Enerflex Ltd. (TSX:EFX) ("Enerflex" or the "Company"), a leading supplier of
products and services to the global energy industry, is pleased to report its
unaudited interim financial and operating results for the three and six months
ended June 30, 2011, which were prepared using International Financial Reporting
Standards ("IFRS").
Enerflex became an independently operated and publicly listed company on June 1,
2011 as a result of its spin-off from Toromont Industries Ltd. ("Toromont"). The
transaction was implemented by way of a plan of arrangement. Toromont
shareholders received one common share of Enerflex for each common share of
Toromont. Enerflex's shares began trading on the Toronto Stock Exchange ("TSX")
on June 3, 2011.
"Enerflex reported improved second quarter and first-half results, which include
an increase of 387% in first-half operating income as well as stronger gross
margin in both periods," said J. Blair Goertzen, Enerflex's President and CEO.
"These results benefitted significantly from the recognition of approved change
orders in MENA totaling $16.5 million in the first six months, increased sales
in all segments and by realizing the cost benefits of our operational
rationalization, which is ongoing."
Financial Highlights(1)
Three Months Ended June 30
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$ millions, except per share amounts and
percentages (unaudited) 2011 2010 $ change
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Revenue $ 254.7 $ 254.0 $ 0.7
Gross margin $ 47.7 $ 43.8 $ 3.9
Gross margin% 18.7 17.3
Operating income (2) $ 13.5 $ 7.9 $ 5.6
Operating income %(2) 5.3 3.1
EBITDA $ 24.8 $ 18.9 $ 5.9
EBITDA% 9.7 7.4
Net earnings $ 9.4 $ 2.8 $ 6.6
Earnings per share $ 0.12 $ 0.04 $ 0.08
Dividends per share $ 0.06 $ - $ 0.06
Six Months Ended June 30
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$ millions, except per share amounts and
percentages (unaudited) 2011 2010 $ change
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Revenue $ 581.1 $ 466.4 $ 114.7
Gross margin $ 104.0 $ 73.4 $ 30.6
Gross margin% 17.9 15.7
Operating income (2) $ 27.2 $ 5.6 $ 21.6
Operating income %(2) 4.7 1.2
EBITDA - normalized(3) $ 50.3 $ 25.9(2) $ 24.4
EBITDA% 8.7 5.6
Net earnings - normalized(3) $ 19.2 $ (2.0) $ 21.2
Earnings per share $ 0.25 $ 0.18 $ 0.07
Dividends per share $ 0.06 $ - $ 0.06
(1) Results through May 31, 2011 have been prepared on a carve out basis.
(2) Operating margin provides the net margin contributions made from the
Company's core businesses after considering all selling, general and
administrative expenses. Operating margin is a non-GAAP measure that
does not have a standardized meaning prescribed by GAAP and therefore is
unlikely to be comparable to similar measures presented by other
issuers.
(3) Normalized for gain on sale of $18.6 million ($15.6 million net of tax)
related to Toromont's acquisition of Enerflex Systems Income Fund.
Second Quarter and First Half Highlights
In the three and six months ended June 30, 2011, Enerflex:
-- Generated revenue of $254.7 million compared to $254.0 million in the
second quarter of 2010. The increase of $0.7 million was a result of
increased revenue in the International segment as a result of an
approved change order in MENA, partially offset by decreased revenues in
two of the Company's business segments (Canada and Northern U.S., and
Southern U.S. and South America). First half revenues were $581.1
compared to $466.4 during the same period of the prior year;
-- Achieved a gross margin of $47.7 million or 18.7% compared to $43.8
million or 17.3% during the same period last year, an increase of $3.9
million. Gross margin for the first half of the year totalled $104.0
million or 17.9%, an increase of 41.7% over the same period of the prior
year and benefitted from approved change orders in MENA, which
contributed $16.5 million to gross margin;
-- Achieved operating income of $13.5 million or 5.3% of revenue, from $7.9
million or 3.1% in the second quarter of 2010. Operating income for the
first half of the year was $27.2 million or 4.7% of revenue, an increase
of $21.6 million from the first half of 2010;
-- Generated second quarter EBITDA of $24.8 million, an increase of $5.9
million over the second quarter of 2010. Normalized EBITDA for the first
half of 2011 was $50.3 million, an increase of $24.4 million over the
first half of 2010;
-- Increased backlog to $722.3 million at June 30, 2011 compared to $393.1
million at June 30, 2010, an increase of 83.7% over the prior year.
Backlog at June 30, 2011 increased by $76.1 million or 11.8% over
December 31, 2010;
-- Secured access to credit facilities totalling $375 million with a
syndicate of Canadian chartered banks, leaving available credit capacity
of approximately $200 million;
-- Repaid indebtedness to Toromont of $173.3 million incurred as a result
of the spin-off from Toromont;
-- Completed a private placement of $90.5 million in unsecured notes; and
-- Exited the second quarter with net debt of $129.1 million which includes
cash on hand of $54.3 million.
Subsequent to the end of the second quarter of 2011, Enerflex:
-- Sold idle manufacturing facilities in Calgary and Stettler, Alberta
totalling 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 is scheduled to close in
September 2011; and
-- Declared the Company's second dividend of $0.06 per share, payable on
October 4, 2011 to shareholders of record on September 12, 2011.
Financial Results
Enerflex's $0.7 million or 0.3% period-over-period increase in revenue to $254.7
million in the second quarter of 2011 was a result of decreased overall revenues
within the Americas regions. Canada and Northern U.S. revenues decreased by $0.9
million from the same period of last year, while Southern U.S. and South America
revenues saw a decrease in revenue of $4.7 million. The International segment
increased revenues by $6.2 million to $90.7 million from $84.5 million in 2010.
During the first six months of 2011, the Company generated $581.1 million in
revenue as compared to $466.4 million in the same period of 2010, a result of
increased revenues in all three business segments. Canada and Northern U.S.
revenues increased by $64.8 million. Southern U.S. and South America revenues
increased by $11.1 million. Revenues in the International segment increased by
$38.9 million and benefitted from change orders related to past projects in
MENA.
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) from
continuing operations totalled $50.3 million in the first half of 2011, an
increase of 94.2% over $25.9 million in the prior year's period.
Gross margin of $47.7 million represented an increase of 8.9% over the second
quarter of 2010 as a result of improved margins on contracts awarded, better
than expected performance on certain projects and the recognition of revenue
associated with past projects. Gross margin for the six months ended June 30,
2011 was $104.0 million or 17.9% of revenue as compared to $73.4 million or
15.7% of revenue for the six months ended June 30, 2010, an increase of $30.6
million. Gross margins also benefitted from change orders related to past
projects in MENA, contributing $16.5 million.
Backlog at June 30, 2011 increased to $722.3 million from $393.1 million at June
30, 2010, an 83.7% increase over the comparable quarter's end. Backlog at June
30, 2011 increased by $76.1 million or 11.8% over December 31, 2010 backlog.
These increases are a result of increased activity in unconventional natural gas
basins, liquids-rich gas basins in the United States and various coal seam gas
to liquefied natural gas projects in Australia.
During the quarter, Enerflex also took measures that have substantially
strengthened its balance sheet. The new $375 million credit facilities are
unsecured and have a term of four years, enabling Enerflex to allocate capital
in a way best-suited to lever its pursuit of growth opportunities around the
world. In addition, Enerflex closed its current negotiations for a private
placement of $90.5 million in senior, unsecured notes. These steps complement
Enerflex's growing revenue, greater operating efficiency and improved margins,
resulting in substantial strengthening of the Company's overall financial
position.
"With our Company's increased backlog and enhanced financial flexibility,
Enerflex is well-positioned to deliver improved results through the balance of
2011 and into 2012," said Mr. Goertzen. "In particular, we are continuing to
focus on operational rationalization that will further reduce costs and make us
more competitive in bidding on and executing projects worldwide."
Enerflex's consolidated financial statements as at and for the three and six
months ended June 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,
August 11, 2011 at 9:00 a.m. MDT (11:00 a.m. EDT) to discuss the Company's 2011
second quarter results. The call will be hosted by Mr. Goertzen.
If you wish to participate in this conference call, please call, 1.877.240.9772
or 1.416.340.8530. Please dial in 10 minutes prior to the start of the call. No
passcode is required. A live audio webcast of the conference call will be
available on the Enerflex website at www.enerflex.com under the Investor
Relations section on August 11, 2011 at 9:00 a.m. MDT (11:00 a.m. EDT).
Approximately one hour after the call, a recording of the event will be
available on the Company's website.
A replay of the teleconference will be available one hour after the conclusion
of the call until midnight, August 18, 2011. Please call 1.800.408.3053 or
1.905.694.9451 and enter passcode 6358267.
About Enerflex
Enerflex Ltd. is the 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 2,800 employees.
Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate
in Canada, the United States, Argentina, Colombia, Australia, the Netherlands,
the United Kingdom, Germany, Pakistan, the United Arab Emirates, Egypt, Oman 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' 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") should be read in conjunction
with the unaudited interim consolidated financial statements and the
accompanying notes to the interim consolidated financial statements for the
three and six months ended June 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.
The MD&A has been prepared taking into consideration information that is
available up to August 9, 2011 and focuses on key statistics from the
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 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.
("Enerflex" or "the Company") 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 analysis
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; 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 Industries Ltd. to integrate 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 shareholder approval, satisfactory
tax rulings and opinions from the Canada Revenue Agency and approval by the
Ontario Superior Court of Justice (Commercial List). The approved Arrangement
created 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.
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, CO(2) processing plants, refrigeration systems and power
generators serving the natural gas production industry.
Headquartered in Calgary, Canada, Enerflex has approximately 2,800 employees
worldwide. Enerflex, its subsidiaries, interests in affiliates and
joint-ventures operate in Canada, the United States, Argentina, Colombia,
Australia, the Netherlands, the United Kingdom, Germany, Pakistan, the United
Arab Emirates, Egypt, Oman 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 half of 2011, Enerflex continued to see improved bookings in
all regions, including successful bids on large projects in the U.S. and in
MENA. Manufacturing and service activity levels have increased in all regions,
with the largest increase coming in Canada. North American rental utilization
levels were challenged throughout 2010, however, utilization rates have
increased slightly through the first half of the year. MENA has also contributed
positively to the bottom line through the first half 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, totaling $16.5 million.
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Three months ended Six months ended
June 30, June 30,
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(unaudited)(thousands) 2011 2010 2011 2010(1)
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Revenue
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Canada & Northern U.S. 101,627 102,494 243,925 179,143
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Southern U.S. and South America 62,413 67,050 151,752 140,707
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International 90,698 84,478 185,466 146,585
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Total revenue 254,738 254,022 581,143 466,435
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Gross margin 47,699 43,835 103,963 73,364
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Selling, general & administrative
expenses 34,222 35,926 76,733 67,770
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Operating income 13,477 7,909 27,230 5,594
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Gain on available for sale assets - - - (18,627)
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Gain on sale of assets (619) (795) (1,361) (45)
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Equity (earnings) loss (309) 27 (510) (190)
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Earnings before interest & taxes 14,405 8,677 29,101 24,456
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Finance costs and income 1,603 3,992 3,940 7,047
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Income before taxes 12,802 4,685 25,161 17,409
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Income tax expense 3,442 1,623 7,181 2,199
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Gain on sale of discontinued
operations - - 1,430 -
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Losses from discontinued operations - (298) (164) (1,581)
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Net earnings 9,360 2,764 19,246 13,629
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FINANCIAL HIGHLIGHTS
Key ratios:
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Gross margin as a % of revenues 18.7 17.3 17.9 15.7
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Selling, general & administrative
expenses as a % of revenues 13.4 14.1 13.2 14.5
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Operating income as a % of revenues 5.3 3.1 4.7 1.2
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Income taxes as a % of earnings
before income taxes 26.9 34.6 28.5 12.6
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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 Six months ended
June 30, June 30,
----------------------------------------------------------------------------
(unaudited)(thousands) 2011 2010 2011 2010(1)
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EBITDA
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Earnings before interest & income
taxes 14,405 8,677 29,101 24,456
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Depreciation and amortization 10,356 10,231 21,235 20,068
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EBITDA 24,761 18,908 50,336 44,524
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EBITDA(2) - normalized 24,761 18,908 50,336 25,897
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Cash flow
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Cash flow from operations 17,067 9,969 33,878 12,660
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Non-cash working capital and other 28,698 (27,799) 29,127 (535)
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Cash flow 45,765 (17,830) 63,005 12,125
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(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
(2) EBITDA is normalized for the net impact of the gain on available for
sale assets of $18,627. Prior to the acquisition of Enerflex Systems
Income Fund ("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 Generally Accepted Accounting Principles ("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.
Free cash flow may fluctuate on a quarterly basis due to seasonal cash flows,
capital expenditures incurred, income taxes paid, and interest costs on
outstanding debt.
FOR THE THREE MONTHS ENDED JUNE 30, 2011
During the second quarter of 2011, the Company generated $ 254.7 million in
revenue, as compared to $254.0 million in the second quarter of 2010. The
increase of $0.7 million was a result of increased revenue in the International
segment partially offset by decreased revenues in Canada and Northern US, and
Southern US and South America. As compared to the three month period ended June
30, 2010:
-- Canada and Northern U.S. revenues decreased by $0.9 million as a result
of lower Rental revenue, partially offset by higher Service revenue;
-- Southern U.S. and South America revenues decreased by $4.7 million, as a
result of decreased engineered systems activity levels in 2011, which
was partially offset by increased Service revenues; and
-- International revenues increased by $6.2 million as a result of
increased revenue in Australia, the recognition of revenue on approved
change orders related to a past project in MENA, partially offset by
closing the International C&P manufacturing facility in the third
quarter of 2010 and the transfer of bookings and backlog related to that
facility to Enerflex's other two segments.
Gross margin for the three months ended June 30, 2011 was $47.7 million or 18.7%
of revenue as compared to $43.8 million or 17.3% of revenue for the three months
ended June 30, 2010, an increase of $3.9 million. Contributing to the gross
margin increase over the second quarter of 2010 was strong gross margin
performance in Canada and Northern U.S., as a result of improved plant
utilization; improved gross margin performance in the International business
segment, as a result of revenue recognized on approved change orders related to
a past project, which contributed $7.0 million to gross margin, partially offset
by lower margins in the Southern U.S. and South America segment as a result of
lower revenues.
Selling, general and administrative ("SG&A") expenses were $34.2 million or
13.4% of revenue during the three months ended June 30, 2011, compared to $35.9
million or 14.1% of revenue in the same period of 2010. The $1.7 million
decrease in SG&A expenses is primarily attributable to reduced costs resulting
from integration initiatives and continued cost control efforts.
Operating income assists the reader in understanding the net contributions made
from the Company's core businesses after considering all SG&A expenses and the
impact of the foreign exchange hedging strategy. During the second quarter of
2011, Enerflex produced an operating income of $13.5 million or 5.3% of revenue
as compared to operating income of $7.9 million or 3.1% of revenue in 2010. The
increase in operating income in the second 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 totaled $1.6 million for the three months ended June 30, 2011,
compared with $4.0 million in the same period of 2010, a decrease of $2.4
million. Finance costs in 2011 were lower than those in 2010 primarily as a
result of lower interest expense, which is a direct result of lower average
borrowings and a lower effective interest rate.
Income tax expense totaled $3.4 million for the three months ended June 30, 2011
compared with an expense of $1.6 million in the same period of 2010. The
period-over-period increase in income taxes in the second quarter of 2011
compared to 2010 was primarily due to an increase in earnings before taxes from
operations.
During the second quarter of 2011, Enerflex generated net earnings from
continuing operations of $9.4 million as compared to $3.1 million in the same
period of 2010.
Loss from discontinued operations reflects the results of Enerflex Environmental
Pty Ltd. ("Environmental"), and Enerflex Syntech. These items, in addition to
the above, contributed to net earnings of $9.4 million and $2.8 million in the
second 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 to the oil & gas industries,
focusing in Canada and Northern U.S.; 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 & gas
industries focusing on Southern and Eastern U.S. as well as South America
3. International is comprised of four divisions:
- AustralAsia division provides process construction for gas and power
facilities, compression package assembly and mechanical service for the oil &
gas industry. This division wholly owns EFX Global KL Sdn Bhd, which provides
engineering and estimating services to the AustralAsia operations;
- Europe division provides combined heat and power ("CHP") generator products
and mechanical service to the oil & gas industry and the CHP product line;
- 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 & 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. In addition, the division has a 50% joint venture
interest in PDIL in Pakistan.
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 generations systems. Combined Heat and Power
Systems are predominantly an International region product line. Engineered
Systems' product line tends to be more cyclical with respect to revenue, gross
margin and income before interest and income taxes than Enerflex's other
business segments. Revenues are derived primarily from the investments made in
natural gas infrastructure by producers.
Service product line includes support services, labour and parts sales, to the
oil and gas industry as well as the CHP industry in our International region.
Enerflex, through various business units, is an authorized distributor for
Waukesha engines and parts in Canada, Alaska, Northern U.S., Australia,
Indonesia, Papua New Guinea, the Netherlands, Germany and Spain. 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 June 30,
----------------------------------------------------------------------------
(unaudited)(thousands) 2011 2010
----------------------------------------------------------------------------
Segment revenue 155,355 108,662
Intersegment revenue (53,728) (6,168)
----------------------------------------------------------------------------
Revenue 101,627 102,494
----------------------------------------------------------------------------
Revenue - Engineered Systems 47,088 47,677
----------------------------------------------------------------------------
Revenue - Service 46,574 39,288
----------------------------------------------------------------------------
Revenue - Rental 7,965 15,529
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating income 9,720 5,020
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment revenues as a % of total revenues 39.9 40.3
Service revenues as a % of segment revenues 45.8 38.3
Operating income as a % of segment revenues 9.6 4.9
----------------------------------------------------------------------------
Revenues in this region were $101.6 million for the second quarter of 2011 and
comprised 39.9% of consolidated revenue. This compared to $102.5 million and
40.3% of consolidated revenue for the same period of 2010. The decrease of $0.9
million was the result of slightly lower Engineered Systems revenues due to
timing of revenue recognition on projects and lower rental revenue, as a result
of fewer rental units being sold in the second quarter of 2011. This was
partially offset by increased activity in the Service business in Canada and
Wyoming.
Operating income increased by $4.7 million to $9.7 million in 2011 from $5.0
million in 2010. This increase was the result of the increased gross margin
performance as a result of improved plant utilization and higher parts sales in
Service. This was partially offset by higher SG&A as a result of the transfer of
staff to the Domestic C&P facility resulting from the closure of the
International C&P facility in the third quarter of 2010.
SOUTHERN U.S. AND SOUTH AMERICA
Three months ended June 30,
----------------------------------------------------------------------------
(unaudited)(thousands) 2011 2010
----------------------------------------------------------------------------
Segment revenue 62,642 67,129
Intersegment revenue (229) (79)
----------------------------------------------------------------------------
Revenue 62,413 67,050
----------------------------------------------------------------------------
Revenue - Engineered Systems 50,001 58,600
----------------------------------------------------------------------------
Revenue - Service 12,412 8,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating income 4,252 9,606
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment revenues as a % of total revenues 24.5 26.4
Service revenues as a % of segment revenues 19.9 12.6
Operating income as a % of segment revenues 6.8 14.3
----------------------------------------------------------------------------
Southern U.S. and South America revenues totaled $62.4 million in the second
quarter of 2011 as compared to $67.1 million in the second quarter of 2010. This
decrease of $4.7 million was the result of delayed delivery dates on equipment
related to Engineered Systems booking activity in late 2010, deferring revenue
to the second half of 2011. This was partially off set by stronger Service
revenues, as a result of higher activity levels in the unconventional shale
plays in the U.S.
Operating income decreased from $9.6 million in the second quarter of 2010 to
$4.3 million in the second quarter of 2011, as a result of lower revenues due to
timing of revenue recognition, and lower gross margin as a result of
under-applied overhead and lower awarded margins compared to 2010.
INTERNATIONAL
Three months ended June 30,
----------------------------------------------------------------------------
(unaudited)(thousands), 2011 2010
----------------------------------------------------------------------------
Segment revenue 91,440 89,396
Intersegment revenue (742) (4,918)
----------------------------------------------------------------------------
Revenue 90,698 84,478
----------------------------------------------------------------------------
Revenue - Engineered Systems 67,283 65,654
----------------------------------------------------------------------------
Revenue - Service 16,151 18,523
----------------------------------------------------------------------------
Revenue - Rental 7,264 301
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating loss (495) (6,717)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment revenues as a % of total revenues 35.6 33.3
Service revenues as a % of segment revenues 17.8 21.9
Operating loss as a % of segment revenues (0.5) (8.0)
----------------------------------------------------------------------------
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 Enerflex Environmental Australia business, which was
sold in the first quarter of 2011 for a gain of $1.4 million net of tax. These
two discontinued operations recorded a loss before tax totaling $0.4 million in
the second quarter of 2010, $2.1 million for the first six months of 2010 and
$0.2 million loss for the first six months of 2011.
Revenues for 2011 increased by $6.2 million to $90.7 million from $84.5 million
in the second quarter of 2010. The increase was due to higher activity levels in
Australia related to Coal Seam Gas ("CSG") projects, the recognition of revenue
on approved change orders related to a past project in MENA and the BP Oman
project beginning operations in late 2010. This was partially offset by lower
Compression and Power ("C&P") revenue as a result of the closure of the
International C&P business in late 2010, with its backlog and future
opportunities transferred to plants in Casper, Wyoming and Houston, Texas.
Operating loss for the second quarter of 2011 was $0.5 million, $6.2 million
better than the second quarter of 2010. Operating income improved as a result of
increased revenues, improved margin performance in the MENA division, and lower
SG&A costs in this segment as a result of the closure of the International C&P
facility. This was partially offset by weaker financial performance in the
Australian and European operations in the International segment. These
operations have not performed as expected during the second quarter of 2011 as a
result of macro economic issues in Europe, project delays, cost over-runs and
impairment of work in process incurred on specific projects in Australia due to
weather related delays in Queensland. These regions have had a material negative
impact on the operating results of this segment.
BOOKINGS AND BACKLOG
The Company records bookings and backlog when a firm commitment is received from
customers for the Engineered Systems product line. Backlog represents
unfulfilled orders at period end and is an indicator of future Engineered
Systems revenue for the Company.
Bookings Six months ended June 30,
(unaudited)(thousands) 2011 2010(1)
----------------------------------------------------------------------------
Canada and Northern U.S. 153,638 $ 94,127
Southern U.S. and South America 201,499 157,586
International(2) 119,860 239,422
----------------------------------------------------------------------------
Total bookings 474,997 $ 491,135
------------------------------
------------------------------
(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 June 30,
(unaudited)(thousands) 2011 2010
----------------------------------------------------------------------------
Canada and Northern U.S. 151,379 $ 101,943
Southern U.S. and South America 211,225 173,766
International 359,727 117,366
----------------------------------------------------------------------------
Total backlog 722,331 $ 393,075
------------------------------
------------------------------
Backlog at June 30, 2011 was $722.3 million compared to $393.1 million at June
30, 2010, representing an 84% increase over the prior year. As compared to
December 31, 2010, backlog at June 30, 2011 increased by $76.1 million or 12%.
FOR THE SIX MONTHS ENDED JUNE 30, 2011
During the first six months of 2011, the Company generated $ 581.1 million in
revenue, as compared to $466.4 million in the same period of 2010. The increase
of $114.7 million, or 24.6%, was a result of increased revenues in all three
business segments. As compared to the six month period ended June 30, 2010:
-- Canada and Northern U.S. revenues increased by $64.8 million as a result
of increased engineered systems volumes related to the Montney and
Horn Rive unconventional resource basins, and increased parts sales in
our service business;
-- Southern U.S. and South America revenues increased by $11.0 million, a
result of strong bookings in 2010 and increased activity levels in 2011
in the Eagleford and Marcellus resource basins;
-- International revenues increased by $38.9 million as a result of
increased revenues in Australia due to CSG projects, the recognition of
revenue on approved change orders related to past projects in MENA and
the commencement of commercial operations of the BP project in that
region. This was partially offset by lower revenues in our European
region as a result of the macro economic issue being experienced on that
continent.
The first two quarters of 2011 includes six full months of activity, whereas the
first two quarters of 2010 includes six full months of activity for the legacy
Toromont Compression business and five months and 9 days activity of the legacy
ESIF business.
Gross margin for the six months ended June 30, 2011 was $104.0 million or 17.9%
of revenue as compared to $73.4 million or 15.7% of revenue for the six months
ended June 30, 2010, an increase of $30.6 million. Contributing to the gross
margin increase over the first six months of 2010 was strong gross margin
performance in Canada and Northern U.S as a result of improved plant
utilization, improved rental utilization rates, stronger parts sales; and
improved gross margin performance in the International business segment, 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. Southern U.S.
and South America, gross margin remained flat compared to the same period in
2010.
Selling, general and administrative expenses were $76.7 million or 13.2% of
revenue during the six months ended June 30, 2011, compared to $67.8 million or
14.5% of revenue in the same period of 2010. The increase of $8.9 million in
SG&A expenses is primarily attributable to a full six months of costs in 2011,
compared to 2010, which included SG&A costs for the legacy Enerflex business for
only five months and 9 days.
Operating income for 2011 was $27.2 million or 4.7% of revenue as compared to an
operating income of $5.6 million or 1.2% 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 totaled $3.9 million for the six months ended June 30, 2011,
compared with $7.0 million in the same period of 2010, a decrease of $3.1
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 $7.2 million for the six months ended June 30, 2011
compared with an expense of $2.2 million in the same period of 2010. The
period-over-period increase in income taxes in the first half of 2011 compared
to 2010 was primarily due to an increase in earnings before taxes from
operations. 2010 earnings included an $18.6 million gain realized on ESIF units,
which was taxed at a lower effective rate.
During the first half of 2011, Enerflex generated net earnings from continuing
operations of $18.0 million as compared to $15.2 million in the same period of
2010, which included the $17.2 million, net of tax gain realized on the ESIF
units.
Loss on discontinued operations reflect the results of Environmental, including
the gain on the sale of Environmental of $1.4 million, net of tax, in the first
six months of 2011, and Enerflex Syntech. In the first six months of 2010,
Enerflex reported a gain of $18.6 million ($17.2 million net of tax) related to
the sale of ESIF units purchased prior to the acquisition. These items, in
addition to the above, contributed to net earnings of $19.2 million and $13.6
million in the first half of 2011 and 2010 respectively.
CANADA AND NORTHERN U.S.
Six months ended June 30,
----------------------------------------------------------------------------
(unaudited)(thousands) 2011 2010(1)
----------------------------------------------------------------------------
Segment revenue 298,913 190,193
Intersegment revenue (54,988) (11,050)
----------------------------------------------------------------------------
Revenue 243,925 179,143
----------------------------------------------------------------------------
Revenue - Engineered Systems 140,024 79,686
----------------------------------------------------------------------------
Revenue - Service 85,799 73,242
----------------------------------------------------------------------------
Revenue - Rental 18,102 26,215
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating income 16,554 2,554
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment revenues as a % of total revenues 42.0 38.4
Service revenues as a % of segment revenues 35.2 40.9
Operating income as a % of segment revenues 6.8 1.4
----------------------------------------------------------------------------
(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
Revenues in this region were $243.9 million in 2011 and comprised 42.0% of
consolidated revenue for the first six months of 2011. This compared to $179.1
million and 38.4% of consolidated revenue for the same period of 2010. The
increase of $64.8 million was the result of increased engineered systems
revenues due to higher backlog exiting 2010 and 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 fewer unit sales in 2011. 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 $16.6 million in the first half of 2011, an increase of
$14.0 million from the first half of 2010. The improved performance was due to
increased gross margin resulting from improved plant utilization and higher
parts sales, partially off set by higher SG&A as a result of a full six months
of expenses in this segment compared to 5 months and 9 days in 2010 and the
transfer of staff to the Domestic C&P facility resulting from the closure of the
International C&P facility in the third quarter of 2010.
SOUTHERN U.S. AND SOUTH AMERICA
Six months ended June 30,
----------------------------------------------------------------------------
(unaudited)(thousands) 2011 2010
----------------------------------------------------------------------------
Segment revenue 152,117 140,798
Intersegment revenue (365) (91)
----------------------------------------------------------------------------
Revenue 151,752 140,707
----------------------------------------------------------------------------
Revenue - Engineered Systems 130,327 123,731
----------------------------------------------------------------------------
Revenue - Service 21,425 16,976
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating income 12,456 13,661
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment revenues as a % of total revenues 26.1 30.2
Service revenues as a % of segment revenues 14.1 12.1
Operating income as a % of segment revenues 8.2 9.7
----------------------------------------------------------------------------
Southern U.S. and South America revenues totaled $151.7 million for the first
six months of 2011 as compared to $140.7 million in the same period of 2010.
This increase of $11.0 million was the result of strong booking activity as the
Southern U.S. and South America region continues to add to its backlog for 2011,
and stronger service activity levels.
Operating income decreased to $12.5 million in the first six months of 2011 from
$13.7 million in the same period of 2010, as a result of lower gross margin
percentages due to under-applied overhead in the second quarter and lower
awarded margins in the six month period.
INTERNATIONAL
Six months ended June 30,
----------------------------------------------------------------------------
(unaudited)(thousands), 2011 2010(1)
----------------------------------------------------------------------------
Segment revenue 188,359 155,383
Intersegment revenue (2,893) (8,798)
----------------------------------------------------------------------------
Revenue 185,466 146,585
----------------------------------------------------------------------------
Revenue - Engineered Systems 140,202 114,053
----------------------------------------------------------------------------
Revenue - Service 35,495 32,231
----------------------------------------------------------------------------
Revenue - Rental 9,769 301
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating loss (1,780) (10,621)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Segment revenues as a % of total revenues 31.9 31.4
Service revenues as a % of segment revenues 19.1 22.0
Operating loss as a % of segment revenues (1.0) (7.2)
----------------------------------------------------------------------------
(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
Revenues for 2011 increased by $38.9 million to $185.5 million from $146.6
million in the first six months of 2010. The increase was due to higher activity
levels in Australia related to CSG projects, the recognition of revenue on
approved change orders related to past projects in MENA and the BP Oman project
beginning operations in late 2010. This was offset by lower C&P revenue as a
result of the closure of the International C&P business in late 2010, with its
backlog and future opportunities transferred to plants in Casper, Wyoming and
Houston, Texas.
Operating loss for the first six months of 2011 was $1.8 million, $8.8 million
better than the same period of 2010. Operating income improved as a result of
increased revenues, improved margin performance in the MENA division due to
factors discussed above, partially offset by higher SG&A costs in this segment
from three less weeks of operations in 2010 as a result of the acquisition of
ESIF.
This was partially offset by weaker financial performance in the Australian and
European operations in the International segment. These operations have not
performed as expected during the first half of 2011 as a result of macro
economic issues in Europe and project delays, cost over-runs and impairment of
work in process on specific projects in Australia due to weather related delays
in Queensland.
QUARTERLY SUMMARY
----------------------------------------------------------------------------
Quarter ended Net Earnings Earnings per share
(unaudited)(thousands) Revenue earnings per share - diluted
----------------------------------------------------------------------------
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 9,454 0.12 0.12
----------------------------------------------------------------------------
September 30, 2010(2) 277,834 3,216 0.04 0.04
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
September 30, 2009(2),(3) 150,179 10,120 0.16 0.16
----------------------------------------------------------------------------
(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 June 30, 2011 as compared to December 31, 2010:
----------------------------------------------------------------------------
Increase /
($millions) (decrease) Explanation
----------------------------------------------------------------------------
Assets:
----------------------------------------------------------------------------
Accounts receivable 25.2 Increase is due to higher revenues in
the Canada & Northern U.S and
International business segments.
----------------------------------------------------------------------------
Inventory 4.9 Increase is primarily related to higher
work in progress and repair and
distribution parts, partially offset by
decreases in finished goods and direct
material inventory.
----------------------------------------------------------------------------
Other current assets (6.3) Decrease is primarily due to lower
prepaid assets
----------------------------------------------------------------------------
Property, plant and (10.7) Decrease is primarily due to
equipment depreciation charges for the quarter, as
well as the sale of non-core land and
buildings. This was partially offset by
additions to property plant & equipment.
----------------------------------------------------------------------------
Rental equipment (4.5) Decrease is primarily related to
depreciation charges and the sale of
equipment during the first quarter,
partially offset by rental asset
additions during the quarter.
----------------------------------------------------------------------------
Intangible assets (5.1) Decrease is attributable to amortization
of intangible assets primarily related
to the ESIF acquisition for the first
half of 2011.
----------------------------------------------------------------------------
Liabilities:
----------------------------------------------------------------------------
Accounts payable and (7.1) Decrease is primarily related to payment
accrued liabilities of year-end performance incentives
----------------------------------------------------------------------------
Deferred revenue 68.4 High activity levels have resulted in
progress billings exceeding revenue
recognized for the first six months.
----------------------------------------------------------------------------
Note payable (215.0) The Note has been repaid to Toromont
during the second quarter.
----------------------------------------------------------------------------
Long-term debt 183.4 New debt facility has been established
by Enerflex during the second quarter
----------------------------------------------------------------------------
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 Six months ended
June 30, June 30,
(unaudited)(thousands) 2011 2010 2011 2010(1)
----------------------------------------------------------------------------
Cash, beginning of period 28,573 15,000 15,000 34,949
Cash provided from (used) in:
Operating activities 45,765 (17,830) 63,005 12,125
Investing activities 3,147 (11,276) 5,314 (310,339)
Financing activities (23,289) 25,555 (28,812) 275,884
Exchange rate changes on foreign
currency cash 59 3,551 (252) 2,381
Cash, end of period 54,255 15,000 54,255 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 June 30, 2011, cash provided by operating activities
was $45.8 million as compared to cash used in operating activities of $17.8
million in the same period of 2010. Increased operating results and a
significant improvement in non-cash working capital resulted in the increase in
cash provided by operating activities.
For the six months ended June 30, 2011, cash provided by operating activities
was $63.0 million as compared to $12.1 million in the same period of 2010. The
increase was due to increased operating results, higher depreciation and
amortization and a significant improvement in non-cash working capital.
Investing Activities
Investing activities provided $3.1 million and $5.3 million of cash for the
three and six months ended June 30, 2011 respectively, as compared to cash used
in investing activities of $11.3 million and $310.3 million in the same periods
of 2010. Expenditures on capital assets for the three months ended June 30, 2011
decreased $9.1 million from the same quarter of 2010 while proceeds from the
disposition of capital assets in 2011 increased in the second quarter of 2011 by
$3.3 million as a result of the disposition of non core real estate assets. For
the six months ended June 30, 2011, additions decreased by $14.2 million while
dispositions increased by $3.2 million over the comparable period in 2010 as a
result of the disposition of non core real estate and equipment. The disposal of
the Environmental business contributed an additional $3.4 million in the first
quarter of 2011, while the acquisition of ESIF in the first quarter of 2010
resulted in an investment of $292.5 million.
Financing Activities
Cash used in financing activities for the three and six months ended June 30,
2011 was $23.3 million and $28.8 million respectively, as compared to cash
provided in financing of $25.6 million and $275.9 million 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.
Net Capital Spending
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
(unaudited)(thousands) 2011 2010 2011 2010(1)
----------------------------------------------------------------------------
Net capital spending $ (3,147) $ 11,276 $ (1,925) $ 17,806
----------------------------------------------------------------------------
(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
Net capital spending for the second quarter of 2011 was $(3.1) million, as
compared to $11.3 million in 2010. The change was primarily the result of the
disposal of non-core land and buildings, and lower investments in fixed assets
and the rental fleet.
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 loss of $8.8 million at June 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 appreciated by
1% against the U.S. dollar in the second quarter of 2011 versus a depreciation
of 4% against the U.S. dollar during the same period of 2010. The Australian
dollar appreciated by 3% against the Canadian dollar during the second quarter
of 2011, as compared to a 3% depreciation in the same period of 2010. The Euro
appreciated by 2% against the Canadian dollar during the second quarter of 2011,
as compared to a depreciation of 5% 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 Private Placement Notes outstanding at June 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 $1.9 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 August 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 second quarter of 2011, the Company
declared a dividend of $0.06 per share.
During the second quarter of 2011, the Company negotiated 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 USD million. Drawings on the US Facility are
by way of LIBOR loans, US Base Rate Loans and letters of credit. The Company is
currently in the process of negotiating an extension 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.
At June 30, 2011, the Company had $95.3 million drawn against the Facility. This
facility was 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 Less than one
Obligations year 2-3 years 4-5 years Thereafter Total
----------------------------------------------------------------------------
Leases 7,551 20,485 12,206 11,391 51,633
Purchase obligations 31,183 8,182 - - 39,365
----------------------------------------------------------------------------
Total 38,734 28,667 12,206 11,391 90,998
----------------------------------------------------------------------------
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:
June 30, December 31,
2011 2010
-------------------------------
Revenue $ 163 $ 20
Management Fees 4,598 7,920
Purchases 760 1,279
Interest expense 1,902 5,484
Accounts receivable - 61
Accounts payable 330(1) 3,692
Note payable - 215,000
(1) Although Toromont ceased to be a related party on June 1, 2011, related
party accounts payable includes $211 of management fees payable to
Toromont at June 30, 2011
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 six months ended June 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 three months ended June
30, 2011, which were prepared on a carve-out basis for the first five months of
2011 and consolidated basis as at June 30, 2011.
Deferred Financing Costs
Costs associated with the issuance of long-term debt are deferred and amortized
by the effective interest method over the term of the debt. The unamortized cost
is included in long-term debt in the consolidated statement of financial
position. The amortization is included in interest expense.
Share-Based Payments
The Company's share-based compensation plans are described in Note 19 to the
interim consolidated financial statements.
Stock Options: Certain employees of the Company participate in the Company's
Stock Option Plan. Stock options have a seven-year term, vest 20% cumulatively
on each anniversary date of the grant and are exercisable at the designated
common share price, which is fixed at prevailing market prices of the common
shares at the date the option is granted.
The Company uses the fair value method of accounting for stock options issued.
The value of options is determined using the Black-Scholes option pricing model
and the best estimate of the number of stock options that will ultimately vest.
The fair value of each tranche is charged to income over its respective vesting
period. Consideration paid by employees on exercise of stock options is credited
to shareholder's capital, along with the related value previously expensed.
Deferred Share Units: Deferred Share Units ("DSUs") represent indexed
liabilities of the Company relative to the Company's share price.
During the vesting period, the Company records, as a compensation expense, an
allocated portion of the market value of the number of units expected to vest
under the plan. DSUs granted vest on a graded basis, subject to the continued
employment of the employee and the passage of a predetermined period of time, as
set by the Board of Directors. During the vesting period, the compensation
expense is recognized based on management's best estimate of the number of DSUs
expected to vest based on management's best estimates of whether the criteria
will be met. The accrued liability is adjusted to reflect current unit value at
each period end, through a charge to compensation expense, and allocated between
current and long-term liabilities based on when the amount becomes payable.
Phantom Shares: The Company maintains a Phantom Share (Share Appreciation
Rights) ("SARs") Plan for certain directors and key employees of affiliates
located in Australia, the United Arab Emirates ("UAE") and the Netherlands for
whom the Company's Stock Option Plan would have negative personal taxation
consequences.
SARs represent an indexed liability of the Company relative to the Company's
share price.
During the vesting period, the Company records as a compensation expense an
allocated portion of the difference between the market value of the number of
rights expected to vest under the plan and the strike prices of those rights
based on management's best estimate of the number of rights expected to
ultimately vest. The accrued liability is marked to market at each period end,
through a charge to compensation expense.
Earnings per Share ("EPS")
Basic EPS is calculated by dividing the net earnings available to common
shareholders by the weighted average number of common shares outstanding during
the year, excluding shares purchased by the Company and held as treasury shares.
Diluted EPS is calculated using the treasury stock method, which assumes that
all outstanding stock option grants are exercised, if dilutive, and the assumed
proceeds are used to purchase the Company's common shares at the average market
price during the year.
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.
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.
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.
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. IFRS 11 is
effective January 1, 2013 and the Company is in the process of assessing the
impact of adopting IFRS 11.
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.
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.
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 June 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
Subsequent to June 30, 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 is scheduled to close in
September 2011.
Subsequent to June 30, 2011, the Company declared dividends of $0.06 per share,
payable on October 4, 2011, to shareholders of record on September 12, 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.
The Canada and Northern U.S. region is experiencing 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 is also experiencing improved
bookings and backlog during the first and second quarter 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.
The International region continues to hold a lot of opportunity and experienced
strong bookings and backlog through the first half 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 see several opportunities for similar projects in Oman for equipment and
service work. Domestic demand for gas in this region remains strong and we are
well positioned to compete for 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. As
a result, the focus has expanded to the Oil & Gas industry and industrial power
generation applications for our products. Enerflex's European operations are
focusing on CHP and power generation growth opportunities in Russia, Turkey,
Italy, Poland and Germany, targeting industrial applications in these countries.
Oil & Gas opportunities will be targeted to the U.K. and Netherlands.
ENERFLEX LTD.
INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION
June 30, December 31,
(unaudited)($ thousands) 2011 2010
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 54,255 $ 15,000
Accounts receivable (Note 7) 268,391 243,238
Inventories (Note 8) 227,716 222,855
Income taxes receivable 121 1,944
Derivative financial instruments (Note 20) 1,083 448
Other current assets 15,695 22,013
----------------------------------------------------------------------------
Total current assets 567,261 505,498
----------------------------------------------------------------------------
Property, plant and equipment (Note 9) 161,358 172,041
Rental equipment (Note 9) 111,636 116,162
Deferred tax assets 48,150 47,940
Other assets (Note 10) 11,125 13,797
Intangible assets (Note 11) 34,325 39,462
Goodwill 482,656 482,656
----------------------------------------------------------------------------
Total assets $ 1,416,511 $ 1,377,556
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable, accrued liabilities and
provisions (Note 12) $ 157,342 $ 164,422
Income taxes payable 2,755 7,135
Deferred revenues 218,705 150,319
Derivative financial instruments (Note 20) 668 603
Note payable - 215,000
----------------------------------------------------------------------------
Total current liabilities 379,470 537,479
----------------------------------------------------------------------------
Long-term debt (Note 13) 183,391 -
Other long-term liabilities 192 549
----------------------------------------------------------------------------
Total liabilities 563,053 538,028
Guarantees, Commitments and Contingencies (Note 14)
Shareholders' Equity
Owner's net investment - 849,977
Share capital (Note 16) 205,369 -
Contributed surplus (Note 17) 656,565 -
Retained earnings 275 -
Accumulated other comprehensive loss (8,831) (10,845)
----------------------------------------------------------------------------
Total shareholders' equity before non-
controlling interest 853,378 839,132
Non-controlling interest 80 396
----------------------------------------------------------------------------
Total shareholders' equity and non-
controlling interest 853,458 839,528
----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,416,511 $ 1,377,556
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
ENERFLEX LTD.
INTERIM CONSOLIDATED INCOME STATEMENT
Three Months Six Months
(Unaudited) ($ thousands, ended June 30, ended June 30,
except share amounts) 2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues $ 254,738 $ 254,022 $ 581,143 $ 466,435
Cost of goods sold 207,039 210,187 477,180 393,071
----------------------------------------------------------------------------
Gross margin 47,699 43,835 103,963 73,364
Selling and administrative
expenses 34,222 35,926 76,733 67,770
----------------------------------------------------------------------------
Operating income 13,477 7,909 27,230 5,594
Gain on disposal of
property, plant & equipment (619) (795) (1,361) (45)
Gain on available-for-sale
financial assets (Note 5) - - - (18,627)
Equity (earnings) loss from
affiliates (309) 27 (510) (190)
----------------------------------------------------------------------------
Earnings before finance
costs and income taxes 14,405 8,677 29,101 24,456
Finance costs 2,072 4,046 4,692 7,149
Finance income (469) (54) (752) (102)
----------------------------------------------------------------------------
Earnings before income taxes 12,802 4,685 25,161 17,409
Income taxes (Note 15) 3,442 1,623 7,181 2,199
----------------------------------------------------------------------------
Net earnings from continuing
operations 9,360 3,062 17,980 15,210
Gain on sale of discontinued
operations (Note 6) - - 1,430 -
Loss from discontinued
operations (Note 6) - (298) (164) (1,581)
----------------------------------------------------------------------------
Net earnings $ 9,360 $ 2,764 $ 19,246 $ 13,629
------------------------------------------------
------------------------------------------------
Earnings attributable to:
Controlling interest $ 9,681 $ 2,679 $ 19,562 $ 13,556
Non-controlling interest $ (321) $ 85 $ (316) $ 73
Earnings per share - basic
(Note 19)
Continuing operations $ 0.12 $ 0.04 $ 0.23 $ 0.20
Discontinued operations $ - $ - $ 0.02 $ (0.02)
Earnings per share - diluted
(Note 19)
Continuing operations $ 0.12 $ 0.04 $ 0.23 $ 0.20
Discontinued operations $ - $ - $ 0.02 $ (0.02)
Weighted average number of
shares 77,214,913 76,881,262 77,214,913 75,381,981
See accompanying Notes to the Consolidated Financial Statements
ENERFLEXLTD.
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited) ($ thousands)
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Net earnings $ 9,360 $ 2,764 $19,246 $13,629
Other comprehensive income (loss):
Change in fair value of
derivatives designated as cash
flow hedges, net of income tax
expense (recovery) (2011 - $283;
2010 - ($6)) 139 (583) 728 (16)
Gain on derivatives designated as
cash flow hedges transferred to
net income in the current period,
net of income taxes (2011 - $133;
2010 - $27) (426) (72) (342) (70)
Unrealized gain (loss) on
translation of financial
statements of foreign operations 4,781 6,642 1,628 (2,740)
Reclassification to net income of
gain on available for sale
financial assets as a result of
business acquisition, net of
income taxes (2011 - nil ; 2010 -
$3,090) - - - (15,615)
----------------------------------------------------------------------------
Other comprehensive income (loss) 4,494 5,987 2,014 (18,441)
----------------------------------------------------------------------------
Comprehensive income (loss) $ 13,854 $ 8,751 $ 21,260 $ (4,812)
----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
ENERFLEX LTD.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended Six months ended
June 30 June 30
(unaudited) ($ thousands) 2011 2010 2011 2010
----------------------------------------------------------------------------
Operating activities
Net earnings $ 9,360 $ 2,764 $ 19,246 $ 13,629
Items not requiring cash and cash
equivalents
Depreciation and amortization 10,356 10,231 21,235 20,068
Equity (earnings) loss from
affiliates (309) 27 (510) (190)
Deferred income taxes (1,787) (2,276) (2,327) (2,193)
Gain on sale of:
Discontinued operations (Note 6) - - (2,471) -
Rental equipment, property, plant
and equipment (619) (777) (1,361) (27)
Available for sale assets on
acquisition of control - - - (18,627)
Stock option expense 66 - 66 -
----------------------------------------------------------------------------
17,067 9,969 33,878 12,660
Net change in non-cash working
capital and other 28,698 (27,799) 29,127 (535)
----------------------------------------------------------------------------
Cash provided (used in) by operating
activities 45,765 (17,830) 63,005 12,125
----------------------------------------------------------------------------
Investing activities
Business acquisition, net of cash
acquired
(Note 5) - - - (292,533)
Additions to:
Rental equipment (4,549) (12,660) (8,561) (16,397)
Property, plant and equipment (5,143) (6,182) (7,539) (13,927)
Proceeds on disposal of:
Rental equipment 1,256 7,410 3,231 9,521
Property, plant and equipment 9,492 - 12,122 2,584
Disposal of discontinued operations,
net of cash (Note 6) - - 3,389 -
Decrease in other assets 2,091 156 2,672 413
----------------------------------------------------------------------------
Cash provided by (used in) investing
activities 3,147 (11,276) 5,314 (310,339)
----------------------------------------------------------------------------
Financing activities
(Repayment of) proceeds from note
payable (206,680) 20,982 (215,000) 227,417
Proceeds from (repayment of) long-
term debt 183,391 - 183,391 (164,811)
Equity from parent - 4,573 2,797 213,278
----------------------------------------------------------------------------
Cash (used in) provided by financing
activities (23,289) 25,555 (28,812) 275,884
----------------------------------------------------------------------------
Effect of exchange rate changes on
cash denominated in foreign
currency 59 3,551 (252) 2,381
Increase (decrease) in cash and cash
equivalents 25,682 - 39,255 (19,949)
Cash and cash equivalents at
beginning of period 28,573 15,000 15,000 34,949
----------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 54,255 $ 15,000 $ 54,255 $ 15,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow information (Note 22)
See accompanying Notes to the Consolidated Financial Statements
ENERFLEX LIMITED
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Foreign
Currency
Net Share Contributed Retained Translation
($ thousands) Investment capital Surplus earnings Adjustments
---------------------------------------------------------
At January 1, 2010 297,973 -
---------------------------------------------------------
Net earnings 26,434
Non-controlling
interest on
acquisition -
Other comprehensive
income - (10,901)
Owner's
Investment/
Dividends 525,570
---------------------------------------------------------
At December 31,
2010 849,977 (10,901)
---------------------------------------------------------
Net earnings 14,654
Other comprehensive
income (2,463)
Owner's
Investment/
Dividends (2,794)
---------------------------------------------------------
At May 31, 2011 861,837 - - - (13,364)
---------------------------------------------------------
Bifurcation
transaction (861,837) 205,337 656,500
Net earnings 4,908
Other comprehensive
income (309)
Effect of share
based payment
plans 32 65
Dividends (4,633)
---------------------------------------------------------
At June 30, 2011 - 205,369 656,565 275 (13,673)
---------------------------------------------------------
Total
Available- accumulated
Cash for-sale other Non-
Flow financial comprehensive controlling
($ thousands) Hedges assets income interest Total
---------------------------------------------------------
At January 1, 2010 14 15,615 15,629 - 313,602
---------------------------------------------------------
Net earnings (135) 26,299
Non-controlling
interest on
acquisition 531 531
Other comprehensive
income 42 (15,615) (26,474) (26,474)
Owner's
Investment/
Dividends 525,570
---------------------------------------------------------
At December 31,
2010 56 - (10,845) 396 839,528
---------------------------------------------------------
Net earnings (289) 14,365
Other comprehensive
income 4,892 - 2,429 2,429
Owner's
Investment/
Dividends (2,794)
---------------------------------------------------------
At May 31, 2011 4,948 - (8,416) 107 853,528
---------------------------------------------------------
Bifurcation
transaction -
Net earnings (27) 4,881
Other comprehensive
income (106) (415) (415)
Effect of share
based payment
plans 97
Dividends (4,633)
---------------------------------------------------------
At June 30, 2011 4,842 (8,831) 80 853,458
---------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited) (Thousands of dollars, except per share amount)
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") to integrate Enerflex's products and services with Toromont's
existing Compression and Power, Production and Processing, Revamps and Service
divisions. During the first quarter of 2010, the operations of Toromont Energy
Systems Inc., a subsidiary of Toromont Industries Ltd., were combined with the
operations of Enerflex Systems Income Fund to form Enerflex Ltd.
Headquartered in Calgary, the registered office is located at 904, 1331 Macleod
Trail SE, Calgary, Canada. Enerflex has approximately 2,800 employees worldwide.
Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate
in Canada, the United States, Argentina, Colombia, Australia, the Netherlands,
the United Kingdom, Germany, Pakistan, the United Arab Emirates, Oman, Egypt and
Indonesia.
These consolidated financial statements include the legacy natural gas and
process compression business (Toromont Energy Systems, subsequently renamed
Enerflex Ltd.) as well as the acquired business of ESIF from the date of
acquisition, January 20, 2010. Toromont completed its acquisition of ESIF on
January 20, 2010 and therefore the 2010 comparatives contain results for the
legacy ESIF starting January 20, 2010.
Note 2. Background and Basis of Presentation
Background
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 in each of Enerflex
and New Toromont in exchange for each Toromont share held.
Enerflex became an independently operated and publicly listed company on June 1,
2011 as a result of its spin-off from Toromont Industries Ltd. Toromont's
consolidated financial results for the period ended June 30, 2011 include the
financial results of Enerflex as a business segment of Toromont up to May 31,
2011. Enerflex's shares began trading on the TSX on June 3, 2011.
In the second quarter of 2011, Enerflex entered into a transitional services
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 transitional services
agreement will expire one year from the arrangement date. This 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. However, subsequent to the Arrangement, 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 six month
periods ended June 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 month period ended March 31, 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
six month periods ended June 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 June 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 basis 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 only for the month of June 2011, the current period and
historical financial statements 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
Audit Committee of the Board of Directors on August 10, 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.
Non-controlling interests represent the portion of net earnings and net assets
that is not held by the Company and are presented separately within equity in
the consolidated statement of financial position.
(d) Significant Accounting Estimates and Judgments
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 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.
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.
(e) Deferred Financing Costs
Costs associated with the issuance of long-term debt are deferred and amortized
by the effective interest method over the term of the debt. The unamortized cost
is included in long-term debt in the consolidated statement of financial
position. The amortization is included in interest expense.
(f) Share-Based Payments
The Company's share-based compensation plans are described in Note 18.
Stock Options: Certain employees of the Company participate in the Company's
Stock Option Plan. Stock options have a seven-year term, vest 20% cumulatively
on each anniversary date of the grant and are exercisable at the designated
common share price, which is fixed at prevailing market prices of the common
shares at the date the option is granted.
The Company uses the fair value method of accounting for stock options issued.
The value of options is determined using the Black-Scholes option pricing model
and the best estimate of the number of stock options that will ultimately vest.
The fair value of each tranche is charged to income over its respective vesting
period. Consideration paid by employees on exercise of stock options is credited
to shareholders' capital, along with the related value previously expensed.
Deferred Share Units: Deferred Share Units ("DSUs") represent indexed
liabilities of the Company relative to the Company's share price.
During the vesting period, the Company records, as a compensation expense, an
allocated portion of the market value of the number of units expected to vest
under the plan. DSUs granted vest on a graded basis, subject to the continued
employment of the employee and the passage of a predetermined period of time, as
set by the Board of Directors. During the vesting period, the compensation
expense is recognized based on management's best estimate of the number of DSUs
expected to vest based on management's best estimates of whether the criteria
will be met. The accrued liability is adjusted to reflect current unit value at
each period end, through a charge to compensation expense, and allocated between
current and long-term liabilities based on when the amount becomes payable.
Phantom Shares: The Company maintains a Phantom Share (Share Appreciation
Rights) ("SARs") Plan for certain directors and key employees of affiliates
located in Australia, the United Arab Emirates ("UAE") and the Netherlands for
whom the Company's Stock Option Plan would have negative personal taxation
consequences.
SARs represent an indexed liability of the Company relative to the Company's
share price.
During the vesting period, the Company records as a compensation expense an
allocated portion of the difference between the market value of the number of
rights expected to vest under the plan and the strike prices of those rights
based on management's best estimate of the number of rights expected to
ultimately vest. The accrued liability is marked to market at each period end,
through a charge to compensation expense.
(g) Earnings per Share ("EPS")
Basic EPS is calculated by dividing the net earnings available to common
shareholders by the weighted average number of common shares outstanding during
the year.
Diluted EPS is calculated using the treasury stock method, which assumes that
all outstanding stock option grants are exercised, if dilutive, and the assumed
proceeds are used to purchase the Company's common shares at the average market
price during the year.
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. IFRS 11 is
effective January 1, 2013 and 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. IFRS 12 is effective January 1, 2013 and 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. IFRS 13 is effective January 1, 2013 and
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 the second quarter of 2011.
On January 20, 2010, the Company completed its offer for the units of Enerflex
Systems Income Fund ("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, Europe 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. Discontinued Operations
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
Syntech Enerflex, 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 installments, plus
interest, commencing January 2011. Net assets disposed, including transaction
costs, also totaled $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 six months ended
June 30, 2011 and 2010:
Three months Three months
ended June 30, 2011 ended June 30, 2010
-----------------------------------------------------------
Net (Loss)
Net Loss Income Income Income
Revenue Before Tax Tax Revenue Before Tax Tax
-----------------------------------------------------------
Syntech Enerflex $ - $ - $ - $ 17,596 $ (718) $ 182
EEA $ - $ - $ - $ 7,283 $ 342 $ (104)
Six months Six months
ended June 30, 2011 ended June 30, 2010
-----------------------------------------------------------
Net Loss Income Net Loss Income
Revenue Before Tax Tax Revenue Before Tax Tax
-----------------------------------------------------------
Syntech Enerflex $ - $ - $ - $ 31,829 $ (1,870) $ 471
EEA $ 2,653 $ (239) $ 75 $ 8,482 $ (259) $ 77
Note 7. Accounts Receivable
Accounts receivable consisted of the following:
June 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Trade receivables $ 219,720 $ 200,382
Less: allowance for doubtful accounts 4,811 6,217
----------------------------------------------------------------------------
Trade receivables, net 214,909 194,165
Other receivables 53,482 49,073
----------------------------------------------------------------------------
Total accounts receivable $ 268,391 $ 243,238
----------------------------------------------------------------------------
Aging of trade receivables:
June 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Current to 90 days $ 207,846 $ 182,538
Over 90 days 11,874 17,844
----------------------------------------------------------------------------
$ 219,720 $ 200,382
----------------------------------------------------------------------------
Movement in allowance for doubtful accounts:
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Balance, beginning of period $ 6,757 $ 2,709 $ 6,217 $ 2,029
Provisions and revisions, net (1,946) 1,714 (1,406) 2,394
----------------------------------------------------------------------------
Balance, end of period $ 4,811 $ 4,423 $ 4,811 $ 4,423
----------------------------------------------------------------------------
Note 8. Inventories
Inventories consisted of the following:
June 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Equipment $ 14,874 $ 35,171
Repair and distribution parts 58,371 41,611
Direct materials 31,346 53,935
Work in progress 123,125 92,138
----------------------------------------------------------------------------
Total Inventories $ 227,716 $ 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 second quarter of 2011 was $67.0 million (2010 - $80.9
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 second quarter of 2011 was $1.5 million (2010 - $0.8
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 half of 2011 was $135.3 million (2010 - $146.0 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 half of 2011 was $1.6 million (2010 - $1.0 million).
Note 9. Property, Plant and Equipment and Rental Equipment
Land Building Equipment
----------------------------------------------------------------------------
Cost
January 1, 2011 $ 47,384 $107,845 $ 44,222
Additions - 329 1,812
Disposals (3,994) (6,168) (1,501)
Currency translation effects (204) (1,093) 2,401
----------------------------------------------------------------------------
June 30, 2011 $ 43,186 $100,913 $ 46,934
Accumulated Depreciation
January 1, 2011 - (18,308) (24,714)
Depreciation charge - (3,563) (3,360)
Disposals - 523 356
Currency translation effects - 251 (1,909)
----------------------------------------------------------------------------
June 30, 2011 - (21,097) (29,627)
----------------------------------------------------------------------------
Net book value - June 30, 2011 $ 43,186 $ 79,816 $ 17,307
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Property,
Assets Under Plant and Rental
Construction Equipment Equipment
----------------------------------------------------------------------------
Cost
January 1, 2011 $ 15,611 $ 215,062 $ 132,703
Additions 5,398 7,539 8,561
Disposals - (11,663) (4,714)
Currency translation effects 40 1,144 (405)
----------------------------------------------------------------------------
June 30, 2011 $ 21,049 $212,082 $ 136,145
Accumulated Depreciation
January 1, 2011 - (43,022) (16,541)
Depreciation charge - (6,923) (8,700)
Disposals - 879 1,254
Currency translation effects - (1,658) (522)
----------------------------------------------------------------------------
June 30, 2011 - (50,724) (24,509)
----------------------------------------------------------------------------
Net book value - June 30, 2011 $ 21,049 $ 161,358 $ 111,636
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note 10. Other long-term assets
June 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Investment in associates ` $ 4,920 $ 3,146
Net investment in sales type lease 6,205 10,651
----------------------------------------------------------------------------
$ 11,125 $ 13,797
----------------------------------------------------------------------------
The value of the net investment is comprised of the following:
June 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Minimum future lease payments $ 16,607 $ 23,202
Unearned finance income (1,094) (1,900)
----------------------------------------------------------------------------
15,513 21,302
Less current portion 9,308 10,651
----------------------------------------------------------------------------
$ 6,205 $ 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 11.Intangible assets
June 30, 2011
Accumulated
Acquired value amortization Net book value
----------------------------------------------------------------------------
Customer relationships $ 38,400 $ 10,912 $ 27,488
Software and other 14,463 7,626 6,837
----------------------------------------------------------------------------
$ 52,863 $ 18,538 $ 34,325
----------------------------------------------------------------------------
December 31, 2010
Accumulated
Acquired value amortization Net book 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 12. Accounts payable, accrued liabilities and provisions
June 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 142,599 $ 149,884
Provisions 14,743 14,538
----------------------------------------------------------------------------
$ 157,342 $ 164,422
----------------------------------------------------------------------------
Note 13. Long-Term Debt
The Company has, by way of private placement, $ 90,500 of Unsecured Notes
("Notes") issued and outstanding. The Notes mature on two separate dates with
$50,500, with a coupon of 4.841%, maturing on June 22, 2016 and $40,000, 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 $325,000. The Bank Facilities consist of a committed
4-year $270,000 revolving credit facility (the "Revolver"), a committed 4-year
$10,000 operating facility (the "Operator"), a committed 4-year $20,000
Australian operating facility (the "Australian Operator") and a committed 4-year
$25,000 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 $50,000 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 $50,000 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 $20,000 USD. Drawings on the US Facility are by way
of LIBOR loans, US Base Rate loans and letters of credit. The Company is
currently in the process of negotiating an extension of the US Facility.
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.
At June 30, 2011, the Company had $95,374 drawn 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 June 30, 2011 borrowings on the Bank Facilities and the
Notes was as follows:
June 30, 2011
Drawings on bank facility $ 95,374
Notes due June 22, 2016 50,500
Notes due June 22, 2021 40,000
Deferred transaction costs (2,483)
-------------------------
$ 183,391
-------------------------
-------------------------
Canadian dollar equivalent principal payments which are due over the next five
years, without considering renewal at similar terms, are:
2012 $ 95,374
2013 -
2014 -
2015 -
2016 50,500
Thereafter 40,000
-------------------------
$ 185,874
-------------------------
-------------------------
Note 14. Guarantees, Commitments and Contingencies
At June 30, 2011, the Company had outstanding letters of credit of $ 65,903
(December 31, 2010 - $ 61,162).
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 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 $ 51,633 payable over the next five
years and thereafter as follows:
2011 $ 7,551
2012 11,662
2013 8,823
2014 6,900
2015 5,306
Thereafter 11,391
-----------------------------------
Total 51,633
-----------------------------------
-----------------------------------
In addition, the Company has purchase obligations over the next three years
as follows:
2011 $ 31,183
2012 7,184
2013 998
Note 15. 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 ending Six months ending
June 30 June 30
2011 2010 2011 2010
----------------------------------------
Earnings before income taxes $ 12,802 $ 4,685 $ 25,161 $ 17,409
Canadian statutory rate 26.6% 28.1% 26.6% 28.1%
----------------------------------------
Expected income tax provision $ 3,405 $ 1,316 $ 6,693 $ 4,892
Add (deduct)
Income taxed in foreign
jurisdictions 129 849 495 1,309
Non-taxable portion of gain on
available for sale financial
assets - - - (3,938)
Other (92) (542) (7) (64)
----------------------------------------
Income tax provision $ 3,442 $ 1,623 $ 7,181 $ 2,199
----------------------------------------
----------------------------------------
The composition of the income tax provision is as follows:
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------
Current taxes $ 5,229 $ 3,899 $ 9,508 $ 4,392
Deferred taxes (1,787) (2,276) (2,327) (2,193)
----------------------------------------
Income tax provision $ 3,442 $ 1,623 $ 7,181 $ 2,199
----------------------------------------
----------------------------------------
Note 16. Share Capital
Authorized
The Company is authorized to issue an unlimited number of ordinary shares.
Issued and Outstanding:
Six months ended June 30, 2011
Number of Common Shares Common 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 17. Contributed Surplus
As at June 30, 2011:
----------------------------------------------------------------------------
Contributed Surplus, beginning of period $ -
----------------------------------------------------------------------------
Reclassification of net investment on bifurcation 656,500
----------------------------------------------------------------------------
Share-based compensation 65
----------------------------------------------------------------------------
Contributed Surplus, end of period $ 656,565
----------------------------------------------------------------------------
For comparative periods, contributed surplus was included in the balance of
Toromont's Net Investment in Enerflex Ltd.
Note 18. 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 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:
June 30, 2011
Weighted average
Number of Options exercise price
Options outstanding, June 1, 2011 2,030,030 $ 11.35
Granted - -
Exercised (3,000) 10.09
Forfeited (11,210) 11.47
----------------------------------------------------------------------------
Options outstanding, end of period 2,015,820 11.38
-----------------------------------------
Options exercisable, end of period 968,711 11.01
-----------------------------------------
The following table summarizes options outstanding and exercisable at June
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 - $11.40 1,111,720 2.63 $ 10.22 695,009 $ 10.33
$ 11.78 - $12.95 904,100 4.89 12.81 273,702 12.72
----------------------------------------------------------------------------
Total 2,015,820 3.64 $ 11.38 968,711 $ 11.01
----------------------------------------------------------------------------
No stock options were granted in the first six months of 2011. The fair value of
the stock options granted by Toromont during the first six months of 2010 was
determined at the time of 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
share 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 six months ended June 30, 2011 directors fees
elected to be received in deferred share units totaled $71 (three and six months
ended June 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, the UAE and the Netherlands 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 six months ended June 30, 2011 was:
Stock options $ 65
Deferred share units 71
Phantom share units -
----------------------------------------------
Total $ 136
--------------------------
Note 19. Reconciliation of Earnings per Share Calculations
----------------------------------------------------------------------------
2011 2010
Three months Weighted Weighted
ended Net Average Shares Per Net Average Shares Per
June 30, Earnings Outstanding share Earnings Outstanding share
----------------------------------------------------------------------------
Basic $ 9,360 77,214,913 $ 0.12 $ 2,764 76,881,262 $ 0.04
----------------------------------------------------------------------------
Dilutive effect
of stock
option
conversion 403,928 242,361
----------------------------------------------------------------------------
Diluted $ 9,360 77,618,841 $ 0.12 $ 2,764 77,123,623 $ 0.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011 2010
Six months Weighted Weighted
ended Net Average Shares Per Net Average Shares Per
June 30, Earnings Outstanding share Earnings Outstanding share
----------------------------------------------------------------------------
Basic $ 19,246 77,214,913 $ 0.25 $ 13,629 75,381,981 $ 0.18
----------------------------------------------------------------------------
Dilutive effect
of stock
option
conversion 403,928 288,178
----------------------------------------------------------------------------
Diluted $ 19,246 77,618,841 $ 0.25 $ 13,629 75,670,159 $ 0.18
----------------------------------------------------------------------------
Since Enerflex's shares were issued pursuant to the Arrangement with Toromont to
create the Company, the per share amounts disclosed for the comparative period
are based on Toromont's common shares.
Note 20. Financial Instruments
Designation and valuation of financial instruments
The Company has designated its financial instruments as follows:
Carrying Estimated
June 30, 2011 Value Fair Value
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents(i) $ 54,255 $ 54,255
Derivative instruments designated as
fair value through profit or loss ("FVTPL") 29 29
Derivative instruments in designated
hedge accounting relationships 1,054 1,054
Loans and receivables:
Accounts receivable 268,391 268,391
Financial Liabilities
Derivative instruments designated as FVTPL 18 18
Derivative instruments in designated
hedge accounting relationships 650 650
Other financial liabilities
Accounts payable and accrued liabilities 157,342 157,342
Long-term debt - Bank facility 95,374 95,374
Long-term debt - Notes 88,017 87,612
(i) Includes $1,357 of highly liquid short-term investments with original
maturities of three months or less.
Carrying Estimated
December 31, 2010 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 and accrued liabilities 164,422 164,422
Note payable to Toromont 215,000 215,000
Long-term debt - Bank facility - -
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 June
30, 2011 and indicates the fair value hierarchy of the valuation techniques used
to determine such fair value. During the three-month period ended June 30, 2011,
there were no transfers between Level 1 and Level 2 fair value measurements.
Fair Value
------------------------------
Carrying
Value Level 1 Level 2 Level 3
----------------------------------------------------------------------------
Financial Assets
Derivative financial instruments $ 1,083 $ 1,083
Financial Liabilities
Derivative financial instruments $ 668 $ 668
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 June 30, 2011, as
determined on a discounted cash flow basis with a weighted average discount rate
of 5.46% was $87,612.
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 June 30, 2011:
Notional
Amount Maturity
----------------------------------------------------------------------------
Canadian dollar denominated contracts
Purchase contracts USD 38,544 July 2011 to February 2012
EUR 128 August 2011 to March 2012
Sales contracts USD 59,290 July 2011 to February 2012
EUR 5,504 July 2011
Australian dollar denominated contracts
Purchase contracts USD 3,004 July 2011 to December 2011
EUR 765 July 2011 to August 2011
Sales contracts USD 1,007 July 2011
Management estimates that a gain of $415 would be realized if the contracts were
terminated on June 30, 2011. Certain of these forward contracts are designated
as cash flow hedges, and accordingly, a gain of $139 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 June 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 income before tax 1,540 (224) (672)
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 June 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 US 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 3,321 465 2,832
Financial instruments held in Canadian
operations:
Net earnings 1,391 40 1
Other comprehensive income 27 - -
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 June 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 $1.9 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 June 30,
2011, the Company had $95,374 committed against the Bank Facilities, leaving
$229,626 available for future drawings plus cash and cash equivalents of $54,255
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:
Greater
Less than 3 months than 1
3 months to 1 year year Total
Derivative financial liabilities:
Foreign currency forward
contracts 668 - - 668
Other financial liabilities:
Accounts payable and accrued
liabilities 157,342 - - 157,342
Long-term debt - Bank Facilities - - 95,374 95,374
Long-term debt - Notes - - 88,017 88,017
The Company expects that continued cash flows from operations in 2011 together
with cash and cash equivalents on hand and credit facilities that will be
available will be more than sufficient to fund its requirements for investments
in working capital, and capital assets.
Dividends
The Company declared dividends of $4,633, or $0.06 per share, for the three and
six months ended June 30, 2011 (June 30, 2010 - no dividend declared).
Note 21. Capital Disclosures
The capital structure of the Company consists of shareholder's 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 June 30,
2011, the Net debt to equity was 0.15 :1 (December 31, 2010 - 0.24:1),
calculated as follows:
June 30, December 31,
2011 2010
--------------------------------------
Note payable $ - $ 215,000
Long-term debt 183,391 -
Cash (54,255) (15,000)
--------------------------------------
Net debt $ 129,136 $ 200,000
--------------------------------------
--------------------------------------
Shareholders'/Owner's equity $ 853,458 $ 839,528
--------------------------------------
--------------------------------------
Net debt to equity ratio 0.15 :1 0.24:1
--------------------------------------
Note 22.Supplemental Cash Flow Information
Three months ended Six months ended
June 30, June 30,
2011 2010 2011 2010
Cash provided by (used in) changes
in non-cash working capital
Accounts receivable (10,889) (58,471) (29,870) (38,209)
Inventory (48,979) 26,892 (4,885) 58,809
Accounts and taxes payable, accrued
liabilities and deferred revenue 92,554 17,708 64,978 6,236
Foreign currency and other (3,988) (13,928) (1,096) (27,371)
----------------------------------------------------------------------------
28,698 (27,799) 29,127 (535)
----------------------------------------
Resulting from operations 35,712 (23,985) 42,737 9,735
Resulting from investing (321) (263) (7,228) (7,889)
Resulting from financing (6,693) (3,551) (6,382) (2,381)
----------------------------------------------------------------------------
28,698 (27,799) 29,127 (535)
----------------------------------------
Three months ended Six months ended
Cash paid during the period: June 30, June 30,
2011 2010 2011 2010
Interest 933 1,000 2,363 1,000
Income taxes 8,517 2,169 11,682 2,338
Note 23. 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:
June 30, December 31,
2011 2010
-------------------------------
Revenue $ 163 $ 20
Management Fees 4,598 7,920
Purchases 760 1,279
Interest expense 1,902 5,484
Accounts receivable - 61
Accounts payable 330(1) 3,692
Note payable - 215,000
(1) Although Toromont ceased to be a related party on June 1, 2011, related
party accounts payable includes $211 of management fees payable to
Toromont at June 30, 2011
Note 24. 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:
June 30, December 31,
Statement of Financial Position 2011 2010
----------------------------------------------------------------------------
Current assets $ 2,199 $ 2,477
Long-term assets 483 518
------------------------------
Total Assets $ 2,682 $ 2,995
------------------------------
Current liabilities $ 1,046 $ 894
Long-term liabilities and equity 1,636 2,101
----------------------------------------------------------------------------
Total Liabilities and equity $ 2,682 $ 2,995
------------------------------
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Statement of Earnings
Revenue $ 206 $ 510 $ 225 $ 1,094
Expenses 370 726 682 1,377
----------------------------------------------------------------------------
Net loss $ (164) $ (216) $ (457) $ (283)
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Cash Flows
From operations $(434) $ (767) $ (663) $ (1,264)
From investing activities (16) 35 (34) (32)
From financing activities (1) (5) (4) (7)
Note 25. 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. No reportable
operating segment is reliant on any single external customer.
Southern US & South
Canada & Northern US America
Three months ended
June 30, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 155,355 $ 108,662 $ 62,642 $ 67,129
Intersegment revenue $ (53,728) $ (6,168) $ (229) $ (79)
----------------------------------------------------------------------------
External revenue $ 101,627 $ 102,494 $ 62,413 $ 67,050
------------------------------------------------
Operating income $ 9,720 $ 5,020 $ 4,252 $ 9,606
----------------------------------------------------------------------------
International Total
Three months ended
June 30, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 91,440 $ 89,396 $ 309,437 $ 265,187
Intersegment revenue $ (742) $ (4,918) $ (54,699) $ (11,165)
----------------------------------------------------------------------------
External revenue $ 90,698 $ 84,478 $ 254,738 $ 254,022
------------------------------------------------
Operating income $ (495) $ (6,717) $ 13,477 $ 7,909
----------------------------------------------------------------------------
Southern US & South
Canada & Northern US America
Six months ended
June 30, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 298,913 $ 190,193 $ 152,117 $ 140,798
Intersegment revenue $ (54,988) $ (11,050) $ (365) $ (91)
----------------------------------------------------------------------------
External revenue $ 243,925 $ 179,143 $ 151,752 $ 140,707
----------------------------------------------
Operating income $ 16,554 $ 2,554 $ 12,456 $ 13,661
----------------------------------------------------------------------------
International Total
Six months ended
June 30, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 188,359 $ 155,383 $ 639,389 $ 486,374
Intersegment revenue $ (2,893) $ (8,798) $ (58,246) $ (19,939)
----------------------------------------------------------------------------
External revenue $ 185,466 $ 146,585 $ 581,143 $ 466,435
----------------------------------------------
Operating income $ (1,780) $ (10,621) $ 27,230 $ 5,594
----------------------------------------------------------------------------
June 30 Dec 31 June 30 Dec 31
As at 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment Assets $ 477,794 $ 524,304 $ 184,063 $ 222,980
Corporate
Goodwill $ 270,046 $ 270,046 $ 56,510 $ 56,510
----------------------------------------------------------------------------
Total Segment assets $ 747,840 $ 794,350 $ 240,573 $ 279,490
-----------------------------------------------
June 30 Dec 31 June 30 Dec 31,
As at 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment Assets $ 299,864 $ 280,482 $ 961,721 $ 1,027,766
Corporate (27,866) (132,866)
Goodwill $ 156,100 $ 156,100 $ 482,656 $ 482,656
----------------------------------------------------------------------------
Total Segment assets $ 455,964 $ 436,582 $ 1,416,511 $ 1,377,556
------------------------------------------------
Revenue from foreign countries was:
----------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Australia 50,619 15,063 80,295 30,425
----------------------------------------------------------------------------
Netherlands 6,150 14,192 15,905 18,032
----------------------------------------------------------------------------
United States 80,404 92,246 165,463 191,938
----------------------------------------------------------------------------
Other 27,075 35,541 81,646 50,451
----------------------------------------------------------------------------
Revenue is attributed by destination of sale.
Note 26. 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 27. 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
International Accounting Standards Board ("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,
December 31, 2010, June 30, 2010 and January 1, 2010.
Upon adoption of IFRS the Company elected to reset the cumulative translation
adjustment balance to zero.
Consolidated Statement
of Equity
As at December 31, 2010
Cumulative
Canadian Estimated
(Unaudited)(Thousands) GAAP Fair Value Reclassification IFRS
----------------------------------------------------------------------------
Net Investment
Owner's net
investment 864,686 (14,709) - 849,977
Accumulated other
comprehensive income (25,554) 14,709 - (10,845)
Non-controlling
interest 396 - - 396
-----------------------------------------------------
Total net investment
and non-controlling
interest 839,528 - - 839,528
-----------------------------------------------------
Consolidated Statement
of Equity
As at June 30, 2010
Cumulative
Canadian Estimated
(Unaudited)(Thousands) GAAP Fair Value Reclassification IFRS
----------------------------------------------------------------------------
Net Investment
Owner's net
investment 864,686 (14,709) - 849,977
Accumulated other
comprehensive income (25,554) 14,709 - (10,845)
Non-controlling
interest 396 - - 396
-----------------------------------------------------
Total net investment
and non-controlling
interest 839,528 - - 839,528
-----------------------------------------------------
Consolidated Statement of
Equity
As at January 1, 2010
Cumulative
Canadian Estimated
(Unaudited)(Thousands) GAAP Fair Value Reclassification IFRS
----------------------------------------------------------------------------
Net Investment
Owner's net investment $ 312,382 (14,709) - $ 297,673
Accumulated other
comprehensive income 920 14,709 - 15,629
Non-controlling
interest - - - -
---------------------------------------------------
Total net investment and
non-controlling interest $ 313,302 - - $ 313,302
---------------------------------------------------
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, December 31, 2010, June 30, 2010
and January 1, 2010.
Upon transitions to IFRS the Company reclassified all deferred tax assets and
liabilities as non-current.
Statement of Financial
Position
As at December 31, 2010
Cumulative
Canadian Estimated
(Unaudited)(Thousands) GAAP Fair Value 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
---------------------------------------------------
Statement of Financial
Position
As at June 30, 2010
Cumulative
Canadian Estimated
(Unaudited)(Thousands) GAAP Fair Value Reclassification IFRS
----------------------------------------------------------------------------
Assets
Current tax assets 30,851 - (30,851) -
Deferred tax assets 9,630 - 28,676 38,306
Liabilities
Current tax liabilities 255 - (255) -
Deferred tax liabilities 1,920 - (1,920) -
---------------------------------------------------
38,306 - - 38,306
---------------------------------------------------
Statement of Financial
Position
As at January 1, 2010
Cumulative
Canadian Estimated
(Unaudited)(Thousands) GAAP Fair Value 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
---------------------------------------------------
Note 28. Subsequent Events
Subsequent to June 30, 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 is scheduled to close in
September 2011.
Subsequent to June 30, 2011, the Company declared dividends of $0.06 per share,
payable on October 4, 2011, to shareholders of record on September 12, 2011.
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