Enerflex Systems Income Fund
TSX : EFX.UN

Enerflex Systems Income Fund

February 09, 2006 23:59 ET

Enerflex Announces Record Results in 2005 and Confirms Increased Dividend for 2006

CALGARY--(CCNMatthews - Feb. 9) - Enerflex Systems Ltd. (EFX:TSX), a leading Canadian supplier of products and services to the global energy industry, today announced its financial and operating results for the three and twelve months ended December 31, 2005.


For the three months ended December 31
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$ millions, except per share
amounts (unaudited) 2005 2004 % change
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Revenue $ 203.1 $ 167.7 21%
Gross margin $ 44.7 $ 37.4 20%
Net income $ 13.7 $ 11.4 20%
Earnings per share (Basic) $ 0.61 $ 0.51 20%
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For the year ended December 31
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$ millions, except per share
amounts (unaudited) 2005 2004 % change
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Revenue $ 670.6 $ 557.1 20%
Gross margin $ 145.9 $ 125.2 17%
Net income $ 40.1 $ 32.1 25%
Earnings per share (Basic) $ 1.78 $ 1.44 24%
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Mr. P. John Aldred, Chairman and Chief Executive Officer, is pleased to report "an exciting year for Enerflex. We posted record financial results and made significant progress in the execution of our strategic plan."

"Earnings per share in 2005 increased 24% to $1.78 per common share, up from $1.44 per common share in 2004. Revenues grew by 20% to $671 million versus $557 in the prior year."

Mr. J. Blair Goertzen, President and Chief Operating Officer went on to say, "these strong results do not tell the whole story. In 2005 we laid the foundation of our strategic growth plan by developing our Variable Cost Compression offering and by creating Enerflex Global. Also, we are very pleased with the roughly 50% increase in new orders booked by our Engineered Systems segment in 2005."

Mr. Aldred closed by saying, "I am very pleased with both our operating and financial performance in 2005. Strong industry fundamentals, record backlogs and bookings levels point toward even stronger results in 2006."

Quarterly Overview

- Net income for the three months ended December 31, 2005 was

$13.7 million or $0.61 per common share. Net income increased by

$2.3 million, or $0.10 per common share over the same quarter in 2004.

- Revenue generated in the fourth quarter increased by $35.4 million or

21%, as compared to the three months ended December 31, 2004.

- The Engineered Systems segment, formerly Fabrication, increased its

revenue by 33% to $124.8 million for the three months ended

December 31, 2005. $15.2 million was attributed to HPS group.

- Backlog in our Engineered Systems segment at December 31, 2005

increased by approximately 211% over our closing order backlog at

December 31, 2004.

- Our Service segment increased its pre-tax income by 34% on a 7%

increase in revenue for the fourth quarter of 2005, due to improved

operating efficiencies and moderately higher activity levels when

compared to the same quarter of 2004.

SUMMARY QUARTERLY STATISTICS

Enerflex generated net income for the three months ended December 31, 2005 of $13.7 million ($0.61 per common share) from revenue of $203.1 million. This represents an increase in net income of $2.3 million ($0.10 per common share or 20%) as compared to the same period in 2004. Revenue generated in the fourth quarter increased by $35.4 million or 21% as compared to the three month period ended December 31, 2004. The HPS acquisition added $15.2 million in revenue for the quarter. Other revenue improvements were most notable in the Compression and Power division, as a result of increased customer demand; and in the Electrical Instrumentation & Control ("EI&C") division which experienced increased electrical construction project activity as compared to the fourth quarter of 2004. The Mechanical Service division, experienced modest revenue improvements due to moderately higher activity levels in the quarter as compared to the same period of 2004. The Company's revenue in the Production Services segment was essentially unchanged as increases arising from a larger rental fleet were offset by lower utilization rates during the period.

The above revenue increases were offset by reduced revenue in the Production and Processing division, excluding HPS, due to lower international project revenue during the quarter as compared with the same period in 2004. This resulted from the timing and stage of completion of current year projects differing from those which were in progress during the fourth quarter of 2004.

Gross margin for the three months ended December 31, 2005 was $44.7 million or 22.0% of revenue as compared to $37.4 million or 22.3% of revenue for the three months ended December 31, 2004, an increase of $7.3 million. The slightly lower gross margin percentage was a result of a higher portion of revenues being generated from the Company's Engineered Systems segment, which generates lower margins on revenue as compared to Enerflex's Service and Production Services segments, lower international project revenue and higher input costs arising from increases in the prices of parts and components, utility prices and raw material costs, such as steel.

Selling, general and administrative ("SG&A") expenses were $23.7 million or 11.6% of revenue during the three months ended December 31, 2005, compared with $20.5 million or 12.2% of revenue in the same period of 2004. The $3.2 million increase in SG&A expenses during the quarter, as compared to the same period in 2004 are a result of: $1.5 million in costs resulting from the inclusion of HPS; an increase of $0.3 million in stock based compensation expenses; an additional $0.2 million in costs associated with its ongoing program for adopting compliance measures for Multilateral Instrument 52-109 and 52-111; increased bad debt expense of $0.7 million; higher amortization expense for intangible assets of $0.4 million; and increased information technology costs of $0.3 million. These increases were partially offset by reduced bonus accruals in 2005 over the same period of 2004, as a result of the Company's change from funding retirement plans through profit sharing to a defined contribution group retirement savings plan.

Operating margin assists the reader in understanding the net 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 December 31, 2005, Enerflex produced an operating margin of $20.2 million, or 10.0% of revenue, as compared to an operating margin of $18.1 million, or 10.8% of revenue, for the same three month period in 2004. The reduction in operating margin for the quarter as compared to 2004 occurred as a result of the same factors contributing to the reduced gross margin and increased SG&A expenses. The foreign exchange loss during the quarter resulted primarily from the Company's hedging strategy and changes in the value of Euro and United States dollar as compared to the Canadian dollar during the period.

Income before interest and income taxes totaled $20.8 million for the fourth quarter of 2005, as compared to $19.0 million for the same period in 2004, an increase of $1.8 million, or 9.4%.

During the fourth quarter of 2005, Enerflex increased its net income by $2.3 million to $13.7 million over the same period of 2004.

FOR THE YEAR ENDED DECEMBER 31, 2005

In 2005, the Company initiated a strategy intent on capitalizing on strong activity levels in the Canadian oil and natural gas industry, further expanding its international business and improving the operations of existing locations. In Canada, Enerflex intends to take advantage of its strong product lines and brand recognition of its business units, develop new compression and production processing products, further expand its rental fleet and introduce new service offerings. Internationally, the Company will approach the various markets in three manners. First, where the size and nature of the market warrant, Enerflex will expand or establish business units offering mechanical services, equipment rentals, engineering support, and project management services. Second, the Company will pursue projects ranging in size from $5 million to $100 million in regions where oil-field activity and natural gas infrastructure requirements present opportunities for turnkey projects. Enerflex will focus these efforts in Pakistan, Asia-Pacific and the Middle East. In these regions the Company will, individually or with partners, provide project engineering, facility construction, project management, and supervision and commissioning services for natural gas processing facilities requiring a combination of Enerflex's products. Third, in other markets the Company will position itself to expand the export sales of products manufactured in its North American based facilities.

The strong Canadian oil and gas service market and the initial steps in the implementation of this strategy have enabled Enerflex to: increase revenues by 20% to $670.6 million; maintain a solid gross margin of 21.8% while overcoming supply chain management concerns and the challenges of a strong labor market; increase its return on capital employed to 15.8% and generate earnings of $1.78 per basic common share, an increase of $0.34 per common share or 24%. Specific accomplishments include:

- The acquisition of HPS Group Limited ("HPS") located in Perth,

Australia in July 2005 which contributed revenue of $25.9 million and

expanded the ability of Enerflex to offer construction services,

environmental project management and engineering support;

- Increased international revenues by 20%, generating $93.5 million in

revenue from international operations and $83.9 million from export

product sales;

- Increased Mechanical Service revenue by 10% and earnings before

interest and income taxes by 21%;

- Increased Compression and Power revenue by 33% and earnings before

interest and income taxes by 60%;

- The successful completion of international production and processing

contracts in Australia, Pakistan, Russia and Bangladesh;

- Developed new compression products for the coal bed methane ("CBM")

market, for (released in 2005), and for enhanced hydrocarbon

production using flue gas injection, for release in 2006;

- Expanded the compression rental fleet to 100,000 horsepower in the

third quarter of 2005;

- Continued the rationalization of the Company's sales offices and

branch network to reduce costs and improve efficiencies; and

- Expanded the order backlog in the Company's Engineered Systems

segment.

In the Canadian market, Enerflex has recently introduced two new service offerings. The first being HPMAX, a service which permits the Company's Compression Services business unit to monitor its customer's compressor performance, evaluate possibilities to improve such performance and then, through its field services re-configure the customer's compression facility to improve production throughput and reduce the facility's operating cost.

The second service offering is Variable Cost Compression. This new initiative arises from the natural expansion of Enerflex's existing compression rental, mechanical service and compression facility construction expertise. With Variable Cost Compression, Enerflex plans to leverage the existing legacy compression assets in the Western Canadian Sedimentary Basin by providing the production company or energy trust with the opportunity to maintain strategic control of the facility and natural gas reservoir while reducing its capital and operating costs. Enerflex will own, operate and optimize the compression facility in return for a variable revenue stream dependent on the facility's operating time and performance. To provide the Company with access to the capability to monitor and operate a geographically dispersed fleet of compression facilities, in November 2005, Enerflex acquired a 40% equity interest in Total Production Services Inc., a Grande Prairie, Alberta company with access to over 2,000 oilfield service personnel. Both these new services are receiving significant customer interest and are anticipated to add to the opportunity for further revenue growth in 2006.

Consolidated revenue for the year ended December 31, 2005 totalled $670.6 million, an increase of $113.5 million, or 20%, as compared to 2004 consolidated revenue of $557.1 million. The revenue growth in 2005 was generated in the Company's Engineered Systems' segment (formerly Fabrication), which increased revenue by $91.1 million, or 33%, the Service segment, which increased revenue by $19.4 million, or 8% and the Production Services segment (formerly Leasing), which increased revenue by $3.0 million, or 11%. Engineered Systems' Canadian revenue improved by $67.9 million as a result of an increase in high horsepower compressor package sales arising from an improved market share in certain aspects of the market, such as screw compression and compressor reconfiguration services, and higher customer demand, including demand for Enerflex's production and processing products, the standard (BTB) compression product and products designed for the CBM production market segment. Engineered Systems international revenue also increased by $23.2 million as a result of the acquisition of HPS and higher export sales both offset in part by lower international project revenue in the Production and Processing division. Service revenue increases were driven by strong customer demand for engine maintenance and overhaul services in all global regions and an increase in the number of contracts awarded to Enerflex's Canadian based EI&C division. Production Services revenues increased as a result of Enerflex's investment in additional rental compression horsepower, partially offset by lower equipment utilization rates.

Gross margin has increased to $145.9 million or 21.8% of revenue in 2005 as compared to $125.2 million or 22.5% of revenue in 2004. The increase in gross margin of $20.7 million resulted from increasing revenues of $113.5 million. As eighty percent of the increase in revenues occurred in the Engineered Systems segment the Company's overall gross margin percentage decreased from 22.5% in 2004 to 21.8% in 2005. This occurred as revenue from the Engineered Systems segment tends to have lower margins than either the Service or Production Services segments. The proportion of revenue generated in the Engineered Systems segment increased from 50.3% of consolidated revenue in 2004 to 55.3% in 2005. Other factors that positively affected Enerflex's gross margin were: modest increases in the price of the Company's products and services, improved utilization of the Company's Engineered Systems facilities, and increases in the revenue generated from Enerflex's compressor rental fleet. Gross margin was reduced by obsolescence provisions of $0.7 million in the Power business unit and lower international project revenue in the Production and Processing division, excluding HPS. Gross margin improvement continues to be a focus of management's attention as exhibited by the improvement in the gross margin percentage over recent years. In 2005, Enerflex produced a gross margin of 21.8% as compared to 22.5% in 2004, 20.2% in 2003, 21.4% in 2002 and 19.5% in 2001.

Selling, general and administrative expenses were $85.5 million in 2005, compared with $77.4 million in 2004 and $72.5 million in 2003. Total SG&A costs increased in 2005 over both 2004 and 2003 as a consequence of the continued growth of Enerflex, the expanding scope of its operations, increased regulatory and compliance obligations and higher variable costs. SG&A has decreased as a percentage of revenue. In 2005, SG&A amounted to 12.8% of revenue as compared to 13.9% in 2004 and 14.1% in 2003.

The increase in SG&A expense in 2005 of $8.2 million related to the acquisition of HPS which incurred its own expenditures totaling $3.0 million since the July 2005 acquisition date, $1.1 million increase in stock based compensation expense, $1.1 million increase in bad debt expense following a significant recovery of prior period provisions in 2004, $0.8 million rise in the amortization of intangible assets, $0.7 million in increased information technology expenses, and $1.7 million due to increased regulation and compliance costs associated with the Company's project for implementing the requirements of Multilateral Instrument 52-109 and 52-111. These were partially offset by a reduction in profit share and management bonus, as a result of the Company's change from funding retirement plans through profit sharing to a defined contribution group retirement savings plan.

Foreign exchange gains totaled $2.2 million in both 2005 and 2004. Most international Engineered Systems work is quoted in U.S. dollars and in some cases, the Euro. As the U.S. dollar depreciates, the Company's Canadian dollar revenue falls. The U.S. dollar depreciated by 3% against the Canadian dollar during 2005, as compared to 7% in 2004. The Euro depreciated by 15% against the Canadian dollar during 2005, as compared to a negligible change in 2004.

Operating margin assists the reader in understanding the net margin contributions made from the Company's core businesses after considering all SG&A expenses and the impact of the foreign exchange hedging strategy discussed above. During 2005, Enerflex produced an operating margin of $62.6 million or 9.3% of revenue, as compared to an operating margin of $50.1 million, or 9.0% of revenue in 2004. Operating margin in 2003 was $33.4 million or 6.5% of revenue.

Interest costs totaled $4.6 million in 2005, compared with $3.8 million in 2004, an increase of $0.8 million. Interest costs in 2005 were higher than those in 2004 as a result of debt incurred to finance the increased working capital needs of the Company and its acquisition of HPS. Enerflex's total borrowings averaged of $92.7 million in 2004 as compared to an average of $99.4 million in 2005. Enerflex has benefited from continued low interest rates as its bank debt is subject to floating rates. The Company pays its lenders a margin over the Canadian bankers' acceptance rate, or the U.S. LIBOR rate, which varies depending on the ratio of debt to EBITDA for the trailing twelve months. Over the past year, Enerflex has maintained a debt to EBITDA ratio of between 1.29 to one and 1.69 to one. As at December 31, 2005, the Debt to EBITDA ratio was 1.69 to one and as such the lending margin for the initial months of 2006 will be 1.5% on the operating loan and 2.0% on the term loan.

Income tax expense was $20.5 million in 2005 compared with $17.2 million in the prior year. The increase in tax expense is a result of higher pre-tax earnings in the current year. The effective rate of income tax in 2005 was 33.9%, compared to 34.9% in 2004. The Company expects the effective tax rate in 2006 will continue to be less than 34%.

Net income for 2005 increased by 25% to $40.1 million compared to $32.1 million in 2004. On a per share basis, 2005 net income increased by 24% to $1.77 per diluted common share as compared with $1.43 per diluted common share in 2004.

Segmented results

Enerflex has three business segments: Service, Engineered Systems (formerly Fabrication) and Production Services (formerly Leasing), which operate as follows:

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, Germany, the Netherlands, Australia and Indonesia. Service is the Company's second largest business segment. It employs 42% of staff, holds 32% of the total assets, generates 40% of the Company's revenue and produces 36% of Enerflex's income before interest and income taxes. Key performance metrics include labour utilization, revenue, gross margin percent and income before interest and income taxes. In 2005, Enerflex established a small business unit in Poland to take greater advantage of the Waukesha distributorship awarded to it in this country and closed a number of its North American branches due to insufficient returns.



(Thousands) 2005 2004
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Service segment revenue $ 283,454 $ 264,740
Intersegment revenue (15,411) (16,105)
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Revenue $ 268,043 $ 248,635
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Gross margin $ 74,567 $ 67,050
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EBITDA $ 26,632 $ 21,720
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Income before interest and income taxes $ 23,208 $ 18,346
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Service revenue was $268.0 million in 2005 and comprised 40% of consolidated revenue. This compares to $248.6 million and 45% of consolidated revenue in 2004. Mechanical Service generated 58% of the division's revenue in 2005 and 57% in 2004. EI&C contributed 42% of the division's revenue in 2005 and 43% in 2004. The increase in segment revenue of 8%, or $19.4 million, was a result of increased international revenue, higher demand for parts and services and strong oilfield service activity in Canada. Gross margin for the segment totaled $74.6 million, or 27.8%, as compared to $67.1 million or 27.0% in 2004. The increase in gross margin percent was caused by higher demand for the Company's services and increased utilization rates. In general pricing increases were offset by increases in input costs, such as parts, materials, personnel costs and the costs associated with responding to supply chain management issues that arise in periods of high demand for these products. Income before interest and income taxes increased from 2004 by $4.9 million, or 27%, to $23.2 million as a result of these factors. The improvement in the profitability of the segment from 7.4% of revenue to 8.7% of revenue was due to reduced branch and administrative costs in the segment and the leveraging of existing fixed costs in a period of high oil and gas activity.

Mechanical Service

Mechanical Service revenue for 2005 was $154.9 million, or 10% higher than 2004 revenue of $141.1 million. In Canada, which accounted for 67% of the division's revenue, as compared to 68% in 2004, sales increased by 8% from 2004 as a result of increased utilization rates, increased customer demand and modest price increases for parts and services. International revenue also increased by 14% over 2004. The increase in international revenue resulted from higher utilization and new maintenance contracts in Australia and increased service and engine sales in Europe and Indonesia. During 2005 the division closed two branch locations as returns generated and opportunities available in the future were not considered sufficient for the operation's required cost structure.

Gross margins for Mechanical Service increased by $4.8 million or 11% over 2004, though, as a percentage of revenue, the gross margin percentage was relatively constant. Increased customer demand accounted for the increase in gross margin with pricing increases offsetting the increase in costs of parts and personnel associated with the services. The division's income before interest and income taxes in 2005, increased by $3.1 million, or 21.1% as compared to 2004 as it leveraged its existing fixed branch and administrative services to meet the expanding demands of it customers. A continuing challenge to achieving improved profitability in 2006 will be the timely availability of certain Original Equipment Manufacturer ("OEM") components and repair parts, and the availability and access to a sufficient number of skilled employees, both of which will be in steady demand given anticipated activity levels in the oil and gas services industry.

Electrical, Instrumentation and Control

The EI&C division continued to improve its gross margin, as a percentage of revenue in 2005. During the year, EI&C generated revenue of $113.1 million, an increase of $5.5 million, or 5% as compared to $107.6 million in 2004. The EI&C business in Canada is highly competitive. Consequently, this division realizes lower margins than the Mechanical Service division and as such, it requires a focused and disciplined approach to the bidding and execution of the services provided. In 2004, the division intentionally reduced the scope of contracts it would pursue and focused its efforts on obtaining projects with higher margin potential and reducing the cost of maintaining the branch infrastructure requirements throughout Alberta, Saskatchewan and northeast British Columbia. By continuing this strategy in 2005, and with the increase in demand for the division's services, its gross margin increased by $2.7 million or 12% as compared to 2004. The division's earnings before interest and income taxes increased by $1.8 million and were 51% higher in 2005 than in 2004. In 2005, as part of the restructuring of its branch network, the EI&C division closed three branch locations.

ENGINEERED SYSTEMS

The Engineered Systems business segment engineers, fabricates and assembles standard and custom-designed compression packages, production and processing equipment and facilities, and power generation systems. In 2005, in order to more accurately describe the segment's activities, its name was changed from Fabrication to Engineered Systems. The key performance metrics for this business segment are market share, plant utilization, overhead application rates and gross margin as a percentage of revenue. Engineered Systems is the Company's largest business segment. It employs 55% of staff, holds 47% of the total assets, generates 55% of the Company's revenue and provides 34% of Enerflex's income before interest and income taxes.

On July 6, 2005 the Company acquired 100% of the outstanding shares of HPS Group Pty Limited of Perth, Australia ("HPS"). HPS 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 $25.2 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 HPS covering the twelve months following the acquisition, a maximum contingent consideration of $5.0 million Australian could be paid in July 2006. The acquired assets include: 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. HPS forms an important component of this segment and the Production and Processing division.



(Thousands) 2005 2004
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Engineered Systems segment revenue $ 393,703 $ 319,503
Intersegment revenue (22,551) (39,460)
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Revenue $ 371,152 $ 280,043
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Gross margin $ 51,143 $ 40,040
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EBITDA $ 27,696 $ 22,102
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Income before interest and income taxes $ 22,460 $ 17,469
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Engineered Systems revenue was $371.2 million in 2005 and comprised 55% of consolidated revenue. This compares to $280.0 million and 50% of consolidated revenue in 2004. Compression and Power generated 68% of the division's revenue in both 2005 and 2004. Production and Processing contributed 32% of the division's revenue in both years. The increase of $91.1 million, or 33%, in segment revenue for the year was a result of the acquisition of HPS, increased domestic revenue in the Production and Processing division, increased demand for the Company's high horsepower compression products, the introduction of new products and modest increases in the pricing of the segment's products. Gross margin for the segment was 13.8%, or $51.1 million, as compared to 14.3% in 2004. The increase in gross margin of $11.1 million, or 28% was a result of the same factors that improved the segment's revenue, offset by a $0.7 million obsolescence provision in the Power business unit's inventory. This provision eliminates the anticipated exposure the Company could have with respect to product lines that were discontinued. Income before interest and income taxes increased by $5.0 million, or 29%, to $22.5 million as a result of the above-mentioned factors.

Compression and Power

The Compression and Power division contributed revenue of $252.8 million, an increase of $63.2 million, or 33% over the prior year. International revenue in the division was $49.8 million in 2005, as compared to $40.2 million in 2004. Expanded product ranges for both reciprocating and screw compression applications, increased customer demand for compression equipment, increasing customer requirements for in-field compression refurbishment of legacy compression assets and modest pricing improvements accounted for the increased revenue. While definitive market share data is difficult to obtain, Enerflex estimates that its Canadian large horsepower compressor package market share was constant in 2005 as compared with 2004. Though pricing leverage was difficult to achieve in 2005, due to the highly competitive nature of this business segment, pricing appears to be improving for future deliveries. The apparent improvement in pricing leverage is presently attributed to the high levels of customer demand, concerns over the lead times associated with major component parts and the introduction of expanded product offerings that better suit the customers changing compression requirements, such as high horsepower screw compression packages and in-field optimization services for existing compression assets.

During 2005, gross margin increased by $8.0 million, or 31% as a result of increased revenue, improved plant utilization and lower overhead rates. These were offset by increased component, material and personnel related costs, obsolescence provisions in the power product line and costs associated with the design and production of new products and services. At present, Enerflex owns approximately 370,000 square feet of compression shop floor space in North America and during 2005 management estimates that the average utilization rate, based on the theoretical plant capacity in labour hours, was 67% as compared to 58% in 2004. Despite increases in overhead costs, increased customer demand and utilization of the facilities reduced overhead costs per hour by 1%, as compared to 2004. The Compression and Power division's income before interest and income taxes increased by 60% as a result of the factors mentioned above.

Production and Processing

The Production and Processing division contributed revenue of $118.4 million, an increase of $27.9 million, or 31% over the prior year. While definitive market share data is difficult to obtain, Enerflex estimates that it has maintained its domestic and international market share, and through the acquisition of HPS, Enerflex has increased its market share in Australia. In each market segment competition remains strong. The increase in the division's revenues were generated $25.9 million from the acquisition of HPS and $14.3 million from domestic markets, including $3.2 million from contracts and products with respect to the development of northern Alberta's oil sands production. In 2005, international revenue, excluding HPS, declined by $12.3 million, as compared to 2004. Last year, the division was nearing completion on certain large projects at year end whereas similar projects in 2005 were only commenced in the fourth quarter, thus reducing the revenue recognized on such projects on a comparative basis.

During 2005, gross margin also increased by $3.1 million, or 22% as a result of the HPS acquisition and higher Canadian demand for its products. This increase in gross margin was offset by lower margins on international projects, and completion costs associated with projects undertaken in 2005. At present, Enerflex owns approximately 100,000 square feet of production and processing shop floor space in Alberta, Canada and 62,000 square feet of shop floor space in Perth, Western Australia. During 2005, management estimates that the average utilization rate, based on available labour hours, was 92% as compared to 89% in 2004 in its Canadian based facilities and 87% in its Australian based facilities since acquisition. The division's income before interest and income taxes decreased by 9% during 2005 as compared to 2004, as a result of fewer international projects and higher labour and overhead costs, partially offset by the increase in utilization rates.

PRODUCTION SERVICES

The Production Services business segment provides a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. In 2005, with the introduction of Variable Cost Compression services, the segment name was changed from Leasing to Production Services. At the end of 2005, Enerflex's lease fleet was comprised of approximately 370 compression units and 104,000 horsepower, as compared with 360 units and 97,000 horsepower in 2004. This resulted in an average fleet of 360 units and 98,600 horsepower. The key performance metrics in this business are fleet size, utilization rates and rental rates. The Production Services segment employs 1.0% of staff, holds 19% of the total assets, generates 5% of the Company's revenue and produces 30% of Enerflex's income before interest and income taxes.



(Thousands) 2005 2004
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Production Services segment revenue $ 31,563 $ 28,500
Intersegment revenue (146) (101)
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Revenue $ 31,417 $ 28,399
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Gross margin $ 20,235 $ 18,120
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EBITDA $ 27,067 $ 24,331
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Income before interest and income taxes $ 19,588 $ 17,236
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Capital expenditures, net of proceeds
on disposal $ 5,798 $ 21,646
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Revenue in 2005 increased by $3.0 million, or 11%, to $31.4 million. While the division owns and rents compression, power and processing equipment, the main driver for its revenue growth is the rental of compression equipment. In 2005, the division's revenue was generated 92% by compression and 8% by power and production process equipment. The revenue increase experienced in 2005 over 2004 was a result of the availability of more compression equipment and modest price increases offset by lower utilization rates during the year. Overall, the division experienced compression rental utilization rates, based on capital deployed, of 80.3% compared to 84.7% in 2004. The reduction in utilization rates was attributed to higher than anticipated energy prices resulting in higher cash flows and working capital in the hands of the division's customers. Consequently, these customers tended to acquire new compression assets, as exhibited through the increase in revenues generated by the Compression and Power division, and to purchase compression assets previously under lease, also exhibited by the higher proceeds on the sale of rental assets.

During 2005, Production Services sold 40 compression units and 51 power and process equipment units from its fleet, for gross proceeds of $17.7 million and a gain on sale of $2.5 million. This compares to 45 compression units and 91 power and process equipment units, for gross proceeds of $17.4 million and a gain on sale of $2.9 million in 2004. The sale of units generally occurs when customers exercise their contractual option to purchase equipment. In order to facilitate the expansion of Enerflex's rental fleet in 2006, the Company has altered the buyout provisions of new rental contracts in a manner which encourages renters to continue the contract to its expiry date. To satisfy growing demand for leased compression, Enerflex added 45 compression units and 53 power and processing units to its fleet in 2005, for an investment of $22.9 million. This turnover of assets renews the fleet, resulting in an average fleet age of less than five years.

The Production Services business is a significant contributor to earnings, despite its low proportion of overall Company revenue. In addition, Production Services strengthens Enerflex's other business segments. Production Services is a significant customer of the compression Engineered Systems business units, as almost all of its equipment is purchased from Engineered Systems. Service also benefits because the majority of Production Services customers use Pamco and Jiro Service to perform routine maintenance over the term of the lease.

Production Services expects continued growth in demand for its products in Canada, and has targeted specific geographic regions for expansion in the United States and abroad. Production Services does not generally increase the capital invested in its fleet unless it has lease contracts. Growth in the lease fleet is expected to be the largest internal capital investment opportunity for the Company in 2006. Though Variable Cost Compression did not contribute to revenues during 2005, Enerflex is pleased with the initial level of interest in this new offering and the Company presently estimates that it could deploy $10.0 million in capital towards this endeavor during 2006. Variable cost Compression provides Enerflex the opportunity to combine the strength of its balance sheet with its expertise in compression optimization in order to improve the returns generated from existing compression assets for both its customers and its shareholders.

CASH FLOW

Enerflex generated cash flow from operations of $21.5 million in 2005, compared with $50.9 million in 2004. In 2005, operating cash flow was impacted by a $32.6 million increase in non-cash working capital. Cash generated funded the increased investment in working capital, $5.3 million of net additions to rental assets, $9.5 million of net additions to property, plant and equipment and dividends to shareholders of $9.0 million. Additional borrowings under the Company's credit facility funded the acquisition of HPS and the acquisition of the Company's 40% interest in Total Production Services Inc.

In 2005, non-cash working capital from operations increased to $147.8 million as a result of a $30.9 million increase in accounts and income taxes receivable and $21.2 million increase in inventory, offset by a $19.5 million increase in total accounts payable. The increase in accounts receivable reflects the increase in revenue in 2005. Inventories increased in order to insure the Company had access to sufficient quantities of major components and parts for items that are continuing to experience long re-order lead times.

Notice of Dividend

Enerflex Systems Ltd. has declared a dividend of $0.125 per common share payable on April 7, 2006 to the shareholders of record on March 24, 2006.

Conference Call and Webcast Notice

Enerflex Systems Ltd. (TSX:EFX) will host a conference call for analysts and investors on Friday, February 10, 2006 at 9:00 a.m. MDT (11:00 a.m. EDT) to discuss the Company's 2005 year end and fourth quarter results, which will be released on Thursday, February 9, 2006. The call will be hosted by Mr. P. 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 1.416.644.3414. 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: 21169792 followed by the number sign) approximately one hour after the completion of the call. The recording will be available until the end of day Friday, February 17, 2006.

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 February 10, 2006 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

December 31, December 31,
(Unaudited) (Thousands) 2005 2004
-------------------------------------------------------------------------

Assets
Current assets
Cash $ 16,350 $ 12,840
Accounts receivable 163,899 132,562
Inventory 84,378 63,176
Income taxes receivable - 412
Future income taxes 3,983 3,402
-------------------------------------------------------------------------
Total current assets 268,610 212,392

Rental equipment 90,348 88,772
Property, plant and equipment 68,959 65,814
Investment in affiliates 2,797 -
Future income taxes 4,868 4,425
Intangible assets 7,355 3,210
Goodwill 121,378 112,252
-------------------------------------------------------------------------
$ 564,315 $ 486,865
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities
Operating bank loans $ 43,310 $ 28,853
Accounts payable and accrued liabilities 90,561 71,980
Accrued dividends payable 2,260 2,234
Income taxes payable 7,612 6,729
Current portion of long-term debt 12,717 16,009
-------------------------------------------------------------------------
Total current liabilities 156,460 125,805

Long-term debt 63,587 48,027
Other long-term liabilities 1,969 719
Future income taxes 13,042 14,445
-------------------------------------------------------------------------
235,058 188,996
Shareholders' equity
Share capital 184,151 178,540
Cumulative translation adjustment (6,250) (414)
Contributed surplus 1,739 1,203
Retained earnings 149,617 118,540
-------------------------------------------------------------------------
329,257 297,869
-------------------------------------------------------------------------
$ 564,315 $ 486,865
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF INCOME

Three months ended Year ended
December 31 December 31
(Unaudited) (Thousands, ----------------------- -----------------------
except share amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Revenue $ 203,108 $ 167,677 $ 670,612 $ 557,077
Cost of goods sold 158,434 130,286 524,667 431,867
-------------------------------------------------------------------------
Gross margin 44,674 37,391 145,945 125,210
Selling, general and
administrative expenses 23,657 20,510 85,523 77,372
Foreign currency (gains)
and losses 775 (1,211) (2,212) (2,229)
Gain on sale of assets (572) (934) (2,622) (2,984)
-------------------------------------------------------------------------
Income before interest
and income taxes 20,814 19,026 65,256 53,051
Interest 1,548 1,123 4,641 3,828
-------------------------------------------------------------------------
Income before income taxes 19,266 17,903 60,615 49,223
Income taxes 5,552 6,497 20,523 17,164
-------------------------------------------------------------------------
Net income $ 13,714 $ 11,406 $ 40,092 $ 32,059
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income per common
share
- basic $ 0.61 $ 0.51 $ 1.78 $ 1.44
- diluted $ 0.60 $ 0.51 $ 1.77 $ 1.43
Weighted average number
of common shares 22,606,323 22,334,426 22,519,976 22,304,429
-------------------------------------------------------------------------
-------------------------------------------------------------------------



CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Three months ended Year ended
December 31 December 31
----------------------- -----------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 138,163 $ 109,367 $ 118,540 $ 96,114
Adjustment to retained
earnings - - - (705)
Net income 13,714 11,406 40,092 32,059
Dividends (2,260) (2,233) (9,015) (8,928)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 149,617 $ 118,540 $ 149,617 $ 118,540
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended Year ended
December 31 December 31
----------------------- -----------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating Activities
Net income $ 13,714 $ 11,406 $ 40,092 $ 32,059
Depreciation and
amortization 4,326 3,687 16,139 15,102
Future income taxes 438 (323) (3,072) 1,354
Gain on sale of assets (572) (934) (2,622) (2,984)
Stock option expense 251 163 849 703
-------------------------------------------------------------------------
18,157 13,999 51,386 46,234
Changes in non-cash
working capital and
other (15,292) 609 (29,873) 4,620
-------------------------------------------------------------------------
2,865 14,608 21,513 50,854
-------------------------------------------------------------------------

Investing Activities
Acquisition of subsidiary (252) - (16,795) -
Acquisition of interest
in affiliate (2,762) - (2,762) -
Purchase of:
Rental equipment (7,378) (12,149) (22,939) (38,965)
Property, plant and
equipment (3,552) (1,919) (7,543) (9,957)
Assets under
construction (101) - (3,277) -
Proceeds on disposal of:
Rental equipment 4,834 5,168 17,650 17,378
Property, plant and
equipment 1,080 180 1,326 1,115
-------------------------------------------------------------------------
(8,131) (8,720) (34,340) (30,429)
Changes in non-cash working
capital and other (1,268) (2,083) (3,665) (3,698)
-------------------------------------------------------------------------
(9,399) (10,803) (38,005) (34,127)
-------------------------------------------------------------------------

Financing Activities
Increase in operating
bank loans 22,469 4,922 14,456 1,226
Advance (repayment)
of long-term debt (9,758) - 13,512 (3,630)
Stock options exercised 29 109 2,456 1,407
Dividends (2,261) (2,222) (8,989) (8,917)
-------------------------------------------------------------------------
10,479 2,809 21,435 (9,914)
Changes in non-cash working
capital and other 16 (604) (1,433) (714)
-------------------------------------------------------------------------
10,495 2,205 20,002 (10,628)
-------------------------------------------------------------------------
Increase in cash 3,961 6,010 3,510 6,099
Cash, beginning of period 12,389 6,830 12,840 6,741
-------------------------------------------------------------------------
Cash, end of period $ 16,350 $ 12,840 $ 16,350 $ 12,840
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements



Note 1. Segmented Information

The Company has three reportable segments: Service, Engineered Systems
(formerly Fabrication) and Production Services (formerly Leasing). The
Service reportable segment is the aggregation of the Mechanical Service
and Syntech divisions. The Engineered Systems reportable segment is the
aggregation of the Production & Processing, and Compression and Power
divisions.

(Unaudited) (Thousands) Service Engineered Systems
Three months ended -----------------------------------------------
December 31 2005 2004 2005 2004
-------------------------------------------------------------------------

Segment revenue $ 74,293 $ 70,128 $ 129,834 $ 106,614
Intersegment revenue (3,792) (4,364) (5,022) (12,365)
-----------------------------------------------
External revenue 70,501 65,764 124,812 94,249
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 770 873 1,544 1,110
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest
and taxes 6,654 4,931 9,477 9,142
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 2,834 $ 985 $ 1,794 $ 753
Corporate


-------------------------------------------------------------------------
-------------------------------------------------------------------------


(Unaudited) (Thousands) Production Services Consolidated
Three months ended -----------------------------------------------
December 31 2005 2004 2005 2004
-------------------------------------------------------------------------

Segment revenue $ 7,861 $ 7,679 $ 211,988 $ 184,421
Intersegment revenue (66) (15) $ (8,880) $ (16,744)
-----------------------------------------------
External revenue 7,795 7,664 $ 203,108 $ 167,677
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 2,012 1,704 $ 4,326 $ 3,687
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest
and taxes 4,683 4,953 $ 20,814 $ 19,026
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 7,886 $ 12,194 $ 12,514 $ 13,932
Corporate (1,483) 136
-----------------------
$ 11,031 $ 14,068
-------------------------------------------------------------------------
-------------------------------------------------------------------------



(Unaudited) (Thousands) Service Engineered Systems
-----------------------------------------------
Year ended December 31 2005 2004 2005 2004
-------------------------------------------------------------------------

Segment revenue $ 283,454 $ 264,740 $ 393,703 $ 319,503
Intersegment revenue (15,411) (16,105) (22,551) (39,460)
-----------------------------------------------
External revenue 268,043 248,635 371,152 280,043
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross Margin 74,567 67,050 51,143 40,040
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 3,424 3,374 5,236 4,633
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest
and taxes 23,208 18,346 22,460 17,469
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment assets 128,199 117,363 203,367 150,120
Corporate
Goodwill 52,195 52,814 61,825 52,082
-----------------------------------------------
Total segment assets 180,394 170,177 265,192 202,202
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 4,672 $ 4,992 $ 4,758 $ 3,886
Corporate


-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on disposal
of assets $ 1,178 $ 883 $ 148 $ 186
Corporate


-------------------------------------------------------------------------
-------------------------------------------------------------------------


(Unaudited) (Thousands) Production Services Consolidated
-----------------------------------------------
Year ended December 31 2005 2004 2005 2004
-------------------------------------------------------------------------

Segment revenue $ 31,563 $ 28,500 $ 708,720 $ 612,743
Intersegment revenue (146) (101) $ (38,108) $ (55,666)
-----------------------------------------------
External revenue 31,417 28,399 $ 670,612 $ 557,077
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross Margin 20,235 18,120 $ 145,945 $ 125,210
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 7,479 7,095 $ 16,139 $ 15,102
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest
and taxes 19,588 17,236 $ 65,256 $ 53,051
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment assets 102,006 93,659 $ 433,572 $ 361,142
Corporate $ 9,367 $ 13,471
Goodwill 7,356 7,356 $ 121,376 $ 112,252
-----------------------------------------------
Total segment assets 109,362 101,015 $ 564,315 $ 486,865
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 23,448 $ 39,026 $ 32,878 $ 47,904
Corporate 881 1,018
-----------------------
$ 33,759 $ 48,922
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on disposal
of assets $ 17,650 $ 17,380 $ 18,976 $ 18,449
Corporate - 44
-----------------------
$ 18,976 $ 18,493
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Revenue from foreign countries was:

Three months ended Year ended
December 31 December 31
-----------------------------------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Australia $ 19,036 $ 11,154 $ 53,124 $ 27,810
Egypt 13,856 195 15,851 815
Indonesia 5,204 431 11,352 1,834
Netherlands 4,846 3,749 20,120 18,495
Pakistan 2,128 13,968 13,045 37,760
United States 3,809 2,942 23,951 21,500
Other 9,682 16,606 39,884 39,490
-------------------------------------------------------------------------
$ 58,561 $ 49,045 $ 177,327 $ 147,704
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Revenue is attributed to countries by the destination of the sale.

Contact Information