Archrock, Inc. - Quarter Report: 2011 June (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-33666

EXTERRAN HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		74-3204509
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
16666 Northchase Drive
Houston, Texas		77060
(Address of principal executive offices)		(Zip Code)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of the common stock of the registrant outstanding as of July 28, 2011: 63,936,692 shares.

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Comprehensive Income (Loss)			5
Condensed Consolidated Statements of 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			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 6. Exhibits			48
SIGNATURES			49
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXTERRAN HOLDINGS, INC.

(In thousands, except par value and share amounts)

(unaudited)

		June 30,				December 31,
		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	35,097			$	44,616
Restricted cash			1,757				1,941
Accounts receivable, net of allowance of $11,997 and $13,108, respectively			414,375				429,047
Inventory, net			396,670				396,287
Costs and estimated earnings in excess of billings on uncompleted contracts			164,104				147,901
Current deferred income taxes			38,110				36,093
Other current assets			105,360				98,801
Current assets associated with discontinued operations			4,759				5,918
Total current assets			1,160,232				1,160,604
Property, plant and equipment, net			3,035,154				3,092,652
Goodwill, net			197,475				196,680
Intangible and other assets, net			265,333				282,428
Long-term assets associated with discontinued operations			8,794				9,172
Total assets		$	4,666,988			$	4,741,536
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable, trade		$	166,049			$	157,206
Accrued liabilities			279,164				330,551
Deferred revenue			115,364				124,282
Billings on uncompleted contracts in excess of costs and estimated earnings			97,722				130,610
Current liabilities associated with discontinued operations			15,408				15,554
Total current liabilities			673,707				758,203
Long-term debt			1,704,200				1,897,147
Other long-term liabilities			122,323				150,227
Deferred income taxes			174,486				120,424
Long-term liabilities associated with discontinued operations			14,184				13,111
Total liabilities			2,688,900				2,939,112
Commitments and contingencies (Note 11)
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; 69,932,197 and 69,071,027 shares issued, respectively			699				691
Additional paid-in capital			3,635,497				3,500,292
Accumulated other comprehensive income (loss)			8,446				(20,225	)
Accumulated deficit			(1,725,370	)			(1,667,314	)
Treasury stock — 5,995,363 and 5,841,087 common shares, at cost, respectively			(206,411	)			(203,996	)
Total Exterran stockholders’ equity			1,712,861				1,609,448
Noncontrolling interest			265,227				192,976
Total equity			1,978,088				1,802,424
Total liabilities and equity		$	4,666,988			$	4,741,536

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

EXTERRAN HOLDINGS, INC.

(In thousands, except per share amounts)

(unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Revenues:
North America contract operations		$	150,755			$	152,048			$	301,809			$	304,675
International contract operations			110,944				131,087				216,625				240,827
Aftermarket services			94,142				83,363				175,840				153,686
Fabrication			301,731				277,324				581,777				520,942
			657,572				643,822				1,276,051				1,220,130
Costs and Expenses:
Cost of sales (excluding depreciation and amortization expense):
North America contract operations			75,509				74,811				156,018				146,186
International contract operations			49,766				42,873				90,732				83,728
Aftermarket services			86,533				70,290				159,071				126,902
Fabrication			269,352				246,398				508,643				443,271
Selling, general and administrative			92,192				94,166				183,473				178,217
Depreciation and amortization			92,676				106,188				183,154				197,963
Long-lived asset impairment			2,063				745				2,063				2,452
Interest expense			34,586				32,608				71,756				65,542
Equity in loss of non-consolidated affiliates			—				348				—				348
Other (income) expense, net			(2,951	)			(2,485	)			(3,365	)			(4,668	)
			699,726				665,942				1,351,545				1,239,941
Loss before income taxes			(42,154	)			(22,120	)			(75,494	)			(19,811	)
Provision for (benefit from) income taxes			(12,499	)			184				(17,513	)			(3,815	)
Loss from continuing operations			(29,655	)			(22,304	)			(57,981	)			(15,996	)
Income (loss) from discontinued operations, net of tax			(569	)			38,957				(2,707	)			49,382
Net income (loss)			(30,224	)			16,653				(60,688	)			33,386
Less: Net loss attributable to the noncontrolling interest			2,198				873				2,632				802
Net income (loss) attributable to Exterran stockholders		$	(28,026	)		$	17,526			$	(58,056	)		$	34,188
Basic income (loss) per common share:
Loss from continuing operations attributable to Exterran stockholders		$	(0.44	)		$	(0.35	)		$	(0.89	)		$	(0.25	)
Income (loss) from discontinued operations attributable to Exterran stockholders			(0.01	)			0.63				(0.04	)			0.80
Net income (loss) attributable to Exterran stockholders		$	(0.45	)		$	0.28			$	(0.93	)		$	0.55
Diluted income (loss) per common share:
Loss from continuing operations attributable to Exterran stockholders		$	(0.44	)		$	(0.35	)		$	(0.89	)		$	(0.25	)
Income (loss) from discontinued operations attributable to Exterran stockholders			(0.01	)			0.63				(0.04	)			0.80
Net income (loss) attributable to Exterran stockholders		$	(0.45	)		$	0.28			$	(0.93	)		$	0.55
Weighted average common and equivalent shares outstanding:
Basic			62,669				62,044				62,529				61,925
Diluted			62,669				62,044				62,529				61,925

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

EXTERRAN HOLDINGS, INC.

(In thousands)

(unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income (loss)		$	(30,224	)		$	16,653			$	(60,688	)		$	33,386
Other comprehensive income (loss), net of tax:
Change in fair value of derivative financial instruments			(3,714	)			(2,108	)			(20	)			(2,975	)
Adjustments from sale of Partnership units			142				—				1,184				—
Amortization of payments to terminate interest rate swaps			4,873				—				9,722				—
Foreign currency translation adjustment			2,570				(10,509	)			16,186				(15,917	)
Total other comprehensive income (loss)			3,871				(12,617	)			27,072				(18,892	)
Comprehensive income (loss)			(26,353	)			4,036				(33,616	)			14,494
Less: Comprehensive loss attributable to the noncontrolling interest			3,778				501				4,231				489
Comprehensive income (loss) attributable to Exterran		$	(22,575	)		$	4,537			$	(29,385	)		$	14,983

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

EXTERRAN HOLDINGS, INC.

(In thousands)

(unaudited)

		Exterran Holdings, Inc. Stockholders
										Accumulated
						Additional				Other
		Common				Paid-in				Comprehensive				Treasury				Accumulated				Noncontrolling
		Stock				Capital				Income (loss)				Stock				Deficit				Interest				Total
Balance at December 31, 2009		$	682			$	3,434,618			$	(27,879	)		$	(201,935	)		$	(1,565,489	)		$	176,862			$	1,816,859
Treasury stock purchased															(1,971	)											(1,971	)
Options exercised			1				655																				656
Shares issued in employee stock purchase plan			1				1,223																				1,224
Stock-based compensation expense, net of forfeitures			6				11,622																86				11,714
Income tax expense from stock-based compensation expense							(1,138	)																			(1,138	)
Cash distribution to noncontrolling unitholders of the Partnership																							(7,753	)			(7,753	)
Other																							92				92
Comprehensive income (loss):
Net income (loss)																			34,188				(802	)			33,386
Derivatives change in fair value, net of tax											(3,288	)											313				(2,975	)
Foreign currency translation adjustment											(15,917	)															(15,917	)
Balance at June 30, 2010		$	690			$	3,446,980			$	(47,084	)		$	(203,906	)		$	(1,531,301	)		$	168,798			$	1,834,177
Balance at December 31, 2010		$	691			$	3,500,292			$	(20,225	)		$	(203,996	)		$	(1,667,314	)		$	192,976			$	1,802,424
Treasury stock purchased															(2,415	)											(2,415	)
Options exercised							487																				487
Shares issued in employee stock purchase plan							940																				940
Stock-based compensation, net of forfeitures			8				10,318																133				10,459
Income tax expense from stock-based compensation expense							(221	)																			(221	)
Net proceeds from sale of Partnership units, net of tax							123,681				1,184												92,190				217,055
Cash distribution to noncontrolling unitholders of the Partnership																							(15,841	)			(15,841	)
Comprehensive income (loss):
Net loss																			(58,056	)			(2,632	)			(60,688	)
Derivatives change in fair value, net of tax											1,579												(1,599	)			(20	)
Amortization of payments to terminate interest rate swaps, net of tax											9,722																9,722
Foreign currency translation adjustment											16,186																16,186
Balance at June 30, 2011		$	699			$	3,635,497			$	8,446			$	(206,411	)		$	(1,725,370	)		$	265,227			$	1,978,088

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

EXTERRAN HOLDINGS, INC.

(In thousands)

(unaudited)

		Six Months Ended June 30,
		2011				2010
Cash flows from operating activities:
Net income (loss)		$	(60,688	)		$	33,386
Adjustments:
Depreciation and amortization			183,154				197,963
Long-lived asset impairment			2,063				2,452
Deferred financing cost amortization			4,393				2,537
(Income) loss from discontinued operations, net of tax			2,707				(49,382	)
Amortization of debt discount			8,902				7,947
Provision for doubtful accounts			74				3,169
Gain on sale of property, plant and equipment			(3,140	)			(2,566	)
Equity in loss of non-consolidated affiliates, net of dividends received			—				348
Interest rate swaps			—				557
Amortization of payments to terminate interest rate swaps			9,722				—
(Gain) loss on remeasurement of intercompany balances			(1,173	)			2,774
Stock-based compensation expense			10,326				11,714
Deferred income tax provision			(24,770	)			(21,421	)
Changes in assets and liabilities:
Accounts receivable and notes			(1,842	)			21,310
Inventory			(5,739	)			73,097
Costs and estimated earnings versus billings on uncompleted contracts			(46,037	)			(33,403	)
Prepaid and other current assets			(4,147	)			24,043
Accounts payable and other liabilities			(66,704	)			1,279
Deferred revenue			(12,207	)			(72,932	)
Other			(375	)			(7,209	)
Net cash provided by (used in) continuing operations			(5,481	)			195,663
Net cash provided by (used in) discontinued operations			662				(3,880	)
Net cash provided by (used in) operating activities			(4,819	)			191,783
Cash flows from investing activities:
Capital expenditures			(107,483	)			(109,399	)
Proceeds from sale of property, plant and equipment			32,545				18,404
Cash invested in non-consolidated affiliates			—				(348	)
Net proceeds from the sale of Partnership units			289,908				—
(Increase) decrease in restricted cash			184				(1,523	)
Net cash provided by (used in) continuing operations			215,154				(92,866	)
Net cash provided by discontinued operations			—				89,509
Net cash provided by (used in) investing activities			215,154				(3,357	)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt			1,003,409				385,221
Repayments of long-term debt			(1,205,258	)			(572,764	)
Payments for debt issue costs			(980	)			—
Proceeds from stock options exercised			487				656
Proceeds from stock issued pursuant to our employee stock purchase plan			940				1,224
Purchases of treasury stock			(2,415	)			(1,971	)
Stock-based compensation excess tax benefit			816				801
Distributions to noncontrolling partners in the Partnership			(15,841	)			(7,753	)
Net cash used in financing activities			(218,842	)			(194,586	)
Effect of exchange rate changes on cash and equivalents			(1,012	)			(3,736	)
Net decrease in cash and cash equivalents			(9,519	)			(9,896	)
Cash and cash equivalents at beginning of period			44,616				83,745
Cash and cash equivalents at end of period		$	35,097			$	73,849

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

EXTERRAN HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements of Exterran Holdings, Inc. (“we” or “Exterran”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) are not required in these interim financial statements and have been condensed or omitted. It is the opinion of management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, that are necessary to present fairly our financial position, results of operations and cash flows for the periods indicated.

Revenue Recognition

Revenue from contract operations is recorded when earned, which generally occurs monthly at the time the monthly service is provided to customers in accordance with the contracts. Aftermarket services revenue is recorded as products are delivered and title is transferred or services are performed for the customer.

Fabrication revenue is recognized using the percentage-of-completion method when the applicable criteria are met. We estimate percentage-of-completion for compressor and accessory fabrication on a direct labor hour to total labor hour basis. Production and processing equipment fabrication percentage-of-completion is estimated using the direct labor hour to total labor hour and the cost to total cost basis. The duration of these projects is typically between three and 36 months. Fabrication revenue is recognized using the completed contract method when the applicable criteria of the percentage-of-completion method are not met. Fabrication revenue from a claim is recognized to the extent that costs related to the claim have been incurred, when collection is probable and can be reliably estimated.

Earnings (Loss) Attributable to Exterran Stockholders Per Common Share

Basic income (loss) attributable to Exterran stockholders per common share is computed by dividing income (loss) attributable to Exterran common stockholders by the weighted average number of shares outstanding for the period. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and are included in the computation of earnings (loss) per share following the two-class method. Therefore, restricted share awards that contain the right to vote and receive dividends are included in the computation of basic and diluted earnings (loss) per share, unless their effect would be anti-dilutive.

Diluted income (loss) attributable to Exterran stockholders per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options and warrants to purchase common stock, restricted stock, restricted stock units, stock to be issued pursuant to our employee stock purchase plan and convertible senior notes, unless their effect would be anti-dilutive.

The table below summarizes income (loss) attributable to Exterran stockholders (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Loss from continuing operations attributable to Exterran stockholders		$	(27,457	)		$	(21,431	)		$	(55,349	)		$	(15,194	)
Income (loss) from discontinued operations, net of tax			(569	)			38,957				(2,707	)			49,382
Net income (loss) attributable to Exterran stockholders		$	(28,026	)		$	17,526			$	(58,056	)		$	34,188

There were no potential shares of common stock included in computing the dilutive potential shares of common stock used in diluted net income (loss) per common share for the three and six months ended June 30, 2011 and 2010. The table below indicates the potential shares of common stock issuable that were excluded from net dilutive potential shares of common stock issuable as their effect would have been anti-dilutive (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average market value for the period			2,333				1,376				1,826				1,436
On exercise of options and vesting of restricted stock and restricted stock units			433				757				634				378
On settlement of employee stock purchase plan shares			14				11				12				14
On exercise of warrants			2,808				2,808				2,808				2,808
On conversion of 4.25% convertible senior notes due 2014			15,334				15,334				15,334				15,334
On conversion of 4.75% convertible senior notes due 2014			3,115				3,115				3,115				3,115
Net dilutive potential common shares issuable			24,037				23,401				23,729				23,085

Financial Instruments

Our financial instruments include cash, restricted cash, receivables, payables, interest rate swaps and foreign currency hedges. At June 30, 2011 and December 31, 2010, the estimated fair value of these financial instruments approximated their carrying value as reflected in our consolidated balance sheets. Our financial instruments also include debt. The fair value of our fixed rate debt has been estimated primarily based on quoted market prices. The fair value of our floating rate debt has been estimated based on similar debt transactions that occurred near the valuation dates. A summary of the fair value and carrying value of our debt as of June 30, 2011 and December 31, 2010 is shown in the table below (in thousands):

		As of June 30, 2011								As of December 31, 2010
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Fixed rate debt		$	784,880			$	819,000			$	775,810			$	808,000
Floating rate debt			919,320				1,013,000				1,121,337				1,101,000
Total debt		$	1,704,200			$	1,832,000			$	1,897,147			$	1,909,000

GAAP requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings (loss) unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

2. DISCONTINUED OPERATIONS

In May 2009, the Venezuelan government enacted a law that reserves to the State of Venezuela certain assets and services related to hydrocarbon activities, which included substantially all of our assets and services in Venezuela. The law provides that the reserved activities are to be performed by the State, by the State-owned oil company, Petroleos de Venezuela S.A. (“PDVSA”), or its affiliates, or through mixed companies under the control of PDVSA or its affiliates. The law authorizes PDVSA or its affiliates to take possession of the assets and take over control of those operations related to the reserved activities as a step prior to the commencement of an expropriation process, and permits the national executive of Venezuela to decree the total or partial expropriation of shares or assets of companies performing those services.

In June  2009, PDVSA commenced taking possession of our assets and operations in a number of our locations in Venezuela and by the end of the second quarter of 2009, PDVSA had assumed control over substantially all of our assets and operations in Venezuela.

While the law provides that companies whose assets are expropriated in this manner may be compensated in cash or securities, we are unable to predict what, if any, compensation Venezuela will ultimately offer in exchange for any such expropriated assets and, accordingly, we are unable to predict what, if any, compensation we ultimately will receive. We reserve and will continue to reserve the right to seek full compensation for any and all expropriated assets and investments under all applicable legal regimes, including

investment treaties and customary international law. In this connection, on June 16, 2009, our Spanish subsidiary delivered to the Venezuelan government and PDVSA an official notice of dispute relating to the seized assets and investments under the Agreement between Spain and Venezuela for the Reciprocal Promotion and Protection of Investments and under Venezuelan law. On March 23, 2010, our Spanish subsidiary filed a request for the institution of an arbitration proceeding against Venezuela with the International Centre for Settlement of Investment Disputes (“ICSID”) related to the seized assets and investments, which was registered by ICSID on April 12, 2010. The arbitration hearing on jurisdiction and the merits is presently scheduled to take place in July 2012.

We maintained insurance for the risk of expropriation of our investments in Venezuela, subject to a policy limit of $50 million. During the year ended December 31, 2009, we recorded a receivable of $50 million related to this insurance policy because we determined that recovery under this policy of a portion of our loss was probable. We collected the $50 million under our policy in January 2010. Under the terms of the insurance policy, certain compensation we may receive from the Venezuelan government or PDVSA for our expropriated assets, receivables and operations will be applied first to the reimbursement of out-of-pocket expenses incurred by us and the insurance company, second to the insurance company until the $50 million payment has been repaid and third to us.

As a result of PDVSA taking possession of substantially all of our assets and operations in Venezuela, we recorded asset impairments during the year ended December 31, 2009, totaling $329.7 million ($379.7 million excluding the insurance proceeds of $50 million). These charges primarily related to receivables, inventory, fixed assets and goodwill, and are reflected in Income (loss) from discontinued operations. We believe the fair value of our seized Venezuelan operations substantially exceeds the historical cost-based carrying value of the assets, including the goodwill allocable to those operations; however, GAAP requires that our claim be accounted for as a gain contingency with no benefit being recorded until resolved. Accordingly, we did not include any compensation we may receive for our seized assets and operations from Venezuela in recording the loss on expropriation.

The expropriation of our business in Venezuela meets the criteria established for recognition as discontinued operations under accounting standards for presentation of financial statements. Therefore, our Venezuela contract operations and aftermarket services businesses are now reflected as discontinued operations in our consolidated statements of operations.

In January 2010, the Venezuelan government announced a devaluation of the Venezuelan bolivar. This devaluation resulted in a translation gain of approximately $12.2 million on the remeasurement of our net liability position in Venezuela and is reflected in other (income) loss, net in the table below for the six months ended June 30, 2010. The functional currency of our Venezuela subsidiary is the U.S. dollar and we had more liabilities than assets denominated in bolivars in Venezuela at the time of the devaluation. The exchange rate used to remeasure our net liabilities changed from 2.15 bolivars per U.S. dollar at December 31, 2009 to 4.3 bolivars per U.S. dollar in January 2010.

Our loss (recovery) attributable to expropriation for the three and six months ended June 30, 2010 includes a benefit of $40.9 million from payments received from PDVSA and its affiliates for the fixed assets for two projects. These payments relate to the recovery of the loss we recognized on the value of the equipment for these projects in the second quarter of 2009.

The table below summarizes the operating results of the discontinued operations (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Revenues		$	—			$	352			$	—			$	580
Expenses and selling, general and administrative			135				686				591				1,742
Loss (recovery) attributable to expropriation			148				(39,912	)			1,461				(40,212	)
Other (income) loss, net			(69	)			79				(150	)			(12,062	)
Provision for income taxes			355				542				805				1,730
Income (loss) from discontinued operations, net of tax		$	(569	)		$	38,957			$	(2,707	)		$	49,382

The table below summarizes the balance sheet data for discontinued operations (in thousands):

		June 30,				December 31,
		2011				2010
Cash		$	473			$	754
Accounts receivable			5				434
Inventory			1,017				1,077
Other current assets			3,264				3,653
Total current assets associated with discontinued operations			4,759				5,918
Property, plant and equipment, net			—				502
Other long-term assets			8,794				8,670
Total assets associated with discontinued operations		$	13,553			$	15,090
Accounts payable		$	676			$	801
Accrued liabilities			13,233				13,932
Deferred revenues			1,499				821
Total current liabilities associated with discontinued operations			15,408				15,554
Other long-term liabilities			14,184				13,111
Total liabilities associated with discontinued operations		$	29,592			$	28,665

3. INVENTORY

Inventory, net of reserves, consisted of the following amounts (in thousands):

		June 30,				December 31,
		2011				2010
Parts and supplies		$	233,372			$	244,618
Work in progress			128,180				116,371
Finished goods			35,118				35,298
Inventory, net of reserves		$	396,670			$	396,287

As of June 30, 2011 and December 31, 2010, we had inventory reserves of $17.1 million and $18.3 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

		June 30,				December 31,
		2011				2010
Compression equipment, facilities and other fleet assets		$	4,233,145			$	4,302,483
Land and buildings			173,987				166,273
Transportation and shop equipment			242,526				225,073
Other			147,635				142,770
			4,797,293				4,836,599
Accumulated depreciation			(1,762,139	)			(1,743,947	)
Property, plant and equipment, net		$	3,035,154			$	3,092,652

5. INVESTMENTS IN NON-CONSOLIDATED AFFILIATES

Investments in affiliates that are not controlled by Exterran but where we have the ability to exercise significant influence over the operations are accounted for using the equity method. Our equity method investments are primarily comprised of entities that own, operate, service and maintain compression and other related facilities.

Our ownership interest and location of each equity method investee at June 30, 2011 is as follows:

		Ownership
		Interest				Location		Type of Business
PIGAP II			30.0	%		Venezuela		Gas Compression Plant
El Furrial			33.3	%		Venezuela		Gas Compression Plant

In May 2009, PDVSA assumed control over the assets of PIGAP II and El Furrial and transitioned the operations of PIGAP II and El Furrial, including the hiring of their employees, to PDVSA and therefore, we recorded a full impairment of our investment in PIGAP II and El Furrial in the second quarter of 2009. Our non-consolidated affiliates are expected to seek full compensation for any and all expropriated assets and investments under all applicable legal regimes, including investment treaties and customary international law, which could result in us recording a gain on our investment in future periods. However, we are unable to predict what, if any, compensation we ultimately will receive or when we may receive any such compensation.

Because the assets and operations of our investments in our remaining non-consolidated affiliates have been expropriated, we currently do not expect to have any meaningful equity earnings in non-consolidated affiliates in the future from these investments, excluding any compensation we may receive related to the expropriation.

6. LONG-TERM DEBT

Long-term debt consisted of the following (in thousands):

		June 30,				December 31,
		2011				2010
Revolving credit facility due August 2012		$	34,000			$	50,395
Term loan			345,820				615,943
2007 asset-backed securitization facility notes due July 2012			—				6,000
Partnership’s revolving credit facility due November 2015			389,500				299,000
Partnership’s term loan facility due November 2015			150,000				150,000
4.25% convertible senior notes due June 2014 (presented net of the unamortized discount of $64.3 million and $73.2 million, respectively)			290,729				281,827
4.75% convertible senior notes due January 2014			143,750				143,750
7.25% senior notes due December 2018			350,000				350,000
Other, interest at various rates, collateralized by equipment and other assets			401				232
Long-term debt		$	1,704,200			$	1,897,147

In March 2011, we repaid the $6.0 million outstanding balance under our asset-backed securitization facility (the “2007 ABS Facility”) and terminated that facility. As a result of the termination of the 2007 ABS Facility, we expensed $1.4 million of unamortized deferred financing costs, which is reflected in interest expense in our condensed consolidated statements of operations for the six months ended June 30, 2011.

In June 2009, we issued under a shelf registration statement $355.0 million aggregate principal amount of 4.25% convertible senior notes due June 2014 (the “4.25% Notes”). The 4.25% Notes are convertible upon the occurrence of certain conditions into shares of our common stock at an initial conversion rate of 43.1951 shares of our common stock per $1,000 principal amount of the convertible notes, equivalent to an initial conversion price of approximately $23.15 per share of common stock. The conversion rate will be subject to adjustment following certain dilutive events and certain corporate transactions. The value of the shares the 4.25% Notes can be converted into did not exceed their principal amount as of June 30, 2011. We may not redeem the 4.25% Notes prior to their maturity date.

GAAP requires that the liability and equity components of certain convertible debt instruments that may be settled in cash upon conversion be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. Upon issuance of our 4.25% Notes, $97.9 million was recorded as a debt discount and reflected in equity related to the convertible feature of these notes. The discount on the 4.25% Notes will be amortized using the effective interest method through June 30, 2014. During the three months ended June 30, 2011 and 2010, we recognized $3.7 million and $3.8 million, respectively, of interest expense related to the contractual interest coupon. During each of the six months ended June 30, 2011 and 2010, we recognized $7.5 million of interest expense related to the contractual interest coupon. During the three months ended June 30, 2011 and 2010, we recognized $4.5 million and $4.0 million, respectively, of amortization of the debt discount. During the six months ended June 30, 2011 and 2010, we

recognized $8.9 million and $7.9 million, respectively, of amortization of the debt discount. The effective interest rate on the debt component of these notes was 11.67%.

As of June 30, 2011, our senior secured borrowings consisted of our term loan facility and our revolving credit facility. As of June 30, 2011, we had $34.0 million in outstanding borrowings under our revolving credit facility, $241.1 million in letters of credit outstanding under our revolving credit facility and $345.8 million in outstanding borrowings under our term loan facility. At June 30, 2011, we had undrawn capacity of $574.9 million under our revolving credit facility. Our senior secured credit agreement limits our Total Debt to EBITDA ratio to not greater than 5.0 to 1.0. Due to this limitation, $205.3 million of the $574.9 million of undrawn capacity under our revolving credit facility was available for additional borrowings as of June 30, 2011.

On November 3, 2010, the Partnership, as guarantor, and EXLP Operating LLC, a wholly-owned subsidiary of the Partnership, as borrower, entered into an amendment and restatement of their senior secured credit agreement (as so amended and restated, the “Partnership Credit Agreement”) to provide for a new five-year, $550 million senior secured credit facility consisting of a $400 million revolving credit facility and a $150 million term loan facility. In March 2011, the revolving borrowing capacity under this facility was increased by $150.0 million to $550.0 million.

As of June 30, 2011, the Partnership had $160.5 million of undrawn capacity under its revolving credit facility.

7. ACCOUNTING FOR DERIVATIVES

We are exposed to market risks primarily associated with changes in interest rates and foreign currency exchange rates. We use derivative financial instruments to minimize the risks and/or costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We also use derivative financial instruments to minimize the risks caused by currency fluctuations in certain foreign currencies. We do not use derivative financial instruments for trading or other speculative purposes.

Interest Rate Risk

At June 30, 2011, we were a party to interest rate swaps pursuant to which we pay fixed payments and receive floating payments on a notional value of $815.0 million. We entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. Our interest rate swaps expire over varying dates, with interest rate swaps having a notional amount of $565.0 million expiring on or before August 2012 and the remaining interest rate swaps expiring through November 2015. As of June 30, 2011, the weighted average effective fixed interest rate on our interest rate swaps was 3.4%. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive income (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and therefore we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. We recorded no ineffectiveness in the three and six months ended June 30, 2011. We recorded approximately $0.1 million and $0.2 million of interest expense for the three and six months ended June 30, 2010, respectively, due to the ineffectiveness related to these swaps. We estimate that approximately $23.4 million of deferred pre-tax losses attributable to existing interest rate swaps and included in our accumulated other comprehensive loss at June 30, 2011, will be reclassified into earnings as interest expense at then-current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

In the fourth quarter of 2010, we paid $43.0 million to terminate interest rate swap agreements with a total notional value of $585.0 million and a weighted average effective fixed interest rate of 4.6%. These swaps qualified for hedge accounting and were previously included on our balance sheet as a liability and in accumulated other comprehensive income (loss). The liability was paid in connection with the termination, and the associated amount in accumulated other comprehensive income (loss) will be amortized into interest expense over the original term of the swaps. We estimate that $18.4 million of deferred pre-tax losses from these terminated interest rate swaps will be amortized into interest expense during the next twelve months.

Foreign Currency Exchange Risk

We operate in approximately 30 countries throughout the world, and a fluctuation in the value of the currencies of these countries relative to the U.S. dollar could impact our profits from international operations and the value of the net assets of our international operations when reported in U.S. dollars in our financial statements. From time to time we may enter into foreign currency hedges to reduce our foreign exchange risk associated with cash flows we will receive in a currency other than the functional currency of the local Exterran affiliate that entered into the contract. The impact of foreign currency exchange on our consolidated statements of operations will depend on the amount of our net asset and liability positions exposed to currency fluctuations in future periods.

Foreign currency swaps or forward contracts that meet the hedging requirements or that qualify for hedge accounting treatment are accounted for as cash flow hedges and changes in the fair value are recognized as a component of comprehensive income (loss) to the extent the hedge is effective. The amounts recognized as a component of other comprehensive income (loss) will be reclassified into earnings (loss) in the periods in which the underlying foreign currency exchange transaction is recognized and are included under the same category as the income or loss from the underlying assets, liabilities, or anticipated transactions in our consolidated statements of operations. For foreign currency swaps and forward contracts that do not qualify for hedge accounting treatment, changes in fair value and gains and losses on settlement are included under the same category as the income or loss from the underlying assets, liabilities or anticipated transactions in our consolidated statements of operations.

The following tables present the effect of derivative instruments on our consolidated financial position and results of operations (in thousands):

		June 30, 2011
				Fair Value
		Balance Sheet Location		Asset (Liability)
Derivatives designated as hedging instruments:
Interest rate hedges		Intangibles and other assets		$	1,963
Interest rate hedges		Accrued liabilities			(23,386	)
Interest rate hedges		Other long-term liabilities			(2,269	)
Total derivatives				$	(23,692	)

		December 31, 2010
				Fair Value
		Balance Sheet Location		Asset (Liability)
Derivatives designated as hedging instruments:
Interest rate hedges		Intangibles and other assets		$	5,769
Interest rate hedges		Accrued liabilities			(24,432	)
Interest rate hedges		Other long-term liabilities			(10,362	)
Foreign currency hedge		Accrued liabilities			(462	)
Total derivatives				$	(29,487	)

Three Months Ended June 30, 2011

Six Months Ended June 30, 2011

Gain (Loss)

Gain (Loss)

Location of Gain

Reclassified

Location of Gain

Reclassified

(Loss)

from

Gain (Loss)

(Loss)

from

Gain (Loss)

Reclassified from

Accumulated

Recognized in

Reclassified from

Accumulated

Recognized in

Accumulated

Other

Other

Accumulated

Other

Other

Other Comprehensive

Comprehensive

Comprehensive

Other Comprehensive

Comprehensive

Comprehensive

Income

Income (Loss)

Income (Loss)

Income

Income (Loss)

Income (Loss) on

(Loss) into Income

into Income

on

(Loss) into Income

into Income

Derivatives

(Loss)

(Loss)

Derivatives

(Loss)

(Loss)

Derivatives designated as cash flow hedges:

Interest rate hedges

$

(10,205

)

Interest expense

$

(11,364

)

$         (13,983)

Interest expense

$

(24,095

)

Foreign currency hedge

—

Fabrication revenue

—

—

Fabrication revenue

410

Total

$

(10,205

)

$

(11,364

)

$         (13,983)

$

(23,685

)

Three Months Ended June 30, 2010

Six Months Ended June 30, 2010

Gain (Loss)

Gain (Loss)

Location of Gain

Reclassified

Location of Gain

Reclassified

(Loss)

from

`

(Loss)

from

Gain (Loss)

Reclassified from

Accumulated

Gain (Loss)

Reclassified from

Accumulated

Recognized in

Accumulated

Other

Recognized in

Accumulated

Other

Other

Other Comprehensive

Comprehensive

Other

Other Comprehensive

Comprehensive

Comprehensive

Income

Income (Loss)

Comprehensive

Income

Income (Loss)

Income (Loss) on

(Loss) into Income

into Income

Income (Loss) on

(Loss) into Income

into Income

Derivatives

(Loss)

(Loss)

Derivatives

(Loss)

(Loss)

Derivatives designated as cash flow hedges:

Interest rate hedges

$

(13,883

)

Interest expense

$

(14,147

)

$         (29,062)

Interest expense

$

(28,459

)

Foreign currency hedge

(7,848

)

Fabrication revenue

(5,476

)

(7,848)

Fabrication revenue

(5,476

)

Total

$

(21,731

)

$

(19,623

)

$         (36,910)

$

(33,935

)

The counterparties to our derivative agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. We have no specific collateral posted for our derivative instruments. The counterparties to our interest rate swaps are also lenders under our credit facilities and, in that capacity, share proportionally in the collateral pledged under the related facility.

8. 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 broad 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.

The following table summarizes the valuation of our interest rate swaps and impaired assets as of and for the six months ended June 30, 2011, with pricing levels as of the date of valuation (in thousands):

						Quoted
						Market
						Prices in				Significant				Significant
						Active				Other				Unobservable
						Markets				Observable				Inputs
		Total				(Level 1)				Inputs (Level 2)				(Level 3)
Interest rate swaps asset (liability)		$	(23,692	)		$	—			$	(23,692	)		$	—
Impaired long-lived assets			416				—				—				416

The following table summarizes the valuation of our interest rate swaps, foreign currency derivatives and impaired assets as of and for the six months ended June 30, 2010, with pricing levels as of the date of valuation (in thousands):

						Quoted
						Market
						Prices in				Significant				Significant
						Active				Other				Unobservable
						Markets				Observable				Inputs
		Total				(Level 1)				Inputs (Level 2)				(Level 3)
Interest rate swaps asset (liability)		$	(84,765	)		$	—			$	(84,765	)		$	—
Foreign currency derivatives asset (liability)			(7,848	)			—				(7,848	)			—
Impaired long-lived assets			418				—				—				418

On a quarterly basis, our interest rate swaps and foreign currency derivatives are recorded at fair value utilizing a combination of the market approach and income approach to estimate fair value. Our estimate of the fair value of the impaired long-lived assets was based on the estimated component value of the equipment that we plan to use.

9. LONG-LIVED ASSET IMPAIRMENT

During the six months ended June 30, 2011 and 2010, we reviewed the idle compression assets used in our contract operations segments for units that are not of the type, configuration, make or model that are cost efficient to maintain and operate. We performed a cash flow analysis of the expected proceeds from the salvage value of these units to determine the fair value of the assets. The net book value of these assets exceeded the fair value by $2.1 million and $2.5 million, respectively, for the six months ended June 30, 2011 and 2010 and was recorded as a long-lived asset impairment.

10. STOCK-BASED COMPENSATION

Stock Incentive Plan

In August 2007, we adopted the Exterran Holdings, Inc. 2007 Stock Incentive Plan (as amended and restated, the “2007 Plan”) that provides for the granting of stock-based awards in the form of options, restricted stock, restricted stock units, stock appreciation rights and performance awards to our employees and directors. In May 2011, our stockholders approved an amendment to the 2007 Plan that increased the aggregate number of shares of common stock that may be issued under the 2007 Plan to 12,500,000 from 9,750,000. Each option and stock appreciation right granted counts as one share against the aggregate share limit, and each share of restricted stock and restricted stock unit granted counts as two shares against the aggregate share limit. Awards granted under the 2007 Plan that are subsequently cancelled, terminated or forfeited are available for future grant.

Stock Options

Under the 2007 Plan, stock options are granted at fair market value at the date of grant, are exercisable in accordance with the vesting schedule established by the compensation committee of our board of directors in its sole discretion and expire no later than seven years after the date of grant. Options generally vest 33 1/3% on each of the first three anniversaries of the grant date.

The weighted average fair value at date of grant for options granted during the six months ended June 30, 2011 was $8.36, and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

		Six Months
		Ended
		June 30, 2011
Expected life in years			4.5
Risk-free interest rate			1.92	%
Volatility			41.08	%
Dividend yield			0.00	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for a period commensurate with the estimated expected life of the stock options. Expected volatility is based on the historical volatility of our stock over the period commensurate with the expected life of the stock options and other factors. We have not historically paid a dividend and do not expect to pay a dividend during the expected life of the stock options.

The following table presents stock option activity for the six months ended June 30, 2011 (in thousands, except per share data and remaining life in years):

										Weighted
						Weighted				Average				Aggregate
		Stock				Average				Remaining				Intrinsic
		Options				Exercise Price				Life				Value
Options outstanding, December 31, 2010			3,124			$	31.20
Granted			375				22.84
Exercised			(33	)			16.16
Cancelled			(211	)			32.72
Options outstanding, June 30, 2011			3,255			$	30.29				4.4			$	3,087
Options exercisable, June 30, 2011			2,214			$	34.44				3.7			$	2,285

Intrinsic value is the difference between the market value of our stock and the exercise price of each option multiplied by the number of options outstanding for those options where the market value exceeds their exercise price. The total intrinsic value of stock options exercised during the six months ended June 30, 2011 was $0.2 million. As of June 30, 2011, $6.7 million of unrecognized compensation cost related to unvested stock options is expected to be recognized over the weighted-average period of 1.8 years.

Restricted Stock and Restricted Stock Units

For grants of restricted stock and restricted stock units, we recognize compensation expense over the vesting period equal to the fair value of our common stock at the date of grant. Our restricted stock and restricted stock unit grants generally vest 33 1/3% on each of the first three anniversaries of the grant date.

The following table presents restricted stock and restricted stock unit activity for the six months ended June 30, 2011 (in thousands, except per share data):

						Weighted
						Average
						Grant-Date
						Fair Value
		Shares				Per Share
Non-vested restricted stock and restricted stock units, December 31, 2010			1,421			$	23.20
Granted			871				22.79
Vested			(563	)			26.38
Cancelled			(70	)			21.78
Non-vested restricted stock and restricted stock units, June 30, 2011			1,659			$	21.97

As of June 30, 2011, $30.0 million of unrecognized compensation cost related to unvested restricted stock and restricted stock units is expected to be recognized over the weighted-average period of 2.2 years.

Our compensation committee’s practice is to grant equity-based awards once a year, in late February or early March after fourth quarter earnings information for the prior year has been released for at least two full trading days. The schedule for making equity-based awards is typically established several months in advance, and is not set based on knowledge of material nonpublic information or in response to our stock price. This practice results in awards being granted on a regular, predictable annual cycle, after annual earnings information has been disseminated to the marketplace. Equity-based awards are occasionally granted at other times during the year, such as upon the hiring of a new employee or following the promotion of an employee. In some instances, the compensation committee may be aware, at the time grants are made, of matters or potential developments that are not ripe for public disclosure at that time but that may result in public announcement of material information at a later date. In March 2011, the compensation committee of our board of directors authorized annual long-term incentive awards of stock options, restricted stock, restricted stock units and performance shares to our executive officers, other employees and non-employee directors.

Employee Stock Purchase Plan

In August 2007, we adopted the Exterran Holdings, Inc. Employee Stock Purchase Plan (“ESPP”), which is intended to provide employees with an opportunity to participate in our long-term performance and success through the purchase of shares of common stock at a price that may be less than fair market value. The ESPP is designed to comply with Section 423 of the Internal Revenue Code of 1986, as amended. Each quarter, an eligible employee may elect to withhold a portion of his or her salary up to the lesser of $25,000 per year or 10% of his or her eligible pay to purchase shares of our common stock at a price equal to 85% to 100% of the fair market value of the stock as of the first trading day of the quarter, the last trading day of the quarter or the lower of the first trading day of the quarter and the last trading day of the quarter, as the compensation committee of our board of directors may determine. The ESPP will terminate on the date that all shares of common stock authorized for sale under the ESPP have been purchased, unless it is extended. In May 2011, our stockholders approved an amendment to the ESPP that increased the aggregate number of shares of common stock available for purchase under the ESPP to 1,000,000. At June 30, 2011, 569,593 shares remained available for purchase under the ESPP. Our ESPP is compensatory and, as a result, we record an expense on our consolidated statements of operations related to the ESPP. Since July 2009, the purchase discount under the ESPP has been 5% of the fair market value of our common stock on the first trading day of the quarter or the last trading day of the quarter, whichever is lower.

Partnership Long-Term Incentive Plan

The Partnership has a long-term incentive plan that was adopted by Exterran GP LLC, the general partner of the Partnership’s general partner, in October 2006 for employees, directors and consultants of the Partnership, us or our respective affiliates. The long-term incentive plan currently permits the grant of awards covering an aggregate of 1,035,378 common units, common unit options, restricted units and phantom units. The long-term incentive plan is administered by the board of directors of Exterran GP LLC or a committee thereof (the “Plan Administrator”).

Unit options will have an exercise price that is not less than the fair market value of a common unit on the date of grant and will become exercisable over a period determined by the Plan Administrator. Phantom units are notional units that entitle the grantee to receive a common unit upon the vesting of the phantom unit or, at the discretion of the Plan Administrator, cash equal to the fair value of a common unit.

Partnership Phantom Units

The following table presents phantom unit activity for the six months ended June 30, 2011:

						Weighted
						Average
						Grant-Date
		Phantom				Fair Value
		Units				per Unit
Phantom units outstanding, December 31, 2010			98,537			$	19.23
Granted			20,851				28.50
Vested			(43,764	)			18.90
Phantom units outstanding, June 30, 2011			75,624			$	21.98

As of June 30, 2011, $1.3 million of unrecognized compensation cost related to unvested phantom units is expected to be recognized over the weighted-average period of 1.8 years.

11. COMMITMENTS AND CONTINGENCIES

We have issued the following guarantees that are not recorded on our accompanying balance sheet (dollars in thousands):

						Maximum Potential
						Undiscounted
						Payments as of
		Term				June 30, 2011
Performance guarantees through letters of credit(1)			2011-2013			$	244,624
Standby letters of credit			2011-2014				16,423
Commercial letters of credit			2011-2012				4,284
Bid bonds and performance bonds(1)			2011-2018				162,520
Maximum potential undiscounted payments						$	427,851

As part of our acquisition of Production Operators Corporation in 2001, we may be required to make contingent payments of up to $46 million to the seller, depending on our realization of certain U.S. federal tax benefits through the year 2015. To date, we have not realized any such benefits that would require a payment and we do not anticipate realizing any such benefits that would require a payment before the year 2013.

See Note 2 and Note 5 for a discussion of gain contingencies related to assets and investments that were expropriated in Venezuela.

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 and commercial automobile liability and other coverage we believe is appropriate. In addition, we have a minimal amount of insurance on our offshore assets. 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 worker’s 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.

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, we believe that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Because of the inherent uncertainty of litigation, however, 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 consolidated financial position, results of operations or cash flows for the period in which the resolution occurs.

12. RECENT ACCOUNTING DEVELOPMENTS

In October 2009, the Financial Accounting Standards Board (“FASB”) issued an update to existing guidance on revenue recognition for arrangements with multiple deliverables. This update addresses accounting for multiple-deliverable arrangements to enable vendors to account for deliverables separately. The guidance establishes a selling price hierarchy for determining the selling price of a deliverable. This update requires expanded disclosures for multiple deliverable revenue arrangements. The update is effective for us for revenue arrangements entered into or materially modified on or after January 1, 2011. Our adoption of this new guidance on January 1, 2011 did not have a material impact on our condensed consolidated financial statements.

In December 2010, the FASB issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. This standard update clarifies that, when presenting comparative financial statements, public companies should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business

combination included in the reported pro forma revenue and earnings. The update is effective prospectively for business combinations entered into in fiscal years beginning on or after December 15, 2010. Our adoption of this new guidance did not have a material impact on our condensed consolidated financial statements.

In May 2011, the FASB issued an update to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This update changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This update is effective for interim and annual periods beginning on or after December 15, 2011. We do not believe the adoption of this update will have a material impact on our consolidated financial statements.

In June 2011, the FASB issued an update on the presentation of other comprehensive income. Under this update, entities will be required to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The current option to report other comprehensive income and its components in the statement of changes in equity has been eliminated. This update is effective for interim and annual periods beginning on or after December 15, 2011. We do not believe the adoption of this update will have a material impact on our consolidated financial statements.

13. REPORTABLE SEGMENTS

We manage our business segments primarily based upon the type of product or service provided. We have four principal industry segments: North America contract operations, international contract operations, aftermarket services and fabrication. The North America and international contract operations segments primarily provide natural gas compression services, production and processing equipment services and maintenance services to meet specific customer requirements on Exterran-owned assets. The aftermarket services segment provides a full range of services to support the surface production, compression and processing needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets. The fabrication segment involves (i) design, engineering, installation, fabrication and sale of natural gas compression units and accessories and equipment used in the production, treating and processing of crude oil and natural gas and (ii) engineering, procurement and fabrication services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the fabrication of tank farms and the construction of evaporators and brine heaters for desalination plants.

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

The following table presents sales and other financial information by industry segment for the three and six months ended June 30, 2011 and 2010 (in thousands):

		North
		America				International												Reportable
		Contract				Contract				Aftermarket								Segments
Three months ended		Operations				Operations				Services				Fabrication				Total
June 30, 2011:
Revenue from external customers		$	150,755			$	110,944			$	94,142			$	301,731			$	657,572
Gross margin(1)			75,246				61,178				7,609				32,379				176,412
June 30, 2010:
Revenue from external customers		$	152,048			$	131,087			$	83,363			$	277,324			$	643,822
Gross margin(1)			77,237				88,214				13,073				30,926				209,450