Enerflex Reports Second Quarter 2016 Financial Results
CALGARY, ALBERTA — (Marketwired) — 08/04/16 — Enerflex Ltd. (TSX: EFX) (“Enerflex” or “the Company” or “we” or “our”), a leading supplier of products and services to the global energy industry, today reported its financial and operating results for the three and six months ended June 30, 2016.
Summary Table of Second Quarter and First Half of 2016 Financial and Operating Results
(unaudited) ($ Canadian millions, except per share amounts, horsepower and percentages) Three months ended June 30, Six months ended June 30, 2016 2015 Change 2016 2015 Change ---------------------------------------------------------------------------- Revenue $ 253.1 $ 389.7 $ (136.6) $ 524.8 $ 845.2 $ (320.4) Gross margin 64.2 81.5 (17.3) 110.6 165.0 (54.4) EBIT gain (loss) (1) $ 21.9 $ 38.2 $ (16.3) $ (69.3) $ 75.2 $ (144.5) Net earnings (loss) - continuing operations $ 16.8 $ 26.8 $ (10.0) $ (76.6) $ 50.4 $ (127.0) Earnings (loss) per share - continuing operations 0.21 0.34 (0.13) (0.97) 0.64 (1.61) Recurring revenue % (2) 37.7% 30.8% 37.7% 30.8% Bookings (3) $ 154.4 $ 86.5 $ 67.9 $ 219.4 $ 227.1 $ (7.7) Backlog (3) 345.4 532.7 (187.3) 345.4 532.7 (187.3) Rental horsepower 499,615 457,862 41,753 499,615 457,862 41,753 (1) Earnings before Interest (Finance Costs) and Taxes ("EBIT") is considered an additional GAAP measure, which may not be comparable with similar additional GAAP measures used by other entities. (2) Determined by taking the trailing 12-month period. (3) Bookings and backlog are considered non-GAAP measures that do not have standardized meanings as prescribed by GAAP, and are therefore unlikely to be comparable to similar measures used by other entities.
“Enerflex’s second quarter financial results reflected the continuing uncertainty surrounding commodity prices and the associated reduction in customer capital budgets, which resulted in lower revenues. Against this backdrop, the Company has increased recurring rental revenues, improved project margins and increased bookings”, said J. Blair Goertzen, Enerflex’s President and Chief Executive Officer. “Enerflex expects that these challenging conditions will continue through 2016. The Company remains focused on controlling costs, preserving the strength of its balance sheet and generating free cash flow, positioning it to weather this prolonged downturn. Enerflex will continue to deploy capital and pursue opportunities in those regions where there is economic growth, including the USA, Middle/East Africa and Latin America regions.”
Quarterly and First Half Overview
-- Bookings increased by $67.9 million over the second quarter of 2015, and by $89.4 million over the first quarter of 2016, but were lower in the first half of 2016 by $7.7 million. -- Backlog at June 30, 2016 was lower by $81.8 million than December 31, 2015 on reduced bookings, but increased by $10.5 million from March 31, 2016 due to stronger second quarter 2016 bookings. -- EBIT was $28.3 million and $47.5 million for the first three and six months ended June 30, 2016, compared to $42.0 million and $81.7 million for the same periods in 2015, after excluding provisions for on-going warranty disputes, Oman Oil Company Exploration and Production LLC ("OOCEP") arbitration process costs, severance and restructuring costs, and during the first quarter of 2016 the goodwill impairment of $92.1 million. -- Reduced headcount by 153 during the second quarter to just over 1,900 (compared to approximately 2,800 at June 30, 2015). Total global headcount reductions of 429 in 2016. -- Rental fleet grew to almost 500,000 horsepower with the completion of a large project in the MEA region during the first half of 2016. 105,000 horsepower has been added in the last 15 months. -- Reduced net indebtedness by $38.9 million during the first half of 2016 while increasing cash balances by $4.6 million. -- Subsequent to quarter end, declared quarterly dividend of $0.085 per share payable October 6, 2016.
Quarterly and First Half Results Summary
Net earnings for the first three and six months of 2016 were lower as a result of reduced gross margin, partially offset by lower SG&A expenses and lower income tax expense, and for the first half of 2016 due to the goodwill impairment recorded in the Canada segment. Gross margin in the second quarter and first half of 2016 decreased by $17.3 million and $54.4 million, respectively, on lower revenues in the Canada and USA segments. Rest of World gross margin increased during the second quarter but was lower for the first six months of 2016. The gross margin percentage increased for the three and six months on project margin improvements and an increased proportion of higher margin Rental revenue, which have more than offset costs related to on-going warranty disputes, severance costs and for the first six months of 2016, higher inventory allowances. The goodwill impairment in the first quarter of 2016 resulted from the effect of the on-going deterioration in commodity prices and the impact on customer budgets, and therefore the outlook for activity in Canada in 2016 and beyond. SG&A expenses decreased during the three and six months ended June 30, 2016 by $2.1 million and $4.3 million, respectively, on lower compensation expense due primarily to headcount reductions, partially offset by costs associated with the OOCEP arbitration process, and bad debt expenses. In addition, SG&A expense was lower during the first six months on unfavourable foreign exchange movements and restructuring costs. Compensation expense decreased due to lower headcount, reduced incentive accruals based on decreased profitability, partially offset by larger mark-to-market share based compensation during the second quarter and first half of 2015.
Enerflex remains focused on maintaining a strong balance sheet and generating operating cash flow. During the second quarter, the Company generated $18.0 million of cash flows from operations, and for the first six months, $68.3 million. The Company recorded reductions on its borrowings of $38.9 million during the first half of 2016. The resulting impact on net debt to EBITDA for covenant purposes has been positive but has not offset the impact of the decrease in EBITDA for the trailing 12-month period. Net debt to EBITDA continues to be under 2:1 compared to under 3:1 required for covenant purposes.
Bookings, Backlog and Outlook
The Company expects the current market weakness to continue, particularly in Canada. That being said, the improvement in oil and gas prices over the second quarter has led to increased enquiries, particularly in the USA and Rest of World segments. If current prices hold, a slight uptick in bookings is expected, however further increases in commodity prices would be required to bring activity back to historical levels. During the second quarter of 2016, bookings increased by $67.9 million compared to the same period in 2015, with increases in the USA and Rest of World segments, partially offset by a decrease in the Canada segment. While bookings improved sequentially by $89.4 million during the second quarter of 2016 compared to the first quarter of 2016, the lower bookings in the first quarter of 2016 resulted in a drop in bookings of $7.7 million for the first six months of 2016 compared to the same period in 2015. There were no project cancellations during the first six months of 2016. Overall, backlog increased by $10.5 million during the quarter but fell by $81.8 million during the first half of 2016.
The improved bookings trend experienced during the second quarter of 2016 continued into the third quarter with large bookings of over $100 million in the USA and MEA regions. Enerflex’s financial performance also continues to benefit from the recurring revenue stream derived from existing and new long-term rental and service contract progress, and from a geographically diversified business. Inclusive of 30,000 compression horsepower added in the MEA region during the first quarter, the Company has added approximately 105,000 horsepower in rental projects in the MEA and Latin America regions over the last 15 months, which will continue to contribute to increased recurring revenue going forward. Enerflex will continue to strategically deploy capital to rental opportunities in growth markets that meet internal return goals.
Progress on 2016 Strategic Objectives
Although the current weak market environment has challenged the achievement of several 2016 objectives, the Company reduced its total recordable injury rate, a key strategic objective, by 7% over the 2016 goal. Enerflex is tracking above its 20% growth target for processing bookings and is currently within the range of its 35-40% recurring revenue target.
Canada segment revenue in the second quarter of 2016 was $58.1 million, down $71.8 million or 55.3% from $129.8 million in the same period of 2015. For the first half of 2016, revenue was $119.2 million, down $162.6 million or 57.7% from $281.9 million in the same period of 2015. The segment has been negatively affected by the significant decline in activity levels from low natural gas prices and by the changes to distribution arrangements for GE products. Engineered Systems revenue was down on lower 2016 opening backlog of $150.9 million compared to $332.0 million at the start of 2015. Lower Service revenue reflects lower parts sales, while lower Rental revenue was due to a decrease in rental unit sales. Utilization levels by horsepower were 49% compared to 66% in the second quarter of 2015.
Operating income for the second quarter of 2016 of $0.6 million decreased by $10.7 million or 94.9%, and operating loss for the first six months of 2016 of $10.8 million decreased $31.8 million or 151.7%, on lower gross margin, partially offset by lower SG&A expenses. The decrease in gross margin resulted primarily from lower revenues, lower project margins and severance costs of $0.5 million and $1.7 million in the first three and six months of 2016, partially offset by improved warranty experience. For the first six months of 2016, an increase in inventory allowances also reduced gross margin. The reduction in SG&A expense was attributable to lower compensation expense on a drop in headcount, and lower office and occupancy costs due to branch and facility closures, partially offset by higher bad debt expenses, compared to the second quarter of 2015. For the first half of 2016, severance and restructuring costs of $3.8 million increased SG&A expenses compared to $0.8 million in the same period of 2015.
USA segment revenue in the second quarter of 2016 was $94.3 million, down $40.3 million or 29.9% from $134.6 million a year earlier. For the first half of 2016, revenue was $204.1 million, down $137.5 million or 40.2% from $341.6 million in the same period of 2015. The reductions in revenue resulted from lower Engineered Systems revenue on lower opening backlog and lower Service revenue on lower parts sales, partially offset by higher Rental revenue.
Operating income for the second quarter of $5.0 million decreased by $6.6 million or 57.1%, and operating income of $13.0 million decreased by $9.8 million or 43.0% during the first half of 2016, due to lower gross margin, partially offset by reduced SG&A expenses. Gross margin decreased primarily as a result of lower revenues and increased warranty expenses, partially offset by project margin improvements. The decreases in SG&A expenses were primarily a result of lower compensation on reduced headcount.
Rest of World
Rest of World segment revenue in the second quarter of 2016 was $100.7 million, down $24.6 million or 19.7% from 2015. For the first half of 2016, revenue was $201.4 million, down $20.3 million or 9.2% from 2015. The decreases in revenue were a result of a reduction in Engineered Systems revenue on lower opening backlog, and a decrease in Service revenue, partially offset by an increase in Rental revenue with new rental projects in the Middle East and Latin America. Service revenue decreased on lower service activity in Latin America and Australia, and reduced part sales into Australia and Asia, partially offset by higher activity in the MEA region.
Operating income of $16.3 million increased by $2.2 million or 15.8% in the second quarter as a result of improved gross margin, partially offset by higher SG&A expenses. The increase in gross margin was a result of project margin improvements and an increased proportion of higher margin Rental revenue, partially offset by the impact of lower revenues. SG&A expenses increased due to costs associated with the OOCEP arbitration process, partially offset by lower compensation expense on reduced headcount.
Operating income of $18.3 million decreased by $8.5 million or 31.7% in the first half of 2016 as a result of lower gross margin and higher SG&A expenses. Lower gross margin was attributable to the impact of reduced revenues, lower awarded margins and increased costs associated with unresolved customer warranty disputes, partially offset by project margin improvements and an increased proportion of higher margin Rental revenue. SG&A expenses were higher in 2016 compared to 2015 due to costs associated with the OOCEP arbitration process and unfavourable foreign exchange movements, partially offset by lower compensation expense on reduced headcount.
There were no significant developments related to the OOCEP dispute during the second quarter. The variation claims remain subject to arbitration and the approximately $30.0 million in milestone payments due from OOCEP remain outstanding. Enerflex is unable to predict when the arbitration will be resolved.
Subsequent to the end of the second quarter of 2016, Enerflex declared a quarterly dividend of $0.085 per share, payable on October 6, 2016, to shareholders of record on August 17, 2016.
Quarterly Results Material
Enerflex’s Interim Condensed Financial Statements as at and for the three and six months ended June 30, 2016, and the accompanying Management’s Discussion and Analysis, will be available on the Enerflex website at www.enerflex.com under the Investors section and on SEDAR at www.sedar.com.
Conference Call and Webcast Details
Enerflex will host a conference call for analysts, investors, members of the media and other interested parties on Friday, August 5, 2016 at 8:00 a.m. MST (10:00 a.m. EST) to discuss the second quarter 2016 financial results and operating highlights. The call will be hosted by Mr. J. Blair Goertzen, President and Chief Executive Officer and Mr. D. James Harbilas, Executive Vice President and Chief Financial Officer of Enerflex.
If you wish to participate in this conference call, please call 1.800.745.9476. Please dial in 10 minutes prior to the start of the call. No passcode is required. The live audio webcast of the conference call will be available on the Enerflex website at www.enerflex.com under the Investors section on August 5, 2016 at 8:00 a.m. MST (10:00 a.m. EST). 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 12, 2016. Please call 1.800.558.5253 or 1.416.626.4100 and enter passcode 21815364.
Enerflex Ltd. is a single source supplier of natural gas compression, oil and gas processing, refrigeration systems, and electric power equipment – plus in-house engineering and mechanical service expertise. The Company’s broad in-house resources provide 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, refrigeration systems, and electric power equipment servicing the natural gas production industry.
Headquartered in Calgary, Canada, Enerflex has approximately 1,900 employees worldwide. Enerflex, its subsidiaries, interests in associates and joint-ventures operate in Canada, the United States, Argentina, Bolivia, Brazil, Colombia, Mexico, Peru, Australia, the United Kingdom, Russia, the United Arab Emirates, Oman, Bahrain, Indonesia, Malaysia, Singapore, and Thailand. 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 may be 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. Forward-looking statements and information contained in this press release include, but are not limited to: (i) the anticipated duration of weak natural gas prices and the effect thereof in Canada and USA markets; (ii) expected bookings; and (iii) the nature and scope of challenges and opportunities in the Rest of World segment. In developing the forward-looking information in this news release, the Company has made certain assumptions with respect to general economic and industry growth rates, commodity prices, currency exchange and interest rates, competitive intensity and regulatory 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, 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; political unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to, or pursued by, the Company; obtaining financing; and other factors, many of which are beyond its control. The foregoing list of factors and risks is not exhaustive. For an augmented discussion of the risk factors and uncertainties that affect or may affect Enerflex, the reader is directed to the section entitled “Risk Factors” in Enerflex’s most recently filed Annual Information Form, as well as Enerflex’s other publicly filed disclosure documents, available on www.sedar.com. 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 variation 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.
J. Blair Goertzen
President & Chief Executive Officer
D. James Harbilas
Executive Vice President & Chief Financial Officer