2003 Annual Report - Enerflex

Service revenue was $256.4 million in 2003, compared with$191.0 million in 2002. Mechanical Service and Syntech eachcontributed approximately half of the revenue generated by ourService business segment in 2003.Syntech’s revenues are more cyclical as revenue is generated from both maintenance spending and from newinfrastructure investment.(Thousands) 2003 2002Segment revenue $ 269,036 $ 193,578Intersegment revenue (12,618) (2,570)External revenue $ 256,418 $ 191,008Income before interest and taxes $ 15,882 $ 14,527Service revenue was $256.4 million in 2003, compared with $191.0 million in 2002. Mechanical Service andSyntech each contributed approximately half of the revenue generated by our Service business segment in 2003.However, approximately 70% of income before interest and taxes was earned by Mechanical Service. While thetwo operating units share common characteristics, the Company determined that separate management isrequired to properly address the strategic and operating matters that are unique to each business. The change inmanagement structure took effect on October 1, 2003 and had a positive impact on results in the fourth quarterof the year.Mechanical Service revenues for 2003 were consistent with the prior year. In North America, which accounted for69.6% of revenue, sales decreased by 1.1% from 2002. Activity levels were low at the beginning of the year, butincreased as the year progressed. Customers are tending to increase the number of hours their equipmentoperates before performing maintenance, which has reduced demand for both parts and service. Enerflex has offseta reduction of sales in its historical markets with the addition of Jiro Service in mid-2002, as part of the EnSourceacquisition, the initiation of service operations in the United States, and the acquisition in late 2001 of LandréRuhaak in the Netherlands. Gross margins for Mechanical Service were equivalent to the prior year, but increasedSG&A associated with new operations reduced income before interest and taxes by $1.6 million. Mechanicalservice is focused on increasing income before interest and taxes as a percentage of revenue through enhancedcustomer relationships and vigilant cost control.The Syntech operating unit realized improved results in the last half of 2003. Syntech generated revenue of $124.3million in 2003 compared with $68.2 million in the five and one-half months of 2002 following the EnSourceacquisition. This business is highly competitive. Low margins, compared with Mechanical Service, and the cost ofEnerflex 2003 Annual Report42