Enerflex Systems Income Fund
TSX : EFX.UN

Enerflex Systems Income Fund

August 03, 2006 23:59 ET

Enerflex Delivers 12th Quarter of Year Over Year Earnings Growth

CALGARY--(CCNMatthews - Aug. 3) - 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 six months ended June 30, 2006.



For the three months ended June 30
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$ millions, except per share amounts 2006 2005 % change
(unaudited)
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Revenue $ 200.1 $ 157.1 27%
Gross margin $ 45.1 $ 34.8 30%
Gross margin percent 22.6 22.1 2%
Operating margin $ 19.7 $ 14.9 32%
Operating margin percent 9.8 9.5 3%
Net income $ 12.5 $ 9.2 36%
Earnings per share (Basic) $ 0.55 $ 0.41 34%
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For the six months ended June 30
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$ millions, except per share amounts 2006 2005 % change
(unaudited)
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Revenue $ 406.9 $ 304.8 34%
Gross margin $ 91.7 $ 66.3 38%
Gross margin percent 22.5 21.7 4%
Operating margin $ 41.3 $ 26.6 55%
Operating margin percent 10.1 8.7 16%
Net income $ 25.4 $ 16.5 53%
Earnings per share (Basic) $ 1.12 $ 0.74 51%
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During the second quarter of 2006, Enerflex continued to produce year over year improvements in operating results. The Company generated revenue of $200.1 million, an increase in revenue of $43.0 million, improved its gross margin to 22.6%, increased its operating margin by $4.8 million and produced $0.55 in basic earnings per common share, all as compared to the second quarter of 2005. Also during the second quarter, Enerflex incurred various advisory costs related to corporate and legal matters totaling approximately $1.3 million during the period. These charges have reduced earnings by approximately $0.9 million or $0.04 per common share. Despite these charges, Enerflex continues to show strong earnings growth as indicated in its basic earnings per share for the trailing twelve month period ended June 30, 2006 of $2.17, as compared to $1.60 for the same period ended June 30, 2005. These improved results can be attributed to increased natural gas infrastructure and maintenance spending by oil and natural gas producers in a period of fluctuating commodity prices, the acquisition of HPS Group Pty Ltd. ("HPS") in July 2005, and cost and process efficiencies generated by the Company.

"The second quarter of 2006 marks a record second quarter for the Company and the twelfth consecutive quarter that Enerflex has delivered earnings per share that exceed the prior year comparatives," said Mr. J. Blair Goertzen, President and Chief Executive Officer. "Operating margin, EBITDA and earnings continue to grow at a significantly faster rate than our strong revenue gains, reflecting our strong focus on customer needs and our commitment to continuously improve upon our high standards for quality and performance."

"The closing of the second quarter also marks the first anniversary of the acquisition of HPS in Australia. We couldn't be happier with this acquisition. HPS has exceeded all performance targets which we set at the time and they have become a major contributor to revenue from our Engineered Systems segment," Mr. Goertzen continued.

"We are pleased with the progress from each of our segments. Engineered Systems continues to produce high levels of order bookings and backlogs, the Service segment maintained its already strong financial performance and Production Services has worked diligently to introduce new product lines to the market. The dedication that we have seen from our staff is truly gratifying, and coupled with the strong market conditions, I expect that we will see continued success throughout 2006 despite the current lower natural gas prices," said Mr. Goertzen in closing.



Quarterly Overview:

- Net income generated in the second quarter increased by
$3.3 million or 36% to $12.5 million or $0.55 per common share, on
revenue of $200.1 million, an increase of 27%, all when compared
to the three months ended June 30, 2005.

- Consolidated gross margin increased by $10.3 million or 30% to
22.6% of revenue when compared to the same quarter of 2005. The
increase in gross margin percent is largely due to the
improvements from the Engineered Systems segment.

- Operating margin increased by 32% to $19.7 million or 9.8% of
revenue compared to $14.9 million or 9.5% of revenue in the second
quarter of 2005.

- Engineered Systems segment increased revenue by 52% in the second
quarter to $118.5 million, from $78.2 million in the same quarter
of 2005, and increased gross margin by 90% to $19.1 million or
16.1% of revenue from 12.8% in the three months ended June 30,
2005.

- The Engineered Systems segment increased its order backlog by 161%
over the segment's order backlog at June 30, 2005, and by 7% over
December 31, 2005. New order bookings decreased slightly by 6%
when compared to the same quarter of 2005.

- Production Services successfully installed, commissioned and is
now operating compression equipment for a customer under the
Company's first contract for Variable Cost Compression.


FORWARD-LOOKING STATEMENTS

This MD&A contains forward-looking statements. Certain statements containing words such as "anticipate", "could", "expect", "seek", "may", "intend", "will", "believe" and similar expressions, statements that are based on current expectations and estimates about the markets in which the Company operates and statements of the Company's belief, intentions and expectations about development, results and events which will or may occur in the future constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Company derived from its experience and perceptions. Forward-looking statements in this MD&A include, but are not limited to: statements with respect to future capital expenditures, including the amount and nature thereof; oil and gas prices and demand; other development trends of the oil and gas industry; business strategy; expansion and growth of the Company's business and operations, including the Company's market share and position in the oilfield service markets; and other such matters. In addition, other written or oral statements which constitute forward-looking statements may be made from time to time by and on behalf of the Company. Such forward-looking statements are subject to important risks, uncertainties, and assumptions which are difficult to predict and which may affect the Company's operations, including, without limitations: the impact of general economic conditions; industry conditions, including the adoption of new environmental and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; risks inherent in the Company's ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or management; labor unrest; fluctuations in foreign exchange or interest rates; stock market volatility, opportunities available to or pursued by the Company and other factors, many of which are beyond the control of the Company. The Company's actual results, performance, or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, the Company will derive there-from. Other than as required by law, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

During the second quarter of 2006, Enerflex generated net income of $12.5 million ($0.55 per common share) from revenue of $200.1 million. This represents an increase in net income of $3.3 million ($0.14 per common share) or 36% as compared to the same period in 2005. Revenue generated in the second quarter increased by $43.0 million or 27% as compared to the three month period ended June 30, 2005. Revenue improvements were most notable in the Production and Processing division which increased revenues by $34.0 million and the Compression and Power division which increased revenues by $6.4 million. These increases are attributed to the acquisition of HPS in July of 2005, which added $27.0 million in revenue for the quarter and the execution on the strong backlog at the beginning of the period. Other divisions also experienced increased revenue with the Mechanical Service division contributing an additional $1.7 million; the Electrical Instrumentation & Controls ("EI&C") division adding $0.6 million; and Production Services contributing $0.3 million in additional revenue.

Gross margin for the three months ended June 30, 2006 was $45.1 million or 22.6% of revenue as compared to $34.8 million or 22.1% of revenue for the three months ended June 30, 2005, an increase of $10.3 million. The higher gross margin percentage was a result of price increases generated from the Company's Engineered Systems segment, increased activity levels which improved overhead absorption, and higher field utilization rates in the Service segment, partially offset by higher input costs. Consolidated gross margin percent varies from quarter to quarter depending on the revenue mix from each of our segments. During the second quarter of 2006 our lower margined Engineered Systems segment contributed the highest portion of revenue and while they posted significant gross margin gains, the consolidated average gross margin percentage of revenue is reduced by this revenue shift.

Selling, general and administrative ("SG&A") expenses were $26.7 million or 13.3% of revenue during the three months ended June 30, 2006, compared with $20.0 million or 12.7% of revenue in the same period of 2005. The $6.7 million increase in SG&A expenses during the quarter, as compared to the same period in 2005, is primarily a result of: $2.2 million resulting from the inclusion of HPS; increases in compensation costs of $1.6 million; increased bad debt expense of $0.2 million; increased intangible asset amortization of $0.6 million; increased stock-based compensation expense of $0.5 million; increased bonus accruals of $0.4 million; increased marketing expenditures of $0.4 million and increases in information technology costs and audit costs of $0.2 million each, partially offset by a reduction in Bill 198 compliance costs of $0.2 million.

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 June 30, 2006, Enerflex produced an operating margin of $19.7 million, or 9.8% of revenue, as compared to an operating margin of $14.9 million, or 9.5% of revenue, for the same three month period in 2005. The increase in operating margin percentage for the quarter as compared to 2005 occurred as a result of the same factors contributing to the increased gross margin percentage and increased SG&A expenses. The foreign exchange gain during the quarter resulted primarily from the Company's hedging strategy and changes in the value of the Euro and U.S. dollar as compared to the Canadian dollar.

Income before interest and income taxes totalled $21.0 million for the second quarter of 2006, as compared to $15.7 million for the same period in 2005, an increase of $5.3 million, or 34%. During the quarter, the Company experienced an effective income tax rate of 36.0% as compared to 38.0% for the same period in 2005.

Segmented results for the three months ended June 30, 2006

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 43% of staff, holds 33% of the total assets, generates 37% of the Company's revenue and produces 33% 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.

Enerflex, through various business units, is an authorized distributor for Waukesha engines and parts in Canada, Australia, Indonesia, Papua New Guinea, the Netherlands, Germany, Portugal, Poland and Spain. Mechanical Service revenues tend to be fairly stable as ongoing equipment maintenance is generally required to preserve the customer's natural gas production. Outside of North America, the maintenance of power generation equipment is also a significant factor in the division's revenue base. EI&C services are provided in Canada through Syntech where revenues are more cyclical as they are generated from both maintenance spending and from infrastructure investment.



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Service Segment Three months ended June 30
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(unaudited) (thousands) 2006 2005
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Segment revenue $ 76,919 $ 74,661
Intersegment revenue (3,575) (3,657)
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Revenue 73,344 71,004
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Gross margin 20,913 19,455
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EBITDA 7,825 7,511
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Income before interest and income taxes $ 6,967 $ 6,617
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Service revenue was $73.3 million for the three months ended June 30, 2006 and comprised 37% of consolidated revenue. This compares to $71.0 million and 45% of consolidated revenue during the same period in 2005. Mechanical Service generated 62% of the segment's revenue in the quarter and 61% in the same period of 2005. EI&C contributed 38% of the segment's revenue in the second quarter of 2006 and 39% in the same period of 2005. The increase in segment revenue of 3%, or $2.3 million, was a result of higher demand for parts and services. Gross margin for the segment totalled $20.9 million, or 28.5%, as compared to $19.5 million or 27.4% in 2005. The increase in gross margin percent was primarily a result of improvements in the EI&C division. Income before interest and income taxes increased by $0.4 million during the quarter, as compared to the same period of 2005.

Mechanical Service

Mechanical Service revenue for the three months ended June 30, 2006 was $45.1 million, or 4% higher than 2005 revenue of $43.4 million. In Canada, which accounted for 70% of the division's revenue for the three months ended June 30, 2006 as compared to 68% during the same period of 2005, sales increased by 7% over the second quarter in 2005 as a result of higher parts sales and strong utilization rates. International revenue decreased by 3% in the quarter as compared to the same period in 2005. The decrease in international revenue resulted from lower engine and parts sales in Europe offset by higher engine and parts sales in Australia and Indonesia.

Gross margin for Mechanical Service was virtually unchanged at $13.6 million in the second quarter of 2006, as compared to the same period in 2005. As a percentage of revenue, the gross margin decreased from 31.2% to 30.0% as a result of increased input costs and foreign exchange fluctuations. The division's income before interest and income taxes for the three months ended June 30, 2006 decreased by $1.2 million, as compared to the second quarter in 2005, as a result of increased selling, general and administrative costs.

Electrical, Instrumentation & Controls

The EI&C division continued to improve its gross margin as a percentage of revenue for the three months ended June 30, 2006. During the quarter, EI&C generated revenue of $28.2 million, an increase of $0.6 million, as compared to $27.6 million in the second quarter of 2005. The EI&C business in Canada is highly competitive. Consequently, this division generally 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 2006, the division focused the scope of contracts it would pursue to cost plus arrangements and on obtaining projects with higher margin potential. In addition, the division continued its efforts towards reducing the cost of maintaining the branch infrastructure requirements throughout Alberta, Saskatchewan and northeast British Columbia. Through this strategy and with the increase in demand for the division's services, its gross margin increased by $1.4 million or 24% in the second quarter as compared to the same period in 2005. As a percentage of revenue, gross margin for the second quarter was 26.1% as compared to 21.5% one year earlier. The division's earnings before interest and income taxes increased by $1.6 million for the three months ended June 30, 2006 as compared to the same period in 2005, principally as a direct result of improvements in gross margin.

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. 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 56% of staff, holds 45% of the total assets, generates 59% of the Company's revenue and produces 44% of Enerflex's income before interest and income taxes.

Engineered Systems' business tends to have more volatility in revenue, gross margin and income before interest and income taxes than Enerflex's other business segments. Revenues are derived primarily from the investments made in natural gas infrastructure by producers. It is presently estimated by industry commentators that the investment rate by such producers will remain at levels consistent with the prior year in 2006. Factors expected to positively affect this include: increased investments in Canadian oil sands development projects; expansion of the Australian natural gas distribution system; the need for additional international natural gas processing facilities; and coal bed methane ("CBM") production in North America and Australia.



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Engineered Systems Segment Three months ended June 30
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(unaudited) (thousands) 2006 2005
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Segment revenue $ 128,939 $ 85,004
Intersegment revenue (10,399) (6,851)
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Revenue 118,540 78,153
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Gross margin 19,098 10,028
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EBITDA 10,837 4,784
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Income before interest and income taxes $ 9,130 $ 3,735
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Engineered Systems' revenue totalled $118.5 million for the three months ended June 30, 2006 and comprised 59% of consolidated revenue. This compares to $78.2 million and 50% of consolidated revenue in the same period of 2005. Compression and Power generated 54% of the segment's revenue for the quarter as compared to 74% in the same period of 2005. Production and Processing contributed 46% of the segment's revenue for the three months ended June 30, 2006 as compared to 26% in the same period of 2005. The increase of $40.4 million, or 52%, in segment revenue was a result of the acquisition of HPS, the continuation of the Production and Processing division's Egyptian project, increased demand for the Company's high horsepower compression products, the introduction of new products and increases in the pricing of the segment's products. Gross margin for the segment totalled $19.1 million, or 16.1%, for the three months ended June 30, 2006, as compared to 12.8% in the same period of 2005. The increase in gross margin of $9.1 million, or 90%, was a result of the same factors that improved the segment's revenue. Income before interest and income taxes increased by $5.4 million, or 144%, to $9.1 million for the three months ended June 30, 2006.

Compression and Power

The Compression and Power division contributed revenue of $64.2 million for the three months ended June 30, 2006, an increase of $6.4 million, or 11% over the same quarter of 2005. International revenue in the division totalled $16.0 million for the period, as compared to $14.3 million in the same period of 2005. 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 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 continued to increase in the high horsepower screw compression market segment, but was constant overall in other product segments. The improvement in pricing leverage is 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.

During the quarter, gross margin increased by $3.8 million, or 51% as compared to the second quarter of 2005, as a result of increased revenue, improved plant utilization and price increases. These were partially offset by increased component, material and personnel related costs, higher overhead rates 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 the quarter management estimates that the average utilization rate, based on the theoretical plant capacity in labour hours, was 73% as compared to 63% in 2005. Increases in the utilization of the facilities, due to increased customer demand, were partially offset by increases in overhead costs, resulting in an overall net reduction in overhead costs per hour of 9%, as compared to 2005. Compression and Power's income before interest and income taxes increased by 128% in the second quarter of 2006, as compared to the same period in 2005, as a result of the factors mentioned above.

Production and Processing

The Production and Processing division contributed revenue of $54.3 million for the three months ended June 30, 2006, an increase of $34.0 million, or 167% over the same period in 2005. While definitive market share data is difficult to obtain, Enerflex estimates that it has maintained its domestic 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 was generated $27.0 million in Australia and $9.4 million in other international markets, with a small reduction of $2.4 million in the domestic markets, due principally from the timing of orders. During the quarter, domestic demand continued to be strong. Internationally the Company continues to be awarded significant contracts in Australia however, backlog in other international regions is declining as existing orders for natural gas processing facilities are being completed and outstanding quotes for new orders have yet to be awarded.

During the quarter, gross margin also increased by $5.2 million, or 208% as compared to the second quarter of 2005 as a result of $4.3 million from the addition of HPS, the progress made on the Company's Egyptian project and higher Canadian demand for the division's products. At present, Enerflex owns approximately 107,000 square feet of production and processing shop floor space in Alberta, Canada, including its recently opened large vessel fabrication shop, and 62,000 square feet of leased shop floor space in Perth, Western Australia. During the quarter, management estimates that the average utilization rate, based on available labour hours, was 92% in the second quarter of both 2006 and 2005 in its Canadian based facilities and 89% in its Australian based facilities. The division's income before interest and income taxes increased by 185% during the quarter as compared to the same period in 2005, as a result of the acquisition of HPS and other factors as previously identified.

Engineered Systems Segment Bookings

During the quarter, Enerflex's order bookings in the Engineered Systems segment decreased by 6% as compared to bookings recorded in the same quarter of 2005. Though international bookings increased during the period, domestic bookings were reduced as many customers utilized this period to evaluate the implications of lower natural gas commodity prices. The Engineered Systems segment's order backlog at June 30, 2006 was approximately 161% above the segment's order backlog at June 30, 2005, and 7% above the order backlog at December 31, 2005.

Production Services

The Production Services business segment provides a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. As of June 30, 2006, Production Services' rental fleet was comprised of approximately 360 compression units, representing 99,000 horsepower, and 146 power and processing units. This compared with 360 compression units, or 97,000 horsepower, and 135 power and processing units as at June 30, 2005. The compression fleet averaged 362 units and 99,000 horsepower for the three months ended June 30, 2006. The key performance metrics in this business are fleet size, utilization rates and rental rates. The Production Services segment employs 1% of Enerflex's employees, holds 19% of the total assets, generates 4% of the Company's revenue and produces 23% of Enerflex's income before interest and income taxes.

The Company's rental fleet is located principally in western Canada. Expansion in international markets is presently being continued on a selective basis to minimize the risk from these new markets. As of June 30, 2006, Enerflex's compression rental fleet included 15 units located in the United States and 6 units in Australia.



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Production Services Segment Three months ended June 30
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(unaudited) (thousands) 2006 2005
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Segment revenue $ 8,210 $ 7,963
Intersegment revenue (7) (32)
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Revenue 8,203 7,931
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Gross margin 5,120 5,267
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EBITDA 6,928 6,982
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Income before interest and income taxes 4,903 5,328
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Capital expenditures, net of proceeds
on disposal $ (2,026) $ 1,082
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Revenue for the three months ended June 30, 2006 increased by $0.3 million, or 3%, to $8.2 million, over the same period in 2005. While the segment owns and rents compression, power and processing equipment, the main driver for its revenue growth is the rental of compression equipment. During the quarter, the segment's revenue was generated 90% by compression and 10% by power and processing equipment. Included in compression rentals is $0.2 million of revenue associated with Variable Cost Compression ("VCC") services arising from the deployment of approximately 1,500 horsepower of compression equipment in June of 2006. The revenue increase experienced in the second quarter of 2006 over 2005 was a result of new VCC service offering and increases in utilization rates in the power and processing fleet partially offset by lower utilization in the compression fleet. The segment experienced compression rental utilization rates, based on average capital deployed, of 74% during the quarter compared to 82% in 2005. Power and processing fleet utilization rates, based on average capital deployed, increased from 64% to 73% in the second quarter of 2006. The reduction in compression utilization rates was primarily attributed to lower customer demand for rentals and compression rental units acquired at or subsequent to the end of the initial rental term by customers. With higher than anticipated energy prices resulting in higher cash flows and working capital in the hands of the segment's customers, 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 rent.

During the quarter, Production Services sold 10 compression units and 24 power and processing equipment units from its fleet, for gross proceeds of $9.0 million, recording a gain on sale of $1.0 million. This compares to 10 compression units and 8 power and process equipment units, for gross proceeds of $3.5 million and a gain on sale of $0.8 million in the second quarter of 2005. 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, the Company has altered the buyout provisions of new rental contracts in a manner which discourages renters from acquiring the rental assets subsequent to the end of the contract expiry date. To satisfy the demand for rental equipment, Enerflex added 6 compression units and 12 power and processing units to its fleet in the quarter, for an investment of $6.2 million. This turnover of assets renews the fleet, resulting in an average fleet age of less than five years.

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 rental contracts. Growth in the rental fleet is expected to be the largest internal capital investment opportunity for the Company in 2006. By the third quarter, Production Services will expand the scope of the processing fleet by adding a natural gas refrigeration unit, currently under construction by the Production and Processing division.

Variable Cost Compression is an initiative which involves Enerflex owning, operating, maintaining and optimizing field equipment on behalf of producers for a variable fee based on throughput and uptime. This initiative 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. 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. As of June 30, 2006 the Company had deployed approximately $2.0 million towards this initiative.

Also during the second quarter of 2006, Production Services successfully completed its field testing of flue gas compression packages and completed its first commercial application of the technology. At present, Enerflex has two units available for under-balanced drilling applications and anticipates the release of an additional unit during the third quarter.

Six Months Ended June 30, 2006

Enerflex generated net income for the six months ended June 30, 2006 of $25.4 million ($1.12 per common share) from revenue of $406.9 million. This represents an increase in net income of $8.8 million ($0.38 per common share) or 53% as compared to the same period in 2005. As previously noted the Company had also incurred one-time costs of approximately $0.04 per share. Revenue generated in the first six months increased by $102.1 million or 34% as compared to the six month period ended June 30, 2005. Revenue improvements were most notable in the Engineered Systems segment. Production and Processing revenue increased by $58.5 million primarily due to the acquisition of HPS in July of 2005, which added $47.6 million, strong domestic activity and the progress made on a contract for facilities in Egypt. Compression and Power revenue increased by $26.5 million, as a result of increased customer demand. During the first two quarters of 2006, Enerflex's other divisions also generated revenue in excess of the same period of 2005 with the Mechanical Service division increasing revenue by $8.6 million; the EI&C division adding $7.9 million; and the Production Services division providing an additional $0.5 million.

Gross margin for the six months ended June 30, 2006 was $91.7 million or 22.5% of revenue as compared to $66.3 million or 21.7% of revenue for the six months ended June 30, 2005, an increase of $25.4 million. The higher gross margin percentage was a result of price increases and increased facility utilization in the Company's Engineered Systems segment and higher activity levels in the Service segment, partially offset by higher input costs. The portion of second quarter advisory fees affecting gross margin totalled $1.0 million. Consolidated gross margin varies from quarter to quarter depending on the revenue mix from each of our segments. During the first half of 2006 our lower margined Engineered Systems segment contributed the highest portion of revenue and while they posted significant gross margin gains, the consolidated average gross margin percentage of revenue is reduced by this revenue shift.

Selling, general and administrative expenses were $52.0 million or 12.8% of revenue during the six months ended June 30, 2006, compared with $39.7 million or 13.0% of revenue in the same period of 2005. The $12.3 million increase in SG&A expenses during the quarter, as compared to the same period in 2005, is primarily a result of: $3.9 million resulting from the inclusion of HPS; increases in compensation costs of $3.1 million; increased bad debt expense of $0.9 million; increased intangible asset amortization of $1.1 million; increased stock-based compensation expense of $1.0 million; increased bonus accruals of $0.7 million; legal fees and consulting expenses of $1.0 million; increased marketing expenditures of $0.6 million and increases in information technology costs and audit costs of $0.3 million each, partially offset by a reduction in Bill 198 compliance costs of $0.5 million.

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 six months ended June 30, 2006, Enerflex produced an operating margin of $41.3 million, or 10.1% of revenue, as compared to an operating margin of $26.6 million, or 8.7% of revenue, for the same six month period in 2005. The increase in operating margin percentage for the first six months of 2006, as compared to 2005, occurred as a result of the same factors contributing to the increased gross margin percentage and increased SG&A expenses. The foreign exchange gain during the first six month period ended June 30, 2006 resulted primarily from the Company's hedging strategy and changes in the value of the Euro and U. S. dollar as compared to the Canadian dollar during the period.

Income before interest and income taxes totalled $43.4 million for the first two quarters of 2006, as compared to $28.1 million for the same period in 2005, an increase of $15.3 million, or 55%. During the first half of 2006, the Company experienced an effective income tax rate of 36.9% as compared to 36.8% for the same period in 2005. This slight increase is a result of the Company not recognizing the benefit of losses generated in certain foreign jurisdictions and a provision for the reassessment of prior year taxes.



Segmented results for the six months ended June 30, 2006

Service
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Service Segment Six months ended June 30
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(unaudited) (thousands) 2006 2005
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Segment revenue $ 154,536 $ 138,359
Intersegment revenue (6,806) (7,174)
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Revenue 147,730 131,185
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Gross margin 41,690 35,013
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EBITDA 15,767 11,341
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Income before interest and income taxes $ 14,096 $ 9,566
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Service revenue was $147.7 million for the six months ended June 30, 2006 and comprised 36% of consolidated revenue and 32% of consolidated income before interest and income taxes. This compares to $131.2 million and 43% of consolidated revenue and 34% of consolidated income before interest and income taxes during the same period in 2005. Mechanical Service generated 59% of the segment's revenue in the first half of 2006 and 60% in the same period of 2005. EI&C contributed 41% of the segment's revenue in the first two quarters of 2006 and 40% in the same period of 2005. The increase in segment revenue of 13%, or $16.5 million, was a result of higher demand for parts and services, improved inventory and supply chain management and strong oilfield service activity in Canada. Gross margin for the segment totalled $41.7 million, or 28.2%, as compared to $35.0 million or 26.7% in 2005. 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 and personnel costs. Income before interest and income taxes in the first six months of 2006, as compared to the same period of 2005, increased by $4.5 million, or 47%, to $14.1 million as a result of these same factors. The improvement in income before interest and income taxes of the segment from 7.3% of revenue for the six months ended June 30, 2005 to 9.5% of revenue in 2006 was due to the above factors, better leveraging of existing branch costs and a focus on improving execution of services.



Engineered Systems
-------------------------------------------------------------------------
Engineered Systems Segment Six months ended June 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 259,985 $ 169,363
Intersegment revenue (17,285) (11,709)
-------------------------------------------------------------------------
Revenue 242,700 157,654
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 39,629 20,849
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA 22,537 10,277
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest and income taxes $ 19,137 $ 8,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Engineered Systems revenue has benefited from the HPS acquisition, strong markets and customer demand, and a focus on improving its profitability. Engineered Systems' revenue totalled $242.7 million for the first six months of 2006 and comprised 60% of consolidated revenue and 44% of consolidated income before interest and income taxes. This compares to $157.7 million, 52% of consolidated revenue and 29% of consolidated income before interest and income taxes in the first six months of 2005. Compression and Power generated 58% of the segment's revenue for the first two quarters of 2006 as compared to 72% in the same period of 2005. Production and Processing contributed 42% of the segment's revenue for the first six months of 2006 as compared to 28% in the same period of 2005. The increase of $85.0 million, or 54%, in segment revenue was a result of the acquisition of HPS, increased domestic revenue in the Production and Processing division, the continuation of the Production and Processing division's Egyptian project, increased demand for the Company's high horsepower compression products, the introduction of new products and increases in the pricing of the segment's products. Gross margin for the segment totalled $39.6 million, or 16.3%, for the six months ended June 30, 2006, as compared to 13.2% in the same period of 2005. The increase in gross margin of $18.8 million, or 90%, was a result of the same factors that improved the segment's revenue. Income before interest and income taxes increased by $11.0 million, or 135%, to $19.1 million for the six months ended June 30, 2006 as a result of the above-mentioned factors.

Engineered Systems Segment Bookings

During the first six months of 2006, Enerflex increased its order bookings by approximately 45% as compared to bookings recorded in the first two quarters of 2005.



Production Services
-------------------------------------------------------------------------
Production Services Segment Six months ended June 30
-------------------------------------------------------------------------
(unaudited) (thousands) 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 16,494 $ 16,002
Intersegment revenue (14) (64)
-------------------------------------------------------------------------
Revenue 16,480 15,938
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 10,366 10,416
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA 14,351 13,894
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest and income taxes 10,210 10,337
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures, net of proceeds
on disposal $ 431 $ (290)
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Revenue for the first six months of 2006 increased by $0.5 million, or 3%, to $16.5 million, over the same period in 2005. While the segment owns and rents compression, power and processing equipment, the main driver for its revenue growth is the rental of compression equipment. During the period, the segment's revenue was generated 90% by compression and 10% by power and processing equipment. The revenue increase experienced in the first six months of 2006 over 2005 was a result of VCC revenue of $0.2 million, and increased utilization rates in the power and processing fleet, partially offset by the impact of lower utilization rates in the compression fleet. The segment experienced compression rental utilization rates, based on average capital deployed, of 75% for the six months ended June 30, 2006 as compared to 83% in 2005. Power and processing fleet utilization rates, based on average capital deployed, during the period increased from 63% to 77% in 2006.

Gross Margin for the first six months of 2006 and 2005 was virtually unchanged from $10.4 million and as a percentage of revenue decreased from 65.4% to 62.9% primarily due to the reduction in the compression fleet utilization rate. Gains on the sale of rental equipment and additional costs incurred with respect to the initiation of VCC and flue gas product lines also impacted income before interest and income taxes for the period as compared with the first six months of 2005.

During the first six months of 2006, Production Services sold 24 compression units and 28 power and process equipment units from its fleet, for gross proceeds of $12.8 million generating a gain on sale of $2.2 million. This compares to 25 compression units and 33 power and process equipment units, for gross proceeds of $9.9 million and a gain on sale of $1.5 million in the first half of 2005. To satisfy the existing demand for rental compression, Enerflex added 16 compression units and 22 power and processing units to its fleet in the first half of 2006, for an investment of $12.5 million.

Financial Condition and Liquidity

During 2006, non-cash working capital from operations increased by $9.4 million as a result of a $0.9 million increase in accounts and income taxes receivable, a $13.4 million increase in inventory, and a $4.9 million increase in accounts payable. The increase in accounts receivable reflects the increase in revenue in 2006. Inventories increased in order to ensure the Company had access to sufficient quantities of major components and parts for items that are continuing to experience long re-order lead times.

SUBSEQUENT EVENT

On July 26, 2006 the Board of Directors of Enerflex Systems Ltd. unanimously approved proceeding with the reorganization of Enerflex into an income trust (the "Trust"), subject to shareholder approval. The proposed reorganization is the foundation of a plan to enhance shareholder value through the distribution of a portion of cash flow generated by the business of Enerflex on a tax-effective basis and to develop a platform of growth. The reorganization will be accomplished by way of a plan of arrangement under the Canadian Business Corporations Act that is subject to the approval of at least 66 2/3% of the votes cast by the shareholders of Enerflex at a special meeting to be held in September 2006. Under the terms of the proposed reorganization, Enerflex shareholders will receive one unit of the Trust for each Enerflex common share held.

The current growth strategy, business and operations of Enerflex will be unaffected by the reorganization and will continue to be performed by the current management and employees of Enerflex.

INDUSTRY OUTLOOK

The current favorable economics for the oil and gas industry and trends within Enerflex's markets continue to provide growth opportunities. Management believes that three developing trends which could impact the Company's outlook are:

- Customers in domestic markets are becoming more receptive to outsourcing their production infrastructure on a fee for service basis. A new generation of natural gas producer focused on a shorter business cycle with shorter-life reserves and the growth of income trusts, which place a greater priority on cash flow, and the drive to optimize legacy gas production facilities in western Canada, have heightened this interest.

- The oil and natural gas sector continues to become more global. While oil and gas production in North America is maturing, the industry outside North America presents an important growth opportunity. The rapid industrialization of China and the Indian subcontinent is driving worldwide demand for natural gas. This demand, combined with development of liquefied natural gas, is expanding the market for production and processing infrastructure. International customers are focused on their core business of exploration and production, and want a fully integrated service provider for engineering, fabrication, transportation, construction, commissioning and maintenance.

- There is a growing shortage of human capital in the industry. This is a serious long-term issue that results primarily from demographics and the increasing demand for skilled employees. As a result, customers are placing greater reliance on energy service companies to deliver these skills on an 'as and when needed basis' rather than the historical approach of maintaining these capabilities in house. While this skills shortage represents an opportunity it has also evolved into Enerflex's greatest challenge.

While Enerflex continues to build its international presence and develop its new product lines to take advantage of the trends identified above, the Company's fortunes will continue to be tied to natural gas capital and operating expenditures in western Canada. Approximately 24,800 wells were completed in 2005, of which approximately 69% were natural gas wells. In 2006, industry analysts forecast that capital expenditures on plant and equipment will remain strong, though they are presently re-evaluating their drilling forecasts to take into consideration the recent movements in the pricing of natural gas and various regulatory matters currently facing CBM development. Amendments to such forecasts, should they reflect actual industry activity levels, would impact the prospects of the Company and would most likely result in variations in order bookings. Many forecasters continue to 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 coal-bed methane, both of which require more compression than traditional reservoirs, and expansion in frontier regions such as the Northwest Territories. It is also the opinion of management that natural gas prices above current levels will be required to support gas development in these areas.

Management also believes that the availability of major components used in the fabrication of the Company's products and access to skilled personnel to meet the technical and trade requirements for designing and assembling these products will continue to affect the industry on a worldwide basis.

Notice of Dividend

On July 28, 2006, the Company had 22,707,406 common shares outstanding. Enerflex has a dividend policy, which is reviewed on an annual basis. On August 3, 2006, the Company declared a quarterly dividend equal to $0.125 per common share, payable on October 6, 2006 to shareholders of record September 21, 2006.

Conference Call and Webcast Details

Enerflex Systems Ltd. (TSX:EFX) will host a conference call for analysts and investors on Friday, August 4, 2006 at 9:00 a.m. MDT (11:00 a.m. EDT) to discuss the Company's 2006 second quarter results, which will be released on Thursday, August 3, 2006. The call will be hosted by Blair Goertzen, Enerflex's President and Chief Executive Officer.

If you wish to participate in this conference call, please call, 1.800.814.4890 or 1.416.644.3417. 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: 21195785 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, August 11, 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 on August 4, 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.

Enerflex is a leading supplier of products and services to the global oil and natural gas production industry. The Company's core expertise lies in its ability to provide products and services to the industry segment that operates between the wellhead and the pipeline. Enerflex's primary products and services are: natural gas compression, power generation and process equipment for sale, rent or lease; hydrocarbon production and processing equipment and 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 believes it offers its global customers a unique value proposition.

Headquartered in Calgary, Canada, the Company has approximately 2,700 employees worldwide. Enerflex, its subsidiaries, interests in affiliates and joint-ventures, operate in Canada, Australia, the Netherlands, the United States, Germany, Pakistan, Egypt and Indonesia. The Company's common shares trade on the Toronto Stock Exchange under the symbol "EFX".



CONSOLIDATED BALANCE SHEETS
(Unaudited)

June 30, December 31,
(Thousands) 2006 2005
-------------------------------------------------------------------------

Assets
Current assets
Cash $ 10,249 $ 16,350
Accounts receivable 164,836 163,899
Inventory 97,770 84,378
Future income taxes 4,014 3,983
-------------------------------------------------------------------------
Total current assets 276,869 268,610

Rental equipment 87,410 90,348
Property, plant and equipment 68,024 65,585
Assets held for resale 5,822 -
Assets under construction 3,271 3,374
Investment in affiliates 3,048 2,797
Future income taxes 5,977 4,868
Intangible assets 7,921 7,355
Goodwill 123,739 121,378
-------------------------------------------------------------------------
$ 582,081 $ 564,315
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Operating bank loans $ 42,116 $ 43,310
Accounts payable and accrued liabilities 92,521 90,561
Accrued dividends payable 2,839 2,260
Income taxes payable 10,006 7,612
Current portion of long-term debt - 12,717
-------------------------------------------------------------------------
Total current liabilities 147,482 156,460

Long-term debt 69,450 63,587
Other long-term liabilities 2,865 1,969
Future income taxes 12,356 13,042
-------------------------------------------------------------------------
232,153 235,058
-------------------------------------------------------------------------
Shareholders' equity
Share capital 186,033 184,151
Cumulative translation adjustment (7,040) (6,250)
Contributed surplus 2,172 1,739
Retained earnings 168,763 149,617
-------------------------------------------------------------------------
349,928 329,257
-------------------------------------------------------------------------
$ 582,081 $ 564,315
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying note to the Consolidated Financial Statements


CONSOLIDATED STATEMENTS OF INCOME

Three months ended Six months ended
(Unaudited) June 30 June 30
(Thousands, except ------------------------- ----------------------
share amounts) 2006 2005 2006 2005
------------------------------------------------------------------------
Revenue $ 200,087 $ 157,088 $ 406,910 $ 304,777
Cost of goods sold 154,956 122,338 315,225 238,499
-------------------------------------------------------------------------
Gross margin 45,131 34,750 91,685 66,278
Selling, general and
administrative expenses 26,673 19,987 51,998 39,713
Foreign currency gains (1,113) (97) (1,325) -
Gain on sale of assets (1,314) (820) (2,181) (1,492)
Equity earnings from
affiliates (115) - (250) -
-------------------------------------------------------------------------
Income before interest and
income taxes 21,000 15,680 43,443 28,057
Interest 1,503 908 3,197 1,870
-------------------------------------------------------------------------
Income before income taxes 19,497 14,772 40,246 26,187
Income taxes 7,024 5,608 14,869 9,641
-------------------------------------------------------------------------
Net income $ 12,473 $ 9,164 $ 25,377 $ 16,546
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net income per common
share - basic $ 0.55 $ 0.41 $ 1.12 $ 0.74
- diluted $ 0.55 $ 0.41 $ 1.11 $ 0.73
Weighted average number
of common shares 22,700,497 22,470,828 22,673,570 22,439,503
-------------------------------------------------------------------------
-------------------------------------------------------------------------


CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Three months ended Six months ended
June 30 June 30
(Unaudited) ------------------------- ----------------------
(Thousands) 2006 2005 2006 2005
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 159,493 $ 123,675 $ 149,617 $ 118,540
Normal course issuer bid (364) - (560) -
Net income 12,473 9,164 25,377 16,546
Dividends (2,839) (2,247) (5,671) (4,494)
-------------------------------------------------------------------------
Retained earnings, end
of period $ 168,763 $ 130,592 $ 168,763 $ 130,592
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying note to the Consolidated Financial Statements


CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended Six months ended
June 30 June 30
(Unaudited) ------------------------- ----------------------
(Thousands) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating Activities
Net income $ 12,473 $ 9,164 $ 25,377 $ 16,546
Depreciation and
amortization 4,590 3,597 9,212 7,455
Future income taxes (1,504) (279) (1,838) (3,547)
Gain on sale of assets (1,314) (820) (2,181) (1,492)
Equity earnings from
affiliates (115) - (250) -
Stock option expense 400 232 711 367
-------------------------------------------------------------------------
14,530 11,894 31,031 19,329
Changes in non-cash working
capital and other (8,302) (2,734) (13,004) (11,678)
-------------------------------------------------------------------------
Cash flow from operations 6,228 9,160 18,027 7,651
-------------------------------------------------------------------------

Investing Activities
Purchase of:
Rental equipment (6,227) (4,552) (12,501) (9,648)
Property, plant and
equipment (7,743) (1,450) (11,131) (2,772)
Assets under
construction (1,068) (768) (1,995) (1,347)
Proceeds on disposal of:
Rental equipment 8,960 3,470 12,792 9,923
Property, plant and
equipment 718 87 737 153
-------------------------------------------------------------------------
(5,360) (3,213) (12,098) (3,691)
Changes in non-cash working
capital and other 3,415 469 (387) 85
-------------------------------------------------------------------------
(1,945) (2,744) (12,485) (3,606)
-------------------------------------------------------------------------

Financing Activities
Increase (decrease) in
operating bank loans 9,733 (4,039) (1,194) (5,396)
Repayment long-term debt (11,489) (1,421) (4,921) (1,421)
Stock options exercised 888 4 1,820 2,164
Normal course issuer bid (498) - (776) -
Dividends (2,832) (2,247) (5,092) (4,481)
-------------------------------------------------------------------------
(4,198) (7,703) (10,163) (9,134)
Changes in non-cash working
capital and other (1,926) 65 (1,480) 141
-------------------------------------------------------------------------
(6,124) (7,638) (11,643) (8,993)
-------------------------------------------------------------------------
Decrease in cash (1,841) (1,222) (6,101) (4,948)
Cash, beginning of period 12,090 9,114 16,350 12,840
-------------------------------------------------------------------------
Cash, end of period $ 10,249 $ 7,892 $ 10,249 $ 7,892
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
Electrical, Instrumentation and Controls divisions. The Fabrication reportable
segment is the aggregation of the Production and Processing, and Compression
and Power divisions.


Service Engineered
(Unaudited) (Thousands) Systems
---------------------------------------------------
Three months ended
June 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 76,919 $ 74,661 $ 128,939 $ 85,004
Intersegment revenue (3,575) (3,657) (10,399) (6,851)
-------------------------------------------------------------------------
External revenue 73,344 71,004 118,540 78,153
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 20,913 19,455 19,098 10,028
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 858 894 1,707 1,049
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest
and income taxes 6,967 6,617 9,130 3,735
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment capital
expenditures 721 573 1,370 942
Corporate capital
expenditures
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment proceeds on
disposal of assets $ 718 $ 25 $ - $ 62
Corporate proceeds on
disposal of assets
-------------------------------------------------------------------------

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



Production Consolidated
(Unaudited) (Thousands) Services
---------------------------------------------------
Three months ended
June 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 8,210 $ 7,963 $ 214,068 $ 167,628
Intersegment revenue (7) (32) (13,981) (10,540)
-------------------------------------------------------------------------
External revenue 8,203 7,931 200,087 157,088
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 5,120 5,267 45,131 34,750
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 2,025 1,654 4,590 3,597
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest
and income taxes 4,903 5,328 21,000 15,680
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment capital
expenditures 6,934 4,552 9,025 6,067
Corporate capital
expenditures 6,013 703
-------------------------------------------------------------------------
15,038 6,770
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment proceeds on
disposal of assets $ 8,960 $ 3,470 $ 9,678 $ 3,557
Corporate proceeds on
disposal of assets $ - $ -
-------------------------------------------------------------------------
$ 9,678 $ 3,557
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Service Engineered
(Unaudited) (Thousands) Systems
---------------------------------------------------
Six months ended
June 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 154,536 $ 138,359 $ 259,985 $ 169,363
Intersegment revenue (6,806) (7,174) (17,285) (11,709)
-------------------------------------------------------------------------
External revenue 147,730 131,185 242,700 157,654
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 41,690 35,013 39,629 20,849
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 1,671 1,775 3,400 2,123
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest
and income taxes 14,096 9,566 19,137 8,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment assets 140,926 123,537 197,568 146,813
Corporate assets
Goodwill 50,545 52,516 65,838 52,093
-------------------------------------------------------------------------
Total segment assets 191,471 176,053 263,406 198,906
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment capital
expenditures 1,717 1,342 3,677 1,733
Corporate capital
expenditures
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment proceeds on
disposal of assets $ 721 $ 70 $ 16 $ 83
Corporate proceeds
on disposal of assets
-------------------------------------------------------------------------

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



Production Consolidated
(Unaudited) (Thousands) Services
---------------------------------------------------
Six months ended
June 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Segment revenue $ 16,494 $ 16,002 $ 431,015 $ 323,724
Intersegment revenue (14) (64) (24,105) (18,947)
-------------------------------------------------------------------------
External revenue 16,480 15,938 406,910 304,777
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin 10,366 10,416 91,685 66,278
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization 4,141 3,557 9,212 7,455
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before interest
and income taxes 10,210 10,337 43,443 28,057
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment assets 100,461 90,222 438,955 360,572
Corporate assets 19,387 35,281
Goodwill 7,356 7,356 123,739 111,965
-------------------------------------------------------------------------
Total segment assets 107,817 97,578 582,081 507,818
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment capital
expenditures 13,223 9,633 18,617 12,708
Corporate capital
expenditures 7,010 1,059
-------------------------------------------------------------------------
25,627 13,767
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segment proceeds on
disposal of assets $ 12,792 $ 9,923 $ 13,529 $ 10,076
Corporate proceeds
on disposal of assets $ - $ -
-------------------------------------------------------------------------
$ 13,529 $ 10,076
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Revenue from foreign countries was:

Three months Six months
ended June 30 ended June 30
--------------------------------------------------
(Unaudited) (Thousands) 2006 2005 2006 2005
-------------------------------------------------------------------------
Australia $ 38,505 $ 6,734 $ 63,309 $ 18,552
Egypt 8,617 689 17,208 1,007
Indonesia 1,067 2,473 2,057 3,004
Netherlands 4,906 5,236 9,418 10,583
Pakistan 1,102 3,560 2,873 9,456
United States 7,882 7,788 11,481 10,768
Other 12,210 10,148 25,217 20,181
-------------------------------------------------------------------------
$ 74,289 $ 36,628 $ 131,563 $ 73,551
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Included in these
amounts are gross
exports from
domestic operations of: $ 29,686 $ 17,129 $ 50,506 $ 39,791
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue is attributed to countries by the destination of the sale.

Contact Information