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Attention Business/Financial Editors
Enerflex Continuing Trend of Steadily Improving Performance
CALGARY, Oct. 31 /CNW/ - Enerflex Systems Ltd. (EFX:TSX), a leading
Canadian supplier of products and services to the global oil and gas
production industry, today announced its financial and operating results for
the three and nine months ended September 30, 2005.
Mr. P. John Aldred, Chairman and Chief Executive Officer, is pleased to
report "strong financial results for the three and nine months ended September
30, 2005, continuing the trend of steadily improving performance."
"Earnings per share in the third quarter increased by 26% to $0.44 per
common share, on a 15% increase in revenue to $163 million, as compared to the
third quarter of 2004 with earnings per share of $0.35 and revenue of $141
million. Earnings per share for the nine months ended September 30 also
increased by 26% to $1.17 and net income increased by 28%, when compared to
the same period of 2004."
Mr. J. Blair Goertzen, President and Chief Operating Officer added that
"strategically we are on track with both our international and domestic
expansion. During the third quarter we have been awarded a number of
significant fabrication contracts internationally, while we have made steady
progress in developing our 'Variable Cost Compression' initiative for the
domestic market. This will involve Enerflex owning, operating and maintaining
compression equipment for a variable fee, based on throughput and uptime."
Quarterly Overview:
- Consolidated operating margin improved to 9.7% of revenue in the
third quarter as compared to 8.2% in the prior year period.
- The acquisition of HPS Group Limited ("HPS Group") closed on
July 6th, 2005. The integration process is well advanced and
proceeding smoothly. HPS Group contributed $0.02 per share towards
earnings for the three and nine month periods.
- Our Service segment delivered a 48% increase in earnings before
interest and taxes as a result of strong labour utilization, improved
inventory management and increased focus on logistics.
- Leasing increased the size of its compression rental fleet to over
100,000 horsepower for first time in its 25 year history and
continued to deliver steadily improving results in the quarter.
- The Fabrication segment continued to demonstrate strong growth with a
26% increase in revenue and a 37% increase in income before interest
and taxes over the prior year period.
- Fabrication backlog increased by 162% over the prior year quarter end
to establish a new record. Roughly 32% of total backlog as of
September 30th, 2005 is attributable to the acquisition of HPS Group.
- Fabrication bookings in the third quarter of 2005 increased by 72%
over the same quarter in 2004. Approximately 11% of bookings in the
quarter were generated by HPS Group.
- Enerflex was awarded international fabrication contracts during the
third quarter for projects in Egypt, Indonesia, Bangladesh,
Australia, Thailand and Pakistan totalling approximately $68 million
in value.
<<
For the three months ended
September 30
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$ millions, except per share amounts
(unaudited) 2005 2004 % change
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Revenue $ 162.7 $ 141.3 15%
Gross margin $ 35.0 $ 30.6 14%
Net income $ 9.8 $ 7.7 27%
Earnings per share (Basic) $ 0.44 $ 0.35 26%
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For the nine months ended
September 30
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$ millions, except per share amounts
(unaudited) 2005 2004 % change
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Revenue $ 467.5 $ 389.4 20%
Gross margin $ 101.3 $ 87.8 15%
Net income $ 26.4 $ 20.7 28%
Earnings per share (Basic) $ 1.17 $ 0.93 26%
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Three months ended September 30, 2005
During the three months ended September 30, 2005, Enerflex generated net
income of $9.8 million ($0.44 per common share) from revenue of
$162.7 million. This represents an increase in net income of $2.1 million or
27%, resulting from a revenue increase of $21.4 million or 15%, all as
compared to the three month period ended September 30, 2004. Increased
revenue, the acquisition of HPS Group Limited ("HPS Group"), the leveraging of
existing fixed costs and a consistent gross margin percentage, contributed to
the earnings improvement. The acquisition of HPS Group, which closed on
July 6, 2005, significantly increased the Company's presence in Australia,
added to its fabrication backlog and contributed $10.7 million in revenue and
approximately $0.02 per common share for the three and nine month periods
ended September 30, 2005.
During the third quarter of 2005, revenue increased in all divisions with
the single exception of the Power division where revenue decreased by
$1.7 million. The most significant increases in revenue arose from the
acquisition of HPS Group which contributed $10.7 million and Compression which
added $16.6 million.
Gross margin for the three months ended September 30, 2005 was
$35.0 million or 21.5% of revenue as compared to $30.6 million or 21.7% of
revenue for the three months ended September 30, 2004, an increase of
$4.4 million or 14%. Higher gross margins were achieved in each business unit
during the quarter as compared to the same period of 2004, with the exception
of Power, despite higher labour, component and input costs. The average gross
margin as a percentage of revenue remained consistent between the two periods
as a result of a change in the mix of revenue. During the third quarter of
2005, a greater portion of revenue was generated from Fabrication activities,
which carry a lower average gross margin percentage than Service and Leasing
activities.
Selling, general and administrative ("SG&A") expenses were $22.2 million
or 13.6% of revenue during the three months ended September 30, 2005, compared
with $20.4 million or 14.5% of revenue in the same period of 2004. During the
third quarter SG&A increased by $1.7 million or 8%. The primary reason for the
increased expense was the acquisition of HPS Group, which accounted for
$1.5 million of the increase.
Operating margin(1) assists the reader in understanding the margin
contributions made from the Company's core businesses after considering all
SG&A expenses and the impact of the Company's foreign exchange hedging
strategy. For the three months ended September 30, 2005, Enerflex produced an
operating margin(2) of $15.8 million, or 9.7% of revenue, as compared to an
operating margin(1) of $11.5 million, or 8.2% of revenue, for the same three
month period in 2004. In addition to the factors effecting revenue, gross
margin and SG&A, the increase in operating margin(1) of $4.3 million or 37% is
also affected by foreign exchange gains on United States dollar based debt
borrowed to protect the gross margin over the term of United States dollar
denominated contracts. All such borrowings are in accordance with the
Company's previously stated foreign exchange mitigation program as described
on page 39 of Enerflex's 2004 Annual Report.
Income before interest and income taxes totalled $16.4 million for the
three months ended September 30, 2005, as compared to $12.3 million for the
same period in 2004, an increase of $4.1 million or 33%. Higher interest
expense was incurred during the quarter on borrowings to fund the HPS Group
acquisition and establish the borrowings under the foreign exchange mitigation
program referred to above. Income taxes totalled $5.3 million, an increase of
$1.6 million. The effective income tax rate increased to 35%, as compared to
33% in 2004, as a consequence a reduction in the recognition of the future
income tax benefits arising from foreign jurisdictions and a higher tax rate
in Pakistan where income taxes are calculated as a percentage of revenue on
certain contracts. Management expects the effective tax rate to revert back
toward statutory rates in the future.
Segmented results for the three months ended September 30, 2005
Service
The Service business segment provides a complete line of mechanical, and
electrical, instrumentation and controls services to the oil and gas industry
through an extensive branch network in Canada, as well as operations in the
United States, Germany, the Netherlands, Australia and Indonesia. Service
employs 43% of staff, holds 34% of the total assets, and generated 41% of the
Company's revenue in the third quarter of 2005. Key performance metrics
include labour utilization, revenue, gross margin percent and income before
interest and income taxes.
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Three months ended
September 30
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(unaudited) (thousands) 2005 2004
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Segment revenue $ 70,802 $ 68,192
Intersegment revenue (4,445) (3,751)
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Revenue $ 66,357 $ 64,441
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Gross margin $ 19,368 $ 17,564
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EBITDA(2) $ 7,867 $ 5,625
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Income before interest and income taxes $ 6,988 $ 4,737
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Service revenue was $66.4 million in the three months ended September 30,
2005 and comprised 41% of consolidated revenue. This compares to $64.4 million
and 46% of consolidated revenue in the same period of 2004. In the third
quarter of 2005, Mechanical Service generated 59% of the segment's revenue as
compared to 58% in 2004. Electrical, Instrumentation and Controls ("EI&C")
contributed 41% of the segment's revenue in the three months ended September
30, 2005 and 42% in the same period of 2004. The increase in the segment's
revenue of 3%, or $1.9 million, was due to increased demand for products and
services in Mechanical Service. Gross margin for the segment totalled
$19.4 million, or 29.2% of revenue, as compared to $17.6 million, or 27.3% of
revenue, in the third quarter of 2004. The increase in gross margin percentage
reflects efficiency gains from the Mechanical Service Central Services
facility and increased utilization rates by field service operations in both
the Mechanical Service and the EI&C divisions during the period. Income before
interest and income taxes for the three months ended September 30, 2005
totalled $7.0 million, an increase of $2.3 million from the $4.7 million
generated in the third quarter of 2004. This increase in income before
interest and income taxes was a result of the gross margin improvements
referred to above and lower SG&A expenses in EI&C.
A challenge to sustaining improved profitability in this segment will
continue to be the timely availability of certain Original Equipment
Manufacturer ("OEM") components and repair parts, which will be in steady
demand as activity levels and production of natural gas in North America
remain high. The availability and compensation scales associated with field
and technical personnel in the global energy services industry will also
continue to be a challenge for Enerflex and its competitors throughout the
remainder of 2005 and 2006. In order to mitigate these concerns, the Company
fosters a competitive and safe employment environment to attract and maintain
skilled employees, and it closely monitors its purchasing practices, inventory
levels and training programs.
Fabrication
The Fabrication business segment engineers, project manages, fabricates,
assembles and commissions standard and custom-designed compression facilities,
production and processing equipment and facilities, and power generation
systems. The key performance metrics for this business segment are plant
utilization and gross margin as a percentage of revenue. It employs 54% of
staff, holds 45% of the total assets, and generated 54% of the Company's
revenue in the third quarter of 2005.
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Three months ended
September 30
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(unaudited) (thousands) 2005 2004
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Segment revenue $ 94,506 $ 80,171
Intersegment revenue (5,820) (9,638)
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Revenue $ 88,686 $ 70,533
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Gross margin $ 10,799 $ 8,675
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EBITDA(2) $ 6,398 $ 4,661
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Income before interest and income taxes $ 4,829 $ 3,512
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Fabrication revenue totalled $88.7 million for the three months ended
September 30, 2005 and comprised 54% of consolidated revenue. This compares to
$70.5 million and 50% of consolidated revenue for the same period in 2004.
Compression generated 65% of the segment's revenue in the third quarter of
2005 and 58% during the comparable period in 2004. Production and Processing
contributed 33% of the segment's revenue in the three months ended September
30, 2005 and 37% during the same period of 2004. Power contributed 2% of the
segment's revenue in the third quarter of 2005 and 5% in 2004.
The increase in the segment's revenue of $18.2 million, or 26%, for the
third quarter of 2005 over the third quarter of 2004, was a result of the
acquisition of HPS Group in July 2005, domestic growth in the Production and
Processing division and increased demand for the Company's compression
products, offset by lower international project revenues in Production and
Processing. The HPS Group acquisition added $10.7 million in revenue and
Compression added $16.6 million, a portion of which occurred as a result of
the Compression division receiving many key components for compression
packages of which delivery was delayed in the first quarter of 2005. These
increases were offset by lower international project revenues in Presson and
lower Power sales in the period.
At present, most major suppliers of key components continue to require
significant order lead times and as such the Company has significantly
increased its order quantities and inventory levels for such items. This trend
will continue throughout the remainder of 2005 and 2006. The availability and
compensation scales associated with shop and technical personnel in the global
energy services industry will also continue to be a challenge for Enerflex and
its competitors throughout the remainder of 2005 and 2006. The Company
continues to meet this challenge by closely monitoring and maintaining its
training programs and fostering a competitive and safe employment environment
in order to attract and retain skilled employees.
Gross margin for the segment was 12.2%, or $10.8 million, for the period
as compared to 12.3% in the same quarter of 2004. Though the gross margin
percentage was essentially unchanged many challenges did arise and were
successfully managed. Higher margins in the HPS Group offset the lower
international revenues generated in Presson as major projects in 2005
commenced later in the year than in 2004. Compression also offset the effect
on gross margin resulting from discounts on multiple unit orders and the
incurrence of additional costs to limit the impact of delays in the delivery
of major components. Income before interest and income taxes for the three
months ended September 30, 2005 increased by $1.3 million, or 37%, to
$4.8 million.
Enerflex owns approximately 370,000 square feet of compression shop floor
space in North America and during the three months ended September 30, 2005
management estimates that the average utilization rate, based on the
theoretical plant capacity in labour hours, was 68% as compared to 54% during
the same period in 2004.
Enerflex owns approximately 100,000 square feet of production and
processing shop floor space in Alberta, Canada and approximately 62,000 square
feet in Perth, Australia. During the three months ended September 30, 2005
management estimates that the utilization rate of the Canadian facilities,
based on labour hours, was 91.3%. This compares to 88.9% during the same
period in 2004. The Perth facility utilization was estimated at 84% for the
third quarter of 2005. In 2005, Enerflex commenced the expansion of its
production and processing fabrication facility in Nisku, Alberta with the
construction of a 9,000 square foot large vessel fabrication facility which is
anticipated to commence operation in March of 2006.
Leasing
The Leasing business segment provides a variety of rental and leasing
alternatives for natural gas compression, power generation and processing
equipment. As of September 30, 2005, the Enerflex lease fleet was comprised of
approximately 360 compression units totaling 100,000 horsepower, as compared
with 345 units and 93,000 horsepower as at September 30, 2004. The key
performance metrics in this business are fleet size and utilization rates. The
Leasing segment employs 1% of staff, holds 19% of the total assets and
generated 5% of the Company's revenue in the third quarter.
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Three months ended
September 30
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(unaudited) (thousands) 2005 2004
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Segment revenue $ 7,700 $ 6,350
Intersegment revenue (16) (31)
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Revenue $ 7,684 $ 6,319
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Gross margin $ 4,826 $ 4,371
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EBITDA(2) $ 6,478 $ 5,953
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Income before interest and income taxes $ 4,568 $ 4,072
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Capital expenditures, net of proceeds on disposal $ 3,036 $ 4,674
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Revenue during the three months ended September 30, 2005 of $7.7 million
increased by $1.4 million or 22% from revenue of $6.3 million in the third
quarter of 2004. Although the segment owns and rents compression, power and
processing equipment, the main driver for its revenue growth is compression
equipment. The increase in revenue during the period was a result of a larger
average fleet offset by slightly lower fleet utilization rates. Rental rates
have not increased significantly during the period. For the three months ended
September 30, 2005, the segment's revenue was generated 93% by compression and
7% by power and production process equipment. Overall, the segment experienced
compression rental utilization rates, based on capital deployed, of 79%
compared to 84% for the third quarter of 2004. The decline in utilization
rates is attributable to the timing of disposals of leased units.
During the third quarter of 2005, Leasing sold a number of compression,
power and process equipment units from its fleet, for gross proceeds of
$2.9 million and a gain on sale of $0.5 million. The sale of units generally
occurs when customers exercise their contractual option to purchase equipment.
This compares to gross proceeds of $4.1 million and a gain on sale of
$0.6 million in the same period of 2004.
Nine Months Ended September 30, 2005
During the nine months ended September 30, 2005, Enerflex generated net
income of $26.4 million ($1.17 per common share) from revenue of
$467.5 million. This represents an increase in net income of $5.7 million or
28%, resulting from a revenue increase of $78.1 million or 20%, all as
compared to the nine month period ended September 30, 2004. The acquisition of
HPS Group, increased revenue in the previously existing business units and the
leveraging of existing fixed costs contributed to the earnings improvement,
offset by a small reduction in the average gross margin. During the first nine
months of 2005, revenue increased in each division with significant increases
occurring in three divisions. In Compression and Mechanical Service, increased
domestic demand contributed to revenue growth, while the acquisition of HPS
Group and increased domestic revenue were the primary reasons for growth in
Production and Processing.
Gross margin for the nine months ended September 30, 2005 was
$101.3 million or 21.7% of revenue as compared to $87.8 million or 22.6% of
revenue for the nine months ended September 30, 2004, an increase of
$13.5 million or 15%. The reduction in the gross margin as a percentage of
revenue is attributed to a change in the mix of revenue from higher margin
Service and Leasing activity towards lower margin Fabrication activity and
higher labour, input and shipping costs.
Selling, general and administrative expenses were $61.9 million or 13.2%
of revenue during the nine months ended September 30, 2005, compared with
$56.9 million or 14.6% of revenue in the same period of 2004. Though lower as
a percentage of revenue, SG&A increased during the first nine months of 2005
by $5.0 million, or 9%. The acquisition of HPS Group increased SG&A by
$1.5 million. Other factors contributing to the higher SG&A expense are
increases in: stock-based compensation expense of $0.8 million; costs
associated with the Company's ongoing program for adopting compliance measures
for Multilateral Instrument 52-109 of $1.7 million; information technology
expenditures of $0.5 million; employee related costs of $1.0 million;
amortization of intangibles and depreciation expenses of $0.7 million, offset
by reductions in other administrative expenditures.
Operating margin(1) assists the reader in understanding the margin
contributions made from the Company's core businesses after considering all
SG&A expenses and the impact of the Company's foreign exchange hedging
strategy. For the nine months ended September 30, 2005, Enerflex produced an
operating margin(1) of $42.4 million, or 9.1% of revenue, as compared to an
operating margin(1) of $32.0 million, or 8.2% of revenue, for the same nine
month period in 2004. The increase in operating margin(1) of $10.4 million or
33% is primarily attributed to the leveraging of existing fixed costs, offset
by changes in the Company's revenue mix as referred to above, the acquisition
of HPS Group and the generation of $3.0 million in foreign exchange gains
resulting from the Company's foreign exchange mitigation program as previously
discussed.
Income before interest and income taxes totalled $44.4 million for the
nine months ended September 30, 2005, as compared to $34.0 million for the
same period in 2004, an increase of $10.4 million or 31%. During the period,
interest expense increased $0.4 million to $3.1 million and income taxes
totalled $15.0 million, an increase of $4.3 million. The effective income tax
rate increased to 36% from 34% as a consequence of an unfavorable income tax
assessment from prior years, a reduction in the recognition of the future
income tax benefits arising from foreign jurisdictions and a higher effective
income tax rate arising from Pakistan where income tax is calculated as a
percentage of revenue on certain contracts. Management expects the effective
tax rate to revert back toward statutory rates in the future.
Segmented results for the nine months ended September 30, 2005
Service
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Nine months ended
September 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
-------------------------------------------------------------------------
Segment revenue $209,161 $194,612
Intersegment revenue (11,619) (11,741)
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Revenue $197,542 $182,871
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Gross margin $ 54,381 $ 49,535
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EBITDA(2) $ 19,208 $ 15,916
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Income before interest and income taxes $ 16,554 $ 13,415
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Service revenue was $197.5 million in the nine months ended September 30,
2005 and comprised 42% of consolidated revenue. This compares to
$182.9 million and 47% of consolidated revenue in the same period of 2004. In
the first nine months of 2005, Mechanical Service generated 59% of the
segment's revenue as compared to 57% in 2004. EI&C contributed 41% of the
segment's revenue in the first three quarters of 2005 and 43% in the same
period of 2004. The revenue increase of 8%, or $14.7 million, was due to
increased demand for products and services in Mechanical Service, resulting in
an increase of $13.5 million, and an increase in revenue contributed by EI&C
of $1.1 million. Gross margin for the segment totalled $54.4 million, or
27.5%, as compared to $49.5 million or 27.1% in the same period of 2004. The
small increase in gross margin percent was caused by slightly higher margins
in Mechanical Service offset by slightly lower margins in the EI&C division.
Income before interest and income taxes for the nine months ended
September 30, 2005 totalled $16.6 million, an increase of $3.1 million from
the $13.4 million generated in the first three quarters of 2004, an increase
of 23% as compared to the increase in revenue of 8%.
Fabrication
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Nine months ended
September 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
-------------------------------------------------------------------------
Segment revenue $263,869 $212,889
Intersegment revenue (17,529) (27,095)
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Revenue $246,340 $185,794
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Gross margin $ 31,648 $ 25,151
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EBITDA(2) $ 16,675 $ 11,850
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Income before interest and income taxes $ 12,983 $ 8,327
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Fabrication revenue totalled $246.3 million for the nine months ended
September 30, 2005 and comprised 53% of consolidated revenue. This compares to
$185.8 million and 48% of consolidated revenue for the same period in 2004.
Compression generated 68% of the segment's revenue in the first nine months
and 67% during the comparable period in 2004. Production and Processing
contributed 30% of the segment's revenue in the nine months ended
September 30, 2005 and 2004. Power contributed 2% of the segment's revenue in
the first three quarters of 2005 and 3% in 2004.
The increase of $60.5 million, or 33%, in the segment's revenue for the
first nine months of 2005 over the same period in 2004, was a result of
increased domestic and international demand for the Company's compression
products, the acquisition of HPS Group and domestic growth in the Production
and Processing division. Gross margin for the segment was 12.8%, or
$31.6 million, for the period as compared to 13.5% in the first nine months of
2004. The reduction in gross margin percent was a result of completion costs
on international projects, discounts on multiple unit orders, higher costs of
materials, major components and labour. Income before interest and income
taxes for the nine months ended September 30, 2005 increased by $4.7 million,
or 56%, to $13.0 million.
Fabrication Segment Bookings
During the first nine months of 2005, Enerflex increased its order
bookings in the Fabrication segment by approximately 48%, as compared to
bookings recorded in the same period of 2004. The Fabrication segment's order
backlog as at September 30, 2005 was approximately 214% above the segment's
order backlog at December 31, 2004, and approximately 162% above the segment's
order backlog at September 30, 2004. Approximately 32% of the September 30,
2005 backlog came as a result of the acquisition and additional bookings
generated since acquisition of HPS Group.
Leasing
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Nine months ended
September 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
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Segment revenue $ 23,702 $ 20,821
Intersegment revenue (80) (86)
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Revenue $ 23,622 $ 20,735
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Gross margin $ 15,242 $ 13,133
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EBITDA(2) $ 20,372 $ 17,674
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Income before interest and income taxes $ 14,905 $ 12,283
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Capital expenditures, net of proceeds on disposal $ 2,746 $ 14,622
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Revenue during the nine months ended September 30, 2005 was
$23.6 million, an increase of 14% over the $20.7 million in 2004. The increase
in revenue during the period was a result of a larger average fleet, offset by
slightly lower fleet utilization rates. Rental rates have not increased
significantly during the period. For the nine months ended September 30, 2005,
the segment's revenue was generated 93% by compression and 7% by power and
production process equipment. Overall, the segment experienced compression
rental utilization rates, based on capital deployed, of 82% compared to 85%
for the first three quarters of 2004. The decline in utilization rates was
attributed to the timing of disposals of leased units. It is currently
management's belief that the increase in 2005 drilling activity and subsequent
production requirements for new wells in the segment's core market of Canada,
the increase in the number of coal bed methane ("CBM") wells, and a desire by
natural gas producers to maintain production during periods when their
equipment requires maintenance will ultimately drive increased demand for
rental units.
During 2005, Leasing sold 30 compression units and 45 power and process
equipment units from its fleet, for gross proceeds of $12.8 million and a gain
on sale of $2.0 million. This compares to 30 compression units and 86 power
and process equipment units, for gross proceeds of $12.2 million and a gain on
sale of $1.8 million in the same period of 2004. The sale of units generally
occurs when customers exercise their contractual option to purchase equipment.
To satisfy demand for leased compression, Enerflex added 30 compression units
and 22 power and processing units to its fleet during the nine months ended
September 30, 2005, for an investment of $15.6 million. This turnover of
assets renews the fleet, resulting in an average fleet age of less than five
years.
Leasing expects continued growth in demand for its products in Canada,
and has targeted specific geographic regions in Australia and the United
States for expansion. Growth in the lease fleet is expected to be the largest
internal investment opportunity for the Company in 2005.
The Leasing business is a significant contributor to earnings, despite
its low proportion of overall Company revenue. In addition, Enerflex Leasing
enhances the Company's other business segments in that it is a significant
customer of the compression fabrication business units, as almost all of its
equipment is purchased from Fabrication. Service also benefits because the
majority of Leasing's customers use our Service business units to perform
routine maintenance over the term of the lease.
Financial Condition
During the first nine months of 2005, Enerflex generated funds from
operations before changes in non-cash working capital of $33.2 million. The
Company increased long-term borrowings by $23.3 million and received proceeds
on the exercise of stock options of $2.4 million. The Company invested $16.5
million of these funds in the acquisition of HPS Group (net of cash acquired),
$9.7 million in net capital additions, increased working capital of $18.4
million and the repayment of $8.0 million in operating loans. The Company also
paid dividends of $6.7 million to shareholders during the first nine month of
the year.
On July 6, 2005 the Company acquired 100% of the outstanding shares of
HPS Group of Perth, Australia. HPS Group is a specialized engineering,
contracting and project management organization, servicing a wide range of
energy and other industrial customers. The total purchase consideration,
including transaction costs of approximately $0.8 million, was $25.3 million.
Approximately $2.8 million was paid through the issuance of 122,176 common
shares of Enerflex and the remaining $21.6 million was paid in cash and
financed through additional drawings on the Company's existing credit
facilities. Subject to the achievement of certain performance measures and
future earnings targets in the HPS Group covering the twelve months following
the acquisition, a maximum contingent consideration of $5.0 million Australian
could be paid in July 2006.
Enerflex is presently completing its assessment of the valuation of
specific assets acquired and currently estimates the acquired assets to be:
goodwill of $11.0 million, intangible assets of $5.9 million, cash and cash
equivalents of $5.6 million, capital assets of $2.2 million, non-current
liabilities of $1.0 million and working capital of $1.5 million.
On October 28, 2005, the Company had 22,606,270 common shares
outstanding. Enerflex has a dividend policy, which is reviewed on an annual
basis. On October 31, 2005, the Company declared a quarterly dividend equal to
$0.10 per common share, payable on January 9, 2006 to shareholders of record
December 21, 2005.
INDUSTRY OUTLOOK
While Enerflex continues to build its international presence, the
Company's fortunes are largely tied to natural gas capital and operating
expenditures in western Canada. In 2005 and 2006, industry analysts forecast
that capital expenditures on plant and equipment will remain strong and will
be at least comparable to 2004. Many forecasters expect that, in the absence
of significant discoveries, North American conventional natural gas production
will decrease. Sustaining or increasing production volumes is progressively
more dependent upon development of tight gas and CBM, both of which require
more compression than traditional reservoirs, and expansion in frontier
regions such as the Northwest Territories. The continuation of higher natural
gas prices similar to, or above, those experienced in recent years will be
required to support gas development in these areas.
Internationally, Enerflex will continue to incrementally grow its
existing international operations, seek new opportunities to expand its market
presence and will pursue additional international contracts in order to
support its domestic operations. The awarding of such contracts is difficult
to predict and often requires substantial sales effort and lead time prior to
the commencement of such contracts. As such, future revenues are difficult to
predict and are subject to significant levels of volatility.
In order to continue to grow both the international and domestic markets
for Enerflex's products and services, it is important to maintain the ability
of Enerflex to attract and retain skilled employees. In periods of high
economic activity in the oil and natural gas industry such employees are in
high demand. Although the Company has been successful at acquiring, developing
and retaining such employees in the past, current and future economic
conditions will continue to challenge the resources of the organization.
Advisory
This document contains forward-looking information, which is subject to
certain risks, uncertainties and assumptions. Should one or more of these risk
factors materialize, or should assumptions prove incorrect, actual results may
vary significantly from those expected.
The unaudited Consolidated Balance Sheets as at September 30, 2005 and
December 31, 2004, and Consolidated Statements of Income, Retained Earnings
and Cash Flows for the three and nine months ended September 30, 2005 and 2004
are attached. The financial statements and above analysis should be read in
conjunction with the Company's Annual Report for the year ended December 31,
2004 and the Interim Reports for the periods ended March 31, 2005 and June 30,
2005.
Enerflex Systems Ltd. is a leading supplier of products and services to
the global oil and gas production industry. Our core expertise lies between
the wellhead and the pipeline. Enerflex provides natural gas compression,
power generation and process equipment for sale or lease, hydrocarbon
production and processing facilities, electrical, instrumentation and controls
services and a comprehensive package of field maintenance and contracting
capabilities. Through our ability to provide these products and services in an
integrated manner, or as stand-alone offerings, Enerflex offers its customers
a unique value proposition.
Headquartered in Calgary, Canada, the Company has approximately 2,350
employees and operations in Canada, Australia, the Netherlands, Pakistan, the
United States, Indonesia and Germany. The Company's shares trade on the
Toronto Stock Exchange under the symbol EFX.
Conference Call and Webcast Notice
Enerflex Systems Ltd. (TSX:EFX) will host a conference call for analysts
and investors on Tuesday, November 1, 2005 at 9:00 a.m. MDT (11:00 a.m. EDT)
to discuss the Company's 2005 third quarter results. The call will be hosted
by John Aldred, Enerflex's Chairman and Chief Executive Officer.
If you wish to participate in this conference call, please call,
1.800.814.4861 or 1.416.640.4127. Please call at least ten minutes ahead of
time.
Participants who wish to listen to a recording of the conference call may
do so by calling 1.877.289.8525 or 1.416.640.1917 (passcode: 21156771 followed
by the number sign) approximately one hour after the completion of the call.
The recording will be available until the end of day Tuesday, November 8,
2005.
A live audio webcast of the conference call will be available on our
internet site at www.enerflex.com in the Investor Relations section under
Webcasts & Presentations on November 1, 2005 at 9:00 a.m. MDT (11:00 a.m.
EDT). Approximately one hour after the call, a recording of the event will be
available on our internet site.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(Thousands) 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Assets
Current assets
Cash $ 12,389 $ 12,840
Accounts receivable 133,189 132,562
Inventory 83,028 63,176
Income taxes receivable 66 412
Future income taxes 4,475 3,402
-------------------------------------------------------------------------
Total current assets 233,147 212,392
Assets held for sale 1,283 -
Rental equipment 87,603 88,772
Property, plant and equipment 64,197 65,814
Assets under construction 3,274 -
Future income taxes 4,366 4,425
Intangible assets 7,958 3,210
Goodwill 121,805 112,252
-------------------------------------------------------------------------
$ 523,633 $ 486,865
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Operating bank loans $ 20,841 $ 28,853
Accounts payable and accrued liabilities 77,335 72,699
Dividends payable 2,261 2,234
Income taxes payable 5,808 6,729
Current portion of long-term debt 7,166 16,009
-------------------------------------------------------------------------
Total current liabilities 113,411 126,524
Long-term debt 78,828 48,027
Future income taxes 12,613 14,445
-------------------------------------------------------------------------
204,852 188,996
Shareholders' equity
Share capital 184,115 178,540
Cumulative translation adjustment (4,993) (414)
Contributed surplus 1,496 1,203
Retained earnings 138,163 118,540
-------------------------------------------------------------------------
318,781 297,869
-------------------------------------------------------------------------
$ 523,633 $ 486,865
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying note to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended
September 30 September 30
(Unaudited) (Thousands, ----------------------- -----------------------
except share amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Revenue $ 162,727 $ 141,293 $ 467,504 $ 389,400
Cost of goods sold 127,734 110,683 366,233 301,581
-------------------------------------------------------------------------
Gross margin 34,993 30,610 101,271 87,819
Selling, general and
administrative expenses 22,153 20,427 61,866 56,862
Foreign currency gains (2,987) (1,352) (2,987) (1,018)
Gain on sale of assets (558) (786) (2,050) (2,050)
-------------------------------------------------------------------------
Income before interest and
income taxes 16,385 12,321 44,442 34,025
Interest 1,223 829 3,093 2,705
-------------------------------------------------------------------------
Income before income taxes 15,162 11,492 41,349 31,320
Income taxes 5,330 3,766 14,971 10,667
-------------------------------------------------------------------------
Net income $ 9,832 $ 7,726 $ 26,378 $ 20,653
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per common
share - basic $ 0.44 $ 0.35 $ 1.17 $ 0.93
- diluted $ 0.43 $ 0.34 $ 1.17 $ 0.92
Weighted average number
of common shares 22,591,951 22,322,540 22,490,878 22,296,143
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three months ended Nine months ended
September 30 September 30
----------------------- -----------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 130,592 $ 103,873 $ 118,540 $ 95,409
Net income 9,832 7,726 26,378 20,653
Dividends (2,261) (2,232) (6,755) (6,695)
-------------------------------------------------------------------------
Retained earnings, end of
period $ 138,163 $ 109,367 $ 138,163 $ 109,367
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying note to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Nine months ended
September 30 September 30
----------------------- -----------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating Activities
Net income $ 9,832 $ 7,726 $ 26,378 $ 20,653
Depreciation and
amortization 4,358 3,918 11,813 11,415
Future income taxes 37 779 (3,510) 1,677
Gain on sale of assets (558) (786) (2,050) (2,050)
Stock option expense 231 161 598 540
-------------------------------------------------------------------------
13,900 11,798 33,229 32,235
Changes in non-cash
working capital and other (2,903) 4,250 (14,581) 4,011
-------------------------------------------------------------------------
Cash flow from operations 10,997 16,048 18,648 36,246
-------------------------------------------------------------------------
Investing Activities
Acquisition of HPS Group
Limited (16,543) - (16,543) -
Purchase of:
Rental equipment (5,913) (8,765) (15,561) (26,816)
Property, plant and
equipment (1,219) (3,864) (3,991) (8,038)
Assets under
construction (1,829) - (3,176) -
Proceeds on disposal of:
Rental equipment 2,893 4,107 12,816 12,210
Property, plant and
equipment 93 510 246 935
-------------------------------------------------------------------------
(22,518) (8,012) (26,209) (21,709)
-------------------------------------------------------------------------
Changes in non-cash
working capital and
other (2,482) (832) (2,397) (1,615)
-------------------------------------------------------------------------
(25,000) (8,844) (28,606) (23,324)
-------------------------------------------------------------------------
Financing Activities
Decrease in operating
bank loans (2,617) (1,848) (8,013) (3,696)
Increase in (repayment of)
long-term debt 24,691 (1,000) 23,270 (3,630)
Stock options exercised 263 150 2,427 1,298
Dividends (2,247) (2,232) (6,728) (6,695)
-------------------------------------------------------------------------
20,090 (4,930) 10,956 (12,723)
Changes in non-cash working
capital and other (1,590) (758) (1,449) (110)
-------------------------------------------------------------------------
18,500 (5,688) 9,507 (12,833)
-------------------------------------------------------------------------
(Decrease) increase in cash 4,497 1,516 (451) 89
Cash, beginning of period 7,892 5,314 12,840 6,741
-------------------------------------------------------------------------
Cash, end of period $ 12,389 $ 6,830 $ 12,389 $ 6,830
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying note to the Consolidated Financial Statements
Note 1. Segmented Information
The Company has three reportable segments: Service, Fabrication and
Leasing. The Service reportable segment is the aggregation of the
Mechanical Service and Electrical, Instrumentation and Controls
divisions. The Fabrication reportable segment is the aggregation of the
Production and Processing, Compression and Power divisions. The
operations of HPS Group have been included in the Fabrication segment.
(Unaudited)
(Thousands)
Three months Service Fabrication Leasing
ended -----------------------------------------------------------
September 30 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Segment
revenue $ 70,802 $ 68,192 $ 94,506 $ 80,171 $ 7,700 $ 6,350
Intersegment
revenue (4,445) (3,751) (5,820) (9,638) (16) (31)
-------------------------------------------------------------------------
Revenue 66,357 64,441 88,686 70,533 7,684 6,319
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 19,368 17,564 10,799 8,675 4,826 4,371
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation
and
amortization 879 888 1,569 1,149 1,910 1,881
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before
interest and
income taxes 6,988 4,737 4,829 3,512 4,568 4,072
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital
expenditures 496 2,626 1,231 1,016 5,929 8,781
Corporate
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on
disposal $ 39 $ 468 $ 54 $ 9 $ 2,893 $ 4,107
Corporate
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited)
(Thousands)
Three months Consolidated
ended -------------------
September 30 2005 2004
---------------------------------
Segment
revenue $173,008 $154,713
Intersegment
revenue (10,281) (13,420)
---------------------------------
Revenue 162,727 141,293
---------------------------------
---------------------------------
Gross margin 34,993 30,610
---------------------------------
---------------------------------
Depreciation
and
amortization 4,358 3,918
---------------------------------
---------------------------------
Income before
interest and
income taxes 16,385 12,321
---------------------------------
---------------------------------
Capital
expenditures 7,656 12,423
Corporate 1,305 206
---------------------------------
8,961 12,629
---------------------------------
---------------------------------
Proceeds on
disposal $ 2,986 $ 4,584
Corporate $ - $ 33
---------------------------------
$ 2,986 $ 4,617
---------------------------------
---------------------------------
(Unaudited)
(Thousands)
Nine months Service Fabrication Leasing
ended -----------------------------------------------------------
September 30 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Segment
revenue $209,161 $194,612 $263,869 $212,889 $ 23,702 $ 20,821
Intersegment
revenue (11,619) (11,741) (17,529) (27,095) (80) (86)
-------------------------------------------------------------------------
Revenue 197,542 182,871 246,340 185,794 23,622 20,735
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 54,381 49,535 31,648 25,151 15,242 13,133
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation
and
amortization 2,654 2,501 3,692 3,523 5,467 5,391
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before
interest and
income taxes 16,554 13,415 12,983 8,327 14,905 12,283
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment assets 123,831 113,272 172,516 136,432 93,260 86,714
Corporate
Goodwill 52,233 52,771 62,216 52,112 7,356 7,356
-------------------------------------------------------------------------
Total segment
assets 176,064 166,043 234,732 188,544 100,616 94,070
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital
expenditures 1,838 4,007 2,964 3,133 15,562 26,832
Corporate
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on
disposal $ 109 $ 837 $ 137 $ 65 $ 12,816 $ 12,210
Corporate
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited)
(Thousands)
Nine months Consolidated
ended -------------------
September 30 2005 2004
---------------------------------
Segment
revenue $496,732 $428,322
Intersegment
revenue (29,228) (38,922)
---------------------------------
Revenue 467,504 389,400
---------------------------------
---------------------------------
Gross margin 101,271 87,819
---------------------------------
---------------------------------
Depreciation
and
amortization 11,813 11,415
---------------------------------
---------------------------------
Income before
interest and
income taxes 44,442 34,025
---------------------------------
---------------------------------
Segment assets 389,607 336,418
Corporate 12,221 7,757
Goodwill 121,805 112,239
---------------------------------
Total segment
assets 523,633 456,414
---------------------------------
---------------------------------
Capital
expenditures 20,364 33,972
Corporate 2,364 882
---------------------------------
22,728 34,854
---------------------------------
---------------------------------
Proceeds on
disposal $ 13,062 $ 13,112
Corporate - 33
---------------------------------
$ 13,062 $ 13,145
---------------------------------
---------------------------------
Revenue from foreign countries was:
Three months ended Nine months ended
September 30 September 30
----------------------- -----------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Australia $ 15,536 $ 2,866 $ 34,088 $ 16,656
Indonesia 3,144 326 6,148 1,403
Netherlands 4,691 5,273 15,274 14,746
Pakistan 1,461 17,016 10,917 23,838
United States 9,374 5,369 20,142 18,558
Other 11,158 11,284 32,346 23,504
-------------------------------------------------------------------------
$ 45,364 $ 42,134 $ 118,915 $ 98,705
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in these amounts
are gross exports from
domestic operations of: $ 16,967 $ 27,290 $ 56,758 $ 51,984
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue is attributed to countries by the destination of the sale.
-------------------
(1) Operating margin and operating margin percent are non-GAAP earnings
measures that do not have a standardized meaning prescribed by GAAP
and therefore are unlikely to be comparable to similar measures
presented by other issuers
(2) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP earnings measure that does not have a
standardized meaning prescribed by GAAP and therefore is unlikely to
be comparable to similar measures presented by other issuers.
>>
-30-
/For further information: P. John Aldred, Chairman & Chief Executive
Officer, Tel: (403) 236-6806, Fax: (403) 236-6816, Email:
john.aldred@enerflex.com; J. Blair Goertzen, President & Chief Operating
Officer, Tel: (403) 236-6852, Fax: (403) 236-6816, Email:
blair.goertzen@enerflex.com; Leonard Cornez, Vice President & Chief
Financial Officer, Tel: (403) 236-6857, Fax: (403) 236-6816, Email:
len.cornez@enerflex.com; www.enerflex.com;
To request a free copy of this organization's annual report, please go to
http://www.newswire.ca and click on Tools for Investors./
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