CALGARY, Feb. 2, 2012 /PRNewswire/ - CE FRANKLIN LTD.
(TSX.CFT, NASDAQ.CFK) reported net earnings of $4.5 million or $0.26 per share (basic) for the fourth quarter
ended December 31, 2011, a
significant increase from net earnings of $1.6 million or $0.09 per share (basic) generated in the fourth
quarter ended December 31,
2010. For 2011, net income was $14.3 million or $0.82 per share (basic) an increase of 142% from
the $5.9 million or $0.34 per share (basic) earned in 2010.
Financial Highlights
(millions of Cdn. $ except per
share data) |
|
|
|
Three Months Ended |
|
Twelve Months Ended |
|
|
|
|
December 31 |
|
December 31 |
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
Unaudited |
|
Unaudited |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
154.3 |
|
|
135.6 |
|
546.4 |
|
489.6 |
|
Gross Profit |
|
25.3 |
|
|
20.5 |
|
90.7 |
|
75.0 |
|
Gross Profit - % of sales |
|
16.4 |
% |
|
15.1 |
% |
16.6 |
% |
15.3 |
% |
EBITDA
(1) |
|
6.6 |
|
|
3.8 |
|
22.6 |
|
12.5 |
|
EBITDA (1)
- % of sales |
|
4.3 |
% |
|
2.8 |
% |
4.1 |
% |
2.5 |
% |
Net earnings |
|
4.5 |
|
|
1.6 |
|
14.3 |
|
5.9 |
|
Per share |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
0.26 |
|
|
0.09 |
|
0.82 |
|
0.34 |
|
|
Diluted |
|
0.25 |
|
|
0.09 |
|
0.79 |
|
0.33 |
|
Net working capital
(2) |
|
116.9 |
|
|
125.7 |
|
|
|
|
|
Long term debt
/ Bank operating loan (2) |
$ |
- |
|
$ |
6.4 |
|
|
|
|
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"Strong year over year revenue growth, improved
product margins and disciplined cost management led to significant
year over year improvement in the fourth quarter. We will
continue to leverage our strategies into 2012", said Michael West, President and CEO.
The December 31,
2011 condensed interim consolidated financial statements are
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 condensed
interim consolidated financial statements, and there were no
material differences.
Net earnings for the fourth quarter of 2011,
were $4.5 million, an increase of
$2.9 million from the fourth quarter
of 2010. Revenues for the fourth quarter of 2011 were
$154.3 million, an increase of
$18.7 million (14%) from the fourth
quarter of 2010. Well completions decreased 9% compared to
the fourth quarter of 2010 as the fourth quarter of 2010 was a busy
quarter and those activity levels carried into 2011, while the
fourth quarter 2011 slowed down slightly due to lower natural gas
activity. Capital project business revenue grew $6.8 million year over year due to the improved
overall industry activity levels. Gross profits increased by
$4.8 million (23%) due to the
increase in revenues and improved gross profit margins year over
year. Average gross profit margins in the fourth quarter of 2011
were lower than the third quarter of 2011 due to more pipe flange
and fitting sales to lower margin alliance customers. Average gross
profit margins for the fourth quarter of 2011 were higher than the
fourth quarter 2010 as increased purchasing levels contributed to
higher volume rebates. SG&A expenses increased by
$0.8 million (5%) to $17.5 million for the quarter as compensation and
operating costs have increased in response to higher revenue
levels. Fourth quarter earnings for 2010 included a $0.7 million after tax charge associated with the
elimination of the stock option cash settlement mechanism.
The Company also recorded an unrealized foreign exchange loss of
$0.8 million in the quarter on
foreign exchange contracts used to manage currency exposure on US
denominated product purchases, which reversed a previously
recognized unrealized gain on these contracts in the third quarter.
The weighted average number of shares outstanding during the fourth
quarter was consistent with the prior year period as the rise in
share price during the last year limited the activity occurring
under the normal course issuer bid program. Net earnings per share
(basic) was $0.26 in the fourth
quarter of 2011, compared to net earnings of $0.09 per share in the fourth quarter of
2010.
Net income for the year ended December 31, 2011 was $14.3 million, an increase of $8.4 million (142%) compared to 2010, as industry
activity levels improved year over year. Well completions in 2011,
rose by 17% compared to 2010 as the industry was focused on oil,
oil sands and liquid rich natural gas plays. Revenues increased by
12% to $546.4 million, as both
capital project and maintenance repair and operating sales
increased year over year. Gross profits increased by
$15.7 million (21%) due to the impact
of higher sales and increased vendor rebates from increased
purchasing levels. SG&A costs increased by
$6.2 million (9.8%) to 68.7 million
in 2011 as compensation costs and operating costs have increased in
response to higher activity levels. Income tax expense
increased by $1.9 million as a result
of higher pre-tax earnings in 2011. The weighted average number of
shares outstanding (basic) during 2011 was consistent with the
prior year as the rise in the share price during the last year has
limited the activity occurring under the normal course issuer bid
program. Net earnings per share (basic) was $0.82 in 2011, a 141% increase from 2010,
consistent with the increase in net income.
Business Outlook
CE Franklin's revenues are expected to increase
modestly in 2012 as the oil and gas industry activity levels remain
relatively consistent with 2011 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
northeastern British Columbia and
liquid rich gas plays in northwestern Alberta where the Company has a strong market
position. Conventional and heavy oil economics are attractive
at current price levels leading to increased activity in eastern
Alberta and southeast Saskatchewan. We expect oil sands
project announcements will continue at current levels, assuming
current oil price levels are maintained. Approximately 50% to 60%
of the Company's total revenues are driven by our customers'
capital expenditure requirements.
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 should 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 income before interest, taxes,
depreciation and amortization. EBITDA is a supplemental
measure that is not part of generally accepted accounting
principles ("GAAP"). EBITDA is 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 as a percentage of sales because it is used by
management as a supplemental measure 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 sales. Management compensates for these
limitations to the use of EBITDA by using EBITDA as only a
supplementary measure of profitability. EBITDA is not used by
management as an alternative to net income as an indicator of the
Company's operating performance, as an alternative to any other
measure of performance in conformity with generally accepted
accounting principles or as an alternative to cash flow from
operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net income is provided within the table
above. Not all companies calculate EBITDA in the same manner
and EBITDA does not have a standardized meaning prescribed by IFRS.
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, note payable and other current liabilities. Net
working capital and long term debt / bank operating loan amounts
are as at quarter end. |
|
|
The following 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 should be read in conjunction with the
Company's condensed interim consolidated financial statements for
the three and twelve month periods ended December 31, 2011 and the MD&A and the
consolidated financial statements for the three and nine month
periods ended September 30, 2011, for
the three and six month periods ended June
30, 2011 and the three month period ended March 31, 2011 (the Company's first financial
statements under IFRS) and the MD&A and consolidated financial
statements for the year ended December 31,
2010. All amounts are expressed in Canadian dollars and are
in accordance with International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standards
Board ("IASB"), except where otherwise noted. The
December 31, 2011 condensed interim
consolidated financial statements are 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 condensed
interim consolidated financial statements, and there were 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 exemptions
have been used they have also been explained in Note 3 to the
condensed interim consolidated 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 in Canada through its 39
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, midstream, refining,
petrochemical 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
infrastructure enables us to provide our customers with the
products they need on a same day or overnight basis. Our
centralized inventory and procurement capabilities allow us to
leverage our scale to enable industry leading hub and spoke
purchasing, logistics and project execution capabilities. The
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 common 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 Canadian oilfield equipment supply industry
is highly competitive and fragmented. There are approximately
230 oilfield supply stores in Canada which generate annual estimated sales
of $2 billion to $3 billion. CE
Franklin competes with three other large oilfield product
distributors and with numerous local and regional distributors as
well as specialty equipment distributors and manufacturers.
The oilfield equipment market is part of the larger industrial
equipment supply market, which is also serviced by numerous
competitors. The oil sands and niche industrial product
markets are more specialized and solutions oriented and require
more in-depth product knowledge and supplier relationships to
service specific customer requirements.
Oilfield equipment distributors compete based on
price and level of service. Service includes the ability to
consistently provide required products to a customer's operating
site when needed, project management services, product expertise
and support, billing and expenditure management services, and
related equipment services.
Demand for oilfield products and services is
driven by the level of capital expenditures in the oil and gas
industry in the Western Canadian sedimentary basin as well as by
production related maintenance, repair and operating ("MRO")
requirements. MRO demand tends to be relatively stable over
time and predictable in terms of product and service requirements
and typically comprises 40% to 50% of the Company's annual
sales. Capital project demand fluctuates over time with oil
and gas commodity prices, which directly impacts the economic
returns realized by oil and gas companies.
The size, scope, and product mix of each order
will affect profitability. Local walk in relationship
business with smaller orders or more specialized products will
typically generate higher profit margins compared to large project
bids for alliance customers where the Company can take advantage of
volume discounts and longer lead times. Larger oil and gas
customers tend to have a broader geographic operating reach
requiring multi-site service capability, conducting larger capital
projects, and requiring more sophisticated billing and project
management services than do smaller customers. The
Company has entered into a number of formal alliances with larger
customers where the scale and repeat nature of business enables
efficiencies which are shared with the customer through lower
profit margins.
Barriers to entry in the oilfield supply
business are low with start-up operations typically focused on
servicing local relationship based MRO customers. To compete
effectively on capital project business and to service larger
customers requires multi-location branch operations, increased
financial, procurement, product expertise and breadth of product
lines, information systems and process capability.
The Company's 39 branch operations provide
substantial geographic coverage across the oil and gas producing
regions in Western Canada.
Each branch services and competes for local business and services
the Company's alliance customers supported by centralized support
services provided by the Company's Distribution Centre and
corporate office in Calgary. The
Company's large branch network, coupled with its centralized
capabilities enables it to develop strong supply chain
relationships with suppliers and provide it with a competitive
advantage over local independent oilfield and specialty equipment
distributors for large alliance customers who are seeking
multi-location, one stop shopping, and more comprehensive
service. The Company's relationship with Wilson Supply, a
leading oilfield equipment distributor operating in the United States, and a wholly owned
subsidiary of Schlumberger, enables it to provide North American
solutions to its customer base and provides increased purchasing
scale with equipment suppliers.
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 may be complemented by selected acquisitions.
- Expand production equipment service capability to capture more
of the product life cycle requirements for the equipment the
Company sells such as downhole pump repair, oilfield engine
maintenance, well optimization and onsite project management. This
will differentiate the Company's service offering from its
competitors and deepen relationships with its customers.
- Expand oil sands, industrial project and MRO business by
leveraging our existing supply chain infrastructure, product, and
major 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 customer service.
Strategy Accomplishments
- In the spring of 2008, the Company moved into a new 153,000
square foot Distribution Centre and nine acre pipe yard located in
Edmonton, Alberta. The new
Distribution Centre provided a 76% increase in functional
warehousing capacity over our previous facility, increasing our
capability to support and grow sales through our branch
network. The larger facility also enabled us to increase the
Company's central project execution capability and processes, to
service larger projects and ship direct to customers, avoiding
double handling of material by branches.
- In June of 2009, the Company increased its market share,
customer base, and branch network through the acquisition of a
Western Canadian oilfield supply competitor (the "Acquired
Business"). The Acquired Business operated 23 supply stores
of which 18 stores were proximate to existing Company branches and
were integrated. The remaining 5 operations were
focused in the eastern Alberta
heavy oil corridor, and have extended the Company's distribution
network reach. Total oilfield supply sales have increased an
estimated 15% as a result of the acquisition. The Company's
Fort St. John and Lloydminster
branches moved to larger locations during the year, increasing
capacity to service customer requirements in these important
markets. Sales to oil sands customers increased for the fifth
year in a row, reaching a record $64.5
million in 2009, comprising 15% of total Company
sales. The Company added process automation products to its
product line and opened a valve actuation centre at our Edmonton
Distribution Centre to broaden the spectrum of solutions the
Company provides to existing oilfield, oil sands, and other
industrial customers, and enhancing its ability to attract new
customers. The Company recruited new product, operations, and
supply chain expertise into the organization to advance its
strategies.
- In 2011 and 2010, the Company made advances in the central
resourcing of project work by processing $161.2 million (2010 - $99.3 million) of sales orders through our
Edmonton distribution centre,
representing 29% (2010 - 20%) of total Company sales. This
enabled us to service the 12% year over year increase in sales
(2010 - 12% increase). In 2011 and 2010, the Company has continued
to grow its valve actuation business.
Fourth Quarter Operating
Results |
|
The following table summarizes CE
Franklin's results of operations: |
|
(In millions of Canadian Dollars
except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31 |
|
Twelve Months Ended December
31 |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Revenues |
154.3 |
100.0 |
% |
|
135.6 |
100.0 |
% |
|
546.4 |
100.0 |
% |
|
489.6 |
100.0 |
% |
Cost of Sales |
(129.0) |
(83.6) |
% |
|
(115.1) |
84.8 |
% |
|
(455.7) |
(83.4) |
% |
|
(414.6) |
(84.7) |
% |
Gross Profit |
25.3 |
16.4 |
% |
|
20.5 |
15.1 |
% |
|
90.7 |
16.6 |
% |
|
75.0 |
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
(17.5) |
(11.3) |
% |
|
(16.7) |
(12.3) |
% |
|
(68.7) |
(12.6) |
% |
|
(62.6) |
(12.8) |
% |
Foreign exchange and other |
(1.1) |
(0.7) |
% |
|
- |
- |
% |
|
0.6 |
0.1 |
% |
|
0.1 |
- |
% |
EBITDA(1) |
6.7 |
4.3 |
% |
|
3.8 |
2.8 |
% |
|
22.6 |
4.1 |
% |
|
12.5 |
2.5 |
% |
Depreciation |
(0.6) |
(0.4) |
% |
|
(0.6) |
(0.4) |
% |
|
(2.5) |
(0.5) |
% |
|
(2.5) |
(0.5) |
% |
Interest |
(0.1) |
(0.1) |
% |
|
(0.2) |
(0.1) |
% |
|
(0.4) |
(0.1) |
% |
|
(0.7) |
(0.1) |
% |
Earnings before tax |
6.0 |
3.9 |
% |
|
3.0 |
2.2 |
% |
|
19.7 |
3.6 |
% |
|
9.3 |
1.9 |
% |
Income tax expense |
(1.5) |
(1.0) |
% |
|
(1.4) |
(1.0) |
% |
|
(5.4) |
(1.0) |
% |
|
(3.4) |
(0.7) |
% |
Net earnings |
4.5 |
2.9 |
% |
|
1.6 |
1.2 |
% |
|
14.3 |
2.6 |
% |
|
5.9 |
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
Basic |
$ |
0.26 |
|
|
$ |
0.09 |
|
|
$ |
0.82 |
|
|
|
0.34 |
|
Diluted |
$ |
0.25 |
|
|
$ |
0.09 |
|
|
$ |
0.79 |
|
|
|
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding (000's) |
|
Basic |
|
17,483 |
|
|
|
17,452 |
|
|
|
17,501 |
|
|
|
17,499 |
|
Diluted |
|
18,163 |
|
|
|
17,966 |
|
|
|
18,188 |
|
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues for the quarter ended December
31, 2011, were $154.3 million,
an increase of 14% from the quarter ended December 31, 2010.
Oil and gas commodity prices are a key driver of
industry capital project activity as commodity prices directly
impact the economic returns realized by oil and gas companies. The
Company uses oil and gas well completions and average rig counts as
industry activity measures to assess demand for oilfield equipment
used in capital projects. Oil and gas well completions
require the products sold by the Company to complete a well and
bring production on stream and are a general indicator of energy
industry activity levels. Average drilling rig counts are
also used by management to assess industry activity levels as the
number of rigs in use ultimately drives well completion
requirements. Well completion, rig count and commodity price
information for the three and twelve month periods ended
December 31, 2011 and 2010 are
provided in the table below.
|
|
|
Q4 Average |
|
% |
|
|
YTD
Average |
|
% |
|
|
|
2011 |
|
|
2010 |
|
change |
|
|
2011 |
|
|
2010 |
|
change |
Gas - Cdn. $/gj (AECO spot) |
$ |
3.20 |
|
$ |
3.64 |
|
(12) |
% |
|
$ |
3.63 |
|
$ |
4.00 |
|
(9) |
% |
Oil - Cdn. $/bbl (synthetic
crude) |
$ |
102.30 |
|
$ |
84.35 |
|
21 |
% |
|
$ |
102.63 |
|
$ |
80.57 |
|
27 |
% |
Average rig count |
|
488 |
|
|
398 |
|
23 |
% |
|
|
414 |
|
|
332 |
|
25 |
% |
Well completions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil |
|
3,341 |
|
|
2,625 |
|
27 |
% |
|
|
10,022 |
|
|
6,541 |
|
53 |
% |
|
Gas |
|
1,009 |
|
|
2,135 |
|
(53) |
% |
|
|
4,449 |
|
|
5,873 |
|
(24) |
% |
Total well completions |
|
4,350 |
|
|
4,760 |
|
(9) |
% |
|
|
14,471 |
|
|
12,414 |
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December
31 |
|
Twelve months ended December 31 |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
End use revenue demand |
$ |
% |
|
$ |
% |
|
$ |
% |
|
$ |
% |
Capital projects |
80.3 |
52 |
% |
|
73.5 |
54 |
% |
|
286.0 |
52 |
% |
|
255.3 |
52 |
% |
Maintenance, repair and
operating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
supplies ("MRO") |
74.0 |
48 |
% |
|
62.1 |
46 |
% |
|
260.4 |
48 |
% |
|
234.3 |
48 |
% |
Total Revenues |
154.3 |
100 |
% |
|
135.6 |
100 |
% |
|
546.4 |
100 |
% |
|
489.6 |
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 $80.3 million in the fourth
quarter of 2011, an increase of 9% ($6.8
million) from the fourth quarter of 2010. Total well
completions decreased by 9% in the fourth quarter of 2011 and the
average working rig count increased by 23% compared to the prior
year period. Gas wells comprised 23% of the total wells completed
in western Canada in the fourth
quarter of 2011 compared to 45% in the fourth quarter of 2010. Spot
gas prices ended the fourth quarter at $2.64 per GJ (AECO), a decrease of 18% from
fourth quarter 2010 average prices. Oil prices ended the
fourth quarter at $103.61 per bbl
(Synthetic Crude), an increase of 1% from the fourth quarter 2010
average. Depressed gas prices are expected to continue to
negatively impact gas drilling activity into 2012, 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 revenue quotation
processes and increasing the operating flexibility and efficiency
of its branch network. The Company is well positioned to
support customers who are pursuing oil plays and more particularly
tight oil plays.
Revenues for capital project related products
were $286.0 million for the full year
2011, up $30.7 million (12%) from
2010. The increase in capital project end use revenues reflects the
17% increase in total industry well completions to 14,471 in 2011.
Capital project business for the year comprised 52% of total
revenues as it did in 2010. While the capital project business
represented the same percentage of the business year over year, its
makeup changed as a 19% decline in tubular revenues was offset by a
4% increase in oil sands sales and increased branch based capital
project sales. Tubular sales in the year declined as the Company
followed a disciplined approach in its competitive bid processes
and, as a result, was not as successful as it had been in prior
years. There remains a significant amount of tubular product
inventory on hand in the industry which has led to a very
competitive environment for tubular product sales.
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 December 31, 2011 increased by
$11.9 million (19%) to $74.0 million compared to the quarter ended
December 31, 2010 and comprised 48%
of the Company's total revenues (2010 - 46%). MRO product revenues
for the full year 2011 increased by $26.1
million (11%) to $260.4
million compared to 2010 and comprised 48% of the Company's
total revenues (2010 - 48%). Higher MRO revenues in 2011 were due
to increased conventional oilfield activity.
The Company's strategy is to grow profitability
by focusing on its core western Canadian oilfield product
distribution business, complemented by an increase in the product
life cycle services provided to its customers and the focus on the
emerging oil sands capital project and MRO revenues opportunities.
Revenues from these initiatives to date are provided below:
|
Q4
2011 |
|
Q4
2010 |
|
YTD
2011 |
|
YTD
2010 |
|
Revenues ($millions) |
$ |
% |
|
$ |
% |
|
$ |
% |
|
$ |
% |
|
Oilfield |
132.4 |
86 |
% |
|
118.1 |
88 |
% |
|
459.6 |
84 |
% |
|
410.7 |
83 |
% |
|
Oil sands |
15.5 |
10 |
% |
|
11.5 |
8 |
% |
|
63.8 |
12 |
% |
|
61.3 |
13 |
% |
|
Production services |
6.4 |
4 |
% |
|
6.0 |
4 |
% |
|
23.0 |
4 |
% |
|
17.6 |
4 |
% |
|
Total Revenues |
154.3 |
100 |
% |
|
135.6 |
100 |
% |
|
546.4 |
100 |
% |
|
489.6 |
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from oilfield products to conventional
western Canada oil and gas end use
applications were $132.4 million for
the fourth quarter of 2011, an increase of 12% from the fourth
quarter 2010. This increase was driven by an increase in oil
well completions compared to the prior year period.
Revenues from oil sands end use applications
were $15.5 million in the fourth
quarter, an increase of $4.0 million
(35%) compared to $11.5 million in
the fourth quarter of 2010 reflecting increased capital project
revenues which were partially offset by the impact of not having a
large tailing line pipe order and having less turnaround work in
2011 with our Fort McMurray based
customers.
Production service revenues were $6.4 million in the fourth quarter of 2011, a 7%
increase from the $6.0 million of
revenues in the fourth quarter of 2010, reflecting improved oil
production economics resulting in increased customer maintenance
activities.
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4
2011 |
|
Q4
2010 |
|
YTD
2011 |
|
YTD
2010 |
Gross profit ($ millions) |
$ |
25.3 |
|
|
$ |
20.5 |
|
|
$ |
90.7 |
|
|
$ |
75.0 |
|
Gross profit margin as a % of revenues |
|
16.4 |
% |
|
|
15.1 |
% |
|
|
16.6 |
% |
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit composition by product revenue
category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubulars |
|
5 |
% |
|
|
5 |
% |
|
|
4 |
% |
|
|
3 |
% |
Pipe, flanges and fittings |
|
29 |
% |
|
|
24 |
% |
|
|
29 |
% |
|
|
28 |
% |
Valves and accessories |
|
21 |
% |
|
|
21 |
% |
|
|
21 |
% |
|
|
20 |
% |
Pumps, production equipment and services |
|
17 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
14 |
% |
General |
|
28 |
% |
|
|
35 |
% |
|
|
31 |
% |
|
|
35 |
% |
Total gross profit |
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit was $25.3
million in the fourth quarter of 2011, an increase of
$4.8 million (23%) from the fourth
quarter of 2010 due to increased revenues and average gross profit
margins compared to the prior year period. Gross profit margins for
the quarter were lower than the third quarter of 2011 due to more
pipe, flange, and fittings sales to lower margin alliance
customers. Average gross profit margins were better than the prior
year period at 16.4% as increased purchasing levels contributed to
higher volume rebate income. Increased pipe, flanges and
fittings and pumps, production equipment and services gross profit
composition was due to improved gross profit margins.
Selling, General and
Administrative ("SG&A") Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($millions) |
Q4
2011 |
|
Q4
2010 |
|
YTD
2011 |
|
YTD
2010 |
|
|
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
|
People Costs |
10.2 |
|
58 |
|
9.8 |
|
59 |
|
41.1 |
|
60 |
|
36.3 |
|
58 |
|
Facility and office costs |
3.5 |
|
20 |
|
2.0 |
|
12 |
|
15.1 |
|
22 |
|
13.4 |
|
11 |
|
Selling Costs |
2.3 |
|
13 |
|
3.3 |
|
20 |
|
6.5 |
|
9 |
|
6.6 |
|
21 |
|
Other |
1.5 |
|
9 |
|
1.6 |
|
9 |
|
6.0 |
|
9 |
|
6.3 |
|
10 |
|
SG&A costs |
17.5 |
|
100 |
|
16.7 |
|
100 |
|
68.7 |
|
100 |
|
62.6 |
|
100 |
|
SG&A costs as % of revenues |
11 |
% |
|
|
12 |
% |
|
|
13 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A costs increased $0.8 million (5%) in the fourth quarter of 2011
from the prior year period and represented 11% of revenues compared
to 12% in the prior year period. The $0.8
million increase in expenses was attributable to higher
incentive and higher agent commission costs reflecting the improved
profit performance of the business year over year.
Depreciation Expense
Depreciation expense of $0.6 million in the fourth quarter of 2011 was
comparable to the fourth quarter of 2010.
Interest Expense
Interest expense of $0.1
million in the fourth quarter of 2011 was lower than the
prior year due to lower borrowing levels.
Foreign Exchange and other
Foreign exchange and other in the quarter was a
loss of $1.1 million as the Canadian
dollar strengthened which increased the translation loss from US
denominated net working capital assets. The Company
recognized a $0.2 million unrealized
foreign currency gain on $18.3
million of foreign currency forward contracts it had
outstanding at quarter end. As at December 31, 2011, a one percent change in the
Canadian dollar relative to the US dollar would decrease or
increase the Company's annual net income by approximately
$0.2 million.
Income Tax Expense
The Company's effective tax rate for the fourth
quarter of 2011 was 24.4% down from a 46.6% effective rate in the
fourth quarter 2010. The fourth quarter 2010 effective rate
resulted from the write-off of $0.5
million of future tax assets related to the removal of the
cash settlement mechanism from the Company's stock option plan as a
result of provisions contained in the federal government's 2010
budget which effectively eliminated the ability to deduct for tax
purposes cash payments made to settle stock option
obligations. The current effective tax rate is lower
than the statutory rate due to the impact of non-deductible items
and other adjustments. Substantially all of the Company's tax
provision is currently payable.
Summary of Quarterly Financial Data
The selected quarterly financial data below is presented in
Canadian dollars and in accordance with IFRS. This
information is derived from the Company's unaudited quarterly
financial statements.
(in millions of Cdn. $ except per
share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
Unaudited |
2010 |
|
2010 |
|
2010 |
|
2010 |
|
2011 |
|
2011 |
|
2011 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
121.9 |
|
|
|
99.9 |
|
|
|
132.2 |
|
|
|
135.6 |
|
|
|
137.7 |
|
|
|
113.9 |
|
|
|
140.5 |
|
|
|
154.3 |
|
Gross Profit |
|
19.7 |
|
|
|
15.6 |
|
|
|
19.2 |
|
|
|
20.5 |
|
|
|
22.3 |
|
|
|
19.3 |
|
|
|
23.9 |
|
|
|
25.3 |
|
Gross Profit % |
|
16.1 |
% |
|
|
15.6 |
% |
|
|
14.5 |
% |
|
|
15.1 |
% |
|
|
16.2 |
% |
|
|
16.9 |
% |
|
|
17.0 |
% |
|
|
16.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
4.1 |
|
|
|
0.7 |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
5.3 |
|
|
|
3.1 |
|
|
|
7.6 |
|
|
|
6.6 |
|
EBITDA as a % of
revenues |
|
3.4 |
% |
|
|
0.7 |
% |
|
|
2.9 |
% |
|
|
2.8 |
% |
|
|
3.8 |
% |
|
|
2.7 |
% |
|
|
5.4 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
(loss) |
|
2.2 |
|
|
|
(0.1) |
|
|
|
2.2 |
|
|
|
1.6 |
|
|
|
3.4 |
|
|
|
1.7 |
|
|
|
4.8 |
|
|
|
4.5 |
|
Net earnings (loss) as
a % of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
|
1.8 |
% |
|
|
(0.1) |
% |
|
|
1.7 |
% |
|
|
1.2 |
% |
|
|
2.5 |
% |
|
|
1.5 |
% |
|
|
3.4 |
% |
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.13 |
|
|
$ |
(0.01) |
|
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
$ |
0.10 |
|
|
|
0.27 |
|
|
$ |
0.26 |
|
|
Diluted |
$ |
0.12 |
|
|
$ |
(0.01) |
|
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
$ |
0.09 |
|
|
|
0.26 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net working
capital(1) |
|
113.9 |
|
|
|
111.8 |
|
|
|
129.0 |
|
|
|
125.7 |
|
|
|
120.1 |
|
|
|
136.5 |
|
|
|
134.6 |
|
|
|
116.9 |
|
Long term
debt/bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
loan(1) |
|
1.4 |
|
|
|
0.3 |
|
|
|
14.4 |
|
|
|
6.4 |
|
|
|
0.3 |
|
|
|
12.2 |
|
|
|
5.8 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total well completions |
|
2,846 |
|
|
|
2,197 |
|
|
|
2,611 |
|
|
|
4,760 |
|
|
|
3,861 |
|
|
|
2,765 |
|
|
|
3,495 |
|
|
|
4,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Net working capital and long
term debt/bank operating loan amounts are as at quarter
end |
|
The Company's sales levels are affected by
weather conditions. As warm weather returns in the spring
each year, the winter's frost comes out of the ground rendering
many secondary roads incapable of supporting the weight of heavy
equipment until they have dried out. In addition, many
exploration and production areas in northern Canada are accessible only in the winter
months when the ground is frozen. An exceptionally wet second
quarter in 2011 had some impact on customer capital programs in the
third quarter. As a result, the first and fourth quarters typically
represent the busiest time for oil and gas industry activity and
the highest oilfield sales activity for the Company. Oilfield
sales levels drop dramatically during the second quarter until such
time as roads have dried and road bans have been lifted. This
typically results in a significant reduction in earnings during the
second quarter, as the decline in sales typically outpaces 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, current taxes payable, note payable and other
current liabilities) and borrowing levels follow similar seasonal
patterns as sales.
Liquidity and Capital Resources
The Company's primary internal source of
liquidity is cash flow from operating activities before changes in
non-cash net working capital balances. 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 December 31,
2011, the Company had $15.8
million of cash on hand and had no long term debt.
Borrowings decreased by $6.1 million
from December 31, 2010 due to the
Company generating $17.5 million from
operating activities, before net changes in non-cash working
capital balances and a $8.9 million
net working capital reduction. This was offset by $2.9 million in capital expenditures and
$1.5 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 December 31,
2010, long term debt was $6.4
million and was comprised principally of borrowings under
the Company's revolving term credit facility. Borrowings
decreased by $20.4 million from
December 31, 2009 due to the Company
generating $10.7 million in cash flow
from operating activities, before net changes in non-cash working
capital balances and a $12.8 million
reduction in net working capital. This was offset by $1.3 million in capital expenditures and
$1.9 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").
Net working capital was $116.9 million at December
31, 2011, a decrease of $8.9
million from December 31,
2010. Accounts receivable at December 31, 2011 was $98.2 million, an increase of $5.2 million (5.6%) from December 31, 2010, due to the 14% increase in
fourth quarter sales compared to the prior year period, partially
offset by a 7% improvement in days sales outstanding in accounts
receivable ("DSO") in the fourth quarter of 2011 to 52 days from 56
days in the fourth quarter of 2010. DSO is calculated using average
sales per day for the quarter compared to the period end customer
accounts receivable balance. Inventory at December 31, 2011 was $111.7 million, up $16.8
million (18%) from December 31,
2010. Inventory turns for the fourth quarter of 2011
at 4.7 turns were comparable to the prior year as the impact of
fourth quarter sales increases was more than offset by the increase
in inventory levels. 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 at December 31,
2011 were $93.6 million, an
increase of $30.2 million (48%) due
to increased purchasing activity in the fourth quarter of 2011 to
resource the increase in sales compared to the prior year
period.
Capital expenditures in 2011 were $2.9 million, an increase of $1.6 million (127%) from 2010 expenditures.
Expenditures in 2011 were directed towards facility expansion and
maintenance, business system expansion and vehicles and operating
equipment. The majority of the expenditures in 2010 were
directed towards similar items as they were in 2011. Capital
expenditures in 2012 are anticipated to be in the $4.5 million to $5.5 million range and will be
directed towards business system, branch facility, vehicle and
operating equipment upgrades and replacements.
In July 2011, the
Company renewed its $60.0 million
revolving term credit facility that matures in July 2014 (the "Credit Facility").
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 the Company to maintain
the ratio of its debt to debt plus equity at less than 40%.
As at December 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 December 31, 2011, this ratio was 34.5
times. The Credit Facility contains certain other covenants
with which the Company is in compliance. As at December 31, 2011, the Company had no borrowings
under the facility and had available undrawn borrowing capacity of
$60.0 million under the Credit
Facility.
Contractual Obligations
There have been no material changes in
off-balance sheet contractual commitments since December 31, 2010.
|
Capital Stock |
As at December 31, 2011 and 2010, the
following shares and securities convertible into shares were
outstanding: |
|
|
|
|
|
(millions) |
|
December 31, 2011 |
|
December 31, 2010 |
|
|
Shares |
|
Shares |
Shares outstanding |
|
17.4 |
|
17.5 |
Stock options |
|
0.7 |
|
1.1 |
Share unit plan obligations |
|
0.6 |
|
0.5 |
Shares outstanding and issuable |
|
18.7 |
|
19.1 |
|
|
|
|
|
The basic weighted average number of shares
outstanding in 2011 was 17.5 million, which is consistent with the
prior year as the rise in the Company's share price in the last
year has limited activity occurring under the normal course issuer
bid program. The diluted weighted average number of shares
outstanding in 2011 was 18.2 million and was comparable to
2010.
The Company has established an independent trust
to purchase shares of the Company on the open market to resource
share unit plan obligations. For the year ended December 31, 2011, there were 175,000 shares
acquired by the trust at an average cost per share of $8.85. (2010 - 204,300 at an average cost per
share of $6.91). As at December 31, 2011, the trust held 579,951 shares
representing approximately 100% of stock unit plan obligations
outstanding (December 31, 2010 -
450,732 shares representing approximately 100% of stock unit plan
obligations outstanding).
During the fourth quarter of 2010, the Company
discontinued the settlement of stock option obligations with cash
payments in favor of issuing shares from treasury. The cash
settlement mechanism was discontinued as a result of provisions
contained in the federal government's 2010 budget which effectively
eliminated the ability to deduct for tax purposes, cash payments
made to settle stock option obligations. An after tax charge
of $0.7 million was recorded in the
fourth quarter comprised of a $0.2
million stock based compensation charge and the write off of
$0.5 million of future income tax
asset related to stock option obligations. The mark to market
current obligation of $2.1 million
was transferred to contributed surplus on the balance sheet as a
result of this change in settlement of stock option obligations.
The cash settlement mechanism had been implemented during the third
quarter of 2009 to enable the Company to manage its share dilution
while resourcing its stock option plan on a tax efficient
basis.
On December 21,
2010, the Company announced the renewal of its NCIB to
purchase for cancellation through the facilities of NASDAQ, up to
850,000 common shares representing approximately 5% of its
outstanding common shares. In 2011, the Company purchased 3,102
shares at an average cost of $7.56
per share. During 2010, the Company purchased 61,769 shares at a
cost of $0.4 million ($6.62 per share) under its NCIB. On
December 20, 2011, the Company
announced the renewal of the NCIB, effective January 3, 2012, to purchase up to 850,000 common
shares representing approximately 5% of its outstanding common
shares. Shares may be purchased up to December 31, 2012.
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
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 condensed 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.
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 fully 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.
As part of the transition to IFRS the Company
established that the carrying value of its property and equipment
were substantially equivalent between IFRS and Canadian GAAP and
therefore the Company has continued to carry its property and
equipment at the historic costs model as was used under Canadian
GAAP in these statements.
Risk Factors
The Company is exposed to certain business and
market risks including risks arising from transactions that are
entered into the normal course of business, which are primarily
related to interest rate changes and fluctuations in foreign
exchange rates. During the reporting period, no events or
transactions since the year ended December
31, 2010 have occurred that would materially change the
business and market risk information disclosed in the Company's
Form 20F.
CE Franklin Ltd. |
CONDENSED INTERIM
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION -
UNAUDITED |
|
|
|
|
|
|
|
|
|
|
As at December 31 |
As at December 31 |
(in thousands of Canadian
dollars) |
2011 |
2010 |
Assets |
|
|
|
|
|
|
Current assets |
|
|
|
Cash and cash equivalents (Note 4) |
15,830 |
- |
|
Accounts receivable (Note 5) |
98,190 |
92,950 |
|
Inventories (Note 6) |
111,661 |
94,838 |
|
Other |
2,565 |
1,625 |
|
|
228,246 |
189,413 |
Non-current assets |
|
|
|
Property and equipment |
9,709 |
9,431 |
|
Goodwill |
20,570 |
20,570 |
|
Deferred tax assets (Note 7) |
1,969 |
1,116 |
|
Other assets |
171 |
147 |
Total Assets |
260,665 |
220,677 |
|
|
|
|
Liabilities |
|
|
|
|
|
|
Current liabilities |
|
|
|
Accounts payable and accrued liabilities
(Note 8) |
93,613 |
63,363 |
|
Current taxes payable (Note 7) |
1,663 |
348 |
|
Note payable (Note 9) |
290 |
- |
|
|
95,566 |
63,711 |
Non current liabilities |
|
|
|
Long term debt (Note 9) |
- |
6,430 |
Total liabilities |
95,566 |
70,141 |
|
|
|
|
|
|
|
|
Shareholders' equity |
|
|
|
Capital stock (Note 12) |
22,536 |
23,078 |
|
Contributed surplus |
20,529 |
19,716 |
|
Retained earnings |
122,034 |
107,742 |
|
|
165,099 |
150,536 |
Total liabilities and shareholders'
equity |
260,665 |
220,677 |
|
|
|
|
See accompanying notes to these
condensed interim consolidated financial statements |
CE Franklin Ltd. |
CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED |
|
|
|
|
|
|
|
|
|
(Canadian dollars and number of shares in
thousands) |
Capital Stock |
|
|
|
|
|
|
|
Number of |
|
|
Contributed |
|
Retained |
|
Shareholders' |
|
Shares |
$ |
|
Surplus |
|
Earnings |
|
Equity |
|
|
|
|
|
|
|
|
|
Balance - January 1, 2010 |
17,581 |
23,284 |
|
17,184 |
|
102,159 |
|
142,627 |
|
|
|
|
|
|
|
|
|
Stock based compensation expense (Note 12
(b) and (c)) |
- |
- |
|
1,751 |
|
- |
|
1,751 |
Normal course issuer bid (Note 12 (d)) |
(62) |
(81) |
|
- |
|
(328) |
|
(409) |
Stock options exercised (Note 12 (b)) |
46 |
290 |
|
(121) |
|
- |
|
169 |
Modification of stock option plan (Note 12
(a) and (b)) |
- |
- |
|
2,075 |
|
- |
|
2,075 |
Purchase of shares in trust for share unit plans
and |
|
|
|
|
|
|
|
|
settlement of deferred share unit exercise (Note
12 (c)) |
(204) |
(1,410) |
|
(178) |
|
- |
|
(1,588) |
Shares issued from share unit plan trust (Note 12
(c)) |
113 |
995 |
|
(995) |
|
- |
|
- |
Net earnings |
- |
- |
|
- |
|
5,911 |
|
5,911 |
Balance - December 31, 2010 |
17,474 |
23,078 |
|
19,716 |
|
107,742 |
|
150,536 |
|
|
|
|
|
|
|
|
|
Stock based compensation expense (Note 12
(b) and (c)) |
- |
- |
|
1,823 |
|
- |
|
1,823 |
Normal Course Issuer Bid (Note 12 (d)) |
(3) |
(4) |
|
- |
|
(19) |
|
(23) |
Stock options exercised (Note 12 (b)) |
98 |
736 |
|
(736) |
|
- |
|
- |
Share Units exercised (Note 12 (c)) |
46 |
274 |
|
(274) |
|
- |
|
- |
Purchase of shares in trust for Share Unit
Plans (Note 12 (c)) |
(175) |
(1,548) |
|
- |
|
- |
|
(1,548) |
Net earnings |
- |
- |
|
- |
|
14,311 |
|
14,311 |
Balance - December 31, 2011 |
17,440 |
22,536 |
- |
20,529 |
- |
122,034 |
- |
165,099 |
|
|
|
|
|
|
|
|
|
See accompanying notes to these
condensed interim consolidated financial statements |
|
|
|
|
|
|
|
CE Franklin Ltd. |
CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME -
UNAUDITED |
|
|
|
|
|
|
|
|
|
Three months ended |
|
Twelve months ended |
|
|
|
|
|
|
|
(in thousands of Canadian dollars
except per |
December 31 |
December 31 |
|
December 31 |
December 31 |
share amounts) |
2011 |
2010 |
|
2011 |
2010 |
|
|
|
|
|
|
Revenue |
154,331 |
135,641 |
|
546,352 |
489,585 |
Cost of sales |
129,077 |
115,095 |
|
455,669 |
414,579 |
Gross profit |
25,254 |
20,546 |
|
90,683 |
75,006 |
|
|
|
|
|
|
|
Other expenses |
|
|
|
|
|
|
Selling, general and |
|
|
|
|
|
|
administrative expenses (Note 15) |
17,535 |
16,738 |
|
68,715 |
62,554 |
|
Depreciation |
613 |
610 |
|
2,450 |
2,465 |
|
|
18,148 |
17,348 |
|
71,165 |
65,019 |
|
|
|
|
|
|
|
Operating profit |
7,106 |
3,198 |
|
19,518 |
9,987 |
|
Foreign exchange gain/(loss) and other |
1,119 |
(20) |
|
(649) |
(65) |
|
Interest expense |
65 |
158 |
|
464 |
698 |
Earnings before tax |
5,922 |
3,060 |
|
19,703 |
9,354 |
|
|
|
|
|
|
|
Income tax expense (recovery)
(Note 7) |
|
|
|
|
|
|
Current |
1,862 |
979 |
|
6,245 |
3,102 |
|
Deferred |
(417) |
448 |
|
(853) |
341 |
|
|
1,445 |
1,427 |
|
5,392 |
3,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings and comprehensive
income |
4,477 |
1,633 |
|
14,311 |
5,911 |
|
|
|
|
|
|
|
Net earnings per share (Note
13) |
|
|
|
|
|
|
Basic |
0.26 |
0.09 |
|
0.82 |
0.34 |
|
Diluted |
0.25 |
0.09 |
|
0.79 |
0.33 |
|
|
|
|
|
|
|
Weighted average number of shares
outstanding ('000s) |
|
|
|
|
|
Basic |
17,483 |
17,452 |
|
17,501 |
17,499 |
|
Diluted (Note 13) |
18,163 |
17,966 |
|
18,188 |
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these
condensed interim consolidated financial statements |
CE Franklin Ltd. |
|
CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF CASHFLOWS - UNAUDITED |
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended |
Twelve months ended |
|
|
|
|
December 31 |
December 31 |
December 31 |
December 31 |
|
(in thousands of Canadian
dollars) |
2011 |
2010 |
2011 |
2010 |
|
|
|
|
|
|
|
Cash flows from operating
activities |
|
|
|
|
|
|
Net earnings for the period |
4,477 |
1,633 |
14,311 |
5,911 |
|
|
Items not affecting cash - |
|
|
|
|
|
|
|
Depreciation |
613 |
610 |
2,450 |
2,465 |
|
|
|
Deferred income tax (recovery) |
(417) |
449 |
(853) |
341 |
|
|
|
Stock based compensation expense |
317 |
471 |
1,823 |
1,991 |
|
|
|
Foreign exchange and other |
1,710 |
78 |
(239) |
27 |
|
|
|
|
6,700 |
3,241 |
17,492 |
10,735 |
|
Net change in non-cash working capital
balances |
|
|
|
|
|
related to operations - |
|
|
|
|
|
|
Accounts receivable |
(2,110) |
(1,216) |
(5,107) |
(25,479) |
|
|
Inventories |
(9,157) |
1,270 |
(16,823) |
7,831 |
|
|
Other current assets |
2,724 |
3,810 |
(920) |
2,358 |
|
|
Accounts payable and accrued
liabilities |
23,649 |
977 |
30,023 |
26,691 |
|
|
Current taxes payable |
661 |
222 |
1,315 |
1,378 |
|
|
|
|
22,467 |
8,304 |
25,980 |
23,514 |
|
|
|
|
|
|
|
|
|
Cash flows used in investing
activities |
|
|
|
|
|
|
Purchase of property and
equipment |
(330) |
(176) |
(2,870) |
(1,263) |
|
|
Proceeds on disposal
of property and equipment |
34 |
- |
431 |
- |
|
|
|
|
(296) |
(176) |
(2,439) |
(1,263) |
|
|
|
|
|
|
|
|
|
Cash flows (used in)/from financing
activities |
|
|
|
|
|
|
Increase (decrease) in bank operating
loan |
- |
- |
- |
(26,549) |
|
|
(Decrease) in long term debt |
(5,492) |
(7,970) |
(6,140) |
6,126 |
|
|
Issuance of capital stock - |
|
|
|
|
|
|
|
stock options exercised |
- |
58 |
- |
169 |
|
|
Purchase of capital stock through
normal |
|
|
|
|
|
|
|
course issuer bid |
- |
(35) |
(23) |
(409) |
|
|
Purchase of capital stock in trust
for |
|
|
|
|
|
|
|
Share Unit Plans |
(849) |
(181) |
(1,548) |
(1,588) |
|
|
|
|
(6,341) |
(8,128) |
(7,711) |
(22,251) |
|
|
|
|
|
|
|
|
|
Change in cash and cash
equivalents |
|
|
|
|
|
|
during the period |
15,830 |
- |
15,830 |
- |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
at the beginning of the
period |
- |
- |
- |
- |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
at the end of the period |
15,830 |
- |
15,830 |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
Interest |
241 |
158 |
464 |
698 |
|
|
Income taxes |
1,189 |
768 |
4,827 |
1,725 |
|
|
|
|
|
|
|
|
|
See accompanying notes to these
condensed interim consolidated financial statements |
|
CE Franklin Ltd.
Notes to Condensed Interim Consolidated Financial Statements
- Unaudited
(Tabular amounts 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,
Alberta, Canada. The Company is a subsidiary of Schlumberger
Limited, a global energy services company. The address of the
Company's registered office is 1800, 635 8th 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 39
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
Basis of preparation and adoption of
IFRS
The Company prepares its financial statements in
accordance with Canadian generally accepted accounting principles
as set out in the Handbook of the Canadian Institute of Chartered
Accountants ("CICA Handbook"). In 2010, the CICA Handbook was
revised to incorporate International Financial Reporting Standards
("IFRS"), and require publicly accountable enterprises to apply
such standards effective for years beginning on or after
January 1, 2011. Accordingly,
the Company commenced reporting on this basis in its first 2011
condensed interim consolidated financial statements. In these
financial statements, the term "Canadian GAAP" refers to Canadian
GAAP before the adoption of IFRS.
These condensed interim consolidated financial
statements have been prepared in accordance with IFRS applicable to
the preparation of interim financial statements, including IAS 34,
Interim Financial Reporting, and IFRS 1, First-time
Adoption of International Financial Reporting Standards. The
accounting policies followed in these condensed interim
consolidated financial statements are the same as those applied in
the Company's condensed interim consolidated financial statements
for the period ended March 31, 2011.
The Company has consistently applied the same accounting policies
throughout all periods presented, as if these polices had always
been in effect. Note 3 discloses the impact of the transition to
IFRS on the Company's reported equity as at December 31, 2011 and comprehensive income for
the three and twelve months ended December
31, 2011, including the nature and effect of significant
changes in accounting policies from those used in the Company's
consolidated financial statements for the year ended December 31, 2010.
The Board of Directors approved the financial
statements on February 2, 2012.
The condensed 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, and the Company's
consolidated financial statements for the year ended December 31, 2011 prepared in accordance with
IFRS.
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.
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:
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.
As part of the transition to IFRS, the Company
established that the carrying values of its property and equipment
were substantially equivalent between IFRS and Canadian GAAP and
therefore the Company has continued to carry its property and
equipment at the historic cost model as was used under Canadian
GAAP in these statements.
4. Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
December
31, 2010 |
|
January 1,
2010 |
|
|
Cash at bank and on hand |
15,830 |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
Cash is held at a major Canadian
chartered bank. |
|
5. Accounts receivable
|
|
|
|
|
December 31,
2011 |
|
December 31, 2010 |
Current |
46,556 |
|
40,014 |
Less than 60 days overdue |
36,732 |
|
41,253 |
Greater than 60 days overdue |
8,328 |
|
5,519 |
Total Trade receivables |
91,616 |
|
86,786 |
Allowance for credit losses |
(1,615) |
|
(1,887) |
Net trade receivables |
90,001 |
|
84,899 |
Other receivables |
8,189 |
|
8,051 |
|
98,190 |
|
92,950 |
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.
6. Inventories
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:
|
Year ended |
|
Year ended |
|
December 31, 2011 |
|
December
31, 2010 |
Opening balance as at January 1 |
5,000 |
|
6,300 |
Additions |
2,495 |
|
900 |
Utilization through write downs |
(2,905) |
|
(2,200) |
Closing balance |
4,590 |
|
5,000
|
7. 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:
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended |
|
Year Ended |
|
December 31 |
|
December 31 |
|
2011 |
% |
2010 |
% |
|
2011 |
% |
2010 |
% |
Earnings before income
taxes |
5,922 |
|
3,060 |
|
|
19,703 |
|
9,354 |
|
Income taxes calculated at statutory rates |
1,585 |
26.8 |
860 |
28.1 |
|
5,269 |
26.7 |
2,647 |
28.3 |
Non-deductible items |
(1) |
(0.1) |
25 |
0.8 |
|
53 |
0.3 |
104 |
1.1 |
Share based compensation |
8 |
0.1 |
554 |
18.1 |
|
103 |
0.5 |
712 |
7.6 |
Adjustments for filing
returns and others |
(146) |
(2.4) |
(12) |
(0.4) |
|
(33) |
(0.1) |
(20) |
(0.2) |
|
1,445 |
24.4 |
1,427 |
46.6 |
|
5,392 |
27.4 |
3,443 |
36.8 |
As at December 31,
2011, income taxes payable was $1.7
million (December 31, 2010 -
$0.3 million payable). Income tax
expense is based on management's best estimate of the weighted
average annual income tax rate expected for the full financial
year.
|
As at |
|
December 31,
2011 |
|
December 31, 2010 |
|
|
Assets |
|
|
|
|
|
|
Property and equipment |
|
883 |
|
870 |
|
|
Stock based compensation expense |
|
951 |
|
487 |
|
|
Other |
|
609 |
|
156 |
|
|
|
|
2,443 |
|
1,513 |
|
|
Liabilities |
|
|
|
|
|
|
Goodwill and other |
|
(474) |
|
397 |
|
|
Net
Deferred tax asset |
|
1,969 |
|
1,116 |
|
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.
8. Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
|
|
December 31,
2011 |
|
December 31, 2010 |
|
|
Current |
|
|
|
|
|
|
Trade payables |
|
10,919 |
|
23,966 |
|
|
Other payables |
|
3,834 |
|
7,057 |
|
|
Accrued compensation expenses |
|
4,683 |
|
2,434 |
|
|
Other accrued liabilities |
|
74,177 |
|
29,906 |
|
|
|
|
93,613 |
|
63,363 |
|
9. Note payable, bank operating loan and long term
debt
|
|
|
|
|
|
|
|
|
|
December 31,
2011 |
|
December 31, 2010 |
|
|
JEN Supply debt |
|
290 |
|
- |
|
|
Note payable |
|
290 |
|
|
|
|
|
|
|
|
|
|
|
JEN Supply debt |
|
- |
|
290 |
|
|
Bank operating loan |
|
- |
|
6,140 |
|
|
Long term debt |
|
- |
|
6,430 |
|
|
|
|
|
|
|
|
In July of 2011, the Company renewed its
$60.0 million revolving term credit
facility that matures in July
2014. 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 December 31, 2011, this
ratio was nil (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 December 31,
2011, this ratio was 34.5 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
December 31, 2011, the Company had
borrowed nil 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 note payable is unsecured and
bears interest at the floating Canadian bank prime rate and is
repayable in November 2012.
10. 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 2014 (see Note 9) 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:
|
|
December 31,
2011 |
|
December 31, 2010 |
|
|
Shareholders' equity |
165,099 |
|
150,536 |
|
|
Long term debt / Bank operating loan |
- |
|
6,430 |
|
|
Net working capital |
116,850 |
|
125,702 |
|
|
|
|
|
|
|
|
Net working capital
is defined as current assets less cash and cash equivalents,
accounts payable and accrued liabilities,
current taxes payable, note payable and other current
liabilities. |
|
11. Related party transactions
Schlumberger owns approximately 56% of the
Company's outstanding shares. The Company is the exclusive
distributor in Canada of downhole
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 year
ended December 31 |
|
2011 |
|
2010 |
|
|
Cost of sales for the three months ended |
|
4,949 |
|
2,280 |
|
|
Cost of sales for the twelve months ended |
|
10,896 |
|
8,212 |
|
|
Inventory |
|
5,302 |
|
3,544 |
|
|
Accounts payable and accrued liabilities |
|
1,830 |
|
1,457 |
|
|
Accounts receivable |
|
77 |
|
- |
|
12. Capital Stock
a) The Company has
authorized an unlimited number of common shares with no par value.
As at December 31, 2011, the Company
had 17.4 million common shares, 0.7 million stock options and 0.6
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 for each of the twelve month
periods ended December 31 was as
follows:
|
(000's) |
|
2011 |
|
2010 |
|
|
Outstanding - January 1 |
|
1,073 |
|
1,195 |
|
|
Exercised |
|
(196) |
|
(86) |
|
|
Forfeited |
|
(132) |
|
(36) |
|
|
Outstanding at December
31 |
|
745 |
|
1,073 |
|
|
Exercisable at December 31 |
|
734 |
|
897 |
|
|
|
|
|
|
|
|
Stock based compensation expense recorded for
the three and twelve month period ended December 31, 2011 was $81,000 (2010 - $350,000) and $383,000 (2010 - $723,000) respectively and is included in
selling, general and administrative expenses on the consolidated
statement of earnings and comprehensive income. No options
were granted during the twelve month period ended December 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.
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 consolidated statement of financial position.
Stock options were revalued at each period end using the Black
Scholes pricing model, the following assumptions were used:
|
|
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.
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"), whereby RSUs, PSUs and
DSUs 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. For 2011, the PSU performance adjustment was an
increase of 4% from target, resulting in a 4,000 unit adjustment
($16,000). For 2010, the PSU
performance adjustment was a reduction of 58% from target,
resulting in a 77,000 unit adjustment ($284,000). RSU and PSU grants vest one third per
year over the three year period following the date of the grant.
DSUs 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 twelve month period ended
December 31, 2011 and 2010 the fair
value of the RSU, PSU and DSU units granted was $2,249,000 (2010 - $1,497,000) and compensation expense recorded in
the three and twelve month period ended December 31, 2011, were $236,000 (2010 - $306,000) and $1,440,000 (2010 - $1,268,000).
Share Unit Plan activity for the periods ended December 31, 2011, and December 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
(000's) |
December 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 |
130 |
117 |
22 |
269 |
|
145 |
132 |
31 |
308 |
Performance adjustments |
- |
4 |
- |
4 |
|
- |
(77) |
- |
(77) |
Exercised |
(34) |
(12) |
- |
(46) |
|
(82) |
(7) |
(49) |
(138) |
Forfeited |
(62) |
(44) |
- |
(106) |
|
(13) |
(4) |
- |
(17) |
Outstanding at end
of period |
307 |
162 |
102 |
571 |
|
273 |
97 |
80 |
450 |
Exercisable at end of period |
93 |
33 |
102 |
228 |
|
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 twelve month period ended December 31, 2011, 175,000 common shares were
purchased by the trust (2010 - 204,300) at an average cost of
$8.85 per share (2010 - $6.91). As at December 31, 2011, the trust held 579,951 shares
(2010 - 450,732).
d) Normal Course Issuer Bid
("NCIB")
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 twelve months ended
December 31, 2011, the company
purchased 3,102 shares at an average cost of $7.56 (2010: 61,769 shares purchased at an
average cost of $6.62).
On December 20,
2011, the Company announced the renewal of the NCIB
effective January 3, 2012, to
purchase up to 850,000 common shares through the facilities of
NASDAQ, representing approximately 5% of its outstanding common
shares. Shares may be purchased up to December 31, 2012.
13. 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 RSUs, PSUs, DSUs 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.
|
Three Months
Ended |
|
Year Ended |
|
December 31 |
|
December 31 |
|
2011 |
2010 |
|
2011 |
2010 |
Total Comprehensive income attributable to
shareholders |
4,477 |
1,633 |
|
14,311 |
5,911 |
Weighted average number of common shares issued
(000's) |
17,483 |
17,452 |
|
17,501 |
17,499 |
Adjustments for: |
|
|
|
|
|
Stock options |
257 |
209 |
|
263 |
194 |
Share Units |
423 |
305 |
|
424 |
307 |
Weighted average number of ordinary shares for
dilutive |
18,163 |
17,966 |
|
18,188 |
18,000 |
Net earnings per share: Basic |
0.26 |
0.09 |
|
0.82 |
0.34 |
Net earnings per share: Diluted |
0.25 |
0.09 |
|
0.79 |
0.33 |
14. Financial instruments
a) Fair values
The Company's financial instruments recognized
on the consolidated statements of financial position consist of
accounts receivable, accounts payable and accrued liabilities and
note payable. The fair values of these financial instruments
approximate their carrying amounts due to their short-term
maturity.
b) Credit Risk is described in Note
5.
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. Based on the Company's
borrowing levels as at December 31,
2011, a change of one percent in interest rates would
decrease or increase the Company's annual net income by nil.
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 December 31,
2011, the Company had contracted to purchase US$18.3 million at fixed exchange rates with
terms not exceeding five months (2010 - $6.5
million). The fair market values of the contracts were
$0.2 million at December 31, 2011 and nominal at December 31, 2010. The Company recorded on these
contracts an unrealized gain of $0.2
million for the year ended December
31, 2011 and an unrealized loss of $0.8 million for the three months ended
December 31, 2011, which has been
recorded in foreign exchange gain and other in the condensed
interim consolidated statements of earnings and comprehensive
income. As at December 31,
2011, a one percent change in the Canadian dollar relative
to the US dollar would decrease or increase the Company's annual
net income by $0.2 million.
15. Selling, general and administrative ("SG&A")
Costs
Selling, general and administrative costs for the three and
twelve month periods ended December
31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Year Ended |
|
|
2011 |
2010 |
|
2011 |
2010 |
|
|
$ |
% |
$ |
% |
|
$ |
% |
$ |
% |
|
Salaries and Benefits |
10,177 |
58% |
9,792 |
59% |
|
41,086 |
60% |
36,287 |
58% |
|
Selling Costs |
2,280 |
13% |
1,976 |
12% |
|
6,495 |
9% |
6,558 |
10% |
|
Facility and office costs |
3,544 |
20% |
3,311 |
20% |
|
15,063 |
22% |
13,392 |
21% |
|
Other |
1,534 |
9% |
1,659 |
9% |
|
6,071 |
9% |
6,317 |
10% |
|
SG&A costs |
17,535 |
100% |
16,738 |
100% |
|
68,715 |
100% |
62,554 |
100% |
|
16. Segmented reporting
The Company distributes oilfield products
principally through its network of 39 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.
Forward Looking Statements
The information in this press release contains
"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 within the meaning of Canadian securities
laws. 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 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 2012 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;
and
- 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 circumstances after
the date of filing this MD&A, except as required by law.
Additional Information
Additional information relating to CE Franklin,
including its fourth 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 fourth
quarter results, which is open to the public, will be held on
Friday, February 3, 2012 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
1-855-859-2056 and entering the Passcode of 42851162
and may be accessed until midnight February
9, 2012.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/detail/904075/964391 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 Derrren Newell, 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 39 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;
within the meaning of Canadian securities law 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.
SOURCE CE Franklin Ltd.