Enerflex Systems Income Fund
TSX : EFX.UN

Enerflex Systems Income Fund

October 31, 2005 23:59 ET

Enerflex Continuing Trend of Steadily Improving Performance

CALGARY--(CCNMatthews - Oct. 31) - Enerflex Systems Ltd. (EFX:TSX), a leading Canadian supplier of products and services to the global oil and gas production industry, today announced its financial and operating results for the three and nine months ended September 30, 2005.

Mr. P. John Aldred, Chairman and Chief Executive Officer, is pleased to report "strong financial results for the three and nine months ended September 30, 2005, continuing the trend of steadily improving performance."

"Earnings per share in the third quarter increased by 26% to $0.44 per common share, on a 15% increase in revenue to $163 million, as compared to the third quarter of 2004 with earnings per share of $0.35 and revenue of $141 million. Earnings per share for the nine months ended September 30 also increased by 26% to $1.17 and net income increased by 28%, when compared to the same period of 2004."

Mr. J. Blair Goertzen, President and Chief Operating Officer added that "strategically we are on track with both our international and domestic expansion. During the third quarter we have been awarded a number of significant fabrication contracts internationally, while we have made steady progress in developing our 'Variable Cost Compression' initiative for the domestic market. This will involve Enerflex owning, operating and maintaining compression equipment for a variable fee, based on throughput and uptime."

Quarterly Overview:

- Consolidated operating margin improved to 9.7% of revenue in the third quarter as compared to 8.2% in the prior year period.

- The acquisition of HPS Group Limited ("HPS Group") closed on July 6th, 2005. The integration process is well advanced and proceeding smoothly. HPS Group contributed $0.02 per share towards earnings for the three and nine month periods.

- Our Service segment delivered a 48% increase in earnings before interest and taxes as a result of strong labour utilization, improved inventory management and increased focus on logistics.

- Leasing increased the size of its compression rental fleet to over 100,000 horsepower for first time in its 25 year history and continued to deliver steadily improving results in the quarter.

- The Fabrication segment continued to demonstrate strong growth with a 26% increase in revenue and a 37% increase in income before interest and taxes over the prior year period.

- Fabrication backlog increased by 162% over the prior year quarter end to establish a new record. Roughly 32% of total backlog as of September 30th, 2005 is attributable to the acquisition of HPS Group.

- Fabrication bookings in the third quarter of 2005 increased by 72% over the same quarter in 2004. Approximately 11% of bookings in the quarter were generated by HPS Group.

- Enerflex was awarded international fabrication contracts during the third quarter for projects in Egypt, Indonesia, Bangladesh, Australia, Thailand and Pakistan totalling approximately $68 million in value.


For the three months ended
September 30
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$ millions, except per share amounts
(unaudited) 2005 2004 % change
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Revenue $ 162.7 $ 141.3 15%
Gross margin $ 35.0 $ 30.6 14%
Net income $ 9.8 $ 7.7 27%
Earnings per share (Basic) $ 0.44 $ 0.35 26%
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For the nine months ended
September 30
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$ millions, except per share amounts
(unaudited) 2005 2004 % change
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Revenue $ 467.5 $ 389.4 20%
Gross margin $ 101.3 $ 87.8 15%
Net income $ 26.4 $ 20.7 28%
Earnings per share (Basic) $ 1.17 $ 0.93 26%
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Three months ended September 30, 2005

During the three months ended September 30, 2005, Enerflex generated net income of $9.8 million ($0.44 per common share) from revenue of $162.7 million. This represents an increase in net income of $2.1 million or 27%, resulting from a revenue increase of $21.4 million or 15%, all as compared to the three month period ended September 30, 2004. Increased revenue, the acquisition of HPS Group Limited ("HPS Group"), the leveraging of existing fixed costs and a consistent gross margin percentage, contributed to the earnings improvement. The acquisition of HPS Group, which closed on July 6, 2005, significantly increased the Company's presence in Australia, added to its fabrication backlog and contributed $10.7 million in revenue and approximately $0.02 per common share for the three and nine month periods ended September 30, 2005.

During the third quarter of 2005, revenue increased in all divisions with the single exception of the Power division where revenue decreased by $1.7 million. The most significant increases in revenue arose from the acquisition of HPS Group which contributed $10.7 million and Compression which added $16.6 million.

Gross margin for the three months ended September 30, 2005 was $35.0 million or 21.5% of revenue as compared to $30.6 million or 21.7% of revenue for the three months ended September 30, 2004, an increase of $4.4 million or 14%. Higher gross margins were achieved in each business unit during the quarter as compared to the same period of 2004, with the exception of Power, despite higher labour, component and input costs. The average gross margin as a percentage of revenue remained consistent between the two periods as a result of a change in the mix of revenue. During the third quarter of 2005, a greater portion of revenue was generated from Fabrication activities, which carry a lower average gross margin percentage than Service and Leasing activities.

Selling, general and administrative ("SG&A") expenses were $22.2 million or 13.6% of revenue during the three months ended September 30, 2005, compared with $20.4 million or 14.5% of revenue in the same period of 2004. During the third quarter SG&A increased by $1.7 million or 8%. The primary reason for the increased expense was the acquisition of HPS Group, which accounted for $1.5 million of the increase.

Operating margin(1) assists the reader in understanding the margin contributions made from the Company's core businesses after considering all SG&A expenses and the impact of the Company's foreign exchange hedging strategy. For the three months ended September 30, 2005, Enerflex produced an operating margin(2) of $15.8 million, or 9.7% of revenue, as compared to an operating margin(1) of $11.5 million, or 8.2% of revenue, for the same three month period in 2004. In addition to the factors effecting revenue, gross margin and SG&A, the increase in operating margin(1) of $4.3 million or 37% is also affected by foreign exchange gains on United States dollar based debt borrowed to protect the gross margin over the term of United States dollar denominated contracts. All such borrowings are in accordance with the Company's previously stated foreign exchange mitigation program as described on page 39 of Enerflex's 2004 Annual Report.

Income before interest and income taxes totalled $16.4 million for the three months ended September 30, 2005, as compared to $12.3 million for the same period in 2004, an increase of $4.1 million or 33%. Higher interest expense was incurred during the quarter on borrowings to fund the HPS Group acquisition and establish the borrowings under the foreign exchange mitigation program referred to above. Income taxes totalled $5.3 million, an increase of $1.6 million. The effective income tax rate increased to 35%, as compared to 33% in 2004, as a consequence a reduction in the recognition of the future income tax benefits arising from foreign jurisdictions and a higher tax rate in Pakistan where income taxes are calculated as a percentage of revenue on certain contracts. Management expects the effective tax rate to revert back toward statutory rates in the future.

Segmented results for the three months ended September 30, 2005

Service

The Service business segment provides a complete line of mechanical, and electrical, instrumentation and controls services to the oil and gas industry through an extensive branch network in Canada, as well as operations in the United States, Germany, the Netherlands, Australia and Indonesia. Service employs 43% of staff, holds 34% of the total assets, and generated 41% of the Company's revenue in the third quarter of 2005. Key performance metrics include labour utilization, revenue, gross margin percent and income before interest and income taxes.



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Three months ended
September 30
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(unaudited) (thousands) 2005 2004
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Segment revenue $ 70,802 $ 68,192
Intersegment revenue (4,445) (3,751)
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Revenue $ 66,357 $ 64,441
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Gross margin $ 19,368 $ 17,564
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EBITDA(2) $ 7,867 $ 5,625
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Income before interest and income taxes $ 6,988 $ 4,737
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Service revenue was $66.4 million in the three months ended September 30, 2005 and comprised 41% of consolidated revenue. This compares to $64.4 million and 46% of consolidated revenue in the same period of 2004. In the third quarter of 2005, Mechanical Service generated 59% of the segment's revenue as compared to 58% in 2004. Electrical, Instrumentation and Controls ("EI&C") contributed 41% of the segment's revenue in the three months ended September 30, 2005 and 42% in the same period of 2004. The increase in the segment's revenue of 3%, or $1.9 million, was due to increased demand for products and services in Mechanical Service. Gross margin for the segment totalled $19.4 million, or 29.2% of revenue, as compared to $17.6 million, or 27.3% of revenue, in the third quarter of 2004. The increase in gross margin percentage reflects efficiency gains from the Mechanical Service Central Services facility and increased utilization rates by field service operations in both the Mechanical Service and the EI&C divisions during the period. Income before interest and income taxes for the three months ended September 30, 2005 totalled $7.0 million, an increase of $2.3 million from the $4.7 million generated in the third quarter of 2004. This increase in income before interest and income taxes was a result of the gross margin improvements referred to above and lower SG&A expenses in EI&C.

A challenge to sustaining improved profitability in this segment will continue to be the timely availability of certain Original Equipment Manufacturer ("OEM") components and repair parts, which will be in steady demand as activity levels and production of natural gas in North America remain high. The availability and compensation scales associated with field and technical personnel in the global energy services industry will also continue to be a challenge for Enerflex and its competitors throughout the remainder of 2005 and 2006. In order to mitigate these concerns, the Company fosters a competitive and safe employment environment to attract and maintain skilled employees, and it closely monitors its purchasing practices, inventory levels and training programs.

Fabrication

The Fabrication business segment engineers, project manages, fabricates, assembles and commissions standard and custom-designed compression facilities, production and processing equipment and facilities, and power generation systems. The key performance metrics for this business segment are plant utilization and gross margin as a percentage of revenue. It employs 54% of staff, holds 45% of the total assets, and generated 54% of the Company's revenue in the third quarter of 2005.



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Three months ended
September 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
-------------------------------------------------------------------------
Segment revenue $ 94,506 $ 80,171
Intersegment revenue (5,820) (9,638)
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Revenue $ 88,686 $ 70,533
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Gross margin $ 10,799 $ 8,675
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EBITDA(2) $ 6,398 $ 4,661
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Income before interest and income taxes $ 4,829 $ 3,512
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Fabrication revenue totalled $88.7 million for the three months ended September 30, 2005 and comprised 54% of consolidated revenue. This compares to $70.5 million and 50% of consolidated revenue for the same period in 2004. Compression generated 65% of the segment's revenue in the third quarter of 2005 and 58% during the comparable period in 2004. Production and Processing contributed 33% of the segment's revenue in the three months ended September 30, 2005 and 37% during the same period of 2004. Power contributed 2% of the segment's revenue in the third quarter of 2005 and 5% in 2004.

The increase in the segment's revenue of $18.2 million, or 26%, for the third quarter of 2005 over the third quarter of 2004, was a result of the acquisition of HPS Group in July 2005, domestic growth in the Production and Processing division and increased demand for the Company's compression products, offset by lower international project revenues in Production and Processing. The HPS Group acquisition added $10.7 million in revenue and Compression added $16.6 million, a portion of which occurred as a result of the Compression division receiving many key components for compression packages of which delivery was delayed in the first quarter of 2005. These increases were offset by lower international project revenues in Presson and lower Power sales in the period.

At present, most major suppliers of key components continue to require significant order lead times and as such the Company has significantly increased its order quantities and inventory levels for such items. This trend will continue throughout the remainder of 2005 and 2006. The availability and compensation scales associated with shop and technical personnel in the global energy services industry will also continue to be a challenge for Enerflex and its competitors throughout the remainder of 2005 and 2006. The Company continues to meet this challenge by closely monitoring and maintaining its training programs and fostering a competitive and safe employment environment in order to attract and retain skilled employees.

Gross margin for the segment was 12.2%, or $10.8 million, for the period as compared to 12.3% in the same quarter of 2004. Though the gross margin percentage was essentially unchanged many challenges did arise and were successfully managed. Higher margins in the HPS Group offset the lower international revenues generated in Presson as major projects in 2005 commenced later in the year than in 2004. Compression also offset the effect on gross margin resulting from discounts on multiple unit orders and the incurrence of additional costs to limit the impact of delays in the delivery of major components. Income before interest and income taxes for the three months ended September 30, 2005 increased by $1.3 million, or 37%, to $4.8 million.

Enerflex owns approximately 370,000 square feet of compression shop floor space in North America and during the three months ended September 30, 2005 management estimates that the average utilization rate, based on the theoretical plant capacity in labour hours, was 68% as compared to 54% during the same period in 2004.

Enerflex owns approximately 100,000 square feet of production and processing shop floor space in Alberta, Canada and approximately 62,000 square feet in Perth, Australia. During the three months ended September 30, 2005 management estimates that the utilization rate of the Canadian facilities, based on labour hours, was 91.3%. This compares to 88.9% during the same period in 2004. The Perth facility utilization was estimated at 84% for the third quarter of 2005. In 2005, Enerflex commenced the expansion of its production and processing fabrication facility in Nisku, Alberta with the construction of a 9,000 square foot large vessel fabrication facility which is anticipated to commence operation in March of 2006.

Leasing

The Leasing business segment provides a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. As of September 30, 2005, the Enerflex lease fleet was comprised of approximately 360 compression units totaling 100,000 horsepower, as compared with 345 units and 93,000 horsepower as at September 30, 2004. The key performance metrics in this business are fleet size and utilization rates. The Leasing segment employs 1% of staff, holds 19% of the total assets and generated 5% of the Company's revenue in the third quarter.



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Three months ended
September 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
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Segment revenue $ 7,700 $ 6,350
Intersegment revenue (16) (31)
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Revenue $ 7,684 $ 6,319
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Gross margin $ 4,826 $ 4,371
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EBITDA(2) $ 6,478 $ 5,953
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Income before interest and income taxes $ 4,568 $ 4,072
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Capital expenditures, net of proceeds on disposal $ 3,036 $ 4,674
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Revenue during the three months ended September 30, 2005 of $7.7 million increased by $1.4 million or 22% from revenue of $6.3 million in the third quarter of 2004. Although the segment owns and rents compression, power and processing equipment, the main driver for its revenue growth is compression equipment. The increase in revenue during the period was a result of a larger average fleet offset by slightly lower fleet utilization rates. Rental rates have not increased significantly during the period. For the three months ended September 30, 2005, the segment's revenue was generated 93% by compression and 7% by power and production process equipment. Overall, the segment experienced compression rental utilization rates, based on capital deployed, of 79% compared to 84% for the third quarter of 2004. The decline in utilization rates is attributable to the timing of disposals of leased units.

During the third quarter of 2005, Leasing sold a number of compression, power and process equipment units from its fleet, for gross proceeds of $2.9 million and a gain on sale of $0.5 million. The sale of units generally occurs when customers exercise their contractual option to purchase equipment. This compares to gross proceeds of $4.1 million and a gain on sale of $0.6 million in the same period of 2004.

Nine Months Ended September 30, 2005

During the nine months ended September 30, 2005, Enerflex generated net income of $26.4 million ($1.17 per common share) from revenue of $467.5 million. This represents an increase in net income of $5.7 million or 28%, resulting from a revenue increase of $78.1 million or 20%, all as compared to the nine month period ended September 30, 2004. The acquisition of HPS Group, increased revenue in the previously existing business units and the leveraging of existing fixed costs contributed to the earnings improvement, offset by a small reduction in the average gross margin. During the first nine months of 2005, revenue increased in each division with significant increases occurring in three divisions. In Compression and Mechanical Service, increased domestic demand contributed to revenue growth, while the acquisition of HPS Group and increased domestic revenue were the primary reasons for growth in Production and Processing.

Gross margin for the nine months ended September 30, 2005 was $101.3 million or 21.7% of revenue as compared to $87.8 million or 22.6% of revenue for the nine months ended September 30, 2004, an increase of $13.5 million or 15%. The reduction in the gross margin as a percentage of revenue is attributed to a change in the mix of revenue from higher margin Service and Leasing activity towards lower margin Fabrication activity and higher labour, input and shipping costs.

Selling, general and administrative expenses were $61.9 million or 13.2% of revenue during the nine months ended September 30, 2005, compared with $56.9 million or 14.6% of revenue in the same period of 2004. Though lower as a percentage of revenue, SG&A increased during the first nine months of 2005 by $5.0 million, or 9%. The acquisition of HPS Group increased SG&A by $1.5 million. Other factors contributing to the higher SG&A expense are increases in: stock-based compensation expense of $0.8 million; costs associated with the Company's ongoing program for adopting compliance measures for Multilateral Instrument 52-109 of $1.7 million; information technology expenditures of $0.5 million; employee related costs of $1.0 million; amortization of intangibles and depreciation expenses of $0.7 million, offset by reductions in other administrative expenditures.

Operating margin(1) assists the reader in understanding the margin contributions made from the Company's core businesses after considering all SG&A expenses and the impact of the Company's foreign exchange hedging strategy. For the nine months ended September 30, 2005, Enerflex produced an operating margin(1) of $42.4 million, or 9.1% of revenue, as compared to an operating margin(1) of $32.0 million, or 8.2% of revenue, for the same nine month period in 2004. The increase in operating margin(1) of $10.4 million or 33% is primarily attributed to the leveraging of existing fixed costs, offset by changes in the Company's revenue mix as referred to above, the acquisition of HPS Group and the generation of $3.0 million in foreign exchange gains resulting from the Company's foreign exchange mitigation program as previously discussed.

Income before interest and income taxes totalled $44.4 million for the nine months ended September 30, 2005, as compared to $34.0 million for the same period in 2004, an increase of $10.4 million or 31%. During the period, interest expense increased $0.4 million to $3.1 million and income taxes totalled $15.0 million, an increase of $4.3 million. The effective income tax rate increased to 36% from 34% as a consequence of an unfavorable income tax assessment from prior years, a reduction in the recognition of the future income tax benefits arising from foreign jurisdictions and a higher effective income tax rate arising from Pakistan where income tax is calculated as a percentage of revenue on certain contracts. Management expects the effective tax rate to revert back toward statutory rates in the future.



Segmented results for the nine months ended September 30, 2005

Service

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Nine months ended
September 30
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(unaudited) (thousands) 2005 2004
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Segment revenue $209,161 $194,612
Intersegment revenue (11,619) (11,741)
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Revenue $197,542 $182,871
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Gross margin $ 54,381 $ 49,535
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EBITDA(2) $ 19,208 $ 15,916
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Income before interest and income taxes $ 16,554 $ 13,415
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Service revenue was $197.5 million in the nine months ended September 30, 2005 and comprised 42% of consolidated revenue. This compares to $182.9 million and 47% of consolidated revenue in the same period of 2004. In the first nine months of 2005, Mechanical Service generated 59% of the segment's revenue as compared to 57% in 2004. EI&C contributed 41% of the segment's revenue in the first three quarters of 2005 and 43% in the same period of 2004. The revenue increase of 8%, or $14.7 million, was due to increased demand for products and services in Mechanical Service, resulting in an increase of $13.5 million, and an increase in revenue contributed by EI&C of $1.1 million. Gross margin for the segment totalled $54.4 million, or 27.5%, as compared to $49.5 million or 27.1% in the same period of 2004. The small increase in gross margin percent was caused by slightly higher margins in Mechanical Service offset by slightly lower margins in the EI&C division. Income before interest and income taxes for the nine months ended September 30, 2005 totalled $16.6 million, an increase of $3.1 million from the $13.4 million generated in the first three quarters of 2004, an increase of 23% as compared to the increase in revenue of 8%.



Fabrication

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Nine months ended
September 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
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Segment revenue $263,869 $212,889
Intersegment revenue (17,529) (27,095)
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Revenue $246,340 $185,794
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Gross margin $ 31,648 $ 25,151
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EBITDA(2) $ 16,675 $ 11,850
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Income before interest and income taxes $ 12,983 $ 8,327
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Fabrication revenue totalled $246.3 million for the nine months ended September 30, 2005 and comprised 53% of consolidated revenue. This compares to $185.8 million and 48% of consolidated revenue for the same period in 2004. Compression generated 68% of the segment's revenue in the first nine months and 67% during the comparable period in 2004. Production and Processing contributed 30% of the segment's revenue in the nine months ended September 30, 2005 and 2004. Power contributed 2% of the segment's revenue in the first three quarters of 2005 and 3% in 2004.

The increase of $60.5 million, or 33%, in the segment's revenue for the first nine months of 2005 over the same period in 2004, was a result of increased domestic and international demand for the Company's compression products, the acquisition of HPS Group and domestic growth in the Production and Processing division. Gross margin for the segment was 12.8%, or $31.6 million, for the period as compared to 13.5% in the first nine months of 2004. The reduction in gross margin percent was a result of completion costs on international projects, discounts on multiple unit orders, higher costs of materials, major components and labour. Income before interest and income taxes for the nine months ended September 30, 2005 increased by $4.7 million, or 56%, to $13.0 million.

Fabrication Segment Bookings

During the first nine months of 2005, Enerflex increased its order bookings in the Fabrication segment by approximately 48%, as compared to bookings recorded in the same period of 2004. The Fabrication segment's order backlog as at September 30, 2005 was approximately 214% above the segment's order backlog at December 31, 2004, and approximately 162% above the segment's order backlog at September 30, 2004. Approximately 32% of the September 30, 2005 backlog came as a result of the acquisition and additional bookings generated since acquisition of HPS Group.



Leasing

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Nine months ended
September 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2005 2004
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Segment revenue $ 23,702 $ 20,821
Intersegment revenue (80) (86)
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Revenue $ 23,622 $ 20,735
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Gross margin $ 15,242 $ 13,133
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EBITDA(2) $ 20,372 $ 17,674
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Income before interest and income taxes $ 14,905 $ 12,283
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Capital expenditures, net of proceeds on disposal $ 2,746 $ 14,622
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Revenue during the nine months ended September 30, 2005 was $23.6 million, an increase of 14% over the $20.7 million in 2004. The increase in revenue during the period was a result of a larger average fleet, offset by slightly lower fleet utilization rates. Rental rates have not increased significantly during the period. For the nine months ended September 30, 2005, the segment's revenue was generated 93% by compression and 7% by power and production process equipment. Overall, the segment experienced compression rental utilization rates, based on capital deployed, of 82% compared to 85% for the first three quarters of 2004. The decline in utilization rates was attributed to the timing of disposals of leased units. It is currently management's belief that the increase in 2005 drilling activity and subsequent production requirements for new wells in the segment's core market of Canada, the increase in the number of coal bed methane ("CBM") wells, and a desire by natural gas producers to maintain production during periods when their equipment requires maintenance will ultimately drive increased demand for rental units.

During 2005, Leasing sold 30 compression units and 45 power and process equipment units from its fleet, for gross proceeds of $12.8 million and a gain on sale of $2.0 million. This compares to 30 compression units and 86 power and process equipment units, for gross proceeds of $12.2 million and a gain on sale of $1.8 million in the same period of 2004. The sale of units generally occurs when customers exercise their contractual option to purchase equipment. To satisfy demand for leased compression, Enerflex added 30 compression units and 22 power and processing units to its fleet during the nine months ended September 30, 2005, for an investment of $15.6 million. This turnover of assets renews the fleet, resulting in an average fleet age of less than five years.

Leasing expects continued growth in demand for its products in Canada, and has targeted specific geographic regions in Australia and the United States for expansion. Growth in the lease fleet is expected to be the largest internal investment opportunity for the Company in 2005.

The Leasing business is a significant contributor to earnings, despite its low proportion of overall Company revenue. In addition, Enerflex Leasing enhances the Company's other business segments in that it is a significant customer of the compression fabrication business units, as almost all of its equipment is purchased from Fabrication. Service also benefits because the majority of Leasing's customers use our Service business units to perform routine maintenance over the term of the lease.

Financial Condition

During the first nine months of 2005, Enerflex generated funds from operations before changes in non-cash working capital of $33.2 million. The Company increased long-term borrowings by $23.3 million and received proceeds on the exercise of stock options of $2.4 million. The Company invested $16.5 million of these funds in the acquisition of HPS Group (net of cash acquired), $9.7 million in net capital additions, increased working capital of $18.4 million and the repayment of $8.0 million in operating loans. The Company also paid dividends of $6.7 million to shareholders during the first nine month of the year.

On July 6, 2005 the Company acquired 100% of the outstanding shares of HPS Group of Perth, Australia. HPS Group is a specialized engineering, contracting and project management organization, servicing a wide range of energy and other industrial customers. The total purchase consideration, including transaction costs of approximately $0.8 million, was $25.3 million. Approximately $2.8 million was paid through the issuance of 122,176 common shares of Enerflex and the remaining $21.6 million was paid in cash and financed through additional drawings on the Company's existing credit facilities. Subject to the achievement of certain performance measures and future earnings targets in the HPS Group covering the twelve months following the acquisition, a maximum contingent consideration of $5.0 million Australian could be paid in July 2006.

Enerflex is presently completing its assessment of the valuation of specific assets acquired and currently estimates the acquired assets to be: goodwill of $11.0 million, intangible assets of $5.9 million, cash and cash equivalents of $5.6 million, capital assets of $2.2 million, non-current liabilities of $1.0 million and working capital of $1.5 million.

On October 28, 2005, the Company had 22,606,270 common shares outstanding. Enerflex has a dividend policy, which is reviewed on an annual basis. On October 31, 2005, the Company declared a quarterly dividend equal to $0.10 per common share, payable on January 9, 2006 to shareholders of record December 21, 2005.

INDUSTRY OUTLOOK

While Enerflex continues to build its international presence, the Company's fortunes are largely tied to natural gas capital and operating expenditures in western Canada. In 2005 and 2006, industry analysts forecast that capital expenditures on plant and equipment will remain strong and will be at least comparable to 2004. Many forecasters expect that, in the absence of significant discoveries, North American conventional natural gas production will decrease. Sustaining or increasing production volumes is progressively more dependent upon development of tight gas and CBM, both of which require more compression than traditional reservoirs, and expansion in frontier regions such as the Northwest Territories. The continuation of higher natural gas prices similar to, or above, those experienced in recent years will be required to support gas development in these areas.

Internationally, Enerflex will continue to incrementally grow its existing international operations, seek new opportunities to expand its market presence and will pursue additional international contracts in order to support its domestic operations. The awarding of such contracts is difficult to predict and often requires substantial sales effort and lead time prior to the commencement of such contracts. As such, future revenues are difficult to predict and are subject to significant levels of volatility.

In order to continue to grow both the international and domestic markets for Enerflex's products and services, it is important to maintain the ability of Enerflex to attract and retain skilled employees. In periods of high economic activity in the oil and natural gas industry such employees are in high demand. Although the Company has been successful at acquiring, developing and retaining such employees in the past, current and future economic conditions will continue to challenge the resources of the organization.

Advisory

This document contains forward-looking information, which is subject to certain risks, uncertainties and assumptions. Should one or more of these risk factors materialize, or should assumptions prove incorrect, actual results may vary significantly from those expected.

The unaudited Consolidated Balance Sheets as at September 30, 2005 and December 31, 2004, and Consolidated Statements of Income, Retained Earnings and Cash Flows for the three and nine months ended September 30, 2005 and 2004 are attached. The financial statements and above analysis should be read in conjunction with the Company's Annual Report for the year ended December 31, 2004 and the Interim Reports for the periods ended March 31, 2005 and June 30, 2005.

Enerflex Systems Ltd. is a leading supplier of products and services to the global oil and gas production industry. Our core expertise lies between the wellhead and the pipeline. Enerflex provides natural gas compression, power generation and process equipment for sale or lease, hydrocarbon production and processing facilities, electrical, instrumentation and controls services and a comprehensive package of field maintenance and contracting capabilities. Through our ability to provide these products and services in an integrated manner, or as stand-alone offerings, Enerflex offers its customers a unique value proposition.

Headquartered in Calgary, Canada, the Company has approximately 2,350 employees and operations in Canada, Australia, the Netherlands, Pakistan, the United States, Indonesia and Germany. The Company's shares trade on the Toronto Stock Exchange under the symbol EFX.

Conference Call and Webcast Notice

Enerflex Systems Ltd. (TSX:EFX) will host a conference call for analysts and investors on Tuesday, November 1, 2005 at 9:00 a.m. MDT (11:00 a.m. EDT) to discuss the Company's 2005 third quarter results. The call will be hosted by John Aldred, Enerflex's Chairman and Chief Executive Officer.

If you wish to participate in this conference call, please call, 1.800.814.4861 or 1.416.640.4127. Please call at least ten minutes ahead of time.

Participants who wish to listen to a recording of the conference call may do so by calling 1.877.289.8525 or 1.416.640.1917 (passcode: 21156771 followed by the number sign) approximately one hour after the completion of the call. The recording will be available until the end of day Tuesday, November 8, 2005.

A live audio webcast of the conference call will be available on our internet site at www.enerflex.com in the Investor Relations section under Webcasts & Presentations on November 1, 2005 at 9:00 a.m. MDT (11:00 a.m. EDT). Approximately one hour after the call, a recording of the event will be available on our internet site.



CONSOLIDATED BALANCE SHEETS
(Unaudited)

September 30, December 31,
(Thousands) 2005 2004
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Assets
Current assets
Cash $ 12,389 $ 12,840
Accounts receivable 133,189 132,562
Inventory 83,028 63,176
Income taxes receivable 66 412
Future income taxes 4,475 3,402
-------------------------------------------------------------------------
Total current assets 233,147 212,392

Assets held for sale 1,283 -
Rental equipment 87,603 88,772
Property, plant and equipment 64,197 65,814
Assets under construction 3,274 -
Future income taxes 4,366 4,425
Intangible assets 7,958 3,210
Goodwill 121,805 112,252
-------------------------------------------------------------------------
$ 523,633 $ 486,865
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Operating bank loans $ 20,841 $ 28,853
Accounts payable and accrued liabilities 77,335 72,699
Dividends payable 2,261 2,234
Income taxes payable 5,808 6,729
Current portion of long-term debt 7,166 16,009
-------------------------------------------------------------------------
Total current liabilities 113,411 126,524

Long-term debt 78,828 48,027
Future income taxes 12,613 14,445
-------------------------------------------------------------------------
204,852 188,996
Shareholders' equity
Share capital 184,115 178,540
Cumulative translation adjustment (4,993) (414)
Contributed surplus 1,496 1,203
Retained earnings 138,163 118,540
-------------------------------------------------------------------------
318,781 297,869
-------------------------------------------------------------------------
$ 523,633 $ 486,865
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF INCOME

Three months ended Nine months ended
September 30 September 30
(Unaudited) (Thousands, ----------------------- -----------------------
except share amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Revenue $ 162,727 $ 141,293 $ 467,504 $ 389,400
Cost of goods sold 127,734 110,683 366,233 301,581
-------------------------------------------------------------------------
Gross margin 34,993 30,610 101,271 87,819
Selling, general and
administrative expenses 22,153 20,427 61,866 56,862
Foreign currency gains (2,987) (1,352) (2,987) (1,018)
Gain on sale of assets (558) (786) (2,050) (2,050)
-------------------------------------------------------------------------
Income before interest and
income taxes 16,385 12,321 44,442 34,025
Interest 1,223 829 3,093 2,705
-------------------------------------------------------------------------
Income before income taxes 15,162 11,492 41,349 31,320
Income taxes 5,330 3,766 14,971 10,667
-------------------------------------------------------------------------
Net income $ 9,832 $ 7,726 $ 26,378 $ 20,653
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income per common
share - basic $ 0.44 $ 0.35 $ 1.17 $ 0.93
- diluted $ 0.43 $ 0.34 $ 1.17 $ 0.92
Weighted average number
of common shares 22,591,951 22,322,540 22,490,878 22,296,143
-------------------------------------------------------------------------
-------------------------------------------------------------------------



CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Three months ended Nine months ended
September 30 September 30
----------------------- -----------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 130,592 $ 103,873 $ 118,540 $ 95,409
Net income 9,832 7,726 26,378 20,653
Dividends (2,261) (2,232) (6,755) (6,695)
-------------------------------------------------------------------------
Retained earnings, end of
period $ 138,163 $ 109,367 $ 138,163 $ 109,367
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended Nine months ended
September 30 September 30
----------------------- -----------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating Activities
Net income $ 9,832 $ 7,726 $ 26,378 $ 20,653
Depreciation and
amortization 4,358 3,918 11,813 11,415
Future income taxes 37 779 (3,510) 1,677
Gain on sale of assets (558) (786) (2,050) (2,050)
Stock option expense 231 161 598 540
-------------------------------------------------------------------------
13,900 11,798 33,229 32,235
Changes in non-cash
working capital and other (2,903) 4,250 (14,581) 4,011
-------------------------------------------------------------------------
Cash flow from operations 10,997 16,048 18,648 36,246
-------------------------------------------------------------------------
Investing Activities
Acquisition of HPS Group
Limited (16,543) - (16,543) -
Purchase of:
Rental equipment (5,913) (8,765) (15,561) (26,816)
Property, plant and
equipment (1,219) (3,864) (3,991) (8,038)
Assets under
construction (1,829) - (3,176) -
Proceeds on disposal of:
Rental equipment 2,893 4,107 12,816 12,210
Property, plant and
equipment 93 510 246 935
-------------------------------------------------------------------------
(22,518) (8,012) (26,209) (21,709)
-------------------------------------------------------------------------
Changes in non-cash
working capital and
other (2,482) (832) (2,397) (1,615)
-------------------------------------------------------------------------
(25,000) (8,844) (28,606) (23,324)
-------------------------------------------------------------------------
Financing Activities
Decrease in operating
bank loans (2,617) (1,848) (8,013) (3,696)
Increase in (repayment of)
long-term debt 24,691 (1,000) 23,270 (3,630)
Stock options exercised 263 150 2,427 1,298
Dividends (2,247) (2,232) (6,728) (6,695)
-------------------------------------------------------------------------
20,090 (4,930) 10,956 (12,723)
Changes in non-cash working
capital and other (1,590) (758) (1,449) (110)
-------------------------------------------------------------------------
18,500 (5,688) 9,507 (12,833)
-------------------------------------------------------------------------
(Decrease) increase in cash 4,497 1,516 (451) 89
Cash, beginning of period 7,892 5,314 12,840 6,741
-------------------------------------------------------------------------
Cash, end of period $ 12,389 $ 6,830 $ 12,389 $ 6,830
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements



Note 1. Segmented Information

The Company has three reportable segments: Service, Fabrication and
Leasing. The Service reportable segment is the aggregation of the
Mechanical Service and Electrical, Instrumentation and Controls
divisions. The Fabrication reportable segment is the aggregation of the
Production and Processing, Compression and Power divisions. The
operations of HPS Group have been included in the Fabrication segment.

(Unaudited)
(Thousands)
Three months Service Fabrication Leasing
ended -----------------------------------------------------------
September 30 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Segment
revenue $ 70,802 $ 68,192 $ 94,506 $ 80,171 $ 7,700 $ 6,350
Intersegment
revenue (4,445) (3,751) (5,820) (9,638) (16) (31)
-------------------------------------------------------------------------
Revenue 66,357 64,441 88,686 70,533 7,684 6,319
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 19,368 17,564 10,799 8,675 4,826 4,371
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation
and
amortization 879 888 1,569 1,149 1,910 1,881
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before
interest and
income taxes 6,988 4,737 4,829 3,512 4,568 4,072
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital
expenditures 496 2,626 1,231 1,016 5,929 8,781
Corporate
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on
disposal $ 39 $ 468 $ 54 $ 9 $ 2,893 $ 4,107
Corporate
-------------------------------------------------------------------------

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


(Unaudited)
(Thousands)
Three months Consolidated
ended -------------------
September 30 2005 2004
---------------------------------
Segment
revenue $173,008 $154,713
Intersegment
revenue (10,281) (13,420)
---------------------------------
Revenue 162,727 141,293
---------------------------------
---------------------------------
Gross margin 34,993 30,610
---------------------------------
---------------------------------
Depreciation
and
amortization 4,358 3,918
---------------------------------
---------------------------------
Income before
interest and
income taxes 16,385 12,321
---------------------------------
---------------------------------
Capital
expenditures 7,656 12,423
Corporate 1,305 206
---------------------------------
8,961 12,629
---------------------------------
---------------------------------
Proceeds on
disposal $ 2,986 $ 4,584
Corporate $ - $ 33
---------------------------------
$ 2,986 $ 4,617
---------------------------------
---------------------------------



(Unaudited)
(Thousands)
Nine months Service Fabrication Leasing
ended -----------------------------------------------------------
September 30 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Segment
revenue $209,161 $194,612 $263,869 $212,889 $ 23,702 $ 20,821
Intersegment
revenue (11,619) (11,741) (17,529) (27,095) (80) (86)
-------------------------------------------------------------------------
Revenue 197,542 182,871 246,340 185,794 23,622 20,735
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 54,381 49,535 31,648 25,151 15,242 13,133
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation
and
amortization 2,654 2,501 3,692 3,523 5,467 5,391
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before
interest and
income taxes 16,554 13,415 12,983 8,327 14,905 12,283
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment assets 123,831 113,272 172,516 136,432 93,260 86,714
Corporate
Goodwill 52,233 52,771 62,216 52,112 7,356 7,356
-------------------------------------------------------------------------
Total segment
assets 176,064 166,043 234,732 188,544 100,616 94,070
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital
expenditures 1,838 4,007 2,964 3,133 15,562 26,832
Corporate
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proceeds on
disposal $ 109 $ 837 $ 137 $ 65 $ 12,816 $ 12,210
Corporate
-------------------------------------------------------------------------

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


(Unaudited)
(Thousands)
Nine months Consolidated
ended -------------------
September 30 2005 2004
---------------------------------
Segment
revenue $496,732 $428,322
Intersegment
revenue (29,228) (38,922)
---------------------------------
Revenue 467,504 389,400
---------------------------------
---------------------------------
Gross margin 101,271 87,819
---------------------------------
---------------------------------
Depreciation
and
amortization 11,813 11,415
---------------------------------
---------------------------------
Income before
interest and
income taxes 44,442 34,025
---------------------------------
---------------------------------
Segment assets 389,607 336,418
Corporate 12,221 7,757
Goodwill 121,805 112,239
---------------------------------
Total segment
assets 523,633 456,414
---------------------------------
---------------------------------
Capital
expenditures 20,364 33,972
Corporate 2,364 882
---------------------------------
22,728 34,854
---------------------------------
---------------------------------
Proceeds on
disposal $ 13,062 $ 13,112
Corporate - 33
---------------------------------
$ 13,062 $ 13,145
---------------------------------
---------------------------------



Revenue from foreign countries was:

Three months ended Nine months ended
September 30 September 30
----------------------- -----------------------
(Unaudited) (Thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Australia $ 15,536 $ 2,866 $ 34,088 $ 16,656
Indonesia 3,144 326 6,148 1,403
Netherlands 4,691 5,273 15,274 14,746
Pakistan 1,461 17,016 10,917 23,838
United States 9,374 5,369 20,142 18,558
Other 11,158 11,284 32,346 23,504
-------------------------------------------------------------------------
$ 45,364 $ 42,134 $ 118,915 $ 98,705
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in these amounts
are gross exports from
domestic operations of: $ 16,967 $ 27,290 $ 56,758 $ 51,984
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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



-------------------
(1) Operating margin and operating margin percent are non-GAAP earnings
measures that do not have a standardized meaning prescribed by GAAP
and therefore are unlikely to be comparable to similar measures
presented by other issuers
(2) Earnings before interest, taxes, depreciation and amortization
("EBITDA") is a non-GAAP earnings measure that does not have a
standardized meaning prescribed by GAAP and therefore is unlikely to
be comparable to similar measures presented by other issuers.

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