Exhibit 99.2
INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (unaudited)
($ Canadian thousands) | September 30, 2023 | December 31, 20221 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 163,429 | $ | 253,776 | ||||
Short-term investments | 10,652 | - | ||||||
Accounts receivable | 489,141 | 455,841 | ||||||
Contract assets | 192,896 | 186,259 | ||||||
Inventories (Note 3) | 417,079 | 369,298 | ||||||
Work-in-progress related to finance leases (Note 3) | - | 41,986 | ||||||
Current portion of finance leases receivable (Note 6) | 96,036 | 60,020 | ||||||
Income taxes receivable (Note 12) | 6,290 | 10,397 | ||||||
Derivative financial instruments (Note 16) | 123 | 901 | ||||||
Prepayments | 61,820 | 71,398 | ||||||
Total current assets | 1,437,466 | 1,449,876 | ||||||
Property, plant and equipment (Note 4) | 147,062 | 152,505 | ||||||
Energy infrastructure assets (Note 4) | 1,207,854 | 1,237,550 | ||||||
Contract assets | 254,997 | 223,179 | ||||||
Lease right-of-use assets (Note 5) | 92,852 | 78,372 | ||||||
Finance leases receivable (Note 6) | 224,819 | 234,484 | ||||||
Deferred tax assets (Note 12) | 28,282 | 21,857 | ||||||
Intangible assets (Note 7) | 82,897 | 102,773 | ||||||
Goodwill (Note 8) | 667,200 | 674,396 | ||||||
Other assets (Note 9) | 57,410 | 83,076 | ||||||
Total assets | $ | 4,200,839 | $ | 4,258,068 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 601,633 | $ | 628,086 | ||||
Provisions | 23,846 | 18,826 | ||||||
Income taxes payable (Note 12) | 89,790 | 74,086 | ||||||
Deferred revenues | 301,845 | 366,085 | ||||||
Current portion of long-term debt (Note 10) | 54,080 | 27,088 | ||||||
Current portion of lease liabilities (Note 11) | 24,701 | 20,125 | ||||||
Derivative financial instruments (Note 16) | 37 | 977 | ||||||
Total current liabilities | 1,095,932 | 1,135,273 | ||||||
Deferred revenues | 30,728 | 33,435 | ||||||
Long-term debt (Note 10) | 1,349,346 | 1,363,237 | ||||||
Lease liabilities (Note 11) | 84,754 | 72,908 | ||||||
Deferred tax liabilities (Note 12) | 73,859 | 88,550 | ||||||
Other liabilities | 19,245 | 21,757 | ||||||
Total liabilities | $ | 2,653,864 | $ | 2,715,160 | ||||
Shareholders’ equity | ||||||||
Share capital | $ | 591,377 | $ | 589,827 | ||||
Contributed surplus | 660,003 | 660,072 | ||||||
Retained earnings | 171,329 | 164,200 | ||||||
Accumulated other comprehensive income | 124,266 | 128,809 | ||||||
Total shareholders’ equity | 1,546,975 | 1,542,908 | ||||||
Total liabilities and shareholders’ equity | $ | 4,200,839 | $ | 4,258,068 |
1 Certain balances as at December 31, 2022 have been re-presented as a result of measurement period adjustments for the acquisition of Exterran as required by IFRS 3 “Business Combinations”, refer to Note 2 “Acquisition” for more information.
See accompanying notes to the unaudited interim condensed consolidated financial statements, including Note 18 “Guarantees, Commitments, and Contingencies”.
Interim Condensed Consolidated Financial Statements | F-1 |
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ Canadian thousands, except per share amounts) | 2023 | 20221 | 2023 | 20221 | ||||||||||||
Revenue (Note 13) | $ | 778,173 | $ | 392,813 | $ | 2,379,887 | $ | 1,087,959 | ||||||||
Cost of goods sold | 631,935 | 314,143 | 1,925,823 | 892,057 | ||||||||||||
Gross margin | 146,238 | 78,670 | 454,064 | 195,902 | ||||||||||||
Selling and administrative expenses | 114,850 | 55,102 | 330,256 | 145,252 | ||||||||||||
Operating income | 31,388 | 23,568 | 123,808 | 50,650 | ||||||||||||
Gain on disposal of property, plant and equipment | 44 | 9 | 17 | 88 | ||||||||||||
Equity earnings from associates and joint ventures | 1,203 | 353 | 1,998 | 1,199 | ||||||||||||
Impairment of goodwill (Note 8) | - | (48,000) | - | (48,000) | ||||||||||||
Earnings before finance costs and income taxes | 32,635 | (24,070) | 125,823 | 3,937 | ||||||||||||
Net finance costs (Note 15) | 32,188 | 4,522 | 92,699 | 12,853 | ||||||||||||
Earnings before income taxes | 447 | (28,592) | 33,124 | (8,916) | ||||||||||||
Income taxes (Note 12) | (5,267) | 4,216 | 16,709 | 10,909 | ||||||||||||
Net Income (loss) | $ | 5,714 | $ | (32,808) | $ | 16,415 | $ | (19,825) | ||||||||
Income (loss) per share – basic | $ | 0.05 | $ | (0.37) | $ | 0.13 | $ | (0.22) | ||||||||
Income (loss) per share – diluted | $ | 0.05 | $ | (0.37) | $ | 0.13 | $ | (0.22) | ||||||||
Weighted average number of shares – basic | 123,888,473 | 89,680,965 | 123,799,145 | 89,680,584 | ||||||||||||
Weighted average number of shares – diluted | 124,106,107 | 89,680,965 | 124,014,367 | 89,680,584 |
1 Comparative figures through the Financial Statements represent Enerflex’s results prior to the closing of the acquisition of Exterran Corporation on October 13, 2022, and therefore do not reflect pre-acquisition historical data from Exterran.
See accompanying notes to the unaudited interim condensed consolidated financial statements.
F-2 |
|
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ Canadian thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net income (loss) | $ | 5,714 | $ | (32,808) | $ | 16,415 | $ | (19,825) | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Other comprehensive income (loss) that may be reclassified to profit or loss in subsequent periods: | ||||||||||||||||
Change in fair value of derivatives designated as cash flow hedges, net of income tax recovery | 318 | 518 | (43) | 578 | ||||||||||||
(Gain) loss on derivatives designated as cash flow hedges transferred to net earnings in the current year, net of income tax expense | 41 | 5 | 24 | (34) | ||||||||||||
Unrealized gain (loss) on translation of foreign denominated debt (Note 16) | (17,811) | (3,531) | 1,226 | (4,425) | ||||||||||||
Unrealized gain (loss) on translation of financial statements of foreign operations | 38,092 | 78,639 | (5,750) | 95,218 | ||||||||||||
Other comprehensive income (loss) | $ | 20,640 | $ | 75,631 | $ | (4,543) | $ | 91,337 | ||||||||
Total comprehensive income (loss) | $ | 26,354 | $ | 42,823 | $ | 11,872 | $ | 71,512 |
See accompanying notes to the unaudited interim condensed consolidated financial statements.
Interim Condensed Consolidated Financial Statements | F-3 |
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ Canadian thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Operating Activities | ||||||||||||||||
Net income (loss) | $ | 5,714 | $ | (32,808) | $ | 16,415 | $ | (19,825) | ||||||||
Adjustments for: | ||||||||||||||||
Depreciation and amortization (Note 4) | 71,125 | 21,695 | 197,178 | 65,643 | ||||||||||||
Equity earnings from associates and joint ventures | (1,203) | (353) | (1,998) | (1,199) | ||||||||||||
Deferred income taxes (Note 12) | (18,528) | (3,275) | (26,447) | (4,937) | ||||||||||||
Share-based compensation expense (recovery) (Note 14) | (799) | 3,097 | 8,736 | 4,479 | ||||||||||||
(Gain) loss on sale of property, plant and equipment | (44) | (9) | (17) | (88) | ||||||||||||
Impairment of energy infrastructure assets (Note 4) | - | - | 693 | 349 | ||||||||||||
Impairment of goodwill (Note 8) | - | 48,000 | - | 48,000 | ||||||||||||
56,265 | 36,347 | 194,560 | 92,422 | |||||||||||||
Net change in working capital and other (Note 17) | 14,602 | 1,366 | (130,228) | (56,324) | ||||||||||||
Cash provided by operating activities | $ | 70,867 | $ | 37,713 | $ | 64,332 | $ | 36,098 | ||||||||
Investing Activities | ||||||||||||||||
Additions to: | ||||||||||||||||
Property, plant and equipment (Note 4) | $ | (4,523) | $ | (1,920) | $ | (14,451) | $ | (4,911) | ||||||||
Energy infrastructure assets (Note 4) | (20,944) | (26,612) | (104,855) | (41,307) | ||||||||||||
Intangibles assets (Note 7) | (227) | - | (5,802) | - | ||||||||||||
Proceeds on disposal of: | ||||||||||||||||
Property, plant and equipment | 732 | 18 | 745 | 105 | ||||||||||||
Energy infrastructure assets | 4,766 | 10,601 | 24,862 | 13,294 | ||||||||||||
Purchase of short-term investments | (7,780) | - | (7,780) | - | ||||||||||||
Investment in associates and joint ventures | - | (5,483) | - | (5,950) | ||||||||||||
Dividends received from associates and joint ventures | - | 3,094 | - | 3,094 | ||||||||||||
Net change in working capital associated with investing activities | (2,425) | 26,094 | (13,857) | 24,739 | ||||||||||||
Cash provided by (used in) investing activities | $ | (30,401) | $ | 5,792 | $ | (121,138) | $ | (10,936) | ||||||||
Financing Activities | ||||||||||||||||
Net proceeds from (repayment of) the Revolving Credit Facility (Note 10) | $ | (27,698) | $ | - | $ | 15,313 | $ | - | ||||||||
Repayment of the Term Loan (Note 10) | (13,520) | - | (13,520) | - | ||||||||||||
Net proceeds from the Bank Facility (Note 10) | - | 12,201 | - | 32,879 | ||||||||||||
Net repayment of the Asset-Based Facility (Note 10) | - | (6,178) | - | (17,039) | ||||||||||||
Lease liability principal repayment (Note 11) | (6,145) | (3,626) | (16,487) | (10,957) | ||||||||||||
Dividends | (3,095) | (2,242) | (9,281) | (6,726) | ||||||||||||
Stock option exercises (Note 14) | 749 | - | 1,121 | 12 | ||||||||||||
Deferred transaction costs | (779) | (453) | (3,422) | (7,045) | ||||||||||||
Cash used in financing activities | $ | (50,488) | $ | (298) | $ | (26,276) | $ | (8,876) | ||||||||
Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies | $ | (728) | $ | 8,502 | $ | (7,265) | $ | 9,743 | ||||||||
Increase (decrease) in cash and cash equivalents | (10,750) | 51,709 | (90,347) | 26,029 | ||||||||||||
Cash and cash equivalents, beginning of period | 174,179 | 147,078 | 253,776 | 172,758 | ||||||||||||
Cash and cash equivalents, end of period | $ | 163,429 | $ | 198,787 | $ | 163,429 | $ | 198,787 |
See accompanying notes to the unaudited interim condensed consolidated financial statements.
F-4 |
|
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)
($ Canadian thousands) | Share capital | Contributed surplus | Retained earnings | Foreign currency translation adjustments | Hedging reserve | Accumulated other comprehensive income | Total | |||||||||||||||||||||
At January 1, 2022 | $ | 375,524 | $ | 658,615 | $ | 274,962 | $ | 44,544 | $ | 109 | $ | 44,653 | $ | 1,353,754 | ||||||||||||||
Net loss | - | - | (19,825) | - | - | - | (19,825) | |||||||||||||||||||||
Other comprehensive income | - | - | - | 90,793 | 544 | 91,337 | 91,337 | |||||||||||||||||||||
Effect of stock option plans | 16 | 1,289 | - | - | - | - | 1,305 | |||||||||||||||||||||
Dividends | - | - | (6,727) | - | - | - | (6,727) | |||||||||||||||||||||
At September 30, 2022 | $ | 375,540 | $ | 659,904 | $ | 248,410 | $ | 135,337 | $ | 653 | $ | 135,990 | $ | 1,419,844 | ||||||||||||||
At January 1, 2023 | $ | 589,827 | $ | 660,072 | $ | 164,200 | $ | 128,729 | $ | 80 | $ | 128,809 | $ | 1,542,908 | ||||||||||||||
Net income | - | - | 16,415 | - | - | - | 16,415 | |||||||||||||||||||||
Other comprehensive loss | - | - | - | (4,524) | (19) | (4,543) | (4,543) | |||||||||||||||||||||
Effect of stock option plans | 1,550 | (69) | - | - | - | - | 1,481 | |||||||||||||||||||||
Dividends | - | - | (9,286) | - | - | - | (9,286) | |||||||||||||||||||||
At September 30, 2023 | $ | 591,377 | $ | 660,003 | $ | 171,329 | $ | 124,205 | $ | 61 | $ | 124,266 | $ | 1,546,975 |
See accompanying notes to the unaudited interim condensed consolidated financial statements.
Interim Condensed Consolidated Financial Statements | F-5 |
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(All amounts in thousands of Canadian dollars, except per share amounts or as otherwise noted.)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) | Statement of Compliance |
These unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of interim financial statements, and were approved and authorized for issue by the Board of Directors (the “Board”) on November 8, 2023.
(b) | Basis of Presentation and Measurement |
The Financial Statements for the three and nine months ended September 30, 2023 and 2022 were prepared in accordance with IAS 34 “Interim Financial Reporting” and do not include all the disclosures included in the annual consolidated financial statements for the year ended December 31, 2022. Accordingly, these Financial Statements should be read in conjunction with the annual consolidated financial statements. Certain comparative figures have been reclassified to conform to the current period’s presentation.
The preparation of these Financial Statements requires management to make judgments, estimates and assumptions based on existing knowledge that affect the application of accounting policies and the reported amounts and disclosures. Actual results could differ from these estimates and assumptions. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
The Financial Statements are presented in Canadian dollars, which is Enerflex’s (the “Company”) presentation currency, rounded to the nearest thousand, except per share amounts or as otherwise noted, and are prepared on a going concern basis under the historical cost basis with certain financial assets and financial liabilities recorded at fair value. There have been no significant changes in accounting policies compared to those described in the annual consolidated financial statements for the year-ended December 31, 2022.
(c) | Current Accounting Policy Changes |
i. | IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”) |
Effective January 1, 2023, the definition of accounting estimates was amended under IAS 8. Under the amended definition, a change in an input or a change in a measurement technique are changes in accounting estimates if they do not result from the correction of prior period errors. The amendment further clarifies that accounting estimates are monetary amounts in the financial statements subject to measurement uncertainty.
ii. | IAS 12 Income Taxes (“IAS 12”) |
In May 2021, the IASB issued amendments to IAS 12, which narrows the scope of the initial recognition exception under IAS 12, so that it no longer applies to transactions that give rise to equal taxable and deductible temporary differences. Under the amendments, the initial recognition exception does not apply to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. It only applies if the recognition of a related asset and liability give rise to taxable and deductible temporary differences that are not equal.
These amendments are effective for annual periods beginning on or after January 1, 2023, and the Company adopted these amendments as of January 1, 2023. There were no adjustments that resulted from the adoption of these amendments on January 1, 2023.
F-6 |
|
NOTE 2. ACQUISITION
On October 13, 2022, the Company completed the acquisition (the “Transaction”) of Exterran Corporation (“Exterran”) for total consideration of $222.6 million. For more details see Note 7 “Acquisition” of the annual consolidated financial statements for the year ended December 31, 2022.
The preliminary purchase price allocation is based on Management’s best estimate of the fair value of the assets acquired and liabilities assumed as at October 13, 2022. As of the Transaction date, the Company was investigating options for the disposal of certain energy infrastructure assets. During the three months ended March 31, 2023, the Company sold these assets which resulted in the adjustment of fair value. The adjusted purchase price allocation resulted in decreases to energy infrastructure assets of $12.8 million and net working capital, $0.2 million, and increases to deferred tax assets, $3.5 million and goodwill, $9.5 million.
During the three months ended September 30, 2023, the Company finalized its assessment of deferred and current taxes, which led to further purchase price allocation adjustments resulting in decreases to deferred taxes of $6.8 million and current taxes of $9.5 million, and an increase to accrued liabilities of $1.8 million. The impact of these adjustments was a $14.5 million decrease to goodwill.
The total impact of these adjustments was a decrease of $5.0 million to goodwill, and resulted in total goodwill for the Transaction as at December 31, 2022 of $134.4 million (October 13, 2022 – $139.4 million). As at September 30, 2023, Management finalized the purchase price allocation.
During the three and nine months ended September 30, 2023, the Company incurred $6.2 million and $35.9 million (September 30, 2022 – $3.8 million and $14.1 million) of further restructuring, transaction, and integration costs directly related to the Transaction. These costs are included in cost of goods sold (“COGS”) and selling and administrative expenses (“SG&A”) in the interim condensed consolidated statements of earnings (loss).
NOTE 3. INVENTORIES
Inventories consisted of the following:
September 30, 2023 | December 31, 2022 | |||||||
Direct materials | $ | 93,093 | $ | 107,575 | ||||
Repair and distribution parts | 149,122 | 136,876 | ||||||
Work-in-progress | 147,788 | 98,297 | ||||||
Equipment | 27,076 | 26,550 | ||||||
Total inventories | $ | 417,079 | $ | 369,298 | ||||
September 30, 2023 | December 31, 2022 | |||||||
Work-in-progress related to finance leases | $ | - | $ | 41,986 |
The amount of inventory and overhead costs recognized as expense and included in COGS during the three and nine months ended September 30, 2023 was $631.9 million and $1,925.8 million (September 30, 2022 – $314.1 million and $892.1 million). COGS is made up of direct materials, direct labour, depreciation on manufacturing assets, post-manufacturing expenses, and overhead. COGS also includes inventory write-downs pertaining to obsolescence and aging, and recoveries of past write-downs upon disposition. The net change in inventory reserves charged to the interim condensed consolidated statements of earnings (loss) and included in COGS for the three and nine months ended September 30, 2023 was $0.1 million and $4.9 million (September 30, 2022 – $0.9 million and 1.8 million).
The costs related to the construction of energy infrastructure assets determined to be finance leases are accounted for as work-in-progress related to finance leases. Once a project is completed and enters service it is reclassified to COGS. During the three and nine months ended September 30, 2023 the Company invested nil and $4.7 million (September 30, 2022 – $19.1 million and $60.0 million) related to finance leases that commenced operations in the period. The Company does not have any finance lease projects in progress as at September 30, 2023.
Notes to the Interim Condensed Consolidated Financial Statements | F-7 |
NOTE 4. PROPERTY, PLANT AND EQUIPMENT AND ENERGY INFRASTRUCTURE ASSETS
Land | Building | Equipment | Assets under construction | Total property, plant and equipment | Energy infrastructure assets1 | |||||||||||||||||||
Cost | ||||||||||||||||||||||||
December 31, 2022 | $ | 23,559 | $ | 151,400 | $ | 90,698 | $ | 4,585 | $ | 270,242 | $ | 1,529,166 | ||||||||||||
Additions | - | 799 | 2,256 | 11,396 | 14,451 | 104,855 | ||||||||||||||||||
Reclassification | 120 | 2,170 | 10,859 | (13,876) | (727) | - | ||||||||||||||||||
Disposals | - | (852) | (3,180) | - | (4,032) | (29,790) | ||||||||||||||||||
Currency translation effects | (15) | (327) | (2,146) | 3,488 | 1,000 | 5,589 | ||||||||||||||||||
September 30, 2023 | $ | 23,664 | $ | 153,190 | $ | 98,487 | $ | 5,593 | $ | 280,934 | $ | 1,609,820 | ||||||||||||
Accumulated depreciation | ||||||||||||||||||||||||
December 31, 2022 | $ | - | $ | (58,666) | $ | (59,071) | $ | - | $ | (117,737) | $ | (291,616) | ||||||||||||
Depreciation charge | - | (8,111) | (13,232) | - | (21,343) | (125,503) | ||||||||||||||||||
Impairment | - | - | - | - | - | (693) | ||||||||||||||||||
Disposals | - | 812 | 2,492 | - | 3,304 | 16,494 | ||||||||||||||||||
Currency translation effects | - | 150 | 1,754 | - | 1,904 | (648) | ||||||||||||||||||
September 30, 2023 | $ | - | $ | (65,815) | $ | (68,057) | $ | - | $ | (133,872) | $ | (401,966) | ||||||||||||
Net book value | ||||||||||||||||||||||||
December 31, 2022 | $ | 23,559 | $ | 92,734 | $ | 31,627 | $ | 4,585 | $ | 152,505 | $ | 1,237,550 | ||||||||||||
September 30, 2023 | $ | 23,664 | $ | 87,375 | $ | 30,430 | $ | 5,593 | $ | 147,062 | $ | 1,207,854 |
1 Certain balances as at December 31, 2022 have been re-presented as a result of measurement period adjustments for the acquisition of Exterran as required by IFRS 3 “Business Combinations”, refer to Note 2 “Acquisition” for more information.
Depreciation of property, plant, and equipment (“PP&E”) and energy infrastructure assets included in net income (loss) for the three and nine months ended September 30, 2023, was $49.9 million and $146.9 million (September 30, 2022 – $17.1 million and $50.0 million), of which $43.9 million and $133.1 million was included in COGS (September 30, 2022 – $16.7 million and $48.7 million) and $6.0 million and $13.8 million was included in SG&A (September 30, 2022 – $0.4 million and $1.3 million).
F-8 |
|
NOTE 5. LEASE RIGHT-OF-USE ASSETS
Land and buildings | Equipment | Total lease right-of-use assets | ||||||||||
Cost | ||||||||||||
December 31, 2022 | $ | 94,107 | $ | 25,058 | $ | 119,165 | ||||||
Additions | 16,863 | 16,374 | 33,237 | |||||||||
Disposal | (8,612) | (3,440) | (12,052) | |||||||||
Currency translation effects | (298) | (380) | (678) | |||||||||
September 30, 2023 | $ | 102,060 | $ | 37,612 | $ | 139,672 | ||||||
Accumulated depreciation | ||||||||||||
December 31, 2022 | $ | (27,157) | $ | (13,636) | $ | (40,793) | ||||||
Depreciation charge | (12,520) | (5,305) | (17,825) | |||||||||
Disposal | 6,903 | 3,696 | 10,599 | |||||||||
Currency translation effects | 101 | 1,098 | 1,199 | |||||||||
September 30, 2023 | $ | (32,673) | $ | (14,147) | $ | (46,820) | ||||||
Net book value | ||||||||||||
December 31, 2022 | $ | 66,950 | $ | 11,422 | $ | 78,372 | ||||||
September 30, 2023 | $ | 69,387 | $ | 23,465 | $ | 92,852 |
Depreciation of lease right-of-use (“ROU”) assets included in net earnings (loss) for the three and nine months ended September 30, 2023 was $7.6 million and $17.8 million (September 30, 2022 – $3.5 million and $10.6 million), of which $6.0 million and $13.3 million was included in COGS (September 30, 2022 – $2.9 million and $8.9 million) and $1.6 million and $4.5 million was included in SG&A (September 30, 2022 – $0.6 million and $1.7 million).
Notes to the Interim Condensed Consolidated Financial Statements | F-9 |
NOTE 6. FINANCE LEASES RECEIVABLE
The Company has entered into finance lease arrangements for certain of its energy infrastructure assets, with initial terms ranging from eight to 10 years.
The value of the finance leases receivable are comprised of the following:
Minimum lease payments and unguaranteed residual value | Present value of minimum lease payments and unguaranteed residual value | |||||||||||||||
September 30, 2023 | December 31 2022 | September 30, 2023 | December 31, 2022 | |||||||||||||
Less than one year | $ | 101,985 | $ | 73,614 | $ | 96,036 | $ | 60,020 | ||||||||
Between one and five years | 188,962 | 196,314 | 138,596 | 149,052 | ||||||||||||
Later than five years | 143,538 | 144,482 | 86,223 | 85,432 | ||||||||||||
$ | 434,485 | $ | 414,410 | $ | 320,855 | $ | 294,504 | |||||||||
Less: Unearned finance income | (113,630) | (119,906) | - | - | ||||||||||||
$ | 320,855 | $ | 294,504 | $ | 320,855 | $ | 294,504 | |||||||||
September 30, 2023 | December 31, 2022 | |||||||||||||||
Balance, January 1 | $ | 294,504 | $ | 103,358 | ||||||||||||
Acquisition | - | 110,097 | ||||||||||||||
Additions | 64,112 | 86,602 | ||||||||||||||
Interest income | 24,158 | 14,801 | ||||||||||||||
Billings and payments | (61,032) | (33,740) | ||||||||||||||
Other | (2,254) | - | ||||||||||||||
Currency translation effects | 1,367 | 13,386 | ||||||||||||||
Closing balance | $ | 320,855 | $ | 294,504 |
The Company recognized non-cash selling profit related to the commencement of finance leases of $17.8 million for the nine months ended September 30, 2023 (September 30, 2022 – $6.6 million). Additionally, the Company recognized $7.7 million and $24.2 million of interest income on finance leases receivable during the three and nine months ended September 30, 2023 (September 30, 2022 – $3.0 million and $8.8 million). The total cash received in respect of finance leases was $20.2 million and $61.0 million for the three and nine months ended September 30, 2023 (September 30, 2022 – $5.2 million and $16.7 million), as reflected in billings and payments.
The average interest rates implicit in the leases are fixed at the contract date for the entire lease term. At September 30, 2023, the average interest rate was 9.2 percent per annum (December 31, 2022 – 9.4 percent). The finance leases receivable at the end of reporting period are neither past due nor impaired.
Subsequent to September 30, 2023, the Company disposed of certain assets that were accounted for as finance leases, resulting in the derecognition of the associated finance lease receivable of $32.8 million. The total balance of the finance lease receivable has been classified as current.
F-10 |
|
NOTE 7. INTANGIBLE ASSETS
Customer and other | Software | Total intangible assets | ||||||||||
Cost | ||||||||||||
December 31, 2022 | $ | 151,310 | $ | 74,303 | $ | 225,613 | ||||||
Additions | - | 5,802 | 5,802 | |||||||||
Reclassification | - | 727 | 727 | |||||||||
Disposal | - | (1,401) | (1,401) | |||||||||
Currency translation effects | (1,256) | (1,980) | (3,236) | |||||||||
September 30, 2023 | $ | 150,054 | $ | 77,451 | $ | 227,505 | ||||||
Accumulated amortization | ||||||||||||
December 31, 2022 | $ | (73,427) | $ | (49,413) | $ | (122,840) | ||||||
Amortization charge | (13,531) | (8,414) | (21,945) | |||||||||
Disposal | - | 1,401 | 1,401 | |||||||||
Currency translation effects | 1,044 | (2,268) | (1,224) | |||||||||
September 30, 2023 | $ | (85,914) | $ | (58,694) | $ | (144,608) | ||||||
Net book value | ||||||||||||
December 31, 2022 | $ | 77,883 | $ | 24,890 | $ | 102,773 | ||||||
September 30, 2023 | $ | 64,140 | $ | 18,757 | $ | 82,897 |
NOTE 8. GOODWILL AND IMPAIRMENT REVIEW OF GOODWILL
September 30, 2023 | December 31, 20221 | |||||||
Balance, January 1 | $ | 674,396 | $ | 566,270 | ||||
Acquisition (Note 2) | - | 134,444 | ||||||
Impairment | - | (48,000) | ||||||
Currency translation effects | (7,196) | 21,682 | ||||||
Closing balance | $ | 667,200 | $ | 674,396 |
1 Certain balances as at December 31, 2022 have been re-presented as a result of measurement period adjustments for the acquisition of Exterran as required by IFRS 3 “Business Combinations”, refer to Note 2 “Acquisition” for more information.
At September 30, 2023, Management determined that there were no indicators of impairment and that the previous assessment continued to best represent the recoverability of the Company’s goodwill.
As of the Transaction date, the Company was investigating options for the disposal of certain energy infrastructure assets. During the three months ended March 31, 2023, the Company sold these assets which resulted in the adjustment of fair value. During the three months ended September 30, 2023, the Company finalized its assessment of deferred taxes and income taxes payable which resulted in an adjustment of fair value. These adjustments are reflected in the December 31, 2022 comparative period which also resulted in a final adjustment to the purchase price allocation and goodwill. Refer to Note 2 “Acquisition” for more information.
Notes to the Interim Condensed Consolidated Financial Statements | F-11 |
NOTE 9. OTHER ASSETS
September 30, 2023 | December 31, 2022 | |||||||
Investment in associates and joint ventures | $ | 37,155 | $ | 34,977 | ||||
Prepaid deposits | 18,319 | 13,972 | ||||||
Long-term receivables1 | 1,936 | 34,127 | ||||||
Total other assets | $ | 57,410 | $ | 83,076 |
1 During the three months ended March 31, 2023 the Company received proceeds of $28.0 million from the settlement of preferred shares.
NOTE 10. LONG-TERM DEBT
The three-year secured term loan (“Term Loan”) and the three-year secured revolving credit facility (“Revolving Credit Facility”) have a maturity date of October 13, 2025 (the “Maturity Date”). In addition, the Revolving Credit Facility may be increased by US$150.0 million at the request of the Company, subject to the lenders’ consent. The Maturity Date of the Revolving Credit Facility may be extended annually on or before the anniversary date with the consent of the lenders. The senior secured notes (the “Notes”) consist of US$625.0 million principal amount, bears interest of 9.0 percent, and has a maturity of October 15, 2027.
The Company obtained a $94.6 million (US$70.0 million) unsecured credit facility (“LC Facility”) with one of the lenders in its Revolving Credit Facility. This LC Facility allows the Company to request the issuance of letters of guarantee, standby letters of credit, performance bonds, counter guarantees, import documentary credits, counter standby letters of credit or similar credits to finance the day-to-day operations of the Company. This LC Facility is supported by performance security guarantees provided by Export Development Canada. As at September 30, 2023, the Company has utilized $18.2 million (US$13.5 million) of the $94.6 million (US$70.0 million) limit.
The Company is required to maintain certain covenants on the Revolving Credit Facility, Term Loan and the Notes. As at September 30, 2023, the Company was in compliance with its covenants.
The composition of the borrowings on the Revolving Credit Facility, Term Loan, and the Notes were as follows:
Maturity Date | September 30, 2023 | December 31, 2022 | ||||||||||
Drawings on the Revolving Credit Facility (US$700,000) | October 13, 2025 | $ | 474,368 | $ | 459,202 | |||||||
Drawings on the Term Loan (US$140,000) | October 13, 2025 | 189,280 | 203,160 | |||||||||
Notes (US$625,000) | October 15, 2027 | 845,000 | 846,500 | |||||||||
Deferred transaction costs and Notes discount | (105,222) | (118,537) | ||||||||||
$ | 1,403,426 | $ | 1,390,325 | |||||||||
Current portion of long-term debt | $ | 54,080 | $ | 27,088 | ||||||||
Non-current portion of long-term debt | 1,349,346 | 1,363,237 | ||||||||||
Long-term debt | $ | 1,403,426 | $ | 1,390,325 |
The weighted average interest rate on the Revolving Credit Facility for nine months ended September 30, 2023 was 7.7 percent (December 31, 2022 – 7.0 percent), and the weighted average interest rate on the Term Loan for the nine months ended September 30, 2023 was 8.9 percent (December 31, 2022 – 7.8 percent). At September 30, 2023 without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the next five years are $1,508.6 million, and nil thereafter.
F-12 |
|
NOTE 11. LEASE LIABILITIES
September 30, 2023 | December 31, 2022 | |||||||
Balance, January 1 | $ | 93,033 | $ | 57,014 | ||||
Acquisition | - | 39,845 | ||||||
Additions | 34,067 | 9,977 | ||||||
Lease interest | 4,501 | 3,398 | ||||||
Payments made against lease liabilities | (20,989) | (19,156) | ||||||
Currency translation effects and other | (1,157) | 1,955 | ||||||
Closing balance | $ | 109,455 | $ | 93,033 | ||||
Current portion of lease liabilities | $ | 24,701 | $ | 20,125 | ||||
Non-current portion of lease liabilities | 84,754 | 72,908 | ||||||
Lease liabilities | $ | 109,455 | $ | 93,033 |
Future minimum lease payments under non-cancellable leases were as follows:
September 30, 2023 | ||||
2023 | $ | 7,833 | ||
2024 | 27,889 | |||
2025 | 24,167 | |||
2026 | 17,932 | |||
2027 | 14,407 | |||
Thereafter | 35,903 | |||
$ | 128,131 | |||
Less: | ||||
Imputed interest | 18,535 | |||
Short-term leases | 134 | |||
Low-value leases | 7 | |||
Lease liabilities | $ | 109,455 |
Notes to the Interim Condensed Consolidated Financial Statements | F-13 |
NOTE 12. INCOME TAXES
(a) | Income Tax Recognized in Net Earnings |
The components of income taxes were as follows:
Three months ended September 30,
| Nine months ended September 30,
| |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Current income taxes | $ | 13,261 | $ | 7,491 | $ | 43,156 | $ | 15,846 | ||||||||
Deferred income taxes | (18,528) | (3,275) | (26,447) | (4,937) | ||||||||||||
Income taxes | $ | (5,267) | $ | 4,216 | $ | 16,709 | $ | 10,909 |
(b) | Reconciliation of 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 September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Earnings before income taxes | $ | 447 | $ | (28,592) | $ | 33,124 | $ | (8,916) | ||||||||
Canadian statutory rate | 23.4% | 23.4% | 23.4% | 23.4% | ||||||||||||
Expected income tax provision | $ | 104 | $ | (6,690) | $ | 7,751 | $ | (2,086) | ||||||||
Add (deduct): | ||||||||||||||||
Change in unrecognized deferred tax asset | 6,128 | 2,153 | 18,490 | 7,943 | ||||||||||||
Impairment of goodwill | - | 11,232 | - | 11,232 | ||||||||||||
Exchange rate effects on tax basis | (2,018) | (1,523) | (135) | (4,259) | ||||||||||||
Earnings taxed in foreign jurisdictions | (7,711) | (361) | (9,463) | (1,630) | ||||||||||||
Amounts not deductible for tax purposes | (1,847) | (95) | - | 148 | ||||||||||||
Impact of accounting for associates and joint ventures | (282) | (83) | (468) | (281) | ||||||||||||
Other | 359 | (417) | 534 | (158) | ||||||||||||
Income taxes | $ | (5,267) | $ | 4,216 | $ | 16,709 | $ | 10,909 |
The applicable statutory tax rate is the aggregate of the Canadian federal income tax rate of 15.0 percent (2022 – 15.0 percent) and the Alberta provincial income tax rate of 8.4 percent (2022 – 8.4 percent).
The Company’s effective tax rate is subject to fluctuations in the Argentine peso and Mexican peso exchange rate against the U.S. dollar. Since the Company holds significant energy infrastructure assets in Argentina and Mexico, the tax base of these assets are denominated in Argentine peso and Mexican peso, respectively. The functional currency is the U.S. dollar and as a result, the related local currency tax bases are revalued periodically to reflect the closing U.S. dollar rate against the local currency. Any movement in the exchange rate results in a corresponding unrealized exchange rate gain or loss being recorded as part of deferred income tax expense or recovery. During periods of large fluctuation or devaluation of the local currency against the U.S. dollar, these amounts may be significant but are unrealized and may reverse in the future. Recognition of these amounts is required by IFRS, even though the revalued tax basis does not generate any cash tax obligation or liability in the future.
F-14 |
|
NOTE 13. REVENUE
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Energy Infrastructure1 | $ | 189,977 | $ | 82,820 | $ | 569,109 | $ | 218,164 | ||||||||
After-Market Services | 164,710 | 109,109 | 472,716 | 298,134 | ||||||||||||
Engineered Systems | 423,486 | 200,884 | 1,338,062 | 571,661 | ||||||||||||
Total revenue | $ | 778,173 | $ | 392,813 | $ | 2,379,887 | $ | 1,087,959 |
1 During the three and nine months ended September 30, 2023, the Company recognized $62.4 million and $198.4 million of revenue related to operating leases in its Latin America (“LATAM”) and Eastern Hemisphere (“EH”) segments (September 30, 2022 – $19.1 million and $45.5 million), and $43.4 million and $122.5 million of revenue related to its North America (“NAM”) contract compression fleet (September 30, 2022 – $32.9 million and $91.9 million).
Revenue by geographic location, which is attributed by destination of sale, was as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
United States | $ | 342,486 | $ | 244,715 | $ | 987,605 | $ | 566,662 | ||||||||
Canada | 91,309 | 58,853 | 249,714 | 189,185 | ||||||||||||
Nigeria | 57,734 | 392 | 210,287 | 11,662 | ||||||||||||
Argentina | 52,262 | 8,804 | 166,192 | 33,050 | ||||||||||||
Oman | 62,196 | 14,495 | 160,162 | 79,397 | ||||||||||||
Iraq | 44,896 | 225 | 155,835 | 768 | ||||||||||||
Bahrain | 16,192 | 7,207 | 109,576 | 25,879 | ||||||||||||
Brazil | 23,734 | 8,034 | 82,107 | 25,638 | ||||||||||||
Australia | 21,197 | 11,844 | 64,903 | 47,675 | ||||||||||||
Mexico | 19,071 | 17,285 | 58,404 | 43,915 | ||||||||||||
Other | 47,096 | 20,959 | 135,102 | 64,128 | ||||||||||||
Total revenue | $ | 778,173 | $ | 392,813 | $ | 2,379,887 | $ | 1,087,959 |
The following table outlines the Company’s unsatisfied performance obligations, by product line, as at September 30, 2023:
Less than one year | One to two years | Greater than two years | Total | |||||||||||||
Energy Infrastructure | $ | 592,094 | $ | 499,181 | $ | 1,452,209 | $ | 2,543,484 | ||||||||
After-Market Services | 97,776 | 37,861 | 91,227 | 226,864 | ||||||||||||
Engineered Systems | 1,231,082 | 334,855 | - | 1,565,937 | ||||||||||||
$ | 1,920,952 | $ | 871,897 | $ | 1,543,436 | $ | 4,336,285 |
Notes to the Interim Condensed Consolidated Financial Statements | F-15 |
NOTE 14. SHARE-BASED COMPENSATION
(a) | Share-Based Compensation Expense |
The share-based compensation expense included in the determination of net earnings was:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Equity-settled share-based payments | $ | 171 | $ | 366 | $ | 360 | $ | 1,293 | ||||||||
Cash-settled share-based payments (recovery) | (970) | 2,731 | 8,376 | 3,186 | ||||||||||||
Share-based compensation expense (recovery) | $ | (799) | $ | 3,097 | $ | 8,736 | $ | 4,479 |
Deferred share units (“DSUs”), phantom share entitlements (“PSEs”), performance share units (“PSUs”), restricted share units (“RSUs”), and cash performance target plan awards are all classified as cash settled share-based payments. Stock options are equity-settled share-based payments.
The Company granted PSUs and RSUs to officers and key employees during the nine months ended September 30, 2023 with a weighted average fair value of CAD $8.55 and USD $6.26 per share. The DSU, PSU, and RSU holders had dividends credited to their accounts during the period. The carrying value of the liability relating to cash-settled share-based payments at September 30, 2023 included in current liabilities was $8.9 million (December 31, 2022 – $13.5 million) and in other long-term liabilities was $11.4 million (December 31, 2022 - $13.8 million).
(b) | Equity-Settled Share-Based Payments |
September 30, 2023 | December 31, 2022 | |||||||||||||||
Number of options | Weighted average | Number of options | Weighted average exercise price | |||||||||||||
Options outstanding, beginning of period | 3,089,229 | $ | 10.77 | 4,456,444 | $ | 11.66 | ||||||||||
Exercised1 | (188,977) | 5.92 | (47,120) | 5.51 | ||||||||||||
Forfeited | (305,107) | 9.69 | (27,286) | 13.51 | ||||||||||||
Expired | (208,147) | 13.41 | (1,292,809) | 13.98 | ||||||||||||
Options outstanding, end of period | 2,386,998 | $ | 11.06 | 3,089,229 | $ | 10.77 | ||||||||||
Options exercisable, end of period | 1,678,662 | $ | 12.36 | 1,671,421 | $ | 12.48 |
1 The weighted average share price of options at the date of exercise for the nine months ended September 30, 2023 was $8.52 (September 30, 2022 – $7.89).
The following table summarizes options outstanding and exercisable at September 30, 2023:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Range of exercise prices1 | Number outstanding | Weighted average remaining life (years) | Weighted price | Number outstanding | Weighted average remaining life (years) | Weighted price | ||||||||||||||||||
$5.51 – $6.68 | 555,752 | 3.75 | $ | 5.51 | 288,587 | 3.63 | $ | 5.51 | ||||||||||||||||
$6.69 – $14.75 | 1,174,581 | 3.71 | 10.94 | 733,410 | 3.35 | 11.83 | ||||||||||||||||||
$14.76 – $16.12 | 656,665 | 1.43 | 15.97 | 656,665 | 1.43 | 15.97 | ||||||||||||||||||
Total | 2,386,998 | 3.09 | $ | 11.06 | 1,678,662 | 2.65 | $ | 12.36 |
1 The range of exercise prices equal the weighted average market price of the Company’s shares on the five days preceding the effective date of the grant based on prices from the Toronto Stock Exchange.
F-16 |
|
(c) | Cash-Settled Share-Based Payments |
During the three and nine months ended September 30, 2023, the value of director’s compensation and executive bonuses elected to be received in DSUs totalled $0.6 million and $1.8 million (September 30, 2022 – $0.5 million and $1.6 million).
Number of DSUs | Weighted average grant date fair value per unit | |||||||
DSUs outstanding, January 1, 2023 | 1,625,513 | $ | 10.16 | |||||
Granted | 224,091 | 7.94 | ||||||
In lieu of dividends | 13,611 | 8.62 | ||||||
Vested | (113,018) | 9.56 | ||||||
DSUs outstanding, September 30, 2023 | 1,750,197 | $ | 9.90 |
NOTE 15. FINANCE COSTS AND INCOME
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Finance Costs | ||||||||||||||||
Short- and long-term borrowings1 | $ | 39,166 | $ | 4,696 | $ | 116,229 | $ | 13,168 | ||||||||
Interest on lease liability | 1,531 | 658 | 4,501 | 2,019 | ||||||||||||
Total finance costs | $ | 40,697 | $ | 5,354 | $ | 120,730 | $ | 15,187 | ||||||||
Finance Income | ||||||||||||||||
Interest income | $ | 8,509 | $ | 832 | $ | 28,031 | $ | 2,334 | ||||||||
Net finance costs | $ | 32,188 | $ | 4,522 | $ | 92,699 | $ | 12,853 |
1 Finance costs on short- and long-term borrowings relate primarily to interest on the Company’s Revolving Credit Facility, Term Loan and Notes that were issued during the three months ended December 31, 2022. Refer to Note 10 “Long-Term Debt” for more information on interest rates on the Revolving Credit Facility, Term Loan and Notes.
NOTE 16. FINANCIAL INSTRUMENTS
Designation and Valuation of Financial Instruments
Financial instruments at September 30, 2023 were designated in the same manner as they were at December 31, 2022. During the three months ended September 30, 2023, the Company entered into short-term investments which are measured at fair value through profit or loss. Accordingly, with the exception of the Notes, the estimated fair values of financial instruments approximated their carrying values. The carrying value and estimated fair value of the Notes as at September 30, 2023 was $845.0 million and $877.0 million, respectively (December 31, 2022 – $846.5 million and $869.3 million, respectively). The fair value of these Notes at September 30, 2023 was determined on a discounted cash flow basis with a weighted average discount rate of 9.3 percent (December 31, 2022 – 9.0 percent).
The Company previously held preferred shares that were initially recorded at fair value, subsequently measured at amortized cost and recognized as long-term receivables in Other assets. During the three months ended March 31, 2023 the Company redeemed these preferred shares and recognized a gain in excess of the carrying value, which is included in the interim condensed consolidated statements of earnings. The carrying value and estimated fair value of the preferred shares at December 31, 2022 was $28.0 million and $28.7 million, respectively.
Notes to the Interim Condensed Consolidated Financial Statements | F-17 |
Derivative Financial Instruments and Hedge Accounting
Foreign exchange contracts are transacted with financial institutions to hedge foreign currency denominated obligations and cash receipts related to purchases of inventory and sales of products.
The following table summarizes the Company’s commitments to buy and sell foreign currencies as at September 30, 2023:
Notional amount | Maturity | |||||||
Canadian Dollar Denominated Contracts | ||||||||
Purchase contracts | USD | $ | 15,187 | October 2023 – July 2024 | ||||
Sales contracts | USD | (10,357) | October 2023 – September 2024 |
At September 30, 2023, the fair value of derivative financial instruments classified as financial assets was $0.1 million, and as financial liabilities was less than $0.1 million (December 31, 2022 – $0.9 million and $1.0 million, respectively).
Foreign Currency Translation Exposure
The Company is subject to foreign currency translation exposure, primarily due to fluctuations of the Canadian dollar against the U.S. dollar (“USD”), Australian dollar (“AUD”), and Brazilian real (“BRL”). Enerflex uses foreign currency borrowings to hedge against the exposure that arises from foreign subsidiaries that are translated to the Canadian dollar through a net investment hedge. As a result, foreign exchange gains and losses on the translation of US$622.7 million in designated foreign currency borrowings are included in accumulated other comprehensive income (loss) for September 30, 2023. The following table shows the sensitivity to a five percent weakening of the Canadian dollar against the USD, AUD, and BRL.
Canadian dollar weakens by five percent | USD | AUD | BRL | |||||||||
Earnings (loss) from foreign operations | ||||||||||||
Earnings (loss) before income taxes | $ | 6,966 | $ | (13) | $ | (1,233) | ||||||
Financial instruments held in foreign operations | ||||||||||||
Other comprehensive income | $ | 16,023 | $ | 366 | $ | 205 | ||||||
Financial instruments held in Canadian operations | ||||||||||||
Loss before income taxes | $ | (24,068) | $ | - | $ | - |
The movement in net earnings before tax in Canadian operations is a result of a change in the fair values of financial instruments.
With the ongoing devaluation of the Argentine peso, caused by high inflation, the Company is at risk for foreign exchange losses on its cash balances denominated in Argentine peso (“ARS”). During the three and nine months ended September 30, 2023, the Company had foreign exchange losses of $17.3 million and $40.9 million, respectively, which represented 46 percent and 109 percent of the Argentina cash balance. If the ARS weakens by five percent, the Company could experience additional foreign exchange losses of approximately $1.8 million. There is a risk of higher losses based on the further devaluation of the ARS. The Company will continue to explore its options to minimize the impact of future devaluation.
Interest Rate Risk
The Company’s liabilities include long-term debt that is subject to fluctuations in interest rates. The Company’s Notes outstanding at September 30, 2023 has a fixed interest rate and therefore the related interest expense will not be impacted by fluctuations in interest rates. Conversely, the Company’s Revolving Credit Facility and Term Loan are subject to changes in market interest rates.
For each one percent change in the rate of interest on the Revolving Credit Facility and Term Loan, the change in annual interest expense would be $4.7 million. All interest charges are recorded in the interim condensed consolidated statements of earnings as finance costs.
F-18 |
|
Liquidity Risk
Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. In managing liquidity risk, the Company has access to a significant portion of its Revolving Credit Facility for future drawings to meet the Company’s requirements for investments in working capital and capital assets. As at September 30, 2023, the Company held cash and cash equivalents of $163.4 million and had access to $328.2 million on the Revolving Credit Facility.
September 30, 2023 | ||||
Total Revolving Credit Facility (US$700,000) | $ | 946,400 | ||
Less: | ||||
Drawings on the Revolving Credit Facility | 474,368 | |||
Letters of Credit1 | 143,800 | |||
Available for future drawings | $ | 328,232 |
1 This represents the letters of credit that the Company has funded with the Revolving Credit Facility. Additional letters of credit of $18.2 million (US$13.5 million) are funded from the LC Facility. Refer to Note 10 “Long-Term Debt” for more information.
The Company continues to meet the covenant requirements of its funded debt, including the Revolving Credit Facility, Term Loan and Notes. Senior secured net funded debt, defined as borrowings under the Revolving Credit Facility and Term Loan, net of cash, to EBITDA ratio is 1.0:1, compared to a maximum ratio of 2.5:1, and a net funded debt to EBITDA (“bank-adjusted net debt to EBITDA”) ratio of 2.7:1, compared to a maximum ratio of 4.5:1, and an interest coverage ratio of 4.2:1 compared to a minimum ratio of 2.5:1. The interest coverage ratio is calculated by dividing the trailing 12-month EBITDA, as defined by the Company’s lenders, by interest expense over the same timeframe.
A liquidity analysis of the Company’s financial instruments has been completed on a maturity basis. The following table outlines the cash flows, including interest associated with the maturity of the Company’s financial liabilities, as at September 30, 2023:
Less than 3 months | 3 months to 1 year | Greater than 1 year | Total | |||||||||||||
Derivative financial instruments | ||||||||||||||||
Foreign currency forward contracts | $ | 35 | $ | 2 | $ | - | $ | 37 | ||||||||
Accounts payable and accrued liabilities | 601,633 | - | - | 601,633 | ||||||||||||
Long-term debt – Revolving Credit Facility | - | - | 474,368 | 474,368 | ||||||||||||
Long-term debt – Term Loan | 13,520 | 40,560 | 135,200 | 189,280 | ||||||||||||
Long-term debt – Notes | - | - | 845,000 | 845,000 | ||||||||||||
Other long-term liabilities | - | - | 19,245 | 19,245 |
The Company expects that cash flows from operations in 2023, together with cash and cash equivalents on hand, the Revolving Credit Facility and the Term Loan, will be more than sufficient to fund its requirements for investments in working capital and capital assets.
Notes to the Interim Condensed Consolidated Financial Statements | F-19 |
NOTE 17. SUPPLEMENTAL CASH FLOW INFORMATION
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Accounts receivable1 | $ | (32,081) | $ | 17,429 | $ | (32,377) | $ | (28,944) | ||||||||
Contract assets | 17,797 | 5,287 | (38,455) | (8,272) | ||||||||||||
Inventories | (8,537) | (50,219) | (47,781) | (71,317) | ||||||||||||
Work-in-progress related to finance leases | - | (19,405) | 41,986 | (27,470) | ||||||||||||
Finance leases receivable | 9,213 | (5,956) | (26,351) | (41,770) | ||||||||||||
Income taxes receivable | 2,125 | (1,649) | 4,107 | (365) | ||||||||||||
Prepayments | (5,898) | (20,945) | 9,578 | (24,063) | ||||||||||||
Long-term receivables related to preferred shares | - | - | 27,954 | - | ||||||||||||
Accounts payable and accrued liabilities, and provisions2 | 9,035 | 10,630 | (10,159) | 47,677 | ||||||||||||
Income taxes payable | (4,712) | (2,405) | 15,704 | (2,473) | ||||||||||||
Deferred revenue | 258 | 50,917 | (66,947) | 83,239 | ||||||||||||
Other | 27,402 | 17,682 | (7,487) | 17,434 | ||||||||||||
Net change in working capital and other | $ | 14,602 | $ | 1,366 | $ | (130,228) | $ | (56,324) |
1 The change in accounts receivable represents only the portion relating to operating activities.
2 The change in accounts payable and accrued liabilities and provisions represents only the portion relating to operating activities.
Cash interest and taxes paid and received during the period:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Interest paid – short- and long-term borrowings | $ | 18,198 | $ | 1,768 | $ | 88,554 | $ | 10,856 | ||||||||
Interest paid – lease liabilities | 1,531 | 658 | 4,501 | 2,019 | ||||||||||||
Total interest paid | $ | 19,729 | $ | 2,426 | $ | 93,055 | $ | 12,875 | ||||||||
Interest received | 14,307 | 292 | 29,639 | 784 | ||||||||||||
Taxes paid | 12,512 | 9,766 | 34,544 | 15,946 | ||||||||||||
Taxes received | - | 133 | 500 | 2,581 |
Changes in liabilities arising from financing activities during the period:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Long-term debt, opening balance | $ | 1,408,304 | $ | 345,951 | $ | 1,390,325 | $ | 331,422 | ||||||||
Changes from financing cash flows | (41,218) | 6,023 | 1,793 | 15,840 | ||||||||||||
The effect of changes in foreign exchange rates | 32,724 | 16,264 | (1,186) | 20,541 | ||||||||||||
Amortization of deferred transaction costs | 3,633 | 285 | 10,585 | 902 | ||||||||||||
Accretion of Notes discount | 1,821 | - | 6,991 | - | ||||||||||||
Deferred transaction costs | (1,838) | (110) | (5,082) | (292) | ||||||||||||
Long-term debt, closing balance | $ | 1,403,426 | $ | 368,413 | $ | 1,403,426 | $ | 368,413 |
F-20 |
|
NOTE 18. GUARANTEES, COMMITMENTS, AND CONTINGENCIES
As of September 30, 2023, the Company had outstanding letters of credit of $162.0 million (December 31, 2022 – $175.1 million). Of the total outstanding letters of credit, $143.8 million (December 31, 2022 – $175.1 million) are funded from the Revolving Credit Facility and $18.2 million (US$13.5 million) (December 31, 2022 – nil) are funded from the LC Facility.
The Company has purchase obligations over the next three years as follows:
2023 | $ | 232,642 | ||
2024 | 257,107 | |||
2025 | 3,428 |
Legal Proceedings
On January 31, 2022, the Local Labor Board of the State of Tabasco in Mexico (the “Labor Board”) awarded a former employee of Exterran MXN$2,152 million in connection with a dispute relating to the employee’s severance pay following termination of their employment in 2015.
Enerflex believes the order of the Labor Board is in error and has no credible basis in law or fact. In 2017, the Labor Board ruled that the former employee was entitled to approximately MXN$1.4 million as severance based on an appellate court’s determination that the employee’s salary was approximately MXN$3,500 per day. However, the Labor Board’s January 2022 order significantly increased the amount the employee is owed, ignoring the actual salary that had been established by the appellate court and using an amount the former employee never actually received while working for Exterran.
Enerflex has appealed the decision, and the appeal is pending before the courts in Mexico. In the meantime, the Company is pursuing all other available avenues to preserve its rights, including rights under the Agreement between the United States of America, the United Mexican States, and Canada (“USMCA”) investment treaty arguing that the conduct of the Labor Board in Mexico amounts to violations of protections available under the North American Free Trade Agreement.
The Company is involved in litigation and claims associated with normal operations against which certain provisions may be made in the Financial Statements. Management is of the opinion that any resulting settlement arising from the litigation would not materially affect the consolidated financial position, results of operations, or liquidity of the Company.
NOTE 19. SEASONALITY
The energy sector in Canada and in some parts of the USA has a distinct seasonal trend in activity levels which results from well-site access and drilling pattern adjustments to take advantage of weather conditions. Generally, the Company has experienced higher revenues in the fourth quarter of each year related to these seasonal trends. Revenues are also impacted by both the Company’s and its customers’ capital investment decisions. The LATAM and EH segments are not significantly impacted by seasonal variations, while certain parts of the USA can be impacted by seasonal trends depending on customer activity, demand, and location. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating.
Notes to the Interim Condensed Consolidated Financial Statements | F-21 |
NOTE 20. SEGMENTED INFORMATION
The Company has identified three reporting segments for external reporting:
· | NAM consists of operations in Canada and the USA. The segment generates revenue from manufacturing natural gas infrastructure under contract, refrigeration, processing, and electric power equipment, including custom and standard compression packages and modular natural gas processing equipment, refrigeration systems and produced water treatment services, in addition to generating revenue from mechanical services and parts, and maintenance solutions, and operating our compression assets under contract for oil and gas and midstream customers. |
· | LATAM consists of operations in Argentina, Bolivia, Brazil, Colombia, Mexico and Peru. The segment generates revenue from operating Enerflex’s Energy Infrastructure assets under take-or-pay contracts, providing after-market services, including parts and components, as well as operations, maintenance, and overhaul services. |
· | EH consists of operations in the Middle East, Africa, Europe and Asia Pacific. The segment generates revenue by operating Enerflex’s Energy Infrastructure assets under take-or-pay contracts, manufacturing (focusing on large-scale process equipment), after-market services, including parts and components, as well as operations, maintenance, and overhaul services, and rentals of compression and processing equipment. |
The accounting policies of the reportable operating segments are the same as those described in Note 3 “Summary of Significant Accounting Policies” of the Company’s annual consolidated financial statements for the year-ended December 31, 2022.
For internal Management reporting, the Company’s Chief Operating Decision Maker (“CODM”) has identified four operating segments which include: Canada; USA; Latin America; and Eastern Hemisphere. Each of the operating segments are supported by the Corporate head office. Corporate overheads are allocated to the operating segments based on revenue. In assessing its reporting and operating segments, the Company considered geographic locations, economic characteristics, the nature of products and services provided, the nature of production processes, the types of customers for its products and services, and distribution methods used. These considerations also factored into the decision to combine Canada and USA into one reporting segment. For each of the operating segments, the CODM reviews internal management reports on at least a quarterly basis.
For the nine months ended September 30, 2023, the Company had no individual customer which accounted for more than 10 percent of its revenue (September 30, 2022 – none).
F-22 |
|
The following tables provide certain financial information by the Company’s reporting segments.
Revenues and Operating Income
North America | Latin America | Eastern Hemisphere | Total | |||||||||||||||||||||||||||||
Three months ended September 30, | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
Segment revenue | $ | 490,959 | $ | 314,273 | $ | 107,547 | $ | 29,072 | $ | 178,098 | $ | 56,298 | $ | 776,604 | $ | 399,643 | ||||||||||||||||
Intersegment revenue | 3,742 | (6,655) | (2) | - | (2,171) | (175) | 1,569 | (6,830) | ||||||||||||||||||||||||
Revenue | $ | 494,701 | $ | 307,618 | $ | 107,545 | $ | 29,072 | $ | 175,927 | $ | 56,123 | $ | 778,173 | $ | 392,813 | ||||||||||||||||
Energy Infrastructure | 43,435 | 44,216 | 77,097 | 18,739 | 69,445 | 19,865 | 189,977 | 82,820 | ||||||||||||||||||||||||
After-Market Services | 103,602 | 75,515 | 14,896 | 7,119 | 46,212 | 26,475 | 164,710 | 109,109 | ||||||||||||||||||||||||
Engineered Systems | 347,664 | 187,887 | 15,552 | 3,214 | 60,270 | 9,783 | 423,486 | 200,884 | ||||||||||||||||||||||||
Operating income (loss) | $ | 38,858 | $ | 14,267 | $ | (13,257) | $ | 1,725 | $ | 5,787 | $ | 7,576 | $ | 31,388 | $ | 23,568 | ||||||||||||||||
North America | Latin America | Eastern Hemisphere | Total | |||||||||||||||||||||||||||||
Nine months ended September 30, | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
Segment revenue | $ | 1,460,774 | $ | 860,879 | $ | 341,309 | $ | 122,665 | $ | 605,797 | $ | 176,224 | $ | 2,407,880 | $ | 1,159,768 | ||||||||||||||||
Intersegment revenue | (21,267) | (71,445) | (773) | (36) | (5,953) | (328) | (27,993) | (71,809) | ||||||||||||||||||||||||
Revenue | $ | 1,439,507 | $ | 789,434 | $ | 340,536 | $ | 122,629 | $ | 599,844 | $ | 175,896 | $ | 2,379,887 | $ | 1,087,959 | ||||||||||||||||
Energy Infrastructure | 125,610 | 105,227 | 249,421 | 52,922 | 194,078 | 60,015 | 569,109 | 218,164 | ||||||||||||||||||||||||
After-Market Services | 285,143 | 209,645 | 50,576 | 21,134 | 136,997 | 67,355 | 472,716 | 298,134 | ||||||||||||||||||||||||
Engineered Systems | 1,028,754 | 474,562 | 40,539 | 48,573 | 268,769 | 48,526 | 1,338,062 | 571,661 | ||||||||||||||||||||||||
Operating income (loss) | $ | 107,732 | $ | 23,850 | $ | (9,540) | $ | 8,082 | $ | 25,616 | $ | 18,718 | $ | 123,808 | $ | 50,650 | ||||||||||||||||
Segment Assets | ||||||||||||||||||||||||||||||||
North America | Latin America | Eastern Hemisphere | Total | |||||||||||||||||||||||||||||
Sep. 30, 2023 | Dec. 31, 20221 | Sep. 30, 2023 | Dec. 31, 20221 | Sep. 30, 2023 | Dec. 31, 20221 | Sep. 30, 2023 | Dec. 31, 20221 | |||||||||||||||||||||||||
Segment assets | $ | 1,464,017 | $ | 1,602,755 | $ | 690,553 | $ | 829,676 | $ | 1,155,825 | $ | 828,517 | $ | 3,310,395 | $ | 3,260,948 | ||||||||||||||||
Goodwill2 | 224,664 | 224,992 | 89,105 | 89,264 | 353,431 | 360,140 | 667,200 | 674,396 | ||||||||||||||||||||||||
Corporate | - | - | - | - | - | - | 223,244 | 322,724 | ||||||||||||||||||||||||
Total segment assets | $ | 1,688,681 | $ | 1,827,747 | $ | 779,658 | $ | 918,940 | $ | 1,509,256 | $ | 1,188,657 | $ | 4,200,839 | $ | 4,258,068 |
1 Certain balances as at December 31, 2022 have been re-presented as a result of measurement period adjustments for the acquisition of Exterran as required by IFRS 3 “Business Combinations”, refer to Note 2 “Acquisition” for more information, as well as amendments to the Company’s reporting segments.
2 The total amount of goodwill in the Canada and USA operating segments are $40.4 million and $184.3 million, respectively (December 31, 2022 – $40.4 million and $184.6 million, respectively).
NOTE 21. SUBSEQUENT EVENTS
Subsequent to September 30, 2023, Enerflex declared a quarterly dividend of $0.025 per share, payable on January 10, 2024, to shareholders of record on November 21, 2023. The Board will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow, anticipated market conditions, and the general needs of the business.
Notes to the Interim Condensed Consolidated Financial Statements | F-23 |