrued interest. During the nine months ended September 30, 2020, we recognized a gain on extinguishment of debt of $3.4 million, which was calculated as the difference between the repurchase price and the carrying amount of the 2017 Notes, partially offset by $0.2 million in related deferred financing costs.

Other (income) expense, net
The change in other (income) expense, net, was primarily due to foreign currency losses of $2.0 million during the nine months ended September 30, 2020 compared to foreign currency losses, net of losses on foreign currency derivatives, of $3.5 million during the nine months ended September 30, 2019 compared to foreign currency losses of $6.4 million during the nine months ended September 30, 2018.2019. Foreign currency losses and gains included translation gains, net of gains on foreign currency derivatives, of $3.8 million and translation losses, net of losses on foreign currency derivatives, of $0.1 million and translation losses of $4.2 million during the nine months ended September 30, 20192020 and 2018,2019, respectively, related to the currency remeasurement of our foreign subsidiaries’ non-functional currency denominated intercompany obligations. The change in other (income) expense, net, also included an increasea decrease of $1.0$1.1 million in gains on sale of property, plant and equipment in the current year period and a lossperiod.

34

Table of $1.7 million on the sale of our PEQ assets in the prior year period.Contents

Income Taxes
(dollars in thousands)
Nine Months Ended September 30,  Nine Months Ended
September 30,
2019 2018 Change % Change20202019Change% Change
Provision for income taxes$20,209
 $23,068
 $(2,859) (12)%Provision for income taxes$18,970 $20,209 $(1,239)(6)%
Effective tax rate(240.4)% 80.3% (320.7)% (399)%Effective tax rate(57.3)%(77.6)%20.3 %(26)%
 
Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn, or losses we incur, in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Our effective tax rate is also affected by valuation allowances recorded against loss carryforwards in the U.S. and certain other jurisdictions, foreign withholding taxes and changes in foreign currency exchange rates.

The following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21.0%21% and our effective tax rate for the nine months ended September 30, 2019:2020: (i) a $6.6 million(27.7)% negative impact resulting primarily from rate differences between U.S. and foreign jurisdictions including foreign withholding taxes, (ii) a $7.4 million(26.7)% negative impact resulting from unrecognized tax benefits under FIN 48, (iii) a (15.6)% negative impact resulting from foreign currency devaluations in Argentina, and (iii)(iv) a $7.3 million(2.7)% negative impact resulting from the recording of valuation allowances recorded against U.S. deferred tax assets.

Discontinued Operations
(dollars in thousands)
 Nine Months Ended September 30,  
 2019 2018 Change % Change
Income from discontinued operations, net of tax$6,074
 $5,116
 $958
 19%
Nine Months Ended
September 30,
20202019Change% Change
Income (loss) from discontinued operations, net of tax$(15,833)$23,695 $(39,528)(167)%
 
Income (loss) from discontinued operations, net of tax, includes our Venezuelan subsidiary’s operations that were expropriated in June 2009Belleli EPC business and our Belleli EPCU.S. compression fabrication business.
 
Income (loss) from discontinued operations, net of tax, during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 2018 increased primarily2019 decreased due to a $1.0$34.3 million increase decrease in income from U.S. compression business and a $5.4 million decrease in income from Belleli EPC. The decrease in income in U.S. compression business was primarily driven by the decrease in orders for the business and a $6.5 million impairment. The decrease in income from Belleli EPC was primarily due to $6.5 million tax benefit related to a settlement of Italian tax litigation previously recorded as an unrecognized tax benefit, partially offset by payment received from a customer for amounts that were previously reserved. For further details on our discontinued operations, see Note 43 to the Financial Statements.


Table of Contents

Liquidity and Capital Resources
 
Our unrestricted cash balance was $22.0$28.2 million at September 30, 20192020 compared to $19.3$16.7 million at December 31, 2018.2019. Working capital increased to $165.8$116.5 million at September 30, 20192020 from $108.7$109.3 million at December 31, 2018.2019. The increase in working capital was primarily due to a decrease in accounts payable and increases in contract assets and accounts receivables, partially offset by increases in contract liabilities and accrued liabilities and a decrease in contract liabilities, partially offset by a decrease in contract assets.inventory. The decrease in accounts payable was largely caused by the timing of purchases and payments to suppliers during the current year period. The decreaseincrease in contract assets was primarily driven by the timing of milestone billings on product sales projects. The increase in accounts receivables was due to a delay in payments from customers. The increase in contract liabilities was primarily driven by the change in the term of a contract operation services contract. The increase in accrued liabilities was due to the timing of payments received on a significant product sales contract in the Middle East and Africa region.interest payment of the 2017 Notes. The decrease in contract assets wereinventory was primarily driven by higherthe progression of product sales activity in North America.activity.

35

Table of Contents
Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized in the following table (in thousands):
Nine Months Ended
September 30,		Nine Months Ended
September 30,
2019 201820202019
Net cash provided by (used in) continuing operations:   Net cash provided by (used in) continuing operations:
Operating activities$120,995
 $88,793
Operating activities$25,672 $157,461 
Investing activities(168,630) (144,796)Investing activities(65,612)(166,481)
Financing activities49,486
 46,305
Financing activities74,583 49,486 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(1,298) (3,691)Effect of exchange rate changes on cash, cash equivalents and restricted cash(750)(1,298)
Discontinued operations1,967
 1,210
Discontinued operations(20,766)(36,648)
Net change in cash, cash equivalents and restricted cash$2,520
 $(12,179)Net change in cash, cash equivalents and restricted cash$13,127 $2,520 
 
Operating Activities.  The increasedecrease in net cash provided by operating activities during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 was primarily attributable to better collections of in-period billings during the current year perioda decrease in gross margin for our product sales segment and an increasea decrease in cash received from upfront billings on contract operations projects. Working capital changes during the nine months ended September 30, 20192020 included a decrease of $63.3$13.5 million in accounts payable and a decreaseother liabilities, an increase of $49.3$12.6 million in contract assets.assets and an increase of $10.8 million in accounts receivable and notes. Working capital changes during the nine months ended September 30, 20182019 included an increase of $51.1$68.0 million in contract liabilities, an increase of $18.3 million in inventory and an increasea decrease of $16.3$23.9 million in contract assets.
Investing Activities.  The increasedecrease in net cash used in investing activities during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 was primarily attributable to a $19.9$104.1 million increasedecrease in capital expenditures. The increasedecrease in capital expenditures was primarily driven by an increase inthe timing of awards and growth capital expenditures onfor new contract operations services contracts in the Latin America region.projects.

Financing Activities.  The increase in net cash provided by financing activities during the nine months ended September 30, 20192020 compared to the nine months ended September 30, 20182019 was primarily attributable to an increase in net borrowingsa decrease of $41.0 million on our long-term debt, partially offset by an increase of $37.8$40.7 million in purchases of treasury stock.stock, partially offset by a decrease in net borrowings of $15.2 million on our long-term debt.

Discontinued Operations.  The decrease in net cash used in discontinued operations during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to working capital changes related to our U.S. compression fabrication business.

Capital Requirements.  Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of equipment required for us to render those contract operations services to our customers. Our capital requirements have consisted primarily of, and we anticipate will continue to consist of, the following:
•growth capital expenditures, which are made to expand or to replace partially or fully depreciated assets or to expand the operating capacity or revenue generating capabilities of existing or new assets, whether through construction, acquisition or modification; and
•maintenance capital expenditures, which are made to maintain the existing operating capacity of our assets and related cash flows further extending the useful lives of the assets.


Table of Contents

The majority of our growth capital expenditures are related to installation costs on contract operations services projects and acquisition costs of new compressor units and processing and treating equipment that we add to our contract operations fleet. In addition, growth capital expenditures can include the upgrading of major components on an existing compressor unit where the current configuration of the compressor unit is no longer in demand and the compressor unit is not likely to return to an operating status without the capital expenditures. These latter expenditures substantially modify the operating parameters of the compressor unit such that it can be used in applications for which it previously was not suited. Maintenance capital expenditures are related to major overhauls of significant components of a compressor unit, such as the engine, compressor and cooler, that return the components to a “like new” condition, but do not modify the applications for which the compressor unit was designed.

36

Table of Contents
We generally invest funds necessary to manufacture contract operations fleet additions when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new equipment expenditure is expected to generate economic returns over its expected useful life that exceeds our targeted return on capital. We currently plan to spend approximately $190$75 million to $200$85 million in capital expenditures during 2019,2020, including (1) approximately $155$55 million to $65 million on contract operations growth capital expenditures and (2) approximately $35 million to $40$20 million on equipment maintenance capital related to our contract operations business and other capital expenditures.

Historically, we have financed capital expenditures with a combination of net cash provided by operating and financing activities. Our ability to access the capital markets may be restricted at the time when we would like, or need, to do so, which could have an adverse impact on the cost and access to capital and our ability to maintain our operations and to grow. For example, COVID-19 disrupted the broader financial markets and the capital markets for energy service related companies continue to be impacted. If any of our lenders become unable to perform their obligations under the Credit Agreement, our borrowing capacity under our revolving credit facility could be reduced. Inability to borrow additional amounts under our revolving credit facility could limit our ability to fund our future growth and operations. Based on current market conditions, we expect that net cash provided by operating activities and borrowings under our revolving credit facility will be sufficient to finance our operating expenditures, capital expenditures and other contractual cash obligations, including our debt obligations. However, if net cash provided by operating activities and borrowings under our revolving credit facility are not sufficient, we may seek additional debt or equity financing.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and financial markets and created significant volatility and disruption across most industries. Efforts to mitigate the spread of COVID-19 have also resulted in decreased energy demand and additional weakness in energy pricing. The broader implications of COVID-19 on our customers and our long-term future results of operations and overall financial condition remains uncertain.

Long-Term Debt. We and our wholly owned subsidiary, Exterran Energy Solutions, L.P. (“EESLP”), are parties to an amended and restated credit agreement (the “Credit Agreement”) consisting of a $700.0 million revolving credit facility expiring in October 2023.

During the nine months ended September 30, 20192020 and 2018,2019, the average daily outstanding borrowings of long-term debt were $508.8$496.7 million and $455.3$508.8 million, respectively. The weighted average annual interest rate on outstanding borrowings under our revolving credit facility at September 30, 2020 and 2019 was 2.4% and 2018 was 4.1% and 4.0%, respectively. LIBOR and certain other “benchmarks” arehave been the subject of recent national, international and other regulatory guidance and proposals for reform. In particular, on July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is unclear whether, at that time, LIBOR will cease to exist or if new methods of calculating LIBOR will be established. Central banks and regulators in a number of major jurisdictions (for example, U.S., United Kingdom, European Union, Switzerland, and Japan) have convened working groups to find and implement the transition to suitable replacement benchmarks. In the U.S. the Alternative Reference Rates Committee, a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, identified the Secured Overnight Financing Rate, a rate based on U.S. report trading, as its preferred alternative rate for LIBOR. We are in the beginning stages of creating a program that focuses on identifying, evaluating, and monitoring financial and non-financial risks that may result if LIBOR rates are no longer published after 2021.

As of September 30, 2019,2020, we had $126.0$170.0 million in outstanding borrowings and $23.0$11.8 million in outstanding letters of credit under our revolving credit facility. At September 30, 2019,2020, taking into account guarantees through letters of credit, we had undrawn capacity of $551.0$518.2 million under our revolving credit facility. Our Amended Credit Agreement limits our senior secured leverageTotal Debt to EBITDA ratio (as defined in the Amended Credit Agreement) on the last day of the fiscal quarter to no greater than 2.754.50 to 1.0. As a result of this limitation, $472.9$145.9 million of the $551.0$518.2 million of undrawn capacity under our revolving credit facility was available for additional borrowings as of September 30, 2019.2020.

The Credit Agreement contains various covenants with which we, EESLP and our respective restricted subsidiaries must comply, including, but not limited to, limitations on the incurrence of indebtedness, investments, liens on assets, repurchasing equity, making distributions, transactions with affiliates, mergers, consolidations, dispositions of assets and other provisions customary in similar types of agreements. We are required to maintain, on a consolidated basis, a minimum interest coverage ratio (as defined in the Credit Agreement) of 2.25 to 1.00; a maximum total leverage ratio (as defined in the Credit Agreement) of 4.50 to 1.00; and a maximum senior secured leverage ratio (as defined in the Credit Agreement) of 2.75 to 1.00. As of September 30, 2019,2020, we maintained a 7.24.3 to 1.0 interest coverage ratio, a 2.33.5 to 1.0 total leverage ratio and a 0.61.2 to 1.0 senior secured leverage ratio. As of September 30, 2019,2020, we were in compliance with all financial covenants under the Credit Agreement.

37

Table of Contents
In April 2017, our 100% owned subsidiaries EESLP and EES Finance Corp. issued $375.0 million aggregate principal amount of 8.125% senior unsecured notes due 2025 (the “2017 Notes”).the 2017 Notes. We guarantee the 2017 Notes on a senior unsecured basis. We may redeem the 2017 Notes at any time in cash, in whole or part, at certain redemption prices, including the applicable make-whole premium plus accrued and unpaid interest, if any, to the date of redemption.

During the nine months ended September 30, 2020, we purchased and retired $24.0 million principal amount of our 2017 Notes for $20.6 million (including $0.3 million of accrued interest) resulting in a gain on extinguishment of debt of $3.4 million. The gain was calculated as the difference between the repurchase price and the carrying amount of the 2017 Notes, partially offset by $0.2 million in related deferred financing costs.

We may from time to time seek to retire, extend or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such extensions, repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Table of Contents


Historically, we have financed capital expenditures with a combination of net cash provided by operating and financing activities. Our ability to access the capital markets may be restricted at the time when we would like, or need, to do so, which could have an adverse impact on our ability to maintain our operations and to grow. If any of our lenders become unable to perform their obligations under the Credit Agreement, our borrowing capacity under our revolving credit facility could be reduced. Inability to borrow additional amounts under our revolving credit facility could limit our ability to fund our future growth and operations. Based on current market conditions, we expect that net cash provided by operating activities and borrowings under our revolving credit facility will be sufficient to finance our operating expenditures, capital expenditures and other contractual cash obligations, including our debt obligations. However, if net cash provided by operating activities and borrowings under our revolving credit facility are not sufficient, we may seek additional debt or equity financing.

Unrestricted Cash. Of our $22.0$28.2 million unrestricted cash balance at September 30, 2019, $21.32020, $27.4 million was held by our non-U.S. subsidiaries. In the event of a distribution of earnings to the U.S. in the form of dividends, we may be subject to foreign withholding taxes. We do not believe that the cash held by our non-U.S. subsidiaries has an adverse impact on our liquidity because we expect that the cash we generate in the U.S., the available borrowing capacity under our revolving credit facility and the repayment of intercompany liabilities from our non-U.S. subsidiaries will be sufficient to fund the cash needs of our U.S. operations for the foreseeable future.

Share Repurchase Program. On February 20, 2019, our board of directors approved a share repurchase program under which the Company is authorized to purchase up to $100.0 million of its outstanding common stock through February 2022. The timing and method of any repurchases under the program will depend on a variety of factors, including prevailing market conditions among others. Purchases under the program may be suspended or discontinued at any time and we have no obligation to repurchase any amount of our common shares under the program. Shares of common stock acquired through the repurchase program are held in treasury at cost. During the nine months ended September 30, 2019, we repurchased 3,054,338 shares of our common stock for $38.9 million in connection with our share repurchase program. During the nine months ended September 30, 2020, we did not repurchase any shares under this program. As of September 30, 2019,2020, the remaining authorized repurchase amount under the share repurchase program was $61.1$57.7 million.

Dividends.  We do not currently anticipate paying cash dividends on our common stock. We currently intend to retain our future earnings to support the growth and development of our business. The declaration of any future cash dividends and, if declared, the amount of any such dividends, will be subject to our financial condition, earnings, capital requirements, financial covenants, applicable law and other factors our board of directors deems relevant.

Supplemental Guarantor Financial Information

In April 2017, our 100% owned subsidiaries EESLP and EES Finance Corp. (together, the “Issuers”) issued the 2017 Notes, which consists of $375.0 million aggregate principal amount senior unsecured notes. The 2017 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by Exterran Corporation (“Parent”). The 2017 Notes and Parent’s guarantee are:
•Senior unsecured obligations of each of the Issuers and the Parent, as applicable;
•Equal in right of payment with all of the existing and future senior unsecured indebtedness and senior unsecured guarantees of each of the Issuers and the Parent, as applicable;
•Senior in right of payment to all subordinated indebtedness and subordinated guarantees of each of the Issuers and the Parent, as applicable;
•Effectively junior in right of payment to all existing and future secured indebtedness and secured guarantees of each of the Issuers and the Parent, as applicable, to the extent of the value of the assets securing such indebtedness or guarantees; and
•Structurally junior in right of payment to all existing and future indebtedness, guarantees and other liabilities (including trade payables) and any preferred equity of each of the Parent’s subsidiaries (other than the Issuers) that are not guarantors of the 2017 Notes.

Parent’s guarantee will be automatically and unconditionally released and discharged upon (i) the merger of the Parent into the Issuers, (ii) a legal defeasance, covenant defeasance or satisfaction and discharge of the indenture governing the 2017 Notes or (iii) the liquidation or dissolution of the Parent, provided in each case no default or event of default has occurred and is continuing under the indenture governing the 2017 Notes.
38

Table of Contents

Federal bankruptcy and state fraudulent transfer laws permit a court to void all or a portion of the obligations of the Parent pursuant to its guarantee, or to subordinate the Parent’s obligations under its guarantee to claims of the Parent’s other creditors, reducing or eliminating the ability to recover under the guarantee. Although laws differ among jurisdictions, in general, under applicable fraudulent transfer or conveyance laws, the guarantee could be voided as a fraudulent transfer or conveyance if (i) the guarantee was incurred with the intent of hindering, delaying or defrauding creditors or (ii) the Parent received less than reasonably equivalent value or fair consideration in return for incurring the guarantee and either (x) the Parent was insolvent or rendered insolvent by reason of the incurrence of the guarantee or subsequently became insolvent for other reasons, (y) the incurrence of the guarantee left the Parent with an unreasonably small amount of capital to carry on the business, or (z) the Parent intended to, or believed that it would, incur debts beyond its ability to pay such debts as they mature. A court would likely find that Parent did not receive reasonably equivalent value or fair consideration for its guarantee if it determined that the Parent did not substantially benefit directly or indirectly from the issuance of the 2017 Notes. If a court were to void a guarantee, noteholders would no longer have a claim against the Parent. In addition, the court might direct noteholders to repay any amounts that you already received from the Parent. Parent’s guarantee contains a provision intended to limit the Parent’s liability under the guarantee to the maximum amount that the Parent could incur without causing the incurrence of obligations under its guarantee to be deemed a fraudulent transfer. This provision may not be effective to protect the guarantee from being voided under fraudulent transfer law.

All consolidated subsidiaries of Exterran other than the Issuers are collectively referred to as the “Non-Guarantor Subsidiaries.” The 2017 Notes are structurally subordinated to any indebtedness and other liabilities (including trade payables) of any of the Non-Guarantor Subsidiaries. The Non-Guarantor Subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the 2017 Notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Holders of the 2017 Notes will have no claim as a creditor against any Non-Guarantor Subsidiaries. In the event of bankruptcy, liquidation or reorganization of any of the Non-Guarantor Subsidiaries, such subsidiaries will pay current outstanding obligations to the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Parent or the Issuers. As a result, in the context of a bankruptcy, liquidation or reorganization, holders of the 2017 Notes would likely receive less, ratably, than holders of indebtedness and other liabilities (including trade payables of such entities).

The Parent and EESLP are also parties to our credit agreement, which covenants with which the Parent, EESLP and our respective restricted subsidiaries must comply, including, but not limited to, limitations on the incurrence of indebtedness, investments, liens on assets, repurchasing equity, making distributions, transactions with affiliates, mergers, consolidations, dispositions of assets and other provisions customary in similar types of agreements. These covenants may impact the ability of the Parent and EESLP to repay the 2017 Notes or amounts owing under Parent’s guarantee.

Summarized Financial Information (in thousands)

As a result of the Parent’s guarantee, we are presenting the following summarized financial information for the Issuers’ and Parent (collectively referred to as the “Obligated Group”) pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the following summarized financial information, transactions between the Parent and the Issuers, presented on a combined basis, have been eliminated and information for the Non-Guarantor Subsidiaries have been excluded. Amounts due from or due to the Non-Guarantor Subsidiaries and other related parties, as applicable, have been separately presented within the summarized financial information.

Nine Months Ended September 30, 2020
Summarized Statement of Operations:
Revenues(1)
$127,435 
Cost of sales(1)
93,314 
Loss from continuing operations(118,715)
Net loss(135,377)

(1)Includes $61.2 million of revenue and $40.6 million of cost of sales for intercompany sales from the Obligated Group the Non-Guarantor Subsidiaries during the nine months ended September 30, 2020.

39

Table of Contents
September 30, 2020December 31, 2019
Summarized Balance Sheet:
ASSETS
Intercompany receivables due from non-guarantors$190,323 $177,649 
Total current assets323,244 353,431 
Total long-term assets256,063 249,732 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Intercompany payables due to non-guarantors$363,609 $399,645 
Total current liabilities481,885 552,941 
Long-term liabilities571,058 495,829 

Non-GAAP Financial Measures
 
We define EBITDA, as adjusted, as net income (loss) excluding income (loss) from discontinued operations (net of tax), cumulative effect of accounting changes (net of tax), income taxes, interest expense (including debt extinguishment costs), depreciation and amortization expense, impairment charges, restructuring and other charges, non-cash gains or losses from foreign currency exchange rate changes recorded on intercompany obligations, expensed acquisition costs, gain on extinguishment of debt and other items. We believe EBITDA, as adjusted, is an important measure of operating performance because it allows management, investors and others to evaluate and compare our core operating results from period to period by removing the impact of our capital structure (interest expense from our outstanding debt), asset base (depreciation and amortization), our subsidiaries’ capital structure (non-cash gains or losses from foreign currency exchange rate changes on intercompany obligations), tax consequences, impairment charges, restructuring and other charges, expensed acquisition costs, gain on extinguishment of debt and other items. Management uses EBITDA, as adjusted, as a supplemental measure to review current period operating performance, comparability measures and performance measures for period to period comparisons. In addition, the compensation committee has used EBITDA, as adjusted, in evaluating the performance of the Company and management and in evaluating certain components of executive compensation, including performance-based annual incentive programs. Our EBITDA, as adjusted, may not be comparable to a similarly titled measure of another company because other entities may not calculate EBITDA in the same manner.

EBITDA, as adjusted, is not a measure of financial performance under GAAP, and should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities or any other measure determined in accordance with GAAP. Items excluded from EBITDA, as adjusted, are significant and necessary components to the operation of our business, and, therefore, EBITDA, as adjusted, should only be used as a supplemental measure of our operating performance.


Table of Contents

The following table reconciles our net income (loss)loss to EBITDA, as adjusted (in thousands):
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Net loss$(17,721)$(9,841)$(67,914)$(22,540)
(Income) loss from discontinued operations, net of tax998 (3,153)15,833 (23,695)
Depreciation and amortization36,630 41,106 100,887 113,450 
Impairments1,695 2,970 1,695 8,889 
Restatement related charges, net— — — 20 
Restructuring and other charges238 1,257 3,550 6,342 
Interest expense9,623 10,103 29,214 28,194 
Gain on extinguishment of debt(780)— (3,424)— 
(Gain) loss on currency exchange rate remeasurement of intercompany balances(624)884 (3,822)55 
Provision for income taxes5,745 477 18,970 20,209 
EBITDA, as adjusted$35,804 $43,803 $94,989 $130,924 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019
2018 2019 2018
Net income (loss)$(9,841) $5,369
 $(22,540) $10,781
(Income) loss from discontinued operations, net of tax1,546
 (2,173) (6,074) (5,116)
Depreciation and amortization42,133
 31,108
 116,669
 92,321
Long-lived asset impairment2,970
 2,054
 8,889
 3,858
Restatement related charges (recoveries), net—
 (342) 20
 (318)
Restructuring and other charges1,794
 264
 7,966
 1,686
Interest expense10,103
 7,685
 28,194
 21,787
Loss on currency exchange rate remeasurement of intercompany balances884
 164
 55
 4,245
Loss on sale of business—
 —
 —
 1,714
Provision for income taxes477
 7,954
 20,209
 23,068
EBITDA, as adjusted$50,066
 $52,083
 $153,388
 $154,026

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.
40

Table of Contents

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks associated with changes in foreign currency exchange rates due to our significant international operations. While the majority of our revenue contracts are denominated in the U.S. dollar, certain contracts or portions of certain contracts, most notably within our contract operations segment, are exposed to foreign currency fluctuations. Approximately 20%15% of revenues in our contract operations segment are denominated in a currency other than the U.S. dollar. The currencies for which we have our largest exchange rate exposures are related to changes in the Argentine Peso and the Brazilian Real. During the nine months ended September 30, 2019,2020, the Argentine Peso depreciated by approximately 34%21% and Brazilian Real appreciateddepreciated by approximately 7%29%. The impact of foreign currency risk on income for these contracts is generally mitigated by matching costs with revenues in the same currency.

Additionally, the net assets and liabilities of these operations are exposed to changes in currency exchange rates. These operations may also have net assets and liabilities not denominated in their functional currency, which exposes us to changes in foreign currency exchange rates that impact income. We recorded foreign currency losses of $2.7$2.0 million and $6.4foreign currency losses of $2.7 million in our statements of operations during the nine months ended September 30, 20192020 and 2018,2019, respectively. Our foreign currency gains and losses are primarily due to exchange rate fluctuations related to monetary asset balances denominated in currencies other than the functional currency, including foreign currency exchange rate changes recorded on intercompany obligations. Our material exchange rate exposure relates to intercompany loans to subsidiaries whose functional currency are the Brazilian Real and Canadian Dollar, which loans carried U.S. dollars balances of $3.9 million and $23.4 million, respectively, as of September 30, 2019. Foreign currency losses included translation gains of $0.2$3.8 million and translation losses of $4.2$0.2 million during the nine months ended September 30, 20192020 and 2018,2019, respectively, related to the functional currency remeasurement of our foreign subsidiaries’ non-functional currency denominated intercompany obligations. During the nine months ended September 30, 2020 and 2019, we entered into forward currency exchange contracts to mitigate exposures in U.S. dollars related to the Argentine Peso, Brazilian Real and Indonesian Rupiah. As a result of entering into these contracts, we recognized losses of $0.8 million during the nine months ended September 30, 2019. Changes in exchange rates may create gains or losses in future periods to the extent we maintain net assets and liabilities not denominated in the functional currency.

Item 4.  Controls and Procedures
 
This Item 4 includes information concerning the controls and controls evaluation referred to in the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Exchange Act included in this Quarterly Report as Exhibits 31.1 and 31.2.


Table of Contents

Management’s Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.

In connection with the preparation of this Quarterly Report on Form 10-Q, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019.2020. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principle financial officer, on a timely basis to ensure that it is recoded,recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
41

Table of Contents

PART II.  OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these actions will not have a material adverse effect on our financial position, results of operations or cash flows. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our financial position, results of operations or cash flows.

Contemporaneously with filing the Form 8-K on April 26, 2016, we self-reported the errors and possible irregularities at Belleli EPC to the SEC. On April 8, 2019, the SEC provided written notice to us stating that based on the information they have as of this date, they have concluded their investigation and do not intend to recommend enforcement action by the SEC against us in connection with this matter.

Item 1A.  Risk Factors
 
There have been no material changes or updates to our risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019, except as follows:

Natural disasters, public health crises, including the COVID-19 pandemic, and other catastrophic events outside of our control may adversely affect our business or the business of third parties on which we depend.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic and aggressive actions taken in response to it have negatively impacted the global economy, disrupted global supply chains and financial markets and created significant volatility and disruption across most industries, including ours. In response to the pandemic, governmental authorities mandated shutdowns, travel restrictions, social distancing requirements, stay at home orders and advisories and other restrictions. Some (but not all) of these restrictions have been gradually relaxed over the summer and early fall of this year but may be re-imposed in the future in areas that experience a resurgence of COVID-19 cases.

The extent to which the coronavirus pandemic will continue to impact our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on our customers and customer demand for our products, solutions, and services; our ability to sell and provide our products, solutions, and services, including as a result of supplier disruptions, travel restrictions, economic shutdowns and people working from home; the ability of our customers to pay for our products, solutions, and services; and any closures of our and our customers’ offices and facilities.

We are following local governmental guidance for viral spread mitigation, including having many of our employees who would traditionally work in an office work from home, and have put in place additional health and safety measures to protect our employees, customers and other parties who are working at our operating sites. While some of our employees can work remotely, many of our projects require our employees to travel to operating sites. Certain of our customers and significant projects are located in areas where travel restrictions have been imposed and we may be unable to fulfill our obligations to those customers as a result. The ability of our employees and our suppliers’ and customers’ employees to work may be significantly impacted by individuals contracting or being exposed to COVID-19, or by their inability to travel as a result of the mitigation measures noted above, which may affect our ability to fulfill our obligations to our customers. See Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Impact of COVID-19 on our Business for further discussion of our response to, and the impact of, the COVID-19 pandemic on our business.

Many countries significantly shut down their economies to mitigate the spreading of the virus, thus impacting consumer spending including reduced demand for oil and natural gas. Although certain economies are reopening. Any full or partial future shutdowns imposed in an attempt to gain further control over the spread of the virus could directly or indirectly impact the demand for and pricing of our products and services and negatively impact our operating results especially if there are returns to shutdowns in the future. Further deterioration in economic conditions, as a result of the COVID-19 pandemic or otherwise, could lead to a further or prolonged decline in demand for our products and services and negatively impact our business. For example, some customers that have been impacted by COVID-19 have slowed down decision making, delayed planned work and have sought to terminate or renegotiate existing agreements. We have also increased our reserve for uncollectible accounts in response to the impact of COVID-19 on our business, but we may have to increase it further as the virus continues to impact demand and pricing of oil and natural gas and our customers’ financial condition. The pandemic has also and may again adversely impact financial markets and corporate credit markets which could adversely impact our access to financing or the terms of any such financing. These types of events are unpredictable and can materially affect our business, financial condition, results of operations and cash flows.
42

Table of Contents

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
(a)  Not applicable.
 
(b)  Not applicable.

(c)  The following table summarizes our repurchases of equity securities during the three months ended September 30, 2019:2020:
Period
Total Number 
of Shares 
Repurchased(1)
 
Average
Price Paid
Per Unit
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (2)
 
Approximate Dollar Value of Shares yet to be Purchased Under the Publicly Announced
Plans or Programs (2)
July 1, 2019 - July 31, 2019454
 $17.90
 —
 $81,213,252
August 1, 2019 - August 31, 201911,384
 10.78
 756,261
 73,449,557
September 1, 2019 - September 30, 2019142
 13.01
 1,007,999
 61,061,250
Total11,980
 $11.08
 1,764,260
 $61,061,250
Period
Total Number 
of Shares 
Repurchased(1)
Average
Price Paid
Per Unit
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (2)
Approximate Dollar Value of Shares yet to be Purchased Under the Publicly Announced
Plans or Programs (2)
July 1, 2020 - July 31, 2020504 $5.22 — $57,726,011 
August 1, 2020 - August 31, 20201,372 5.94 — 57,726,011 
September 1, 2020 - September 30, 2020142 4.06 — 57,726,011 
Total2,018 $5.63 — $57,726,011 
____________________
(1)
(1)     Total number of shares repurchased includes 2,018 shares withheld to satisfy employees’ tax withholding obligations in connection with vesting of restricted stock awards during the period.
Includes shares withheld to satisfy employees’ tax withholding obligations in connection with vesting of restricted stock awards during the period.
(2)
On February 20, 2019, our board of directors approved a share repurchase program, under which the Company is authorized to purchase up to $100.0 million of its outstanding common stock through February 2022. The timing and method of any repurchases under the program will depend on a variety of factors, including prevailing market conditions among others. Purchases under the program may be suspended or discontinued at any time, and we have no obligation to repurchase any amount of our common shares under the program. Shares of common stock acquired through the repurchase program are held in treasury at cost.

(2)     On February 20, 2019, our board of directors approved a share repurchase program, under which the Company is authorized to purchase up to $100.0 million of its outstanding common stock through February 2022. The timing and method of any repurchases under the program will depend on a variety of factors, including prevailing market conditions among others. Purchases under the program may be suspended or discontinued at any time, and we have no obligation to repurchase any amount of our common shares under the program. Shares of common stock acquired through the repurchase program are held in treasury at cost.

Item 3.  Defaults Upon Senior Securities
 
None.
 
Item 4.  Mine Safety Disclosures
 
Not applicable.
 
Item 5.  Other Information
 
None.
43

Table of Contents

Item 6.  Exhibits

Exhibit No.Description
2.1
2.2
31.1*22.1*
31.1*
31.2*
32.1**
32.2**
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Labels Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 1010).

*†Filed herewith.Management contract or compensation plan or arrangement.
*Filed herewith.
**Furnished, not filed.


44

Table of Contents

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Exterran Corporation
Date: November 5, 20192, 2020By:/s/ DAVID A. BARTA
David A. Barta
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)


50
45