MANAGEMENT'S DISCUSSION AND ANALYSIS

August 6, 2020

The Management's Discussion and Analysis ("MD&A") for Enerflex Ltd. ("Enerflex" or "the Company") should be read in conjunction with the unaudited interim condensed consolidated financial statements for three and six months ended June 30, 2020 and 2019, the Company's 2019 Annual Report, the Annual Information Form for the year ended December 31, 2019, and the cautionary statement regarding forward looking information in the "Forward-Looking Statements" section of this report.

The financial information reported herein has been prepared in accordance with International Financial Reporting Standards ("IFRS") and is presented in Canadian dollars unless otherwise stated.

The MD&A focuses on information and key statistics from the unaudited interim condensed consolidated financial statements, and considers known risks and uncertainties relating to the oil and gas services sector. This discussion should not be considered all-inclusive, as it excludes possible future changes that may occur in general economic, political, and environmental conditions. Additionally, other elements may or may not occur which could affect industry conditions and/or Enerflex in the future. Additional information relating to the Company can be found in the Company's Annual Information Form and Management Information Circular, which are available on SEDAR at www.sedar.com.

FINANCIAL OVERVIEW

Three months ended

Six months ended

June 30,

June 30,

($ Canadian thousands, except percentages)

2020

2019

2020

2019

Revenue

$

287,438

$

541,874

$

653,178

$

1,026,776

Gross margin

65,800

110,302

159,532

199,072

Selling and administrative expenses

51,361

47,085

94,873

102,908

Operating income

14,439

63,217

64,659

96,164

Earnings before finance costs and income taxes

("EBIT")

15,428

64,001

65,440

97,347

Net earnings

$

7,415

$

40,649

$

44,853

$

57,618

Key Financial Performance Indicators1

Engineered Systems bookings

$

42,501

$

170,508

$

197,895

$

288,899

Engineered Systems backlog

291,062

974,395

291,062

974,395

Recurring revenue growth2

(11.9)%

23.3%

(6.0)%

21.9%

Gross margin as a percentage of revenue

22.9%

20.4%

24.4%

19.4%

EBIT as a percentage of revenue3

12.1%

10.4%

12.1%

10.4%

Earnings before finance costs, income taxes,

depreciation and amortization ("EBITDA")

$

37,214

$

85,854

$

107,965

$

141,131

Return on capital employed ("ROCE") 3

11.7%

14.6%

11.7%

14.6%

Rental horsepower

698,168

681,414

698,168

681,414

  • Key financial performance indicators used by Enerflex to measure its performance include revenue and EBIT. Certain of these key performance indicators are non- IFRS measures. Further detail is provided in the Non-IFRS Measures section.
    2 Recurring revenue is comprised of revenue from the Service and Rentals product lines, which are typically contracted and extend into the future. While the contracts are subject to cancellation or have varying lengths, the Company does not believe these characteristics preclude them from being considered recurring in nature. Growth in recurring revenue is calculated on a period-over-period basis.
    3 Determined by taking the trailing 12-month period.
Enerflex Ltd. | 2020 Quarterly Report

SECOND QUARTER 2020 OVERVIEW

For the three months ended June 30, 2020:

  • Operating income for the second quarter of 2020 was lower than the prior year, primarily due to reduced revenue, partially offset by improved gross margin percentage. In addition, both the current period and the comparative period include the impact of higher estimated costs to complete certain projects. Lower revenue was due to the lower bookings from 2019 and the first half of 2020, as well as the reduced contribution from certain large, high margin Engineered Systems projects that were booked during the second half of 2018 as they near completion. Gross margin percentage is higher as a result of increased contributions from recurring revenue product lines and continued recognition of the previously mentioned high margin Engineered Systems projects. As these projects near completion, the Company expects gross margins from Engineered Systems will decrease and margin contribution from recurring revenues will make up a larger proportion of total gross margin.
  • SG&A costs of $51.4 million in the second quarter of 2020 were up from $47.1 million in the same period last year. SG&A in the quarter includes increased bad debt provisions, driven by expected credit losses in the USA segment, and higher share- based compensation on mark-to-market movement, partially offset by cost recoveries related to government assistance programs, as well as reduced travel, marketing, and non-critical IT expenditures, and favourable foreign exchange movement. The Company continues to monitor costs in response to recent commodity price weakness and the uncertainty caused by the COVID-19 pandemic, and remains focused on controlling costs where possible.
  • Engineered Systems booking activity was lower in the quarter versus the prior year period, as bookings continue to be tempered by restrained spending within the oil and gas industry due to shifting supply and demand dynamics and the uncertainty caused by the COVID-19 pandemic. These factors are in addition to previously disclosed difficulties facing the industry including producers having made a general shift to funding growth capital expenditures from free cash flow, constrained access to capital for producers, uncertainty around global trade dynamics, and political uncertainty. Bookings totaled $42.5 million, down from $170.5 million in the same period last year. The movement in exchange rates resulted in a decrease of $9.6 million on foreign currency denominated backlog during the second quarter of 2020, compared to a $13.7 million decrease in the comparable period - a $4.1 million period-over-period improvement. Reduced capital spending within the sector continues to negatively impact bookings activity for Enerflex's Engineered Systems business. The Company has enacted measures to align costs with revenue levels expected from the Engineered Systems business, including reducing its variable workforce, implementing reduced work schedules and unpaid days off in certain geographies, and restricting all non- essential travel. Additional measures may be implemented in response to market conditions.
  • The Company continues to manage working capital and has slowed supply chain transactions to align with anticipated market activity. Inventory levels at June 30, 2020 were slightly higher than at December 31, 2019 due to purchases of major equipment with long lead times, which were ordered in prior periods and delivered in 2020. Inventory levels have decreased from March 31, 2020, as these deliveries were front-loaded in the year, and the Company expects to continue to realize this major equipment inventory into Engineered Systems projects and new contract compression units, however the timing and extent to which inventory can be utilized is dependent on demand. In addition, the collectability of accounts receivable becomes increasingly pertinent in periods of slower industry activity. The Company's large geographic footprint and diversification of products and services assists in mitigating counterparty credit risk that can result from customer concentration. Enerflex remains vigilant in assessing outstanding receivables and has implemented additional monitoring processes in assessing the credit worthiness of customers. During the second quarter of 2020, management identified certain receivable balances in the USA segment that may be at higher risk of credit loss as a result of recent events, leading to an increase in the allowance for doubtful accounts provision at June 30, 2020. The Company believes the current provision appropriately reflects the best estimate of its future expected credit losses.
  • For the three months ended June 30, 2020, the Company invested $30.0 million in rental assets to fund both the organic expansion of the USA contract compression fleet and continued construction of four previously announced Build-Own-Operate-Maintain ("BOOM") projects. At June 30, 2020, the USA contract compression fleet totaled approximately 335,000 horsepower. Average fleet utilization during the quarter was 82 percent. In addition, we continue to progress on all previously announced BOOM projects. However, COVID-19-related travel restrictions and limitations on worksite access may delay three of these BOOM projects that were previously expected to commence operations by mid-2020. Despite the challenges faced, the Company continues to make progress on these BOOM projects and anticipates commencement dates at various times through mid- to late-2020.
  • Extended two BOOM projects in the Middle East during the second quarter. Subsequent to the quarter, the Company executed a letter of intent to extend a BOOM project in the Middle East for 10 years. Final terms of the extension are anticipated to be agreed to and executed in the third quarter of 2020.

2

  • Subsequent to June 30, 2020, Enerflex declared a quarterly dividend of $0.02 per share, payable on October 1, 2020, to shareholders of record on August 20, 2020. Enerflex's Board of Directors will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions.

For the six months ended June 30, 2020:

  • Operating income for the first half of 2020 decreased over the prior year, due largely to lower revenue, partially offset by improved gross margin percentage. Both the current period and the comparative period also include the impact of higher estimated costs to complete certain projects, while the comparative period also includes a write-down of equipment. Gross margin percentage is higher as a result of increased contributions from recurring revenue product lines and continued recognition of the previously mentioned high margin Engineered Systems projects.
  • SG&A costs of $94.5 million in the first six months of 2020 were down from $102.9 million in the same period last year. The decrease in SG&A is driven by lower compensation expense on mark-to-market impacts on share-based compensation and recoveries related to government assistance programs, partially offset by increased bad debt provisions, driven by expected credit losses in the USA segment.
  • Engineered Systems booking activity was lower in the first six months of 2020 versus the prior year period due to restrained spending within the oil and gas industry, as described above. The movement in exchange rates resulted in an increase of $16.0 million on foreign currency denominated backlog during the first half of 2020, compared to a $35.1 million decrease in the comparable period - a $51.1 million period-over-period increase.
  • Engineered Systems backlog decreased compared to the balance at December 31, 2019 due to Engineered Systems revenue recognized in the period outpacing bookings, partially offset by favourable foreign exchange impacts.

ADJUSTED EBITDA

The Company's results include items that are unique and items that management and users of the financial statements adjust for when evaluating the Company's results. The presentation of Adjusted EBITDA should not be considered in isolation from EBIT or EBITDA as determined under IFRS. Adjusted EBITDA may not be comparable to similar measures presented by other companies and should not be considered in isolation or as a replacement for measures prepared as determined under IFRS.

The items that have historically been adjusted for presentation purposes relate generally to four categories: 1) impairment or gains on idle facilities (not including rental asset impairments); 2) restructuring activities; 3) transaction costs related to M&A activity; and, 4) share-based compensation. Enerflex has presented the impact of share-based compensation as it is an item that can fluctuate significantly with share price changes during a period based on factors that are not specific to the long-term performance of the Company. The disposal of idle facilities is isolated within Adjusted EBITDA as they are not reflective of the ongoing operations of the Company and are idled as a result of restructuring activities.

During the second quarter of 2020, the Company added another adjustment related to government grants, most notably the Canada Emergency Wage Subsidy. The amount of subsidies received has been recorded as a reduction in cost of goods sold and selling and administrative expense within the interim condensed consolidated statement of earnings in accordance with where the associated expense was recognized. Enerflex considers this to be a unique item as these temporary grants relate to the recent COVID-19 pandemic and are not anticipated to be part of the ongoing operations of the Company.

Management believes that identification of these items allows for a better understanding of the underlying operations of the Company based on the current assets and structure.

Three months ended

June 30, 2020

($ Canadian thousands)

Total

USA

ROW

Canada

Reported EBIT

$

15,428

$

6,751

$

3,817

$

4,860

Severance costs in COGS and SG&A

1,981

509

91

1,381

Government grants in COGS and SG&A

(6,370)

-

(593)

(5,777)

Share-based compensation

690

435

177

78

Depreciation and amortization

21,786

10,662

8,955

2,169

Adjusted EBITDA

$

33,515

$

18,357

$

12,447

$

2,711

Management's Discussion and Analysis | 2020 Quarterly Report

3

Three months ended

June 30, 2019

($ Canadian thousands)

Total

USA

ROW

Canada

Reported EBIT

$

64,001

$

49,832

$

2,843

$

11,326

Gain on disposal of idle facilities

(434)

-

-

(434)

Share-based compensation

(1,906)

(1,050)

(638)

(218)

Depreciation and amortization

21,853

8,367

10,990

2,496

Adjusted EBITDA

$

83,514

$

57,149

$

13,195

$

13,170

Six months ended

June 30, 2020

($ Canadian thousands)

Total

USA

ROW

Canada

Reported EBIT

$

65,440

$

44,135

$

14,073

$

7,232

Severance costs in COGS and SG&A

3,015

796

124

2,095

Government grants in COGS and SG&A

(6,370)

-

(593)

(5,777)

Share-based compensation

(4,399)

(2,258)

(1,386)

(755)

Depreciation and amortization

42,525

20,576

17,507

4,442

Adjusted EBITDA

$

100,211

$

63,249

$

29,725

$

7,237

Six months ended

June 30, 2019

($ Canadian thousands)

Total

USA

ROW

Canada

Reported EBIT

$

97,347

$

75,654

$

4,825

$

16,868

Write-off of facility and equipment in COGS

2,040

-

2,040

-

Gain on disposal of idle facilities

(434)

-

-

(434)

Share-based compensation

7,477

4,099

1,660

1,718

Depreciation and amortization

43,784

16,008

22,675

5,101

Adjusted EBITDA

$

150,214

$

95,761

$

31,200

$

23,253

Please refer to the section "Segmented Results" for additional information about results by geographic location.

ENGINEERED SYSTEMS BOOKINGS AND BACKLOG

Bookings and backlog are monitored by Enerflex as an indicator of future revenue and business activity levels for the Engineered Systems product line. Bookings are recorded in the period when a firm commitment or order is received from customers. Bookings increase backlog in the period that they are received. Revenue recognized on Engineered Systems products decreases backlog in the period that the revenue is recognized. As a result, backlog is an indication of revenue to be recognized in future periods using percentage-of- completion accounting.

4

Enerflex Ltd. | 2020 Quarterly Report

The following tables set forth the Engineered Systems bookings and backlog by reporting segment for the following periods:

Three months ended

Six months ended

June 30,

June 30,

($ Canadian thousands)

2020

2019

2020

2019

Bookings

USA

$

13,433

$

96,713

$

109,540

$

171,858

Rest of World

6,804

14,996

41,297

16,564

Canada

22,264

58,799

47,058

100,477

Total bookings

$

42,501

$

170,508

$

197,895

$

288,899

June 30,

December 31,

($ Canadian thousands)

2020

2019

Backlog

USA

$

150,696

$

320,054

Rest of World

43,393

8,941

Canada

96,973

138,762

Total backlog

$

291,062

$

467,757

Engineered Systems bookings in the second quarter and first half of 2020 were lower than the comparative period, as bookings continue to be tempered by restrained spending within the oil and gas industry due to recent commodity price weakness and the uncertainty caused by the COVID-19 pandemic. These factors are in addition to previously disclosed difficulties facing the industry, including producers having made a general shift to funding growth capital expenditures from free cash flow, constrained access to capital for producers, uncertainty around global trade dynamics, and political uncertainty, and in some cases may serve to accentuate these issues. The Company expects bookings levels to remain subdued in the short-term and has implemented certain cost saving measures in response to unfavourable market conditions.

Backlog at June 30, 2020 was lower than at December 31, 2019 due to Engineered Systems revenue recognized outpacing bookings, partially offset by favourable foreign exchange impacts on foreign currency denominated backlog. The movement in exchange rates resulted in a decrease of $9.6 million during the second quarter and an increase of $16.0 million during the first half of 2020 on foreign currency denominated backlog, compared to a decrease of $13.7 million and $35.1 million in the same periods of 2019.

SEGMENTED RESULTS

Enerflex has identified three reportable operating segments as outlined below, each supported by the Corporate function. Corporate overheads are allocated to the operating segments based on revenue. In assessing its operating segments, the Company considered economic characteristics, the nature of products and services provided, the nature of production processes, the type of customer for its products and services, and distribution methods used.

The following summary describes the operations of each of the Company's reportable segments:

  • USA generates revenue from manufacturing natural gas compression and processing equipment, including custom and standard compression packages and modular natural gas processing equipment and refrigeration systems, in addition to generating revenue from mechanical services and parts, operations and maintenance solutions, and contract compression rentals;
  • Rest of World generates revenue from manufacturing (focusing on large-scale process equipment), after-market services, including parts and components, as well as operations, maintenance, and overhaul services, and rentals of compression and processing equipment. The Rest of World segment has been successful in securing BOOM and ITK projects; and
  • Canada generates revenue from manufacturing both custom and standard natural gas compression, processing, and electric power equipment, as well as providing after-market mechanical service, parts, and compression and power generation rentals.

Management's Discussion and Analysis | 2020 Quarterly Report

5

USA SEGMENT RESULTS

Three months ended

Six months ended

June 30,

June 30,

($ Canadian thousands)

2020

2019

2020

2019

Engineered Systems bookings

$

13,433

$

96,713

$

109,540

$

171,858

Engineered Systems backlog

150,696

599,418

150,696

599,418

Segment revenue

$

179,440

$

337,411

$

408,621

$

642,302

Intersegment revenue

(2,042)

(10,343)

(4,114)

(22,717)

Revenue

$

177,398

$

327,068

$

404,507

$

619,585

Revenue - Engineered Systems

$

113,282

$

263,041

$

278,898

$

503,035

Revenue - Service

$

41,307

$

44,800

$

79,568

$

80,643

Revenue - Rentals

$

22,809

$

19,227

$

46,041

$

35,907

Operating income

$

6,751

$

49,832

$

44,135

$

75,673

EBIT

$

6,751

$

49,832

$

44,135

$

75,654

EBITDA

$

17,413

$

58,199

$

64,711

$

91,662

Segment revenue as a % of total revenue

61.7%

60.4%

61.9%

60.3%

Recurring revenue growth

0.1%

36.2%

7.8%

32.9%

Operating income as a % of segment revenue

3.8%

15.2%

10.9%

12.2%

EBIT as a % of segment revenue

3.8%

15.2%

10.9%

12.2%

EBITDA as a % of segment revenue

9.8%

17.8%

16.0%

14.8%

Engineered Systems bookings of $13.4 million in the second quarter of 2020 represents a decrease of $83.3 million or 86.1 percent compared to the same period in the prior year. Bookings activity continues to be lower than historical levels due to several factors, including a severe downturn in oil prices caused by shifting supply and demand dynamics, as well as market uncertainty caused by the COVID-19 pandemic. These factors are in addition to previously disclosed difficulties facing the industry, including producers having made a general shift to funding growth capital expenditures from free cash flow, constrained access to capital for producers, uncertainty around global trade dynamics, and political uncertainty. The Company expects bookings levels to remain subdued in the short-term and has implemented certain cost saving measures in response to unfavourable market conditions.

Revenue decreased by $149.7 million and $215.1 million in the second quarter and first half of 2020 compared to the same periods of 2019 due largely to lower Engineered Systems and Service revenue, partially offset by higher Rentals revenue. Engineered Systems revenue decreased due to lower opening backlog on reduced bookings in recent periods, while Service was lower due to travel restrictions related to COVID-19. Rentals revenue increased due to the organic growth of the contract compression fleet, which grew by 28.6 percent on a horsepower basis in the last year.

Operating income was lower in the second quarter and first half of 2020 compared to the prior year by $43.1 million and $31.5 million, primarily due to lower gross margins. Gross margins decreased due to lower revenue on soft bookings from 2019 and the first half of 2020, as well as the reduced contribution from certain large, high margin Engineered Systems projects that were booked during the second half of 2018 as they near completion. The second quarter of 2020 was also impacted by higher SG&A costs, the result of bad debt provisions taken in the second quarter of 2020, as management identified certain receivable balances in the USA segment that may be at higher risk of credit loss as a result of recent events. For the six months ended June 30, 2020, SG&A decreased due to lower compensation costs, driven by mark-to-market impacts on share-based compensation, partially offset by higher bad debt provisions.

At June 30, 2020, the USA contract compression fleet totaled approximately 335,000 horsepower, compared to approximately 310,000 horsepower at December 31, 2019. The average utilization of the USA contract compression fleet for the three and six months ended June 30, 2020 was 82 percent and 84 percent, respectively, compared to 87 percent and 87 percent in the comparative periods.

6

Enerflex Ltd. | 2020 Quarterly Report

REST OF WORLD SEGMENT RESULTS

Three months ended

Six months ended

June 30,

June 30,

($ Canadian thousands)

2020

2019

2020

2019

Engineered Systems Bookings

$

6,804

$

14,996

$

41,297

$

16,564

Engineered Systems Backlog

43,393

40,315

43,393

40,315

Segment revenue

$

59,533

$

91,821

$

129,808

$

193,086

Intersegment revenue

-

(113)

-

(7,575)

Revenue

$

59,533

$

91,708

$

129,808

$

185,511

Revenue - Engineered Systems

$

189

$

20,169

$

6,845

$

46,749

Revenue - Service1

$

22,850

$

29,559

$

46,730

$

57,627

Revenue - Rentals1

$

36,494

$

41,980

$

76,233

$

81,135

Operating income

$

3,807

$

2,869

$

14,020

$

4,827

EBIT

$

3,817

$

2,843

$

14,073

$

4,825

EBITDA

$

12,772

$

13,833

$

31,580

$

27,500

Segment revenue as a % of total revenue

20.7%

16.9%

19.9%

18.1%

Recurring revenue growth

(17.0)%

10.0%

(11.4)%

10.8%

Operating income as a % of segment revenue

6.4%

3.1%

10.8%

2.6%

EBIT as a % of segment revenue

6.4%

3.1%

10.8%

2.6%

EBITDA as a % of segment revenue

21.5%

15.1%

24.3%

14.8%

  • Revenues from the operation and maintenance of BOOM contracts have been reclassified from the Service to Rentals product line including $11,717 previously disclosed during the first quarter of 2020. For the three and six months ended June 30, 2019, $10,744 and $21,400 have been reclassified. Please refer to Note 12 of the unaudited interim condensed consolidated financial statements for further details.

Engineered Systems bookings in the Rest of World segment are typically larger in nature and scope and as a result are less frequent.

Rest of World revenue decreased by $32.3 million and $55.7 million in the second quarter and first half of 2020 compared to the same period in the prior year due to lower revenue for all product lines. Engineered Systems revenue was down for the second quarter of 2020 primarily due to a lower opening backlog, while Service revenues decreased due to reduced activity levels and a reduction in parts and equipment sales and Rentals revenues decreased due to lower utilization of the rental fleet in Latin America.

Operating income increased by $0.9 million and $9.2 million in the second quarter and first half of 2020 compared to the same period of 2019. The current quarter increase is driven by improved gross margin percentage as well as lower SG&A costs due to reduced travel, marketing, and non-critical IT expenditures, as well as favourable foreign exchange movements. The improvement in the first half of 2020 was due to higher gross margin percentage and the non-recurrence of write-downs of equipment included in the comparative period, as well as lower SG&A costs on mark-to-market impacts on share-based compensation.

Management's Discussion and Analysis | 2020 Quarterly Report

7

CANADA SEGMENT RESULTS

Three months ended

Six months ended

June 30,

June 30,

($ Canadian thousands)

2020

2019

2020

2019

Engineered Systems bookings

$

22,264

$

58,799

$

47,058

$

100,477

Engineered Systems backlog

96,973

334,662

96,973

334,662

Segment revenue

$

51,182

$

122,769

$

120,535

$

231,167

Intersegment revenue

(675)

329

(1,672)

(9,487)

Revenue

$

50,507

$

123,098

$

118,863

$

221,680

Revenue - Engineered Systems

$

35,726

$

101,743

$

88,847

$

180,631

Revenue - Service

$

12,877

$

18,093

$

25,712

$

35,042

Revenue - Rentals

$

1,904

$

3,262

$

4,304

$

6,007

Operating income

$

3,881

$

10,516

$

6,504

$

15,664

EBIT

$

4,860

$

11,326

$

7,232

$

16,868

EBITDA

$

7,029

$

13,822

$

11,674

$

21,969

Segment revenue as a % of total revenue

17.6%

22.7%

18.2%

21.6%

Recurring revenue growth

(30.8)%

40.1%

(26.9)%

36.5%

Operating income as a % of segment revenue

7.7%

8.5%

5.5%

7.1%

EBIT as a % of segment revenue

9.6%

9.2%

6.1%

7.6%

EBITDA as a % of segment revenue

13.9%

11.2%

9.8%

9.9%

Bookings in the second quarter of 2020 decreased to $22.3 million from $58.8 million a year ago, predominantly due to several factors, including a severe downturn in oil prices caused by shifting supply and demand dynamics, as well as market uncertainty caused by the COVID-19 pandemic. These factors are in addition to previously disclosed difficulties facing the industry, including producers having made a general shift to funding growth capital expenditures from free cash flow, constrained access to capital for producers, uncertainty around global trade dynamics, and political uncertainty. The Company expects bookings levels to remain subdued in the short-term and has implemented certain cost saving measures in response to unfavourable market conditions.

Revenue decreased by $72.6 million and $102.8 million for the second quarter and first half of 2020 compared to the same periods in 2019, primarily due to lower Engineered Systems revenue on a lower opening backlog. In addition, Service and Rentals revenues were down due to lower equipment sales and reseller activity.

The Canadian segment recorded an operating income of $3.9 million and $6.5 million for the second quarter and first half of 2020 compared to $10.5 million and $15.7 million in the same period of 2019. Operating income decreased due to lower gross margin on reduced revenue, partially offset by lower SG&A costs driven by mark-to-market impacts on share-based compensation and cost recoveries related to government assistance programs.

8

Enerflex Ltd. | 2020 Quarterly Report

GROSS MARGIN BY PRODUCT LINE

Enerflex operates three business segments, and each regional business segment has three main product lines: Engineered Systems, Service, and Rentals. The Engineered Systems product line consists of the supply of equipment systems, typically involving engineering, design, manufacturing, installation, construction and the start-up of equipment. The Service product line provides after-market services, parts distribution, operations and maintenance solutions, equipment optimization and maintenance programs, manufacturer warranties, exchange components, and technical services. The Rentals product line encompasses a fleet of natural gas compression, processing, and electric power equipment totalling over 695,000 horsepower on rent or available for rent globally, generating revenue from rental agreements, and the sale of rental equipment to customers. In addition to Enerflex's rental fleet, the Company's Rentals product line provides customers with personnel, equipment, tools, materials, and supplies to meet their natural gas compression, processing, and electric power needs, as well as designing, sourcing, owning, installing, operating, servicing, repairing, and maintaining equipment owned by the Company necessary to provide these services, including providing operation and maintenance as part of a BOOM agreement.

Recurring revenue is comprised of revenue from the Service and Rentals product lines, which are typically contracted and extend into the future. The Company aims to diversify and expand Service and Rentals offerings, which we believe offer longer-term stability in earnings compared to Engineered Systems revenue, which historically has been dependent on cyclical demand for new compression, process, and electric power equipment. While individual Service and Rentals contracts are subject to cancellation or have varying lengths, the Company does not believe these characteristics preclude these product lines from being considered recurring in nature.

Three months ended

June 30, 2020

Engineered

($ Canadian thousands)

Total

Systems

Service

Rentals

Revenue

$

287,438

$

149,197

$

77,034

$

61,207

Cost of goods sold:

Operating expenses

204,627

124,448

58,504

21,675

Depreciation and amortization

17,011

2,139

1,234

13,638

Gross margin

$

65,800

$

22,610

$

17,296

$

25,894

Three months ended

June 30, 2019

Engineered

($ Canadian thousands)

Total

Systems

Service

Rentals

Revenue

$

541,874

$

384,953

$

92,452

$

64,469

Cost of goods sold:

Operating expenses

415,013

316,921

72,364

25,728

Depreciation and amortization

16,559

1,572

679

14,308

Gross margin

$

110,302

$

66,460

$

19,409

$

24,433

Six months ended

June 30, 2020

Engineered

($ Canadian thousands)

Total

Systems

Service

Rentals

Revenue

$

653,178

$

374,590

$

152,010

$

126,578

Cost of goods sold:

Operating expenses

460,622

297,781

116,556

46,285

Depreciation and amortization

33,024

4,249

2,058

26,717

Gross margin

$

159,532

$

72,560

$

33,396

$

53,576

Management's Discussion and Analysis | 2020 Quarterly Report

9

Six months ended

June 30, 2019

Engineered

($ Canadian thousands)

Total

Systems

Service

Rentals

Revenue

$

1,026,776

$

730,415

$

173,312

$

123,049

Cost of goods sold:

Operating expenses

794,309

608,671

136,978

48,660

Depreciation and amortization

33,395

3,058

1,333

29,004

Gross margin

$

199,072

$

118,686

$

35,001

$

45,385

INCOME TAXES

Income tax expense totaled $1.8 million or 19.9 percent and $8.5 million or 15.9 percent of earnings before tax for the second quarter and first half of 2020, compared to $19.2 million or 32.1 percent and $31.2 million or 35.1 percent of earnings before tax in the same period of 2019. Income tax expense and the effective tax rate for the second quarter of 2020 were lower primarily due to reduced earnings before tax and a lower statutory rate, partially offset by the exchange rate effects on tax basis and amounts not deductible for tax purposes. Income tax expense and the effective tax rate for the first half of 2020 were lower primarily due to reduced earnings before tax, a lower statutory rate, the exchange rate effects on tax basis, and the effect of earnings taxed in foreign jurisdictions, partially offset by amounts not deductible for tax purposes. During the second quarter of 2019, lower Alberta corporate income tax rates became substantially enacted, which will reduce Enerflex's taxes in future periods. The Alberta corporate income tax rates are 11.5 percent for 2019, 10.0 percent for 2020, 9.0 percent for 2021, and 8.0 percent for 2022 and thereafter.

OUTLOOK

Enerflex's financial performance derives from strategic decisions to: 1) diversify product offerings for Engineered Systems; 2) focus on increasing the recurring revenue streams derived from new and existing long-term BOOM, rental, and service contracts; and 3) develop a geographically diversified business. Enerflex's capital allocation priorities in recent years have been oriented toward stabilizing cash flows and making the Company more resistant to the natural, yet unpredictable, cyclicality in commodity markets. Priorities have included significant investments in recurring revenue projects in the USA and ROW segments. While the current reduction in global oil and natural gas demand will significantly impact demand for Enerflex's products and services, these investments are expected to assist in stabilizing the Company's cash flow throughout this downturn.

Demand for the Company's Engineered Systems product offerings remains dependent on global capital investment in oil and natural gas, and all product lines are put under pressure when the macro environment is weakened. Uncertainty caused by a number of recent factors, most prominent being the COVID-19 pandemic and changes in supply and demand for oil, has reduced investment levels across the energy industry and tempered expectations for activity levels through 2020 and into 2021. These dynamics are in addition to previously disclosed difficulties facing the industry including: 1) producers having made a general shift to funding growth capital expenditures from free cash flow; 2) constrained access to capital markets for producers; 3) uncertainty around global trade dynamics; and 4) political uncertainty, and in some cases may serve to accentuate these issues.

Currently, North America presents the area of greatest uncertainty for Enerflex. Engineered Systems revenues in the Canada and USA regions are likely to experience pressure through 2020 and into 2021, though order flow is seeing some success from non-traditional applications. The outlook for business lines oriented toward our customers' opex in North America, namely Service and Rentals, appears to have stabilized in the near-term. As previously announced, growth capital expenditures on new rental fleet assets in the USA have been reduced to include only expenditures connected to existing contractual obligations. Notwithstanding, the Company's current financial position affords it some flexibility to pursue additional growth opportunities, should they arise when the macro environment is more constructive. Overall, asset ownership continues to represent a very important growth prospect for the Company and we intend to continue deploying capital to this higher-margin,less-cyclical business, provided returns and growth prospects remain attractive through the short-term uncertainty currently being experienced.

The ROW segment is less dependent on Engineered Systems to drive operating results, as long-term contracts for Service and Rentals make cash flows more predictable than the North American regions. In the Middle East, we have seen increasing interest for new assets

10

Enerflex Ltd. | 2020 Quarterly Report

and have secured contract extensions for certain existing assets. Latin America will benefit from the completion of certain BOOM projects in Brazil and Argentina, the sale of a 13 MW power and gas treating plant to reduce flare gas in Colombia, and renewed rental assets in Mexico which are expected to come online in third quarter of 2020. Despite the challenges caused by COVID-19, the Company continues to progress all previously announced BOOM projects and anticipates commencement dates at various times through mid- to late-2020.

While the Company's recent financial performance has benefitted from strong Engineered Systems project work and significant growth in the recurring revenue streams derived from its asset ownership and after-market services product lines, any continuation of market weakness may cause the Company's customers to further reduce capital budgets while simultaneously instituting cost cutting measures, thereby reducing demand for Enerflex's products and services, including reduced demand for rentals due to production shut-ins.

Enerflex previously disclosed measures instituted to preserve the strength of our balance sheet and maximize free cash flow in the first quarter of 2020. At June 30, 2020, expected cost savings resulting from workforce and compensation reductions are in line with expectations as previously disclosed. In addition, the Company has received grant funding in the Canada and ROW segments to mitigate further job losses in jurisdictions with grant programs. In the second quarter of 2020, the Company was effective in reducing travel, marketing, and non-critical IT expenditures. Growth capital expenditures in the first half of 2020 totaled $88.3 million, and the Company expects full year growth capital expenditures of approximately $110 million, subject to foreign exchange fluctuations between the U.S. and Canadian dollar, up from approximately $90 million previously disclosed. This increase is due to costs relating to a small BOOM not previously included in estimated capex, final scoping on other BOOM projects, foreign exchange differences, and additional project costs due to COVID-19-induced delays. Maintenance capital expenditures are expected to be $15-20 million, subject to the scope of maintenance activities required and foreign exchange fluctuations between the U.S. and Canadian dollar, up from approximately $15 million previously disclosed. The dividend declared in the second quarter represented an 83 percent reduction from the last quarter, and Enerflex's Board of Directors will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions.

In the short term, Enerflex remains focused on providing a safe working environment for all employees, while preserving capital and maintaining balance sheet strength in response to uncertainty caused by the COVID-19 pandemic and recent market volatility. Given the current environment, the Company is carefully assessing project spending, with a focus on ensuring future projects provide maximum returns on invested capital. In the longer term, the Company continues to balance the expected impacts of broader market factors, such as volatility in realized commodity prices, political and economic uncertainty, and consistent access to market, against the projected increases in global demand for natural gas. Enerflex continues to assess the effects of these contributing factors and the corresponding impact on customer activity levels, which will drive the demand for the Company's products and services in future periods.

OUTLOOK BY SEGMENT

USA

The recent performance of the USA segment has been driven by a combination of international equipment orders, the U.S. industry's investment in shale oil and gas, and continued demand for the aftermarket service and contract compression product offerings. While the U.S. industry at large, and growth in the Permian in particular, have been impacted by global events, the Company believes that the increased presence of larger, more patient producers in the Permian is supportive of the formation's long-term production and value. Increased activity by dry gas producers and the presence of Enerflex in 21 locations covering key resource plays including the Marcellus, Utica, Haynesville, and Niobrara positions the Company to capture further demand for Engineered Systems products and fullstream solutions, as well as contract compression assets to improve performance in maturing fields. The Company's contract compression fleet consists of approximately 335,000 horsepower, providing a more stable and predictable revenue source that the Company intends to continue to leverage and grow through 2020 and beyond, provided returns and growth prospects remain attractive. Given the current commodity price environment, producers in the USA segment may continue to shut in production, which would reduce production volumes and negatively impact demand for Enerflex's products and services.

Rest of World

In the Rest of World segment, the Company continues to generate strong recurring revenue in both the MEA and Latin America regions. MEA continues to provide stable rental earnings with a rental fleet of approximately 100,000 horsepower. The Company continues to explore new markets and opportunities within this region, focusing on projects that provide long-term, stable cash flows.

In Latin America, Enerflex remains cautiously optimistic as many countries have indicated a renewed desire to develop oil and natural gas in recent periods. With investment opportunities becoming available, the global energy industry is returning to various prolific plays

Management's Discussion and Analysis | 2020 Quarterly Report

11

within the region, although reduced exploration budgets and a greater aversion to risk may temper this return. The Company is well positioned to provide products and services, and believes that there are near-term prospects within Argentina, Bolivia, Brazil, and Colombia, and mid- to longer-term prospects in Mexico.

Enerflex continues to make progress on the construction of previously awarded BOOM projects in MEA and Latin America. However, COVID-19-related travel restrictions and limitations on worksite access are expected to delay the dates on which certain of these projects were expected to commence operations and begin generating revenue. Despite the challenges faced, the Company continues to make progress on these BOOM projects and anticipates commencement dates at various times through mid- to late-2020.

In Australia, demand for Enerflex service and maintenance support remains solid. Liquified natural gas ("LNG") supply contracts are providing a stable demand for gas. Downward pressure on production costs are increasing customers' desire to improve equipment reliability and efficiency and Enerflex is well positioned to support production equipment optimization and improve reliability. Capital equipment demand in the Australian market has seen a slow down in response to the current economic environment; however, multiple new opportunities have been approved by customers, despite the challenges presented by the decrease in oil prices and the COVID-19 pandemic. While Enerflex remains optimistic that these opportunities will continue to drive demand for the Company's products and services towards the second half of 2020, Enerflex is prepared to respond should our customer needs fall off sharply.

Canada

The Company expects that recent global developments will further constrain spending in the Canadian energy sector, exacerbating conditions faced by an industry that was already experiencing negative sentiment and a lack of consistent access to market. The combination of restricted access to financing in Canada, depressed oil prices and the impact of COVID-19 has raised significant doubt in the Canadian energy industry, which producers across the sector have responded to by reducing capital budgets. As long as current global forces continue to bring market uncertainty, the Company expects limited development potential in Canada. While progress is being made on pipelines and certain LNG projects, raising the likelihood of export capacity and offering some future relief to the Canadian gas industry, management still expects activity in Canada to be very subdued through 2020 and into 2021.

ENERFLEX STRATEGY

Enerflex's global vision is "Transforming natural gas to meet the world's energy needs". The Company's strategy to support this vision centres on being an operationally focused, diversified, financially strong, dividend-paying company that delivers profitable growth by serving an expanding industry in seven gas producing regions worldwide. Enerflex believes that worldwide diversification and growth enhances shareholder value. This strategy has allowed the Company to overcome previous downturns and endure recent uncertainty while still delivering strong operating results. With a positive long-term outlook for natural gas, Enerflex aims to provide superior returns through the continued implementation of this strategy.

Across the Company, Enerflex looks to leverage its diversified international positioning to provide exposure to projects in growing natural gas markets, and to offer integrated solutions spanning all phases of a project's life-cycle from engineering and design through to after-market service, with a focus on recurring revenue from Service and Rentals offerings. The Company works to leverage its enterprise-wide collaborative approach to deploy key expertise worldwide and generate repeat business from internationally active customers. The Company also targets growth areas in the traditional natural gas industry, including the increasing global demand for natural gas-fired power generation. Enerflex has developed regional strategies to support its Company-wide goals.

In the USA segment, Enerflex has concentrated its efforts on key regions and basins, driven by the U.S.'s increasingly complex natural gas sector. The Company has looked to build on its successes for gas processing solutions for liquids-rich plays in the region, and support the development of upstream resources and midstream infrastructure required to feed local demand and an export-focused LNG industry. For our recurring revenue product lines, the focus for the Service business has been on optimizing across the region while responding to market demand in all locations. For the Rentals product line, the organic expansion of the contract compression fleet has allowed Enerflex to increase revenues, while the Company's ability to design, engineer, and build contract compression units positions Enerflex well to respond to future growth in the segment. The Company believes that the long-term impact of continued focus on these recurring revenue product lines will be increased predictability and stability in earnings, while investment in the contract compression fleet should drive growth and strong returns for the Rentals business.

12

Enerflex Ltd. | 2020 Quarterly Report

Enerflex has focused its efforts in the ROW segment on growing primarily in the MEA and Latin America regions, through the sales, rental, and service of its products. In these regions, the Company has targeted ITK projects and BOOM solutions of varying size and scope, including projects requiring construction and installation support at site. Successful projects have been completed in Bahrain, Kuwait, and Oman in MEA, and in Argentina, Brazil, and Colombia in Latin America, and multiple projects secured in previous periods are scheduled to commence operations and begin generating recurring revenue in mid- to late-2020. Enerflex underscores the importance of BOOM solutions in this segment, as long-term contracts for rental and maintenance of this equipment align with the emphasis on growing recurring revenue streams and customers in this segment have proven to be receptive to these solutions. The Company has also seen increased interest in electric power solutions in many of the regions in the ROW segment, and looks to leverage expertise developed across the organization to meet this demand. Elsewhere in the segment, Enerflex has expanded the capability of the Company's Australian Service line in response to activity levels, which are projected to remain high on the strength of increasing demand for natural gas, contributing to recurring revenue.

Enerflex has aimed its efforts in Canada on leveraging its capabilities and expertise to continue to preserve market share in the natural gas sector, particularly in liquids-rich reservoirs, and to support the development of natural gas resources for a future LNG industry. In addition, the Company has looked to build on its successes in the electric power market given sustained low natural gas prices and the resulting increase in demand for natural gas-fired power generation. The Company is able to offer electric power solutions for purchase or for rent, the latter of which allows the Company to offer flexibility and provide maintenance while increasing recurring revenues. Lastly, there has been a focus on signing long-term service and maintenance contracts with customers in order to secure stability in Service revenues.

Enerflex seeks to continue to diversify its revenue streams from multiple markets, grow its backlog, and ensure profitable margins globally by aggressively managing costs, with a medium-term goal of achieving a 10 percent EBIT margin. In addition, the Company is focused on expanding the diversification of its product lines, with a goal to increase recurring revenue by 10 percent annually. Enerflex recognizes that the current economic conditions may make it challenging to meet these goals in the near-term but the Company believes these remain appropriate as medium-term and longer-term goals.

Management's Discussion and Analysis | 2020 Quarterly Report

13

NON-IFRS MEASURES

The success of the Company and its business unit strategies is measured using a number of key performance indicators, some of which do not have a standardized meaning as prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. These non-IFRS measures are also used by management in its assessment of relative investments in operations and include Engineered Systems bookings and backlog, recurring revenue, EBITDA, net debt to EBITDA ratio, and ROCE. They should not be considered as an alternative to net earnings or any other measure of performance under IFRS. The reconciliation of these non-IFRS measures to the most directly comparable measure calculated in accordance with IFRS is provided below where appropriate. Engineered Systems bookings and backlog do not have a directly comparable IFRS measure.

Three months ended

Six months ended

June 30,

June 30,

($ Canadian thousands)

2020

2019

2020

2019

EBITDA

EBIT

$

15,428

$

64,001

$

65,440

$

97,347

Depreciation and amortization

21,786

21,853

42,525

43,784

EBITDA

$

37,214

$

85,854

$

107,965

$

141,131

Recurring Revenue

Service1

$

77,034

$

92,452

$

152,010

$

173,312

Rentals1

61,207

64,469

126,578

123,049

Total Recurring Revenue

$

138,241

$

156,921

$

278,588

$

296,361

ROCE

Trailing 12-month EBIT

$

201,995

$

201,157

$

201,995

$

201,157

Capital Employed - beginning of period

Net debt2

$

402,717

$

38,725

$

334,232

$

117,848

Shareholders' equity

1,458,760

1,270,629

1,342,787

1,282,519

$

1,861,477

$

1,309,354

$

1,677,019

$

1,400,367

Capital Employed - end of period

Net debt2

$

384,588

$

141,492

$

384,588

$

141,492

Shareholders' equity

1,425,912

1,276,350

1,425,912

1,276,350

$

1,810,500

$

1,417,842

$

1,810,500

$

1,417,842

Average Capital Employed3

$

1,719,860

$

1,374,833

$

1,719,860

$

1,374,833

Return on Capital Employed

11.7%

14.6%

11.7%

14.6%

  • Revenues from the operation and maintenance of BOOM contracts have been reclassified from the Service to Rentals product line including $11,717 previously disclosed during the first quarter of 2020. For the three and six months ended June 30, 2019, $10,744 and $21,400 have been reclassified. Please refer to Note 12 of the unaudited interim condensed consolidated financial statements for further details.
    2 Net debt is defined as short- and long-term debt less cash and cash equivalents. 3 Based on a trailing four-quarter average.

14

Enerflex Ltd. | 2020 Quarterly Report

FREE CASH FLOW

Three months ended

Six months ended

June 30,

June 30,

($ Canadian thousands)

2020

2019

2020

2019

Cash provided by (used in) operating activities

$

64,927

$

(17,493)

$

74,260

$

104,841

Net change in non-cash working capital and other

36,719

(89,246)

(7,513)

(20,242)

$

28,208

$

71,753

$

81,773

$

125,083

Add-back:

Net finance costs

6,168

4,129

12,137

8,504

Current income tax expense

2,539

7,282

8,875

13,838

Proceeds on the disposal of property, plant

and equipment

10

60

96

84

Proceeds on the disposal of rental equipment

247

1,472

2,910

2,724

Deduct:

Net interest paid

(10,057)

(8,048)

(11,540)

(7,909)

Net cash taxes paid

(1,297)

(2,975)

(7,457)

(11,987)

Additions to property, plant and equipment

(2,397)

(12,842)

(6,829)

(27,808)

Additions to rental equipment:

Growth

(27,408)

(58,036)

(88,281)

(71,673)

Maintenance

(2,538)

(3,130)

(4,325)

(13,565)

Dividends paid

(10,313)

(9,389)

(20,625)

(18,738)

Free cash flow

$

(16,838)

$

(9,724)

$

(33,266)

$

(1,447)

For the three and six months ended June 30, 2020, free cash flow decreased compared to the same period in 2019. For the three months ended June 30, 2020, this decrease was primarily due to lower cash provided by operating activities before non-cash working capital, partially offset by lower growth capital expenditures on the rental fleet. For the six months ended June 30, 2020, this decrease was due to due to lower cash provided by operating activities before non-cash working capital and higher growth capital expenditures on the rental fleet. As announced in the first quarter of 2020, Enerflex will proceed only with those growth capital expenditures connected to existing contractual obligations, as well as required maintenance capital expenditures. Notwithstanding, the Company's current financial position affords it some flexibility to pursue additional growth opportunities, should they arise when the macro environment is more constructive. Under favourable circumstances, additional capital may be directed to growth opportunities in any of our regions.

Management's Discussion and Analysis | 2020 Quarterly Report

15

FINANCIAL POSITION

The following table outlines significant changes in the Statements of Financial Position as at June 30, 2020 compared to December 31, 2019:

Increase

($ Canadian millions)

(Decrease)

Explanation

The decrease in current assets is due to lower cash, accounts receivable, and contract

assets, partially offset by higher inventories. Cash decreased due to expenditures on

direct material inventory and rental equipment, while accounts receivable decreased

Current assets

$(136.6)

due to collection of trade receivables and lower overall activity levels and contract

assets decreased due to lower activity levels and amounts reclassified to other assets.

Higher inventory is primarily due to purchases of major equipment with long lead times,

which were ordered in prior periods and delivered in the current period.

The increase in rental equipment is due to additions during the year, primarily on the

Rental equipment

$87.9

contract compression fleet in the USA and BOOM projects in ROW, as well as the

strengthening of the U.S. dollar at June 30, 2020 that impacts the revaluation of U.S.

dollar denominated rental equipment, partially offset by depreciation.

The increase in other assets is largely due to a balance previously included in contract

Other assets

$17.7

assets at December 31, 2019 that was reclassified to a long-term receivable during the

first quarter of 2020.

The increase in goodwill is due to the strengthening of the U.S. dollar at June 30, 2020

Goodwill

$21.4

that impacts the revaluation of U.S. dollar denominated goodwill.

The decrease in current liabilities is due to lower accounts payable and deferred

Current liabilities

$(78.6)

revenues, partially offset by a portion of long-term debt that classified as current at June

30, 2020. Lower accounts payable and deferred revenues were due to lower overall

activity levels, partially offset by the strengthening of the U.S. dollar at June 30, 2020.

Shareholders' equity before non-controlling interest increased due to $44.7 million net

Shareholders' equity

before non-controlling

$83.4

earnings, $49.9 million unrealized income on translation of foreign operations and $0.9

interest

million of stock options impact, partially offset by dividends of $12.1 million.

LIQUIDITY

The Company expects that continued cash flows from operations in 2020, together with cash and cash equivalents on hand and currently available credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets. As at June 30, 2020, the Company held cash and cash equivalents of $78.6 million and had cash drawings of $142.4 million against the amended and restated syndicated revolving credit facility (the "Bank Facility"), leaving it with access to $532.2 million for future drawings. The Company continues to meet the covenant requirements of its funded debt, including the Bank Facility and the Company's unsecured notes (the "Senior Notes"), with a bank-adjusted net debt to EBITDA ratio of 1.2:1 compared to a maximum ratio of 3:1, and an interest coverage ratio of 14:1 compared to a minimum ratio of 3:1. The interest coverage ratio is calculated by dividing the trailing 12-monthbank-adjusted EBITDA, as defined by the Company's lenders, by interest expense over the same timeframe.

16

Enerflex Ltd. | 2020 Quarterly Report

SUMMARIZED STATEMENTS OF CASH FLOW

Three months ended

Six months ended

June 30,

June 30,

($ Canadian thousands)

2020

2019

2020

2019

Cash, beginning of period

$

71,671

$

305,032

$

96,255

$

326,864

Cash provided by (used in):

Operating activities

64,927

(17,493)

74,260

104,841

Investing activities

(31,578)

(72,524)

(95,313)

(106,012)

Financing activities

(26,359)

9,061

3,494

(101,071)

Exchange rate changes on foreign currency cash

(91)

(132)

(126)

(678)

Cash, end of period

$

78,570

$

223,944

$

78,570

$

223,944

Operating Activities

For the three months ended June 30, 2020, cash provided by operating activities improved over the same period in 2019, with positive movements in non-cash working capital partially offset by lower net earnings. For the six months ended June 30, 2020, cash provided by operating activities decreased over the comparative period due to lower net earnings, partially offset by favourable non-cash working capital movement. Movements in non-cash working capital are explained in the "Financial Position" section of this MD&A.

Investing Activities

For the three months ended June 30, 2020, cash used in investing activities decreased due to lower capital expenditures on the rental fleet and property, plant and equipment, while for the six months ended June 30, 2020, cash used in investing activities decreased due to lower capital expenditures on property, plant and equipment, partially offset by higher expenditures on the rental fleet.

Financing Activities

For the three months ended June 30, 2020, cash used in financing activities increased primarily due to repayment of long-term debt, compared to draws made on long-term debt in the same period in 2019. For the six months ended June 30, 2020, cash provided by financing activities increased primarily due to draws made on long-term debt, compared to repayment of long-term debt in the comparative period.

QUARTERLY SUMMARY

($ Canadian thousands,

Earnings per

Earnings per

except per share amounts)

Revenue

Net earnings

share - basic

share - diluted

June 30, 2020

$

287,438

$

7,415

$

0.08

$

0.08

March 31, 2020

365,740

37,438

0.42

0.42

December 31, 2019

474,362

31,436

0.35

0.35

September 30, 2019

544,284

63,074

0.71

0.70

June 30, 2019

541,874

40,649

0.45

0.45

March 31, 2019

484,902

16,969

0.19

0.19

December 31, 2018

466,842

32,480

0.37

0.36

September 30, 2018

445,803

37,696

0.43

0.42

June 30, 2018

404,848

20,367

0.23

0.23

March 31, 2018

385,780

10,873

0.12

0.12

December 31, 2017

450,065

26,702

0.30

0.30

September 30, 2017

315,019

25,188

0.28

0.28

Management's Discussion and Analysis | 2020 Quarterly Report

17

CAPITAL RESOURCES

On July 31, 2020, Enerflex had 89,678,845 shares outstanding. Enerflex has not established a formal dividend policy and the Board of Directors anticipates setting the quarterly dividends based on the availability of cash flow and anticipated market conditions, taking into consideration business opportunities and the need for growth capital. Subsequent to the second quarter of 2020, the Company declared a quarterly dividend of $0.02 per share. Enerflex's Board of Directors will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions.

At June 30, 2020, the Company had drawn $142.4 million against the Bank Facility (December 31, 2019 - $121.3 million). The weighted average interest rate on the Bank Facility at June 30, 2020 was 2.6 percent (December 31, 2019 - 3.5 percent).

The composition of the borrowings on the Bank Facility and the Senior Notes was as follows:

June 30,

December 31,

($ Canadian thousands)

2020

2019

Drawings on Bank Facility

$

142,423

$

121,328

Senior Notes due June 22, 2021

40,000

40,000

Senior Notes due December 15, 2024

158,094

151,374

Senior Notes due December 15, 2027

125,396

120,916

Deferred transaction costs

(2,755)

(3,131)

$

463,158

$

430,487

Current portion of long-term debt

$

40,000

$

-

Non-current portion of long-term debt

423,158

430,487

$

463,158

$

430,487

At June 30, 2020, without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the next five years are $340.5 million, and $125.4 million thereafter.

RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS

Management is responsible for the information disclosed in this MD&A and the accompanying unaudited interim condensed consolidated financial statements, and has in place appropriate information systems, procedures, and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company's Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the Company, and has reviewed and approved this MD&A and the audited consolidated financial statements. The Audit Committee is also responsible for determining that management fulfills its responsibilities in the financial control of operations, including disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR").

INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no significant changes in the design of the Company's ICFR during the six months ended June 30, 2020 that would materially affect, or is reasonably likely to materially affect, the Company's ICFR. The Company recognizes that employees may be required to change how control activities are performed during offsite work arrangements resulting from the COVID-19 pandemic, and has ensured that control objectives are being met during this period.

18

Enerflex Ltd. | 2020 Quarterly Report

SUBSEQUENT EVENTS

Subsequent to the quarter, the Company executed a letter of intent to extend a BOOM project in the Middle East for 10 years. Final terms of the extension are anticipated to be agreed to and executed in the third quarter of 2020.

Subsequent to June 30, 2020, Enerflex declared a quarterly dividend of $0.02 per share, payable on October 1, 2020, to shareholders of record on August 20, 2020. Enerflex's Board of Directors will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions.

FORWARD-LOOKING STATEMENTS

This MD&A contains forward-looking information within the meaning of applicable Canadian securities laws. All statements other than statements of historical fact are forward-looking statements. The use of any of the words "anticipate", "plan", "contemplate", "continue", "estimate", "expect","intend","propose", "might", "may","will","shall","project", "should", "could", "would", "believe","predict","forecast","pursue", "potential", "objective" and "capable" and similar expressions are intended to identify forward-looking information. In particular, this MD&A includes (without limitation)forward-looking information pertaining to: anticipatedfinancial performance; future capital expenditures, including the amount and nature thereof; bookings and backlog; oil and gas prices and the impact of such prices on demand for Enerflex products and services; development trends inthe oilandgas industry; seasonalvariations intheactivitylevels of certainoiland gasmarkets; business prospects and strategy; expansion and growth of the business and operations, including market share and position in the energy service markets; the ability to raise capital; the ability of existing and expected cash flows and other cash resources to fund investments in working capital and capital assets; the impact of economic conditions on accounts receivable; expectations regarding future dividends; and implications of changes in government regulation, laws and income taxes.

This forward-looking information is based on assumptions, estimates and analysis made in the light of the Company's experience and its perception of trends, current conditions and expected developments, as well as other factors that are believed by the Company to be reasonable and relevant in the circumstances. All forward-looking information in this MD&A, primarily in the Outlook and Enerflex Strategy sections, is subject to important risks, uncertainties, and assumptions, which are difficult to predict and which may affect the Company's operations, including, without limitation: theimpactof economic conditions includingvolatility inthe price ofoil, gas, andgas liquids, interest ratesandforeign exchange rates; industry conditions including supply and demand fundamentals for oil and gas, and the related infrastructure including new environmental, taxation and other laws and regulations; business disruptions resulting from the COVID-19 pandemic; the ability to continue to build and improve on proven manufacturing capabilities and innovate into new product lines and markets; increased competition; insufficient funds to supportcapital investments required to growthe business; the lack of availability of qualified personnel or management; political unrest; and other factors,many of which are beyondthe Company's control.For anaugmented discussion of the risk factors and uncertainties that affect or may affect Enerflex, the reader is directed to the section entitled "Risk Management" in Enerflex's MD&A for the year ended December 31, 2019 (available on www.sedar.com) as well the section entitled "Supplemental Risk Factors" in Enerflex's MD&A for the three months ended March 31, 2020. While the Company believes that there is a reasonable basis for the forward-looking information and statements included in this MD&A, as a result of such known and unknown risks, uncertainties and other factors, actual results, performance, or achievements could differ materially from those expressed in, or implied by, these statements, and readers are cautioned that such statements should not be unduly relied upon.

The forward-looking information contained herein is expressly qualified in its entirety by the above cautionary statement. The forward-looking information included in this MD&A is made as of the date of this MD&A and, other than as required by law, the Company disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.

Management's Discussion and Analysis | 2020 Quarterly Report

19

INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (unaudited)

(restated)1

($ Canadian thousands)

June 30, 2020

December 31, 2019

Assets

Current assets

Cash and cash equivalents

$

78,570

$

96,255

Accounts receivable (Note 2)

323,379

384,021

Contract assets (Note 2)

71,219

130,392

Inventories (Note 3)

272,106

269,385

Income taxes receivable

9,271

6,626

Derivative financial instruments (Note 15)

919

152

Other current assets

7,005

12,223

Total current assets

762,469

899,054

Property, plant and equipment (Note 4)

113,831

108,551

Rental equipment (Note 4)

730,017

642,095

Lease right-of-use assets (Note 5)

57,899

60,288

Deferred tax assets (Note 11)

50,358

48,624

Other assets

44,064

26,410

Intangible assets

18,988

22,058

Goodwill (Note 6)

595,377

573,928

Total assets

$

2,373,003

$

2,381,008

Liabilities and Shareholders' Equity

Current liabilities

Accounts payable and accrued liabilities

$

221,434

$

333,605

Provisions (Note 7)

15,362

18,250

Income taxes payable

8,797

8,074

Deferred revenues (Note 8)

84,221

89,409

Current portion of long-term debt (Note 9)

40,000

-

Current portion of lease liabilities (Note 10)

14,562

14,172

Deferred financing income

83

88

Derivative financial instruments (Note 15)

877

375

Total current liabilities

385,336

463,973

Long-term debt (Note 9)

423,158

430,487

Lease liabilities (Note 10)

50,690

52,828

Deferred tax liabilities (Note 11)

79,956

76,256

Other liabilities

7,951

14,677

Total liabilities

$

947,091

$

1,038,221

Shareholders' equity

Share capital

$

375,524

$

375,524

Contributed surplus

656,047

655,107

Retained earnings

261,419

228,843

Accumulated other comprehensive income

131,695

81,779

Total shareholders' equity before non-controlling interest

1,424,685

1,341,253

Non-controlling interest

1,227

1,534

Total shareholders' equity and non-controlling interest

1,425,912

1,342,787

Total liabilities and shareholders' equity

$

2,373,003

$

2,381,008

See accompanying Notes to the interim condensed consolidated financial statements, including guarantees, commitments, and contingencies (Note 17).

  • Certain December 31, 2019 balances have been reclassified. Refer to Note 1(b) for additional detail.

20

Enerflex Ltd. | 2020 Quarterly Report

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

Three months ended June 30,

Six months ended June 30,

($ Canadian thousands, except per share amounts)

2020

2019

2020

2019

Revenue (Note 12)

$

287,438

$

541,874

$

653,178

$

1,026,776

Cost of goods sold

221,638

431,572

493,646

827,704

Gross margin

65,800

110,302

159,532

199,072

Selling and administrative expenses

51,361

47,085

94,873

102,908

Operating income

14,439

63,217

64,659

96,164

Gain on disposal of property, plant and equipment (Note 4)

10

408

53

413

Equity earnings from associate

979

376

728

770

Earnings before finance costs and income taxes

15,428

64,001

65,440

97,347

Net finance costs (Note 14)

6,168

4,129

12,137

8,504

Earnings before income taxes

9,260

59,872

53,303

88,843

Income taxes (Note 11)

1,845

19,223

8,450

31,225

Net earnings

$

7,415

$

40,649

$

44,853

$

57,618

Net earnings attributable to:

Controlling interest

$

7,414

$

40,536

$

44,683

$

57,365

Non-controlling interest

1

113

170

253

$

7,415

$

40,649

$

44,853

$

57,618

Earnings per share - basic

$

0.08

$

0.45

$

0.50

$

0.64

Earnings per share - diluted

$

0.08

$

0.45

$

0.50

$

0.64

Weighted average number of shares - basic

89,678,845

89,497,947

89,678,845

89,349,829

Weighted average number of shares - diluted

89,678,845

89,877,972

89,678,845

89,791,465

See accompanying Notes to the interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

21

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

Three months ended June 30,

Six months ended June 30,

($ Canadian thousands)

2020

2019

2020

2019

Net earnings

$

7,415

$

40,649

$

44,853

$

57,618

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

225

(452)

157

(961)

Gain (loss) on derivatives designated as cash flow hedges

transferred to net earnings in the current year, net of income

tax expense

(172)

246

(112)

742

Unrealized gain (loss) on translation of foreign denominated

debt

(675)

1,755

(9,504)

2,999

Unrealized gain (loss) on translation of financial statements of

foreign operations

(38,320)

(28,300)

58,898

(53,035)

Other comprehensive income (loss)

$

(38,942)

$

(26,751)

$

49,439

$

(50,255)

Total comprehensive income (loss)

$

(31,527)

$

13,898

$

94,292

$

7,363

Other comprehensive income (loss) attributable to:

Controlling interest

$

(38,750)

$

(26,604)

$

49,916

$

(49,961)

Non-controlling interest

(192)

(147)

(477)

(294)

$

(38,942)

$

(26,751)

$

49,439

$

(50,255)

See accompanying Notes to the interim condensed consolidated financial statements.

22

Enerflex Ltd. | 2020 Quarterly Report

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three months ended June 30,

Six months ended June 30,

($ Canadian thousands)

2020

2019

2020

2019

Operating Activities

Net earnings

$

7,415

$

40,649

$

44,853

$

57,618

Items not requiring cash and cash equivalents:

Depreciation and amortization

21,786

21,853

42,525

43,784

Equity earnings from associate and joint venture

(979)

(376)

(728)

(770)

Deferred income taxes (Note 11)

(694)

11,941

(425)

17,387

Share-based compensation expense (recovery) (Note 13)

690

(1,906)

(4,399)

7,477

Gain on sale of property, plant and equipment (Note 4)

(10)

(408)

(53)

(413)

28,208

71,753

81,773

125,083

Net change in non-cash working capital and other (Note 16)

36,719

(89,246)

(7,513)

(20,242)

Cash provided by (used in) operating activities

$

64,927

$

(17,493)

$

74,260

$

104,841

Investing Activities

Additions to:

Property, plant and equipment (Note 4)

$

(2,397)

$

(12,842)

$

(6,829)

$

(27,808)

Rental equipment (Note 4)

(29,946)

(61,166)

(92,606)

(85,238)

Proceeds on disposal of:

Property, plant and equipment (Note 4)

10

60

96

84

Rental equipment (Note 4)

247

1,472

2,910

2,724

Change in other assets

508

(48)

1,116

4,226

Cash used in investing activities

$

(31,578)

$

(72,524)

$

(95,313)

$

(106,012)

Financing Activities

Proceeds from (repayment of) long-term debt (Note 16)

$

(11,460)

$

21,131

$

32,212

$

(80,345)

Lease liability principal repayment (Note 10)

(3,714)

(3,523)

(6,347)

(6,666)

Lease interest (Note 10)

(872)

(549)

(1,746)

(1,078)

Dividends

(10,313)

(9,389)

(20,625)

(18,738)

Stock option exercises

-

1,391

-

5,756

Cash provided by (used in) financing activities

$

(26,359)

$

9,061

$

3,494

$

(101,071)

Effect of exchange rate changes on cash and cash equivalents

denominated in foreign currencies

$

(91)

$

(132)

$

(126)

$

(678)

Increase (decrease) in cash and cash equivalents

6,899

(81,088)

(17,685)

(102,920)

Cash and cash equivalents, beginning of period

71,671

305,032

96,255

326,864

Cash and cash equivalents, end of period

$

78,570

$

223,944

$

78,570

$

223,944

See accompanying Notes to the interim condensed consolidated financial statements.

Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

23

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)

Total

Foreign

Accumulated

shareholders'

currency

other

equity before

Non-

Contributed

Retained

translation

Hedging

comprehensive

non-controlling

controlling

($ Canadian thousands)

Share capital

surplus

earnings

adjustments

reserve

income

interest

interest

Total

At January 1, 2019

$

366,120

$

654,324

$

118,134

$

143,563

$

(1,071)

$

142,492

$

1,281,070

$

1,449

$

1,282,519

IFRS 16 opening

retained earnings

adjustment

-

-

(2,429)

-

-

-

(2,429)

-

(2,429)

Net earnings

-

-

57,365

-

-

-

57,365

253

57,618

Other comprehensive

income (loss)

-

-

-

(49,742)

(219)

(49,961)

(49,961)

(294)

(50,255)

Effect of stock option

plans

7,268

412

-

-

-

-

7,680

-

7,680

Dividends

-

-

(18,783)

-

-

-

(18,783)

-

(18,783)

At June 30, 2019

$

373,388

$

654,736

$

154,287

$

93,821

$

(1,290)

$

92,531

$

1,274,942

$

1,408

$

1,276,350

At January 1, 2020

$

375,524

$

655,107

$

228,843

$

82,760

$

(981)

$

81,779

$

1,341,253

$

1,534

$

1,342,787

Net earnings

-

-

44,683

-

-

-

44,683

170

44,853

Other comprehensive

income (loss)

-

-

-

49,871

45

49,916

49,916

(477)

49,439

Effect of stock option

plans

-

940

-

-

-

-

940

-

940

Dividends

-

-

(12,107)

-

-

-

(12,107)

-

(12,107)

At June 30, 2020

$

375,524

$

656,047

$

261,419

$

132,631

$

(936)

$

131,695

$

1,424,685

$

1,227

$

1,425,912

See accompanying Notes to the interim condensed consolidated financial statements.

24

Enerflex Ltd. | 2020 Quarterly Report

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in thousands of Canadian dollars, except per share amounts or as otherwise noted.)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of Compliance

These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), and were approved and authorized for issue by the Board of Directors on August 6, 2020.

(b) Basis of Presentation and Measurement

These unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2020 and 2019 were prepared in accordance with IAS 34 and do not include all the disclosures included in the annual consolidated financial statements for the year ended December 31, 2019. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements. Certain prior period amounts have been reclassified between contract assets and deferred revenues to better align with contractual terms for these projects. Contract assets and deferred revenues as at December 31, 2019 have been reduced by $53,498 from balances disclosed in the annual consolidated financial statements.

The unaudited interim condensed consolidated financial statements are presented in Canadian dollars rounded to the nearest thousands, except per share amounts or as otherwise noted, and are prepared on a going concern basis under the historical cost convention 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 annual consolidated financial statements for the year ended December 31, 2019.

(c) Supplemental Accounting Estimates and Judgement

The timely preparation of financial statements requires that management make estimates and assumptions and use judgement. Estimates and judgements 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. Changes in the economic environment have required the Company to reassess some estimates and judgement or have caused new and/or significant impacts on previous estimates and judgement. Enerflex previously disclosed significant accounting estimates and areas of judgements at December 31, 2019 as part of the Company's 2019 Annual Report. As additional estimates or areas of judgements are identified, or changes are made to the Company's assessment of previously disclosed estimates or areas of judgements, Enerflex will disclose the nature and potential impact of these new or revised judgements, estimates and assumptions.

Revenue Recognition - Performance Obligation Satisfied Over Time

The Company reflects revenues relating to performance obligations satisfied over time using percentage-of-completion accounting, using the input method, whereby actual input costs as a percentage of estimated total costs is used to determine the extent to which performance obligations are satisfied. Certain contracts also include aspects of variable consideration, such as liquidated damages on project delays. For these contracts, management must make estimations as to the likelihood of the variable consideration being recognized or constrained, based on the status of each project, the potential value of variable consideration, communication received from the customer, and other factors. Enerflex continues to monitor these factors, with minimal impacts to date. Changes in estimated cost or revenue associated with a project, including variable consideration, could result in material changes to revenue and gross margin recognized on certain projects.

Allowance for Doubtful Accounts

Amounts included in allowance for doubtful accounts reflect the full lifetime expected credit losses for trade receivables. The Company determines allowances based on management's best estimate of future expected credit losses, considering historical default rates, current economic conditions, and forecasts of future economic conditions. The impact of COVID-19 and negative economic factors surrounding the oil and gas industry on expected credit losses requires significant judgement, as it is not directly

Notes to the Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

25

comparable with any recent similar events. Future economic conditions, especially around the oil and gas industry, may have a significant impact on the collectability of trade receivables from customers and the corresponding expected credit losses. During the second quarter of 2020, management identified certain receivable balances in the USA segment that may be at higher risk of credit loss as a result of recent events, leading to an increase in the allowance for doubtful accounts provision at June 30, 2020. Management has implemented additional monitoring processes in assessing the credit worthiness of customers and believes the current provision appropriately reflects the best estimate of its future expected credit losses.

Impairment of Non-Financial Assets and Goodwill

The Company is required to assess at the end of each reporting period whether there are any indicators that an asset may be impaired. Management determined that there were indicators of impairment of the Company's tangible assets at June 30, 2020, as a result of the negative economic factors surrounding the oil and gas industry and the impact of the recent COVID-19 pandemic. Despite these indicators, management believes the long-term value of these tangible assets remains appropriate, and has not recorded an impairment beyond any amounts required by the Company's policies.

Enerflex tests goodwill for impairment at least on an annual basis, or when there is any indication that goodwill may be impaired. This requires an estimation of the value-in-use of the groups of cash generating units ("CGUs") to which the goodwill is allocated. Estimating the value-in-use requires an estimate of the expected future cash flows from each group of CGUs and use judgement to determine a suitable discount rate in order to calculate the present value of those cash flows. The methodology and assumptions used, as well as the results of the assessment performed are detailed in Note 6.

Income Taxes

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 judgement 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. The basis for this estimate is management's recently updated five-year cash flow projections. The Company determined that previous assessments around the recoverability of deferred tax assets have not changed as a result of recent events, however management will continue to assess in response to changing economic conditions.

Government Grants

In response to the COVID-19 pandemic and associated restrictions, including mandated quarantines, business closures, and travel restrictions, governments in certain jurisdictions in which the Company does business have established programs to assist companies and individuals through the period for which these restrictions are in place. During the second quarter of 2020, the Company qualified for government grants in a number of jurisdictions, most notably the Canada Emergency Wage Subsidy. The subsidies received have been recorded as a reduction in cost of goods sold and selling and administrative expense within the interim condensed consolidated statement of earnings in accordance with where the associated expense was recognized.

NOTE 2. ACCOUNTS RECEIVABLE AND CONTRACT ASSETS

Accounts receivable consisted of the following:

June 30, 2020

December 31, 2019

Trade receivables

$

318,179

$

373,480

Less: allowance for doubtful accounts1

(15,009)

(2,144)

Trade receivables, net

$

303,170

$

371,336

Other receivables

20,209

12,685

Total accounts receivable

$

323,379

$

384,021

  • During the second quarter of 2020, management identified certain receivable balances in the USA segment that may be at higher risk of credit loss as a result of recent events, leading to an increase in the allowance for doubtful accounts provision at June 30, 2020.

26

Enerflex Ltd. | 2020 Quarterly Report

Aging of trade receivables:

June 30, 2020

December 31, 2019

Current to 90 days

$

241,154

$

321,058

Over 90 days

77,025

52,422

$

318,179

$

373,480

Subsequent to the end of the quarter, the Company collected $12.1 million of trade receivables that were included in over 90 days at June 30, 2020.

Movement in allowance for doubtful accounts:

June 30, 2020

December 31, 2019

Balance, January 1

$

2,144

$

992

Impairment provision additions on receivables

13,274

2,162

Amounts written off during the year as uncollectible

(574)

(951)

Currency translation effects

165

(59)

Closing balance

$

15,009

$

2,144

Movement in contract assets:

June 30, 2020

December 31, 2019

Balance, January 1

$

130,392

$

158,027

Unbilled revenue recognized

91,516

645,276

Amounts billed

(133,984)

(666,896)

Amounts transferred to other assets

(26,625)

-

Currency translation effects

9,920

(6,015)

Closing balance

$

71,219

$

130,392

Amounts recognized as contract assets are typically billed to customers within three months. Amounts reclassified to other assets relate to a balance previously included in contract assets at December 31, 2019 that was revised to a long-term receivable during the first quarter of 2020.

NOTE 3. INVENTORIES

Inventories consisted of the following:

June 30, 2020

December 31, 2019

Direct materials

$

172,855

$

182,692

Work-in-process

38,374

33,403

Repair and distribution parts

43,134

42,540

Equipment

17,743

10,750

Total inventories

$

272,106

$

269,385

The amount of inventory and overhead costs recognized as an expense and included in cost of goods for the three and six months ended June 30, 2020 was $221.6 million and $493.6 million (June 30, 2019 - $431.6 million and $827.7 million). Cost of goods sold is made up of direct materials, direct labour, depreciation on manufacturing assets, post-manufacturing expenses, and overhead. Cost of goods sold

Notes to the Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

27

also includes inventory write-downs pertaining to obsolescence and aging together with recoveries of past write-downs upon disposition. The net amount of inventory write-downs charged to the interim condensed consolidated statement of earnings and included in cost of goods sold for the three and six months ended June 30, 2020 was $0.7 million and $2.1 million (June 30, 2019 - $1.7 million and $2.2 million).

Inventory levels increased during 2020 due to purchases of major equipment with long lead times which were ordered in the prior year and delivered in the current year, as well as the impacts of foreign exchange movements on inventory denominated in a foreign currency. The Company expects to continue to realize this major equipment inventory into Engineered Systems projects and new contract compression units, however the timing and extent to which inventory can be utilized is dependent on demand.

NOTE 4. PROPERTY, PLANT AND EQUIPMENT AND RENTAL EQUIPMENT

During the three and six months ended June 30, 2020, the Company added $2.4 million and $6.8 million in property, plant and equipment (June 30, 2019 - $12.8 million and $27.8 million) and $29.9 million and $92.6 million in rental equipment (June 30, 2019 - $61.2 million and $85.2 million). The impact of foreign exchange movements on assets denominated in a foreign currency during the six months ended June 30, 2020 was an increase of $4.7 million on property, plant and equipment and $23.6 million on rental equipment (June 30, 2019 - decrease of $3.2 million and $22.1 million).

Depreciation of property, plant and equipment and rental equipment included in earnings for the three months ended June 30, 2020 was $16.1 million (June 30, 2019 - $16.0 million), of which $15.1 million was included in cost of goods sold (June 30, 2019 - $15.1 million) and $1.0 million was included in selling and administrative expenses (June 30, 2019 - $0.9 million).

Depreciation of property, plant and equipment and rental equipment included in earnings for the six months ended June 30, 2020 was $31.2 million (June 30, 2019 - $32.3 million), of which $29.4 million was included in cost of goods sold (June 30, 2019 - $30.5 million) and $1.8 million was included in selling and administrative expenses (June 30, 2019 - $1.8 million).

NOTE 5. LEASE RIGHT-OF-USE ASSETS

During the three and six months ended June 30, 2020, the Company added $2.1 million and $4.0 million in lease right-of-use assets (June 30, 2019 - $4.0 million and $7.2 million).

Depreciation of lease right-of-use assets included in earnings for the three months ended June 30, 2020 was $3.5 million (June 30, 2019

  • $3.2 million), of which $1.8 million was included in cost of goods sold (June 30, 2019 - $1.5 million) and $1.7 million was included in selling and administrative expenses (June 30, 2019 - $1.7 million).

Depreciation of lease right-of-use assets included in earnings for the six months ended June 30, 2020 was $6.9 million (June 30, 2019 - $6.1 million), of which $3.6 million was included in cost of goods sold (June 30, 2019 - $2.9 million) and $3.3 million was included in selling and administrative expenses (June 30, 2019 - $3.2 million).

NOTE 6. GOODWILL AND IMPAIRMENT REVIEW OF GOODWILL

June 30, 2020

December 31, 2019

Balance, January 1

$

573,928

$

598,831

Currency translation effects

21,449

(24,903)

$

595,377

$

573,928

Goodwill acquired through business combinations was allocated to the USA, Rest of World, and Canada business segments, and represents the lowest level at which goodwill is monitored for internal management purposes. For the six months ended June 30, 2020,

28

Enerflex Ltd. | 2020 Quarterly Report

the Company determined that there were indicators of impairment resulting from the negative economic factors surrounding the oil and gas industry, and the impact of the recent COVID-19 pandemic.

In assessing whether goodwill has been impaired, the carrying amount of the segment (including goodwill) is compared with its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and value-in-use.

The recoverable amounts for the segments have been determined based on value-in-use calculations, using discounted cash flow projections as at June 30, 2020. Management reviewed and updated its five-year cash flow projections during the second quarter of 2020, taking into consideration the recent economic events and their impact on previously approved long-term budgets.

Key Assumptions Used in Value-In-Use Calculations:

The calculation of value-in-use for the Company's segments is most sensitive to the following assumptions:

  • Earnings Before Finance Costs and Taxes: Management has made estimates relating to the amount and timing of revenue recognition for projects included in backlog, and the assessment of the likelihood of maintaining and growing market share. For each ten percent change in earnings before finance costs and taxes, the average impact on the value-in-use of the Company's three segments would be $67.6 million; and
  • Discount Rate: Management has used an average post-tax discount rate of 10.0 percent per annum. The rate represents the Company's weighted average cost of capital, using the five-year average of the Company's peer group debt to total enterprise value, adjusted for a number of risk factors specific to each segment. For each one percent change in the discount rate, the average impact on the value-in-use of the Company's three segments would be $132.5 million.

The Company completed its assessment for goodwill impairment and determined that the recoverable amount for the USA, Rest of World, and Canada segments exceeded the carrying amount using a 8.5 percent (December 31, 2019 - 10.1 percent), 11.8 percent (December 31, 2019 - 14.2 percent), and 9.8 percent (December 31, 2019 - 11.8 percent) post-tax discount rate, respectively.

A reasonable change in assumptions for the USA, Rest of World, and Canada segments would not trigger an impairment.

NOTE 7. PROVISIONS

June 30, 2020

December 31, 2019

Warranty provision

$

13,773

$

15,563

Legal provision

1,589

1,818

Restructuring provision

-

869

$

15,362

$

18,250

NOTE 8. DEFERRED REVENUES

June 30, 2020

December 31, 2019

Balance, January 1

$

89,409

$

348,804

Cash received in advance of revenue recognition

125,271

424,737

Revenue subsequently recognized

(138,111)

(673,473)

Currency translation effects

7,652

(10,659)

Closing balance

$

84,221

$

89,409

Amounts recognized as deferred revenues are typically recognized into revenue within six months.

Notes to the Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

29

NOTE 9. LONG-TERM DEBT

The amended and restated syndicated revolving credit facility ("Bank Facility") has a maturity date of June 30, 2023 (the "Maturity Date"). The Maturity Date of the Bank Facility may be extended annually on or before the anniversary date with the consent of the lenders. In addition, the Bank Facility may be increased by $150.0 million at the request of the Company, subject to the lenders' consent. There are no required or scheduled principal repayments until the Maturity Date of the Bank Facility.

The composition of the borrowings on the Bank Facility and the Company's senior unsecured notes ("Notes") was as follows:

June 30, 2020

December 31, 2019

Drawings on Bank Facility

$

142,423

$

121,328

Notes due June 22, 2021

40,000

40,000

Notes due December 15, 2024

158,094

151,374

Notes due December 15, 2027

125,396

120,916

Deferred transaction costs

(2,755)

(3,131)

$

463,158

$

430,487

Current portion of long-term debt

$

40,000

$

-

Non-current portion of long-term debt

423,158

430,487

$

463,158

$

430,487

For the six months ended June 30, 2020, movement in U.S. dollar foreign exchange rates resulted in an increase of $16.4 million on U.S. dollar denominated long-term debt (December 31, 2019 - decrease of $14.2 million).

The weighted average interest rate on the Bank Facility for the six months ended June 30, 2020 was 2.6 percent (December 31, 2019 -

3.5 percent). At June 30, 2020, without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the next five years are $340.5 million, and $125.4 million thereafter.

NOTE 10. LEASE LIABILITIES

June 30, 2020

December 31, 2019

Balance, January 1

$

67,000

$

39,438

Additions

3,689

41,973

Lease interest

1,746

2,586

Payments made against lease liabilities

(8,093)

(15,137)

Currency translation effects and other

910

(1,860)

Closing balance

$

65,252

$

67,000

Current portion of lease liabilities

$

14,562

$

14,172

Non-current portion of lease liabilities

50,690

52,828

$

65,252

$

67,000

In addition to the lease payments made above, during the three and six months ended June 30, 2020, the Company paid $0.3 million and $0.6 million (June 30, 2019 - $0.9 million and $1.2 million) relating to short-term and low-value leases which were expensed as incurred. During the three and six months ended June 30, 2020, the Company also paid $0.3 million and $0.7 million (June 30, 2019 - $0.8 million and $1.1 million) in variable lease payments not included in the measurement of lease liabilities, of which $0.1 million and $0.3 million (June 30, 2019 - $0.1 million and $0.2 million) was included in cost of goods sold and $0.2 million and $0.4 million (June 30, 2019 - $0.7

30

Enerflex Ltd. | 2020 Quarterly Report

million and $0.9 million) was included in selling and administrative expenses. Interest expense on lease liabilities was $0.9 million and $1.7 million for the three and six months ended June 30, 2020 (June 30, 2019 - $0.5 million and $1.1 million). Total cash outflow for leases for the three and six months ended June 30, 2020 was $5.2 million and $9.4 million (June 30, 2019 - $6.3 million and $10.5 million).

Future minimum lease payments under non-cancellable leases were as follows:

June 30, 2020

2020

$

8,251

2021

14,193

2022

11,800

2023

8,350

2024

5,878

Thereafter

31,849

$

80,321

Less:

Imputed interest

14,916

Short-term leases

135

Low-value leases

18

$

65,252

NOTE 11. INCOME TAXES

(a) Income Tax Recognized in Net Earnings

The components of income tax expense were as follows:

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Current income taxes

$

2,539

$

7,282

$

8,875

$

13,838

Deferred income taxes

(694)

11,941

(425)

17,387

$

1,845

$

19,223

$

8,450

$

31,225

Notes to the Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

31

(b) Reconciliation of Tax Expense

The provision for income taxes differs from that which would be expected by applying Canadian statutory rates. A reconciliation of the difference is as follows:

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Earnings before income taxes

$

9,260

$

59,872

$

53,303

$

88,843

Canadian statutory rate

25.3%

26.5%

25.3%

26.5%

Expected income tax provision

$

2,343

$

15,866

$

13,486

$

23,543

Add (deduct):

Exchange rate effects on tax basis

(569)

(1,312)

(4,565)

1,921

Earnings taxed in foreign jurisdictions

(457)

(204)

(1,495)

444

Revaluation of Canadian deferred tax assets

due to change in statutory rate

-

5,040

-

5,040

Amounts not deductible (taxable) for tax

purposes

603

118

1,100

558

Impact of accounting for associates and joint

ventures

(248)

(127)

(227)

(271)

Other

173

(158)

151

(10)

Income tax expense from continuing operations

$

1,845

$

19,223

$

8,450

$

31,225

The applicable statutory tax rate is the aggregate of the Canadian federal income tax rate of 15.0 percent (2019 - 15.0 percent) and provincial income tax rates of 10.3 percent (2019 - 11.5 percent). During the second quarter of 2019, lower Alberta corporate income tax rates became substantially enacted. The Alberta corporate income tax rates are 11.5 percent for 2019, 10.0 percent for 2020, 9.0 percent for 2021, and 8.0 percent for 2022 and thereafter.

The Company's effective tax rate is subject to fluctuations in the Argentine peso and Mexican peso exchange rate against the U.S. dollar. Since the Company holds significant rental assets in Argentina and Mexico, the tax base of these assets is denominated in Argentine peso and Mexican peso, respectively. The functional currency is, however, the U.S. dollar and as a result, the related local currency tax bases are revalued periodically to reflect the closing U.S. dollar rate against these currencies. Any movement in the exchange rate results in a corresponding unrealized exchange rate gain or loss being recorded as part of deferred income tax expense or recovery. During periods of large fluctuation or devaluation of the local currency against the U.S. dollar, these amounts may be significant but are unrealized and may reverse in the future. Recognition of these amounts is required by IFRS, even though the revalued tax basis does not generate any cash tax obligation or liability in the future.

32

Enerflex Ltd. | 2020 Quarterly Report

NOTE 12. REVENUE

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Engineered Systems

$

149,197

$

384,953

$

374,590

$

730,415

Service1

77,034

92,452

152,010

173,312

Rentals1

61,207

64,469

126,578

123,049

Total revenue

$

287,438

$

541,874

$

653,178

$

1,026,776

  • During the second quarter of 2020, revenues from the operation and maintenance of BOOM contracts have been reclassified from the Service to Rentals product line, including $11,717 previously disclosed during the first quarter of 2020. For the three and six months ended June 30, 2019, $10,744 and $21,400 of revenues have been reclassified from Service to Rentals. This new classification creates better alignment with management's internal metrics, as the operations and maintenance of these facilities are considered costs and revenue associated with the rental of the facilities.

Revenue by geographic location, which is attributed by destination of sale, was as follows:

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

United States

$

150,571

277,149

$

326,062

$

560,306

Canada

37,971

118,512

104,217

210,301

Nigeria

28,863

54,812

80,776

69,451

Australia

18,137

16,849

35,644

38,907

Oman

9,879

30,686

25,959

56,579

Bahrain

11,210

10,743

22,599

21,760

Mexico

6,784

11,300

16,680

22,300

Argentina

4,529

6,133

11,063

10,470

United Arab Emirates

7,945

(80)

8,270

633

Colombia

3,191

6,000

5,570

12,826

Brazil

2,375

2,611

4,680

5,282

Other

5,983

7,159

11,658

17,961

Total revenue

$

287,438

$

541,874

$

653,178

$

1,026,776

The following table outlines the Company's unsatisfied performance obligations, by product line, as at June 30, 2020:

Less than

One to two

Greater than

one year

years

two years

Total

Engineered Systems

$

290,811

$

251

$

-

$

291,062

Service2

70,923

46,664

113,677

231,264

Rentals2

151,566

75,582

241,673

468,821

$

513,300

$

122,497

$

355,350

$

991,147

  • Unsatisfied performance obligations relating to the operation and maintenance of BOOM contracts have been reclassified from Service to Rentals. Please refer to footnote 1 for further details.

Notes to the Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

33

NOTE 13. SHARE-BASED COMPENSATION

(a) Share-Based Compensation Expense

The share-based compensation expense included in the determination of net earnings was:

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Equity settled share-based payments

$

473

$

(173)

$

940

$

1,925

Cash settled share-based payments

217

(1,733)

(5,339)

5,552

Share-based compensation expense (recovery)

$

690

$

(1,906)

$

(4,399)

$

7,477

Deferred share units ("DSUs"), phantom share entitlements ("PSEs"), performance share units ("PSUs"), restricted share units ("RSUs"), and cash performance target plan awards ("CPTs") are all classified as cash settled share-based payments. Stock options are equity settled share-based payments.

The Company did not grant any CPTs, PSEs, PSUs, RSUs, or options to officers and key employees during the first six months of 2020. 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 June 30, 2020 included in current liabilities was $1.5 million (December 31, 2019 - $2.4 million) and in other long term liabilities was $6.1 million (December 31, 2019 - $10.0 million).

(b) Equity-SettledShare-Based Payments

June 30, 2020

December 31, 2019

Weighted

Weighted

Number of

average exercise

Number of

average exercise

options

price

options

price

Options outstanding, beginning of period

3,565,521

$

14.67

3,662,698

$

14.74

Granted

-

-

890,836

13.38

Exercised1

-

-

(595,224)

12.52

Forfeited

-

-

(371,422)

15.67

Expired

-

-

(21,367)

14.91

Options outstanding, end of period

3,565,521

$

14.67

3,565,521

$

$14.67

Options exercisable, end of period

1,427,608

$

14.93

1,427,608

$

$14.93

1No options were exercised for the six months ended June 30, 2020. The weighted average share price of Options at the date of exercise for the six months ended June 30, 2019 was $18.96.

The following table summarizes options outstanding and exercisable at June 30, 2020:

Options Outstanding

Options Exercisable

Weighted

Weighted

Weighted

Weighted

average

average

average

average

Range of exercise

Number

remaining

exercise

Number

remaining

exercise

prices

outstanding

life (years)

price

outstanding

life (years)

price

$11.69 - $13.51

1,106,811

3.32

$

12.39

594,929

2.48

$

12.27

$13.52 - $15.94

1,469,275

4.39

14.64

449,776

2.10

15.04

$15.95 - $20.75

989,435

4.17

17.28

382,903

2.69

18.96

Total

3,565,521

4.00

$

14.67

1,427,608

2.41

$

14.93

34

Enerflex Ltd. | 2020 Quarterly Report

(c) Cash-SettledShare-Based Payments

During the three and six months ended June 30, 2020, the value of director's compensation and executive bonuses elected to be received in DSUs totalled $0.4 million and $1.7 million (June 30, 2019 - $0.4 million and $0.9 million).

Weighted average grant

Number of DSUs

date fair value per unit

DSUs outstanding, January 1, 2020

721,820

$

13.95

Granted

271,773

6.15

In lieu of dividends

23,762

7.36

DSUs outstanding, June 30, 2020

1,017,355

$

11.71

NOTE 14. FINANCE COSTS AND INCOME

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Finance Costs

Short and long-term borrowings

$

5,362

$

4,867

$

10,637

$

10,094

Interest on lease liability

872

549

1,746

1,078

Total finance costs

$

6,234

$

5,416

$

12,383

$

11,172

Finance Income

Bank interest income

$

45

$

1,263

$

202

$

2,619

Income from finance leases

21

24

44

49

Total finance income

$

66

$

1,287

$

246

$

2,668

Net finance costs

$

6,168

$

4,129

$

12,137

$

8,504

NOTE 15. FINANCIAL INSTRUMENTS

Designation and Valuation of Financial Instruments

Financial instruments at June 30, 2020 were designated in the same manner as they were at December 31, 2019. Accordingly, with the exception of the long-term debt Notes, the estimated fair values of financial instruments approximated their carrying values. The carrying value and estimated fair value of the Notes as at June 30, 2020 was $323.5 million and $342.8 million, respectively (December 31, 2019 - $312.3 million and $328.0 million, respectively). The fair value of these Notes at June 30, 2020 was determined on a discounted cash flow basis with a weighted average discount rate of 4.0 percent (December 31, 2019 - 3.8 percent).

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.

Notes to the Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

35

The following table summarizes the Company's commitments to buy and sell foreign currencies as at June 30, 2020:

Notional amount

Maturity

Canadian Dollar Denominated Contracts

Purchase contracts

USD

13,990

July 2020 - January 2021

Sales contracts

USD

(30,035)

July 2020 - January 2021

Purchase contracts

EUR

58

August 2020

Australian Dollar Denominated Contracts

Purchase contracts

USD

1,250

July 2020 - August 2020

At June 30, 2020, the fair value of derivative financial instruments classified as financial assets was $0.9 million, and as financial liabilities was $0.9 million (December 31, 2019 - $0.2 million and $0.4 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, Australian dollar, and Brazilian real. 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, exchange gains and losses on the translation of $63.0 million U.S. dollars in designated foreign currency borrowings are included in accumulated other comprehensive income for June 30, 2020. The following table shows the sensitivity to a 5 percent weakening of the Canadian dollar against the U.S. dollar, Australian dollar, and Brazilian real.

Canadian dollar weakens by 5 percent

USD

AUD

BRL

Earnings from foreign operations

Earnings before income taxes

$

1,959

$

3

$

73

Financial instruments held in foreign operations

Other comprehensive income

$

13,934

$

776

$

241

Financial instruments held in Canadian operations

Earnings before income taxes

$

(10,223)

$

-

$

-

The movement in net earnings before tax in Canadian operations is a result of a change in the fair values of financial instruments. The majority of these financial instruments are hedged.

Interest Rate Risk

The Company's liabilities include long-term debt that is subject to fluctuations in interest rates. The Company's Notes outstanding at June 30, 2020 include interest rates that are fixed and therefore the related interest expense will not be impacted by fluctuations in interest rates. The Company's Bank Facility however, is subject to changes in market interest rates.

For each one percent change in the rate of interest on the Bank Facility, the change in annual interest expense would be $1.4 million. All interest charges are recorded on the interim condensed consolidated statement of earnings as finance costs.

Liquidity Risk

Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. In managing liquidity risk, the Company has access to a significant portion of its Bank Facility for future drawings to meet the Company's future growth targets and to pay its obligations as they come due. As at June 30, 2020, the Company held cash and cash equivalents of $78.6 million and had drawn $142.4 million against the Bank Facility, leaving it with access to $532.2 million for future drawings. The Company continues to meet the covenant requirements of its funded debt, including the Bank Facility and Notes, with a bank-adjusted

36

Enerflex Ltd. | 2020 Quarterly Report

net debt to EBITDA ratio of 1.2:1 compared to a maximum ratio of 3:1, and an interest coverage ratio of 14:1 compared to a minimum ratio of 3:1. The interest coverage ratio is calculated by dividing the trailing 12-monthbank-adjusted EBITDA, as defined by the Company's lenders, by interest expense over the same time frame.

A liquidity analysis of the Company's financial instruments has been completed on a maturity basis. The following table outlines the cash flows, including interest associated with the maturity of the Company's financial liabilities, as at June 30, 2020:

Less than 3

3 months to

Greater

months

1 year

than 1 year

Total

Derivative financial instruments

Foreign currency forward contracts

$

754

$

123

$

- $

877

Accounts payable and accrued liabilities

221,434

-

-

221,434

Long-term debt - Bank Facility

-

-

142,423

142,423

Long-term debt - Notes

-

40,000

283,490

323,490

Other long-term liabilities

-

-

7,951

7,951

The Company expects that cash flows from operations in 2020, together with cash and cash equivalents on hand and credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets.

NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Net change in non-cash working capital and

other

Accounts receivable

$

6,228

$

7,582

$

60,642

$

125,085

Contract assets

39,262

(484)

59,173

20,131

Inventories

34,441

(29,577)

(2,721)

(65,351)

Deferred revenue

10,444

(82,508)

(5,188)

(125,967)

Accounts payable and accrued liabilities,

provisions, and income taxes payable

(71,916)

6,181

(114,336)

17,028

Foreign currency and other

18,260

9,560

(5,083)

8,832

$

36,719

$

(89,246)

$

(7,513)

$

(20,242)

Cash interest and taxes paid and received during the period:

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Interest paid - short- and long-term borrowings

$

9,233

$

8,819

$

9,958

$

9,501

Interest paid - lease liabilities

872

549

1,746

1,078

Total interest paid

$

10,105

$

9,368

$

11,704

$

10,579

Interest received

48

1,320

164

2,670

Taxes paid

1,297

3,351

7,691

12,389

Taxes received

-

376

234

402

Notes to the Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

37

Changes in liabilities arising from financing activities during the period:

Three months ended June 30,

Six months ended June 30,

2020

2019

2020

2019

Long-term debt, opening balance

$

474,388

$

343,757

$

430,487

$

444,712

Changes from financing cash flows

649

27,063

15,934

(67,887)

The effect of changes in foreign exchange rates

(12,175)

(5,255)

16,361

(11,786)

Amortization of deferred transaction costs

230

548

459

1,069

Other changes

66

(677)

(83)

(672)

Long-term debt, closing balance

$

463,158

$

365,436

$

463,158

$

365,436

NOTE 17. GUARANTEES, COMMITMENTS, AND CONTINGENCIES

At June 30, 2020, the Company had outstanding letters of credit of $50.4 million (December 31, 2019 - $46.3 million).

The Company is involved in litigation and claims associated with normal operations against which certain provisions have been made in the financial statements. Management is of the opinion that any resulting settlement arising from the litigation would not materially affect the financial position, results of operations or liquidity of the Company.

The Company has purchase obligations over the next three years as follows:

2020

$

102,973

2021

3,642

2022

1,337

NOTE 18. SEASONALITY

The oil and natural gas service sector in Canada and in some parts of the USA has a distinct seasonal trend in activity levels which results from well-site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex's Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while Service and Rentals product line revenues have been stable throughout the year. Rentals revenues are also impacted by both the Company's and its customers' capital investment decisions. The USA and Rest of World segments are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating.

NOTE 19. SEGMENTED INFORMATION

Enerflex has identified three reportable operating segments as outlined below, each supported by the Corporate head office. Corporate overheads are allocated to the operating segments based on revenue. In assessing its operating segments, the Company considered economic characteristics, the nature of products and services provided, the nature of production processes, the type of customer for its products and services, and distribution methods used. For each of the operating segments, the Chief Operating Decision Maker reviews internal management reports on at least a quarterly basis. For the six months ended June 30, 2020, the Company recognized $80.2 million of revenue from one customer in the USA and Canada segments, which represented 12.3 percent of total consolidated revenue for the period. At June 30, 2020, amounts owing from the customer included in accounts receivable and contract assets was $33.7 million, which represented 8.9 percent of the total balance of accounts receivable and contract assets.

38

Enerflex Ltd. | 2020 Quarterly Report

The following summary describes the operations of each of the Company's reportable segments:

  • USA generates revenue from manufacturing natural gas compression and processing equipment, including custom and standard compression packages and modular natural gas processing equipment and refrigeration systems, in addition to generating revenue from mechanical services and parts, operations and maintenance solutions, and contract compression rentals;
  • Rest of World generates revenue from manufacturing (focusing on large-scale process equipment), after-market services, including parts and components, as well as operations, maintenance, and overhaul services, and rentals of compression and processing equipment. The Rest of World segment has been successful in securing build-own-operate-maintain and integrated turnkey projects; and
  • Canada generates revenue from manufacturing both custom and standard natural gas compression, processing, and electric power equipment, as well as providing after-market mechanical service, parts, and compression and power generation rentals.

The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies.

Three months ended

USA

Rest of World

Canada

Total

June 30,

2020

2019

2020

2019

2020

2019

2020

2019

Segment revenue

$

179,440

$

337,411

$

59,533

$

91,821

$

51,182

$

122,769

$

290,155

$

552,001

Intersegment revenue

(2,042)

(10,343)

-

(113)

(675)

329

(2,717)

(10,127)

Revenue

$

177,398

$

327,068

$

59,533

$

91,708

$

50,507

$

123,098

$

287,438

$

541,874

Revenue - Engineered

Systems

113,282

263,041

189

20,169

35,726

101,743

149,197

384,953

Revenue - Service1

41,307

44,800

22,850

29,559

12,877

18,093

77,034

92,452

Revenue - Rentals1

22,809

19,227

36,494

41,980

1,904

3,262

61,207

64,469

Operating income

$

6,751

$

49,832

$

3,807

$

2,869

$

3,881

$

10,516

$

14,439

$

63,217

Six months ended

USA

Rest of World

Canada

Total

June 30,

2020

2019

2020

2019

2020

2019

2020

2019

Segment revenue

$

408,621

$

642,302

$

129,808

$

193,086

$

120,535

$

231,167

$

658,964

$

1,066,555

Intersegment revenue

(4,114)

(22,717)

-

(7,575)

(1,672)

(9,487)

(5,786)

(39,779)

Revenue

$

404,507

$

619,585

$

129,808

$

185,511

$

118,863

$

221,680

$

653,178

$

1,026,776

Revenue - Engineered

Systems

278,898

503,035

6,845

46,749

88,847

180,631

374,590

730,415

Revenue - Service1

79,568

80,643

46,730

57,627

25,712

35,042

152,010

173,312

Revenue - Rentals1

46,041

35,907

76,233

81,135

4,304

6,007

126,578

123,049

Operating income

$

44,135

$

75,673

$

14,020

$

4,827

$

6,504

15,664

$

64,659

$

96,164

  • Revenues from the operation and maintenance of BOOM contracts have been reclassified from the Service to Rentals product line including $11,717 previously disclosed during the first quarter of 2020. For the three and six months ended June 30, 2019, $10,744 and $21,400 have been reclassified. Please refer to Note 12 for further details.

USA

Rest of World

Canada

Total

Jun. 30,

Dec. 31,

Jun. 30,

Dec. 31,

Jun. 30,

Dec. 31,

Jun. 30,

Dec. 31,

As at

2020

2019

2020

2019

2020

2019

2020

2019

Segment assets

$

961,851

$

948,437

$

613,655

$

601,512

$

531,694

$

552,457

$

2,107,200

$

2,102,406

Goodwill

166,009

158,214

341,001

327,347

88,367

88,367

595,377

573,928

Corporate

-

-

-

-

-

-

(329,574)

(295,326)

Total segment assets

$

1,127,860

$

1,106,651

$

954,656

$

928,859

$

620,061

$

640,824

$

2,373,003

$

2,381,008

Notes to the Interim Condensed Consolidated Financial Statements | 2020 Quarterly Report

39

NOTE 20. SUBSEQUENT EVENTS

Subsequent to the quarter, the Company executed a letter of intent to extend a BOOM project in the Middle East for 10 years. Final terms of the extension are anticipated to be agreed to and executed in the third quarter of 2020.

Subsequent to June 30, 2020, Enerflex declared a quarterly dividend of $0.02 per share, payable on October 1, 2020, to shareholders of record on August 20, 2020. Enerflex's Board of Directors will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions.

40

Enerflex Ltd. | 2020 Quarterly Report

DIRECTORS

AND EXECUTIVES

Enerflex's Executive Management Team:

Left to Right - Andrew Jack, Greg Stewart, David Izett, Marc Rossiter,

Sanjay Bishnoi, Phil Pyle, and Patricia Martinez.

BOARD OF DIRECTORS

EXECUTIVES

FERNANDO ASSING

MARC E. ROSSITER

SANJAY BISHNOI

Director

Director

Senior Vice President, Chief Financial Officer

Katy, TX

President and Chief Executive Officer

Calgary, AB

Calgary, AB

ROBERT S. BOSWELL 1, 4

STEPHEN J. SAVIDANT 7

ANDREW JACK

Director

Chairman

President, Canada

Denver, CO

Calgary, AB

Calgary, AB

MAUREEN CORMIER JACKSON 6

JUAN CARLOS VILLEGAS 4

PATRICIA MARTINEZ

Director

Director

President, Latin America

Calgary, AB

Vitacura, Chile

Houston, TX

W. BYRON DUNN 2, 4

MICHAEL A. WEILL 6

PHIL PYLE

Director

Director

President, International

Dallas, TX

Houston, TX

Abu Dhabi, UAE

H. STANLEY MARSHALL 2, 3

HELEN J. WESLEY 2, 6

GREG STEWART

Director

Director

President, United States of America

Paradise, NL

Calgary, AB

Houston, TX

KEVIN J. REINHART 5

DAVID IZETT

Director

Senior Vice President, General Counsel

Calgary, AB

Calgary, AB

1. Chair of the Nominating and

3. Chair of the Human Resources and

5. Chair of the Audit Committee

Corporate Governance Committee

Compensation Committee

6. Member of the Audit Committee

2. Member of the Nominating and

4. Member of the Human Resources

7. Chairman of the Board

Corporate Governance Committee

and Compensation Committee

SHAREHOLDERS'

INFORMATION

COMMON SHARES

AUDITORS

The common shares of Enerflex are listed and traded on the Toronto

Ernst & Young | Calgary, AB, Canada

Stock Exchange under the symbol "EFX".

TRANSFER AGENT, REGISTRAR, AND DIVIDEND DISBURSING AGENT

AST Trust Company (Canada)

Calgary, AB, Canada and Toronto, ON, Canada

For shareholder enquiries:

AST Trust Company (Canada)

2001 Boul. Robert-Bourassa, Suite 1600

Montreal, QC, H3A 2A6, Canada

Mail:

PO Box 700

Station B

Montreal, QC, H3B 3K3, Canada

Tel: +1.800.387.0825 | +1.416.682.3860

Fax: +1.888.249.6189

Email: inquiries@astfinancial.com

Web: astfinancial.com/ca-en

All questions about accounts, share certificates, or dividend cheques should be directed to the Transfer Agent, Registrar, and Dividend Disbursing Agent.

BANKERS

The Toronto Dominion Bank | Calgary, AB, Canada

The Bank of Nova Scotia | Toronto, ON, Canada

INVESTOR RELATIONS

Enerflex Ltd.

Suite 904, 1331 Macleod Trail SE

Calgary, AB, T2G 0K3, Canada

Tel: +1.403.387.6377 | Email: ir@enerflex.com

Requests for Enerflex's Annual Report, Quarterly Reports, and other corporate communications should be directed to ir@enerflex.com.

HEAD OFFICE

Suite 904

1331 Macleod Trail SE

Calgary, Alberta, Canada

T2G 0K3

+ 1 403 387 6377

enerflex.com

ir@enerflex.com

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Enerflex Ltd. published this content on 06 August 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 06 August 2020 21:48:09 UTC