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CE Franklin Ltd. announces Net Income of $4.1 million or $0.22 per share for the third quarter of 2007
CALGARY, Oct. 25 /PRNewswire-FirstCall/ - CE FRANKLIN LTD. (TSX.CFT,
AMEX.CFK) announced its results for the third quarter ended September 30,
2007.
CE Franklin reported net income of $4.1 million or $0.22 per share for
the quarter ended September 30, 2007, down 13% from net income of $4.7
million or $0.26 per share earned in the quarter ended September 30, 2006.
Financial Highlights
--------------------
Three Months Ended Nine Months Ended Year Ended
September 30 September 30 December 31
------------------- ------------------ -----------
(millions of Cdn.$
except per
share data) 2007 2006 2007 2006 2006
-------- -------- -------- -------- --------
(unaudited) (unaudited)
Sales $ 116.8 $ 131.7 $ 354.0 $ 424.6 $ 555.2
Gross profit 21.0 23.7 64.2 78.4 103.5
Gross profit - % 18.0% 18.0% 18.1% 18.5% 18.6%
EBITDA(1) 7.4 8.4 20.6 30.5 40.1
EBITDA(1) as a %
of sales 6.4% 6.4% 5.8% 7.2% 7.2%
Net income $ 4.1 $ 4.7 $ 11.1 $ 17.5 $ 22.9
Per share
Basic (Cdn. $) $ 0.22 $ 0.26 $ 0.61 $ 0.97 $ 1.27
Diluted (Cdn. $) $ 0.22 $ 0.25 $ 0.59 $ 0.93 $ 1.22
"This is a good result produced in tough industry conditions. Despite
the continued decrease in oil and gas industry activity the Company showed
a disciplined approach to managing expenses and posted strong earnings,"
said Michael West, Chairman, President and CEO. "CE Franklin remains
committed to its core, long term strategies."
Sales decreased 11% to $116.8 million for the quarter ended September
30, 2007 as compared to $131.7 million for the quarter ended September 30,
2006. The decline in sales reflects the current drop in activity levels
which have been impacted by economic factors including soft natural gas
prices and the strength of the Canadian dollar. The average rig count for
the quarter ended September 30, 2007 decreased 27% to 378 rigs compared to
516 rigs for the quarter ended September 30, 2006. Well completions
(excluding dry and service wells) decreased 4% to 3,877 wells for the three
months ended September 30, 2007 compared to 4,030 for the three months
ended September 30, 2006.
EBITDA(1) for the quarter ended September 30, 2007 decreased 12% to
$7.4 million from $8.4 million for the quarter ended September 30, 2006.
EBITDA as a percentage of sales for the quarter ended September 30, 2007
was 6.4% and remained consistent with the quarter ended September 30, 2006.
Outlook
-------
The Company expects the demand for its products will remain depressed
for the remainder of 2007 and into 2008 as a result of soft natural gas
prices, high drilling and operating costs, and the appreciation of the
Canadian dollar which reduces the competitiveness of the western Canadian
sedimentary basin relative to other international oil and gas producing
regions. Fiscal uncertainty introduced by the Federal government's
announcement to subject oil and gas royalty trusts to direct taxation and
the recently released Alberta oil and gas royalty task force report is also
expected to contribute to continued low industry activity levels. Continued
soft demand for the Company's products is expected to contribute to
increased competitive activity.
The Company intends to address these conditions by closely managing its
costs and net working capital investment levels.
Additional Information
----------------------
The Company's Management, Discussion and Analysis, interim consolidated
financial statements for the quarter along with other additional
information, 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 quarter ended September 30, 2007, which
is open to the public, will be held on Friday, October 26, 2007 at 11:00
a.m. Eastern Time (9:00 a.m. Mountain Time).
Participants may join the call by dialing 1-416-644-3416 in Toronto or
dialing 1-800-732-9303 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 pass code of 21248142 followed by the pound sign and may be accessed
until midnight Friday, November 2, 2007.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2024000 and
will be available on the Company's website at http://www.cefranklin.com.
Michael West, Chairman, 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.
--------------------------------
(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 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. 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. See MD&A for a reconciliation of net
income to EBITDA.
Management's Discussion and Analysis as at October 25, 2007
For the quarter and nine months ended September 30, 2007 as compared to
the quarter and nine months ended September 30, 2006.
Forward Looking Statements
--------------------------
The information in this MD&A contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 and other applicable securities
legislation. All statements, other than statements of historical facts,
that address activities, events, outcomes and other matters that CE
Franklin Ltd. ("CE Franklin" or the "Company") plans, expects, intends,
assumes, believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may occur in
the future are forward-looking statements. These forward-looking statements
are based on management's current belief, based on currently available
information, as to the outcome and timing of future events. When
considering forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this MD&A, including those under
the caption "Risk Factors"
Forward-looking statements appear in a number of places and include
statements with respect to, among other things:
- forecasted oil and natural gas industry activity levels for the
remainder of 2007 and 2008;
- 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, gross profit margins and expenses;
- the Company's business strategy and other plans and objectives for
future operations;
- fluctuations in worldwide prices and demand for oil and gas; and
- fluctuations in the demand for the Company's products and services.
Should one or more of the risks or uncertainties described above or
elsewhere in this MD&A occur, or should underlying assumptions prove
incorrect, the Company's actual results and plans could differ materially
from those expressed in any forward-looking statements.
All forward-looking statements expressed or implied, included in this
MD&A and attributable to CE Franklin are qualified in their entirety by
this cautionary statement. This cautionary statement should also be
considered in connection with any subsequent written or oral
forward-looking statements that CE Franklin or persons acting on its behalf
might issue. CE Franklin does not undertake any obligation to update any
forward-looking statements to reflect events or circumstances after the
date of filing this MD&A except as required by law.
(All amounts shown in CDN $ unless otherwise specified)
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") is provided to assist readers
in understanding CE Franklin's financial performance during the periods
presented and significant trends that may impact future performance of CE
Franklin. This discussion should be read in conjunction with the
Management's Discussion and Analysis and the audited consolidated financial
statements and the related notes thereto which are included in the
Company's December 31, 2006 Annual Report, and the Company's First and
Second Quarter MD&A, and unaudited interim consolidated financial
statements for the periods ended March 31, 2007 and June 30, 2007,
respectively.
The selected financial data presented below is presented in Canadian
dollars and were calculated in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP").
OVERVIEW
CE Franklin distributes pipe, valves, flanges, fittings, production
equipment, tubular products and other general oilfield supplies and
services to producers of oil and gas in Canada through its 42 branches and
selected inventory stocking points which are situated in towns and cities
that serve particular oil and gas fields of the western Canadian
sedimentary basin. In addition, the Company distributes pipe, valves,
flanges and fittings to the oilsands, refining, and petrochemical
industries and non-oilfield related industries such as the forestry and
mining industries.
The Company's 42 branches each warehouse an inventory of products to
meet the day to day needs of customers. A 100,000 square-foot centralized
distribution centre located in Edmonton, Alberta, acts as the hub for its
branch operations. Other inventory, such as pipe or tubular products, may
be sourced from various stocking points located throughout the western
Canadian sedimentary basin and shipped direct to the customers' location.
The branches also have access to a sales force located at the Company's
headquarters in Calgary, Alberta that provides product expertise and
logistics to get the product to the customer.
The primary driver of the Company's profitability is the level of oil
and natural gas exploration and production activity, particularly in the
western Canadian sedimentary basin. The price of oil and natural gas, well
completions and rig counts are common indicators of activity levels in the
energy industry. Other drivers of profitability include activity levels
within specific regions, the mix of products sold and customer mix.
Activity levels within specific regions will fluctuate due to various
factors including the mix of oil and gas activity within the region and oil
and gas producers entering or leaving the region. The Company responds to
these fluctuations by opening or closing branch locations in order to
service its customer's needs and ensure there is coverage in areas of
higher activity.
The mix of products sold and customers served can affect profitability.
Profit margins will vary for different products and the method of sale.
Walk-in business at the branches will generate higher profit margins
compared to bids, which are typically larger orders where the Company can
take advantage of volume discounts and longer lead times. Customer
contracts can affect profit margin where different customers receive
different pricing structures based on factors such as size, service
requirements and complexity.
Outlook
The Company expects the demand for its products will remain depressed
for the remainder of 2007 and into 2008 as a result of soft natural gas
prices, high drilling and operating costs, and the appreciation of the
Canadian dollar which reduces the competitiveness of the western Canadian
sedimentary basin relative to other international oil and gas producing
regions. Fiscal uncertainty introduced by the Federal government's
announcement to subject oil and gas royalty trusts to direct taxation and
the recently released Alberta oil and gas royalty task force report is also
expected to contribute to continued low industry activity levels. Continued
soft demand for the Company's products is expected to contribute to
increased competitive activity.
The Company intends to address these conditions by closely managing its
costs and net working capital investment levels.
OPERATING RESULTS
The following table summarizes CE Franklin's results of operations.
(in thousands of Cdn.
dollars except per Three months ended Nine months ended
share data) September 30 September 30
----------------------- -----------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Statements of Operations
Sales $ 116,817 $ 131,675 $ 354,010 $ 424,580
Gross profit 21,047 23,740 64,188 78,447
Gross profit - % 18.0% 18.0% 18.1% 18.5%
Other expenses (income)
Selling, general and
administrative expenses 13,347 15,314 42,699 48,006
Amortization 654 660 2,140 2,053
Interest 487 643 1,549 2,048
Foreign exchange loss
and other 282 40 871 (62)
----------- ----------- ----------- -----------
14,770 16,657 47,259 52,045
----------- ----------- ----------- -----------
Income before income taxes 6,277 7,083 16,929 26,402
Income tax expense 2,153 2,364 5,789 8,890
----------- ----------- ----------- -----------
Net income 4,124 4,719 11,140 17,512
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income as a % of sales 3.5% 3.6% 3.1% 4.1%
EBITDA(1) 7,418 8,386 20,618 30,503
EBITDA as a % of sales 6.4% 6.4% 5.8% 7.2%
Net income per share
Basic $ 0.22 $ 0.26 $ 0.61 $ 0.97
Diluted $ 0.22 $ 0.25 $ 0.59 $ 0.93
Weighted average number
of shares outstanding
Basic 18,391,937 18,232,658 18,282,212 18,053,045
Diluted 18,901,268 18,908,634 18,791,543 18,729,021
The following is a reconciliation of net income to EBITDA:
(in thousands of Cdn. Three months ended Nine months ended
dollars) September 30 September 30
----------------------- -----------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net income $ 4,124 $ 4,719 $ 11,140 $ 17,512
Interest expense 487 643 1,549 2,048
Income tax expense 2,153 2,364 5,789 8,890
Amortization 654 660 2,140 2,053
----------- ----------- ----------- -----------
EBITDA $ 7,418 $ 8,386 $ 20,618 $ 30,503
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
(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 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. 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.
Results of Operations - For the Three and Nine Months Ended September 30,
2007
Industry Activity Levels
The following are selected western Canadian oil and natural gas industry
activity measures:
Three months Nine months
As at ended(5) ended(5)
September 30 September 30 September 30
--------------- --------------- ---------------
2007 2006 2007 2006 2007 2006
------- ------- ------- ------- ------- -------
Oil - U.S. $/bbl(1) $81.66 $62.91 $75.17 $70.47 $65.97 $68.07
Gas - Cdn. $/gj(2) $ 5.17 $ 3.64 $ 5.22 $ 5.70 $ 6.58 $ 6.41
Well completions(3) n/a n/a 3,877 4,030 13,134 14,439
Average rig count(4) n/a n/a 378 516 362 499
(1) West Texas Intermediate per barrel
(2) AECO spot per giga joule
(3) excluding dry and service wells
(4) includes drilling and completing rigs
(5) for the three and nine months ended September 30, average statistics
are shown except for well completions
Overall, capital spending by exploration and production companies
continues at reduced levels as a result of higher drilling costs, soft
natural gas prices and the appreciation of the Canadian dollar which
reduces the competitiveness of the western Canadian sedimentary basin
relative to other international oil and gas producing regions. Finally, the
Federal government's October 2006 announcement concerning the taxation of
oil and gas royalty trusts and the recently released Alberta oil and gas
royalty task force report, have increased fiscal uncertainty and
contributed to reduced industry activity.
The Company uses oil and gas well completions and average rig counts as
industry activity measures. Oil and gas well completions require the
products sold by the Company and therefore are a good general indicator of
market activity. Average rig counts also provide a general indication of
energy industry activity levels as there may be time lags in reporting well
completions that may impact quarterly statistics.
For the quarter ended September 30, 2007, the total number of wells
completed (excluding dry and service wells) in western Canada decreased 4%
to 3,877 wells compared to the prior year period. For the nine months ended
September 30, 2007 the total number of wells completed (excluding dry and
service wells) in western Canada decreased 9% to 13,134 wells compared to
the prior year period.
The average rig count for the quarter ended September 30, 2007,
decreased 27% to 378 average rigs as compared to the prior period. The
average rig count for the nine months ended September 30, 2007, decreased
28% to 362 average rigs as compared to the prior period.
Sales
Sales for the quarter ended September 30, 2007 decreased 11% or $14.8
million to $116.8 million from the quarter ended September 30, 2006. Sales
for the nine months ended September 30, 2007, declined by 17% or $70.6
million to $354.0 million from the nine months ended September 30, 2006.
The decrease in sales for the three and nine month periods ended September
30, 2007 was principally due to lower sales to exploration and development
capital projects due to soft industry activity levels as described
previously. Sales for maintenance repair and operating supplies ("MRO")
used in customer production activities in the third quarter was comparable
to the prior year period and decreased 9% for nine months compared to the
2006 comparative period. MRO sales comprised an estimated 43% of total
Company sales in the third quarter and 42% of sales for the nine months
year to date. The acquisition of Full Tilt Field Services Ltd. ("Full
Tilt") in July 2007 contributed sales of $2.4 million, comprising 2% of CE
Franklin's sales for the three month period ended September 30, 2007.
Gross Profit
Gross profit decreased 11% to $21.0 million for the quarter ended
September 30, 2007 from $23.7 million for the prior year period due to the
reduction in sales. Gross profit margins remained consistent with the prior
year period at 18%.
Gross profit decreased 18% to $64.2 million for the nine months ended
September 30, 2007 from $78.4 million for the nine months ended September
30, 2006 due principally to the reduction in sales. Gross profit margins
decreased to 18.1% from 18.5% in the prior year period due in part to a
large, low margin oil sands order completed during the first quarter of
2007.
Selling, General and Administrative ("SG&A") Costs
SG&A costs decreased $2.0 million or 13% to $13.3 million for the third
quarter ended September 30, 2007 compared to the prior year period and
decreased $5.3 million or 11% to $42.7 million for the nine months ended
September 30, 2007 from $48.0 million for the nine months ended September
30, 2006.
SG&A costs declined in the three and nine month periods due to lower
incentive compensation costs associated with the company's reduced earnings
per share performance in 2007, reduced Sarbanes Oxley consulting costs and
lower net costs resulting from the acquisition of two agent operated
branches during the first half of 2007. Increased base compensation levels,
higher occupancy costs and the addition of the Full Tilt operations,
partially offset the cost reductions detailed above.
Interest Expense
Interest expense declined by $156,000 (24%) and $499,000 (24%) in the
three and nine month periods ended September 30, 2007 compared to the prior
years periods due to a reduction in average funded debt of 32% and 23% in
the same periods respectively, partially offset by an increase in floating
interest rates.
Foreign Exchange Loss and Other
Foreign exchange loss and other was $282,000 and $871,000 in the three
and nine month periods ended September 30, 2007. This resulted from the 7%
and 17% appreciation respectively of the Canadian/U.S. dollar exchange rate
on U.S.$ net working capital balances during these periods. Steps have been
taken to mitigate the Company's net working capital U.S. $ exposure.
Income Taxes
The Company's effective tax rate for the quarter ended September 30,
2007 was 34.3%, and for the nine months ended September 30, 2007 was 34.2%
up marginally from prior year period rates due primarily to non-deductible
items becoming a larger component of income before taxes in 2007.
Substantially all of the company's tax provision is currently payable.
Net Income
Net income for the quarter ended September 30, 2007 was $4.1 million,
down $0.6 million (13%) from the prior year period. Net income as a
percentage of sales was 3.5%, down marginally from the prior year period as
the Company was able to reduce expenses in step with the reduction in sales
levels. The weighted average number of shares outstanding increased by 1%
over the prior year period due to the exercise of stock options. Net income
per share was $0.22, down 15% from the prior year period due to the
reduction in net income and increased number of shares outstanding in 2007.
Net income for the nine months ended September 30, 2007 was $11.1
million, down $6.4 million (37%), due mainly to the decline in industry
activity compared to the prior year period. Net income per share was $0.61,
down 37% from the prior year period due to lower net income and a slight
increase in the average number of share outstanding.
SUMMARY OF QUARTERLY FINANCIAL DATA
The selected quarterly financial data presented below is presented in
Canadian dollars and in accordance with Canadian GAAP.
(in thousands of Cdn. dollars except per share data)
Unaudited Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2005 2006 2006 2006 2006 2007 2007 2007
------- ------- ------- ------- ------- ------- ------- -------
Sales 141,066 176,957 115,948 131,675 130,648 154,255 82,938 116,817
EBITDA
(see
page 4) 11,061 15,094 7,023 8,386 9,574 10,991 2,210 7,418
EBITDA as
a % of
sales 7.8% 8.5% 6.1% 6.4% 7.3% 7.1% 2.7% 6.4%
Net income 6,303 8,879 3,914 4,719 5,427 6,373 644 4,124
Net income
as a % of
sales 4.5% 5.0% 3.4% 3.6% 4.2% 4.1% 0.8% 3.5%
Net income
per share
Basic
(Cdn. $) $0.36 $0.50 $0.21 $0.26 $0.30 $0.35 $0.03 $0.22
Diluted
(Cdn. $) $0.33 $0.47 $0.21 $0.25 $0.29 $0.34 $0.03 $0.22
Net
working
capital 107,219 124,837 117,438 130,567 120,207 127,583 127,020 128,625
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. As a result, the first and
fourth quarters typically represent the busiest time and highest sales
activity for the Company. Sales levels drop significantly during the second
quarter until such time as the roads have dried and road bans have been
lifted. This typically results in a significant reduction in earnings
during the second quarter as the Company does not reduce its SG&A expenses
during this period to offset the reduction in sales. Once the road bans
have been lifted activity levels start to increase and sales levels
increase in the third quarter. Net working capital (defined as current
assets less accounts payable, accrued liabilities, income taxes payable and
other current liabilities) levels follow the seasonality of sales.
LIQUIDITY AND CAPITAL RE
SOURCES
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 working capital,
capital expenditures and acquisitions.
As at September 30, 2007, borrowings under the Company's bank operating
loan were $35.4 million, an increase of $1.4 million from December 31,
2006. Borrowing levels have increased as business acquisitions of $5.8
million and investments of $1.4 million to maintain property and equipment,
have been substantially funded by cash flow from operations.
During the third quarter, the Company's $75 million, 364 day bank
operating loan was extended until July 24, 2008 on similar terms and
conditions. As at September 30, 2007 the Company's debt was 1.2 times
EBITDA for the last 12 months and compared favorably to its debt to EBITDA
borrowing covenant of 2.25 times.
Business acquisitions completed in the first nine months of 2007
aggregated were $5.8 million and included $3.4 million to acquire the Full
Tilt business in the third quarter. Full Tilt provides mechanical services
principally to heavy oil production operations situated in the Lloydminster
area. Two agent operated branch operations were acquired at a cost of $2.2
million. See Note 2 to the interim consolidated financial statements for
further details. These acquisitions contributed to third quarter and year
to date EBITDA and have met acquisition expectations.
Net working capital was $128.7 million at September 30, 2007, an
increase of $8.4 million from December 31, 2006. Accounts receivable
increased by $1.1 million (1.2%) to $88.6 million from year end as average
days sales outstanding increased 1% to 58.4 days for the third quarter of
2007. Inventory decreased by $11.8 million (12%) from December 31, 2006 due
to a reduction in purchasing levels to align with reduced sales levels.
Inventory turns, calculated by taking cost of sales for the trailing 12
month period divided by average inventory, were 4.3 times in the third
quarter, consistent with the fourth quarter of 2006. The company will
continue to adjust its investment in inventory in order to align with
anticipated lower sales levels in order to improve inventory turnover
efficiency. Accounts payable and accrued liabilities decreased by $19.5
million (29%) from December 31, 2006 to $47.2 million at September 30, 2007
due to reduced purchasing activity and lower accrued employee incentive
compensation.
CAPITAL STOCK
The weighted average number of shares outstanding during the third
quarter was 18.4 million, an increase of 0.2 million shares (1%) over the
prior year period due principally to the exercise of stock options. Diluted
weighted average number of shares outstanding during the third quarter was
18.9 million a decrease of 0.1 million over the prior period.
As at September 30, 2007 and December 31, 2006, the following shares
and securities convertible into shares, were outstanding:
(millions) September 30, December 31,
2007 2006
Shares Shares
------------- -------------
Shares outstanding 18.4 18.2
Stock Options 0.8 0.8
Performance & Deferred Share units 0.2 0.1
------------- -------------
Shares outstanding and issuable 19.4 19.1
Contractual Obligations
In April 2007, the lease commitment pertaining to the construction of a
new distribution centre in Edmonton, Alberta was amended to include updated
construction costs and estimated completion date. Construction of the
facility is now anticipated to be complete by mid 2008.
The following table outlines the contractual obligations based on the
revised anticipated completion date:
Bank
Operating U.S.$
Loan and Operating Forward
Capital Lease Long-term Lease Purchase
Period Due Obligations Debt Commitments Contracts Total
-------------------------- ----------- ----------- ----------- ----------
(thousands of
Canadian
dollars)
2007 58 35,390 1,654 - 37,102
2008 191 591 5,220 1,993 7,995
2009 87 - 5,309 - 5,396
2010 - - 4,814 - 4,814
2011 - - 3,987 - 3,987
thereafter - - 33,655 - 33,655
----------- ----------- ----------- ----------- ----------
336 35,981 54,639 1,993 92,949
----------- ----------- ----------- ----------- ----------
There have been no other material changes in any contractual
obligations since the year ended December 31, 2006.
Off-Balance Sheet Arrangements
The Company has not engaged in off-balance sheet financing arrangements.
Critical Accounting Estimates
There have been no material changes since the year ended December 31,
2006.
Change in Accounting Policies
The Company adopted effective January 1, 2007 CICA Handbook Section
1530 - Comprehensive Income, Section 3855 - Financial Instrument
Recognition and Measurement, Section 3861 - Financial Instruments
Disclosure and Presentation, and Section 3865 - Hedges in accordance with
the transitional provisions in each respective section. The adoption of
these provisions did not have a material impact on the financial statements
of the Company and did not result in any adjustments for the recognition,
de-recognition or measurement of financial instruments as compared to the
financial statements for periods prior to adoption of these sections.
OTHER ITEMS
Additional information relating to CE Franklin, including its Annual
Information Form, is available under the Company's profile on SEDAR at
www.sedar.com and at www.cefranklin.com.
Internal control over financial reporting
-----------------------------------------
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 three months ended September 30,
2007 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 have occurred that would materially change the
information disclosed in the Company's 2006 Annual Information Form.
CE Franklin Ltd.
Interim Consolidated Balance Sheets
(Unaudited)
September 30 December 31
(in thousands of Canadian dollars) 2007 2006
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ASSETS
Current assets
Accounts receivable 88,614 87,530
Inventories 85,424 97,275
Income taxes receivable 127 -
Other 1,695 2,965
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175,860 187,770
Property and equipment 6,043 5,546
Goodwill 14,799 10,479
Future income taxes (note 4) 1,472 1,160
Other 864 454
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199,038 205,409
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LIABILITIES
Current liabilities
Bank operating loan 35,390 34,008
Accounts payable 29,375 36,252
Accrued liabilities 17,860 30,492
Income taxes payable - 819
Current portion of obligations under capital lease 210 217
Current portion of long term debt 591 300
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83,426 102,088
Obligations under capital lease 126 286
Long term debt - 560
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83,552 102,934
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SHAREHOLDERS' EQUITY
Capital stock 24,444 23,586
Contributed surplus 17,226 16,213
Retained earnings 73,816 62,676
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115,486 102,475
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199,038 205,409
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CE Franklin Ltd.
Interim Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ ------------------------
(in thousands of September September September September
Canadian dollars, 30 30 30 30
except per share data) 2007 2006 2007 2006
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Sales 116,817 131,675 354,010 424,580
Cost of sales 95,770 107,935 289,822 346,133
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Gross profit 21,047 23,740 64,188 78,447
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Other expenses (income)
Selling, general and
administrative expenses 13,347 15,314 42,699 48,006
Amortization 654 660 2,140 2,053
Interest expense 487 643 1,549 2,048
Foreign exchange loss/
(gain) and other 282 40 871 (62)
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14,770 16,657 47,259 52,045
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Income before income taxes 6,277 7,083 16,929 26,402
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Income tax expense
(recovery) (note 4)
Current 2,219 2,771 6,100 8,757
Future (66) (407) (311) 133
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2,153 2,364 5,789 8,890
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Net and Comprehensive
income for the period 4,124 4,719 11,140 17,512
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Net income per share
(note 3)
Basic 0.22 0.26 0.61 0.97
Diluted 0.22 0.25 0.59 0.93
Weighted average number
of shares outstanding
Basic 18,391,937 18,232,658 18,282,212 18,053,045
Diluted 18,901,268 18,908,634 18,791,543 18,729,021
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CE Franklin Ltd.
Interim Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ ------------------------
(in thousands of September September September September
Canadian dollars, 30 30 30 30
except per share data) 2007 2006 2007 2006
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Cash flows from
operating activities
Net income for the period 4,124 4,719 11,140 17,512
Items not affecting cash -
Amortization 654 660 2,140 2,053
Future income tax
expense (recovery) (66) (407) (311) 133
Stock based
compensation expense 412 999 1,474 1,472
Other 228 206 483 (201)
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5,352 6,177 14,926 20,969
Net change in non-cash
working capital balances
related to operations -
Accounts receivable (20,281) (10,976) 885 (1,830)
Inventories 9,749 (2,971) 10,989 (17,967)
Other current assets 529 (136) 1,284 1,084
Other non current assets (270) - (478) -
Accounts payable 7,740 13,690 (8,187) 6,876
Accrued liabilities (4,128) (12,120) (12,632) (6,577)
Income taxes payable 2,352 (1,343) (946) (5,704)
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1,043 (7,679) 5,841 (3,149)
Cash flows from
financing activities
Issuance of capital stock 1 3 569 1,611
Purchase of capital stock
for Performance Share
Unit plan - - (173) -
Increase/(decrease) in
bank operating loan (593) 8,647 1,382 6,492
Decrease in obligations
under capital leases (54) - (167) -
Increase/(decrease) in
long term debt 9 (31) (269) (157)
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(637) 8,619 1,342 7,946
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Cash flows from
investing activities
Purchase of property
and equipment (359) (592) (1,359) (2,224)
Proceeds on disposal of
property and equipment - 2 - 40
Business acquisitions
(note 2) (47) (350) (5,824) (2,613)
Reduction (increase)
of other assets - - - -
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(406) (940) (7,183) (4,797)
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Change in cash and
cash equivalents
during the period - - - -
Cash and cash
equivalents -
Beginning of period - - - -
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Cash and cash
equivalents -
End of period - - - -
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Cash paid during
the period for:
Interest on bank
operating loan 478 592 1,525 1,969
Interest on obligations
under capital leases 9 51 24 79
Income taxes 27 4,114 7,212 14,461
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CE Franklin Ltd.
Interim Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(in thousands
of Canadian Capital Stock
dollars, ----------------------- Share-
except share Number of Contributed Retained holders'
amounts) Shares $ surplus earnings equity
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Balance -
December 31,
2005 17,804,554 21,914 14,281 39,737 75,932
Stock based
compensation
expense - - 1,472 - 1,472
Stock options
exercised 428,658 1,902 (291) - 1,611
Net income - - - 17,512 17,512
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Balance -
September
30, 2006 18,233,212 23,816 15,462 57,249 96,527
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Balance -
December 31,
2006 18,223,013 23,586 16,213 62,676 102,475
Stock based
compensation
expense - - 1,474 - 1,474
Stock options
exercised 173,887 827 (257) - 570
Performance
share units
(PSU)
exercised 10,310 204 (204) - -
Purchase of
shares in
trust for
PSU plan (15,200) (173) - - (173)
Net income - - - 11,140 11,140
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Balance -
September
30, 2007 18,392,010 24,444 17,226 73,816 115,486
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CE Franklin Ltd.
Notes to Interim Consolidated Financial Statements (Unaudited)
(Tabular amounts in thousands of Canadian dollars)
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Note 1 - Accounting policies
These interim consolidated financial statements have been prepared
following accounting policies applied on a consistent basis with CE
Franklin Ltd.'s (the "Company") annual financial statements for the year
ended December 31, 2006, with exception of policies relating to financial
instruments as noted below. The disclosures provided below are
incremental to those included in the annual audited financial statements.
The interim consolidated financial statements should be read in
conjunction with the annual audited financial statements and the notes
thereto for the year ended December 31, 2006.
Effective January 1, 2007, the Company adopted Section 1530 -
Comprehensive Income, Section 3855 - Financial Instrument Recognition and
Measurement, Section 3861 - Financial Instruments Disclosure and
Presentation, and Section 3865 - Hedges of the Canadian Institute of
Chartered Accountants Handbook in accordance with the transitional
provisions in each respective section. The adoption of Sections 1530,
3855 and 3861 did not have a material impact on the financial statements
of the Company and did not result in any adjustments for the recognition,
de-recognition or measurement of financial instruments as compared to the
financial statements for periods prior to the adoption of these sections.
In addition, since the Company currently does not utilize hedge
accounting, the adoption of Section 3865 currently has no material impact
on the financial statements of 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.
Note 2 - Business Acquisitions
On July 1, 2007, the Company purchased the outstanding shares of Full
Tilt Field Services Ltd. ("Full Tilt"), for total consideration of
$3.447 million, subject to post closing adjustments.
On January 31, 2007, the Company purchased the assets of an agent that
operated two of the Company's branch locations, for total consideration
of $2.167 million.
On February 1, 2006, the Company purchased the outstanding shares of an
agent that operated two of the Company's branch locations, for a net cash
consideration of $2.263 million. In accordance with the purchase
agreement, an additional $210,000 was paid in the first quarter of 2007
(2006 - $350,000). These amounts were contingent on reaching certain
performance conditions and have been accounted for under the purchase
method as an addition to goodwill.
Using the purchase method of accounting for acquisitions, the Company
consolidated the assets and liabilities from the acquisitions and
included earnings as of the closing dates. The consideration paid for
these acquisitions has been allocated as follows:
2007
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Acquisition Acquisition Contingent Total
of Full Tilt of Agent consideration 2007
Cash Consideration
Paid 3,400 2,167 210 5,777
Transaction Costs 47 - - 47
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Total Cash
Consideration 3,447 2,167 210 5,824
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Accounts Receivable 1,970 - - 1,970
Inventory 371 - - 371
Other Current Assets 14 - - 14
Property, Equipment
and Other 292 167 - 459
Goodwill 2,110 2,000 210 4,320
Accounts Payable (1,310) - - (1,310)
Future Tax Liability - - - -
Long Term Debt - - - -
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3,447 2,167 210 5,824
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2006
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Acquisition Contingent Total
of Agent consideration 2006
Cash Consideration
Paid 2,263 350 2,613
Transaction Costs - - -
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Total Cash
Consideration 2,263 350 2,613
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Accounts Receivable - - -
Inventory - - -
Other Current Assets - - -
Property, Equipment
and Other 369 - 369
Goodwill 2,714 350 3,064
Accounts Payable - - -
Future Tax Liability (3) - (3)
Long Term Debt (817) - (817)
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2,263 350 2,613
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Note 3 - Share data
At September 30, 2007, the Company had 18,392,010 common shares and
849,249 options outstanding to acquire common shares at a weighted
average exercise price of $5.47 per common share, 518,457 of those
options were vested and exercisable at a weighted average exercise price
of $3.48 per common share.
a) Stock Options
A total of 110,683 share options to acquire common shares were granted at
a weighted average strike price of $10.30 in the third quarter of 2007
for a fair value of $507,000. The fair value of common share options
granted was estimated as at the grant date using the Black-Scholes option
pricing model, using the following assumptions:
Dividend yield nil
Risk-free interest rate 4.46%
Expected life 5 years
Expected volatility 50%
Stock Option compensation expense recorded in the three and nine month
periods ended September 30, 2007 was $144,000 (2006 - $146,000) and
$380,000 (2006 - $439,000), respectively.
b) Share units
Effective May 2, 2006, the Company adopted the Performance Share Unit
("PSU") and Deferred Share Unit ("DSU") plans approved by shareholders on
that date. Under these plans, PSU's and DSU's are granted which entitle
the participant, at the Company's option, to receive either a common
share or cash equivalent value in exchange for a vested unit. The vesting
period for 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. The contributed surplus balance is reduced as the
vested units are exchanged for either common shares or cash.
A total of 8,727 PSU's were granted in the third quarter of 2007. The
compensation expense recorded in the three and nine month periods ended
September 30, 2007 was $268,500 (2006 - $867,000) and $1,095,000 (2006 -
$1,076,000) respectively. As at September 30, 2007, there were 177,544
PSU's and 37,388 DSU's outstanding (December 31, 2006, 120,710 PSU units
and 12,104 DSU units)
Note 4 - 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
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September 30 September 30
2007 2006
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Income before income taxes 6,277 7,083
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Incomes taxes at
expected rates 2,048 32.6% 2,301 32.5%
Non-deductible items 97 1.6% 35 0.5%
Capital and large
corporations taxes - 0.0% 11 0.2%
Adjustments on filing
returns & Other 8 0.1% 17 0.2%
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2,153 34.3% 2,364 33.4%
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Nine Months Ended
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September 30 September 30
2007 2006
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Income before income taxes 16,929 26,402
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Incomes taxes at
expected rates 5,524 32.6% 8,773 33.2%
Non-deductible items 345 2.0% 312 1.2%
Capital and large
corporations taxes 22 0.1% 47 0.2%
Adjustments on filing
returns & Other (102) -0.6% (242) -0.9%
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5,789 34.2% 8,890 33.7%
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b) Future income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of future income tax assets and liabilities are as
follows:
September 30 December 31
2007 2006
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Assets
Financing and investment charges 126 263
Property and equipment 961 610
Other 761 785
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1,848 1,658
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Liabilities
Goodwill 376 498
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376 498
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Net future income tax asset 1,472 1,160
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Realization of future income tax assets is dependent on generating
sufficient taxable income during the period in which the temporary
differences are deductible. Although realization is not assured,
management believes it is more likely than not that all future income tax
assets will be realized based on projected operating results and tax
planning strategies available.
Note 5 - Related Party Transactions
Smith International Inc. ("Smith") owns approximately 52% 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. Purchase of such equipment conducted in the
normal course on commercial terms were as follows:
September 30 September 30
2007 2006
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Cost of sales for the three months ended 2,498 2,244
Cost of sales for the nine months ended 7,041 6,557
Inventory 4,074 3,574
Accounts Payable and accrued liabilities 1,064 835
Note 6 - Segmented reporting
The Company operates its business as one operating segment in one
geographical location, the western Canadian sedimentary basin.
SOURCE CE Franklin Ltd.