November 04, 2015 03:06:40 pm
Enerflex Reports Third Quarter 2015 Financial Results
CALGARY, ALBERTA--(Marketwired - Nov. 4, 2015) - Enerflex Ltd. (TSX:EFX) ("Enerflex" or "the Company" or "we" or "our"), a leading supplier of products and services to the global energy industry, today reported its financial and operating results for the three and nine months ended September 30, 2015.
Summary: Third Quarter 2015 Compared with Second Quarter 2015 and Third Quarter 2014
"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 on-going 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% or a $104.9 million decrease in bookings compared to the same period in 2014, with the most notable decrease occurring in the United States of America ("USA") segment. For the first nine months of 2015, the decrease in bookings was 53.3% or $529.9 million compared to 2014, with the USA segment again seeing the most notable decrease. The movement in exchange rates had a favourable impact on US 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. Overall, backlog fell by $55.1 million during the quarter, and by $438.8 million during the nine months ended September 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, L.P. (the "Axip Business"), 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 Savings Initiatives
Enerflex has been proactive 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%. Among measures implemented during the third quarter, the Company made headcount reductions of over 200 employees, which resulted in severance costs of $2.5 million. Headcount is now approximately 2,600, a reduction of over 800 since the beginning of 2015, with severance charges of $6.3 million recorded during the first nine months of 2015. During the second quarter, and contributing to the headcount reduction, the Company completed manufacturing activity at the Nisku facility, the closure of which was previously announced in February 2015. This resulted in the Nisku business being classified as a discontinued operation effective June 30, 2015.
Other cost control measures introduced early in 2015, and extended through the remainder of the year, include a Company-wide hiring and salary freeze, business travel expense limitations, reduced marketing expenditures, and significant reductions in expenditures for facilities, IT infrastructure and maintenance, except where critical. Notwithstanding the impact on SG&A expense of severance costs, SG&A expense as a percentage of revenue increased only slightly to 11.3% from 10.9% in the third quarter of 2015, and decreased to 11.2% from 12.5% for the nine months ended September 30, 2015. Despite the inclusion of a full year of results for the Axip Business, and inflationary pressures, Enerflex is ahead of its target of reporting total 2015 SG&A expenses consistent with those in 2014.
Summary Table of Third Quarter 2015 Results
|(unaudited)||Three months ended
|Nine months ended
|($ millions, except per share amounts and percentages)||2015||2014||Change||2015||2014||Change|
|Gross margin %||20.3||%||20.9||%||19.8||%||19.5||%|
|Net earnings - continuing operations||$||31.9||$||31.3||$||0.6||$||82.3||$||48.6||$||33.7|
|Net earnings - discontinued operations||0.2||(1.1||)||1.3||(0.6||)||(3.2||)||2.6|
|Earnings per share - continuing operations||0.40||0.40||-||1.04||0.62||0.42|
|Loss per share - discontinued operations||-||(0.01||)||0.01||(0.01||)||(0.04||)||0.03|
(1) Earnings before Interest (Finance Costs) and Taxes ("EBIT") is considered an additional GAAP measure, which may not be comparable with similar additional GAAP measures used by other entities.
(2) Bookings and backlog are considered non-GAAP measures that do not have standardized meanings as prescribed by GAAP, and are therefore unlikely to be comparable to similar measures used by other entities.
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.
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 USA segments, partially offset by higher revenue in the Rest of World segment. The decrease in gross margin was due to lower revenue and awarded margins, partially offset by improved warranty experience and project margin pick-ups. 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 World segment, partially offset by lower gross margin in the Canada and USA 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 pick-ups, 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 September 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 September 30, 2014).
Progress on 2015 Strategic Objectives
During the third quarter, we made good progress on our 2015 strategic objectives. We reduced our Company-wide total recordable injury rate by 29% over the 2014 rate. We continue to work towards our objective of a 10% EBIT margin, with EBIT as a percentage of revenue increasing to 9.3% for the trailing-twelve months ended September 30, 2015, compared to 7.0% for the same period of 2014. With recurring revenue on a trailing-month basis at 31.1% compared to 28.8% for the same period in 2014, we have progressed towards our 35-40% goal.
Effective January 1, 2015, the Company realigned its reporting segments into Canada, USA, and Rest of World segments. The USA segment now includes the Northern United States Service business, as well as the Retrofit and Rentals operations based out of Casper, Wyoming, each of which were previously reported in the Canada and Northern United States segment. The Rest of World segment includes what were previously the Latin American Engineered Systems, Service and Rental businesses combined with what was previously the International segment.
Canada segment revenue in the third quarter of 2015 was $120.1 million, down $8.6 million or 6.7% 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 September 30, 2015, revenue was $401.9 million, up $18.7 million or 4.9%, 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% 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 pick-ups. 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 September 30, 2015 of $30.9 million increased by $5.7 million or 22.4% 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 pick-ups.
USA segment revenue in the third quarter of 2015 was $180.0 million, down $13.5 million or 7.0% 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% as a result of higher Service revenue on increased parts sales compared to 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% 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% 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
Rest of World segment revenue in the third quarter of 2015 was $125.2 million, down $3.7 million or 2.9% 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% 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% 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 pick-ups, 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% 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 pick-ups, 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 to 2014 on higher compensation expense, and higher office and occupancy costs due to the Axip acquisition, partially offset by favourable foreign exchange movements.
Subsequent to the end of the third quarter of 2015, Enerflex declared a quarterly dividend of $0.085 per share, payable on January 7, 2016, to shareholders of record on November 17, 2015.
Quarterly Results Material
Enerflex's Interim Condensed Financial Statements as at and for the three and nine months ended September 30, 2015, and the accompanying Management's Discussion and Analysis, will be available on the Enerflex website at www.enerflex.com under the Investors section and on SEDAR at www.sedar.com.
Conference Call and Webcast Details
Enerflex will host a conference call for analysts, investors, members of the media and other interested parties on Thursday, November 5, 2015 at 8:00 a.m. MST (10:00 a.m. EST) to discuss the third quarter 2015 financial results and operating highlights. The call will be hosted by Mr. J. Blair Goertzen, President and Chief Executive Officer and Mr. 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 at www.enerflex.com under the Investors section on November 5, 2015 at 8:00 a.m. MST (10:00 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, November 12, 2015. Please call 1.800.558.5253 or 1.416.626.4100 and enter passcode 21780148.
Enerflex Ltd. is a single source supplier of natural gas compression, oil and gas processing, refrigeration systems, and electric power equipment - plus in-house engineering and mechanical service expertise. The Company's broad in-house resources provide the capability to engineer, design, manufacture, construct, commission and service hydrocarbon handling systems. Enerflex's expertise encompasses field production facilities, compression and natural gas processing plants, refrigeration systems, and electric power equipment servicing the natural gas production industry.
Headquartered in Calgary, Canada, Enerflex has approximately 2,600 employees worldwide. Enerflex, its subsidiaries, interests in associates and joint-ventures operate in Canada, the United States, Argentina, Brazil, Colombia, Mexico, Peru, Australia, the United Kingdom, Russia, the United Arab Emirates, Oman, Bahrain, Indonesia, Malaysia, Singapore, and Thailand. Enerflex's shares trade on the Toronto Stock Exchange under the symbol "EFX". For more information about Enerflex, go to www.enerflex.com.
Advisory Regarding Forward-Looking Statements
To provide Enerflex shareholders and potential investors with information regarding Enerflex, including management's assessment of future plans, Enerflex has included in this news release certain statements and information that are forward-looking statements or information within the meaning of applicable securities legislation, and which are collectively referred to in this advisory as "forward-looking statements". Information included in this news release that is not a statement of historical fact may be forward-looking information. When used in this document, words such as "plans", "expects", "will", "may" and similar expressions are intended to identify statements containing forward-looking information. Forward-looking statements and information contained in this press release include, but are not limited to: (i) the anticipated duration of weak natural gas prices and the effect thereof in Canada and USA markets; (ii) expected bookings; and (iii) the nature and scope of challenges and opportunities in the Rest of World segment. In developing the forward-looking information in this news release, the Company has made certain assumptions with respect to general economic and industry growth rates, commodity prices, currency exchange and interest rates, competitive intensity and regulatory approvals. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the future circumstances, outcomes or results anticipated in or implied by such forward-looking statements will occur or that plans, intentions or expectations upon which the forward-looking statements are based will occur.
Forward-looking information involves known and unknown risks and uncertainties and other factors, which may cause or contribute to Enerflex achieving actual results that are materially different from any future results, performance or achievements expressed or implied by such forward-looking information. Such risks and uncertainties include, among other things, the impact of general economic conditions; industry conditions, including the adoption of new environmental, taxation and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations, including future dividends to shareholders of the Company; increased competition; the lack of availability of qualified personnel or management; labour unrest; political unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to, or pursued by, the Company; obtaining financing; and other factors, many of which are beyond its control. The foregoing list of factors and risks is not exhaustive. For an augmented discussion of the risk factors and uncertainties that affect or may affect Enerflex, the reader is directed to the section entitled "Risk Factors" in Enerflex's most recently filed Annual Information Form, as well as Enerflex's other publicly filed disclosure documents, available on www.sedar.com. The reader is cautioned that these factors and risks are difficult to predict and that the assumptions used in the preparation of such information, although considered reasonably accurate at the time of preparation, may prove to be incorrect. Readers are cautioned that the actual results achieved will vary from the information provided in this press release and that such variation may be material. Consequently, Enerflex does not represent that actual results achieved will be the same in whole, or in part, as those set out in the forward-looking information. Furthermore, the statements containing forward-looking information that are included in this news release are made as of the date of this news release, and Enerflex does not undertake any obligation, except as required by applicable securities legislation, to update publicly or to revise any of the included forward-looking information, whether as a result of new information, future events or otherwise. The forward-looking information contained in this news release is expressly qualified by this cautionary statement.