CALGARY, Oct. 28 /PRNewswire-FirstCall/ - CE FRANKLIN LTD.
(TSX.CFT, NASDAQ.CFK) reported net income of $2.2 million or $0.12 per share for the third quarter ended
September 30, 2010, compared to net
income of $0.2 million or
$0.01 per share earned in the third
quarter ended September 30, 2009.
Financial Highlights
--------------------
(millions of Cdn. $
except per share data) Three Months Ended Nine Months Ended
------------------- -------------------
September 30 September 30
2010 2009 2010 2009
------------------- -------------------
Unaudited Unaudited
Sales $132.2 $94.1 $353.9 $344.0
Gross Profit $19.2 $17.4 $54.5 $61.3
Gross Profit - % of sales 14.5% 18.5% 15.4% 17.8%
EBITDA(1) $3.8 $0.5 $8.7 $11.7
EBITDA(1)% of sales 2.9% 0.5% 2.5% 3.4%
Net income $2.2 $0.2 $4.3 $6.8
Per share
Basic $0.12 $0.01 $0.24 $0.38
Diluted $0.12 $0.01 $0.24 $0.38
Net working capital(2) $129.0 $131.1
Long term debt /Bank
operating loan(2) $14.4 $21.3
(1) EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA is supplemental non-GAAP financial measure used
by management, as well as industry analysts, to evaluate operations.
Management believes that EBITDA, as presented, represents a useful
means of assessing the performance of the Company's ongoing operating
activities, as it reflects the Company's earnings trends without
showing the impact of certain charges. The Company is also presenting
EBITDA and EBITDA as a percentage of sales because it is used by
management as supplemental measures of profitability. The use of
EBITDA by the Company has certain material limitations because it
excludes the recurring expenditures of interest, income tax, and
amortization expenses. Interest expense is a necessary component of
the Company's expenses because the Company borrows money to finance
its working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company is
required to pay cash income taxes. Amortization expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management compensates
for these limitations to the use of EBITDA by using EBITDA as only a
supplementary measure of profitability. EBITDA is not used by
management as an alternative to net income, as an indicator of the
Company's operating performance, as an alternative to any other
measure of performance in conformity with generally accepted
accounting principles or as an alternative to cash flow from
operating activities as a measure of liquidity. A reconciliation of
EBITDA to Net income is provided within the Company's Management
Discussion and Analysis. Not all companies calculate EBITDA in the
same manner and EBITDA does not have a standardized meaning
prescribed by GAAP. Accordingly, EBITDA, as the term is used herein,
is unlikely to be comparable to EBITDA as reported by other entities.
(2) Net working capital is defined as current assets excluding cash, less
accounts payable and accrued liabilities, income taxes payable and
other current liabilities, excluding the bank operating loan. Net
working capital, bank operating loan and long term debt are as at
quarter end.
"Third quarter sales increased by 40% over the prior year
period. Year over year improvement in oil and gas industry well
completions and rig counts has continued to strengthen as the year
has progressed and has contributed to increased CE Franklin sales.
This momentum should continue as the year progresses," said
Michael West, President and CEO.
The Company recorded net income for the third quarter of 2010 of
$2.2 million, an increase of
$2.0 million from the third quarter
of 2009. Third quarter sales, which are seasonally stronger than
the second quarter, were $132.2
million, an increase of $38.1
million (40%) from the third quarter of 2009. Improvements
in and stability of oil prices, as well as improved general
economic conditions have lead to higher activity levels in the oil
and gas industry, which in turn has lead to improved oilfield and
oil sands sales compared to the prior year. Increased oilfield
supply sales were driven by a 78% increase in industry well
completions over the prior year period. Gross profit was up
$1.8 million (10%) as the impact of
increased sales activity was partially offset by a 4.0% decline in
average sales margins from the prior year period. Lower average
margins were attributable to an increased mix of lower margin oil
sands sales and the highly competitive oilfield supply industry
environment. Selling, general and administrative expenses decreased
by $1.5 million (9%) to $15.5 million compared to the prior year period
due to the one-time integration costs associated with the
acquisition of a Western Canadian oilfield supply competitor in
June 2009 (the "Oilfield Supply
Acquisition") and lower agent commission costs. Income taxes
increased by $1.6 million in the
third quarter of 2010 compared to the prior year period due to
higher pre-tax earnings. The weighted average number of shares
outstanding (basic) during the third quarter decreased by 0.2
million shares (1%) from the prior year period principally due to
shares purchased for cancellation pursuant to the Company's Normal
Course Issuer Bid ("NCIB"). Net income per share (basic) was
$0.12 in the third quarter of 2010,
compared to net income per share of $0.01 earned in the prior year period.
Net income for the first three quarters of 2010 was $4.3 million, down $2.6
million from the first three quarters of 2009. Sales were
$353.9 million, an increase of
$9.9 million (3%) from the first
three quarters of 2009. Higher sales reflect sales contributed from
the Oilfield Supply Acquisition and increased industry demand
driven by the 14% increase in well completions over the prior year
period. Partially offsetting this was the absence of a $32.4 million sale of oil sands pipe in the
second quarter of 2009 and the rollover of tubular and other steel
product prices and margins during 2009. Gross profit was down
$6.9 million (11%) as the increase in
sales was offset by a 2.4% decline in average margins from the
prior year period. The highly competitive oilfield supply industry
environment continues to impact margins. Selling, general and
administrative expenses decreased by $3.8
million (8%) to $45.8 million
for the first three quarters of the year due to the absence of
$1.5 million of costs to integrate
the Oilfield Supply Acquisition in 2009, and lower compensation,
agent commission and bad debt costs incurred in 2010. Income taxes
decreased by $0.5 million in the
first three quarters of 2010 compared to the prior year period due
to lower pre-tax earnings. The weighted average number of shares
outstanding (basic) during the first nine months decreased by 0.3
million shares (2%) from the prior year period principally due to
shares purchased for cancellation pursuant to the Company's NCIB.
Net income per share (basic) was $0.24 in the first three quarters of 2010,
compared to $0.38 earned in the first
three quarters of 2009.
Business Outlook
Oil and gas industry activity in 2010 continues to increase
modestly from the decade-low levels experienced in 2009. Natural
gas prices remain depressed as North American production capacity
and inventory levels currently exceed demand. Natural gas capital
expenditure activity is focused on the emerging shale gas plays in
north eastern British Columbia
where the Company has a strong market position. Conventional and
heavy oil economics are reasonable at current price levels leading
to moderate activity in eastern Alberta and south east Saskatchewan. The reduction in Alberta royalty rates announced during the
second quarter is expected to result in improved drilling economics
and industry activity. Industry well completions, which drive
demand for the Company's capital project related products, have
begun to accelerate in response to the significant increase in rig
count activity compared to the prior year period. Oil sands project
announcements are gaining momentum with the recovery in oil prices
and access to capital markets. Approximately 50% to 60% of the
Company's total sales are driven by our customer's capital
expenditure requirements. CE Franklin's revenues are expected to
increase modestly in the remainder of 2010 and into 2011 due to
increased oil and gas industry activity and the expansion of the
Company's product lines.
Sales margins are expected to remain under pressure as natural
gas exploration customers focus on reducing their costs to maintain
acceptable project economics, as well as continued aggressive
oilfield supply industry competition and deflation in certain
product lines. The Company will continue to manage its cost
structure to protect profitability while maintaining service
capacity and advancing strategic initiatives.
Over the medium to longer term, the Company's strong financial
and competitive positions will enable profitable growth of its
distribution network through the expansion of its product lines,
supplier relationships and capability to service additional oil and
gas and other industrial end use markets.
Additional Information
----------------------
Additional information relating to CE Franklin, including its
second quarter 2010 Management Discussion and Analysis and interim
consolidated financial statements and its Form 20-F / Annual
Information Form, is available under the Company's profile on the
SEDAR website at www.sedar.com and at www.cefranklin.com.
Conference Call and Webcast Information
---------------------------------------
A conference call to review the 2010 third quarter results,
which is open to the public, will be held on Friday, October 29th, 2010 at 11:00 a.m. Eastern Time (9:00 a.m. Mountain Time).
Participants may join the call by dialing 1-647-427-7450 in
Toronto or dialing 1-888-231-8191
at the scheduled time of 11:00 a.m. Eastern
Time. For those unable to listen to the live conference
call, a replay will be available at approximately 1:00 p.m. Eastern Time on the same day by calling
1-416-849-0833 in Toronto or
dialing 1-800-642-1687 and entering the Passcode of 14372283 and
may be accessed until midnight Friday,
November 12, 2010.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3237300 and
will be available on the Company's website at
http://www.cefranklin.com.
Michael West, President and Chief
Executive Officer will lead the discussion and will be accompanied
by Mark Schweitzer, Vice President
and Chief Financial Officer. The discussion will be followed by a
question and answer period.
About CE Franklin
For more than half a century, CE Franklin has been a leading
supplier of products and services to the energy industry. CE
Franklin distributes pipe, valves, flanges, fittings, production
equipment, tubular products and other general oilfield supplies to
oil and gas producers in Canada as
well as to the oil sands, refining, heavy oil, petrochemical,
forestry and mining industries. These products are distributed
through its 49 branches, which are situated in towns and cities
serving particular oil and gas fields of the western Canadian
sedimentary basin.
Forward-looking Statements: The information in this news release
may contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and other applicable securities
legislation. All statements, other than statements of historical
facts, that address activities, events, outcomes and other matters
that CE Franklin plans, expects, intends, assumes, believes,
budgets, predicts, forecasts, projects, estimates or anticipates
(and other similar expressions) will, should or may occur in the
future are forward-looking statements. These forward-looking
statements are based on management's current belief, based on
currently available information, as to the outcome and timing of
future events. When considering forward-looking statements, you
should keep in mind the risk factors and other cautionary
statements and refer to the Form 20-F or our annual information
form for further detail.
Management's Discussion and Analysis at October 28, 2010
The following Management's Discussion and Analysis ("MD&A")
is provided to assist readers in understanding CE Franklin Ltd.'s
("CE Franklin" or the "Company") financial performance and position
during the periods presented and significant trends that may impact
future performance of CE Franklin. This discussion should be read
in conjunction with the Company's interim consolidated financial
statements for the three and nine month period ended September 30, 2010, the interim consolidated
financial statements and MD&A for the three and six month
period ended June 30, 2010 and the
three month period ended March 31,
2010 and the MD&A and the consolidated financial
statements for the year ended December 31,
2009. All amounts are expressed in Canadian dollars and in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP"), except otherwise noted.
Overview
CE Franklin is a leading distributor of pipe, valves, flanges,
fittings, production equipment, tubular products and other general
industrial supplies primarily to the oil and gas industry through
its 49 branches situated in towns and cities that serve oil and gas
fields of the western Canadian sedimentary basin. In addition, the
Company distributes similar products to the oil sands, refining,
and petrochemical industries and non-oilfield related industries
such as forestry and mining.
The Company's branch operations service over 3,000 customers by
providing the required materials where and when they are needed,
and for the best value. Our branches, supported by our centralized
Distribution Centre in Edmonton,
Alberta, stock over 25,000 stock keeping units sourced from
over 2,000 suppliers. This infrastructure enables us to provide our
customers with the products they need on a same day or over-night
basis. Our centralized inventory and procurement capabilities allow
us to leverage our scale to enable industry leading hub and spoke
purchasing and logistics capabilities. Our branches are also
supported by services provided by the Company's corporate office in
Calgary, Alberta including sales,
marketing, product expertise, logistics, invoicing, credit and
collection and other business services.
The Company's shares trade on the TSX ("CFT") and NASDAQ ("CFK")
stock exchanges. Schlumberger Limited, a major oilfield service
company based in Paris France,
owns approximately 55% of the Company's shares.
Business Strategy
The Company is pursuing the following strategies to grow its
business profitably:
- Expand the reach and market share serviced by the Company's
distribution network. The Company is focusing its sales efforts and
product offering on servicing complex, multi-site needs of large and
emerging customers in the energy sector. Organic growth is expected
to be complemented by selected acquisitions.
- Expand production equipment service capability to capture more of the
product life cycle requirements for the equipment the Company sells
such as down hole pump repair, oilfield engine maintenance, well
optimization and on site project management. This is expected to
differentiate the Company's service offering from its competitors and
deepen relationships with its customers.
- Expand oil sands and industrial project and Maintenance, Repair and
Operating supplies ("MRO") business by leveraging our existing supply
chain infrastructure, product and project expertise.
Business Outlook
Oil and gas industry activity in 2010 continues to increase
modestly from the decade-low levels experienced in 2009. Natural
gas prices remain depressed as North American production capacity
and inventory levels currently dominate demand. Natural gas capital
expenditure activity is focused on the emerging shale gas plays in
north eastern British Columbia
where the Company has a strong market position. Conventional and
heavy oil economics are reasonable at current price levels leading
to moderate activity in eastern Alberta and south east Saskatchewan. The reduction in Alberta royalty rates announced during the
second quarter is expected to result in improved drilling economics
and industry activity. Industry well completions, which drive
demand for the Company's capital project related products, have
begun to accelerate in response to the significant increase in rig
count activity compared to the prior year period. Oil sands project
announcements are gaining momentum with the recovery in oil prices
and access to capital markets. Approximately 50% to 60% of the
Company's total sales are driven by our customer's capital
expenditure requirements. CE Franklin's revenues are expected to
increase modestly in the remainder of 2010 and into 2011 due to
increased oil and gas industry activity and the expansion of the
Company's product lines.
Sales margins are expected to remain under pressure as natural
gas exploration customer's focus on reducing their costs to
maintain acceptable project economics, as well as continued
aggressive oilfield supply industry competition and deflation in
certain product lines. The Company will continue to manage its cost
structure to protect profitability while maintaining service
capacity and advancing strategic initiatives.
Over the medium to longer term, the Company's strong financial
and competitive positions will enable profitable growth of its
distribution network through the expansion of its product lines,
supplier relationships and capability to service additional oil and
gas and other industrial end use markets.
Third Quarter Operating Results
The following table summarizes CE Franklin's results of
operations:
(In millions of Cdn. Dollars except per share data and may not add due to
rounding to millions)
Three Months Ended September 30
---------------------------------------
2010 2009
------------------- -------------------
Sales 132.2 100.0% 94.1 100.0%
Cost of Sales (113.0) (85.5)% (76.7) (81.5)%
------------------- -------------------
Gross profit 19.2 14.5% 17.4 18.5%
Selling, general and
administrative expenses (15.5) (11.7)% (17.0) (18.1)%
Foreign exchange and other 0.1 0.1% 0.1 0.1%
------------------- -------------------
EBITDA(1) 3.8 2.9% 0.5 0.5%
Amortization (0.6) (0.5)% (0.6) (0.6)%
Interest (0.1) (0.1)% (0.3) (0.3)%
------------------- -------------------
Income (loss) before taxes 3.1 2.4% (0.4) (0.5)%
Income tax expense (0.9) (0.7)% 0.6 0.6%
------------------- -------------------
Net income 2.2 1.7% 0.2 0.1%
------------------- -------------------
Net income per share
Basic $0.12 $0.01
Diluted $0.12 $0.01
Weighted average number of
shares outstanding (000's)
Basic 17,461 17,647
Diluted 17,783 17,908
Nine Months Ended September 30
---------------------------------------
2010 2009
------------------- -------------------
Sales 353.9 100.0% 344.0 100.0%
Cost of Sales (299.5) (84.6)% (282.7) (82.2)%
------------------- -------------------
Gross profit 54.4 15.4% 61.3 17.8%
Selling, general and
administrative expenses (45.8) (12.9)% (49.7) (14.4)%
Foreign exchange and other - 0.0% 0.1 0.0%
------------------- -------------------
EBITDA(1) 8.6 2.5% 11.7 3.4%
Amortization (1.8) (0.5)% (1.7) (0.5)%
Interest (0.5) (0.1)% (0.7) (0.2)%
------------------- -------------------
Income (loss) before taxes 6.3 1.9% 9.3 2.7%
Income tax expense (2.0) (0.6)% (2.5) (0.7)%
------------------- -------------------
Net income 4.3 1.3% 6.8 2.0%
------------------- -------------------
Net income per share
Basic $0.24 $0.38
Diluted $0.24 $0.38
Weighted average number of
shares outstanding (000's)
Basic 17,518 17,795
Diluted 17,838 18,036
(1) EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented, represents
a useful means of assessing the performance of the Company's ongoing
operating activities, as it reflects the Company's earnings trends
without showing the impact of certain charges. The Company is also
presenting EBITDA and EBITDA as a percentage of sales because it is
used by management as supplemental measures of profitability. The use
of EBITDA by the Company has certain material limitations because it
excludes the recurring expenditures of interest, income tax, and
amortization expenses. Interest expense is a necessary component of
the Company's expenses because the Company borrows money to finance
its working capital and capital income taxes. Amortization expense is
a necessary component of the Company's expenses because the Company
is required to pay cash equipment to generate sales. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net incomes, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow from
operating activities as a measure of liquidity. A reconciliation of
EBITDA to Net income is provided within the table above. Not all
companies calculate EBITDA in the same manner and EBITDA does not
have a standardized meaning prescribed by GAAP. Accordingly, EBITDA,
as the term is used herein, is unlikely to be comparable to EBITDA as
reported by other entities.
Third Quarter Results
The Company recorded net income for the third quarter of 2010 of
$2.2 million, an increase of
$2.0 million from the third quarter
of 2009. Third quarter sales, which are seasonally stronger than
the second quarter, were $132.2
million, an increase of $38.1
million (40%) from the third quarter of 2009. Improvements
in and stability of oil prices, as well as improved general
economic conditions have lead to higher activity levels in the oil
and gas industry, which in turn has lead to improved oilfield and
oil sands sales compared to the prior year. Increased oilfield
supply sales were driven by a 78% increase in industry well
completions over the prior year period. Gross profit was up
$1.8 million (10%) as the impact of
increased sales activity was partially offset by a 4.0% decline in
average sales margins from the prior year period. Lower average
margins were attributable to an increased mix of lower margin oil
sands sales and the highly competitive oilfield supply industry
environment. Selling, general and administrative expenses decreased
by $1.5 million (9%) to $15.5 million compared to the prior year period
due to the one-time integration costs associated with the
acquisition of a Western Canadian oilfield supply competitor in
June 2009 (the "Oilfield Supply
Acquisition") and lower agent commission costs. Income taxes
increased by $1.6 million in the
third quarter of 2010 compared to the prior year period due to
higher pre-tax earnings. The weighted average number of shares
outstanding (basic) during the third quarter decreased by 0.2
million shares (1%) from the prior year period principally due to
shares purchased for cancellation pursuant to the Company's Normal
Course Issuer Bid ("NCIB"). Net income per share (basic) was
$0.12 in the third quarter of 2010,
compared to net income per share of $0.01 earned in the prior year period.
Year to Date Results
Net income for the first three quarters of 2010 was $4.3 million, down $2.6
million from the first three quarters of 2009. Sales were
$353.9 million, an increase of
$9.9 million (3%) from the first
three quarters of 2009. Higher sales reflect sales contributed from
the Oilfield Supply Acquisition and increased industry demand
driven by the 14% increase in well completions over the prior year
period. Partially offsetting this was the absence of a $32.4 million sale of oil sands pipe in the
second quarter of 2009 and the rollover of tubular and other steel
product prices and margins during 2009. Gross profit was down
$6.9 million (11%) as the increase in
sales was offset by a 2.4% decline in average margins from the
prior year period. The highly competitive oilfield supply industry
environment continues to impact margins. Selling, general and
administrative expenses decreased by $3.8
million (8%) to $45.8 million
for the first three quarters of the year due to the absence of
$1.5 million of costs to integrate
the Oilfield Supply Acquisition in 2009, and lower compensation,
agent commission and bad debt costs incurred in 2010. Income taxes
decreased by $0.5 million in the
first three quarters of 2010 compared to the prior year period due
to lower pre-tax earnings. The weighted average number of shares
outstanding (basic) during the first nine months decreased by 0.3
million shares (2%) from the prior year period principally due to
shares purchased for cancellation pursuant to the Company's NCIB.
Net income per share (basic) was $0.24 in the first three quarters of 2010,
compared to $0.38 earned in the first
three quarters of 2009.
Sales
Sales for the third quarter ended September 30, 2010, were $132.2 million, up 40% from the quarter ended
September 30, 2009, as detailed above
in the "Third Quarter results" discussion.
(in millions of Cdn. $)
Three Months Ended September 30
---------------------------------------
2010 2009
------------------- -------------------
End use sales demand $ % $ %
Capital projects 66.7 50 48.4 51
Maintenance, repair and operating
supplies (MRO) 65.5 50 45.7 49
Total Sales 132.2 100 94.1 100
Nine Months Ended September 30
---------------------------------------
2010 2009
------------------- -------------------
End use sales demand $ % $ %
Capital projects 182.4 52 199.5 58
Maintenance, repair and operating
supplies (MRO) 171.5 48 144.5 42
------------------- -------------------
Total Sales 353.9 100 344.0 100
Note: Capital project end use sales are defined by the Company as
consisting of the tubular and 80% of pipe, flanges and fittings; and
valves and accessories product sales respectively; MRO Sales are defined
by the Company as consisting of pumps and production equipment,
production services; general product and 20% of pipes, flanges and
fittings; and valves and accessory product sales respectively.
The relative level of oil and gas commodity prices are a key
driver of industry capital project activity as product prices
directly impact the economic returns realized by oil and gas
companies. The Company uses oil and gas well completions and
average rig counts as industry activity measures to assess demand
for oilfield equipment used in capital projects. Oil and gas well
completions require the products sold by the Company to complete a
well and bring production on stream and are a general indicator of
energy industry activity levels. Average drilling rig counts are
also used by management to assess industry activity levels as the
number of rigs in use ultimately drives well completion
requirements. Well completion, rig count and commodity price
information for the three and nine month periods ended September 30, 2010 and 2009 are provided in the
table below.
Q3 Average % YTD Average %
------------------------ ------------------------
2010 2009 change 2010 2009 change
-------- ------- ------- ------- -------- -------
Gas - Cdn. $/gj
(AECO spot) $ 3.54 $ 2.97 19% $ 4.12 $ 3.79 9%
Oil - Cdn. $/bbl
(synthetic crude) $ 77.37 $ 73.99 5% $ 79.30 $ 65.93 20%
Average rig count 325 178 83% 309 197 57%
Well completions:
Oil 1,484 822 81% 3,916 2,198 78%
Gas 1,127 646 74% 3,738 4,491 (17)%
-------- ------- ------- ------- -------- -------
Total well completions 2,611 1,468 78% 7,654 6,689 14%
Average statistics are shown except for well completions.
Sources: Oil and Gas prices - First Energy Capital Corp.; Rig count data
- CAODC; well completion data - Daily Oil Bulletin
Sales of capital project related products were $66.7 million in the third quarter of 2010, up
38% ($18.3 million) from the third
quarter of 2009 due to increased industry capital project activity.
Total well completions increased by 78% in the third quarter of
2010 and the average working rig count increased by 83% compared to
the prior year period. Gas wells comprised 43% of the total wells
completed in western Canada in the
third quarter of 2010 compared to 44% in the third quarter of 2009.
Spot gas prices ended the third quarter at $3.55 per GJ (AECO), consistent with third
quarter average prices. Oil prices ended the third quarter at
$81.17 per bbl (Synthetic Crude),
which is a 5% increase from the third quarter average price.
Depressed gas prices are expected to continue to negatively impact
gas drilling activity over the remainder of 2010 and into 2011,
which in turn is expected to constrain demand for the Company's
products.
MRO product sales are related to overall oil and gas industry
production levels and tend to be more stable than capital project
sales. MRO product sales for the quarter ended September 30, 2010 were $65.5 million which is a $19.8 million increase from the $45.7 million in the quarter ended September 30, 2009 and comprised 50% of the
Company's total sales.
The Company's strategy is to grow profitability by focusing on
its core western Canadian oilfield product distribution business,
complemented by an increase in the product life cycle services
provided to its customers and the focus on the emerging oil sands
capital project and MRO sales opportunities. Sales results of these
initiatives to date are provided below:
Q3 2010 Q3 2009 YTD 2010 YTD 2009
----------- ----------- ------------ -----------
Sales ($millions) $ % $ % $ % $ %
Oilfield 104.2 79 87.9 93 292.5 83 282.3 82
Oil sands 23.7 18 3.4 4 49.8 14 54.4 16
Production services 4.3 3 2.8 3 11.6 3 7.3 2
----------- ----------- ------------ -----------
Total sales 132.2 100 94.1 100 353.9 100 344.0 100
Sales of oilfield products to conventional western Canada oil and gas end use applications were
$104.2 million for the third quarter
of 2010, up 19% from the third quarter of 2009. This increase was
driven by the 78% increase in well completions compared to the
prior year period.
Sales to oil sands end use applications were $23.7 million in the third quarter, an increase
of $20.3 million compared to the
third quarter of 2009. On a year to date basis, sales are below
2009 levels as the second quarter of 2009 included a $32.4 million oil sands pipe sale that did not
repeat in 2010. The Company continues to position its sales focus,
Edmonton Distribution Centre and Fort
McMurray branch to penetrate this emerging market for
capital project and MRO products.
Production service sales were $4.3
million in the third quarter of 2010, an increase of
$1.5 million compared to the third
quarter of 2009, reflecting improved oil production economics
resulting in increased customer maintenance activities that were
deferred in 2009.
Gross Profit
Q3 2010 Q3 2009 YTD 2010 YTD 2009
----------- ----------- ------------ ----------
Gross profit (millions) $ 19.2 $ 17.4 $ 54.5 $ 61.3
Gross profit margin as
a % of sales 14.5% 18.5% 15.4% 17.8%
Gross profit composition
by product sales category:
Tubulars 3% 3% 2% 6%
Pipe, flanges and fittings 28% 28% 29% 32%
Valves and accessories 20% 21% 20% 20%
Pumps, production equipment
and services 15% 12% 14% 11%
General 34% 36% 35% 31%
----------- ----------- ------------ ----------
Total gross profit 100% 100% 100% 100%
Gross profit was $19.2 million in
the third quarter of 2010, an increase of $1.8 million (10%) from the third quarter of 2009
as the increase in sales activity was partially offset by a 4.0%
decline in average sales margins. Gross profit margins declined
from 18.5% in the third quarter of 2009 to 14.5% in the third
quarter of 2010. Lower sales margins reflect an increased mix of
lower margin oil sands sales combined with a highly competitive
oilfield supply industry. Lower year to date tubular gross profit
composition reflects the rollover of tubular prices and margins
that commenced in the second quarter of 2009.
Selling, General and Administrative ("SG&A") Costs
($millions) Q3 2010 Q3 2009 YTD 2010 YTD 2009
----------- ----------- ------------ -----------
$ % $ % $ % $ %
People costs 8.9 57 9.3 55 26.5 58 28.0 56
Facility and office
costs 3.3 21 3.4 20 10.1 22 10.1 20
Selling costs 1.8 12 2.4 14 4.5 10 6.0 13
Other 1.5 10 1.9 11 4.7 10 5.6 11
----- ----- ----- ----- ------ ----- ----- -----
SG&A costs 15.5 100 17.0 100 45.8 100 49.7 100
----- ----- ----- ----- ------ ----- ----- -----
SG&A costs as % of
sales 12% 18% 13% 14%
SG&A costs have decreased $1.5
million (9%) in the third quarter of 2010 from the prior
year period and represented 12% of sales compared to 18% in the
prior year period. Lower people costs reflect one-time stock based
compensation costs recorded in the prior year period associated
with the implementation of a cash settlement mechanic to the
Company's stock option plan. Selling costs in the quarter are lower
than the prior year period due to a $0.6
million reduction in agent commissions (Year to date =
$1.0 million reduction). Other costs
are lower in the third quarter of 2010 due to one-time costs
incurred to integrate the Oilfield Supply Acquisition in the prior
year period. The balance of the selling cost decline on a year to
date basis is due to the recovery of a previously written off bad
debt.
Amortization Expense
Amortization expense of $0.6
million in the third quarter of 2010 was comparable to the
third quarter of 2009.
Interest Expense
Interest expense of $0.1 million
in the third quarter of 2010 declined $0.2
million from the prior year period due to lower average
borrowing levels.
Foreign Exchange (Gain) Loss
Foreign exchange gains on United
States dollar denominated product purchases and net working
capital liabilities were $0.1 million
in the third quarter of 2010 and were consistent with the prior
year quarter.
Income Tax Expense
The Company's effective tax rate for the third quarter of 2010
was 30.3% compared to 146.1% in the third quarter of 2009. The high
effective tax rate in the prior year quarter resulted from
implementing a cash settlement mechanism to the Company's stock
option plan. Stock option expense was previously non-deductible for
income tax purposes. Additionally, non-deductible items had a
greater impact on the effective tax rate in the third quarter of
2009 due to the decrease in pre-tax income compared to the current
year period. Substantially all of the Company's tax provision is
currently payable.
Summary of Quarterly Financial Data
The selected quarterly financial data is presented in Canadian
dollars and in accordance with Canadian GAAP. This information is
derived from the Company's unaudited quarterly financial
statements.
(in millions of Cdn.
dollars except per
share data)
Unaudited Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2008 2009 2009 2009 2009 2010 2010 2010
------ ------ ------ ------ ------ ------ ------ ------
Sales $161.2 $140.7 $109.1 $94.1 $93.0 $121.9 $99.9 $132.2
Gross profit 33.9 26.4 17.5 17.4 15.3 19.7 15.6 19.2
Gross profit % 21.0% 18.8% 16.0% 18.5% 16.5% 16.1% 15.6% 14.5%
EBITDA 14.3 9.6 1.7 0.5 0.6 4.1 0.7 3.8
EBITDA as a %
of sales 8.9% 6.8% 1.6% 0.5% 0.6% 3.4% 0.7% 2.9%
Net income (loss) 8.8 6.0 0.6 0.2 (0.5) 2.2 (0.1) 2.2
Net income (loss)
as a % of sales 5.5% 4.3% 0.5% 0.2% (0.5%) 1.8% (0.1%) 1.6%
Net income (loss)
per share
Basic $ 0.48 $ 0.33 $ 0.04 $ 0.01 ($0.03)$ 0.13 ($0.01)$ 0.12
Diluted $ 0.47 $ 0.33 $ 0.03 $ 0.01 ($0.03)$ 0.12 ($0.01)$ 0.12
Net working
capital(1) 142.8 153.2 137.0 131.1 136.6 113.9 111.8 129.0
Long term debt
/Bank operating
loan(1) 34.9 40.2 25.3 21.3 26.5 1.1 0.0 14.4
Total well
completions 6,971 3,947 1,274 1,468 1,576 2,846 2,197 2,611
(1) Net working capital, bank operating loan and long term debt amounts
are as at quarter end.
The Company's sales levels are affected by weather conditions.
As warm weather returns in the spring each year, the winter's frost
comes out of the ground rendering many secondary roads incapable of
supporting the weight of heavy equipment until they have dried out.
In addition, many exploration and production areas in northern
Canada are accessible only in the
winter months when the ground is frozen. As a result, the first and
fourth quarters typically represent the busiest time for oil and
gas industry activity and the highest sales activity for the
Company. Sales levels drop dramatically during the second quarter
until such time as roads have dried and road bans have been lifted.
This typically results in a significant reduction in earnings
during the second quarter, as the decline in sales typically out
paces the decline in SG&A costs as the majority of the
Company's SG&A costs are fixed in nature. Net working capital
(defined as current assets excluding cash, less accounts payable
and accrued liabilities, income taxes payable and other current
liabilities, excluding the bank operating loan) and bank operating
loan borrowing levels follow similar seasonal patterns as
sales.
Liquidity and Capital Resources
The Company's primary internal source of liquidity is cash flow
from operating activities before net changes in non-cash working
capital balances. Cash flow from operating activities and the
Company's revolving term credit facility are used to finance the
Company's net working capital, capital expenditures and
acquisitions.
As at September 30, 2010, there
were $14.1 million of borrowings
under the Company's revolving term bank loan, a decrease of
$12.5 million from December 31, 2009. Borrowing levels have
decreased since December 31, 2009 due
to the Company generating $7.5
million in cash flow from operating activities, before net
changes in non-cash working capital balances and a $7.7 million reduction in net working capital.
This was offset by $1.1 million in
capital and other expenditures, $0.4
million for the settlement of share obligations and
$1.2 million for the purchase of
shares to resource stock compensation obligations and the
repurchase of shares under the Company's NCIB.
As at September 30, 2009,
borrowings under the Company's bank revolving term bank loan were
$21.3 million, a decrease of
$13.6 million from December 31, 2008. Borrowing levels decreased due
to the Company generating $10.3
million in cash flow from operating activities, before net
changes in non-cash working capital balances and a $19.8 million reduction in net working capital
excluding the impact of the cash settled options and inventory
addition related to the acquisition of the Acquired Business. This
was offset by $2.3 million in capital
and other expenditures, $11.3 million
related to the Oilfield Supply Acquisition and $2.9 million for the purchase of shares to
resource stock compensation obligations and the repurchase of
shares under the Company's NCIB.
Net working capital was $129.0
million at September 30, 2010,
a decrease of $7.6 million from
December 31, 2009. Accounts
receivable increased by $24.3 million
(36%) to $91.7 million at
September 30, 2010 from December 31, 2009 due mainly to a 42% increase in
sales partially offset by a 3% improvement in Days Sales
Outstanding ("DSO"). DSO in the third quarter of 2010 was 58 days
compared to 60 days in the fourth quarter of 2009 and 57 days in
the third quarter of 2009. DSO is calculated using average sales
per day for the quarter compared to the period end accounts
receivable balance. Inventory decreased by $6.6 million (6%) at September 30, 2010 from December 31, 2009. Inventory turns for the third
quarter of 2010 improved to 4.7 turns compared to 3.0 turns in the
fourth quarter of 2009 and 2.9 turns in the third quarter of 2009.
Inventory turns are calculated using cost of goods sold for the
quarter on an annualized basis compared to the period end inventory
balance. The Company continues to adjust its investment in
inventory to align with anticipated industry activity levels and
supplier lead times in order to improve inventory turnover
efficiency. Accounts payable and accrued liabilities increased by
$25.7 million (66%) to $64.0 million at September
30, 2010 from December 31,
2009, responsive to increased purchasing and sales
levels.
Capital expenditures in the third quarter of 2010 were
$0.6 million, a reduction of
$0.1 million compared to the prior
year period. The majority of the capital expenditures in both
periods were directed towards branch facility expansions and
maintenance.
On July 8, 2010, a new
$60.0 million revolving term bank
credit facility was entered into. The credit facility matures in
July 2013 and provides lower
borrowing costs and improved covenant flexibility. Previously the
Company had a $60 million, 364 day
bank operating facility. The maximum amount available to borrow
under the Credit Facility is subject to a borrowing base formula
applied to accounts receivable and inventories. Under the terms of
the Credit Facility, the Company must maintain the ratio of its
debt to debt-plus-equity at less than 40% (9% at September 30, 2010) and coverage of net operating
free cash flow as defined in the Credit Facility agreement over
interest expense for the trailing 12 month period of greater than
1.25 times (9.1 times at September 30,
2010). The Credit Facility contains certain other covenants,
which the Company is in compliance with.
Contractual Obligations
There have been no material changes in off-balance sheet
contractual commitments since December 31,
2009.
Capital Stock
As at September 30, 2010 and 2009,
the following shares and securities convertible into shares were
outstanding:
(millions) September September
30, 2010 30, 2009
Shares Shares
----------------------------
Shares outstanding 17.4 17.6
Stock options 1.1 1.2
Share unit plan obligations 0.6 0.5
----------------------------
Shares outstanding and issuable 19.1 19.3
The weighted average number of shares outstanding during the
third quarter of 2010 was 17.5 million, a decrease of 0.2 million
shares from the prior year's third quarter due principally to the
purchases of common shares under its NCIB and to resource share
unit plan obligations. The diluted weighted average number of
shares outstanding was 17.8 million, a decrease of 0.1 million
shares from the prior year's third quarter.
The Company has established an independent trust to purchase
common shares of the Company on the open market to resource share
unit plan obligations. During the three and nine month periods
ended September 30, 2010, 50,000 and
179,300 common shares were acquired by the trust at an average cost
per share of $6.75 and $6.79 respectively. (Three and nine months ended
September 30, 2009 - nil and 75,000
at an average cost per share of $5.23). As at September
30, 2009, the trust held 471,610 shares (September 30, 2009 - 354,683 shares).
On December 23, 2009, the Company
announced the renewal of the NCIB, to purchase up to 880,000 common
shares representing approximately 5% of its outstanding common
shares. Shares may be purchased up to December 31, 2010. As at September 30, 2010, the Company had purchased
57,878 shares at an average cost of $6.61 per share (September
30, 2009 - 530,587 shares at an average cost of $5.14 per share).
The Company settles exercises of stock options through payment
of cash in order to manage share dilution while resourcing its long
term incentive plan on a tax efficient basis. As a result, the
Company's stock option obligations (subject to vesting) are
classified as a current liability (September
30, 2010 - $1.7 million) based
on the positive difference between the Company's closing stock
price at period end and the underlying option exercise price. The
offset to the generation of the current liability is contributed
surplus, up to the cumulative expensed Black Scholes valuation, and
compensation expense for the excess of the intrinsic value over the
cumulative expensed Black Scholes value. The liability is marked to
market at each period end, with any adjustment allocated to the
relevant account as detailed above. On March
4, 2010, the federal government introduced its 2010 budget
which contained provisions which if enacted, could result in future
stock option settlement payments no longer being deductible by the
Company for tax purposes. This would result in the accounting write
off of approximately $0.5 million of
related future tax assets and a compensation expense recovery of
$0.6 million. No accounting
recognition will be made until such time and to the extent that
proposed changes to the deductibility of stock option payments for
tax purposes has been substantively enacted.
Critical Accounting Estimates
There have been no material changes to critical accounting
estimates since December 31, 2009.
The Company is not aware of any environmental or asset retirement
obligations that could have a material impact on its
operations.
Change in Accounting Policies
There have been no changes to accounting policies since
December 31, 2009.
Transition to International Financial Reporting Standards
("IFRS")
In February 2008, the Canadian
Accounting Standards Board confirmed that the basis for financial
reporting by Canadian publicly accountable enterprises will change
from Canadian GAAP to IFRS effective for January 1, 2011, including the preparation and
reporting of one year of comparative figures. This change is part
of a global shift to provide consistency in financial reporting in
the global marketplace.
Project Structure and Governance
A Steering Committee has been established to provide leadership
and guidance to the project team, assist in developing accounting
policy recommendations and ensure there is adequate resources and
training available. Management provides status updates to the Audit
Committee on a quarterly basis.
Resources and Training
CE Franklin's project team has been assembled and has developed
a detailed work plan that includes training, detailed Canadian GAAP
to IFRS analysis, technical research, policy recommendations and
implementation. The project team completed initial training and
ongoing training will continue through the project as required. The
Company's Leadership Team and the Audit Committee have also
participated in IFRS awareness sessions.
IFRS Progress
The project team is advanced in its assessment of the
differences between Canadian GAAP and IFRS. A risk based approach
was used to identify significant differences based on possible
financial impact and complexity. No accounting policy differences
have been identified to date that would give rise to significant
differences between Canadian GAAP and IFRS except in stock based
compensation where the assessment work continues. Similarly, there
have been no significant information system change requirements
identified in order to adopt IFRS. The project team has
substantially completed its assessment of changes to financial
statement presentation, disclosure and again no significant
differences have been identified to this point. There are some
additional disclosures required under IFRS that the company will be
presenting in its first IFRS financial statements. Work is ongoing
on internal controls over financial reporting that will be required
to adopt IFRS. There are a number of IFRS standards in the process
of being amended by the International Accounting Standards Board
and are expected to continue until the transition date of
January 1, 2011. The Company is
actively monitoring proposed changes.
At this stage in the project, CE Franklin has determined that
the impact of adopting IFRS will be minimal to its financial
position and future results.
Controls and Procedures
Internal control over financial reporting ("ICFR") is designed
to provide reasonable assurance regarding the reliability of the
Company's financial reporting and its compliance with Canadian GAAP
in its financial statements. The President and Chief Executive
Officer and the Vice President and Chief Financial Officer of the
Company have evaluated whether there were changes to its ICFR
during the nine months ended September 30,
2010 that have materially affected or are reasonably likely
to materially affect the ICFR. No such changes were identified
through their evaluation.
Risk Factors
The Company is exposed to certain business and market risks
including risks arising from transactions that are entered into the
normal course of business, which are primarily related to interest
rate changes and fluctuations in foreign exchange rates. During the
reporting period, no events or transactions since year ended
December 31, 2009 have occurred that
would materially change the information disclosed in the Company's
Form 20F.
Forward Looking Statements
The information in the MD&A may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. All
statements, other than statements of historical facts, that address
activities, events, outcomes and other matters that CE Franklin
plans, expects, intends, assumes, believes, budgets, predicts,
forecasts, projects, estimates or anticipates (and other similar
expressions) will, should or may occur in the future are
forward-looking statements. These forward-looking statements are
based on management's current belief, based on currently available
information, as to the outcome and timing of future events. When
considering forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in this MD&A,
including those in under the caption "Risk Factors".
Forward-looking statements appear in a number of places and
include statements with respect to, among other things:
- forecasted oil and gas industry activity levels in 2010 and beyond;
- planned capital expenditures and working capital and availability of
capital resources to fund capital expenditures and working capital;
- the Company's future financial condition or results of operations and
future revenues and expenses;
- the Company's business strategy and other plans and objectives for
future operations;
- fluctuations in worldwide prices and demand for oil and gas;
- fluctuations in the demand for the Company's products and services.
Should one or more of the risks or uncertainties described above
or elsewhere in this MD&A occur, or should underlying
assumptions prove incorrect, the Company's actual results and plans
could differ materially from those expressed in any forward-looking
statements.
All forward-looking statements expressed or implied, included in
this MD&A and attributable to CE Franklin are qualified in
their entirety by this cautionary statement. This cautionary
statement should also be considered in connection with any
subsequent written or oral forward-looking statements that CE
Franklin or persons acting on its behalf might issue. CE Franklin
does not undertake any obligation to update any forward-looking
statements to reflect events or circumstance after the date of
filing this MD&A, except as required by law.
Additional Information
----------------------
Additional information relating to CE Franklin, including its
second quarter 2010 Management Discussion and Analysis and interim
consolidated financial statements and its Form 20-F/ Annual
Information Form, is available under the Company's profile on the
SEDAR website at www.sedar.com and at www.cefranklin.com.
CE Franklin Ltd.
Interim Consolidated Balance Sheets - Unaudited
-------------------------------------------------------------------------
September 30 December 31
(in thousands of Canadian dollars) 2010 2009
-------------------------------------------------------------------------
Assets
Current assets
Accounts receivable 91,706 67,443
Inventories 96,109 102,669
Other 5,321 4,960
-------------------------------------------------------------------------
193,136 175,072
Property and equipment 9,847 10,517
Goodwill 20,570 20,570
Future income taxes (note 5) 1,565 1,457
Other 237 339
-------------------------------------------------------------------------
225,355 207,955
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current liabilities
Bank operating loan (note 6) - 26,549
Accounts payable and accrued liabilities 63,981 38,489
Income taxes payable (note 5) 126 -
-------------------------------------------------------------------------
64,107 65,038
Long term debt (note 6) 14,383 290
-------------------------------------------------------------------------
78,490 65,328
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock 22,775 23,284
Contributed surplus 17,957 17,184
Retained earnings 106,133 102,159
-------------------------------------------------------------------------
146,865 142,627
-------------------------------------------------------------------------
225,355 207,955
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements.
CE Franklin Ltd.
Interim Consolidated Statements of Operations - Unaudited
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
(in thousands of Canadian --------------------- ---------------------
dollars except shares September September September September
and per share amounts) 30 2010 30 2009 30 2010 30 2009
-------------------------------------------------------------------------
Sales 132,159 94,149 353,944 344,014
Cost of sales 112,928 76,702 299,485 282,704
-------------------------------------------------------------------------
Gross profit 19,231 17,447 54,459 61,310
-------------------------------------------------------------------------
Other expenses
Selling, general and
administrative expenses 15,511 17,017 45,821 49,658
Amortization 620 635 1,855 1,776
Interest expense 108 322 539 670
Foreign exchange (gain) (130) (71) (45) (100)
-------------------------------------------------------------------------
16,109 17,903 48,170 52,004
-------------------------------------------------------------------------
Income (loss) before income
taxes 3,122 (456) 6,289 9,306
Income tax expense (recovery)
(note 5)
Current 1,120 (215) 2,124 2,850
Future (173) (451) (107) (382)
-------------------------------------------------------------------------
947 (666) 2,017 2,468
-------------------------------------------------------------------------
Net income and comprehensive
income 2,175 210 4,272 6,838
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per share (note 4)
Basic 0.12 0.01 0.24 0.38
Diluted 0.12 0.01 0.24 0.38
-------------------------------------------------------------------------
Weighted average number of
shares outstanding (000's)
Basic 17,461 17,647 17,518 17,795
Diluted (note 4(e)) 17,783 17,908 17,838 18,036
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements.
CE Franklin Ltd.
Interim Consolidated Statements of Cash Flow - Unaudited
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
---------------------------------------------
(in thousands of September September September September
Canadian dollars) 30 2010 30 2009 30 2010 30 2009
-------------------------------------------------------------------------
Cash flows from operating
activities
Net income for the period 2,175 210 4,272 6,839
Items not affecting cash -
Amortization 620 635 1,855 1,776
Future income tax (recovery) (173) (451) (107) (382)
Stock based compensation
expense 728 1,101 1,520 2,081
Other (130) - (52) (45)
-------------------------------------------------------------------------
3,220 1,495 7,488 10,269
Net change in non-cash working
capital balances related to
operations -
Accounts receivable (30,000) (7,325) (24,263) 36,070
Inventories (788) 13,766 6,560 25,280
Other current assets (3,340) (1,441) (1,454) 6,277
Accounts payable and
accrued liabilities 16,555 2,083 25,725 (43,323)
Income taxes payable/
receivable 237 (305) 1,156 (4,495)
-------------------------------------------------------------------------
(14,116) 8,273 15,212 30,078
-------------------------------------------------------------------------
Cash flows (used in)/ from
financing activities
Decrease in bank operating
loan/revolving term bank
loan 14,094 (3,941) (12,455) (13,621)
Issuance of capital stock-
Stock options exercised 92 - 111 248
Settlement of share unit
plan obligations - - (178) -
Purchase of capital stock
through normal course
issuer bid (56) (465) (374) (2,727)
Purchase of capital stock
in trust for Share Unit
Plans (347) - (1,229) (394)
-------------------------------------------------------------------------
13,783 (4,406) (14,125) (16,494)
-------------------------------------------------------------------------
Cash flows used in investing
activities
Purchase of property and
equipment (629) (706) (1,099) (2,298)
Business acquisition (note 2) - (3,161) 12 (11,286)
-------------------------------------------------------------------------
(629) (3,867) (1,087) (13,584)
-------------------------------------------------------------------------
Change in cash and cash
equivalents during the
period (962) - - -
Cash and cash equivalents at
the beginning of the period 962 - - -
-------------------------------------------------------------------------
Cash and cash equivalents at
the end of the period - - - -
-------------------------------------------------------------------------
Cash paid during the period for:
Interest 146 322 393 670
Income taxes 717 450 957 7,230
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements.
CE Franklin Ltd.
Interim Consolidated Statements of Changes in Shareholders' Equity -
Unaudited
-------------------------------------------------------------------------
Capital Stock
(in thousands ---------------------- Share-
of Canadian Number of Contributed Retained holders'
dollars Shares $ Surplus Earnings Equity
-------------------------------------------------------------------------
Opening balance
12/31/2008 18,094 22,498 18,835 97,990 139,323
Normal Course
Issuer Bid
(Note 4(a)) (532) (693) - (2,053) (2,746)
Stock Based
Compensation
(Note 4(a) and
(b)) - - 1,270 - 1,270
Stock options
excercised
(Note 4 (a)) 57 248 (86) - 162
Modification of
Stock option
plan (Note 4(a)) - - (1,329) - (1,329)
Purchase of shares
in trust for Share
Unit Plan
(Note 4(c)) (75) (394) - - (394)
Shares issued from
Share Unit Plan
(Note 4 (b)) 64 1,167 (1,167) - -
Net income - - - 6,838 6,838
-------------------------------------------------------------------------
Closing balance
9/30/09 17,608 22,826 17,523 102,775 143,124
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Opening balance
12/31/2009 17,581 23,284 17,184 102,159 142,627
Normal Course
Issuer Bid
(Note 4 (a)) (58) (76) - (298) (374)
Stock Based
Compensation
(Note 4(a) and
(b)) - - 1,485 - 1,485
Modification of
Stock option plan
(Note 4(a)) - - 103 - 103
Purchase of
shares in trust
for Share Unit
Plan (Note 4(c)) (179) (1,229) - - (1,229)
Shares issued from
Share Unit Plan
(Note 4) 67 464 (464) - -
Options exercised
from treasury
(Note 4(a)) 33 259 (100) - 159
Directors Share
Unit Plan exercise
(Note 4(b)) - 73 (251) - (178)
Net income - - - 4,272 4,272
-------------------------------------------------------------------------
Closing balance
09/30/10 17,444 22,775 17,957 106,133 146,865
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements.
Notes to Interim Consolidated Financial Statements -
Unaudited
(tabular amounts in thousands of Canadian dollars, except share
and per share amounts)
Note 1 - Accounting Policies
These interim consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in Canada applied on a
consistent basis with CE Franklin Ltd.'s (the "Company") annual
consolidated financial statements for the year ended December 31, 2009. These interim consolidated
financial statements should be read in conjunction with the annual
consolidated financial statements and the notes thereto for the
year ended December 31, 2009, but do
not include all disclosures required by Generally Accepted
Accounting Principles (GAAP) for annual financial statements.
Recent Canadian GAAP pronouncements include CICA section 1582 -
Business Combinations, CICA section 1601 - Consolidated Financial
Statements and CICA section 1602 - Non- Controlling interests. The
overall objective of the standards issued is to update the
standards pertaining to business combinations and allow convergence
with International Financial Reporting Standards by January 1, 2011. The adoption of these standards
is expected to have no impact on the Company.
These unaudited interim consolidated financial statements
reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the interim
periods presented. All such adjustments are of a normal recurring
nature.
The Company's sales typically peak in the first quarter when oil
and gas drilling activity is at its highest levels. Sales then
seasonally decline through the second and third quarters, rising
again in the fourth quarter when preparation for the next drilling
season commences. Similarly, net working capital levels are
typically at seasonally high levels at the end of the first
quarter, declining in the second and third quarters, and then
rising again in the fourth quarter.
Note 2 - Business Combinations
On June 1st 2009, the Company
acquired the net assets of a western Canadian oilfield equipment
distributor, for total consideration of $11.3 million, after $0.7
million post closing adjustments related principally to
inventory reductions.
Using the purchase method of accounting for acquisitions, the
Company consolidated the assets from the acquisition and allocated
the consideration paid as follows:
Cash consideration paid and payable 11,286
--------
--------
Net assets acquired:
Inventory 10,462
Property, equipment and other 824
--------
11,286
--------
--------
Note 3 - Inventory
Inventories consisting primarily of goods purchased for resale
are valued at the lower of average cost or net realizable value.
Inventory net realizable value reserve expense was recognized in
the three and nine months period ending September 30, 2010 of $105,000 and $315,000 respectively (2009 - $105,000 and $1,050,000 respectively). As at September 30, 2010 and December 31, 2009, the Company had recorded
inventory valuation reserves of $4.9
million and $6.3 million
respectively.
During the three and nine months ended September 30, 2010, inventory valuation reserves
of $0.8 million and $1.7 million respectively were utilized.
Note 4 - Share Data
At September 30, 2010, the Company
had 17.4 million common shares, 1.1 million stock options and 0.6
million share units outstanding.
a) Stock options
Option activity for each of the nine month periods ended
September 30 was as follows:
000's 2010 2009
-------------------------------------------------------------------------
Outstanding at January 1 1,195 1,294
Granted - -
Exercised (73) (57)
Forfeited (26) (37)
-------------------------------------------------------------------------
Outstanding at September 30 1,096 1,200
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable at September 30 824 770
There were no options granted during the three and nine month
periods ended September 30, 2010 and
September 30, 2009.
During the quarter ended September 30,
2009, the Company modified its stock option plan to include
a cash settlement mechanism. As a result, the Company's stock
option obligations are now classified as current obligations
(subject to vesting) based on the positive difference between the
Company's closing stock price at period end and the underlying
option exercise price. As at September 30,
2010, the Company's accrued stock option liability was
$1,748,000. As the stock option
obligations are now recorded as a liability on the Company's
balance sheets, stock options are no longer included in the
calculation of the diluted number of shares outstanding (note
4(e)).
Stock option compensation expense recorded in the three and nine
month period ended September 30, 2010
was $517,000 (2009 - $996,000) and $1,271,000 (2009 - $1,351,000) respectively. Stock option
compensation expense is included in selling, general and
administrative expenses on the Consolidated Statement of
Operations.
b) Share Unit Plans
The Company has Restricted Share Unit ("RSU"), Performance Share
Unit ("PSU") and Deferred Share Unit ("DSU") plans (collectively
the "Share Unit Plans"), whereby RSU's, PSU's and DSU's are granted
entitling the participant, at the Company's option, to receive
either a common share or cash equivalent in exchange for a vested
unit. RSU's and PSU's are granted to the Company's officers and
employees and vest one third per year over the three year period
from the date of grant. DSU's are granted to the independent
members of the Company's Board of Directors ("Board"), vest on the
date of grant, and can only be redeemed when the Director resigns
from the Board. For the PSU plan, the number of units granted is
dependent on the Company meeting certain return on net asset
("RONA") performance thresholds during the year of grant. The
multiplier within the plan ranges from 0% - 200% dependent on
performance. Compensation expense related to the units granted is
recognized over the vesting period based on the fair value of the
units at the date of the grant and is recorded to contributed
surplus. The contributed surplus balance is reduced as the vested
units are settled. Share Unit Plan activity for the nine month
periods ended September 30 was as
follows:
000's 2010 Total 2009 Total
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RSU PSU DSU RSU PSU DSU
Outstanding at
January 1 223 53 98 374 161 - 70 231
Granted 145 132 29 306 172 161 28 361
Exercised (36) (7) (49) (92) (64) - - (64)
Forfeited (10) (4) 0 (14) (4) (5) - (9)
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Outstanding at
September 30 322 174 78 574 265 156 98 519
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Exercisable at
September 30 75 9 78 162 75 - 98 173
Share Unit Plan compensation expense recorded in the three and
nine month periods ended September 30,
2010, were $349,000 (2009-
$105,000) and $961,000 (2009 -$733,000).
c) The Company's intention is to settle Share Unit Plan
obligations from an independent trust established by the Company to
purchase common shares of the Company on the open-market. The trust
is considered to be a variable interest entity and is consolidated
in the Company's financial statements with the number and cost of
shares held in trust, reported as a reduction of capital stock.
During the three and nine month periods ended September 30, 2010, 50,000 and 179,300 common
shares were acquired respectively, by the trust (2009 - nil and
75,000) at a cost of $337,500 for the
three month period and $1,218,000 for
the nine month period. (2009 $nil and $394,000)
d) Normal Course Issuer Bid ("NCIB")
On December 23, 2009, the Company
announced the renewal of the NCIB to purchase up to 880,000 common
shares through the facilities of NASDAQ, representing approximately
5% of its outstanding common shares. Shares may be purchased up to
December 31, 2010. As at September 30, 2010, the Company has purchased
57,878 shares (2009 - 75,739) at an average cost of $6.61 per share (2009 - $6.13) for an aggregate cost of $370,000 (2009- $465,000).
e) Reconciliation of weighted average number of diluted common
shares outstanding (in 000's)
The following table summarizes the common shares in calculating
net earnings per share:
Three Months Ended Nine Months Ended
------------------- -------------------
September 30 September 30
2010 2009 2010 2009
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Weighted average common shares
outstanding- basic 17,461 17,647 17,518 17,795
Effect of Stock options (note 4(a)) - -
Effect of Share Unit Plans 322 261 320 241
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Weighted average common shares
outstanding- diluted 17,783 17,908 17,838 18,036
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Note 5 - Income taxes
a) The difference between the income tax provision recorded and
the provision obtained by applying the combined federal and
provincial statutory rates is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2010 % 2009 % 2010 % 2009 %
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Income (loss) before
income taxes 3,121 (456) 6,289 9,306
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Income taxes
calculated at
expected rates 887 28.4 (134) 29.4 1,787 28.4 2,735 29.4
Non-deductible items 25 0.8 31 (6.8) 80 1.3 91 1.0
Share based
compensation 46 1.5 (324) 71.1 159 2.5 (324) (3.5)
Adjustments on filing
returns & other (11) (0.4) (239) 52.4 (8) (0.1) (34) (0.4)
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947 30.3 (666) 146.1 2,017 32.1 2,468 26.5
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As at September 30, 2010, income
taxes payable were $126,000. As at
December 31, 2009, income taxes
receivable of $1,029,000 were
included in Other Assets.
b) Future income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Significant components of future income tax assets
and liabilities are as follows:
September 30 December 31
2010 2009
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Assets
Property and equipment 890 852
Share based compensation 933 856
Other 143 127
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1,966 1,835
Liabilities
Goodwill and other 401 378
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Net future income tax asset 1,565 1,457
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The Company believes it is more likely than not that all future
income tax assets will be realized.
Note 6 - Capital Management
The Company's primary source of capital is its shareholders'
equity and cash flow from operating activities before net changes
in non-cash working capital balances. The Company augments these
capital sources with a $60 million,
revolving term bank credit facility (the "Credit Facility') that is
used to finance its net working capital and general corporate
requirements. The Credit Facility was entered into on July 8, 2010 and matures in July, 2013.
Previously, the Company had a $60
million, 364 day bank operating borrowing facility.
The maximum amount available to borrow under the Credit Facility
is subject to a borrowing base formula applied to accounts
receivable and inventories. Under the terms of the Credit Facility,
the Company must maintain the ratio of its debt to debt-plus-equity
at less than 40% (9% at September 30,
2010) and coverage of net operating free cash flow as
defined in the Credit Facility agreement over interest expense for
the trailing 12 month period of greater than 1.25 times (9.1 times
at September 30, 2010). The Credit
Facility contains certain other covenants, which the Company is in
compliance with. In management's opinion, the Company's available
borrowing capacity under its Credit Facility and ongoing cash flow
from operations, are sufficient to resource its anticipated
contractual commitments.
Note 7 - Financial Instruments and Risk Management
a) Fair Values
The Company's financial instruments recognized on the
consolidated balance sheet consist of cash, accounts receivable,
accounts payable and accrued liabilities, bank operating loan and
long term debt. The fair values of these financial instruments,
excluding long term debt, approximate their carrying amounts due to
their short- term maturity. At September 30,
2010, the fair value of the long term debt approximated its
carrying value due to its floating interest rate nature and short
term maturity. There is no active market for these financial
instruments.
b) Credit Risk
A substantial portion of the Company's accounts receivable
balance is with customers in the oil and gas industry and is
subject to normal industry credit risks. The Company follows a
program of credit evaluations of customers and limits the amount of
credit extended when deemed necessary.
The Company maintains provisions for possible credit losses that
are charged to selling, general and administrative expenses by
performing an analysis of specific accounts. Movement of the
allowance for credit losses for the nine months ended September 30, 2010 and September 30, 2009 was as follows:
As at September 30 2010 2009
-------------------------------------------------------------------------
Opening balance 2,335 2,776
Write-offs (268) (425)
Change in provision for credit losses (275) 310
-------------------------------------------------------------------------
Closing balance 1,792 2,661
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Included in the change in provision for credit losses for the
nine month period ended September 30,
2010 are recoveries of $675,000 for items previously provided for (2009
- nil).
Trade receivables outstanding greater than 90 days were 6% of
total trade receivables as at September 30,
2010 (2009 - 8%).
c) Market Risk
The Company's long term debt bears interest based on floating
rates. As a result the Company is exposed to market risk from
changes in the Canadian prime interest rate which can impact
borrowing costs. The Company purchases certain products in US
dollars and sells such products to its customers typically priced
in Canadian dollars, thus leading to accounts receivable and
accounts payable balances that are subject to foreign exchange
gains and losses upon translation. As a result, fluctuations in the
value of the Canadian dollar relative to the US dollar can result
in foreign exchange gains and losses.
d) Risk Management
From time to time, the Company enters into foreign exchange
forward contracts to manage its foreign exchange market risk by
fixing the value of its liabilities and future purchase
commitments. The Company's foreign exchange risk arises principally
from the settlement of United
States dollar denominated net working capital balances as a
result of product purchases denominated in United States dollars. As at September 30, 2010, the Company had contracted to
purchase US$9.4 million at fixed
exchange rates with terms not exceeding six months. The fair market
values of the contracts were nominal.
Note 8 - Related Party Transactions
Schlumberger Limited ("Schlumberger") owns approximately 55% of
the Company's outstanding shares. The Company is the exclusive
distributor in Canada of down hole
pump production equipment manufactured by Wilson Supply, a division
of Schlumberger. Purchases of such equipment conducted in the
normal course on commercial terms were as follows:
September 30 September 30
2010 2009
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Cost of sales for the three months ended 2,232 1,491
Cost of sales for the nine months ended 5,929 4,773
Inventory 3,323 3,712
Accounts payable and accrued liabilities 953 538
The Company pays facility rental expense to an operations
manager in the capacity of landlord, reflecting market based rates.
For the three and nine month period ended September 30, 2010, these costs totaled
$188,000 and $613,000 (2009: $157,000 and $550,000).
Note 9 - Segmented reporting
The Company distributes oilfield products principally through
its network of 49 branches located in western Canada to oil and gas industry customers.
Accordingly, the Company has determined that it operated through a
single operating segment and geographic jurisdiction.
SOURCE CE Franklin Ltd.
Copyright . 28 PR Newswire