CALGARY, ALBERTA--(Marketwire - Nov. 9, 2011) - Enerflex Ltd. (TSX:EFX) ("Enerflex" or the "Company"), a leading supplier of products and services to the global energy industry, today reported its financial and operating results for the three and nine months ended September 30, 2011.
Financial Highlights(1)
Three months ended Nine months ended
(unaudited) September 30, September 30,
($ millions, except
per share amounts and Change Change
percentages) 2011 2010 ($) 2011 2010 ($)
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Revenue $ 282.3 $ 270.9 $ 11.4 $ 843.3 $ 720.2 $ 123.1
Gross margin 53.6 48.0 5.6 157.3 119.4 37.9
Gross margin % 19.0% 17.7% 18.6% 16.6%
Operating income(2) 22.0 11.5 10.5 53.6 19.3 34.3
EBITDA (2, 3) 36.0 23.6 12.4 90.4 51.8 38.6
Net earnings (loss)
Continuing 17.0 5.1 11.9 39.0 21.9 17.1
Discontinued (54.3) (1.8) 52.5 (57.1) (5.1) (52.0)
Earnings (loss) per
share
Continuing 0.22 0.06 (0.16) 0.51 0.29 0.22
Discontinued (0.70) (0.02) (0.68) (0.74) (0.07) (0.67)
1. Results through May 31, 2011 have been prepared on a carve-out basis.
Enerflex became an independently operated and listed company on June 1,
2011.
2. Operating income and EBITDA are non-GAAP 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.
3. EBITDA for the nine months of 2010 is normalized for the net impact of
the gain on available for sale assets of $18.6 million related to
Toromont's acquisition of Enerflex Systems Income Fund (ESIF).
Enerflex reported higher results from continuing operations in the third quarter of 2011, compared to the same period last year. Net earnings from continuing operations increased by $11.9 million (233%) as a result of higher revenues and improved gross margins.
"The Enerflex management team is very pleased at our improved third quarter and year-to-date results, including revenue, margin and operating income," said J. Blair Goertzen, Enerflex's President and Chief Executive Officer. "These strong results were driven by increased sales, efficient project execution and the realization of our operational integration, which is ongoing. This established the foundation for the improvement in our financial results."
The Company recorded bookings of $314.6 million during the quarter as our customers' activity levels have remained stable in Canada and Northern U.S. and International compared to the same period last year. The Southern U.S. and South America has seen increased bookings versus the same period last year, driven predominantly by growth in unconventional resource basins such as the Eagle Ford and the Marcellus. Backlog has grown to $833.2 million, which represents an increase of $321.8 million (62.9%) compared to the same period last year.
During the quarter General Electric's ("GE") Gas Engine Division awarded additional distribution territory and product lines to Gas Drive Global LP and Gas Drive Global (US) Inc. (collectively, "Gas Drive"). Gas Drive is a limited partnership wholly-owned by Enerflex, and will be the authorized distributor for GE's Gas Engines', Waukesha product line of gas-fuelled reciprocating engines in Canada and 20 U.S. states.
The European division, within the International segment, has not performed as expected during 2011. This fact, coupled with General Electric's decision to realign its distribution network in this region has resulted in Enerflex's decision during the third quarter of 2011, to exit the Service and Combined Heat and Power ("CHP") business. This business unit has been reported as a discontinued operation during the quarter and for the nine months ended September 2011. Enerflex has recorded a total impairment of $52.0 million, consisting of non-cash impairments of $47.6 million for goodwill, intangible assets, deferred tax assets and fair value adjustments; and anticipated cash transaction costs totalling $4.4 million.
Third Quarter and First Nine Month Highlights
In the three and nine months ended September 30, 2011, Enerflex:
-- Generated revenue of $282.3 million compared to $270.9 million in the
third quarter of 2010. The increase of $11.4 million was a result of
increased revenue in the International segment, which was partially
offset by decreased revenues in the Southern U.S. and South America
segment. Revenues for the first nine months of 2011 were $843.3 million
compared to $720.2 million during the same period of the prior year;
-- Achieved a gross margin of $53.6 million or 19.0% compared to
$48.0 million or 17.7% during the third quarter of 2010, an increase of
$5.6 million. Gross margin for the first nine months of the year
totalled $157.3 million or 18.6%, an increase of 31.7% over the same
period of the prior year;
-- Achieved operating income of $22.0 million or 7.8% of revenue, a strong
turnaround from $11.5 million or 4.2% in the third quarter of 2010.
Operating income for the first nine months of the year was $53.6 million
or 6.4% of revenue, an increase of $34.3 million from the first nine
months of 2010;
-- Generated third quarter EBITDA of $36.0 million, an increase of
$12.4 million over the third quarter of 2010. EBITDA for the first nine
months of 2011 was $90.4 million, an increase of $38.6 million over the
first three quarters of 2010;
-- Achieved net earnings from continuing operations in the third quarter of
$17.0 million ($0.22 cents per share), an increase of $11.9 million over
the same period last year. For the nine months ended September 30, 2011
net earnings from continuing operations were $39.0 million ($0.51 cents
per share), as compared to $21.9 million or $0.29 cents per share in the
same period of 2010;
-- Increased backlog to $833.2 million at September 30, 2011 compared to
$511.4 million at September 30, 2010, an increase of 62.9% over the
prior year. Backlog at September 30, 2011 increased by $189.6 million or
29.5% over December 31, 2010;
-- Repaid $50.5 million in borrowings during the quarter, exiting the third
quarter with net debt of $80.2 million which includes cash on hand of
$52.7 million; and
-- Sold facilities at 4700 47th Street SE, Calgary, Alberta and 5221 46th
Street, Stettler, Alberta totalling 406,000 square feet for gross
proceeds of $42.9 million.
Subsequent to the end of the third quarter of 2011:
-- Enerflex was awarded a U.S. $228.0 million contract for the engineering,
procurement, construction and commissioning of a gas processing plant to
be located in the Sultanate of Oman. The contract includes the supply by
Enerflex of all associated equipment including; gas processing and
compression equipment, gas/condensate export facilities, produced water
treatment, power plant, central control room, electrical substation and
associated utilities. The expected completion date of this project will
be in the third to fourth quarter of 2013;
-- Gas Drive has been notified of GE's Gas Engines interest in extending
distribution rights for the Jenbacher natural gas engine and parts
product line for all of Canada. This overall network realignment
strengthens both Gas Drive's and GE's Gas Engine's ability to meet their
customers' needs by providing an unprecedented level of service and
support;
-- Enerflex announced its plan to file with the Toronto Stock Exchange a
notice of intention to make a normal course issuer bid for certain of
its common shares through the facilities of the exchange. Once accepted
by the Toronto Stock Exchange, this notice will entitle Enerflex to
purchase up to 6,263,211 common shares, representing 10% of its issued
and outstanding common shares in the public float over a 12 month
period, commencing from the date the notice is filed with the Toronto
Stock Exchange; and
-- Enerflex declared the Company's third dividend of $0.06 per share,
payable on January 5, 2012, to shareholders of record on December 14,
2011.
Financial Results
Enerflex's $11.4 million or 4.2% period-over-period increase in revenue to $282.3 million in the third quarter of 2011 was a result of increased revenue in the International segment predominantly offset by decreased revenues in the Southern U.S. and South America. Canada and Northern U.S. had relatively stable revenues at $128.5 million as compared to $128.4 million from the same period of last year, while Southern U.S. and South America revenues decreased by $13.3 million. The International segment increased revenues by $24.7 million to $72.9 million from $48.2 million in 2010.
During the first nine months of 2011, the Company generated $843.3 million in revenue as compared to $720.2 million in the same period of 2010, a result of increased revenues in the Canada and Northern U.S. and International business segments. Canada and Northern U.S. revenues increased by $64.8 million while International segment revenues increased by $60.6 million. This was modestly offset by a $2.2 million decrease in Southern U.S. and South America revenues.
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) totalled $90.4 million in the first three quarters of 2011, an increase of 74.5% over $51.8 million compared to the same period of the prior year.
Gross margin of $53.6 million represented an increase of 11.7% over the third quarter of 2010 as a result of strong gross margin performance in Canada and Northern U.S. and improved plant utilization and Rental margins. This was partially offset by lower gross margin performance in the International and Southern U.S. and South America business segments, as a result of additional cost impacts of weather delays in Australia, lower awarded gross margins and deferred delivery dates of projects in backlog. Gross margin for the nine months ended September 30, 2011 was $157.3 million or 18.6% of revenue as compared to $119.4 million or 16.6% of revenue for the nine months ended September 30, 2010, an increase of $37.9 million. Contributing to the gross margin increase over the first nine months of 2010 was the recognition of revenue on approved change orders related to past projects in the Middle East and North Africa ("MENA"), which contributed $16.5 million to gross margin, partially offset by project delays, cost over-runs and impairment of work in process on specific projects in Australia due to weather related delays in Queensland.
Backlog at September 30, 2011 increased to $833.2 million compared to $511.4 million at September 30, 2010, a 62.9% increase over the comparable period. As compared to December 31, 2010, backlog at September 30, 2011 increased by $189.6 million or 29.5%. These increases are a result of increased activity in unconventional natural gas basins, liquids-rich gas basins in the United States and Canada and various liquefied natural gas to coal seam gas projects in Australia.
"We believe that Enerflex is well positioned to see improving results from operations during the fourth quarter of 2011 and into 2012. The Company has a strong balance sheet, an increasing backlog, which is further strengthened by the recent award in Oman and a growing Service business with the new territories and product lines awarded to Enerflex," said Goertzen.
Enerflex's consolidated financial statements as at and for the three and nine months ended September 30, 2011, and the accompanying management's discussion and analysis, will be available on the Enerflex website at www.enerflex.com or on SEDAR at www.sedar.com.
Conference Call and Webcast Details
Enerflex will host a conference call for analysts and investors on Thursday, November 10, 2011 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's 2011 third quarter results. The call will be hosted by Mr.Blair Goertzen, President and Chief Executive Officer of Enerflex Ltd.
If you wish to participate in this conference call, please call, 1.800.952.4972 or 1.416.695.6617. Please dial in 10 minutes prior to the start of the call. No passcode is required. The live audio webcast of the conference call will be available on the Enerflex website at www.enerflex.com under the Investor Relations section on November 10, 2011 at 9:00 a.m. MT (11:00 a.m. ET). Approximately one hour after the call, a recording of the event will be available on the Company's website.
A replay of the teleconference will be available one hour after the conclusion of the call until midnight, November 17, 2011. Please call 1.800.408.3053 or 1.905.694.9451 and enter passcode 4003430.
About Enerflex
Enerflex Ltd. is a single source supplier of products and services to the global oil and gas production industry. Enerflex provides natural gas compression and oil and gas processing equipment for sale or lease, refrigeration systems and power generation equipment and a comprehensive package of field maintenance and contracting capabilities. Through the Company's 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, Enerflex has approximately 2,900 employees. Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the United Kingdom, the United Arab Emirates, Egypt, Oman, Bahrain and Indonesia. Enerflex's shares trade on the Toronto Stock Exchange under the symbol "EFX". For more information about Enerflex, go to www.enerflex.com.
Advisory Regarding Forward-Looking Statements
To provide Enerflex shareholders and potential investors with information regarding Enerflex, including management's assessment of future plans, Enerflex has included in this news release certain statements and information that are forward-looking statements or information within the meaning of applicable securities legislation, and which are collectively referred to in this advisory as "forward-looking statements." Information included in this news release that is not a statement of historical fact is forward-looking information. When used in this document, words such as "plans", "expects", "will", "may" and similar expressions are intended to identify statements containing forward-looking information. In developing the forward-looking information in this news release, we have made certain assumptions with respect to general economic and industry growth rates, commodity prices, currency exchange and interest rates, competitive intensity and shareholder, regulatory and TSX approvals. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the future circumstances, outcomes or results anticipated in or implied by such forward-looking statements will occur or that plans, intentions or expectations upon which the forward-looking statements are based will occur.
Forward-looking information involves known and unknown risks and uncertainties and other factors, which may cause or contribute to Enerflex achieving actual results that are materially different from any future results, performance or achievements expressed or implied by such forward-looking information. Such risks and uncertainties include, among other things, impact of general economic conditions; industry conditions, including the adoption of new environmental, taxation and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations, including future dividends to shareholders of the Company; increased competition; the lack of availability of qualified personnel or management; labour unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Company, the reliability of Toromont's historical financial information as an indicator of Enerflex's historical or future results; potential tax liabilities if the requirements of the tax-deferred spinoff rules are not met; the effect of Enerflex's rights plan on any potential change of control transaction; obtaining financing; and other factors, many of which are beyond its control.
These factors are not exhaustive. The reader is cautioned that these factors and risks are difficult to predict and that the assumptions used in the preparation of such information, although considered reasonably accurate at the time of preparation, may prove to be incorrect. Readers are cautioned that the actual results achieved will vary from the information provided in this press release and that such variations may be material. Consequently, Enerflex does not represent that actual results achieved will be the same in whole or in part as those set out in the forward-looking information.
Furthermore, the statements containing forward-looking information that are included in this news release are made as of the date of this news release, and Enerflex does not undertake any obligation, except as required by applicable securities legislation, to update publicly or to revise any of the included forward-looking information, whether as a result of new information, future events or otherwise. The forward-looking information contained in this news release is expressly qualified by this cautionary statement.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Management's Discussion and Analysis ("MD&A") comments on the operations performance and financial condition of Enerflex Ltd. ("Enerflex" or "the Company") as at and for the three and nine months ended September 30, 2011, compared to the preceding year should be read in conjunction with the unaudited interim consolidated financial statements and related notes for the three and nine months ended September 30, 2011 and 2010 and in conjunction with Toromont Industries Ltd. ("Toromont") Management Information Circular Relating to an Arrangement involving Toromont Industries Ltd., its shareholders, Enerflex Ltd. and 7787014 Canada Inc. ("Information Circular" or "Arrangement") dated April 11, 2011.
The interim consolidated financial statements reported herein have been prepared in accordance with International Financial Reporting Standards ("IFRS") and are presented in Canadian dollars unless otherwise stated. In accordance with the standard related to the first time adoption of IFRS, our transition date to IFRS was January 1, 2010 and therefore the comparative information for 2010 has been prepared in accordance with our IFRS accounting policies. IFRS has been adopted in Canada as Generally Accepted Accounting Principles ("GAAP"), as a result GAAP and IFRS are used interchangeably within this MD&A.
The MD&A has been prepared taking into consideration information that is available up to November 9, 2011 and focuses on information and key statistics from the unaudited interim consolidated financial statements, and pertains to known risks and uncertainties relating to the oil and gas service sector. This discussion should not be considered all-inclusive, as it excludes possible future changes that may occur in general economic, political and environmental conditions. Additionally, other elements may or may not occur which could affect industry conditions and/or Enerflex Ltd. in the future. Additional information relating to the Company, including the Information Circular, is available on SEDAR at www.sedar.com.
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 analyses made by the Company derived from its experience and perceptions. All statements, other than statements of historical fact contained in this MD&A are forward-looking statements, including, without limitation: statements with respect to anticipated financial performance; future capital expenditures, including the amount and nature thereof; bookings and backlog; oil and gas prices and demand; other development trends of the oil and gas industry; business prospects and strategy; expansion and growth of the business and operations, including market share and position in the energy service markets; the ability to raise capital; expectations regarding future dividends; expectations and implications of changes in government regulation, laws and income taxes; 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 limitation: the impact of general economic conditions; industry conditions, including the adoption of new environmental, taxation and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations, including future dividends to shareholders of the Company; increased competition; the lack of availability of qualified personnel or management; labour unrest; 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 its control. As such, 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 or dividends the Company and its shareholders, will derive there-from. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this MD&A are made as of the date of this MD&A and 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.
THE COMPANY
Enerflex Ltd. was formed after the acquisition of Enerflex Systems Income Fund ("ESIF") by Toromont and subsequent integration of Enerflex's products and services with Toromont's existing Natural Gas Compression and Process business. In January 2010, the operations of Toromont Energy Systems Inc., a subsidiary of Toromont Industries Ltd., were combined with the operations of ESIF to form Enerflex Ltd. Enerflex began independent operations on June 1, 2011 pursuant to the Arrangement with Toromont which received all necessary regulatory approvals. The transaction was implemented by way of a plan of arrangement whereby Toromont shareholders received one share of Enerflex for each common share of Toromont, creating two independent public companies - Toromont Industries Ltd. and Enerflex Ltd. Enerflex's shares began trading on the Toronto Stock Exchange ("TSX") on June 3, 2011 under the symbol EFX.
Enerflex Ltd. is a single-source supplier for natural gas compression, oil and gas processing, refrigeration systems and power generation equipment - plus in-house engineering and mechanical services expertise. The Company's broad in-house resources give us the capability to engineer, design, manufacture, construct, commission and service hydrocarbon handling systems. Enerflex's expertise encompasses field production facilities, compression and natural gas processing plants, CO2 processing plants, refrigeration systems and power generators serving the natural gas production industry.
Headquartered in Calgary, Canada, Enerflex has approximately 2,900 employees worldwide. Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the United Kingdom, the United Arab Emirates, Oman, Egypt, Bahrain and Indonesia.
OVERVIEW
The oil and natural gas service sector in Canada has a distinct seasonal trend in activity levels which results from well-site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex's Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while the Service and Rentals product line revenues are more stable throughout the year. Rentals revenues are also impacted by both the Company's and its customers capital investment decisions. The international markets are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating.
During the first nine months of 2011, Enerflex continued to see improved bookings in all regions, including successful bids on large projects in Canada and the Southern U.S.. Manufacturing activity levels have increased in Canada & Northern U.S. and International while service activity levels have increased in all regions, with the largest increase coming in Canada as a result of increased parts sales. Manufacturing revenue is slightly lower in the Southern U.S. and South America during the first nine months ended September 30, 2011, compared to the same period the prior year. Booking activity has increased in this region during 2011 driven predominantly by the Eagle Ford and Marcellus shale gas basins. As a result, the decrease in revenues in the first nine months of 2011 is related to timing of project deliveries which are heavily weighted to the fourth quarter of 2011 and into the first quarter of 2012 and not lower activity levels.
North American rental utilization levels were challenged throughout 2010, however, utilization rates have increased slightly through the first nine months of the year. In the International segment, Middle East North Africa ("MENA") has contributed positively to profitability through the first nine months of the year as a result of key projects achieving commercial operation in the region and recognition of approved change orders related to past projects contributing $16.5 million. The European region, within the International segment, has not performed as expected during 2011. This fact coupled with General Electric's decision to realign its distribution network in this region has resulted in Enerflex's decision to exit the Service and Combined Heat and Power ("CHP") business during the third quarter of 2011. This business unit has been reported as a discontinued operation during the quarter and for the nine months ended September 30, 2011 and Enerflex has recorded a total impairment of $52.0 million, consisting of non-cash impairments of $47.6 million for goodwill, intangible assets, deferred tax assets and fair value adjustments; and anticipated cash transaction costs totalling $4.4million.
FINANCIAL HIGHLIGHTS
Three months ended Nine months ended
September 30, September 30,
(unaudited)($ thousands) 2011 2010(1) 2011 2010(1)
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Revenue
Canada and Northern U.S. $ 128,466 $ 128,425 $ 372,391 $ 307,568
Southern U.S. and South America 80,919 94,194 232,671 234,901
International 72,950 48,240 238,273 177,698
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Total revenue $ 282,335 $ 270,859 $ 843,335 $ 720,167
Gross margin 53,569 48,027 157,253 119,380
Selling and administrative 31,614 36,562 103,675 100,080
expenses
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Operating income $ 21,955 $ 11,465 $ 53,578 $ 19,300
Gain on sale of assets (2,315) (930) (3,676) (975)
Gain on available for sale assets - - - (18,627)
Equity earnings (297) (140) (807) (330)
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Earnings before finance costs and $ 24,567 $ 12,535 $ 58,061 $ 39,232
taxes
Finance costs and income 1,870 3,835 5,810 10,882
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Earnings before taxes $ 22,697 $ 8,700$ 52,251 $ 28,350
Income tax expense 5,718 3,638 13,230 6,407
Gain on sale of discontinued - - 1,430 -
operations
(Loss) from discontinued (54,280) (1,845) (58,506) (5,097)
operations
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Net (loss) earnings $ (37,301) $ 3,217 $ (18,055)$ 16,846
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Key Ratios:
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Gross margin as a % of revenues 19.0% 17.7% 18.6% 16.6%
Selling and administrative
expenses as a % of revenues 11.2% 13.5% 12.3% 13.9%
Operating income as a % of
revenues 7.8% 4.2% 6.4% 2.7%
Income taxes as a % of earnings
before income taxes 25.2% 41.8% 25.3% 22.6%
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(1) 2010 amounts include the financial results of ESIF from the date of acquisition, January 20, 2010.
NON-GAAP MEASURES
Three months ended Nine months ended
September 30, September 30,
(unaudited)($ thousands) 2011 2010(1) 2011 2010(1)
----------------------------------------------------------------------------
EBITDA
Earnings before finance costs and $ 24,567 $ 12,535 $ 58,061 $ 39,232
taxes
Depreciation and amortization 11,454 11,079 32,306 31,147
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EBITDA $ 36,021 $ 23,614 $ 90,367 $ 70,379
EBITDA - normalized(2) $ 36,021 $ 23,614 $ 90,367 $ 51,752
Cash flow
Cash flow from operations $ 24,845 $ 12,484 $ 58,670 $ 25,714
Non-cash working capital and other (10,281) 25,927 26,126 32,711
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Cash flow $ 14,564 $ 38,411 $84,796 $ 58,425
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(1) 2010 amounts include the financial results of ESIF from the date of acquisition, January 20, 2010.
(2) EBITDA for the nine months of 2010 is normalized for the net impact of the gain on available for sale assets of $18,627. Prior to the acquisition of ESIF, Toromont owned 3,902,100 ESIF Trust Units. On acquisition of ESIF, Toromont recognized a pre-tax gain of $18,627 on this investment which was recorded at the Enerflex Ltd. level.
The success of the Company and business unit strategies is measured using a number of key performance indicators, some of which are outlined below. These measures are also used by management in its assessment of relative investments in operations. These key performance indicators are not measurements in accordance with GAAP. It is possible that these measures will not be comparable to similar measures prescribed by other companies. They should not be considered as an alternative to net income or any other measure of performance under GAAP.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
EBITDA provides the results generated by the Company's primary business activities prior to consideration of how those activities are financed, assets are amortized or how the results are taxed in various jurisdictions.
Cash flow
Cash flow provides the amount of cash generated by the business (net of non-cash working capital) and measures the Company's ability to finance capital programs and meet financial obligations.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
During the third quarter of 2011, the Company generated $282.3 million in revenue, as compared to $270.9 million in the third quarter of 2010. The increase of $11.4 million was a result of increased revenue in the International segment predominantly offset by decreased revenues in Southern U.S. and South America. As compared to the three month period ended September 30, 2010:
-- Canada and Northern U.S. revenues were relatively stable at $128.5
million as a result of lower Rental and Service revenue, which was
offset by higher Engineered Systems revenue. Service revenue was
impacted in 2011 as a result of timing, as producers have deferred
maintenance work resulting from low natural gas prices. Rental revenue
was lower as a result of selling low horse power units in the third
quarter of 2011 yielding less revenue, compared to the sale of higher
horse power units in the same period of 2010. Engineered Systems revenue
benefited from improved bookings and backlog as a result of increased
activities by producers in the Montney and Horn River resource basins;
-- Southern U.S. and South America revenues decreased by $13.3 million, as
a result of decreased Engineered Systems revenue in 2011, which was
partially offset by increased Service revenues. Engineered Systems
revenue was impacted by project delivery dates being weighted to the
last quarter of 2011 and first quarter of 2012. Service revenue was
higher in 2011 resulting from increased activity levels at our new
branches located near the unconventional resource basins in the U.S.;
and
-- International revenues increased by $24.7 million as a result of
increased revenue in Australia, MENA and International Production and
Processing ("P&P"), partially offset by lower revenues due to closing
the International C&P manufacturing facility during the third quarter of
2010 and the transfer of bookings and backlog related to that facility
to Enerflex's other two segments. Revenues in Australia benefited from
increased activity in the development of Coal Seam Gas ("CSG"), while
revenues in MENA benefited from the commencement of commercial
operations of the BP facility in the last quarter of 2010.
Gross margin for the three months ended September 30, 2011 was $53.6 million or 19.0 % of revenue as compared to $48.0 million or 17.7% of revenue for the three months ended September 30, 2010, an increase of $5.6 million. Contributing to the gross margin increase over the third quarter of 2010 was strong gross margin performance in Canada and Northern U.S., as a result of improved plant utilization and rental margins. This was partially offset by lower gross margin performance in the International and Southern U.S. business segments, as a result of additional cost impacts for weather delays in Australia, lower awarded gross margins and timing of revenue recognition related to deferred delivery dates of projects in backlog for the Southern U.S..
Selling, general and administrative ("SG&A") expenses were $31.6 million or 11.2 % of revenue during the three months ended September 30, 2011, compared to $36.6 million or 13.5% of revenue in the same period of 2010. The $5.0 million decrease in SG&A expenses is primarily attributable to reduced compensation and occupancy costs resulting from integration initiatives undertaken during 2010 and continued efforts to control costs in 2011.
Operating income assists the reader in understanding the net contributions made from the Company's core businesses after considering all SG&A expenses. During the third quarter of 2011, Enerflex produced an operating income of $22.0 million or 7.8% of revenue as compared to operating income of $11.5 million or 4.2% of revenue in 2010. The increase in operating income in the third quarter of 2011 over the same period of 2010 was a result of the same factors contributing to the increased gross margin and decreased SG&A expenses.
Finance costs and income totaled $1.9 million for the three months ended September 30, 2011, compared with $3.8 million in the same period of 2010, a decrease of $1.9 million. Finance costs in 2011 were lower than those in 2010 primarily as a result of lower average borrowings, a lower effective interest rate and higher finance income arising from higher cash balances.
Income tax expense totaled $5.7 million for the three months ended September 30, 2011 compared with an expense of $3.6 million in the same period of 2010. The increase over the same period in 2010 was primarily due to an increase in earnings before taxes from operations. The effective tax rate of 25.2% in 2011 was 16.6% lower than the comparable period last year, as a result of increased earnings in lower tax jurisdictions within the MENA segment.
During the third quarter of 2011, Enerflex generated net earnings from continuing operations of $17.0 million or $0.22 cents per share, as compared to $5.1 million or $0.06 cents per share in the same period of 2010.
Loss from discontinued operations reflects the results of Enerflex Environmental Austraila ("EEA"), Enerflex Syntech ("Syntech") and Enerflex Europe. These business units recorded a net loss from discontinued operations, including impairments of $54.3 million ($0.70 cents per share) and $1.8 million ($0.02 cents per share) in the third quarter of 2011 and 2010 respectively.
SEGMENTED RESULTS
Enerflex operates three business segments: Canada and Northern United States, Southern United States and South America, and International, which operate as follows:
1. Canada and Northern U.S. is comprised of three divisions:
-- Manufacturing, with business units operating in Canada and the Northern
U.S., focuses on Compression and Power which provides custom and
standard compression packages for reciprocating and screw compressor
applications, Production and Processing which designs, manufactures,
constructs and installs modular natural gas processing equipment and
Retrofit operating from plants located in Calgary, Alberta and Casper,
Wyoming;
-- Service provides mechanical services and parts as the authorized
Waukesha distributor to the oil and gas industries, focusing in Canada
and Northern U.S.. Enerflex re-branded its service business during the
third quarter of 2011 as Gas Drive Global L.P. ("Gas Drive") and was
awarded new service territories within the U.S.. All future parts sales
and service revenue will be undertaken by this new wholly owned entity;
and
-- Rentals which provides compression and natural gas processing equipment
rentals in Canada and Northern U.S..
2. Southern U.S. and South America is comprised of three divisions:
-- Compression and Power provides custom and standard compression packages
for reciprocating and screw compressor applications from facilities
located in Houston, Texas;
-- Production and Processing designs, manufactures, constructs and installs
modular natural gas processing equipment; and
-- Service which provides mechanical services and products to the oil and
gas industries focusing on Southern and Eastern U.S. as well as South
America.
3. International is comprised of four divisions:
Continuing Operations:
-- AustralAsia division provides process construction for gas and power
facilities and compression package assembly. This division also provides
mechanical service and parts, as the authorized Waukesha distributor for
the oil and gas industry in this region;
-- Middle East and North Africa division provides engineering, procurement
and construction services as well as operating and maintenance services
for gas compression and processing facilities in the region; and
-- Production and Processing division designs, manufactures, constructs and
installs modular natural gas processing equipment, and waste gas
systems, for the natural gas, heavy oil Steam Assisted Gravity Drainage
("SAGD") and heavy mining segments of the market.
Discontinued Operations:
-- Europe division provides CHP generator products and mechanical service
to the CHP product line. Enerflex has announced its intention to exit
this business over the next twelve months through a sale, partial sale
or closure of these operations. As a result of this decision, the Europe
division is reported as a discontinued operation.
Each region has three main product lines:
Engineered Systems' product line includes engineering, fabrication and assembly of standard and custom-designed compression packages, production and processing equipment and facilities and power generation systems. Engineered Systems' product line tends to be more cyclical with respect to revenue, gross margin and earnings 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.
Service product line includes support services, labor and parts sales to the oil and gas industry. Enerflex, through various business units, is an authorized distributor for Waukesha engines and parts in Canada, Alaska, Northern U.S., Australia, Indonesia and Papua New Guinea. Enerflex is also an exclusive authorized distributor for Altronic, a leading manufacturer of electric ignition and control systems in Canada, Australia, Papua New Guinea and New Zealand. Mechanical Service revenues tend to be fairly stable as ongoing equipment maintenance is generally required to maintain the customer's natural gas production.
Rentals revenue includes a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. The rental fleet is primarily deployed in Western Canada and Northern U.S.. Expansion in international markets is conducted on a selective basis to minimize the risk of these newer markets.
CANADA AND NORTHERN U.S.
Three months ended
September 30,
(unaudited) ($ thousands) 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 151,514 $ 147,178
Intersegment revenue (23,048) (18,753)
----------------------------------------------------------------------------
Revenue $ 128,466 $ 128,425
--------------------------
--------------------------
Revenue - Engineered Systems $ 70,485 $ 56,192
Revenue - Service $ 43,686 $ 48,024
Revenue - Rental $ 14,295 $ 24,209
Operating income $ 10,202 $ 295
Segment revenues as a % of total revenues 45.5 % 47.4 %
Service revenues as a % of segment revenues 34.0 % 37.4 %
Operating income as a % of segment revenues 7.9 % 0.2 %
--------------------------
Canada and Northern U.S. revenues totaled $128.5 million in the third quarter of 2011 as compared to $128.4 million for the same period of 2010. The increase of $0.1 million was the result of higher Engineered Systems revenues due to increased backlog from higher activity in unconventional resource basins in Canada. This was offset by lower Rental revenue, as a result of selling low horse power units in the third quarter of 2011 yielding less revenue, compared to the sale of higher horse power units in the same period of 2010 and lower activity in the Service business in Canada and Wyoming as a result of lower natural gas prices.
Operating income increased to $10.2 million in 2011 from $0.3 million in 2010. This $9.9 million increase was due to better gross margin performance as a result of improved plant utilization, higher realized margins on the sale and rental of compression equipment from the rental fleet during the quarter and lower SG&A as a result of integration initiatives undertaken during 2010.
SOUTHERN U.S. AND SOUTH AMERICA
Three months ended September 30,
(unaudited) ($ thousands) 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 81,119 $ 94,254
Intersegment revenue (200) (60)
----------------------------------------------------------------------------
Revenue $ 80,919 $ 94,194
--------------------------
--------------------------
Revenue - Engineered Systems $ 69,802 $ 84,841
Revenue - Service $ 11,117 $ 9,353
Operating income $ 9,830 $ 10,677
Segment revenues as a % of total revenues 28.7 % 34.8 %
Service revenues as a % of segment revenues 13.7 % 9.9 %
Operating income as a % of segment revenues 12.1 % 11.3 %
--------------------------
Southern U.S. and South America revenues totaled $80.9 million in the third quarter of 2011 as compared to $94.2 million in the third quarter of 2010. The decrease of $13.3 million was the result of delayed delivery dates on Engineered Systems booking activity in late 2010, deferring revenue to the fourth quarter of 2011 and first quarter of 2012. This was partially offset by stronger Service revenues, as a result of higher activity levels in the unconventional resource basins in the U.S. and as a result of new service branches being opened in this region during 2011.
The Eagle Ford and Marcellus resource basins have been very active in this segment as evidenced by stronger booking levels in 2011. As a result, the lower revenue in 2011 is related to timing of project delivery not lower activity within this region.
Operating income decreased from $10.7 million in the third quarter of 2010 to $9.8 million in the third quarter of 2011, as a result of lower revenues due to timing of revenue recognition, and lower awarded margins compared to the same period in 2010.
INTERNATIONAL
Three months ended
September 30,
(unaudited) ($ thousands) 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 74,488 $ 60,319
Intersegment revenue (1,538) (12,079)
----------------------------------------------------------------------------
Revenue $ 72,950 $ 48,240
--------------------------
--------------------------
Revenue - Engineered Systems $ 56,746 $ 39,393
Revenue - Service $ 13,336 $ 8,847
Revenue - Rental $ 2,868 $ -
Operating income $ 1,923 $ 493
Segment revenues as a % of total revenues 25.8 % 17.8 %
Service revenues as a % of segment revenues 18.3 % 18.3 %
Operating income as a % of segment revenues 2.6 % 1.0 %
--------------------------
Continuing Operations:
International Revenues totaled $72.9 million in the third quarter of 2011, compared to $48.2 million in the same period of 2010. The increase of $24.7 million was due to higher activity levels in Australia related to CSG projects, the BP project beginning operations in MENA in late 2010 and higher activity levels for the International P&P unit in unconventional resource basins. This was partially offset by lower Compression and Power ("C&P") revenue as a result of the closure of the International C&P business during the third quarter of 2010, with its backlog transferred to plants in Casper, Wyoming and Houston, Texas. These plants will now serve the International markets for compression equipment for Enerflex Ltd.
Operating income for the third quarter of 2011 was $1.9 million, which was $1.4 million higher than the third quarter of 2010. Operating income improved due to lower SG&A costs as a result of the closure of the International C&P facility and improved margin performance in the MENA region as a result of the BP project in Oman. This was offset by lower gross margin performance in the Australia division, resulting from additional cost over-runs on specific projects due to weather related delays in Queensland.
Discontinued Operations:
Operating results for this segment do not include the results for the discontinued operations of the Syntech business, which was sold in the third quarter of 2010 and the EEA business, which was sold in the first quarter of 2011 for a gain of $1.4 million net of tax. During the third quarter of 2011, Enerflex announced its intention to exit the European Service and CHP operations via a sale, partial sale or closure of this business unit. As a result, this business unit will be reported as a discontinued operation beginning in the third quarter and has been excluded from the operating results of this segment.
These three discontinued operations recorded a loss before tax totaling $54.3 million in the third quarter of 2011 compared to a loss of $1.8 million in the same period a year ago.
BOOKINGS AND BACKLOG
The Company records bookings and backlog when a firm commitment is received from customers for the Engineered Systems product line. Bookings represent new orders awarded to Enerflex during the period. Backlog represents unfulfilled orders at period end and is an indicator of future Engineered Systems revenue for the Company.
Bookings Nine months ended
September 30,
(unaudited)($ thousands) 2011 2010(1)
----------------------------------------------------------------------------
Canada and Northern U.S. $ 270,091 $ 219,388
Southern U.S. and South America 361,323 304,714
International(2) 158,176 282,592
----------------------------------------------------------------------------
Total bookings $ 789,590 $ 806,694
--------------------------
(1) 2010 amounts include the financial results of ESIF from the date of acquisition, January 20, 2010.
(2)International bookings includes backlog acquired as part of the ESIF acquisition totaling approximately $140 million on January 20, 2010.
Backlog As at September 30,
(unaudited)($ thousands) 2011 2010
----------------------------------------------------------------------------
Canada and Northern U.S. $ 195,243 $ 169,271
Southern U.S. and South America 307,332 211,575
International 330,626 130,521
----------------------------------------------------------------------------
Total backlog $ 833,201 $ 511,367
------------------------
Backlog at September 30, 2011 was $833.2 million compared to $511.4 million at September 30, 2010, representing a 62.9% increase over the prior year. As compared to December 31, 2010, backlog at September 30, 2011 increased by $189.6 million or 29.5%.
Subsequent to the end of the third quarter of 2011, Enerflex was awarded a $228.0 million US contract for the engineering, procurement, construction and commissioning of a gas processing plant to be located in the Sultanate of Oman. This will be included in bookings and backlog in the fourth quarter of 2011.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
The first three quarters of 2011 includes nine full months of activity, whereas the first three quarters of 2010 includes nine full months of activity for the legacy Toromont Compression business and eight months and nine days activity of the legacy ESIF business.
During the first nine months of 2011, the Company generated $843.3 million in revenue, as compared to $720.2 million in the same period of 2010. The increase of $123.1 million, or 17.1%, was a result of increased revenues in the Canada and Northern U.S. and International business segments, partially offset by lower revenues in the Southern U.S. and South America business segment.
As compared to the shortened nine month period ended September 30, 2010:
-- Canada and Northern U.S. revenues increased by $64.8 million as a result
of increased Engineered Systems product sales related to the Montney and
Horn River unconventional resource basins and increased parts sales in
our Service business. This was partially offset by lower Rental revenue,
as a result of selling low horse power units in the first nine months of
2011 yielding less revenue, compared to the sale of higher horse power
units in the same period of 2010. The comparable period in 2010
benefited from integration efforts to rationalize idle units within the
rental fleet in Canada;
-- Southern U.S. and South America revenues decreased by $2.2 million, a
result of delayed delivery dates for Engineered Systems bookings
recorded in 2010. This has deferred revenue recognition to the fourth
quarter of 2011 and into 2012. The Eagle Ford and Marcellus resource
basins have been very active in this segment in 2011 as evidenced by
strong booking levels in 2011. As a result, the lower revenue in 2011 is
related to timing of project delivery not lower activity or reduced
business prospects within this region; and
-- International revenues increased by $60.6 million as a result of
increased revenues in Australia due to CSG projects, the recognition of
$16.5 million of revenue on approved change orders related to past
projects in MENA, the commencement of commercial operations of the BP
project in that region and International P&P projects related to
unconventional resource basins. This was partially offset by lower
revenues for the first nine months of 2011 resulting from the closure of
the International C&P facility during the third quarter of 2010.
Gross margin for the nine months ended September 30, 2011 was $157.3 million or 18.6% of revenue as compared to $119.4 million or 16.6% of revenue for the nine months ended September 30, 2010, an increase of $37.9 million. Contributing to the gross margin increase over the first nine months of 2010 was strong gross margin performance in Canada and Northern U.S. as a result of increased revenues from Engineered Systems, improved plant utilization, improved rental utilization rates, and stronger parts sales. International gross margins were also higher than the same period a year ago, as a result of the recognition of revenue on approved change orders related to past projects in MENA, which contributed $16.5 million to gross margin, partially off-set by project delays, cost over-runs and impairment of work in process on specific projects in Australia due to weather related delays in Queensland. Southern U.S. and South America gross margins were comparable to the same period in 2010 despite lower revenues in that segment.
Selling, general and administrative expenses were $103.7 million or 12.3% of revenue during the nine months ended September 30, 2011, compared to $100.1 million or 13.9% of revenue in the same period of 2010. The increase of $3.6 million in SG&A expenses is primarily attributable to a full nine months of costs in 2011, compared to 2010, which included SG&A costs for the legacy Enerflex business for only eight months and nine days.
Operating income for 2011 was $53.6 million or 6.4% of revenue as compared to an operating income of $19.3 million or 2.7% of revenue in 2010. The increase in operating income in 2011 over 2010 was a result of the same factors contributing to the increased gross margin partially offset by the increased SG&A expenses.
Finance costs and income totaled $5.8 million for the nine months ended September 30, 2011, compared with $10.9 million in the same period of 2010, a decrease of $5.1 million. Finance costs in 2011 were lower than those in 2010 primarily as a result of lower average borrowings, a lower effective interest rate and higher finance income.
Income tax expense totaled $13.2 million for the nine months ended September 30, 2011 compared with $6.4 million during the same period of 2010. The increase in income taxes during the period compared to 2010 was primarily due to an increase in earnings before taxes from operations. Earnings during the first nine months of 2010 included an $18.6 million ($17.2 million net of tax) gain realized on ESIF units, which was taxed at a lower effective rate.
During the first nine months of 2011, Enerflex generated net earnings from continuing operations of $39.0 million or $0.51 cents per share as compared to $21.9 million or $0.29 cents per share in the same period of 2010, which included the $17.2 million (net of tax gain) realized on the ESIF units.
Loss from discontinued operations reflects the results of EEA, Syntech and Enerflex Europe. These business units recorded a net loss from discontinued operations of $57.1 million ($0.74 cents per share) (net of a $1.4 million gain on the sale of EEA) and $5.1 million ($0.07 cents per share) in the first nine months of 2011 and 2010 respectively.
CANADA AND NORTHERN U.S.
Nine months ended
September 30,
(unaudited) ($ thousands) 2011 2010(1)
----------------------------------------------------------------------------
Segment revenue $ 450,426 $ 337,371
Intersegment revenue(2) (78,035) (29,803)
----------------------------------------------------------------------------
Revenue $ 372,391 $ 307,568
--------------------------
--------------------------
Revenue - Engineered Systems $ 210,509 $ 135,878
Revenue - Service $ 129,486 $ 121,266
Revenue - Rental $ 32,396 $ 50,424
Operating income $ 26,756 $ 2,849
Segment revenues as a % of total revenues 44.2 % 42.7 %
Service revenues as a % of segment revenues 34.8 % 39.4 %
Operating income as a % of segment revenues 7.2 % 0.9 %
--------------------------
(1) 2010 amounts include the financial results of ESIF from the date of acquisition, January 20, 2010.
(2) Intersegment revenue includes revenue on contracts relating to CSG projects.
Revenues in this region were $372.4 million for the first nine months of 2011 compared to $307.6 million for the same period of 2010. The increase of $64.8 million was the result of increased Engineered Systems revenues due to strong activity by Enerflex customers in the Montney and Horn River resource basins, increased service revenues from parts sales in Canada and Northern U.S., partially offset by lower rental revenue as a result of selling low horse power units in the first nine months of 2011 yielding less revenue, compared to the sale of higher horse power units in the same period of 2010. Enerflex focused on rationalizing the rental fleet in 2010 as part of its integration efforts once the acquisition of ESIF was completed.
Operating income was $26.8 million in the first nine months of 2011, an increase of $23.9 million compared to the same period in 2010. The improved performance was due to increased gross margin resulting from improved plant utilization, higher parts sales and higher realized margins on the sale and rental of compression equipment in the rental fleet. This was partially offset by higher SG&A as a result of a full nine months of expenses in this segment compared to eight months and nine days in 2010 and the transfer of staff to the Domestic C&P facility resulting from the closure of the International C&P facility during the third quarter of 2010.
SOUTHERN U.S. AND SOUTH AMERICA
Nine months ended
September 30,
(unaudited) ($ thousands) 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 233,236 $ 235,052
Intersegment revenue (565) (151)
----------------------------------------------------------------------------
Revenue $ 232,671 $ 234,901
--------------------------
--------------------------
Revenue - Engineered Systems $ 200,128 $ 208,572
Revenue - Service $ 32,543 $ 26,329
Operating income $ 22,286 $ 24,338
Segment revenues as a % of total revenues 27.6 % 32.6 %
Service revenues as a % of segment revenues 14.0 % 11.2 %
Operating income as a % of segment revenues 9.6 % 10.4 %
--------------------------
Southern U.S. and South America revenues totaled $232.7 million for the first nine months of 2011 as compared to $234.9 million in the same period of 2010. This decrease of $2.2 million was due to the timing of revenue recognition. Delivery dates on Engineered Systems projects booked in late 2010 have been delayed, deferring revenue to the fourth quarter of 2011 and into early 2012. Despite the timing impact of certain 2010 bookings, the Eagle Ford and Marcellus resource basins have been very active in this segment in 2011 as evidenced by stronger booking levels in 2011. As a result, the lower revenue in 2011 is related to timing of project delivery not lower activity or business prospects within this region.
Operating income decreased to $22.3 million in the first nine months of 2011 from $24.3 million in the same period of 2010. This was as a result of higher SG&A in the first nine months of 2011.
INTERNATIONAL
Nine months ended
September 30,
(unaudited) ($ thousands) 2011 2010(1)
----------------------------------------------------------------------------
Segment revenue $ 242,702 $ 198,575
Intersegment revenue (4,429) (20,877)
----------------------------------------------------------------------------
Revenue $ 238,273 $ 177,698
--------------------------
--------------------------
Revenue - Engineered Systems $ 193,668 $ 152,071
Revenue - Service $ 31,969 $ 25,326
Revenue - Rental $ 12,636 $ 301
Operating income $ 4,536 $ (7,887)
Segment revenues as a % of total revenues 28.3 % 24.7 %
Service revenues as a % of segment revenues 13.4 % 14.3 %
Operating income as a % of segment revenues 1.9 % (4.4)%
--------------------------
(1) 2010 amounts include the financial results of ESIF from the date of acquisition, January 20, 2010.
Continuing Operations:
International revenues totaled $238.3 million for the first nine months of 2011, compared to $177.7 million during the same period of 2010. The increase of $60.6 million was due to higher activity levels in Australia related to CSG projects, the recognition of revenue on approved change orders totaling $16.5 million related to past projects in MENA, the BP Oman project beginning operations in late 2010 and higher International P&P revenue resulting from gas processing projects in unconventional gas basins. This was partially offset by lower C&P revenue as a result of the closure of the International C&P business in late 2010, with its backlog transferred to plants in Casper, Wyoming and Houston, Texas. These plants will now serve the International markets for compression equipment for Enerflex Ltd.
Operating income for the first nine months of 2011 was $4.5 million, compared to an operating loss of $7.9 million for the same period of 2010. Operating income improved by $12.4 million over the same period last year, as a result of increased revenues and improved margin performance in the MENA division due to factors discussed above. This was partially offset by project delays, cost over-runs and impairment of work in process on specific projects in Australia due to weather related delays in Queensland. Operating income was also impacted by higher SG&A costs in this segment during 2011, resulting from a full nine months of expenses in this segment compared to eight months and nine days in 2010.
Discontinued Operations:
Operating results for this segment do not include the results for the discontinued operations of the Syntech business, which was sold in the third quarter of 2010 and EEA, which was sold in the first quarter of 2011 for a gain of $1.4 million net of tax. During the third quarter of 2011, Enerflex announced its intention to exit the European Service and CHP operations via a sale, partial sale or closure of this business unit. As a result, this business unit has been reported as part of discontinued operations and excluded from the operating results of this segment.
These three discontinued operations recorded a loss before tax totaling $57.1 million (net of a $1.4 million gain on the sale of EEA) in the first nine months of 2011 compared to a loss of $5.1 million in the same period a year ago.
QUARTERLY SUMMARY
(Loss) (Loss)
earnings earnings
Net (loss) per share per share
Revenue earnings - basic - diluted
September 30, 2011 $ 282,335 $ (37,301) $ (0.48) $ (0.48)
June 30, 2011 254,738 9,360 0.12 0.12
March 31, 2011(2) 326,405 9,886 0.13 0.13
December 31, 2010(2) 362,615 9,453 0.12 0.12
September 30, 2010(2) 277,834 3,217 0.03 0.03
June 30, 2010(2) 254,022 2,764 0.04 0.04
March 31, 2010(1,2) 212,413 10,865 0.14 0.14
December 31, 2009(2,3) 167,096 15,450 0.24 0.24
(1) 2010 amounts include the financial results of ESIF from the date of acquisition, January 20, 2010.
(2) Enerflex shares were issued pursuant to the Arrangement on June 1, 2011, as a result, per share amounts for comparative periods are based on Toromont's common shares at the time of initial exchange.
(3) Results for the periods ending 2009 have been prepared using Canadian GAAP and not IFRS.
FINANCIAL POSITION
The following table outlines significant changes in the Consolidated Statement of Financial Position as at September 30, 2011 as compared to December 31, 2010:
----------------------------------------------------------------------------
(unaudited) Increase /
($ millions) (decrease) Explanation
----------------------------------------------------------------------------
Assets:
----------------------------------------------------------------------------
Accounts (15.3) The decrease is primarily related to lower accrued
receivable revenues in the quarter in Canada and Northern U.S.
and a reclassification of receivables to assets held
for sale related to the European operations. This was
partially offset by an increase in billed but
uncollected receivables.
----------------------------------------------------------------------------
Inventory 23.8 The increase is related to higher work in process
(WIP) in all segments as backlog increases, partially
offset by a reclassification of inventory to assets
held for sale related to the European Operations.
----------------------------------------------------------------------------
Other (5.0) The decrease is due to lower finance income
current receivable resulting from recognition of finance
assets income on the BP project and lower prepaid expenses.
----------------------------------------------------------------------------
Property, (48.2) The decrease is due to depreciation charges and the
plant and sale of non-core real estate assets in Calgary and
equipment Stettler, Alberta completed during the quarter.
----------------------------------------------------------------------------
Rental (6.8) The decrease is related to depreciation charges and
equipment the sale of rental assets during the quarter,
partially offset by rental asset additions to the
fleet.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Intangible (9.3) The decrease is related to amortization of intangibles
assets and an impairment of $1.8 million recorded as part of
discontinued operations during the quarter related to
the European Operations.
----------------------------------------------------------------------------
Goodwill (31.2) The decrease is due to an impairment charge related to
the European Operations and recorded as part of
discontinued operations during the quarter.
----------------------------------------------------------------------------
Liabilities:
----------------------------------------------------------------------------
Accounts (27.5) The decrease is primarily related to the payment of
payable and short-term incentives to employees that were accrued
accrued at year end and payments to suppliers for raw material
liabilities purchases allocated to projects in WIP.
----------------------------------------------------------------------------
Deferred 73.7 The increase is related to higher activity levels and
revenue bookings during the year. Advanced billings have
exceeded revenue recognition on key projects in the
first nine months of 2011.
----------------------------------------------------------------------------
Note payable (215.0) The note was repaid to Toromont concurrent with
Enerflex's bifurcation on June 1, 2011.
----------------------------------------------------------------------------
Long-term 132.9 Enerflex established new bank facilities during 2011
debt to repay indebtedness to Toromont and to fund working
capital requirements.
----------------------------------------------------------------------------
LIQUIDITY
The Company's primary sources of liquidity and capital resources are:
-- Cash generated from continuing operations;
-- Bank financing and operating lines of credit; and
-- Issuance and sale of debt and equity instruments.
Statement of Cash Flows:
Three months ended Nine months ended
September 30 September 30
(unaudited)($ thousands) 2011 2010 2011 2010(1)
----------------------------------------------------------------------------
Cash, beginning of period $ 54,255 $ 15,000 $ 15,000 $ 34,949
Cash provided by (used in):
Operating activities 14,564 38,411 84,796 58,425
Investing activities 36,871 8,914 34,958 (309,314)
Financing activities (55,128) (43,021) (83,940) 232,863
Exchange rate changes on
foreign currency cash 2,104 (4,304) 1,852 (1,923)
----------------------------------------------------------------------------
Cash, end of period $ 52,666 $ 15,000 $ 52,666 $ 15,000
(1) 2010 amounts include the financial results of ESIF from the date of acquisition, January 20, 2010.
Operating Activities
For the three months ended September 30, 2011, cash provided by operating activities was $14.6 million as compared to $38.4 million in the same period of 2010. The decrease of $23.8 million was a result of increased working capital requirements. This was partially offset by increased operating results in comparison to the same period in 2010.
For the nine months ended September 30, 2011, cash provided by operating activities was $84.8 million as compared to $58.4 million in the same period of 2010. The increase was due to increased operating results which were partially offset by an increase in non-cash working capital resulting from an increase in WIP and a decrease in accounts payable.
Investing Activities
Investing activities provided $36.9 million and $35.0 million of cash for the three and nine months ended September 30, 2011 respectively, as compared to cash provided by and used in investing activities of $8.9 million and $309.3 million respectively in the same periods of 2010. Expenditures on capital assets for the three months ended September 30, 2011 increased $1.9 million from the same quarter of 2010 while proceeds from the disposition of capital assets increased in the third quarter of 2011 by $44.0 million as a result of the disposition of non-core real estate assets. For the nine months ended September 30, 2011, additions decreased by $12.3 million while dispositions increased by $47.2 million over the comparable period in 2010 as a result of the disposition of non-core real estate and equipment. The disposal of manufacturing facilities in Calgary and Stettler, Alberta contributed an additional $42.9 million in the third quarter of 2011, while the acquisition of ESIF in the first quarter of 2010 resulted in an investment of $292.5 million. Dividends paid in the third quarter and nine months ended 2011 were $4.6 million. No dividend payments were made in 2010.
Financing Activities
Cash used in financing activities for the three and nine months ended September 30, 2011 was $55.1 million and $83.9 million respectively, as compared to cash used in and provided by financing of $43.0 million and $232.9 million respectively in the same period of 2010. The change was primarily due to the repayment of the note to Toromont during the second quarter of 2011, and borrowings on the new debt facility during the same quarter as compared to an equity investment by Toromont for the acquisition of ESIF in the first quarter of 2010.
RISK MANAGEMENT
In the normal course of business, the Company is exposed to financial risks that may potentially impact its operating results in any or all of its business segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates and interest rates. The Company does not enter into derivative financial agreements for speculative purposes.
Foreign Exchange Risk
Enerflex mitigates the impact of exchange rate fluctuations by matching expected future U.S. dollar denominated cash inflows with U.S. dollar liabilities, principally through the use of foreign exchange contracts, bank debt, accounts payable and by manufacturing U.S. dollar denominated contracts at plants located in the U.S.. The Company has adopted U.S. based manufacturing plants and foreign exchange forward contracts as its primary mitigation strategy to hedge any net foreign currency exposure. Forward contracts are entered into for the amount of the net foreign dollar exposure for a term matching the expected payment terms outlined in the sales contract.
The Company elected to apply hedge accounting for foreign exchange forward contracts for firm commitments, which are designated as cash flow hedges. For cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognized in accumulated other comprehensive income, net of taxes. The ineffective portion of the fair value changes is recognized in net income. Amounts charged to accumulated other comprehensive income are reclassified to the income statement when the hedged transaction affects the income statement.
Outstanding forward contracts are marked-to-market at the end of each period with any gain or loss on the forward contract included in accumulated other comprehensive income until such time as the forward contract is settled, when it flows to income.
Enerflex does not hedge its exposure to investments in foreign subsidiaries. Exchange gains and losses on net investments in foreign subsidiaries are accumulated in accumulated comprehensive income/loss. The accumulated comprehensive loss at the end of 2010 of $10.8 million was adjusted to an accumulated comprehensive income of $0.6 million at September 30, 2011. This was primarily the result of the changes in the value of the Canadian dollar against the Euro, Australian dollar and U.S. dollar. The Canadian dollar depreciated by 8% against the U.S. dollar in the third quarter of 2011 versus an appreciation of 3% against the U.S. dollar during the same period of 2010. The Australian dollar depreciated by 2% against the Canadian dollar during the third quarter of 2011, as compared to a 10% appreciation in the same period of 2010. The Euro depreciated against the Canadian dollar by a negligible amount during the third quarter of 2011, as compared to an appreciation of 7% in the same period of 2010.
The types of foreign exchange risk and the Company's related risk management strategies are as follows:
Transaction exposure
The Canadian operations of the Company source the majority of its products and major components from the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cost of imported inventory where appropriate.
The Company also sells compression packages in foreign currencies, primarily the U.S. dollar, the Australian dollar and the Euro and enters into foreign currency contracts to reduce these exchange rate risks.
Most of Enerflex's international orders are manufactured in the U.S. operations if the contract is denominated in U.S. dollars. This minimizes the Company's foreign currency exposure on these contracts.
The Company identifies and hedges all significant transactional currency risks.
Translation exposure
The Company's earnings from, and net investment in, foreign subsidiaries are exposed to fluctuations in exchange rates. The currencies with the most significant impact are the U.S. dollar, Australian dollar and the Euro.
Assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the balance sheet dates. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in income when there has been a reduction in the net investment in the foreign operations.
Earnings at foreign operations are translated into Canadian dollars each period at average exchange rates for the period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net income. Such exchange rate fluctuations have historically not been material year-over-year relative to the overall earnings or financial position of the Company.
Interest rate risk
The Company's liabilities include long-term debt that is subject to fluctuations in interest rates. The Company's Notes outstanding at September 30, 2011 include interest rates that are fixed and therefore will not be impacted by fluctuations in market interest rates. The Company's Bank Facilities however, are subject to changes in market interest rates. For each 1.0% change in the rate of interest on the Bank Facilities, the change in interest expense would be approximately $1.4 million. All interest charges are recorded on the income statement as a separate line item called Finance Costs.
Credit risk
Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, accounts receivable, and derivative financial instruments. The carrying amount of assets included on the balance sheet represents the maximum credit exposure.
Cash equivalents consist mainly of short-term investments, such as money market deposits. The Company has deposited the cash equivalents with highly rated financial institutions, from which management believes the risk of loss to be remote.
The Company has accounts receivable from clients engaged in various industries including natural gas producers, natural gas transportation, agricultural, chemical and petrochemical processing and the generation and sale of electricity. These specific industries may be affected by economic factors that may impact accounts receivable. Enerflex has entered into a number of significant projects through to 2013 with one specific customer however no single operating unit is reliant on any single external customer.
The credit risk associated with net investment in sales-type lease arises from the possibility that the counterparty may default on their obligations. In order to minimize this risk, the Company enters into sales-type lease transactions only in select circumstances. Close contact is maintained with the customer over the duration of the lease to ensure visibility to issues as and if they arise.
The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly-rated financial institutions.
Liquidity risk
Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. Accounts payable are primarily due within 90 days and will be satisfied from current working capital.
CAPITAL RESOURCES
On November 1, 2011, Enerflex had 77,215,396 shares outstanding. Enerflex has not established a formal dividend policy and the Board of Directors anticipates setting the quarterly dividends based on the availability of cash flow and anticipated market conditions, taking into consideration business opportunities and the need for growth capital. In the third quarter of 2011, the Company declared a dividend of $0.06 per share.
The Company has a series of credit facilities with a syndicate of banks ("Bank Facilities") totaling $325.0 million. The Bank Facilities consist of a committed 4-year $270.0 million revolving credit facility (the "Revolver"), a committed 4-year $10.0 million operating facility (the "Operator"), a committed 4-year $20.0 million Australian operating facility (the "Australian Operator") and a committed 4-year $25.0 million bi-lateral letter of credit facility (the "LC Bi-Lateral"). The Revolver, Operator, Australian Operator and LC Bi-Lateral are collectively referred to as the Bank Facilities. The Bank Facilities were funded on June 1, 2011.
The Bank Facilities have a maturity date of June 1, 2015 ("Maturity Date"), but may be extended annually on or before the anniversary date with the consent of the lenders. In addition, the Bank Facilities may be increased by $50.0 million at the request of the Company, subject to the lenders' consent. There is no required or scheduled repayment of principal until the Maturity Date of the Bank Facilities.
Drawings on the Bank Facilities are available by way of Prime Rate loans ("Prime"), U.S. Base Rate loans, LIBOR loans, and Bankers' Acceptance ("BA") notes. The Company may also draw on the Bank Facilities through bank overdrafts in either Canadian or U.S. dollars and issue letters of credit under the Bank Facilities.
The Company also has a committed facility with one of the lenders in the Bank Facilities for the issuance of letters of credit (the "Bi-Lateral"). The amount available under the Bi-Lateral is $50.0 million and has a maturity date of June 1, 2013, which may be extended annually with the consent of the lender. Drawings on the Bi-Lateral are by way of letters of credit.
In addition, the Company has a committed facility with a US lender ("US Facility") in the amount of $20.0 million USD. Drawings on the US Facility are by way of LIBOR loans, US Base Rate loans and letters of credit. During the quarter, the Company negotiated an extension of the US Facility to July 1, 2014. The US Facility may be extended annually at the request of the Company, subject to the lenders consent. There are no required or scheduled repayments of principal until the maturity date of the US Facility.
The Company completed the restructuring of its debt with the closing of a private placement for $90.5 million in Unsecured Private Placement Notes ("Notes") during the second quarter of 2011. The Notes mature on two separate dates with $50.5 million, with a coupon of 4.841%, maturing on June 22, 2016 and $40.0 million, with a coupon of 6.011%, maturing on June 22, 2021.
The Bank Facilities, the Bi-Lateral and the US Facility are unsecured and rank pari passu with the Notes. The Company is required to maintain certain covenants on the Bank Facilities, the Bi-Lateral, the US Facility and the Notes. As at September 30, 2011, the Company was in compliance with these covenants.
At September 30, 2011, the Company had $45.4 million drawn against the Bank Facilities. The Bank Facilities were not available at December 31, 2010, as the Company's borrowings consisted of a Note Payable to its parent company.
CONTRACTUAL OBLIGATIONS, COMMITTED CAPITAL INVESTMENT AND OFF-BALANCE SHEET ARRANGEMENTS
The Company's contractual obligations are contained in the following table.
CONTRACTUAL OBLIGATIONS
(unaudited)
($ thousands) Payments due by period
Contractual
Obligations 2011 2012-2013 2014-2015 Thereafter Total
----------------------------------------------------------------------------
Leases $ 3,456 $ 16,408 $ 10,120 $ 10,535 $ 40,519
Purchase obligations 29,300 10,330 - - 39,630
----------------------------------------------------------------------------
Total $ 32,756 $ 26,738 $ 10,120 $ 10,535 $ 80,149
-------------------------------------------------------
-------------------------------------------------------
The majority of the Company's lease commitments are operating leases for service vehicles.
The majority of the Company's purchase commitments relate to major components for the Engineered Systems product line and to long-term information technology and communications contracts entered into in order to reduce the overall cost of services received.
The Company does not believe that it has off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the company's financial condition, results of operations, liquidity or capital expenditures.
RELATED PARTIES
Enerflex transacts with certain related parties as a normal course of business. Related parties include Toromont which owned 100% of Enerflex until June 1, 2011, and Total Production Services Inc. ("Total") which was an influenced investee by virtue of the Company's 40% investment in Total.
All transactions occurring with both parties were in the normal course of business operations under the same terms and conditions as transactions with unrelated companies. A summary of the financial statement impacts of all transactions with all related parties are as follows:
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Revenue $ 212 $ 20
Management fees 4,299 7,920
Purchases 526 1,279
Interest expense 1,902 5,484
Accounts receivable - 61
Accounts payable 92 3,692
Note payable - 215,000
----------------------------------------------------------------------------
ACCOUNTING POLICIES
Adoption of International Financial Reporting Standards
As disclosed in Note 3, these interim Consolidated Financial Statements have been prepared in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standards" and with IAS 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"). Previously, the Company prepared its interim and annual financial statements in accordance with pre-changeover Canadian GAAP.
The interim consolidated financial statements for the nine months ended September 30, 2011 include the results for the three months ended March 31, 2011, which were prepared on a carve-out basis, and the results for the nine months ended September 30, 2011, which were prepared on a carve-out basis for the first five months of 2011 and consolidated basis as at September 30, 2011.
Assets held for sale
Non-current assets and groups of assets and liabilities which comprise disposal groups are categorized as assets held for sale where the asset or disposal group is available for sale in its present condition, and the sale is highly probable. For this purpose, a sale is highly probable if management is committed to a plan to achieve the sale; there is an active program to find a buyer; the non-current asset or disposal group is being actively marketed at a reasonable price; the sale is anticipated to be completed within one year from the date of classification, and; it is unlikely there will be changes to the plan. Non-current assets held for sale and disposal groups are carried at the lesser of carrying amount and fair value less costs to sell. The profit or loss arising on reclassification or sale of a disposal group is recognized in discontinued operations on the statement of earnings.
SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of the Company's consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In the process of applying the Company's accounting policies, management has made the following judgments, estimates and assumptions which have the most significant effect on the amounts recognized in the consolidated financial statements:
Revenue Recognition - Long-term Contracts
The Company reflects revenues generated from the assembly and manufacture of projects using the percentage-of-completion approach of accounting for performance of production-type contracts. This approach to revenue recognition requires management to make a number of estimates and assumptions surrounding the expected profitability of the contract, the estimated degree of completion based on cost progression and other detailed factors. Although these factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions could lead to changes in the revenues recognized in a given period.
Provisions for Warranty
Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical experience under contractual warranty obligations or specific provisions created in respect of individual customer issues undergoing commercial resolution and negotiation. Amounts set aside represent management's best estimate of the likely settlement and the timing of any resolution with the relevant customer.
Property, Plant and Equipment
Fixed assets are stated at cost less accumulated depreciation, including asset impairment losses. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of fixed assets are reviewed on an annual basis. Assessing the reasonableness of the estimated useful lives of fixed assets requires judgment and is based on currently available information. Fixed assets are also reviewed for potential impairment on a regular basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Changes in circumstances, such as technological advances and changes to business strategy can result in actual useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated useful lives of fixed assets or future cash flows constitute a change in accounting estimate and are applied prospectively.
Impairment of Non-financial Assets
Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm's length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset's performance of the cash generating unit being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes.
Impairment of Goodwill
The Company tests whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from each cash-generating unit and also to determine a suitable discount rate in order to calculate the present value of those cash flows. Impairment losses on goodwill are not reversed.
Income Taxes
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Company establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective company's domicile.
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.
Assets Held for Sale and Discontinued Operations
The Company's accounting policy related to assets held for sale are described in Note 3e to the Financial Statements. In applying this policy, judgment is applied in determining whether certain assets should be reclassified to assets held for sale on the consolidated statement of financial position. Judgment is also applied in determining whether the results of operations associated with the assets should be recorded in discontinued operations on the consolidated statements of earnings. The Company will reclassify the results of operations associated with certain assets to discontinued operations where the asset represents part of a disposal group or segment.
FUTURE ACCOUNTING PRONOUNCEMENTS
The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Company:
As of January 1, 2013, the Company will be required to adopt IFRS 9 Financial Instruments; IFRS 10 Consolidated Financial Statements; IFRS 11 Joint Arrangements; IFRS 12 Disclosure of Interest in Other Entities; and IFRS 13 Fair Value Measurement.
IFRS 9 Financial Instruments is the result of the first phase of the IASB's project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Company is in the process of assessing the impact of adopting IFRS 9, if any.
IFRS 10 Consolidated Financial Statements replaces the consolidation requirements in SIC-12 Consolidation-Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. The standard identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance to assist in the determination of control where this is difficult to assess. The Company is in the process of assessing the impact of adopting IFRS 10, if any.
IFRS 11 Joint Arrangements replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities - Non-Monetary Contributions by Venturers. IFRS 11 uses some of the terms that were originally used by IAS 31, but with different meanings. This standard addresses two forms of joint arrangements (joint operations and joint ventures) where there is joint control. The Company is in the process of assessing the impact of adopting IFRS 11, if any.
IFRS 12 Disclosure of Interest in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The Company is in the process of assessing the impact of adopting IFRS 12, if any.
IFRS 13 Fair Value Measurement provides new guidance on fair value measurement and disclosure requirements for IFRS. The Company is in the process of assessing the impact of adopting IFRS 13, if any.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
IFRS replaces Canadian generally accepted accounting principles ("Canadian GAAP") for publicly accountable enterprises for financial periods beginning on or after January 1, 2011. Accordingly, Enerflex has adopted IFRS effective January 1, 2011 and has prepared the interim financial statements, inclusive of comparative information using IFRS accounting policies. Prior to the adoption of IFRS, the Company's financial statements were prepared in accordance with Canadian GAAP. The Company's financial statements for the year ended December 31, 2011 will be the first annual financial statements that comply with IFRS.
RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS
Management is responsible for the information disclosed in this MD&A and the accompanying consolidated financial statements, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company's Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the Company, and has reviewed and approved this MD&A and the accompanying consolidated financial statements. The Audit Committee is also responsible for determining that management fulfills its responsibilities in the financial control of operations, including disclosure controls and procedures and internal control over financial reporting.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer, together with other members of management, have designed the Company's disclosure controls and procedures ("DC&P") in order to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would have been known to them and by others within those entities.
Additionally, they have designed internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting in accordance with GAAP.
The control framework used in the design of both DC&P and ICFR is the internal control integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
There have been no significant changes in the design of the Company's internal controls over financial reporting during the three-month period ended September 30, 2011 that would materially affect, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
While the Officers of the Company have designed the Company's disclosure controls and procedures and internal controls over financial reporting, they expect that these controls and procedures may not prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met.
SUBSEQUENT EVENTS
On November 2, 2011, Enerflex was awarded a $228.0 million US contract for the engineering, procurement, construction and commissioning of a gas processing plant to be located in the Sultanate of Oman.
The gas processing plant will produce 90 million standard cubic feet per day of natural gas and 6,000 barrels per day of condensate. The contract includes the supply by Enerflex of all associated equipment including; gas processing and compression equipment, gas/condensate export facilities, produced water treatment, power plant, central control room, electrical substation and associated utilities.
General Electric's ("GE") Gas Engine's Division has recently realigned its channel-to-market strategy and distribution network and as a result, Gas Drive has been notified of GE's Gas Engines interest in extending distribution rights for the Jenbacher natural gas engine and parts product line for all of Canada. This overall network realignment strengthens both Gas Drive's and GE's Gas Engine's ability to meet their customers' needs by providing an unprecedented level of service and support.
Subsequent to September 30, 2011, Enerflex declared the Company's third dividend $0.06 per share, payable on January 5, 2012, to shareholders of record on December 14, 2011.
OUTLOOK FOR MARKETS
The global economy continues its fragile recovery from the recent recession. Enerflex entered 2011 with significantly stronger backlog than the Company had entering 2010. Bookings in the first nine months of 2011, augmented by the large international contract in the Sultanate of Oman received subsequent to the third quarter of 2011 has resulted in backlog for Engineered Systems in excess of $1.0 billion.
The Canada and Northern U.S. region continues to experience improved bookings and backlog as a result of increased activity in Canada's unconventional gas basins in the Montney and the Horn River. These unconventional gas basins require higher horsepower compression and more gas processing equipment in comparison to conventional gas basins. Enerflex is well positioned to take advantage of opportunities in this area for both equipment supply and mechanical services as many of our customers have increased activities in 2011.
The Southern U.S. and South America region also continues to experience improved bookings and backlog during the first nine months of 2011. Increased activity in liquid rich U.S. gas basins has driven new orders for compression equipment for this region. These liquid rich resource basins can achieve superior returns for producers despite low natural gas prices due to the higher value that could be realized for the natural gas liquids ("NGL's"). In addition, the requirement for gas compression and gas processing equipment for liquid rich resource basins like the Eagle Ford and parts of the Marcellus has increased bookings in this region. Project delivery dates have been delayed in this region, resulting in revenue recognition for the Engineered Systems product line to be weighted to the fourth quarter of 2011 and the first quarter of 2012.
The International region continues to hold considerable opportunity and has benefited from strong bookings and backlog through the first nine months of 2011. Activity in these regions is being driven by increased activity in Australia's natural gas industry. There are numerous Liquefied Natural Gas ("LNG") projects in early stages of development. LNG projects of Queensland Gas and Santos have received final investment decisions and orders for equipment have already been placed with Enerflex.
In the Middle East and North Africa, Enerflex has taken a targeted approach to mitigate exposure to political unrest. Our primary areas of focus have been Bahrain, Kuwait, Egypt, Oman and the United Arab Emirates. Enerflex has achieved commercial operations of the on-shore gas compression facility for BP in Oman and subsequent to the end of the third quarter, has received an award for a $228.0 million US gas processing plant in the region. Domestic demand for gas in this region remains strong and we are well positioned to compete for future projects in Oman and Bahrain for compression, processing equipment and after market service support.
In Europe, the traditional customers have been small greenhouse operators, which were significantly impacted by the financial crisis and economic downturn. In addition, they have come under commercial pressure from overseas competitors. This fact coupled with General Electric's decision to realign distribution territories in this region has resulted in Enerflex's decision to exit the CHP and Service business in Europe. Enerflex will continue to pursue opportunities for Compression and Processing equipment in this region through it sales office in the United Kingdom and our joint venture in Russia. Unconventional gas basins are in the early stages of development in Poland, while Russia is home to the largest recoverable natural gas reserves in the world. We are well positioned to compete for these opportunities once some of these projects receive final investment decisions.
INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION
September 30, December 31,
(unaudited) ($ Canadian thousands) 2011 2010
----------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 52,666 $ 15,000
Accounts receivable (Note 8) 227,857 243,238
Inventories (Note 9) 246,699 222,855
Income tax receivable 539 1,944
Derivative financial instruments (Note
21) 2,617 448
Other current assets 16,989 22,013
----------------------------------------------------------------------------
Total current assets 547,367 505,498
Property, plant and equipment (Note 10) 123,800 172,041
Rental equipment (Note 10) 109,400 116,162
Deferred tax assets 43,680 47,940
Other assets (Note 11) 12,554 13,797
Intangible assets (Note 12) 30,198 39,462
Goodwill 451,456 482,656
----------------------------------------------------------------------------
1,318,455 1,377,556
----------------------------------------------------------------------------
Assets related to assets held for sale
(Note 6) 13,920 -
----------------------------------------------------------------------------
Total assets $ 1,332,375 $ 1,377,556
--------------------------------
--------------------------------
Liabilities
Current liabilities
Accounts payable, accrued liabilities $ $
and provisions (Note 13) 136,894 164,422
Income taxes payable 2,307 7,135
Deferred revenues 224,037 150,319
Derivative financial instruments
(Note 21) 3,408 603
Note payable - 215,000
----------------------------------------------------------------------------
Total current liabilities 366,646 537,479
Long-term debt (Note 14) 132,896 -
Other liabilities 560 549
----------------------------------------------------------------------------
500,102 538,028
----------------------------------------------------------------------------
Liabilities related to assets held for sale
(Note 6) 10,791 -
----------------------------------------------------------------------------
Total liabilities 510,893 538,028
--------------------------------
--------------------------------
Guarantees, commitments and contingencies(Note 15)
Shareholders' Equity
Owner's net investment - 849,977
Share capital (Note 17) 205,369 -
Contributed surplus (Note 18) 657,151 -
Retained earnings (41,658) -
Accumulated other comprehensive income(loss) 620 (10,845)
----------------------------------------------------------------------------
Total shareholders' equity before non-
controlling interest 821,482 839,132
Non-controlling interest - 396
----------------------------------------------------------------------------
Total shareholders' equity and non-
controlling interest 821,482 839,528
----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,332,375 $ 1,377,556
--------------------------------
--------------------------------
See accompanying Notes to the Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(unaudited) Three months ended Nine months ended
September 30, September 30,
($ Canadian thousands, 2011 2010 2011 2010
except per share
amounts)
----------------------------------------------------------------------------
Revenues $ 282,335 $ 270,859 $ 843,335 $ 720,167
Cost of goods sold 228,766 222,832 686,082 600,787
----------------------------------------------------------------------------
Gross margin 53,569 48,027 157,253 119,380
Selling and 31,614 36,562 103,675 100,080
administrative expenses
----------------------------------------------------------------------------
Operating income 21,955 11,465 53,578 19,300
Gain on disposal of (2,315) (930) (3,676) (975)
property, plant
and equipment
Gain on available-for- - - - (18,627)
sale financial assets
Equity earnings from (297) (140) (807) (330)
associates
----------------------------------------------------------------------------
Earnings before finance 24,567 12,535 58,061 39,232
costs and income taxes
Finance costs 2,498 3,858 7,190 11,007
Finance income (628) (23) (1,380) (125)
----------------------------------------------------------------------------
Earnings before income 22,697 8,700 52,251 28,350
taxes
Income taxes (Note 16) 5,718 3,638 13,230 6,407
----------------------------------------------------------------------------
Net earnings from $ 16,979 $ 5,062 $ 39,021 $ 21,943
continuing operations
Gain on sale of - - 1,430 -
discontinued operations
(Note 7)
Loss from discontinued (54,280) (1,845) (58,506) (5,097)
operations (Note 7)
----------------------------------------------------------------------------
Net (loss) earnings $ (37,301) $ 3,217 $ (18,055) $ 16,846
----------------------------------------------------
----------------------------------------------------
(Loss) earnings
attributable to:
Controlling interest $ (37,301) $ 3,518 $ (17,739) $ 17,074
Non-controlling $ - $ (301) $ (316) $ (228)
interest
Earnings(loss) per share
- basic (Note 20)
Continuing operations $ 0.22 $ 0.06 $ 0.51 $ 0.29
Discontinued $ (0.70) $ (0.02) $ (0.74) $ (0.07)
operations
Earnings(loss) per share
- diluted (Note 20)
Continuing operations $ 0.22 $ 0.06 $ 0.51 $ 0.29
Discontinued $ (0.70) $ (0.02) $ (0.74) $ (0.07)
operations
Weighted average number 77,215,396 76,896,069 77,215,280 75,895,887
of shares - basic
See accompanying Notes to the Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Three months ended Nine months ended
September 30, September 30,
(unaudited)
($ Canadian thousands) 2011 2010 2011 2010
----------------------------------------------------------------------------
Net (loss) earnings $ (37,301) $ 3,217 $(18,055) $ 16,846
Other comprehensive income (loss):
Change in fair value of
derivatives designated as cash
flow hedges, net of income tax
expense (2011: $311; 2010: $4) (1,529) 6 (801) (10)
Gain (loss) on derivatives
designated as cash flow hedges
transferred to net income in the
current period, net of income tax
(recovery)expense(2011: $(98);
2010: $6) 595 54 253 (16)
Unrealized gain (loss) on
translation of financial
statements of foreign operations 10,385 (162) 12,013 (2,902)
Reclassification to net income of
gain on available for sale
financial assets as a result of
business acquisition, net of
income tax expense (2011: $ nil;
2010: $3,090) - - - (15,615)
----------------------------------------------------------------------------
Other comprehensive income (loss) $ 9,451 $ (102) $ 11,465 $(18,543)
----------------------------------------------------------------------------
Comprehensive(loss) income $ (27,850) $ 3,115 $ (6,590) $ (1,697)
----------------------------------------
----------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended Nine months ended
September 30, September 30,
(unaudited)
($ Canadian thousands) 2011 2010 2011 2010
----------------------------------------------------------------------------
Operating activities
Net (loss) earnings $ (37,301) $ 3,217 $ (18,055) $ 16,846
Items not requiring cash and
cash equivalents:
Impairment of assets held
for sale (Note 6) 52,028 - 52,028 -
Depreciation and
amortization 11,454 11,079 32,306 31,147
Equity earnings from
associates (297) (140) (807) (330)
Deferred income taxes (Note
16) 690 (742) (1,306) (2,365)
Stock option expense (Note
19) 586 - 651 -
Gain on sale of:
Discontinued operations - - (2,471) -
Rental equipment, property,
plant and equipment (2,315) (930) (3,676) (957)
Available for sale assets on
acquisition of control - - - (18,627)
----------------------------------------------------------------------------
24,845 12,484 58,670 25,714
Net change in non-cash working
capital and other (10,281) 25,927 26,126 32,711
----------------------------------------------------------------------------
Cash provided by operating
activities $ 14,564 $ 38,411 $ 84,796 $ 58,425
----------------------------------------------------------------------------
Investing activities
Business acquisition, net of
cash acquired $ - $ - $ - $(292,533)
(Note 5)
Additions to:
Rental equipment (622) (928) (9,183) (17,325)
Property, plant and equipment (8,181) (5,995) (15,719) (19,922)
Proceeds on disposal of:
Rental equipment 2,440 2,345 5,671 11,866
Property, plant and equipment 44,743 850 56,865 3,434
Disposal of discontinued
operations, net of cash (Note - 3,500 3,389 3,500
7)
Change in other assets (1,429) 2,160 1,243 2,573
----------------------------------------------------------------------------
36,951 1,932 42,266 (308,407)
Net change in non-cash working
capital and other (80) 6,982 (7,308) (907)
----------------------------------------------------------------------------
Cash provided by (used in)
investing activities $ 36,871 $ 8,914 $ 34,958 $(309,314)
----------------------------------------------------------------------------
Financing activities
(Repayment of) proceeds from
note payable $ - $ (10,013)$ (215,000)$ 217,404
(Repayment of) proceeds from
long-term debt (50,495) - 132,896 (164,811)
Dividends (4,633) - (4,633) -
Equity(to)from parent - (33,008) 2,797 180,270
----------------------------------------------------------------------------
Cash (used in)provided by
financing activities $ (55,128)$ (43,021)$ (83,940)$ 232,863
----------------------------------------------------------------------------
Effect of exchange rate changes
on cash denominated in foreign 2,104 (4,305) 1,852 (1,923)
currencies
(Decrease)increase in cash and
cash equivalents (1,589) - 37,666 (19,949)
Cash and cash equivalents,
beginning of period $ 54,255 $ 15,000$ 15,000 $ 34,949
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 52,666 $ 15,000$ 52,666 $ 15,000
--------------------------------------------
--------------------------------------------
Supplemental cash flow information (Note 23).
See accompanying Notes to the Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Foreign
(unaudited) Contri- currency
($ Canadian Net Share buted Retained translation
thousands) investment capital surplus earnings adjustments
----------------------------------------------------------------------------
At January 1,
2010 $ 297,973 $ - $ - $ - $ -
Net earnings 17,074 - - - -
Non-
controlling
interest on
acquisition - - - - -
Other
compre-
hensive
income - - - - (2,902)
Owner's
investment/
dividends 505,758 -
----------------------------------------------------------------------------
At September
30, 2010 $ 820,805 $ - $ - $ - $ (2,902)
----------------------------------------------------------------------------
Net earnings 9,360 - - - -
Non-
controlling
interest on
acquisition - - - - -
Other
compre-
hensive
income - - - - (7,999)
Owner's
investment/
dividends 19,812 - - - -
----------------------------------------------------------------------------
At December
31, 2010 $ 849,977 $ - $ - $ - $ (10,901)
----------------------------------------------------------------------------
Net earnings 14,654 - - (32,393) -
Owner's
investment/
equity (to)
from parent (2,794) - - - -
Bifurcation
transaction (861,837) 205,337 656,500 - -
Non-
controlling
interest
disposed - - - - -
Other
comprehensive
income - - - - 12,013
Effect of
stock
option
plans - 32 651 - -
Dividends - - - (9,265) -
----------------------------------------------------------------------------
At September
30, 2011 $ - 205,369 657,151 (41,658) 1,112
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Total
accumulated
Available other
(unaudited) for sale compre- Non-
($ Canadian Hedging financial hensive controlling
thousands) reserve assets income interest Total
----------------------------------------------------------------------------
At January 1,
2010 $ 14 $ 15,615 $ 15,629 $ - $ 313,602
Net earnings - - - (228) 16,846
Non-
controlling
interest on
acquisition - - - 531 531
Other
compre-
hensive
income (26) (15,615) (18,543) - (18,543)
Owner's
investment/
dividends - - - - 505,758
----------------------------------------------------------------------------
At September
30, 2010 $ (12) $ - $ (2,914) $ 303 $ 818,194
----------------------------------------------------------------------------
Net earnings - - - 93 9,453
Non-
controlling
interest on
acquisition - - - - -
Other
compre-
hensive
income 68 - (7,931) - (7,931)
Owner's
investment/
dividends - - - - 19,812
----------------------------------------------------------------------------
At December
31, 2010 $ 56 $ - $ (10,845) $ 396 $ 839,528
----------------------------------------------------------------------------
Net earnings - - - (316) (18,055)
Owner's
investment/
equity (to)
from parent - - - - (2,794)
Bifurcation
transaction - - - - -
Non-
controlling
interest
disposed - - - (80) (80)
Other
comprehensive
income (548) - 11,465 - 11,465
Effect of
stock
option
plans - - - - 683
Dividends - - - - (9,265)
----------------------------------------------------------------------------
At September
30, 2011 (492) - 620 - 821,482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011
(Unaudited) ($ thousands of dollars, except per share amounts)
Note 1. Nature and Description of the Company
Enerflex Ltd. ("Enerflex" or "the Company") was formed subsequent to the acquisition of Enerflex Systems Income Fund ("ESIF") by Toromont Industries Ltd. ("Toromont") and subsequent integration of Enerflex's products and services with Toromont's existing Natural Gas Compression and Processing business. In January 2010, the operations of Toromont Energy Systems Inc., a subsidiary of Toromont, were combined with the operations of ESIF to form Enerflex Ltd.
Headquartered in Calgary, the registered office is located at 904, 1331 Macleod Trail SE, Calgary, Canada. Enerflex has approximately 2,900 employees worldwide. Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the United Kingdom, the United Arab Emirates, Oman, Egypt, Bahrain and Indonesia.
These consolidated financial statements include the legacy natural gas and process compression business (Toromont Energy Systems, subsequently renamed Enerflex Ltd.) and the acquired business of ESIF from the date of acquisition, January 20, 2010.
Note 2. Background and Basis of Presentation
On May 16th, 2011 Toromont Shareholders approved the Plan of Arrangement ("the Arrangement") that would establish Enerflex as a stand-alone publicly traded company listed on the Toronto Stock Exchange ("TSX"). In connection with the Arrangement, Toromont common shareholders received one share of Enerflex for each common share of Toromont, creating two independent public companies - Toromont Industries Ltd. and Enerflex Ltd.
Enerflex began independent operations on June 1, 2011 pursuant to the Arrangement with Toromont. Enerflex's shares began trading on the TSX on June 3, 2011 under the symbol EFX.
In the second quarter of 2011, Enerflex entered into a transitional services agreement (the "Agreement") pursuant to which it is expected that, on an interim basis, Toromont will provide consulting services and other assistance with respect to information technology of Enerflex which, from time to time, are reasonably requested by Enerflex in order to assist in its transition to a public company, independent from Toromont. Unless terminated earlier, the Agreement will expire on June 1, 2012. The Agreement reflects terms negotiated in anticipation of each company being a stand-alone public company, each with independent directors and management teams.
Accordingly, up until the completion of the Arrangement, Toromont and Enerflex were considered related parties due to the parent - subsidiary relationship that existed. Subsequent to June 1, 2011, Toromont is no longer considered a related party.
Note 3. Summary of Significant Accounting Policies
(a) Statement of Compliance
These interim consolidated financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board ("IASB") and using the accounting policies that the Company expects to adopt in its consolidated financial statements for the year ending December 31, 2011. International Financial Reporting Standards ("IFRS") requires an entity to adopt IFRS 1 when it issues its first annual financial statements under IFRS by making an explicit and unreserved statement in those financial statements of compliance with IFRS. The Company will make this statement when it issues its 2011 annual financial statements.
(b) Basis of Presentation
These interim consolidated financial statements for the three and nine month periods ended September 30, 2011 and 2010 were prepared in accordance with IAS 34 Interim Financial Reporting and IFRS 1 First Time Adoption of International Financial Reporting Standards. The same accounting policies and methods of computation were followed in the preparation of these interim consolidated financial statements for the three and six month period ended June 30, 2011. In addition, the interim carve-out financial statements for the three month period ended March 31, 2011 contain certain incremental annual IFRS disclosures not included in the annual carve-out financial statements for the year-ended December 31, 2010 prepared in accordance with previous Canadian GAAP. Accordingly, these interim consolidated financial statements for the three and nine month periods ended September 30, 2011 and 2010 should be read together with the annual carve-out consolidated financial statements for the year ended December 31, 2010 prepared in accordance with previous Canadian GAAP, as well as the interim carve-out financial statements for the three month period ended March 31, 2011.
These interim consolidated financial statements for the period ending September 30, 2011 represent the financial position, results of operations and cash flows of the business transferred to Enerflex on a carve-out basis up to May 31, 2011.
The historical financial statements have been derived from the accounting system of Toromont using the historical results of operations and historical bases of assets and liabilities of the business transferred to Enerflex on a carve-out accounting basis.
As the Company operated as a subsidiary of Toromont up to May 31, 2011 and was a stand-alone entity effective June 1, 2011, certain current period and historical financial information include an allocation of certain Toromont corporate expenses up to the date of the Arrangement.
The carve-out operating results of Enerflex were specifically identified based on Toromont's divisional organization. Certain other expenses presented in the interim consolidated financial statements represent allocations and estimates of services incurred by Toromont.
These financial statements are presented in Canadian dollars rounded to the nearest thousands and are prepared on a going concern basis under the historical cost convention with certain financial assets and financial liabilities at fair value. The accounting policies set out below have been applied consistently in all material respects. Standards and guidelines not effective for the current accounting period are described in Note 4.
These interim consolidated financial statements were authorized for issue by the Board of Directors on November 9, 2011.
(c) Basis of Consolidation
These interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, income and expenses, and unrealized gains and losses resulting from intra-group transactions are eliminated in full.
(d)Significant Accounting Estimates and Judgments
The preparation of the Company's interim consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In the process of applying the Company's accounting policies, management has made the following judgments, estimates and assumptions which have the most significant effect on the amounts recognized in the consolidated financial statements:
-- Revenue Recognition - Long-term Contracts
The Company reflects revenues generated from the assembly and
manufacture of projects using the percentage-of-completion approach of
accounting for performance of production-type contracts. This approach
to revenue recognition requires management to make a number of estimates
and assumptions surrounding the expected profitability of the contract,
the estimated degree of completion based on cost progression and other
detailed factors. Although these factors are routinely reviewed as part
of the project management process, changes in these estimates or
assumptions could lead to changes in the revenues recognized in a given
period.
-- Provisions for Warranty
Provisions set aside for warranty exposures either relate to amounts
provided systematically based on historical experience under contractual
warranty obligations or specific provisions created in respect of
individual customer issues undergoing commercial resolution and
negotiation. Amounts set aside represent management's best estimate of
the likely settlement and the timing of any resolution with the relevant
customer.
-- Property, Plant and Equipment
Fixed assets are stated at cost less accumulated depreciation, including
any asset impairment losses. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives of fixed assets are reviewed on an annual basis.
Assessing the reasonableness of the estimated useful lives of fixed
assets requires judgment and is based on currently available
information. Fixed assets are also reviewed for potential impairment on
a regular basis or whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
Changes in circumstances, such as technological advances and changes to
business strategy can result in actual useful lives and future cash
flows differing significantly from estimates. The assumptions used,
including rates and methodologies, are reviewed on an ongoing basis to
ensure they continue to be appropriate. Revisions to the estimated
useful lives of fixed assets or future cash flows constitute a change in
accounting estimate and are applied prospectively.
-- Impairment of Non-Financial Assets
Impairment exists when the carrying value of an asset or cash generating
unit exceeds its recoverable amount, which is the higher of its fair
value less costs to sell and its value in use. The fair value less costs
to sell calculation is based on available data from binding sales
transactions in an arm's length transaction of similar assets or
observable market prices less incremental costs for disposing of the
asset. The value in use calculation is based on a discounted cash flow
model. The cash flows are derived from the budget for the next five
years and do not include restructuring activities that the Company is
not yet committed to or significant future investments that will enhance
the asset's performance of the cash generating unit being tested. The
recoverable amount is most sensitive to the discount rate used for the
discounted cash flow model as well as the expected future cash inflows
and the growth rate used for extrapolation purposes.
-- Impairment of Goodwill
The Company tests whether goodwill is impaired at least on an annual
basis. This requires an estimation of the value in use of the cash-
generating unit to which the goodwill is allocated. Estimating the value
in use requires the Company to make an estimate of the expected future
cash flows from each cash-generating unit and also to determine a
suitable discount rate in order to calculate the present value of those
cash flows. Impairment losses on goodwill are not reversed.
-- Income Taxes
Uncertainties exist with respect to the interpretation of complex tax
regulations and the amount and timing of future taxable income. Given
the wide range of international business relationships and the long-term
nature and complexity of existing contractual agreements, differences
arising between the actual results and the assumptions made, or future
changes to such assumptions, could necessitate future adjustments to tax
income and expense already recorded. The Company establishes provisions,
based on reasonable estimates, for possible consequences of audits by
the tax authorities of the respective countries in which it operates.
The amount of such provisions is based on various factors, such as
experience of previous tax audits and differing interpretations of tax
regulations by the taxable entity and the responsible tax authority.
Such differences of interpretation may arise on a wide variety of issues
depending on the conditions prevailing in the respective company's
domicile.
Deferred tax assets are recognized for all unused tax losses to the
extent that it is probable that taxable profit will be available against
which the losses can be utilized. Significant management judgment is
required to determine the amount of deferred tax assets that can be
recognized, based upon the likely timing and the level of future taxable
profits together with future tax planning strategies.
-- Assets Held for Sale and Discontinued Operations
The Company's accounting policy related to assets held for sale are
described in Note 3e. In applying this policy, judgment is used in
determining whether certain assets should be reclassified to assets held
for sale on the consolidated statement of financial position. Judgment
is also applied in determining whether the results of operations
associated with the assets should be recorded in discontinued operations
on the consolidated statements of earnings. The Company will reclassify
the results of operations associated with certain assets to discontinued
operations where the asset represents part of a disposal group or
segment.
(e) Assets Held for Sale
Non-current assets and groups of assets and liabilities which comprise disposal groups are categorized as assets held for sale where the asset or disposal group is available for sale in its present condition, and the sale is highly probable. For this purpose, a sale is highly probable if management is committed to a plan to achieve the sale; there is an active program to find a buyer; the non-current asset or disposal group is being actively marketed at a reasonable price; the sale is anticipated to be completed within one year from the date of classification, and; it is unlikely there will be changes to the plan. Non-current assets held for sale and disposal groups are carried at the lesser of carrying amount and fair value less costs to sell. The profit or loss arising on reclassification or sale of a disposal group is recognized in discontinued operations on the statement of earnings.
Note 4. Future Accounting Changes
The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Company:
As of January 1, 2013, the Company will be required to adopt IFRS 9 Financial Instruments; IFRS 10 Consolidated Financial Statements; IFRS 11 Joint Arrangements; IFRS 12 Disclosure of Interest in Other Entities; and IFRS 13 Fair Value Measurement.
IFRS 9 Financial Instruments is the result of the first phase of the IASB's project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Company is in the process of assessing the impact of adopting IFRS 9, if any.
IFRS 10 Consolidated Financial Statements replaces the consolidation requirements in SIC-12 Consolidation-Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. The Standard identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance to assist in the determination of control where this is difficult to assess. The Company is in the process of assessing the impact of adopting IFRS 10, if any.
IFRS 11 Joint Arrangements replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-Controlled Entities - Non-Monetary Contributions by Venturers. IFRS 11 uses some of the terms that were originally used by IAS 31, but with different meanings. This Standard addresses two forms of joint arrangements (joint operations and joint ventures) where there is joint control. The Company is in the process of assessing the impact of adopting IFRS 11, if any.
IFRS 12 Disclosure of Interest in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The Company is in the process of assessing the impact of adopting IFRS 12, if any.
IFRS 13 Fair Value Measurement provides new guidance on fair value measurement and disclosure requirements for IFRS. The Company is in the process of assessing the impact of adopting IFRS 13, if any.
Note 5. Business Acquisition
No businesses were acquired in 2011.
On January 20, 2010, Toromont completed its offer for the units of ESIF.
Toromont paid approximately $315.5 million in cash and issued approximately 11.9 million of Toromont common shares to complete the acquisition. For accounting purposes, the cost of Toromont's common shares issued in the Acquisition was calculated based on the average share price traded on the TSX on the relevant dates.
Prior to the acquisition, Toromont owned 3,902,100 Trust Units which were purchased with cash of $37.8 million ($9.69 per unit). Prior to the date of acquisition, Toromont designated its investment in ESIF as available-for-sale and as a result the units were measured at fair value with the changes in fair value recorded in Other Comprehensive Income ("OCI"). On acquisition, the cumulative gain on this investment was reclassified out of OCI and into the income statement. The fair value of this investment was included in the cost of purchase outlined below. The fair value of these units at January 20, 2010 was $56.4 million, resulting in a pre-tax gain of $18.6 million.
Purchase Price:
Units owned by Toromont prior to Offer $ 56,424
Cash consideration 315,539
Issuance of Toromont common shares 328,105
----------------------------------------------------------------------------
Total $ 700,068
---------------
---------------
The acquisition was accounted for as a business combination using the purchase method of accounting with Enerflex designated as the acquirer of ESIF. Results from ESIF have been consolidated from the acquisition date, January 20, 2010.
Cash used in the investment was determined as follows:
Cash consideration $ 315,539
Less cash acquired (23,006)
----------------------------------------------------------------------------
$ 292,533
---------------
---------------
The purchase cost was allocated to the underlying assets acquired and liabilities assumed based upon their fair value at the date of acquisition. The Company determined the fair values based on discounted cash flows, market information, independent valuations and management's estimates.
The final allocation of the purchase price was as follows:
Purchase price allocation
Cash $ 23,006
Non-cash working capital 125,742
Property, plant and equipment 135,400
Rental equipment 67,587
Other long-term assets 24,315
Intangible assets with a finite life
Customer relationships 38,400
Other 5,700
Long-term liabilities (181,388)
----------------------------------------------------------------------------
Net identifiable assets 238,762
Residual purchase price allocated to goodwill 461,306
----------------------------------------------------------------------------
$ 700,068
---------------
---------------
Non-cash working capital included accounts receivable of $109 million, representing gross contractual amounts receivable of $115 million less management's best estimate of the contractual cash flows not expected to be collected of $6 million.
Factors that contributed to a purchase price that resulted in the recognition of goodwill include: the existing ESIF business; the acquired workforce; time-to-market benefits of acquiring an established manufacturing and service organization in key international markets such as Australia and the Middle East; and the combined strategic value to the Company's growth plan. The amount assigned to goodwill is not expected to be deductible for tax purposes.
Note 6. Assets and Associated Liabilities Held for Sale
In the third quarter of 2011, the Company reclassified its European operations to assets and associated liabilities held for sale upon receiving third-party offers to purchase. As the Combined Heat & Power ("CHP") and Service business within the European region represents a specific operation that management intends to exit, the assets and liabilities have been reclassified to assets and associated liabilities held for sale on the statement of financial position.
Enerflex will continue to sell compression processing equipment in Europe through its sales office in the United Kingdom.
The following table represents the assets and associated liabilities reclassified as held for sale:
September 30,
2011
----------------------------------------------------------------------------
Assets
Cash and cash equivalents $ -
Accounts receivable 6,242
Inventories 6,756
Other current assets 706
Property, plant and equipment 216
Rental equipment -
---------------
Assets held for sale $ 13,920
---------------
---------------
Liabilities
Accounts payable, accrued liabilities and provisions $ 9,984
Deferred revenue 807
Other long-term liabilities -
---------------
Liabilities associated with assets held for sale $ 10,791
---------------
---------------
The carrying value of the assets held for sale was established at the lower of the carrying value and the estimated fair value less costs to sell. As a result, for the three and nine months ended September 30, 2011, an impairment loss of $52.0 million was recognized, which consisted of impairment of goodwill and intangible assets of $31.2 million and $1.8 million, respectively; deferred tax assets of $4.5 million; fair value adjustments of $10.0 million; and anticipated cash transaction costs totalling $4.4 million.
Note 7. Discontinued Operations
As disclosed in Note 6, the Company reclassified its European operations to assets held for sale in the third quarter. As the CHP and Service business within the European region represents a specific operation that management intends to exit, the corresponding revenues and expenses have been reclassified to discontinued operations in the statement of earnings.
Effective February 2011, the Company sold the shares of Enerflex Environmental Australia Pty ("EEA") to a third party, as the business was not considered core to the future growth of the Company. Total consideration received was $3.4 million, net of cash, and resulted in a pre-tax gain of $2.5 million, less tax of $1.1 million.
Effective September 2010, the Company sold certain assets and the operations of Enerflex Syntech, an electrical, instrumentation and controls business, as the business was not considered core to the future growth of the Company.
Total consideration received was $7.0 million, comprised of $3.5 million cash and $3.5 million in note receivable due in twelve equal instalments, plus interest, commencing January 2011. Net assets disposed, including transaction costs, also totalled $7.0 million, comprised of $6.0 million of non-cash working capital and $1.0 million of capital assets.
The following tables summarize the revenues, income (loss) before income taxes, and income taxes from discontinued operations for the three and nine months ended September 30, 2011 and 2010:
Three months ended Three months ended
September 30, 2011 September 30, 2010
Enerflex Enerflex
Europe EEA Syntech Europe EEA Syntech
----------------------------------------------------------------------------
Revenue $ 10,536 $ - $ - $ 6,975 $ 5,631 $ 10,058
(Loss) earnings
from operations $ (2,271) $ - $ - $ (1,599) $ 254 $ (133)
Impairments $(47,502) $ - $ - $ - $ - $ -
Income tax
expense
(recovery) $ (4,507) $ - $ - $ 324 $ 77 $ (34)
Nine months ended Nine months ended
September 30, 2011 September 30, 2010
Enerflex Enerflex
Europe EEA Syntech Europe EEA Syntech
----------------------------------------------------------------------------
Revenue $ 30,680 $ 2,653 $ - $ 24,102 $ 14,113 $ 41,887
(Loss) earnings
from operations $ (6,665) $ (239) $ - $ (3,840) $ (5) $ (2,003)
Impairments $(47,502) $ - $ - $ - $ - $ -
Income tax
expense
(recovery) $ (4,175) $ (75) $ - $ (246) $ - $ (505)
The following table summarizes cash from discontinued operations for the
three and nine months ended September 30, 2011 and 2010:
Three months ended Three months ended
September 30, 2011 September 30, 2010
Enerflex Enerflex
Europe EEA Syntech Europe EEA Syntech
----------------------------------------------------------------------------
Cash from
operations $ 1,263 $ (152) $ - $ 4,338 $ (693) $ 1,446
Cash from
investing $ 82 $ 1,480 $ - $ (4,610) $ 340 $ 7
Cash from
financing $ (1) $ - $ - $ 900 $ - $ -
Nine months ended Nine months ended
September 30, 2011 September 30, 2010
Enerflex Enerflex
Europe EEA Syntech Europe EEA Syntech
----------------------------------------------------------------------------
Cash from
operations $ 7,354 $ (152) $ - $ (3,771) $ 1,053 $ 5,505
Cash from
investing $ (424) $ 1,480 $ - $ (7,582) $ 142 $ (3,306)
Cash from
financing $ (26) $ - $ - $ 900 $ - $ -
Note 8. Accounts Receivable
Accounts receivable consisted of the following:
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Trade receivables $ 197,651 $ 200,382
Less: allowance for doubtful accounts 3,988 6,217
----------------------------------------------------------------------------
Trade receivables, net 193,663 194,165
Other receivables 34,194 49,073
----------------------------------------------------------------------------
Total accounts receivable $ 227,857 $ 243,238
------------------------------
------------------------------
Aging of trade receivables:
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Current to 90 days $ 169,437 $ 182,538
Over 90 days 28,214 17,844
----------------------------------------------------------------------------
$ 197,651 $ 200,382
------------------------------
------------------------------
Movement in allowance for doubtful accounts:
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Balance, beginning of period $ 4,811 $ 4,423 $ 6,217 $ 2,029
Provisions and revisions, net (823) 3,432 (2,229) 5,826
----------------------------------------------------------------------------
Balance, end of period $ 3,988 $ 7,855 $ 3,988 $ 7,855
----------------------------------------
----------------------------------------
Note 9. Inventories
Inventories consisted of the following:
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Equipment $ 15,125 $ 35,171
Repair and distribution parts 30,557 41,611
Direct materials 43,944 53,935
Work-in-process 157,073 92,138
----------------------------------------------------------------------------
Total inventories $ 246,699 $ 222,855
------------------------------
------------------------------
The amount of inventory and overhead costs recognized as an expense and included in cost of goods sold accounted for other than by the percentage-of-completion method during the third quarter of 2011 was $41.8 million (2010 - $52.9 million). The cost of goods sold includes inventory write-down pertaining to obsolescence and aging together with recoveries of past write-downs upon disposition. The net amount charged to the income statement and included in cost of goods sold during the third quarter of 2011 was $0.6 million (2010 - $4.6 million).
The amount of inventory and overhead costs recognized as an expense and included in cost of goods sold accounted for other than by the percentage-of-completion method during the first nine months of 2011 was $161.0 million (2010 - $186.9 million). The cost of goods sold includes inventory write-down pertaining to obsolescence and aging together with recoveries of past write-downs upon disposition. The net amount charged to the income statement and included in cost of goods sold during the first nine months of 2011 was $2.1 million (2010 - $5.6 million).
Note 10. Property, Plant and Equipment and Rental Equipment
Land Building Equipment
----------------------------------------------------------------------------
Cost
January 1, 2011 $ 47,384 $107,845 $ 44,222
Additions - 351 351
Reclassification 2,422 7,810 4,826
Assets held for sale ("AHFS") - - (474)
Impairment of AHFS - (207) (1,355)
Disposals (23,519) (29,816) (2,966)
Currency translation effects 300 1,720 (19)
----------------------------------------------------------------------------
September 30, 2011 $ 26,587 $ 87,703 $ 44,585
Accumulated depreciation
January 1, 2011 $ - $(18,308) $(24,713)
Depreciation charge - (5,185) (5,538)
AHFS - - 258
Impairment of AHFS - 35 670
Disposals - 3,900 586
Currency translation effects - (456) 716
----------------------------------------------------------------------------
September 30, 2011 $ - $(20,014) $(28,021)
----------------------------------------------------------------------------
Net book value-September 30,
2011 $ 26,587 $ 67,689 $ 16,564
---------------------------------------------
---------------------------------------------
Property,
Assets under plant and Rental
construction equipment equipment
----------------------------------------------------------------------------
Cost
January 1, 2011 $ 15,611 $215,062 $132,703
Additions 15,017 15,719 9,183
Reclassification (18,320) (3,262) 3,262
Assets held for sale ("AHFS") - (474) -
Impairment of AHFS - (1,562) (322)
Disposals - (56,301) (8,118)
Currency translation effects 652 2,653 2,022
----------------------------------------------------------------------------
September 30, 2011 $ 12,960 $171,835 $138,730
Accumulated depreciation
January 1, 2011 $ - $(43,021) $(16,541)
Depreciation charge - (10,723) (13,618)
AHFS - 258 -
Impairment of AHFS - 705 98
Disposals - 4,486 2,217
Currency translation effects - 260 (1,486)
----------------------------------------------------------------------------
September 30, 2011 $ - $(48,035) $(29,330)
----------------------------------------------------------------------------
Net book value-September 30,
2011 $ 12,960 $123,800 $109,400
---------------------------------------------
---------------------------------------------
Land Building Equipment
----------------------------------------------------------------------------
Cost
January 1, 2010 $ 13,287 $ 62,214 $ 33,721
Business combinations 31,906 50,741 16,501
Reclassifications - - -
Additions 6,460 3,633 3,126
Disposals (377) (1,852) (6,318)
Currency translation effects (3,892) (6,891) (2,808)
----------------------------------------------------------------------------
December 31, 2010 $ 47,384 $107,845 $ 44,222
Accumulated depreciation
January 1, 2010 $ - $(16,904) $(23,034)
Depreciation charge - (6,589) (9,785)
Disposals - 800 4,564
Currency translation effects - 4,385 3,542
----------------------------------------------------------------------------
December 31, 2010 $ - $(18,308) $(24,713)
----------------------------------------------------------------------------
Net book value-December 31,
2010 $ 47,384 $ 89,537 $ 19,509
---------------------------------------------
---------------------------------------------
Property,
Assets under plant and Rental
construction equipment equipment
----------------------------------------------------------------------------
Cost
January 1, 2010 $ 497 $109,719 $ 69,012
Business combinations 36,252 135,400 67,587
Reclassifications (32,121) (32,121) 32,121
Additions 10,983 24,202 30,062
Disposals - (8,547) (63,138)
Currency translation effects - (13,591) (2,941)
----------------------------------------------------------------------------
December 31, 2010 $ 15,611 $215,062 $132,703
Accumulated depreciation
January 1, 2010 $ - $(39,938) $ (9,870)
Depreciation charge - (16,374) (11,765)
Disposals - 5,364 3,047
Currency translation effects - 7,927 2,047
----------------------------------------------------------------------------
December 31, 2010 $ - $(43,021) $(16,541)
----------------------------------------------------------------------------
Net book value-December 31,
2010 $ 15,611 $172,041 $116,162
---------------------------------------------
---------------------------------------------
During the third quarter of 2011, the Company sold idle manufacturing facilities in Calgary and Stettler, Alberta totaling approximately 406,000 square feet for gross proceeds of $42.9 million. The sale of the Stettler facility closed at the end of July and the sale of the Calgary facility closed in September. The gain on sale of these facilities is reflected in the third quarter statement of earnings.
Note 11. Other Assets
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Investment in associates $ 4,776 $ 3,146
Net investment in sales type lease 7,778 10,651
----------------------------------------------------------------------------
$ 12,554 $ 13,797
------------------------------
------------------------------
The value of the net investment is comprised of the following:
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Minimum future lease payments $ 18,656 $ 23,202
Unearned finance income (850) (1,900)
----------------------------------------------------------------------------
17,806 $ 21,302
Less current portion 10,028 10,651
----------------------------------------------------------------------------
$ 7,778 $ 10,651
------------------------------
------------------------------
The interest rate inherent in the lease is fixed at the contract date for
the entire lease term and is approximately 9% per annum.
Note 12. Intangible Assets
September 30, 2011
Acquired Accumulated Net book
value amortization value
----------------------------------------------------------------------------
Customer relationships $ 36,400 $ 12,232 $ 24,168
Software and other 13,644 7,614 6,030
----------------------------------------------------------------------------
$ 50,044 $ 19,846 $ 30,198
---------------------------------------------
---------------------------------------------
December 31, 2010
Acquired Accumulated Net book
value amortization value
----------------------------------------------------------------------------
Customer relationships $ 38,400 $ 7,658 $ 30,742
Software and other 14,174 5,454 8,720
----------------------------------------------------------------------------
$ 52,574 $ 13,112 $ 39,462
---------------------------------------------
---------------------------------------------
Note 13. Accounts Payable, Accrued Liabilities and Provisions
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 118,479 $ 149,884
Accrued dividend payable 4,633 -
Provisions 13,782 14,538
----------------------------------------------------------------------------
$ 136,894 $ 164,422
------------------------------
------------------------------
Note 14. Long-Term Debt
The Company has, by way of private placement, $90.5 million of Unsecured Notes ("Notes") issued and outstanding. They have different maturities with $50.5 million, with a coupon of 4.841%, maturing on June 22, 2016 and $40.0 million, with a coupon of 6.011%, maturing on June 22, 2021.
The Company has syndicated revolving credit facilities ("Bank Facilities") with an amount available of $325.0 million. The Bank Facilities consist of a committed 4-year $270.0 million revolving credit facility (the "Revolver"), a committed 4-year $10.0 million operating facility (the "Operator"), a committed 4-year $20.0 million Australian operating facility (the "Australian Operator") and a committed 4-year $25.0 million bi-lateral letter of credit facilities (collectively known as the "LC Bi-Lateral"). The Revolver, Operator, Australian Operator and LC Bi-Lateral are collectively referred to as the Bank Facilities. The Bank Facilities were funded on June 1, 2011.
The Bank Facilities have a maturity date of June 1, 2015 ("Maturity Date"), but may be extended annually on or before the anniversary date with the consent of the lenders. In addition, the Bank Facilities may be increased by $50.0 million at the request of the Company, subject to the lenders' consent. There is no required or scheduled repayment of principal until the Maturity Date of the Bank Facilities.
Drawings on the Bank Facilities are available by way of Prime Rate loans ("Prime"), U.S. Base Rate loans, LIBOR loans, and Bankers' Acceptance ("BA") notes. The Company may also draw on the Bank Facilities through bank overdrafts in either Canadian or U.S. dollars and issue letters of credit under the Bank Facilities.
Pursuant to the terms and conditions of the Bank Facilities, a margin is applied to drawings on the Bank Facilities in addition to the quoted interest rate. The margin is established in basis points and is based on consolidated net debt to earnings before interest, income taxes, depreciation and amortization ("EBITDA") ratio. The margin is adjusted effective the first day of the third month following the end of each fiscal quarter based on the above ratio.
The Company also has a committed facility with one of the lenders in the Bank Facilities for the issuance of letters of credit (the "Bi-Lateral"). The amount available under the Bi-Lateral is $50.0 million and has a maturity date of June 1, 2013, which may be extended annually with the consent of the lender. Drawings on the Bi-Lateral are by way of letters of credit.
In addition, the Company has a committed facility with a U.S. lender ("U.S. Facility") in the amount of $20.0 million USD. Drawings on the U.S. Facility are by way of LIBOR loans, US Base Rate loans and letters of credit. The maturity date of the U.S. Facility is July 1, 2014 and may be extended annually at the request of the Company, subject to the lenders consent. There are no required or scheduled repayments of principal until the maturity date of the U.S. Facility.
The Bank Facilities, the Bi-Lateral and the U.S. Facility are unsecured and rank pari passu with the Notes. The Company is required to maintain certain covenants on the Bank Facilities, the Bi-Lateral, the US Facility and the Notes. As at September 30, 2011, the Company was in compliance with these covenants.
At September 30, 2011, the Company had $45.4 million cash drawings against the Bank Facilities. These Bank Facilities were not available at December 31, 2010, as the Company's borrowings consisted of a Note Payable to its parent company.
The composition of the September 30, 2011 borrowings on the Bank Facilities and the Notes was as follows:
September 30 ,
2011
----------------------------------------------------------------------------
Drawings of Bank Facilities $ 45,443
Notes due June 22, 2016 50,500
Notes due June 22, 2021 40,000
Deferred transaction costs (3,047)
----------------------------------------------------------------------------
$ 132,896
---------------
---------------
Canadian dollar equivalent principal payments which are due over the next
five years, without considering renewal at similar terms, are:
2012 $ -
2013 -
2014 -
2015 45,443
2016 50,500
Thereafter 40,000
----------------------------------------------------------------------------
$ 135,943
---------------
---------------
Note 15. Guarantees, Commitments and Contingencies
At September 30, 2011, the Company had outstanding letters of credit of $ 73.5 million (December 31, 2010 - $ 61.2 million).
The Company is involved in litigation and claims associated with normal operations against which certain provisions have been made in the financial statements. Management is of the opinion that any resulting net settlement arising from the litigation would not materially affect the financial position, results of operations or liquidity of the Company.
Aggregate minimum future required lease payments, primarily for operating leases for equipment, automobiles and premises, are $40.5 million payable over the next five years and thereafter as follows:
2011 $ 3,456
2012 9,500
2013 6,908
2014 5,437
2015 4,683
Thereafter 10,535
----------------------------------------------------------------------------
Total $ 40,519
---------------
---------------
In addition, the Company has purchase obligations over the next three years
as follows:
2011 $ 29,300
2012 9,332
2013 998
Note 16. Income Taxes
The provision for income taxes differs from that which would be expected by
applying Canadian statutory rates. A reconciliation of the difference is as
follows:
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Earnings before income taxes $ 22,697 $ 8,700 $ 52,251 $ 28,350
Canadian statutory rate 26.6% 28.1% 26.6% 28.1%
----------------------------------------------------------------------------
Expected income tax provision $ 6,037 $ 2,444 $ 13,899 $ 7,966
Add (Deduct):
Income taxed in foreign
jurisdictions (357) (264) (1,037) 985
Non-taxable portion of gain on
available for sale financial
assets - - - (3,938)
Other 38 1,458 368 1,394
----------------------------------------------------------------------------
Income tax provision $ 5,718 $ 3,638 $ 13,230 $ 6,407
----------------------------------------
----------------------------------------
The composition of the income tax provision is as follows:
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Current taxes $ 5,028 $ 4,380 $ 14,536 $ 8,772
Deferred taxes 690 (742) (1,306) (2,365)
----------------------------------------------------------------------------
Income tax provision $ 5,718 $ 3,638 $ 13,230 $ 6,407
----------------------------------------
----------------------------------------
Note 17. Share Capital
Authorized:
The Company is authorized to issue an unlimited number of common shares.
Issued and Outstanding:
Number of Common
Nine months ended September 30, 2011 common shares share capital
----------------------------------------------------------------------------
Balance, beginning of period - $ -
Bifurcation transaction 77,212,396 205,337
Exercise of stock options 3,000 32
----------------------------------------------------------------------------
Balance, end of period 77,215,396 $ 205,369
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As part of the Arrangement, Toromont shareholders received one share of Enerflex for each common share of Toromont owned. To determine Enerflex's share capital amount, Toromont's stated capital immediately prior to the Arrangement was bifurcated based on the relative fair market value of the property transferred from Toromont to Enerflex ("Butterfly Proportion") at the time of the Arrangement. The Butterfly Proportion was determined to be 56.4% and 43.6% for Toromont and Enerflex, respectively.
Net Investment
For comparative periods, Toromont's Net Investment in Enerflex Ltd. prior to the arrangement is presented as Owner's Net Investment in these interim consolidated financial statements. Total Net Investment consists of Owner's Net Investment, Retained Earnings and Contributed Surplus.
Note 18. Contributed Surplus
As at September 30, 2011:
Contributed surplus, beginning of period $ - Reclassification of net investment on bifurcation transaction 656,500 Share-based compensation 651 ---------------------------------------------------------------------------- Contributed surplus, end of period $ 657,151 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
For comparative periods, contributed surplus was included in the balance of Toromont's Net Investment in Enerflex Ltd.
Note 19. Share-Based Compensation
a) Stock Options
The Company maintains a stock option program for certain employees. Under the plan, up to 7.7 million options may be granted for subsequent exercise in exchange for common shares. It is Company policy that no more than 1% of outstanding shares or approximately 0.8 million share options may be granted in any one year.
The stock option plan entitles the holder to acquire shares of the Company at the strike price, established at the time of the grant, after vesting and before expiry. The strike price of each option equals the weighted average of the market price of the Company's shares on the five days preceding the effective date of the grant. The options have a seven-year term and vest at a rate of one fifth on each of the five anniversaries of the date of the grant.
As part of the Arrangement, Toromont Options were exchanged for new stock options granted by each of Toromont and Enerflex. For each Toromont stock option previously held, option holders received one option in each of Toromont and Enerflex, with the exercise price determined by applying the Butterfly Proportion to the previous exercise price. All other conditions relating to these options, including terms and vesting periods, remained the same and there was no acceleration of option vesting. The Butterfly Proportion was determined to be 56.4% and 43.6% for Toromont and Enerflex, respectively. Stock options outstanding represent options exchanged under the Arrangement and are as follows:
September 30, 2011
Weighted
average
Number of exercise
options price
----------------------------------------------------------------------------
Options outstanding, June 1, 2011 2,030,030 $ 11.35
Granted - -
Exercised (3,000) 10.09
Forfeited (13,160) 11.35
----------------------------------------------------------------------------
Options outstanding, end of period 2,013,870 11.39
------------------------------
Options exercisable, end of period 1,107,590 $ 11.01
------------------------------
The following table summarizes options outstanding and exercisable at
September 30, 2011:
Options Outstanding Options Exercisable
Weighted
average Weighted Weighted
remaining average average
Range of exercise Number life exercise Number exercise
prices outstanding (years) price outstanding price
----------------------------------------------------------------------------
$9.52 - $11.31 1,065,970 2.57 $ 10.17 761,010 $ 10.29
$11.32 - $12.96 947,900 4.55 12.75 346,580 12.57
----------------------------------------------------------------------------
Total 2,013,870 3.50 $ 11.39 1,107,590 $ 11.01
----------------------------------------------------------------------------
No stock options were granted in the first nine months of 2011. The fair value of the stock options granted by Toromont during the first nine months of 2010 was determined at the time of the grant using the Black-Scholes option pricing model.
b) Deferred Share Units
The Company offers a deferred share unit ("DSU") plan for executives and non-employee directors, whereby they may elect on an annual basis to receive all or a portion of their management incentive award or fees, respectively, in deferred share units. In addition, the Board may grant discretionary DSUs to executives. A DSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the implied market value calculated as the number of DSUs multiplied by the closing price of Enerflex shares on the entitlement date.
DSUs may be granted to eligible participants on an annual basis and will generally vest on each of the first three anniversaries of the date of the grant. Vested DSUs are to be settled by the end of the year vesting occurs. The Company may, at its sole discretion, satisfy, in whole or in part, its payment obligation through a cash payment to the participant or by instructing an independent broker to acquire a number of fully paid shares in the open market on behalf of the participant.
DSU recipients are entitled to additional units over and above those initially granted based on the notional number of units that could have been purchased using the proceeds of notional dividends, that would have been received had the units then subject to vesting been actual shares of the Company, following each dividend paid to the Shareholders of the Company. The additional units are calculated with each dividend declared by the Company.
DSUs represent an indexed liability of the Company relative to the Company's share price. In 2011 the Board of Directors did not grant any DSUs to employees of the Company. For the three and nine months ended September 30, 2011, directors fees elected to be received in deferred share units totaled $0.01 million and $0.1 million (three and nine months ended September 30, 2010 - nil).
c) Phantom Share Rights
The Company utilizes a Phantom Share Rights Plan (Share Appreciation Right) ("SAR") for certain directors and key employees of affiliates located in Australia, and the UAE, for whom the Company's Stock Option Plan would have negative personal taxation consequences.
The exercise price of each SAR equals the average of the market price of the Company's shares on the five days preceding the date of the grant. The SARs vest at a rate of one third on each of the first three anniversaries of the date of the grant and expire on the fifth anniversary. The award entitlements for increases in the share trading value of the Company are to be paid to the recipient in cash upon exercise.
In 2011, the Board of Directors did not grant any SARs to directors or employees of the Company.
d) Employee Share Ownership Plan
The Company offers an Employee Share Ownership Plan whereby employees who meet the eligibility criteria can purchase shares by way of payroll deductions. There is a Company match of up to $1,000 per employee per annum based on contributions by the Company of $1 for every $3 contributed by the employee. Company contributions vest to the employee immediately. Company contributions are charged to selling, general and administrative expense when paid. The Plan is administered by a third party.
e) Share-Based Compensation Expense
The share-based compensation expense included in the determination of net income for the three and nine months ended September 30, 2011 was:
Three months ended Nine months ended
September 30, 2011 September 30, 2011
----------------------------------------------------------------------------
Stock options $ 586 $ 651
Deferred share units 62 133
Phantom share units - -
----------------------------------------------------------------------------
Total $ 648 $ 784
---------------------------------------
---------------------------------------
Note 20. Reconciliation of Earnings per Share Calculations
Three months ended September 30, 2011
Weighted
Net (loss) average shares
earnings outstanding Per share
----------------------------------------------------------------------------
Basic $ (37,301) 77,215,396 $ (0.48)
Dilutive effect of stock
option conversion -
----------------------------------------------------------------------------
Diluted $ (37,301) 77,215,396 $ (0.48)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended September 30, 2010
Weighted
average shares
Net earnings outstanding Per share
----------------------------------------------------------------------------
Basic $ 3,217 76,896,069 $ 0.04
Dilutive effect of stock
option conversion 200,428
----------------------------------------------------------------------------
Diluted $ 3,217 77,096,497 $ 0.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended September 30, 2011
Weighted
Net (loss) average shares
earnings outstanding Per share
----------------------------------------------------------------------------
Basic $ (18,055) 77,215,280 $ (0.23)
Dilutive effect of stock
option conversion -
----------------------------------------------------------------------------
Diluted $ (18,055) 77,215,280 $ (0.23)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended September 30, 2010
Weighted
average shares
Net earnings outstanding Per share
----------------------------------------------------------------------------
Basic $ 16,846 75,895,887 $ 0.22
Dilutive effect of stock
option conversion 255,849
----------------------------------------------------------------------------
Diluted $ 16,846 76,151,736 $ 0.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Since Enerflex's shares were issued pursuant to the Arrangement with Toromont to create the Company, per share amounts disclosed for the comparative period are based on Toromont's common shares.
Note 21. Financial Instruments
Designation and Valuation of Financial Instruments
The Company has designated its financial instruments as follows:
September 30, 2011
Carrying Estimated
value fair value
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents(1) $ 52,666 $ 52,666
Derivative instruments designated as fair
value through profit or loss ("FVTPL") 584 584
Derivative instruments in designated hedge
accounting relationships 2,033 2,033
Loans and receivables:
Accounts receivable 227,857 227,857
Financial Liabilities
Derivative instruments designated as FVTPL $ 907 $ 907
Derivative instruments in designated hedge
accounting relationships 2,501 2,501
Other financial liabilities:
Accounts payable, accrued liabilities and
provisions 136,894 136,894
Long-term debt - Bank Facilities 45,443 45,443
Long-term debt - Notes 87,453 89,385
----------------------------------------------------------------------------
(1) Includes $1.0 million of highly liquid short term investments with
maturities of three months or less.
December 31, 2010
Carrying Estimated
value fair value
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents $ 15,000 $ 15,000
Derivative instruments designated as FVTPL - -
Derivative instruments in designated hedge
accounting relationships 448 448
Loans and receivables:
Accounts receivable 243,328 243,328
Financial Liabilities
Derivative instruments designated as FVTPL $ 26 $ 26
Derivative instruments in designated hedge
accounting relationships 577 577
Other financial liabilities:
Accounts payable, accrued liabilities and
provisions 164,422 164,422
Note payable to Toromont 215,000 215,000
Long-term debt - Bank Facilities - -
Long-term debt - Notes - -
----------------------------------------------------------------------------
Fair Values of Financial Assets and Liabilities
The following table presents information about the Company's financial assets and financial liabilities measured at fair value on a recurring basis as at September 30, 2011 and indicates the fair value hierarchy of the valuation techniques used to determine such fair value. During the three-month period ended September 30, 2011, there were no transfers between Level 1 and Level 2 fair value measurements.
Fair
Carrying Value
value Level 1 Level 2 Level 3
----------------------------------------------------------------------------
Financial assets
Derivative financial instruments $ 2,617 $ - $ 2,617 $ -
Financial liabilities
Derivative financial instruments $ 3,408 $ - $ 3,408 $ -
The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability and may affect placement within.
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, other long term liabilities and the note payable to Toromont are reported at their fair values on the statement of financial position. The fair values equal the carrying values for these instruments due to their short-term nature.
The fair value of derivative financial instruments is measured using the discounted value of the difference between the contract's value at maturity based on the contracted foreign exchange rate and the contract's value at maturity based on prevailing exchange rates. The financial institution's credit risk is also taken into consideration in determining fair value.
Long-term debt associated with the Company's Notes is recorded at amortized cost using the effective interest rate method. The amortized cost of the Notes is equal to the face value as there were no premiums or discounts on the issuance of the debt. Transaction costs associated with the debt were deducted from the debt and are being recognized using the effective interest method over the life of the related debt. The fair value of these Notes at September 30, 2011, as determined on a discounted cash flow basis with a weighted average discount rate of 5.24%, was $89.4 million.
Fair values are determined using inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Fair values determined using inputs including forward market rates and credit spreads that are readily observable and reliable, or for which unobservable inputs are determined not to be significant to the fair value, are categorized as Level 2. Foreign exchange contract fair values falling within the Level 2 of the fair value hierarchy include those determined by using a benchmark index and applying that index to the notional amount outstanding.
Derivative Financial Instruments and Hedge Accounting
Foreign exchange contracts and options are transacted with financial institutions to hedge foreign currency denominated obligations related to purchases of inventory and sales of products. The following table summarizes the Company's commitments to buy and sell foreign currencies as at September 30, 2011:
Notional
amount Maturity
----------------------------------------------------------------------------
Canadian dollar denominated
contracts
Purchase contracts USD 34,185 October 2011 to September 2012
EUR 74 November 2011 to March 2012
Sales contracts USD 57,826 October 2011 to September 2012
EUR 5,504 October 2011
Australian dollar denominated
contracts
Purchase contracts USD 1,684 October 2011 to December 2011
EUR 585 October 2011 to February 2012
Management estimates that a gain of $0.8 million would be realized if the contracts were terminated on September 30, 2011. Certain of these forward contracts are designated as cash flow hedges, and accordingly, a loss of $1.5 million has been included in other comprehensive income. These gains are not expected to affect net income as the gains will be reclassified to net income and will offset losses recorded on the underlying hedged items, namely foreign currency denominated accounts payable and accounts receivable.
All hedging relationships are formally documented, including the risk management objective and strategy. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions.
Risks Arising from Financial Instruments and Risk Management
In the normal course of business, the Company is exposed to financial risks that may potentially impact its operating results in any or all of its business segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates and interest rates. The Company does not enter into derivative financial agreements for speculative purposes.
Foreign Currency Risk
In the normal course of operations, the Company is exposed to movements in the U.S. dollar, the Australian dollar, the Euro, the Pakistani rupee and the Indonesian rupiah. In addition, Enerflex has significant international exposure through export from its Canadian operations as well as a number of foreign subsidiaries, the most significant of which are located in the United States, Australia, the Netherlands and the United Arab Emirates. The Company does not hedge its net investment exposure in foreign subsidiaries.
The types of foreign exchange risk and the Company's related risk management strategies are as follows:
Transaction exposure
The Canadian operations of the Company source the majority of its products and major components from the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cost of imported inventory where appropriate.
The Company also sells compression packages in foreign currencies, primarily the U.S. dollar, the Australian dollar and the Euro and enters into foreign currency contracts to reduce these exchange rate risks.
Most of Enerflex's international orders are manufactured in the U.S. operations if the contract is denominated in U.S. dollars. This minimizes the Company's foreign currency exposure on these contracts.
The Company identifies and hedges all significant transactional currency risks.
Translation exposure
The Company's earnings from and net investment in foreign subsidiaries are exposed to fluctuations in exchange rates. The currencies with the most significant impact are the US dollar, Australian dollar and the Euro.
Assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the statement of financial position dates. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in income when there has been a reduction in the net investment in the foreign operations.
Earnings from foreign operations are translated into Canadian dollars each period at average exchange rates for the period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net income. Such exchange rate fluctuations have historically not been material year-over-year relative to the overall earnings or financial position of the Company. The following table shows the effect on net income before tax for the period ended September 30, 2011 of a 5% weakening of the Canadian dollar against the US dollar, Euro and Australian dollar, everything else being equal. A 5% strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis is provided as an indicative range in a volatile currency environment.
Canadian dollar weakens by 5% USD Euro AUD ---------------------------------------------------------------------------- Net earnings before tax $ 2,221 $ (361) $ (748)
Sensitivity Analysis
The following sensitivity analysis is intended to illustrate the sensitivity to changes in foreign exchange rates on the Company's financial instruments and show the impact on net earnings and comprehensive income. Financial instruments affected by currency risk include cash and cash equivalents, accounts receivable, accounts payable and derivative financial instruments. This sensitivity analysis relates to the position as at September 30, 2011 and for the period then ended. The following table shows the Company's sensitivity to a 5% weakening of the Canadian dollar against the U.S. dollar, Euro and Australian dollar. A 5% strengthening of the Canadian dollar would have an equal and opposite effect.
Canadian dollar weakens by 5% USD Euro AUD ---------------------------------------------------------------------------- Financial instruments held in foreign operations Other comprehensive income $ 5,068 $ 525 $ 556 Financial instruments held in Canadian operations Net earnings 164 34 - Other comprehensive income (loss) (14) - -
The movement in other comprehensive income in foreign operations reflects the change in the fair value of financial instruments. Gains or losses on translation of foreign subsidiaries are deferred in other comprehensive income. Accumulated currency translation adjustments are recognized in income when there is a reduction in the net investment in the foreign operation.
The movement in net earnings in Canadian operations is a result of a change in the fair values of financial instruments. The majority of these financial instruments are hedged.
The movement in other comprehensive income in Canadian operations reflects the change in the fair value of derivative financial instruments that are designated as cash flow hedges. The gains or losses on these instruments are not expected to affect net income as the gains or losses will offset losses or gains on the underlying hedged items.
Interest Rate Risk
The Company's liabilities include long-term debt that is subject to fluctuations in interest rates. The Company's Notes outstanding at September 30, 2011 include interest rates that are fixed and therefore will not be impacted by fluctuations in interest rates. The Company's Bank Facilities however, are subject to changes in market interest rates. For each 1% change in the rate of interest on the Bank Facilities, the change in interest expense would be approximately $1.4 million. All interest charges are recorded on the income statement as a separate line item called Finance Costs.
Credit Risk
Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, accounts receivable, net investment in sales type lease, and derivative financial instruments. The carrying amount of assets included on the statement of financial position represents the maximum credit exposure.
Cash equivalents consist mainly of short-term investments, such as money market deposits. The Company has deposited the cash equivalents with highly-rated financial institutions, from which management believes the risk of loss to be remote.
The Company has accounts receivable from clients engaged in various industries including natural gas producers, natural gas transportation, chemical and petrochemical processing and the generation and sale of electricity. These specific industries may be affected by economic factors that may impact accounts receivable. Management does not believe that any single customer represents significant credit risk.
The credit risk associated with the net investment in sales-type leases arises from the possibility that the counterparty may default on their obligations. In order to minimize this risk, the Company enters into sales-type lease transactions only in select circumstances. Close contact is maintained with the customer over the duration of the lease to ensure visibility to issues as and if they arise.
The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly-rated financial institutions.
Liquidity Risk
Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. In managing liquidity risk, the Company has access to a significant portion of its Bank Facilities for future drawings to meet the Company's future growth targets. As of September 30, 2011, the Company had $45.4 million committed against the Bank Facilities, leaving $279.6 million available for future drawings plus cash and cash equivalents of $52.7 million at that date.
A liquidity analysis of the Company's financial instruments has been completed on a maturity basis. The following table outlines the cash flows associated with the maturity of the Company's financial liabilities:
Less Greater
than 3 3 months than 1
months to 1 year year Total
----------------------------------------------------------------------------
Derivative financial instruments
Foreign currency forward contracts $ 3,408 $ - $ - $ 3,408
Other financial liabilities
Accounts payable and accrued
liabilities $136,894 $ - $ - $136,894
Long-term debt - Bank Facilities - - 45,443 45,443
Long-term debt - Notes - - 87,453 87,453
The Company expects that continued cash flows from operations in 2011 together with cash and cash equivalents on hand and credit facilities will be more than sufficient to fund its requirements for investments in working capital, and capital assets.
Dividends
For the three and nine months ended September 30, 2011, the Company declared dividends of $4.6 million and $9.3 million, or $0.06 per share (September 30, 2010 - no dividend declared).
Note 22. Capital Disclosures
The capital structure of the Company consists of shareholders' equity plus net debt. The Company manages its capital to ensure that entities in the Company will be able to continue to grow while maximizing the return to shareholders through the optimization of the debt and equity balances. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, issue new Company shares, or access debt markets.
The Company formally reviews the capital structure on an annual basis and monitors it on an on-going basis. As part of this review, the Company considers the cost of capital and the risks associated with each class of capital. In order to position itself to execute its long-term plan to become a leading supplier of products and services to the global energy sector, the Company is maintaining a conservative statement of financial position. The Company uses the following measures to monitor its capital structure:
Net debt to equity ratio
The Company targets a Net debt to equity ratio of less than 1.00:1. At September 30, 2011, the Net debt to equity was 0.10:1 (December 31, 2010 - 0.24:1), calculated as follows:
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Note payable $ - $ 215,000
Long-term debt 132,896 -
Cash (52,666) (15,000)
----------------------------------------------------------------------------
Net debt $ 80,230 $ 200,000
----------------------------------------------------------------------------
Shareholders'/Owner's equity $ 821,482 $ 839,528
----------------------------------------------------------------------------
Net debt to equity ratio 0.10:1 0.24: 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note 23. Supplemental Cash Flow Information
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Cash provided by (used in)
changes in non-cash working capital
Accounts receivable $ 40,534 $(24,689) $ 10,664 $(62,898)
Inventories (18,983) (7,956) (23,868) 50,853
Accounts and taxes payable, accrued
liabilities and deferred revenue (15,564) 51,047 49,414 57,283
Foreign currency and other (16,348) 14,507 (17,392) (13,434)
----------------------------------------------------------------------------
$(10,361) $ 32,909 $ 18,818 $ 31,804
----------------------------------------
----------------------------------------
Cash paid during the period:
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Interest $ 3,376 $ 10,007 $ 5,739 $ 11,007
Taxes $ 9,588 $ (2,628) $ 21,270 $ (290)
Note 24. Related Parties
Enerflex transacts with certain related parties as a normal course of business. Related parties include Toromont, which owned 100% of Enerflex until June 1, 2011, and Total Production Services Inc. ("Total"), which was an influenced investee by virtue of the Company's 40% investment in Total.
All transactions occurring with both parties were in the normal course of business operations under the same terms and conditions as transactions with unrelated companies. A summary of the financial statement impacts of all transactions with all related parties are as follows:
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Revenue $ 212 $ 20
Management fee expense 4,299 7,920
Purchases 526 1,279
Interest expense 1,902 5,484
Accounts receivable - 61
Accounts payable 92 3,692
Note payable - 215,000
Note 25. Interest in Joint Venture
The Company proportionately consolidates its 50% interest in the assets, liabilities, results of operations and cash flows of its joint venture in Pakistan, Presson-Descon International (Private) Limited. The interest included in the Company's accounts includes:
September 30, December 31,
2011 2010
----------------------------------------------------------------------------
Statement of financial position
Current assets $ 3,614 $ 2,477
Long-term assets 464 518
----------------------------------------------------------------------------
Total assets $ 4,078 $ 2,995
Current liabilities $ 2,717 $ 894
Long-term liabilities and equity 1,361 2,101
----------------------------------------------------------------------------
Total liabilities and equity $ 4,078 $ 2,995
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Statement of earnings
Revenue $ 10 $ 1,173 $ 235 $ 2,267
Expenses 293 1,190 975 2,567
----------------------------------------------------------------------------
Net loss $ (283) $ (17) $ (740) $ (300)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Cash flows
Cash from operations $ 1,443 $ 99 $ 780 $ (1,165)
Cash from investing 49 (423) 15 (455)
Cash from financing - (3) (4) (10)
Note 26. Segmented Information
The Company has three reportable operating segments as outlined below, each supported by the Corporate office. Corporate overheads are allocated to the business segments based on revenue.
The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies. For the nine months ended September 30, 2011, one customer accounted for 16.4% of the Company's total revenue.
Three months ended Canada & Southern US
Northern US & South America
September 30, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $151,514 $147,178 $ 81,119 $ 94,254
Intersegment revenue (23,048) (18,753) (200) (60)
----------------------------------------------------------------------------
External revenue $128,466 $128,425 $ 80,919 $ 94,194
Operating income $ 10,202 $ 295 $ 9,830 $ 10,677
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended International Total
September 30, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 74,488 $ 60,319 $307,121 $301,751
Intersegment revenue (1,538) (12,079) (24,786) (30,892)
----------------------------------------------------------------------------
External revenue $ 72,950 $ 48,240 $282,335 $270,859
Operating income $ 1,923 $ 493 $ 21,955 $ 11,465
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended Canada & Southern US &
Northern US South America
September 30, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $450,426 $337,371 $233,236 $235,052
Intersegment revenue (78,035) (29,803) (565) (151)
----------------------------------------------------------------------------
External revenue $372,391 $307,568 $232,671 $234,901
Operating income $ 26,756 $ 2,849 $ 22,286 $ 24,338
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended International Total
September 30, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $242,702 $198,575 $926,364 $770,998
Intersegment revenue (4,429) (20,877) (83,029) (50,831)
----------------------------------------------------------------------------
External revenue $238,273 $177,698 $843,335 $720,167
Operating income $ 4,536 $ (7,887) $ 53,578 $ 19,300
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canada & Southern US &
Northern US South America
As at Sep 30, Dec 31, Sep 30, Dec 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
Segment assets $486,454 $524,304 $206,251 $222,980
Corporate - - - -
Goodwill 270,046 270,046 56,510 56,510
----------------------------------------------------------------------------
$756,500 $794,350 $262,761 $279,490
----------------------------------------------------------------------------
Assets held for sale - - - -
----------------------------------------------------------------------------
Total segment assets
$756,500 $794,350 $262,761 $279,490
----------------------------------------------------------------------------
----------------------------------------------------------------------------
International Total
As at Sep 30, Dec 31, Sep 30, Dec 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
Segment assets $248,571 $280,482 $ 941,276 $1,027,766
Corporate - - (74,277) (132,866)
Goodwill 124,900 156,100 451,456 482,656
----------------------------------------------------------------------------
$373,471 $436,582 $1,318,455 $1,377,556
----------------------------------------------------------------------------
Assets held for sale 13,920 - 13,920 -
----------------------------------------------------------------------------
Total segment assets $387,391 $436,582 $1,332,375 $1,377,556
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue from foreign countries was:
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Australia $ 47,416 $ 7,632 $127,711 $ 38,057
Netherlands - 6,611 651 24,643
United States 99,183 105,826 264,646 297,764
Other 22,100 47,891 98,812 98,342
Revenue is attributed by destination of sale.
Note 27. Seasonality
The oil and natural gas service sector in Canada has a distinct seasonal trend in activity levels which results from well-site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex's Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while the Service and Rentals product line revenues are stable throughout the year. Rentals revenues are also impacted by both the Company's and its customers capital investment decisions. The international markets are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating.
Note 28. Transition to IFRS
These interim Consolidated Financial Statements have been prepared in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards and with IAS 34, Interim Financial Reporting, as issued by the IASB. Prior to January 1, 2011, the Company prepared its interim and annual financial statements in accordance with pre-changeover Canadian GAAP.
IFRS 1 requires the presentation of comparative information as at the January 1, 2010 transition date and subsequent comparative periods as well as the consistent and retrospective application of IFRS accounting policies. To assist with the transition, the provisions of IFRS allow for certain mandatory and elective exemptions for first-time adopters to alleviate the retrospective application of all IFRS. IFRS had no impact on the Consolidated Statements of Earnings and Comprehensive Income and Cash Flows.
Reconciliation of Equity as Reported under Canadian GAAP to IFRS
The following is a reconciliation of the Company's equity reported in accordance with Canadian GAAP to its equity in accordance with IFRS at the transition date, January 1, 2010, September 30, 2010 and December 31, 2010.
Upon adoption of IFRS the Company elected to reset the cumulative translation adjustment balance to zero.
Consolidated Statement of
Equity
As at January 1, 2010
Canadian
GAAP Reclassification IFRS
----------------------------------------------------------------------------
Net investment
Owner's net investment $ 312,682 $ (14,709) $ 297,973
Accumulated other
comprehensive income 920 14,709 15,629
Non-controlling interest - - -
----------------------------------------------------------------------------
Total net investment and non-
controlling interest $ 313,602 $ - $ 313,602
---------------------------------------------
---------------------------------------------
Consolidated Statement of
Equity
As at September 30, 2010
Canadian
GAAP Reclassification IFRS
----------------------------------------------------------------------------
Net investment
Owner's net investment $ 835,817 $ (14,709) $ 821,108
Accumulated other
comprehensive (loss) income (17,623) 14,709 (2,914)
Non-controlling interest 303 - 303
----------------------------------------------------------------------------
Total net investment and non-
controlling interest $ 818,497 $ - $ 818,497
---------------------------------------------
---------------------------------------------
Consolidated Statement of
Equity
As at December 31, 2010
Canadian
GAAP Reclassification IFRS
----------------------------------------------------------------------------
Net investment
Owner's net investment $ 864,686 $ (14,709) $ 849,977
Accumulated other
comprehensive (loss) income (25,554) 14,709 (10,845)
Non-controlling interest 396 - 396
----------------------------------------------------------------------------
Total net investment and non-
controlling interest $ 839,528 $ - $ 839,528
---------------------------------------------
---------------------------------------------
Reconciliation of the Deferred Tax Assets and Liabilities under Canadian GAAP to IFRS
The following is a reconciliation of the Company's tax assets and liabilities reported in accordance with Canadian GAAP to its tax assets and liabilities in accordance with IFRS at the transition date, January 1, 2010, September 30, 2010 and December 31, 2010.
Upon transition to IFRS the Company reclassified all deferred tax assets and liabilities as non-current.
Consolidated Statement of
Financial Position
As at January 1, 2010
Canadian
GAAP Reclassification IFRS
----------------------------------------------------------------------------
Assets
Current tax assets $ 23,194 $ (23,194) $ -
Deferred tax assets 1,129 18,764 19,893
Liabilities
Current tax liabilities $ - $ - $ -
Deferred tax liabilities 4,430 (4,430) -
----------------------------------------------------------------------------
$ 19,893 $ - $ 19,893
---------------------------------------------
---------------------------------------------
Consolidated Statement of
Financial Position
As at September 30, 2010
Canadian
GAAP Reclassification IFRS
----------------------------------------------------------------------------
Assets
Current tax assets $ 27,352 $ (27,352) $ -
Deferred tax assets 23,184 27,352 50,536
Liabilities
Current tax liabilities $ 296 $ (296) $ -
Deferred tax liabilities 1,914 296 2,210
----------------------------------------------------------------------------
$ 48,326 $ - $ 48,326
---------------------------------------------
---------------------------------------------
Consolidated Statement of
Financial Position
As at December 31, 2010
Canadian
GAAP Reclassification IFRS
----------------------------------------------------------------------------
Assets
Current tax assets $ 29,204 $ (29,204) $ -
Deferred tax assets 18,736 29,204 47,940
Liabilities
Current tax liabilities $ - $ - $ -
Deferred tax liabilities - - -
----------------------------------------------------------------------------
$ 47,940 $ - $ 47,940
---------------------------------------------
---------------------------------------------
Note 29. Subsequent Events
On November 2, 2011, Enerflex was awarded a $228.0 million US contract for the engineering, procurement, construction and commissioning of a gas processing plant to be located in the Sultanate of Oman.
The gas processing plant will produce 90 million standard cubic feet per day of natural gas and 6,000 barrels per day of condensate. The contract includes the supply by Enerflex of all associated equipment including; gas processing and compression equipment, gas/condensate export facilities, produced water treatment, power plant, central control room, electrical substation and associated utilities.
General Electric's ("GE") Gas Engine's Division has recently realigned its channel-to-market strategy and distribution network and as a result, Gas Drive has been notified of GE's Gas Engines interest in extending distribution rights for the Jenbacher natural gas engine and parts product line for all of Canada. This overall network realignment strengthens both Gas Drive's and GE's Gas Engine's ability to meet their customers' needs by providing an unprecedented level of service and support.
Subsequent to September 30, 2011, Enerflex declared the Company's third dividend of $0.06 per share, payable on January 5, 2012, to shareholders of record on December 14, 2011.
Contact Information:
J. Blair Goertzen
President & Chief Executive Officer
403.236.6852
Enerflex Ltd.
D. James Harbilas
Vice-President & Chief Financial Officer
403.236.6857