Feb 26, 2015 18:40 ET
Enerflex Reports Fourth Quarter and Year End 2014 Financial Results and Announces Quarterly Dividend
CALGARY, ALBERTA--(Marketwired - Feb. 26, 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 twelve months ended December 31, 2014.
Summary: Fourth Quarter 2014 Compared with Fourth Quarter 2013
"Notwithstanding our strong fourth quarter performance, we are adjusting expenditures and operations for the challenges of a lower oil price environment," said J. Blair Goertzen, President and Chief Executive Officer of Enerflex. "Cost-saving initiatives that we have already commenced, along with increasing recurring revenues, a geographically diversified business and our solid backlog, will best position Enerflex and preserve the strength of our balance sheet as we navigate through the uncertainties of 2015."
Bookings, Backlog and Outlook
Despite challenging commodity price conditions, we successfully converted opportunities in liquids-rich plays in Canada and the U.S., and other opportunities in the Middle East and North Africa (MENA) region, resulting in a 9% or $36.1 million year-over-year increase in bookings in the fourth quarter of 2014. We finished 2014 with a backlog increase of $122.5 million or 15%. Sequentially, backlog has increased by $50.1 million or 6% from September 30, 2014.
The downturn in commodity prices over the past several months has started to impact our customers, which in turn is likely to negatively impact demand for our products and services during 2015. We have already seen some minor project deferrals and cancellations, with customers reducing their capital budgets in 2015. We expect further capital reductions as the commodity price challenges continue, and as customers seek to preserve financial flexibility and protect their long-term businesses.
Cost Savings Initiatives
In the context of this outlook, and being mindful of our EBIT goal of 10%, we are responding with immediate cost savings initiatives. In January 2015, we implemented staff reductions, a Company-wide hiring freeze, salary increase deferrals, business travel expense limitations, reduced marketing expenditures and significant reductions in capital expenditures for facilities, IT infrastructure and maintenance, except where essential. These initiatives will be regularly reviewed throughout the year and adjusted as the market evolves and as we continue to evaluate the impact of low commodity prices on our business.
We have also decided to close our production and processing facility in Nisku, Alberta and discontinue operations in the oil sands module fabrication market. We have taken this action in response to current uncertainty, increasing competition, and operational challenges in achieving bid margins on oil sands projects. Starting in the second half of 2014, existing backlog for traditional gas processing work has been transferred to other Enerflex manufacturing facilities in Alberta for fabrication. After completing projects currently in production, the Nisku assets will be held for sale and the business reported as a discontinued operation.
Summary Table of Fourth Quarter and Full Year 2014 Results
|Three months ended December 31,||Twelve months ended December 31,|
|($ millions, except per share amounts and percentages)||2014||2013||Change||% Change||2014||2013||Change||% Change|
|Gross margin %||17.8||%||16.9||%||18.1||%||17.5||%|
|Normalized EBIT (2) (3)||49.9||20.3||29.6||146||%||150.6||91.6||59.0||64||%|
|Normalized EBIT % (2) (3)||9.5||%||5.8||%||8.5||%||6.5||%|
|Net earnings (loss)|
|Earnings (loss) per share|
|Normalized earnings per share - continuing (3)||0.43||0.17||0.26||153||%||1.25||0.78||0.47||60||%|
|(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)||Normalized EBIT, normalized EBIT% and normalized net earnings per share, 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. See "Non-GAAP Measures" in the Company's MD&A for the year ended December 31, 2014.|
|(3)||EBIT, EBIT% and earnings per share from continuing operations have been normalized for acquisition-related transaction costs, severance and restructuring costs and losses associated with the Alberta oil sands business.|
Financial results for the quarter were in line with expectations, and significantly improved on the same period last year. For the fourth quarter, results for all segments, and therefore overall results for the Company, improved compared to the same period in 2013. Significant increases in revenue and gross margin, in part due to the business acquired from Axip Energy Services, LP ("the Axip Business"), partially offset by higher SG&A expenses, drove strong results for the fourth quarter of 2014. Results normalized for one time transaction expenses associated with the purchase of the Axip Business, non-recurring severance and restructuring costs, and losses associated with the Alberta oil sands business, were further improved compared with the prior year, with a normalized EBIT of $50 million for the fourth quarter of 2014.
Notwithstanding the excellent contribution from the six months' inclusion of the Axip Business, and much improved revenues, earnings for the year remained below expectations, largely due to the cost increases in the International segment on the Oman project, and the related impact on gross margin, and an increase in SG&A expenses. The increase in SG&A expenses was in large part driven by the growth in the business, both organic and through acquisition, and non-recurring costs associated with severance and restructuring, and costs associated with the purchase of the Axip Business. For the year ended December 31, 2014, results for the Canada and Northern U.S. and Southern U.S. and Latin America segments, as well as overall results for the Company, have improved when compared to the same period in 2013. Normalized results were significantly improved compared with the prior year, with a normalized EBIT of $151 million for 2014.
Progress on 2014 Strategic Objectives
We completed and in some cases exceeded our 2014 strategic objectives. Firstly, we progressed towards our goal of generating 35%-40% recurring revenue on a trailing 12-month basis. Recurring revenue, which is defined as revenue from the Service and Rentals product lines, has increased to 27.3% from 26.7% of revenue for the years ended December 31, 2014 and 2013, respectively.
We also reduced our Company-wide total recordable injury rate by 9% over its 2013 rate, which exceeded our strategic objective of a 4% improvement in this rate. We continue to work towards our objective of a 10% EBIT margin, with EBIT as a percentage of revenue increasing to 7.1% from 6.2% for the years ended December 31, 2014 and 2013, respectively.
For the quarter and full year 2014, revenue was higher in the Canada and Northern U.S., and Southern U.S. and Latin America segments, partially offset by lower revenue in the International segment.
Canada and Northern U.S. segment revenue increased by $40.1 million or 27% during the fourth quarter of 2014, and by $157.9 million or 30% during 2014, as a result of higher Engineered Systems revenue due to higher opening backlog. During the year ended December 31, 2014, Service revenue was higher on increased parts sales, partially offset by lower Rental revenue as a result of a decrease in the total horsepower under rental contracts and a decrease in rental unit sales.
Southern U.S. and Latin America segment revenue increased by $149.3 million or 119% in the fourth quarter of 2014, and by $295.3 million or 59% for the year ended December 31, 2014, due to higher Engineered Systems revenue as a result of higher opening backlog, higher Service revenue on increased service calls and parts sales and the contribution of the business acquired from Axip, compared to the same periods in 2013. The segment recorded higher Rental revenue as a result of the business acquired from Axip.
International segment revenue decreased by $16.2 million or 21% in the fourth quarter of 2014, and by $77.5 million or 21% for the 2014 year, as a result of lower Engineered Systems revenue due to lower opening backlog. These decreases in revenue were partially offset by higher Rental revenue due to the contribution of the rental business acquired from Axip, and for the 2014 year due to higher Service revenue resulting from increased activity in the AustralAsia and MENA regions.
Increases in our overall gross margin were due to higher gross margins in all three segments. The higher gross margin in the Canada and Northern U.S. segment resulted from the positive impact of higher revenue, lower warranty expense and stronger plant utilization, partially offset by lower project margins primarily on oil sands projects at the Nisku facility.
In the Southern U.S. and Latin America segment, increases in gross margin were attributable to higher revenues, in part due to the acquisition of the Axip Business, and improved plant utilization, partially offset by lower warranty releases and lower project margins.
Higher gross margin in the International segment was due to improved project margins, partially offset by the impact of lower revenues and the corresponding impact on gross margin. In 2014, we achieved a number of project execution efficiencies, particularly in Australia, which when combined with the Oman project and other minor project execution challenges, resulted in gross margin erosion for the year of $12.8 million. This compares to margin erosion in 2013 of $20.0 million on international projects.
During the early part of 2014, we completed two international projects in the AustralAsia region with no additional material cost increases, after having experienced margin erosion in 2013. On a third international project in Oman, we continued to experience customer driven scope and schedule challenges, with cost increases identified during the 2014 year with a total gross margin impact of $25.6 million.
The Oman plant is exporting gas and condensate to specification, mechanical completion having been achieved and certified by the customer. We have submitted variation claims for cost increases on the project, which are common for engineering, procurement and construction contracts, and we continue to pursue these claims vigorously with the customer.
To the extent we subsequently recover these cost increases through approved variation claims from customers, we will recognize revenue in the corresponding period. Variation claims are typically approved at the completion of the project. This results in volatility in gross margins as costs are recognized as incurred on these projects, while revenue resulting from variation claims is recognized in the period that these claims are approved.
The increase in our overall bookings in the fourth quarter of 2014 was due to higher bookings in the Southern U.S. and Latin America and International segments, with Canada and Northern U.S. bookings slightly lower than 2013 levels.
For the full year 2014, bookings were higher in all segments compared to 2013. The increase in bookings in the Canada and Northern U.S. during 2014 was due to an increase in domestic activity levels, despite continued weakness in natural gas prices and the impact of lower oil prices on customers. In the Southern U.S. and Latin America, bookings increased as a result of significantly higher domestic bookings in the U.S. on weak but stable market fundamentals, and bookings in Latin America, partially offset by lower bookings destined for international markets. Booking levels in the International segment increased in 2014 as a result of increased activity in the AustralAsia and MENA regions.
Subsequent to the end of 2014, Enerflex declared a quarterly dividend of $0.085 per share, payable on April 9, 2015, to shareholders of record on March 11, 2015.
Acquisition of the Axip Business
On June 30, 2014, Enerflex completed the acquisition of the Axip Business for approximately USD $431.0 million in cash, inclusive of closing purchase price adjustments. Accordingly, starting in the third quarter of 2014, Enerflex's results reflect the contribution of the acquired business, now fully integrated into the Enerflex operations and conducting business under the Enerflex name. The Axip Business contributed $118.9 million in revenue and $23.0 million in EBIT during 2014.
Quarterly Results Material
Enerflex's Consolidated Financial Statements as at and for the year ended December 31, 2014, 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 Friday, February 27, 2015 at 8:00 a.m. MDT (10:00 a.m. EDT) to discuss the fourth quarter 2014 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 Ltd.
If you wish to participate in this conference call, please call 1.800.735.5968. 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 February 27, 2015 at 8:00 a.m. MDT (10:00 a.m. EDT). 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, March 6, 2015. Please call 1.800.558.5253 or 1.416.626.4100 and enter passcode 21760940.
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, CO2 processing plants, refrigeration systems and electric power equipment servicing the natural gas production industry.
Headquartered in Calgary, Canada, Enerflex has approximately 3,500 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 Northern U.S. markets; (ii) expected bookings in Southern U.S. and Latin America; and (iii) the nature and scope of challenges and opportunities in the International 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.