Mr. J. Blair Goertzen reports

ENERFLEX REPORTS THIRD QUARTER 2015 FINANCIAL RESULTS

Enerflex Ltd. is releasing its financial and operating results for the three and nine months ended Sept. 30, 2015.

Summary of the third quarter of 2015, compared with the second quarter of 2015 and the third quarter of 2014:

• Revenue of $425.2-million in third quarter of 2015, up 9.1 per cent from $389.7-million in the 2015 second quarter but down 5.7 per cent from $451.1-million in third quarter of 2014;
• Gross margin of $86.5-million, up 6.1 per cent from $81.5-million but down 8.2 per cent from $94.2-million, or 20.3 per cent of revenue, versus 20.9 per cent and 20.9 per cent;
• EBIT (earnings before interest (finance costs) and taxes) of $40.6-million, up 6.3 per cent from $38.2-million but down 13.4 per cent from $46.9-million;
• EBIT as a percentage of revenue of 9.5 per cent, down from 9.8 per cent and 10.4 per cent;
• Costs associated with unresolved customer disputes and severances reduced EBIT by $4.8-million, compared with $4.5-million in second quarter of 2015;
• Earnings per share from continuing operations of 40 cents, up 17.6 per cent from 34 cents but same as prior year;
• Added 10,000 contracted horsepower to the rental fleet, bringing the total to approximately 470,000 horsepower; 40,000 contracted horsepower added during the second quarter of 2015;
• Bookings of $237.3-million, up 174.3 per cent from $86.5-million but down 30.7 per cent from $342.2-million;
• Backlog of $477.6-million, down 10.3 per cent from $532.7-million and down 44.9 per cent from $866.4-million.

"Our third quarter financial results were respectable despite the significant uncertainty surrounding commodity prices, in part due to the contribution from the Latin America business and through the strategic deployment of capital to grow the rental business. However, the continuing decline in our backlog, 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 and service projects, a geographically diversified business and our healthy balance sheet, we are positioned to weather these challenges."

Bookings, backlog and outlook

During the third quarter of 2015, the continuing commodity price challenges in North America resulted in a 30.7-per-cent or $104.9-million decrease in bookings compared with the same period in 2014, with the most notable decrease occurring in the United States segment. For the first nine months of 2015, the decrease in bookings was 53.3 per cent or $529.9-million, compared with 2014, with the U.S. segment again seeing the most notable decrease. The movement in exchange rates had a favourable impact on U.S.-dollar-denominated bookings during the quarter and the first nine months of 2015. Project cancellations reduced backlog during the third quarter and first nine months of 2015, by $1.8-million and $22.8-million, respectively. Over all, backlog fell by $55.1-million during the quarter and by $438.8-million during the nine months ended Sept. 30, 2015, as the lower booking levels were more than offset by engineered systems revenue.

The company expects weak oil, natural gas liquids (NGLs) and natural gas commodity prices through 2015 and into 2016, creating further uncertainty, and potentially resulting in further capital budget cuts and cost-reduction initiatives by customers. This would reduce the demand for Enerflex products and services during the remainder of 2015 and into 2016. These market conditions create significant uncertainty for bookings and activity levels in the fourth quarter 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 increased recurring revenues, including new and renewed long-term rental and service contracts, and from a geographically diversified business. With the business acquired from Axip Energy Services LP, 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. During the quarter, Enerflex renewed a number of long-term service agreements for over 145,000 horsepower in Canada and the MEA region.

Cost-saving initiatives

Enerflex has been pro-active in responding to the reduction in business activity in North America, and has implemented measures to streamline its business, control costs and remains committed to its EBIT goal of 10 per cent. Among measures implemented during the third quarter, the company made head count reductions of over 200 employees, which resulted in severance costs of $2.5-million. Head count is now approximately 2,600, a reduction of over 800 since the beginning of 2015, with severance charges of $6.3-million recorded during the first nine months of 2015. During the second 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 extended through the remainder of the year, include a company-wide hiring and salary freeze, business travel expense limitations, reduced marketing expenditures, and significant reductions in expenditures for facilities, IT infrastructure and maintenance, except where critical. Notwithstanding the impact on SG&A (selling, general and administrative) expense of severance costs, SG&A expense as a percentage of revenue increased only slightly to 11.3 per cent, from 10.9 per cent in the third quarter of 2015, and decreased to 11.2 per cent, from 12.5 per cent for the nine months ended Sept. 30, 2015. Despite the inclusion of a full year of results for the Axip business and inflationary pressures, Enerflex is ahead of its target of reporting total 2015 SG&A expenses, consistent with those in 2014.

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

                                     Three months ended
                                     Sept. 30, Sept. 30,
                                         2015      2014

Revenue                              $  425.2  $  451.1
Gross margin                             86.5      94.2
Gross margin                             20.3%     20.9%
EBIT                                     40.6      46.9
EBIT                                      9.5%     10.4%
Net earnings, continuing operations      31.9      31.3
Net earnings, discontinued   
operations                                0.2      (1.1)
Earnings per share, continuing      
operations                           $   0.40  $   0.40
(Loss) per share, discontinued       
operations                                  -  $  (0.01)
Bookings                                237.3     342.2
Backlog                                 477.6     866.4

                                      Nine months ended
                                     Sept. 30, Sept. 30,
                                         2015      2014

Revenue                              $1,270.5  $1,195.6
Gross margin                            251.5     232.7
Gross margin                             19.8%     19.5%
EBIT                                    115.8      90.2
EBIT                                      9.1%      7.5%
Net earnings, continuing operations      82.3      48.6
Net earnings, discontinued    
operations                               (0.6)     (3.2)
Earnings per share, continuing     
operations                               1.04      0.62
(Loss) per share, discontinued     
operations                           $  (0.01) $  (0.04)
Bookings                                464.5     994.4
Backlog                                 477.6     866.4

Highlights

The company continues to strategically allocate resources to growth areas of the business with the fabrication and deployment of rental assets, and associated installation, construction and service activities in the MEA and Latin America regions. During the quarter, Enerflex started recognizing revenue on a large rental contract, which deploys approximately 10,000 horsepower into the MEA region, adding to the 40,000 contracted horsepower deployed during the second quarter of 2015. In addition, revenue is being recognized for the construction component of one other large rental and service contract, which was expanded in scope during the quarter to include additional rental units and which will deliver approximately an additional 30,000 horsepower into the region starting early in 2016. In Latin America, fabrication is complete on the long-term rental and service agreement for over 25,000 horsepower secured during the second quarter. The agreement is anticipated to contribute to revenue starting in the fourth quarter of 2015. Lastly, Enerflex has secured a number of new long-term, or long-term extensions to existing, service agreements in Canada and the MEA region covering almost 145,000 horsepower in equipment.

During the second quarter, Enerflex initiated arbitration proceedings against Oman Oil Company Exploration and Production LLC (OOCEP) related to previously disclosed variation claims which were submitted to OOCEP, and to approximately $30-million in milestone payments which are overdue and remain unpaid. These variation claims were the result of customer-driven scope and schedule changes which 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. As previously disclosed, Enerflex is currently unable to reasonably estimate when it expects this arbitration to be resolved.

Results overview

Financial results for the quarter deteriorated over the same period last year, on lower revenues in all three segments, and lower gross margin in the Canada and U.S. segments, partially offset by higher revenue in the rest of the world. The decrease in gross margin was due to lower revenue and awarded margins, partially offset by improved warranty experience and project margin pickups. Lower EBIT in the third quarter of 2015 was attributable to lower gross margin, partially offset by lower SG&A expenses. The gross margin impact of unresolved customer disputes, coupled with severances recorded during the quarter, reduced EBIT by $4.8-million. Net earnings from continuing operations increased on lower income taxes, partially offset by lower EBIT. Income tax expense for the third quarter was lower due to reduced earnings before tax and the mix of earnings taxed in foreign jurisdictions.

Financial results for the first nine months of 2015 were significantly improved on the same period last year, with revenues higher in all three segments and gross margin higher in the rest of the world, partially offset by lower gross margin in the Canada and U.S. segments. The significant improvement in EBIT in the first nine months of 2015 was due to higher gross margin and lower SG&A expenses. The increase in gross margin was primarily due to the increase in revenue, improved warranty experience and project margin pickups, partially offset by reduced absorption of overheads. In addition, during the first nine months of 2014, the company experienced $23.8-million in margin erosion on the large project in Oman. The impact of unresolved customer disputes, coupled with severances recorded during the year-to-date period, reduced EBIT by $12.3-million. During the first nine months of 2014, acquisition-related costs increased SG&A expenses by $9.1-million. Net earnings increased on higher EBIT and lower income tax expense, partially offset by lower equity earnings from associates and joint ventures. Income tax expense was lower due to the mix of earnings taxed in foreign jurisdictions and the unfavourable tax effect of acquisition-related activities, partially offset by higher earnings before tax.

Results from continuing operations for the three and nine months ended Sept. 30, 2015, include the Axip business purchased on June 30, 2014, which represented revenues of $53.5-million and $147.6-million, respectively, and EBIT of $8.7-million and $25.5-million, respectively (revenue of $59.5-million and EBIT of $6.8-million during the three and nine months ended Sept. 30, 2014).

Progress on 2015 strategic objectives

During the third quarter, the company made good progress on its 2015 strategic objectives. It reduced its company-wide total recordable injury rate by 29 per cent over the 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 9.3 per cent for the trailing 12 months ended Sept. 30, 2015, compared with 7.0 per cent for the same period of 2014. With recurring revenue on a trailing-month basis at 31.1 per cent, compared with 28.8 per cent for the same period in 2014, the company has progressed toward its goal of 35 to 40 per cent.

Segmented results

Effective Jan. 1, 2015, the company realigned its reporting segments into Canada, the U.S. and the rest of the world. The U.S. segment now includes the Northern United States service business, as well as the retrofit and rentals operations based out of Casper, Wyo., each of which were previously reported in the Canada and Northern United States segment. The rest of the world 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 third quarter of 2015 was $120.1-million, down $8.6-million or 6.7 per cent from $128.7-million in the same period of 2014, on lower service revenue due to lower parts sales and lower rental revenue from contracts, partially offset by higher engineered systems revenue. Despite lower opening backlog, engineered systems revenue was higher due to the expanded fabrication facility fully operational in the fourth quarter of 2014. For the nine months ended Sept. 30, 2015, revenue was $401.9-million, up $18.7-million or 4.9 per cent, as a result of higher engineered systems revenue due to higher opening backlog and the expanded fabrication facility, 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 and lower revenue from rental contracts.

Operating income for the third quarter of 2015 of $9.9-million decreased by $2.1-million or 17.2 per cent on lower gross margin, partially offset by lower SG&A expenses. The lower gross margin resulted from lower awarded margins and lower revenue, partially offset by improved warranty experience and project margin pickups. The decrease in SG&A expense was due to lower compensation expense, and lower depreciation and amortization expense.

Operating income for the nine months ended Sept. 30, 2015, of $30.9-million increased by $5.7-million or 22.4 per cent on lower SG&A expenses, partially offset by lower gross margin. The decrease in SG&A expense was due to lower third party services, lower compensation expense, lower travel costs, and lower depreciation and amortization expense. The lower gross margin resulted from lower awarded margins and lower absorption of overheads, partially offset by higher revenue, improved warranty experience and project margin pickups.

United States

U.S. segment revenue in the third quarter of 2015 was $180.0-million, down $13.5-million or 7.0 per cent from $193.5-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 nine months of 2015, revenue was $521.6-million, up $1.5-million or 0.3 per cent as a result of higher service revenue on increased parts sales, compared with the same period in 2014, partially offset by lower engineered systems revenue due to lower bookings in 2015, and despite higher opening backlog.

Operating income of $12.4-million decreased by $11.2-million or 47.6 per cent during the third quarter of 2015, due to lower gross margin and higher SG&A expenses. Gross margin was lower due to lower awarded margins, lower revenues and lower absorption of overheads, partially offset by improved warranty experience. Higher SG&A expenses were a result of unfavourable foreign exchange translation impacts.

Operating income of $35.2-million decreased by $17.8-million or 33.6 per cent during the first nine months of 2015, due to lower gross margin, partially offset by lower SG&A expense. Lower gross margin was attributable to lower awarded margins with more compression than process work, project margin hits and lower absorption of overheads, partially offset by improved warranty experience. SG&A expenses were lower in 2015, as a result of reduced third party services, lower compensation expense and lower travel costs, partially offset by unfavourable foreign exchange translation impacts.

Rest of world

Revenue for the rest of the world in the 2015 third quarter was $125.2-million, down $3.7-million or 2.9 per cent from 2014, due to lower engineered systems revenue on lower opening backlog, partially offset by higher service and rental revenues on increased activity in Australia, and the Latin America and MEA regions.

For the first nine months of 2015, revenue increased by $54.7-million or 18.7 per cent to $346.9-million, as a result of higher service and rental revenues, due to increased activity in 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 region and Australia in 2015.

Operating income of $16.3-million increased by $6.7-million or 69.6 per cent in the third quarter as a result of improved gross margin. The higher gross margin was due to the increased relative contribution of the rental and service operations, which contribute higher margins, and project margin pickups, partially offset by increased costs associated with unresolved customer disputes.

Operating income for the first nine months of 2015 of $43.1-million increased by $37.7-million or 689.3 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, including as a result of the Axip acquisition, the impact of higher revenues and project margin pickups, partially offset by the increased costs associated with unresolved customer disputes. In addition, during the first nine months 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 third quarter of 2015, Enerflex declared a quarterly dividend of 8.5 cents per share, payable on Jan. 7, 2016, to shareholders of record on Nov. 17, 2015.

Quarterly results material

Enerflex's interim condensed financial statements as at and for the three and nine months ended Sept. 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 Thursday, Nov. 5, 2015, at 8 a.m. MST (10 a.m. EST), to discuss the third quarter 2015 financial results and operating highlights. The call will be hosted by Mr. Goertzen and D. James Harbilas, executive vice-president and chief financial officer of Enerflex.

If you wish to participate in this conference call, please call 1-888-221-1785. 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 Nov. 5, 2015, at 8 a.m. MST (10 a.m. EST). 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, Nov. 12, 2015. Please call 1-800-558-5253 or 1-416-626-4100 and enter passcode 21780148.

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