Mr. J. Blair Goertzen reports

ENERFLEX REPORTS SECOND QUARTER 2015 FINANCIAL RESULTS

Enerflex Ltd. has released its financial and operating results for the three and six months ended June 30, 2015.

Summary of second quarter 2015 compared with second quarter 2014

• Revenue: $389.7-million, down 8.3 per cent from $424.9-million;
• Gross margin: $81.5-million, down 4.7 per cent from $85.5-million, or 20.9 per cent of revenue compared with 20.1 per cent;
• EBIT (earnings before interest (finance costs) and taxes): $38.2-million, up 22.4 per cent from $31.2-million;
• EBIT as a percentage of revenue: 9.8 per cent compared with 7.3 per cent;
• Costs associated with unresolved customer disputes and severances reduced EBIT by $4.5-million;
• Acquisition-related costs in 2014 increased SG&A (selling, general and administrative) expenses by $8.1-million;
• Earnings per share -- continuing operations: 34 cents, up 126.7 per cent from 15 cents;
• Added 40,000 horsepower to the rental fleet, bringing the total to approximately 460,000 horsepower;
• Bookings: $86.5-million, net of cancellations of $15.3-million, down 79.1 per cent from $414.3-million;
• Backlog: $532.7-million, down 38.6 per cent from $867.9-million.

"Our second quarter financial results were strong despite the significant uncertainty surrounding commodity prices, in part due to the contribution from the business acquired from Axip, and through the strategic deployment of capital to grow the rental business. However, the continuing decline in our bookings, a key leading indicator, reinforces our expectation of challenges ahead," said J. Blair Goertzen, Enerflex's president and chief executive officer. "With our ongoing focus on cost-cutting initiatives, increased recurring revenues including new rental projects, a geographically diversified business, our healthy balance sheet and our remaining backlog, we are well positioned to weather these challenges."

Bookings, backlog and outlook

During the second quarter of 2015, the continuing commodity price challenges in North America resulted in a 79.1-per-cent or a $327.8-million decrease in bookings, with the most notable decrease occurring in the United States segment. For the first six months of 2015, the decrease in bookings was 65.2 per cent or $425.1-million, with the U.S. segment again seeing the most notable decrease. The movement in exchange rates had an unfavourable impact on U.S.-dollar-denominated bookings during the quarter but favourable for the first six months of 2015. Project cancellations reduced backlog during the second quarter and the first six months of 2015 by $15.3-million, and $21-million, respectively. Over all, backlog fell by $182.4-million during the quarter, and by $383.8-million during the first half of 2015, as the lower booking levels were more than offset by engineered systems revenue.

The company expects the challenge of weak oil, natural gas liquids and natural gas commodity prices to continue through 2015, creating further uncertainty and likely resulting in further capital budget cuts and cost-reduction initiatives by customers. This is likely to reduce the demand for Enerflex products and services during the remainder of 2015. These market conditions create significant uncertainty for bookings and activity levels in the second half of 2015, and therefore backlog and revenue over the remainder of 2015 and into 2016.

Notwithstanding the weaker markets, the company's financial performance has and will continue to benefit from increasing recurring revenues, including several new long-term rental and service contracts, and from a geographically diversified business. With the business acquired from Axip, Enerflex has successfully positioned itself to deliver growth from market opportunities in Latin America and the Middle East/Africa (MEA) region, and to increase recurring revenues globally.

Cost-savings initiatives

Enerflex has been pro-active in anticipation of the reduction in business activity in North America and has implemented measures to streamline its business, control costs, and continue toward its EBIT goal of 10 per cent. Among measures implemented during the quarter, the company made head count reductions of over 400 employees, which resulted in severance costs of $2-million. The head count is now approximately 2,800, which represents a reduction of over 600 employees since the beginning of 2015, with severance charges of $3.7-million recorded during the first half of 2015. During the quarter, and contributing to the head count reduction, the company completed manufacturing activity at the Nisku facility, the closure of which was previously announced in February, 2015. This resulted in the Nisku business being classified as a discontinued operation effective June 30, 2015.

Other cost-control measures introduced early in 2015, and recently extended through the remainder of 2015, include a company-wide hiring and salary freeze, business travel expense limitations, reduced marketing expenditures, and significant reductions in expenditures for facilities, IT (information technology) infrastructure and maintenance, except where critical. Even including the effect on SG&A expense of severance costs, SG&A expense as a percentage of revenue decreased to 11.4 per cent from 13.3 per cent in the second quarter of 2015, and to 11.2 per cent from 13.4 per cent for the first half of 2015. Despite the addition of a full year of results for the Axip business, and inflationary pressures, Enerflex is targeting total 2015 SG&A expenses consistent with those in 2014.

        SUMMARY TABLE OF SECOND QUARTER 2015 RESULTS
                   (in millions of dollars, 
          except per-share amounts and percentages)

                       Three months ended    Six months ended
                                  June 30,            June 30,
                            2015     2014       2015     2014
Financial highlights
Revenue                 $  389.7 $  424.9   $  845.2 $  744.5
Gross margin                81.5     85.5      165.0    138.5
Gross margin %              20.9%    20.1%      19.5%    18.6%
EBIT(1)                 $   38.2 $   31.2   $   75.2 $   43.3
EBIT %                       9.8%     7.3%       8.9%     5.8%
Net earnings --
continuing operations   $   26.8 $   11.7   $   50.4 $   17.3
Net earnings --
discontinued
operations                  (0.1)    (0.5)      (0.8)    (2.1)
Earnings per share --
continuing operations       0.34     0.15       0.64     0.22
(Loss) per share --
discontinued
operations                 (0.00)   (0.01)     (0.00)   (0.03)
Bookings(2)                 86.5    414.3      227.1    652.2
Backlog(2)                 532.7    867.9      532.7    867.9

(1) EBIT is considered an additional GAAP (generally accepted
    accounting principles) measure, which may not be comparable 
    with similar additional GAAP measures used by other entities.
(2) Bookings and backlog are considered non-GAAP measures that 
    do not have standardized meanings as prescribed by GAAP, 
    and are therefore unlikely to be comparable with similar 
    measures used by other entities.

Highlights

During the quarter, Enerflex initiated arbitration proceedings against Oman Oil Co. Exploration and Production LLC (OOCEP) related to previously disclosed variation claims that were submitted to OOCEP. These variation claims were the result of customer-driven scope and schedule changes that led to increased costs and delays with respect to the construction and delivery of a gas-processing plant owned by OOCEP and located in the Sultanate of Oman. On July 29, 2015, OOCEP requested an extension to file its response. Currently the arbitration panel has not been fully constituted, and Enerflex is unable to reasonably estimate when it expects this arbitration to be resolved.

The company continues to strategically allocate resources to growth areas of the business with the fabrication and deployment of rental assets and associated installation and construction activities in the MEA and Latin America regions. During the quarter, Enerflex started recognizing revenue for a large rental contract that deploys over 40,000 horsepower into the MEA region, and for the construction components of two other rental and service contracts, which will deliver approximately an additional 30,000 horsepower into the region later in 2015 and early in 2016. In addition, Enerflex secured a long-term rental and service agreement for over 25,000 horsepower in Latin America. The equipment is under fabrication and will contribute to revenue toward the end of 2015 or early 2016.

Results overview

Financial results for the quarter improved over the same period last year, despite revenues and gross margin being lower in the Canada and U.S. segments, and partially offset by the rest-of-world segment. The lower gross margin was primarily due to the changes in revenue, partially offset by improved warranty experience. Higher EBIT in the second quarter of 2015 was attributable to lower SG&A expenses, which more than offset the lower gross margin. The gross margin effect of unresolved customer disputes, coupled with severances recorded during the quarter, reduced EBIT by $4.5-million. During the second quarter of 2014, acquisition-related costs increased SG&A expenses by $8.1-million. Net earnings from continuing operations increased on higher EBIT and lower income taxes, partially offset by lower equity earnings from associates and joint ventures. Income tax expense for the second quarter was lower due to the effect of earnings taxed in foreign jurisdictions and the unfavourable tax effect of acquisition-related activities in 2014.

Financial results for the first half of 2015 were significantly improved on the same period last year, with revenues higher in all three segments and gross margin higher in the Canada and rest-of-world segments. The significant improvement in EBIT in the first half of 2015 was due to higher gross margin and lower SG&A expenses. Net earnings increased on higher EBIT and lower income tax expense, partially offset by lower equity earnings from associates and joint ventures.

Results from continuing operations for the three and six months ended June 30, 2015, include the Axip business purchased on June 30, 2014, which represented revenues of $55-million and $94.1-million, respectively, and EBIT of $8.5-million and $16.8-million, respectively.

Progress on 2015 strategic objectives

During the second quarter, the company made good progress on its 2015 strategic objectives. It reduced its company-wide total recordable injury rate by 27 per cent over its 2014 rate. It continues to work toward its objective of a 10-per-cent EBIT margin, with EBIT as a percentage of revenue increasing to 9.5 per cent for the trailing 12 months ended June 30, 2015, compared with 5.5 per cent for the same period of 2014. With recurring revenue on a trailing 12-month basis at 30.8 per cent, compared with 27.7 per cent for the same period in 2014, the company expects to make progress toward its 35- and 40-per-cent goal through the remainder of 2015, as it approaches a full year of contribution from the Axip business. While Enerflex has been pro-active in managing costs, the current economic environment and an extended slowdown will make achievement of these objectives more challenging.

Segmented results

Effective Jan. 1, 2015, the company realigned its reporting segments into the Canada, U.S. and rest-of-world segments. The U.S. segment now includes the northern U.S. service business, as well as the retrofit and rentals operations based out of Casper, Wyo., each of which was previously reported in the Canada and northern U.S. segment. The rest-of-world segment includes what were previously the Latin American engineered systems, service and rental businesses combined with what was previously the international segment.

Canada

Canada segment revenue in the second quarter of 2015 was $129.8-million, down $19.3-million or 12.9 per cent from $149.1-million a year earlier, due to lower engineered systems revenue on lower opening backlog and lower service revenue due to lower parts sales. For the first half of 2015, revenue was $281.9-million, up $27.3-million or 10.7 per cent, as a result of higher engineered systems revenue in the first quarter of 2015 due to higher opening backlog, partially offset by lower service and rental revenues. Lower service revenue resulted from lower parts sales, while lower rental revenue was due to a decrease in rental unit sales.

Operating income for the second quarter of 2015 of $11.3-million increased by $1.5-million or 15.1 per cent on lower SG&A expenses, partially offset by lower gross margin. The decrease in SG&A expenses was due to lower third party services, lower compensation expense, and lower depreciation and amortization expense. The lower gross margin resulted from lower revenue and underabsorption of overheads, partially offset by improved warranty experience and project margin pickups.

Operating income for the first half of 2015 of $20.9-million increased by $7.7-million or 58.4 per cent on lower SG&A expenses and slightly higher gross margin. The decrease in SG&A expenses was due to lower third party services, lower compensation expense, and lower depreciation and amortization expense. The higher gross margin resulted from higher revenue, improved warranty experience and project margin improvements, partially offset by under absorption of overheads.

U.S.

U.S. segment revenue in the second quarter of 2015 was $134.6-million, down $49.6-million or 26.9 per cent from $184.2-million a year earlier, due to lower engineered systems revenue on lower opening backlog, partially offset by higher service revenue due to an increase in parts sales. For the first six months of 2015, revenue was $341.6-million, up $15.1-million or 4.6 per cent as a result of higher engineered systems revenue during the first quarter on higher opening backlog and higher service revenue on increased parts sales compared with the same period in 2014.

Operating income of $11.6-million decreased by $3.4-million or 22.7 per cent during the second quarter of 2015, and by $6.6-million or 22.4 per cent during the first half of 2015, due to lower gross margin, partially offset by lower SG&A expenses. For the second quarter, lower gross margin was attributable to lower revenues and project margin hits, partially offset by improved warranty experience. For the first half of 2015, lower gross margin was due to lower project margins with more compression than process work, and project margin hits, partially offset by improved warranty experience and higher revenues. SG&A expenses were lower in 2015 as a result of reduced third party services and lower compensation expense.

Rest of world

Rest-of-world segment revenue in the second quarter of 2015 was $125.3-million, up $33.7-million or 36.8 per cent from 2014. For the first six months of 2015, revenue increased by $58.4-million or 35.7 per cent to $221.8-million. These increases were a result of higher service and rental revenues due to increased activity in the Australia, Latin America and MEA regions, primarily due to the contribution of the service and rental business acquired from Axip. These increases were partially offset by lower engineered systems revenue, despite higher opening backlog, primarily due to lower activity in the MEA and Australia regions in 2015.

Operating income of $14-million increased by $9.9-million or 242.2 per cent in the second quarter as a result of improved gross margin, partially offset by higher SG&A expenses. The higher gross margin was due to the increased relative contribution of the rental and service operations, which contribute higher margins, and the effect of higher revenues, partially offset by increased costs associated with unresolved customer disputes. Higher SG&A expenses were the result of higher compensation expense and higher office and occupancy costs due to the Axip acquisition, partially offset by favourable foreign exchange movements.

Operating income for the first half of 2015 of $26.8-million increased by $31-million or 748.2 per cent due to higher gross margin, partially offset by higher SG&A expenses. Higher gross margin was attributable to the relative higher margin contribution of the rental and service operations, and the effect of higher revenues, partially offset by the increased costs associated with unresolved customer disputes. In addition, during the first half of 2014, the company experienced significant margin erosion on the large project in Oman. SG&A expenses were higher in 2015 compared with 2014 on higher compensation expense and higher office and occupancy costs due to the Axip acquisition, partially offset by favourable foreign exchange movements.

Dividend

Subsequent to the end of the second quarter of 2015, Enerflex declared a quarterly dividend of 8.5 cents per share, payable on Oct. 8, 2015, to shareholders of record on Aug. 20, 2015.

Quarterly results material

Enerflex's interim condensed financial statements as at and for the three and six months ended June 30, 2015, and the accompanying management's discussion and analysis will be available on the Enerflex website under the investors section and on SEDAR.

Conference call and webcast details

Enerflex will host a conference call for analysts, investors, members of the media and other interested parties on Friday, Aug. 7, 2015, at 8 a.m. MT (10 a.m. ET) to discuss the second quarter 2015 financial results and operating highlights. The call will be hosted by Mr. Goertzen (president and CEO) and D. James Harbilas (executive vice-president and chief financial officer).

If you wish to participate in this conference call, please call 1-800-381-7839. Please dial in 10 minutes prior to the start of the call. No passcode is required. The live audio webcast of the conference call will be available on the Enerflex website under the investors section on Aug. 7, 2015, at 8 a.m. MT (10 a.m. ET). Approximately one hour after the call, a recording of the event will be available on the company's website. A replay of the teleconference will be available one hour after the conclusion of the call until midnight on Aug. 14, 2015. Please call 1-800-558-5253 or 1-416-626-4100 and enter passcode 21772206.

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