CALGARY, Feb. 2, 2012 /CNW/ - CE FRANKLIN LTD. (TSX.CFT,
NASDAQ.CFK) reported net earnings of $4.5 million or $0.26 per
share (basic) for the fourth quarter ended December 31, 2011, a
significant increase from net earnings of $1.6 million or $0.09 per
share (basic) generated in the fourth quarter ended December 31,
2010. For 2011, net income was $14.3 million or $0.82 per
share (basic) an increase of 142% from the $5.9 million or $0.34
per share (basic) earned in 2010. Financial Highlights (millions of
Cdn. $ except per share data) Three Months Ended Twelve MonthsEnded
December 31 December 31 2011 2010 2011 2010 Unaudited Unaudited
Revenues 154.3 135.6 546.4 489.6 Gross Profit 25.3 20.5 90.7 75.0
Gross Profit - % of sales 16.4 % 15.1 % 16.6 % 15.3 % EBITDA(1) 6.6
3.8 22.6 12.5 EBITDA(1)- % of sales 4.3 % 2.8 % 4.1 % 2.5 % Net
earnings 4.5 1.6 14.3 5.9 Per share Basic 0.26 0.09 0.82 0.34
Diluted 0.25 0.09 0.79 0.33 Net working capital(2) 116.9 125.7 Long
term debt/ Bank $ - $ 6.4 operating loan(2) "Strong year over year
revenue growth, improved product margins and disciplined cost
management led to significant year over year improvement in the
fourth quarter. We will continue to leverage our strategies
into 2012", said Michael West, President and CEO. The December 31,
2011 condensed interim consolidated financial statements are
prepared under International Financial Reporting Standards
("IFRS"). Consequently the comparative figures for 2010 and the
Company's statement of financial position as at January 1, 2010
have been restated from accounting principles generally accepted in
Canada ("Canadian GAAP") to comply with IFRS. The reconciliations
from the previously published Canadian GAAP financial statements
are summarized in Note 3 to the condensed interim consolidated
financial statements, and there were no material differences. Net
earnings for the fourth quarter of 2011, were $4.5 million, an
increase of $2.9 million from the fourth quarter of 2010.
Revenues for the fourth quarter of 2011 were $154.3 million, an
increase of $18.7 million (14%) from the fourth quarter of
2010. Well completions decreased 9% compared to the fourth
quarter of 2010 as the fourth quarter of 2010 was a busy quarter
and those activity levels carried into 2011, while the fourth
quarter 2011 slowed down slightly due to lower natural gas
activity. Capital project business revenue grew $6.8 million year
over year due to the improved overall industry activity levels.
Gross profits increased by $4.8 million (23%) due to the increase
in revenues and improved gross profit margins year over year.
Average gross profit margins in the fourth quarter of 2011 were
lower than the third quarter of 2011 due to more pipe flange and
fitting sales to lower margin alliance customers. Average gross
profit margins for the fourth quarter of 2011 were higher than the
fourth quarter 2010 as increased purchasing levels contributed to
higher volume rebates. SG&A expenses increased by $0.8
million (5%) to $17.5 million for the quarter as compensation and
operating costs have increased in response to higher revenue
levels. Fourth quarter earnings for 2010 included a $0.7 million
after tax charge associated with the elimination of the stock
option cash settlement mechanism. The Company also recorded
an unrealized foreign exchange loss of $0.8 million in the quarter
on foreign exchange contracts used to manage currency exposure on
US denominated product purchases, which reversed a previously
recognized unrealized gain on these contracts in the third quarter.
The weighted average number of shares outstanding during the fourth
quarter was consistent with the prior year period as the rise in
share price during the last year limited the activity occurring
under the normal course issuer bid program. Net earnings per share
(basic) was $0.26 in the fourth quarter of 2011, compared to net
earnings of $0.09 per share in the fourth quarter of 2010. Net
income for the year ended December 31, 2011 was $14.3 million, an
increase of $8.4 million (142%) compared to 2010, as industry
activity levels improved year over year. Well completions in 2011,
rose by 17% compared to 2010 as the industry was focused on oil,
oil sands and liquid rich natural gas plays. Revenues increased by
12% to $546.4 million, as both capital project and maintenance
repair and operating sales increased year over year. Gross
profits increased by $15.7 million (21%) due to the impact of
higher sales and increased vendor rebates from increased purchasing
levels. SG&A costs increased by $6.2 million (9.8%)
to 68.7 million in 2011 as compensation costs and operating costs
have increased in response to higher activity levels. Income
tax expense increased by $1.9 million as a result of higher pre-tax
earnings in 2011. The weighted average number of shares outstanding
(basic) during 2011 was consistent with the prior year as the rise
in the share price during the last year has limited the activity
occurring under the normal course issuer bid program. Net earnings
per share (basic) was $0.82 in 2011, a 141% increase from 2010,
consistent with the increase in net income. Business Outlook CE
Franklin's revenues are expected to increase modestly in 2012 as
the oil and gas industry activity levels remain relatively
consistent with 2011 levels. Natural gas prices remain depressed as
North American production capacity and inventory levels continue to
dominate demand. Natural gas capital expenditure activity is
focused on the emerging shale gas plays in northeastern British
Columbia and liquid rich gas plays in northwestern Alberta where
the Company has a strong market position. Conventional and
heavy oil economics are attractive at current price levels leading
to increased activity in eastern Alberta and southeast
Saskatchewan. We expect oil sands project announcements will
continue at current levels, assuming current oil price levels are
maintained. Approximately 50% to 60% of the Company's total
revenues are driven by our customers' capital expenditure
requirements. Gross profit margins are expected to remain under
pressure as customers that produce natural gas focus on reducing
their costs to maintain acceptable project economics and due to
continued aggressive oilfield supply industry competition as
industry activity levels remain below the last five year average.
The Company will continue to manage its cost structure to protect
profitability while maintaining service capacity and advancing
strategic initiatives. Over the medium to longer term, the
Company's strong financial and competitive positions should enable
profitable growth of its distribution network through the expansion
of its product lines, supplier relationships, and capability to
service additional oil and gas and other industrial end use
markets. (1) EBITDA represents net income before interest, taxes,
depreciation and amortization. EBITDA is a supplemental measure
that is not part of generally accepted accounting principles
("GAAP"). EBITDA is used by management, as well as industry
analysts, to evaluate operations. Management believes that EBITDA,
as presented, represents a useful means of assessing the
performance of the Company's ongoing operating activities, as it
reflects the Company's earnings trends without showing the impact
of certain charges. The Company is also presenting EBITDA as a
percentage of sales because it is used by management as a
supplemental measure of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and depreciation
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Depreciation expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net income as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net income is provided within the table
above. Not all companies calculate EBITDA in the same manner and
EBITDA does not have a standardized meaning prescribed by IFRS.
Accordingly, EBITDA, as the term is used herein, is unlikely to be
comparable to EBITDA as reported by other entities. (2) Net working
capital is defined as current assets less cash and cash
equivalents, accounts payable and accrued liabilities, current
taxes payable, note payable and other current liabilities. Net
working capital and long term debt / bank operating loan amounts
are as at quarter end. The following is provided to assist readers
in understanding CE Franklin Ltd.'s ("CE Franklin" or the
"Company") financial performance and position during the periods
presented and significant trends that may impact future performance
of CE Franklin. This should be read in conjunction with the
Company's condensed interim consolidated financial statements for
the three and twelve month periods ended December 31, 2011 and the
MD&A and the consolidated financial statements for the three
and nine month periods ended September 30, 2011, for the three and
six month periods ended June 30, 2011 and the three month period
ended March 31, 2011 (the Company's first financial statements
under IFRS) and the MD&A and consolidated financial statements
for the year ended December 31, 2010. All amounts are expressed in
Canadian dollars and are in accordance with International Financial
Reporting Standards ("IFRS") as issued by the International
Accounting Standards Board ("IASB"), except where otherwise noted.
The December 31, 2011 condensed interim consolidated financial
statements are prepared under IFRS. Consequently the comparative
figures for 2010 and the Company's statement of financial position
as at January 1, 2010 have been restated from accounting principles
generally accepted in Canada ("Canadian GAAP") to comply with IFRS.
The reconciliations from the previously published Canadian GAAP
financial statements are summarized in Note 3 to the condensed
interim consolidated financial statements, and there were no
material differences. In addition, IFRS 1 on first time adoption
allows certain exemptions from retrospective application of IFRS in
the opening statement of financial position. Where these exemptions
have been used they have also been explained in Note 3 to the
condensed interim consolidated financial statements. Overview CE
Franklin is a leading distributor of pipe, valves, flanges,
fittings, production equipment, tubular products and other general
industrial supplies, primarily to the oil and gas industry in
Canada through its 39 branches situated in towns and cities that
serve oil and gas fields of the Western Canadian sedimentary basin.
In addition, the Company distributes similar products to the oil
sands, midstream, refining, petrochemical and non-oilfield related
industries such as forestry and mining. The Company's branch
operations service over 3,000 customers by providing the right
materials where and when they are needed, and for the best
value. Our branches, supported by our centralized
Distribution Centre in Edmonton, Alberta, stock over 25,000 stock
keeping units sourced from over 2,000 suppliers. This
infrastructure enables us to provide our customers with the
products they need on a same day or overnight basis. Our
centralized inventory and procurement capabilities allow us to
leverage our scale to enable industry leading hub and spoke
purchasing, logistics and project execution capabilities. The
branches are also supported by services provided by the Company's
corporate office in Calgary, Alberta including sales, marketing,
product expertise, logistics, invoicing, credit and collection, and
other business services. The Company's common shares trade on the
TSX ("CFT") and NASDAQ ("CFK") stock exchanges. Schlumberger
Limited ("Schlumberger"), a major oilfield service company based in
Paris, France, owns approximately 56% of the Company's shares.
Business Strategy The Canadian oilfield equipment supply industry
is highly competitive and fragmented. There are approximately
230 oilfield supply stores in Canada which generate annual
estimated sales of $2 billion to $3 billion. CE Franklin
competes with three other large oilfield product distributors and
with numerous local and regional distributors as well as specialty
equipment distributors and manufacturers. The oilfield
equipment market is part of the larger industrial equipment supply
market, which is also serviced by numerous competitors. The
oil sands and niche industrial product markets are more specialized
and solutions oriented and require more in-depth product knowledge
and supplier relationships to service specific customer
requirements. Oilfield equipment distributors compete based on
price and level of service. Service includes the ability to
consistently provide required products to a customer's operating
site when needed, project management services, product expertise
and support, billing and expenditure management services, and
related equipment services. Demand for oilfield products and
services is driven by the level of capital expenditures in the oil
and gas industry in the Western Canadian sedimentary basin as well
as by production related maintenance, repair and operating ("MRO")
requirements. MRO demand tends to be relatively stable over
time and predictable in terms of product and service requirements
and typically comprises 40% to 50% of the Company's annual
sales. Capital project demand fluctuates over time with oil
and gas commodity prices, which directly impacts the economic
returns realized by oil and gas companies. The size, scope, and
product mix of each order will affect profitability. Local
walk in relationship business with smaller orders or more
specialized products will typically generate higher profit margins
compared to large project bids for alliance customers where the
Company can take advantage of volume discounts and longer lead
times. Larger oil and gas customers tend to have a broader
geographic operating reach requiring multi-site service capability,
conducting larger capital projects, and requiring more
sophisticated billing and project management services than do
smaller customers. The Company has entered into a
number of formal alliances with larger customers where the scale
and repeat nature of business enables efficiencies which are shared
with the customer through lower profit margins. Barriers to entry
in the oilfield supply business are low with start-up operations
typically focused on servicing local relationship based MRO
customers. To compete effectively on capital project business
and to service larger customers requires multi-location branch
operations, increased financial, procurement, product expertise and
breadth of product lines, information systems and process
capability. The Company's 39 branch operations provide substantial
geographic coverage across the oil and gas producing regions in
Western Canada. Each branch services and competes for local
business and services the Company's alliance customers supported by
centralized support services provided by the Company's Distribution
Centre and corporate office in Calgary. The Company's large branch
network, coupled with its centralized capabilities enables it to
develop strong supply chain relationships with suppliers and
provide it with a competitive advantage over local independent
oilfield and specialty equipment distributors for large alliance
customers who are seeking multi-location, one stop shopping, and
more comprehensive service. The Company's relationship with
Wilson Supply, a leading oilfield equipment distributor operating
in the United States, and a wholly owned subsidiary of
Schlumberger, enables it to provide North American solutions to its
customer base and provides increased purchasing scale with
equipment suppliers. The Company is pursuing the following
strategies to grow its business profitably: -- Expand the reach and
market share serviced by the Company's distribution network. The
Company is focusing its sales efforts and product offering on
servicing complex, multi-location needs of large and emerging
customers in the energy sector. Organic growth may be complemented
by selected acquisitions. -- Expand production equipment service
capability to capture more of the product life cycle requirements
for the equipment the Company sells such as downhole pump repair,
oilfield engine maintenance, well optimization and onsite project
management. This will differentiate the Company's service offering
from its competitors and deepen relationships with its customers.
-- Expand oil sands, industrial project and MRO business by
leveraging our existing supply chain infrastructure, product, and
major project expertise. -- Increase the resourcing of customer
project sales quotation and order fulfillment services provided by
our Distribution Centre to augment local branch capacity to address
seasonal and project driven fluctuations in customer demand. By
doing so, we aim to increase our capacity flexibility and improve
operating efficiency while providing consistent customer service.
Strategy Accomplishments -- In the spring of 2008, the Company
moved into a new 153,000 square foot Distribution Centre and nine
acre pipe yard located in Edmonton, Alberta. The new Distribution
Centre provided a 76% increase in functional warehousing capacity
over our previous facility, increasing our capability to support
and grow sales through our branch network. The larger facility also
enabled us to increase the Company's central project execution
capability and processes, to service larger projects and ship
direct to customers, avoiding double handling of material by
branches. -- In June of 2009, the Company increased its market
share, customer base, and branch network through the acquisition of
a Western Canadian oilfield supply competitor (the "Acquired
Business"). The Acquired Business operated 23 supply stores of
which 18 stores were proximate to existing Company branches and
were integrated. The remaining 5 operations were focused in the
eastern Alberta heavy oil corridor, and have extended the Company's
distribution network reach. Total oilfield supply sales have
increased an estimated 15% as a result of the acquisition. The
Company's Fort St. John and Lloydminster branches moved to larger
locations during the year, increasing capacity to service customer
requirements in these important markets. Sales to oil sands
customers increased for the fifth year in a row, reaching a record
$64.5 million in 2009, comprising 15% of total Company sales. The
Company added process automation products to its product line and
opened a valve actuation centre at our Edmonton Distribution Centre
to broaden the spectrum of solutions the Company provides to
existing oilfield, oil sands, and other industrial customers, and
enhancing its ability to attract new customers. The Company
recruited new product, operations, and supply chain expertise into
the organization to advance its strategies. -- In 2011 and 2010,
the Company made advances in the central resourcing of project work
by processing $161.2 million (2010 - $99.3 million) of sales orders
through our Edmonton distribution centre, representing 29% (2010 -
20%) of total Company sales. This enabled us to service the 12%
year over year increase in sales (2010 - 12% increase). In 2011 and
2010, the Company has continued to grow its valve actuation
business. Fourth Quarter Operating Results The following table
summarizes CE Franklin's results of operations: (In millions of
Canadian Dollars except per share data) Three Months Ended December
31 Twelve Months EndedDecember 31 2011 2010 2011 2010 Revenues
154.3 100.0 % 135.6 100.0 % 546.4 100.0 % 489.6 100.0 % Cost of
Sales (129.0) (83.6) % (115.1) 84.8 % (455.7) (83.4) % (414.6)
(84.7) % Gross Profit 25.3 16.4 % 20.5 15.1 % 90.7 16.6 % 75.0 15.3
% Selling, general and (17.5) (11.3) % (16.7) (12.3) % (68.7)
(12.6) % (62.6) (12.8) % administrative expenses Foreign (1.1)
(0.7) % - - % 0.6 0.1 % 0.1 - % exchange and other EBITDA(1) 6.7
4.3 % 3.8 2.8 % 22.6 4.1 % 12.5 2.5 % Depreciation (0.6) (0.4) %
(0.6) (0.4) % (2.5) (0.5) % (2.5) (0.5) % Interest (0.1) (0.1) %
(0.2) (0.1) % (0.4) (0.1) % (0.7) (0.1) % Earnings 6.0 3.9 % 3.0
2.2 % 19.7 3.6 % 9.3 1.9 % before tax Income tax (1.5) (1.0) %
(1.4) (1.0) % (5.4) (1.0) % (3.4) (0.7) % expense Net earnings 4.5
2.9 % 1.6 1.2 % 14.3 2.6 % 5.9 1.2 % Net earnings per share Basic
0.26 $ 0.09 $ 0.82 0.34 $ Diluted 0.25 $ 0.09 $ 0.79 0.33 $
Weighted average number of shares outstanding (000's) Basic 17,452
17,501 17,499 17,483 Diluted 18,163 17,966 18,188 18,000 Revenues
Revenues for the quarter ended December 31, 2011, were $154.3
million, an increase of 14% from the quarter ended December 31,
2010. Oil and gas commodity prices are a key driver of industry
capital project activity as commodity prices directly impact the
economic returns realized by oil and gas companies. The Company
uses oil and gas well completions and average rig counts as
industry activity measures to assess demand for oilfield equipment
used in capital projects. Oil and gas well completions
require the products sold by the Company to complete a well and
bring production on stream and are a general indicator of energy
industry activity levels. Average drilling rig counts are
also used by management to assess industry activity levels as the
number of rigs in use ultimately drives well completion
requirements. Well completion, rig count and commodity price
information for the three and twelve month periods ended December
31, 2011 and 2010 are provided in the table below. Q4 Average % YTD
Average % 2011 2010 change 2011 2010 change Gas - Cdn. $ 3.20 $
3.64 (12) % $ 3.63 $ 4.00 (9) % $/gj (AECO spot) Oil - Cdn. $
102.30 $ 84.35 21 % $ 102.63 $ 80.57 27 % $/bbl (synthetic crude)
Average rig 488 398 23 % 414 332 25 % count Well completions: Oil
3,341 2,625 27 % 10,022 6,541 53 % Gas 1,009 2,135 (53) % 4,449
5,873 (24) % Total well 4,350 4,760 (9) % 14,471 12,414 17 %
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 Threemonths ended December 31 Twelve months
ended December of Cdn. $) 31 2011 2010 2011 2010 End use $ % $ % $
% $ % revenue demand Capital 80.3 52 % 73.5 54 % 286.0 52 % 255.3
52 % projects Maintenance, repair and operating supplies 74.0 48 %
62.1 46 % 260.4 48 % 234.3 48 % ("MRO") Total 154.3 100 % 135.6 100
% 546.4 100 % 489.6 100 % 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 $80.3 million in the
fourth quarter of 2011, an increase of 9% ($6.8 million) from the
fourth quarter of 2010. Total well completions decreased by 9% in
the fourth quarter of 2011 and the average working rig count
increased by 23% compared to the prior year period. Gas wells
comprised 23% of the total wells completed in western Canada in the
fourth quarter of 2011 compared to 45% in the fourth quarter of
2010. Spot gas prices ended the fourth quarter at $2.64 per GJ
(AECO), a decrease of 18% from fourth quarter 2010 average
prices. Oil prices ended the fourth quarter at $103.61 per
bbl (Synthetic Crude), an increase of 1% from the fourth quarter
2010 average. Depressed gas prices are expected to continue to
negatively impact gas drilling activity into 2012, which in turn is
expected to constrain demand for the Company's products. Natural
gas customers continue to utilize a high level of competitive bid
activity to procure the products they require in an effort to
reduce their costs. The Company is addressing this industry trend
by pursuing initiatives focused on improving revenue quotation
processes and increasing the operating flexibility and efficiency
of its branch network. The Company is well positioned to
support customers who are pursuing oil plays and more particularly
tight oil plays. Revenues for capital project related products were
$286.0 million for the full year 2011, up $30.7 million (12%) from
2010. The increase in capital project end use revenues reflects the
17% increase in total industry well completions to 14,471 in 2011.
Capital project business for the year comprised 52% of total
revenues as it did in 2010. While the capital project business
represented the same percentage of the business year over year, its
makeup changed as a 19% decline in tubular revenues was offset by a
4% increase in oil sands sales and increased branch based capital
project sales. Tubular sales in the year declined as the Company
followed a disciplined approach in its competitive bid processes
and, as a result, was not as successful as it had been in prior
years. There remains a significant amount of tubular product
inventory on hand in the industry which has led to a very
competitive environment for tubular product sales. MRO product
revenues are related to overall oil and gas industry production
levels and tend to be more stable than capital project revenues.
MRO product revenues for the quarter ended December 31, 2011
increased by $11.9 million (19%) to $74.0 million compared to the
quarter ended December 31, 2010 and comprised 48% of the Company's
total revenues (2010 - 46%). MRO product revenues for the full year
2011 increased by $26.1 million (11%) to $260.4 million compared to
2010 and comprised 48% of the Company's total revenues (2010 -
48%). Higher MRO revenues in 2011 were due to increased
conventional oilfield activity. The Company's strategy is to grow
profitability by focusing on its core western Canadian oilfield
product distribution business, complemented by an increase in the
product life cycle services provided to its customers and the focus
on the emerging oil sands capital project and MRO revenues
opportunities. Revenues from these initiatives to date are provided
below: Q4 2011 Q4 2010 YTD 2011 YTD 2010 Revenues $ % $ % $ % $ %
($millions) Oilfield 132.4 86 % 118.1 88 % 459.6 84 % 410.7 83 %
Oil sands 15.5 10 % 11.5 8 % 63.8 12 % 61.3 13 % Production 6.4 4 %
6.0 4 % 23.0 4 % 17.6 4 % services Total 154.3 100 % 135.6 100 %
546.4 100 % 489.6 100 % Revenues Revenues from oilfield products to
conventional western Canada oil and gas end use applications were
$132.4 million for the fourth quarter of 2011, an increase of 12%
from the fourth quarter 2010. This increase was driven by an
increase in oil well completions compared to the prior year period.
Revenues from oil sands end use applications were $15.5 million in
the fourth quarter, an increase of $4.0 million (35%) compared to
$11.5 million in the fourth quarter of 2010 reflecting increased
capital project revenues which were partially offset by the impact
of not having a large tailing line pipe order and having less
turnaround work in 2011 with our Fort McMurray based customers.
Production service revenues were $6.4 million in the fourth quarter
of 2011, a 7% increase from the $6.0 million of revenues in the
fourth quarter of 2010, reflecting improved oil production
economics resulting in increased customer maintenance activities.
Gross Profit Q42011 Q4 2010 YTD 2011 YTD 2010 Gross profit ($
millions) $ 25.3 $ 20.5 $ 90.7 $ 75.0 Gross profit margin as a 16.4
% 15.1 % 16.6 % 15.3 % % of revenues Gross profit composition by
product revenue category: Tubulars 5 % 5 % 4 % 3 % Pipe, flanges
and 29 % 24 % 29 % 28 % fittings Valves and accessories 21 % 21 %
21 % 20 % Pumps, production 17 % 15 % 15 % 14 % equipment and
services General 28 % 35 % 31 % 35 % Total gross profit 100 % 100 %
100 % 100 % Gross profit was $25.3 million in the fourth quarter of
2011, an increase of $4.8 million (23%) from the fourth quarter of
2010 due to increased revenues and average gross profit margins
compared to the prior year period. Gross profit margins for the
quarter were lower than the third quarter of 2011 due to more pipe,
flange, and fittings sales to lower margin alliance customers.
Average gross profit margins were better than the prior year period
at 16.4% as increased purchasing levels contributed to higher
volume rebate income. Increased pipe, flanges and fittings
and pumps, production equipment and services gross profit
composition was due to improved gross profit margins. Selling,
General and Administrative ("SG&A") Costs ($millions) Q42011
Q42010 YTD 2011 YTD2010 $ % $ % $ % $ % People 10.2 58 9.8 59 41.1
60 36.3 58 Costs Facility 3.5 20 2.0 12 15.1 22 13.4 11 and office
costs Selling 2.3 13 3.3 20 6.5 9 6.6 21 Costs Other 1.5 9 1.6 9
6.0 9 6.3 10 SG&A costs 17.5 100 16.7 100 68.7 100 62.6 100
SG&A costs 11 % 12 % 13 % 13 % as % of revenues SG&A costs
increased $0.8 million (5%) in the fourth quarter of 2011 from the
prior year period and represented 11% of revenues compared to 12%
in the prior year period. The $0.8 million increase in expenses was
attributable to higher incentive and higher agent commission costs
reflecting the improved profit performance of the business year
over year. Depreciation Expense Depreciation expense of $0.6
million in the fourth quarter of 2011 was comparable to the fourth
quarter of 2010. Interest Expense Interest expense of $0.1 million
in the fourth quarter of 2011 was lower than the prior year due to
lower borrowing levels. Foreign Exchange and other Foreign exchange
and other in the quarter was a loss of $1.1 million as the Canadian
dollar strengthened which increased the translation loss from US
denominated net working capital assets. The Company
recognized a $0.2 million unrealized foreign currency gain on $18.3
million of foreign currency forward contracts it had outstanding at
quarter end. As at December 31, 2011, a one percent change in
the Canadian dollar relative to the US dollar would decrease or
increase the Company's annual net income by approximately $0.2
million. Income Tax Expense The Company's effective tax rate for
the fourth quarter of 2011 was 24.4% down from a 46.6% effective
rate in the fourth quarter 2010. The fourth quarter 2010 effective
rate resulted from the write-off of $0.5 million of future tax
assets related to the removal of the cash settlement mechanism from
the Company's stock option plan as a result of provisions contained
in the federal government's 2010 budget which effectively
eliminated the ability to deduct for tax purposes cash payments
made to settle stock option obligations. The current
effective tax rate is lower than the statutory rate due to the
impact of non-deductible items and other adjustments. Substantially
all of the Company's tax provision is currently payable. Summary of
Quarterly Financial Data The selected quarterly financial data
below is presented in Canadian dollars and in accordance with
IFRS. This information is derived from the Company's
unaudited quarterly financial statements. (in millions of Cdn. $
except per share data) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Unaudited 2010 2010
2010 2010 2011 2011 2011 2011 Revenues 121.9 99.9 132.2 135.6 137.7
113.9 140.5 154.3 Gross 19.7 15.6 19.2 20.5 22.3 19.3 23.9 25.3
Profit Gross 16.1 % 15.6 % 14.5 % 15.1 % 16.2 % 16.9 % 17.0 % 16.4
% Profit % EBITDA 4.1 0.7 3.8 3.8 5.3 3.1 7.6 6.6 EBITDA as a 3.4 %
0.7 % 2.9 % 2.8 % 3.8 % 2.7 % 5.4 % 4.3 % % of revenues Net 2.2
(0.1) 2.2 1.6 3.4 1.7 4.8 4.5 earnings (loss) Net earnings (loss)
as a % of revenues 1.8 % (0.1) % 1.7 % 1.2 % 2.5 % 1.5 % 3.4 % 2.9
% Net earnings (loss) per share Basic $ 0.13 $ (0.01) $ 0.12 $ 0.09
$ 0.19 $ 0.10 0.27 $ 0.26 Diluted $ 0.12 $ (0.01) $ 0.12 $ 0.09 $
0.19 $ 0.09 0.26 $ 0.25 Net working 113.9 111.8 129.0 125.7 120.1
136.5 134.6 116.9 capital(1) Long term debt/bank operating 1.4 0.3
14.4 6.4 0.3 12.2 5.8 - loan(1) Total well 2,846 2,197 2,611 4,760
3,861 2,765 3,495 4,350 completions (1) Net working capital and
long term debt/bank operating loan amounts are as at quarter end
The Company's sales levels are affected by weather
conditions. As warm weather returns in the spring each year,
the winter's frost comes out of the ground rendering many secondary
roads incapable of supporting the weight of heavy equipment until
they have dried out. In addition, many exploration and
production areas in northern Canada are accessible only in the
winter months when the ground is frozen. An exceptionally wet
second quarter in 2011 had some impact on customer capital programs
in the third quarter. As a result, the first and fourth quarters
typically represent the busiest time for oil and gas industry
activity and the highest oilfield sales activity for the
Company. Oilfield sales levels drop dramatically during the
second quarter until such time as roads have dried and road bans
have been lifted. This typically results in a significant reduction
in earnings during the second quarter, as the decline in sales
typically outpaces the decline in SG&A costs as the majority of
the Company's SG&A costs are fixed in nature. Net working
capital (defined as current assets less cash and cash equivalents,
accounts payable and accrued liabilities, current taxes payable,
note payable and other current liabilities) and borrowing levels
follow similar seasonal patterns as sales. Liquidity and Capital
Resources The Company's primary internal source of liquidity is
cash flow from operating activities before changes in non-cash net
working capital balances. Cash flow from operating activities
and the Company's $60.0 million revolving term credit facility are
used to finance the Company's net working capital, capital
expenditures and acquisitions. As at December 31, 2011, the Company
had $15.8 million of cash on hand and had no long term debt.
Borrowings decreased by $6.1 million from December 31, 2010 due to
the Company generating $17.5 million from operating activities,
before net changes in non-cash working capital balances and a $8.9
million net working capital reduction. This was offset by $2.9
million in capital expenditures and $1.5 million for the purchase
of shares to resource stock compensation obligations and the
repurchase of shares under the Company's Normal Course Issuer Bid
("NCIB"). As at December 31, 2010, long term debt was $6.4 million
and was comprised principally of borrowings under the Company's
revolving term credit facility. Borrowings decreased by $20.4
million from December 31, 2009 due to the Company generating $10.7
million in cash flow from operating activities, before net changes
in non-cash working capital balances and a $12.8 million reduction
in net working capital. This was offset by $1.3 million in capital
expenditures and $1.9 million for the purchase of shares to
resource stock compensation obligations and the repurchase of
shares under the Company's Normal Course Issuer Bid ("NCIB"). Net
working capital was $116.9 million at December 31, 2011, a decrease
of $8.9 million from December 31, 2010. Accounts receivable
at December 31, 2011 was $98.2 million, an increase of $5.2 million
(5.6%) from December 31, 2010, due to the 14% increase in fourth
quarter sales compared to the prior year period, partially offset
by a 7% improvement in days sales outstanding in accounts
receivable ("DSO") in the fourth quarter of 2011 to 52 days from 56
days in the fourth quarter of 2010. DSO is calculated using average
sales per day for the quarter compared to the period end customer
accounts receivable balance. Inventory at December 31, 2011
was $111.7 million, up $16.8 million (18%) from December 31,
2010. Inventory turns for the fourth quarter of 2011 at 4.7
turns were comparable to the prior year as the impact of fourth
quarter sales increases was more than offset by the increase in
inventory levels. Inventory turns are calculated using cost
of goods sold for the quarter on an annualized basis, compared to
the period end inventory balance. Accounts payable and
accrued liabilities at December 31, 2011 were $93.6 million, an
increase of $30.2 million (48%) due to increased purchasing
activity in the fourth quarter of 2011 to resource the increase in
sales compared to the prior year period. Capital expenditures in
2011 were $2.9 million, an increase of $1.6 million (127%) from
2010 expenditures. Expenditures in 2011 were directed towards
facility expansion and maintenance, business system expansion and
vehicles and operating equipment. The majority of the
expenditures in 2010 were directed towards similar items as they
were in 2011. Capital expenditures in 2012 are anticipated to
be in the $4.5 million to $5.5 million range and will be directed
towards business system, branch facility, vehicle and operating
equipment upgrades and replacements. In July 2011, the Company
renewed its $60.0 million revolving term credit facility that
matures in July 2014 (the "Credit Facility").
Borrowings under the Credit Facility bear interest based on
floating interest rates and are secured by a general security
agreement covering all assets of the Company. The maximum
amount available under the Credit Facility is subject to a
borrowing base formula applied to accounts receivable and
inventories. The Credit Facility requires the Company to maintain
the ratio of its debt to debt plus equity at less than 40%.
As at December 31, 2011, this ratio was 0%. The Company must
also maintain coverage of its net operating cash flow as defined in
the Credit Facility agreement over interest expense for the
trailing twelve month period of greater than 1.25 times. As
at December 31, 2011, this ratio was 34.5 times. The Credit
Facility contains certain other covenants with which the Company is
in compliance. As at December 31, 2011, the Company had no
borrowings under the facility and had available undrawn borrowing
capacity of $60.0 million under the Credit Facility. Contractual
Obligations There have been no material changes in off-balance
sheet contractual commitments since December 31, 2010. Capital
Stock As at December 31, 2011 and 2010, the following shares and
securities convertible into shares were outstanding: (millions)
December 31, 2011 December 31, 2010 Shares Shares Shares
outstanding 17.4 17.5 Stock options 0.7 1.1 Share unit plan
obligations 0.6 0.5 Shares outstanding and 18.7 19.1 issuable The
basic weighted average number of shares outstanding in 2011 was
17.5 million, which is consistent with the prior year as the rise
in the Company's share price in the last year has limited activity
occurring under the normal course issuer bid program. The diluted
weighted average number of shares outstanding in 2011 was 18.2
million and was comparable to 2010. The Company has established an
independent trust to purchase shares of the Company on the open
market to resource share unit plan obligations. For the year
ended December 31, 2011, there were 175,000 shares acquired by the
trust at an average cost per share of $8.85. (2010 - 204,300 at an
average cost per share of $6.91). As at December 31, 2011, the
trust held 579,951 shares representing approximately 100% of stock
unit plan obligations outstanding (December 31, 2010 - 450,732
shares representing approximately 100% of stock unit plan
obligations outstanding). During the fourth quarter of 2010, the
Company discontinued the settlement of stock option obligations
with cash payments in favor of issuing shares from treasury. The
cash settlement mechanism was discontinued as a result of
provisions contained in the federal government's 2010 budget which
effectively eliminated the ability to deduct for tax purposes, cash
payments made to settle stock option obligations. An after
tax charge of $0.7 million was recorded in the fourth quarter
comprised of a $0.2 million stock based compensation charge and the
write off of $0.5 million of future income tax asset related to
stock option obligations. The mark to market current
obligation of $2.1 million was transferred to contributed surplus
on the balance sheet as a result of this change in settlement of
stock option obligations. The cash settlement mechanism had been
implemented during the third quarter of 2009 to enable the Company
to manage its share dilution while resourcing its stock option plan
on a tax efficient basis. On December 21, 2010, the Company
announced the renewal of its NCIB to purchase for cancellation
through the facilities of NASDAQ, up to 850,000 common shares
representing approximately 5% of its outstanding common shares. In
2011, the Company purchased 3,102 shares at an average cost of
$7.56 per share. During 2010, the Company purchased 61,769 shares
at a cost of $0.4 million ($6.62 per share) under its NCIB.
On December 20, 2011, the Company announced the renewal of the
NCIB, effective January 3, 2012, to purchase up to 850,000 common
shares representing approximately 5% of its outstanding common
shares. Shares may be purchased up to December 31, 2012. Critical
Accounting Estimates There have been no material changes to
critical accounting estimates since December 31, 2010. The Company
is not aware of any environmental or asset retirement obligations
that could have a material impact on its operations. Change in
Accounting Policies TRANSITION TO INTERNATIONAL FINANCIAL REPORTING
STANDARDS ("IFRS") In February 2008, the Canadian Accounting
Standards Board confirmed that the basis for financial reporting by
Canadian publicly accountable enterprises will change from Canadian
GAAP to IFRS effective for January 1, 2011, including the
preparation and reporting of one year of comparative figures. This
change is part of a global shift to provide consistency in
financial reporting in the global marketplace. Over the transition
period the Company assessed the differences between Canadian GAAP
and IFRS. A risk based approach was used to identify possibly
significant differences based on possible financial impact and
complexity. As described in Note 3 to the condensed interim
consolidated financial statements no material differences were
identified. As such there are no reconciling items that materially
changed the reporting requirements upon the transition from
Canadian GAAP to IFRS. Similarly, no significant information
system changes were required in order to adopt IFRS. IFRS 1 allows
first time adopters of IFRS to take advantage of a number of
voluntary exemptions from the general principal of retroactive
restatement. In adopting IFRS, the Company did take advantage of
the following voluntary exemptions under IFRS 1. Business
Combinations The Company has not applied IFRS 3, the Business
Combinations standard to acquisitions of subsidiaries that occurred
before January 1, 2010, the Company's transition date to IFRS. As
such there is no retrospective change in accounting for business
combinations. The Company used this exemption to simplify its IFRS
conversion plan and improve comparability between its Canadian GAAP
statements and its IFRS statements. Borrowing Costs IAS 23 requires
that borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset (one that takes a
substantial period of time to get ready for use or sale) be
capitalized as part of the cost of that asset. The option of
immediately expensing those borrowing costs has been removed. The
Company has elected to account for such transactions on a go
forward basis, and as such there is no retrospective change in
accounting for borrowing standards. The Company used this exemption
to simplify its IFRS conversion plan and improve comparability
between its Canadian GAAP statements and its IFRS statements. Stock
Options The Company has assessed and quantified the difference in
accounting for stock based compensation under IFRS compared to
Canadian GAAP and has deemed the difference to be immaterial. The
Company has elected to not apply IFRS 2 to share based payments
granted and fully vested before the Company's date of transition to
IFRS. The Company used this exemption to simplify its IFRS
conversion plan and improve comparability between its Canadian GAAP
statements and its IFRS statements. As part of the transition to
IFRS the Company established that the carrying value of its
property and equipment were substantially equivalent between IFRS
and Canadian GAAP and therefore the Company has continued to carry
its property and equipment at the historic costs model as was used
under Canadian GAAP in these statements. Risk Factors The Company
is exposed to certain business and market risks including risks
arising from transactions that are entered into the normal course
of business, which are primarily related to interest rate changes
and fluctuations in foreign exchange rates. During the reporting
period, no events or transactions since the year ended December 31,
2010 have occurred that would materially change the business and
market risk information disclosed in the Company's Form 20F. CE
Franklin Ltd. CONDENSED INTERIM CONSOLIDATEDSTATEMENTS OF FINANCIAL
POSITION - UNAUDITED As at December 31 As at December 31 (in
thousands of Canadian dollars) 2011 2010 Assets Current assets Cash
and cash equivalents (Note 15,830 - 4) Accounts receivable (Note 5)
98,190 92,950 Inventories (Note 6) 111,661 94,838 Other 2,565 1,625
228,246 189,413 Non-current assets Property and equipment 9,709
9,431 Goodwill 20,570 20,570 Deferred tax assets (Note 7) 1,969
1,116 Other assets 171 147 Total Assets 260,665 220,677 Liabilities
Current liabilities Accounts payable and accrued 93,613 63,363
liabilities (Note 8) Current taxes payable (Note 7) 1,663 348 Note
payable (Note 9) 290 - 95,566 63,711 Non current liabilities Long
term debt (Note 9) - 6,430 Total liabilities 95,566 70,141
Shareholders' equity Capital stock (Note 12) 22,536 23,078
Contributed surplus 20,529 19,716 Retained earnings 122,034 107,742
165,099 150,536 Total liabilities and shareholders' 260,665 220,677
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 Capital Stock dollars and number of shares in
thousands) Number Contributed Retained Shareholders' of Shares $
Surplus Earnings Equity Balance - 17,581 23,284 17,184 102,159
142,627 January 1, 2010 Stock based - - 1,751 - 1,751 compensation
expense (Note 12 (b) and (c)) Normal (62) (81) - (328) (409) course
issuer bid (Note 12 (d)) Stock 46 290 (121) - 169 options exercised
(Note 12 (b)) Modification - - 2,075 - 2,075 of stock option plan
(Note 12 (a) and (b)) Purchase of shares in trust for share unit
plans and settlement (204) (1,410) (178) - (1,588) of deferred
share unit exercise (Note 12 (c)) Shares 113 995 (995) - - issued
from share unit plan trust (Note 12 (c)) Net earnings - - - 5,911
5,911 Balance - 17,474 23,078 19,716 107,742 150,536 December 31,
2010 Stock based - - 1,823 - 1,823 compensation expense (Note 12
(b) and (c)) Normal (3) (4) - (19) (23) Course Issuer Bid (Note 12
(d)) Stock 98 736 (736) - - options exercised (Note 12 (b)) Share
Units 46 274 (274) - - exercised (Note 12 (c)) Purchase of (175)
(1,548) - - (1,548) shares in trust for Share Unit Plans (Note 12
(c)) Net earnings - - - 14,311 14,311 Balance - 17,440 22,536 -
20,529 - 122,034 - 165,099 December 31, 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 Twelve
months ended (in thousands of December 31 December 31 December 31
December 31 Canadian dollars except per share amounts) 2011 2010
2011 2010 Revenue 154,331 135,641 546,352 489,585 Cost of sales
129,077 115,095 455,669 414,579 Gross profit 25,254 20,546 90,683
75,006 Other expenses Selling, general and administrative 17,535
16,738 68,715 62,554 expenses (Note 15) Depreciation 613 610 2,450
2,465 18,148 17,348 71,165 65,019 Operating profit 7,106 3,198
19,518 9,987 Foreign 1,119 (20) (649) (65) exchange gain/ (loss)
and other Interest 65 158 464 698 expense Earnings before 5,922
3,060 19,703 9,354 tax Income tax expense (recovery)(Note 7)
Current 1,862 979 6,245 3,102 Deferred (417) 448 (853) 341 1,445
1,427 5,392 3,443 Net earnings and 4,477 1,633 14,311 5,911
comprehensive income Net earnings per share(Note 13) Basic 0.26
0.09 0.82 0.34 Diluted 0.25 0.09 0.79 0.33 Weighted average number
of shares outstanding ('000s) Basic 17,483 17,452 17,501 17,499
Diluted (Note 18,163 17,966 18,188 18,000 13) See accompanying
notes to these condensed interim consolidated financial statements
CE Franklin Ltd. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF
CASHFLOWS - UNAUDITED Three months ended Twelvemonths ended
December December 31 December 31 December 31 31 (in thousands of
2011 2010 2011 2010 Canadian dollars) Cash flows from operating
activities Net earnings 4,477 1,633 14,311 5,911 for the period
Items not affecting cash - Depreciation 613 610 2,450 2,465
Deferred (417) 449 (853) 341 income tax (recovery) Stock based 317
471 1,823 1,991 compensation expense Foreign 1,710 78 (239) 27
exchange and other 6,700 3,241 17,492 10,735 Net change in non-cash
working capital balances related to operations - Accounts (2,110)
(1,216) (5,107) (25,479) receivable Inventories (9,157) 1,270
(16,823) 7,831 Other current 2,724 3,810 (920) 2,358 assets
Accounts 23,649 977 30,023 26,691 payable and accrued liabilities
Current taxes 661 222 1,315 1,378 payable 22,467 8,304 25,980
23,514 Cash flows used in investing activities Purchase of (330)
(176) (2,870) (1,263) property and equipment Proceeds on 34 - 431 -
disposal of property and equipment (296) (176) (2,439) (1,263) Cash
flows (used in)/from financing activities Increase - - - (26,549)
(decrease) in bank operating loan (Decrease) in (5,492) (7,970)
(6,140) 6,126 long term debt Issuance of capital stock - stock - 58
- 169 options exercised Purchase of capital stock through normal
course - (35) (23) (409) issuer bid Purchase of capital stock in
trust for Share Unit (849) (181) (1,548) (1,588) Plans (6,341)
(8,128) (7,711) (22,251) Change in cash and cash equivalents during
the 15,830 - 15,830 - period Cash and cash equivalents at the - - -
- beginning of the period Cash and cash equivalents at the end of
15,830 - 15,830 - the period Cash paid during the period for:
Interest 241 158 464 698 Income taxes 1,189 768 4,827 1,725 See
accompanying notes to these condensed interim consolidated
financial statements CE Franklin Ltd.
------------------------------ Notes to Condensed Interim
Consolidated Financial Statements - Unaudited (Tabular amounts in
thousands of Canadian dollars, except share and per share amounts)
1. General information CE Franklin Ltd. (the "Company") is
headquartered and domiciled in Calgary, Alberta, Canada. The
Company is a subsidiary of Schlumberger Limited, a global energy
services company. The address of the Company's registered office is
1800, 635 8(th) Ave SW, Calgary, Alberta, Canada and it is
incorporated under the Alberta Business Corporations Act. The
company is a distributor of pipe, valves, flanges, fittings,
production equipment, tubular products and other general industrial
supplies primarily to the oil and gas industry through its 39
branches situated in towns and cities that serve oil and gas fields
of the western Canadian sedimentary basin. In addition, the Company
distributes similar products to the oil sands, refining and
petrochemical industries and non-oilfield related industries such
as forestry and mining. 2. Accounting policies Basis of preparation
and adoption of IFRS The Company prepares its financial statements
in accordance with Canadian generally accepted accounting
principles as set out in the Handbook of the Canadian Institute of
Chartered Accountants ("CICA Handbook"). In 2010, the CICA Handbook
was revised to incorporate International Financial Reporting
Standards ("IFRS"), and require publicly accountable enterprises to
apply such standards effective for years beginning on or after
January 1, 2011. Accordingly, the Company commenced reporting
on this basis in its first 2011 condensed interim consolidated
financial statements. In these financial statements, the term
"Canadian GAAP" refers to Canadian GAAP before the adoption of
IFRS. These condensed interim consolidated financial statements
have been prepared in accordance with IFRS applicable to the
preparation of interim financial statements, including IAS 34,
Interim Financial Reporting, and IFRS 1, First-time Adoption of
International Financial Reporting Standards. The accounting
policies followed in these condensed interim consolidated financial
statements are the same as those applied in the Company's condensed
interim consolidated financial statements for the period ended
March 31, 2011. The Company has consistently applied the same
accounting policies throughout all periods presented, as if these
polices had always been in effect. Note 3 discloses the impact of
the transition to IFRS on the Company's reported equity as at
December 31, 2011 and comprehensive income for the three and twelve
months ended December 31, 2011, including the nature and effect of
significant changes in accounting policies from those used in the
Company's consolidated financial statements for the year ended
December 31, 2010. The Board of Directors approved the financial
statements on February 2, 2012. The condensed interim consolidated
financial statements should be read in conjunction with the
Company's Canadian GAAP annual financial statements for the year
ended December 31, 2010, and the Company's consolidated financial
statements for the year ended December 31, 2011 prepared in
accordance with IFRS. 3. Explanation of transition to IFRS The
Company does not have any material differences between IFRS and
Canadian GAAP. As such there are no reconciling items that would
materially change the reporting requirements under Canadian GAAP to
IFRS. IFRS 1 allows first time adopters to IFRS to take advantage
of a number of voluntary exemptions from the general principal of
retrospective restatement. The Company has taken the following
exemptions: IFRS 2 Share based payments The Company has elected to
not apply IFRS 2 to share based payments granted and fully vested
before the Company's date of transition to IFRS. The Company has
assessed and quantified the difference in accounting for stock
based compensation under IFRS compared to Canadian GAAP and has
deemed the difference to be immaterial. IFRS 3 Business
combinations This standard has not been applied to acquisitions of
subsidiaries that occurred before January 1, 2010, the Company's
transition date to IFRS. As such, there is no retrospective change
in accounting for business combinations. IAS 23 Borrowing costs
Borrowing costs requires an entity to capitalize borrowing costs
directly attributable to the acquisition, construction or
production of a qualifying asset (one that takes a substantial
period of time to get ready for use or sale) as part of the cost of
that asset. The option of immediately expensing those borrowing
costs has been removed. The Company has elected to account for such
transactions on a go forward basis. As such there is no
retrospective change in accounting for borrowing costs. As part of
the transition to IFRS, the Company established that the carrying
values of its property and equipment were substantially equivalent
between IFRS and Canadian GAAP and therefore the Company has
continued to carry its property and equipment at the historic cost
model as was used under Canadian GAAP in these statements. 4. Cash
and cash equivalents December 31, December 31, January 1, 2011 2010
2010 Cash at bank and 15,830 - - on hand Cash is held at a major
Canadian chartered bank. 5. Accounts receivable December31, 2011
December 31, 2010 Current 46,556 40,014 Less than 60 days overdue
36,732 41,253 Greater than 60 days overdue 8,328 5,519 Total Trade
receivables 91,616 86,786 Allowance for credit losses (1,615)
(1,887) Net trade receivables 90,001 84,899 Other receivables 8,189
8,051 98,190 92,950 A substantial portion of the Company's accounts
receivable balance is with customers within the oil and gas
industry and is subject to normal industry credit risks.
Concentration of credit risk in trade receivables is limited as the
Company's customer base is large and diversified. The Company
follows a program of credit evaluations of customers and limits the
amount of credit extended when deemed necessary. The Company has
established procedures in place to review and collect outstanding
receivables. Significant outstanding and overdue balances are
reviewed on a regular basis and resulting actions are put in place
on a timely basis. Appropriate provisions are made for debts that
may be impaired on a timely basis. The Company maintains an
allowance for possible credit losses that are charged to selling,
general and administrative expenses by performing an analysis of
specific accounts. 6. Inventories The Company maintains net
realizable value allowances against slow moving, obsolete and
damaged inventories that are charged to cost of goods sold on the
statement of earnings. These allowances are included in the
inventory value disclosed above. Movement of the allowance for net
realizable value is as follows: Year ended Year ended December 31,
2011 December 31, 2010 Opening balance as at January 5,000 6,300 1
Additions 2,495 900 Utilization through write (2,905) (2,200) downs
Closing balance 4,590 5,000 7. Taxation The difference between the
income tax provision recorded and the provision obtained by
applying the combined federal and provincial statutory rates is as
follows: ThreeMonths Ended Year Ended December 31 December 31 2011
% 2010 % 2011 % 2010 % Earnings 5,922 3,060 19,703 9,354 before
income taxes Income taxes 1,585 26.8 860 28.1 5,269 26.7 2,647 28.3
calculated at statutory rates Non-deductible (1) (0.1) 25 0.8 53
0.3 104 1.1 items Share based 8 0.1 554 18.1 103 0.5 712 7.6
compensation Adjustments (146) (2.4) (12) (0.4) (33) (0.1) (20)
(0.2) for filing returns and others 1,445 24.4 1,427 46.6 5,392
27.4 3,443 36.8 As at December 31, 2011, income taxes payable was
$1.7 million (December 31, 2010 - $0.3 million payable). Income tax
expense is based on management's best estimate of the weighted
average annual income tax rate expected for the full financial
year. As at December31, 2011 December 31, 2010 Assets Property and
equipment 883 870 Stock based compensation 951 487 expense Other
609 156 2,443 1,513 Liabilities Goodwill and other (474) 397 Net
Deferredtax asset 1,969 1,116 Deductible temporary differences are
recognized to the extent that it is probable that taxable profit
will be available against which the deductible temporary
differences can be utilized. 8. Accounts payable and accrued
liabilities December 31, 2011 December 31, 2010 Current Trade
payables 10,919 23,966 Other payables 3,834 7,057 Accrued
compensation 4,683 2,434 expenses Other accrued liabilities 74,177
29,906 93,613 63,363 9. Note payable, bank operating loan and long
term debt December 31, 2011 December 31, 2010 JEN Supply debt 290 -
Note payable 290 JEN Supply debt - 290 Bank operating loan - 6,140
Long term debt - 6,430 In July of 2011, the Company renewed
its $60.0 million revolving term credit facility that matures
in July 2014. Borrowings under the credit facility bear
interest based on floating interest rates and are secured by a
general security agreement covering all assets of the Company. The
maximum amount available under the credit facility is subject to a
borrowing base formula applied to accounts receivable and
inventories. The credit facility requires that the Company
maintains the ratio of its debt to debt plus equity at less than
40%. As at December 31, 2011, this ratio was nil (December 31, 2010
- 4%). The Company must also maintain coverage of its net operating
cash flow as defined in the credit facility agreement, over
interest expense for the trailing twelve month period, at greater
than 1.25 times. As at December 31, 2011, this ratio was 34.5 times
(December 31, 2010 - 14.1 times). The credit facility
contains certain other covenants, with which the Company is in
compliance and has been for the comparative periods. As at December
31, 2011, the Company had borrowed nil and had available undrawn
borrowing capacity of $60.0 million under the credit facility. In
management's opinion, the Company's available borrowing capacity
under its Credit Facility and ongoing cash flow from operations,
are sufficient to resource its ongoing obligations. The JEN Supply
note payable is unsecured and bears interest at the floating
Canadian bank prime rate and is repayable in November 2012. 10.
Capital management The Company's primary source of capital is its
shareholders' equity and cash flow from operating activities before
net changes in non-cash working capital balances. The Company
augments these capital sources with a $60 million, revolving bank
term loan facility maturing in July 2014 (see Note 9) which is used
to finance its net working capital and general corporate
requirements. The Company's objective is to maintain adequate
capital resources to sustain current operations including meeting
seasonal demands of the business and the economic cycle. The
Company's capital is summarised as follows: December 31, 2011
December 31, 2010 Shareholders' equity 165,099 150,536 Long term
debt / Bank - 6,430 operating loan Net working capital 116,850
125,702 Net working capital isdefined as current assets less cash
and cash equivalents, accounts payable and accruedliabilities,
current taxes payable, note payable and other current liabilities.
11. Related party transactions Schlumberger owns approximately 56%
of the Company's outstanding shares. The Company is the exclusive
distributor in Canada of downhole pump production equipment
manufactured by Wilson Supply, a division of Schlumberger.
Purchases of such equipment conducted in the normal course on
commercial terms were as follows: For the yearended December 31
2011 2010 Cost of sales for the three months ended 4,949 2,280 Cost
of sales for the twelve months ended 10,896 8,212 Inventory 5,302
3,544 Accounts payable and accrued liabilities 1,830 1,457 Accounts
receivable 77 - 12. Capital Stock
a) The Company has authorized an
unlimited number of common shares with no par value. As at December
31, 2011, the Company had 17.4 million common shares, 0.7 million
stock options and 0.6 million share units outstanding.
b) The Board of Directors may grant
options to purchase common shares to substantially all employees,
officers and directors and to persons or corporations who provide
management or consulting services to the Company. The
exercise period and the vesting schedule after the grant date are
not to exceed 10 years. Option activity for each of the twelve
month periods ended December 31 was as follows: (000's) 2011 2010
Outstanding - January 1 1,073 1,195 Exercised (196) (86) Forfeited
(132) (36) Outstanding at December 31 745 1,073 Exercisable at
December 31 734 897 Stock based compensation expense recorded for
the three and twelve month period ended December 31, 2011 was
$81,000 (2010 - $350,000) and $383,000 (2010 - $723,000)
respectively and is included in selling, general and administrative
expenses on the consolidated statement of earnings and
comprehensive income. No options were granted during the
twelve month period ended December 31, 2011 or the year ended
December 31, 2010. Options vest one third or one fourth per year
from the date of grant. Prior to the fourth quarter of 2010, the
Company's stock option plan included a cash settlement mechanism.
During the fourth quarter of 2010, the Company discontinued the
settlement of stock option obligations with cash payments in favour
of issuing shares from treasury. At the time of this plan
modification, the current liability of $2,075,000 was transferred
to contributed surplus on the Company's consolidated statement of
financial position. Stock options were revalued at each period end
using the Black Scholes pricing model, the following assumptions
were used: 2010 Dividend yield Nil Risk-free interest rate 3.48%
Expected life 5 years Expected volatility 63.2% Note: Expected
volatility is based on historical volatility. c) Share
Unit Plans The Company has Restricted Share Unit ("RSU"),
Performance Share Unit ("PSU") and Deferred Share Unit ("DSU")
plans (collectively the "Share Unit Plans"), whereby RSUs, PSUs and
DSUs are granted entitling the participant, at the Company's
option, to receive either a common share or cash equivalent in
exchange for a vested unit. For the PSU plan the number of units
granted is dependent on the Company meeting certain return on net
asset ("RONA") performance thresholds during the year of grant. The
multiplier within the plan ranges from 0% - 200% dependent on
performance. For 2011, the PSU performance adjustment was an
increase of 4% from target, resulting in a 4,000 unit adjustment
($16,000). For 2010, the PSU performance adjustment was a
reduction of 58% from target, resulting in a 77,000 unit adjustment
($284,000). RSU and PSU grants vest one third per year over the
three year period following the date of the grant. DSUs vest on the
date of grant, and can only be redeemed when the Director resigns
from the Board. Compensation expense related to the units
granted is recognized over the vesting period based on the fair
value of the units at the date of the grant and is recorded to
contributed surplus. The contributed surplus balance is
reduced as the vested units are exchanged for either common shares
or cash. During the twelve month period ended December 31, 2011 and
2010 the fair value of the RSU, PSU and DSU units granted was
$2,249,000 (2010 - $1,497,000) and compensation expense recorded in
the three and twelve month period ended December 31, 2011, were
$236,000 (2010 - $306,000) and $1,440,000 (2010 - $1,268,000).
Share Unit Plan activity for the periods ended December 31, 2011,
and December 31, 2010 was as follows: (000's) December 31, 2011
December 31, 2010 Number of Units Number of Units RSU PSU DSU Total
RSU PSU DSU Total Outstanding at 273 97 80 450 223 53 98 374
January 1 Granted 130 117 22 269 145 132 31 308 Performance - 4 - 4
- (77) - (77) adjustments Exercised (34) (12) - (46) (82) (7) (49)
(138) Forfeited (62) (44) - (106) (13) (4) - (17) Outstanding at
307 162 102 571 273 97 80 450 end ofperiod Exercisable at 93 33 102
228 30 10 80 120 end of period The Company has established an
independent trust to purchase common shares of the Company on the
open-market to satisfy Share Unit Plan obligations. The Company's
intention is to settle all share based obligations with shares
delivered from the trust. The trust is considered to be a special
interest entity and is consolidated in the Company's financial
statements with the cost of the shares held in trust reported as a
reduction to capital stock. For the twelve month period ended
December 31, 2011, 175,000 common shares were purchased by the
trust (2010 - 204,300) at an average cost of $8.85 per share (2010
- $6.91). As at December 31, 2011, the trust held 579,951
shares (2010 - 450,732). d) Normal Course Issuer
Bid ("NCIB") On December 21, 2010, the Company announced a NCIB to
purchase for cancellation up to 850,000 common shares representing
approximately 5% of its outstanding common shares. During the
twelve months ended December 31, 2011, the company purchased 3,102
shares at an average cost of $7.56 (2010: 61,769 shares purchased
at an average cost of $6.62). On December 20, 2011, the Company
announced the renewal of the NCIB effective January 3, 2012, to
purchase up to 850,000 common shares through the facilities of
NASDAQ, representing approximately 5% of its outstanding common
shares. Shares may be purchased up to December 31, 2012. 13.
Earnings per share Basic Basic earnings per share is calculated by
dividing the net income attributable to shareholders by the
weighted average number of ordinary shares in issue during the
year. Dilutive Diluted earnings per share are calculated using the
treasury stock method, as if RSUs, PSUs, DSUs and stock options
were exercised at the beginning of the year and funds received were
used to purchase the Company's common shares on the open market at
the average price for the year. Three Months Ended Year Ended
December 31 December 31 2011 2010 2011 2010 Total 4,477 1,633
14,311 5,911 Comprehensive income attributable to shareholders
Weighted average 17,483 17,452 17,501 17,499 number of common
shares issued (000's) Adjustments for: Stock options 257 209 263
194 Share Units 423 305 424 307 Weighted average 18,163 17,966
18,188 18,000 number of ordinary shares for dilutive Net earnings
per 0.26 0.09 0.82 0.34 share: Basic Net earnings per 0.25 0.09
0.79 0.33 share: Diluted 14. Financial instruments
a) Fair values The Company's financial
instruments recognized on the consolidated statements of financial
position consist of accounts receivable, accounts payable and
accrued liabilities and note payable. The fair values of these
financial instruments approximate their carrying amounts due to
their short-term maturity. b) Credit
Risk is described in Note 5. c) Market
Risk and Risk Management The Company's long term debt bears
interest based on floating interest rates. As a result the Company
is exposed to market risk from changes in the Canadian prime
interest rate which can impact its borrowing costs. Based on the
Company's borrowing levels as at December 31, 2011, a change of one
percent in interest rates would decrease or increase the Company's
annual net income by nil. From time to time the Company enters into
foreign exchange forward contracts to manage its foreign exchange
market risk by fixing the value of its liabilities and future
commitments. The Company is exposed to possible losses in the event
of non-performance by counterparties. The Company manages this
credit risk by entering into agreements with counterparties that
are substantially all investment grade financial institutions. The
Company's foreign exchange risk arises principally from the
settlement of United States dollar dominated net working capital
balances as a result of product purchases denominated in United
States dollars. As at December 31, 2011, the Company had contracted
to purchase US$18.3 million at fixed exchange rates with terms not
exceeding five months (2010 - $6.5 million). The fair market values
of the contracts were $0.2 million at December 31, 2011 and nominal
at December 31, 2010. The Company recorded on these contracts an
unrealized gain of $0.2 million for the year ended December 31,
2011 and an unrealized loss of $0.8 million for the three months
ended December 31, 2011, which has been recorded in foreign
exchange gain and other in the condensed interim consolidated
statements of earnings and comprehensive income. As at
December 31, 2011, a one percent change in the Canadian dollar
relative to the US dollar would decrease or increase the Company's
annual net income by $0.2 million. 15. Selling, general and
administrative ("SG&A") Costs Selling, general and
administrative costs for the three and twelve month periods ended
December 31 are as follows: Three months ended Year Ended 2011 2010
2011 2010 $ % $ % $ % $ % Salaries 10,177 58% 9,792 59% 41,086 60%
36,287 58% and Benefits Selling 2,280 13% 1,976 12% 6,495 9% 6,558
10% Costs Facility 3,544 20% 3,311 20% 15,063 22% 13,392 21% and
office costs Other 1,534 9% 1,659 9% 6,071 9% 6,317 10% SG&A
17,535 100% 16,738 100% 68,715 100% 62,554 100% costs 16. Segmented
reporting The Company distributes oilfield products principally
through its network of 39 branches located in western Canada
primarily to oil and gas industry customers. Accordingly, the
Company has determined that it operated through a single operating
segment and geographic jurisdiction. Forward Looking Statements The
information in this press release contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934 and
within the meaning of Canadian securities laws. All
statements, other than statements of historical facts, that address
activities, events, outcomes and other matters that CE Franklin
plans, expects, intends, assumes, believes, budgets, predicts,
forecasts, projects, estimates or anticipates (and other similar
expressions) will, should or may occur in the future are
forward-looking statements. These forward-looking statements
are based on management's current belief, based on currently
available information, as to the outcome and timing of future
events. When considering forward-looking statements, you
should keep in mind the risk factors and other cautionary
statements in this MD&A, including those under the caption
"Risk factors". Forward-looking statements appear in a number of
places and include statements with respect to, among other things:
-- forecasted oil and gas industry activity levels in 2012 and
beyond; -- planned capital expenditures and working capital and
availability of capital resources to fund capital expenditures and
working capital; -- the Company's future financial condition or
results of operations and future revenues and expenses; -- the
Company's business strategy and other plans and objectives for
future operations; -- fluctuations in worldwide prices and demand
for oil and gas; and -- fluctuations in the demand for the
Company's products and services. Should one or more of the risks or
uncertainties described above or elsewhere in this MD&A occur,
or should underlying assumptions prove incorrect, the Company's
actual results and plans could differ materially from those
expressed in any forward-looking statements. All forward-looking
statements expressed or implied, included in this MD&A and
attributable to CE Franklin are qualified in their entirety by this
cautionary statement. This cautionary statement should also
be considered in connection with any subsequent written or oral
forward-looking statements that CE Franklin or persons acting on
its behalf might issue. CE Franklin does not undertake any
obligation to update any forward-looking statements to reflect
events or circumstances after the date of filing this MD&A,
except as required by law. Additional Information Additional
information relating to CE Franklin, including its fourth quarter
2011 Management Discussion and Analysis and interim consolidated
financial statements and its Form 20-F / Annual Information Form,
is available under the Company's profile on the SEDAR website at
www.sedar.com and at www.cefranklin.com. Conference Call and
Webcast Information A conference call to review the 2011 fourth
quarter results, which is open to the public, will be held on
Friday, February 3, 2012 at 11:00 a.m. Eastern Time (9:00a.m.
Mountain Time). Participants may join the call by dialing
1-647-427-7450 in Toronto or dialing 1-888-231-8191 at the
scheduled time of 11:00 a.m. Eastern Time. For those unable
to listen to the live conference call, a replay will be available
at approximately 2:00 p.m. Eastern Time on the same day by calling
1-416-849-0833 in Toronto or dialing 1-855-859-2056 and entering
the Passcode of 42851162 and may be accessed until midnight
February 9, 2012. The call will also be webcast live at:
http://www.newswire.ca/en/webcast/detail/904075/964391 and will be
available on the Company's website at http://www.cefranklin.com.
Michael West, President and Chief Executive Officer will lead the
discussion and will be accompanied by Derrren Newell, Vice
President and Chief Financial Officer. The discussion will be
followed by a question and answer period. About CE Franklin For
more than half a century, CE Franklin has been a leading supplier
of products and services to the energy industry. CE Franklin
distributes pipe, valves, flanges, fittings, production equipment,
tubular products and other general oilfield supplies to oil and gas
producers in Canada as well as to the oil sands, refining, heavy
oil, petrochemical, forestry and mining industries. These
products are distributed through its 39 branches, which are
situated in towns and cities serving particular oil and gas fields
of the western Canadian sedimentary basin. Forward-looking
Statements: The information in this news release may contain
"forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934; within the meaning of Canadian securities law
and other applicable securities legislation. All statements,
other than statements of historical facts, that address activities,
events, outcomes and other matters that CE Franklin plans, expects,
intends, assumes, believes, budgets, predicts, forecasts, projects,
estimates or anticipates (and other similar expressions) will,
should or may occur in the future are forward-looking
statements. These forward-looking statements are based on
management's current belief, based on currently available
information, as to the outcome and timing of future events.
When considering forward-looking statements, you should keep in
mind the risk factors and other cautionary statements and refer to
the Form 20-F or our annual information form for further detail.
CE Franklin Ltd. CONTACT: Investor
Relations800-345-2858403-531-5604investor@cefranklin.com
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