CALGARY, Oct. 27, 2011 /CNW/ - CE FRANKLIN LTD. (TSX.CFT,
NASDAQ.CFK) reported net earnings of $4.8 million or $0.27 per
share for the third quarter ended September 30, 2011 a significant
increase from net earnings of $2.2 million or $0.12 per share
generated in the third quarter ended September 30, 2010. Financial
Highlights (millions of Cdn. $ except per share data) Three Months
Ended Nine Months Ended September 30 September 30 2011 2010 2011
2010 Unaudited Unaudited Revenues 140.5 132.2 392.0 353.9 Gross
Profit 23.9 19.2 65.4 54.5 Gross Profit - % of sales 17.0 % 14.5 %
16.7 % 15.4 % EBITDA(1) 7.7 3.8 16.0 8.7 EBITDA(1)- % of sales 5.5
% 2.9 % 4.1 % 2.5 % Net earnings 4.8 2.2 9.8 4.3 Per share Basic
0.27 0.12 0.56 0.24 Diluted 0.26 0.12 0.54 0.24 Net working
capital(2) 134.6 129.0 Long term debt / Bank $ 5.8 $ 14.4 operating
loan(2) "Improved product margins, supported by disciplined revenue
growth lead to increased profitability. Activity levels are
expected to remain at or above prior year levels as the industry
works through this period of economic volatility" said Michael
West, President and CEO. The September 30, 2011 condensed interim
consolidated financial statements are prepared under International
Financial Reporting Standards ("IFRS"). Consequently the
comparative figures for 2010 and the Company's statement of
financial position as at January 1, 2010 have been restated from
accounting principles generally accepted in Canada ("Canadian
GAAP") to comply with IFRS. The reconciliations from the previously
published Canadian GAAP financial statements are summarized in Note
3 to the condensed interim consolidated financial statements, and
there were no material differences. Net earnings for the third
quarter of 2011, were $4.8 million, an increase of $2.6 million
from the third quarter of 2010. Revenues were $140.5 million,
an increase of $8.3 million (6%) from the third quarter of 2010.
Industry activity continued to improve and is focused on oil, oil
sands and liquid rich natural gas plays. Well completions increased
34% compared to the third quarter of 2010. Capital project business
revenue grew $6.2 million year over year due to improved industry
activity levels. Gross profits increased by $4.7 million (24%) due
to the increase in revenues and improved gross profit margins year
over year. Average gross profit margins were consistent with the
second quarter of 2011 but improved over the third quarter 2010
average gross profit margin, as increased purchasing levels
contributed to higher volume rebate income. Selling, general and
administrative expenses increased by $2.3 million (15%) from prior
year to $17.8 million for the quarter as compensation and operating
costs have increased in response to higher revenue levels. During
the quarter, the Company moved its head office location within
downtown Calgary and as a consequence recorded a one time lease
charge of $0.7 million in relation to its old head office lease
obligations net of expected sublease revenue. The Company also
recorded an unrealized foreign exchange gain of $1.0 million in the
quarter on foreign exchange contracts used to manage currency
exposure on US denominated product purchases. The weighted average
number of shares outstanding during the third quarter was
consistent with the prior year period as the rise in share price
during the last year has limited the activity occurring under the
normal course issuer bid program. Net earnings per share (basic)
was $0.27 in the third quarter of 2011, compared to net earnings of
$0.12 per share in the third quarter of 2010. Net earnings for the
nine months ended September 30, 2011 at $9.8 million was more than
double the net income for the same prior year period. Revenues were
$392.0 million, an increase of $38.1 million (11%) over the
comparable 2010 period due to improvements in capital project and
maintenance repair and operating revenues. Well completions have
increased 32% year over year as industry activity continues to
build. Gross profit was up $10.9 million (20%) due to the increase
in revenues combined with an increase in vendor rebate income due
to increased purchasing levels. Selling, general and administrative
expenses increased by $5.4 million (12%) to $51.2 million for the
nine months ended for the same reasons they were higher in the
third quarter. Income taxes increased by $1.9 million for the nine
months ended September 30, 2011 compared to the prior year period
due to higher pre-tax earnings. The weighted average number of
shares outstanding (basic) during the third quarter was consistent
with the prior year period as the rise in share price during the
last year has limited the activity occurring under the normal
course issuer bid program. Net earnings per share (basic) was
$0.56 for the nine months ended September 30, 2011, compared to
$0.24 earned in same prior year period. Business Outlook Oil and
gas industry activity in 2011 is expected to remain at or above
2010 levels for the remainder of the year. Natural gas prices
remain depressed as North American production capacity and
inventory levels continue to dominate demand. Natural gas
capital expenditure activity is focused on the emerging shale gas
plays in northeastern British Columbia and liquid rich gas plays in
northwestern Alberta where the Company has a strong market
position. Conventional and heavy oil economics are attractive
at current price levels leading to continuing activity in eastern
Alberta and southeast Saskatchewan. Oil sands project
announcements continue at current oil price levels. Approximately
50% to 60% of the Company's total revenues are driven by our
customers' capital expenditure requirements. CE Franklin's revenues
are expected to increase modestly in 2012 as the oil and gas
industry activity levels remain relatively consistent with 2011
levels. Gross profit margins are expected to remain under pressure
as customers that produce natural gas focus on reducing their costs
to maintain acceptable project economics and due to continued
aggressive oilfield supply industry competition as industry
activity levels remain below the last five year average. The
Company will continue to manage its cost structure to protect
profitability while maintaining service capacity and advancing
strategic initiatives. Over the medium to longer term, the
Company's strong financial and competitive positions should enable
profitable growth of its distribution network through the expansion
of its product lines, supplier relationships and capability to
service additional oil and gas and other industrial end use
markets. (1) EBITDA represents net earnings before interest, taxes,
depreciation and amortization. EBITDA is supplemental non-GAAP
financial measure used by management, as well as industry analysts,
to evaluate operations. Management believes that EBITDA, as
presented, represents a useful means of assessing the performance
of the Company's ongoing operating activities, as it reflects the
Company's earnings trends without showing the impact of certain
charges. The Company is also presenting EBITDA and EBITDA as a
percentage of revenues because it is used by management as
supplemental measures of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and depreciation
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Depreciation expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate revenues. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net earnings, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net earnings is provided within the
Company's Management Discussion and Analysis. Not all companies
calculate EBITDA in the same manner and EBITDA does not have a
standardized meaning prescribed by GAAP. Accordingly, EBITDA, as
the term is used herein, is unlikely to be comparable to EBITDA as
reported by other entities. (2) Net working capital is defined as
current assets less cash and cash equivalents, accounts payable and
accrued liabilities, current taxes payable and other current
liabilities. Net working capital and long term debt / bank
operating loan amounts are as at quarter end. Additional
Information Additional information relating to CE Franklin,
including its third quarter 2011 Management Discussion and Analysis
and interim consolidated financial statements and its Form 20-F /
Annual Information Form, is available under the Company's profile
on the SEDAR website at www.sedar.com and at www.cefranklin.com.
Conference Call and Webcast Information A conference call to review
the 2011 third quarter results, which is open to the public, will
be held on Friday, October 28, 2011 at 11:00 a.m. Eastern Time
(9:00a.m. Mountain Time). Participants may join the call by dialing
1-647-427-7450 in Toronto or dialing 1-888-231-8191 at the
scheduled time of 11:00 a.m. Eastern Time. For those unable
to listen to the live conference call, a replay will be available
at approximately 2:00 p.m. Eastern Time on the same day by calling
1-416-849-0833 in Toronto or dialing 1-855-859-2056 and entering
the Passcode of 15091601 and may be accessed until midnight
November 4, 2011. The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3683680 and
will be available on the Company's website at
http://www.cefranklin.com. Michael West, President and Chief
Executive Officer will lead the discussion and will be accompanied
by Derrren Newell, Vice President and Chief Financial Officer. The
discussion will be followed by a question and answer period. About
CE Franklin For more than half a century, CE Franklin has been a
leading supplier of products and services to the energy
industry. CE Franklin distributes pipe, valves, flanges,
fittings, production equipment, tubular products and other general
oilfield supplies to oil and gas producers in Canada as well as to
the oil sands, refining, heavy oil, petrochemical, forestry and
mining industries. These products are distributed through its
43 branches, which are situated in towns and cities serving
particular oil and gas fields of the western Canadian sedimentary
basin. Forward-looking Statements: The information in this news
release may contain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and other applicable securities
legislation. All statements, other than statements of
historical facts, that address activities, events, outcomes and
other matters that CE Franklin plans, expects, intends, assumes,
believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may
occur in the future are forward-looking statements. These
forward-looking statements are based on management's current
belief, based on currently available information, as to the outcome
and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other
cautionary statements and refer to the Form 20-F or our annual
information form for further detail. Management's Discussion and
Analysis at October 27, 2011 The following Management's Discussion
and Analysis ("MD&A") is provided to assist readers in
understanding CE Franklin Ltd.'s ("CE Franklin" or the "Company")
financial performance and position during the periods presented and
significant trends that may impact future performance of CE
Franklin. This MD&A should be read in conjunction with the
Company's condensed interim consolidated financial statements for
the three and nine month period ended September 30, 2011 and the
MD&A and the consolidated financial statements for the three
and six month periods ended June 30, 2011 and the three month
period ended March 31, 2011 (the Company's first financial
statements under IFRS) and the MD&A and consolidated financial
statements for the year ended December 31, 2010. All amounts are
expressed in Canadian dollars and are in accordance with
International Financial Reporting Standards ("IFRS"), except where
otherwise noted. The September 30, 2011 condensed interim
consolidated financial statements are prepared under IFRS.
Consequently the comparative figures for 2010 and the Company's
statement of financial position as at January 1, 2010 have been
restated from accounting principles generally accepted in Canada
("Canadian GAAP") to comply with IFRS. The reconciliations from the
previously published Canadian GAAP financial statements are
summarized in Note 3 to the condensed interim consolidated
financial statements, and there were no material differences. In
addition, IFRS 1 on first time adoption allows certain exemptions
from retrospective application of IFRS in the opening statement of
financial position. Where these exemptions have been used they have
also been explained in Note 3 to the condensed interim consolidated
financial statements. Overview CE Franklin is a leading distributor
of pipe, valves, flanges, fittings, production equipment, tubular
products and other general industrial supplies primarily to the oil
and gas industry through its 43 branches situated in towns and
cities that serve oil and gas fields of the western Canadian
sedimentary basin. In addition, the Company distributes similar
products to the oil sands, refining, and petrochemical industries
and non-oilfield related industries such as forestry and mining.
The Company's branch operations service over 3,000 customers by
providing the right materials where and when they are needed, and
for the best value. Our branches, supported by our
centralized Distribution Centre in Edmonton, Alberta, stock over
25,000 stock keeping units sourced from over 2,000 suppliers.
This supply chain infrastructure enables us to provide our
customers with the products they need on a same day or over-night
basis. Our centralized inventory and procurement capabilities
allow us to leverage our scale to enable industry leading hub and
spoke purchasing and logistics capabilities. Our branches are also
supported by services provided by the Company's corporate office in
Calgary, Alberta including sales, marketing, product expertise,
logistics, invoicing, credit and collection and other business
services. The Company's shares trade on the TSX ("CFT") and NASDAQ
("CFK") stock exchanges. Schlumberger Limited
("Schlumberger"), a major oilfield service company based in Paris,
France, owns approximately 56% of the Company's shares. Business
Strategy The Company is pursuing the following strategies to grow
its business profitably: -- Expand the reach and market share
serviced by the Company's distribution network. The Company is
focusing its sales efforts and product offering on servicing
complex, multi-location needs of large and emerging customers in
the energy sector. Organic growth is expected to be complemented by
selected acquisitions over time. -- Expand production equipment
service capability to capture more of the product life cycle
requirements for the equipment the Company sells such as down hole
pump repair, oilfield engine maintenance, well optimization and on
site project management. This will differentiate the Company's
service offering from its competitors and deepen relationships with
its customers. -- Expand oil sands and industrial project and
Maintenance, Repair and Operating Supplies ("MRO") business by
leveraging our existing supply chain infrastructure, product and
project expertise. -- Increase the resourcing of customer project
sales quotation and order fulfillment services provided by our
Distribution Centre to augment local branch capacity to address
seasonal and project driven fluctuations in customer demand. By
doing so, we aim to increase our capacity flexibility and improve
operating efficiency while providing consistent service. Business
Outlook Oil and gas industry activity in 2011 is expected to remain
at or above 2010 levels for the remainder of the year.
Natural gas prices remain depressed as North American production
capacity and inventory levels continue to dominate demand.
Natural gas capital expenditure activity is focused on the emerging
shale gas plays in northeastern British Columbia and liquid rich
gas plays in northwestern Alberta where the Company has a strong
market position. Conventional and heavy oil economics are
attractive at current price levels leading to continuing activity
in eastern Alberta and southeast Saskatchewan. Oil sands
project announcements continue at current oil price levels.
Approximately 50% to 60% of the Company's total revenues are driven
by our customers' capital expenditure requirements. CE Franklin's
revenues are expected to increase modestly in 2012 as the oil and
gas industry activity levels remain relatively consistent with 2011
levels. Gross profit margins are expected to remain under pressure
as customers that produce natural gas focus on reducing their costs
to maintain acceptable project economics and due to continued
aggressive oilfield supply industry competition as industry
activity levels remain below the last five year average. The
Company will continue to manage its cost structure to protect
profitability while maintaining service capacity and advancing
strategic initiatives. Over the medium to longer term, the
Company's strong financial and competitive positions should enable
profitable growth of its distribution network through the expansion
of its product lines, supplier relationships and capability to
service additional oil and gas and other industrial end use
markets. Third Quarter Operating Results The following table
summarizes CE Franklin's results of operations: (In millions of
Canadian Dollars except per share data) Three Months Ended
September 30 NineMonths Ended September 30 2011 2010 2011 2010
Revenues 140.5 100.0 % 132.2 100.0 % 392.0 100.0 % 353.9 100.0 %
Cost of Sales (116.6) (83.0) % (113.0) (85.5) % (326.6) (83.3) %
(299.5) (84.6) % Gross Profit 23.9 17.0 % 19.2 14.5 % 65.4 16.7 %
54.4 15.4 % Selling, (17.8) (12.7) % (15.5) (11.7) % (51.2) (13.1)
% (45.8) (12.9) % general and administrative expenses Foreign 1.6
1.1 % 0.1 0.1 % 1.8 0.5 % - - % exchange and other EBITDA(1) 7.7
5.5 % 3.8 2.9 % 16.0 4.1 % 8.6 2.5 % Depreciation (0.6) (0.4) %
(0.6) (0.5) % (1.8) (0.5) % (1.8) (0.5) % Interest (0.2) (0.1) %
(0.1) (0.1) % (0.4) (0.1) % (0.5) (0.1) % Earnings 6.9 4.9 % 3.1
2.3 % 13.8 3.5 % 6.3 1.9 % before tax Income tax (2.1) (1.5) %
(0.9) (0.7) % (4.0) (1.0) % (2.0) (0.6) % expense Net earnings 4.8
3.4 % 2.2 1.7 % 9.8 2.5 % 4.3 1.3 % Net earnings per share Basic $
0.27 $ 0.12 $ 0.56 $ 0.24 Diluted $ 0.26 $ 0.12 $ 0.54 $ 0.24
Weighted average number of shares outstanding (000's) Basic 17,537
17,461 17,507 17,518 Diluted 18,165 17,783 18,142 17,838 (1) EBITDA
represents net earnings before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented,
represents a useful means of assessing the performance of the
Company's ongoing operating activities, as it reflects the
Company's earnings trends without showing the impact of certain
charges. The Company is also presenting EBITDA and EBITDA as a
percentage of revenues because it is used by management as
supplemental measures of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and depreciation
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Depreciation expense is a
necessary component of the Company's expenses because the Company
is required to pay cash to acquire equipment to generate revenues.
Management compensates for these limitations to the use of EBITDA
by using EBITDA as only a supplementary measure of profitability.
EBITDA is not used by management as an alternative to net earnings,
as an indicator of the Company's operating performance, as an
alternative to any other measure of performance in conformity with
generally accepted accounting principles or as an alternative to
cash flow from operating activities as a measure of liquidity. A
reconciliation of EBITDA to net earnings is provided within the
table above. Not all companies calculate EBITDA in the same manner
and EBITDA does not have a standardized meaning prescribed by GAAP.
Accordingly, EBITDA, as the term is used herein, is unlikely to be
comparable to EBITDA as reported by other entities. Third Quarter
Results Net earnings for the third quarter of 2011, were $4.8
million, an increase of $2.6 million from the third quarter of
2010. Revenues were $140.5 million, an increase of $8.3
million (6%) from the third quarter of 2010. Industry activity
continued to improve and is focused on oil, oil sands and liquid
rich natural gas plays. Well completions increased 34% compared to
the third quarter of 2010. Capital project business revenue grew
$6.2 million year over year due to improved industry activity
levels. Gross profits increased by $4.7 million (24%) due to the
increase in revenues and improved gross profit margins year over
year. Average gross profit margins were consistent with the second
quarter of 2011 but improved over the third quarter 2010 average
gross profit margin, as increased purchasing levels contributed to
higher volume rebate income. Selling, general and administrative
expenses increased by $2.3 million (15%) to $17.8 million for the
quarter as compensation and operating costs have increased in
response to higher revenue levels. During the quarter, the Company
moved its head office location within downtown Calgary and as a
consequence recorded a one time lease charge of $0.7 million in
relation to its old head office lease obligations net of expected
sublease revenue. The Company also recorded an unrealized foreign
exchange gain of $1.0 million in the quarter on foreign exchange
contracts used to manage currency exposure on US denominated
product purchases. The weighted average number of shares
outstanding during the third quarter was consistent with the prior
year period as the rise in share price during the last year has
limited the activity occurring under the normal course issuer bid
program. Net earnings per share (basic) was $0.27 in the third
quarter of 2011, compared to net earnings of $0.12 per share in the
third quarter of 2010. Year to date Results Net Income for the nine
months ended September 30, 2011 at $9.8 million was more than
double the net income for the same prior year period. Revenues were
$392.0 million, an increase of $38.1 million (11%) over the
comparable 2010 period due to improvements in capital project and
maintenance repair and operating revenues. Well completions have
increased 32% year over year as industry activity continues to
build. Gross profit was up $10.9 million (20%) due to the increase
in revenues combined with an increase in vendor rebate income due
to increased purchasing levels. Selling, general and administrative
expenses increased by $5.4 million (12%) to $51.2 million for the
nine months ended for the same reasons they were higher in the
third quarter. Income taxes increased by $1.9 million for the nine
months ended September 30, 2011 compared to the prior year period
due to higher pre-tax earnings. The weighted average number of
shares outstanding (basic) during the third quarter was consistent
with the prior year period as the rise in share price during the
last year has limited the activity occurring under the normal
course issuer bid program. Net earnings per share (basic) was
$0.56 for the nine months ended September 30, 2011, compared to
$0.24 earned in the same prior year period. Revenues Revenues for
the quarter ended September 30, 2011, were $140.5 million, an
increase of 6% from the quarter ended September 30, 2010, as
detailed above in the "Third Quarter Results" discussion. Oil and
gas commodity prices are a key driver of industry capital project
activity as commodity prices directly impact the economic returns
realized by oil and gas companies. The Company uses oil and gas
well completions and average rig counts as industry activity
measures to assess demand for oilfield equipment used in capital
projects. Oil and gas well completions require the products
sold by the Company to complete a well and bring production on
stream and are a general indicator of energy industry activity
levels. Average drilling rig counts are also used by
management to assess industry activity levels as the number of rigs
in use ultimately drives well completion requirements. Well
completion, rig count and commodity price information for the three
and nine month periods ended September 30, 2011 and 2010 are
provided in the table below. Q3 Average % YTDAverage % 2011 2010
change 2011 2010 change Gas - Cdn. $ 3.67 $ 3.55 3 % $ 3.77 $ 4.12
(8) % $/gj (AECO spot) Oil - Cdn. $ 99.16 $ 77.37 28 % $ 102.74 $
79.30 30 % $/bbl (synthetic crude) Average rig 456 325 40 % 392 309
27 % count Well completions: Oil 2,699 1,484 82 % 6,685 3,916 71 %
Gas 796 1,127 (29) % 3,436 3,738 (8) % Total well 3,495 2,611 34 %
10,121 7,654 32 % completions Average statistics are shown except
for well completions. Sources:Oil and Gas prices - First Energy
Capital Corp.; Rig count data - CAODC; well completion data - Daily
Oil Bulletin (in millions Three monthsended September Nine months
ended September of Cdn. $) 30 30 2011 2010 2011 2010 End use $ % $
% $ % $ % revenue demand Capital 72.9 52 % 66.7 50 % 205.7 52 %
182.4 52 % projects Maintenance, repair and operating supplies
("MRO") 67.6 48 % 65.5 50 % 186.3 48 % 171.5 48 % Total 140.5 100 %
132.2 100 % 392.0 100 % 353.9 100 % Revenues Note:Capital project
end use revenues are defined by the Company as consisting of the
tubular and 80% of pipe, flanges and fittings; and valves and
accessories product revenues respectively; MRO revenues are defined
by the Company as consisting of pumps and production equipment,
production services; general product and 20% of pipes, flanges and
fittings; and valves and accessory product revenues respectively.
Revenues from capital project related products were $72.9 million
in the third quarter of 2011, an increase of 9% ($6.2 million) from
the third quarter of 2010. Total well completions increased by 34%
in the third quarter of 2011 and the average working rig count
increased by 40% compared to the prior year period. Gas wells
comprised 23% of the total wells completed in western Canada in the
third quarter of 2011 compared to 43% in the third quarter of 2010.
Spot gas prices ended the third quarter at $3.52 per GJ (AECO) a
decrease of 4% from third quarter average prices. Oil prices
ended the third quarter at $90.34 per bbl (Synthetic Crude) a
decrease of 9% from the third quarter average. Depressed gas prices
are expected to continue to negatively impact gas drilling activity
over the remainder of 2011, which in turn is expected to constrain
demand for the Company's products. Natural gas customers continue
to utilize a high level of competitive bid activity to procure the
products they require in an effort to reduce their costs. The
Company is addressing this industry trend by pursuing initiatives
focused on improving revenue quotation processes and increasing the
operating flexibility and efficiency of its branch network.
The Company is well positioned to support customers who are
pursuing oil plays and more particularly tight oil plays. MRO
product revenues are related to overall oil and gas industry
production levels and tend to be more stable than capital project
revenues. MRO product revenues for the quarter ended September 30,
2011 increased by $2.1 million (3%) to $67.6 million compared to
the quarter ended September 30, 2010 and comprised 48% of the
Company's total revenues (2010 - 50%). The Company's strategy is to
grow profitability by focusing on its core western Canadian
oilfield product distribution business, complemented by an increase
in the product life cycle services provided to its customers and
the focus on the emerging oil sands capital project and MRO
revenues opportunities. Revenues from these initiatives to date are
provided below: Q3 2011 Q32010 YTD2011 YTD 2010 Revenues $ % $ % $
% $ % ($millions) Oilfield 115.1 82 % 104.2 79 % 327.2 84 % 292.5
84 % Oil sands 18.9 13 % 23.7 18 % 48.3 12 % 49.8 14 % Production
6.5 5 % 4.3 3 % 16.5 4 % 11.6 3 % services Total 140.5 100 % 132.2
100 % 392.0 100 % 353.9 100 % Revenues Revenues from oilfield
products to conventional western Canada oil and gas end use
applications were $115.1 million for the third quarter of 2011,
backing out tubular product sales, which were down $0.7 million in
the third quarter year over year, oilfield revenue was up
12.2%. This increase was driven by the 34% increase in well
completions compared to the prior year period. Revenues from oil
sands end use applications were $18.9 million in the third quarter,
a decrease of $4.8 million (20%) compared to $23.7 million in the
third quarter of 2010 reflecting lower turnaround activity and no
tailing pipe sales in 2011. The Company continues to position
its major project execution capability and the Fort McMurray branch
to penetrate this emerging market for capital projects and MRO
products. Production service revenues were $6.5 million in the
third quarter of 2011, a 51% increase from the $4.3 million of
revenues in the third quarter of 2010, reflecting improved oil
production economics resulting in increased customer maintenance
activities. Gross Profit Q3 2011 Q32010 YTD 2011 YTD2010 Gross
profit ($ millions) $ 23.9 $ 19.2 $ 65.4 $ 54.5 Gross profit margin
as a 17.0 % 14.5 % 16.7 % 15.4 % % of revenues Gross profit
composition by product revenue category: Tubulars 1 % 3 % 3 % 2 %
Pipe, flanges and 33 % 28 % 30 % 29 % fittings Valves and
accessories 21 % 20 % 21 % 20 % Pumps, production 17 % 15 % 15 % 14
% equipment and services General 28 % 34 % 31 % 35 % Total gross
profit 100 % 100 % 100 % 100 % Gross profit was $23.9 million in
the third quarter of 2011, an increase of $4.7 million (24%) from
the third quarter of 2010 due to increased revenues and average
gross profit margins compared to the prior year period. Gross
profit margins for the quarter remained consistent with the second
quarter 2011 levels and were better than the prior year period at
16.9% as increased purchasing levels contributed to higher volume
rebate income. In the quarter the Company effectively passed
along price increases related to increasing steel costs from our
suppliers to our customers. Increased pipe, flanges and
fittings and valves and accessories gross profit composition was
due to improved gross profit margins. The decrease in tubular gross
profit composition reflects larger lower margin sales and the
disposal of surplus tubular inventory. Selling, General and
Administrative ("SG&A") Costs ($millions) Q3 2011 Q3 2010 YTD
2011 YTD2010 $ % $ % $ % $ % People 10.6 60 8.9 57 30.9 61 26.5 58
Costs Facility 4.3 24 3.3 21 11.5 22 10.1 22 and office costs
Selling 1.7 10 1.8 12 4.2 8 4.5 10 Costs Other 1.2 6 1.5 10 4.6 9
4.7 10 SG&A costs 17.8 100 15.5 100 51.2 100 45.8 100 SG&A
costs 12.7 % 11.7 % 13.1 % 12.9 % as % of revenues SG&A costs
increased $2.3 million (15%) in the third quarter of 2011 from the
prior year period and represented 12.7% of revenues compared to
11.7% in the prior year period. The $2.3 million increase in
expenses was attributable to higher people costs reflecting a 6%
increase in employee head count to service the additional sales
volumes and higher incentive compensation costs reflecting the
improved profit performance of the business year over year.
Facility and office costs also increased in the quarter as the
Company moved its head office location within downtown Calgary and
as a consequence recorded a one time lease charge of $0.7 million
for its old head office lease obligations net of expected sublease
revenue. Depreciation Expense Depreciation expense of $0.6 million
in the third quarter of 2011 was comparable to the third quarter of
2010. Interest Expense Interest expense of $0.2 million in the
third quarter of 2011 was higher than the prior year as fees
related to the renewal of the Company's banking facility were
expensed in the period. Foreign Exchange Gain and other Foreign
exchange gains and other in the quarter amounted to $1.6 million as
the significant weakening of the Canadian dollar at the end of the
quarter increased the translation gains from US denominated net
working capital assets. The Company recognized a $1.0 million
unrealized foreign currency gain on $14.2 million of foreign
currency forward contracts it had outstanding at quarter end.
As at September 30, 2011, a one percent change in the Canadian
dollar relative to the US dollar would decrease or increase the
Company's annual net income by $0.1 million. Income Tax Expense The
Company's effective tax rate for the third quarter of 2011 was
29.8%, down 0.5% from the third quarter of 2010 as the decline in
the statutory rate was partially offset by the impact of permanent
differences. The current effective tax rate is higher than the
statutory rate due to the impact of non-deductible items and other
adjustments. Substantially all of the Company's tax provision is
currently payable. Summary of Quarterly Financial Data The selected
quarterly financial data is presented in Canadian dollars and in
accordance with IFRS. This information is derived from the
Company's unaudited quarterly financial statements. As noted above
the September 30, 2011 interim consolidated financial statements
have been prepared under IFRS. The comparative figures shown in the
table below for 2010 have been restated from Canadian GAAP. The
reconciliations from Canadian GAAP to IFRS have been completed and
there were no material differences noted. The conversion from
Canadian GAAP to IFRS is further discussed in Note 3 of the
condensed interim consolidated financial statements. (in millions
of Cdn. $ except per share data) Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Unaudited
2009 (2) 2010 2010 2010 2010 2011 2011 2011 Revenues 93.0 121.9
99.9 132.2 135.6 137.7 113.9 140.5 Gross Profit 15.3 19.7 15.6 19.2
20.5 22.3 19.3 23.9 Gross Profit % 16.5 % 16.1 % 15.6 % 14.5 % 15.1
% 16.2 % 16.9 % 17.0 % EBITDA 0.6 4.1 0.7 3.8 3.8 5.3 3.1 7.7
EBITDA as a % of 0.6 % 3.4 % 0.7 % 2.9 % 2.8 % 3.8 % 2.7 % 5.5 %
revenues Net earnings (0.5) 2.2 (0.1) 2.2 1.6 3.4 1.7 4.8 (loss)
Net earnings (loss) as a % of revenues (0.5) % 1.8 % (0.1) % 1.7 %
1.2 % 2.5 % 1.5 % 3.4 % Net earnings (loss) per share Basic $
(0.03) $ 0.13 $ (0.01) $ 0.12 $ 0.09 $ 0.19 0.10 $ 0.27 Diluted $
(0.03) $ 0.12 $ (0.01) $ 0.12 $ 0.09 $ 0.19 0.09 $ 0.26 Net working
136.6 113.9 111.8 129.0 125.7 120.1 136.5 134.6 capital(1) Long
term 26.8 1.4 0.3 14.4 6.4 0.3 12.2 5.8 debt/bankoperating loan(1)
Total well 1,576 2,846 2,197 2,611 4,760 3,861 2,765 3,495
completions (1) Net working capital and long term debt/bank
operating loan amounts are as at quarter end (2) Prepared using
Canadian GAAP The Company's revenue levels are affected by weather
conditions. As warm weather returns in the spring each year, the
winter's frost comes out of the ground rendering many secondary
roads incapable of supporting the weight of heavy equipment until
they have dried out. In addition, many exploration and production
areas in northern Canada are accessible only in the winter months
when the ground is frozen. An exceptionally wet second quarter in
2011 had some impact on customer capital programs in the third
quarter. As a result, the first and fourth quarters typically
represent the busiest time for oil and gas industry activity and
the highest revenue activity for the Company. Revenue levels drop
dramatically during the second quarter until such time as roads
have dried and road bans have been lifted. This typically results
in a significant reduction in earnings during the second quarter,
as the decline in revenue typically out paces the decline in
SG&A costs as the majority of the Company's SG&A costs are
fixed in nature. Net working capital (defined as current assets
less cash and cash equivalents, accounts payable and accrued
liabilities, income taxes payable and other current liabilities)
and borrowing levels follow similar seasonal patterns as revenue.
Liquidity and Capital Resources The Company's primary internal
source of liquidity is cash flow from operating activities before
net changes in non-cash working capital balances related to
operations. Cash flow from operating activities and the Company's
$60.0 million revolving term credit facility are used to finance
the Company's net working capital, capital expenditures and
acquisitions. As at September 30, 2011 the Company had $5.8 million
in borrowings under its revolving term credit facility, a net
decrease of $0.6 million from December 31, 2010. Borrowing levels
have decreased due to the Company generating $10.8 million in cash
flow from operating activities before net changes in working
capital. This was offset by $2.1 million in capital and other
expenditures and $0.7 million for the purchase of shares to
resource stock compensation obligations and the repurchase of
shares under the Company's Normal Course Issuer Bid ("NCIB"). As at
September 30, 2010, there were $14.1 million in borrowings under
the Company's debt facility, a decrease of $12.5 million from
December 31, 2009. Borrowing levels have decreased since December
31, 2009 due to the Company generating $7.5 million in cash flow
from operating activities before net changes in working capital and
a $7.7 million reduction in net working capital. This was offset by
$1.1 million in capital and other expenditures, $0.4 million for
the settlement of share obligations and $1.2 million for the
purchase of shares to resource stock compensation obligations and
the repurchase of shares under the Company's NCIB. Net working
capital was $134.6 million at September 30, 2011, an increase of
$8.9 million from December 31, 2010. Accounts receivable increased
by $3.1 million to $96.1 million at September 30, 2011 from
December 31, 2010 due to the 4% increase in revenues in the third
quarter compared to the fourth quarter of 2010, partially offset by
a weaker Days Sales Outstanding ("DSO"). DSO in the third quarter
of 2011 was 58 days compared to 56 days in the fourth quarter of
2010 and 58 days in the third quarter of 2010. DSO is calculated
using average revenues per day for the quarter compared to the
period end accounts receivable balance. Inventory increased by $7.7
million at September 30, 2011 from December 31, 2010. Inventory
turns for the third quarter of 2011 decreased to 4.5 turns compared
to 4.9 turns in the fourth quarter of 2010. Inventory turns are
calculated using cost of goods sold for the quarter on an
annualized basis compared to the period end inventory balance. The
Company continues to adjust its investment in inventory to align
with anticipated industry activity levels and supplier lead times
in order to improve inventory turnover efficiency. Accounts payable
and accrued liabilities increased by $6.6 million (10%) to $70.0
million at September 30, 2011 from December 31, 2010 due to the
seasonal increase in activity. Capital expenditures in the third
quarter of 2011 were $1.1 million, $0.5 million higher than the
prior year period and were comprised primarily of vehicles,
warehouse equipment replacements and branch improvements. In
the quarter the Company disposed of a surplus building and some
surplus vehicles for net proceeds of $0.4 million. The Company has
a $60.0 million revolving term credit facility that matures in July
2014 (the "Credit Facility"). The loan facility bears interest
based on floating interest rates and is secured by a general
security agreement covering all assets of the Company. The maximum
amount available under the Credit Facility is subject to a
borrowing base formula applied to accounts receivable and
inventories. The Credit Facility requires the Company to maintain
the ratio of its debt to debt plus equity at less than 40%. As at
September 30, 2011, this ratio was 3%. The Company must also
maintain coverage of its net operating cash flow as defined in the
Credit Facility agreement over interest expense for the trailing
twelve month period of greater than 1.25 times. As at September 30,
2011 this ratio was 24.9 times. The Credit Facility contains
certain other covenants with which the Company is in compliance. As
at September 30, 2011 the Company had available undrawn borrowing
capacity of $54.5 million under this Credit facility. Contractual
Obligations There have been no material changes in off-balance
sheet contractual commitments since June 30, 2011. Capital Stock As
at September 30, 2011 and 2010, the following shares and securities
convertible into shares were outstanding: (millions) September 30,
2011 September 30, 2010 Shares Shares Shares outstanding 17.5 17.4
Stock options 0.6 1.1 Share unit plan obligations 0.7 0.6 Shares
outstanding and 18.8 19.1 issuable The weighted average number of
shares outstanding during the third quarter of 2011 was 17.5
million, which was consistent with the prior year period as the
rise in the Company's share price during the last year has limited
the activity occurring under the normal course issuer bid program.
The diluted weighted average number of shares outstanding was 18.2
million, which is also consistent with the prior year quarter. The
Company has established an independent trust to purchase common
shares of the Company on the open market to resource share unit
plan obligations. During the three and nine month periods ended
September 30, 2011, 500 common shares and 75,500 common shares were
acquired by the trust at an average cost per share of $8.28 and
$9.26 per share respectively (three and nine months ended September
30, 2010 - 92,500 and 129,300 common shares at an average cost per
share of $6.79 and $6.83 respectively). As at September 30, 2011,
the trust held 481,726 shares (September 30, 2010 - 471,610
shares). On December 21, 2010, the Company announced the renewal of
the NCIB, to purchase up to 850,000 common shares representing
approximately 5% of its outstanding common shares. Shares may be
purchased up to December 31, 2011. As at September 30, 2011 the
Company had purchased 3,102 shares at an average cost of $7.56 per
share (September 30, 2010 - 57,878 shares at an average cost of
$6.61 per share). Critical Accounting Estimates There have been no
material changes to critical accounting estimates since December
31, 2010. The Company is not aware of any environmental or asset
retirement obligations that could have a material impact on its
operations. Change in Accounting Policies Transition to
International Financial Reporting Standards ("IFRS") In February
2008, the Canadian Accounting Standards Board confirmed that the
basis for financial reporting by Canadian publicly accountable
enterprises will change from Canadian GAAP to IFRS effective for
January 1, 2011, including the preparation and reporting of one
year of comparative figures. This change is part of a global shift
to provide consistency in financial reporting in the global
marketplace. Over the transition period the Company assessed the
differences between Canadian GAAP and IFRS. A risk based approach
was used to identify possibly significant differences based on
possible financial impact and complexity. As described in Note 3 to
the condensed interim consolidated financial statements no material
differences were identified. As such there are no reconciling items
that materially changed the reporting requirements upon the
transition from Canadian GAAP to IFRS. Similarly, no
significant information system changes were required in order to
adopt IFRS. IFRS 1 allows first time adopters of IFRS to take
advantage of a number of voluntary exemptions from the general
principal of retroactive restatement. In adopting IFRS, the Company
did take advantage of the following voluntary exemptions under IFRS
1. Business Combinations The Company has not applied IFRS 3, the
Business Combinations standard to acquisitions of subsidiaries that
occurred before January 1, 2010, the Company's transition date to
IFRS. As such there is no retrospective change in accounting for
business combinations. The Company used this exemption to simplify
its IFRS conversion plan and improve comparability between its
Canadian GAAP statements and its IFRS statements. Borrowing Costs
IAS 23 requires that borrowing costs directly attributable to the
acquisition, construction or production of a qualifying asset (one
that takes a substantial period of time to get ready for use or
sale) be capitalized as part of the cost of that asset. The option
of immediately expensing those borrowing costs has been removed.
The Company has elected to account for such transactions on a go
forward basis, and as such there is no retrospective change in
accounting for borrowing standards. The Company used this exemption
to simplify its IFRS conversion plan and improve comparability
between its Canadian GAAP statements and its IFRS statements. Stock
Options The Company has assessed and quantified the difference in
accounting for stock based compensation under IFRS compared to
Canadian GAAP and has deemed the difference to be immaterial. The
Company has elected to not apply IFRS 2 to share based payments
granted and fully vested before the Company's date of transition to
IFRS. The Company used this exemption to simplify its IFRS
conversion plan and improve comparability between its Canadian GAAP
statements and its IFRS statements. As part of the transition to
IFRS the Company established that the carrying value of its
property and equipment were substantially equivalent between IFRS
and Canadian GAAP and therefore the Company has continued to carry
its property and equipment at the historic costs model as was used
under Canadian GAAP in these statements. Controls and Procedures
Internal control over financial reporting ("ICFR") is designed to
provide reasonable assurance regarding the reliability of the
Company's financial reporting and its compliance with IFRS in its
financial statements. The President and Chief Executive Officer and
the Vice President and Chief Financial Officer of the Company have
evaluated whether there were changes to its ICFR during the nine
months ended September 30, 2011 that have materially affected or
are reasonably likely to materially affect the ICFR. No such
changes were identified through their evaluation. Risk Factors The
Company is exposed to certain business and market risks including
risks arising from transactions that are entered into the normal
course of business, which are primarily related to interest rate
changes and fluctuations in foreign exchange rates. During the
reporting period, no events or transactions since the year ended
December 31, 2010 have occurred that would materially change the
business and market risk information disclosed in the Company's
Form 20F. Forward Looking Statements The information in the
MD&A may contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. All statements, other
than statements of historical facts, that address activities,
events, outcomes and other matters that CE Franklin plans, expects,
intends, assumes, believes, budgets, predicts, forecasts, projects,
estimates or anticipates (and other similar expressions) will,
should or may occur in the future are forward-looking statements.
These forward-looking statements are based on management's current
belief, based on currently available information, as to the outcome
and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other
cautionary statements in this MD&A, including those in under
the caption "Risk Factors". Forward-looking statements appear in a
number of places and include statements with respect to, among
other things: -- forecasted oil and gas industry activity levels in
2011 and beyond; -- planned capital expenditures and working
capital and availability of capital resources to fund capital
expenditures and working capital; -- the Company's future financial
condition or results of operations and future revenues and
expenses; -- the Company's business strategy and other plans and
objectives for future operations; -- fluctuations in worldwide
prices and demand for oil and gas; -- fluctuations in the demand
for the Company's products and services. Should one or more of the
risks or uncertainties described above or elsewhere in this
MD&A occur, or should underlying assumptions prove incorrect,
the Company's actual results and plans could differ materially from
those expressed in any forward-looking statements. All
forward-looking statements expressed or implied, included in this
MD&A and attributable to CE Franklin are qualified in their
entirety by this cautionary statement. This cautionary statement
should also be considered in connection with any subsequent written
or oral forward-looking statements that CE Franklin or persons
acting on its behalf might issue. CE Franklin does not undertake
any obligation to update any forward-looking statements to reflect
events or circumstance after the date of filing this MD&A,
except as required by law. Additional Information Additional
information relating to CE Franklin, including its third quarter
2011 Management Discussion and Analysis and interim consolidated
financial statements and its Form 20-F / Annual Information Form,
is available under the Company's profile on the SEDAR website at
www.sedar.com and at www.cefranklin.com. CE Franklin Ltd. CONDENSED
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - UNAUDITED
As at September 30 As at December 31 (in thousands of Canadian
dollars) 2011 2010 Assets Current assets Accounts receivable (Note
4) 96,089 92,950 Inventories (Note 5) 102,504 94,838 Other 6,966
1,625 205,559 189,413 Non-current assets Property and equipment
10,035 9,431 Goodwill 20,570 20,570 Deferred tax assets (Note 6)
1,593 1,116 Other assets 188 147 Total Assets 237,945 220,677
Liabilities Current liabilities Accounts payable and accrued 69,956
63,363 liabilities (Note 7) Current taxes payable (Note 6) 1,002
348 70,958 63,711 Non current liabilities Long term debt (Note 8)
5,782 6,430 Total liabilities 76,740 70,141 Shareholders' equity
Capital stock (Note 11) 23,376 23,078 Contributed surplus 20,271
19,716 Retained earnings 117,558 107,742 161,205 150,536 Total
liabilities and 237,945 220,677 shareholders' equity See
accompanying notes to these condensed interim consolidated
financial statements CE Franklin Ltd. CONDENSED INTERIM
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY -
UNAUDITED (Canadian CapitalStock dollars and number of shares in
thousands) Number of Contributed Retained Shareholders' Shares $
Surplus Earnings Equity Balance - 17,581 23,284 17,184 102,159
142,627 January 1, 2010 Stock based - - 1,485 - 1,485 compensation
expense (Note 11 (b) and (c)) Normal (58) (76) - (298) (374) Course
Issuer Bid (Note 11 (d)) Modification - - 103 - 103 of Stock option
plan (Note 11 (a) and (b)) Share Units 67 464 (464) - - exercised
(Note 11 (c)) Purchase of (179) (1,229) - - (1,229) shares in trust
for Share Unit Plans (Note 11 (c)) Options 33 259 (100) - 159
exercised from treasury Directors - 73 (251) - (178) Share Unit
Plan exercise (Note 11 (c)) Net earnings - - - 4,272 4,272 Balance
- 17,444 22,775 17,957 106,133 146,865 September 30, 2010 Balance -
17,474 23,078 19,716 107,742 150,536 January 1, 2011 Stock based -
- 1,556 - 1,556 compensation expense (Note 11 (b) and (c)) Normal
(3) (4) - (19) (23) Course Issuer Bid (Note 11 (d)) Stock 97 735
(735) - - options exercised (Note 11 (b)) Share Units 45 266 (266)
- - exercised (Note 11 (c)) Purchase of (76) (699) - - (699) shares
in trust for Share Unit Plans (Note 11 (c)) Net earnings - - -
9,835 9,835 Balance - 17,537 23,376 20,271 117,558 161,205
September 30, 2011 See accompanying notes to these condensed
interim consolidated financial statements CE Franklin Ltd.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND
COMPREHENSIVE INCOME - UNAUDITED Three months ended Nine months
ended (in thousands of September 30 September 30 September 30
September 30 Canadian dollars 2011 2010 2011 2010 except pershare
amounts) Revenue 140,454 132,159 392,021 353,944 Cost of sales
116,581 112,928 326,592 299,485 Gross profit 23,873 19,231 65,429
54,459 Other expenses Selling, 17,801 15,511 51,181 45,821 general
and administrative expenses (Note 14) Depreciation 633 620 1,836
1,855 18,434 16,131 53,017 47,676 Operating profit 5,439 3,100
12,412 6,783 Foreign (1,596) (130) (1,768) (45) exchange gain and
other Interest 226 108 398 539 expense Earnings before 6,809 3,122
13,782 6,289 tax Income tax expense (recovery)(Note 6) Current
2,215 1,120 4,383 2,124 Deferred (185) (173) (436) (107) 2,030 947
3,947 2,017 Net earnings and 4,779 2,175 9,835 4,272 comprehensive
income Net earnings per share(Note 12) Basic 0.27 0.12 0.56 0.24
Diluted 0.26 0.12 0.54 0.24 Weighted average number of shares
outstanding ('000s) Basic 17,537 17,461 17,507 17,518 Diluted (Note
18,165 17,783 18,142 17,838 12) See accompanying notes to these
condensed interim consolidated financial statements CE Franklin
Ltd. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASHFLOWS -
UNAUDITED Three monthsended Nine months ended September 30
September 30 September 30 September 30 (in thousands of 2011 2010
2011 2010 Canadian dollars) Cash flows from operating activities
Net earnings for 4,779 2,175 9,835 4,272 the period Items not
affecting cash - Depreciation 633 620 1,836 1,855 Deferred income
(185) (173) (436) (107) tax (recovery) Stock based 384 728 1,506
1,520 compensation expense Foreign (1,995) (130) (1,948) (52)
exchange and other 3,616 3,220 10,793 7,488 Net change in non-cash
working capital balance related to operations - Accounts (14,916)
(30,000) (2,997) (24,263) receivable Inventories 5,543 (788)
(7,666) 6,560 Other current (1,624) (3,340) (3,644) (1,454) assets
Accounts payable 13,530 16,555 6,374 25,725 and accrued liabilities
Current taxes 1,002 237 653 1,156 payable 7,151 (14,116) 3,513
15,212 Cash flows used in investing activities Purchase of (1,068)
(629) (2,540) (1,099) property and equipment Proceeds on 352 - 397
- disposal of property and eqipment Business - - - 12 acquisition
(716) (629) (2,143) (1,087) Cash flows (used in)/ from financing
activities Increase - 14,094 - (12,455) (decrease) in bank
operating loan (Decrease) in (6,443) - (648) - long term debt
Issuance of - 92 - 111 capital stock - stock options exercised
Settlement of - - - (178) share unit plan obligations Purchase of -
(56) (23) (374) capital stock through normal course issuer bid
Purchase of capital stock in trust for Share Unit Plans 8 (347)
(699) (1,229) (6,435) 13,783 (1,370) (14,125) Change in cash and -
(962) - - cash equivalentduring the period Cash and cash - 962 - -
equivalentsat the beginning of the period Cash and cash - - - -
equivalentsat the end of the period Cash paid during the period
for: Interest 89 146 223 393 Income taxes 1,189 717 3,638 957 See
accompanying notes to these condensed interim consolidated
financial statements CE Franklin Ltd.
------------------------------ Notes to Condensed Interim
Consolidated Financial Statements - Unaudited (Tabular amounts in
thousands of Canadian dollars, except share and per share amounts)
1. General information CE Franklin Ltd. (the "Company") is
headquartered and domiciled in Calgary, Canada. The Company is a
subsidiary of Schlumberger Limited, a global energy services
company. The address of the Company's registered office is 1800,
635 8th Ave SW, Calgary, Alberta, Canada and it is incorporated
under the Alberta Business Corporations Act. The Company is a
distributor of pipe, valves, flanges, fittings, production
equipment, tubular products and other general industrial supplies
primarily to the oil and gas industry through its 43 branches
situated in towns and cities that serve oil and gas fields of the
western Canadian sedimentary basin. In addition, the Company
distributes similar products to the oil sands, refining, and
petrochemical industries and non-oilfield related industries such
as forestry and mining. 2. Accounting policies Basis of preparation
and adoption of IFRS The Company prepares its financial statements
in accordance with Canadian generally accepted accounting
principles as set out in the Handbook of the Canadian Institute of
Chartered Accountants ("CICA Handbook"). In 2010, the CICA Handbook
was revised to incorporate International Financial Reporting
Standards ("IFRS"), and require publicly accountable enterprises to
apply such standards effective for years beginning on or after
January 1, 2011. Accordingly, the Company commenced reporting on
this basis in its 2011 interim consolidated financial statements.
In these financial statements, the term "Canadian GAAP" refers to
Canadian GAAP before the adoption of IFRS. These interim
consolidated financial statements have been prepared in accordance
with IFRS applicable to the preparation of interim financial
statements, including IAS 34, Interim Financial Reporting, and IFRS
1, First-time Adoption of International Financial Reporting
Standards. The accounting policies followed in these interim
financial statements are the same as those applied in the Company's
interim financial statements for the period ended March 31, 2011.
The Company has consistently applied the same accounting policies
throughout all periods presented, as if these polices had always
been in effect. Note 3 discloses the impact of the transition to
IFRS on the Company's reported equity as at September 30, 2011 and
comprehensive income for the three and nine months ended September
30, 2011, including the nature and effect of significant changes in
accounting policies from those used in the Company's consolidated
financial statements for the year ended December 31, 2010. The
accounting policies applied in these condensed interim consolidated
financial statements are based on IFRS effective for the year ended
December 31, 2011, as issued and outstanding as of October 27,
2011, the date the Board of Directors approved the statements. Any
subsequent changes to IFRS that are given effect in the Company's
annual consolidated financial statements for the year ending
December 31, 2011 could result in the restatement of these interim
consolidated financial statements, including transition adjustments
recognized on change-over to IFRS. The condensed interim
consolidated financial statements should be read in conjunction
with the Company's Canadian GAAP annual financial statements for
the year ended December 31, 2010, and the Company's interim
financial statements for the quarter ended March 31, 2011 prepared
in accordance with IFRS applicable to interim financial statements.
3. Explanation of transition to IFRS The Company does not have any
material differences between IFRS and Canadian GAAP. As such there
are no reconciling items that would materially change the reporting
requirements under Canadian GAAP to IFRS. The interim consolidated
financial statements for the period ended March 31, 2011 were the
Company's first financial statements prepared under IFRS. For all
accounting periods prior to this, the Company prepared its
financial statements under Canadian GAAP. IFRS 1 allows first time
adopters to IFRS to take advantage of a number of voluntary
exemptions from the general principal of retrospective restatement.
The Company has taken the following exemptions: IFRS 2 Share based
payments The Company has elected to not apply IFRS 2 to share based
payments granted and fully vested before the Company's date of
transition to IFRS. The Company has assessed and quantified the
difference in accounting for stock based compensation under IFRS
compared to Canadian GAAP and has deemed the difference to be
immaterial. IFRS 3 Business combinations This standard has not been
applied to acquisitions of subsidiaries that occurred before
January 1, 2010, the Company's transition date to IFRS. As such,
there is no retrospective change in accounting for business
combinations. IAS 23 Borrowing costs Borrowing costs requires an
entity to capitalize borrowing costs directly attributable to the
acquisition, construction or production of a qualifying asset (one
that takes a substantial period of time to get ready for use or
sale) as part of the cost of that asset. The option of immediately
expensing those borrowing costs has been removed. The Company has
elected to account for such transactions on a go forward basis. As
such there is no retrospective change in accounting for borrowing
costs. As part of the transition to IFRS the Company established
that the carrying values of its property and equipment were
substantially equivalent between IFRS and Canadian GAAP and
therefore the Company has continued to carry its property and
equipment at the historic costs model as was used under Canadian
GAAP in these statements. 4.Accounts receivable September 30, 2011
December 31, 2010 Current 50,060 40,014 Less than 60 days overdue
34,301 41,253 Greater than 60 days overdue 7,193 5,519 Total Trade
receivables 91,554 86,786 Allowance for credit losses (1,504)
(1,887) Net trade receivables 90,050 84,899 Other receivables 6,039
8,051 96,089 92,950 A substantial portion of the Company's accounts
receivable balance is with customers within the oil and gas
industry and is subject to normal industry credit risks.
Concentration of credit risk in trade receivables is limited as the
Company's customer base is large and diversified. The Company
follows a program of credit evaluations of customers and limits the
amount of credit extended when deemed necessary. The Company has
established procedures in place to review and collect outstanding
receivables. Significant outstanding and overdue balances are
reviewed on a regular basis and resulting actions are put in place
on a timely basis. Appropriate provisions are made for debts that
may be impaired on a timely basis. The Company maintains an
allowance for possible credit losses that are charged to selling,
general and administrative expenses by performing an analysis of
specific accounts. 5. Inventories The Company maintains net
realizable value allowances against slow moving, obsolete and
damaged inventories that are charged to cost of goods sold on the
statement of earnings. These allowances are included in the
inventory value disclosed above. Movement of the allowance for net
realizable value is as follows: Nine months ended Year ended
September30, 2011 December 31, 2010 Opening balance as at January
1, 5,000 6,300 Additions 728 900 Utilization through write downs
(1,358) (2,200) Closing balance 4,370 5,000 6. Taxation The
difference between the income tax provision recorded and the
provision obtained by applying the combined federal and provincial
statutory rates is as follows: Three Months Ended Nine Months Ended
September 30 September 30 2011 % 2010 % 2011 % 2010 % Earnings
before 6,809 3,121 13,782 6,289 income taxes Income taxes 1,825
26.8 887 28.4 3,680 26.7 1,787 28.4 calculated at statutory rates
Non-deductible 22 0.3 25 0.8 55 0.4 80 1.3 items Share based 19 0.3
46 1.5 81 0.6 159 2.5 compensation Adjustments for 164 2.4 (11)
(0.4) 131 0.9 (9) (0.1) filing returns and others 2,030 29.8 947
30.3 3,947 28.6 2,017 32.1 As at September 30, 2011, income taxes
payable was $1.0 million (December 31, 2010 - $0.3 million
payable). Income tax expense is based on management's best estimate
of the weighted average annual income tax rate expected for the
full financial year. As at September 30, 2011 December 31, 2010
Assets Property and equipment 887 870 Stock based compensation 830
487 expense Other 536 156 2,253 1,513 Liabilities Goodwill and
other 660 397 Net Deferred taxasset 1,593 1,116 Deductible
temporary differences are recognized to the extent that it is
probable that taxable profit will be available against which the
deductible temporary differences can be utilized. 7. Accounts
payable and accrued liabilities September 30, 2011 December
31, 2010 Current Trade payables 24,899 23,966 Other payables 9,477
7,057 Accrued compensation 2,951 2,434 expenses Other accrued
liabilities 32,629 29,906 69,956 63,363 8. Long term debt and bank
operating loan September30, 2011 December 31, 2010 JEN Supply debt
290 290 Bank operating loan 5,492 6,140 Long term debt 5,782 6,430
In July of 2011, the Company entered into a $60.0 million revolving
term Credit Facility that matures in July 2014. Borrowings
under the Credit Facility bear interest based on floating interest
rates and are secured by a general security agreement covering all
assets of the Company. The maximum amount available under the
Credit Facility is subject to a borrowing base formula applied to
accounts receivable and inventories. The Credit Facility requires
that the Company maintains the ratio of its debt to debt plus
equity at less than 40%. As at September 30, 2011, this ratio was
3% (December 31, 2010 - 4%). The Company must also maintain
coverage of its net operating cash flow as defined in the Credit
Facility agreement, over interest expense for the trailing twelve
month period, at greater than 1.25 times. As at September 30, 2011,
this ratio was 24.9 times (December 31, 2010 - 14.1 times).
The Credit Facility contains certain other covenants, with which
the Company is in compliance and has been for the comparative
periods. As at September 30, 2011, the Company had borrowed $5.5
million and had available undrawn borrowing capacity of $54.5
million under the Credit Facility. In management's opinion, the
Company's available borrowing capacity under its Credit Facility
and ongoing cash flow from operations, are sufficient to resource
its ongoing obligations. The JEN Supply debt is unsecured and bears
interest at the floating Canadian bank prime rate and is repayable
in 2012. 9. Capital management The Company's primary source of
capital is its shareholders' equity and cash flow from operating
activities before net changes in non-cash working capital balances.
The Company augments these capital sources with a $60 million,
revolving bank term loan facility maturing in July 2014 (see Note
8) which is used to finance its net working capital and general
corporate requirements. The Company's objective is to maintain
adequate capital resources to sustain current operations including
meeting seasonal demands of the business and the economic
cycle. The Company's capital is summarised as follows:
September 30, 2011 December 31, 2010 Shareholders' equity 161,205
150,536 Long term debt / Bank 5,782 6,430 operating loan Net
working capital 134,601 125,702 Net working capital is defined as
current assets less cash and cash equivalents, accounts payable and
accrued liabilities, current taxes payable and other current
liabilities. 10. Related party transactions Schlumberger owns
approximately 56% of the Company's outstanding shares. The Company
is the exclusive distributor in Canada of downhole pump production
equipment manufactured by Wilson Supply, a division of
Schlumberger. Purchases of such equipment conducted in the normal
course on commercial terms were as follows: For the nine months
ended September 30 2011 2010 Cost of sales for the three months
ended 3,357 2,232 Cost of sales for the nine months ended 7,446
5,932 Inventory 4,854 3,323 Accounts payable and accrued
liabilities 1,264 953 Accounts receivable 4 - 11. Capital Stock a)
The Company has authorized an unlimited number of common shares
with no par value. At September 30, 2011, the Company had 17.5
million common shares, 0.7 million stock options and 0.6 million
share units outstanding. b) The Board of Directors may grant
options to purchase common shares to substantially all employees,
officers and directors and to persons or corporations who provide
management or consulting services to the Company. The
exercise period and the vesting schedule after the grant date are
not to exceed 10 years. Option activity for each of the nine month
periods ended September 30 was as follows: (000's) 2011 2010
Outstanding - January 1 1,073 1,195 Exercised (97) (73) Forfeited
(228) (26) Outstandingat September 30 748 1,096 Exercisable at
September 30 662 824 Stock based compensation expense recorded for
the three and nine month period ended September 30, 2011 was
$72,000 (2010 - $517,000) and $302,000 (2010 - $1,271,000)
respectively and is included in selling, general and administrative
expenses on the Consolidated Statement of Earnings and
Comprehensive Income. No options were granted during the
nine month period ended September 30, 2011 or the year ended
December 31, 2010. Options vest one third or one fourth per year
from the date of grant. Prior to the fourth quarter of 2010, the
Company's stock option plan included a cash settlement mechanism.
During the fourth quarter of 2010, the Company discontinued the
settlement of stock option obligations with cash payments in favour
of issuing shares from treasury. At the time of this plan
modification, the current liability of $2,075,000 was transferred
to contributed surplus on the Company's consolidated statement of
financial position. Stock options were revalued at each period end
using the Black Scholes pricing model, the following assumptions
were used: 2010 Dividend yield Nil Risk-free interest rate 3.48%
Expected life 5 years Expected volatility 63.2% Note: Expected
volatility is based on historical volatility. c) Share Unit Plans
The Company has Restricted Share Unit ("RSU"), Performance Share
Unit ("PSU") and Deferred Share Unit ("DSU") plans (collectively
the "Share Unit Plans"), where by RSU's, PSU's and DSU's are
granted entitling the participant, at the Company's option, to
receive either a common share or cash equivalent in exchange for a
vested unit. For the PSU plan the number of units granted is
dependent on the Company meeting certain return on net asset
("RONA") performance thresholds during the year of grant. The
multiplier within the plan ranges from 0% - 200% dependent on
performance. RSU and PSU grants vest one third per year over the
three year period following the date of the grant. DSU's vest on
the date of grant, and can only be redeemed when the Director
resigns from the Board. Compensation expense related to the
units granted is recognized over the vesting period based on the
fair value of the units at the date of the grant and is recorded to
contributed surplus. The contributed surplus balance is
reduced as the vested units are exchanged for either common shares
or cash. During the nine month period ended September 30, 2011 and
2010 the fair value of the RSU, PSU and DSU units granted was
$2,219,000 (2010 - $1,968,000) and compensation expense recorded in
the three and nine month period ended September 30, 2011, were
$262,000 (2010 - $349,000) and $1,053,000 (2010 - $961,000). Share
Unit Plan activity for the periods ended September 30, 2011, and
December 31, 2010 was as follows: (000's) September 30, 2011
December 31, 2010 Number ofUnits Number of Units RSU PSU DSU Total
RSU PSU DSU Total Outstanding at January 1 273 97 80 450 223 53 98
374 Granted 128 117 22 267 145 132 31 308 Performance adjustments -
- - - - (77) - (77) Exercised (35) (10) - (45) (82) (7) (49) (138)
Forfeited (55) (42) - (97) (13) (4) - (17) Outstanding at end of
period 311 162 102 575 273 97 80 450 Exercisable at end of period
96 35 102 233 30 10 80 120 The Company has established an
independent trust to purchase common shares of the Company on the
open-market to satisfy Share Unit Plan obligations. The Company's
intention is to settle all share based obligations with shares
delivered from the trust. The trust is considered to be a special
interest entity and is consolidated in the Company's financial
statements with the cost of the shares held in trust reported as a
reduction to capital stock. For the nine month period ended
September 30, 2011, 75,500 common shares were purchased by the
trust (2010 - 179,300) at an average cost of $9.26 per share (2010
- $6.79). As at September 30, 2011, the trust held 481,726
shares (2010 - 471,610). d) Normal Course Issuer Bid ("NCIB")
On December 21, 2010, the Company announced a NCIB to purchase for
cancellation up to 850,000 common shares representing approximately
5% of its outstanding common shares. During the nine months ended
September 30, 2011, the company purchased 3,102 shares at an
average cost of $7.56 (2010: 57,878 shares purchased at an average
cost of $6.61). 12. Earnings per share Basic Basic earnings per
share is calculated by dividing the net income attributable to
shareholders by the weighted average number of ordinary shares in
issue during the year. Dilutive Diluted earnings per share are
calculated using the treasury stock method, as if RSU's, PSU's,
DSU's and stock options were exercised at the beginning of the year
and funds received were used to purchase the Company's common
shares on the open market at the average price for the year. Three
MonthsEnded Nine Months Ended September 30 September 30 2011 2010
2011 2010 Total Comprehensive income 4,779 2,175 9,835 4,272
attributable to shareholders Weighted average number of common
17,537 17,461 17,507 17,518 shares issued (000's) Adjustments for:
Stock options 250 39 380 - Share Units 378 283 255 320 Weighted
average number of 18,165 17,783 18,142 17,838 ordinary shares for
dilutive Net earnings per share: Basic 0.27 0.12 0.56 0.24 Net
earnings per share: Diluted 0.26 0.12 0.54 0.24 13. Financial
instruments a) Fair values The Company's financial instruments
recognized on the consolidated statements of financial position
consist of accounts receivable, accounts payable and accrued
liabilities and long term debt. The fair values of these financial
instruments, excluding long term debt, approximate their carrying
amounts due to their short-term maturity. At September 30, 2011,
the fair value of the long term debt approximated their carrying
values due to their floating interest rate nature and short term
maturity. Long term debt is initially recorded at fair value and
subsequently measured at amortized cost using the effective
interest rate method. b) Credit Risk is described in Note 4. c)
Market Risk and Risk Management The Company's long term debt bears
interest based on floating interest rates. As a result the Company
is exposed to market risk from changes in the Canadian prime
interest rate which can impact its borrowing costs. Based on the
Company's borrowing levels as at September 30, 2011, a change of
one percent in interest rates would decrease or increase the
Company's annual net income by $0.1 million. From time to time the
Company enters into foreign exchange forward contracts to manage
its foreign exchange market risk by fixing the value of its
liabilities and future commitments. The Company is exposed to
possible losses in the event of non-performance by counterparties.
The Company manages this credit risk by entering into agreements
with counterparties that are substantially all investment grade
financial institutions. The Company's foreign exchange risk arises
principally from the settlement of United States dollar dominated
net working capital balances as a result of product purchases
denominated in United States dollars. As at September 30, 2011, the
Company had contracted to purchase US$14.2 million at fixed
exchange rates with terms not exceeding nine months (December 31,
2010 - $6.5 million). The fair market values of the contracts were
$1.0 million at September 30, 2011 and nominal at December 31,
2010. The Company recorded on these contracts an unrealized gain of
$1.0 million for the three and nine month periods ended September
30, 2011 which has been recorded in foreign exchange (gain)
loss. As at September 30, 2011, a one percent change in the
Canadian dollar relative to the US dollar would decrease or
increase the Company's annual net income by $0.1 million. Selling,
general and administrative ("SG&A") Costs Selling, general and
administrative costs for the three and nine month periods ended
September 30 are as follows: Three months ended Nine months ended
2011 2010 2011 2010 $ % $ % $ % $ % Salaries and 10,596 60% 8,938
58% 30,908 60% 26,500 58% Benefits Selling Costs 1,663 9% 1,843 12%
4,216 8% 4,583 10% Facility and 4,268 24% 3,211 21% 11,520 23%
10,081 22% office costs Other 1,274 7% 1,519 9% 4,537 9% 4,657 10%
SG&A costs 17,801 100% 15,511 100% 51,181 100% 45,821 100% 15.
Segmented reporting The Company distributes oilfield products
principally through its network of 43 branches located in western
Canada primarily to oil and gas industry customers.
Accordingly, the Company has determined that it operated through a
single operating segment and geographic jurisdiction. 16.
Seasonality The Company's sales levels are affected by weather
conditions. As warm weather returns in the spring each year, the
winter's frost comes out of the ground rendering many secondary
roads incapable of supporting the weight of heavy equipment until
they have dried out. In addition, many exploration and production
areas in northern Canada are accessible only in the winter months
when the ground is frozen. As a result, the first and fourth
quarters typically represent the busiest time for oil and gas
industry activity and the highest sales activity for the Company.
Revenue levels drop dramatically during the second quarter until
such time as roads have dried and road bans have been lifted. This
typically results in a significant reduction in earnings during the
second quarter, as the decline in revenues typically out paces the
decline in SG&A costs as the majority of the Company's SG&A
costs are fixed in nature. Net working capital (defined as current
assets less cash and cash equivalents, accounts payable and accrued
liabilities, income taxes payable and other current liabilities)
and bank revolving loan borrowing levels follow similar seasonal
patterns as revenues. CE
Franklin Ltd. CONTACT: Investor
Relations800-345-2858403-531-5604investor@cefranklin.com
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