CALGARY, April 27 /PRNewswire-FirstCall/ - CE FRANKLIN
LTD. (TSX: CFT), (NASDAQ: CFK) reported net earnings of $3.4
million or $0.19 per share for the first quarter ended March 31,
2011, an increase of 46% from $0.13 per share earned in the first
quarter ended March 31, 2010.
Financial Highlights
(millions of Cdn. $ except per share
data) |
Three Months
Ended |
|
March 31 |
|
2011 |
|
2010 |
|
Unaudited |
Revenues |
$ 137.7 |
|
$ 121.9 |
|
|
|
|
Gross Profit |
$ 22.3 |
|
$ 19.7 |
Gross Profit - % of sales |
16.2% |
|
16.1% |
|
|
|
|
EBITDA (1) |
$ 5.3 |
|
$ 4.1 |
EBITDA(1)% of
sales |
3.8% |
|
3.4% |
|
|
|
|
Net earnings |
$ 3.4 |
|
$
2.2 |
|
|
|
|
Per share |
|
|
|
|
Basic |
$ 0.19 |
|
$ 0.13 |
|
Diluted |
$ 0.19 |
|
$ 0.12 |
|
|
|
|
Net working capital
(2) |
$ 120.1 |
|
$ 113.9 |
|
|
|
|
Long term debt / Bank
operating loan
(2) |
$
0.3 |
|
$ 1.4 |
"Improved first quarter results reflect
continued improvement in oil and gas industry activity levels and
resulting increased demand for CE Franklin's products. This
momentum is anticipated to continue as the year progresses." said
Michael West, President and CEO.
The March 31, 2011 interim consolidated
financial statements are the Company's first financial statements
prepared under International Financial Reporting Standards
("IFRS"). Consequently the comparative figures for 2010 and the
Company's statement of financial position as at January 1, 2010
have been restated from accounting principles generally accepted in
Canada (Canadian GAAP) to comply with IFRS. The reconciliations
from the previously published Canadian GAAP financial statements
are summarized in Note 3 to the consolidated interim financial
statements, and there were no material differences.
Net earnings for the first quarter of 2011 were
$3.4 million, an increase of $1.2 million from the first quarter of
2010. Revenues were $137.7 million, an increase of $15.8 million
(13%) from the first quarter of 2010. Capital project business
comprised 55% of total revenues (2010 - 50%), and increased $14.5
million (24%) from the prior year period, while well completions
increased 36% for the comparable period. Industry activity
continues to improve and is focused on oil, oil sands and liquid
rich natural gas plays. Gross profits increased by $2.6 million
(13%) due to the increase in revenues year over year. Average gross
profit margins improved sequentially from fourth quarter 2010
levels and were comparable to first quarter 2010 levels, as
increased purchasing levels contributed to higher volume rebate
income. Selling, general and administrative expenses increased by
$1.4 million (9%) to $17.0 million for the quarter as compensation
and operating costs have increased in response to higher revenues
levels. The weighted average number of shares outstanding during
the first quarter decreased by 0.1 million shares (1%) from the
prior year period principally due to shares purchased for
cancellation pursuant to the Company's Normal Course Issuer Bid.
Net income per share (basic) was $0.19 in the first quarter of
2011, a 46% increase from the first quarter 2010.
Business Outlook
Oil and gas industry activity in 2011 is
expected to increase modestly from 2010 levels. Natural gas
prices remain depressed as North American production capacity and
inventory levels continue to dominate demand. Natural gas
capital expenditure activity is focused on the emerging shale gas
plays in north eastern British Columbia and liquids rich gas plays
in north-western Alberta where the Company has a strong market
position. Conventional and heavy oil economics are attractive at
current price levels leading to moderate increases in capital
expenditure activity in eastern Alberta and south east
Saskatchewan. Oil sands project announcements continue to
gain momentum at current oil price levels. Approximately 50% to 60%
of the Company's total revenues are driven by our customers'
capital expenditure requirements. CE Franklin's revenues are
expected to continue to increase modestly in 2011 due to increased
oil and gas industry activity and the expansion of the Company's
product lines.
Gross profit margins are expected to remain
under pressure as customers that produce natural gas focus on
reducing their costs to maintain acceptable project economics and
due to continued aggressive oilfield supply industry competition as
industry activity levels remain below the last five year average.
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.
(1) |
EBITDA represents net earnings 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 revenues 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 depreciation
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. Depreciation expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate revenues. 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 earnings, 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 earnings 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 less cash and
cash equivalents, accounts payable and accrued liabilities, current
taxes payable and other current liabilities, excluding the bank
operating loan. Net working capital and long term debt / bank
operating loan amounts are as at quarter end. |
Additional Information
Additional information relating to CE Franklin,
including its first quarter 2011 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 2011 first
quarter results, which is open to the public, will be held on
Thursday, April 28, 2011 at 11:00 a.m. Eastern Time (9:00a.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 2:00 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 58571660
and may be accessed until midnight Wednesday, May 12, 2011.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3476220 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 45
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 April
27, 2011
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 MD&A should be read in conjunction with the
Company's interim consolidated financial statements for the three
month period ended March 31, 2011 and the MD&A and the
consolidated financial statements for the year ended December 31,
2010. All amounts are expressed in Canadian dollars and in
accordance with International Financial Reporting Standards
("IFRS"), except otherwise noted. The March 31, 2011 interim
consolidated financial statements are the Company's first financial
statements prepared under IFRS. Consequently the comparative
figures for 2010 and the Company's statement of financial position
as at January 1, 2010 have been restated from accounting principles
generally accepted in Canada (Canadian GAAP) to comply with IFRS.
The reconciliations from the previously published Canadian GAAP
financial statements are summarized in Note 3 to the consolidated
interim financial statements, and there were no material
differences. In addition, IFRS1 on first time adoption, allows
certain exemptions from retrospective application of IFRS in the
opening statement of financial position. Where these exemptions
have been used they have also been explained in Note 3 to the
consolidated interim financial statements.
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 45 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 right 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 supply chain 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
("Schlumberger"), a major oilfield service company based in Paris,
France, owns approximately 56% 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-location
needs of large and emerging customers in the energy sector.
Organic growth is expected to be complemented by selected
acquisitions over time.
- 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
will 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.
- Increase the resourcing of customer project sales quotation and
order fulfillment services provided by our Distribution Centre to
augment local branch capacity to address seasonal and project
driven fluctuations in customer demand. By doing so, we aim to
increase our capacity flexibility and improve operating efficiency
while providing consistent service.
Business Outlook
Oil and gas industry activity in 2011 is
expected to increase modestly from 2010 levels. Natural gas
prices remain depressed as North American production capacity and
inventory levels continue to dominate demand. Natural gas
capital expenditure activity is focused on the emerging shale gas
plays in north eastern British Columbia and liquids rich gas plays
in north-western Alberta where the Company has a strong market
position. Conventional and heavy oil economics are attractive
at current price levels leading to moderate increases to capital
expenditure activity in eastern Alberta and south east
Saskatchewan. Oil sands project announcements continue to
gain momentum at current oil price levels. Approximately 50% to 60%
of the Company's total revenues are driven by our customers'
capital expenditure requirements. CE Franklin's revenues are
expected to continue to increase modestly in 2011 due to increased
oil and gas industry activity and the expansion of the Company's
product lines.
Gross profit margins are expected to remain
under pressure as customers that produce natural gas focus on
reducing their costs to maintain acceptable project economics and
due to continued aggressive oilfield supply industry competition as
industry activity levels remain below the last five year average.
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.
First Quarter Operating Results
The following table summarizes CE Franklin's results of
operations:
|
Three Months Ended March 31 |
|
2011 |
|
2010 |
Revenues |
137.7 |
|
100.0% |
|
121.9 |
|
100.0% |
Cost of Sales |
(115.4) |
|
(83.8)% |
|
(102.2) |
|
(83.9)% |
Gross profit |
22.3 |
|
16.2% |
|
19.7 |
|
16.1% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
(17.0) |
|
(12.3)% |
|
(15.6) |
|
(12.8)% |
EBITDA(1) |
5.3 |
|
3.8% |
|
4.1 |
|
3.4% |
Depreciation |
(0.6) |
|
(0.4)% |
|
(0.6) |
|
(0.5)% |
Interest |
(0.1) |
|
(0.1)% |
|
(0.2) |
|
(0.2)% |
Earnings before tax |
4.6 |
|
3.3% |
|
3.3 |
|
2.7% |
Income tax expense |
(1.2) |
|
(0.9)% |
|
(1.1) |
|
(0.9)% |
Net earnings |
3.4 |
|
2.5% |
|
2.2 |
|
1.8% |
|
|
|
|
|
|
|
|
Net earnings per share |
|
|
|
|
|
|
|
Basic |
$0.19 |
|
|
|
$0.13 |
|
|
Diluted |
$0.19 |
|
|
|
$0.12 |
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
(000's) |
|
|
|
|
|
|
|
Basic |
17,488 |
|
|
|
17,576 |
|
|
Diluted |
18,029 |
|
|
|
17,959 |
(1) |
EBITDA represents net earnings 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 revenues 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 depreciation
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. Depreciation expense is a
necessary component of the Company's expenses because the Company
is required to pay cash equipment to generate revenues. 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 earnings, 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 earnings 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. |
First Quarter Results
Net earnings for the first quarter of 2011 was
$3.4 million, an increase of $1.2 million from the first quarter of
2010. Revenues were $137.7 million, an increase of $15.8 million
(13%) from the first quarter of 2010. Capital project business
comprised 55% of total revenues (2010 - 50%), and increased $14.5
million (24%) from the prior year period while well completions
increased 36% for the comparable period. Industry activity
continues to improve and is focused on oil, oil sands and liquid
rich, natural gas plays. Gross profits increased by $2.6 million
(13%) due to the increase in revenues year over year. Average gross
profit margins improved sequentially from fourth quarter 2010
levels and were comparable to first quarter 2010 levels as
increased purchasing levels contributed to higher volume rebate
income. Selling, general and administrative expenses increased by
$1.4 million (9%) to $17.0 million for the quarter as compensation
and operating costs have increased in response to higher revenues
levels. The weighted average number of shares outstanding during
the first quarter decreased by 0.1 million shares (1%) from the
prior year period principally due to shares purchased for
cancellation pursuant to the Company's Normal Course Issuer Bid.
Net income per share (basic) was $0.19 in the first quarter of
2011, a 46% increase from the first quarter 2010.
Revenues
Revenues for the quarter ended March 31, 2011, were $137.7
million, an increase of 13% from the quarter ended March 31, 2010,
as detailed above in the "First Quarter results" discussion.
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 2011 and 2010 first quarters are provided in
the table below.
|
Q1 Average |
|
% |
|
2011 |
|
2010 |
|
change |
Gas - Cdn. $/gj (AECO spot) |
$ 3.76 |
|
$ 4.93 |
|
(24)% |
Oil - Cdn. $/bbl (synthetic
crude) |
$ 99.63 |
|
$ 82.49 |
|
21% |
Average rig count |
532 |
|
425 |
|
25% |
Well completions: |
|
|
|
|
|
|
Oil |
2,201 |
|
1,355 |
|
62% |
|
Gas |
1,660 |
|
1,491 |
|
11% |
Total well completions |
3,861 |
|
2,846 |
|
36% |
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
(in millions of Cdn. $) |
Three months ended March
31 |
|
2011 |
|
2010 |
End use revenue demand |
$ |
|
% |
|
$ |
|
% |
Capital projects |
76.0 |
|
55 |
|
61.5 |
|
50 |
Maintenance, repair and operating supplies |
61.7 |
|
45 |
|
60.4 |
|
50 |
Total Revenues |
137.7 |
|
100 |
|
121.9 |
|
100 |
Note: Capital project end use revenues are
defined by the Company as consisting of the tubular and 80% of
pipe, flanges and fittings; and valves and accessories product
revenues respectively; MRO revenues 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 revenues respectively.
Revenues from capital project related products
were $76.0 million in the first quarter of 2011, an increase of 24%
($14.5 million) from the first quarter of 2010. Total well
completions increased by 36% in the first quarter of 2011 and the
average working rig count increased by 25% compared to the prior
year period. Gas wells comprised 43% of the total wells completed
in western Canada in the first quarter of 2011 compared to 52% in
the first quarter of 2010. Spot gas and oil prices ended the first
quarter at $3.78 per GJ (AECO) and $116.34 per bbl (Synthetic
Crude), consistent with an increase of 17%, respectively, from
first quarter average prices. Depressed gas prices are expected to
continue to negatively impact gas drilling activity over the
remainder of 2011, which in turn is expected to constrain demand
for the Company's products. Natural gas customers continue to
utilize a high level of competitive bid activity to procure the
products they require in an effort to reduce their costs. The
Company is addressing this industry trend by pursuing initiatives
focused on improving revenues quotation processes and increasing
the operating flexibility and efficiency of its branch network.
MRO product revenues are related to overall oil
and gas industry production levels and tend to be more stable than
capital project revenues. MRO product revenues for the quarter
ended March 31, 2011, increased by $1.3 million (2%) to $61.7
million compared to the quarter ended March 31, 2010 and comprised
45% of the Company's total revenues (2010 - 50%). The increase in
revenues reflects the increase in industry activity.
The Company's strategy is to grow profitability
by focusing on its core western Canadian oilfield product
distribution business, complemented by an increase in the product
life cycle services provided to its customers and the focus on the
emerging oil sands capital project and MRO revenues opportunities.
Revenues from these initiatives to date are provided below:
|
|
Q1 2011 |
|
Q1 2010 |
Revenues
($millions) |
$ |
% |
|
$ |
% |
Oilfield |
|
122.6 |
89 |
|
102.9 |
85 |
Oil sands |
|
10.0 |
7 |
|
15.1 |
12 |
Production services |
5.1 |
4 |
|
3.9 |
3 |
Total revenues |
137.7 |
100 |
|
121.9 |
100 |
Revenues from oilfield products to conventional western Canada
oil and gas end use applications were $122.6 million for the first
quarter of 2011, an increase of 19% from the first quarter of 2010.
This increase was driven by the 36% increase in well completions
compared to the prior year period.
Revenues from to oil sands end use applications
were $10.0 million in the first quarter, a decrease of $5.1 million
(34%) compared to $15.1 million in the first quarter of 2010
reflecting the timing of project revenues. The Company continues to
position its major project execution capability and Fort McMurray
branch to penetrate this emerging market for capital project and
MRO products.
Production service revenues were $5.1 million in
the first quarter of 2011, a 31% increase from the $3.9 million of
revenues in the first quarter of 2010, reflecting improved oil
production economics resulting in increased customer maintenance
activities.
Gross Profit
|
Q1
2011 |
|
Q1 2010 |
Gross profit ($ millions) |
$ 22.3 |
|
$ 19.7 |
Gross profit margin as a % of revenues |
16.2% |
|
16.1% |
|
|
|
|
Gross profit composition by product revenue category: |
|
|
|
Tubulars |
6% |
|
2% |
Pipe, flanges and fittings |
26% |
|
28% |
Valves and accessories |
21% |
|
19% |
Pumps, production equipment and services |
15% |
|
17% |
General |
32% |
|
34% |
Total gross profit |
100% |
|
100% |
Gross profit was $22.3 million in the first quarter of 2011, an
increase of $2.6 million (13%) from the first quarter of 2010 due
to increased revenues compared to the prior year period. Gross
profit margins for the quarter improved sequentially from fourth
quarter 2010 levels and were consistent with the prior year period
at 16.2% as increased purchasing levels contributed to higher
volume rebate income. The increase in tubular gross profit
composition was due to higher revenues and margins as industry
activity picked up on a year over year basis and market inventory
surpluses were reduced. Reduced pipe, flange and fittings gross
profit composition in the first quarter of 2011 reflects lower oil
sands revenues compared to the prior year period. Increased valves
and accessories gross profit composition was due to improved gross
profit margins. The decrease in general products gross profit
composition reflects the decrease in MRO end use revenues to 45% of
total revenues in the quarter, compared to 50% in the prior year
period.
Selling, General and Administrative ("SG&A")
Costs
($millions) |
Q1 2011 |
|
Q1 2010 |
|
$ |
|
% |
|
$ |
|
% |
People costs |
10.3 |
|
60 |
|
8.9 |
|
57 |
Facility and office costs |
3.7 |
|
22 |
|
3.4 |
|
21 |
Selling costs |
1.5 |
|
9 |
|
1.8 |
|
12 |
Other |
1.5 |
|
9 |
|
1.5 |
|
10 |
SG&A costs |
17.0 |
|
100 |
|
15.6 |
|
100 |
SG&A costs as % of revenues |
12% |
|
|
|
13% |
SG&A costs increased $1.4 million (9%) in the first quarter
of 2011 from the prior year period and represented 12% of revenues
compared to 13% in the prior year period. The $1.4 million increase
in expenses was attributable to higher people costs reflecting a 4%
increase in employee count, to service the additional sales
volumes, and higher incentive compensation costs reflecting the
improved profit performance of the business year over year.
Depreciation Expense
Depreciation expense of $0.6 million in the
first quarter of 2011 was comparable to the first quarter of
2010.
Interest Expense
Interest expense of $0.1 million in the first
quarter of 2011 was $0.1 million below the first quarter of 2010
due to lower borrowing levels.
Foreign Exchange (Gain) Loss
Foreign exchange gains and losses on United
States dollar denominated product purchases and net working capital
liabilities were nominal in both the first quarters of 2011 and
2010.
Income Tax Expense
The Company's effective tax rate for the first
quarter of 2011 was 26.5%, down from 32.6% in the first quarter of
2010 due to lower statutory tax rates and other adjustments.
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 IFRS. This
information is derived from the Company's unaudited quarterly
financial statements. As noted above the March 31, 2011 interim
consolidated financial statements are the Company's first financial
statements under IFRS. The comparative figures shown in the table
below for 2010 and 2009 have been restated from Canadian GAAP. The
reconciliations from Canadian GAAP to IFRS have been completed and
there were no material differences noted. The conversion from
Canadian GAAP to IFRS is further discussed in Note 3 of the interim
consolidated financial statements.
(in millions of Cdn. $ except per
share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
Q2 |
|
Q3 |
|
Q4 |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
Q1 |
|
2009 |
|
2009 |
|
2009 |
|
2010 |
|
2010 |
|
2010 |
|
2010 |
|
2011 |
Revenues |
$109.1 |
|
$ 94.1 |
|
$ 93.0 |
|
$121.9 |
|
$ 99.9 |
|
$132.2 |
|
$135.6 |
|
$137.7 |
Gross profit |
17.5 |
|
17.4 |
|
15.3 |
|
19.7 |
|
15.6 |
|
19.2 |
|
20.5 |
|
22.3 |
Gross profit % |
16.0% |
|
18.5% |
|
16.5% |
|
16.1% |
|
15.6% |
|
14.5% |
|
15.1% |
|
16.2% |
EBITDA |
1.7 |
|
0.5 |
|
0.6 |
|
4.1 |
|
0.7 |
|
3.8 |
|
3.8 |
|
5.3 |
EBITDA as a % of revenues |
1.6% |
|
0.5% |
|
0.6% |
|
3.4% |
|
0.7% |
|
2.9% |
|
2.8% |
|
3.8% |
Net earnings (loss) |
0.6 |
|
0.2 |
|
(0.5) |
|
2.2 |
|
(0.1) |
|
2.2 |
|
1.6 |
|
3.4 |
Net income (loss) as a % of
revenues |
0.5% |
|
0.2% |
|
(0.5%) |
|
1.8% |
|
(0.1) |
|
1.7% |
|
1.2% |
|
2.5% |
Net earnings (loss) per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$0.04 |
|
$0.01 |
|
($0.03) |
|
$0.13 |
|
($0.01) |
|
$0.12 |
|
$0.09 |
|
$0.19 |
Diluted |
$0.03 |
|
$0.01 |
|
($0.03) |
|
$0.12 |
|
($0.01) |
|
$0.12 |
|
$0.09 |
|
$0.19 |
Net working
capital (1) |
137.0 |
|
131.1 |
|
136.6 |
|
113.9 |
|
111.8 |
|
129.0 |
|
125.7 |
|
120.1 |
Long Term Debt / Bank operating
loan (1) |
25.8 |
|
21.6 |
|
26.8 |
|
1.4 |
|
0.35 |
|
14.4 |
|
6.4 |
|
0.3 |
Total well completions |
1,274 |
|
1,468 |
|
1,576 |
|
2,846 |
|
2,197 |
|
2,611 |
|
4,760 |
|
3,861 |
(1) Net working capital and long term debt / bank
operating lan amouns are as at quarter end.
The Company's revenues 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 revenues activity for the
Company. Revenue 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 revenues 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 less cash and cash equivalents, accounts
payable and accrued liabilities, income taxes payable and other
current liabilities, excluding the bank operating loan) and
borrowing levels follow similar seasonal patterns as revenues.
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 related to operations. Cash
flow from operating activities and the Company's $60.0 million
revolving term credit facility are used to finance the Company's
net working capital, capital expenditures and acquisitions.
As at March 31, 2011, the Company had $3.2
million of cash and cash equivalents and no borrowings under its
revolving term credit facility, a net decrease of $9.4 million from
December 31, 2010. Borrowing levels have decreased due to the
Company generating $4.4 million in cash flow from operating
activities, before net changes in non-cash working capital balances
and a $5.6 million reduction in net working capital. This was
offset by $0.5 million in capital and other expenditures and $0.2
million for the purchase of shares to resource stock compensation
obligations and the repurchase of shares under the Company's Normal
Course Issuer Bid ("NCIB").
As at March 31, 2010, borrowings under the
Company's bank operating loan were $1.1 million, a decrease of
$25.4 million from December 31, 2009. Borrowing levels decreased
due to the Company generating $3.2 million in cash flow from
operating activities before net changes in working capital and a
$22.7 million reduction in net working capital. This was offset by
$0.1 million in capital and other expenditures and $0.4 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 $120.1 million at March
31, 2011, a decrease of $5.6 million from December 31, 2010.
Accounts receivable increased by $0.5 million to $93.5 million at
March 31, 2011 from December 31, 2010 due to the 1% increase in
revenues in the first quarter compared to the fourth quarter of
2010, partially offset by an improvement in Days Sales Outstanding
("DSO"). DSO in the first quarter of 2011 was 54 days compared to
56 days in the fourth quarter of 2010 and 51 days in the first
quarter of 2010. DSO is calculated using average revenues per day
for the quarter compared to the period end accounts receivable
balance. Inventory increased by $5.8 million (6%) at March 31, 2011
from December 31, 2010. Inventory turns for the first quarter of
2011 decreased slightly to 4.6 turns compared to 4.9 turns in the
fourth quarter of 2010 but were comparable to the first quarter of
2010. Inventory turns are calculated using cost of goods sold for
the quarter on an annualized basis compared to the period end
inventory balance. Accounts payable and accrued liabilities
increased by $12.2 million (19%) to $75.6 million at March 31, 2011
from December 31, 2010 due to increased purchasing activity.
Capital expenditures in the first quarter of
2011 were $0.5 million, $0.4 million higher than the prior year
period and were comprised primarily of vehicle and warehouse
equipment replacements.
The Company has a $60.0 million revolving term
credit facility that matures in July 2013 (the "Credit Facility").
The loan facility bears interest based on floating interest rates
and is secured by a general security agreement covering all assets
of the Company. The maximum amount available under the Credit
Facility is subject to a borrowing base formula applied to accounts
receivable and inventories. The Credit Facility requires the
Company to maintain the ration of its debt to debt plus equity at
less than 40%. As at March 31, 2011, this ratio was 0%. The Company
must also maintain coverage of its net operating cash flow as
defined in the Credit Facility agreement over interest expense for
the trailing twelve month period of greater than 1.25 times. As at
March 31, 2011 this ratio was 15.9 times. The Credit Facility
contains certain other covenants with which the Company is in
compliance. As at March 31, 2011 the Company had available undrawn
borrowing capacity of $60.0 million under this Credit facility.
Contractual Obligations
There have been no material changes in
off-balance sheet contractual commitments since December 31,
2010.
Capital Stock
As at March 31, 2011 and 2010, the following
shares and securities convertible into shares were outstanding:
(millions) |
March
31,
2011 Shares |
|
March
31,
2010 Shares |
Shares outstanding |
17.5 |
|
17.6 |
Stock options |
1.0 |
|
1.2 |
Share unit plan obligations |
0.7 |
|
0.6 |
Shares outstanding and issuable |
19.2 |
|
19.4 |
The weighted average number of shares outstanding during the
first quarter of 2011 was 17.5 million, a decrease of 0.1 million
shares from the prior year's first 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 18.0 million, an increase of 0.1 million
shares from the prior year's first 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 month period
ended March 31, 2011, 25,000 common shares were acquired by the
trust at an average cost per share of $8.75 (March 31, 2010 -
36,800 at an average cost per share of $6.77). As at March 31,
2011, the trust held 462,753 shares (March 31, 2010 - 357,463
shares).
On December 21, 2010, the Company announced the
renewal of the NCIB, to purchase up to 850,000 common shares
representing approximately 5% of its outstanding common shares.
Shares may be purchased up to December 31, 2011. As at March 31,
2011 the Company had purchased 3,102 shares at an average cost of
$7.56 per share (March 31, 2010 - 29,498 shares at an average cost
of $6.61 per share).
Critical Accounting Estimates
There have been no material changes to critical
accounting estimates since December 31, 2010. 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
These interim consolidated financial statements
for the period ended March 31, 2011 are the Company's first
financial statements prepared under IFRS. For all accounting
periods prior to this, the Company prepared its financial
statements under Canadian GAAP.
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.
Over the transition period the Company assessed
the differences between Canadian GAAP and IFRS. A risk based
approach was used to identify possibly significant differences
based on possible financial impact and complexity. As described in
Note 3 to the interim consolidated financial statements no material
differences were identified. As such there are no reconciling items
that materially changed the reporting requirements upon the
transition from Canadian GAAP to IFRS. Similarly, no significant
information system changes were required in order to adopt
IFRS.
IFRS 1 allows first time adopters of IFRS to
take advantage of a number of voluntary exemptions from the general
principal of retroactive restatement. In adopting IFRS, the Company
did take advantage of the following voluntary exemptions under IFRS
1.
Property and equipment
The Company has elected to use the historic cost model, as
presently used under Canadian GAAP and acceptable under IFRS.
Therefore the historical cost of Property and Equipment has been
brought forward into the consolidated interim financial statements
for the period ended March 31, 2011. The Company wanted to maintain
as much comparability as possible upon transition given the nature
and magnitude of the Company's property and equipment.
Business Combinations
The Company has not applied IFRS 3, the Business Combinations
standard to acquisitions of subsidiaries that occurred before
January 1, 2010, the Company's transition date to IFRS. As such
there is no retrospective change in accounting for business
combinations. The Company used this exemption to simplify its IFRS
conversion plan and improve comparability between its Canadian GAAP
statements and its IFRS statements.
Borrowing Costs
IAS 23 requires that borrowing costs directly attributable to
the acquisition, construction or production of a qualifying asset
(one that takes a substantial period of time to get ready for use
or sale) be capitalized as part of the cost of that asset. The
option of immediately expensing those borrowing costs has been
removed. The Company has elected to account for such transactions
on a go forward basis, and as such there is no retrospective change
in accounting for borrowing standards. The Company used this
exemption to simplify its IFRS conversion plan and improve
comparability between its Canadian GAAP statements and its IFRS
statements.
Stock Options
The Company has assessed and quantified the difference in
accounting for stock based compensation under IFRS compared to
Canadian GAAP and has deemed the difference to be immaterial. The
Company has elected to not apply IFRS 2 to share based payments
granted and full vested before the Company's date of transition to
IFRS. The Company used this exemption to simplify its IFRS
conversion plan and improve comparability between its Canadian GAAP
statements and its IFRS statements.
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 IFRS 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 three months ended March 31, 2011 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 for year ended December 31, 2010 have occurred that
would materially change the business and market risk 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 2011 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 first quarter 2011 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 STATEMENTS OF
FINANCIAL POSITION - UNAUDITED |
|
|
|
|
|
|
|
|
|
|
|
|
|
As at March 31 |
As at December 31 |
As at January 1 |
(in thousands of Canadian dollars) |
|
2011 |
2010 |
2010 |
Assets |
|
|
|
(Note 2 & 3) |
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash and cash equivalents |
|
3,214 |
- |
- |
|
Accounts receivable (Note 6) |
|
93,510 |
92,950 |
67,443 |
|
Inventories (Note 7) |
|
100,690 |
94,838 |
102,669 |
|
Current tax recoverable |
|
- |
- |
1,029 |
|
Other |
|
1,829 |
1,625 |
3,931 |
|
|
199,243 |
189,413 |
175,072 |
Non-current assets |
|
|
|
|
Property and equipment (Note 8) |
|
9,343 |
9,431 |
10,517 |
Goodwill (Note 9) |
|
20,570 |
20,570 |
20,570 |
Deferred tax assets (Note 10) |
|
1,172 |
1,116 |
1,457 |
Other assets |
|
- |
147 |
339 |
Total Assets |
|
230,328 |
220,677 |
207,955 |
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Accounts payable and accrued
liabilities (Note 11) |
|
75,582 |
63,363 |
38,489 |
|
Current taxes payable |
|
361 |
348 |
- |
|
Bank operating loan (Note 12) |
|
- |
- |
26,549 |
|
|
75,943 |
63,711 |
65,038 |
Non current liabilities |
|
|
|
|
Long term debt (Note 12) |
|
290 |
6,430 |
290 |
Total liabilities |
|
76,233 |
70,141 |
65,328 |
|
|
|
|
|
Commitments and contingencies (Note
14) |
|
|
|
|
CE Franklin
Ltd. |
|
|
|
|
|
|
|
|
INTERIM
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY -
UNAUDITED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of Canadian
dollars and number of shares) |
Capital Stock |
|
|
|
|
|
|
|
Number of
Shares |
$ |
|
Contributed Surplus |
|
Retained Earnings |
|
Shareholders' Equity |
|
|
|
|
|
|
|
|
|
Balance - January 1,
2010 |
17,581 |
23,284 |
|
17,184 |
|
102,159 |
|
142,627 |
Stock based compensation expense
(Note 16 (b) and (c)) |
- |
- |
|
519 |
|
- |
|
519 |
Normal Course Issuer Bid (Note 16
(d)) |
(29) |
(39) |
|
- |
|
(156) |
|
(195) |
Share Units exercised (Note 16
(c)) |
39 |
273 |
|
(273) |
|
- |
|
- |
Purchase of shares in trust for
Share Unit Plans (Note 16 (c)) |
(37) |
(249) |
|
- |
|
- |
|
(249) |
Net earnings |
- |
- |
|
- |
|
2,211 |
|
2,211 |
Balance - March 31,
2010 |
17,554 |
23,269 |
|
17,430 |
|
104,214 |
|
144,913 |
|
|
|
|
|
|
|
|
|
Balance - January 1,
2011 |
17,474 |
23,078 |
|
19,716 |
|
107,742 |
|
150,536 |
Stock based compensation expense
(Note 16 (b) and (c)) |
- |
- |
|
426 |
|
- |
|
426 |
Normal Course Issuer Bid (Note 16
(d)) |
(3) |
(4) |
|
|
|
(19) |
|
(23) |
Stock options exercised (Note 16
(b)) |
51 |
400 |
|
(400) |
|
- |
|
- |
Share Units exercised (Note 16
(c)) |
13 |
77 |
|
(77) |
|
- |
|
- |
Purchase of shares in trust for
Share Unit Plans (Note 16 (c)) |
(25) |
(219) |
|
- |
|
- |
|
(219) |
Net earnings |
- |
- |
|
- |
|
3,375 |
|
3,375 |
Balance - March 31,
2011 |
17,510 |
23,332 |
|
19,665 |
|
111,098 |
|
154,095 |
|
|
|
|
|
|
|
|
|
See accompanying notes
to these interim consolidated financial statements
|
|
|
|
CE Franklin
Ltd. |
|
|
|
INTERIM
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME -
UNAUDITED |
|
|
|
|
|
|
|
|
|
|
Three
months ended |
|
|
|
|
|
|
March 31 |
March 31 |
(in
thousands of Canadian dollars except shares and per
share amounts) |
|
2011 |
2010 |
|
|
|
|
Revenue |
|
137,701 |
121,879 |
Cost of
sales |
|
115,424 |
102,219 |
Gross
profit |
|
22,277 |
19,660 |
|
|
|
|
Other
Expenses |
|
|
|
|
Selling, general and adminstrative
expenses (Note 19) |
|
16,980 |
15,600 |
|
Depreciation |
|
602 |
617 |
|
|
17,582 |
16,217 |
|
|
|
|
Operating
profit |
|
4,695 |
3,443 |
|
Foreign exchange loss and
other |
|
10 |
(76) |
|
Interest expense |
|
94 |
240 |
Earnings before
tax |
|
4,591 |
3,279 |
|
|
|
|
Income tax
expense/(recovery) (note 10) |
|
|
|
|
Current |
|
1,360 |
1,015 |
|
Deferred |
|
(144) |
53 |
|
|
1,216 |
1,068 |
|
|
|
|
Net earnings
and comprehensive income |
|
3,375 |
2,211 |
|
|
|
|
Earnings per
share (note 17) |
|
|
|
|
Basic |
|
0.19 |
0.13 |
|
Diluted |
|
0.19 |
0.12 |
|
|
|
|
Weighted average
number of shares outstanding (000's) |
|
|
|
|
Basic |
|
17,488 |
17,576 |
|
Diluted (note 17) |
|
18,052 |
17,959 |
|
|
|
|
See accompanying notes
to these interim consolidated financial statements |
|
CE Franklin Ltd. |
|
|
|
INTERIM CONSOLIDATED STATEMENTS OF CASHFLOWS
- UNAUDITED |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended |
|
|
March 31 |
(in thousands of Canadian dollars) |
|
2011 |
2010 |
|
|
|
|
Cash flows from operating activities |
|
|
|
|
Net earnings |
|
3,375 |
2,211 |
|
|
Items not affecting cash: |
|
|
|
|
|
Amortization |
|
602 |
617 |
|
|
Deferred Income taxes |
|
(144) |
53 |
|
|
Foreign exchange and other |
|
90 |
- |
|
|
Stock based compensation expense |
|
466 |
374 |
|
|
4,389 |
3,255 |
Net change in non-cash working capital
balances |
|
|
|
related to operations: |
|
|
|
|
Accounts receivable |
|
(678) |
(7,407) |
|
Inventories |
|
(5,853) |
12,790 |
|
Other current assets |
|
(79) |
2,617 |
|
Accounts payable and accrued liabilities |
|
12,208 |
13,781 |
|
Current taxes payable |
|
101 |
1,010 |
|
|
10,088 |
26,046 |
|
|
|
|
Cash flows (used in)/from investing
activities |
|
|
|
|
Purchase of property and
equipment |
|
(492) |
(131) |
|
|
(492) |
(131) |
|
|
|
|
Cash flows (used in)/ from financing
activities |
|
|
|
|
Increase/(decrease) from revolving
term bank loan |
|
(6,140) |
(25,471) |
|
Purchase of capital stock through
normal course issuer bid |
|
(23) |
(195) |
|
Purchase of capital stock in trust for
Share Unit Plans |
|
(219) |
(249) |
|
|
(6,382) |
(25,915) |
|
|
|
|
|
|
|
|
Change in cash and cash equivalents during the
period |
|
3,214 |
- |
|
|
|
|
Cash and cash equivalents begining of the
period |
|
- |
- |
|
|
|
|
Cash and cash equivalents end of the
period |
|
3,214 |
- |
|
|
|
|
Cash paid during the period for: |
|
|
|
|
Interest |
|
94 |
240 |
|
Income taxes |
|
1,260 |
- |
|
|
|
|
See accompanying notes to these interim
consolidated financial statements |
|
|
CE Franklin
Ltd.
Notes to Interim Consolidated Financial Statements -
Unaudited
(Tabular amount in thousands of Canadian
dollars, except share and per share amounts)
1. General information
CE Franklin Ltd. (the "Company") is
headquartered and domiciled in Calgary, Canada. The Company is a
subsidiary of Schlumberger Limited, a global energy services
company. The address of the Company's registered office is 1900,
300 5th Ave SW, Calgary, Alberta, Canada and it is incorporated
under the Alberta Business Corporations Act. The Company is a
distributor of pipe, valves, flanges, fittings, production
equipment, tubular products and other general industrial supplies
primarily to the oil and gas industry through its 45 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.
2. Accounting policies
Generally accepted accounting
principles
The interim consolidated financial statements of
the Company have been prepared in accordance with International
Accounting Standards ("IAS") 34 - Interim Financial Reporting and
International Financial Reporting Standards ("IFRS") 1 - First-
time Adoption of IFRS, as they form part of the period covered by
the Company's first IFRS financial statements for the year ending
December 31, 2011. They are also in compliance with all IFRSs and
IFRICs (International Financial Reporting Interpretations
Committee) issued and effective or issued and early adopted as at
the time of preparing these financial statements.
The March 31, 2011 interim consolidated
financial statements are the Company's first financial statements
prepared under IFRS. Consequently the comparative figures for 2010
and the Company's statement of financial position as at January 1,
2010 have been restated from accounting principles generally
accepted in Canada (Canadian GAAP) to comply with IFRS. The
reconciliations to IFRS from the previously published Canadian GAAP
financial statements are summarized in Note 3, and there are no
material differences. In addition, IFRS 1 on first time adoption
allows certain exemptions from retrospective application of IFRS in
the opening statement of financial position. Where these have been
used they are explained in Note 3.
The policies applied in these interim
consolidated statements are based on IFRS issued and outstanding as
at April 27, 2011, the date the Board of Directors approved these
financial statements. Any subsequent changes to IFRS, that are
given effect in the Company's annual consolidated financial
statements for the year ended December 31, 2011 could result in
restatement of these interim consolidated financial statements,
including the transitional adjustments recognized on change over to
IFRS.
Basis of presentation
The interim consolidated financial statements
have been prepared under the historical cost convention, except for
the revaluation of certain financial assets and liabilities to
estimated fair value. The interim consolidated financial statements
have also been prepared on the basis that the Company will continue
to operate as a going concern, which contemplates the realization
of assets and the settlement of liabilities and commitments in the
normal course of business. The interim consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. Subsidiaries are entities controlled by the Company
including special purpose entities. All significant transactions
and balances between the Company and its subsidiaries have been
eliminated on consolidation. The interim consolidated financial
statements should be read in conjunction with the Company's
Canadian GAAP annual financial statements for the year ended
December 31, 2010.
Foreign currency translation
The interim consolidated financial statements
are presented in Canadian dollars, which is the Company's and its
subsidiaries functional and presentation currency. Monetary assets
and liabilities are translated into Canadian dollars at period-end
exchange rates and gains or losses from translation are recognized
in the Consolidated Statements of Earnings. Revenues and
expenses are translated at the exchange rate prevailing on the date
the transaction occurs.
Financial instruments
The Company initially measures financial
instruments at estimated fair value. The Company's loans and
receivables are comprised of cash and cash equivalents, trade
receivables and are included in current assets due to their
short-term nature. Financial liabilities are categorized as "other
financial liabilities" consisting of accounts payable and accrued
liabilities, bank operating loan, and long term debt.
Loans and receivables
Loans and receivables are non-derivative
financial assets with fixed or determinable payments that are not
quoted in an active market and with no intention of trading. They
are included in current assets, except for maturities greater than
12 months after the statement of financial position date, which are
classified as non-current assets. Loans and receivables are
recognized at the amount expected to be received less, any discount
or rebate to reduce the loan and receivables to estimated fair
value. Loans and receivables are subsequently measured at amortized
cost using the effective interest method. Loans and receivables are
included in accounts receivable and other current assets on the
statement of financial position.
Other financial liabilities
Other financial liabilities are financial
liabilities that are not quoted on an active market and with no
intention of being traded. They are included in current
liabilities, except for the long term debt as it has a maturity
greater than 12 months after the statement of financial position
date and is classified as a non-current liability. Financial
liabilities include accounts payable and accrued liabilities, bank
operating loan and long-term debt. Accounts payable are initially
recognized at the amount required to be paid less any discount or
rebates to reduce the payables to estimated fair value. Accounts
payable are subsequently measured at amortized cost using the
effective interest method. Bank debt and long-term debt are
recognized initially at fair value, net of any transaction costs
incurred, and subsequently at amortized cost using the effective
interest method.
Derivative instruments
In the normal course of business, the Company
enters into foreign currency forward exchange contracts with
financial institutions to fix the value of liabilities or future
commitments. These foreign currency exchange contracts are
not designated as hedges for accounting purposes. These
derivatives are initially recognized at the estimated fair value at
the date the derivative contract is entered into and are
subsequently remeasured to their estimated fair value at the end of
each reporting period. The resulting gain or loss is recognized in
profit or loss immediately.
Cash and cash equivalents
Cash and cash equivalents consist of cash on
hand and investments in highly liquid instruments with maturities
of 90 days or less on the date acquired.
Inventories
Inventories, consisting primarily of goods
purchased and held for resale, are valued at the lower of cost or
net realizable value. Cost is determined using the weighted average
cost method, and includes the cost of goods purchased for resale
including import and customs duties, freight and other attributable
costs, less trade discounts and rebates. Net realizable value is
the estimated selling price less applicable selling expenses. When
the weighted average cost of the inventories exceeds the net
realizable value, inventory is written down to the net realizable
value and is subsequently written back up to the original cost if
the net realizable value exceeds the book value. All write downs
and reversals are charged to cost of sales.
Property and equipment
Property and equipment are recorded at cost less
related accumulated depreciation. Cost is determined as the
expenditure directly attributable to the asset at acquisition, only
when it is probable that future economic benefits will flow to the
Company and the cost can be reliably measured. When an asset is
disposed of, its carrying cost is derecognized. All repairs and
maintenance costs are charged to the earnings statement during the
financial period in which they are incurred.
The Company provides for depreciation of
property and equipment on a straight line basis using the following
rates:
Buildings |
5% to 10% |
|
Leasehold improvements |
over the term of the lease |
|
Computer equipment and software |
15% to 33% |
|
Equipment and machinery |
10% to 100% |
|
Furniture and office equipment |
15% to 20% |
|
Automotive equipment |
30% |
|
The Company allocates the amount initially
recognized in respect of an item of property and equipment to its
significant components and depreciates separately each such
component, where applicable. The estimated residual value and
useful lives of property and equipment are reviewed at the end of
each reporting period and adjusted if required.
Gains and losses on disposals of property and
equipment are determined by comparing the proceeds with the
carrying amount of the asset and are included as part of other
gains and losses in the consolidated statement of earnings and
comprehensive income.
Leased assets
Assets held under finance leases, which are
leases where substantially all the risks and rewards of ownership
of the asset have transferred to the Company, are capitalized on
the statement of financial position and amortized by the
straight-line method over the term of the lease or the estimated
useful life of the assets; whichever is shorter.
Leases where the lessor retains substantially
all the risks and rewards of ownership are classified as operating
leases. The cost of operating leases (net of any incentives
received from the lessor) is charged to the earnings statement on a
straight-line basis over the periods of the leases.
Impairment of assets
Financial assets
Impairment losses on financial assets carried at
amortized cost are reversed in subsequent periods if the amount of
the loss decreases and the decrease can be related objectively to
an event occurring after the impairment was recognized.
Non-financial and intangible assets
The carrying amounts of the Company's property
and equipment and intangible assets having a finite useful life are
assessed for impairment indicators on at least an annual basis to
determine whether there is any indication that these assets have
suffered an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated in order to determine
the extent of the impairment loss, if any.
An impairment loss is recognized for the amount
by which the assets carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset's or group of
assets estimated fair value less costs to sell and its value in
use. For the purposes of assessing impairment, assets are grouped
at the lowest levels for which there are separately identifiable
independent cash inflows (a cash generating unit ("CGU")).
Where an impairment loss subsequently reverses,
the carrying amount of the asset (or CGU) is increased to the
revised estimate of its recoverable amount, but limited to the
carrying that would have been determined had no impairment loss
been recognized for the asset (or CGU) in prior years. A reversal
of an impairment loss is recognized immediately in profit or
loss.
Assets that have an indefinite useful life and
goodwill are not subject to depreciation and are tested for
impairment on an annual basis and when there is an indication of
potential impairment.
Goodwill
Goodwill represents the excess of the cost over
the estimated fair value of net assets acquired related to an
acquisition. Goodwill is not amortized, as it has an
indefinite useful life, but is instead evaluated annually for
impairment, or when events and circumstances indicate that there
might be impairment, as the carrying amount may not be
recoverable.
Goodwill acquired through a business combination
is allocated to each CGU, or group of CGU's, that are expected to
benefit from the business combination. Each of these CGU's
represents the lowest level within the Company which the associated
goodwill is monitored for management purposes.
Goodwill impairment cannot subsequently be
reversed once an impairment has been recognized.
Provisions
Provisions are recognized when the Company has a
present legal or constructive obligation as a result of a past
obligating event and it is more likely than not that an outflow of
resources will be required to settle the obligation and the amount
can be reliably estimated.
These provisions are measured at the present
value of management's best estimate of the expenditure required to
settle the obligation as at March 31, 2011. The discount rate used
to determine the present value reflects current market assessments
of the time value of money. The company performs evaluations to
identify onerous contracts and, where applicable, records
provisions for such contracts.
Borrowing costs
Borrowing costs are recognized as interest
expense in the consolidated statement of earnings and comprehensive
income in the period in which they are incurred. Borrowing costs
attributable to the acquisition, construction or production of
qualifying assets are added to the cost of those assets, until such
time the assets are substantially ready for their intended use. The
Company does not have any qualifying assets.
Group Registered Retirement Savings
Plan
Contributions to the Company's registered
retirement savings plans are charged to the consolidated statement
of earnings and comprehensive income as incurred.
Capital stock
The Company has one class of shares, ordinary
shares, which are classified as equity. These are recorded at the
proceeds received less any direct issue costs and related
taxes.
Where the Company purchases any of the Company's
equity share capital, the consideration paid is deducted from
equity attributable to the Company's equity holders until shares
are cancelled, reissued or disposed of.
Stock options
The Company operates a stock option plan that is
described in Note 16(b). Prior to the fourth quarter of 2010,
the Company's stock option plan included a cash settlement
mechanism. As a result, the Company's stock option obligations were
classified as current obligations (subject to vesting) on the
consolidated statement of financial position and were revalued
using the Black Scholes model at each period end. The offset to the
generation of the current liability was contributed surplus, up to
the cumulative expensed Black Scholes valuation for those
options.
During the fourth quarter of 2010, the Company
modified its stock option plan to remove the cash settlement
mechanism. As a result, the Company now recognizes compensation
expense based on the fair value of the options on the modification
date or the grant date for new options, which is determined by
using the Black-Scholes option pricing model. The fair value of the
options is recognized over the vesting period of the options
granted as compensation expense and an increase of contributed
surplus. The amount initially recorded for the options in
contributed surplus is reduced as options are exercised and is
credited to capital stock.
Other stock-based compensation
Restricted share units ("RSU"), Performance
share units ("PSU") and Deferred share units ("DSU"), collectively
the "Share Unit Plans", are granted to specific employees and
directors, which entitle the participant, at the Company's option,
to receive either a common share or cash equivalent in exchange for
a vested unit. The vesting period for RSU's and PSU's is one
third per year over the three year period from the grant date.
DSU's vest on the date of grant. Compensation expense related to
the units granted is recognized over the vesting period based on
the fair value of the units, calculated using a 10 day weighted
average stock trading price, at the date of the grant and is
recorded to contributed surplus. The contributed surplus
balance is reduced as the vested units are settled.
Revenue recognition
The Company's revenue, which is comprised
principally of product sales, is generally subject to contractual
arrangements, which specify price and general terms and
conditions. The Company recognizes product sales when the
risks and rewards of ownership of goods have been transferred to
the customer and it is probable that the economic benefits
associated with the transaction will flow to the Company. The
Company also considers if it has retained any material involvement
in the items being sold and if the revenue and costs related to the
sale can be measured reliably.
Revenue from services is recognized on a
percentage of completion basis.
Volume discounts are assessed and recorded as a
reduction in revenue based on anticipated applicable annual
revenues. The Company does not have any material multiple element
revenue arrangements.
Cost of sales
Cost of sales includes purchased goods and the
cost of bringing inventory to its present location and condition.
Where the Company assembles products, labour and overheads directly
attributable to assembly and services are included in cost of
sales.
Vendor rebates
The Company enters into arrangements with
certain vendors providing for inventory purchase rebates. These
purchase rebates are accrued as a reduction in inventory and a
corresponding reduction in cost of sales when the underlying
inventory is sold.
Income taxes
Current income tax represents the expected
income tax payable (or recoverable) on taxable income for the
period using income tax rates enacted or substantially enacted at
the end of the reporting period and taking into account any
adjustments arising from prior years.
The Company uses the liability method of
accounting for income taxes under which deferred tax assets and
liabilities are recognized when there are differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using substantively enacted or enacted tax
rates in effect in the period in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as
part of the provision for income taxes in the period that includes
the enactment date. Deferred tax assets are recognized to the
extent that it is probable that the assets can be recovered.
Deferred income tax assets and liabilities are
presented as non-current on the consolidated statement of financial
position.
Tax on income in interim periods is accrued
using the tax rate that would be applicable to expected total
annual earnings. All items recognized directly in shareholders'
equity are recognized net of tax.
Earnings per share
Earnings per share are computed based on the
weighted average basic number of shares outstanding for the period.
Diluted earnings per share have been calculated using the treasury
stock method, as if RSU's, PSU's, DSU's and stock options were
exercised at the beginning of the year and funds received were used
to purchase the Company's common shares on the open market at the
average price for the year.
Business combinations
The acquisition method of accounting is used to
account for the acquisition of subsidiaries by the Company.
The cost of acquisition is measured as the fair
value of the assets given, equity instruments issued and debt
incurred or assumed at the acquisition date. Costs directly
attributable to the acquisition are expensed in the period
incurred. The fair value of the assets and liabilities is
determined and compared to the fair value of the consideration
paid. If the fair value of consideration paid exceeds the fair
value of the net assets, then goodwill is recognized. If the fair
value of the consideration paid is less than the estimated fair
value of the net assets acquired, the difference is recognized
directly in the statements of earnings and comprehensive
income.
3. Explanation of transition to IFRS
The Company does not have any material
differences between IFRS and Canadian GAAP. As such there are no
reconciling items that would materially change the reporting
requirements under Canadian GAAP to IFRS.
These interim consolidated financial statements
for the period ended March 31, 2011 are the Company's first
financial statements prepared under IFRS. For all accounting
periods prior to this, the Company prepared its financial
statements under Canadian GAAP.
IFRS 1 allows first time adopters to IFRS to
take advantage of a number of voluntary exemptions from the general
principal of retrospective restatement. The Company has taken the
following exemptions:
Property and equipment
The Company has continued to use the historic
cost model, as was used under Canadian GAAP and acceptable under
IFRS. Therefore the historical cost of Property and Equipment has
been brought forward into these financial statements, as was
previously recorded under Canadian GAAP.
IFRS 2 Share based payments
The Company has elected to not apply IFRS 2 to
share based payments granted and fully vested before the Company's
date of transition to IFRS. The Company has assessed and quantified
the difference in accounting for stock based compensation under
IFRS compared to Canadian GAAP and has deemed the difference to be
immaterial.
IFRS 3 Business combinations
This standard has not been applied to
acquisitions of subsidiaries that occurred before January 1, 2010,
the Company's transition date to IFRS. As such, there is no
retrospective change in accounting for business combinations.
IAS 23 Borrowing costs
Borrowing costs requires an entity to capitalize
borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset (one that takes a
substantial period of time to get ready for use or sale) as part of
the cost of that asset. The option of immediately expensing those
borrowing costs has been removed. The Company has elected to
account for such transactions on a go forward basis. As such there
is no retrospective change in accounting for borrowing costs.
4. Accounting standards issued but not yet applied
IFRS 9 - Financial instruments and
measurement
International Financial Reporting Standard 9, Financial
Instruments ("IFRS 9"), was issued in November 2009 and contained
requirements for financial assets. This standard addresses
classification and measurement of financial assets and replaces the
multiple category and measurement models in IAS 39 for debt
instruments with a new mixed measurement model having only two
categories: amortized cost and fair value through profit or loss.
IFRS 9 also replaces the models for measuring equity instruments,
and such instruments are either recognized at fair value through
profit or loss or at fair value through other comprehensive income.
Where such equity instruments are measured at fair value through
other comprehensive income, dividends are recognized in profit or
loss to the extent not clearly representing a return of investment,
are recognized in profit or loss; however, other gains and losses
(including impairments) associated with such instruments remain in
accumulated comprehensive income indefinitely.
Requirements for financial liabilities were added in October
2010 and they largely carried forward existing requirements in IAS
39, Financial Instruments - Recognition and
Measurement, except that fair value changes due to credit risk
for liabilities designated at fair value through profit and loss
would generally be recorded in other comprehensive income.
This standard is required to be applied for accounting periods
beginning on or after January 1, 2013, with earlier adoption
permitted. The Company has not yet assessed the impact of the
standard or determined whether it will adopt the standard
early.
5. Critical accounting estimates and judgments
The preparation of the consolidated financial
statements in accordance with IFRS requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting periods. Although these estimates are based on
management's best knowledge of the amount, events or actions,
actual results ultimately may differ from those estimates.
Management believes the most significant
estimates and assumptions are associated with the valuation of
accounts receivable, inventories, vendor rebates, deferred tax
assets and liabilities, stock based compensation expense and
goodwill. If the underlying estimates and assumptions, upon
which the consolidated financial statements are based, change in
future periods, actual amounts may differ from those included in
the accompanying consolidated financial statements.
Allowance for credit losses
The Company maintains an allowance for credit
losses to provide for receivables which may ultimately be
uncollectible. Reserves are determined in light of a number
of factors including customer specific conditions, economic events
and the Company's historical loss experience. The allowance
is assessed quarterly by a detailed formal review of customer
balances. See note 6.
Inventories
The Company evaluates its inventory to ensure it
is carried at the lower of average cost or net realizable value.
Allowances are made against slow moving, obsolete and damaged
inventories and charged to cost of sales. These allowances are
assessed quarterly for adequacy. The reversal of any write down of
inventory arising from an increase in net realizable value shall be
recognized as a reduction in cost of sales in the period in which
the reversal occurred. See note 7.
Stock based compensation
In determining stock based compensation expense,
the Company uses the Black Scholes option pricing model, which
requires a number of assumptions to be made, including the
risk-free interest rate, expected option life and expected share
price volatility. Consequently, the actual stock based compensation
expense may vary from the amount estimated.
Vendor rebates
Vendor rebates consist of volume discount
incentives earned from the purchase of selected products during the
year from specified vendors. These discounts are based on
contractual agreements with the vendors which outline price, volume
and general terms and conditions. Rebates are accrued for each
reporting period with reassessments being performed quarterly. The
Company accrues these rebates as a reduction in inventory and a
corresponding reduction in cost of sales when the underlying
inventory is sold.
Impairment of long-lived assets
The Company evaluates goodwill impairment at a
consolidated level, as it operates through a single CGU. The
impairment evaluation involves comparing the estimated recoverable
amount of the Company's business to its carrying amount. The
recoverable amount is the higher of an asset's fair value less
costs to sell and value in use. Value in use is estimated using
future cash flow projections, discounted to their present value,
expected to arise from the CGU to which the goodwill relates. The
required valuation methodology and underlying financial information
that is used to determine value in use requires significant
judgments to be made by management. These judgments include, but
are not limited to, long term projections of future financial
performance and the selection of appropriate discount rates used to
determine the present value of future cash flow. Changes in such
estimates or the application of alternative assumptions could
produce significantly different results. See Note 9.
Taxation
Deferred tax assets and liabilities are measured
using enacted or substantively enacted tax rates in effect in the
period in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized as part of the
provision for income taxes in the period that includes the
enactment date.
6. Accounts receivable
|
March 31, 2011 |
|
December 31, 2010 |
|
January 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
53,852 |
|
40,014 |
|
32,967 |
Less than 60 days overdue |
29,638 |
|
41,253 |
|
25,766 |
Greater than 60 days overdue |
4,861 |
|
5,519 |
|
6,398 |
Total Trade receivables |
88,351 |
|
86,786 |
|
65,131 |
Allowance for credit losses |
(1,714) |
|
(1,887) |
|
(2,335) |
Net trade receivables |
86,637 |
|
84,899 |
|
62,796 |
Other receivables |
6,873 |
|
8,051 |
|
4,647 |
|
93,510 |
|
92,950 |
|
67,443 |
|
|
|
|
|
|
A substantial portion of the Company's accounts receivable
balance is with customers within the oil and gas industry and is
subject to normal industry credit risks. Concentration of credit
risk in trade receivables is limited as the Company's customer base
is large and diversified. The Company follows a program of credit
evaluations of customers and limits the amount of credit extended
when deemed necessary.
The Company has established procedures in place
to review and collect outstanding receivables. Significant
outstanding and overdue balances are reviewed on a regular basis
and resulting actions are put in place on a timely basis.
Appropriate provisions are made for debts that may be impaired on a
timely basis.
The Company maintains an allowance 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 is as
follows:
7. Inventories
|
|
Three months ended |
|
Year ended |
|
|
March 31,
2011 |
|
December 31,
2010 |
Opening balance |
|
1,887 |
|
2,335 |
Write offs |
|
(239) |
|
(1,385) |
Recoveries |
|
118 |
|
952 |
Change in provision for credit losses |
|
(52) |
|
(15) |
Closing balance |
|
1,714 |
|
1,887 |
The Company maintains net realizable value allowances against
slow moving, obsolete and damaged inventories that are charged to
cost of goods sold on the statement of earnings. These allowances
are included in the inventory value disclosed above. Movement of
the allowance for net realizable value is as follows:
|
Three months
ended
March 31, 2011 |
|
Year ended
December
31, 2010 |
Opening balance as at January 1, |
5,000 |
|
6,300 |
Additions |
300 |
|
900 |
Utilization through (write downs)/recoveries |
(900) |
|
(2,200) |
Closing balance |
4,400 |
|
5,000 |
8. Property and Equipment
COST |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land, Buildings
and leasehold
improvements |
|
Computer
equipment and
software |
|
Equipment and
machinery |
|
Furniture and
fixtures |
|
Automotive
equipment |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance as at January 1,
2011 |
|
11,999 |
|
21,254 |
|
6,535 |
|
3,864 |
|
1,065 |
|
44,717 |
Additions |
|
61 |
|
10 |
|
17 |
|
104 |
|
303 |
|
495 |
Closing balance as at March 31,
2011 |
|
12,060 |
|
21,264 |
|
6,552 |
|
3,968 |
|
1,368 |
|
45,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED AMORTIZATION |
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance as at January 1,
2011 |
|
5,696 |
|
20,348 |
|
5,627 |
|
2,859 |
|
756 |
|
35,286 |
Depreciation expense |
|
188 |
|
155 |
|
79 |
|
106 |
|
55 |
|
583 |
Closing balance as at March 31,
2011 |
|
5,884 |
|
20,503 |
|
5,706 |
|
2,965 |
|
811 |
|
35,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book amount as at March 31,
2011 |
|
6,176 |
|
761 |
|
846 |
|
1,003 |
|
557 |
|
9,343 |
|
|
Land, Buildings and
leasehold
improvements |
|
Computer
equipment and
software |
|
Equipment and
machinery |
|
Furniture and
fixtures |
|
Automotive
equipment |
|
Total |
COST |
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance as at January 1, 2010 |
|
11,624 |
|
20,751 |
|
6,412 |
|
3,822 |
|
838 |
|
43,447 |
Additions |
|
375 |
|
503 |
|
125 |
|
42 |
|
231 |
|
1,276 |
Disposals |
|
- |
|
- |
|
(2) |
|
- |
|
(4) |
|
(6) |
Closing balance as at December 31, 2010 |
|
11,999 |
|
21,254 |
|
6,535 |
|
3,864 |
|
1,065 |
|
44,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED AMORTIZATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance as at January 1, 2010 |
|
4,958 |
|
19,721 |
|
5,350 |
|
2,408 |
|
493 |
|
32,930 |
Depreciation expense |
|
738 |
|
627 |
|
277 |
|
451 |
|
263 |
|
2,356 |
Closing balance as at December 31, 2010 |
|
5,696 |
|
20,348 |
|
5,627 |
|
2,859 |
|
756 |
|
35,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book amount as at December 31, 2010 |
|
6,303 |
|
906 |
|
908 |
|
1,005 |
|
309 |
|
9,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book amount as at January 1, 2010 |
|
6,666 |
|
1,030 |
|
1,062 |
|
1,414 |
|
345 |
|
10,517 |
9. Goodwill
|
March 31, 2011 |
|
December 31, 2010 |
|
January 1, 2010 |
Goodwill |
20,570 |
|
20,570 |
|
20,570 |
All goodwill has arisen from business
combinations. The Company tests goodwill annually for impairment or
more frequently if there are indications that the asset may be
impaired. An impairment test was performed at a CGU level during
the year ended December 31, 2010 and no impairment was
recognized.
The recoverable amount is determined using the
greater of value in use and fair value less cost to sell. The value
in use calculation uses future cash flow projections, discounted to
their present value. Future cash flows are based on various
assumptions and judgments including actual performance of the
business, managements estimates of future performance, indicators
of future oil and gas industry activity levels including commodity
price forecasts, long term growth rates of 5% derived from earnings
and cash flow trading multiples for comparable public energy
service and distribution companies. Present value discount rate
assumptions use an estimate of the Company's pre tax weighted
average cost of capital, based on the average five year historic
volatility of public energy service company share prices and
benchmark interest rates. The pre tax discount rate ranges from 17%
to 20% for the year ended December 31, 2010 (17% to 20% - January
1, 2010). Changes in such estimates or the application of
alternative assumptions could produce significantly different
results. As at December 31, 2010 and January 1, 2010 the estimated
fair value of the Company's business would approximate its carrying
amount if the after tax discount rate were to increase by 1% to 3%,
or the assumed growth rate was reduced by 1% to 3%.
Taxation
The difference between the income tax provision
recorded and the provision obtained by applying the combined
federal and provincial statutory rates is as follows:
For the
three months ended March 31 |
|
2011 |
|
% |
|
2010 |
|
% |
|
Earnings before income
taxes |
|
4,591 |
|
|
|
3,279 |
|
|
|
Income taxes calculated at statutory rates |
|
1,227 |
|
26.7 |
|
930 |
|
28.4 |
|
Non-deductible items |
|
18 |
|
0.4 |
|
27 |
|
0.8 |
|
Share based compensation |
|
12 |
|
0.3 |
|
75 |
|
2.3 |
|
Capital taxes |
|
3 |
|
0.1 |
|
3 |
|
0.1 |
|
Adjustments of filing
returns and other |
|
(44) |
|
(1.0) |
|
33 |
|
1.0 |
|
|
1,216 |
|
26.5 |
|
1,068 |
|
32.6 |
As at March 31, 2011, income taxes payable was $361,000 (March
31, 2010 - $19,000 receivable). Income tax expense is based on
management's best estimate of the weighted average annual income
tax rate expected for the full financial year.
Significant components of deferred tax assets
and liabilities are as follows:
As
at |
|
March 31,
2011 |
|
December 31,
2010 |
|
January 1,
2010 |
Assets |
|
|
|
|
|
|
|
Property and equipment |
|
903 |
|
870 |
|
852 |
|
Stock based compensation expense |
|
487 |
|
487 |
|
856 |
|
Other |
|
178 |
|
156 |
|
127 |
|
|
1,568 |
|
1,513 |
|
1,835 |
Liabilities |
|
|
|
|
|
|
|
Goodwill and other |
|
396 |
|
397 |
|
378 |
Net deferred tax asset |
|
1,172 |
|
1,116 |
|
1,457 |
Deductible temporary differences are recognized to the extent
that it is probable that taxable profit will be available against
which the deductible temporary differences can be utilized.
11. Accounts payable and accrued liabilities
|
|
March 31, 2011 |
|
December 31, 2010 |
|
January 1, 2010 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables |
31,455 |
|
23,966 |
|
16,766 |
|
Other payables |
6,455 |
|
7,057 |
|
9,275 |
|
Accrued compensation expense |
1,315 |
|
2,434 |
|
3,396 |
|
Other accrued liabilities |
36,357 |
|
29,906 |
|
9,052 |
|
|
75,582 |
|
63,363 |
|
38,489 |
12. Long term debt and bank operating loan
|
|
March 31, 2011 |
|
December 31,
2010 |
|
January 1, 2010 |
Bank operating loan |
|
- |
|
- |
|
26,549 |
|
|
|
|
|
|
|
JEN Supply debt |
|
290 |
|
290 |
|
290 |
Bank operating loan |
|
- |
|
6,140 |
|
- |
Long term debt |
|
290 |
|
6,430 |
|
290 |
|
|
|
|
|
|
|
In July of 2010, the Company entered into a $60.0 million
revolving term Credit Facility that matures in July 2013. The
Credit Facility replaced the existing $60.0 million, 364 day bank
operating loan. Borrowings under the Credit Facility bear interest
based on floating interest rates and are secured by a general
security agreement covering all assets of the Company. The maximum
amount available under the Credit Facility is subject to a
borrowing base formula applied to accounts receivable and
inventories. The Credit Facility requires that the Company
maintains the ratio of its debt to debt plus equity at less than
40%. As at March 31, 2011, this ratio was 0% (December 31, 2010 -
4%) The Company must also maintain coverage of its net operating
cash flow as defined in the Credit Facility agreement, over
interest expense for the trailing twelve month period, at greater
than 1.25 times. As at March 31, 2011, this ratio was 15.9 times
(December 31, 2010 - 14.1 times). The Credit Facility
contains certain other covenants, with which the Company is in
compliance and has been for the comparative periods. As at March
31, 2011, the Company had no borrowings and had available undrawn
borrowing capacity of $60.0 million under the Credit Facility. 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 ongoing obligations.
The JEN Supply debt is unsecured and bears
interest at the floating Canadian bank prime rate and is repayable
in 2012.
13. 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 bank
term loan facility maturing in July 2013 (see Note 12) which is
used to finance its net working capital and general corporate
requirements. The Company's objective is to maintain adequate
capital resources to sustain current operations including meeting
seasonal demands of the business and the economic cycle. The
Company's capital is summarised as follows:
|
|
|
|
|
|
|
March 31, 2011 |
|
December 31, 2010 |
|
January 1, 2010 |
Shareholders' equity |
154,094 |
|
150,536 |
|
142,627 |
Long term debt/Bank operating loan |
290 |
|
6,430 |
|
26,839 |
Net working capital |
120,086 |
|
125,702 |
|
136,583 |
Net working capital is defined as current assets less cash
and cash equivalents, accounts payable and accrued liabilities,
income taxes payable and other current liabilities.
14. Commitments and contingencies
a) The following
table outlines the Company's contractual obligations for debt,
lease and related obligations, having initial terms in excess of
one year. Obligations due over the next five years and thereafter
are as follows:
(000's)
Period Due |
|
Long
term debt (Note
12) |
|
Operating lease
commitments (b) |
|
Total |
|
|
|
|
|
|
|
2011 |
|
- |
|
5,112 |
|
5,112 |
2012 |
|
290 |
|
6,452 |
|
6,742 |
2013 |
|
- |
|
5,875 |
|
5,875 |
2014 |
|
- |
|
5,217 |
|
5,217 |
2015 |
|
- |
|
4,456 |
|
4,456 |
thereafter |
|
- |
|
22,233 |
|
22,233 |
|
|
290 |
|
49,345 |
|
49,635 |
b) The Company is involved in
various lawsuits, and has contractual performance and product
warranty obligations, the losses from which, if any, are not
anticipated to be material to the consolidated financial
statements.
15. Related party transactions
Schlumberger owns approximately 56% 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:
For the
quarter ended March 31 |
|
2011 |
|
2010 |
|
|
|
|
|
Cost of sales |
|
2,285 |
|
2,115 |
|
|
|
|
|
Inventory |
|
4,443 |
|
3,511 |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
1,081 |
|
555 |
|
|
|
|
|
Accounts receivable |
|
- |
|
- |
16. Capital Stock
a) The Company has
authorized an unlimited number of common shares with no par value.
At March 31, 2011, the Company had 17.5 million common shares, 1.0
million stock options and 0.7 million share units outstanding.
b) The Board of
Directors may grant options to purchase common shares to
substantially all employees, officers and directors and to persons
or corporations who provide management or consulting services to
the Company. The exercise period and the vesting schedule
after the grant date are not to exceed 10 years.
Option activity was as follows:
|
|
March 31 , 2011 |
|
December
31, 2010 |
|
|
For the three months
ended |
|
For the year ended |
|
|
Number of Options
(000's) |
|
Weighted average exercise
price per share |
|
Number
of Options
(000's) |
|
Weighted average exercise
price per share |
|
|
|
|
|
|
|
|
|
Outstanding - January 1 |
|
1,073 |
|
6.01 |
|
1,195 |
|
5.95 |
Granted |
|
0 |
|
0.00 |
|
0 |
|
0.00 |
Exercised |
|
(51) |
|
3.24 |
|
(86) |
|
4.57 |
Forfeited |
|
(32) |
|
3.52 |
|
(36) |
|
7.68 |
Outstanding - end of period |
|
990 |
|
6.22 |
|
1,073 |
|
6.01 |
Exercisable - end of period |
|
826 |
|
5.90 |
|
897 |
|
5.67 |
A summary of stock options outstanding at March 31, 2011, is set
out below:
|
|
|
|
Outstanding stock options (000's) |
|
Exercisable stock options |
Range of Exercise
price |
|
Number |
|
Weighted average remaining
contractual life |
|
Weighted average
exercise price |
|
Number |
|
Weighted average
exercise price |
$2.70 |
to |
$3.50 |
|
228 |
|
2.00 |
|
3.09 |
|
228 |
|
3.09 |
$4.60 |
to |
$6.50 |
|
567 |
|
4.04 |
|
5.99 |
|
461 |
|
5.89 |
$10.30 |
to |
$10.90 |
|
195 |
|
5.86 |
|
10.56 |
|
137 |
|
10.67 |
|
|
|
|
990 |
|
4.96 |
|
6.22 |
|
826 |
|
5.90 |
Stock option compensation expense recorded for the three month
period ended March 31, 2011 was $67,000 (2010 - $54,000) and is
included in selling, general and administrative expenses on the
Consolidated Statement of Earnings. No options were granted
during the three month period ended March 31, 2011 or the year
ended December 31, 2010. Options vest one third or one fourth per
year from the date of grant.
Prior to the fourth quarter of 2010, the
Company's stock option plan included a cash settlement mechanism.
Stock options were revalued at each period end using the Black
Scholes pricing model, using the following assumptions:
|
|
2010 |
|
Dividend yield |
|
Nil |
|
Risk-free interest rate |
|
3.48% |
|
Expected life |
|
5 years |
|
Expected volatility |
|
63.2% |
|
Note: Expected volatility is based on
historical volatility.
During the fourth quarter of 2010, the Company
discontinued the settlement of stock option obligations with cash
payments in favour of issuing shares from treasury. At the time of
this plan modification, the current liability of $2,075,000 was
transferred to contributed surplus on the Company's statement of
financial position.
c) 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"), where by 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. 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. RSU and PSU grants vest one third per year over the
three year period following the date of the grant. DSU's vest on
the date of grant, and can only be redeemed when the Director
resigns from the Board. 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 exchanged for either common shares
or cash. During the three month period ended March 31, 2011 and
2010, the fair value of the RSU, PSU and DSU units granted was
$1,830,000 (2010 - $1,768,000) and $358,000 of compensation expense
was recorded (2010 - $272,000).
Share Unit Plan activity for the periods ended
March 31, 2011, and December 31, 2010 was as follows:
(000's) |
March 31, 2011 |
|
December 31,
2010 |
|
Number of Units |
|
Number of Units |
|
RSU |
PSU |
DSU |
Total |
|
RSU |
PSU |
DSU |
Total |
Outstanding at January 1 |
273 |
97 |
80 |
450 |
|
223 |
53 |
98 |
374 |
Granted |
116 |
101 |
- |
217 |
|
145 |
132 |
31 |
308 |
Performance adjustment |
- |
- |
- |
- |
|
- |
(77) |
- |
(77) |
Excercised |
(10) |
(3) |
- |
(13) |
|
(82) |
(7) |
(49) |
(138) |
Forfeited |
- |
- |
- |
- |
|
(13) |
(4) |
- |
(17) |
Outstanding at end of period |
379 |
195 |
80 |
654 |
|
273 |
97 |
80 |
450 |
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
117 |
44 |
80 |
241 |
|
30 |
10 |
80 |
120 |
|
|
|
|
|
|
|
|
|
|
The Company has established an independent trust to purchase
common shares of the Company on the open-market to satisfy Share
Unit Plan obligations. The Company's intention is to settle all
share based obligations with shares delivered from the trust. The
trust is considered to be a special interest entity and is
consolidated in the Company's financial statements with the cost of
the shares held in trust reported as a reduction to capital
stock. For the three months ended March 31, 2011, 25,000
common shares were purchased by the trust (2010 - 36,800) at an
average cost of $8.75 per share (2010 - $6.77 per share). As
at March 31, 2011, the trust held 462,753 shares (2010 -
357,463).
On December 21, 2010, the Company announced a
NCIB to purchase for cancellation up to 850,000 common shares
representing approximately 5% of its outstanding common shares.
During the three months ended March 31, 2011, the company purchased
3,102 shares at an average cost of $7.56 (2010: 29,498 shares
purchased at an average cost of $6.61).
17. Earnings per share
Basic
Basic earnings per share is calculated by
dividing the net income attributable to shareholders by the
weighted average number of ordinary shares in issue during the
year.
Dilutive
Diluted earnings per share are calculated using
the treasury stock method, as if RSU's, PSU's, DSU's and stock
options were exercised at the beginning of the year and funds
received were used to purchase the Company's common shares on the
open market at the average price for the year.
As at |
March 31, 2011 |
|
March 31, 2010 |
|
|
|
|
Total Comprehensive income attributable to shareholders |
3,375 |
|
2,211 |
|
|
|
|
Weighted average number of common shares issued (000's) |
17,488 |
|
17,576 |
Adjustments for: |
|
|
|
Stock Options |
255 |
|
156 |
Share Units |
309 |
|
227 |
Weighted average number of ordinary shares for dilutive |
18,052 |
|
17,959 |
|
|
|
|
Net earnings per share: Diluted |
0.19 |
|
0.12 |
|
|
|
|
Net earnings per share: Basic |
0.19 |
|
0.13 |
18. Financial instruments
a) Fair values
The Company's financial instruments recognized
on the consolidated statements of financial position consist of
cash and cash equivalents, 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 March 31, 2011, the fair value of the long term debt
approximated their carrying values due to their floating interest
rate nature and short term maturity. Long term debt is held at cost
and is discounted using the effective interest rate method.
b) Credit Risk is
described in Note 6.
c) Market Risk and
Risk Management
The Company's long term debt bears interest
based on floating interest rates. As a result the Company is
exposed to market risk from changes in the Canadian prime interest
rate which can impact its borrowing costs. Since the Company has no
borrowings as at March 31, 2011, there would be no impact on net
earnings if there was a change in interest rates.
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
commitments. The Company is exposed to possible losses in the event
of non-performance by counterparties. The Company manages this
credit risk by entering into agreements with counterparties that
are substantially all investment grade financial institutions. The
Company's foreign exchange risk arises principally from the
settlement of United States dollar dominated net working capital
balances as a result of product purchases denominated in United
States dollars. As at March 31, 2011, the Company had contracted to
purchase US$7.2 Million at fixed exchange rates with terms not
exceeding six months (December 31, 2010 - $6.5 Million). The fair
market values of the contracts were nominal at March 31, 2011 and
December 31, 2010 respectively. As at March 31, 2011, a one percent
change in the Canadian dollar relative to the US dollar would be
expected to not have a material impact on net earnings.
19. Selling, general and administrative ("SG&A")
Costs
Selling, general and administrative costs for
the three month periods ended March 31 are as follows:
|
|
2011 |
|
2010 |
|
|
$ |
% |
|
$ |
% |
Salaries and Benefits |
|
10,291 |
61% |
|
8,860 |
57% |
Selling costs |
|
1,472 |
9% |
|
1,799 |
12% |
Facility and office costs |
|
3,712 |
22% |
|
3,429 |
22% |
Other |
|
1,505 |
8% |
|
1,512 |
9% |
SG&A costs |
|
16,980 |
100% |
|
15,600 |
100% |
Included in salaries and benefits are the Company's
contributions to employee Registered Retired Savings Plans
("RRSP"). The Company matches employee contributions based on
employee salaries to a maximum of 6% (6% in 2010) and the amount
deductible under the Income Tax Act, to employees RRSP's.
Contributions incurred and paid during the three month period ended
March 31, 2011 were $195,000 (2010 - $163,000).
20. Economic Dependency
For the three months ended March 31, 2011 and
2010, there were no customers that comprised more than 10% of
revenues. In respect to the Company's purchases, 10% of product
purchases in the three month periods ended March 31, 2011 and 2010
were from one supplier.
21. Segmented reporting
The Company distributes oilfield products
principally through its network of 45 branches located in western
Canada primarily to oil and gas industry customers.
Accordingly, the Company has determined that it operated through a
single operating segment and geographic jurisdiction.
22. Seasonality
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. Revenue 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 revenues 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 less accounts payable and accrued
liabilities, income taxes payable and other current liabilities,
excluding the bank operating loan) and bank revolving loan
borrowing levels follow similar seasonal patterns as revenues.
SOURCE CE Franklin Ltd.