Mr. Blair Goertzen reports

ENERFLEX REPORTS FIRST QUARTER 2016 FINANCIAL RESULTS

Enerflex Ltd. has released its financial and operating results for the three months ended March 31, 2016.

      FIRST-QUARTER 2016 FINANCIAL AND OPERATING RESULTS
($ millions, except per-share amounts, horsepower and per cent)
     
                                   Three months ended March 31,   
                                              2016        2015

Revenue                                   $  271.7    $  455.5
Gross margin                                  46.4        83.5
EBIT (loss) gain (1)                      $  (91.1)   $   37.0
Net (loss) earnings -- continuing
operations                                $  (93.5)   $   23.5
(Loss) earnings per share -- continuing
operations                                   (1.18)       0.30
Recurring revenue % (2)                       35.9%       28.2%
Bookings (3)                              $   65.0    $  140.6
Backlog (3)                                  334.9       715.1
Rental horsepower                          498,193     419,649
                                                                            
(1) Earnings before interest (finance costs) and taxes (EBIT)
    is considered an additional generally accepted accounting
    principles measure, which may not be comparable with 
    similar additional GAAP measures used by other entities.                
(2) Determined by taking the trailing 12-month period.                      
(3) 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.            

"Our first-quarter financial results reflected the continuing uncertainty surrounding commodity prices and the associated reduction in customer capital budgets. In response to declining activity levels and weaker bookings, the company has completed multiple service branch closures and implemented further cost-reduction measures, primarily in Canada. These actions have resulted in restructuring and severance costs for the quarter", said J. Blair Goertzen, Enerflex's president and chief executive officer. "We expect that these challenging conditions will continue through 2016, and, as such, have recorded a goodwill impairment for the Canada segment. We are focused on controlling costs, preserving the strength of our balance sheet and generating free cash flow, positioning us to weather this prolonged downturn. We have deployed capital and will continue to pursue opportunities in those regions where there is economic growth, such as the Middle/East Africa and Latin America regions."

Quarterly overview:

• EBIT loss for the first quarter of 2016 includes goodwill impairment of $92.1-million, provisions for continuing warranty disputes of $9.6-million, severance and restructuring costs of $6.2-million, and customer legal dispute costs of $2.5-million;
• Bookings lower by $75.6-million across all segments, most notably the United States;
• Backlog lower by $380.2-million on reduced bookings through 2015 and engineered systems revenue exceeding bookings;
• Closed six service branches in Canada, reduced scale of the retrofit business and reduced shifts at the two manufacturing locations in Calgary;
• Further downsized the manufacturing and service operations in the United States;
• Reduced head count by 276 to just under 2,100 (compared with just over 3,200 at March 31, 2015). Global head count reductions in 2016 expected to yield $35-million to $40-million of annualized savings;
• Completed the fabrication and installation of a 30,000-horsepower rental project in Middle East/Africa (MEA) region;
• Reduced net indebtedness by $39.2-million;
• Subsequent to quarter-end, declared quarterly dividend of 8.5 cents per share payable July 7, 2016.

Summary quarterly results

Net earnings for the first quarter of 2016 were lower as a result of reduced gross margin and the goodwill impairment in the Canada segment, partially offset by lower selling, general and administrative expenses, and income tax recoveries. Gross margin in the first quarter decreased by $37.1-million on lower revenues in the Canada and U.S. segments, costs related to continuing warranty disputes, reduced absorption of overheads from reduced facilities utilization, and severance costs of $1.6-million, partially offset by project margin improvements on engineered systems jobs and a greater proportion of higher-margin recurring revenue. The goodwill impairment of $92.1-million resulted from the effect of the continuing deterioration in commodity prices and the impact on customer budgets, and therefore the outlook for activity in Canada in 2016 and beyond. SG&A expenses decreased by $2.2-million on lower compensation expense, partially offset by higher third party services as a result of customer disputes, unfavourable foreign exchange movements and restructuring costs of $2.3-million. Compensation expense decreased due to lower head count, reduced incentive accruals based on lower profitability and the mark-to-market impact of a larger decline in the share price during the first quarter of 2016 compared with the same quarter in 2015, partially offset by severance costs of $2.3-million.

Bookings, backlog and outlook

During the first quarter of 2016, the continuing commodity price challenges and reduced capital budgets for 2016 resulted in a decrease in bookings of $75.6-million across all three segments compared with the same period in 2015, with the most notable decrease occurring in the U.S. The movement in exchange rates had an unfavourable impact of $13.3-million on U.S.-dollar-denominated bookings during the first quarter of 2016, compared with a favourable impact of $46.6-million for the first quarter of 2015. There were no project cancellations during the first quarter of 2016. Over all, backlog fell by $92.3-million during the quarter, as the lower booking levels were more than offset by engineered systems revenue.

Notwithstanding the weaker markets, the company's financial performance continues to benefit from the recurring revenue stream derived from existing, and new long-term rental and service contract progress, and from a geographically diversified business. Inclusive of 30,000 compression horsepower added in the MEA region during the first quarter, the company has added approximately 105,000 horsepower in rental projects in the MEA and Latin America regions over the last 12 months, which will continue to contribute to increased recurring revenue going forward.

Progress on 2016 strategic objectives

The health and safety of the company's employees is one of Enerflex's continuing, key strategic objectives. Although the current weak market environment has precluded meaningful progress and assessment of several 2016 objectives, the company reduced its total recordable injury rate by 27 per cent over the 2016 goal.

Segmented results

Canada

Canada segment revenue in the first quarter of 2016 was $61.2-million, down $90.9-million or 60 per cent from $152.0-million in the same period of 2015 on lower revenue across all three product lines, largely driven by the current economic environment. Engineered systems revenue was down on lower opening backlog, which was less than half the opening backlog in 2015. Service revenue was lower on reduced parts sales and service calls, while rental revenue decreased due to lower revenues from contracts and reduced rental unit sales. Utilization levels by horsepower were 51 per cent compared with 67 per cent in the first quarter of 2015.

Operating loss for the first quarter of 2016 of $11.4-million decreased by $21.0-million or 219 per cent on lower gross margin and higher SG&A expenses. The decrease in gross margin resulted primarily from lower revenues, in addition to increased inventory allowances and severance costs of $1.2-million, partially offset by improved awarded margins due to the mix of engineered systems jobs. The increase in SG&A expense was attributable to severance and restructuring costs of $4.2-million associated with service branch closures and head count reductions in Canada, partially offset by reduced compensation expense on lower head count compared with the first quarter of 2015.

U.S.

U.S. segment revenue in the first quarter of 2016 was $109.8-million, down $97.3-million or 47 per cent from $207.1-million a year earlier due to a decrease in engineered systems revenue on lower opening backlog, partially offset by higher rental revenue attributable to an increase in revenue on customer contracts.

Operating income of $8.0-million decreased by $3.2-million or 28 per cent during the first quarter of 2016 due to reduced gross margin, partially offset by lower SG&A expenses. Gross margin decreased primarily as a result of lower revenues, in addition to reduced absorption of overheads, in part due to severance costs of $300,000 and lower warranty releases, partially offset by project margin improvements and a decrease in inventory allowances taken during the quarter. The decrease in SG&A expenses was primarily a result of lower compensation on reduced head count, and a decrease in third party services, partially offset by severance costs of $200,000.

Rest of world

Rest of world segment revenue in the first quarter of 2016 was $100.7-million, up $4.3-million or 4 per cent from 2015 due to higher engineered systems revenue despite lower opening backlog on higher activity in the Latin America and MEA regions, partially offset by reduced activity in Australia, with the restructuring under way. Rental revenue was also higher with new rental projects in the Middle East and Latin America. Service revenue decreased during the quarter on reduced activity in Australia and Asia, partially offset by increased activity with long-term service contracts in the MEA region.

Operating income of $2.1-million decreased by $10.7-million or 84 per cent in the first quarter as a result of lower gross margin and higher SG&A expenses. The decrease in gross margin was a result of lower absorption of overheads, in part due to severance of $100,000 and provisions for continuing warranty disputes, partially offset by margin improvements on jobs and higher revenue. SG&A expenses increased on costs associated with unresolved customer legal disputes and unfavourable foreign exchange movements, partially offset by lower compensation expense on reduced head count, partially offset by severance costs of $200,000.

During the second quarter of 2015, 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 $30.0-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. During April, 2016, Enerflex submitted its detailed claim to the tribunal panel. As previously disclosed, Enerflex is currently unable to reasonably estimate when it expects this arbitration to be resolved.

Dividend

Subsequent to the end of the first quarter of 2016, Enerflex declared a quarterly dividend of 8.5 cents per share, payable on July 7, 2016, to shareholders of record on May 17, 2016.

Quarterly results material

Enerflex's interim condensed financial statements as at and for the three months ended March 31, 2016, 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, May 5, 2016, at 8 a.m. MST (10 a.m. EST) to discuss the first-quarter 2016 financial results and operating highlights. The call will be hosted by Mr. Goertzen, president and chief executive officer, and D. James Harbilas, executive vice-president and chief financial officer of Enerflex.

If you wish to participate in this conference call, please call 1-800-734-8592. 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 May 5, 2016, 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, May 12, 2016. Please call 1-800-558-5253 or 1-416-626-4100 and enter passcode 21809523.

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