Mr. J. Blair Goertzen reports
ENERFLEX REPORTS FOURTH QUARTER 2016 FINANCIAL RESULTS AND QUARTERLY DIVIDEND
Enerflex Ltd. has released its financial and operating results for the three and 12 months ended Dec. 31, 2016.
FINANCIAL AND OPERATING RESULTS
(in millions of dollars, except per-share amounts, horsepower and percentages)
Three months ended Dec. 31, 12 months ended Dec. 31,
2016 2015 2016 2015
Revenue $ 343.4 $ 358.5 $ 1,130.6 $ 1,629.0
Gross margin 69.2 74.7 243.8 326.2
EBITDA (1) (12.4) 7.0 11.6 176.8
Adjusted EBITDA (2) 57.9 55.7 180.6 231.1
EBIT (loss) (1) (36.3) (20.9) (81.5) 94.9
Adjusted EBIT (2) 34.0 27.7 87.5 148.3
Net (loss) earnings --
continuing operations (45.5) (33.4) (104.5) 48.9
(Loss) earnings per
share -- continuing
operations (0.54) (0.42) (1.28) 0.62
Recurring revenue % (3) 41.7% 33.0% 41.7% 33.0%
Bookings (4) 262.2 170.6 853.3 635.1
Backlog (4) 621.4 427.2 621.4 427.2
Rental horsepower 491,206 482,175 491,206 482,175
(1) Earnings before interest (finance costs), taxes, depreciation and amortization (EBITDA) and earnings
before interest (finance costs) and taxes (EBIT) are considered non-GAAP (generally accepted
accounting principles) and additional GAAP measures, which may not be comparable with similar non-GAAP
or additional GAAP measures used by other entities.
(2) Adjusted EBITDA and adjusted EBIT are non-GAAP measures. These measures provide a better
representation of the company's continuing operations.
(3) Determined by taking the trailing 12-month period.
(4) 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.
"Enerflex's fourth quarter financial results reflect the challenging business environment in which we have been operating. Customers have been cautious with their capital expenditures due to low commodity prices, which resulted in additional restructuring and asset impairments in Enerflex's Canada, Asia and Australia operations during the quarter. The cost reductions resulting from this restructuring will position these regions well for 2017," said J. Blair Goertzen, Enerflex's president and chief executive officer.
"With the recent stability in commodity prices, Enerflex experienced increased customer enquiries and a rebound in bookings in the second half of 2016, particularly in North America. By the end of 2016, company backlog -- a leading indicator of future revenue -- was 45.5 per cent higher than at the end of 2015.
"This positive trend has continued during the early part of 2017, as North American producers have increased capital budgets and we continue to see strengthening customer enquiries. Consequently, we are optimistic that further stability in commodity prices will allow oil and gas producers to increase investment in their businesses, which will ultimately drive demand for Enerflex's products and services. However, Enerflex will continue to operate with caution and stay focused on controlling costs, protecting the company's balance sheet and generating strong free cash flow."
Quarterly overview
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Recorded bookings of $262.2-million, a 53.7-per-cent increase compared with the $170.6-million recorded in the fourth quarter of 2015;
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Engineered systems backlog at Dec. 31, 2016, was $621.4-million, a 45.5-per-cent increase compared with the Dec. 31, 2015, backlog of $427.2-million;
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Reported an EBIT loss of ($36.3-million) and ($81.5-million) for the three months and year ended Dec. 31, 2016, compared with EBIT loss of ($20.9-million) in the fourth quarter of 2015 and EBIT of $94.9-million for the full year 2015. The EBIT loss for the three months and year ended Dec. 31, 2016, includes goodwill impairment losses of $68.8-million and $160.9-million. Adjusted EBIT was $34.0-million and $87.5-million for the three and 12 months ended Dec. 31, 2016, compared with $27.7-million and $148.3-million for the same periods in 2015, after excluding severance and restructuring costs in Canada, Asia and Australia, the impairment of assets and goodwill associated with Canada, and the gain on the disposal of PP&E (property, plant and equipment);
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Rental fleet grew to almost 500,000 horsepower with the completion of a large project in the Middle East/Africa region during the first half of 2016. Enerflex has added more than 100,000 horsepower in the last 18 months as a result of organic growth;
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Reduced net debt by $23.2-million during the quarter, resulting in a ratio of net debt to EBITDA, as calculated for covenant compliance purposes, of less than 1.3 to 1;
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Subsequent to quarter-end, declared a quarterly dividend of 8.5 cents per share, payable on April 6, 2017, to shareholders on record on March 15, 2017.
Fourth quarter results summary
Net loss for the fourth quarter of 2016 was higher compared with the same period of 2015, primarily as a result of higher goodwill and asset impairments and reduced gross margin, partially offset by lower SG&A (selling, general and administrative) expenses and lower income tax expense. Gross margin in the Canada and United States segments for the quarter decreased by $13.8-million, primarily on lower revenues in Canada. Revenues in the U.S. segment were slightly higher than the comparable quarter. For the rest-of-world segment, gross margin increased by $8.3-million during the fourth quarter, as a result of higher revenue. The consolidated gross margin percentage of 20.1 per cent for the quarter was lower than the margin of 20.8 per cent realized in the prior year. The margin decreased due to higher inventory reserves, asset impairments and warranty costs experienced during the quarter, partially offset by stronger overhead absorption. The company's geographic and product line diversification also helped keep margins relatively stable in a competitive and constrained economic environment caused by low commodity prices. SG&A expenses decreased $14.0-million during the three months ended Dec. 31, 2016, primarily due to reduced compensation on lower head count, combined with favourable foreign exchange effects and improved bad debt experience. The fourth quarter 2016 results also reflect an $11.4-million gain on the sale of fixed assets.
Adjusted EBIT and adjusted EBITDA
The downturn in the energy industry has resulted in multiple rounds of cost cutting and restructuring at Enerflex in order for the business to be well positioned to weather this cycle. Lower commodity prices and reduced customer activity have also given rise to indicators of impairment over the last 24 months, which resulted in non-cash impairments being recorded on long-lived assets and the carrying value of goodwill in the Canada and U.S. segments. The company has recorded a number of these items in its results for the quarters and 12-month periods ended 2016 and 2015. These restructuring costs and impairments are not expected to recur in a stable commodity price environment. The exclusion of these items presents a view of the results that management believes is a better representation of the company's continuing operations. The presentation of adjusted EBIT and adjusted EBITDA should not be considered in isolation from EBIT or EBITDA as determined under IFRS (international financial reporting standards). The adjusted EBIT and adjusted EBITDA presented herein may not be comparable with similar measures presented by other companies and should not be considered in isolation or as a replacement for measures prepared as determined under IFRS.
The items that have been adjusted for presentation purposes relate generally to two categories: (i) impairment or gains on assets; and (ii) restructuring activities. Exclusion of these items should allow for a better understanding of continuing, normal operations of the company.
Three months ended Dec. 31, 2016 Total Canada United States Rest of world
(in thousands of dollars)
Reported EBIT (loss) $ (36,284) $ (67,774) $ 20,412 $ 11,078
Restructuring costs in COGS and SGA 7,051 2,267 209 4,575
Writedown of equipment in COGS 5,853 3,997 - 1,856
(Gain) loss on disposal of PPE (11,386) (11,387) (29) 30
Goodwill impairment 68,802 68,802 - -
Adjusted EBIT $ 34,036 $ (4,095) $ 20,592 $ 17,539
Depreciation and amortization 23,842 4,864 2,975 16,003
Adjusted EBITDA $ 57,878 $ 769 $ 23,567 $ 33,542
Three months ended Dec. 31, 2015 Total Canada United States Rest of world
(in thousands of dollars)
Reported EBIT (loss) $ (20,880) $ 6,509 $ (18,800) $ (8,589)
Restructuring costs in COGS and SGA 11,487 1,075 325 10,087
Writedown of equipment in COGS - - - -
(Gain) loss on disposal of PPE 228 (601) (1,003) 1,832
Goodwill impairment 36,900 - 36,900 -
Adjusted EBIT $ 27,735 $ 6,983 $ 17,422 $ 3,330
Depreciation and amortization 27,927 4,290 5,476 18,161
Adjusted EBITDA $ 55,662 $ 11,273 $ 22,898 $ 21,491
Once the effects of the impairment or gains on assets and the restructuring activities are removed, the adjusted EBIT and adjusted EBITDA for the three months and year ended Dec. 31, 2016, show positive EBIT instead of an EBIT loss.
Segmented results
Canada
Canada segment revenue in the fourth quarter of 2016 was $53.3-million, down $39.0-million or 42.3 per cent from $92.3-million recorded in the same period of 2015. The segment has been negatively affected by the significant decline in activity levels due to low commodity prices. Engineered systems revenue was down on lower 2016 opening backlog of $150.9-million, compared with $332.0-million at the start of 2015. Lower service revenue reflects lower parts sales and a decreased level of maintenance and overhaul work. Rental revenue was higher as a result of higher rental unit sales, partially offset by reduced utilization of the Canadian rental fleet.
Operating loss for the fourth quarter of 2016 was $10.5-million, compared with operating income of $2.8-million in the comparable quarter last year. This resulted from lower revenues, lower gross margin and higher restructuring costs recorded during the quarter. The decrease in gross margin was the result of lower revenues, lower project margins, reduced overhead absorption, and the non-cash impairment of the rental fleet and inventory, partially offset by improved warranty experience. Operating loss for the 12 months ended Dec. 31, 2016, was $21.9-million, compared with operating income of $33.7-million in the prior year. The $55.6-million reduction was due to lower gross margin, partially offset by decreased SG&A expenses. The decrease in gross margin resulted primarily from lower revenues, lower project margins, lower overhead absorption, and the non-cash impairment of the rental fleet and inventory, partially offset by improved warranty experience. The reduction in SG&A expense was attributable to lower compensation expense on lower head count. For the 12 months of 2016, EBIT was unfavourably affected by $160.9-million of goodwill impairments, $7.7-million of restructuring costs and $4.0-million of equipment impairments, partially offset by $11.4-million of gains on the sale of buildings.
United States
U.S. segment revenue in the fourth quarter of 2016 was $158.1-million, increased by $1.5-million or 1.0 per cent from $156.6-million a year earlier. The increase is due to higher engineered systems revenue, partially offset by lower service and rental revenue. Engineered systems revenue increased due to the increased bookings in the back half of 2016 as compared with the back half of 2015. Service revenue was lower as a result of deferred maintenance, while rental revenue was lower due to weaker utilization and rental rates.
Operating income increased by $2.3-million during the fourth quarter of 2016, due to decreased SG&A expenses, partially offset by lower gross margin. SG&A expenses decreased primarily due to lower compensation expense on lower head count.
Rest of world
Rest-of-world segment revenue in the fourth quarter of 2016 was $132.0-million, which increased by $22.3-million or 20.4 per cent from 2015 due to increased engineered systems, service and rental revenue. Engineered systems revenue was higher as a result of higher opening backlog, while service and rental revenue was higher as a result of new projects becoming operational during 2016, which were under construction in the same period last year.
Operating income increased by $19.5-million in the fourth quarter of 2016 as compared with the same period of 2015, as a result of improved gross margin and lower SG&A expenses. The increase in gross margin was a result of the overall increase in revenue, stronger overhead absorption, better warranty experience and project margin improvements. SG&A expenses decreased due to lower compensation expense on reduced head count. EBIT for the fourth quarter was unfavourably impacted by $4.4-million of restructuring costs, compared with $10.1-million in the prior year. The prior year's fourth quarter EBIT was also negatively affected by $4.5-million of foreign exchange losses, primarily as a result of the devaluation of the Argentine peso.
Stabilization of commodity prices in the second half of 2016 led to increased enquiries and continued strength in bookings in the fourth quarter, particularly in the Canada and U.S. segments. The company is cautiously optimistic that further stability or improvement in commodity prices may cause customers to increase investment, which should translate to further demand for the company's products and services. The start of 2017 has been positive, and the company expects bookings to exceed $190-million in North America for the first quarter of 2017. The rest-of-world segment continues to experience strong enquiry levels, with near-term prospects expected to close in the first quarter of 2017. Finally, consistent with the company's strategy to focus on recurring revenues from long-term maintenance and service contracts, during the first quarter of 2017 Enerflex was engaged to operate certain gas processing facilities within the Delaware basin in the Permian basin for an initial term of 24 months.
Dividend
Subsequent to the end of the fourth quarter of 2016, Enerflex declared a quarterly dividend of 8.5 cents per share, payable on April 6, 2017, to shareholders of record on March 15, 2017.
Quarterly results material
This press release should be read in conjunction with Enerflex's consolidated financial statements as at and for the three and 12 months ended Dec. 31, 2016, and the accompanying management's discussion and analysis, both of which will be available on the Enerflex website 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, March 3, 2017, at 8 a.m. MT (10 a.m. ET) to discuss the fourth quarter and year-end 2016 financial results and operating highlights. The call will be hosted by J. Blair 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 1-844-231-9067. 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 on March 3, 2017, 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 on March 3, 2017, at 11 a.m. MT until March 10, 2017, at 11 a.m. MT. Please call 1-855-859-2056 or 1-404-537-3406 and enter conference ID 71932748.
About Enerflex
Ltd.
Enerflex is a single-source supplier of natural gas compression, oil and gas processing, refrigeration systems, and electric power generation equipment, as well as related engineering and mechanical service expertise. Enerflex has approximately 1,800 employees worldwide.
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