CE Franklin Ltd. announces 2009 Third Quarter Results
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
Net income for the third quarter of 2009 was
Net income for the first nine months of 2009 was
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
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 www.sedar.com and at 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
Participants may join the call by dialing 1-416-644-3423 in
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.
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
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
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
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
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
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
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
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
Year to Date Results
Net income for the first nine months of 2009 was
A more detailed discussion of the Company's third quarter results from operations is provided below:
Sales
Sales for the quarter ended
(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
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 $115.65 (43%)
Average rig count 178 407 (56%) 197 360 (45%)
Well completions:
Oil 822 1,826 (55%) 2,198 4,068 (46%)
Gas 646 2,370 (73%) 4,491 7,330 (39%)
-------- -------- ----------------- -------- --------
Total well
completions 1,468 4,196 (65%) 6,689 11,398 (41%)
Average statistics are shown except for well completions.
Sources: Oil and Gas prices - First Energy Capital Corp.; Rig count data
- CAODC; Well completion data - Daily Oil Bulletin
Sales of capital project related products were
MRO product sales are related to overall oil and gas industry production levels and tend to be more stable than capital project sales. MRO product sales for the quarter ended
The Company's strategy is to grow profitability by focusing on its core western Canadian oilfield equipment service business, complemented by an increase in the product life cycle services provided to its customers and the focus on the emerging oil sands capital project and MRO sales opportunities. Sales results of these initiatives to date are provided below:
Q3 2009 Q3 2008 YTD 2009 YTD 2008
------------- ------------- ------------- -------------
Sales ($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
Sales to oil sands end use applications decreased to
Production service sales were
Gross Profit
Q3 2009 Q3 2008 YTD 2009 YTD 2008
--------- --------- --------- ---------
Gross profit (millions) $17.4 $27.8 $61.3 $73.8
Gross profit margin as a %
of sales 18.5% 18.6% 17.8% 19.1%
Gross profit composition by
product sales category:
Tubulars 3% 18% 6% 11%
Pipe, flanges and fittings 27% 23% 33% 24%
Valves and accessories 20% 14% 19% 18%
Pumps, production equipment
and services 13% 15% 11% 16%
General 37% 30% 31% 31%
--------- --------- --------- ---------
Total gross profit 100% 100% 100% 100%
Gross profit was
Selling, General and Administrative ("SG&A") Costs
Q3 2009 Q3 2008 YTD 2009 YTD 2008
------------- ------------- ------------- -------------
($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
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
People costs decreased by
The Company leases 40 of its 50 branch locations as well as its corporate office in
Amortization Expense
Amortization expense of
Interest Expense
Interest expense of
Foreign Exchange (Gain) Loss
Foreign exchange (gains) and losses were nominal at a
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
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
Net working capital was
Capital expenditures in the third quarter of 2009 were
The Company has a 364 day bank operating loan facility in the amount of
Long term debt was reduced by
Contractual Obligations
There have been no material changes in off-balance sheet contractual commitments since
Capital Stock
As at
(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
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
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
Change in Accounting Policies
Effective
Transition to International Financial Reporting Standards (IFRS)
In
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
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
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
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 www.sedar.com and at www.cefranklin.com
CE Franklin Ltd.
Interim Consolidated Balance Sheets - Unaudited
-------------------------------------------------------------------------
September 30 December 31
(in thousands of Canadian dollars) 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
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 17,908 18,495 18,036 18,674
-------------------------------------------------------------------------
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 %
-------------------------------------------------------------------------
Income before
income taxes (456) 8,352 9,306 18,955
-------------------------------------------------------------------------
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)
-------------------------------------------------------------------------
(666) (146.1) 2,606 31.2 2,468 26.5 5,976 31.5
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
Assets
Property and equipment 836 855
Share based compensation 1,123 289
Other 99 395
-------------------------------------------------------------------------
2,058 1,539
Liabilities
Goodwill and other 374 353
-------------------------------------------------------------------------
Net future income tax asset 1,684 1,186
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
Opening balance 2,776 1,454
Increase during period 310 2,306
Write-offs (425) (984)
-------------------------------------------------------------------------
Closing balance 2,661 2,776
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
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.
For further information: Investor Relations, 1-800-345-2858, (403) 531-5604, [email protected]
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