CALGARY, Oct. 27 /PRNewswire-FirstCall/ -- CE FRANKLIN LTD.
(TSX.CFT, NASDAQ.CFK) reported net income of $0.01 per share
(basic) for the third quarter ended September 30, 2009, compared to
$0.31 per share earned in the third quarter ended September 30,
2008. Financial Highlights -------------------- (millions of Cdn.$
except Three Months Ended Nine Months Ended per share data)
September 30 September 30 ------------------- -------------------
2009 2008 2009 2008 --------- --------- --------- ---------
(unaudited) (unaudited) Sales $ 94.1 $ 149.3 $ 344.0 $ 386.2 Gross
profit 17.4 27.8 61.3 73.8 Gross profit - % of sales 18.5% 18.6%
17.8% 19.1% EBITDA(1) 0.5 9.1 11.7 21.6 EBITDA(1) % of sales 0.5%
6.1% 3.4% 5.6% Net income $ 0.2 $ 5.7 $ 6.8 $ 13.0 Per share -
basic $ 0.01 $ 0.31 $ 0.38 $ 0.71 - diluted $ 0.01 $ 0.31 $ 0.38 $
0.70 Net working capital(2) $ 131.1 $ 123.1 Bank operating loan(2)
$ 21.3 $ 20.9 "CE Franklin remained profitable despite depressed
oil and gas industry activity levels. The integration of the
oilfield supply competitor acquired June 1, 2009 is complete and
the Company will continue to focus on its key strategic
initiatives," said Michael West, President and Chief Executive
Officer. Net income for the third quarter of 2009 was $0.2 million,
down from $5.7 million in the third quarter of 2008. Third quarter
sales were $94.1 million, a decrease of $55.2 million (37%)
compared to the third quarter of 2008 as well completions declined
65% and rig counts declined 56% compared to 2008 levels. Capital
project business for the third quarter comprised 51% of total sales
(2008 - 58%), and decreased $38.2 million (44%) from the prior year
period due to declines in conventional oilfield and oil sands
activity. Gross profit for the third quarter was down $10.4 million
with gross profit margins consistent with the prior year period.
Selling, general and administrative expenses decreased by $1.5
million for the quarter compared to the prior year period.
Excluding the $0.8 million ($0.2 million after tax) cost associated
with the implementation of a cash settlement mechanism for the
Company's stock option program in the third quarter and $0.7
million of costs associated with the integration of the second
quarter acquisition of an oilfield supply competitor ("the Acquired
Business"), selling, general and administrative costs decreased by
$3.0 million (16%) compared to the prior year period as
compensation, selling and marketing costs have been managed to a
lower level in response to the reduced oil and gas industry
activity levels. The Acquired Business expanded the Company's store
network from 44 to 50 locations adding $14 million of sales and
$0.8 million of net income to the third quarter. The weighted
average number of shares outstanding during the third quarter
decreased by 0.6 million shares (3%) 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 $0.01 in the third quarter of 2009, down $0.30 from
that earned in the third quarter 2008. Net income for the first
nine months of 2009 was $6.8 million, down $6.2 million from the
first nine months of 2008. Sales were $344.0 million, a decrease of
$42.2 million (11%) compared to the first nine months of 2008.
Capital project business for the first nine months of 2009
comprised 58% of total sales (2008 - 56%), and decreased $17.2
million (8%) from the prior year period due to decreased
conventional oilfield sales offset partially by increased oil sands
sales. Gross profit for the first nine months was down $12.5
million with margins reducing by 1.3% from the prior year period.
The decrease is a result of the increase in lower margin oil sands
sales and increased competitive pressure. Selling, general and
administrative expenses decreased by $2.5 million for the first
nine months compared to the prior year period as compensation,
selling and marketing costs have been managed to a lower level in
response to the reduced oil and gas industry activity levels offset
by increased costs associated with the expansion of the Company's
store network resulting from the Acquired Business. Costs to
complete the integration of the Acquired Business were $1.5
million. The weighted average number of shares outstanding during
the first nine months of the year decreased by 0.5 million shares
(3%) from the prior year period principally due to shares purchased
in 2009 for cancellation pursuant to the Company's normal course
issuer bid. Net income per share (basic) was $0.38 in the first
nine months of 2009, down $0.33 (46%) from the first nine months of
2008. Business Outlook Natural gas prices continued to deteriorate
during the third quarter with North American production capacity
and inventory levels dominating demand. The only significant gas
capital expenditure activities are focused on the emerging shale
gas plays in north eastern British Columbia. Conventional and heavy
oil economics are reasonable at current price levels leading to
moderate activity in eastern Alberta and south eastern
Saskatchewan. Conventional oil and gas industry activity in western
Canada, as measured by well completions and the average drilling
rig count, is down approximately 60% from the prior year period.
These trends are expected to continue to subdue demand for the
Company's products for the balance of 2009 and into 2010. Oil sands
project announcements are beginning to gain momentum with the
recovery in oil prices and capital markets. Approximately 60% of
the Company's sales are driven by our customers' capital project
expenditures. The oilfield supply industry continues to struggle
with too much inventory complicated by declining revenues.
Competitor pricing is erratic, particularly with tubular and line
pipe products and is expected to continue to pressure the company's
gross profit margins. For the balance of 2009 and into 2010, sales
levels and sales margins are expected to decline compared to 2008.
The Company will continue to manage its cost structure to protect
profitability while maintaining service capacity and advancing
strategy initiatives. Over the medium to longer term, the Company
is confident its strong financial and competitive position will
enable profitable growth of its distribution network by expanding
product lines, supplier relationships and capability to service
additional oil and gas and industrial end use markets. (1) EBITDA
represents net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented,
represents a useful means of assessing the performance of the
Company's ongoing operating activities, as it reflects the
Company's earnings trends without showing the impact of certain
charges. The Company is also presenting EBITDA and EBITDA as a
percentage of sales because it is used by management as
supplemental measures of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and amortization
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Amortization expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net income, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net income is provided within the
Company's Management Discussion and Analysis. Not all companies
calculate EBITDA in the same manner and EBITDA does not have a
standardized meaning prescribed by GAAP. Accordingly, EBITDA, as
the term is used herein, is unlikely to be comparable to EBITDA as
reported by other entities. (2) Net working capital is defined as
current assets less accounts payable and accrued liabilities,
income taxes payable and other current liabilities, excluding the
bank operating loan. Net working capital and Bank operating loan
are as at quarter end. Additional Information
---------------------- Additional information relating to CE
Franklin, including its third quarter 2009 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 http://www.sedar.com/ and at
http://www.cefranklin.com/. Conference Call and Webcast Information
--------------------------------------- A conference call to review
the 2009 third quarter results, which is open to the public, will
be held on Wednesday, October 28, 2009 at 11:00 a.m. Eastern Time
(9:00 a.m. Mountain Time). Participants may join the call by
dialing 1-416-644-3423 in Toronto or dialing 1-800-589-8577 at the
scheduled time of 11:00 a.m. Eastern Time. For those unable to
listen to the live conference call, a replay will be available at
approximately 1:00 p.m. Eastern Time on the same day by calling
1-416-640-1917 in Toronto or dialing 1-877-289-8525 and entering
the Passcode of 4169372 followed by the pound sign and may be
accessed until midnight Wednesday, November 11, 2009. The call will
also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2830960 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,
midstream, refining, heavy oil, petrochemical and non oilfield
related industries such as forestry and mining. These products are
distributed through its 50 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 as at October 27, 2009 The following Management's
Discussion and Analysis ("MD&A") is provided to assist readers
in understanding CE Franklin Ltd.'s ("CE Franklin" or the
"Company") financial performance and position during the periods
presented and significant trends that may impact future performance
of CE Franklin. This discussion should be read in conjunction with
the Company's interim consolidated financial statements for the
three and nine month periods ended September 30, 2009, the interim
consolidated financial statements and MD&A for the three and
six month period ended June 30, 2009 and the three month period
ended March 31, 2009, and the MD&A and the consolidated
financial statements for the year ended December 31, 2008. All
amounts are expressed in Canadian dollars and in accordance with
Canadian generally accepted accounting principles ("Canadian
GAAP"), except where otherwise noted. Overview CE Franklin is a
leading distributor of pipe, valves, flanges, fittings, production
equipment, tubular products and other general industrial supplies
primarily to the oil and gas industry in Canada through its 50
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 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, for the best value. Our branches, supported
by our centralized Distribution Centre in Edmonton, Alberta, stock
over 25,000 stock keeping units. 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 expediting
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. Smith
International Inc., a major oilfield service company based in the
United States, owns approximately 55% of the Company's shares.
Business and Operating Strategy The Company is pursuing the
following strategies to grow its business profitably: - Expand the
reach and market share serviced by our distribution network. We are
focusing our sales efforts and product offering on servicing
complex, multi-site needs of large and emerging customers in the
energy sector. On June 1, 2009, the Company acquired a western
Canadian oilfield equipment distributor. The Acquired Business
operated 23 supply stores across the western Canadian sedimentary
basin of which 17 locations were proximate to existing CE Franklin
supply stores and have been integrated. The remaining 6 locations
extended the market reach of our distribution network. In 2009, our
Fort St. John and Lloydminster branches moved to larger locations
to support long term growth. In 2008, we continued to invest in our
distribution network by opening a branch operation in Red Earth,
Alberta and by expanding our facilities at five existing branch
operations. In the spring of 2008, we successfully completed the
move to our new 153,000 square foot Distribution Centre and nine
acre pipe yard located in Edmonton, Alberta which positions us to
service our growing distribution network. Organic growth is
expected to be complemented by selected acquisitions. - Expand our
production equipment service capability to capture more of the
product life cycle requirements for the equipment we sell such as
down hole pump repair, oilfield engine maintenance, well
optimization and on site project management. This will
differentiate our service offering from our competitors and deepen
our relationship with customers. In the first quarter of 2009, we
opened a valve actuation centre at our Distribution Centre, to
service our customers' valve automation requirements. In the third
quarter of 2009, flow control and process control products were
added to our automation product line. - Focus on the oil sands and
industrial project and MRO business by leveraging our existing
supply chain infrastructure, product and project expertise. The
Company is expanding its product line, supplier relationships and
expertise to provide the automation, instrumentation and other
specialty products that these customers require. Business Outlook
Natural gas prices continued to deteriorate during the third
quarter with North American production capacity and inventory
levels dominating demand. The only significant gas capital
expenditure activities are focused on the emerging shale gas plays
in north eastern British Columbia. Conventional and heavy oil
economics are reasonable at current price levels leading to
moderate activity in eastern Alberta and south eastern
Saskatchewan. Conventional oil and gas industry activity in western
Canada, as measured by well completions and the average drilling
rig count, is down approximately 60% from the prior year period.
These trends are expected to continue to subdue demand for the
Company's products for the balance of 2009 and into 2010. Oil sands
project announcements are beginning to gain momentum with the
recovery in oil prices and capital markets. Approximately 60% of
the Company's sales are driven by our customers' capital project
expenditures. The oilfield supply industry continues to struggle
with too much inventory complicated by declining revenues.
Competitor pricing is erratic, particularly with tubular and line
pipe products and is expected to continue to pressure the company's
gross profit margins. For the balance of 2009 and into 2010, sales
levels and sales margins are expected to decline compared to 2008.
The Company will continue to manage its cost structure to protect
profitability while maintaining service capacity and advancing
strategy initiatives. Over the medium to longer term, the Company
is confident its strong financial and competitive position will
enable profitable growth of its distribution network by expanding
product lines, supplier relationships and capability to service
additional oil and gas and industrial end use markets. Operating
Results The following table summarizes CE Franklin's results of
operations: (in millions of Cdn. dollars except per share data)
Three Months Ended Nine Months Ended September 30 September 30
------------------------------- -------------------------------
2009 2008 2009 2008 --------------- --------------- ---------------
--------------- Sales $ 94.1 100.0% $149.3 100.0% $344.0 100.0%
$386.2 100.0% Cost of sales (76.7) (81.5)% (121.5) (81.4)% (282.7)
(82.2)% (312.4) (80.9)% ------- ------- ------- ------- -------
------- ------- ------- Gross profit 17.4 18.5% 27.8 18.6% 61.3
17.8% 73.8 19.1% Selling, general and admin- istrative expenses
(17.0) (18.1)% (18.5) (12.4)% (49.7) (14.4)% (52.1) (13.5)% Foreign
exchange gain (loss) 0.1 0.1% (0.1) (0.1)% 0.1 0.0% (0.1) (0.0)%
------- ------- ------- ------- ------- ------- ------- -------
EBITDA(1) 0.5 0.5% 9.1 6.1% 11.7 3.4% 21.6 5.6% Amortiz- ation
(0.6) (0.6)% (0.6) (0.4)% (1.7) (0.5)% (1.8) (0.5)% Interest (0.3)
(0.3)% (0.2) (0.1)% (0.7) (0.2)% (0.8) (0.2)% ------- -------
------- ------- ------- ------- ------- ------- Income (loss)
before taxes (0.4) (0.4)% 8.3 5.6% 9.3 2.7% 19.0 4.9% Income tax
(expense) recovery 0.6 0.6% (2.6) (1.7)% (2.5) (0.7)% (6.0) (1.6)%
------- ------- ------- ------- ------- ------- ------- ------- Net
income 0.2 0.2% 5.7 3.8% 6.8 2.0% 13.0 3.3% ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- Net income per share Basic
$ 0.01 $ 0.31 $ 0.38 $ 0.71 Diluted $ 0.01 $ 0.31 $ 0.38 $ 0.70
Weighted average number of shares outstanding (000's) Basic 17,647
18,254 17,795 18,290 Diluted 17,908 18,495 18,036 18,674 (1) EBITDA
represents net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented,
represents a useful means of assessing the performance of the
Company's ongoing operating activities, as it reflects the
Company's earnings trends without showing the impact of certain
charges. The Company is also presenting EBITDA and EBITDA as a
percentage of sales because it is used by management as
supplemental measures of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and amortization
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Amortization expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net income, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net income is provided within the table
above. Not all companies calculate EBITDA in the same manner and
EBITDA does not have a standardized meaning prescribed by GAAP.
Accordingly, EBITDA, as the term is used herein, is unlikely to be
comparable to EBITDA as reported by other entities. Third Quarter
Results Net income for the third quarter of 2009 was $0.2 million,
down from $5.7 million in the third quarter of 2008. Third quarter
sales were $94.1 million, a decrease of $55.2 million (37%)
compared to the third quarter of 2008 as well completions declined
65% and rig counts declined 56% compared to 2008 levels. Capital
project business for the third quarter comprised 51% of total sales
(2008 - 58%), and decreased $38.2 million (44%) from the prior year
period due to declines in conventional oilfield and oil sands
activity. Gross profit for the third quarter was down $10.4 million
with gross profit margins consistent with the prior year period.
Selling, general and administrative expenses decreased by $1.5
million for the quarter compared to the prior year period.
Excluding the $0.8 million ($0.2 million after tax) cost associated
with the implementation of a cash settlement mechanism for the
Company's stock option program in the third quarter and $0.7
million of costs associated with the integration of the second
quarter acquisition of an oilfield supply competitor ("the Acquired
Business"), selling, general and administrative costs decreased by
$3.0 million (16%) compared to the prior year period as
compensation, selling and marketing costs have been managed to a
lower level in response to the reduced oil and gas industry
activity levels. The Acquired Business expanded the Company's store
network from 44 to 50 locations adding $14 million of sales and
$0.8 million of operating expenses to the third quarter. The
weighted average number of shares outstanding during the third
quarter decreased by 0.5 million shares (3%) 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 $0.01 in the third quarter of 2009, down $0.30
from that earned in the third quarter 2008. Year to Date Results
Net income for the first nine months of 2009 was $6.8 million, down
$6.2 million from the first nine months of 2008. Sales were $344.0
million, a decrease of $42.2 million (11%) compared to the first
nine months of 2008. Capital project business for the first nine
months of 2009 comprised 58% of total sales (2008 - 56%), and
decreased $17.2 million (8%) from the prior year period due to
decreased conventional oilfield sales offset partially by increased
oil sands sales. Gross profit for the first nine months was down
$12.5 million with margins reducing by 1.3% from the prior year
period. The decrease is a result of the increase in lower margin
oil sands sales and increased competitive pressure. Selling,
general and administrative expenses decreased by $2.5 million for
the first nine months compared to the prior year period as
compensation, selling and marketing costs have been managed to a
lower level in response to the reduced oil and gas industry
activity levels offset by increased costs associated with the
expansion of the Company's store network resulting from the
Acquired Business. Costs to complete the integration of the
Acquired Business were $1.5 million. The weighted average number of
shares outstanding during the first nine months of the year
decreased by 0.5 million shares (3%) from the prior year period
principally due to shares purchased in 2009 for cancellation
pursuant to the Company's normal course issuer bid. Net income per
share (basic) was $0.38 in the first nine months of 2009, down
$0.33 (46%) from the first nine months of 2008. A more detailed
discussion of the Company's third quarter results from operations
is provided below: Sales Sales for the quarter ended September 30,
2009 were $94.1 million, a decrease of $55.2 million (37%) compared
to the quarter ended September 30, 2008, as detailed above in the
"Third Quarter Results" discussion. (in millions of Cdn. $) Three
months ended Sept 30 Nine months ended Sept 30
--------------------------- --------------------------- 2009 2008
2009 2008 ------------- ------------- ------------- -------------
End use sales demand: $ % $ % $ % $ % Capital projects 48.4 51 86.6
58 199.5 58 216.8 56 Maintenance, repair and operating supplies
(MRO) 45.7 49 62.7 42 144.5 42 169.4 44 ------------- -------------
------------- ------------- Total sales 94.1 100 149.3 100 344.0
100 386.2 100 Note: Capital project end use sales are defined by
the Company as consisting of tubulars and 80% of pipe, flanges and
fittings; and valves and accessories product sales respectively;
MRO Sales are defined by the Company as consisting of pumps and
production equipment, production services; general product and 20%
of pipes, flanges and fittings; and valves and accessory product
sales respectively. The 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 good
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. The relative level of oil and gas
commodity prices are a key driver of industry capital project
activity as product prices directly impact the economic returns
realized by oil and gas companies. Well completion, rig count and
commodity price information for the three and nine months ended
September 30, 2009 and 2008 are provided in the table below. Q3
Average YTD Average ----------------- % ----------------- % 2009
2008 change 2009 2008 change -------- -------- -----------------
-------- -------- Gas - Cdn. $/gj (AECO spot) $2.97 $7.78 (62%)
$3.79 $8.65 (56%) Oil - Cdn. $/bbl (Synthetic Crude) $73.99 $122.84
(40%) $65.93 $115.65 (43%) Average rig count 178 407 (56%) 197 360
(45%) Well completions: Oil 822 1,826 (55%) 2,198 4,068 (46%) Gas
646 2,370 (73%) 4,491 7,330 (39%) -------- --------
----------------- -------- -------- Total well completions 1,468
4,196 (65%) 6,689 11,398 (41%) Average statistics are shown except
for well completions. Sources: Oil and Gas prices - First Energy
Capital Corp.; Rig count data - CAODC; Well completion data - Daily
Oil Bulletin Sales of capital project related products were $48.4
million in the third quarter of 2009, down $38.2 million (44%) from
the third quarter of 2008 due to decreased conventional oilfield
and oil sands activity. Total well completions decreased by 65% in
the third quarter of 2009 and the average working rig count
decreased by 56% compared to the prior year period. Gas wells
comprised 44% of the total wells completed in western Canada in the
third quarter of 2009 compared to 56% in the third quarter of 2008.
Spot gas prices ended the third quarter at $3.69 per GJ (AECO) an
increase of 24% from the third quarter average price. Oil prices
ended the third quarter at $74.91 per bbl (Synthetic Crude) an
increase of 1% from the third quarter average price. Continued
depressed oil and gas prices are expected to lead to reduced
industry cash flow, access to capital and capital expenditure
economics, which in turn is expected to decrease demand for the
Company's products through the remainder of 2009 and into 2010. MRO
product sales are related to overall oil and gas industry
production levels and tend to be more stable than capital project
sales. MRO product sales for the quarter ended September 30, 2009
decreased by $17.0 million (27%) to $45.7 million compared to the
quarter ended September 30, 2008 and comprised 49% of the Company's
total sales (2008 - 42%). The Company's strategy is to grow
profitability by focusing on its core western Canadian oilfield
equipment service business, complemented by an increase in the
product life cycle services provided to its customers and the focus
on the emerging oil sands capital project and MRO sales
opportunities. Sales results of these initiatives to date are
provided below: Q3 2009 Q3 2008 YTD 2009 YTD 2008 -------------
------------- ------------- ------------- Sales ($millions) $ % $ %
$ % $ % Oilfield 87.9 93 126.4 92 282.3 82 349.4 94 Oil sands 3.4 4
18.8 4 54.4 16 24.9 3 Production services 2.8 3 4.1 4 7.3 2 11.9 3
------------- ------------- ------------- ------------- Total sales
94.1 100 149.3 100 344.0 100 386.2 100 Sales of oilfield products
to conventional western Canada oil and gas end use applications
were $87.9 million for the third quarter of 2009, down 30% from the
third quarter of 2008. This decrease was driven by the 65% decrease
in well completions compared to the prior year period. The impact
on sales of decreased industry activity was partially offset by $14
million of sales contributed during the quarter by the Acquired
Business. Sales to oil sands end use applications decreased to $3.4
million in the third quarter compared to $18.8 million in the third
quarter of 2008. The decrease in sales was mainly due to the
reduction in project activity during the third quarter. The Company
continues to position its sales focus, Distribution Centre and Fort
McMurray branch to penetrate this emerging market for capital
project and MRO products. Production service sales were $2.8
million in the third quarter of 2009 compared to $4.1 million in
the third quarter of 2008 as customers deferred maintenance
activities in the face of challenging commodity prices. Gross
Profit Q3 2009 Q3 2008 YTD 2009 YTD 2008 --------- ---------
--------- --------- Gross profit (millions) $17.4 $27.8 $61.3 $73.8
Gross profit margin as a % of sales 18.5% 18.6% 17.8% 19.1% Gross
profit composition by product sales category: Tubulars 3% 18% 6%
11% Pipe, flanges and fittings 27% 23% 33% 24% Valves and
accessories 20% 14% 19% 18% Pumps, production equipment and
services 13% 15% 11% 16% General 37% 30% 31% 31% ---------
--------- --------- --------- Total gross profit 100% 100% 100%
100% Gross profit was $17.4 million in the third quarter of 2009,
and gross profit margins were 18.5%, a decrease of $10.4 million
from the prior year third quarter with margin % consistent quarter
over quarter. The most significant change in gross profit
composition in the third quarter of 2009 compared to the third
quarter of 2008 was the reduction in tubular gross profit
contribution. Tubular sales and margins in 2009 have been affected
by depressed drilling activity and an excess supply of inventory
compared to the third quarter of 2008 when sales and margins were
high due to product cost inflation and tight product supply
conditions. The increase in general products gross profit
composition reflects the increase in MRO end use sales by 7% to 49%
of total sales in the quarter, compared to the prior year period.
Selling, General and Administrative ("SG&A") Costs Q3 2009 Q3
2008 YTD 2009 YTD 2008 ------------- ------------- -------------
------------- ($millions) $ % $ % $ % $ % People costs 9.3 55 10.5
57 28.0 56 29.9 57 Selling costs 2.4 14 2.7 15 6.0 13 7.0 13
Facility and office costs 3.4 20 3.3 18 10.1 20 9.4 18 Other 1.9 11
2.0 10 5.6 11 5.8 12 ------------- ------------- -------------
------------- SG&A costs 17.0 100 18.5 100 49.7 100 52.1 100
SG&A costs as % of sales 18% 12% 14% 14% SG&A costs
decreased by $1.5 million (8%) in the third quarter of 2009
compared to the prior year period. Excluding one-time costs of $0.8
million ($0.2 million after tax) associated with the implementation
of a cash settlement mechanism to the Company's stock option plan
during the quarter and $0.7 million of acquisition integration
costs, SG&A costs were down $3.0 million (16%) compared to the
prior year period. The stock option plan cash settlement mechanic
was implemented to provide the Company increased flexibility to
manage share dilution while resourcing the plan on a tax efficient
basis. The cash settlement option requires the Company to record a
current obligation equal to the positive difference between the
Company's stock price and the stock option exercise price. Stock
option obligations were previously recorded as a credit to
shareholders' equity - contributed surplus using the Black-Scholes
valuation model. The integration of the Acquired Business was
completed at a total integration cost of $1.5 million of which $0.7
million was incurred in the third quarter. The acquisition has
increased the Company's store network by 6 locations and employee
base by 42. Operating costs associated with the acquired store
locations (excluding integration costs) were $0.7 million in the
third quarter. People costs decreased by $1.2 million during the
third quarter compared to the prior year period due to a 5%
reduction in employees during the quarter (15% year to date) and
lower incentive compensation costs, partially offset by the cost of
employees added from the Acquired Business. Selling costs were down
$0.3 million from the prior year period due to lower commission
based sales and discretionary expenses. Facility and office costs
increased marginally over the prior year period as higher lease
costs associated with the expansion of the Company's store network,
were partially offset by lower utility costs. The Company leases 40
of its 50 branch locations as well as its corporate office in
Calgary and Edmonton Distribution Centre. Six branch locations are
owned and four are operated by agents. The Company continues to
take steps to reduce its variable and fixed costs to adjust to
lower industry activity levels while maintaining service capacity
and advancing strategic initiatives. Amortization Expense
Amortization expense of $0.6 million in the third quarter of 2009
was comparable to the third quarter of 2008. Interest Expense
Interest expense of $0.3 million in the third quarter of 2009 was
comparable to the third quarter of 2008. Foreign Exchange (Gain)
Loss Foreign exchange (gains) and losses were nominal at a $0.1
million gain in the third quarter of 2009 and a $0.1 million loss
in the third quarter of 2008. Management of the Company's foreign
exchange exposures has contributed to this result despite
significant exchange rate volatility experienced in both 2008 and
the first nine months of 2009. Income Tax Expense The Company's
effective tax rate, for the third quarter of 2009 was 146.1%,
compared to 31.2% in the third quarter of 2008. The change in
effective tax rates reflects the impact of implementing the stock
option cash settlement mechanism during the third quarter. Stock
option expense was previously non-deductible for income tax
purposes. Additionally, non-deductible items had a greater impact
on the effective tax rate in the third quarter of 2009 due to the
decrease in pre-tax income compared to the prior year period.
Substantially all of the Company's tax provision is currently
payable. Summary of Quarterly Financial Data The selected quarterly
financial data presented below is presented in Canadian dollars and
in accordance with Canadian GAAP. This information is derived from
the Company's unaudited quarterly financial statements. (in
millions of Cdn. dollars except per share data) Unaudited Q4 Q1 Q2
Q3 Q4 Q1 Q2 Q3 2007 2008 2008 2008 2008 2009 2009 2009 -------
------- ------- ------- ------- ------- ------- ------- Sales
$112.3 $140.6 $ 96.4 $149.3 $161.2 $140.7 $109.1 $ 94.1 Gross
profit 20.4 27.1 19.0 27.8 33.9 26.4 17.5 17.4 Gross profit % 18.2%
19.2% 19.7% 18.6% 21.0% 18.8% 16.0% 18.5% EBITDA 5.1 10.2 2.3 9.1
14.3 9.5 1.7 0.5 EBITDA as a % of sales 4.5% 7.2% 2.4% 6.1% 8.9%
6.8% 1.6% 0.5% Net income 2.4 6.3 1.0 5.7 8.8 6.0 0.6 0.2 Net
income as a % of sales 2.1% 4.5% 1.0% 3.8% 5.5% 4.3% 0.5% 0.2% Net
income per share Basic $ 0.13 $ 0.34 $ 0.05 $ 0.31 $ 0.48 $ 0.33 $
0.04 $ 0.01 Diluted $ 0.13 $ 0.34 $ 0.05 $ 0.31 $ 0.47 $ 0.33 $
0.03 $ 0.01 Net working capital (1) 134.7 117.4 114.9 123.1 142.8
153.2 137.0 131.1 Bank operating loan(1) 44.3 21.8 18.4 20.9 34.9
40.2 25.3 21.3 Total well complet- ions 5,026 4,595 2,607 4,392
6,971 3,947 1,274 1,468 (1) Net working capital and 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. As a result,
the first and fourth quarters typically represent the busiest time
for oil and gas industry activity and the highest sales activity
for the Company. Sales levels typically drop dramatically during
the second quarter until such time as roads have dried and road
bans have been lifted. This typically results in a significant
reduction in earnings during the second quarter, as the decline in
sales typically out paces the decline in SG&A costs as the
majority of the Company's SG&A costs are fixed in nature. Net
working capital (defined as current assets less accounts payable
and accrued liabilities, income taxes payable and other current
liabilities, excluding the bank operating loan) and bank operating
loan borrowing levels follow similar seasonal patterns as sales.
Liquidity and Capital Resources The Company's primary internal
source of liquidity is cash flow from operating activities before
net changes in non-cash working capital balances. Cash flow from
operating activities and the Company's 364-day bank operating
facility are used to finance the Company's net working capital,
capital expenditures required to maintain its operations, and
growth capital expenditures. As at September 30, 2009, borrowings
under the Company's bank operating loan were $21.3 million, a
decrease of $13.6 million from December 31, 2008. Borrowing levels
have decreased due to the Company generating $10.3 million in cash
flow from operating activities, before net changes in non-cash
working capital balances and a $19.8 million reduction in net
working capital excluding the impact of the cash settled options
and inventory additions related to the acquisition of the Acquired
Business. This was offset by $2.3 million in capital and other
expenditures, $11.3 million related to the acquisition of the
oilfield equipment distributor and $2.9 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"). The acquisition post closing adjustments were complete
and the final payment was made in the third quarter. Net working
capital was $131.1 million at September 30, 2009, a decrease of
$11.7 million from December 31, 2008. Accounts receivable decreased
by $36.1 million (36%) to $64.4 million at September 30, 2009 from
December 31, 2008 due to the decrease in sales in the third quarter
partially offset by an increase in days sales outstanding ("DSO").
DSO in the third quarter of 2009 was 57 days compared to 51 days in
the fourth quarter of 2008 and 57 days in the third quarter of
2008. DSO is calculated using average sales per day for the quarter
compared to the period end accounts receivable balance. Inventory
decreased by $15.0 million at September 30, 2009 from December 31,
2008. Including the $10.5 million of inventory from the Acquired
Business inventory was down $25.5 million (21%) from year end
levels. Inventory turns for the third quarter of 2009 decreased to
2.9 times compared to 4.2 times in the fourth quarter of 2008 and
5.6 times in the third quarter of 2008. Inventory turns are
calculated using cost of goods sold for the quarter on an
annualized basis compared to the period end inventory balance. The
Company plans to adjust its investment in inventory as the Acquired
Business is integrated and to align with anticipated lower industry
activity levels and compressed supplier lead times in order to
improve inventory turnover efficiency. Accounts payable and accrued
liabilities decreased by $41.2 million (50%) to $42.1 million at
September 30, 2009 from December 31, 2008, responsive to the
decreased activity levels. Capital expenditures in the third
quarter of 2009 were $0.7 million, compared to $0.3 million in the
prior year period. The majority of the expenditures in 2009 have
been directed towards branch facility expansions. The Company has a
364 day bank operating loan facility in the amount of $60.0 million
arranged with a syndicate of three banks that matures in July 2010.
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 facility is
subject to a borrowing base formula applied to accounts receivable
and inventories, and a covenant restricting the Company's average
debt to 3.0 times trailing twelve month EBITDA. As at September 30,
2009, the Company's average debt to EBITDA ratio was 1.1 times
(September 30, 2008 - 1.0 times) which provides a maximum borrowing
ability of $60 million under the facility. As at September 30,
2009, the ratio of the Company's debt to total capitalization (debt
plus equity) was 13% (September 30, 2008 - 14%). Long term debt was
reduced by $0.2 million during the quarter to $0.3 million in
consideration for the settlement of a JEN Supply post closing
acquisition adjustment. Contractual Obligations There have been no
material changes in off-balance sheet contractual commitments since
December 31, 2008. Capital Stock As at September 30, 2009 and 2008,
the following shares and securities convertible into shares were
outstanding: (millions) September 30, September 30, 2009 2008
Shares Shares -------------- -------------- Shares outstanding 17.6
18.2 Stock options 1.2 1.3 Share units 0.5 0.2 --------------
-------------- Shares outstanding and issuable 19.3 19.7 The
weighted average number of shares outstanding during the third
quarter 2009 was 17.6 million, a decrease of 0.6 million shares
from the prior year's third quarter due principally to the
purchases of common shares under its NCIB and to resource share
unit obligations. The diluted weighted average number of shares
outstanding was 17.9 million, a decrease of 0.6 million shares from
the prior year's third quarter. The Company has established an
independent trust to purchase common shares of the Company on the
open market to resource share unit obligations. There were no
common shares acquired in the third quarter of 2009. For the nine
months ended September 30, 2009 there were 75,000 common shares
acquired by the trust at an average cost per share $5.23. (Three
and nine months ended September 30, 2008 - 100,095 and 200,095 at
an average cost per share of $9.22 and $8.23 respectively). As at
September 30, 2009, the trust held 354,683 shares (September 30,
2008 - 243,892 shares). A stock option cash settlement mechanic was
introduced during the third quarter which allows the Company to
manage share dilution while resourcing its long term incentive
compensation plan on a tax efficient basis. The Company's intention
is to settle stock option exercises with cash going forward. On
January 6, 2009, the Company announced a NCIB to purchase for
cancellation, up to 900,000 common shares representing
approximately 5% of its outstanding common shares. As at September
30, 2009, the Company had purchased 530,587 shares at a cost of
$2.7 million ($5.14 per share). Critical Accounting Estimates The
preparation of the Company's financial statements requires
management to adopt accounting policies that involve the use of
significant estimates and assumptions. These estimates and
assumptions are developed based on the best available information
and are believed by management to be reasonable under the existing
circumstances. New events or additional information may result in
the revision of these estimates over time. A summary of the
significant accounting policies can be found in Note 1 to the
December 31, 2008 consolidated financial statements. Change in
Accounting Policies Effective January 1, 2009, the Company adopted
section 3064 - Goodwill and Intangible Assets. The standard
addresses the accounting treatment of internally developed
intangibles and the recognition of such assets. The adoption of
this Standard has had no impact on the Company. Transition to
International Financial Reporting Standards (IFRS) In February
2008, the Canadian Accounting Standards Board ("AcSB") confirmed
that the basis for financial reporting by Canadian publicly
accountable enterprises will change from Canadian GAAP to IFRS
effective for January 1, 2011, including the preparation and
reporting of one year of comparative figures. This change is part
of a global shift to provide consistency in financial reporting in
the global marketplace. Project Structure and Governance A Steering
Committee has been established to provide leadership and guidance
to the project team, assist in developing accounting policy
recommendations and ensure there is adequate resources and training
available. Management provides status updates to the Audit
Committee on a quarterly basis. Resources and Training CE
Franklin's project team has been assembled and has developed a
detailed workplan that includes training, detailed GAAP to IFRS
analysis, technical research, policy recommendations and
implementation. The project team completed initial training and
ongoing training will continue through the project as required. The
Company's Leadership Team and the Audit Committee have also
participated in IFRS awareness sessions. IFRS Progress The project
team is currently assessing the differences between Canadian GAAP
and IFRS. A risk based approach has been used to identify
significant differences based on possible financial impact and
complexity. The significant differences have been identified and
the impact to financial reporting, information systems and internal
controls over financial reporting is being assessed. There are a
number of IFRS standards in the process of being amended by the
IASB and are expected to continue until the transition date of
January 1, 2011. The Company is actively monitoring proposed
changes. At this stage in the project, CE Franklin cannot
reasonably determine the full impact that adopting IFRS would have
on its financial position and future results. Controls and
Procedures Internal control over financial reporting ("ICFR") is
designed to provide reasonable assurance regarding the reliability
of the Company's financial reporting and its compliance with
Canadian GAAP in its financial statements. The President and Chief
Executive Officer and the Vice President and Chief Financial
Officer of the Company have evaluated whether there were changes to
its ICFR during the nine months ended September 30, 2009 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, 2008 have occurred that would materially change
the information disclosed in the Company's Form 20F. Forward
Looking Statements The information in this 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
2009 and 2010; - 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 circumstances after the date of filing this MD&A,
except as required by law. Additional Information
---------------------- Additional information relating to CE
Franklin, including its third quarter 2009 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 http://www.sedar.com/ and at
http://www.cefranklin.com/ CE Franklin Ltd. Interim Consolidated
Balance Sheets - Unaudited
-------------------------------------------------------------------------
September 30 December 31 (in thousands of Canadian dollars) 2009
2008
-------------------------------------------------------------------------
Assets Current assets Accounts receivable 64,443 100,513
Inventories 104,411 119,459 Other 4,353 9,529
-------------------------------------------------------------------------
173,207 229,501 Property and equipment 11,000 9,528 Goodwill 20,570
20,570 Future income taxes (note 5) 1,684 1,186 Other 377 649
-------------------------------------------------------------------------
206,838 261,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities Current liabilities Bank operating loan 21,336 34,948
Accounts payable and accrued liabilities 42,088 83,258 Income taxes
payable (note 5) - 3,405
-------------------------------------------------------------------------
63,424 121,611 Long term debt 290 500
-------------------------------------------------------------------------
63,714 122,111
-------------------------------------------------------------------------
Shareholders' Equity Capital stock 22,826 22,498 Contributed
surplus 17,523 18,835 Retained earnings 102,775 97,990
-------------------------------------------------------------------------
143,124 139,323
-------------------------------------------------------------------------
206,838 261,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Operations - Unaudited
-------------------------------------------------------------------------
Three months ended Nine months Ended (in thousands of Canadian
------------------- -------------------- dollars except shares and
September September September September per share amounts) 30, 2009
30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Sales 94,149 149,256 344,014 386,233 Cost of sales 76,702 121,460
282,704 312,423
-------------------------------------------------------------------------
Gross profit 17,447 27,796 61,310 73,810
-------------------------------------------------------------------------
Other expenses Selling, general and administrative expenses 17,017
18,534 49,658 52,144 Amortization 635 586 1,776 1,797 Interest
expense 322 205 670 805 Foreign exchange (gain)/loss (71) 119 (100)
109
-------------------------------------------------------------------------
17,903 19,444 52,004 54,855
-------------------------------------------------------------------------
Income/(loss) before income taxes (456) 8,352 9,306 18,955 Income
tax expense (recovery) (note 5) Current (215) 2,548 2,850 6,131
Future (451) 58 (382) (155)
-------------------------------------------------------------------------
(666) 2,606 2,468 5,976
-------------------------------------------------------------------------
Net income and comprehensive income 210 5,746 6,838 12,979
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per share (note 4(e)) Basic 0.01 0.31 0.38 0.71 Diluted
0.01 0.31 0.38 0.70
-------------------------------------------------------------------------
Weighted average number of shares outstanding (000's) Basic 17,647
18,254 17,795 18,290 Diluted (note 4(e)) 17,908 18,495 18,036
18,674
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Cash Flow - Unaudited
-------------------------------------------------------------------------
Three months ended Nine months Ended --------------------
------------------- (in thousands of Canadian September 30
September 30 dollars 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flows from operating activities Net income for the period 210
5,746 6,838 12,979 Items not affecting cash - Amortization 635 586
1,776 1,797 Gain on disposal of assets - - (45) - Future income tax
recovery (451) 58 (382) (155) Stock based compensation expense
1,101 303 2,082 1,149
-------------------------------------------------------------------------
1,495 6,693 10,269 15,770 Net change in non-cash working capital
balances related to operations - Accounts receivable (7,325)
(17,008) 36,070 (12,020) Inventories 13,766 (3,451) 25,280 14 Other
current assets (1,441) (2,176) 6,277 (3,931) Accounts payable and
accrued liabilities 2,083 15,597 (43,323) 28,666 Income taxes
payable (305) (925) (4,495) (793)
-------------------------------------------------------------------------
8,273 (1,270) 30,078 27,706
-------------------------------------------------------------------------
Cash flows (used in)/from financing activities Decrease in bank
operating loan (3,941) 2,452 (13,621) (24,158) Issuance of capital
stock - - 248 49 Purchase of capital stock through normal course
issuer bid (465) - (2,727) - Purchase of capital stock in trust for
Share Unit Plans - (919) (394) (1,642)
-------------------------------------------------------------------------
(4,406) 1,533 (16,494) (25,751)
-------------------------------------------------------------------------
Cash flows (used in)/from investing activities Purchase of property
and equipment (706) (263) (2,298) (2,396) Business acquisition
(note 2) (3,161) - (11,286) 441
-------------------------------------------------------------------------
(3,867) (263) (13,584) (1,955)
-------------------------------------------------------------------------
Change in cash and cash equivalents during the period - - - - Cash
and cash equivalents - Beginning and end of period - - - -
-------------------------------------------------------------------------
Cash paid during the period for: Interest on bank operating loan
322 163 670 601 Income taxes 450 2,407 7,230 2,570
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Changes in Shareholders' Equity - Unaudited
-------------------------------------------------------------------------
Capital Stock ------------------ (in thousands of Number Share-
Canadian dollars and of Contributed Retained holders' number of
shares) Shares $ Surplus Earnings Equity
-------------------------------------------------------------------------
Balance - December 31, 2007 18,370 24,306 17,671 76,243 118,220
Stock based compensation expense - - 1,149 - 1,149 Stock options
excercised 10 70 (20) - 50 Share Units exercised 11 181 (181) - -
Purchase of shares in trust for Share Unit Plans (200) (1,643) - -
(1,643) Net income - - - 12,979 12,979
-------------------------------------------------------------------------
Balance - September 30, 2008 18,191 22,914 18,619 89,222 130,755
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance - December 31, 2008 18,094 22,498 18,835 97,990 139,323
Stock based compensation expense - - 1,270 - 1,270 Modification of
Stock Option plan (Note 4(a)) - - (1,329) - (1,329) Normal Course
Issuer Bid (532) (693) - (2,053) (2,746) Stock options exercised 57
248 (86) - 162 Share Units exercised 64 1,167 (1,167) - - Purchase
of shares in trust for Share Unit Plans (75) (394) - - (394) Net
income - - - 6,838 6,838
-------------------------------------------------------------------------
Balance - September 30, 2009 17,608 22,826 17,523 102,775 143,124
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Notes to Interim Consolidated
Financial Statements - Unaudited
-------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars except share and
per share amounts) Note 1 - Accounting Policies These interim
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada applied on
a consistent basis with CE Franklin Ltd.'s (the "Company") annual
consolidated financial statements for the year ended December 31,
2008, except for the adoption of section 3064, as detailed below.
These interim consolidated financial statements should be read in
conjunction with the annual consolidated financial statements and
the notes thereto for the year ended December 31, 2008, but do not
include all disclosures required by Generally Accepted Accounting
Principles (GAAP) for annual financial statements. Effective
January 1, 2009, the Company adopted CICA section 3064 - Goodwill
and Intangible Assets. The standard addresses the accounting
treatment of internally developed intangibles and the recognition
of such assets. The adoption of this standard has had no impact on
the Company. These unaudited interim consolidated financial
statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for
the interim periods presented; all such adjustments are of a normal
recurring nature. The Company's sales typically peak in the first
quarter when drilling activity is at its highest levels. They then
decline through the second quarter, rising again in the third and
fourth quarters when preparation for the new drilling season
commences. Similarly, net working capital levels are typically at
seasonally high levels at the end of the first quarter, declining
in the second and third quarters, and then rising again in the
fourth quarter. Note 2 - Business Combinations On June 1st 2009,
the Company acquired a western Canadian oilfield equipment
distributor, for total consideration of $11.3 million, after post
closing adjustments of $0.7 million related principally to
inventory. Using the purchase method of accounting for
acquisitions, the Company consolidated the assets from the
acquisition date and allocated the consideration paid as follows:
As at September 30, 2009 $'000
-------------------------------------------------------------------------
Cash consideration paid 11,286 -------- -------- Net assets
acquired: Inventory 10,462 Property, plant and equipment 824
-------- 11,286 -------- -------- Note 3 - Inventory Inventories
consisting primarily of goods purchased for resale are valued at
the lower of average cost or net realizable value. Inventory
obsolescence expense was recognized in the three and nine month
period ending September 30, 2009 of $105,000 and $1,050,000
respectively (2008 - $25,000 recovery and $301,000 expense). As at
September 30, 2009 and December 31, 2008 the Company had recorded
inventory valuation reserves of $6.5 million and $2.8 million
respectively. The year over year increase in the reserve resulting
from normal business was augmented by a $2.9 million increase in
the reserve as a result of the acquisition detailed in note 2. Note
4 - Share Data At September 30, 2009, the Company had 17.6 million
common shares, 1.2 million stock options and 0.5 million share
units outstanding. a) Stock options Option activity for each of the
nine month periods ended September 30 was as follows: 000's 2009
2008
-------------------------------------------------------------------------
Outstanding at January 1 1,294 1,262 Granted - 75 Exercised (57)
(10) Forfeited (37) (1)
-------------------------------------------------------------------------
Outstanding at September 30 1,200 1,326
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable at September 30 770 667 There were no options granted
during the three and nine month periods ended September 30, 2009. A
total of 75,588 stock options were granted at a weighted average
strike price of $6.26 in the nine month period ended September 30,
2008 for a fair value of $274,000. The fair value of the options
granted was estimated as at the grant date using the Black- Scholes
option pricing model, using the following assumptions: 2008 ------
Dividend yield Nil Risk-free interest rate 3.88% Expected life 5
years Expected volatility 50% During the quarter ended September
30, 2009, the Company modified its stock option plan to include a
cash settlement mechanism. As a result, the Company's stock option
obligations are now classified as current obligations (subject to
vesting) based on the positive difference between the Company's
closing stock price at period end and the underlying option
exercise price. At September 30, 2009, the Company's accrued stock
option liability was $2,143,000 representing an $814,000 increase
in compensation expense during the quarter over the equity
obligation of $1,329,000 previously recorded to shareholders equity
(contributed surplus) using the Black-Scholes valuation model.
Total stock option compensation expense recorded in the three and
nine month periods ended September 30, 2009 was $996,000 (2008 -
$170,000) and $1,351,000 (2008 - $520,000), respectively and is
included in selling, general and administrative expenses on the
Consolidated Statement of Operations. b) Share Unit Plans The
Company has Restricted Share Unit ("RSU"), Performance Share Unit
("PSU") and Deferred Share Unit ("DSU") plans (collectively the
"Share Unit Plans"), 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 value 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% dependant on
performance. The vesting period for RSU's and PSU's is three years
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 at the date of the
grant and is recorded to compensation expense and contributed
surplus. For PSU grants, the compensation expense is based on the
estimated RONA performance for the year ended December 31, 2009.
The contributed surplus balance is reduced as the vested units are
exchanged for either common shares or cash. Share Unit Plan
activity for the nine month periods ended September 30 was as
follows: 000's 2009 Total 2008 Total
-------------------------------------------------------------------------
RSU PSU DSU RSU PSU DSU Outstanding at January 1 161 - 70 231 178 -
37 215 Granted 172 161 28 361 1 - 33 34 Exercised (64) - - (64)
(11) - - (11) Forfeited (4) (5) - (9) - - - -
-------------------------------------------------------------------------
Outstanding at September 30 265 156 98 519 168 - 70 238
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable at September 30 75 - 98 173 80 - 70 150 Share Unit Plan
compensation expense recorded in the three and nine month periods
ended September 30, 2009 were $105,000 (2008- $133,000) and
$733,000 (2008- $629,000) respectively. c) The Company purchases
its common shares on the open market to satisfy Share Unit Plan
obligations through an independent trust. The trust is considered
to be a variable interest entity and is consolidated in the
Company's financial statements with the number and cost of shares
held in trust, reported as a reduction of capital stock. During the
three and nine month periods ended September 30, 2009, nil and
75,000 common shares were acquired, respectively, by the trust
(2008 - 100,095 and 200,095) at a cost of nil for the three month
period (2008- $922,000) and $394,000 for the nine month period
(2008 - $1,643,000). d) Normal Course Issuer Bid ("NCIB") On
January 6, 2009, the Company announced a NCIB to purchase for
cancellation, up to 900,000 common shares representing
approximately 5% of its outstanding common shares. During the third
quarter, the Company purchased 75,739 shares at a cost of $465,000
and since the inception of the NCIB, the Company had purchased
530,587 shares at a cost of $2,727,000. e) Reconciliation of
weighted average number of diluted common shares outstanding (in
000's) The following table summarizes the common shares in
calculating net earnings per share. Three Months Ended Nine Months
Ended -------------------- ------------------- September 30
September 30 2009 2008 2009 2008
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Weighted average common shares outstanding - basic 17,647 18,254
17,795 18,290 Effect of Stock options and Share Unit Plans 261 241
241 384
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Weighted average common shares outstanding - diluted 17,908 18,495
18,036 18,674
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Note 5 - Income taxes a) The difference between the income tax
provision recorded and the provision obtained by applying the
combined federal and provincial statutory rates is as follows:
Three Months Ended Nine Months Ended September 30 September 30 2009
% 2008 % 2009 % 2008 %
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Income before income taxes (456) 8,352 9,306 18,955
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Income taxes calculated at expected rates (134) (29.4) 2,498 29.9
2,735 29.4 5,670 29.9 Non-deductible items 31 6.8 76 0.9 91 1.0 180
0.9 Capital taxes 16 3.5 13 0.2 45 0.5 35 0.2 Share based
compensation (324) (71.1) 46 0.6 (324) (3.5) 139 0.7 Adjustments on
filing returns & other (255) (55.9) (27) (0.3) (79) (0.8) (48)
(0.3)
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(666) (146.1) 2,606 31.2 2,468 26.5 5,976 31.5
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As at September 30, 2009 included in other current assets are
income taxes receivable of $975,000 (December 31 2008 - $3,405,000
payable). b) Future income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of future income
tax assets and liabilities are as follows: As at September 30
December 31 2009 2008
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Assets Property and equipment 836 855 Share based compensation
1,123 289 Other 99 395
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2,058 1,539 Liabilities Goodwill and other 374 353
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Net future income tax asset 1,684 1,186
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The Company believes it is more likely than not that all future
income tax assets will be realized. Note 6 - Capital Management The
Company's primary source of capital is its shareholders equity and
cash flow from operating activities before net changes in non-cash
working capital balances. The Company augments these capital
sources with a $60 million, 364 day bank operating loan facility
which is used to finance its net working capital and general
corporate requirements. The bank operating facility is arranged
through a syndicate of three banks and matures in July 2010. The
maximum amount available to borrow under this facility is subject
to a borrowing base formula applied to accounts receivable and
inventories, and a covenant restricting the Company's average
guaranteed debt to 3.0 times trailing 12 month earnings before
interest, amortization and taxes. As at September 30, 2009, this
ratio was 1.1 times (December 31, 2008 - 0.7 times) and the maximum
amount available to be borrowed under the facility was $60 million.
In management's opinion, the Company's available borrowing capacity
under its bank operating facility and ongoing cash flow from
operations, are sufficient to resource its anticipated contractual
commitments. The facility contains certain other restrictive
covenants, which the Company was in compliance with as at September
30, 2009. Note 7 - Financial Instruments and Risk Management a)
Fair Values The Company's financial instruments recognized on the
consolidated balance sheet consist of accounts receivable, accounts
payable and accrued liabilities, bank operating loan, long term
debt and obligations under capital leases. The fair values of these
financial instruments, excluding the bank operating loan, long term
debt and obligations under capital leases, approximate their
carrying amounts due to their short- term maturity. At September
30, 2009, the fair value of the bank operating loan and obligations
under capital leases approximated their carrying values due to
their floating interest rate nature and short term maturity. b)
Credit Risk A substantial portion of the Company's accounts
receivable balance is with customers in the oil and gas industry
and is subject to normal industry credit risks. The Company follows
a program of credit evaluations of customers and limits the amount
of credit extended when deemed necessary. The Company maintains
provisions for possible credit losses that are charged to selling,
general and administrative expenses by performing an analysis of
specific accounts. Movement of the allowance for credit losses for
the nine month period ended September 30, 2009 and twelve months
ended December 31, 2008 and the allowance for credit losses for the
same period deducted from accounts receivables as at September 30
was as follows: As at September 30 December 31 2009 2008
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Opening balance 2,776 1,454 Increase during period 310 2,306
Write-offs (425) (984)
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Closing balance 2,661 2,776
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Trade receivables outstanding greater than 90 days were 8% of total
trade receivables as at September 30, 2009 (2008 - 9%). c) Market
Risk The Company is exposed to market risk from changes in the
Canadian prime interest rate which can impact its borrowing costs.
The Company purchases certain products in US dollars and sells such
products to its customers typically priced in Canadian dollars,
thus leading to accounts receivable and accounts payable balances
that are subject to foreign exchange gains and losses upon
translation. As a result, fluctuations in the value of the Canadian
dollar relative to the US dollar can result in foreign exchange
gains and losses. d) Risk Management From time to time, the Company
enters into foreign exchange forward contracts to manage its
foreign exchange market risk by fixing the value of its liabilities
and future purchase commitments. The Company's foreign exchange
risk arises principally from the settlement of United States dollar
denominated net working capital balances as a result of product
purchases denominated in United States dollars. As at September 30,
2009, the Company had contracted to purchase US$4.9 million at a
fixed exchange rate with terms not exceeding three months. The fair
market value of the contract was nominal. Note 8 - Related Party
Transactions Smith International Inc. ("Smith") owns approximately
55% of the Company's outstanding shares. The Company is the
exclusive distributor in Canada of down hole pump production
equipment manufactured by Wilson Supply, a division of Smith.
Purchases of such equipment conducted in the normal course on
commercial terms were as follows: September September 30, 2009 30,
2008
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Cost of sales for the three months ended 1,491 2,570 Cost of sales
for the nine months ended 4,773 7,938 Inventory 3,712 4,849
Accounts payable and accrued liabilities 538 535 The Company pays
facility rental expense to an operations manager in the capacity of
landlord, reflecting market based rates. For the three and nine
month period ended September 30, 2009, these costs totaled $157,000
and $550,000 respectively (2008: $40,000 and $97,000). Note 9 -
Segmented reporting The Company distributes oilfield products
principally through its network of 50 branches located in western
Canada to oil and gas industry customers. Accordingly, the Company
has determined that it operated through a single operating segment
and geographic jurisdiction. DATASOURCE: CE Franklin Ltd. CONTACT:
Investor Relations, 1-800-345-2858, (403) 531-5604,
Copyright