ENDURING SUCCESS
IN A GLOBAL ENERGY MARKET.
2019 ANNUAL REPORT
Enerflex is a global supplier of compression, processing, and electric
power solutions. With decades of experience, broad in-house
resources, and world-class facilities, the Company is well-positioned
to execute on its vision of Transforming Natural Gas to Meet the
World’s Energy Needs.
Enerflex’s vertically-integrated platform encompasses
engineering, manufacturing, construction, and
operations across the natural gas value chain. The
Company is positioned to increase its presence in growth
areas of the natural gas industry while strengthening the
diversity of its offerings. Enerflex is especially proud of
its expanding asset ownership platform: its recurring
revenues contribute significantly to the predictability and
stability of our financial performance.
We remain focused on optimizing the business through a combination
of operational excellence, continuous improvement efforts, and
value-creating investments. Enerflex is dedicated to serving the
needs of the global energy market including the shift towards cleaner
burning fuels, while creating value for our shareholders.
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02
04
08
15
ENDURING SUCCESS IN A GLOBAL ENERGY MARKET
2019 RESULTS AND HIGHLIGHTS
LETTER TO SHAREHOLDERS
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
MANAGEMENT’S DISCUSSION AND ANALYSIS
53
58
101
102
103
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2019 ESG PERFORMANCE SUMMARY
DIRECTORS AND EXECUTIVES
SHAREHOLDERS’ INFORMATION
This Annual Report contains forward-looking information within the meaning of applicable Canadian securities laws, including relating to industry trends, business prospects and strategy,
and identifying emissions reduction opportunities. All forward-looking information in this Annual Report is subject to the qualifications, risks, uncertainties and assumptions described in the
“Forward-Looking Statements” section of our Management’s Discussion and Analysis (“MD&A”) dated February 20, 2020, which is included on page 49 of this Annual Report.
ENDURING SUCCESS IN A
GLOBAL ENERGY MARKET
Revenue
$2,045M
Revenue for 2019 was $2,045 million, a 20.1% increase
compared to 2018 due to higher revenue across all product lines.
Recurring Revenue
$597M
Recurring revenue grew by
$76 million, or 14.5%, in 2019
due to higher activity and
increased demand for both
Service and Rental product
offerings.
Adjusted EBIT%
12.7%
Improvements in gross margin
from strong project execution
and increased contributions
from recurring revenue
resulted in an adjusted EBIT%
of 12.7%.
EBITDA
$320M
EBITDA of $320 million represents an increase of
$79 million, or 32.7%, over 2018.
Gross Margin
$429M
Gross margin increased by
$121 million, to $429 million in
2019, a 39.3% increase compared
to 2018.
Operating Cash Flow Net of Working Capital
$276M
Cash provided by operating activities, net of
changes in working capital, increased by
$71 million, or 34.8% in 2019.
Dividend
$0.46per share
Our continued commitment to growing the dividend
led to an increase of 9.5% in the third quarter of
2019, to $0.46 per share on an annualized basis.
1 Bookings, backlog, adjusted EBIT%, and recurring revenue are non-IFRS measures. Further detail is provided in the Definitions and Non-IFRS Measures sections of the MD&A.
2 EBIT% has been adjusted for impacts not expected to recur in the normal course of business. The adjusting items for the year ended December 31, 2019 are presented in the Company’s MD&A.
2019 Annual Report | Enduring Success in a Global Energy Market
1
$2,045.4M
2019
$1,703.3M
2018
$1,130.6M
2016
$1,553.4M
2017
$1,629.0M
2015
$326.2M
$243.8M
$286.5M
$308.0M
$429.1M
2015
2016
2017
2018
2019
$345.8M
2019
$225.2M
2018
$214.1M
2017
$190.3M
2016
$233.3M
2015
17.5%
2019
9.8%3
2018
9.9%
2017
10.0%
2015
6.8%
2016
2019 RESULTS
AND HIGHLIGHTS
For the years ended December 31,
(Thousands of dollars, except percent and per share) (Unaudited)
Revenue
Gross margin
Operating income
Earnings (loss) before finance costs and taxes
2019
2018
2017
2016
2015
$ 2,045,422
$ 1,703,273
$ 1,553,355
$ 1,130,604
$ 1,629,032
429,085
231,908
233,902
307,973
144,964
151,679
286,523
122,274
145,795
243,784
65,413
(81,472)
326,189
121,759
94,877
Net earnings (loss)
– continuing operations
Net earnings (loss)
– discontinued operations
Earnings (loss) per share (basic)
– continuing operations
Earnings (loss) per share (basic)
– discontinued operations
Dividends per share - declared
152,128
101,416
97,753
(104,528)
48,890
-
152,128
-
101,416
-
97,753
388
(104,140)
(845)
48,045
1.70
-
1.70
0.43
1.14
-
1.14
0.39
1.10
-
1.10
0.35
(1.28)
0.62
0.01
(1.27)
0.34
(0.01)
0.61
0.34
For the years ended December 31,
(Thousands of dollars, except percent and per share) (Unaudited)
Key Financial Performance Indicators1
Bookings
Backlog
Recurring revenue growth
Selling and administrative expenses
as a percentage of revenue
Earnings before finance costs and
taxes as a percentage of revenue
Earnings before finance costs, taxes,
depreciation, and amortization
Return on capital employed 2
Adjusted return on capital employed 2
2019
2018
2017
2016
2015
$ 508,916
$ 1,980,363
$ 1,141,032
$ 853,337
$ 635,059
467,757
1,420,621
14.5%
12.9%
670,799
(2.1)%
621,397
(12.2)%
427,204
10.5%
9.6%
11.4%
9.6%
8.9%
10.6%
15.8%
12.5%
9.4%
(7.2)%
5.8%
320,461
241,453
226,373
15.8%
17.5%
10.9%
9.8%
10.9%
9.9%
11,627
(5.7)%
6.8%
176,771
6.2%
10.0%
Key financial performance indicators used by Enerflex to measure its performance include revenue and EBIT. Certain of these key performance indicators are non-IFRS measures. Further
detail is provided in the Definitions and Non-IFRS Measures sections of the MD&A.
ROCE is calculated by taking EBIT for the 12-month trailing period divided by capital employed. Further detail is provided in the Definitions and Non-IFRS Measures sections of the MD&A.
Adjusted ROCE includes impacts not expected to recur in the normal course of business, as presented in the Adjusted EBITDA section of the MD&A. Included in these adjustments for 2018
is the removal of cost recoveries related to the Oman Oil Exploration and Production LLC (“OOCEP”) arbitration. Costs incurred related to the arbitration were not adjusted for in previous
periods. Including these cost recoveries in 2018 would result in Adjusted ROCE of 11.4%.
2019 Results and Highlights | 2019 Annual Report
1
2
2
$2,045.4M
2019
$1,703.3M
2018
$1,130.6M
2016
$1,553.4M
2017
$1,629.0M
2015
$326.2M
2015
$243.8M
2016
$286.5M
2017
$308.0M
2018
$429.1M
2019
REVENUE
($Millions)
GROSS MARGIN
($Millions)
Higher revenue in 2019 was driven by increases across all
product lines, particularly Engineered Systems, and continued
demand for Service and Rental product offerings in the USA.
Gross margin grew year-over-year due to higher revenues and
improved gross margin percentage related to strong project execution,
higher margin projects included in opening backlog, and increased
contributions from the Service and Rental product lines.
$345.8M
2019
$225.2M
2018
$214.1M
2017
$190.3M
2016
$233.3M
2015
17.5%
2019
9.8%3
2018
9.9%
2017
10.0%
2015
6.8%
2016
ADJUSTED EBITDA 1
($Millions)
Record gross margin drove improved operating income, earnings,
and adjusted EBITDA.
ADJUSTED RETURN ON
CAPITAL EMPLOYED 2
Higher gross margin from strong project execution and
increased contributions from recurring revenue, resulted in
adjusted ROCE of 17.5%.
1 EBITDA has been adjusted for impacts not expected to recur in the normal course of business. The adjusting items for the years ended December 31, 2019, 2018, 2017, and 2016 are
presented in the Company’s MD&A for the respective years.
2 ROCE is calculated by taking EBIT for the 12-month trailing period divided by capital employed. Further detail is provided in the Definitions and Non-IFRS Measures sections of the MD&A.
Adjusted ROCE includes impacts not expected to recur in the normal course of business, as presented in the Adjusted EBITDA section of the MD&A.
3 Impacts not expected to recur in the normal course of business, as presented in the Adjusted EBITDA section of the MD&A, includes the removal of cost recoveries related to the OOCEP
arbitration. Costs incurred related to the arbitration were not adjusted for in previous periods. Including these cost recoveries, 2018 would result in Adjusted ROCE of 11.4%.
2019 Annual Report | 2019 Results and Highlights
3
LETTER TO
SHAREHOLDERS
2019 was an exceptional year operationally for Enerflex. Our results reflect
the strength of our business model, our unwavering focus on value creation,
and our commitment to providing natural gas solutions that accelerate the
transition away from more carbon intensive fossil fuels. Our employees
delivered on our promise to provide reliable products and successful projects,
executing multiple record-breaking project scopes in both our Calgary and
Houston facilities destined for customers around the world. The commitment
of our 2,500 personnel is illustrated by the strength of our safety performance,
which in 2019, achieved a record low total recordable incident rate of 0.55 per
200,000 exposure hours on a target of 0.62. Our team’s dedication to ensuring
the safety and occupational health of our people is a fundamental value at
Enerflex and the genesis of our slogan: Everyone Home Safe.
Marc E. Rossiter
President, Chief Executive Officer, and Director
During the year we executed on our succession plans at the
Executive level of the Company. In addition to my appointment to
President and CEO in May, Sanjay Bishnoi, Senior Vice President,
Chief Financial Officer and David Izett, Senior Vice President,
General Counsel, joined the Company in September. Both Sanjay and
David bring significant expertise and fresh ideas to our Executive
Management Team, which is comprised of entrepreneurial,
collaborative leaders committed to the creation of shareholder value
through the continued execution of our diversification strategy.
contract compression equipment from Mesa Compression, LLC
in 2017. Today, our asset ownership platform consists of a highly-
utilized global fleet of 670,000 horsepower across a combination
of gas compression and processing applications and we anticipate
continuing to allocate capital toward this initiative. Together with
our AMS offerings, our objective is to derive at least 50 percent of
our profits from these recurring revenue streams within the next
five-years, while growing the overall profitability of the business and
maintaining sector-leading returns.
This strategy, developed to profitably expand our product lines in
each of our geographic regions, is a continuation of the strategy upon
which we’ve executed for the past several years and has supported
our drive for sustainable and responsible growth. Our product lines
include:
During the year, Enerflex continued to invest in assets that will
provide recurring revenue, driving growth and stability in earnings
for future periods. We were able to make these investments on the
strength of our balance sheet, which we have achieved and sustained
from years of:
•
•
Engineered Systems: Custom designed and fabricated gas
compression, gas processing, and power generation systems;
Integrated Turnkey (“ITK”): Turnkey Engineered Systems with
local construction and commissioning capabilities;
• After-Market Services (“AMS”): Full after-market parts and
services for all products; and
• Asset Ownership: Any Engineered Systems or ITK product
owned by Enerflex and provided to our customers on a leased
or build-own-operate-maintain (“BOOM”) basis.
Our asset ownership initiative has provided a stable, predictable
contribution to our financial profile. We embarked upon this initiative in
2014 with the acquisition of assets from Axip Energy Services, LP, which
delivered us a gas compression fleet in our Rest of World segment,
and we continued to grow our asset base with the acquisition of
• Deploying free cash flow towards investing in productive
assets, strategic acquisitions, and reducing leverage, resulting
in a current bank adjusted net debt to EBITDA ratio of
approximately 1:1, even with significant investments being
made in recent years;
•
Strategically sound capital spending, with approximately
$1.2 billion invested in the rental fleet through acquisitions and
capital expenditures since 2013;
• Maintaining a scalable business that allows for demand-
matched growth while also proactively adopting cost savings
initiatives; and
• Growing the dividend at an affordable and sustainable rate.
The current dividend represents an increase of over 90 percent
since 2011.
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Letter to Shareholders | 2019 Annual Report
Enerflex’s 2019 Financial Results
Enerflex’s approach to growth is strategic and opportunistic. During
2019, the Company was able to deploy substantial capital toward
the USA’s contract compression fleet, as well as other large rental
opportunities across the globe, which will serve to grow and stabilize
earnings in future periods. Even with these investments, Enerflex
continues to have financial flexibility in pursuing its asset ownership
strategy and is well positioned for organic and inorganic growth.
2019 Financial Highlights
•
Revenue of $2,045.4 million, compared to $1,703.3 million in
2018.
• Gross margin of $429.1 million, or 21.0 percent of consolidated
revenue, compared to $308.0 million or 18.1 percent in 2018.
• Additions to rental equipment of $217.1 million, compared to
$115.3 million in 2018.
•
Recurring revenue of $596.9 million, an increase of 14.5 percent
compared with $521.1 million in 2018.
• Adjusted EBITDA of $345.8 million in 2019 compared with
$225.2 million in 2018, as detailed in the MD&A.
•
Increased dividend to $0.115 per share in the third quarter of
2019, an increase of 9.5 percent over the previous dividend.
Operational Update
Although 2019 was a successful year, the global energy industry faces
challenges as producers aggressively manage their capital expenditures,
which translates to lower Engineered Systems bookings for Enerflex.
However, we maintain our market position and continue improving
the business through several initiatives directed at differentiating and
optimizing our global platform, including:
•
Establishing an internal Environmental Assessment Committee
responsible for providing strategic guidance on climate change
risks, opportunities, and emission reduction strategies. This
internal committee is focused on expanding collaboration across
our organization and operations to identify and evaluate key
environmental risks and opportunities for our business to enhance
our environmental performance across our facilities and fleet.
• Making strides with an innovative global asset management
program to improve fleet and service efficiency and related
environmental footprint reductions.
• Automating multiple processes and newly implemented systems
during the facility expansion in Houston to achieve efficiency
gains.
•
Expanding our global approach to improving safety performance
by harmonizing each region’s skillsets, experiences, and tools.
In 2019, the Company hired a Global Subject Matter Expert for
HSE, focused on driving continued enhancements. As well, we
conducted an internal HSE conference with representatives from
each of our global operations, where learnings and best practices
were shared to be incorporated back into regional operations.
2019 Annual Report | Letter to Shareholders
5
Rest of World
In the Rest of World segment, several countries within Latin America and
the Middle East are continuing efforts to displace the burning of coal and
crude oil for domestic power generation and replacing it with cleaner
burning natural gas. The gas compression and processing infrastructure
requirements to fulfill these initiatives are significant and form a large
part of our international opportunity set for both Engineered Systems
and Asset Ownership. Our BOOM projects are proving invaluable for
both recurring revenue and growth in this segment as we have seen
several long-term BOOM projects extended and another three BOOM
projects under construction with expected contribution in mid-2020.
In Latin America and the Middle East, we continue to focus on securing
additional asset ownership opportunities and are focused on continuous
improvements to build out our expertise and risk appetite for ITK
projects to mitigate against future execution challenges. We are also
gratified to see growth plans underway in Argentina, Bolivia, Brazil, and
across the Middle East.
USA
Natural gas production grew in the U.S. in 2019, driven by
associated gas output from oil wells as the U.S. transitioned
toward energy independence. Our USA segment experienced
the highest throughput in the Company’s history, driven by
strong execution of a record Engineered Systems backlog. The
USA segment also benefitted significantly from the strong
fundamentals within the contract compression space, where
demand for rental compression fuelled the growth of our asset
ownership platform. Service revenue also increased due to
higher market activity and additional equipment deployed
within the various basins in which we operate. Our previously
announced expansion of our Houston facility is nearing
completion and most of the facility is online, implementing the
latest technologies to gain efficiencies in our manufacturing
processes. Our new facility allows us to optimize several
aspects of manufacturing, including project scheduling, supply
chain management, and throughput.
Canada
Enerflex’s Canadian operations excelled in 2019 with the
successful execution of several major manufacturing projects
and consistent strength from the AMS segment. Enerflex also
continued its efforts to capture electric power opportunities in
the region and has established its “Centre of Excellence” that will
be the foundation of our global electric power offerings for all
regions. We remain cautious on the outlook for Canada in 2020 as
egress issues and an uncertain political environment are limiting
near-term opportunities for growth. However, opportunity exists
in relation to LNG development, liquids recovery, and the electric
power space, and we anticipate dedicating additional resources
toward these initiatives.
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Letter to Shareholders | 2019 Annual Report
2020 Outlook
We remain encouraged by the fundamentals supporting the global
natural gas environment. However, we expect 2020 to be a correction
year following our record results in 2019 as the energy sector works
through the overhang from the frenetic activity of 2018 and customers
exercise caution with capital expenditure decisions. Nevertheless, we
see promising opportunities particularly within international markets,
where the transition away from more carbon intensive fossil fuels and
toward natural gas is gaining momentum across all end-use sectors
and especially within electric power generation. We are committed
to providing products and services that will assist in accelerating
this transition as we strive to become the global leading provider of
natural gas infrastructure. In addition, Enerflex anticipates continued
demand for its contract compression offerings and will deploy capital
toward this initiative to further develop its asset ownership platform.
We also believe that improvements in commodity prices should
cause customers to increase investment, which would translate into
additional demand for the Company’s products and services.
Energy remains a fundamental input to societal advancement
with natural gas demand strengthening within the global energy
consumption picture. Enerflex is well positioned to capitalize on
this opportunity with its advanced manufacturing facilities,
57 locations covering 17 countries, and extensive knowledge and
capabilities across the natural gas value chain. While we are proud of
our accomplishments, we also understand that the energy industry
continues to change and is at a crossroads particularly as it relates to
the consideration of environmental, social, and governance practices.
Expectations of Enerflex’s stakeholders are shifting. Ensuring that our
priorities align with the future of the investment market and energy
industry is key at Enerflex.
We would like to thank our employees, customers, investors, and other
stakeholders for their ongoing commitment to Enerflex. Your support is what
fuels our motivation to deliver on our promises today and in the future.
On behalf of the Board of Directors,
[signed] “Marc E. Rossiter”
Marc E. Rossiter
President, Chief Executive Officer, and Director
February 20, 2020
2019 Annual Report | Letter to Shareholders
7
ENVIRONMENTAL,
SOCIAL, AND
GOVERNANCE
ENVIRONMENT
Enerflex has long been committed to helping reduce the global emission footprint by focussing on the
cleanest fossil fuel and providing safe natural gas solutions to its customers. Additionally, we have made it our
responsibility to understand our environmental impact and work towards minimizing our footprint. We have
established an internal Environmental Assessment Committee responsible for identifying opportunities to
enhance environmental performance across our facilities and fleet.
CLIMATE CHANGE-RELATED RISKS AND GOVERNANCE
Adverse changes in the global climate and related risks could adversely
affect Enerflex’s future business or operations. Various physical and
transitional climate change-related risks applicable to Enerflex are
described in its Annual Information Form for the year ended
December 31, 2019. While these risks are not currently, or for
the foreseeable future, impacting Enerflex’s business growth and
financial performance, they are being monitored, evaluated, and
managed through the Company’s formal risk management process.
Management’s enterprise risk management (“ERM”) process includes
the identification and prioritization of Enerflex’s principal and emerging
risks (including climate-related risks), assigning each principal risk to
a member of the Executive Management Team (“EMT”) as the risk
owner, and regularly assessing such risks at EMT meetings. For each
risk scenario, the EMT estimates the likelihood and potential impact
that such risks could have on our business and how they may impact
our strategy. Management compiles all risks identified as critical on an
integrated risk register that catalogs actions for managing or mitigating
each risk. Management also provides continuous supervision over the
Company’s (pending and in-flight) major projects and their risks, meeting
monthly and as required. In addition, Enerflex has recently established
To review Enerflex’s Environmental, Social, and Governance Performance Summary for 2019, refer to Appendix 1 on page 101.
8
Environmental, Social, and Governance | 2019 Annual Report
an internal Environmental Assessment Committee to provide strategic
guidance on climate change risks, opportunities, and emission reduction
strategies. This internal committee is focused on expanding collaboration
across our organization and operations to identify and evaluate key
environmental risks and opportunities for our business. The Company’s
SVP, General Counsel acts as Chair of the Environmental Assessment
Committee and reports regularly to the other members of the EMT,
including the CEO, who reports to the Board.
The Board has the responsibility to oversee and monitor risk across the
organization, and ensure implementation of appropriate ERM systems
to identify, monitor, and manage those risks with a view to the long-term
viability of the Company. Management ensures that the Board and
its committees are kept well informed of Enerflex’s ERM systems and
principal and emerging risks (including climate-related risks), including
by way of: quarterly reports on operational and earnings risks; quarterly
reports on market valuation risks; annual reports on risks to achieving
the proposed budget; annual reports on risks to Enerflex’s strategy; and
regular ERM updates and discussions on how the Company is identifying,
mitigating, and tracking risks as part of its overall ERM strategy. The
Board also considers climate-related opportunities as part of its overall
assessment of Enerflex’s strategy at the annual strategy session.
CLIMATE CHANGE-RELATED OPPORTUNITIES AND
STRATEGIES
The key focal areas that Enerflex is examining to address climate change-
related risks and enhance environmental performance include:
•
•
•
Identifying energy and emissions reduction opportunities in its
operations.
Identifying energy efficient procurement opportunities.
Identifying opportunities to design and manufacture
cost-effective equipment with enhanced environmental
performance.
Innovating for improved efficiencies.
•
• Measuring emissions and potential reductions.
Enerflex has already implemented strategies to pursue these objectives
and continues to explore further opportunities. Beyond recycling and
other waste management initiatives at corporate, manufacturing, and
field locations, Enerflex focusses on energy and water conservation,
spill prevention and response, reducing air emissions, and systematic,
location-by-location environmental auditing across all regions and
core service offerings. For example, in 2014 and 2018, respectively,
Enerflex transitioned its Canadian and USA manufacturing facilities to
low Volatile Organic Compound (“VOC”) paint and VOC free thinner. The
Company has also reduced its usage of freshwater by mandating the use of
recycled water for pressure testing vessels at its manufacturing facilities.
Moreover, Enerflex is currently pursuing an innovative project regarding
its global asset management program to achieve improved rental fleet
performance and functional efficiency, and related environmental
footprint reductions.
Enerflex will continue to investigate actions it can undertake to control
and reduce its carbon footprint and help shape the energy industry for
a more sustainable future.
2019 Annual Report | Environmental, Social, and Governance
9
SOCIAL
With more than 2,500 employees, 57 locations, and operations spanning 17 countries, Enerflex’s commitment to
conducting business activities in a manner that is socially responsible and safeguards the health, safety, and
well-being of its employees and the communities in which it operates has remained resolute. Enerflex’s commitment
to people is embedded in our core values: we believe that our employees and stakeholders worldwide deserve to
be treated with respect. We have policies and practices in place to support these values and promote diversity and
inclusion throughout the organization.
SAFETY
Safety is a fundamental value at Enerflex. Our commitment to providing
a safe workplace is instilled in our culture and in everything we do,
exemplified daily by our global employees. Since our inception 40 years
ago, our focus on safety performance, responsible operations, and
continuous improvement has not wavered.
As a Company standard, we set aggressive safety goals in order to
intentionally raise the bar each year. For 2019, we achieved a Total
Recordable Injury Rate of 0.55, below our internal Company target and
well below industry standards. During the year, we continued to report
Near Misses, and our Lost Time Incidents Rate for 2019 was 0.09, close
to our ambitious target of zero. Enerflex also achieved significant results
in its Motor Vehicle Incident Rate, ending the year with a rate of 0.28 on
over 18 million kilometers driven across our global fleet. To put this into
perspective, in 2019 Enerflex employees drove enough kilometers to
circumnavigate the earth 450 times.
The Company performs annual internal safety audits, as well as periodic
comprehensive third-party external audits, ensuring each location meets
or exceeds industry standards and the Company’s HSE requirements.
Our safety culture is enhanced by Enerflex’s Values Based Decision
Making training, a top-to-bottom safety commitment by every employee
and manager, careful stewardship in every location and on every project,
and a corporate management system that includes reporting regional
results using common measures, contributing to our strategic HSE
oversight.
In 2019, Enerflex expanded its global approach to improving safety
performance by harmonizing the individual regions’ skillsets,
experiences, and tools. We hired a Global Subject Matter Expert for HSE,
focused on driving continued enhancements. As well, we conducted
an internal HSE conference during the fourth quarter of 2019 with
representatives from each of our global operations, where learnings
and best practices were shared to be incorporated back into regional
operations and global HSE objectives were set for 2020.
Enerflex instituted a number of additional cross-regional safety
campaigns in 2019, including:
•
The automation of Aware Cards, providing employees the ability
to submit safety concerns via phone app, thus standardizing
the information for better reporting and more effective change
initiatives resulting from the findings.
• Communication of learnings from Near Misses, bringing
awareness and mitigating repeat incidents.
• Continued emphasis on behavioral-based safety through daily
stand-down meetings, Near Miss investigations, strict adherence
to every day safety inspections, and job risk assessments.
•
The launch of the Driver Safety Challenge program, encouraging
safe and improved driving behavior.
Enerflex remains disciplined and committed to continuously
strengthening our safety programs on a global scale, as we continue to
expand our capabilities and footprint.
10
Environmental, Social, and Governance | 2019 Annual Report
DIVERSITY AND INCLUSION
As a global company, we assemble teams that cross geographical and
cultural boundaries and recruit from around the world. We are proud
of our diverse and dedicated workforce, which is a key strength in
helping us to understand and meet our customers needs worldwide.
The diversity of our global team is also key to driving greater
innovation and creativity, a core value at Enerflex. We believe inclusive
teams that value diverse perspectives lead to better outcomes for all
our stakeholders, making us a stronger company overall.
Our goal is to recruit, develop, promote, and include diverse talent. In
2019, we continued progressing towards this goal, including by:
•
Extending the application of the Diversity Policy to apply
to the EMT in addition to the Board, as well as introducing
a quantifiable target: Enerflex will strive to ensure that the
candidate slates for Board and EMT positions are comprised of
at least 30% qualified females.
• Continuing to concentrate on our training and development
offerings, to which all employees have equal access. In 2019,
Enerflex’s formal training and development constituted
344 global facilitated training hours, and a total of 5,102 global
employee training hours. In particular, over 400 additional
employees (16% of our workforce) participated in Enerflex’s
Values Based Decision Making training in 2019, which is a
full day in-person course designed to enhance the application
of effective ethical decision-making tools. The Values Based
Decision Making course has been offered by Enerflex as part of
its core training program since 2012, and as of 2019 is offered in
both English and Spanish.
•
Enhancing flexible work arrangements to provide additional
flexibility to support work-life balance and family life. Depending
on the region, Enerflex’s flexible work arrangements include
vacation purchase, flexible days off, reduced work weeks, and
paid and unpaid leaves of absence (including family, military,
maternity, and parental).
•
•
Ensuring market-competitive compensation and benefits, to
help acknowledge the value our people bring to the Company.
Promoting our established performance management
process, utilizing a web-based information system that
enables transparent, easy access for employees and managers
throughout the process. In 2019, the performance review
participation rate was 98%.
The foundation of an inclusive culture is to build respectful teams who
collectively share the responsibility to prevent, identify, and respond
appropriately to incidents of harassment. We believe all employees
deserve to work in a safe, respectful workplace free of harassment
and bullying. A culture of respect creates a climate for employees
to contribute meaningfully. In 2019, the Company implemented
the following initiatives to expand our commitment to a respectful
workplace:
•
Introduced a global Respectful Workplace Policy that
reiterates Enerflex’s commitment and expectations for a work
environment that is free from harassment, discrimination, and
violence. In 2019, all employees and consultants were required
to complete a mandatory review of the Respectful Workplace
Policy and take an online quiz to ensure understanding, which
will occur bi-annually. In addition, each region is conducting
respectful workplace training to promote the identification,
appropriate response, and prevention of incidents of
harassment.
•
Implemented unconscious bias training for 40 managers in
the organization, designed to help leaders enhance awareness
around what bias is, how it arises, and what we can all do to
overcome it.
2019 Annual Report | Environmental, Social, and Governance
11
COMMUNITY
We have made it our responsibility to care for the health, safety, and
well-being of the local communities in which our employees live, as well
as where we operate. Strengthening and helping to shape the future
of our global communities is an important goal for employees and the
Company as a whole. Enerflex contributes directly to a number of
causes, and also supports charitable activities by encouraging employees
to volunteer their time and talent. Enerflex is actively involved in
supporting neighbouring businesses and non-profits such as Kids Cancer
Care, Habitat for Humanity, the MS Society, as well as Blood, Diabetes,
and Heart Services agencies.
SHAREHOLDER ENGAGEMENT
Enerflex’s platform delivers a powerful and value-creating array of natural
gas infrastructure solutions. These solutions are supported by a strong
strategy and diversified operations that enable the Company to provide
value to clients and generate returns for shareholders.
Enerflex communicates this value through annual and quarterly reporting,
news releases, the Company’s website, quarterly teleconferences, and
audio webcasts with replays, as well as other disclosure and regulatory
documents filed under Enerflex’s profile on SEDAR. The Company believes
that partnership is key to successful operations, which is why Enerflex
takes a direct, constructive, and transparent approach to shareholder
engagement. In 2019, the Board adopted a formal Shareholder Engagement
Policy, to ensure that shareholders can communicate questions or concerns
directly to senior management or to the Board, which is available for review
on the Company website at www.enerflex.com. Investors may also contact
Enerflex’s Investor Relations department at any time at ir@enerflex.com.
Enerflex values effective and constructive conversations that foster better
alignment between the Board, management, and shareholders, as well
as organizations that represent and advise shareholders on matters of
governance such as the Canadian Coalition for Good Governance.
12
Environmental, Social, and Governance | 2019 Annual Report
GOVERNANCE
We are proud of the integrity of our people and
processes. Since inception Enerflex has been
committed to implementing and maintaining
effective practices in corporate governance.
Strong governance is in the best interest of
our shareholders and promotes transparent,
effective decision-making at the Board level
and throughout the Company. Management
and the Board regularly monitor regulatory
developments and governance best practices to
ensure Enerflex maintains its high governance
standards, including with respect to Board and
EMT composition and pay, Board tenure and
succession practices, shareholder rights, and
audit and risk oversight.
Detailed discussions of Enerflex’s governance practices and
standards will be contained in the Management Information
Circular which is expected to be dated on or about March 9, 2020,
including:
•
•
•
The independence of all directors excluding the CEO, and
the independence and role of Board chair;
The absence of interlocking board positions;
The practice of holding in camera sessions at every board
meeting without management present;
• Committee structure and mandates;
•
•
The orientation and continuing education offerings for
directors;
The Board annual assessment process and director skills
matrix;
• Director term limits and succession planning;
• Director compensation;
•
•
Executive compensation and the “say on pay” advisory
vote;
Stock ownership guidelines for directors and members of
the EMT;
•
The prohibition on hedging for directors and the EMT;
• Director and EMT diversity policy, practices, and targets;
•
Risk and strategic planning oversight;
• Various policies and practices designed to govern and
sustain our culture of ethical business conduct, including
the Business Code of Conduct, the Respectful Workplace
Policy, the Whistleblower Policy, the Anti-Bribery and Anti-
Corruption Policy, and the Insider Trading Policy; and
•
Policies and practices designed to enhance shareholder
rights, including the Majority Voting Policy and the
Shareholder Engagement Policy.
2019 Annual Report | Environmental, Social, and Governance
13
MANAGEMENT’S
DISCUSSION
AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2019 ESG PERFORMANCE SUMMARY
SHAREHOLDERS’ INFORMATION
15
53
58
101
103
14
Management’s Discussion and Analysis | 2019 Annual Report
•
•
•
•
•
•
•
•
•
•
•
The Rentals product line provides natural gas compression equipment rentals to oil and natural gas customers in the USA,
primarily operating in the Permian and SCOOP/STACK formations utilizing a fleet of low-, medium-, and high-horsepower
packages. These compressor packages are typically used in wellhead, gas-lift, and natural gas gathering systems, and other
applications primarily in connection with natural gas and oil production. The Rentals product line in the USA operates out of
Enerflex’s Houston, Texas facility.
REST OF WORLD
The Rest of World segment deploys products typically fabricated by Enerflex’s Engineered Systems division in Houston, Texas.
The Latin America region, with locations in Argentina, Bolivia, Brazil, Colombia, and Mexico, provides Engineered Systems
products, including integrated turnkey (“ITK”) natural gas compression and processing solutions, with local construction and
installation capabilities. The Service product line in the region focuses on after-market services, parts, and components, as well
as operations, maintenance, and overhaul services. The Rentals product line provides natural gas compression and processing
equipment, including build-own-operate-maintain (“BOOM”) solutions of varying size and scope, for rent to oil and gas
customers in the region.
The Middle East/Africa (“MEA”) region, through its operations in Bahrain, Oman, Kuwait, and the UAE, provides engineering,
design, procurement, and construction services for compression, process, and power generation equipment, as well as rentals,
after-market service, and operations and maintenance services for gas compression and processing facilities in the region.
The Australia region is headquartered in Brisbane, Queensland with additional locations in Queensland, New South Wales,
and New Zealand providing after-market services, equipment supply, parts supply, and general asset management.
The Asia region, with locations and operations in Indonesia, Malaysia, and Thailand, provides Engineered Systems, as well as
Service capabilities, offered through the Company’s local operations.
Through its location in the United Kingdom, the Company provides customized compression, processing, and high-end
refrigeration solutions in the Europe region.
engines and parts in its Rest of World regions.
As a Platinum Power Packager of INNIO's Waukesha engines, the Company provides factory-direct access to Waukesha
CANADA
The Engineered Systems product line is comprised of compression, process, and electric power solutions. Enerflex provides
custom and standard compression packages for reciprocating and screw compressor applications. It also engineers, designs,
manufactures, constructs, and installs modular processing equipment and waste gas systems for natural gas facilities. Enerflex
also provides ITK power generation and gas processing facilities. Retrofit solutions provide re-engineering, reconfiguration,
and repackaging of compressors for various field applications. Enerflex has a manufacturing facility in Calgary, Alberta and
retrofit facilities in Calgary, Grand Prairie and Red Deer, Alberta.
The Service product line provides after-market mechanical service and parts distribution. In 2015, Enerflex’s long-term
distributorship agreement for INNIO’s Waukesha natural gas engines and parts changed from being the exclusive distributor
in Canada and Australia to being a Global Platinum Partner under INNIO’s Waukesha Power Packager program. As an INNIO
Waukesha Platinum Power Packager, the Company has worldwide factory-direct access to Waukesha engines and parts. In
addition, Enerflex is also the authorized distributor and service provider of INNIO’s Jenbacher gas engines and parts in
Canada. The Company also packages CAT engines and parts. The Service product line operates out of service branches located
in Alberta, British Columbia, Ontario, and Quebec.
The Rentals product line provides reciprocating and rotary screw natural gas compression packages ranging from 50
horsepower to 2,000 horsepower, as well as electric power equipment for rent to customers from its locations in Calgary and
Grand Prairie, Alberta.
ENGINEERED SYSTEMS
The Engineered Systems product line is comprised of three product offerings: compression, process, and electric power. Enerflex is able
to combine one or more of these product offerings into an ITK solution, including civil works, piping and structural fabrication, and
electrical, instrumentation, controls, and automation, as well as installation and commissioning. Enerflex’s ITK offering allows customers
to simplify their supply chain, eliminate interface risk, and reduce the concept-to-commissioning cycle time of major projects.
Compression packages are offered from 20 horsepower to 10,000 plus horsepower and ranging from low specification field compressors
to high specification process compressors for onshore and offshore applications. The Company also provides retrofit solutions which
includes re-engineering, reconfiguration, and repackaging of compressors for various field applications. Processing equipment includes
2
Enerflex Ltd. | 2019 Annual Report
QUARTERLY REPORT FOR THE THREE MONTHS ENDED DECEMBER 31, 2019
MANAGEMENT’S DISCUSSION AND ANALYSIS
February 20, 2020
The Management’s Discussion and Analysis (“MD&A”) for Enerflex Ltd. (“Enerflex” or “the Company”) should be read in conjunction with
the audited consolidated financial statements for years ended December 31, 2019 and 2018, and the cautionary statement regarding
forward looking information in the “Forward-Looking Statements” section of this report.
The financial information reported herein has been prepared in accordance with International Financial Reporting Standards (“IFRS”)
and is presented in Canadian dollars unless otherwise stated.
The MD&A focuses on information and key statistics from the audited consolidated financial statements, and considers known risks and
uncertainties relating to the oil and gas services sector. This discussion should not be considered all-inclusive, as it excludes possible
future changes that may occur in general economic, political, and environmental conditions. Additionally, other elements may or may not
occur which could affect industry conditions and/or Enerflex in the future. Additional information relating to the Company can be found
in the Company’s Annual Information Form and Management Information Circular, which are available on SEDAR at www.sedar.com.
THE COMPANY
Enerflex is a single-source supplier of natural gas compression, oil and gas processing, refrigeration systems, and electric power
generation equipment with in-house engineering and mechanical services 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, gas lift compression, refrigeration systems, and
electric power equipment serving the natural gas production industry.
Headquartered in Calgary, Canada, the Company has approximately 2,500 employees worldwide. Enerflex, its subsidiaries, interests in
associates and joint operations, operate in Canada, the United States of America (“USA”), Argentina, Bolivia, Brazil, Colombia, Mexico,
the United Kingdom, Bahrain, Kuwait, Oman, the United Arab Emirates (“UAE”), Australia, New Zealand, Indonesia, Malaysia, and
Thailand. Through Enerflex’s owned natural gas infrastructure, the Company transforms over 2.5 billion cubic feet of natural gas per day,
globally.
Enerflex has fabrication facilities in Calgary, Canada; Houston, USA; and Brisbane, Australia that supply custom fabricated equipment to
our customers worldwide. Enerflex is a leading supplier in Canada, the USA, Latin America, and the Middle East rental markets for natural
gas compression with a global rental fleet of over 670,000 horsepower. The Company is a highly-qualified service provider with industry-
certified mechanics and technicians strategically situated across a network of 49 service locations in Canada, the USA, Latin America,
the Middle East, Asia, Australia, and New Zealand.
Enerflex operates three business segments: USA, Rest of World (“ROW”), and Canada. Each regional business segment has three main
product lines: Engineered Systems, Service, and Rentals. A summary of the business segments and product lines is included below:
USA
•
The Engineered Systems product line provides custom and standard compression packages for reciprocating and screw
compressor applications from Enerflex’s manufacturing facility located in Houston, Texas. In addition, the Company engineers,
designs, manufactures, constructs, and installs modular natural gas processing equipment and refrigeration systems. Retrofit
provides re-engineering, reconfiguration, and repackaging of compressors for various field applications.
•
•
The Service product line provides mechanical services and parts, as well as operations and maintenance solutions to the oil
and natural gas industry in the USA. Effective January 2015, the Company became a General Electric (now INNIO) Waukesha
Platinum Power Packager, providing worldwide factory-direct access to Waukesha engines and parts. In addition, Enerflex
packages CAT engines and parts. Enerflex’s USA service branches are located in Colorado, Louisiana, New Mexico, North
Dakota, Oklahoma, Pennsylvania, Texas, West Virginia, and Wyoming.
The Rentals product line provides natural gas compression equipment rentals to oil and natural gas customers in the USA,
primarily operating in the Permian and SCOOP/STACK formations utilizing a fleet of low-, medium-, and high-horsepower
packages. These compressor packages are typically used in wellhead, gas-lift, and natural gas gathering systems, and other
applications primarily in connection with natural gas and oil production. The Rentals product line in the USA operates out of
Enerflex’s Houston, Texas facility.
REST OF WORLD
2019 Annual Report | Management’s Discussion and Analysis
•
•
The Rest of World segment deploys products typically fabricated by Enerflex’s Engineered Systems division in Houston, Texas.
The Latin America region, with locations in Argentina, Bolivia, Brazil, Colombia, and Mexico, provides Engineered Systems
products, including integrated turnkey (“ITK”) natural gas compression and processing solutions, with local construction and
installation capabilities. The Service product line in the region focuses on after-market services, parts, and components, as well
as operations, maintenance, and overhaul services. The Rentals product line provides natural gas compression and processing
equipment, including build-own-operate-maintain (“BOOM”) solutions of varying size and scope, for rent to oil and gas
customers in the region.
15
CANADA
•
•
•
•
•
•
•
•
The Middle East/Africa (“MEA”) region, through its operations in Bahrain, Oman, Kuwait, and the UAE, provides engineering,
design, procurement, and construction services for compression, process, and power generation equipment, as well as rentals,
after-market service, and operations and maintenance services for gas compression and processing facilities in the region.
The Australia region is headquartered in Brisbane, Queensland with additional locations in Queensland, New South Wales,
and New Zealand providing after-market services, equipment supply, parts supply, and general asset management.
The Asia region, with locations and operations in Indonesia, Malaysia, and Thailand, provides Engineered Systems, as well as
Service capabilities, offered through the Company’s local operations.
Through its location in the United Kingdom, the Company provides customized compression, processing, and high-end
refrigeration solutions in the Europe region.
engines and parts in its Rest of World regions.
As a Platinum Power Packager of INNIO's Waukesha engines, the Company provides factory-direct access to Waukesha
The Engineered Systems product line is comprised of compression, process, and electric power solutions. Enerflex provides
custom and standard compression packages for reciprocating and screw compressor applications. It also engineers, designs,
manufactures, constructs, and installs modular processing equipment and waste gas systems for natural gas facilities. Enerflex
also provides ITK power generation and gas processing facilities. Retrofit solutions provide re-engineering, reconfiguration,
and repackaging of compressors for various field applications. Enerflex has a manufacturing facility in Calgary, Alberta and
retrofit facilities in Calgary, Grand Prairie and Red Deer, Alberta.
The Service product line provides after-market mechanical service and parts distribution. In 2015, Enerflex’s long-term
distributorship agreement for INNIO’s Waukesha natural gas engines and parts changed from being the exclusive distributor
in Canada and Australia to being a Global Platinum Partner under INNIO’s Waukesha Power Packager program. As an INNIO
Waukesha Platinum Power Packager, the Company has worldwide factory-direct access to Waukesha engines and parts. In
addition, Enerflex is also the authorized distributor and service provider of INNIO’s Jenbacher gas engines and parts in
Canada. The Company also packages CAT engines and parts. The Service product line operates out of service branches located
in Alberta, British Columbia, Ontario, and Quebec.
The Rentals product line provides reciprocating and rotary screw natural gas compression packages ranging from 50
horsepower to 2,000 horsepower, as well as electric power equipment for rent to customers from its locations in Calgary and
Grand Prairie, Alberta.
ENGINEERED SYSTEMS
The Engineered Systems product line is comprised of three product offerings: compression, process, and electric power. Enerflex is able
to combine one or more of these product offerings into an ITK solution, including civil works, piping and structural fabrication, and
electrical, instrumentation, controls, and automation, as well as installation and commissioning. Enerflex’s ITK offering allows customers
to simplify their supply chain, eliminate interface risk, and reduce the concept-to-commissioning cycle time of major projects.
Compression packages are offered from 20 horsepower to 10,000 plus horsepower and ranging from low specification field compressors
to high specification process compressors for onshore and offshore applications. The Company also provides retrofit solutions which
includes re-engineering, reconfiguration, and repackaging of compressors for various field applications. Processing equipment includes
2
Enerflex Ltd. | 2019 Annual Report
•
The Rentals product line provides natural gas compression equipment rentals to oil and natural gas customers in the USA,
primarily operating in the Permian and SCOOP/STACK formations utilizing a fleet of low-, medium-, and high-horsepower
packages. These compressor packages are typically used in wellhead, gas-lift, and natural gas gathering systems, and other
applications primarily in connection with natural gas and oil production. The Rentals product line in the USA operates out of
Enerflex’s Houston, Texas facility.
REST OF WORLD
•
•
•
•
•
•
•
The Rest of World segment deploys products typically fabricated by Enerflex’s Engineered Systems division in Houston, Texas.
The Latin America region, with locations in Argentina, Bolivia, Brazil, Colombia, and Mexico, provides Engineered Systems
products, including integrated turnkey (“ITK”) natural gas compression and processing solutions, with local construction and
installation capabilities. The Service product line in the region focuses on after-market services, parts, and components, as well
as operations, maintenance, and overhaul services. The Rentals product line provides natural gas compression and processing
equipment, including build-own-operate-maintain (“BOOM”) solutions of varying size and scope, for rent to oil and gas
customers in the region.
The Middle East/Africa (“MEA”) region, through its operations in Bahrain, Oman, Kuwait, and the UAE, provides engineering,
design, procurement, and construction services for compression, process, and power generation equipment, as well as rentals,
after-market service, and operations and maintenance services for gas compression and processing facilities in the region.
The Australia region is headquartered in Brisbane, Queensland with additional locations in Queensland, New South Wales,
and New Zealand providing after-market services, equipment supply, parts supply, and general asset management.
The Asia region, with locations and operations in Indonesia, Malaysia, and Thailand, provides Engineered Systems, as well as
Service capabilities, offered through the Company’s local operations.
Through its location in the United Kingdom, the Company provides customized compression, processing, and high-end
refrigeration solutions in the Europe region.
As a Platinum Power Packager of INNIO's Waukesha engines, the Company provides factory-direct access to Waukesha
engines and parts in its Rest of World regions.
CANADA
•
The Engineered Systems product line is comprised of compression, process, and electric power solutions. Enerflex provides
custom and standard compression packages for reciprocating and screw compressor applications. It also engineers, designs,
manufactures, constructs, and installs modular processing equipment and waste gas systems for natural gas facilities. Enerflex
also provides ITK power generation and gas processing facilities. Retrofit solutions provide re-engineering, reconfiguration,
and repackaging of compressors for various field applications. Enerflex has a manufacturing facility in Calgary, Alberta and
retrofit facilities in Calgary, Grand Prairie and Red Deer, Alberta.
•
•
The Service product line provides after-market mechanical service and parts distribution. In 2015, Enerflex’s long-term
distributorship agreement for INNIO’s Waukesha natural gas engines and parts changed from being the exclusive distributor
in Canada and Australia to being a Global Platinum Partner under INNIO’s Waukesha Power Packager program. As an INNIO
Waukesha Platinum Power Packager, the Company has worldwide factory-direct access to Waukesha engines and parts. In
addition, Enerflex is also the authorized distributor and service provider of INNIO’s Jenbacher gas engines and parts in
Canada. The Company also packages CAT engines and parts. The Service product line operates out of service branches located
in Alberta, British Columbia, Ontario, and Quebec.
The Rentals product line provides reciprocating and rotary screw natural gas compression packages ranging from 50
horsepower to 2,000 horsepower, as well as electric power equipment for rent to customers from its locations in Calgary and
Grand Prairie, Alberta.
ENGINEERED SYSTEMS
The Engineered Systems product line is comprised of three product offerings: compression, process, and electric power. Enerflex is able
to combine one or more of these product offerings into an ITK solution, including civil works, piping and structural fabrication, and
electrical, instrumentation, controls, and automation, as well as installation and commissioning. Enerflex’s ITK offering allows customers
to simplify their supply chain, eliminate interface risk, and reduce the concept-to-commissioning cycle time of major projects.
Compression packages are offered from 20 horsepower to 10,000 plus horsepower and ranging from low specification field compressors
to high specification process compressors for onshore and offshore applications. The Company also provides retrofit solutions which
includes re-engineering, reconfiguration, and repackaging of compressors for various field applications. Processing equipment includes
dehydration and liquids recovery, refrigeration and cryogenic processing, oil and natural gas separators, and amine sweetening to
remove H2S or CO2. For electric power, a typical power generation unit is comprised of a natural gas reciprocating engine driver, a
generator, and control devices. Facilities dedicated to the Engineered Systems product line occupy approximately 250,000 square feet
of manufacturing space in Canada, approximately 315,000 square feet of shop space in the USA, and approximately 40,000 square feet
Enerflex Ltd. | 2019 Annual Report
2
of shop space in Australia devoted to retrofit, service, and overhaul activities.
SERVICE
Enerflex’s Service division provides after-market services, parts distribution, operations and maintenance solutions, equipment
optimization and maintenance programs, manufacturer warranties, exchange components, and technical services to our global
customers. The product line operates through an extensive network of branch offices and generally provides its services at the
customer's wellsite location using trained technicians and mechanics. Enerflex is a Global Platinum partner under INNIO’s Waukesha
Power Packager program, which allows the Company to package and service Waukesha engines for its customers worldwide.
Additionally, the Company is a distributor for INNIO’s Jenbacher gas engines and parts in Canada. Enerflex is also the authorized
distributor for Altronic, a leading manufacturer of electric ignition and control systems, in all of its operating regions. Enerflex’s after-
market service and support business includes 49 outlets situated in active natural gas producing areas, over 400 service vehicles,
Management’s Discussion and Analysis | 2019 Annual Report
hundreds of skilled mechanics, and a sizable inventory of original equipment manufacturer parts from key manufacturers.
16
RENTALS
The Rentals product line includes a variety of rental and leasing alternatives for natural gas compression, processing, and electric power
equipment. The rental fleet is deployed across Canada, the USA, Argentina, Brazil, Colombia, Mexico, Bahrain, and Oman, and provides
comprehensive contract operations services to customers in each of those regions. In addition to Enerflex’s rental fleet, the Company’s
Rentals product line provides customers with personnel, equipment, tools, materials, and supplies to meet our customers’ natural gas
compression and processing needs, as well as designing, sourcing, owning, installing, operating, servicing, repairing, and maintaining
equipment owned by the Company necessary to provide these services. The Rentals product line encompasses a fleet of natural gas
compressors totalling over 670,000 horsepower on rent or available for rent globally.
Management’s Discussion and Analysis | 2019 Annual Report
3
dehydration and liquids recovery, refrigeration and cryogenic processing, oil and natural gas separators, and amine sweetening to
remove H2S or CO2. For electric power, a typical power generation unit is comprised of a natural gas reciprocating engine driver, a
generator, and control devices. Facilities dedicated to the Engineered Systems product line occupy approximately 250,000 square feet
of manufacturing space in Canada, approximately 315,000 square feet of shop space in the USA, and approximately 40,000 square feet
of shop space in Australia devoted to retrofit, service, and overhaul activities.
SERVICE
Enerflex’s Service division provides after-market services, parts distribution, operations and maintenance solutions, equipment
optimization and maintenance programs, manufacturer warranties, exchange components, and technical services to our global
customers. The product line operates through an extensive network of branch offices and generally provides its services at the
customer's wellsite location using trained technicians and mechanics. Enerflex is a Global Platinum partner under INNIO’s Waukesha
Power Packager program, which allows the Company to package and service Waukesha engines for its customers worldwide.
Additionally, the Company is a distributor for INNIO’s Jenbacher gas engines and parts in Canada. Enerflex is also the authorized
distributor for Altronic, a leading manufacturer of electric ignition and control systems, in all of its operating regions. Enerflex’s after-
market service and support business includes 49 outlets situated in active natural gas producing areas, over 400 service vehicles,
hundreds of skilled mechanics, and a sizable inventory of original equipment manufacturer parts from key manufacturers.
RENTALS
The Rentals product line includes a variety of rental and leasing alternatives for natural gas compression, processing, and electric power
equipment. The rental fleet is deployed across Canada, the USA, Argentina, Brazil, Colombia, Mexico, Bahrain, and Oman, and provides
comprehensive contract operations services to customers in each of those regions. In addition to Enerflex’s rental fleet, the Company’s
Rentals product line provides customers with personnel, equipment, tools, materials, and supplies to meet our customers’ natural gas
compression and processing needs, as well as designing, sourcing, owning, installing, operating, servicing, repairing, and maintaining
equipment owned by the Company necessary to provide these services. The Rentals product line encompasses a fleet of natural gas
compressors totalling over 670,000 horsepower on rent or available for rent globally.
Management’s Discussion and Analysis | 2019 Annual Report
3
2019 Annual Report | Management’s Discussion and Analysis
17
FINANCIAL OVERVIEW
FINANCIAL OVERVIEW
($ Canadian thousands, except percentages and horsepower)
Revenue
Gross margin 1
($ Canadian thousands, except percentages and horsepower)
Selling and administrative expenses
Revenue
Operating income
Gross margin 1
Earnings before finance costs and income taxes
Selling and administrative expenses
(“EBIT”)
Operating income
Net earnings
Earnings before finance costs and income taxes
(“EBIT”)
Key Financial Performance Indicators 2
Net earnings
Engineered Systems bookings
Engineered Systems backlog
Key Financial Performance Indicators 2
Recurring revenue growth 3
Engineered Systems bookings
Gross margin as a percentage of revenue
Engineered Systems backlog
EBIT as a percentage of revenue 4
Recurring revenue growth 3
Earnings before finance costs, income taxes,
Gross margin as a percentage of revenue
depreciation and amortization (“EBITDA”) 1
EBIT as a percentage of revenue 4
Return on capital employed (“ROCE”) 1, 4
Earnings before finance costs, income taxes,
Rental horsepower
depreciation and amortization (“EBITDA”) 1
$
$
$
$
$
$
$
$
2019
474,362
97,442
2019
49,070
474,362
48,372
97,442
49,070
48,813
48,372
31,436
48,813
31,436
94,509
467,757
6.3%
94,509
20.5%
467,757
11.4%
6.3%
20.5%
70,234
11.4%
15.8%
$
$
$
$
$
Three months ended
December 31,
Twelve months ended
December 31,
466,842 $
2,045,422 $
$
2018
Three months ended
December 31,
81,762
2018
34,174
$
466,842 $
2,045,422 $
2019
429,085
2019
197,177
231,908
429,085
2018
Twelve months ended
1,703,273
December 31,
307,973
2018
163,009
1,703,273
144,964
307,973
47,588
81,762
34,174
48,240
47,588
32,480 $
197,177
233,902
231,908
152,128 $
48,240
233,902
32,480 $
676,956 $
152,128 $
508,916 $
1,420,621
467,757
12.4%
676,956 $
17.5%
1,420,621
8.9%
12.4%
17.5%
75,218 $
8.9%
10.9%
14.5%
508,916 $
21.0%
467,757
11.4%
14.5%
21.0%
320,461 $
11.4%
15.8%
163,009
151,679
144,964
101,416
151,679
101,416
1,980,363
1,420,621
12.9%
1,980,363
18.1%
1,420,621
8.9%
12.9%
18.1%
241,453
8.9%
10.9%
641,915
241,453
674,153
70,234
$
641,915
75,218 $
674,153
320,461 $
15.8%
Rental horsepower
Return on capital employed (“ROCE”) 1, 4
1 In the fourth quarter and twelve months of 2019, Enerflex recognized $24.4 million and $26.4 million of write-offs and impairment charges on rental equipment. Of
the total value recognized, $14.5 million relates to the write-off of specialized rental assets acquired as part of a business combination in 2014 that we have now
674,153
determined cannot be redeployed and have never been utilized or generated revenue for Enerflex.
2 Key financial performance indicators used by Enerflex to measure its performance include revenue and EBIT. Certain of these key performance indicators are non-
1 In the fourth quarter and twelve months of 2019, Enerflex recognized $24.4 million and $26.4 million of write-offs and impairment charges on rental equipment. Of
IFRS measures. Further detail is provided in the Non-IFRS Measures section.
the total value recognized, $14.5 million relates to the write-off of specialized rental assets acquired as part of a business combination in 2014 that we have now
3 Recurring revenue is comprised of revenue from the Service and Rentals product lines, which are typically contracted and extend into the future. While the contracts
determined cannot be redeployed and have never been utilized or generated revenue for Enerflex.
are subject to cancellation or have varying lengths, the Company does not believe these characteristics preclude them from being considered recurring in nature. Growth
2 Key financial performance indicators used by Enerflex to measure its performance include revenue and EBIT. Certain of these key performance indicators are non-
in recurring revenue is calculated on a period-over-period basis.
IFRS measures. Further detail is provided in the Non-IFRS Measures section.
4 Determined by taking the trailing 12-month period.
3 Recurring revenue is comprised of revenue from the Service and Rentals product lines, which are typically contracted and extend into the future. While the contracts
are subject to cancellation or have varying lengths, the Company does not believe these characteristics preclude them from being considered recurring in nature. Growth
674,153
641,915
641,915
15.8%
10.9%
10.9%
in recurring revenue is calculated on a period-over-period basis.
4 Determined by taking the trailing 12-month period.
18
4
4
Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
Enerflex Ltd. | 2019 Annual Report
FOURTH QUARTER AND TWELVE MONTHS OF 2019 OVERVIEW
For the three months ended December 31, 2019:
• Operating income for the fourth quarter of 2019 was consistent with the prior year, with higher gross margins being offset by
the cost recoveries related to the Oman Oil Exploration and Production LLC (“OOCEP”) arbitration included in SG&A costs in
the prior year. Gross margin improved based on strong execution of projects from opening backlog, higher service activity
levels, and the continued organic expansion of the contract compression fleet in the USA. Gross margin percentage for the
quarter was 20.5 percent, compared to 17.5 percent in 2018, driven by the solid execution of a small number of large, high
margin Engineered Systems projects that were booked during the second half of 2018 and increasing revenue from rentals,
partially offset by impairments recognized on rental equipment in the USA and ROW segments and the margin impact of
warranty experience in the quarter. As the large, high margin projects are completed in 2020, we expect margins to revert to
historical levels, with modest improvements provided by growth in recurring revenues.
•
•
•
•
The fourth quarter of 2019 includes $24.4 million of impairment charges on rental equipment, of which $2.6 million was
included in the USA segment and $21.8 million was included in the ROW segment. Of the total value of impairments
recognized, $14.5 million relates to the write-off of specialized rental assets acquired as part of a business combination in 2014
that we have now determined cannot be redeployed and have never been utilized or generated revenue for Enerflex.
Engineered Systems booking activity was low in the quarter as the oil and gas industry continues to balance growth with
prudent financial management. Reduced growth capex in the sector impacts Enerflex’s Engineered Systems business the
hardest. The Company has ensured, and expects to continue to ensure, that costs are aligned with revenue levels expected
from Engineered Systems. The movement in exchange rates resulted in a decrease of $6.8 million on foreign currency
denominated backlog during the fourth quarter of 2019, compared to a $45.3 million increase in the comparable period – a
$52.1 million period-over-period decrease.
Recurring revenue grew by 6.3 percent, driven by increased service activity levels and the continued expansion of the contract
compression fleet in the USA. During the quarter, the Company invested $76.5 million in rental assets, largely in the USA,
where our fleet has grown by 45.2 percent on a horsepower basis in the last year and has more than doubled since the
acquisition of the contract compression platform in July 2017.
Subsequent to December 31, 2019, Enerflex declared a quarterly dividend of $0.115 per share, payable on April 2, 2020, to
shareholders of record on March 12, 2020.
For the twelve months ended December 31, 2019:
• Operating income for the twelve months of 2019 improved compared to the prior year, based on strong execution of projects
included in opening backlog, higher service activity levels, and the continued organic expansion of the contract compression
fleet in the USA.
•
•
•
Engineered Systems booking activity decreased over the twelve months of 2019 as the oil and gas industry continues to
balance growth with prudent financial management. The movement in exchange rates resulted in a decrease of $35.0 million
on foreign currency denominated backlog during the twelve months of 2019 compared to a $56.0 million increase in the
comparative period – a $91.0 million period-over-period decrease.
Engineered Systems backlog decreased compared to the balance at December 31, 2018 due to Engineered Systems revenue
recognized in the period outpacing bookings, as well as unfavourable foreign exchange impacts. The backlog at December 31,
2019 provides visibility for Engineered Systems revenue into mid-2020.
Recurring revenue grew by 14.5 percent, driven by increased service activity levels and the organic expansion of the contract
compression fleet in the USA.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
5
19
ADJUSTED EBITDA
The Company’s results include items that are unique and items that management and users of the financial statements adjust for when
evaluating the Company’s results. The presentation of Adjusted EBITDA should not be considered in isolation from EBIT or EBITDA as
determined under IFRS. Adjusted EBITDA may not be comparable to similar measures presented by other companies and should not be
considered in isolation or as a replacement for measures prepared as determined under IFRS.
The items that have historically been adjusted for presentation purposes relate generally to four categories: 1) impairment or gains on
idle facilities (not including rental asset impairments); 2) restructuring activities; 3) transaction costs related to M&A activity; and, 4)
share-based compensation. Enerflex has presented the impact of share-based compensation as it is an item that can fluctuate
significantly with share price changes during a period based on factors that are not specific to the long-term performance of the
Company. The disposal of idle facilities is isolated within Adjusted EBITDA as they are not reflective of the ongoing operations of the
Company and are idled as a result of restructuring activities.
During the fourth quarter of 2019, the Company added another adjustment related to the write-off of specialized assets acquired as part
of a business combination but never utilized by Enerflex. Impairment of rental equipment included in reported EBIT for the three and
twelve months ended December 31, 2019 was $24.4 million and $26.4 million, of which the USA segment recorded $2.6 million and the
ROW segment recorded $21.8 million and $23.8 million. Of the total value of impairments recognized, $14.5 million relates to the write-
off of specialized assets acquired as part of a business combination in 2014 that we have now determined cannot be redeployed and have
never been utilized or generated revenue for Enerflex. The Company considers this non-cash adjustment to be a unique item given these
assets have not contributed to earnings since being acquired.
Management believes that identification of these items allows for a better understanding of the underlying operations of the Company
based on the current assets and structure.
($ Canadian thousands)
Reported EBIT
Write-off of rental equipment in COGS
Write-off of facility and equipment in COGS
Restructuring costs in COGS and SG&A
Share-based compensation
Depreciation and amortization
Total
USA
ROW
Canada
$
48,813
$
61,065 $
(18,180)
$
5,928
Three months ended
December 31, 2019
14,489
614
869
2,826
21,421
-
-
-
1,344
8,751
14,489
614
-
814
9,940
-
-
869
668
2,730
10,195
Adjusted EBITDA
$
89,032
$
71,160 $
7,677
$
($ Canadian thousands)
Reported EBIT
Cost recovery related to OOCEP
Share-based compensation
Depreciation and amortization
Total
USA
ROW
$
48,240
$
24,394 $
17,577
$
(12,961)
2,534
26,978
-
1,287
6,575
(12,961)
784
18,417
Adjusted EBITDA
$
64,791
$
32,256 $
23,817
$
Canada
6,269
-
463
1,986
8,718
Three months ended
December 31, 2018
6
20
Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
($ Canadian thousands)
Reported EBIT
Write-off of rental equipment in COGS
Write-off of facility and equipment in COGS
Restructuring costs in COGS and SG&A
Gain on disposal of idle facilities
Share-based compensation
Depreciation and amortization
Total
USA
ROW
Canada
$
233,902
$
193,825 $
537
$
39,540
Twelve months ended
December 31, 2019
14,489
2,654
869
(434)
7,749
86,559
-
-
-
-
3,838
33,381
14,489
2,654
-
-
1,888
42,846
-
-
869
(434)
2,023
10,332
52,330
Adjusted EBITDA
$
345,788 $
231,044 $
62,414 $
Twelve months ended
December 31, 2018
($ Canadian thousands)
Reported EBIT
Restructuring costs in COGS and SG&A
(Gain) loss on disposal of idle facilities
Cost recovery related to OOCEP
Share-based compensation
Depreciation and amortization
Total
USA
ROW
$
151,679
$
87,638 $
49,698
$
2,367
(6,208)
(22,368)
9,938
89,774
-
(2,432)
-
5,047
23,395
938
(41)
(22,368)
3,429
57,844
Canada
14,343
1,429
(3,735)
-
1,462
8,535
Adjusted EBITDA
$
225,182
$
113,648 $
89,500
$
22,034
Adjusted EBITDA for the three and twelve months ended December 31, 2019 has increased over the same periods from the prior year.
Please refer to the section “Segmented Results” for additional information about results by geographic location.
Effective January 1, 2019, the Company applied IFRS 16 Leases (“IFRS 16”) for the first time. Under IFRS 16, Enerflex recognizes a lease
right-of-use asset and a lease liability to reflect the benefit the Company obtains from the underlying asset in the lease and the
requirement to pay the amounts included in the lease contract. Under the previous standard, IAS 17 Leases, costs relating to operating
leases were recognized on a straight-line basis as COGS and SG&A. Under IFRS 16, the Company records depreciation on lease right-of-
use assets as COGS and SG&A, and records an interest expense relating to the lease liability. The amount of the depreciation and interest
recorded for the three and twelve months ended December 31, 2019 was $3.5 million and $12.7 million and $0.9 million and $2.6 million,
respectively. The effect of the new standard is to increase EBIT for the three and twelve months ended December 31, 2019 by $0.3
million and $2.5 million, as a portion of lease expenses are included as interest. The resulting increase in EBITDA for the three and twelve
months ended December 31, 2019 was $3.8 million and $15.1 million. The standard was adopted prospectively from January 1, 2019,
and accordingly the 2018 results have not been affected.
ENGINEERED SYSTEMS BOOKINGS AND BACKLOG
Bookings and backlog are monitored by Enerflex as an indicator of future revenue and business activity levels for the Engineered Systems
product line. Bookings are recorded in the period when a firm commitment or order is received from customers. Bookings increase
backlog in the period that they are received. Revenue recognized on Engineered Systems products decreases backlog in the period that
the revenue is recognized. As a result, backlog is an indication of revenue to be recognized in future periods using percentage-of-
completion accounting.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
7
21
The following tables set forth the Engineered Systems bookings and backlog by reporting segment for the following periods:
($ Canadian thousands)
Bookings
USA
Rest of World
Canada
Total bookings
($ Canadian thousands)
Backlog
USA
Rest of World
Canada
Total backlog
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
$
$
72,261 $
451,132
$
340,552 $
1,354,745
1,955
20,293
6,985
218,839
20,179
148,185
141,600
484,018
94,509 $
676,956
$
508,916 $
1,980,363
December 31,
2019
December 31,
2018
$
320,054 $
930,595
8,941
138,762
75,210
414,816
$
467,757 $
1,420,621
Engineered Systems bookings in the fourth quarter and twelve months of 2019 were lower than the same periods of 2018 due to several
factors, including producers having made a general shift to funding growth capital expenditures from free cash flow, constrained access
to capital for producers, uncertainty around global trade dynamics, and political uncertainty.
Backlog at December 31, 2019 was lower than at December 31, 2018 due to Engineered Systems revenue recognized outpacing
bookings throughout 2019, as well as unfavourable foreign exchange impacts on foreign currency denominated backlog. The movement
in exchange rates resulted in a decrease of $6.8 million and $35.0 million during the fourth quarter and twelve months of 2019 on foreign
currency denominated backlog, compared to an increase of $45.3 million and a $56.0 million in the same periods of 2018.
Of the $467.8 million in backlog, approximately 50 percent relates to natural gas compression and 45 percent pertains to oil and gas
processing, with the remaining 5 percent relating to other manufacturing projects.
SEGMENTED RESULTS
Enerflex has identified three reportable operating segments as outlined below, each supported by the Corporate function. Corporate
overheads are allocated to the operating segments based on revenue. In assessing its operating segments, the Company considered
economic characteristics, the nature of products and services provided, the nature of production processes, the type of customer for its
products and services, and distribution methods used.
The following summary describes the operations of each of the Company’s reportable segments:
•
•
•
USA generates revenue from manufacturing natural gas compression and processing equipment, including custom and
standard compression packages and modular natural gas processing equipment and refrigeration systems, in addition to
generating revenue from mechanical services and parts, operations and maintenance solutions, and contract compression
rentals;
Rest of World generates revenue from manufacturing (focusing on large-scale process equipment), after-market services,
including parts and components, as well as operations, maintenance, and overhaul services, and rentals of compression and
processing equipment. The Rest of World segment has been successful in securing BOOM and ITK; and
Canada generates revenue from manufacturing both custom and standard natural gas compression, processing, and electric
power equipment, as well as providing after-market mechanical service, parts, and compression and power generation rentals.
8
22
Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
USA SEGMENT RESULTS
($ Canadian thousands)
Engineered Systems bookings
Engineered Systems backlog
Segment revenue
Intersegment revenue
Revenue
Revenue – Engineered Systems
Revenue – Service
Revenue – Rentals
Operating income
EBIT
EBITDA
Segment revenue as a % of total revenue
Recurring revenue growth
Operating income as a % of segment revenue
EBIT as a % of segment revenue
EBITDA as a % of segment revenue
$
$
$
$
$
$
$
$
$
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
72,261
$
451,132 $
340,552
$
1,354,745
320,054
930,595
320,054
930,595
290,170
$
300,149 $
1,243,760
$
1,004,676
$
$
$
$
$
$
$
(13,385)
276,785
207,835
48,127
20,823
61,045
61,065
69,816
58.3%
21.5%
22.1%
22.1%
25.2%
$
$
$
$
$
$
$
(3,641)
(48,091)
296,508 $
1,195,669
239,778 $
41,865 $
14,865 $
24,413 $
24,394 $
30,969 $
63.5%
15.9%
8.2%
8.2%
10.4%
947,451
172,130
76,088
194,010
193,825
227,206
58.5%
25.7%
16.2%
16.2%
19.0%
(24,137)
980,539
783,114
145,358
52,067
85,224
87,638
111,033
57.6%
35.8%
8.7%
8.9%
11.3%
Engineered Systems bookings of $72.3 million in the fourth quarter of 2019 represent a decrease of $378.9 million or 84.0 percent
compared to the same period in the prior year. This decrease was predominantly due to producers having made a general shift to funding
growth capital expenditures from free cash flow, constrained access to capital for producers, and uncertainty around global trade
dynamics. In addition, the comparative period includes bookings of certain large projects, including international projects to be built in
the Company’s Houston fabrication facility, that did not recur in the current period.
Revenue decreased by $19.7 million in the fourth quarter of 2019 compared to the same period of 2018 due to lower Engineered Systems
revenue, partially offset by higher Service and Rentals revenue. Engineered Systems revenue decreased due to temporary project delays
on certain large projects, as well as lower opening backlog on reduced bookings throughout 2019, while Service revenue increased due
to higher activity levels and Rentals revenue increased due to the organic growth of the contract compression fleet. For the twelve
months of 2019, revenue increased by $215.1 million over the comparative period, driven by improved results across all product lines.
Engineered Systems revenue improved over the prior year as a result of the realization of strong bookings from 2018 and continued
progress of certain large projects, as well as the impact of the stronger U.S. dollar in 2019 versus the comparative period. Service
revenues increased due to higher activity, while Rentals revenues increased as a result of the organic growth of the contract compression
fleet, which grew by 45.2 percent on a horsepower basis in the last year. The Company has experienced continued strength in demand
for after-market service and contract compression in key basins in the USA and sees a solid pipeline of opportunities for growth in those
businesses.
Operating income was higher in the fourth quarter and twelve months of 2019 compared to the prior year by $36.6 million and $108.8
million, due to improved gross margin performance on strong project execution, partially offset by higher SG&A costs and the effects of
impairment recognized on certain rental assets. Impairment of rental equipment included in operating income for the three and twelve
months ended December 31, 2019 was $2.5 million. Increases in SG&A were driven by higher compensation on a larger workforce,
partially offset by mark-to-market impacts on share-based compensation.
At December 31, 2019, the USA contract compression fleet totaled approximately 310,000 horsepower with an 87 percent utilization
rate, compared to approximately 215,000 horsepower with an 86 percent utilization rate at December 31, 2018.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
9
23
REST OF WORLD SEGMENT RESULTS
($ Canadian thousands)
Engineered Systems Bookings
Engineered Systems Backlog
Segment revenue
Intersegment revenue
Revenue
Revenue – Engineered Systems
Revenue – Service
Revenue – Rentals
Operating income
EBIT
EBITDA
Segment revenue as a % of total revenue
Recurring revenue growth
Operating income as a % of segment revenue
EBIT as a % of segment revenue
EBITDA as a % of segment revenue
$
$
$
$
$
$
$
$
$
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
1,955 $
6,985 $
20,179
$
141,600
8,941
75,210
8,941
75,210
73,909 $
102,678 $
354,680
$
425,435
(107)
(450)
(7,846)
73,802 $
102,228 $
346,834
5,652 $
34,255 $
40,233 $
36,794 $
27,917 $
31,179 $
(18,208) $
17,822 $
(18,180) $
17,577 $
(8,240) $
35,994 $
15.6%
0.3%
(24.7)%
(24.6)%
(11.2)%
21.9%
8.8%
17.4%
17.2%
35.2%
76,813
154,951
115,070
511
537
43,383
17.0%
6.5%
0.1%
0.2%
12.5%
$
$
$
$
$
$
$
(2,603)
422,832
169,410
139,015
114,407
50,005
49,698
107,542
24.8%
5.6%
11.8%
11.8%
25.4%
Engineered Systems bookings in the Rest of World segment are typically larger in nature and scope and as a result are less frequent.
Rest of World revenue decreased by $28.4 million and $76.0 million in the fourth quarter and twelve months of 2019 compared to the
same periods in the prior year due to lower Engineered Systems revenues, partially offset by higher Service revenues. Engineered
Systems revenue was down for both the fourth quarter and twelve months of 2019 primarily due to a lower opening backlog and reduced
bookings throughout 2019, which was further reduced by the effects of customer disputes. Service revenues increased due to higher
activity levels in Australia and the impact of service agreements that were recently signed in Latin America. Rentals revenues were lower
in the fourth quarter due to a reduction in contracted units in Mexico, but were higher for the twelve months of 2019 on the full year
contributions of certain projects that commenced operations in 2018 and the sale of idle rental units in Latin America.
Operating income decreased by $36.0 million and $49.5 million in the fourth quarter and twelve months of 2019 compared to the same
periods of 2018. The current quarter decrease is driven by lower revenues and impairments recognized on certain rental assets, as well
as the effects of cost recoveries recognized in SG&A in the prior year. The twelve months of 2019 was also impacted by lower revenues
and higher estimated costs to complete certain projects, as well as impairments recognized on certain rental assets and a write-down of
equipment. Impairment of rental equipment included in operating income for the three and twelve months ended December 31, 2019
was $21.8 million and $23.9 million. The majority of this amount relates to the write-off of specialized assets acquired as part of a
business combination in 2014 that we have now determined cannot be redeployed and have never been utilized or generated revenue
for Enerflex.
SG&A costs for the fourth quarter 2019 increased compared to 2018 due to the effects of cost recoveries recognized in the prior year.
SG&A for the twelve months of 2019 increased compared to 2018 due to increased compensation on higher headcount and the effects
of cost recoveries recognized in the prior year, partially offset by mark-to-market impacts on share-based compensation and favourable
foreign exchange movements, as well as the effects of one-time restructuring activities in Australia recognized in the prior year.
10
24
Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
CANADA SEGMENT RESULTS
($ Canadian thousands)
Engineered Systems bookings
Engineered Systems backlog
Segment revenue
Intersegment revenue
Revenue
Revenue – Engineered Systems
Revenue – Service
Revenue – Rentals
Operating income
EBIT
EBITDA
Segment revenue as a % of total revenue
Recurring revenue growth
Operating income as a % of segment revenue
EBIT as a % of segment revenue
EBITDA as a % of segment revenue
$
$
$
$
$
$
$
$
$
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
20,293 $
218,839 $
148,185
$
138,762
414,816
138,762
126,454 $
82,621 $
518,042
$
(2,679)
(14,515)
(15,123)
123,775 $
68,106 $
502,919
106,313 $
47,406 $
424,239
15,271 $
17,942 $
2,191 $
5,535 $
5,928 $
8,658 $
26.1%
(15.6)%
4.5%
4.8%
7.0%
2,758 $
5,353 $
6,269 $
8,255 $
14.6%
15.2%
7.9%
9.2%
12.1%
67,505
11,175
37,387
39,540
49,872
24.6%
12.0%
7.4%
7.9%
9.9%
$
$
$
$
$
$
$
2018
484,018
414,816
319,223
(19,321)
299,902
229,646
60,725
9,531
9,735
14,343
22,878
17.6%
(7.9)%
3.2%
4.8%
7.6%
Bookings have decreased to $20.3 million from $218.8 million a year ago, predominantly due to several factors, including producers
having made a general shift to funding growth capital expenditures from free cash flow, constrained access to capital for producers, and
political uncertainty. In addition, the comparative period includes bookings of certain large projects that did not recur in the current
period.
Revenue increased by $55.7 million and $203.0 million for the fourth quarter and twelve months of 2019 compared to the same periods
in 2018, primarily due to higher Engineered Systems revenue, which improved due to continued progress on projects from opening
backlog. Service and Rentals revenues were down in the fourth quarter due to lower equipment sales and reseller activity, however both
product lines increased for the twelve months of 2019 due to increased parts and equipment sales.
The Canadian segment recorded an operating income of $5.5 million and $37.4 million for the fourth quarter and twelve months of 2019
compared to operating income of $5.4 million and $9.7 million over the same periods in 2018. Operating income in the fourth quarter
was consistent with the comparative period, with improved gross margin on higher revenue being offset by warranty experience and
severance costs. The increase in operating income for the twelve months of 2019 is due to improved gross margin on higher revenue and
improved gross margin percentage resulting from strong project execution. For the fourth quarter and twelve months of 2019, SG&A
costs were consistent with the comparable periods in 2018.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
11
25
GROSS MARGIN BY PRODUCT LINE
Enerflex operates three business segments, and each regional business segment has three main product lines: Engineered Systems,
Service, and Rentals. The Engineered Systems product line consists of the supply of equipment systems, typically involving engineering,
design, manufacturing, installation, construction and the start-up of equipment. The Service product line includes the sale of parts and
equipment, as well as the operations and maintenance of equipment. The Rentals product line includes recurring revenues from rental
agreements, and the sale of rental equipment to customers. Recurring revenue is comprised of revenue from the Service and Rentals
product lines, which are typically contracted and extend into the future. While the contracts are subject to cancellation or have varying
lengths, the Company does not believe these characteristics preclude them from being considered recurring in nature.
($ Canadian thousands)
Revenue
Cost of goods sold:
Operating expenses
Depreciation and amortization
Total
Engineered
Systems
Service
Rentals
$
474,362
$
319,800 $
103,631
$
50,931
Three months ended
December 31, 2019
360,445
16,475
240,276
1,828
76,623
1,214
43,546
13,433
Gross margin
$
97,442 1
$
77,696 $
25,794
$
(6,048) 1
Total
Engineered
Systems
Service
Rentals
$
466,842
$
321,439 $
96,601
$
48,802
Three months ended
December 31, 2018
($ Canadian thousands)
Revenue
Cost of goods sold:
Operating expenses
Depreciation and amortization
Gross margin
$
81,762
$
46,041 $
25,599
$
361,616
23,464
274,874
524
69,953
1,049
16,789
21,891
10,122
($ Canadian thousands)
Revenue
Cost of goods sold:
Operating expenses
Depreciation and amortization
Total
Engineered
Systems
Service
Rentals
$
2,045,422
$
1,448,503 $
394,586
$
202,333
Twelve months ended
December 31, 2019
1,550,036
1,159,712
66,301
6,681
293,924
3,905
96,400
55,715
Gross margin
$
429,085 1
$
282,110 $
96,757
$
50,218 1
Total
Engineered
Systems
Service
Rentals
$
1,703,273
$
1,182,170 $
345,098
$
176,005
Twelve months ended
December 31, 2018
($ Canadian thousands)
Revenue
Cost of goods sold:
Operating expenses
Depreciation and amortization
Gross margin
$
307,973
$
168,563 $
90,015
$
1,320,588
1,012,415
74,712
1,192
251,490
3,593
56,683
69,927
49,395
1 In the fourth quarter and twelve months of 2019, Enerflex recognized $24.4 million and $26.4 million of write-offs and impairment charges on rental equipment . Of
the total value recognized, $14.5 million relates to the write-off of specialized rental assets acquired as part of a business combination in 2014 that we have now
determined cannot be redeployed and have never been utilized or generated revenue for Enerflex.
12
26
Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
INCOME TAXES
Income tax expense totaled $11.9 million or 27.5 percent and $63.2 million or 29.3 percent of earnings before tax for the three and
twelve months ended December 31, 2019 compared to $11.2 million or 25.6 percent and $31.1 million or 23.5 percent of earnings before
tax in the same periods of 2018. Income tax expense and the effective tax rate for the fourth quarter of 2019 were higher primarily due
to the effect of earnings taxed in foreign jurisdictions, partially offset by exchange rate effects on tax basis. Income tax expense and the
effective tax rate for the twelve months of 2019 were higher due to an increase in earnings before tax, the revaluation of Canadian
deferred tax assets due to a change in the statutory rate, the effect of earnings taxed in foreign jurisdictions, and exchange rate effects
on tax bases. These increases were partially offset by withholding taxes on dividends received from subsidiaries in prior years that have
not re-occurred in 2019. During the second quarter of 2019, lower Alberta corporate income tax rates became substantially enacted,
which will reduce Enerflex’s taxes in future periods. The Alberta corporate income tax rates are 11.5 percent for 2019, 10.0 percent for
2020, 9.0 percent for 2021, and 8.0 percent for 2022 and thereafter.
OUTLOOK
Enerflex’s financial performance continues to benefit from strategic decisions to: 1) diversify product offerings for Engineered Systems;
2) focus on increasing the recurring revenue streams derived from new and existing long-term BOOM, rental, and service contracts; and
3) develop a geographically diversified business.
Demand for the Company’s Engineered Systems product offerings remains dependent on global capital investment in oil and natural gas.
Throughout 2019, bookings activity has slowed considerably, driven by several factors including: 1) producers having made a general
shift to funding growth capital expenditures from free cash flow; 2) constrained access to capital markets for producers; 3) uncertainty
around global trade dynamics; and 4) political uncertainty.
Enerflex is responding to customer inquiries across all major basins in the USA, including the Permian, Bakken, Niobrara, Marcellus, and
Utica, as customers plan for future growth. However, the pace at which customers are releasing capital for growth projects has
moderated significantly compared to the heady days of 2018. In recent periods, the Permian Basin has been a major driver of gas
production growth, with significant drilling activity and associated gas production. Future production growth in the Permian Basin looks
to be transitioning away from smaller producers and toward major oil companies and large independents which are able to take a more
measured approach to developing their acreage. Enerflex believes this is a positive dynamic and plays to our strengths of size, scope, and
reputation; however, activity in the Basin is dependent on these producers driving a rebound in capital spending from depressed levels
in 2019 to those previously seen in the recent build-out of the play. The Company maintains that the Permian is a world-class oil and
associated gas resource with significant potential for continued natural gas production growth, and Enerflex is well positioned to provide
long-term natural gas solutions in all major basins.
Enerflex continues to experience strong demand for global after-market services and contract compression in key basins in the USA,
with a solid pipeline of opportunities for further growth in those businesses. We continue to see favourable investment opportunities in
the contract compression fleet in the USA, and are leveraging the expertise of our people and our existing supply chain to build out and
maintain a highly competitive platform, while preserving strong returns. Overall, asset ownership represents the most significant growth
prospect for the Company and we intend to continue deploying capital to this higher-margin, less-cyclical business. The Company has
made significant progress on previously awarded BOOM projects in Latin America and MEA, with these projects expected to commence
operations and begin generating revenue in mid-2020.
In the near term, the Company anticipates that strong execution on Engineered Systems project work seen in recent quarters will
continue for the duration of these projects. Demand for Service and Rentals product offerings, which has continued to increase despite
slower Engineered Systems bookings activity, is expected to drive growth in recurring revenue. In the longer term, the Company
continues to balance the expected impacts of broader market factors, such as volatility in realized commodity prices, political and
economic uncertainty, and consistent access to market, against the projected increases in global demand for natural gas. Enerflex
continues to assess the effects of these contributing factors and the corresponding impact on our customers’ activity levels, which will
drive the demand for the Company’s products and services in future periods.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
13
27
OUTLOOK BY SEGMENT
USA
The recent performance of the USA segment has been largely driven by the industry’s investment in shale oil and gas, particularly in the
Permian Basin. While growth in the Permian has slowed in recent periods, the Company believes that improved pipeline infrastructure
and the increased presence of larger, more patient producers solidify the formation’s long-term production potential. Continued
development in the Permian and other key resource plays should translate to further demand for Engineered Systems products, as well
as contract compression solutions to improve performance in maturing fields. The Company’s contract compression fleet consists of
approximately 310,000 horsepower, providing a valuable recurring revenue source that the Company intends to continue to grow
organically through 2020 and beyond, provided the market remains robust.
Rest of World
In the Rest of World segment, the Company continues to generate strong recurring revenue in both the MEA region and Latin America.
MEA continues to provide stable rental earnings with a rental fleet of approximately 100,000 horsepower. The Company continues to
explore new markets and opportunities within this region, focusing on projects that provide long-term, stable cash flows.
In Latin America, Enerflex remains cautiously optimistic as many countries have indicated a renewed desire to develop oil and natural
gas in recent periods. With investment opportunities becoming available, the global energy industry is returning to various prolific plays
within the region. The Company is well positioned to provide products and services, and believes that there are near-term prospects
within Argentina, Bolivia, Brazil, and Colombia, and mid- to longer-term prospects in Mexico.
Enerflex continues to make progress on previously awarded BOOM projects in MEA and Latin America, with these projects expected to
commence operations and begin generating recurring revenue in mid-2020.
In Australia, Enerflex is well positioned to capitalize on the need for increased production due to the supply imbalance driven by higher
liquefied natural gas exports and increased domestic natural gas demand. The Company believes that maintenance and service
opportunities will continue to increase, which may result in further growth for the Australian Service product line.
Canada
The Canadian market remains constrained by negative sentiment and the lack of consistent access to market that is causing uncertain
pricing and limiting development potential in Canada. In addition, producers have recently made a general shift to funding growth capital
expenditures from free cash flow, as declining investment levels have restricted access to other forms of financing. The most recent
Federal election resulted in a minority government and increased uncertainty for the oil and natural gas industry in Canada. Progress
made on pipelines, as well as the approval of certain liquified natural gas (“LNG”) projects and improved sentiment surrounding the
Canadian LNG industry may offer some future relief to the Canadian gas industry, though management still expects activity in Canada
to be subdued in 2020.
ENERFLEX STRATEGY
Enerflex’s global vision is “Transforming natural gas to meet the world’s energy needs”. The Company’s strategy to support this vision
centres on being an operationally focused, diversified, financially strong, dividend-paying company that delivers profitable growth by
serving an expanding industry in seven gas producing regions worldwide. Enerflex believes that worldwide diversification and growth
enhances shareholder value.
Across the Company, Enerflex looks to leverage its diversified international positioning to provide exposure to projects in growing
natural gas markets, to offer integrated solutions spanning all phases of a project’s life-cycle from engineering and design through to
after-market service, and to leverage its enterprise-wide collaborative approach to deploy key expertise worldwide and generate repeat
business from internationally active customers. The Company also targets growth areas in the traditional natural gas industry, including
the increasing global demand for natural gas-fired power generation. Enerflex has developed regional strategies to support its Company-
wide goals.
In the USA segment, Enerflex has concentrated its efforts on key regions and basins, driven by the U.S.’s increasingly complex natural gas
sector. The Company has looked to build on its successes for gas processing solutions for liquids-rich plays in the region, and support the
development of upstream resources and midstream infrastructure required to feed an expanding LNG industry. In addition, the focus
14
28
Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
has been on optimizing the Service business across the region while responding to higher activity levels in all locations. The organic
expansion of the contract compression fleet has allowed Enerflex to increase revenues from the Rentals product line, while the larger
fleet provides a platform for future growth in the segment.
Enerflex has focused its efforts in the ROW segment on growing primarily in the MEA and Latin America regions, through the sales, rental,
and service of its products. In these regions, the Company has targeted ITK projects and BOOM solutions of varying size and scope,
including projects requiring construction and installation support at site. Successful projects have been completed in Bahrain, Kuwait,
and Oman in MEA, and in Argentina, Brazil, and Colombia in Latin America, and multiple projects secured in previous periods are
scheduled to commence operations and begin generating recurring revenue in mid-2020. The Company continues to look at
opportunities throughout these regions.
Enerflex has aimed its efforts in Canada on leveraging its capabilities and expertise to continue to preserve market share in the traditional
natural gas sector, particularly in liquids-rich reservoirs, and to support the development of LNG infrastructure. In addition, the Company
has looked to build on its successes in the electric power market given sustained low natural gas prices and the resulting increase in
demand for natural gas-fired power generation. Lastly, there has been a focus on signing long-term service and maintenance contracts
with customers in order to secure recurring revenues.
Enerflex seeks to continue to diversify its revenue streams from multiple markets, grow its backlog, and ensure profitable margins
globally by aggressively managing costs, with a medium-term goal of achieving a 10 percent EBIT margin. In addition, the Company is
focused on expanding the diversification of its product lines, with a goal to increase recurring revenue by 10 percent annually.
DEFINITIONS
The success of the Company and its business unit strategies is measured using a number of key financial performance indicators, some
of which are outlined below. Some of these indicators do not have a standardized meaning as prescribed by IFRS and are therefore
unlikely to be comparable to similar measures presented by other companies. These non-IFRS measures are Engineered Systems
bookings and backlog, recurring revenue, EBITDA, net debt to EBITDA ratio, and return on capital employed (“ROCE”). Further
information on these non-IFRS measures is provided in the section, Non-IFRS Measures.
Bookings and Backlog
Bookings and backlog are monitored by Enerflex as an indicator of future revenue and business activity levels for the Engineered Systems
product line. Bookings are recorded in the period when a firm commitment or order is received from customers. Bookings increase
backlog in the period that they are received. Revenue recognized on Engineered Systems products decreases backlog in the period that
the revenue is recognized. As a result, backlog is an indication of revenue to be recognized in future periods using percentage-of-
completion accounting.
Recurring Revenue
Recurring revenue is defined as revenue from the Service and Rentals product lines. These revenue streams are contracted and extend
into the future, rather than being recognized as a single transaction. Service revenues are derived from the ongoing maintenance of
equipment that produces gas over the life of a field. Rentals revenues relate to compression, processing, and electric power equipment.
This classification is to contrast revenue from these product lines with the Company’s Engineered Systems revenues, which are for the
manufacturing and delivery of equipment and do not have any recurring aspect once the goods are delivered. While the contracts are
subject to cancellation or have varying lengths, the Company does not believe that these characteristics preclude them from being
considered recurring in nature.
Operating Income
Operating income assists the reader in understanding the net contributions made from the Company’s core businesses after considering
all SG&A expenses. Each operating segment assumes responsibility for its operating results as measured by, amongst other factors,
operating income, which is defined as income before income taxes, interest (or finance) costs (net of interest income), equity earnings or
loss, and gain or loss on sale of assets. Financing and related charges cannot be attributed to business segments on a meaningful basis
that is comparable to other companies. Business segments and income tax jurisdictions are not synonymous, and it is believed that the
allocation of income taxes distorts the historical comparability of the operating performance of business segments.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
15
29
EBIT
EBIT provides the results generated by the Company’s primary business activities prior to consideration of how those activities are
financed or taxed in the various jurisdictions that the Company operates in.
EBITDA
EBITDA provides the results generated by the Company’s primary business activities prior to consideration of how those activities are
financed, how assets are amortized, or how the results are taxed in various jurisdictions.
Net Debt to EBITDA
Net debt is defined as short- and long-term debt less cash and cash equivalents at the end of the period which is then divided by the
annualized EBITDA.
ROCE
ROCE is a measure to analyze operating performance and efficiency of the Company’s capital allocation process. The ratio is calculated
by taking EBIT for the 12-month trailing period divided by capital employed. Capital employed is debt and equity less cash for the trailing
four quarters.
16
30
Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
NON-IFRS MEASURES
The success of the Company and its business unit strategies is measured using a number of key performance indicators, some of which
do not have a standardized meaning as prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by
other companies. These non-IFRS measures are also used by management in its assessment of relative investments in operations and
include Engineered Systems bookings and backlog, recurring revenue, EBITDA, net debt to EBITDA ratio, and ROCE. They should not be
considered as an alternative to net earnings or any other measure of performance under IFRS. The reconciliation of these non-IFRS
measures to the most directly comparable measure calculated in accordance with IFRS is provided below where appropriate. Engineered
Systems bookings and backlog do not have a directly comparable IFRS measure.
($ Canadian thousands)
EBITDA
EBIT
Depreciation and amortization
EBITDA
Recurring Revenue
Service
Rentals
Total Recurring Revenue
ROCE
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
48,813 $
48,240 $
233,902
$
151,679
21,421
26,978
86,559
89,774
70,234 $
75,218 $
320,461
$
241,453
103,631 $
96,601 $
394,586
$
50,931
48,802
202,333
345,098
176,005
154,562 $
145,403 $
596,919
$
521,103
$
$
$
$
Trailing 12-month EBIT
$
233,902 $
151,679 $
233,902
$
151,679
Capital Employed – beginning of period
Net debt1
Shareholders' equity
Capital Employed – end of period
Net debt1
Shareholders' equity
Average Capital Employed2
Return on Capital Employed
$
$
$
$
$
182,001 $
159,149 $
117,848
$
232,726
1,338,416
1,199,800
1,282,519
1,134,472
1,520,417 $
1,358,949 $
1,400,367
$
1,367,198
334,232 $
117,848 $
334,232
$
117,848
1,342,787
1,282,519
1,342,787
1,282,519
1,677,019 $
1,400,367 $
1,677,019
$
1,400,367
1,483,919 $
1,386,863 $
1,483,919
$
1,386,863
15.8%
10.9%
15.8%
10.9%
1 Net debt is defined as short- and long-term debt less cash and cash equivalents.
2 Based on a trailing four-quarter average.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
17
31
FREE CASH FLOW
($ Canadian thousands)
Cash provided by operating activities
Net change in non-cash working capital and other
Add-back:
Net finance costs
Current income tax expense
Proceeds on the disposal of property, plant
and equipment
Proceeds on the disposal of rental equipment
Deduct:
Net interest paid
Net cash taxes paid
Additions to property, plant and equipment
Additions to rental equipment:
Growth
Maintenance
Dividends paid
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
$
$
(82,333)
$
108,434 $
54,169 $
242,868
(140,131)
37,983
(221,749)
38,208
57,798 $
70,451 $
275,918 $
204,660
5,474
9,347
112
1,334
(9,773)
(9,965)
(8,289)
(74,481)
(2,017)
(9,414)
4,574
2,075
(187)
3,141
(8,331)
(2,013)
(10,124)
18,578
31,720
9,205
4,454
(18,398)
(29,434)
(46,322)
19,145
20,871
22,853
6,935
(18,373)
(2,273)
(16,920)
(53,266)
(208,978)
(102,960)
(3,330)
(8,435)
(8,090)
(37,548)
(12,365)
(33,676)
Free cash flow
$
(39,874)
$
(5,445) $
(8,895)
$
87,897
For the three and twelve months ended December 31, 2019 free cash flow decreased compared to the same periods in 2018. This
decrease was primarily due to investment in the rental fleet, which totaled $76.5 million and $217.1 million for the fourth quarter and
twelve months of 2019. Enerflex anticipates that capital expenditures on the contract compression fleet in the USA in 2020 will be
consistent with levels seen in 2019. In addition, the Company will continue to spend on previously awarded BOOM projects in Latin
America and MEA, with these projects expected to commence operations and begin generating revenue in mid-2020, and will deploy
capital as opportunities arise in these regions or elsewhere.
18
32
Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
FINANCIAL POSITION
The following table outlines significant changes in the Statements of Financial Position as at December 31, 2019 compared to December
31, 2018:
($ Canadian millions)
Increase
(Decrease)
Explanation
Current assets
$(200.8)
Property, plant and
equipment
$19.8
Rental equipment
$103.6
Lease right-of-use assets
$60.3
Current liabilities
$(169.7)
Long-term debt
$(14.2)
Lease liabilities
$52.8
Shareholders’ equity
before non-controlling
interest
$60.2
The decrease in current assets is due to lower cash and accounts receivable, partially
offset by higher inventory and contract assets. Cash decreased due to expenditures on
direct material inventory, rental equipment, and property, plant and equipment, while
accounts receivable decreased due to collection of trade receivables and amounts
owing from OOCEP. Higher inventory is due to purchases of equipment leading up to
December 31, 2019, while higher contract assets were due to unbilled revenue
recognized outpacing amounts billed in the year.
The increase in property, plant and equipment is due to additions during the year,
primarily the expansion of the Houston fabrication facility, partially offset by
depreciation on property, plant and equipment assets.
The increase in rental equipment is due to additions during the year, primarily on the
contract compression fleet in the USA, partially offset by depreciation and impairment
charges, as well as the weakening U.S. dollar that impacts the revaluation of U.S. dollar
denominated rental equipment.
The increase in lease right-of-use assets is due to the adoption of IFRS 16, which
requires an asset to be recorded to reflect the Company’s right to use an asset for a
contracted period of time. This standard was adopted prospectively from January 1,
2019, and accordingly no lease right-of-use asset was recorded at December 31, 2018.
The decrease in current liabilities is due to lower deferred revenue, partially offset by
higher accounts payable and current portion of lease liabilities. Lower deferred revenue
was due to revenue recognized during the year on projects for which cash was received
prior to December 31, 2018, as well as lower overall activity levels in 2019. Higher
accounts payable was due to purchases of equipment leading up to December 31, 2019.
The increase in current portion of lease liabilities is due to the adoption of IFRS 16, which
requires future cash amounts owing under leases to be recorded and presented on the
statement of financial position. This standard was adopted prospectively from January
1, 2019, and accordingly no lease liabilities were recorded at December 31, 2018.
The decrease in long-term debt is due to repayments made on the Bank Facility and the
weakening U.S. dollar that impacts the revaluation of U.S. dollar denominated debt.
The increase in lease liabilities is due to the adoption of IFRS 16, which requires future
cash amounts owing under leases to be recorded and presented on the statement of
financial position. This standard was adopted prospectively from January 1, 2019, and
accordingly no lease liabilities were recorded at December 31, 2018.
Shareholders’ equity before non-controlling interest increased due to $151.6 million
net earnings and $10.2 million of stock options impact, partially offset by $60.7 million
unrealized loss on translation of foreign operations, $2.4 million opening retained
earnings adjustment on adoption of IFRS 16 and dividends of $38.5 million.
LIQUIDITY
The Company expects that continued cash flows from operations in 2020, together with cash and cash equivalents on hand and currently
available credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets. As at
December 31, 2019, the Company held cash and cash equivalents of $96.3 million and had cash drawings of $121.3 million against the
amended and restated syndicated revolving credit facility (the “Bank Facility”), leaving it with access to $557.3 million for future
drawings. The Company continues to meet the covenant requirements of its funded debt, including the Bank Facility and the Company’s
unsecured notes (the “Senior Notes”), with a bank-adjusted net debt to EBITDA ratio of 1:1 compared to a maximum ratio of 3:1, and an
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
19
33
interest coverage of 18:1 compared to a minimum ratio of 3:1. The interest coverage ratio is calculated by dividing the trailing 12-month
bank-adjusted EBITDA, as defined by the Company’s lenders, by interest expense over the same timeframe.
SUMMARIZED STATEMENTS OF CASH FLOW
($ Canadian thousands)
Cash, beginning of period
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Exchange rate changes on foreign currency cash
Three months ended
December 31,
Twelve months ended
December 31,
2019
2018
2019
2018
$
219,544
$
267,121
$
326,864 $
227,284
(82,333)
(57,287)
16,324
7
108,434
(62,434)
12,502
1,241
54,169
(222,820)
(60,980)
(978)
242,868
(100,410)
(44,450)
1,572
Cash, end of period
$
96,255
$
326,864
$
96,255 $
326,864
Operating Activities
For the three and twelve months ended December 31, 2019, cash provided by operating activities was lower than the same periods in
2018, with negative movements in non-cash working capital partially offset by improved net earnings. Non-cash working capital was
primarily impacted by lower deferred revenue and higher inventories, partially offset by lower accounts receivable. Movements in non-
cash working capital are explained in the “Financial Position” section of this MD&A.
Investing Activities
For the three months ended December 31, 2019 cash used in investing activities decreased due to changes in other assets. For the twelve
months ended December 31, 2019, cash used in investing activities increased due to additions to rental equipment and property, plant
and equipment and lower proceeds from the sale of property, plant and equipment.
Financing Activities
For the three months ended December 31, 2019, cash provided by financing activities increased primarily due to draws on long-term
debt, partially offset by lease liability repayments. For the twelve months ended December 31, 2019, cash used in financing activities
increased compared to 2018 due to repayment of long-term debt, lease liability repayments, and larger dividends paid in the year.
QUARTERLY SUMMARY
($ Canadian thousands,
except per share amounts)
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
Revenue
Net earnings
Earnings per
share – basic
Earnings per
share – diluted
$
474,362
$
31,436 $
0.35 $
544,284
541,874
484,902
466,842
445,803
404,848
385,780
450,065
315,019
63,074
40,649
16,969
32,480
37,696
20,367
10,873
26,702
25,188
0.71
0.45
0.19
0.37
0.43
0.23
0.12
0.30
0.28
0.35
0.70
0.45
0.19
0.36
0.42
0.23
0.12
0.30
0.28
20
34
Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
($ Canadian thousands,
except per share amounts)
December 31, 2019
December 31, 2018
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
Total
Assets
Total Non-Current
Financial Liabilities
Cash Dividends
Declared Per Share
$
2,434,506 $
430,487 $
2,482,859
2,130,602
1,881,943
2,209,264
2,144,988
444,712
460,010
393,963
528,140
505,076
0.43
0.39
0.35
0.34
0.34
0.31
RISK MANAGEMENT
In the normal course of business, the Company is exposed to financial and operating risks that may potentially impact its operating
results. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. The Company
enters into derivative financial agreements to manage exposure to fluctuations in exchange rates and interest rates, but not for
speculative purposes.
Energy Prices, Industry Conditions, and the Cyclical Nature of the Energy Industry
The oil and gas service industry is highly reliant on the levels of capital expenditures made by oil and gas producers and explorers. The
capital expenditures of these companies, along with those midstream companies who service these oil and gas explorers and producers,
drive the demand for Enerflex’s equipment. Capital expenditure decisions are based on various factors, including but not limited to:
demand for hydrocarbons and prices of related products; exploration and development prospects in various jurisdictions; reserve
production levels; oil and natural gas prices; and access to capital — none of which can be accurately predicted. Any downturn in
commodity prices may lead to reduced levels of growth capital expenditures, which may negatively impact the demand for the products
and services that Enerflex offers. Even the perception of lower oil or gas prices over the long term can result in a decision to cancel or
postpone exploration and production capital expenditures, which may lead to a reduced demand for products and services offered by
Enerflex.
The supply and demand for oil and gas is influenced by a number of factors, including the outlook for worldwide economies, as well as the
activities of the Organization of Petroleum Exporting Countries (“OPEC”). Changing political, economic, or military circumstances
throughout the energy producing regions of the world may impact the demand for oil and natural gas for extended periods of time, which
in turn impacts the price of oil and natural gas. If economic conditions or international markets decline unexpectedly and oil and gas
producing customers decide to cancel or postpone major capital expenditures, the Company’s business may be adversely impacted.
Competition
The business in which Enerflex operates is highly competitive and there are low barriers to entry, especially for natural gas compression
services, contract compression, and the compression fabrication business. Several packagers target the same customers as Enerflex in a
market where margins can be low and contract negotiations can be challenging. Enerflex has a number of competitors in all aspects of its
business, both domestically and abroad. Some of these competitors, particularly in the Engineered Systems division, are large, multi-
national companies. The Company’s competitors may be able to adapt more quickly to technological changes within the industry and
changes in economic and market conditions, more readily take advantage of acquisitions and other opportunities, and adopt more
aggressive pricing policies. In addition, the Company could face significant competition from new entrants into the compression services,
contract compression, and fabrication business. Some of Enerflex’s existing competitors or new entrants may expand or fabricate new
compression units that would create additional competition for the products, equipment, or services that Enerflex offers to customers.
Further, the Company may not be able to take advantage of certain opportunities or make certain investments because of debt levels
and other obligations.
Any of these competitive pressures could have a material adverse effect on the Company’s business, financial condition, and results of
operations.
Management’s Discussion and Analysis | 2019 Annual Report
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Project Execution Risk
Enerflex engineers, designs, manufactures, constructs, commissions, operates, and services hydrocarbon handling systems. Enerflex's
expertise encompasses field production facilities, compression and natural gas processing plants, gas lift compression, refrigeration
systems, and electric power equipment, primarily serving the natural gas production industry. The Company participates in some
projects that have a relatively larger size and scope than the majority of its projects, which may translate into more technically
challenging conditions or performance specifications for its products and services. These projects typically specify delivery dates,
performance criteria, and penalties for the failure to perform. The Company's ability to profitably execute on these solutions for
customers is dependent on numerous factors which include, but are not limited to: changes in project scope; the availability and
timeliness of external approvals and other required permits; skilled labour availability and productivity; availability and cost of material
and services; design, engineering, and construction errors; and the availability of contractors to deliver on commitments. Any failure to
execute on these larger projects in a timely and cost-effective manner could have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
The Company pursues continuous improvement initiatives to achieve accurate, complete, and timely provision of deliverables.
Nonetheless, project risks can translate into performance issues and project delays, as well as project costs being in excess of cost
estimates. While the Company will assess the recoverability of any cost overruns, there can be no assurance that these costs will be
reimbursed, which may result in a material adverse effect on our business, financial condition, results of operations, and cash flows.
Compliance with HSE Regulations
The Company and many of its customers are subject to a variety of federal, provincial, state, local, and international laws and regulations
relating to HSE. These laws and regulations are complex, change frequently, and are becoming increasingly stringent. The cost of
compliance with these requirements can be expected to increase over time thereby increasing the Company’s operating costs or
negatively impacting the demand for the Company’s products and services. Failure to comply with these laws and regulations may result
in administrative, civil, and criminal enforcement measures, including assessment of monetary penalties, imposition of remedial
requirements, and issuance of injunctions as to future compliance.
Compliance with environmental laws is a major consideration in the manufacturing of the Company's products, as the Company uses,
generates, stores, and disposes of hazardous substances and wastes in its operations. In addition, many of the Company’s current and
former properties are or have been used for industrial purposes. Certain environmental laws may impose joint and several and strict
liability for environmental contamination, which may render the Company liable for remediation costs, natural resource damages, and
other damages as a result of our conduct (that may have been lawful at the time it occurred) or the conduct of, or conditions caused by,
prior owners or operators or other third parties. In addition, where contamination may be present, it is not uncommon for neighboring
land owners and other third parties to file claims for personal injury, property damage, and recovery of response costs. Remediation costs
and other damages arising as a result of environmental laws and regulations, and costs associated with new information, changes in
existing environmental laws and regulations or the adoption of new environmental laws and regulations could be substantial and could
negatively impact financial condition, profitability and results of operations.
Enerflex may need to apply for or amend facility permits or licenses from time to time with respect to storm water or wastewater
discharges, waste handling, or air emissions relating to manufacturing activities or equipment operations, which may subject Enerflex to
new or revised permitting conditions. These permits and authorizations may contain numerous compliance requirements, including
monitoring and reporting obligations and operational restrictions, such as emission limits, which may be onerous or costly to comply
with. Given the large number of facilities in which Enerflex operates, and the numerous environmental permits and other authorizations
that are applicable to our operations, the Company may occasionally identify or be notified of technical violations of certain compliance
requirements. Occasionally, we have been assessed penalties for non-compliance, and Enerflex could be subject to such penalties in the
future.
The Company is also subject to various federal, provincial, state, and local laws and regulations relating to safety and health conditions
in its manufacturing facilities. Those laws and regulations may also subject the Company to material financial penalties or liabilities for
any noncompliance, as well as potential business disruption if any of its facilities, or a portion of any facility, is required to be temporarily
closed as a result of any violation of those laws and regulations. Any such financial liability or business disruption could have a material
adverse effect on the Company's projections, business, results of operations, and financial condition.
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The modification or interpretation of existing HSE laws or regulations, the more vigorous enforcement of existing laws or regulations, or
the adoption of new laws or regulations may also negatively impact oil and natural gas exploration, production, gathering and pipeline
companies, including Enerflex customers, which in turn could have a negative impact on the Company’s financial results and operations.
Climate Change Risks
The subject of energy and the environment has created intense public debate around the world in recent years, which is expected to
continue for the foreseeable future. The direction of this debate, and any initiatives that arise as a result, could potentially have a
significant impact on all aspects of the economy.
Regulatory and Policy Risks
Although the Company is not a large producer of GHGs, the products and services of the Company are primarily related to the production
of hydrocarbons including crude oil and natural gas, the ultimate consumption of which is generally considered a major source of GHG
emissions. The trend in environmental regulation in recent periods has been to impose more restrictions and limitations on activities that
may impact the environment, including laws, regulations, and/or taxes pertaining to the emission of CO2 and other GHGs into the
atmosphere. Any regulatory changes that impose additional environmental restrictions or requirements on the Company and/or its
customers could increase the Company’s operating costs and/or impact the demand for the Company’s products and services. For
example, taxes on GHG emissions, emissions reduction requirements, or carbon pricing initiatives may result in increased costs and
capital expenditures for oil and natural gas producers, thereby decreasing the demand for the Company’s products and services, and
negatively impacting Enerflex’s business prospects. Such future regulations may impose significant liabilities on failure to comply with
their requirements.
The Company is unable to predict the impact of new climate change and emissions reduction legislation and regulatory initiatives on the
Company and its equipment or operations, or its customers’ operations, and it is possible that such laws or regulations would have a
material adverse effect on the Company’s business, financial conditions, results of operation and cash flows.
Physical Risks
There has been public discussion that climate change may be associated with extreme weather conditions such as more intense
hurricanes, droughts, forest fires, thunderstorms, tornados and snow or ice storms, as well as rising sea levels and other acute (event-
driven) and chronic (long-term) climate events. Another possible consequence of climate change is increased volatility in seasonal
temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially colder or
warmer than their historical averages.
To the extent there are significant climate changes in the markets Enerflex serves or areas where our assets reside, Enerflex could incur
increased costs, its assets could be damaged, it could experience supply chain disruption, operations could be materially impacted (such
as shut-down requirements), there may be health implications for its employees, and its customers may experience operational
disruptions causing reduced demand for the Company’s products. At this time, the Company is unable to determine the extent to which
climate change may lead to increased climate events affecting its operations.
Technological Risks
Demand for our products may also be adversely affected by the development and demand for new technologies in response to global
climate change. Many governments provide, or may in the future provide, tax advantages and other subsidies to support the use and
development of alternative energy technologies. Technological advances and cost declines in renewable power and electric grids, electric
vehicles, and batteries may reduce demand for fossil fuels, which could lead to a lower demand for the Company’s products and services.
If customer preferences shift, the Company may also be required to develop new technologies, requiring significant investments of
capital and resources. At this time, the Company is unable to determine the extent to which such technological risks may impact its
business prospects and financial condition.
Reputational and Market Risks
As the focus on climate-related risks and impacts increases, there is growing concern about whether or how the expansion of fossil fuel
infrastructure is consistent with action on climate change. While Enerflex is focussed on providing natural gas solutions, the cleanest
fossil fuel, there is potential for these concerns to have an impact on Enerflex’s brand, reputation, and business prospects. Negative public
perception and public protests against oil and natural gas development could negatively affect the Company’s reputation. Investors and
financial institutions may move funds away from the energy sector or towards investing in renewables, which could restrict funds
Management’s Discussion and Analysis | 2019 Annual Report
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available for the Company and its customers and negatively impact Enerflex’s share price. Such changing stakeholder preferences may
decrease demand for fossil fuels, which could negatively impact the Company’s customers and thereby reduce demand for Enerflex’s
products and services, which could reduce the Company’s revenue. At this time, the Company is unable to determine the extent to which
such risks may impact its reputation and business prospects.
Customer Credit Risk
A substantial portion of Enerflex's accounts receivable balances are with customers involved in the oil and natural gas industry. Many
customers finance their exploration and development activities through cash flow from operations, the incurrence of debt or the
issuance of equity. During times when the oil or natural gas markets weaken, customers may experience decreased cash flow from
operations, or a reduction in their ability to incur debt or access equity financing. A reduction in borrowing bases under reserve-based
credit facilities, the lack of availability of debt or equity financing or other factors that negatively impact our customers’ financial
condition may impair their ability to pay for products or services rendered. Enerflex may extend credit to certain customers for products
and services that it provides during its normal course of business. Enerflex monitors its credit exposure to its customers, but there can
be no certainty that a credit-related loss will not materialize or have a material adverse impact on the organization. The consolidation of
energy producers and the developing trend for smaller start-up exploration corporations may alter Enerflex's exposure to credit risk.
The financial failure of a customer may impair the Company’s ability to collect on all or a portion of the accounts receivable balance from
that customer.
The Company has remained diligent during 2019 in assessing credit levels granted to customers, monitoring the aging of receivables, and
proactively collecting outstanding balances. The challenging economic conditions have resulted in financial failures in the industry but
Enerflex has been able to maintain very low levels of doubtful debts.
Contracted Revenue
Many of Enerflex’s customers finance their exploration and development activities through cash flow from operations, incurrence of
debt, or issuance of equity. If our customers experience decreased cash flow from operations and limitations on their ability to incur debt
or raise equity, for example due to weak oil or natural gas prices or reservoir underperformance, then they may seek to preserve capital
by pursuing price concessions on revenue contracts, cancelling contracts or determining not to renew contracted recurring revenue
contracts. Under these circumstances, the Company may be unable to renew recurring revenue contracts with customers on favorable
commercial terms, if at all. Terms of new contracts or renegotiated contracts may also transfer additional risk of liquidated damages,
consequential loss, liability caps, and indemnities to the Company. These factors may lead to a reduction in our revenue and net income,
which could have a material adverse effect on Enerflex’s business, financial condition, results from operations and cash flows. To the
extent that the Company is unable to renew existing contracts or enter into new contracts that are on favorable terms to Enerflex, overall
revenue mix may change over time which could have a material adverse effect on the Company’s business, results from operations and
cash flows.
Health and Safety Risks
Our operations are subject to hazardous health and safety inherent in manufacturing, construction, and operations. These risks can
include explosions; fires; severe weather and natural disasters; collisions and other transportation incidents; leaks and ruptures involving
vessels, pipelines, and railcars; and spills, discharges, and releases of toxic or hazardous substances or gases.
Failure to prevent or appropriately respond to a safety or health incident could result in injuries or fatalities among our employees,
contractors, or residents in communities near our operations. Such incidents may lead to liabilities arising out of personal injuries or
death, operational interruptions, and shutdown or abandonment of affected facilities. Preventing or responding to accidents could
require Enerflex to expend significant managerial time and effort, and financial resources to remediate safety issues, compensate injured
parties, or repair damaged facilities. Any of the foregoing could have an adverse impact on our financial results and our reputation.
Contract Compression Operations
The duration of Enerflex’s rental contracts with customers vary based on operating conditions and customer needs. Initial contract terms
typically are not long enough to enable the Company to recoup the cost of the equipment deployed in the rental business segment. Many
of Enerflex’s North American rental contracts have short initial terms and after the initial term are cancelable on short notice. While
these contracts are frequently extended beyond their initial terms, Enerflex cannot be sure that a substantial number of these contracts
will be extended or renewed beyond the initial term or that any customer will continue to contract with Enerflex. The inability to
negotiate extensions or renew a substantial portion of the Company’s rental contracts, the renewal of such contracts at reduced rates,
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the inability to contract for additional services with customers, or the loss of all or a significant portion of the rental contracts with any
significant customer could lead to a reduction in revenues and net income and could result in asset impairments. This could have a
material adverse effect upon Enerflex’s business, financial condition, results of operations and cash flows.
International Operations
Enerflex operates in many countries outside of North America, and these operations account for a significant amount of the Company’s
revenue. Enerflex is exposed to risks inherent in conducting international operations, including but not limited to:
Recessions and other economic crises that may impact the Company’s cost of conducting business in those countries;
•
• Difficulties in staffing and managing foreign operations including logistical, security, and communication challenges;
•
Changes in foreign government policies, laws, regulations, and regulatory requirements, or the interpretation, application
and/or enforcement thereof;
• Working in higher risk countries with increased safety and security risks;
• Difficulty or expense of enforcing contractual rights due to the lack of a developed legal system or otherwise;
•
•
• Difficulties, delays, and expenses that may be experienced or incurred in connection with the movement and clearance of
The adoption of new, or the expansion of existing, trade, or other restrictions;
Renegotiation or nullification of existing contracts;
personnel and goods through the customs and immigration authorities of multiple jurisdictions;
Embargoes;
Acts of war, civil unrest, and terrorism;
Social, political, and economic instability;
Confiscation, expropriation, or nationalization of property without fair compensation;
Tax increases or changes in tax laws or in the interpretation, application and/or enforcement thereof; and
Limitations on the Company’s ability to repatriate cash, funds, or capital invested or held in jurisdictions outside Canada.
•
•
•
•
•
•
In addition, Enerflex may expand the business to markets where the Company has not previously conducted business. The risks inherent
in establishing new business ventures, especially in international markets where local customs, laws, and business procedures present
special challenges, may affect Enerflex’s ability to be successful in these ventures.
To the extent Enerflex’s international operations are affected by unexpected or adverse economic, political, and other conditions, the
Company’s business, financial condition, and results of operations may be adversely affected.
Anti-Corruption and Anti-Bribery Laws
The Company is required to comply with Canadian, U.S., and international laws and regulations prohibiting bribery and corruption.
Enerflex conducts business in many parts of the world that experience high levels of corruption, including but not limited to Nigeria,
Mexico, Bolivia, Brazil, Thailand, Colombia, Bahrain, Kuwait, Egypt, Indonesia, and Pakistan, and our business brings us in frequent
contact with foreign officials. In addition, in certain jurisdictions the Company may be reliant on third-party agents to interface with its
clients.
The Company has controls, policies, procedures, and training that mandate the compliance with all applicable anti-bribery and anti-
corruption laws, however there can be no assurance that employees, contractors or agents will not violate these controls, policies, and
procedures. It is possible that the Company or its subsidiaries could be charged with bribery or corruption as a result of the actions of its
employees, contractors or agents. If the Company is found guilty of such a violation, which could include a failure to take effective steps
to prevent or address corruption by its employees, contractors or agents, the Company could be subject to onerous penalties and
reputational damage. Even an investigation could lead to significant corporate disruption, high legal costs and forced settlements. In
addition, bribery allegations or bribery or corruption convictions could impair the Company’s ability to work with governments or
nongovernmental organizations. Such convictions or allegations could result in the formal exclusion of the Company from a country or
area, national or international lawsuits, government sanctions or fines, project suspension or delays, reduced market capitalization and
increased investor concern.
Litigation Risk and Liability Claims
In the normal course of Enerflex’s operations, it may become involved in, named as a party to, or be the subject of various legal
proceedings, including regulatory proceedings, tax proceedings, and legal actions related to contract disputes, property damage,
environmental matters, employment matters and personal injury.
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The Company’s operations entail inherent risks, including but not limited to equipment defects, malfunctions and failures, and natural
disasters that could result in uncontrollable flows of natural gas or well fluids, fires, and explosions. These risks may expose the Company
to substantial liability claims, which could adversely affect its projections, business, results of operations, and financial condition. Some
of the Company's products are used in hazardous applications where an accident or a failure of a product could cause personal injury or
loss of life, or damage to property, equipment, or the environment, as well as the suspension of the end-user's operations. If the
Company's products were to be involved in any of these incidents, the Company could face litigation and may be held liable for those
losses. The Company may not be able to adequately protect itself contractually and insurance coverage may not be available or adequate
in risk coverage or policy limits to cover all losses or liabilities that it may incur. Moreover, the Company may not be able in the future to
maintain insurance at levels of risk coverage or policy limits that management deems adequate. Any claims made under the Company's
policies likely will cause its premiums to increase. Any future damages deemed to be caused by the Company's products or services that
are not covered by insurance, or that are in excess of policy limits or subject to substantial deductibles, could have a material adverse
effect on the Company's projections, business, results of operations, and financial condition.
Defense and settlement costs associated with lawsuits and claims can be substantial, even with respect to lawsuits and claims that have
no merit. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal proceeding could have an adverse
effect on Enerflex’s operating results or financial performance.
Availability of Raw Materials, Component Parts, or Finished Products
Enerflex purchases a broad range of materials and components in connection with its manufacturing and service activities. Some of the
components used in Enerflex’s products are obtained from a single source or a limited group of suppliers. While Enerflex and its people
make it a priority to maintain and enhance these strategic relationships, there can be no assurance that these relationships will continue
and reliance on these suppliers involves several risks, including price increases, inferior component quality, unilateral termination, and a
potential inability to obtain an adequate supply of required components in a timely manner. In particular, long lead times for high demand
components, such as engines, can result in project delays. While Enerflex has long standing relationships with recognized and reputable
suppliers, it does not have long-term contracts with all of them, and the partial or complete loss of certain of these sources could have a
negative impact on Enerflex’s results of operations and could damage customer relationships. Further, a significant increase in the price
of one or more of these components could have a negative impact on results of operations.
Though Enerflex is generally not dependent on any single source of supply, the ability of suppliers to meet performance, quality
specifications, and delivery schedules is important to the maintenance of Enerflex customer satisfaction. If the availability of certain
OEM components and repair parts, which are generally in steady demand, is constrained or delayed, certain of Enerflex’s operational or
financial results may be adversely impacted.
Information Technology and Cyberattacks
We are dependent upon the availability, capacity, reliability and security of our information technology infrastructure and our ability to
expand and continually update this infrastructure, to conduct daily operations. Information technology assets and protocols become
increasingly important to Enerflex as it continues to expand internationally, provide information technology access to global personnel,
develop web-based applications and monitoring products, and improve its business software applications. If any such programs or
systems were to fail or create erroneous information in the Company’s hardware or software network infrastructure, it could have a
material adverse effect on the Company’s business activities.
Enerflex may be threatened by or subjected to cyberattack risks such as cyber-fraud, viruses, malware infections, or social engineering
activities like phishing and employee impersonation, which may disrupt operations and harm operating results. Cyberattacks have
become more prevalent and much harder to detect and defend against. These threats may arise from a variety of sources, all ranging in
sophistication from an individual hacker to alleged state-sponsored attacks. A cyberattack may be generic, or it may be custom-crafted
to target the specific information technology used by Enerflex.
The Company may be targeted by parties using fraudulent spoof and phishing emails to misappropriate Enerflex information, or the
information of our customers and suppliers, or to introduce viruses or other malware through “trojan horse” programs into computer
networks of the Company, our customers and/or our suppliers. These phishing emails may appear upon a cursory review to be legitimate
emails sent by a member of Enerflex, its customers or suppliers. If a member of Enerflex or a member of one of its customers or suppliers
fails to recognize that a phishing email has been sent or received and responds or forwards the phishing email, the attack could corrupt
the computer networks and/or access confidential information of Enerflex, its customers, employees, and/or suppliers, including
passwords, through email or downloaded malware. In addition to spoof and phishing emails, network and storage applications may be
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subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. It is often difficult
to anticipate or immediately detect such incidents and the damage caused by such incidents.
Security measures and employee education and training have been implemented to protect the Company’s information technology
systems and network infrastructure. However, the Company’s mitigation measures cannot provide absolute security, and the
information technology infrastructure may be vulnerable to criminal cyberattacks or data security incidents due to employee or
customer error, malfeasance, or other vulnerabilities. Additionally, Enerflex is reliant on third-party service providers for certain
information technology applications. While the Company conducts due-diligence and believes that these third-party service providers
have adequate security measures, there can be no assurance that these security measures will prevent any cyber events or computer
viruses from impacting the applications that Enerflex relies on.
If Enerflex’s information technology systems were to fail and the Company was unable to recover in a timely way, the Company might be
unable to fulfill critical business functions, which could damage the Company’s reputation and have a material adverse effect on the
business, financial condition, and results of operations.
Personnel and Contractors
The Company’s ability to attract and retain qualified personnel and provide the necessary organizational structure, programs, and
culture to engage and develop employees is crucial to its growth and achieving its business results.
Enerflex's Engineered Systems product line requires skilled engineers and design professionals in order to maintain customer
satisfaction through industry leading design, build, and installation of the Company’s product offering. Enerflex competes for these
professionals, not only with other companies in the same industry, but with oil and natural gas producers and other industries. In periods
of high activity, demand for the skills and expertise of these professionals increases, making the hiring and retention of these individuals
more difficult.
Enerflex's Service product line relies on the skills and availability of trained and experienced tradesmen, mechanics, and technicians to
provide efficient and appropriate services to Enerflex and its customers. Hiring and retaining such individuals is critical to the success of
Enerflex’s business. Demographic trends are reducing the number of individuals entering the trades, making Enerflex's access to skilled
individuals more difficult.
There are certain jurisdictions where Enerflex relies on third-party contractors to carry out the operation and maintenance of its
equipment. The ability of our third-party contractors to find and retain individuals with the proper technical background and training is
critical to the continued success of the contracted operations in these jurisdictions. If Enerflex’s third-party contractors are unable to
find and retain qualified operators, or the cost of these qualified operators increases substantially, the contract operations business could
be materially impacted.
Additionally, in increasing measures, Enerflex is dependent upon the skills and availability of various professional and administrative
personnel to meet the increasing demands of the requirements and regulations of various professional and governmental bodies.
There are few barriers to entry in a number of Enerflex's businesses, so retention of qualified staff is essential in order to differentiate
Enerflex's businesses and compete in its various markets. Enerflex’s success depends on key personnel and its ability to hire and retain
skilled personnel, and the loss of skilled personnel could delay the completion of certain projects or otherwise adversely impact certain
of our operational and financial results.
Terrorism
Terrorist activities (including environmental terrorism), anti-terrorist efforts and other armed conflicts involving Canada, the United
States or other countries may adversely affect the global economies and could prevent the Company from meeting its financial and other
obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and
natural gas, potentially putting downward pressure on demand for the Company’s products and services and causing a reduction in the
Company’s revenues. In addition, the Company’s assets may be direct targets of terrorist attacks that could disrupt Enerflex’s ability to
service its customers. The Company may be required by regulators or by the future terrorist threat environment to make investments in
security that cannot be predicted. The implementation of security guidelines and measures and the maintenance of insurance, to the
extent available, to address such activities could increase Enerflex’s costs. These types of events could materially adversely affect the
Company’s business and results of operations.
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Insurance
Enerflex’s operations are subject to risks inherent in the oil and natural gas services industry, such as equipment defects, malfunctions
and failures, and natural disasters with resultant uncontrollable flows of oil and natural gas, fires, spills, and explosions. These risks could
expose Enerflex to substantial liability for personal injury, loss of life, business interruption, property damage, pollution, and other
liabilities. Enerflex carries prudent levels of insurance to protect the Company against these unforeseen events, subject to appropriate
deductibles and the availability of coverage. In addition, the Company has procured cyber security insurance designed to mitigate the
cost of a cyber security breach and executive liability insurance to limit exposure to unforeseen incidents. An annual review of insurance
coverage is completed to assess the risk of loss and risk mitigation alternatives.
Extreme weather conditions, natural occurrences, and terrorist activity have strained insurance markets leading to substantial increases
in insurance costs and limitations on coverage. It is anticipated that appropriate insurance coverage will be maintained in the future, but
there can be no assurance that such insurance coverage will be available on commercially reasonable terms or on terms as favourable as
Enerflex's current arrangements. The occurrence of a significant event outside of the scope of coverage of the Enerflex insurance policies
could have a material adverse effect on the results of the organization.
Access to Capital
Enerflex relies on its cash, as well as the credit and capital markets to provide some of the capital required to continue operations.
Enerflex relies on its Bank Facility and Senior Notes to meet its funding and liquidity requirements. The Company's Bank Facility, which
is senior unsecured indebtedness and is subject to floating rates of interest, is due on June 30, 2023 and may be renewed annually with
the consent of the lenders. The Senior Notes, which are also senior unsecured indebtedness of the organization, mature as follows:
C$40.0 million of ten-year notes mature on June 22, 2021; U$105.0 million and C$15.0 million of seven-year notes mature on December
15, 2024; and U$70.0 million and C$30.0 million of ten-year notes mature on December 15, 2027. As of December 31, 2019, the
Company had $312.3 million in Senior Notes issued and outstanding, and $121.3 million outstanding on its Bank Facility.
Significant instability or disruptions to the capital markets, including the credit markets, may impact the Company’s ability to successfully
renegotiate all or part of its Bank Facility prior to its due date which could have important adverse consequences including:
Increasing vulnerability to general adverse economic conditions and industry conditions;
Limiting the ability to fund future working capital, capital expenditures or acquisitions;
• Making it more difficult to satisfy contractual obligations;
•
•
•
•
Paying future dividends to shareholders.
Limiting the ability to refinance debt in the future or borrow additional funds to fund ongoing operations; and
As at December 31, 2019, the Company had $557.3 million available in borrowing base on its Bank Facility.
The Company's Bank Facility and the Note Purchase Agreement also contain a number of covenants and restrictions with which Enerflex
and its subsidiaries must comply, including, but not limited to, use of proceeds, limitations on our ability to incur additional indebtedness,
transactions with affiliates, mergers and acquisitions, and our ability to sell assets. The Company’s ability to comply with these covenants
and restrictions may be affected by events beyond its control, including prevailing economic, financial, and industry conditions. If market
or other economic conditions deteriorate, the Company’s ability to comply with these covenants may be impaired. Failure to meet any
of these covenants, financial ratios, or financial tests could result in events of default under each agreement which require the Company
to repay its indebtedness under those agreements and could impair the Company’s ability to access the capital markets for financing.
While Enerflex is currently in compliance with all covenants, financial ratios, and financial tests, there can be no assurance that it will be
able to comply with these covenants, financial ratios, and financial tests in future periods. These events could restrict the Company's and
other guarantors' ability to fund its operations, meet its obligations associated with financial liabilities, or declare and pay dividends.
Foreign Exchange
Enerflex reports its financial results to the public in Canadian dollars; however, a significant percentage of its revenues and expenses are
denominated in currencies other than Canadian dollars. The Company identifies and hedges all significant transactional currency risks
and its hedging policy remains unchanged in the current year. Further information on Enerflex’s hedging activities is provided in Note 27
in the audited consolidated financial statements for the year ended December 31, 2019.
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Transaction Exposure
The Canadian operations of the Company source the majority of their 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 also sells compression and processing packages in foreign currencies, primarily
the U.S. dollar. Most of Enerflex’s international orders are manufactured in the United States if the contract is denominated in U.S.
dollars. This minimizes the Company’s foreign currency exposure on these contracts.
The Company has implemented a hedging policy, applicable primarily to the Canadian operations, with the objective of securing the
margins earned on awarded contracts denominated in currencies other than Canadian dollars. In addition, the Company may hedge input
costs that are paid in a currency other than the home currency of the subsidiary executing the contract. The Company utilizes a
combination of foreign denominated debt and currency forward contracts to meet its hedging objective.
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 Brazilian real.
Assets and liabilities of foreign subsidiaries 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 (“AOCI”). The
cumulative currency translation adjustments are recognized in earnings 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 earnings. Such exchange rate
fluctuations could be 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 may be subject to fluctuations in interest rates. The Company's Senior Notes
outstanding at December 31, 2019 are at fixed interest rates and therefore will not be impacted by fluctuations in market interest rates.
The Company's Bank Facility, however, is subject to changes in market interest rates. As at December 31, 2019 the Company had $121.3
million of indebtedness that is effectively subject to floating interest rates. Changes in economic conditions outside of Enerflex’s control
could result in higher interest rates, thereby increasing Enerflex’s interest expense which may have a material adverse impact on
Enerflex’s financial results, financial condition, or ability to declare and pay dividends.
For each one percent change in the rate of interest on the Bank Facility, the change in interest expense for the twelve months ended
December 31, 2019 would be approximately $1.2 million. All interest charges are recorded in finance costs on the consolidated
statements of earnings. Any increase in market interest rates could have a material adverse impact on the Company's financial results,
financial condition, or ability to declare and pay dividends.
Inflationary Pressures
Strong economic conditions and competition for available personnel, materials, and major components may result in significant increases
in the cost of obtaining such resources. To the greatest extent possible, Enerflex passes such cost increases on to its customers and it
attempts to reduce these pressures through proactive procurement and human resource practices. Should these efforts not be
successful, the gross margin and profitability of Enerflex could be adversely affected.
Seasonal Factors and Demand
Demand for natural gas fluctuates largely with the heating and electric power requirements caused by the changing seasons in North
America. Cold winters typically increase demand for, and the price of, natural gas. This increases customers' cash flow, which can have a
positive impact on Enerflex. At the same time, access to many western Canadian oil and natural gas properties is limited to the period
when the ground is frozen so that heavy equipment can be transported. As a result, the first quarter of the year is generally accompanied
by increased winter deliveries of equipment. Warm winters in western Canada, however, can both reduce demand for natural gas and
make it difficult for producers to reach well locations. This restricts drilling and development operations, reduces the ability to supply
natural gas production in the short-term, and can negatively impact the demand for Enerflex's products and services.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
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CAPITAL RESOURCES
On January 31, 2020, Enerflex had 89,678,845 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. Subsequent to the fourth quarter of 2019, the Company
declared a quarterly dividend of $0.115 per share.
At December 31, 2019, the Company had drawn $121.3 million against the Bank Facility (December 31, 2018 - $124.9 million). The
weighted average interest rate on the Bank Facility at December 31, 2019 was 3.5 percent (December 31, 2018 – 3.5 percent).
The composition of the borrowings on the Bank Facility and the Senior Notes was as follows:
($ Canadian thousands)
Drawings on Bank Facility
Senior Notes due June 22, 2021
Senior Notes due December 15, 2024
Senior Notes due December 15, 2027
Deferred transaction costs
December 31,
2019
December 31,
2018
$
121,328 $
40,000
151,374
120,916
(3,131)
$
430,487 $
124,852
40,000
158,241
125,494
(3,875)
444,712
At December 31, 2019, without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the
next five years are $312.7 million, and $120.9 million thereafter.
CONTRACTUAL OBLIGATIONS COMMITTED CAPITAL INVESTMENT, AND OFF-
BALANCE SHEET ARRANGEMENTS
The Company’s contractual obligations are contained in the following table:
($ Canadian thousands)
2020
2021
2022
2023
2024
Thereafter
Leases
Purchase
Obligations
Total
$
15,313
$
129,721 $
145,034
12,915
10,598
7,570
5,667
31,440
1,795
973
-
-
-
14,710
11,571
7,570
5,667
31,440
215,992
Total contractual obligations
$
83,503
$
132,489 $
The Company’s lease commitments are operating leases for premises, equipment, and 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 have 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.
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Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
RELATED PARTIES
Enerflex transacts with certain related parties as a normal course of business. Related parties include Roska DBO, the Company’s 45
percent equity investment, and the Company’s 50 percent controlling interest in Geogas consortium. During 2019, Enerflex acquired 65
percent investment of VAG -Flex Gas Ltda.
All transactions occurring with related 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 is as
follows:
Years ended December 31,
Associate – Roska DBO
Revenue
Purchases
Accounts receivable
Joint Operation – Geogas
Revenue
Purchases
Accounts receivable
All related party transactions are settled in cash.
$
$
2019
2018
509 $
-
4
62 $
74
19
186
2
-
90
75
236
SIGNIFICANT ACCOUNTING ESTIMATES
The Company’s significant accounting policies are described in Note 5 of the audited consolidated financial statements for the year
ended December 31, 2019. The preparation of financial statements in conformity with IFRS 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
audited consolidated financial statements:
Revenue Recognition – Performance Obligation Satisfied Over Time
The Company reflects revenues relating to performance obligations satisfied over time using the percentage-of-completion approach of
accounting. The Company uses the input method of percentage-of-completion accounting, whereby actual input costs as a percentage
of estimated total costs is used as the basis for determining the extent to which performance obligations are satisfied. The input method
of percentage-of-completion accounting provides a faithful depiction of the transfer of control to the customer, as the Company is able
to recover costs incurred relating to the satisfaction of the associated performance obligation. 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.
Revenue Recognition – Performance Obligation Satisfied at a Point in Time
The Company reflects revenues relating to performance obligations satisfied at a point in time when control – indicated by transfer of
the legal title, physical possession, significant risks and rewards of ownership, or any combination of these indicators – is transferred to
the customer.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
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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.
Business Acquisitions
In a business acquisition, the Company may acquire assets and assume certain liabilities of an acquired entity. Estimates are made as to
the fair value of property, plant and equipment, intangible assets, and goodwill, among other items. In certain circumstances, such as the
valuation of property, plant and equipment and intangible assets acquired, the Company relies on independent third-party valuators.
The determination of these fair values involves a variety of assumptions, including revenue growth rates, projected cash flows, discount
rates, and earnings multiples.
Property, Plant and Equipment and Rental Equipment
Property, plant and equipment and rental equipment is stated at cost less accumulated depreciation and any impairment losses.
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of
property, plant and equipment and rental equipment is reviewed on an annual basis. Assessing the reasonableness of the estimated
useful lives of property, plant and equipment and rental equipment requires judgment and is based on currently available information.
Property, plant and equipment and rental equipment is also reviewed for potential impairment on an annual 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 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 property, plant and equipment and rental equipment constitutes a
change in accounting estimate and are applied prospectively.
Right-of-Use Asset and Lease Liability
The Company determines the right-of-use asset and lease liability for each lease upon commencement. In calculating the right-of-use
asset and lease liability, the Company is required to determine a suitable discount rate in order to calculate the present value of the
contractual payments for the right to use the underlying asset during the lease term. In addition, the Company is required to assess the
term of the lease, including if the Company is reasonably certain to exercise options to extend the lease or terminate the lease. Discount
rates and lease assumptions are reassessed on a periodic basis.
Allowance for Doubtful Accounts
Amounts included in allowance for doubtful accounts reflect the full lifetime expected credit losses for trade receivables. The Company
determines allowances based on management’s best estimate of future expected credit losses, considering historical default rates,
current economic conditions, and forecasts of future economic conditions. Significant or unanticipated changes in economic conditions
could impact the magnitude of future expected credit losses.
Impairment of Inventories
The Company regularly reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on
historical usage patterns, known changes to equipment or processes, and customer demand for specific products. Significant or
unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized.
Impairment of Non-Financial Assets
Impairment exists when the carrying value of an asset or group of assets 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, which requires the Company to estimate future cash flows and
use judgment to determine a suitable discount rate to calculate the present value of those cash flows.
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Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
Impairment of Goodwill
The Company tests goodwill for impairment at least on an annual basis. This requires an estimation of the value-in-use of the groups of
CGUs 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 group of CGUs and use judgment 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 taxable income. 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.
Share-Based Compensation
The Company employs the fair value method of accounting for stock options and phantom share entitlement. The determination of the
share-based compensation expense for stock options and phantom share entitlement requires the use of estimates and assumptions
based on exercise prices, market conditions, vesting criteria, length of employment, and past experiences of the Company. Changes in
these estimates and future events could alter the determination of the provision for such compensation. Details concerning the
assumptions used are described in Note 23 of the audited consolidated financial statements for the year ended December 31, 2019.
NEW ACCOUNTING POLICIES
IFRS 16 Leases (“IFRS 16”)
IFRS 16 sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract.
The standard supersedes IAS 17 Leases and lease-related interpretations. IFRS 16 is effective for annual periods beginning on or after
January 1, 2019. Management elected to adopt IFRS 16 using the modified retrospective approach and has included an adjustment to
opening balances upon adoption to reflect the Company’s financial position at January 1, 2019 had the new standard been applied in
prior periods. Adjustments made on transition are detailed in Note 34 of the audited consolidated financial statements for the year ended
December 31, 2019.
The Company has elected not to recognize lease right-of-use assets and lease liabilities for short-term and low-value leases. Lease
payments associated with these leases will be recognized as an expense on a straight-line basis over the lease term. Certain leases include
both lease and non-lease components, which are generally accounted for separately. For certain equipment leases, the Company applies
a portfolio approach to effectively account for the lease right-of-use assets and lease liabilities.
FUTURE ACCOUNTING PRONOUNCEMENTS
The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective. The Company
determined that the following narrow scope amendment may have an impact:
IFRS 3 Business Combinations (“IFRS 3”)
Effective January 1, 2020, the definition of a business will be amended under IFRS 3. Under the amended definition, to be considered a
business an acquisition must include an input and a substantive process that together significantly contribute to the ability to create
outputs. The new guidance provides a framework to evaluate when an input and a substantive process are present.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
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Under the prior definition, IFRS 3 stated that a business need not include all of the inputs or processes that the seller used in operating
that business “if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the
business with their own inputs and processes”. The reference to such integration is now deleted from IFRS 3 in the proposed amendment
and the assessment must be based on what has been acquired in its current state and condition.
This amendment will be applied prospectively to future acquisitions. While there are no immediate impacts resulting from this
amendment, this change will likely result in more acquisitions being accounted for as asset acquisitions. Application of the change could
also affect the accounting for disposal transactions.
The Company applied the amendments beginning January 1, 2020, with no changes to the Company’s consolidated financial statements.
RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS
Management is responsible for the information disclosed in this MD&A and the accompanying audited 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 audited 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 (“DC&P”) and
internal control over financial reporting (“ICFR”).
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer, together with other members of management, have evaluated the
effectiveness of the Company’s disclosure controls and procedures and internal controls over financial reporting as at December 31,
2019, using the internal control integrated framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. Based on that evaluation, management has concluded that the design and operation of the Company’s disclosure
controls and procedures were adequate and effective as at December 31, 2019, to provide reasonable assurance that: a) material
information relating to the Company and its consolidated subsidiaries would have been known to them and by others within those
entities; and b) information required to be disclosed is recorded, processed, summarized, and reported within required time periods.
They have also concluded that the design and operation of internal controls over financial reporting was adequate and effective as at
December 31, 2019, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
reporting in accordance with IFRS.
There have been no significant changes in the design of the Company’s ICFR during the twelve months ended December 31, 2019 that
would materially affect, or is reasonably likely to materially affect, the Company’s ICFR.
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 December 31, 2019, Enerflex declared a quarterly dividend of $0.115 per share, payable on April 2, 2020, to shareholders
of record on March 12, 2020.
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Enerflex Ltd. | 2019 Annual Report
Management’s Discussion and Analysis | 2019 Annual Report
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking information within the meaning of applicable Canadian securities laws. These statements relate to
management’s expectations about future events, results of operations and the Company’s future performance (both operational and financial)
and business prospects. All statements other than statements of historical fact are forward-looking statements. The use of any of the words
“anticipate”, “plan”, “contemplate”, “continue”, “estimate”, “expect”, “intend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”,
“would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, “objective” and “capable” and similar expressions are intended to identify forward-
looking information. In particular, this MD&A includes (without limitation) forward-looking information pertaining to: anticipated financial
performance; future capital expenditures, including the amount and nature thereof; bookings and backlog; oil and gas prices and the impact of
such prices on demand for Enerflex products and services; development trends in the oil and gas industry; seasonal variations in the activity levels
of certain oil and gas markets; 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; the ability of existing and expected cash flows and other cash resources to fund
investments in working capital and capital assets; the impact of economic conditions on accounts receivable; expectations regarding future
dividends; and implications of changes in government regulation, laws and income taxes.
All forward-looking information in this MD&A, primarily in the Outlook and Enerflex Strategy sections, is 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
economic conditions including volatility in the price of oil, gas, and gas liquids, interest rates and foreign exchange rates; industry conditions
including supply and demand fundamentals for oil and gas, and the related infrastructure including new environmental, taxation and other laws
and regulations; the ability to continue to build and improve on proven manufacturing capabilities and innovate into new product lines and
markets; increased competition; insufficient funds to support capital investments required to grow the business; the lack of availability of
qualified personnel or management; political unrest; and other factors, many of which are beyond the Company's control. Readers are cautioned
that the foregoing list of assumptions and risk factors should not be construed as exhaustive. While the Company believes that there is a
reasonable basis for the forward-looking information and statements included in this MD&A, as a result of such known and unknown risks,
uncertainties and other factors, actual results, performance, or achievements could differ materially from those expressed in, or implied by, these
statements. The forward-looking information included in this MD&A should not be unduly relied upon.
The forward-looking information contained herein is expressly qualified in its entirety by the above cautionary statement. The forward-looking
information included in this MD&A is 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 information, whether as a result of new information, future events or otherwise.
Management’s Discussion and Analysis | 2019 Annual Report
2019 Annual Report | Management’s Discussion and Analysis
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MANAGEMENT’S RESPONSIBILITY
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL POSITION
FOR FINANCIAL POSITION
TO THE SHAREHOLDERS OF ENERFLEX LTD.
TO THE SHAREHOLDERS OF ENERFLEX LTD.
The accompanying consolidated financial statements and all information in the Annual Report have been prepared by management and
approved by the Board of Directors of the Company. The consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards and, where appropriate, reflect management’s best estimates and judgments. Management
is responsible for the accuracy, integrity, and objectivity of the consolidated financial statements within reasonable limits of materiality
and for the consistency of financial data included in the text of the Annual Report with that in the consolidated financial statements.
To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls designed to provide
reasonable assurance that accounting records are reliable, and assets are safeguarded.
The Audit Committee is appointed by the Board of Directors. The Audit Committee meets with management, as well as with the external
auditors, Ernst & Young LLP, to satisfy itself that management is properly discharging its financial reporting responsibilities and to review
the consolidated financial statements and the auditors’ report. The Audit Committee reports its findings to the Board of Directors for
consideration in approving the consolidated financial statements for presentation to the shareholders. The external auditors have direct
access to the Audit Committee of the Board of Directors.
The consolidated financial statements have been audited independently by Ernst & Young LLP on behalf of the shareholders in
accordance with generally accepted auditing standards. Their report outlines the nature of their audits and expresses their opinion on
the consolidated financial statements.
[signed] “Marc E. Rossiter”
[signed] “Sanjay Bishnoi”
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance
Marc E. Rossiter
President, Chief Executive Officer, and Director
Sanjay Bishnoi
Senior Vice President, Chief Financial Officer
February 20, 2020
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Management’s Responsibility for Financial Position | 2019 Annual Report
Enerflex Ltd. | 2019 Annual Report
Independent Auditors’ Report | 2019 Annual Report
37
INDEPENDENT
AUDITORS’ REPORT
TO THE SHAREHOLDERS OF ENERFLEX LTD.
Opinion
We have audited the consolidated financial statements of Enerflex Ltd. and its subsidiaries (the Company), which comprise the
consolidated statements of financial position as at December 31, 2019 and 2018, and the consolidated statements of earnings,
comprehensive income (loss), changes in equity and cash flows for the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial
position of the Company as at December 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows
for the years then ended in accordance with International Financial Reporting Standards (IFRSs).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards
are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are
independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial
statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises:
• Management’s Discussion and Analysis
•
The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report
conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so,
consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained
in the audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion & Analysis and the Annual Report prior to the date of this auditor’s report. If, based on the work
we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in
this auditor’s report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial
Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs,
and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management
either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
INDEPENDENT
INDEPENDENT
AUDITORS’ REPORT
AUDITORS’ REPORT
TO THE SHAREHOLDERS OF ENERFLEX LTD.
TO THE SHAREHOLDERS OF ENERFLEX LTD.
Opinion
We have audited the consolidated financial statements of Enerflex Ltd. and its subsidiaries (the Company), which comprise the
consolidated statements of financial position as at December 31, 2019 and 2018, and the consolidated statements of earnings,
comprehensive income (loss), changes in equity and cash flows for the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial
position of the Company as at December 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows
for the years then ended in accordance with International Financial Reporting Standards (IFRSs).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards
are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are
independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial
statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises:
• Management’s Discussion and Analysis
•
The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance
conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so,
consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained
in the audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion & Analysis and the Annual Report prior to the date of this auditor’s report. If, based on the work
we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in
this auditor’s report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial
Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs,
and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management
either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
2019 Annual Report | Independent Auditors’ Report
Independent Auditors’ Report | 2019 Annual Report
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Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards
will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of
these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
•
•
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on
the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves
fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within
the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision
and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Gord Graham.
Chartered Professional Accountants
Calgary, Canada
February 20, 2020
38
52
Enerflex Ltd. | 2019 Annual Report
Independent Auditors’ Report | 2019 Annual Report
See accompanying Notes to the consolidated financial statements, including guarantees, commitments, and contingencies (Note 30).
See accompanying Notes to the consolidated financial statements, including guarantees, commitments, and contingencies (Note 30).
CONSOLIDATED
CONSOLIDATED
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ Canadian thousands)
($ Canadian thousands)
Assets
Assets
Current assets
Current assets
Cash and cash equivalents
Cash and cash equivalents
Accounts receivable (Note 7)
Accounts receivable (Note 7)
Contract assets (Note 7)
Contract assets (Note 7)
Inventories (Note 8)
Inventories (Note 8)
Income taxes receivable
Income taxes receivable
Derivative financial instruments (Note 27)
Derivative financial instruments (Note 27)
Other current assets
Other current assets
Total current assets
Total current assets
Property, plant and equipment (Note 9)
Property, plant and equipment (Note 9)
Rental equipment (Note 9)
Rental equipment (Note 9)
Lease right-of-use assets (Note 10)
Lease right-of-use assets (Note 10)
Deferred tax assets (Note 19)
Deferred tax assets (Note 19)
Other assets (Note 11)
Other assets (Note 11)
Intangible assets (Note 12)
Intangible assets (Note 12)
Goodwill (Note 13)
Goodwill (Note 13)
Total assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities and Shareholders’ Equity
Current liabilities
Current liabilities
Accounts payable and accrued liabilities (Note 14)
Accounts payable and accrued liabilities (Note 14)
Provisions (Note 15)
Provisions (Note 15)
Income taxes payable
Income taxes payable
Deferred revenues (Note 16)
Deferred revenues (Note 16)
Current portion of lease liabilities (Note 18)
Current portion of lease liabilities (Note 18)
Deferred financing income
Deferred financing income
Derivative financial instruments (Note 27)
Derivative financial instruments (Note 27)
Total current liabilities
Total current liabilities
Long-term debt (Note 17)
Long-term debt (Note 17)
Lease liabilities (Note 18)
Lease liabilities (Note 18)
Deferred tax liabilities (Note 19)
Deferred tax liabilities (Note 19)
Other liabilities
Other liabilities
Total liabilities
Total liabilities
Shareholders’ equity
Shareholders’ equity
Share capital (Note 20)
Share capital (Note 20)
Contributed surplus (Note 21)
Contributed surplus (Note 21)
Retained earnings
Retained earnings
Accumulated other comprehensive income
Accumulated other comprehensive income
Total shareholders’ equity before non-controlling interest
Total shareholders’ equity before non-controlling interest
Non-controlling interest
Non-controlling interest
Total shareholders’ equity and non-controlling interest
Total shareholders’ equity and non-controlling interest
Total liabilities and shareholders’ equity
Total liabilities and shareholders’ equity
Consolidated Financial Statements | 2019 Annual Report
Consolidated Financial Statements | 2019 Annual Report
December 31,
December 31,
2019
2019
December 31,
December 31,
2018
2018
$
$
96,255 $
96,255 $
384,021
384,021
183,890
183,890
269,385
269,385
6,626
6,626
152
152
12,223
12,223
952,552
952,552
108,551
108,551
642,095
642,095
60,288
60,288
48,624
48,624
26,410
26,410
22,058
22,058
573,928
573,928
18,250
8,074
8,074
142,907
142,907
14,172
14,172
88
88
375
375
517,471
517,471
430,487
430,487
52,828
52,828
76,256
76,256
14,677
14,677
2,434,506 $
2,434,506 $
333,605 $
333,605 $
18,250
1,091,719 $
1,091,719 $
375,524 $
375,524 $
655,107
655,107
228,843
228,843
81,779
81,779
1,341,253
1,341,253
1,534
1,534
1,342,787
1,342,787
2,434,506 $
2,434,506 $
$
$
$
$
$
$
$
$
$
$
326,864
326,864
469,337
469,337
158,027
158,027
176,206
176,206
9,057
9,057
1,079
1,079
12,737
12,737
1,153,307
1,153,307
88,706
88,706
538,489
538,489
-
-
53,053
53,053
21,591
21,591
28,882
28,882
598,831
598,831
2,482,859
2,482,859
306,859
306,859
12,890
12,890
17,057
17,057
348,804
348,804
179
179
1,400
1,400
687,189
687,189
444,712
444,712
-
-
-
-
52,237
52,237
16,202
16,202
1,200,340
1,200,340
366,120
366,120
654,324
654,324
118,134
118,134
142,492
142,492
1,281,070
1,281,070
1,449
1,449
1,282,519
1,282,519
2,482,859
2,482,859
39
39
CONSOLIDATED
CONSOLIDATED
CONSOLIDATED
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ Canadian thousands)
($ Canadian thousands)
Assets
Assets
Current assets
Current assets
Cash and cash equivalents
Cash and cash equivalents
Accounts receivable (Note 7)
Accounts receivable (Note 7)
Contract assets (Note 7)
Contract assets (Note 7)
Inventories (Note 8)
Inventories (Note 8)
Income taxes receivable
Income taxes receivable
Derivative financial instruments (Note 27)
Derivative financial instruments (Note 27)
Other current assets
Other current assets
Total current assets
Total current assets
Property, plant and equipment (Note 9)
Property, plant and equipment (Note 9)
Rental equipment (Note 9)
Rental equipment (Note 9)
Lease right-of-use assets (Note 10)
Lease right-of-use assets (Note 10)
Deferred tax assets (Note 19)
Deferred tax assets (Note 19)
Other assets (Note 11)
Other assets (Note 11)
Intangible assets (Note 12)
Intangible assets (Note 12)
Goodwill (Note 13)
Goodwill (Note 13)
Total assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities and Shareholders’ Equity
Current liabilities
Current liabilities
Accounts payable and accrued liabilities (Note 14)
Accounts payable and accrued liabilities (Note 14)
Provisions (Note 15)
Provisions (Note 15)
Income taxes payable
Income taxes payable
Deferred revenues (Note 16)
Deferred revenues (Note 16)
Current portion of lease liabilities (Note 18)
Current portion of lease liabilities (Note 18)
Deferred financing income
Deferred financing income
Derivative financial instruments (Note 27)
Derivative financial instruments (Note 27)
Total current liabilities
Total current liabilities
Long-term debt (Note 17)
Long-term debt (Note 17)
Lease liabilities (Note 18)
Lease liabilities (Note 18)
Deferred tax liabilities (Note 19)
Deferred tax liabilities (Note 19)
Other liabilities
Other liabilities
Total liabilities
Total liabilities
Shareholders’ equity
Shareholders’ equity
Share capital (Note 20)
Share capital (Note 20)
Contributed surplus (Note 21)
Contributed surplus (Note 21)
Retained earnings
Retained earnings
Accumulated other comprehensive income
Accumulated other comprehensive income
Total shareholders’ equity before non-controlling interest
Total shareholders’ equity before non-controlling interest
Non-controlling interest
Non-controlling interest
Total shareholders’ equity and non-controlling interest
Total shareholders’ equity and non-controlling interest
Total liabilities and shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
December 31,
2019
2019
December 31,
December 31,
2018
2018
$
$
$
$
$
$
$
$
$
$
$
$
96,255 $
96,255 $
384,021
384,021
183,890
183,890
269,385
269,385
6,626
6,626
152
152
12,223
12,223
952,552
952,552
108,551
108,551
642,095
642,095
60,288
60,288
48,624
48,624
26,410
26,410
22,058
22,058
573,928
573,928
2,434,506 $
2,434,506 $
333,605 $
333,605 $
18,250
18,250
8,074
8,074
142,907
142,907
14,172
14,172
88
88
375
375
517,471
517,471
430,487
430,487
52,828
52,828
76,256
76,256
14,677
14,677
1,091,719 $
1,091,719 $
375,524 $
375,524 $
655,107
655,107
228,843
228,843
81,779
81,779
1,341,253
1,341,253
1,534
1,534
1,342,787
1,342,787
2,434,506 $
2,434,506 $
326,864
326,864
469,337
469,337
158,027
158,027
176,206
176,206
9,057
9,057
1,079
1,079
12,737
12,737
1,153,307
1,153,307
88,706
88,706
538,489
538,489
-
-
53,053
53,053
21,591
21,591
28,882
28,882
598,831
598,831
2,482,859
2,482,859
306,859
306,859
12,890
12,890
17,057
17,057
348,804
348,804
-
-
179
179
1,400
1,400
687,189
687,189
444,712
444,712
-
-
52,237
52,237
16,202
16,202
1,200,340
1,200,340
366,120
366,120
654,324
654,324
118,134
118,134
142,492
142,492
1,281,070
1,281,070
1,449
1,449
1,282,519
1,282,519
2,482,859
2,482,859
53
39
39
See accompanying Notes to the consolidated financial statements, including guarantees, commitments, and contingencies (Note 30).
See accompanying Notes to the consolidated financial statements, including guarantees, commitments, and contingencies (Note 30).
2019 Annual Report | Consolidated Financial Statements
Consolidated Financial Statements | 2019 Annual Report
Consolidated Financial Statements | 2019 Annual Report
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31,
($ Canadian thousands, except per share amounts)
Revenue (Note 22)
Cost of goods sold
Gross margin
Selling and administrative expenses
Operating income
Gain on disposal of property, plant and equipment (Note 9)
Equity earnings from associate
Earnings before finance costs and income taxes
Net finance costs (Note 25)
Earnings before income taxes
Income taxes (Note 19)
Net earnings
Net earnings attributable to:
Controlling interest
Non-controlling interest
Earnings per share – basic (Note 26)
Earnings per share – diluted (Note 26)
Weighted average number of shares – basic
Weighted average number of shares – diluted
See accompanying Notes to the consolidated financial statements.
2019
$
2,045,422 $
1,616,337
429,085
197,177
231,908
302
1,692
233,902
18,578
215,324
63,196
152,128 $
2018
1,703,273
1,395,300
307,973
163,009
144,964
5,882
833
151,679
19,145
132,534
31,118
101,416
151,647 $
100,999
481
417
152,128 $
101,416
1.70 $
1.70 $
1.14
1.14
89,500,829
89,709,745
88,709,142
89,088,628
$
$
$
$
$
54
40
Consolidated Financial Statements | 2019 Annual Report
Enerflex Ltd. | 2019 Annual Report
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ Canadian thousands)
Net earnings
Other comprehensive income (loss):
Other comprehensive income (loss) that may be reclassified to profit or loss in subsequent periods:
Change in fair value of derivatives designated as cash flow hedges, net of income tax recovery
Gain on derivatives designated as cash flow hedges transferred to net earnings in the current
year, net of income tax expense
Unrealized gain (loss) on translation of foreign denominated debt
Unrealized gain (loss) on translation of financial statements of foreign operations
Other comprehensive income (loss)
Total comprehensive income
Other comprehensive income (loss) attributable to:
Controlling interest
Non-controlling interest
See accompanying Notes to the consolidated financial statements.
Years ended December 31,
2019
2018
$
152,128 $
101,416
(815)
905
3,845
(65,044)
(61,109) $
91,019 $
(60,713) $
(396)
(61,109) $
(318)
208
(17,781)
87,726
69,835
171,251
70,128
(293)
69,835
$
$
$
$
2019 Annual Report | Consolidated Financial Statements
Consolidated Financial Statements | 2019 Annual Report
55
41
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ Canadian thousands)
Operating Activities
Net earnings
Items not requiring cash and cash equivalents:
Depreciation and amortization
Equity earnings from associate and joint venture
Deferred income taxes (Note 19)
Share-based compensation expense (Note 23)
Gain on sale of property, plant and equipment (Note 9)
Net change in non-cash working capital and other (Note 29)
Years ended December 31,
2019
2018
$
152,128 $
101,416
86,559
(1,692)
31,476
7,749
(302)
275,918
(221,749)
89,774
(833)
10,247
9,938
(5,882)
204,660
38,208
242,868
Cash provided by operating activities
$
54,169 $
Investing Activities
Additions to:
Property, plant and equipment (Note 9)
Rental equipment (Note 9)
Proceeds on disposal of:
Property, plant and equipment (Note 9)
Rental equipment (Note 9)
Change in other assets
Cash used in investing activities
Financing Activities
Repayment of long-term debt (Note 29)
Lease liability principal repayment (Note 18)
Lease interest (Note 18)
Dividends
Stock option exercises
Cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
See accompanying Notes to the consolidated financial statements.
$
(46,322) $
(217,068)
(16,920)
(115,325)
9,205
4,454
26,911
22,853
6,935
2,047
(222,820) $
(100,410)
(15,748) $
(17,335)
(12,551)
(2,586)
(37,548)
7,453
(60,980) $
(978) $
(230,609)
326,864
96,255 $
-
-
(33,676)
6,561
(44,450)
1,572
99,580
227,284
326,864
$
$
$
$
$
56
42
Consolidated Financial Statements | 2019 Annual Report
Enerflex Ltd. | 2019 Annual Report
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
($ Canadian thousands)
Share capital
surplus
earnings
adjustments
reserve
income
interest
interest
Total
Contributed
Retained
translation
Hedging
comprehensive
non-controlling
controlling
At January 1, 2018
$
357,696 $
654,076 $
49,011 $
73,325 $
(961) $
72,364 $
1,133,147 $
1,325 $
1,134,472
Foreign
currency
Accumulated
shareholders’
Total
other
equity before
Non-
IFRS 15 opening
retained earnings
adjustment
Net earnings
Other comprehensive
income (loss)
Effect of stock option
plans
-
-
-
-
-
-
8,424
248
Dividends
-
-
(34,614)
IFRS 16 opening
retained earnings
adjustment (Note 34)
Net earnings
Other comprehensive
income (loss)
Effect of stock option
plans
Dividends
-
-
-
-
-
-
9,404
783
-
-
(38,509)
-
-
-
-
2,738
100,999
-
-
-
-
-
-
2,738
100,999
-
417
2,738
101,416
70,238
(110)
70,128
70,128
(293)
69,835
-
-
-
-
-
-
8,672
(34,614)
-
-
8,672
(34,614)
(2,429)
151,647
-
-
-
-
-
-
(2,429)
151,647
-
481
(2,429)
152,128
(60,803)
90
(60,713)
(60,713)
(396)
(61,109)
-
-
-
-
-
-
10,187
(38,509)
-
-
10,187
(38,509)
At December 31, 2018
$
366,120 $
654,324 $
118,134 $
143,563 $
(1,071) $
142,492 $
1,281,070 $
1,449 $
1,282,519
At December 31, 2019
$
375,524 $
655,107 $
228,843 $
82,760 $
(981) $
81,779 $
1,341,253 $
1,534 $
1,342,787
See accompanying Notes to the consolidated financial statements.
2019 Annual Report | Consolidated Financial Statements
Consolidated Financial Statements | 2019 Annual Report
57
43
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(All amounts in thousands of Canadian dollars, except per share amounts or as otherwise noted.)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Enerflex Ltd. (“Enerflex” or “the Company”) 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 services 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, gas lift compression,
refrigeration systems, and electric power equipment serving the natural gas production industry.
Headquartered in Calgary, the registered office is located at 904, 1331 Macleod Trail SE, Calgary, Canada. Enerflex has approximately
2,500 employees worldwide. Enerflex, its subsidiaries, interests in associates and joint operations, operate in Canada, the United States
of America, Argentina, Bolivia, Brazil, Colombia, Mexico, Peru, the United Kingdom (“UK”), Bahrain, Kuwait, Oman, the United Arab
Emirates (“UAE”), Australia, Indonesia, Malaysia, and Thailand. Enerflex operates three business segments: USA, Rest of World, and
Canada.
The following table represents material subsidiaries of the Company:
Name
Enerflex Ltd.
Jurisdiction of
Incorporation
Canada
Enerflex Energy Systems Inc.
Delaware, USA
Enerflex Middle East LLC
Enerflex Middle East SPC
Oman
Bahrain
1 Enerflex indirectly owns 100.0 percent of Enerflex Middle East LLC.
Ownership
Operating Segment
Public Shareholders
100.0 percent
70.0 percent1
100.0 percent
Canada
USA
Rest of World
Rest of World
NOTE 2. BASIS OF PRESENTATION
(a) Statement of Compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”), and were approved and authorized for issue by the
Board of Directors on February 20, 2020. Certain prior year amounts have been reclassified to conform with the current period’s
presentation.
(b) Basis of Measurement
The consolidated financial statements are prepared on a historical cost basis except as detailed in the accounting policies disclosed
in Note 3. The accounting policies described in Note 3 and Note 4 have been applied consistently to all periods presented in these
financial statements. Standards and guidelines issued but not yet effective for the current accounting period are described in Note
6.
(c) Functional Currency and Presentation Currency
These consolidated financial statements are presented in Canadian dollars, which is the Company’s presentation currency.
Transactions of the Company’s individual entities are recorded in their own functional currency based on the primary economic
environment in which it operates.
58
44
Notes to the Consolidated Financial Statements | 2019 Annual Report
Enerflex Ltd. | 2019 Annual Report
(d) Use of Estimates and Judgment
The timely preparation of financial statements requires that management make estimates and assumptions and use judgment.
Accordingly, actual results may differ from estimated amounts as future confirming events occur. Significant estimates and
judgment used in the preparation of the financial statements are described in Note 5.
(e) Basis of Consolidation
These consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are fully
consolidated from the date of acquisition and continue to be consolidated until the date that 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.
The Company holds a 50 percent ownership interest in a joint operation in Brazil. Under IFRS 10 Consolidated Financial Statements,
the Company has determined that it has control of the arrangement as it controls the operating committee based on voting rights.
As a result, the Company fully consolidates the arrangement and has recorded a non-controlling interest in equity and net earnings.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Investments in Associates and Joint Ventures
The Company uses the equity method to account for its 45 percent investment in Roska DBO Inc. (“Roska DBO”) and its 65 percent
investment in a joint venture in Brazil. Under the equity method, the investment is carried on the consolidated statements of
financial position at cost plus post acquisition changes in the Company’s share of net assets of the associate or joint venture.
The consolidated statements of earnings reflect the Company’s share of the results of operations of associates and joint ventures.
Unrealized gains and losses resulting from transactions between the Company and associates are eliminated to the extent of the
interest in the associate or joint venture.
The Company’s share of profits from associates and joint ventures is shown on the face of the consolidated statements of earnings.
This is the profit attributable to equity holders of the associate and joint venture partners and, therefore, is profit after tax and non-
controlling interests in the subsidiaries of the associates and joint ventures.
(b) Foreign Currency Translation
In the accounts of individual subsidiaries, transactions in currencies other than the Company’s functional currency are recorded at
the prevailing rate of exchange at the date of the transaction. At year end, monetary assets and liabilities denominated in foreign
currencies are translated at the rates of exchange prevailing at that date. Non-monetary items that are measured in terms of
historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary
assets and liabilities measured at fair value in a foreign currency are translated using the rates of exchange at the date the fair value
was determined.
The assets and liabilities on the statements of financial position of foreign subsidiaries are translated into Canadian dollars at the
rates of exchange prevailing at the reporting date. The statements of earnings of foreign subsidiaries are translated at average
exchange rates for the reporting period. Exchange differences arising on the translation of net assets are taken to accumulated
other comprehensive income.
All foreign exchange gains and losses are taken to the consolidated statements of earnings with the exception of exchange
differences arising on monetary assets and liabilities that form part of the Company’s net investment in subsidiaries. These are
taken directly to other comprehensive income until the disposal of the foreign subsidiary at which time the unrealized gain or loss
is recognized in the consolidated statements of earnings.
On the disposal of a foreign subsidiary, accumulated exchange differences are recognized in the consolidated statements of
earnings as a component of the gain or loss on disposal.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
45
59
(c) Business Combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of
the consideration transferred, measured at fair value on the date of the acquisition. Acquisition costs incurred are expensed and
included in selling and administrative expenses, except for those associated with the issuance of debt, which are included in the
initial carrying amount of the liability.
Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred over the net identifiable
assets acquired and liabilities assumed.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Cost
comprises the purchase price or construction cost and any costs directly attributable to making the asset capable of operating as
intended. Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of assets
and commences when the assets are ready for intended use.
Asset Class
Buildings
Equipment
Estimated Useful Life Range
5 to 20 years
2 to 20 years
Major renewals and improvements are capitalized when they are expected to provide future economic benefit. When significant
components of property, plant and equipment are required to be replaced at intervals, the Company derecognizes the replaced
part, and recognizes the new part with its own associated useful life and depreciation. No depreciation is charged on land or assets
under construction. Repairs and maintenance costs are charged to operations as incurred.
The carrying amount of an item of property, plant and equipment is derecognized on disposal or when no future economic benefits
are expected from its use or disposal. The gain or loss arising from derecognition of property, plant and equipment is included in the
consolidated statements of earnings when the item is derecognized.
Each asset’s estimated useful life, residual value, and method of depreciation are reviewed and adjusted, if appropriate, at each year
end, or when factors and circumstances suggest a different useful life for the asset.
(e) Rental Equipment
Rental equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets, which are generally between 5 and 20 years.
When, under the terms of a rental contract, the Company is responsible for major maintenance and overhauls, the actual overhaul
cost is capitalized and depreciated over the estimated useful life of the overhaul, generally between 2 and 5 years. Repairs and
maintenance costs are charged to operations as incurred.
Each asset’s estimated useful life, residual value, and method of depreciation are reviewed and adjusted, if appropriate, at each year
end, or when factors and circumstances suggest a different useful life for the asset.
(f) Goodwill
Goodwill arising on an acquisition of a business is initially measured at cost, being the excess of the aggregate of the consideration
transferred over the net identifiable assets acquired and liabilities assumed. Following initial recognition, goodwill is measured at
cost less any accumulated impairment losses.
Goodwill allocated to a group of cash generating units (“CGUs”) is reviewed for impairment annually, or when there is an indication
that a related group of CGUs may be impaired. Impairment is determined by assessing the recoverable amount of the group of CGUs
to which the goodwill relates. Where the recoverable amount of the group of CGUs is less than the carrying amount of the CGUs
and related goodwill, an impairment loss is recognized in the consolidated statements of earnings. Impairment losses on goodwill
are not reversed.
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Notes to the Consolidated Financial Statements | 2019 Annual Report
(g) Intangible Assets
Intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Intangible assets with
a finite life are amortized on a straight-line basis over management’s best estimate of their expected useful lives. The amortization
charge is included in selling and administrative expenses in the consolidated statements of earnings. The expected useful lives and
amortization method are reviewed on an annual basis with any change in the useful life or pattern of consumption adjusted at year
end. Intangible assets are tested for impairment whenever there is an indication that the asset may be impaired.
Acquired identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives.
Customer relationships, software, and other intangible assets have an estimated useful life range of 3 to 8 years.
(h) Impairment of Non-Financial Assets (excluding Goodwill)
At least annually, the Company reviews the carrying amounts of its tangible and intangible assets with finite lives to assess whether
there is an indication that those assets may be impaired. If any such indication exists, the Company makes an estimate of the asset’s
recoverable amount. An asset’s recoverable amount is the higher of an asset’s fair value less costs to sell and its value-in-use. In
assessing its value-in-use, the estimated future cash flows attributable to the asset are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced
to its recoverable amount. A corresponding impairment loss is recognized in the consolidated statements of earnings.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its
recoverable amount, but only to the extent that the increased carrying amount does not exceed the original carrying amount that
would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Any
impairment reversal is recognized in the consolidated statements of earnings.
(i) Inventories
Inventories are valued at the lower of cost and net realizable value. Serialized inventory is determined on a first-in first-out basis.
Non-serialized inventory is determined based on a weighted average cost.
Cost of equipment, repair and distribution parts, and direct materials includes purchase cost and costs incurred in bringing each
product to its present location and condition.
Cost of work-in-process includes cost of direct materials, labour, and an allocation of overheads, based on normal operating
capacity.
Cost of inventories includes the transfer from accumulated other comprehensive income of gains and losses on qualifying cash flow
hedges in respect of the purchase of inventory.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the
estimated costs necessary to make the sale.
Inventories are written down to net realizable value when the cost of inventories is estimated to be unrecoverable due to
obsolescence, damage, or declining selling prices. Inventories are not written down below cost if the finished products in which they
will be incorporated are expected to be sold at or above cost. When circumstances that previously caused inventories to be written
down below cost no longer exist or when there is clear evidence of an increase in selling prices, the amount of the write down
previously recorded is reversed.
(j) Trade Receivables
Trade receivables are recognized and carried at original invoice amount less an allowance for any amounts estimated to be
uncollectible. The Company calculates an expected credit loss based on historical experience of bad debts and specific provisions
created when there is objective evidence that the collection of the full amount of a receivable is no longer probable under the terms
of the original invoice. The amount of this allowance represents management’s best estimate of expected credit losses. Trade
receivables are derecognized when they are assessed as uncollectible.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
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(k) Cash
Cash includes cash and cash equivalents, which are defined as highly liquid investments with original maturities of three months or
less.
(l) Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable
that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation.
(m) Onerous Contracts
A provision for onerous contracts is recognized when the expected benefits to be derived by the Company from a contract are lower
than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower
of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is
established, the Company recognizes any impairment loss on the assets associated with that contract.
(n) Employee Future Benefits
The Company sponsors various defined contribution pension plans, which cover substantially all employees and are funded in
accordance with applicable plan and regulatory requirements. Regular contributions are made by the Company to the employees’
individual accounts, which are administered by a plan trustee, in accordance with the plan document. The actual cost of providing
benefits through defined contribution pension plans is charged to earnings in the period in respect of which contributions become
payable.
(o) Share-Based Payments
Equity-Settled Share-Based Payments
The Company offers a Stock Option Plan to key employees, measured at the fair value of the equity instrument at the grant date.
Details regarding the determination of the fair value of equity-settled share-based transactions are set out in Note 23.
The fair value of equity-settled share-based payments is expensed over a five-year vesting period with a corresponding increase in
equity. Stock options have a seven-year expiry and are exercisable at the designated common share price, which is determined by
the average of the market price of the Company’s shares on the five days preceding the date of the grant. The cumulative expense
recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting
period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest.
Cash-Settled Share-Based Payments
The Company offers Deferred Share Unit (“DSU”), Performance Share Unit (“PSU”), Restricted Share Unit (“RSU”), and Cash
Performance Target (“CPT”) plans to certain employees. The Company also offers the DSU plan to non-employee directors. For
each cash-settled share-based payment plan, a liability is recognized at the fair value of the liability. At the end of each reporting
period until the liability is settled, and at the date of settlement, the fair value of the liability is remeasured, with changes in fair value
recognized in the consolidated statements of earnings.
The Company also offers a Phantom Share Entitlement (“PSE”) plan to certain employees of affiliates located in Australia and the
UAE. PSEs are measured at the fair value of the equity instrument at the grant date and expensed over a five-year vesting period
and expire on the seventh anniversary. The exercise price of each PSE equals the average of the market price of the Company’s
shares on the five days preceding the date of the grant. At the end of each reporting period until the liability is settled, and at the
date of settlement, the fair value of the liability is remeasured, with changes in fair value recognized in the consolidated statements
of earnings. The award entitlements for increases in the share trading value of the Company are to be paid to the recipient in cash
upon exercise.
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Notes to the Consolidated Financial Statements | 2019 Annual Report
(p) Leases
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in
exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company
assesses whether:
•
•
•
The contract involves the use of an identified asset, either explicitly or implicitly, and whether the supplier has a substantive
substitution right for the asset;
The Company has the right to obtain substantially all the economic benefits from the use of the asset throughout the period;
and
The Company has the right to direct the use of the identified asset.
The Company determines if a contractual arrangement is a lease at the inception of the contract term. The Company has identified
leases for the following asset types: land and buildings (including manufacturing facilities, office space, and rental accommodations)
and equipment (including vehicles, office equipment, and shop equipment). The Company recognizes a right-of-use asset and a lease
liability to reflect the benefit the Company obtains from the underlying asset in the lease and the requirement to pay the amounts
included in the lease contract, respectively.
The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability, adjusted for any lease
payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to decommission
the underlying asset, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line
method over the lesser of lease term or the useful life of the underlying asset, where appropriate.
The lease liability is initially measured at the present value of remaining lease payments, discounted using the interest rate implicit
in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate.
Lease payments included in the measurement of the lease liability include fixed payments, variable lease payments that depend on
an index or rate, amounts expected to be payable under a residual value guarantee, and amounts owing under purchase or
termination options, if the Company is reasonably certain to exercise these options. If the lease contains an extension option that
the Company is reasonably certain to exercise, all payments in the renewal period are also included in determining the lease liability.
The lease liability is measured at amortized cost using the effective interest method. The amount of the liability is remeasured when
there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate
of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will
exercise a purchase, extension, or termination option. When the lease liability is remeasured, a corresponding adjustment is made
to the carrying value of the right-of-use asset, or is recorded on the statements of earnings if the carrying amount of the right-of-
use asset has been reduced to zero.
The Company has elected not to recognize right-of-use assets and lease liabilities for short-term and low-value leases. Lease
payments associated with these leases will be recognized as an expense on a straight-line basis over the lease term. Certain leases
include both lease and non-lease components, which are generally accounted for separately. For certain equipment leases, the
Company applies a portfolio approach to effectively account for the lease right-of-use assets and lease liabilities.
Prior to January 1, 2019, the Company’s policy was as follows:
Leases which transfer substantially all of the benefits and risk of ownership of the asset to the lessee are classified as finance leases; all
other leases are classified as operating leases.
Company as a Lessor
Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred
in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line
basis over the lease term.
The Company recognizes selling profit or loss in the period for outright sales relating to manufacturer type leases. Amounts due from
finance leases are recorded as receivables at the amount of the Company’s net investment in the leases. Finance lease income is allocated
to accounting periods so as to reflect a constant periodic rate of return on the Company’s net investment outstanding in respect of leases.
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2019 Annual Report | Notes to the Consolidated Financial Statements
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Company as a Lessee
The Company does not hold any assets under finance lease. Operating lease payments are recognized as an expense on a straight-line
basis over the lease term.
(q) Revenue Recognition
Revenue is recognized as the Company satisfies its performance obligations by transferring promised goods or services to
customers, regardless of when payment is received. Revenue is measured at the amount of consideration to which the Company
expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf
of third parties, and may include fixed amounts, variable amounts, or both. Variable amounts are recorded using either the
“expected value approach” or the “most likely outcome approach”, as determined upon initial recognition of the contract, and are
reassessed at each reporting period. The expected value approach measures variable consideration by probability weighting all the
potential outcomes. The most likely outcome approach measures variable consideration as management’s best estimate of the
variable component. In estimating variable consideration, the Company reviews any potential for returns, refunds, and other similar
obligations. For contracts containing multiple performance obligations, the amount of consideration to which the Company expects
to be entitled is allocated to individual performance obligations proportionately based on the stand-alone selling price.
Engineered Systems
Revenue from the supply of equipment systems – contracts typically involving engineering, design, manufacture, installation, and
start-up of equipment – is accounted for as Engineered Systems revenue. Such revenue is recognized on a percentage-of-
completion basis proportionate to the costs incurred in the construction of the project. At the completion of the contract, any
remaining profit on the contract is recognized as revenue. When it is probable that total contract costs will exceed total contract
revenue, the expected loss is recognized as an expense immediately. Revenue from Engineered Systems includes the supply of
compression, processing, and electric power equipment, as well as retrofit work and construction on integrated turnkey projects.
The Company also provides a warranty on manufactured equipment as part of the standard terms and conditions of the contract.
No options are provided for the customer to purchase a warranty separately.
For Engineered Systems contracts, the Company generally requires customers to pay based on milestones as manufacturing
progresses. These milestones are generally structured to keep the Company cash flow positive. Contracts are also generally
structured to ensure the Company is made whole for costs incurred in the event of cancellation of a contract.
Service
Service revenues include the sales of parts and equipment, as well as the servicing and maintenance of equipment. For the sale of
parts and equipment, revenue is recognized when the transfer of control passes with the transfer of legal title of the asset, which is
typically at the point of shipping. For servicing and maintenance of equipment, revenue is recognized on a straight-line basis based
on performance of the contracted-upon service.
Revenue from long-term service contracts is recognized on a stage of completion basis proportionate to the service work that has
been performed based on parts and labour service provided. Payments are typically required on a monthly basis or as work is
performed, with no unusual payment terms. At the completion of the contract, any remaining profit on the contract is recognized
as revenue. Any expected losses on such projects are charged to operations when determined. Long-term service contracts include
scheduled milestone maintenance, corrective or crash maintenance, the supply of parts, and the operation of equipment.
Rentals
Revenue from equipment rentals is recognized in accordance with the terms of the relevant agreement with the customer on a
straight-line basis over the term of the agreement. Payments are typically required on a monthly basis with no unusual payment
terms. Certain rental contracts contain an option for the customer to purchase the equipment at the end of the rental period. Should
the customer exercise this option to purchase, revenue from the sale of the equipment is recognized directly in the consolidated
statements of earnings.
The Company has elected to use the practical expedients in IFRS 15 paragraphs 63 and 94 with regards to the existence of a
significant financing component in the contract and incremental costs of obtaining a contract, respectively. For the years ended
December 31, 2019 and 2018 the Company had no contracts with a significant financing component. Incremental costs of obtaining
a contract predominantly relate to commission costs on Engineered Systems projects, which are typically completed within one
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Notes to the Consolidated Financial Statements | 2019 Annual Report
year. Accordingly, the Company did not recognize commission costs incurred as an asset in the consolidated statements of financial
position.
(r) Financial Instruments
Financial instruments are measured at fair value on initial recognition of the instrument, plus or minus transaction costs that are
directly attributable to the acquisition or issue of the financial asset or financial liability. For the purposes of measuring financial
assets after initial recognition, the Company classifies financial assets as either amortized cost, fair value through other
comprehensive income (“FVOCI”) or fair value through profit or loss (“FVTPL”), based on the contractual cash flow characteristics
and the Company’s business model for managing the financial asset. For the purposes of measuring financial liabilities after initial
recognition, the Company classifies all financial liabilities as amortized cost, except certain financial liabilities, such as derivatives,
which are classified as fair value through profit or loss.
The Company primarily applies the market approach for recurring fair value measurements. Three levels of inputs may be used to
measure fair value:
•
•
•
Level 1: Fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or
liabilities. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing
information on an on-going basis;
Level 2: Fair value measurements are those derived from inputs, other than quoted prices included in Level 1, that are
observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3: Fair value measurements are those derived from inputs for the asset or liability that are not based on observable
market data (unobservable inputs). In these instances, internally developed methodologies are used to determine fair value.
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.
The Company has made the following classifications:
•
•
•
Cash and cash equivalents are measured at fair value through profit or loss. Gains and losses resulting from the periodic
revaluation are recorded in the consolidated statement of earnings;
Accounts receivable are recorded at amortized cost using the effective interest rate method; and
Accounts payable, accrued liabilities, and long-term debt are recorded at amortized cost using the effective interest rate
method.
Transaction costs are expensed as incurred for financial instruments classified or designated as fair value through profit or loss.
Transaction costs related to other financial liabilities are added to the value of the instrument at acquisition and taken into the
consolidated statements of earnings using the effective interest rate method.
(s) Derivative Financial Instruments and Hedge Accounting
The Company formally documents its risk management objectives and strategies to manage exposures to fluctuations in foreign
currency exchange rates and interest rates. The risk management policy permits the use of certain derivative financial instruments,
including forward foreign exchange contracts and interest rate swaps, to manage these fluctuations. The Company does not enter
into derivative financial agreements for speculative purposes.
Derivative financial instruments are measured at their fair value upon initial recognition and are remeasured to their fair value at
the end of each reporting period. The fair value of quoted derivatives is equal to their positive or negative market value. Derivatives
are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
The Company elected to apply hedge accounting for foreign exchange forward contracts for anticipated transactions. These 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 the consolidated statements of earnings. Amounts charged to accumulated other comprehensive income are reclassified to the
consolidated statements of earnings when the hedged transaction affects the consolidated statements of earnings.
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2019 Annual Report | Notes to the Consolidated Financial Statements
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The Company’s U.S. dollar denominated long-term debt has been designated as a hedge of net investment in self-sustaining foreign
operations. As a result, unrealized foreign exchange gains and losses on the U.S. dollar denominated long-term debt are included in the
cumulative translation account in other comprehensive income.
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.
(t) Income Taxes
Income tax expense represents the sum of current income tax and deferred tax.
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered
from or paid to the taxation authorities. Taxable earnings differ from earnings as reported in the consolidated statements of
earnings as it excludes temporary and permanent differences. The Company’s current tax assets and liabilities are calculated by
using tax rates that have been enacted or substantively enacted at the reporting date.
Deferred income tax is recognized on all temporary differences at the reporting date based on the difference between the carrying
amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable
profit, with the following exceptions:
• Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that
is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss;
In respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where
the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will
not reverse in the foreseeable future; and
•
• Deferred income tax assets are recognized only to the extent that it is probable that a taxable profit will be available against
which the deductible temporary differences, carried forward tax credits or tax losses can be utilized.
The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilized.
Unrecognized deferred income tax assets are reassessed at each reporting date and are recognized to the extent that it has become
probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when
the asset is realized or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the reporting date.
Current and deferred income taxes are charged or credited directly to equity if it relates to items that are credited or charged to
equity in the same period. Otherwise, income tax is recognized in the consolidated statements of earnings.
In accordance with IAS 12, where an entity’s tax return is prepared in a currency other than its functional currency, changes in the
exchange rate between the two currencies create temporary differences with respect to the valuation of non-monetary assets and
liabilities. As a result, deferred tax is recognized in the statements of earnings and the statement of financial position.
(u) Earnings Per Share
Basic earnings per share is calculated by dividing the net earnings for the period by the weighted average number of common shares
outstanding during the period.
Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding for dilutive
common shares related to the Company’s equity share-based compensation plan.
(v) Finance Costs and Income
Finance income comprises interest income on funds invested and finance income from leases. Finance income is recognized as it
accrues in profit or loss, using the effective interest rate method.
Finance costs comprise interest expense on borrowings and interest incurred on lease liabilities.
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Notes to the Consolidated Financial Statements | 2019 Annual Report
NOTE 4. CHANGES IN ACCOUNTING POLICIES
IFRS 16 Leases (“IFRS 16”)
IFRS 16 sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract.
The standard supersedes IAS 17 Leases and lease-related interpretations. IFRS 16 is effective for annual periods beginning on or after
January 1, 2019. Management elected to adopt IFRS 16 using the modified retrospective approach and has included an adjustment to
opening balances upon adoption to reflect the Company’s financial position at January 1, 2019 had the new standard been applied in
prior periods. Adjustments made on transition are detailed in Note 34.
The Company has elected not to recognize lease right-of-use assets and lease liabilities for short-term and low-value leases. Lease
payments associated with these leases will be recognized as an expense on a straight-line basis over the lease term. Certain leases include
both lease and non-lease components, which are generally accounted for separately. For certain equipment leases, the Company applies
a portfolio approach to effectively account for the lease right-of-use assets and lease liabilities.
NOTE 5. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENT
The timely preparation of financial statements requires that management make estimates and assumptions and use judgment. 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.
Uncertainty about these assumptions and estimates could however 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 – Performance Obligation Satisfied Over Time
The Company reflects revenues relating to performance obligations satisfied over time using the percentage-of-completion approach of
accounting. The Company uses the input method of percentage-of-completion accounting, whereby actual input costs as a percentage
of estimated total costs is used as the basis for determining the extent to which performance obligations are satisfied. The input method
of percentage-of-completion accounting provides a faithful depiction of the transfer of control to the customer, as the Company is able
to recover costs incurred relating to the satisfaction of the associated performance obligation. 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.
Revenue Recognition – Performance Obligation Satisfied at a Point in Time
The Company reflects revenues relating to performance obligations satisfied at a point in time when control – indicated by transfer of
the legal title, physical possession, significant risks and rewards of ownership, or any combination of these indicators – is transferred to
the customer.
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.
Business Acquisitions
In a business acquisition, the Company may acquire assets and assume certain liabilities of an acquired entity. Estimates are made as to
the fair value of property, plant and equipment, intangible assets, and goodwill, among other items. In certain circumstances, such as the
valuation of property, plant and equipment and intangible assets acquired, the Company relies on independent third-party valuators.
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The determination of these fair values involves a variety of assumptions, including revenue growth rates, projected cash flows, discount
rates, and earnings multiples.
Property, Plant and Equipment and Rental Equipment
Property, plant and equipment and rental equipment is stated at cost less accumulated depreciation and any impairment losses.
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of
property, plant and equipment and rental equipment is reviewed on an annual basis. Assessing the reasonableness of the estimated
useful lives of property, plant and equipment and rental equipment requires judgment and is based on currently available information.
Property, plant and equipment and rental equipment is also reviewed for potential impairment on an annual 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 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 property, plant and equipment and rental equipment constitutes a
change in accounting estimate and are applied prospectively.
Right-of-Use Asset and Lease Liability
The Company determines the right-of-use asset and lease liability for each lease upon commencement. In calculating the right-of-use
asset and lease liability, the Company is required to determine a suitable discount rate in order to calculate the present value of the
contractual payments for the right to use the underlying asset during the lease term. In addition, the Company is required to assess the
term of the lease, including if the Company is reasonably certain to exercise options to extend the lease or terminate the lease. Discount
rates and lease assumptions are reassessed on a periodic basis.
Allowance for Doubtful Accounts
Amounts included in allowance for doubtful accounts reflect the full lifetime expected credit losses for trade receivables. The Company
determines allowances based on management’s best estimate of future expected credit losses, considering historical default rates,
current economic conditions, and forecasts of future economic conditions. Significant or unanticipated changes in economic conditions
could impact the magnitude of future expected credit losses.
Impairment of Inventories
The Company regularly reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on
historical usage patterns, known changes to equipment or processes, and customer demand for specific products. Significant or
unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized.
Impairment of Non-Financial Assets
Impairment exists when the carrying value of an asset or group of assets 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, which requires the Company to estimate future cash flows and
use judgment to determine a suitable discount rate to calculate the present value of those cash flows.
Impairment of Goodwill
The Company tests goodwill for impairment at least on an annual basis. This requires an estimation of the value-in-use of the groups of
CGUs 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 group of CGUs and use judgment 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 taxable income. 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
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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.
Share-Based Compensation
The Company employs the fair value method of accounting for stock options and phantom share entitlement. The determination of the
share-based compensation expense for stock options and phantom share entitlement requires the use of estimates and assumptions
based on exercise prices, market conditions, vesting criteria, length of employment, and past experiences of the Company. Changes in
these estimates and future events could alter the determination of the provision for such compensation. Details concerning the
assumptions used are described in Note 23.
NOTE 6. NEW POLICIES, STANDARDS, INTERPRETATIONS, AND AMENDMENTS
The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective. The Company
determined that the following narrow scope amendment may have an impact:
IFRS 3 Business Combinations (“IFRS 3”)
Effective January 1, 2020, the definition of a business will be amended under IFRS 3. Under the amended definition, to be considered a
business an acquisition must include an input and a substantive process that together significantly contribute to the ability to create
outputs. The new guidance provides a framework to evaluate when an input and a substantive process are present.
Under the prior definition, IFRS 3 stated that a business need not include all of the inputs or processes that the seller used in operating
that business “if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the
business with their own inputs and processes”. The reference to such integration is now deleted from IFRS 3 in the proposed amendment
and the assessment must be based on what has been acquired in its current state and condition.
This amendment will be applied prospectively to future acquisitions. While there are no immediate impacts resulting from this
amendment, this change will likely result in more acquisitions being accounted for as asset acquisitions. Application of the change could
also affect the accounting for disposal transactions.
The Company applied the amendments beginning January 1, 2020, with no changes to the Company’s consolidated financial statements.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
55
69
NOTE 7. ACCOUNTS RECEIVABLE AND CONTRACT ASSETS
Accounts receivable consisted of the following:
December 31,
Trade receivables
Less: allowance for doubtful accounts
Trade receivables, net
Other receivables1
Total accounts receivable
2019
373,480 $
(2,144)
371,336 $
12,685
384,021 $
2018
406,659
(992)
405,667
63,670
469,337
$
$
$
1 Other receivables at December 31, 2018 include amounts that were reclassified from long-term to current during the second quarter of 2018. These assets represent
milestone payments with respect to a gas processing plant constructed and delivered to Oman Oil Company Exploration and Production LLC (“OOCEP”) during 2015,
which were included in arbitration proceedings initiated in the second quarter of 2015. In July 2018, Enerflex was awarded the full amount relating to these milestone
payments, as well as variation claims in respect of additional costs and delays in construction and interest on the outstanding amounts, by the arbitration tribunal. In
addition, in December 2018, the tribunal awarded Enerflex amounts relating to costs, fees, taxes, and expenses incurred as part of the proceedings. At December 31,
2018, the amount owing for all awards was $54.7 million and interest on the outstanding amounts totaled $4.8 million. Enerflex collected the full amount owing, as
per the rulings, in March 2019.
Aging of trade receivables:
December 31,
Current to 90 days
Over 90 days
Movement in allowance for doubtful accounts:
December 31,
Balance, January 1
Impairment provision additions on receivables
Amounts written off during the year as uncollectible
Currency translation effects
Closing balance
Movement in contract assets:
December 31,
Balance, January 1
IFRS 15 transitional adjustment
Unbilled revenue recognized
Amounts billed
Currency translation effects
Closing balance
2019
321,058 $
52,422
373,480 $
2018
371,324
35,335
406,659
$
$
$
$
2019
992 $
2,162
(951)
(59)
2,144 $
2019
$
158,027 $
-
698,774
(666,896)
(6,015)
$
183,890 $
2018
968
635
(652)
41
992
2018
134,995
14,657
565,306
(575,694)
18,763
158,027
Amounts recognized as contract assets are typically billed to customers within three months.
56
70
Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
NOTE 8. INVENTORIES
Inventories consisted of the following:
December 31,
Direct materials
Work-in-process
Repair and distribution parts
Equipment
Total inventories
2019
182,692 $
33,403
42,540
10,750
2018
84,021
40,331
45,483
6,371
269,385 $
176,206
$
$
The amount of inventory and overhead costs recognized as an expense and included in cost of goods during 2019 was $1,616.3 million
(December 31, 2018 – $1,395.3 million). Cost of goods sold is made up of direct materials, direct labour, depreciation on manufacturing
assets, post-manufacturing expenses, and overhead. Cost of goods sold also includes inventory write-downs pertaining to obsolescence
and aging together with recoveries of past write-downs upon disposition. The net amount of inventory write-downs charged to the
consolidated statements of earnings and included in cost of goods sold December 31, 2019 was $5.9 million (December 31, 2018 – $4.3
million).
NOTE 9. PROPERTY, PLANT AND EQUIPMENT AND RENTAL EQUIPMENT
Land
Building
Equipment
Assets under
construction
Total
property,
plant and
equipment
Rental
equipment
Cost
January 1, 2019
Additions
Reclassification
Disposals
Currency translation effects
$
23,034 $
-
-
(3,531)
(747)
88,668
1,557
33,403
(14,663)
(3,835)
$
59,685 $
1,283
8,167
(3,898)
(1,851)
11,641 $
43,482
(44,338)
-
(481)
183,028 $
46,322
(2,768)
(22,092)
(6,914)
798,999
217,068
-
(51,811)
(47,052)
December 31, 2019
$
18,756 $
105,130
$
63,386 $
10,304 $
197,576 $
917,204
Accumulated depreciation
January 1, 2019
Depreciation charge
Impairment
Disposals
Currency translation effects
December 31, 2019
Net book value –
December 31, 2019
$
$
$
- $
-
-
-
-
(45,216)
(5,039)
-
9,441
1,552
$
(49,106) $
(5,740)
-
3,748
1,335
- $
-
-
-
-
(94,322) $
(10,779)
-
13,189
2,887
(260,510)
(52,916)
(26,414)
45,969
18,762
- $
(39,262)
$
(49,763) $
- $
(89,025) $
(275,109)
18,756 $
65,868
$
13,623 $
10,304 $
108,551 $
642,095
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
57
71
Land
Building
Equipment
Assets under
construction
Total
property,
plant and
equipment
Cost
January 1, 2018
Additions
Reclassification
Disposals
Currency translation effects
$
24,870 $
-
-
(3,143)
1,307
108,427
525
380
(26,157)
5,493
$
61,127 $
2,300 $
196,724 $
2,169
3,193
(8,792)
1,988
14,226
(5,291)
-
406
16,920
(1,718)
(38,092)
9,194
Rental
equipment
646,907
115,325
(172)
(12,293)
49,232
December 31, 2018
$
23,034 $
88,668
$
59,685 $
11,641 $
183,028 $
798,999
Accumulated depreciation
January 1, 2018
Depreciation charge
Disposals
Currency translation effects
December 31, 2018
Net book value –
December 31, 2018
$
$
$
- $
-
-
-
(50,668)
(5,043)
12,905
(2,410)
$
(48,824) $
(7,034)
8,216
(1,464)
- $
(45,216)
$
(49,106) $
- $
-
-
-
- $
(99,492) $
(12,077)
21,121
(3,874)
(187,054)
(66,572)
5,358
(12,242)
(94,322) $
(260,510)
23,034 $
43,452
$
10,579 $
11,641 $
88,706 $
538,489
Depreciation of property, plant and equipment and rental equipment included in earnings for the year ended December 31, 2019 was
$63.7 million (December 31, 2018 – $78.6 million), of which $60.1 million was included in cost of goods sold (December 31, 2018 – $74.7
million) and $3.6 million was included in selling and administrative expenses (December 31, 2018 – $3.9 million).
Impairment of rental equipment included in earnings for the year ended December 31, 2019 was $26.4 million (December 31, 2018 –
nil). The majority of this amount relates to the write-off of specialized assets acquired as part of a business combination in 2014 that we
have now determined cannot be redeployed and have never been utilized or generated revenue for Enerflex.
Effective January 1, 2019, the estimated useful life for certain rental assets was adjusted from 15 years to 20 years to better align with
the historical lifecycle of these assets. As a result, depreciation expense for the year ended December 31, 2019 decreased by
approximately $13.0 million.
58
72
Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
NOTE 10. LEASE RIGHT-OF-USE ASSETS
Cost
January 1, 2019
Additions
Disposal – end of lease term
Currency translation effects
December 31, 2019
Accumulated depreciation
January 1, 2019
Depreciation charge
Disposal – end of lease term
Currency translation effects
December 31, 2019
Net book value – December 31, 2019
NOTE 11. OTHER ASSETS
December 31,
Investment in associates and joint ventures
Prepaid deposits
Net investment in finance leases
Land and buildings
Equipment
Total lease
right-of-use assets
$
$
$
$
$
23,017 $
8,968 $
32,896
(74)
(376)
8,579
(152)
(291)
55,463 $
17,104 $
- $
- $
(8,198)
74
96
(8,028) $
47,435 $
(4,457)
152
54
(4,251) $
12,853 $
31,985
41,475
(226)
(667)
72,567
-
(12,655)
226
150
(12,279)
60,288
$
$
2019
25,670 $
198
542
2018
20,284
320
987
26,410 $
21,591
Net Investment in Finance Leases
The Company entered into finance lease arrangements for certain of its rental assets. Leases are denominated in Canadian dollars. The
terms of the leases entered into range from 3 to 7 years.
The value of the net investment is comprised of the following:
December 31,
Less than one year
Between one and five years
Less: unearned finance income
$
$
$
Minimum
lease payments
Present value of
minimum lease payments
2019
446 $
542
988 $
(88)
900 $
2018
444 $
987
1,431 $
(179)
1,252 $
2019
427
$
473
900
$
-
900
$
2018
425
827
1,252
-
1,252
The average interest rates inherent in the leases are fixed at the contract date for the entire lease term and are approximately 8.3 percent
per annum (December 31, 2018 – 8.3 percent). The finance lease receivables at the end of reporting period are neither past due nor
impaired.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
59
73
NOTE 12. INTANGIBLE ASSETS
Acquired value
January 1, 2019
Additions
Reclassification
Disposal
Currency translation effects
December 31, 2019
Accumulated amortization
January 1, 2019
Amortization charge
Disposal
Currency translation effects
December 31, 2019
Net book value – December 31, 2019
Acquired value
January 1, 2018
Reclassification
Disposal
Currency translation effects
December 31, 2018
Accumulated amortization
January 1, 2018
Amortization charge
Disposal
Currency translation effects
December 31, 2018
Net book value – December 31, 2018
Customer
relationships
and other
Software
Total intangible
assets
$
72,899
$
49,564 $
122,463
-
-
-
(2,004)
13
2,768
(431)
(631)
70,895
$
51,283 $
(51,326)
$
(42,255) $
(4,966)
-
1,060
(3,694)
431
630
13
2,768
(431)
(2,635)
122,178
(93,581)
(8,660)
431
1,690
(55,232)
15,663
$
$
(44,888) $
(100,120)
6,395 $
22,058
Customer
relationships
and other
Software
Total intangible
assets
72,196
$
47,645 $
119,841
-
(2,469)
3,172
1,890
(559)
588
1,890
(3,028)
3,760
72,899
$
49,564 $
122,463
(46,193)
$
(38,196) $
(84,389)
(5,057)
1,268
(1,344)
(4,031)
559
(587)
(51,326)
21,573
$
$
(42,255) $
7,309 $
(9,088)
1,827
(1,931)
(93,581)
28,882
$
$
$
$
$
$
$
$
$
60
74
Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
NOTE 13. GOODWILL AND IMPAIRMENT REVIEW OF GOODWILL
December 31,
Balance, January 1
Currency translation effects
2019
598,831 $
(24,903)
573,928 $
2018
570,299
28,532
598,831
$
$
Goodwill acquired through business combinations was allocated to the USA, Rest of World, and Canada business segments, and
represents the lowest level at which goodwill is monitored for internal management purposes. For the year ended December 31, 2019,
the Company did not identify any indicators of impairment.
In assessing whether goodwill has been impaired, the carrying amount of the segment (including goodwill) is compared with its
recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and value-in-use.
The recoverable amounts for the segments have been determined based on value-in-use calculations, using discounted cash flow
projections as at December 31, 2019. Management has adopted a five-year projection period to assess each segment’s value-in-use. The
cash flow projections are based on financial budgets approved by the Board of Directors, including an inflation factor of 2.0 percent for
years beyond the budget period, consistent with the approach taken by management in the prior year.
Key Assumptions Used in Value-In-Use Calculations:
The calculation of value-in-use for the Company’s segments is most sensitive to the following assumptions:
•
Earnings Before Finance Costs and Taxes: Management has made estimates relating to the amount and timing of revenue
recognition for projects included in backlog, and the assessment of the likelihood of maintaining and growing market share.
For each one percent change in earnings before finance costs and taxes, the average impact on the value-in-use of the
Company’s three segments would be $7.1 million; and
• Discount Rate: Management has used an average post-tax discount rate of 12.0 percent per annum which is derived from the
estimated weighted average cost of capital of the Company, using the five-year average of the Company’s debt to total
enterprise value. This discount rate has been calculated using an estimated risk-free rate of return adjusted for the Company’s
estimated equity market risk premium, the Company’s cost of debt, and the tax rate in the local jurisdiction. For each one
percent change in the discount rate, the average impact on the value-in-use of the Company’s three segments would be $105.5
million.
The Company completed its annual assessment for goodwill impairment and determined that the recoverable amount for the USA, Rest
of World, and Canada segments exceeded the carrying amount using a 10.1 percent (December 31, 2018 – 9.1 percent), 14.2 percent
(December 31, 2018 – 12.8 percent), and 11.8 percent (December 31, 2018 – 10.6 percent) post-tax discount rate, respectively.
A reasonable change in assumptions for the USA, Rest of World, and Canada segments would not trigger an impairment.
NOTE 14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31,
Accounts payable and accrued liabilities
Accrued dividend payable
Cash-settled share-based payments
2019
2018
320,932 $
293,652
10,312
2,361
9,349
3,858
333,605 $
306,859
$
$
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
61
75
NOTE 15. PROVISIONS
December 31,
Warranty provision
Legal provision
Restructuring provision
Onerous lease provision
$
$
2019
15,563 $
1,818
869
-
18,250 $
2019
Warranty
provision
Legal
provision
Restructuring
provision
Onerous lease
provision
Balance, January 1
$
9,720
$
1,121 $
IFRS 16 opening adjustment
Additions during the year
Amounts settled and
released in the year
Currency translation effects
-
21,960
(15,777)
(340)
-
697
-
-
-
-
869
-
-
$
2,049 $
(2,049)
-
-
-
2018
9,720
1,121
-
2,049
12,890
Total
12,890
(2,049)
23,526
(15,777)
(340)
Balance, December 31
$
15,563
$
1,818 $
869
$
- $
18,250
2018
Warranty
provision
Legal
provision
Restructuring
provision
Onerous lease
provision
Balance, January 1
$
10,927
$
94 $
285
$
4,347 $
Additions during the year
Amounts settled and
released in the year
Currency translation effects
9,674
(11,348)
467
1,160
(138)
5
150
(429)
(6)
-
(2,245)
(53)
Total
15,653
10,984
(14,160)
413
Balance, December 31
$
9,720
$
1,121 $
-
$
2,049 $
12,890
The Company previously entered into non-cancellable leases for several office spaces and facilities in Canada and Australia. Due to
previous business restructuring, the Company ceased using these premises. Onerous lease provisions were recognized in prior years,
representing future payments, net of anticipated sub-lease recoveries. Upon adoption of IFRS 16 on January 1, 2019, the Company
elected to use the practical expedient in IFRS 16.C10(b), which allows a lessee to rely on its assessment of whether leases are onerous
applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative
to performing an impairment review at the date of initial application of the new standard. The value of lease right-of-use assets at the
date of initial application was then adjusted by the amount of these provisions for onerous leases. The balance of the provision as of
December 31, 2018, subsequently recognized against lease right-of-use assets, was $0.2 million for Canada and $1.8 million for Australia.
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Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
NOTE 16. DEFERRED REVENUES
December 31,
Balance, January 1
IFRS 15 transitional adjustment
Cash received in advance of revenue recognition
Revenue subsequently recognized
Currency translation effects
Closing balance
2019
$
348,804 $
-
478,235
(673,473)
(10,659)
$
142,907 $
2018
143,177
(33,954)
705,468
(479,934)
14,047
348,804
Amounts recognized as deferred revenues are typically recognized into revenue within six months.
NOTE 17. LONG-TERM DEBT
Through private placement, the Company has $312.3 million of unsecured notes (“Notes”) issued and outstanding. These Notes consist
of $105.0 million U.S. dollar and $15.0 million Canadian dollar maturing December 15, 2024 bearing an interest rate of 4.67 percent and
4.50 percent respectively, and $70.0 million U.S. dollar and $30.0 million Canadian dollar maturing December 15, 2027 bearing an
interest rate of 4.87 percent and 4.79 percent respectively, issued December 15, 2017. In addition, the Company has $40.0 million
Canadian dollars of unsecured notes with an interest rate of 6.01 percent maturing on June 22, 2021.
The Company has an amended and restated syndicated revolving credit facility (“Bank Facility”) with an amount available of $725.0
million. The Bank Facility has a maturity date of June 30, 2023 (“Maturity Date”) but may be extended annually on or before the
anniversary date with the consent of the lenders. In addition, the Bank Facility may be increased by $150.0 million at the request of the
Company, subject to the lenders’ consent. There are no required or scheduled repayment of principal until the maturity date of the Bank
Facility. Drawings on the Bank Facility are available by way of Prime Rate loans, U.S. Base Rate loans, London Interbank Offered Rate
(“LIBOR”) loans, and Bankers’ Acceptance notes. The Company may also draw on the Bank Facility through bank overdrafts in either
Canadian or U.S. dollars and issue letters of credit under the Bank Facility.
Pursuant to the terms and conditions of the Bank Facility, a margin is applied to drawings on the Bank Facility in addition to the quoted
interest rate. The margin is established in basis points and is based on a consolidated net debt to earnings before finance costs, 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 Bank Facility is unsecured and ranks pari passu with the Notes. The Company is required to maintain certain covenants on the Bank
Facility and the Notes. As at December 31, 2019, the Company was in compliance with these covenants.
The weighted average interest rate on the Bank Facility for the year ended December 31, 2019 was 3.5 percent (December 31, 2018 –
3.5 percent).
The composition of the borrowings on the Bank Facility and the Company’s senior unsecured notes (“Notes”) was as follows:
December 31,
Drawings on Bank Facility
Notes due June 22, 2021
Notes due December 15, 2024
Notes due December 15, 2027
Deferred transaction costs
2019
$
121,328 $
40,000
151,374
120,916
(3,131)
$
430,487 $
2018
124,852
40,000
158,241
125,494
(3,875)
444,712
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
63
77
At December 31, 2019, without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the
next five years are $312.7 million, and $120.9 million thereafter.
NOTE 18. LEASE LIABILITIES
Balance, January 1
Additions
Lease interest
Payments made against lease liabilities
Currency translation effects and other
Closing balance
Current portion of lease liabilities
Non-current portion of lease liabilities
December 31, 2019
$
$
$
$
39,438
41,973
2,586
(15,137)
(1,860)
67,000
14,172
52,828
67,000
In addition to the lease payments made above, during the year ended December 31, 2019 the Company paid $1.7 million relating to
short-term and low-value leases which were expensed as incurred. During the year ended December 31, 2019 the Company also paid
$1.7 million in variable lease payments not included in the measurement of lease liabilities, of which $0.4 million was included in cost of
goods sold and $1.3 million was included in selling and administrative expenses. Interest expense on lease liabilities was $2.6 million for
the year ended December 31, 2019. Total cash outflow for leases for the year ended December 31, 2019 was $19.1 million.
Future minimum lease payments under non-cancellable leases were as follows:
2020
2021
2022
2023
2024
Thereafter
Less:
Imputed interest
Short-term leases
Low-value leases
December 31, 2019
$
$
15,313
12,915
10,598
7,570
5,667
31,440
83,503
16,058
400
45
$
67,000
The Company previously disclosed future required lease payments at December 31, 2018 which were used to determine the balance of
lease liabilities at January 1, 2019. The weighted average incremental borrowing rate applied to lease liabilities recognized in the
statement of financial position at the date of initial application was 5.1 percent. The difference between future required lease payments
at December 31, 2018, discounted using this incremental borrowing rate, and lease liabilities recognized in the statement of financial
position at January 1, 2019 was primarily due to short-term and low-value leases that were not included in the balance of lease liabilities.
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Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
NOTE 19. INCOME TAXES
(a) Income Tax Recognized in Net Earnings
The components of income tax expense were as follows:
Years ended December 31,
Current income taxes
Deferred income taxes
$
$
2019
31,720 $
31,476
63,196 $
2018
20,871
10,247
31,118
(b) Reconciliation of Tax Expense
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:
Years ended December 31,
Earnings before income taxes
Canadian statutory rate
Expected income tax provision
Add (deduct):
Exchange rate effects on tax basis
Earnings taxed in foreign jurisdictions
Revaluation of Canadian deferred tax assets due to change in statutory rate
Withholding tax on dividends received from foreign subsidiaries
Amounts not deductible (taxable) for tax purposes
Impact of accounting for associates and joint ventures
Other
$
$
2019
215,324 $
26.5%
57,061 $
2,125
(1,129)
5,040
-
723
(575)
(49)
2018
132,534
27.0%
35,784
(2,319)
(5,903)
-
3,188
700
(338)
6
Income tax expense from continuing operations
$
63,196 $
31,118
The applicable tax rate is the aggregate of the Canadian federal income tax rate of 15.0 percent (December 31, 2018 – 15.0 percent) and
the provincial income tax rate of 11.5 percent (December 31, 2018 – 12.0 percent). During the second quarter of 2019, lower Alberta
corporate income tax rates became substantially enacted. The Alberta corporate income tax rates are 11.5 percent for 2019, 10.0
percent for 2020, 9.0 percent for 2021, and 8.0 percent for 2022 and thereafter.
The Company’s effective tax rate is subject to fluctuations in the Argentine peso and Mexican peso exchange rate against the U.S. dollar.
Since the Company holds significant rental assets in Argentina and Mexico, the tax base of these assets is denominated in Argentine peso
and Mexican peso, respectively. The functional currency is, however, the U.S. dollar and as a result, the related local currency tax bases
are revalued periodically to reflect the closing U.S. dollar rate against these currencies. Any movement in the exchange rate results in a
corresponding unrealized exchange rate gain or loss being recorded as part of deferred income tax expense or recovery. During periods
of large fluctuation or devaluation of the local currency against the U.S. dollar, these amounts may be significant but are unrealized and
may reverse in the future. Recognition of these amounts is required by IFRS, even though the revalued tax basis does not generate any
cash tax obligation or liability in the future.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
65
79
(c) Income Tax Recognized in Other Comprehensive Income
Years ended December 31,
Deferred Tax
2019
2018
Arising on income and expenses recognized in other comprehensive income:
Fair value remeasurement of hedging instruments entered into for cash flow
hedges
Arising on income and expenses reclassified from other comprehensive income to
net earnings:
Relating to cash flow hedges
Total income tax recognized in other comprehensive income
$
$
(286)
$
(130)
276
(10) $
67
(63)
(d) Net Deferred Tax Assets (Liabilities)
Deferred tax assets and liabilities arise from the following:
Accounting
provisions
and accruals
Tax losses
Long-term
assets
Other
Exchange
rate effects
on tax bases
Cash flow
hedges
Total1
$ 19,056 $ 32,596
$
(36,986) $
1,537 $
(15,776) $
389 $
816
1,276
(6,868)
(23,554)
(205)
(2,125)
-
96
(979)
-
-
354
-
576
2,280
-
-
(2)
-
-
757
-
10
-
(64)
(31,476)
10
672
2,346
January 1, 2019
Charged to net
earnings
Charged to OCI
Charged to retained
earnings
Exchange differences
December 31, 2019
$
19,449 $ 26,082
$
(57,684) $
1,330 $
(17,144) $
335 $
(27,632)
1Net deferred tax liabilities at December 31, 2019 of $27.6 million consist of liabilities of $76.2 million net of assets of $48.6 million.
Accounting
provisions
and accruals
Tax losses
Long-term
assets
Other
Exchange
rate effects
on tax bases
Cash flow
hedges
Total
$ 21,884 $ 23,185 $
(15,577) $
1,732 $
(16,640) $
321 $
14,905
(2,437)
9,475
(19,410)
(194)
2,319
-
(892)
501
-
-
-
-
-
-
-
-
(64)
(1,999)
(1)
(1,455)
-
63
-
5
(10,247)
63
(892)
(3,013)
January 1, 2018
Charged to net
earnings
Charged to OCI
Charged to retained
earnings
Exchange differences
December 31, 2018
$
19,056 $ 32,596 $
(36,986)
$
1,537 $
(15,776) $
389 $
816
Management has determined that it is appropriate to continue to recognize the full amount of the deferred tax asset, which largely
consists of accounting provision and tax losses, as all the deductible temporary difference at December 31, 2019 are expected to be
utilized against future taxable profit. The recoverable amount for the deferred tax asset has been determined based on value-in-use
calculations, as at December 31, 2019, and financial budgets approved by the Board of Directors, consistent with the approach taken by
management in determining the recoverable amount as part of the annual assessment for goodwill impairment in Note 13. Certain of the
tax losses recognized are subject to expiration in the years 2026 through 2039.
66
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Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
(e) Unrecognized Deferred Tax Assets
The Company has unused tax losses of $42.5 million for the year ended December 31, 2019 (December 31, 2018 – $57.4 million). Certain
of these unrecognized tax losses are subject to expiration in the years 2020 through 2029. Deferred tax assets totaling $9.0 million on
these tax losses have not been recognized in the consolidated statements of financial position at December 31, 2019 (December 31,
2018 – $14.2 million).
NOTE 20. SHARE CAPITAL AUTHORIZED
The Company is authorized to issue an unlimited number of common shares. Share capital comprises only one class of ordinary shares.
The ordinary shares carry a voting right and a right to a dividend.
Issued and Outstanding
Years ended December 31,
Balance, January 1
Exercise of stock options
Balance, December 31
2019
2018
Number of
common shares
Common
share capital
Number of
common shares
Common
share capital
89,083,621 $
595,224
89,678,845 $
366,120
9,404
375,524
88,540,398 $
543,223
89,083,621 $
357,696
8,424
366,120
Total dividends declared in the year were $38.5 million, or $0.105 per share during the first three quarters and $0.115 per share during
the last quarter of 2019 (December 31, 2018 – $34.6 million, or $0.095 during the first three quarters and $0.105 per share during the
last quarter of 2018).
NOTE 21. CONTRIBUTED SURPLUS
Contributed surplus consists of accumulated stock option expense less the fair value of the options at the grant date that have been
exercised and reclassified to share capital. Changes in contributed surplus were as follows:
Years ended December 31,
Balance, January 1
Share-based compensation
Exercise of stock options
Balance, December 31
NOTE 22. REVENUE
Years ended December 31,
Engineered Systems
Service
Rentals
Total revenue
2019
654,324 $
2,735
(1,952)
655,107 $
2018
654,076
2,112
(1,864)
654,324
$
$
2019
2018
$
1,448,503 $
1,182,170
394,586
202,333
345,098
176,005
$
2,045,422
$
1,703,273
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
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81
Revenue by geographic location, which is attributed by destination of sale, was as follows:
Years ended December 31,
United States
2019
$
954,350 $
Canada
Nigeria
Oman
Australia
Mexico
Bahrain
Argentina
Colombia
Brazil
Indonesia
Other
484,251
256,177
105,721
71,592
46,300
42,864
24,522
17,375
10,953
10,484
20,833
2018
970,691
277,061
11,460
93,462
62,783
47,032
43,587
37,476
35,675
11,590
13,131
99,325
Total revenue
$
2,045,422 $
1,703,273
The following table outlines the Company’s unsatisfied performance obligations, by product line, as at December 31, 2019:
Engineered Systems
Service
Rentals
Less than
one year
One to two
years
Greater than
two years
467,757 $
-
$
-
$
79,327
148,403
45,846
73,651
134,272
237,433
Total
467,757
259,445
459,487
695,487 $
119,497
$
371,705
$
1,186,689
$
$
NOTE 23. SHARE-BASED COMPENSATION
(a) Share-Based Compensation Expense
The share-based compensation expense included in the determination of net earnings was:
Years ended December 31,
Equity settled share-based payments
Deferred share units
Phantom share entitlement plan
Performance share units
Restricted share units
Cash performance target
2019
$
2,735 $
(720)
(449)
2,754
2,199
1,230
Share-based compensation expense
$
7,749 $
2018
2,112
2,294
226
1,778
2,366
1,162
9,938
68
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Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
(b) Equity-Settled Share-Based Payments
Years ended December 31,
2019
Weighted
average exercise
price
Number of
options
Options outstanding, beginning of period
3,662,698
$
Granted
Exercised1
Forfeited
Expired
Options outstanding, end of period
Options exercisable, end of period
890,836
(595,224)
(371,422)
(21,367)
3,565,521
1,427,608
$
$
14.74
13.38
12.52
15.67
14.91
$14.67
$14.93
2018
Weighted
average exercise
price
14.03
16.20
12.08
15.83
11.66
14.74
14.13
Number of
options
3,556,575 $
885,404
(543,223)
(228,058)
(8,000)
3,662,698 $
1,555,909 $
1The weighted average share price of Options at the date of exercise for the year ended December 31, 2019 was $18.32 (December 31, 2018 - $16.50).
The company granted 890,836 stocks options during 2019 (2018 – 885,404). Using the Black-Scholes option pricing model, the weighted
average fair value of stock options granted for the period ended December 31, 2019 was $2.87 per options (December 31, 2018 - $3.99).
The weighted average assumptions used in determinations of fair values are noted below:
Years ended December 31,
Expected life (years)
Expected volatility2
Dividend yield
Risk-free rate
Estimated forfeiture rate
2019
5.28
33.9%
3.2%
1.2%
4.1%
2018
5.32
32.8%
2.4%
2.2%
2.4%
2 Expected volatility is based on the historical volatility of Enerflex over a five-year period, consistent with the expected life of the option.
The following table summarizes options outstanding and exercisable at December 31, 2019:
Options Outstanding
Options Exercisable
Range of exercise
prices
$11.69 – $13.51
$13.52 – $15.94
$15.95 – $20.75
Total
Number
outstanding
1,106,811
1,469,275
989,435
3,565,521
Weighted
average
remaining
life (years)
3.82 $
4.89
4.67
4.50 $
Weighted
average
exercise
price
12.39
14.64
17.28
14.67
Weighted
average
remaining
life (years)
2.97 $
2.60
3.19
Number
outstanding
594,929
449,776
382,903
1,427,608
2.91 $
Weighted
average
exercise
price
12.27
15.04
18.86
14.93
(c) Deferred Share Units
The Company offers a DSU plan for executives and non-employee directors, whereby they may elect on an annual basis to receive all or
a portion of their annual bonus, or retainer and fees, respectively, in deferred share units. In addition, the Board may grant discretionary
DSUs to executives. A specified component of non-employee directors’ compensation must be received in DSUs. 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 weighted average price per share on the Toronto Stock Exchange (“TSX”) for the five trading days
immediately preceding the grant.
Additional Enerflex DSUs will be credited on the regular dividend payment dates as all dividends are assumed to be reinvested.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
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83
DSUs may be granted to eligible participants on an annual basis and will vest upon being credited to the executive or non-employee
director’s account. Participants are not able to cash in their DSUs until they are no longer employed by or cease to be directors of
Enerflex. The Company satisfies its payment obligation through cash payments to the participant.
DSUs represent an indexed liability of the Company relative to the Company’s share price. For the year ended December 31, 2019, the
value of directors’ compensation and executive bonuses elected to be received in DSUs totalled $1.8 million (December 31, 2018 – $1.9
million).
DSUs outstanding, January 1, 2019
Granted
In lieu of dividends
Vested
DSUs outstanding, December 31, 2019
Number of DSUs
Weighted average grant
date fair value per unit
645,713 $
118,708
17,605
(60,206)
721,820 $
14.01
14.84
15.56
16.84
13.95
The carrying amount of the liability relating to DSUs as at December 31, 2019 included in current liabilities was $0.1 million (December
31, 2018 – nil) and in other long-term liabilities was $8.7 million (December 31, 2018 – $10.3 million).
(d) Phantom Share Entitlement Plan
The Company utilizes a PSE plan for key employees of affiliates located in Australia and the UAE, for whom the Company’s Stock Option
Plan would have negative personal taxation consequences.
The exercise price of each PSE equals the average of the market price of the Company’s shares on the TSX for the five days preceding the
date of the grant. The PSEs vest at a rate of one-fifth on each of the first five anniversaries of the date of the grant and expire on the
seventh 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 2019, the Board of Directors granted 50,968 PSEs (December 31, 2018 – 85,013). The intrinsic value of the vested awards at
December 31, 2019 was $0.4 million (December 31, 2018 – $0.3 million).
PSEs outstanding, January 1, 2019
Granted
Forfeited
PSEs outstanding, December 31, 2019
Number of PSEs
Weighted average grant
date fair value per unit
295,732 $
50,968
(183,348)
163,352 $
15.05
13.74
15.43
14.22
The carrying amount of the liability relating to the PSEs as at December 31, 2019 included in current liabilities was $0.1 million
(December 31, 2018 – $0.3 million) and in other long-term liabilities was less than $0.1 million (December 31, 2018 – $0.3 million).
(e) Performance Share Units
The Company offers a PSU plan for executive officers of the Company. The PSU is a notional unit that entitles the holder to receive
payment, as described below, from the Company equal to the number of vested PSUs multiplied by the weighted average price per share
on the TSX during the last five trading days immediately preceding the grant. Vesting is based on the achievement of performance
measures and objectives specified by the Board of Directors. The Board of Directors assesses performance of the officer to determine
the vesting percentage, which can range from zero percent to 200 percent. On the 14th day after the determination of the vesting
percentage, the holder will be paid for the vested PSUs either in cash or in shares of the Company acquired on the open market on behalf
of the holder, at the discretion of the Company.
Additional Enerflex PSUs will be credited on the regular dividend payment dates as all dividends are assumed to be reinvested.
70
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Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
The Company paid $4.1 million for the period ended December 31, 2019 representing units vested in the year (December 31, 2018 –
$2.0 million).
PSUs outstanding, January 1, 2019
Granted
In lieu of dividends
Vested
Forfeited
PSUs outstanding, December 31, 2019
Number of PSUs
Weighted average grant
date fair value per unit
506,778 $
315,038
13,228
(250,681)
(79,742)
504,621 $
15.28
13.41
15.66
16.55
15.19
13.50
The carrying amount of the liability relating to PSUs as at December 31, 2019 included in current liabilities was $0.7 million (December
31, 2018 – $1.5 million) and in other long-term liabilities was $1.2 million (December 31, 2018 – $1.9 million).
(f) Restricted Share Units
The Company offers an RSU plan to officers and other key employees of the Company or its related entities. RSUs may be granted at the
discretion of the Board of Directors. An RSU is a notional unit that entitles the holder to receive payment, as described below, from the
Company equal to the number of vested RSUs multiplied by the weighted average price per share on the TSX during the last five trading
days immediately preceding the vesting date. Unless otherwise determined by the Board, RSUs vest at a rate of one-third on the first,
second, and third anniversaries of the award date. Within 30 days of the vesting date, the holder will be paid for the vested RSUs either
in cash or in shares of the Company acquired by the Company on the open market on behalf of the holder, at the discretion of the
Company.
Additional Enerflex RSUs will be credited on the regular dividend payment dates as all dividends are assumed to be reinvested.
During 2019, the Board of Directors granted 159,740 RSUs to officers or key employees of the Company (2018 – 245,156). The Company
paid $2.8 million for the period ended December 31, 2019 representing units vested in the year (December 31, 2018 – $1.8 million).
RSUs outstanding, January 1, 2019
Granted
In lieu of dividends
Vested
Forfeited
RSUs outstanding, December 31, 2019
Number of RSUs
Weighted average grant
date fair value per unit
352,962 $
159,740
8,778
(169,066)
(59,843)
292,571 $
13.51
13.74
15.64
16.29
15.02
11.79
The carrying amount of the liability included in current liabilities relating to RSUs at December 31, 2019 was $0.9 million (December 31,
2018 – $1.4 million).
(g) Cash Performance Target Plan
The Company offers a CPT plan to certain non-executive, U.S.-based employees of the Company or its related entities. The plan is
denominated in U.S. dollars and may be granted at the discretion of the Board of Directors. Although the liability associated with the CPT
plan follows Enerflex’s share performance, no actual shares or securities are issued under the plan. The cash payment fluctuates based
on the percentage of appreciation or depreciation in the share price over the life of the award, which is calculated using the last five days
immediately preceding the vesting date. The cash grants are held for three years, and vest at a rate of one-third on the first, second, and
third anniversaries of the award date. Within 30 days of the vesting date, the holder will be paid for the vested cash grants, at the
discretion of the Company.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
71
85
During 2019, the Board of Directors distributed $1.9 million of CPT cash grants (2018 – $1.8 million). The Company paid $1.3 million for
the period ended December 31, 2019 representing units vested in the year (December 31, 2018 – $1.1 million). The weighted average
grant fair value per unit was $13.74 (December 31, 2018 – $16.12), using the average share price over the five days preceding the grant
date.
The carrying amount of the liability included in current liabilities relating to CPT plan at December 31, 2019 was $0.5 million (December
31, 2018 – $0.6 million).
(h) Employee Share Purchase Plan
The Company offers an employee share purchase 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 and administrative expense when paid. This plan is administered by a third party.
NOTE 24. RETIREMENT BENEFITS PLAN
The Company sponsors arrangements for substantially all of its employees through defined contribution plans in Canada, UK, Asia, and
Australia, and a 401(k) matched savings plan in the United States. In the case of the defined contribution plans, regular contributions are
made to the employees’ individual accounts, which are administered by a plan trustee, in accordance with the plan document. Both in the
case of the defined contribution plans and the 401(k) matched savings plan, the pension expenses recorded in earnings are the amounts
of actual contributions the Company is required to make in accordance with the terms of the plans.
Years ended December 31,
Defined contribution plans
401(k) matched savings plan
Net pension expense
NOTE 25. FINANCE COSTS AND INCOME
Years ended December 31,
Finance Costs
Short and long-term borrowings
Interest on lease liability
Total finance costs
Finance Income
Bank interest income
Income from finance leases
Total finance income
Net finance costs
$
$
$
$
$
$
$
2019
5,485 $
4,556
10,041 $
2018
4,996
3,488
8,484
2019
2018
19,679 $
22,598
2,586
-
22,265 $
22,598
3,596 $
91
3,687 $
3,334
119
3,453
18,578 $
19,145
72
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Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
NOTE 26. RECONCILIATION OF EARNINGS PER SHARE CALCULATIONS
Year ended December 31, 2019
Basic
Dilutive effect of stock option conversion
Diluted
Year ended December 31, 2018
Basic
Dilutive effect of stock option conversion
Diluted
Net earnings
Weighted average
shares outstanding
152,128
89,500,829 $
-
208,916
152,128
89,709,745 $
Net earnings
Weighted average
shares outstanding
101,416
88,709,142 $
-
379,486
101,416
89,088,628 $
$
$
$
$
Per share
1.70
-
1.70
Per share
1.14
-
1.14
NOTE 27. FINANCIAL INSTRUMENTS
The Company has designated its financial instruments as follows:
December 31, 2019
Financial Assets
Cash and cash equivalents
Derivative instruments in designated hedge accounting relationships
Loans and receivables:
Accounts receivable
Contract assets
Financial Liabilities
Carrying
value
Estimated
fair value
$
96,255 $
152
384,021
183,890
96,255
152
384,021
183,890
Derivative instruments in designated hedge accounting relationships
375
375
Other financial liabilities:
Accounts payable and accrued liabilities
Long-term debt – bank facility
Long-term debt – notes
Other long-term liabilities
333,605
121,328
312,290
14,677
333,605
121,328
328,037
14,677
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
73
87
December 31, 2018
Financial Assets
Cash and cash equivalents
Derivative instruments in designated hedge accounting relationships
Loans and receivables:
Accounts receivable
Contract assets
Financial Liabilities
Carrying
value
Estimated
fair value
$
326,864 $
1,079
469,337
158,027
326,864
1,079
469,337
158,027
Derivative instruments in designated hedge accounting relationships
1,400
1,400
Other financial liabilities:
Accounts payable and accrued liabilities
Long-term debt – bank facility
Long-term debt – notes
Other long-term liabilities
306,859
124,852
323,735
16,202
306,859
124,852
317,987
16,202
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 December 31, 2019 and indicates the fair value hierarchy of the valuation techniques used to determine such fair
value. During the year ended December 31, 2019, there were no transfers between Level 1 and Level 2 fair value measurements.
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. If there is no active market,
fair value is established using valuation techniques, including discounted cash flow models. The inputs to these models are taken from
observable market data where possible, including recent arm’s-length market transactions, and comparisons to the current fair value of
similar instruments. Where this is not feasible, inputs such as liquidity risk, credit risk, and volatility are used.
Carrying
value
Fair Value
Level 1
Level 2
Level 3
Financial Assets
Derivative financial instruments
Financial Liabilities
Derivative financial instruments
Long-term debt – notes
$
$
$
152
$
- $
152 $
375
312,290
$
$
- $
- $
375 $
328,037 $
-
-
-
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and other long-liabilities are reported at
amounts approximating their fair values on the statement of financial position. The fair values approximate 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 rate method over the
74
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Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
life of the related debt. The fair value of these Notes was determined on a discounted cash flow basis, using a weighted average discount
rate of 3.8 percent, was $328.0 million at December 31, 2019.
Derivative Financial Instruments and Hedge Accounting
Foreign exchange contracts are transacted with financial institutions to hedge foreign currency denominated obligations and cash
receipts 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 December 31, 2019:
Canadian Dollar Denominated Contracts
Purchase contracts
Sales contracts
Purchase contracts
USD
USD
EUR
Notional amount
Maturity
16,715
(10,760)
136
January 2020 – June 2020
January 2020 – May 2020
January 2020
Management estimates that a loss of $0.2 million would be realized if the contracts were terminated on December 31, 2019. Certain of
these forward contracts are designated as cash flow hedges and accordingly, a loss of $0.8 million has been included in other
comprehensive income for the 2019 year (December 31, 2018 – $0.3 million). These gains or losses are not expected to affect net
earnings as the gains will be reclassified to net earnings and will offset losses recorded on the underlying hedged items, namely foreign
currency denominated accounts payable and accounts receivable. The amount removed from other comprehensive income during the
year and included in the carrying amount of the hedged items for the 2019 year was a gain of $0.9 million (December 31, 2018 – $0.2
million gain).
All hedging relationships are formally documented, including the risk management objective and strategy. On an on-going 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 Translation Exposure
In the normal course of operations, the Company is exposed to movements in the U.S. dollar, the Australian dollar, and the Brazilian real.
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, Argentina, Brazil, Colombia, Mexico, Bahrain, Oman, the UAE,
and Australia.
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 also sells compression and processing packages in foreign currencies, primarily
the U.S. dollar. Most of Enerflex’s international orders are manufactured in the United States 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. The Company has implemented a hedging policy,
applicable primarily to the Canadian domiciled business units, with the objective of securing the margins earned on awarded contracts
denominated in currencies other than Canadian dollars. In addition, the Company may hedge input costs that are paid in a currency other
than the home currency of the subsidiary executing the contract.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
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89
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 Brazilian real.
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars using the exchange rates in effect
at the reporting dates. Non-monetary assets and liabilities measured at historical cost are translated using the rates of exchange at the
date of the transaction. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income.
The cumulative currency translation adjustments are recognized in earnings 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 earnings. The following table
shows the effect on net earnings before tax for the 2019 year of a five percent weakening of the Canadian dollar against the U.S. dollar,
Australian dollar, and Brazilian real, everything else being equal. A five percent 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 percent
USD
Earnings before income taxes
$
8,752
$
AUD
93 $
BRL
106
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 other comprehensive income. Financial instruments affected by currency risk
include cash and cash equivalents, accounts receivable, accounts payable, and derivative financial instruments. The following table shows
the Company’s sensitivity to a five percent weakening of the Canadian dollar against the U.S. dollar, Australian dollar, and Brazilian real.
A five percent strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis relates to the
position as at December 31, 2019 and for the year then ended.
Canadian dollar weakens by 5 percent
USD
AUD
Financial instruments held in foreign operations
Other comprehensive income
Financial instruments held in Canadian operations
Earnings before income taxes
$
$
18,551
$
741 $
BRL
255
(9,930)
$
- $
-
The movement in net earnings before tax in Canadian operations is a result of a change in the fair values of financial instruments. The
majority of these financial instruments are hedged.
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
December 31, 2019 include interest rates that are fixed and therefore the related interest expense will not be impacted by fluctuations
in interest rates. The Company’s Bank Facility however, is subject to changes in market interest rates.
For each one percent change in the rate of interest on the Bank Facility, the change in interest expense for the year ended December 31,
2019 would be $1.2 million. All interest charges are recorded on the annual consolidated statements of earnings as finance costs.
Credit Risk
Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, accounts receivable, net investment
in finance lease, and derivative financial instruments.
The Company has accounts receivable from clients engaged in various industries. These specific industries may be affected by economic
factors that may impact accounts receivable. Credit quality of the customer is assessed based on an extensive credit rating scorecard
76
90
Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
and individual credit limits are defined in accordance with this assessment. Credit is extended based on an evaluation of the customer’s
financial condition and, generally, advance payment is not required. Outstanding customer receivables are regularly monitored and an
allowance for doubtful accounts is established based expected credit losses.
The Company evaluates the concentration of risk at December 31, 2019 with respect to trade receivables as low, as its customers are
located in several jurisdictions and industries and operate in largely independent markets. At December 31, 2019, the Company had one
customer in the USA and Canada segments with balances in accounts receivable and contract assets totaling $68.0 million, representing
12.0 percent of the total balance of accounts receivable and contract assets . The maximum exposure to credit risk at the reporting date
is the carrying value of each class of financial assets disclosed in this note. The Company does not hold collateral as security.
The credit risk associated with the net investment in finance leases arises from the possibility that the counterparties may default on
their obligations. In order to minimize this risk, the Company enters into finance 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 Facility for future drawings to meet the Company’s
future growth targets. As at December 31, 2019, the Company held cash and cash equivalents of $96.3 million and had drawn $121.3
million against the Bank Facility, leaving it with access to $557.3 million for future drawings. The Company continues to meet the
covenant requirements of its funded debt, including the Bank Facility and Notes, with a bank-adjusted net debt to EBITDA ratio of 1:1
compared to a maximum ratio of 3:1, and an interest coverage ratio of greater than 18:1 compared to a minimum ratio of 3:1. The interest
coverage ratio is calculated by dividing the trailing 12-month bank-adjusted EBITDA, as defined by the Company’s lenders, by interest
expense over the same time frame.
A liquidity analysis of the Company’s financial instruments has been completed on a maturity basis. The following table outlines the cash
flows, including interest associated with the maturity of the Company’s financial liabilities, as at December 31, 2019:
Less than 3
months
3 months to
1 year
Greater
than 1 year
Derivative financial instruments
Foreign currency forward contracts
$
319 $
56
$
Accounts payable and accrued liabilities
333,605
Long-term debt - Bank Facility
Long-term debt - Notes
Other long-term liabilities
-
-
-
-
-
-
-
- $
-
121,328
312,290
14,677
Total
375
333,605
121,328
312,290
14,677
The Company expects that cash flows from operations in 2020, together with cash and cash equivalents on hand and credit facilities, will
be more than sufficient to fund its requirements for investments in working capital and capital assets.
NOTE 28. CAPITAL DISCLOSURES
The capital structure of the Company consists of shareholders’ equity plus net debt. The Company manages its capital to ensure that
entities in the Company will be able to continue to grow while maximizing the return to shareholders through the optimization of the
debt and equity balances. The Company makes adjustments to its capital structure 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.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
77
91
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
cost of capital and the risks associated with each class of capital are considered. In order to position itself to execute its long-term plan
to maintain its status as 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 measure to monitor its capital structure:
Net Debt to EBITDA Ratio
Net debt to EBITDA is defined as short and long-term debt less cash and cash equivalents at the end of the period, divided by annualized
EBITDA. At December 31, 2019, the net debt to EBITDA ratio was:
Years ended December 31,
Long-term debt
Cash and cash equivalents
Net debt
Earnings before finance costs and income taxes
Depreciation and amortization
EBITDA
Net debt to EBITDA ratio
$
$
$
$
2019
430,487 $
(96,255)
334,232 $
233,902 $
86,559
320,461 $
2018
444,712
(326,864)
117,848
151,679
89,774
241,453
1.04:1
0.49:1
The net debt to EBITDA ratio, as defined above is not equivalent to the net debt to EBITDA as defined by the Company’s lenders. As at
December 31, 2019, the Company is in compliance with its covenants. The net debt to EBITDA using adjusted EBITDA (as defined in the
“Adjusted EBITDA” section of the annual Management Discussion and Analysis) is 0.97 at December 31, 2019 (December 31, 2018 –
0.52).
NOTE 29. SUPPLEMENTAL CASH FLOW INFORMATION
Years ended December 31,
Net change in non-cash working capital and other
Accounts receivable
Contract assets
Inventories
Deferred revenue
Accounts payable and accrued liabilities, provisions, and income taxes payable
Foreign currency and other
Cash interest and taxes paid and received during the period:
Years ended December 31,
Interest paid – short- and long-term borrowings
Interest paid – lease liabilities
Total interest paid
Interest received
Taxes paid
Taxes received
78
92
2019
2018
$
85,316 $
(158,618)
(25,863)
(93,179)
(205,897)
23,123
(5,249)
$
(221,749) $
$
$
2019
19,330 $
2,586
21,916 $
3,518
29,855
421
(23,032)
(4,751)
205,627
(7,383)
26,365
38,208
2018
21,749
-
21,749
3,376
13,609
11,336
Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
Changes in liabilities arising from financing activities during the period:
Years ended December 31,
Long-term debt, opening balance
Changes from financing cash flows
The effect of changes in foreign exchange rates
Amortization of deferred transaction costs
Other changes
Long-term debt, closing balance
2019
$
444,712 $
(812)
(14,156)
1,523
(780)
2018
460,010
(45,610)
29,083
2,037
(808)
$
430,487 $
444,712
NOTE 30. GUARANTEES, COMMITMENTS, AND CONTINGENCIES
At December 31, 2019, the Company had outstanding letters of credit of $46.3 million (December 31, 2018 - $78.2 million).
The Company is involved in litigation and claims associated with normal operations against which certain provisions have been made in
the financial statements. Management is of the opinion that any resulting settlement arising from the litigation would not materially
affect the financial position, results of operations or liquidity of the Company.
The Company has purchase obligations over the next three years as follows:
2020
2021
2022
$
129,721
1,795
973
NOTE 31. RELATED PARTIES
Enerflex transacts with certain related parties as a normal course of business. Related parties include Roska DBO, the Company’s 45
percent equity investment, the Company’s 50 percent controlling interest in Geogas consortium, and the Company’s 65 percent interest
in a joint venture in Brazil.
All transactions occurring with related parties were in the normal course of business operations under the same terms and conditions as
transactions with unrelated companies. The Company did not have any transactions with the joint venture in Brazil during the year ended
December 31, 2019. A summary of the financial statement impacts of all transactions with all related parties is as follows:
Years ended December 31,
Associate – Roska DBO
Revenue
Purchases
Accounts receivable
Joint Operation – Geogas
Revenue
Purchases
Accounts receivable
All related party transactions are settled in cash.
$
$
2019
2018
509 $
-
4
62 $
74
19
186
2
-
90
75
236
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
79
93
The remuneration of directors and other key management personnel was as follows:
Years ended December 31,
Short-term compensation
Post-employment compensation
Share-based payments
2019
$
4,747 $
413
7,857
2018
5,496
541
9,808
The remuneration of directors and key executives is determined by the Board of Directors having regard to the performance of
individuals and market trends.
NOTE 32. SEASONALITY
The oil and natural gas service sector in Canada and in some parts of the USA 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 Service and Rentals product line revenues
have been stable throughout the year. Rentals revenues are also impacted by both the Company’s and its customers’ capital investment
decisions. The USA and Rest of World segments are not significantly impacted by seasonal variations. Variations from these trends
usually occur when hydrocarbon energy fundamentals are either improving or deteriorating.
NOTE 33. SEGMENTED INFORMATION
Enerflex has identified three reportable operating segments as outlined below, each supported by the Corporate head office. Corporate
overheads are allocated to the operating segments based on revenue. In assessing its operating segments, the Company considered
economic characteristics, the nature of products and services provided, the nature of production processes, the type of customer for its
products and services, and distribution methods used. For each of the operating segments, the Chief Operating Decision Maker reviews
internal management reports on at least a quarterly basis. For the year ended December 31, 2019, the Company recognized $262.5
million of revenue from one customer in the USA and Canada segments, which represented 12.8 percent of total consolidated revenue
for the period. At December 31, 2019, amounts owing from the customer included in accounts receivable and contract assets was $68.0
million, which represented 12.0 percent of the total balance of accounts receivable and contract assets. For the year ended December
31, 2018, the Company had no individual customer which accounted for more than 10.0 percent of total revenue.
The following summary describes the operations of each of the Company’s reportable segments:
•
•
•
USA generates revenue from manufacturing natural gas compression and processing equipment, including custom and standard
compression packages and modular natural gas processing equipment and refrigeration systems, in addition to generating revenue
from mechanical services and parts, operations and maintenance solutions, and contract compression rentals;
Rest of World generates revenue from manufacturing (focusing on large-scale process equipment), after-market services, including
parts and components, as well as operations, maintenance, and overhaul services, and rentals of compression and processing
equipment. The Rest of World segment has been successful in securing build-own-operate-maintain and integrated turnkey projects;
and
Canada generates revenue from manufacturing both custom and standard natural gas compression, processing, and electric power
equipment, as well as providing after-market mechanical service, parts, and compression and power generation rentals.
The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting
policies.
80
94
Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
Years ended
December 31,
USA
Rest of World
Canada
Total
2019
2018
2019
2018
2019
2018
2019
2018
Segment revenue
$
1,243,760 $
1,004,676 $
354,680 $
425,435 $
518,042 $
319,223 $
2,116,482 $
1,749,334
Intersegment revenue
(48,091)
(24,137)
(7,846)
(2,603)
(15,123)
(19,321)
(71,060)
(46,061)
Revenue
$
1,195,669 $
980,539 $
346,834 $
422,832 $
502,919 $
299,902 $
2,045,422 $
1,703,273
Revenue – Engineered
Systems
947,451
783,114
76,813
169,410
424,239
229,646
1,448,503
1,182,170
Revenue – Service
172,130
145,358
154,951
139,015
Revenue – Rentals
76,088
52,067
115,070
114,407
67,505
11,175
60,725
394,586
345,098
9,531
202,333
176,005
Operating income
$
194,010 $
85,224 $
511 $
50,005 $
37,387 $
9,735 $
231,908 $
144,964
USA
Rest of World
Canada
Total
As at
2019
2018
2019
2018
2019
2018
2019
2018
Dec. 31,
Dec. 31,
Dec. 31,
Dec. 31,
Dec. 31,
Dec. 31,
Dec. 31,
Dec. 31,
Segment assets
$
1,001,935 $
990,819 $
601,512 $
676,676 $
552,457 $
490,135 $
2,155,904 $
2,157,630
Goodwill
Corporate
158,214
166,179
327,347
344,285
88,367
88,367
573,928
598,831
-
-
-
-
-
-
(295,326)
(273,602)
Total segment assets
$
1,160,149 $
1,156,998 $
928,859 $
1,020,961 $
640,824 $
578,502 $
2,434,506 $
2,482,859
NOTE 34. RECONCILIATION OF TRANSITIONAL ADJUSTMENTS
In preparing its consolidated financial statements as at and for the year ended December 31, 2019, the Company has adjusted the
opening retained earnings balance reported previously in the financial statements as at and for the year ended December 31, 2018 for
the adoption of IFRS 16. In addition, results reported under IFRS 16 differ from results that would have been reported under the previous
standard. A reconciliation of the Company’s consolidated statements of financial position, earnings, comprehensive income, and cash
flows under both the new and previous standards is set out in the following tables and accompanying notes.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
81
95
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ Canadian thousands)
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Contract assets
Inventories
Income taxes receivable
Derivative financial instruments
Other current assets
Total current assets
Property, plant and equipment
Rental equipment
Lease right-of-use assets
Deferred tax assets
Other assets
Intangible assets
Goodwill
Total assets
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities
Provisions
Income taxes payable
Deferred revenues
Current portion of lease liabilities
Deferred finance income
Derivative financial instruments
Total current liabilities
Long-term debt
Lease liabilities
Deferred tax liabilities
Other liabilities
Total liabilities
Shareholders’ equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity before non-controlling interest
Non-controlling interest
Total shareholders’ equity and non-controlling interest
As at December 31, 2019
Notes
Per IAS 17
Effect of
Transition
Per IFRS 16
$
96,255 $
384,021
183,890
269,385
6,626
152
12,223
952,552
108,551
642,095
-
47,869
26,410
22,058
573,928
- $
-
-
-
-
-
-
-
-
-
60,288
755
-
-
-
96,255
384,021
183,890
269,385
6,626
152
12,223
952,552
108,551
642,095
60,288
48,624
26,410
22,058
573,928
$
2,373,463
$
61,043 $
2,434,506
$
333,605 $
18,250
8,073
142,907
-
88
375
503,298
430,487
-
76,256
18,011
- $
-
1
-
14,172
-
-
14,173
-
52,828
-
(3,334)
333,605
18,250
8,074
142,907
14,172
88
375
517,471
430,487
52,828
76,256
14,677
$
1,028,052 $
63,667 $
1,091,719
$
375,524 $
655,107
231,467
81,779
1,343,877
1,534
1,345,411
- $
-
(2,624)
-
375,524
655,107
228,843
81,779
(2,624)
1,341,253
-
1,534
(2,624)
1,342,787
i
i
i
i
i
i
i
Total liabilities and shareholders’ equity
$
2,373,463
$
61,043 $
2,434,506
82
96
Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31, 2019
($ Canadian thousands, except per share amounts)
Notes
Per IAS 17
Revenue
Cost of goods sold
Gross margin
Selling and administrative expenses
Operating income
Gain on disposal of property, plant and equipment
Equity earnings from associate and joint venture
Earnings before finance costs and income taxes
Net finance costs
Earnings before income taxes
Income taxes
Net earnings
Net earnings attributable to:
Controlling interest
Non-controlling interest
Earnings per share – basic
Earnings per share – diluted
Weighted average number of shares – basic
Weighted average number of shares – diluted
$
2,045,422 $
1,617,410
428,012
198,582
229,430
302
1,692
231,424
15,992
215,432
63,084
i
i
i
i
Effect of
Transition
- $
(1,073)
1,073
(1,405)
2,478
-
-
2,478
2,586
(108)
112
$
$
$
$
$
152,348 $
(220) $
(220) $
-
(220) $
$
$
151,867
481
152,348
1.70
1.70
89,500,829
89,709,745
Per IFRS 16
2,045,422
1,616,337
429,085
197,177
231,908
302
1,692
233,902
18,578
215,324
63,196
152,128
151,647
481
152,128
1.70
1.70
89,500,829
89,709,745
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ Canadian thousands)
Notes
Per IAS 17
Effect of
Transition
Per IFRS 16
Year ended December 31, 2019
Net earnings
Other comprehensive income that may be reclassified to
profit or loss in subsequent periods:
Change in fair value of derivatives designated as cash
flow hedges, net of income tax
Gain on derivatives designated as cash flow hedges
transferred to net earnings in the current year, net of
income tax
Unrealized gain (loss) on translation of foreign
denominated debt
Unrealized (loss) gain on translation of financial
statements of foreign operations
Other comprehensive income (loss)
Total comprehensive income
Other comprehensive income (loss) attributable to:
Controlling interest
Non-controlling interest
$
152,348 $
(220) $
152,128
(815)
905
3,845
(65,044)
-
-
-
-
(61,109) $
- $
(815)
905
3,845
(65,044)
(61,109)
91,239 $
(220) $
91,019
(60,713)
(396)
(61,109)
- $
-
- $
(60,713)
(396)
(61,109)
$
$
$
$
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
83
97
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ Canadian thousands)
Notes
Per IAS 17
Effect of
Transition
Per IFRS 16
Year ended December 31, 2019
Operating Activities
Net earnings
Items not requiring cash and cash equivalents:
Depreciation and amortization
Equity earnings loss from associate and joint venture
Deferred income taxes
Share-based compensation expense (recovery)
Gain on sale of property, plant and equipment
Net change in non-cash working capital and other
Cash provided by operating activities
Investing Activities
Additions to:
Property, plant and equipment
Rental equipment
Proceeds on disposal of:
Property, plant and equipment
Rental equipment
Change in other assets
Cash used in investing activities
Financing Activities
Repayment of long-term debt
Lease liability principal repayment
Lease interest incurred
Dividends
Stock option exercises
Cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
denominated in foreign currencies
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
i
i
i
i
$
152,348 $
(220) $
152,128
73,904
(1,692)
31,476
7,749
(302)
263,483
(224,451)
12,655
-
-
-
-
12,435
2,702
86,559
(1,692)
31,476
7,749
(302)
275,918
(221,749)
$
39,032 $
15,137 $
54,169
$
(46,322) $
(217,068)
- $
-
(46,322)
(217,068)
9,205
4,454
26,911
-
-
-
9,205
4,454
26,911
$
(222,820) $
- $
(222,820)
$
(15,748) $
- $
-
-
(12,551)
(2,586)
(37,548)
7,453
-
-
(45,843) $
(15,137) $
(15,748)
(12,551)
(2,586)
(37,548)
7,453
(60,980)
(978) $
(230,609)
326,864
96,255 $
- $
-
-
- $
(978)
(230,609)
326,864
96,255
$
$
$
84
98
Enerflex Ltd. | 2019 Annual Report
Notes to the Consolidated Financial Statements | 2019 Annual Report
NOTES TO THE RECONCILIATIONS
i.
Leases
Under IFRS 16, contractual obligations under lease contracts are required to be recorded as lease liabilities, with a corresponding
asset representing the value provided to the Company for the right to use the assets included in the contract for the duration of
the lease term. Lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum
lease payments over the lease term at the commencement date of the lease. In addition to the lease right-of-use assets and lease
liabilities recorded at January 1, 2019, the Company has recorded an adjustment to opening retained earnings resulting from the
asymmetry between depreciation of the lease right-of-use assets and the repayment of the lease liabilities.
Adoption of IFRS 16 has resulted in changes to timing and classification of expenses arising from lease contracts. Under IAS 17,
lease expenses were recorded on a straight-line basis of the life of the lease. Under IFRS 16, the expense recorded relating to a
lease includes the depreciation of the lease right-of-use asset associated with the lease and an interest component for the implied
cost of borrowing the underlying asset, as well as variable lease payments made and any short-term and low-value leases which
were expensed as incurred. The depreciation of the lease right-of-use asset is recorded on a straight-line basis over the term of
the lease, however the amount of the interest component of the lease recorded in net finance costs is determined based on the
remaining lease liability and will therefore decrease over the term of the lease as the lease liability is paid.
Adoption of IFRS 16 has also resulted in changes to classification of cash flows, namely increased depreciation and amortization
as a result of the depreciation of the lease right-of-use asset and the financing cash flow resulting from repayment of lease
liabilities.
The Company elected to apply IFRS 16 using the modified retrospective approach, and recognized the cumulative effect of
initially applying the Standard as an adjustment to the opening balance of retained earnings. The resulting impact of adoption of
the new standard recorded as an adjustment to opening retained earnings on January 1, 2019 was:
Lease right-of-use assets
Deferred tax assets
Lease liabilities
Other liabilities
Retained earnings adjustment
$
$
31,985
672
(39,438)
4,352
2,429
The retained earnings adjustment is the result of asymmetry between depreciation of the lease right-of-use assets and the
repayment of the lease liabilities. The Company adopted IFRS 16 using the modified retrospective approach, and generally
elected to depreciate lease right-of-use assets from the commencement of the lease. The retained earnings adjustment reflects
the impact on the Company’s financial position at January 1, 2019 had the new standard been applied in prior periods.
NOTE 35. SUBSEQUENT EVENTS
Subsequent to December 31, 2019, Enerflex declared a quarterly dividend of $0.115 per share, payable on April 2, 2020, to shareholders
of record on March 12, 2020.
Notes to the Consolidated Financial Statements | 2019 Annual Report
2019 Annual Report | Notes to the Consolidated Financial Statements
85
99
QUARTERLY
AND SHARE DATA
Quarterly Data
(unaudited)
($ millions, except per share data and percentages)
Revenue
Operating income
Earnings before finance costs and income tax
Net earnings - continuing operations
2019
2018
Q4
Q3
Q2
Q1
Q4
Q3
Q2
474.4
544.3
541.9
484.9
466.8
445.8
404.8
48.4
48.8
31.4
87.4
87.7
63.1
63.2
64.0
40.6
32.9
33.3
17.0
47.6
48.2
32.5
49.6
55.6
37.7
28.3
28.5
20.4
Q1
385.8
19.5
19.3
10.9
Net earnings - discontinued operations
-
-
-
-
-
-
-
-
Earnings per share - continuing operations
0.35
0.71
0.45
0.19
0.36
0.43
0.23
0.12
Earnings per share - discontinued operations
-
-
-
-
-
-
-
-
Depreciation and amortization
Cash from operations
Capital expenditures, net
Property, plant and equipment
Rental equipment
Dividends (declared)
Dividends per share
21.4
(82.3)
8.1
75.2
10.3
21.4
31.7
1.2
54.9
9.4
21.9
(17.5)
21.9
27.0
122.3
108.4
20.5
30.7
12.8
59.7
9.4
14.9
22.8
9.4
10.3
51.0
9.3
(15.0)
19.1
8.4
21.4
78.6
(3.0)
17.3
8.4
21.0
25.1
1.8
18.6
8.4
0.115
0.105
0.105
0.105
0.105
0.095
0.095
0.095
Pre-tax earnings (continuing as % of revenue)
9.1%
15.3%
11.0%
6.0%
9.4%
11.4%
5.8%
3.7%
Share Data
(unaudited)
Trading price range of shares ($)
High
Low
Close
Trading volume (millions)
Shares (millions)
2019
2018
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
12.85
10.05
12.23
17.24
11.47
11.62
20.29
15.71
17.05
20.38
15.61
19.09
18.72
15.11
15.98
16.79
13.56
16.53
16.85
13.55
14.14
16.83
13.74
15.36
14.306
10.934
12.756
11.186
13.245
10.008
13.184
16.757
Outstanding at the end of the period
89.679
89.659
89.557
89.439
89.084
88.825
Weighted averages - basic
89.668
89.631
89.498
89.200
88.969
88.707
88.606
88.606
88.606
88.549
100
Quarterly and Share Data | 2019 Annual Report
ENVIRONMENTAL,
SOCIAL, AND GOVERNANCE
PERFORMANCE SUMMARY 2019
APPENDIX 1
ENVIRONMENTAL
Environment
Environment
Environment
Environmental Assessment Committee (to identify ways to enhance environmental performance)
Environmental Assessment Committee (to identify ways to enhance environmental performance)
Board Oversight of Climate-Related Risks and Opportunities
Environmental Assessment Committee (to identify ways to enhance environmental performance)
Board Oversight of Climate-Related Risks and Opportunities
Significant Environmental Fines or Non-Compliance
Board Oversight of Climate-Related Risks and Opportunities
Significant Environmental Fines or Non-Compliance
Automation of Manufacturing Processes Resulting in Reduced Consumables
Significant Environmental Fines or Non-Compliance
Automation of Manufacturing Processes Resulting in Reduced Consumables
Operated Over 2.5 bcf/d of Natural Gas Globally with Zero Hazardous Spills
Automation of Manufacturing Processes Resulting in Reduced Consumables
Operated Over 2.5 bcf/d of Natural Gas Globally with Zero Hazardous Spills
Environmental Management System ISO 14001 Certified / Attested to ISO 14001 in the Middle East and Australia
Operated Over 2.5 bcf/d of Natural Gas Globally with Zero Hazardous Spills
Environmental Management System ISO 14001 Certified / Attested to ISO 14001 in the Middle East and Australia
Recycled Water Program for Pressure Testing Vessels
Environmental Management System ISO 14001 Certified / Attested to ISO 14001 in the Middle East and Australia
Recycled Water Program for Pressure Testing Vessels
Low VOC Paint / VOC Free Thinner at Canada and USA Manufacturing Facilities
Recycled Water Program for Pressure Testing Vessels
Low VOC Paint / VOC Free Thinner at Canada and USA Manufacturing Facilities
Development of Enterprise Asset Management Methodologies to Improve Fleet Performance and Functional Efficiency
Low VOC Paint / VOC Free Thinner at Canada and USA Manufacturing Facilities
Development of Enterprise Asset Management Methodologies to Improve Fleet Performance and Functional Efficiency
Health, Safety, and Environmental Policy in each Region (extends to contractors)
Development of Enterprise Asset Management Methodologies to Improve Fleet Performance and Functional Efficiency
Health, Safety, and Environmental Policy in each Region (extends to contractors)
Health, Safety, and Environmental Policy in each Region (extends to contractors)
SOCIAL
Social
Social
Social
Total Recordable Injury Rate (per 200,000 exposure hours on a target of 0.62)
Total Recordable Injury Rate (per 200,000 exposure hours on a target of 0.62)
Lost Time Incidents Rate (per 200,000 exposure hours on a target of 0.00)
Total Recordable Injury Rate (per 200,000 exposure hours on a target of 0.62)
Lost Time Incidents Rate (per 200,000 exposure hours on a target of 0.00)
Near Miss and Observation Reporting to Improve Safety Program
Lost Time Incidents Rate (per 200,000 exposure hours on a target of 0.00)
Near Miss and Observation Reporting to Improve Safety Program
Motor Vehicle Incident Rate (estimated 18 million kilometers driven)
Near Miss and Observation Reporting to Improve Safety Program
Motor Vehicle Incident Rate (estimated 18 million kilometers driven)
Charitable Organizations Supported (by direct financial contribution or employee volunteer hours)
Motor Vehicle Incident Rate (estimated 18 million kilometers driven)
Charitable Organizations Supported (by direct financial contribution or employee volunteer hours)
Political Contributions and Direct Lobbying
Charitable Organizations Supported (by direct financial contribution or employee volunteer hours)
Political Contributions and Direct Lobbying
Total Employees
Political Contributions and Direct Lobbying
Total Employees
Global Employee Training Hours
Total Employees
Global Employee Training Hours
Flexible Work Arrangements
Global Employee Training Hours
Flexible Work Arrangements
Employees Who Completed Performance Reviews
Flexible Work Arrangements
Employees Who Completed Performance Reviews
Board and Executive Diversity Policy with Quantifiable Target
Employees Who Completed Performance Reviews
Board and Executive Diversity Policy with Quantifiable Target
Global Respectful Workplace Policy and Training
Board and Executive Diversity Policy with Quantifiable Target
Global Respectful Workplace Policy and Training
Global Respectful Workplace Policy and Training
Governance
Governance
GOVERNANCE
Governance
Independent Directors
Independent Directors
Women on Board
Independent Directors
Women on Board
Average Board Meeting Attendance
Women on Board
Average Board Meeting Attendance
Director Term Limits and Succession Planning
Average Board Meeting Attendance
Director Term Limits and Succession Planning
Director Skills Matrix
Director Term Limits and Succession Planning
Director Skills Matrix
Share Ownership Guidelines for Directors and Executives
Director Skills Matrix
Share Ownership Guidelines for Directors and Executives
“Say on Pay” Advisory Vote
Share Ownership Guidelines for Directors and Executives
“Say on Pay” Advisory Vote
Business Code of Conduct and Training
“Say on Pay” Advisory Vote
Business Code of Conduct and Training
Business Code of Conduct and Training
2019 Annual Report | Appendix 1: Environmental, Social, and Governance Performance Summary 2019
Yes
Yes
Yes
Yes
Yes
0
Yes
0
Yes
0
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
0.55
0.55
0.09
0.55
0.09
Yes
0.09
Yes
0.28
Yes
0.28
40
0.28
40
0
40
0
2,500
0
2,500
5,102
2,500
5,102
Yes
5,102
Yes
98%
Yes
98%
Yes
98%
Yes
Yes
Yes
Yes
Yes
90%
90%
20%
90%
20%
100%
20%
100%
Yes
100%
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
101
DIRECTORS
AND EXECUTIVES
Enerflex’s Executive Management Team:
Left to Right – Andrew Jack, Greg Stewart, David Izett, Marc Rossiter,
Sanjay Bishnoi, Phil Pyle, and Patricia Martinez.
BOARD OF DIRECTORS
EXECUTIVES
ROBERT S. BOSWELL 1, 4
Director
Denver, CO
MARC E. ROSSITER
Director
SANJAY BISHNOI
Senior Vice President, Chief Financial Officer
President and Chief Executive Officer
Calgary, AB
MAUREEN CORMIER JACKSON 6
Director
Calgary, AB
W. BYRON DUNN 2, 4
Director
Dallas, TX
H. STANLEY MARSHALL 2, 3
Director
Paradise, NL
KEVIN J. REINHART 5
Director
Calgary, AB
Calgary, AB
STEPHEN J. SAVIDANT 7
Chairman
Calgary, AB
JUAN CARLOS VILLEGAS 4
Director
Vitacura, Chile
MICHAEL A. WEILL 6
Director
Houston, TX
HELEN J. WESLEY 2, 6
Director
Calgary, AB
ANDREW JACK
President, Canada
Calgary, AB
PATRICIA MARTINEZ
President, Latin America
Houston, TX
PHIL PYLE
President, International
Abu Dhabi, UAE
GREG STEWART
President, United States of America
Houston, TX
DAVID IZETT
Senior Vice President, General Counsel
Calgary, AB
1. Chair of the Nominating and
3. Chair of the Human Resources and
5. Chair of the Audit Committee
Corporate Governance Committee
Compensation Committee
2. Member of the Nominating and
Corporate Governance Committee
4. Member of the Human Resources
and Compensation Committee
6. Member of the Audit Committee
7. Chairman of the Board
102
Directors and Executives | 2019 Annual Report
SHAREHOLDERS’
INFORMATION
COMMON SHARES
AUDITORS
The common shares of Enerflex are listed and traded on the Toronto
Stock Exchange under the symbol “EFX”.
Ernst & Young | Calgary, AB, Canada
TRANSFER AGENT, REGISTRAR, AND
DIVIDEND DISBURSING AGENT
AST Trust Company (Canada)
Calgary, AB, Canada and Toronto, ON, Canada
For shareholder enquiries:
AST Trust Company (Canada)
2001 Boul. Robert-Bourassa, Suite 1600
Montreal, QC, H3A 2A6, Canada
Mail:
PO Box 700
Station B
Montreal, QC, H3B 3K3, Canada
Tel: +1.800.387.0825 | +1.416.682.3860
Fax: +1.888.249.6189
Email: inquiries@astfinancial.com
Web: astfinancial.com/ca-en
All questions about accounts, share certificates, or dividend cheques
should be directed to the Transfer Agent, Registrar, and Dividend
Disbursing Agent.
BANKERS
The Toronto Dominion Bank | Calgary, AB, Canada
The Bank of Nova Scotia | Toronto, ON, Canada
INVESTOR RELATIONS
Enerflex Ltd.
Suite 904, 1331 Macleod Trail SE
Calgary, AB, T2G 0K3, Canada
Tel: +1.403.387.6377 | Email: ir@enerflex.com
Requests for Enerflex’s Annual Report, Quarterly Reports, and other
corporate communications should be directed to ir@enerflex.com.
ANNUAL GENERAL MEETING INFORMATION
Shareholders of Enerflex are invited to attend the Annual General and
Special Meeting which will be held on May 8, 2020, at 10:30 a.m. MDT.
The meeting will be held at the Sheraton Suites Eau Claire, 225 Barclay
Parade SW. Those unable to attend are encouraged to sign and return
the proxy form mailed to them.
2019 Annual Report | Shareholders’ Information
103
2019 ANNUAL REPORT
HEAD OFFICE
Suite 904
1331 Macleod Trail SE
Calgary, Alberta, Canada
T2G 0K3
+ 1 403 387 6377
enerflex.com
ir@enerflex.com