CALGARY, ALBERTA--(Marketwire - June 8, 2011) - Enerflex Ltd. (TSX:EFX) ("Enerflex" or the "Company"), a leading supplier of products and services to the global energy industry, is pleased to provide an operational update and to report its unaudited financial and operating results for the three months ended March 31, 2011, which have been prepared using International Financial Reporting Standards ("IFRS").
Enerflex became an independently operated and publicly listed company on June 1, 2011 as a result of its spin-off from Toromont Industries Ltd. ("Toromont"). Toromont had previously released its consolidated financial results for the period ended March 31, 2011, which included the financial results of Enerflex as a business segment of Toromont. Enerflex's shares began trading on the Toronto Stock Exchange (TSX) on June 3, 2011.
Financial Highlights
Three Months Ended March 31
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$ millions, except per unit
amounts and percentages
(unaudited) 2011 2010 $ change
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Revenue $ 326.4 $ 212.4 $ 114.0
Gross margin $ 56.3 $ 29.5 $ 26.8
Gross margin% 17.2 13.9 -
Operating margin(1) $ 14.0 $ (2.1) $ 16.1
Operating margin%(1) 4.3 (1.0) -
EBITDA $ 25.6 25.6(2) $ -
EBITDA% 7.8 12.1 -
Net earnings $ 9.9 $ 10.9 $ (1.0)
(1) Operating margin provides the net margin contributions made from the
Company's core businesses after considering all selling, general and
administrative expenses. Operating margin is a non-GAAP measure that
does not have a standardized meaning prescribed by GAAP and therefore
is unlikely to be comparable to similar measures presented by other
issuers.
(2) Includes gain on sale of $18.6 million related to Toromont's acquisition
of Enerflex Systems Income Fund ("ESIF").
Quarterly Highlights
In the three months ended March 31, 2011, Enerflex:
- Generated revenue of $326.4 million compared to $212.4 million in the first quarter of 2010. The increase of $114.0 million or 53.7% was a result of increased revenues in all three of the Company's business segments and resulted from strong industry demand for Enerflex's products and services;
- Achieved a gross margin of $56.3 million or 17.2% compared to $29.5 million or 13.9% during the same period last year, an increase of $26.8 million thanks to improved business efficiencies;
- Had an operating margin of $14.0 million or 4.2%, a strong turnaround from negative $2.1 million or (1.0)% in the first quarter of 2010;
- Generated EBITDA of $25.6 million, consistent with the first quarter of 2010. Included in the first quarter of 2010 was a gain of $18.6 million related to Toromont's acquisition of Enerflex Systems Income Fund ("ESIF");
- Increased its backlog from year-end 2010 by $25.9 million or 3.9% to $672.1 million at March 31, 2011, 60.5% higher than at March 31, 2010; and
- Exited the first quarter with net debt of $178.1 million and cash on hand of $28.6 million.
Subsequent to the end of the first quarter of 2011, Enerflex:
- Secured access to credit facilities totalling $375 million with a syndicate of Canadian chartered banks, leaving available credit capacity of nearly $150 million;
- Effective June 1, 2011 repaid indebtedness to Toromont totalling $173.3 million incurred as a result of Toromont's acquisition of ESIF;
- Entered negotiations to raise up to $100 million in unsecured notes by way of private placement. This private placement financing is expected to close by the end of June;
- Conditionally sold our 328,000 square foot manufacturing facility at 4700, 47th Street SE, Calgary, Alberta; and
- Declared the Company's first dividend, of $0.06 per share, payable on July 1, 2011 to shareholders of record on June 10, 2011.
Operational Update
Business Operations
Enerflex used the period following the acquisition with Toromont and the combination of the two companies' natural gas compression, processing and service businesses in January 2010 to focus on opportunities to realize cost savings, integration synergies and streamlining of its business operations, as well as to strengthen the combined business to pursue international growth opportunities.
Considerable progress has been made on elimination of duplicate departments and functions and implementation of other integration opportunities. This has generated annualized savings estimated at $30 million, with positive impacts partially realized in the first-quarter 2011 income statement. Work is continuing to realize the full benefits expected from the creation of a much larger worldwide compression, processing and service business with common corporate functions.
Improvements to Enerflex's field operations centered on rationalizing overlapping or less efficient facilities, eliminating duplicate inventories and integrating manufacturing processes worldwide to take advantage of best capabilities, processes and cost structures in individual facilities. The sale of these facilities generated cash flow of $14.0 million and inventory levels were reduced by $105.0 million. Despite the rationalization of facilities, Enerflex continues to expand its operations with a planned expansion of our Houston manufacturing facilities in 2011 and by opening a new parts distribution network in Leduc, Alberta.
Enerflex's integration program incurred approximately $8 million in costs, which have been recognized in income throughout 2010. Further benefits include freeing up of cash, strengthening the balance sheet and enhancing future return on invested capital. Enerflex will continue to seek further operational efficiencies.
Enerflex also disposed of two non-core businesses for combined proceeds of $10.4 million. The dispositions reduced capital employed, improved operating efficiencies and have helped to focus business operations on core areas.
"I am pleased with the momentum generated during the first quarter, which I anticipate will continue to build as Enerflex goes forward," commented Blair Goertzen, President and CEO of Enerflex. "As an independent company, we will be able to take advantage of growth opportunities that might not have been available to us previously. Given our diversified revenue stream geographically and by product line, Enerflex is in an excellent position to continue to expand."
Financial Results
Enerflex's 53.7% period-over-period increase in revenue to $326.4 million in the first quarter of 2011 was a result of increased activity supported by a strengthened backlog in all geographical areas. Canada and Northern U.S. revenues increased by $65.6 million or 85.6% over the same period last year. Southern U.S. and South America revenues saw an increase of $15.6 million. The International segment increased revenues by $32.7 million to $94.8 million from $62.1 million in 2010.
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) from continuing operations also grew to $25.6 million in the first quarter of 2011, an increase of 265.7% when compared to $7.0 million in the prior year's period, after removing the $18.6 million gain on units of ESIF held by Toromont at time of acquisition.
Gross margin of $56.3 million represented an increase of 90.8% over the first quarter of 2010 as a result of improved margins on contracts awarded, better then expected performance on certain projects and the recognition of revenue associated with approved change orders. In addition, Service segment revenues were up by 40.0% due to improved parts volumes and labour utilization, also contributing to the gross margin increase.
Backlog at March 31, 2011 increased to $672.1 million compared to $418.8 million at March 31, 2010, a 60.5% increase over the comparable quarter's end. As compared to December 31, 2010, backlog at March 31, 2011 increased by $25.9 million or 3.9%. These increases are a result of increased activity in unconventional natural gas basins, liquids-rich gas basins in the United States and various liquefied natural gas to coal seam gas projects in Australia.
During and subsequent to the end of the quarter, Enerflex also took measures that have substantially strengthened its balance sheet. The new $375 million credit facilities are unsecured and have a term of four years, enabling Enerflex to allocate capital in a way best-suited to lever its pursuit of growth opportunities around the world. In addition, Enerflex expects to successfully close its current negotiations for $100 million in senior, unsecured notes before the end of the second quarter. These steps complement Enerflex's growing revenue, greater operating efficiency and improved margins, resulting in substantial strengthening of the Company's overall financial position.
"The new credit facilities strengthen our balance sheet while our TSX listing provides direct access to the capital markets to support our growth." Mr. Goertzen stated. "We are in a strong financial position as we look into the future as an independent company. This financial strength is reflected in our Board of Directors decision to declare the Company's first dividend, and our intention is to maintain a prudent quarterly dividend going forward."
A full set of Enerflex's MD&A and Consolidated Financial Statements will be available on the Enerflex website at www.enerflex.com or on SEDAR at www.sedar.com.
About Enerflex
Enerflex Ltd. is the single source supplier of products and services to the global oil and gas production industry. Enerflex provides natural gas compression and oil and gas processing equipment for sale or lease, refrigeration systems and power generation equipment and a comprehensive package of field maintenance and contracting capabilities. Through our ability to provide these products and services in an integrated manner, or as standalone offerings, Enerflex offers its customers a unique value proposition.
Headquartered in Calgary, Canada, Enerflex has approximately 2,800 employees. Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the Netherlands, the United Kingdom, Germany, Pakistan, the United Arab Emirates, Egypt, Oman and Indonesia. Enerflex's shares trade on the Toronto Stock Exchange under the symbol "EFX". For more information about Enerflex, go to www.enerflex.com.
Advisory Regarding Forward-Looking Statements
To provide Enerflex shareholders and potential investors with information regarding Enerflex, including management's assessment of future plans, Enerflex has included in this news release certain statements and information that are forward-looking statements or information within the meaning of applicable securities legislation, and which are collectively referred to in this advisory as "forward-looking statements." Information included in this news release that is not a statement of historical fact is forward-looking information. When used in this document, words such as "plans", "expects", "will", "may" and similar expressions are intended to identify statements containing forward-looking information. In developing the forward-looking information in this news release, we have made certain assumptions with respect to general economic and industry growth rates, commodity prices, currency exchange and interest rates, competitive intensity and shareholder, regulatory and TSX approvals. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the future circumstances, outcomes or results anticipated in or implied by such forward-looking statements will occur or that plans, intentions or expectations upon which the forward-looking statements are based will occur.
Forward-looking information involves known and unknown risks and uncertainties and other factors, which may cause or contribute to Enerflex achieving actual results that are materially different from any future results, performance or achievements expressed or implied by such forward-looking information. Such risks and uncertainties include, among other things, impact of general economic conditions; industry conditions, including the adoption of new environmental, taxation and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations, including future dividends to shareholders of the Company; increased competition; the lack of availability of qualified personnel or management; labour unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Company, the reliability of Toromont' historical financial information as an indicator of Enerflex's historical or future results; potential tax liabilities if the requirements of the tax-deferred spinoff rules are not met; the effect of Enerflex's rights plan on any potential change of control transaction; obtaining financing; and other factors, many of which are beyond its control.
These factors are not exhaustive. The reader is cautioned that these factors and risks are difficult to predict and that the assumptions used in the preparation of such information, although considered reasonably accurate at the time of preparation, may prove to be incorrect. Readers are cautioned that the actual results achieved will vary from the information provided in this press release and that such variations may be material. Consequently, Enerflex does not represent that actual results achieved will be the same in whole or in part as those set out in the forward-looking information.
Furthermore, the statements containing forward-looking information that are included in this news release are made as of the date of this news release, and Enerflex does not undertake any obligation, except as required by applicable securities legislation, to update publicly or to revise any of the included forward-looking information, whether as a result of new information, future events or otherwise. The forward-looking information contained in this news release is expressly qualified by this cautionary statement.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated carve-out financial statements and the accompanying notes to the interim consolidated carve-out financial statements for the three months ended March 31, 2011 and 2010 and in conjunction with Toromont Industries Ltd. ("Toromont") Management Information Circular Relating to an Arrangement involving Toromont Industries Ltd., its shareholders, Enerflex Ltd. and 7787014 Canada Inc. ("Information Circular" or "Arrangement") dated April 11, 2011. The results reported herein have been prepared in accordance with International Financial Reporting Standards ("IFRS") and are presented in Canadian dollars unless otherwise stated. In accordance with the standard related to the first time adoption of IFRS, our transition date to IFRS was January 1, 2010 and therefore the comparative information for 2010 has been prepared in accordance with our IFRS accounting policies.
The MD&A has been prepared taking into consideration information that is available up to June 8, 2011 and focuses on key statistics from the consolidated carve-out financial statements, and pertains to known risks and uncertainties relating to the oil and gas service sector. This discussion should not be considered all-inclusive, as it excludes changes that may occur in general economic, political and environmental conditions. Additionally, other elements may or may not occur which could affect industry conditions and/or Enerflex Ltd. ("Enerflex" or "the Company") in the future. Additional information relating to the Company, including the Information Circular, is available on SEDAR at www.sedar.com.
THE COMPANY
Enerflex Ltd. was formed after the acquisition of Enerflex Systems Income Fund ("ESIF") by Toromont Industries Ltd. to integrate Enerflex's products and services with Toromont's existing Natural Gas Compression and Process business. In January 2010, the operations of Toromont Energy Systems Inc., a subsidiary of Toromont Industries Ltd., were combined with the operations of ESIF to form Enerflex Ltd. Enerflex began independent operations on June 1, 2011 pursuant to the Arrangement with Toromont which received shareholder approval, satisfactory tax rulings and opinions from the Canada Revenue Agency and approval by the Ontario Superior Court of Justice (Commercial List). The approved Arrangement created two independent public companies - Toromont Industries Ltd. and Enerflex Ltd.
Enerflex Ltd. is the single-source supplier for natural gas compression, oil and gas processing, refrigeration systems and power generation equipment - plus in-house engineering and mechanical services expertise. The Company's broad in-house resources give us the capability to engineer, design, manufacture, construct, commission and service hydrocarbon handling systems. Enerflex's expertise encompasses field production facilities, compression and natural gas processing plants, CO2 processing plants, refrigeration systems and power generators serving the natural gas production industry.
Headquartered in Calgary, Canada, Enerflex has approximately 2,800 employees worldwide. Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the Netherlands, the United Kingdom, Germany, Pakistan, the United Arab Emirates, Egypt, Oman and Indonesia.
OVERVIEW
The oil and natural gas service sector in Canada has a distinct seasonal trend in activity levels which results from well-site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex's Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while the Service and Rentals product line revenues are stable throughout the year. Rentals revenues are also impacted by both the Company's and its customers capital investment decisions. The international markets are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating.
During the latter half of 2010, Enerflex experienced increased market activity in all regions. In Canada and the United States ("U.S."), producers were beginning to increase capital spending, as the market recovery progressed. Internationally, the Company enjoyed improved levels of activity as Enerflex was successful in winning large projects in AustralAsia, the Middle East and North Africa ("MENA") regions, leading to improved backlog at December 31, 2010. Also during the last quarter of 2010, Enerflex completed construction of the compression facility in Oman, recording revenue on that project in the same quarter. During the first quarter of 2011, Enerflex continued to see improved bookings in all regions, including successful bids on large projects in the U.S. and in MENA. Service activity levels increased in all regions, with the largest increase coming in Canada and the U.S. North American rental utilization levels were challenging throughout 2010, with no meaningful recovery expected in the next twelve months in this segment of the market.
FINANCIAL HIGHLIGHTS
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(unaudited)(thousands)
Three months ended March 31, 2011 2010(1)
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Revenue
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Canada & Northern U.S. $ 142,298 $ 76,649
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Southern U.S. 89,339 73,657
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International 94,768 62,107
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Total revenue 326,405 212,413
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Gross margin 56,264 29,529
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Selling, general & administrative expenses 42,511 31,844
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Operating income (loss) 13,753 (2,315)
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Gain on available for sale assets - (18,627)
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(Gain) loss on sale of assets (742) 750
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Equity earnings (201) (217)
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Earnings before interest & taxes 14,696 15,779
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Finance costs and income 2,337 3,055
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Income before taxes 12,359 12,724
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Income tax expense 3,739 576
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Gain on sale of discontinued operations 1,430 -
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Losses from discontinued operations (164) (1,283)
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Net earnings $ 9,886 $ 10,865
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Key ratios:
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Gross margin as a % of revenues 17.2% 13.9%
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Selling, general & administrative expenses as
a % of revenues 13.0% 15.0%
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Operating income (loss) as a % of revenues 4.2% (1.1)%
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Income taxes as a % of earnings before income
taxes 30.3% 4.5%
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(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
NON-GAAP MEASURES
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(unaudited)(thousands)
Three months ended March 31, 2011 2010(1)
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Operating margin
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Gross margin $ 56,264 $ 29,529
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Selling, general & administrative expenses 42,511 31,844
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Equity earnings (201) (217)
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Operating margin $ 13,954 $ (2,098)
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Operating margin percent 4.3% (1.0)%
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EBITDA
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Earnings before interest & income taxes $ 14,696 $ 15,779
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Depreciation and amortization 10,879 9,837
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EBITDA $ 25,575 $ 25,616
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EBITDA(2) - normalized $ 25,575 $ 6,989
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Cash flow
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Cash flow from operations $ 17,240 $ 29,955
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Non-cash working capital and other 429 27,264
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Cash flow $ 16,811 $ 2,691
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(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
(2) EBITDA is normalized for the net impact of the gain on available for
sale assets of $18,627. Prior to the acquisition of Enerflex Systems
Income Fund ("ESIF"), Toromont owned 3,902,100 ESIF Trust Units. On
acquisition of ESIF, Toromont recognized a pre-tax gain of $18,627 on
this investment which was recorded at the Enerflex Ltd level.
The success of the Company and business unit strategies is measured using a number of key performance indicators, which are outlined below. These measures are also used by management in its assessment of relative investments in operations. These key performance indicators are not measurements in accordance with GAAP. It is possible that these measures will not be comparable to similar measures prescribed by other companies. They should not be considered as an alternative to net income or any other measure of performance under GAAP.
Operating margin
Operating margin provides the net margin contributions made from the Company's core businesses after considering all SG&A expenses.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
EBITDA provides the results generated by the Company's primary business activities prior to consideration of how those activities are financed, assets are amortized or how the results are taxed in various jurisdictions.
Cash flow
Cash flow provides the amount of cash generated by the business (net of non-cash working capital) and measures the Company's ability to finance capital programs and meet financial obligation.
Cash flow may fluctuate on a quarterly basis due to seasonal cash flows, capital expenditures incurred, income taxes paid, and interest costs on outstanding debt.
FOR THE THREE MONTHS ENDED MARCH 31, 2011
During the first quarter of 2011, the Company generated $326.4 million in revenue, as compared to $212.4 million in the first quarter of 2010. The increase of $114.0 million, or 53.7%, was a result of increased revenues in Canada and Northern U.S., Southern U.S. and South America, and the International segments. As compared to the three month period ended March 31, 2010:
- Canada and Northern U.S. revenues increased by $65.7 million as a result of increased Manufacturing volumes, and increased Service activity;
- Southern U.S. and South America revenues increased by $15.6 million, a result of strong bookings in 2010 and increased activity levels in 2011; and
- International revenues increased by $32.7 million as a result of increased backlog exiting 2010 in all regions and rental income in MENA.
The first quarter of 2011 includes three full months of activity, whereas the first quarter of 2010 includes three full months of activity for the legacy Toromont Compression business and two months and 9 days activity of the legacy ESIF business.
Gross margin for the three months ended March 31, 2011 was $56.3 million or 17.2% of revenue as compared to $29.5 million or 13.9% of revenue for the three months ended March 31, 2010, an increase of $26.8 million. Contributing to the gross margin increase over the first quarter of 2010 was strong gross margin performance in Southern U.S. and South America, as a result of higher awarded margins; improved gross margin performance in the International business segment, as a result of revenue recognized on completion of past projects and higher margins in the Canada and Northern U.S. segment as a result of higher revenues.
Selling, general and administrative ("SG&A") expenses were $42.5 million or 13.0% of revenue during the three months ended March 31, 2011, compared to $31.8 million or 15.0% of revenue in the same period of 2010. The $10.7 million increase in SG&A expenses is primarily attributable to a full quarter of costs in 2011, as 2010 included SG&A costs for the legacy Enerflex business for only two months and 9 days.
Operating margin assists the reader in understanding the net margin contributions made from the Company's core businesses after considering all SG&A expenses. During 2011, Enerflex produced an operating margin of $14.0 million or 4.3% of revenue as compared to negative operating margin $(2.1) million or (1.0)% of revenue in 2010. The increase in operating margin in 2011 over 2010 was a result of the same factors contributing to the increased gross margin partially offset by the increased SG&A expenses. In addition, 2010 operating margin was adjusted to remove the $18.6 million gain realized on available for sale assets.
Finance costs totaled $2.3 million for the three months ended March 31, 2011, compared with $3.1 million in the same period of 2010, a decrease of $0.8 million. Finance costs in 2011 were lower than those in 2010 primarily as a result of lower interest expense, which is a direct result of lower average borrowings.
Income tax expense totaled $3.7 million for the three months ended March 31, 2011 compared with an expense of $0.6 million in the same period of 2010. The period-over-period increase in income taxes in the first quarter of 2011 compared to 2010 was primarily due to an increase in earnings before taxes from operations. 2010 earnings included an $18.6 million gain realized on available for sale assets, which was taxed at a lower effective rate.
During the first quarter of 2011, Enerflex generated net earnings from continuing operations of $8.6 million as compared to $12.1 million in the same period of 2010, which included the $17.2 million gain realized on the ESIF units.
Loss on discontinued operations reflect the results of Enerflex Environmental Pty Ltd. ("Environmental"), including the gain on the sale of Environmental of $1.4 million, net of tax, in the first quarter of 2011, and Enerflex Syntech. In the first quarter of 2010, Enerflex reported a gain of $18.6 million ($17.2 million net of tax) related to the sale of ESIF units purchased prior to the acquisition. These items, in addition to the above, contributed to net earnings of $9.9 million and $10.9 million in the first quarter of 2011 and 2010 respectively.
QUARTERLY SUMMARY
(unaudited)(thousands)
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Quarter ended Revenue Net earnings
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March 31, 2011 $ 326,405 $ 9,886
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December 31, 2010 362,615 9,454
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September 30, 2010 277,834 3,216
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June 30, 2010 254,022 2,765
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March 31, 2010(1) 212,413 10,865
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December 31, 2009 167,096 15,450
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September 30, 2009 150,179 10,120
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June 30, 2009 224,945 16,595
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(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
SEGMENTED RESULTS
Enerflex operates three business segments: Canada and Northern United States, Southern United States and South America, and International, which operate as follows:
1. Canada and Northern U.S. is comprised of three divisions:
- Manufacturing, with business units operating in Canada and the Northern U.S., focuses on Compression and Power which provides custom and standard compression packages for reciprocating and screw compressor applications, Production and Processing which designs, manufactures, constructs and installs modular natural gas processing equipment and Retrofit operating from plants located in Calgary, Alberta and Casper, Wyoming;
- Service provides mechanical services and parts to the oil & gas industries, focusing in Canada and Northern U.S.; and
- Rentals which provides compression, and natural gas processing equipment rentals in Canada and Northern U.S.
2. Southern U.S. and South America is comprised of three divisions:
- Compression and Power provides custom and standard compression packages for reciprocating and screw compressor applications from facilities located in Houston, Texas;
- Production and Processing designs, manufactures, constructs and installs modular natural gas processing equipment; and
- Service which provides mechanical services and products to the oil & gas industries focusing on Southern and Eastern U.S. as well as South America.
3. International is comprised of four divisions:
- AustralAsia division provides process construction for gas and power facilities, compression package assembly and mechanical service for the oil & gas industry. This division wholly owns EFX Global KL Sdn Bhd, which provides engineering and estimating services to the AustralAsia operations;
- Europe division provides combined heat and power ("CHP") generator products and mechanical service to the oil & gas industry and the CHP product line;
- Middle East and North Africa division provides engineering, procurement and construction services as well as operating and maintenance services for gas compression and processing facilities in the region; and
- Production & Processing division designs, manufactures, constructs and installs modular natural gas processing equipment, and waste gas systems, for the natural gas, heavy oil Steam Assisted Gravity Drainage ("SAGD") and heavy mining segments of the market. In addition, the division has a 50% joint venture interest in PDIL in Pakistan.
Each region has three main product lines:
Engineered Systems' product line includes engineering, fabrication and assembly of standard and custom-designed compression packages, production and processing equipment and facilities and power generations systems. Combined Heat and Power Systems are predominantly an International region product line. Engineered Systems' product line tends to be more cyclical with respect to revenue, gross margin and income before interest and income taxes than Enerflex's other business segments. Revenues are derived primarily from the investments made in natural gas infrastructure by producers.
Service product line includes support services, labour and parts sales, to the oil and gas industry as well as the CHP industry in our International region. Enerflex, through various business units, is an authorized distributor for Waukesha engines and parts in Canada, Alaska, Northern United States, Australia, Indonesia, Papua New Guinea, the Netherlands, Germany and Spain. Enerflex is also an exclusive authorized distributor for Altronic, a leading manufacturer of electric ignition and control systems, in Canada, Australia, Papua New Guinea and New Zealand. Mechanical Service revenues tend to be fairly stable as ongoing equipment maintenance is generally required to maintain the customer's natural gas production.
Rentals revenue includes a variety of rental and leasing alternatives for natural gas compression, power generation and processing equipment. The rental fleet is primarily deployed in western Canada and Northern U.S.. Expansion in international markets is conducted on a selective basis to minimize the risk of these newer markets.
CANADA AND NORTHERN U.S.
(unaudited)(thousands) Three months ended
March 31, 2011 2010(1)
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Segment revenue $ 143,558 $ 81,531
Intersegment revenue (1,260) (4,882)
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Revenue $ 142,298 $ 76,649
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Revenue - Engineered Systems $ 92,936 $ 32,009
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Revenue - Service $ 39,225 $ 33,954
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Revenue - Rental $ 10,137 $ 10,686
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Operating income (loss) $ 6,834 $ (2,466)
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Segment revenues as a % of total revenues 43.6% 36.1%
Service revenues as a % of segment revenues 27.6% 44.3%
Operating income as a % of segment revenues 4.8% (3.2)%
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(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
Revenues in this region were $142.3 million in 2011 and comprised 43.6% of consolidated revenue. This compared to $76.6 million and 36.1% of consolidated revenue in 2010. The increase of $65.7 million was the result of increased Engineered Systems revenues due to increased backlog exiting 2010 and improved activity by producers, increased Service revenues in Canada and Wyoming, and partially offset by lower Rental revenue.
Operating income increased by $9.3 million to $6.8 million in 2011 from an operating loss of $2.5 million in 2010. This increase was the result of the increased gross margin as a result of higher revenues.
SOUTHERN U.S. AND SOUTH AMERICA (unaudited)(thousands) Three months ended March 31, 2011 2010 ---------------------------------------------------------------------------- Segment revenue $ 89,475 $ 73,669 Intersegment revenue (136) (12) ---------------------------------------------------------------------------- Revenue $ 89,339 $ 73,657 ---------------------------------------------------------------------------- Revenue - Engineered Systems $ 80,326 $ 65,131 ---------------------------------------------------------------------------- Revenue - Service $ 9,013 $ 8,526 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating income $ 8,204 $ 4,055 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Segment revenues as a % of total revenues 27.4% 34.7% Service revenues as a % of segment revenues 10.1% 11.6% Operating income as a % of segment revenues 9.2% 5.5% ----------------------------------------------------------------------------
Southern U.S. revenues totaled $89.3 million in 2011 as compared to $73.7 million in 2010. This increase of $15.6 million was the result of strong booking activity throughout 2010 and into the first quarter of 2011, as the Southern U.S. and South America continues to add to its backlog for 2011.
Operating income increased from $4.1 million in the first quarter of 2010 to $8.2 million in 2011, as a result of higher revenues and gross margin.
INTERNATIONAL
(unaudited)(thousands) Three months ended
March 31, 2011 2010(1)
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Segment revenue $ 96,919 $ 65,987
Intersegment revenue (2,151) (3,880)
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Revenue $ 94,768 $ 62,107
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Revenue - Engineered Systems $ 59,349 $ 48,399
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Revenue - Service $ 32,914 $ 13,708
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Revenue - Rental $ 2,505 $ -
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Operating loss $ (1,285) $ (3,904)
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Segment revenues as a % of total revenues 29.0% 29.2%
Service revenues as a % of segment revenues 34.7% 22.1%
Operating loss as a % of segment revenues (1.4)% (6.3)%
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(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
Operating results for this segment do not include the results for the discontinued operations of the Syntech business, which was sold in the third quarter of 2010 and the Environmental business, which was sold in the first quarter of 2011 for a gain of $1.4 million net of tax. These two discontinued operations recorded a loss before tax totaling $1.8 million in the first quarter of 2010.
Revenues for 2011 increased by $32.7 million to $94.8 million from $62.1 million in 2010. The increase was due to increased activity levels in the International region, revenue recognized on completion of past projects in MENA and the BP Oman project beginning operations. This was offset by lower Compression & Power ("C&P") revenue as a result of the closure of the International C&P business in late 2010, with its backlog and future opportunities transferred to our plants in Casper, Wyoming and Houston, Texas.
Operating loss for the first quarter of 2011 was $1.3 million, $2.6 million better than the first quarter of 2010. Operating income improved as a result of increased revenues and improved margin performance in the MENA division, partially offset weaker financial performance by the other divisions.
BOOKINGS AND BACKLOG
The Company records bookings and backlog when a firm commitment is received from customers for the Engineered Systems product line. Backlog represents unfulfilled orders at period end and is an indicator of future revenue for the Company.
Bookings
(unaudited)(thousands) Three months ended
March 31, 2011 2010(1)
----------------------------------------------------------------------------
Canada and Northern U.S. $ 58,999 $ 36,168
Southern U.S. 123,578 85,907
International(2) 61,141 211,351
----------------------------------------------------------------------------
Total bookings $ 243,718 $ 333,426
---------------------------
---------------------------
(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
(2) International bookings includes backlog acquired as part of the ESIF
acquisition.
Backlog
(unaudited)(thousands) As at March 31, 2011 2010
----------------------------------------------------------------------------
Canada and Northern U.S. $ 103,213 $ 95,924
Southern U.S. 189,742 160,905
International 379,142 161,980
----------------------------------------------------------------------------
Total backlog $ 672,097 $ 418,809
---------------------------
---------------------------
Backlog at March 31, 2011 was $672.1 million compared to $418.8 million at March 31, 2010, representing a 60% increase over the prior year. As compared to December 31, 2010, backlog at March 31, 2011 increased by $25.9 million or 4%.
FINANCIAL POSITION
The following table outlines significant changes in the Consolidated Statement of Financial Position as at March 31, 2011 as compared to December 31, 2010:
----------------------------------------------------------------------------
Increase /
($millions) (decrease) Explanation
----------------------------------------------------------------------------
Assets:
----------------------------------------------------------------------------
Accounts receivable 14.3 The increase is primarily related to
increased revenues in the International
region.
----------------------------------------------------------------------------
Inventory (44.2) Decrease in direct materials, finished
goods and work in progress are related to
higher revenues during the quarter.
----------------------------------------------------------------------------
Property, plant and (4.3) This decrease is primarily due to
equipment depreciation charges for the quarter, as
well as the sale of non-core land and
buildings. This was partially offset by
additions to property plant & equipment.
----------------------------------------------------------------------------
Rental equipment (3.5) This decrease is primarily related to
depreciation charges and the sale of
equipment during the first quarter ,
partially offset by rental asset additions
during the quarter.
----------------------------------------------------------------------------
Liabilities:
----------------------------------------------------------------------------
Accounts payable and (28.2) The decrease is primarily related to lower
accrued liabilities purchases of inventory and raw materials
and the payment of year-end performance
incentives.
----------------------------------------------------------------------------
Deferred revenue (5.7) Revenue recognized on existing jobs
exceeded advanced billings on new contracts
awarded during the first quarter of 2011
and existing projects currently in backlog.
----------------------------------------------------------------------------
Note payable (8.3) Decrease is related to repayment of inter-
company debt to Toromont.
----------------------------------------------------------------------------
LIQUIDITY
The Company's primary sources of liquidity and capital resources were:
- Cash generated from continuing operations;
- Toromont's bank financing and operating lines of credit; and
- Increases in Owner's Net Investment by Toromont.
Statement of Cash Flows:
(unaudited)(thousands) Three months ended
March 31, 2011 2010(1)
----------------------------------------------------------------------------
Cash, beginning of period $ 15,000 $ 34,949
Cash provided from (used) in:
Operating activities 17,240 29,955
Investing activities 2,167 (299,063)
Financing activities (5,523) 250,329
Exchange rate changes on foreign currency cash (311) (1,170)
----------------------------------------------------------------------------
Cash, end of period $ 28,573 $ 15,000
----------------------------------------------------------------------------
(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
Operating Activities
For the three months ended March 31, 2011, cash generated from operating activities was $17.2 million as compared to $30.0 million in 2010. Increased operating results, adjusted for items not requiring cash were more than offset by increased non-cash working capital requirements.
Investing Activities
Investing activities provided $2.2 million of cash in the first quarter of 2011 as compared to cash used in investing activities of $299.1 million in the same period of 2010. Expenditures on capital assets in the first quarter of 2011 decreased $5.3 million from the same period of 2010 while proceeds from the disposition of capital assets in 2011 were comparable to 2010. The disposal of the Environmental business contributed an additional $3.4 million in the first quarter of 2011, while the acquisition of ESIF in the first quarter of 2010 resulted in an investment of $292.5 million.
Financing Activities
Cash used in financing activities for the three months ended March 31, 2011 was $5.5 million as compared to cash provided in financing of $250.3 million in 2010. The change was primarily due to the repayment of borrowings as compared to an equity investment by Toromont for the acquisition of ESIF in the first quarter of 2010.
Net Capital Spending
----------------------------------------------------------------------------
(unaudited)(thousands) Three months ended
March 31, 2011 2010(1)
----------------------------------------------------------------------------
Net capital spending $ 1,222 $ 6,530
----------------------------------------------------------------------------
(1) 2010 amounts include the financial results of ESIF from the date of
acquisition, January 20, 2010.
Net capital spending for the first quarter of 2011 was $1.2 million, as compared to $6.5 million in 2010. The change was the result of lower investments in the rental fleet and fixed assets during 2011 of $5.3 million.
RISK MANAGEMENT
In the normal course of business, the Company is exposed to financial risks that may potentially impact its operating results in any or all of its business segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates and interest rates. The Company does not enter into derivative financial agreements for speculative purposes.
Foreign Exchange Risk
Enerflex mitigates the impact of exchange rate fluctuations by matching expected future U.S. dollar denominated cash inflows with U.S. dollar liabilities, principally through the use of foreign exchange contracts, bank debt, accounts payable and by manufacturing U.S. dollar denominated contracts at plants located in the U.S. The Company has adopted U.S. based manufacturing plants and foreign exchange forward contracts as its primary mitigation strategy to hedge any net foreign currency exposure. Forward contracts are entered into for the amount of the net foreign dollar exposure for a term matching the expected payment terms outlined in the sales contract.
The Company elected to apply hedge accounting for foreign exchange forward contracts for firm commitments, which are designated as cash flow hedges. For cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognized in accumulated other comprehensive income, net of taxes. The ineffective portion of the fair value changes is recognized in net income. Amounts charged to accumulated other comprehensive income are reclassified to the income statement when the hedged transaction affects the income statement.
Outstanding forward contracts are marked-to-market at the end of each period with any gain or loss on the forward contract included in Accumulated other comprehensive income until such time as the forward contract is settled, when it flows to income.
Enerflex does not hedge its exposure to investments in foreign subsidiaries. Exchange gains and losses on net investments in foreign subsidiaries are accumulated in Owner's Net Investment within "Accumulated comprehensive income/loss". The accumulated comprehensive loss at the end of 2010 of $10.8 million was adjusted to an accumulated comprehensive loss of $13.3 million at March 31, 2011. This was primarily the result of the changes in the value of the Canadian dollar against the Euro, Australian dollar and U.S. dollar. The Canadian dollar appreciated by 2% against the U.S. dollar in the first quarter of 2011 versus an appreciation of 3% against the U.S. dollar during the same period of 2010. The Australian dollar depreciated by 1% against the Canadian dollar during the first quarter of 2011, as compared to a 1% depreciation in the same period of 2010. The Euro appreciated by 4% against the Canadian dollar during the first quarter of 2011, as compared to a depreciation of 8% in the same period of 2010.
The types of foreign exchange risk and the Company's related risk management strategies are as follows:
Transaction exposure
The Canadian operations of the Company source the majority of its products and major components from the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cost of imported inventory where appropriate.
The Company also sells compression packages in foreign currencies, primarily the U.S. dollar, the Australian dollar and the Euro and enters into foreign currency contracts to reduce these exchange rate risks.
Most of Enerflex's international orders are manufactured in the U.S. operations if the contract is denominated in U.S. dollars. This minimizes the Company's foreign currency exposure on these contracts.
The Company identifies and hedges all significant transactional currency risks.
Translation exposure
The Company's earnings from and net investment in, foreign subsidiaries are exposed to fluctuations in exchange rates. The currencies with the most significant impact are the U.S. dollar, Australian dollar and the Euro.
Assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the balance sheet dates. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in income when there has been a reduction in the net investment in the foreign operations.
Earnings at foreign operations are translated into Canadian dollars each period at current exchange rates for the period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net income. Such exchange rate fluctuations have historically not been material year-over-year relative to the overall earnings or financial position of the Company.
Interest rate risk
The Company is exposed to interest rate risk on its notes payable to Toromont. The interest rate charged by Toromont is based on Toromont's actual weighted-average cost of debt and is reset annually. As such, the Company is exposed to the same interest rate risk as Toromont.
Credit risk
Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, accounts receivable, and derivative financial instruments. The carrying amount of assets included on the balance sheet represents the maximum credit exposure.
Cash equivalents consist mainly of short-term investments, such as money market deposits. The Company has deposited the cash equivalents with highly rated financial institutions, from which management believes the risk of loss to be remote.
The Company has accounts receivable from clients engaged in various industries including natural gas producers, natural gas transportation, agricultural, chemical and petrochemical processing and the generation and sale of electricity. These specific industries may be affected by economic factors that may impact accounts receivable. Enerflex has entered into a number of significant projects through to 2013 with one specific customer, however no single operating unit is reliant on any single external customer.
The credit risk associated with net investment in sales-type lease arises from the possibility that the counterparty may default on their obligations. In order to minimize this risk, the Company enters into sales-type lease transactions only in select circumstances. Close contact is maintained with the customer over the duration of the lease to ensure visibility to issues as and if they arise.
The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly-rated financial institutions.
Liquidity risk
Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. Accounts payable are primarily due within 90 days and will be satisfied from current working capital.
CAPITAL RESOURCES
The Company defines capital as the aggregate of Owner's net investment and notes payable to Toromont less cash and cash equivalents. The Company's capital management framework is designed to maintain a flexible capital structure that allows for optimization of the cost of capital at acceptable risk while balancing the interests of both equity and debt holders. The Company generally targets a net debt to equity ratio of 1.0:1, although there is a degree of variability associated with the timing of cash flows. Also, if appropriate opportunities are identified, the Company is prepared to significantly increase this ratio depending upon the opportunity.
The amount of Toromont's net investment in Enerflex was recorded as Owner's net investment in the financial statements. As a result, up to June 1, 2011, the Company had nil shares outstanding.
Upon bifurcation, Enerflex's common shares outstanding will be 77,212,396.
Enerflex has not established a formal dividend policy and post bifurcation 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. On June 1, 2011, the Board of Directors of Enerflex declared a dividend of $0.06 per share, payable July 1, 2011 to shareholders of record on June 10, 2011.
During the first quarter of 2011, Enerflex funded its business through cash flow from operations and notes payable to Toromont. The notes payable are allocations of the Toromont debt and reflect adjustments to achieve the new capital structure. The note payable is unsecured and bears interest at the weighted average cost of borrowing of Toromont, which was 6.0% at March 31, 2011 and December 31, 2010. From a planned private placement of senior unsecured notes.
Upon bifurcation, Enerflex repaid the note to Toromont from proceeds of a syndicated credit facility.
CONTRACTUAL OBLIGATIONS AND COMMITTED CAPITAL INVESTMENT
The Company's contractual obligations are contained in the following table. Details of the amounts payable related to the long-term debt are included in Note 14 to the Company's consolidated financial statements.
CONTRACTUAL OBLIGATIONS (unaudited)(thousands) Payments due by period ---------------------------------------------------------------------------- Contractual Less than Obligations one year 2- 3 years 4-5 years Thereafter Total ---------------------------------------------------------------------------- Leases $ 10,140 $ 17,468 $ 9,908 $ 10,951 $ 48,467 Purchase obligations 41,747 2,182 - - 43,929 Note payable 206,680 206,680 ---------------------------------------------------------------------------- Total $ 258,567 $ 19,650 $ 9,908 $ 10,951 $299,076 ----------------------------------------------------------------------------
The majority of the Company's lease commitments are operating leases for service vehicles.
The majority of the Company's purchase commitments relate to major components for the Engineered Systems product line and to long-term information technology and communications contracts entered into in order to reduce the overall cost of services received.
ACCOUNTING POLICIES
Adoption of International Financial Reporting Standards
As disclosed in Note 2, these interim Consolidated Carve-Out Financial Statements represent Enerflex's initial presentation of the financial results of operations and financial position under IFRS for the period ended March 31, 2011 in conjunction with the Company's annual audited Consolidated Financial Statements to be used under IFRS as at and for the year ended December 31, 2011. As a result, these interim Consolidated Financial Statements have been prepared in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standards" and with IAS 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"). Previously, the Company prepared its interim and annual financial statements in accordance with pre-changeover Canadian GAAP.
The interim consolidated carve out financial statements for the three months ended March 31, 2011 provide the following reconciliations from previous GAAP to IFRS:
- Equity as at January 1, 2010; March 31, 2010; and December 31, 2010;
- Statement of Financial Position as at January 1, 2010; March 31, 2010; and December 31, 2010.
IFRS has no impact on the Consolidated Statements of Earnings, Comprehensive Income and Cash Flows.
Investment in Associates
The Company uses the equity method to account for its 40% investment in Total Production Services Inc., an investment subject to significant influence.
Interests in Joint Ventures
The Company proportionately consolidates its 50% interest in the Presson-Descon International (Private) Limited joint venture, which involves recognizing its proportionate share of the joint venture's assets, liabilities, income and expenses with similar items in the consolidated financial statements on a line-by-line basis.
Changes to Accounting Policies
Voluntary changes to accounting policies are made only in situations where they provide financial statement users with more reliable and relevant information. Policy changes are applied retroactively unless it is impractical to determine the period or cumulative impact of the change.
Foreign Currency Translation
The Company's functional and presentation currency is Canadian dollars. 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 the year-end, monetary assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at the balance sheet date. 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. All foreign exchange gains and losses are taken to the income statement 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 equity until the disposal of the net investment at which time they are recognized in the income statement.
The balance sheets of foreign subsidiaries and joint ventures are translated into Canadian dollars using the closing rate method, whereby assets and liabilities are translated at the rates of exchange prevailing at the balance sheet date. The income statements of foreign subsidiaries and joint ventures are translated at average exchange rates for the year. Exchange differences arising on the translation of net assets are taken directly to a separate component of equity.
On the disposal of a foreign entity, accumulated exchange differences are recognized in the income statement as a component of the gain or loss on disposal.
Property, Plant & Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. 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:
Asset Class Estimated useful life range ---------------------------------------------------------------------------- Buildings 5 to 20 years Equipment 3 to 20 years
Major renewals and improvements are capitalized when they are expected to provide future economic benefit. 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 & equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of property plant & equipment is included in profit or loss when the item is derecognized. Gains are not classified as revenue.
Each asset's estimated useful life, residual value and method of depreciation are reviewed and adjusted if appropriate at each financial year end.
Rental Equipment
Rental equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are generally between 5 and 15 years.
When, under the terms of a rental contract, the Company is responsible for 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.
Major renewals and improvements are capitalized when they are expected to provide future economic benefit. No depreciation is provided on assets under construction. 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 financial year end.
Goodwill
Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the net fair value of the identifiable net assets of the entity at the date of acquisition. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment at least annually.
For the purposes of impairment testing, goodwill acquired is allocated to the cash-generating units that are expected to benefit from the synergies of the combination. Each unit or units to which the goodwill is allocated represents the lowest level within the Company at which the goodwill is monitored for internal management purposes and is not larger than a segment, determined in accordance with IFRS 8 'Operating Segments'.
Impairment is determined by assessing the recoverable amount of the cash-generating units to which the goodwill relates. Where the recoverable amount of the cash-generating units is less than the carrying amount of the cash-generating units and related goodwill, an impairment loss is recognized.
Intangible Assets
Intangible assets acquired in a business combination are initially measured at cost being their fair value at the date of acquisition and are recognized separately from goodwill as the asset is separable or arises from a contractual or other legal right and its fair value can be measured reliably. After initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Intangible assets with a finite life are amortized over management's best estimate of their expected useful life. The amortization charge in respect of intangible assets is included in selling, general and administrative expense line in the income statement. The expected useful lives are reviewed on an annual basis. Any change in the useful life or pattern of consumption of the intangible asset is treated as a change in accounting estimate and is accounted for prospectively by changing the amortization period or method. 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 the estimated useful lives as follows:
Asset Estimated useful life range ---------------------------------------------------------------------------- Customer relationships 5 years Other intangible assets less than 1 year - 5 years
Impairment of Assets (excluding goodwill)
At each balance sheet date, the Company reviews the carrying amounts of its tangible and intangible assets 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 its 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. An impairment loss is recognized immediately in the income statement.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, had no impairment been recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately in the income statement.
Inventories
Inventories are valued at the lower of cost and net realizable value.
Cost of equipment, repair and distribution parts and direct materials include purchase cost and costs incurred in bringing each product to its present location and condition. Serialized inventory is determined on a specific item basis. Non-serialized inventory is determined based on a weighted average actual cost.
Cost of work-in-process includes cost of direct materials, labour and an allocation of manufacturing overheads, excluding borrowing costs, based on normal operating capacity.
Cost of inventories include the transfer from accumulated other comprehensive income (loss) 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. 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.
Work-in-Progress and Billings in Excess of Cost and Estimated Earnings
Fixed price engineering and construction contracts are presented in the balance sheet as follows:
For each contract, the accumulated cost incurred, less cost recognized on the contracts' percentage of completion revenue recognition, are shown in current assets in the balance sheet under "Inventories - current".
Where the payments received or receivable for any contract exceed the cost and estimated earnings less provision for any anticipated losses, the excess is shown as "deferred revenue" within current liabilities.
Trade and Other Receivables
Trade receivables are recognized and carried at original invoice amount less an allowance for any amounts estimated to be uncollectible. An estimate for doubtful debts is made when there is objective evidence that the collection of the full amount is no longer probable under the terms of the original invoice. Impaired debts are derecognized when they are assessed as uncollectible.
Cash
Cash includes cash and cash equivalents, which are defined as highly liquid investments with original maturities of three months or less. For the purposes of the cash flow statement, cash and cash equivalents consists of cash and cash equivalents as defined above, net of outstanding bank overdrafts.
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.
If the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized in the income statement as a finance cost.
Warranties: The Company accrues a liability for warranty obligations on the basis of historical claims experience, specific to each business unit. Warranty costs incurred are charged against this liability.
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 administrated by a plan trustee, in accordance with the plan document. The actual cost of providing benefits through defined contribution pension plans is charged to income in the period in respect of which contributions become payable.
Share-Based Payments
Certain employees of the Company participate in Toromont's Executive Stock Option Plan. Stock options have a seven-year term, vest 20% cumulatively on each anniversary date of the grant and are exercisable at the designated common share price, which is fixed at prevailing market prices of the common shares at the date the option is granted.
Concurrent with the effective date of the Arrangement, Enerflex has adopted a stock option plan with similar terms to the Toromont Plan.
Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use an asset.
The Company has entered into various operating leases, the payments for which are recognized as an expense in the income statement on a straight-line basis over the lease terms.
Revenue Recognition
Revenue is recognized to the extent that it is probable economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, sales taxes and duties. In addition to this general policy, the following describes the specific revenue recognition policies for each major category of revenue:
(i) Revenues from the supply of equipment systems involving design, manufacture, installation and start-up are recorded based on the stage of completion, where the stage of completion measured by reference to costs incurred to date as a percentage of total estimated costs for each project. Any foreseeable losses on such projects are charged to operations when determined.
(ii) Revenues from equipment rentals are recognized in accordance with the terms of the relevant agreement with the customer, generally on a straight-line basis over the term of the agreement.
(iii) Product support services include sales of parts and servicing of equipment. For the sale of parts, revenues are recognized when the part is shipped to the customer. For servicing of equipment, revenues are recognized on a stage of completion basis determined based on performance of the contracted upon services.
(iv) Revenues from long-term service contracts are recognized on a stage of completion basis proportionate to the service work that has been performed based on parts and labour service provided. At the completion of the contract, any remaining profit on the contract is recognized as revenue. Any losses estimated during the term of the contract are recognized when identified.
Financial Instruments
The Company classifies all financial instruments into one of the following categories: loans and receivables, held to maturity investments, assets available for sale, other financial liabilities or assets/liabilities held for trading. Financial instruments are measured at fair value on initial recognition. After initial recognition, financial instruments are measured at their fair values, except for loans and receivables and other financial liabilities, which are measured at cost or amortized cost using the interest rate method.
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 - unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - inputs other than Level 1 prices that are observable or can be corroborated by observable market data for substantially the full term of asset or liability.
Level 3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company has made the following classifications:
Cash and cash equivalents are classified as assets held for trading and are measured at fair value. Gains and losses resulting from the periodic revaluation are recorded in net earnings.
Accounts receivable and net investment in sales-type lease are classified as loans and receivables and are recorded at amortized cost using the effective interest rate method.
Accounts payable and accrued liabilities and notes payable to Toromont are classified as other financial liabilities. Subsequent measurements are recorded at amortized cost using the effective interest rate method.
Transaction costs are expensed as incurred for financial instruments classified or designated as held for trading. Transaction costs for financial assets classified as available for sale are added to the value of the instrument at acquisition. Transaction costs related to other financial liabilities are added to the value of the instrument at acquisition and taken into net income using the effective interest rate method.
Derivative Financial Instruments and Hedge Accounting
Derivative financial agreements are used to manage exposure to fluctuations in exchange rates. The Company does not enter into derivative financial agreements for speculative purposes.
Derivative financial instruments, including embedded derivatives, are measured at their fair value upon initial recognition and on each subsequent reporting date. The fair value of quoted derivatives is equal to their positive or negative market value. If a market value is not available, the fair value is calculated using standard financial valuation models, such as discounted cash flow or option pricing models. 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 firm commitments. These are also designated as cash flow hedges. For cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognized in accumulated other comprehensive income, net of taxes. The ineffective portion of the fair value changes is recognized in net income. Amounts charged to accumulated other comprehensive income are reclassified to the income statement when the hedged transaction affects the income statement.
All hedging relationships are formally documented, including the risk management objective and strategy. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions.
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 profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated by using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred income tax is recognized on all temporary differences at the balance sheet date 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 balance sheet 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 balance sheet 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 balance sheet date.
Current and deferred income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise, income tax is recognized in the income statement.
Discontinued Operations
The results of discontinued operations are presented net of tax on a one-line basis in the combined statements of earnings. Direct corporate overheads and income taxes are allocated to discontinued operations. Interest expense (income) and general corporate overheads are not allocated to discontinued operations.
Net Investment
Toromont's investment in the operations of Enerflex is presented as Total Net Investment in the Combined Financial Statements. Owner's Net Investment represents capital invested, accumulated net earnings of the operations less the accumulated net distributions to Toromont.
SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of the Company's consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In the process of applying the Company's accounting policies, management has made the following judgments, estimates and assumptions which have the most significant effect on the amounts recognized in the consolidated financial statements:
Revenue Recognition - Long-term Contracts
The Company reflects revenues generated from the assembly and manufacture of projects using the percentage-of-completion approach of accounting for performance of production-type contracts. This approach to revenue recognition requires management to make a number of estimates and assumptions surrounding the expected profitability of the contract, the estimated degree of completion based on cost progression and other detailed factors. Although these factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions could lead to changes in the revenues recognized in a given period.
Provisions for Warranty
Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical experience under contractual warranty obligations or specific provisions created in respect of individual customer issues undergoing commercial resolution and negotiation. Amounts set aside represent management's best estimate of the likely settlement and the timing of any resolution with the relevant customer.
Property, Plant and Equipment
Fixed assets are stated at cost less accumulated depreciation, including asset impairment losses. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of fixed assets are reviewed on an annual basis. Assessing the reasonableness of the estimated useful lives of fixed assets requires judgment and is based on currently available information. Fixed assets are also reviewed for potential impairment on a regular basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Changes in circumstances, such as technological advances and changes to business strategy can result in actual useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated useful lives of fixed assets or future cash flows constitute a change in accounting estimate and are applied prospectively.
Impairment of Non-financial Assets
Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm's length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset's performance of the cash generating unit being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes.
Impairment of goodwill
The Company tests whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from each cash-generating unit and also to determine a suitable discount rate in order to calculate the present value of those cash flows. Impairment losses on goodwill are not reversed.
Income Taxes
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Company establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective company's domicile.
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.
FUTURE ACCOUNTING PRONOUNCEMENTS
The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Company:
As of January 1, 2013, the Company will be required to adopt IFRS 9 Financial Instruments; IFRS 10 Consolidated Financial Statements; IFRS 12 Disclosure of Interest in Other Entities; and IFRS 13 Fair Value Measurement.
IFRS 9 Financial Instruments is the result of the first phase of the IASB's project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Company is in the process of assessing the impact of adopting IFRS 9.
IFRS 10 Consolidated Financial Statements replaces the consolidation requirements in SIC-12 Consolidation-Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. The Standard identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance to assist in the determination of control where this is difficult to assess. The Company is in the process of assessing the impact of adopting IFRS 10.
IFRS 11 Joint Arrangements replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities - Non-Monetary Contributions by Venturers. IFRS 11 uses some of the terms that were originally used by IAS 31, but with different meanings. This Standard addresses two forms of joint arrangements (joint operations and joint ventures) where there is joint control. IFRS 11 is effective January 1, 2013 and the Company is in the process of assessing the impact of adopting IFRS 11.
IFRS 12 Disclosure of Interest in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The Company is in the process of assessing the impact of adopting IFRS 12.
IFRS 13 Fair Value Measurement provides new guidance on fair value measurement and disclosure requirements for IFRS. The Company is in the process of assessing the impact of adopting IFRS 13.
The adoption of these standards should not have a material impact on the Company's consolidated financial statements.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
International Financial Reporting Standards ("IFRS") replaces Canadian Generally Accepted Accounting Principles ("Canadian GAAP") for publicly accountable enterprises for financial periods beginning on or after January 1, 2011. Accordingly, Enerflex has adopted IFRS effective January 1, 2011 and has prepared the current interim financial statements using IFRS accounting policies. Prior to the adoption of IFRS, the Company's financial statements were prepared in accordance with Canadian GAAP. The Company's financial statements for the year ending December 31, 2011 will be the first annual financial statements that comply with IFRS.
Transitional Impacts
IFRS 1 First-Time Adoption of International Financial Reporting Standards provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions in certain areas to the general requirement for full retrospective adoption of IFRS. Most adjustments required on transition to IFRS are made retrospectively against opening retained earnings as of the date of the first comparative statement of financial position presented, which is January 1, 2010.
The following are the key transitional provisions which have been adopted on January 1, 2010 and which had an impact on the Company's financial position on transition.
----------------------------------------------------------------------------
Summary of Exemption
Area of IFRS Available Policy Elected
----------------------------------------------------------------------------
Business The Company may elect on The Company has applied the
combinations transition to IFRS to elective exemption such
either restate all past that business combinations
business combinations in entered into prior to
accordance with IFRS 3 transition date have not
Business Combinations or to been restated. Transitional
apply an elective exemption impact: None.
from applying IFRS to past
business combinations.
----------------------------------------------------------------------------
Property, plant and The Company may elect on The Company did not elect
equipment transition to IFRS to to report any items of
report items of property, property, plant and
plant and equipment in its equipment in its opening
opening statement of statement of financial
financial position at a position at a deemed cost
deemed cost instead of the instead of the actual cost
actual cost that would be that would be determined
determined under IFRS. The under IFRS. Transitional
deemed cost of an item may impact: None.
be either its fair value at
the date of transition to
IFRS or an amount
determined by a previous
revaluation under pre-
changeover Canadian GAAP
(as long as that amount was
close to either its fair
value, cost or adjusted
cost). The exemption can be
applied on an asset-by-
asset basis.
----------------------------------------------------------------------------
Foreign Exchange On transition, cumulative The Company elected to
translation gains or losses reclassify all cumulative
in accumulated other translation gains and
comprehensive income (OCI) losses at the date of
can be reclassified to transition to retained
retained earnings. If not earnings. Transitional
elected, all cumulative impact: See Financial
translation differences Statement Note 24.
must be recalculated under
IFRS from inception.
----------------------------------------------------------------------------
Borrowing Costs On transition, the Company The Company elected to
must select a commencement capitalize borrowing costs
date for capitalization of on all qualifying assets
borrowing costs relating to commencing January 1, 2010.
all qualifying assets which Transitional impact: None.
is on or before January 1,
2010.
----------------------------------------------------------------------------
The following are key IFRS 1 mandatory exceptions from full retrospective
application of IFRS:
----------------------------------------------------------------------------
Area of IFRS Mandatory exception applied
----------------------------------------------------------------------------
Hedge Accounting Only hedging relationships that satisfied the hedge
accounting criteria as of January 1, 2010 are reflected as
hedges in the Company's financial statements under IFRS.
----------------------------------------------------------------------------
Estimates Hindsight was not used to create or revise estimates. The
estimates previously made by the Company under Canadian
GAAP are consistent with their application under IFRS.
----------------------------------------------------------------------------
In addition to the one-time transitional impacts described above, several
accounting policy differences will impact the Company on a go forward basis.
The significant accounting policy differences are presented below.
----------------------------------------------------------------------------
Area of IFRS Policy Difference Status
----------------------------------------------------------------------------
Share-based Payments The valuation of stock The impact of these changes
options under IFRS requires is not significant.
individual 'tranche based'
valuations for those option
plans with graded vesting,
while Canadian GAAP allowed
a single valuation for all
tranches.
----------------------------------------------------------------------------
Impairment of assets IFRS requires impairment The Company has identified
testing be done at the more cash generating units
smallest identifiable group than the reporting units
of assets that generate used to assess for
cash inflows from other impairment under Pre-
groups of assets ('cash changeover GAAP.
generating unit'), rather
than the reporting level The impact of this policy
considered by Canadian change will be dependant
GAAP. on the facts and
circumstances at the
IFRS requires the time of each impairment
assessment of asset test.
impairment to be based on
discounted future cash-
flows.
IFRS allows for reversal
of impairment losses
other than for
goodwill and indefinite
life intangible assets,
while Canadian GAAP did
not.
----------------------------------------------------------------------------
Borrowing costs Under IFRS, borrowing costs The impact of this policy
will be capitalized to change will be dependant on
assets which take a the magnitude of capital
substantial time to develop spend on qualifying assets
or construct using a in the future. Generally,
capitalization rate based this would reduce finance
on the Company's weighted costs and increase
average cost of borrowing. property, plant and
equipment balances and
associated depreciation for
those assets.
----------------------------------------------------------------------------
Financial Statement IFRS requires significantly Financial statement
Presentation & more disclosure than disclosures for the period
Disclosure Canadian GAAP for certain ended March 31, 2011 have
standards. been updated to reflect
IFRS requirements.
----------------------------------------------------------------------------
RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS
Management is responsible for the information disclosed in this MD&A and the accompanying consolidated financial statements, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company's Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the company, and has reviewed and approved this MD&A and the accompanying consolidated financial statements. The Audit Committee is also responsible for determining that management fulfills its responsibilities in the financial control of operations, including disclosure controls and procedures and internal control over financial reporting.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer, together with other members of management, have designed the Company's disclosure controls and procedures (DC&P) in order to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would have been known to them and by others within those entities.
Additionally, they have designed internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting in accordance with GAAP.
The control framework used in the design of both DC&P and ICFR is the internal control integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
There have been no significant changes in the design of the Company's internal controls over financial reporting during the three-month period ended March 31, 2011 that would materially affect, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
While the Officers of the Company have designed the Company's disclosure controls and procedures and internal controls over financial reporting, they expect that these controls and procedures may not prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met.
SUBSEQUENT EVENTS
Bifurcation of Enerflex
On November 8, 2010, the Board of Directors of Toromont unanimously approved in principle all actions to prepare for and implement a spinoff of Enerflex, Toromont's natural gas compression and processing equipment business, to Toromont's shareholders as a separate, publicly traded company. The spinoff is designed to enhance long term value for the shareholders of Toromont by separating its businesses into two distinct public companies better able to pursue independent strategies and opportunities for growth.
The transaction requires Toromont shareholders to exchange their current Toromont shares for new shares in both Toromont and in Enerflex and is structured as a tax-deferred divestiture for Canadian tax purposes and expected to be implemented through a court approved plan of arrangement.
Subsequent to March 31, 2011, at a special shareholders meeting held on May 16, 2011, the shareholders of Toromont voted in favour of the Plan of Arrangement to spinoff Enerflex into a standalone business. Enerflex began independent operations on June 1, 2011 pursuant to the Plan of Arrangement with Toromont, which received shareholder approval, satisfactory tax rulings and opinions from the Canada Revenue Agency and approval by the Ontario Superior Court of Justice (Commercial List). Enerflex Ltd. was listed on the Toronto Stock Exchange ("TSX") and began trading under the symbol EFX on June 3, 2011.
The Board of Directors of Enerflex approved a dividend of $0.06 per share which will be paid on July 1, 2011 to shareholders of record on June 10, 2011.
Bank Facilities
Subsequent to March 31, 2011, the Company entered into an agreement with a syndicate of lenders for a syndicated revolving credit facility ("Bank Facilities"). The amount available under the Bank Facilities is $325 million, which consists of a committed 4-year $270 million revolving credit facility (the "Revolver"), a committed 4-year $10 million operating facility (the "Operator"), a committed 4-year $20 million Australian operating facility (the "Australian Operator") and a committed 4-year $25 million bi-lateral letter of credit facility (the "LC Bi-Lateral"). The Revolver, Operator, Australian Operator and LC Bi-Lateral are collectively referred to as the Bank Facilities. The Bank Facilities were funded on June 1, 2011.
The Bank Facilities has a maturity date of June 1, 2015 ("Maturity Date"), but may be extended annually on or before the anniversary date with the consent of the lenders. In addition, the Bank Facilities may be increased by $50 million at the request of the Company and subject to the lenders' consent. There is no required or scheduled repayment of principal until the Maturity Date of the Bank Facilities.
Drawings on the Bank Facilities are available by way of prime rate loans ("Prime"), U.S. Base Rate loans, LIBOR loans, and Bankers' Acceptance (BA) notes. The Company may also draw on the Bank Facilities through bank overdrafts in either Canadian or U.S. dollars and issue letters of credit under the Bank Facilities.
Pursuant to the terms and conditions of the Bank Facilities, a margin is applied to drawings on the Bank Facilities in addition to the quoted interest rate. The margin is established in basis points and is based on consolidated net debt to earnings before interest, income taxes, depreciation and amortization (EBITDA) ratio. The margin is adjusted effective the first day of the third month following the end of each fiscal quarter based on the above ratio.
In addition, subsequent to March 31, 2011, the Company entered into a committed facility with one of the lenders in the Bank Facilities for the issuance of letters of credit (the "Bi-Lateral"). The amount available under the Bi-Lateral is $50 million and has a maturity date of June 1, 2013 ("Maturity Date"). The Maturity Date may be extended annually with the consent of the lender. Drawings on the Bi-Lateral are by way of letters of credit.
The Bank Facilities and Bi-Lateral are unsecured and rank pari passu with the Private Placement Notes. The Company is required to maintain certain covenants on the Bank Facilities, the Bi-Lateral and the Private Placement Notes.
On June 1, 2011, Enerflex has drawn down $173.3 million on the bank facilities to repay its note payable to Toromont.
Private Placement
Subsequent to March 31, 2011, the Company entered negotiations for the issuance of $100 million of unsecured private placement notes. The Company plans to use the proceeds of the issuance will be used to repay existing corporate indebtedness incurred as part of the spin-off, to fund working capital and for general corporate purposes. It is anticipated that there will be no required or scheduled repayments of principal prior to the maturity date of each respective tranche.
OUTLOOK FOR MARKETS
The global economy continues to recover from the recent recession. Enerflex entered 2011 with significantly stronger backlogs than we had entering 2010.
The Canada and Northern U.S. region is experiencing improved bookings and backlog as a result of increased activity in Canada's unconventional gas basins in the Montney and the Horn River. These unconventional gas basins require higher horsepower compression and more gas processing equipment in comparison to conventional gas basins. Enerflex is well positioned to take advantage of opportunities in this area for both equipment supply and mechanical services as many of our customers have increased activities in 2011.
The Southern U.S. and South America region is also experiencing improved bookings and backlog during the first quarter of 2011. Increased activity in liquid rich U.S. gas basins has driven new orders for compression equipment for this region. These liquid rich resource basins can achieve superior returns for producers despite low natural gas prices due to the higher value that could be realized for the natural gas liquids (NGL's). In addition, the requirement for gas compression and gas processing equipment for liquid rich resource basins like the Eagle Ford and parts of the Marcellus has increased bookings in this region.
The International region continues to hold a lot of opportunity and experienced strong bookings and backlog in the first quarter of 2011. Activity in these regions is being driven by increased activity in Australia's natural gas industry. There are numerous LNG projects in early stages of development. LNG projects of Queensland Gas and Santos have received final investment decisions and orders for equipment have already been placed with Enerflex totaling $231 million.
In the Middle East and North Africa, Enerflex has taken a targeted approach to mitigate exposure to political unrest. Our primary areas of focus have been Bahrain, Kuwait, Egypt, Oman and the United Arab Emirates. Enerflex has achieved commercial operations of the on-shore gas compression facility for BP in Oman and see several opportunities for similar projects in Oman for equipment and service work. Domestic demand for gas in this region remains strong and we are well positioned to compete for projects in Oman and Bahrain for compression, processing equipment and aftermarket service support.
In Europe, the traditional customers have been small greenhouse operators, which were significantly impacted by the financial crisis and economic downturn. In addition, they have come under commercial pressure from overseas competitors. As a result, the focus has expanded to the Oil & Gas industry and industrial power generation applications for our products. Enerflex's European operations are focusing on CHP and power generation growth opportunities in Russia, Turkey, Italy, Poland and Germany, targeting industrial applications in these countries. Europe has achieved some early success in Turkey, Italy and Poland, with additional projects expected in Russia and Germany in the latter half of the year. Oil & Gas opportunities will be targeted to the U.K. and Netherlands.
ENERFLEX LTD.
INTERIM CONSOLIDATED CARVE OUT STATEMENT OF FINANCIAL POSITION
(unaudited) March 31, December 31, March 31, January 1,
($ thousands) 2011 2010 2010 2010
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash
equivalents $ 28,573 $ 15,000 $ 15,000 $ 34,949
Accounts receivable
(Note 7) 257,502 243,238 166,972 78,011
Inventories (Note 8) 178,737 222,855 279,856 167,275
Income taxes
receivable 131 1,944 13,090 5,776
Derivative
financial
instruments (Note
17) 1,318 448 1,935 13
Other current
assets 18,721 22,013 8,841 3,104
----------------------------------------------------------------------------
Total current assets 484,982 505,498 485,694 289,128
Property, plant and
equipment (Note 9) 167,785 172,041 206,118 69,781
Rental equipment
(Note 9) 112,707 116,162 122,185 59,142
Deferred tax assets 45,885 47,940 37,785 19,893
Other assets (Note
10) 13,216 13,797 2,267 56,502
Intangible assets
(Note 11) 36,548 39,462 43,095 -
Goodwill 482,656 482,656 482,656 21,350
----------------------------------------------------------------------------
Total assets $ 1,343,779 $ 1,377,556 $ 1,379,800 $ 515,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable,
accrued liabilities
and provisions
(Note 12) $ 136,230 $ 164,422 $ 128,576 $ 68,873
Income taxes
payable 5,459 7,135 324 -
Deferred revenues 144,559 150,319 135,531 59,751
Derivative
financial
instruments (Note
17) 790 603 84 -
Note payable (Note
14) 206,680 215,000 - -
----------------------------------------------------------------------------
Total current
liabilities 493,718 537,479 264,515 128,624
Note payable (Note
14) - - 280,005 73,570
Other long term
liabilities 327 549 - -
----------------------------------------------------------------------------
Total liabilities 494,045 538,028 544,520 202,194
----------------------------------------------------------------------------
Guarantees,
Commitments and
Contingencies (Note
15)
Net Investment
Owner's net
investment 862,658 849,977 843,560 297,973
Accumulated other
comprehensive (loss)
income (13,325) (10,845) (8,799) 15,629
----------------------------------------------------------------------------
Total net investment
before
non-controlling
interest 849,333 839,132 834,761 313,602
Non-controlling
interest 401 396 519 -
----------------------------------------------------------------------------
Total net investment
and non-controlling
interest 849,734 839,528 835,280 313,602
----------------------------------------------------------------------------
Total liabilities
and net investment $ 1,343,779 $ 1,377,556 $ 1,379,800 $ 515,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
ENERFLEX LTD. INTERIM CONSOLIDATED CARVE OUT INCOME STATEMENT
(Unaudited) ($ thousands, except share amounts)
THREE MONTHS ENDING MARCH 31, 2011 2010
----------------------------------------------------------------------------
Revenues $ 326,405 $ 212,413
Cost of goods sold 270,141 182,884
----------------------------------------------------------------------------
Gross margin 56,264 29,529
Selling and administrative expenses 42,511 31,844
----------------------------------------------------------------------------
Operating income (loss) 13,753 (2,315)
(Gain) loss on disposal of property, plant &
equipment (742) 750
Gain on available-for-sale financial assets
(Note 5) - (18,627)
Equity earnings from affiliates (201) (217)
----------------------------------------------------------------------------
Earnings before finance costs and income taxes 14,696 15,779
Finance costs 2,620 3,103
Finance income (283) (48)
----------------------------------------------------------------------------
Earnings before income taxes 12,359 12,724
Income taxes (Note 13) 3,739 576
----------------------------------------------------------------------------
Net earnings from continuing operations 8,620 12,148
Gain on sale of discontinued operations (Note 6) 1,430 -
Loss from discontinued operations (Note 6) (164) (1,283)
----------------------------------------------------------------------------
Net earnings $ 9,886 $ 10,865
--------------------------
--------------------------
Earnings attributable to:
Controlling interest $ 9,881 $ 10,877
Non-controlling interest $ 5 $ (12)
See accompanying Notes to Consolidated Financial Statements
ENERFLEX LTD.
INTERIM CONSOLIDATED CARVE OUT STATEMENT OF COMPREHENSIVE INCOME
(Unaudited) ($ thousands)
THREE MONTHS ENDING MARCH 31, 2011 2010
----------------------------------------------------------------------------
Net earnings $ 9,886 $ 10,865
Other comprehensive income (loss):
Change in fair value of derivatives designated
as cash flow hedges, net of income tax expense
(2011 - $229 ; 2010 - $203) 589 567
Loss on derivatives designated as cash flow
hedges transferred to net income in the current
period, net of income tax expense (2011 - $33;
2010 - $1) 84 2
Unrealized loss on translation of financial
statements of foreign operations (3,153) (9,382)
Reclassification to net income of gain on
available for sale financial assets as a result
of business acquisition, net of income taxes
(2011 - nil ; 2010 - $3,090) - (15,615)
----------------------------------------------------------------------------
Other comprehensive loss (2,480) (24,428)
----------------------------------------------------------------------------
Comprehensive income (loss) $ 7,406 $ (13,563)
----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
ENERFLEX LTD. INTERIM CONSOLIDATED CARVE OUT STATEMENT OF CASH FLOWS
(unaudited) ($ thousands)
Three months ended March 31, 2011 2010
----------------------------------------------------------------------------
Operating activities
Net earnings $ 9,886 $ 10,865
Items not requiring cash and cash equivalents
Depreciation and amortization 10,879 9,837
Equity earnings from affiliates (201) (217)
Deferred income taxes (540) 83
(Gain) loss on sale of:
Discontinued operations (Note 6) (2,471) -
Rental equipment, property, plant and equipment (742) 750
Gain on available for sale assets on acquisition
of control - (18,627)
----------------------------------------------------------------------------
16,811 2,691
Net change in non-cash working capital and other 429 27,264
----------------------------------------------------------------------------
Cash provided by operating activities 17,240 29,955
----------------------------------------------------------------------------
Investing activities
Business acquisition, net of cash acquired (Note 5) - (292,533)
Additions to:
Rental equipment (4,012) (3,737)
Property, plant and equipment (2,396) (7,745)
Proceeds on disposal of:
Rental equipment 1,975 2,111
Property, plant and equipment 2,630 2,584
Disposal of discontinued operations, net of cash
(Note 6) 3,389 -
Decrease in other assets 581 257
----------------------------------------------------------------------------
Cash provided by (used in) investing activities 2,167 (299,063)
----------------------------------------------------------------------------
Financing activities
(Repayment) increase in note payable (8,320) 206,435
Repayment of other long-term debt - (164,811)
Equity from parent 2,797 208,705
----------------------------------------------------------------------------
Cash (used in) provided by financing activities (5,523) 250,329
----------------------------------------------------------------------------
Effect of exchange rate changes on cash
denominated in foreign currency (311) (1,170)
Increase (decrease) in cash and cash equivalents 13,573 (19,949)
Cash and cash equivalents at beginning of period 15,000 34,949
----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 28,573 $ 15,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow information (Note 19)
See accompanying Notes to Consolidated Financial Statements
ENERFLEX LIMITED
INTERIM CONSOLIDATED CARVE OUT STATEMENT OF CHANGES IN EQUITY
(Unaudited) ($ thousands)
----------------------------------------------------------------------------
Foreign
Currency Cash Available-for-
Net Translation Flow sale financial
($ thousands) Investment Adjustments Hedges assets
----------------------------------------------------------------------------
At January 1, 2010 297,973 - 14 15,615
----------------------------------------------------------------------------
Net earnings 10,877
----------------------------------------------------------------------------
Non controlling interest on
acquisition
----------------------------------------------------------------------------
Other comprehensive income (9,382) 569 (15,615)
----------------------------------------------------------------------------
Owner's Investment/Dividends 534,710
----------------------------------------------------------------------------
At March 31, 2010 843,560 (9,382) 583 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total accumulated
other Non-
comprehensive controlling
($ thousands) income interest Total
----------------------------------------------------------------------------
At January 1, 2010 15,629 - 313,602
----------------------------------------------------------------------------
Net earnings - (12) 10,865
----------------------------------------------------------------------------
Non controlling interest on
acquisition - 531 531
----------------------------------------------------------------------------
Other comprehensive income (24,428) (24,428)
----------------------------------------------------------------------------
Owner's Investment/Dividends - 534,710
----------------------------------------------------------------------------
At March 31, 2010 (8,799) 519 835,280
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Foreign
Currency Cash Available-for-
Net Translation Flow sale financial
($ thousands) Investment Adjustments Hedges assets
----------------------------------------------------------------------------
At March 31, 2010 843,560 (9,382) 583 -
----------------------------------------------------------------------------
Net earnings 15,557
----------------------------------------------------------------------------
Other comprehensive
income (1,519) (527) -
----------------------------------------------------------------------------
Owner's Investment/Dividends (9,140)
----------------------------------------------------------------------------
At December 31, 2010 849,977 (10,901) 56 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total accumulated
other Non-
comprehensive controlling
($ thousands) income interest Total
----------------------------------------------------------------------------
At March 31, 2010 (8,799) 519 835,280
----------------------------------------------------------------------------
Net earnings (123) 15,434
----------------------------------------------------------------------------
Other comprehensive income (2,046) (2,046)
----------------------------------------------------------------------------
Owner's Investment/Dividends (9,140)
----------------------------------------------------------------------------
At December 31, 2010 (10,845) 396 839,528
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Foreign
Currency Cash Available-for-
Translation Flow sale financial
($ thousands) Net Investment Adjustments Hedges assets
----------------------------------------------------------------------------
At December 31, 2010 849,977 (10,901) 56 -
----------------------------------------------------------------------------
Net earnings 9,881
----------------------------------------------------------------------------
Other comprehensive income (3,153) 673 -
----------------------------------------------------------------------------
Owner's Investment/Dividends 2,800
----------------------------------------------------------------------------
At March 31, 2011 862,658 (14,054) 729 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total accumulated
other Non-
comprehensive controlling
($ thousands) income interest Total
----------------------------------------------------------------------------
At December 31, 2010 (10,845) 396 839,528
----------------------------------------------------------------------------
Net earnings 5 9,886
----------------------------------------------------------------------------
Other comprehensive income (2,480) (2,480)
----------------------------------------------------------------------------
Owner's Investment/Dividends - 2,800
----------------------------------------------------------------------------
At March 31, 2011 (13,325) 401 849,734
----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
NOTES TO THE INTERIM CONSOLIDATED CARVE OUT FINANCIAL STATEMENTS
March 31, 2011
(Unaudited) (Thousands of dollars, except per share amounts)
Note 1. Nature and Description of the Company
Enerflex Ltd. ("Enerflex" or "the Company") was formed subsequent to the acquisition of Enerflex Systems Income Fund ("ESIF") by Toromont Industries Ltd. ("Toromont") to integrate Enerflex's products and services with Toromont's existing Compression and Power, Production and Processing, Retrofit and Service divisions. During the first quarter of 2010, the operations of Toromont Energy Systems Inc., a subsidiary of Toromont Industries Ltd., were combined with the operations of Enerflex Systems Income Fund to form Enerflex Ltd.
Headquartered in Calgary, the registered office is located at 904, 1331 Macleod Trail SE, Calgary, Canada. Enerflex has approximately 2,800 employees worldwide. Enerflex, its subsidiaries, interests in affiliates and joint-ventures operate in Canada, the United States, Argentina, Colombia, Australia, the Netherlands, the United Kingdom, Germany, Pakistan, the United Arab Emirates, Oman, Egypt and Indonesia.
These consolidated financial statements include the legacy natural gas and process compression business (Toromont Energy Systems, subsequently renamed Enerflex Ltd.) as well as the acquired business of Enerflex Systems Income Fund ("ESIF") from the date of acquisition, January 20, 2010. Toromont completed its acquisition of ESIF on January 20, 2010. Therefore, the January 1, 2010 comparatives contain only pre-existing Toromont entities that became a part of Enerflex group upon acquisition.
Note 2. Background and Basis of Presentation
Background
On May 16, 2011 Toromont Shareholders approved the Plan of Arrangement ("the Arrangement") that would establish Enerflex as a stand-alone publicly traded company listed on the Toronto Stock Exchange ("TSX"). In connection with the Arrangement, Toromont common shareholders will receive one share in each of Enerflex and New Toromont in exchange for each Toromont share held.
Enerflex has entered into a transitional services agreement pursuant to which it is expected that, on an interim basis, Toromont will provide consulting services and other assistance with respect to information technology of Enerflex which, from time to time, are reasonably requested by Enerflex in order to assist in its transition to a public company, independent from Toromont. Unless terminated earlier, the transitional services agreement will expire one year from the arrangement date. These agreements reflect terms negotiated in anticipation of each company being a stand-alone public company, each with independent directors and management teams.
Accordingly, up until the completion of the Arrangement, Toromont and Enerflex are considered related parties due to the parent - subsidiary relationship that exists. However, subsequent to the Arrangement, Toromont will no longer be a related party as defined by GAAP.
Basis of presentation (Carve out financial statements)
The interim consolidated financial statements for the period ending March 31, 2011 represent the financial position, results of operations and cash flows of the business transferred to Enerflex on a carve out basis.
The historical financial statements have been derived from the accounting system of Toromont using the historical results of operations and historical basis of assets and liabilities of the business transferred to Enerflex on a carve out accounting basis.
As the company operated as a subsidiary of Toromont and was not a stand-alone entity prior to the effective date of the Arrangement, the current period and historical financial statements include an allocation of certain Toromont corporate expenses.
The operating results of Enerflex were specifically identified based on Toromont's divisional organization. Certain other expenses presented in the interim consolidated financial statements represent allocations and estimates of services incurred by Toromont.
Net interest has been calculated primarily using the debt balances allocated to Enerflex.
Income Taxes have been recorded as if Enerflex and its subsidiaries had been separate tax paying legal entities, each filing a separate tax return in the jurisdictions that it currently operates in. The calculation of income taxes is based on a number of assumptions, allocations and estimates, including those used to prepare the Enerflex Consolidated Carve Out Financial Statements.
Goodwill is related to Toromont's acquisition of Enerflex and reflects the purchase price in excess of the fair market value of the tangible assets, intangible assets and liabilities identified during the purchase price allocation. The goodwill was pushed down to Enerflex Ltd.
Note 3. Summary of Significant Accounting Policies
(a) Statement of compliance
These interim consolidated carve-out financial statements have been prepared in accordance with IAS 34, "Interim Financial Reporting" ("IAS 34") as issued by the International Accounting Standards Board ("IASB") and using the accounting policies that the company expects to adopt in its consolidated financial statements for the year ending December 31, 2011. International Financial Reporting Standards ("IFRS") requires an entity to adopt IFRS 1 when it issues its first annual financial statements under IFRS by making an explicit and unreserved statement in those financial statements of compliance with IFRS. The company will make this statement when it issues its 2011 annual financial statements.
(b) Basis of presentation
The financial statements are presented in Canadian dollars rounded to the nearest thousands and are prepared on a going concern basis under the historical cost convention with certain financial assets and financial liabilities at fair value. The accounting policies set out below have been applied consistently in all material respects. Standards and guidelines not effective for the current accounting period are described in Note 4.
These consolidated carve out interim financial statements were authorized for issue by the Board of Directors on June 8, 2011.
(c) Basis of consolidation
These consolidated carve-out financial statements include the accounts of the Company and its wholly-owned subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, income and expenses, and unrealized gains and losses resulting from intra-group transactions are eliminated in full.
Non-controlling interests represent the portion of net earnings and net assets that is not held by the Company and are presented separately within equity in the consolidated statement of financial position.
(d) Significant Accounting Estimates and Judgments
The preparation of the Company's consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In the process of applying the Company's accounting policies, management has made the following judgments, estimates and assumptions which have the most significant effect on the amounts recognized in the consolidated financial statements:
Revenue Recognition - Long-term Contracts
The Company reflects revenues generated from the assembly and manufacture of projects using the percentage-of-completion approach of accounting for performance of production-type contracts. This approach to revenue recognition requires management to make a number of estimates and assumptions surrounding the expected profitability of the contract, the estimated degree of completion based on cost progression and other detailed factors. Although these factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions could lead to changes in the revenues recognized in a given period.
Provisions for warranty
Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical experience under contractual warranty obligations or specific provisions created in respect of individual customer issues undergoing commercial resolution and negotiation. Amounts set aside represent management's best estimate of the likely settlement and the timing of any resolution with the relevant customer.
Property, Plant and Equipment
Fixed assets are stated at cost less accumulated depreciation, including any asset impairment losses. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of fixed assets are reviewed on an annual basis. Assessing the reasonableness of the estimated useful lives of fixed assets requires judgment and is based on currently available information. Fixed assets are also reviewed for potential impairment on a regular basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Changes in circumstances, such as technological advances and changes to business strategy can result in actual useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated useful lives of fixed assets or future cash flows constitute a change in accounting estimate and are applied prospectively.
Impairment of Non-financial Assets
Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm's length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset's performance of the cash generating unit being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes.
Impairment of goodwill
The Company tests whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating unit to which the goodwill is allocated. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from each cash-generating unit and also to determine a suitable discount rate in order to calculate the present value of those cash flows. Impairment losses on goodwill are not reversed.
Income Taxes
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Company establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective company's domicile.
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.
(e) Business Combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair values at the date of acquisition, irrespective of the extent of any minority interest.
Goodwill is initially measured at cost being the excess of the cost of the business combination over the Company's share in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative fair values of the operation disposed of and the portion of the cash-generating unit retained.
(f) Investment in Associates
The Company uses the equity method to account for its 40% investment in Total Production Services Inc., an investment subject to significant influence.
(g) Interests in Joint Ventures
The Company proportionately consolidates its 50% interest in the Presson Descon International (Private) joint venture, which involves recognizing its proportionate share of the joint venture's assets, liabilities, income and expenses with similar items in the consolidated financial statements on a line-by-line basis.
(h) Foreign Currency Translation
The Company's functional and presentation currency is Canadian dollars. 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 the statement of financial position date. 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. All foreign exchange gains and losses are taken to the statement 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 equity until the disposal of the net investment at which time they are recognized in the statement of earnings.
The statement of financial position of foreign subsidiaries and joint ventures are translated into Canadian dollars using the closing rate method, whereby assets and liabilities are translated at the rates of exchange prevailing at the statement of financial position date. The statement of earnings of foreign subsidiaries and joint ventures are translated at average exchange rates for the year. Exchange differences arising on the translation of net assets are taken to accumulated other comprehensive income.
On the disposal of a foreign entity, accumulated exchange differences are recognized in the statement of earnings as a component of the gain or loss on disposal.
(i) Property, Plant & Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. 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:
Asset Class Estimated useful life range ---------------------------------------------------------------------------- Buildings 5 to 20 years Equipment 3 to 20 years
Major renewals and improvements are capitalized when they are expected to provide future economic benefit. 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 & 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 & equipment shall be included in profit or loss 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 financial year end.
(j) Rental Equipment
Rental equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are generally between 5 and 15 years.
When, under the terms of a rental contract, the Company is responsible for 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.
Major renewals and improvements are capitalized when they are expected to provide future economic benefit. No depreciation is provided on assets under construction. 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 financial year end.
(k) Goodwill
Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the net fair value of the identifiable net assets of the entity at the date of acquisition. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment at least annually, or when economic circumstances of a cash generating unit are materially impacted.
For the purposes of impairment testing, goodwill acquired is allocated to the cash-generating units that are expected to benefit from the synergies of the combination. Each unit or units to which the goodwill is allocated represents the lowest level within the Company at which the goodwill is monitored for internal management purposes and is not larger than a segment, determined in accordance with IFRS 8 'Operating Segments'.
Impairment is determined by assessing the recoverable amount of the cash-generating units to which the goodwill relates. Where the recoverable amount of the cash-generating units is less than the carrying amount of the cash-generating units and related goodwill, an impairment loss is recognized.
(l) Intangible Assets
Intangible assets acquired in a business combination are initially measured at cost being their fair value at the date of acquisition and are recognized separately from goodwill as the asset is separable or arises from a contractual or other legal right and its fair value can be measured reliably. After initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Intangible assets with a finite life are amortized over management's best estimate of their expected useful life. The amortization charge in respect of intangible assets is included in selling, general and administrative expense line in the statement of earnings. The expected useful lives are reviewed on an annual basis. Any change in the useful life or pattern of consumption of the intangible asset is treated as a change in accounting estimate and is accounted for prospectively by changing the amortization period or method. 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 the estimated useful lives as follows:
Asset Estimated useful life range ---------------------------------------------------------------------------- Customer relationships 5 years Other intangible assets less than 1 year - 5 years
(m) Impairment of Assets (excluding goodwill)
At each statement of financial position date, the Company reviews the carrying amounts of its tangible and intangible assets 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. An impairment loss is recognized immediately in the statement 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. A reversal of an impairment loss is recognized immediately in the statement of earnings.
(n) Inventories
Inventories are valued at the lower of cost and net realizable value.
Cost of equipment, repair and distribution parts and direct materials include purchase cost and costs incurred in bringing each product to its present location and condition. Serialized inventory is determined on a specific item basis. Non-serialized inventory is determined based on a weighted average actual cost.
Cost of work-in-process includes cost of direct materials, labour and an allocation of manufacturing overheads, excluding borrowing costs, based on normal operating capacity.
Cost of inventories include the transfer from accumulated other comprehensive income (loss) 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. 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.
(o) Work-in-Progress and Billings in Excess of Cost and Estimated Earnings
Fixed price engineering and construction contracts are presented in the statement of financial position as follows:
- For each contract, the accumulated cost incurred, less cost recognized on the contracts' percentage of completion revenue recognition, are shown in current assets in the statement of financial position under "Inventories".
- Where the payments received or receivable for any contract exceed the cost and estimated earnings less provision for any anticipated losses, the excess is shown as "deferred revenue" within current liabilities
(p) Trade and Other Receivables
Trade receivables are recognized and carried at original invoice amount less an allowance for any amounts estimated to be uncollectible. An estimate for doubtful debts is made when there is objective evidence that the collection of the full amount is no longer probable under the terms of the original invoice. Impaired debts are derecognized when they are assessed as uncollectible.
(q) Cash
Cash includes cash and cash equivalents, which are defined as highly liquid investments with original maturities of three months or less.
(R) 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.
If the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized in the statement of earnings as a finance cost.
(s) 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 administrated by a plan trustee, in accordance with the plan document. The actual cost of providing benefits through defined contribution pension plans is charged to income in the period in respect of which contributions become payable.
(t) Share-Based Payments
Certain employees of the Company participate in Toromont's Executive Stock Option Plan. Stock options have a seven-year term, vest 20% cumulatively on each anniversary date of the grant and are exercisable at the designated common share price, which is fixed at prevailing market prices of the common shares at the date the option is granted.
Concurrent with the effective date of the Arrangement, Enerflex has adopted a stock option plan with similar terms to the Toromont Plan.
(u) Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use an asset.
The Company has entered into various operating leases, the payments for which are recognized as an expense in the statement of earnings on a straight-line basis over the lease terms.
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.
Amounts due from leases under 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.
Company as a Lessee:
Assets held under finance lease are initially recognized as assets of the Company at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.
Lease payments are apportioned between finance charges and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Company's general policy on borrowing costs. Contingent rentals are recognized as expenses in the period in which they are incurred.
Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.
In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of the rental expense on a straight-line basis except where another systematic basis is more representative of the time pattern in which the economic benefits from the leased asset are consumed.
(v) Revenue Recognition
Revenue is recognized to the extent that it is probable economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, sales taxes and duties. In addition to this general policy, the following describes the specific revenue recognition policies for each major category of revenue:
(i) Revenues from the supply of equipment systems involving design, manufacture, installation and start-up are recorded based on the stage of completion, where the stage of completion measured by reference to costs incurred to date as a percentage of total estimated costs each the project. Any foreseeable losses on such projects are charged to operations when determined.
(ii) Revenues from equipment rentals are recognized in accordance with the terms of the relevant agreement with the customer, generally on a straight-line basis over the term of the agreement.
(iii) Product support services include sales of parts and servicing of equipment. For the sale of parts, revenues are recognized when the part is shipped to the customer. For servicing of equipment, revenues are recognized on a stage of completion basis determined based on performance of the contracted upon services.
(iv) Revenues from long-term service contracts are recognized on a stage of completion basis proportionate to the service work that has been performed based on parts and labour service provided. At the completion of the contract, any remaining profit on the contract is recognized as revenue. Any losses estimated during the term of the contract are recognized when identified.
(w) Financial Instruments
The Company classifies all financial instruments into one of the following categories: loans and receivables, held to maturity investments, assets available for sale, other financial liabilities or assets/liabilities held for trading. Financial instruments are measured at fair value on initial recognition. After initial recognition, financial instruments are measured at their fair values, except for loans and receivables and other financial liabilities, which are measured at cost or amortized cost using the interest rate method.
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 ongoing 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).
- 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 classified as assets held for trading and are measured at fair value. Gains and losses resulting from the periodic revaluation are recorded in net income.
- Accounts receivable and net investment in sales-type lease are classified as loans and receivables and are recorded at amortized cost using the effective interest rate method.
- Accounts payable and accrued liabilities and note payable to Toromont are classified as other financial liabilities. Subsequent measurements are recorded at amortized cost using the effective interest rate method.
Transaction costs are expensed as incurred for financial instruments classified or designated as held for trading. Transaction costs for financial assets classified as available for sale are added to the value of the instrument at acquisition. Transaction costs related to other financial liabilities are added to the value of the instrument at acquisition and taken into net income using the effective interest rate method.
(x) Derivative Financial Instruments and Hedge Accounting
Derivative financial agreements are used to manage exposure to fluctuations in exchange rates. The Company does not enter into derivative financial agreements for speculative purposes.
Derivative financial instruments, including embedded derivatives, are measured at their fair value upon initial recognition and on each subsequent reporting date. The fair value of quoted derivatives is equal to their positive or negative market value. If a market value is not available, the fair value is calculated using standard financial valuation models, such as discounted cash flow or option pricing models. 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 firm commitments. These are also designated as cash flow hedges. For cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognized in accumulated other comprehensive income, net of taxes. The ineffective portion of the fair value changes is recognized in net income. Amounts charged to accumulated other comprehensive income are reclassified to the statement of earnings when the hedged transaction affects the statement of earnings.
All hedging relationships are formally documented, including the risk management objective and strategy. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions.
(y) 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 profit differs from profit as reported in the statement of earnings because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated by using tax rates that have been enacted or substantively enacted by the statement of financial position date.
Deferred income tax is recognized on all temporary differences at the statement of financial position date 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 statement of financial position 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 statement of financial position 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 statement of financial position date.
Current and deferred income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise, income tax is recognized in the statement of earnings.
(z) Discontinued Operations
The results of discontinued operations are presented net of tax on a one-line basis in the statement of earnings. Direct corporate overheads and income taxes are allocated to discontinued operations. Interest expense (income) and general corporate overheads are not allocated to discontinued operations.
Note 4. Change in Accounting Policies
(a) First-Time Adoption of IFRS
March 31, 2011 is the Company's first reporting period under IFRS. IFRS 1 First-Time Adoption of International Financial Reporting Standards provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions in certain areas to the general requirement for full retrospective adoption of IFRS. Most adjustments required on transition to IFRS are made retrospectively against opening retained earnings as of the date of the first comparative statement of financial position presented, which is January 1, 2010.
The following are a summary of the key transitional provisions that were
adopted on January 1, 2010. The impact of transition to IFRS is presented in
Note 24.
Area of IFRS Summary of Exemption Policy Elected
Available
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Business The Company may elect on The Company has applied the
combinations transition to IFRS to either elective exemption such that
restate all past business business combinations
combinations in accordance entered into prior to
with IFRS 3 Business transition date have not
Combinations or to apply an been restated.
elective exemption from
applying IFRS to past Transitional impact: None.
business combinations.
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Property, plant The Company may elect on The Company did not elect to
and equipment transition to IFRS to report report any items of
items of property, plant and property, plant and
equipment in its opening equipment in its opening
statement of financial statement of financial
position at a deemed cost position at a deemed cost
instead of the actual cost instead of the actual cost
that would be determined that would be determined
under IFRS. The deemed cost under IFRS.
of an item may be either its
fair value at the date of Transitional impact: None.
transition to IFRS or an
amount determined by a
previous revaluation under
pre-changeover Canadian GAAP
(as long as that amount was
close to either its fair
value, cost or adjusted
cost). The exemption can be
applied on an asset-by-asset
basis.
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Foreign Exchange On transition, cumulative The Company elected to
translation gains or losses reclassify all cumulative
in accumulated other translation gains and losses
comprehensive income (OCI) at the date of transition to
can be reclassified to retained earnings.
retained earnings. If not
elected, all cumulative Transitional impact: See
translation differences must Note 24.
be recalculated under IFRS
from inception.
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Borrowing Costs On transition, the Company The Company elected to
must select a commencement capitalize borrowing costs
date for capitalization of on all qualifying assets
borrowing costs relating to commencing January 1, 2010.
all qualifying assets which
is on or before January 1, Transitional impact: None.
2010.
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The following are key IFRS 1 mandatory exceptions from full retrospective
application of IFRS:
Area of IFRS Mandatory exception applied
----------------------------------------------------------------------------
Hedge Accounting Only hedging relationships that satisfied the hedge
accounting criteria as of January 1, 2010 are reflected
as hedges in the Company's financial statements under
IFRS.
----------------------------------------------------------------------------
Estimates Hindsight was not used to create or revise estimates.
The estimates previously made by the Company under
Canadian GAAP are consistent with their application
under IFRS.
----------------------------------------------------------------------------
In addition to the one-time transitional impacts described above, several
accounting policy differences will impact the Company on a go forward basis.
The significant accounting policy differences are presented below.
Area of IFRS Policy Difference Status
----------------------------------------------------------------------------
Share-based Payments The valuation of stock The impact of these
options under IFRS changes is not
requires individual significant.
'tranche based' valuations
for those option plans
with graded vesting, while
Canadian GAAP allowed a
single valuation for all
tranches.
----------------------------------------------------------------------------
Impairment of assets IFRS requires impairment The Company has identified
testing be done at the more cash generating units
smallest identifiable than the reporting units
group of assets that used to assess for
generate cash inflows from impairment under Canadian
other groups of assets GAAP.
('cash generating unit'),
rather than the reporting The impact of this policy
level considered by change will be dependant
Canadian GAAP. on the facts and
circumstances at the time
IFRS requires the of each impairment test.
assessment of asset
impairment to be based on
discounted future cash-
flows.
IFRS allows for reversal
of impairment losses other
than for goodwill and
indefinite life intangible
assets, while Canadian
GAAP did not.
----------------------------------------------------------------------------
Borrowing costs Under IFRS, borrowing The impact of this policy
costs will be capitalized change will be dependant
to assets which take a on the magnitude of
substantial time to capital spend on
develop or construct using qualifying assets in the
a capitalization rate future. Generally, this
based on the Company's would reduce finance costs
weighted average cost of and increase property,
borrowing. plant and equipment
balances and associated
depreciation for those
assets.
----------------------------------------------------------------------------
Financial Statement IFRS requires Financial statement
Presentation & significantly more disclosures for the period
Disclosure disclosure than Canadian ended March 31, 2011 have
GAAP for certain been updated to reflect
standards. IFRS requirements.
----------------------------------------------------------------------------
(b) Future Accounting Changes
The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Company:
As of January 1, 2013, the Company will be required to adopt IFRS 9 Financial Instruments; IFRS 10 Consolidated Financial Statements; IFRS 12 Disclosure of Interest in Other Entities; and IFRS 13 Fair Value Measurement.
IFRS 9 Financial Instruments is the result of the first phase of the IASB's project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Company is in the process of assessing the impact of adopting IFRS 9, if any.
IFRS 10 Consolidated Financial Statements replaces the consolidation requirements in SIC-12 Consolidation-Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. The Standard identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance to assist in the determination of control where this is difficult to assess. The Company is in the process of assessing the impact of adopting IFRS 10, if any.
IFRS 11 Joint Arrangements replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities - Non-Monetary Contributions by Venturers. IFRS 11 uses some of the terms that were originally used by IAS 31, but with different meanings. This Standard addresses two forms of joint arrangements (joint operations and joint ventures) where there is joint control. IFRS 11 is effective January 1, 2013 and the Company is in the process of assessing the impact of adopting IFRS 11, if any.
IFRS 12 Disclosure of Interest in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective January 1, 2013 and the Company is in the process of assessing the impact of adopting IFRS 12, if any.
IFRS 13 Fair Value Measurement provides new guidance on fair value measurement and disclosure requirements for IFRS. IFRS 13 is effective January 1, 2013 and the Company is in the process of assessing the impact of adopting IFRS 13, if any.
Note 5. Business Acquisition
No businesses were acquired in the first quarter of 2011.
On January 20, 2010, Toromont completed its offer for the units of Enerflex Systems Income Fund ("ESIF").
Toromont paid approximately $315.5 million in cash and issued approximately 11.9 million of Toromont Industries Ltd. ("Toromont") common shares to complete the acquisition. For accounting purposes, the cost of Enerflex's common shares issued in the Acquisition was calculated based on the average share price of traded on the TSX on the relevant dates.
Prior to the acquisition, Toromont owned 3,902,100 Trust Units which were purchased with cash of $37.8 million ($9.69 per unit). Prior to the date of acquisition, Toromont designated its investment in ESIF as available-for-sale and as a result the units were measured at fair value with the changes in fair value recorded in Other Comprehensive Income ("OCI"). On acquisition, the cumulative gain on this investment was reclassified out of OCI and into the income statement. The fair value of this investment was included in the cost of purchase outlined below. The fair value of these units at January 20, 2010 was $56.4 million, resulting in a pre-tax gain of $18.6 million.
Purchase Price --------------- Units owned by Toromont prior to Offer $ 56,424 Cash consideration 315,539 Issuance of Toromont common shares 328,105 ---------------------------------------------------------------------------- Total $ 700,068 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The acquisition is accounted for as a business combination using the purchase method of accounting with Enerflex designated as the acquirer of ESIF. Results from ESIF have been consolidated from the acquisition date, January 20, 2010.
Cash used in the investment is determined as follows:
Cash consideration $ 315,539
less cash acquired (23,006)
----------------------------------------------------------------------------
$ 292,533
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The purchase cost was allocated to the underlying assets acquired and liabilities assumed based upon their fair value at the date of acquisition. The Company determined the fair values based on discounted cash flows, market information, independent valuations and management's estimates.
The final allocation of the purchase price was as follows:
Purchase price allocation
--------------------------
Cash $ 23,006
Non-cash working capital 125,742
Property, plant and equipment 135,400
Rental equipment 67,587
Other long term assets 24,315
Intangible assets with a finite life
Customer relationships 38,400
Other 5,700
Long term liabilities (181,388)
----------------------------------------------------------------------------
Net identifiable assets 238,762
Residual purchase price allocated to goodwill 461,306
----------------------------------------------------------------------------
$ 700,068
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-cash working capital includes accounts receivable of $109 million, representing gross contractual amounts receivable of $115 million less management's best estimate of the contractual cash flows not expected to be collected of $6 million.
Factors that contributed to a purchase price that resulted in the recognition of goodwill include: the existing ESIF business; the acquired workforce; time-to-market benefits of acquiring an established manufacturing and service organization in key international markets such as Australia, Europe and the Middle East; and the combined strategic value to the Company's growth plan. The amount assigned to goodwill is not expected to be deductible for tax purposes.
Note 6. Discontinued Operations
Effective February 2011, the Company sold the shares of Enerflex Environmental Australia Pty ("EEA")to a third party, as the business was not considered core to the future growth of the entity. Total consideration received was $3.4 million, net of cash and resulted in a pre-tax gain of $2.5 million, less tax of $1.1 million.
Effective September 2010, the Company sold certain assets and the operations of Syntech Enerflex, an electrical, instrumentation and controls business, as the business was not considered core to the future growth of the Company.
Total consideration received was $7.0 million, comprised of $3.5 million cash and $3.5 million in note receivable due in twelve equal installments, plus interest, commencing January 2011. Net assets disposed, including transaction costs, also totaled $7.0 million, comprised of $6.0 million of non-cash working capital and $1.0 million of capital assets.
The following table summarizes the revenues, income (loss) before income taxes, and income taxes from discontinued operations for the three months ended March 31, 2011 and 2010:
March 31, 2011 March 31, 2010
Net Loss Net Loss
Before Income Before Income
Revenue Tax Tax Revenue Tax Tax
------------------------------------------------------
Syntech Enerflex $ - $ - $ - $14,233 $ (1,152) $ 289
EEA $ 2,653 $ (239) $ 75 $ 1,199 $ (601) $ 181
Note 7. Accounts Receivable
Accounts receivable consisted of the following:
March 31, December March 31, January 1,
2011 31, 2010 2010 2010
----------------------------------------------------------------------------
Trade receivables $ 193,280 $ 200,382 $ 142,096 $ 70,874
Less: allowance for doubtful
accounts 6,757 6,217 2,709 2,029
----------------------------------------------------------------------------
Trade receivable, net 186,523 194,165 139,387 68,845
Other receivables 70,979 49,073 27,585 9,166
----------------------------------------------------------------------------
Total accounts receivable $ 257,502 $ 243,238 $ 166,972 $ 78,011
----------------------------------------------------------------------------
Aging of trade receivables:
March 31, December March 31, January 1,
2011 31, 2010 2010 2010
----------------------------------------------------------------------------
Current to 90 days $ 174,503 $ 182,538 $ 130,362 $ 67,199
Over 90 days 18,777 17,844 11,734 3,675
----------------------------------------------------------------------------
$ 193,280 $ 200,382 $ 142,096 $ 70,874
----------------------------------------------------------------------------
Movement in allowance for doubtful accounts:
March 31, March 31,
2011 2010
----------------------------------------------------------------------------
Balance, beginning of period $ 6,217 $ 2,029
Provisions and revisions, net 540 680
----------------------------------------------------------------------------
Balance, end of period $ 6,757 $ 2,709
----------------------------------------------------------------------------
Note 8. Inventory
Inventory consisted of the following:
March 31, December March 31, January 1,
2011 31, 2010 2010 2010
----------------------------------------------------------------------------
Equipment $ 25,384 $ 35,171 $ 54,699 $ 33,896
Repair and distribution parts 43,751 41,611 56,832 18,620
Direct materials 46,874 53,935 111,384 73,534
Work in progress 62,728 92,138 56,941 41,225
----------------------------------------------------------------------------
Total Inventory $ 178,737 $ 222,855 $ 279,856 $ 167,275
----------------------------------------------------------------------------
The amount of inventory recognized as an expense and included in cost of goods sold accounted for other than by the percentage-of-completion method during the first quarter of 2011 was $68.3 million (2010 - $65.0 million). The cost of goods sold includes inventory write-downs pertaining to obsolescence and aging together with recoveries of past write-downs upon disposition. The net amount charged to the income statement and included in cost of goods sold during the first quarter of 2011 was $0.1 million (2010 - recovery of $0.1 million).
Note 9. Property, Plant and Equipment and Rental Equipment
Assets Property,
under Plant and Rental
Land Building Equipment construction Equipment Equipment
----------------------------------------------------------------------------
Cost
December 31,
2010 47,384 107,845 44,222 15,611 215,062 132,703
Additions - 144 941 1,311 2,396 4,012
Disposals (210) (778) (1,143) - (2,131) (2,744)
Currency
translation
effects (154) (923) (1,088) (22) (2,187) (846)
----------------------------------------------------------------------------
March 31,
2011 47,020 106,288 42,932 16,900 213,140 133,125
Accumulated
Depreciation
December 31,
2010 - (18,308) (24,714) - (43,022) (16,541)
Depreciation
charge - (1,829) (2,110) - (3,939) (4,029)
Disposals - 27 160 - 187 769
Currency
translation
effects - 221 1,198 - 1,419 (617)
----------------------------------------------------------------------------
March 31,
2011 - (19,889) (25,466) - (45,355) (20,418)
----------------------------------------------------------------------------
Net book
value -
March 31,
2011 47,020 86,399 17,466 16,900 167,785 112,707
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets Property,
under Plant and Rental
Land Building Equipment construction Equipment Equipment
----------------------------------------------------------------------------
January 1,
2010
Opening - Cost 13,287 62,214 33,721 497 109,719 69,012
Business
Combinations 27,575 53,172 16,501 36,252 133,500 69,072
Reclassifications - - - - - -
Additions 190 2,370 46 5,139 7,745 3,737
Disposal (190) (7,105) (1,320) - (8,615) (2,802)
Currency
translation
effects (144) 611 (1,821) 2,419 1,065 169
----------------------------------------------------------------------------
March 31,
2010 40,718 111,262 47,127 44,307 243,414 139,188
Accumulated
Depreciation
January 1,
2010 - (16,904) (23,034) - (39,938) (9,870)
Depreciation
charge - (1,504) (2,041) - (3,545) (4,052)
Depreciation of
disposals - 4,306 1,023 - 5,329 920
Currency
translation
effects - 220 638 - 858 (4,001)
----------------------------------------------------------------------------
March 31,
2010 - (13,882) (23,414) - (37,296) (17,003)
----------------------------------------------------------------------------
Net book value
- March 31,
2010 40,718 97,380 23,713 44,307 206,118 122,185
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets Property,
under Plant and Rental
Land Building Equipment construction Equipment Equipment
----------------------------------------------------------------------------
Cost
January 1,
2010 13,287 62,214 33,721 497 109,719 69,012
Business
Combinations 31,906 50,741 16,501 36,252 135,400 67,587
Reclassifications - - - (32,121) (32,121) 32,121
Additions 6,460 3,633 3,126 10,983 24,202 30,062
Disposal (377) (1,852) (6,318) - (8,547) (63,138)
Currency
translation
effects (3,892) (6,891) (2,808) - (13,591) (2,941)
----------------------------------------------------------------------------
December 31,
2010 47,384 107,845 44,222 15,611 215,062 132,703
Accumulated
Depreciation
January 1,
2010 - (16,904) (23,034) - (39,938) (9,870)
Depreciation
charge - (6,589) (9,785) - (16,374) (11,765)
Depreciation of
disposals - 800 4,564 - 5,364 3,047
Currency
translation
effects - 4,385 3,542 - 7,927 2,047
----------------------------------------------------------------------------
December 31,
2010 - (18,308) (24,713) - (43,021) (16,541)
----------------------------------------------------------------------------
Net book value -
December 31,
2010 47,384 89,537 19,509 15,611 172,041 116,162
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note 10. Other long-term assets
March 31, December March 31, January 1,
2011 31, 2010 2010 2010
----------------------------------------------------------------------------
Investment in associates $ 4,527 $ 3,146 $ 2,250 $ -
Net investment in sales type
lease 8,599 10,651 - -
Investments in units of ESIF - - - 56,502
Other 90 - 17 -
----------------------------------------------------------------------------
$ 13,216 $ 13,797 $ 2,267 $ 56,502
----------------------------------------------------------------------------
The value of the net investment is comprised of the following:
March 31, December 31,
2011 2010
----------------------------------------------------------------------------
Minimum future lease payments $ 20,281 $ 23,202
Unearned finance income (1,494) (1,900)
----------------------------------------------------------------------------
18,787 21,302
Less current portion 10,188 10,651
----------------------------------------------------------------------------
$ 8,599 $ 10,651
----------------------------------------------------------------------------
The interest rate inherent in the lease is fixed at the contract date for
the entire lease term and is approximately 9% per annum.
Note 11. Intangible assets
March 31, 2011
Accumulated
Acquired value amortization Net book value
----------------------------------------------------------------------------
Customer relationships $ 38,400 $ 9,689 $ 28,711
Software & Other 14,174 6,337 7,837
----------------------------------------------------------------------------
$ 52,574 $ 16,026 $ 36,548
----------------------------------------------------------------------------
December 31, 2010
Accumulated
Acquired value amortization Net book value
----------------------------------------------------------------------------
Customer relationships $ 38,400 $ 7,658 $ 30,742
Software & Other 14,174 5,454 8,720
----------------------------------------------------------------------------
$ 52,574 $ 13,112 $ 39,462
----------------------------------------------------------------------------
March 31, 2010
Accumulated
Acquired value amortization Net book value
----------------------------------------------------------------------------
Customer relationships $ 38,400 $ 1,563 $ 36,837
Software & Other 7,286 1,028 6,258
----------------------------------------------------------------------------
$ 45,686 $ 2,591 $ 43,095
----------------------------------------------------------------------------
Note 12. Accounts payables, accrued liabilities and provisions
March 31, December March 31, January 1,
2011 31, 2010 2010 2010
----------------------------------------------------------------------------
Accounts payables and
accrued liabilities $ 121,291 $ 149,884 $ 113,373 $ 57,584
Provisions 14,939 14,538 15,203 11,289
----------------------------------------------------------------------------
$ 136,230 $ 164,422 $ 128,576 $ 68,873
----------------------------------------------------------------------------
Note 13. Income Taxes
The provision for income taxes differs from that which would be expected by
applying Canadian statutory rates. A reconciliation of the difference is as
follows:
Three Months Ended
March 31
2011 2010
-------------------------
Earnings before income taxes $ 12,359 $ 12,724
Canadian statutory rate 26.6% 28.1%
-------------------------
Expected income tax provision $ 3,287 $ 3,575
Add (deduct)
Income taxed in foreign jurisdictions 667 579
Non-taxable portion of gain on available for sale
financial assets - (3,938)
Other (215) 360
-------------------------
Income tax provision $ 3,739 $ 576
-------------------------
-------------------------
The composition of the income tax provision is as follows:
Three Months Ended
March 31
2011 2010
-------------------------
Current taxes $ 4,279 $ 493
Deferred taxes (540) 83
-------------------------
Income tax provision $ 3,739 $ 576
-------------------------
-------------------------
Note 14. Note payable
Debt is comprised of a note payable to Toromont based on allocations of Toromont's debt and reflect adjustments to achieve Enerflex's new capital structure. The Note Payable is unsecured and bears interest at the weighted average cost of borrowing of Toromont, which at March 31, 2011 was 6.0% (December 31, 2010 - 6.0%). This note payable has no fixed terms of repayment, and has been paid in its entirety concurrent with the effective date of the Arrangement.
Note 15. Guarantees, Commitments and Contingencies
At March 31, 2011, the Company had outstanding letters of credit of $ 62,311 (December 31, 2010 - $ 61,162).
The Company is involved in litigation and claims associated with normal operations against which certain provisions have been made in the financial statements. Management is of the opinion that any resulting net settlement would not materially affect the financial position, results of operations or liquidity of the Company.
The Note Payable, and aggregate minimum future required lease payments, primarily for operating leases for equipment, automobiles and premises, are $ 255,147 payable over the next five years and thereafter as follows:
2011 $ 216,820
2012 9,951
2013 7,517
2014 5,644
2015 4,264
Thereafter 10,951
------------
Total $ 255,147
------------
------------
In addition, the Company has purchase obligations over the next three years
as follows:
2011 $ 41,747
2012 1,184
2013 998
Note 16. Employee benefits
The Company sponsors pension arrangements for substantially all of its employees through defined contribution plans in Canada, Europe 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.
The amount expensed under the Company's employee benefit plans was:
Three months ended
March 31, March 31,
2011 2010
---------------------------
Defined contribution plans $ 1,001 $ 1,392
401(k) matched savings plan 225 223
---------------------------
Net pension expense $ 1,226 $ 1,615
---------------------------
Note 17. Financial Instruments
Designation and valuation of financial instruments
The Company has designated its financial instruments as follows:
Carrying Estimated
March 31, 2011 Value Fair Value
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents(i) $ 28,573 $ 28,573
Derivative instruments designated as fair
value through profit or loss ("FVTPL") - -
Derivative instruments in designated hedge
accounting relationships 1,318 1,318
Loans and receivables:
Accounts receivable 257,502 257,502
Financial Liabilities
Derivative instruments designated as FVTPL 3 3
Derivative instruments in designated hedge
accounting relationships 787 787
Other financial liabilities
Accounts payable and accrued liabilities 136,230 136,230
Note payable 206,680 206,680
(i) Includes $1,517 of highly liquid short-term investments with original
maturities of three months or less.
Carrying Estimated
December 31, 2010 Value Fair Value
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents $15,000 $15,000
Derivative instruments designated as FVTPL - -
Derivative instruments in designated hedge
accounting relationships 448 448
Loans and receivables:
Accounts receivable 243,328 243,328
Financial Liabilities
Derivative instruments designated as FVTPL 26 26
Derivative instruments in designated hedge
accounting relationships 577 577
Other financial liabilities
Accounts payable and accrued liabilities 164,422 164,422
Note payable 215,000 215,000
Carrying Estimated
March 31, 2010 Value Fair Value
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents $15,000 $15,000
Derivative instruments designated as FVTPL 29 29
Derivative instruments in designated hedge
accounting relationships 1,906 1,906
Loans and receivables:
Accounts receivable 166,972 166,972
Financial Liabilities
Derivative instruments designated as FVTPL - -
Derivative instruments in designated hedge
accounting relationships 84 84
Other financial liabilities
Accounts payable and accrued liabilities 128,576 128,576
Note payable 280,005 280,005
Carrying Estimated
January 1, 2010 Value Fair Value
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents $34,949 $34,949
Derivative instruments designated as FVTPL - -
Derivative instruments in designated hedge
accounting relationships 13 13
Loans and receivables:
Accounts receivable 78,011 78,011
Financial Liabilities
Derivative instruments designated as FVTPL - -
Derivative instruments in designated hedge
accounting relationships - -
Other financial liabilities
Accounts payable and accrued liabilities 68,873 68,873
Note payable 73,570 73,570
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 March 31, 2011 and indicates the fair value hierarchy of the valuation techniques used to determine such fair value. During the three-month period ended March 31, 2011, there were no transfers between Level 1 and Level 2 fair value measurements.
Fair Value
Carrying ------------------------------
Value Level 1 Level 2 Level 3
----------------------------------------------------------------------------
Financial Assets
Derivative financial instruments $ 1,318 - $ 1,318 -
Financial Liabilities
Derivative financial instruments $ 790 - $ 790 -
The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability and may affect placement within.
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, other long term liabilities and note payable to Toromont are reported at their fair values on the statement of financial position. The fair values equal the carrying values for these instruments due to their short-term nature.
The fair value of derivative financial instruments is measured using the discounted value of the difference between the contract's value at maturity based on the contracted foreign exchange rate and the contract's value at maturity based on prevailing exchange rates. The financial institution's credit risk is also taken into consideration in determining fair value.
Fair values are determined using inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Fair values determined using inputs including forward market rates and credit spreads that are readily observable and reliable, or for which unobservable inputs are determined not to be significant to the fair value, are categorized as Level 2. Foreign exchange contract fair values falling within the level 2 of the fair value hierarchy include those determined by using a benchmark index and applying that index to the notional amount outstanding.
Derivative financial instruments and hedge accounting
Foreign exchange contracts and options are transacted with financial institutions to hedge foreign currency denominated obligations related to purchases of inventory and sales of products. The following table summarizes the Company's commitments to buy and sell foreign currencies as at March 31, 2011:
Notional
Amount Maturity
----------------------------------------------------------------------------
Canadian dollar denominated
contracts
Purchase contracts USD 13,972 April 2011 to February 2012
EUR 54 April 2011 to February 2012
Sales contracts USD 71,293 August 2011
EUR 3,004 August 2011
Australian dollar denominated
contracts
Purchase contracts USD 6,888 April 2011 to December 2011
EUR 765 May 2011 to August 2011
Management estimates that a gain of $528 would be realized if the contracts were terminated on March 31, 2011. Certain of these forward contracts are designated as cash flow hedges, and accordingly, a gain of $589 has been included in other comprehensive income. These gains are not expected to affect net income as the gains will be reclassified to net income and will offset losses recorded on the underlying hedged items, namely foreign currency denominated accounts payable and accounts receivable.
All hedging relationships are formally documented, including the risk management objective and strategy. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions.
Risks arising from financial instruments and risk management
In the normal course of business, the Company is exposed to financial risks that may potentially impact its operating results in any or all of its business segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates and interest rates. The Company does not enter into derivative financial agreements for speculative purposes.
Foreign Currency Risk
In the normal course of operations, the Company is exposed to movements in the U.S. dollar, the Australian dollar, the Euro, the Pakistani rupee and the Indonesian rupiah. In addition, Enerflex has significant international exposure through export from its Canadian operations as well as a number of foreign subsidiaries, the most significant of which are located in the United States, Australia, the Netherlands and the United Arab Emirates. The Company does not hedge its net investment exposure in foreign subsidiaries.
The types of foreign exchange risk and the Company's related risk management strategies are as follows:
Transaction exposure
The Canadian operations of the Company source the majority of its products and major components from the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company mitigates exchange rate risk by entering into foreign currency contracts to fix the cost of imported inventory where appropriate.
The Company also sells compression packages in foreign currencies, primarily the U.S. dollar, the Australian dollar and the Euro and enters into foreign currency contracts to reduce these exchange rate risks.
Most of Enerflex' international orders are manufactured in the U.S. operations if the contract is denominated in U.S. dollars. This minimizes the Company's foreign currency exposure on these contracts.
The Company identifies and hedges all significant transactional currency risks.
Translation exposure
The Company's earnings from and net investment in, foreign subsidiaries are exposed to fluctuations in exchange rates. The currencies with the most significant impact are the US dollar, Australian dollar and the Euro.
Assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the statement of financial position dates. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in income when there has been a reduction in the net investment in the foreign operations.
Earnings at foreign operations are translated into Canadian dollars each period at current exchange rates for the period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net income. Such exchange rate fluctuations have historically not been material year-over-year relative to the overall earnings or financial position of the Company. The following table shows the effect on net income before tax for the period ended March 31, 2011 of a 5% weakening of the Canadian dollar against the US dollar, Euro and Australian dollar, everything else being equal. A 5% strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis is provided as an indicative range in a volatile currency environment.
Canadian dollar weakens by 5% USD Euro AUD ---------------------------------------------------------------------------- Net income before tax $ 582 $ (88) $ (298)
Sensitivity analysis
The following sensitivity analysis is intended to illustrate the sensitivity to changes in foreign exchange rates on the Company's financial instruments and show the impact on net earnings and comprehensive income. Financial instruments affected by currency risk include cash and cash equivalents, accounts receivable, accounts payable and derivative financial instruments. This sensitivity analysis relates to the position as at March 31, 2011 and for the period then ended. The following table shows the Company's sensitivity to a 5% weakening of the Canadian dollar against the US dollar, Euro and Australian dollar. A 5% strengthening of the Canadian dollar would have an equal and opposite effect.
Canadian dollar weakens by 5% USD Euro AUD ---------------------------------------------------------------------------- Financial instruments held in foreign operations: Other Comprehensive Income 1,046 557 1,814 Financial instruments held in Canadian operations: Net earnings (445) (106) 49 Other Comprehensive Income (1,910) 3 -
The movement in other comprehensive income in foreign operations reflects the change in the fair value of financial instruments. Gains or losses on translation of foreign subsidiaries are deferred in other comprehensive income. Accumulated currency translation adjustments are recognized in income when there is a reduction in the net investment in the foreign operation.
The movement in net earnings in Canadian operations is a result of a change in the fair values of financial instruments. The majority of these financial instruments are hedged.
The movement in other comprehensive income in Canadian operations reflects the change in the fair value of derivative financial instruments that are designated as cash flow hedges. The gains or losses on these instruments are not expected to affect net income as the gains or losses will offset losses or gains on the underlying hedged items.
Interest rate risk
The Company is exposed to interest rate risk on its note payable to Toromont. The interest rate charged by Toromont is based on Toromont's actual weighted-average cost of debt and is reset annually. As such, the Company is exposed to the same interest rate risk as Toromont. A 1.0% increase in interest rates, all things being equal, would reduce income before taxes by $2.1 million on an annualized basis.
Credit risk
Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, accounts receivable, net investment in sales type lease, and derivative financial instruments. The carrying amount of assets included on the statement of financial position represents the maximum credit exposure.
Cash equivalents consist mainly of short-term investments, such as money market deposits. The Company has deposited the cash equivalents with highly-rated financial institutions, from which management believes the risk of loss to be remote.
The Company has accounts receivable from clients engaged in various industries including natural gas producers, natural gas transportation, chemical and petrochemical processing and the generation and sale of electricity. These specific industries may be affected by economic factors that may impact accounts receivable. Management does not believe that any single customer represents significant credit risk.
The credit risk associated with net investment in sales-type lease arises from the possibility that the counterparty may default on their obligations. In order to minimize this risk, the Company enters into sales-type lease transactions only in select circumstances. Close contact is maintained with the customer over the duration of the lease to ensure visibility to issues as and if they arise.
The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly-rated financial institutions.
Liquidity risk
Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. As at March 31, 2011, the Company has $28.6 million in holdings of cash and cash equivalents (December 31, 2010 - $15.0 million). Accounts payable are primarily due within 90 days and will be satisfied from current working capital.
A liquidity analysis of the Company's financial instruments has been completed on a maturity basis. The following table outlines the cash flows associated with the maturity of the Company's financial liabilities:
Current
Derivative financial liabilities:
Foreign currency forward contracts 790
Other financial liabilities:
Accounts payable and accrued liabilities 136,230
Note payable to Toromont 206,680
The company expects that continued cash flows from operations in 2011 together with cash and cash equivalents on hand and credit facilities that will be available will be more than sufficient to fund its requirements for investments in working capital, and capital assets.
Note 18. Capital Disclosures
The capital structure of the Company consists of Owner's net investment 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 owners through the optimization of the debt and equity balances. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to owners, issue new Company shares, or access debt markets.
The Company formally reviews the capital structure on an annual basis and monitors it on an on-going basis. As part of this review, the Company considers the cost of capital and the risks associated with each class of capital. In order to position itself to execute its long-term plan to become a leading supplier of products and services to the global energy sector, the Company is maintaining a conservative statement of financial position. The Company uses the following measures to monitor its capital structure:
Net debt to equity ratio
The Company targets a Net debt to equity ratio of less than 1.00:1. At March 31, 2011, the Net debt to equity was 0.21:1 (December 31, 2010 - 0.24:1), calculated as follows:
March 31, December 31, March 31, January 1,
2011 2010 2010 2010
-------------------------------------------------
Note payable $ 206,680 $ 215,000 $ 280,005 $ 73,570
Cash (28,573) (15,000) (15,000) (34,949)
-------------------------------------------------
Net debt $ 178,107 $ 200,000 $ 265,005 $ 38,621
-------------------------------------------------
-------------------------------------------------
Owner's equity $ 849,734 $ 839,528 $ 835,280 $ 313,602
-------------------------------------------------
-------------------------------------------------
Net debt to equity ratio 0.21:1 0.24:1 0.32:1 0.12:1
-------------------------------------------------
Note 19. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information
Three months ended
March 31,
Cash provided by (used in) 2011 2010
changes in non-cash working capital
Accounts receivable $ (18,981) $ 20,262
Inventory 44,094 31,917
Accounts and taxes payable, accrued liabilities
and deferred revenue (27,576) (11,472)
Foreign currency and other 2,892 (13,443)
----------------------------------------------------------------------------
$ 429 $ 27,264
--------------------------
Resulting from operations $ 7,025 $ 33,720
Resulting from investing (6,907) (7,626)
Resulting from financing 311 1,170
----------------------------------------------------------------------------
$ 429 $ 27,264
--------------------------
Cash paid during the period:
Interest $ 1,430 $ -
Income taxes $ 2,739 $ 169
Note 20. Related Parties
Enerflex transacts with certain related parties as a normal course of business. Related parties include Toromont who owns 100% of Enerflex and Total Production Services Inc. ("Total") who was an influenced investee by virtue of the Company's 40% investment in Total.
All transactions occurring with both parties were in the normal course of business operations under the same terms and conditions as transactions with unrelated companies. A summary of the financials statement impacts of all transactions with all related parties are as follows:
March 31, December 31, March 31, January 1,
2011 2010 2010 2010
-----------------------------------------------
Revenue $ - $ 20 $ 6 $ -
Management fee 3,767 7,920 2,685 -
Purchases 223 1,279 281 -
Interest expense 1,168 5,484 815 -
Accounts receivable 70 61 6 3
Accounts payable 4,153 3,692 2,628 524
Note payable $ 206,680 $ 215,000 $ 280,005 $ 73,570
-----------------------------------------------
Note 21. Interest in Joint Venture
The Company proportionately consolidates its 50% interest in the assets, liabilities, results of operations and cash flows of its joint venture in Pakistan, Presson-Descon International (Private) Limited. The interest included in the Company's accounts includes:
March 31, December 31, March 31,
Statement of Financial Position 2011 2010 2010
----------------------------------------------------------------------------
Current assets $ 2,249 $ 2,477 $ 5,131
Long-term assets 495 518 235
------------------------------------------
Total Assets $ 2,744 $ 2,995 $ 5,366
------------------------------------------
------------------------------------------
Current liabilities $ 966 $ 894 $ 2,431
Long-term liabilities and equity 1,778 2,101 2,935
----------------------------------------------------------------------------
Total Liabilities and equity $ 2,744 $ 2,995 $ 5,366
------------------------------------------
------------------------------------------
Three Months Ended March 31,
2011 2010
----------------------------------------------------------------------------
Statement of Earnings
Revenue $ 19 $ 584
Expenses 312 651
--------------------------
Net loss $ (293) $ (67)
--------------------------
--------------------------
Three Months Ended March 31,
2011 2010
----------------------------------------------------------------------------
Cash Flows
From operations $ (229) $ (497)
From investing activities $ (18) $ (67)
From financing activities $ (3) $ (2)
Note 22. Segmented Information
The Company has three reportable operating segments as outlined below, each supported by the Corporate office. Corporate overheads are allocated to the business segments based on revenue.
The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies. No reportable operating segment is reliant on any single external customer.
Southern US
Canada and Northern US and S. America
Three months ended
March 31, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $143,558 $ 81,531 $ 89,475 $ 73,669
Intersegment revenue $ (1,260) $ (4,882) $ (136) $ (12)
----------------------------------------------------------------------------
External revenue $142,298 $ 76,649 $ 89,339 $ 73,657
----------------------------------------
Operating income $ 6,834 $ (2,466) $ 8,204 $ 4,055
----------------------------------------------------------------------------
As at March 31, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment Assets $457,906 $404,116 $164,386 $173,166
Corporate
Goodwill $270,046 $270,046 $ 56,510 $ 56,510
----------------------------------------------------------------------------
Total Segment assets $727,952 $674,162 $220,896 $229,676
----------------------------------------
Jan 1, Dec 31, Jan 1, Dec 31,
2010 2010 2010 2010
Segment Assets $297,265 $524,304 $204,831 $222,980
Corporate
Goodwill $ 21,350 $270,046 $ - $ 56,510
----------------------------------------------------------------------------
Total Segment assets $318,615 $794,350 $204,831 $279,490
International Total
Three months ended
March 31, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment revenue $ 96,919 $ 65,987 $329,952 $221,187
Intersegment revenue $ (2,151) $ (3,880) $ (3,547) $ (8,774)
----------------------------------------------------------------------------
External revenue $ 94,768 $ 62,107 $326,405 $212,413
----------------------------------------
Operating income $ (1,285) $ (3,904) $ 13,753 $ (2,315)
----------------------------------------------------------------------------
As at March 31, 2011 2010 2011 2010
----------------------------------------------------------------------------
Segment Assets $255,098 $295,933 $877,390 $ 873,215
Corporate (16,267) 23,929
Goodwill $156,100 $156,100 $482,656 $ 482,656
----------------------------------------------------------------------------
Total Segment assets $411,198 $452,033 $1,343,779 $1,379,800
--------------------------------------------
Jan 1, Dec 31, Jan 1, Dec 31,
2010 2010 2010 2010
Segment Assets $ 1,049 $280,482 $503,145 $1,027,766
Corporate (8,699) (132,866)
Goodwill $ - $156,100 $ 21,350 $ 482,656
----------------------------------------------------------------------------
Total Segment assets $ 1,049 $436,582 $515,796 $1,377,556
------------------------------------------
Note 23. Seasonality
The oil and natural gas service sector in Canada has a distinct seasonal trend in activity levels which results from well-site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex's Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while the Service and Rentals product line revenues are stable throughout the year. Rentals revenues are also impacted by both the Company's and its customers capital investment decisions. The international markets are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating.
Note 24. Transition to IFRS
As disclosed in Note 2, these interim Consolidated Financial Statements represent Enerflex's initial presentation of the results of operations and financial position under IFRS for the period ended March 31, 2011 in conjunction with the Company's annual audited Consolidated Financial Statements to be used under IFRS as at and for the year ended December 31, 2011. As a result, these interim Consolidated Financial Statements have been prepared in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standards" and with IAS 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"). Previously, the Company prepared its interim and annual financial statements in accordance with pre-changeover Canadian GAAP.
IFRS 1 requires the presentation of comparative information as at the January 1, 2010 transition date and subsequent comparative periods as well as the consistent and retrospective application of IFRS accounting policies. To assist with the transition, the provisions of IFRS allow for certain mandatory and elective exemptions for first-time adopters to alleviate the retrospective application of all IFRSs.
The following reconciliations present the adjustments made to the Company's previous GAAP financial results of operations and financial position to comply with IFRS 1. Reconciliations include the Company's Consolidated Statement of financial position as at January 1, 2010 and December 31, 2010, and Consolidated Statements of Changes in Owner's Equity for the three months ended March 31, 2010 and for the twelve months ended December 31, 2010. IFRS had no impact on the Consolidated Statements of Earnings, Comprehensive Income and Cash Flows.
IFRS polices have been retrospectively and consistently applied except where specific IFRS 1 exemptions are permitted to first-time adopters.
Significant differences upon transition to IFRS:
(A) Cumulative Translation Adjustment - the Company elected to reset the cumulative translation adjustment balance to zero as at January 1, 2010.
(B) Reclassification - the Company reclassified all deferred tax assets and liabilities as non-current.
ENERFLEX LTD.
Opening Consolidated Statement of Financial Position
As at January 1, 2010
(A) (B)
Cumulative
Canadian Translation
(Unaudited)(Thousands) GAAP Adjustment Reclassification IFRS
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash
equivalents $ 34,949 $ 34,949
Accounts
receivable 78,011 78,011
Inventory 167,275 167,275
Income taxes
receivable 5,776 5,776
Current tax assets 23,194 (23,194) -
Derivative
financial instruments 13 13
Other current
assets 3,104 3,104
----------------------------------------------------------------------------
Total current
assets 312,322 - (23,194) 289,128
Rental equipment 59,142 59,142
Property, plant
and equipment 69,781 69,781
Deferred tax assets 1,129 18,764 19,893
Other assets 56,502 56,502
Intangible assets - -
Goodwill 21,350 21,350
----------------------------------------------------------------------------
Total assets $ 520,226 - (4,430) $ 515,796
--------------------------------------------------------
LIABILITIES
Current
liabilities
Accounts payable
and accrued
liabilities and
provisions $ 68,873 $ 68,873
Income taxes
payable - -
Deferred revenue 59,751 59,751
Current tax
liability - -
Derivative
financial
instruments - -
----------------------------------------------------------------------------
Total current
liabilities 128,624 - 128,624
Note payable 73,570 73,570
Other long-term
liabilities - -
Deferred tax
liability 4,430 (4,430) -
----------------------------------------------------------------------------
206,624 - (4,430) 202,194
----------------------------------------------------------------------------
NET INVESTMENT
Owners net
investment 312,682 (14,709) 297,973
Accumulated other
comprehensive
income 920 14,709 15,629
Non-controlling
interest - -
----------------------------------------------------------------------------
Total net
investment and
non-controlling
interest 313,602 - 313,602
----------------------------------------------------------------------------
Total liabilities
and net investment $ 520,226 - (4,430) $ 515,796
--------------------------------------------------------
ENERFLEX LTD.
Consolidated Statement of Financial Position
As at March 31, 2010
(A) (B)
Cumulative
Canadian Translation
(Unaudited)(Thousands) GAAP Adjustment Reclassification IFRS
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash
equivalents 15,000 15,000
Accounts receivable 166,972 166,972
Inventory 279,856 279,856
Income taxes
receivable 13,090 13,090
Current tax assets 31,309 (31,309) -
Derivative financial
instruments 1,935 1,935
Other current assets 8,841 8,841
----------------------------------------------------------------------------
Total current assets 517,003 (31,309) 485,694
Rental equipment 122,185 122,185
Property, plant and
equipment 206,118 206,118
Deferred tax assets 6,476 31,309 37,785
Other assets 2,267 2,267
Intangible assets 43,095 43,095
Goodwill 482,656 482,656
----------------------------------------------------------------------------
Total assets 1,379,800 1,379,800
--------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and
accrued liabilities
and provisions 128,576 128,576
Income taxes payable 324 324
Deferred revenue 135,531 135,531
Derivative financial
instruments 84 84
Current tax
liability - -
----------------------------------------------------------------------------
Total current
liabilities 264,515 264,515
Note payable 280,005 280,005
----------------------------------------------------------------------------
544,520 544,520
----------------------------------------------------------------------------
NET INVESTMENT
Owner's net
investment 858,269 (14,709) 843,560
Accumulated other
comprehensive
(loss) income (23,508) 14,709 (8,799)
Non-controlling
interest 519 519
----------------------------------------------------------------------------
Total net investment
and non-controlling
interest 835,280 - 835,280
----------------------------------------------------------------------------
Total liabilities and
net investment 1,379,800 - 1,379,800
--------------------------------------------------------
ENERFLEX LTD.
Consolidated Statement of Financial Position
As at December 31, 2010
(A) (B)
Cumulative
Canadian Translation
(Unaudited)(Thousands) GAAP Adjustment Reclassification IFRS
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash
equivalents $15,000 $15,000
Accounts
receivable 243,238 243,238
Inventory 222,855 222,855
Income taxes
receivable 1,944 1,944
Current tax
assets 29,204 (29,204) -
Derivative
financial instruments 448 448
Other current
assets 22,013 22,013
----------------------------------------------------------------------------
Total current
assets 534,702 - (29,204) 505,498
Rental
equipment 116,162 116,162
Property, plant
and equipment 172,041 172,041
Deferred tax
assets 18,736 29,204 47,940
Other assets 13,797 13,797
Intangible
assets 39,462 39,462
Goodwill 482,656 482,656
----------------------------------------------------------------------------
Total assets $1,377,556 - - $ 1,377,556
--------------------------------------------------------
LIABILITIES
Current
liabilities
Accounts
payable and
accrued
liabilities and
provisions $164,422 $164,422
Income tax
payable 7,135 7,135
Deferred
revenue 150,319 150,319
Derivative
financial
instruments 603 603
Note payable 215,000 215,000
----------------------------------------------------------------------------
Total current
liabilities 537,479 - 537,479
Other long-term
liabilities 549 549
----------------------------------------------------------------------------
538,028 - 538,028
----------------------------------------------------------------------------
NET INVESTMENT
Owner's net
investment 864,686 (14,709) 849,977
Accumulated
other
comprehensive
(loss) income (25,554) 14,709 (10,845)
Non-controlling
interest 396 396
----------------------------------------------------------------------------
Total net
investment and
non controlling
interest 839,528 - 839,528
----------------------------------------------------------------------------
Total
liabilities and
net investment $1,377,556 $ - $ 1,377,556
--------------------------------------------------------
ENERFLEX LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
As at January 1, 2010
(Unaudited) ($ thousands)
(A)
Cumulative
Canadian Translation
GAAP Adjustment IFRS
----------------------------------------------------------------------------
Owner's Net Investment
Balance, beginning of period $ 312,682 (14,709) $ 297,973
Net income - -
Owners investment/dividend - -
----------------------------------------------------------------------------
Balance, end of period $ 312,682 (14,709) $ 297,973
----------------------------------------------------------------------------
Accumulated Other Comprehensive
Income
Balance, beginning of period $ 920 14,709 $ 15,629
Exchange differences on translation
of foreign operations - -
Gain on available-for-sale assets - -
Gain on cash flow hedges - -
----------------------------------------------------------------------------
Balance, end of period $ 920 14,709 $ 15,629
----------------------------------------------------------------------------
Non-Controlling Interest
Balance, beginning of period $ - $ -
Net income - -
----------------------------------------------------------------------------
Balance, end of period $ - $ -
----------------------------------------------------------------------------
Total $ 313,602 $ 313,602
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ENERFLEX LTD
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
As at March 31, 2010
(Unaudited) ($ thousands)
(A)
Cumulative
Canadian Translation
GAAP Adjustment IFRS
----------------------------------------------------------------------------
Owner's Net Investment
Balance, beginning of period $ 312,682 (14,709) $ 297,973
Net income 10,877 10,877
Owners investment/dividend 534,710 534,710
----------------------------------------------------------------------------
Balance, end of period $ 858,269 (14,709) $ 843,560
----------------------------------------------------------------------------
Accumulated Other Comprehensive
Income
Balance, beginning of period $ 920 14,709 $ 15,629
Exchange differences on translation
of foreign operations (9,382) (9,382)
Gain on available-for-sale assets (15,615) (15,615)
Gain on cash flow hedges 569 569
----------------------------------------------------------------------------
Balance, end of period $ (23,508) 14,709 $ (8,799)
----------------------------------------------------------------------------
Non-Controlling Interest
Balance, beginning of period $ - $ -
Net income 519 519
----------------------------------------------------------------------------
Balance, end of period $ 519 $ 519
----------------------------------------------------------------------------
Total $ 835,280 $ 835,280
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ENERFLEX LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
As at December 31, 2010
(Unaudited) ($ thousands)
(A)
Cumulative
Canadian Translation
GAAP Adjustment IFRS
----------------------------------------------------------------------------
Owner's Net Investment
Balance, beginning of period $ 312,682 (14,709) $ 297,973
Net income 25,024 25,024
Owners investment/dividend 526,980 526,980
----------------------------------------------------------------------------
Balance, end of period $ 864,686 (14,709) $ 849,977
----------------------------------------------------------------------------
Accumulated Other Comprehensive
Income
Balance, beginning of period $ 920 14,709 $ 15,629
Exchange differences on translation
of foreign operations (10,901) (10,901)
Gain on available-for-sale assets (15,615) (15,615)
Gain on cash flow hedges 42 42
----------------------------------------------------------------------------
Balance, end of period $ (25,554) 14,709 $ (10,845)
----------------------------------------------------------------------------
Non-Controlling Interest
Balance, beginning of period $ - $ -
Net income 396 396
----------------------------------------------------------------------------
Balance, end of period $ 396 $ 396
----------------------------------------------------------------------------
Total $ 839,528 $ 839,528
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note 25. Subsequent Events
Bifurcation Transaction
On November 8, 2010, the Board of Directors of Toromont unanimously approved in principle all actions to prepare for and implement a spinoff of Enerflex, Toromont's natural gas compression and processing equipment business, to Toromont's shareholders as a separate, publicly traded company. The spinoff is designed to enhance long term value for the shareholders of Toromont by separating its businesses into two distinct public companies better able to pursue independent strategies and opportunities for growth.
The transaction required Toromont shareholders to exchange their current Toromont shares for new shares in both Toromont and in Enerflex and was structured as a tax-deferred divestiture for Canadian tax purposes and be implemented through a court approved plan of arrangement.
Subsequent to March 31, 2011, at a special shareholders meeting held on May 16, 2011, the shareholders of Toromont voted in favour of the Plan of Arrangement to spinoff Enerflex into a standalone business. Enerflex began independent operations on June 1, 2011 pursuant to the Plan of Arrangement with Toromont, which received shareholder approval, satisfactory tax rulings and opinions from the Canada Revenue Agency and approval by the Ontario Superior Court of Justice (Commercial List). Enerflex Ltd. was listed on the Toronto Stock Exchange ("TSX") on June 1, 2011 and began trading under the symbol EFX on June 3, 2011.
The Board of Directors of Enerflex approved a dividend of $0.06 per share which will be paid on July 1, 2011 to shareholders of record on June 10, 2011.
Bank Facilities
Subsequent to March 31, 2011, the Company entered into several agreements with a syndicate of lenders for syndicated revolving credit facilities ("Bank Facilities"). The amount available under the Bank Facilities is $325 million, which consists of a committed 4-year $270 million revolving credit facility (the "Revolver"), a committed 4-year $10 million operating facility (the "Operator"), a committed 4-year $20 million Australian operating facility (the "Australian Operator") and a committed 4-year $25 million bi-lateral letter of credit facility (the "LC Bi-Lateral"). The Revolver, Operator, Australian Operator and LC Bi-Lateral are collectively referred to as the Bank Facilities. The Bank Facilities were funded on June 1, 2011.
The Bank Facilities have a maturity date of June 1, 2015 ("Maturity Date"), but may be extended annually on or before the anniversary date with the consent of the lenders. In addition, the Bank Facilities may be increased by $50 million at the request of the Company, subject to the lenders' consent. There is no required or scheduled repayment of principal until the Maturity Date of the Bank Facilities.
Drawings on the Bank Facilities are available by way of Prime Rate loans ("Prime"), U.S. Base Rate loans, LIBOR loans, and Bankers' Acceptance (BA) notes. The Company may also draw on the Bank Facilities through bank overdrafts in either Canadian or U.S. dollars and issue letters of credit under the Bank Facilities.
Pursuant to the terms and conditions of the Bank Facilities, a margin is applied to drawings on the Bank Facilities in addition to the quoted interest rate. The margin is established in basis points and is based on consolidated net debt to earnings before interest, income taxes, depreciation and amortization (EBITDA) ratio. The margin is adjusted effective the first day of the third month following the end of each fiscal quarter based on the above ratio.
In addition, subsequent to March 31, 2011, the Company entered into a committed facility with one of the lenders in the Bank Facilities for the issuance of letters of credit (the "Bi-Lateral"). The amount available under the Bi-Lateral is $50 million and has a maturity date of June 1, 2013 ("Maturity Date"). The Maturity Date may be extended annually with the consent of the lender. Drawings on the Bi-Lateral are by way of letters of credit.
The Bank Facilities and Bi-Lateral are unsecured and rank pari passu with the Private Placement Notes. The Company is required to maintain certain covenants on the Bank Facilities, the Bi-Lateral and the Private Placement Notes.
On June 1, 2011, Enerflex has drawn down $173.3 million on the bank facilities to repay its note payable to Toromont.
Private Placement
Subsequent to March 31, 2011, the Company entered negotiations for the issuance of $100 million of unsecured private placement notes. The Company plans to use the proceeds of the issuance to repay existing corporate indebtedness incurred as part of the spin-off, to fund working capital and for general corporate purposes.
Contact Information:
J. Blair Goertzen
President & Chief Executive Officer
403.236.6852
Enerflex Ltd.
D. James Harbilas
Vice-President & Chief Financial Officer
403.236.6857