CALGARY, July 24 /PRNewswire-FirstCall/ -- CE FRANKLIN LTD.
(TSX.CFT, AMEX.CFK) announced its results for the second quarter of
2008 CE Franklin reported net income of $1.0 million or $0.05 per
share (basic) for the second quarter ended June 30, 2008, a 67%
increase compared to net income of $0.6 million or $0.03 per share
earned in the second quarter ended June 30, 2007. Financial
Highlights (millions of Cdn.$ except Three Months Ended Six Months
Ended per share data) June 30 June 30 -------------------
------------------- 2008 2007 2008 2007 -------------------
------------------- (unaudited) (unaudited) Sales $ 96.4 $ 82.9 $
237.0 $ 237.2 Gross Profit 19.0 16.8 46.0 43.1 Gross Profit - % of
sales 19.7% 20.3% 19.4% 18.2% EBITDA(1) 2.3 2.2 12.4 13.2 EBITDA(1)
as a % of sales 2.4% 2.7% 5.2% 5.6% Net Income $ 1.0 $ 0.6 $ 7.2 $
7.0 Per Share Basic $ 0.05 $ 0.03 $ 0.39 $ 0.38 Diluted $ 0.05 $
0.03 $ 0.39 $ 0.37 Net Working Capital(2) $ 114.9 $ 127.0 Bank
Operating Loan(2) $ 18.4 $ 36.0 "Net income improved in the second
quarter compared to the prior year period, out pacing the 15%
decline in year over year well completions. This is a solid result
in a quarter that also saw the successful opening of our new,
larger distribution centre, which positions CE Franklin well for
the expected recovery in industry activity levels," said Michael
West, President and Chief Executive Officer. Net income for the
second quarter of 2008 was $1.0 million, up $0.4 million (67%)
from the second quarter of 2007. Second quarter sales are
seasonally low as oilfield project activity is impacted by the
spring break up. Sales increased by 16% over the prior year period.
Approximately half of this increase in sales was due to a 17%
increase in the sale of products used in our customer's capital
projects, outpacing the 12% increase in average rig counts. Adverse
weather conditions experienced in the second quarter limited
capital project activity with well completions declining by 15%
compared to the prior year period. The remaining increase reflected
sales from JEN Supply and Full Tilt that were acquired in the
second half of 2007. Gross profit increased by $2.2 million over
the prior year period due to the increase in sales offset by a
reduction in gross profit margins. Gross profit margins for the
quarter were 19.7%, down from strong performance in the prior year
period at 20.3%. Gross margins improved in the second quarter from
19.3% generated in the first quarter of 2008. Selling, general and
administrative expenses increased by $2.6 million to $16.7 million
for the quarter due mainly to the addition of people and facility
costs associated with the two acquisitions completed in the last
half of 2007 and increased facility costs with the opening of the
new Edmonton distribution centre during the second quarter. Lower
interest expense was associated with reduced average debt levels
and floating interest rates in the second quarter of 2008. Income
taxes increased by $0.2 million in the second quarter compared to
the prior year period due to higher pre-tax earnings offset
slightly by a reduction in income tax rates. The weighted average
number of shares outstanding during the second quarter was
comparable to the prior year period. Net income per share (basic)
was $0.05, up 67% from $0.03 earned in the second quarter of 2007,
consistent with the increase in net income. Net income for the
first half of 2008 was $7.2 million, up $0.2 million (3%) from the
first half of 2007. Sales for the first half of 2008 of
$237.0 million were comparable to the prior year period.
Industry capital expenditure activity levels declined steadily
throughout 2007 and the first quarter of 2008, before beginning to
recover in the second quarter for reasons discussed in the
"Outlook" section. This contributed to a 7% decline in capital
project equipment sales compared to the prior year period which was
fully offset from the JEN Supply and Full Tilt acquisitions. Gross
profit increased by $2.9 million over the prior year period as
gross profit margins increased from 18.2% in the first half of 2007
to 19.4% in the first half of 2008. The increases are due to
increased high margin, MRO sales in 2008 and a large, low margin
oilsands order in the first quarter of 2007. Selling, general and
administrative expenses increased by $4.3 million to $33.6 million
due mainly to the addition of people and facility costs associated
with the two acquisitions completed in the last half of 2007 and
increased facility costs associated with the opening of the new
distribution centre in the second quarter. Interest expense
declined due to reduced average debt levels and floating interest
rates in the first half of 2008. Income taxes declined by $0.3
million in the first half of the year compared to the prior year
period due primarily to a reduction in income tax rates. The
weighted average number of shares outstanding during the first
quarter was comparable to the prior year period. Net income per
share (basic) was $0.39 in the first half of 2008 compared to $0.38
in the first half of 2007. Outlook ------- The Company's business
is dependent on the level of conventional oil and gas capital
expenditures and production activity in western Canada. A
combination of events experienced in 2007 including lower natural
gas prices, the Alberta government royalty task force review and
subsequent decision to increase royalty rates, high drilling and
operating costs, and the rapid appreciation of the Canadian dollar,
reduced the competitiveness of the western Canadian sedimentary
basin relative to other international oil and gas producing
regions, resulting in a reduction of industry capital expenditures.
Through the first half of 2008, natural gas and oil prices have
continued to strengthen. On April 10, 2008, the Alberta government
announced certain enhancements to royalty rates designed to improve
the economics of production from deep wells drilled commencing in
2009. These improvements are being partially offset by significant
price increases for steel, which will result in increased costs for
our customers and higher working capital investment by CE Franklin.
Taken together, industry cash flow economics and in turn activity
levels are beginning to improve. Industry forecasts are now
expecting drilling activity over the second half of 2008 and 2009
to exceed comparable 2007 activity levels which should translate
into increased well completions and improved demand for the
Company's products. With the successful opening of its new 153,000
square foot distribution centre in Edmonton during the second
quarter, and its established supply store network in northeast
British Columbia and southeast Saskatchewan, the Company is well
positioned to efficiently service increased industry demand as it
arises. Over the medium to longer term, the Company is optimistic
that its strong competitive position will enable it to take
advantage of available market share as conventional industry
activity recovers and demand for the Company's products increase.
Effective execution of the Company's oilsands and service
diversification strategies provide further opportunities to
profitably leverage its supply chain infrastructure. (1) EBITDA
represents net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented,
represents a useful means of assessing the performance of the
Company's ongoing operating activities, as it reflects the
Company's earnings trends without showing the impact of certain
charges. The Company is also presenting EBITDA and EBITDA as a
percentage of sales because it is used by management as
supplemental measures of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and amortization
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Amortization expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net income, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net Income is provided within the
Company's Management Discussion and Analysis. Not all companies
calculate EBITDA in the same manner and EBITDA does not have a
standardized meaning prescribed by GAAP. Accordingly, EBITDA, as
the term is used herein, is unlikely to be comparable to EBITDA as
reported by other entities. (2) Net Working Capital is defined as
current assets less accounts payable and accrued liabilities,
income taxes payable and other current liabilities. Net Working
Capital and Bank Operating Loan are as at quarter end. Additional
Information ---------------------- Additional information relating
to CE Franklin, including its second quarter 2008 Management
Discussion and Analysis and interim consolidated financial
statements and its Form 20-F/Annual Information Form, is available
under the Company's profile on the SEDAR website at
http://www.sedar.com/ and at http://www.cefranklin.com/. Conference
Call and Webcast Information
--------------------------------------- A conference call to review
the 2008 second quarter results, which is open to the public, will
be held on Friday, July 25, 2008 at 11:00 a.m. Eastern Time (9:00
a.m. Mountain Time). Participants may join the call by dialing
1-416-644-3415 in Toronto or dialing 1-800-732-9307 at the
scheduled time of 11:00 a.m. Eastern Time. For those unable to
listen to the live conference call, a replay will be available at
approximately 1:00 p.m. Eastern Time on the same day by calling
1-416-640-1917 in Toronto or dialing 1-877-289-8525 and entering
the Passcode of 21275119 followed by the pound sign and may be
accessed until midnight Monday, August 4, 2008. The call will also
be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2317040 and
will be available on the Company's website at
http://www.cefranklin.com/. Michael West, President and Chief
Executive Officer will lead the discussion and will be accompanied
by Mark Schweitzer, Vice President and Chief Financial Officer. The
discussion will be followed by a question and answer period. About
CE Franklin For more than half a century, CE Franklin has been a
leading supplier of products and services to the energy industry.
CE Franklin distributes pipe, valves, flanges, fittings, production
equipment, tubular products and other general oilfield supplies to
oil and gas producers in Canada as well as to the oilsands,
refining, heavy oil, petrochemical, forestry and mining industries.
These products are distributed through its 44 branches, which are
situated in towns and cities serving particular oil and gas fields
of the western Canadian sedimentary basin. Forward-looking
Statements: The information in this news release may contain
"forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and other applicable securities legislation.
All statements, other than statements of historical facts, that
address activities, events, outcomes and other matters that CE
Franklin plans, expects, intends, assumes, believes, budgets,
predicts, forecasts, projects, estimates or anticipates (and other
similar expressions) will, should or may occur in the future are
forward-looking statements. These forward-looking statements are
based on management's current belief, based on currently available
information, as to the outcome and timing of future events. When
considering forward-looking statements, you should keep in mind the
risk factors and other cautionary statements and refer to the Form
20-F or our annual information form for further detail.
Management's Discussion and Analysis as at July 24, 2008 The
following Management's Discussion and Analysis ("MD&A") is
provided to assist readers in understanding CE Franklin Ltd.'s ("CE
Franklin" or the "Company") financial performance and position
during the periods presented and significant trends that may impact
future performance of CE Franklin. This discussion should be read
in conjunction with the Company's interim consolidated financial
statements for the three and six month periods ended June 30, 2008,
the MD&A for the three month period ended March 31, 2008 and
the MD&A and the consolidated financial statements for the year
ended December 31, 2007. All amounts are expressed in Canadian
dollars and in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP"), except where otherwise
noted. Overview CE Franklin is a leading distributor of pipe,
valves, flanges, fittings, production equipment, tubular products
and other general industrial supplies, primarily to the oil and gas
industry in Canada through its 44 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 oilsands, 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 they are needed, on time, and
for the best value. Our branches, supported by our distribution
centre in Edmonton, Alberta, stock over 25,000 stock keeping units.
This hub and spoke supply chain infrastructure enables us to
provide our customers with the products they need on a same day or
over night basis while leveraging our scale to enable industry
leading 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, invoicing, credit and collections and other business
services. The Company's shares trade on the TSX ("CFT") and AMEX
("CFK") stock exchanges. Smith International Inc. ("Smith"), a
major oilfield service company based in the United States, owns
approximately 53% of the Company's shares. Business and Operating
Strategy The Company is pursuing four strategies to grow its
business profitably: - Grow market share in our core oilfield
equipment distribution business in western Canada through
concentrated sales efforts and premium customer service
complimented by selected acquisitions such as the acquisition of
JEN Supply Inc. ("JEN Supply") in December 2007. - Leverage our
existing supply chain infrastructure, product and project expertise
by focusing on the emerging oilsands project and Maintenance,
Repair and Operating ("MRO") business. - Expand our production
equipment service capability to capture more of the product life
cycle requirements for the equipment we sell such as down hole pump
repair, oilfield engine maintenance, well optimization and on site
project management, in order to differentiate our service offering
from that of other competitors and deepen our relationship with
customers. The acquisition of Full Tilt Field Services Limited
("Full Tilt") in July 2007 provided us with the capability to
service oilfield engines and related components that we were
previously selling, and by doing so, positions us to attract new
customers to our core oilfield equipment distribution business. -
Leverage our domestic supply chain infrastructure capabilities and
customers by targeting international sales. Selected international
project sales are resourced from our Edmonton distribution centre.
An oilfield equipment distribution joint venture was established in
the 2nd quarter of 2007 in Libya with Wilson Supply, a wholly owned
subsidiary of Smith, and a Libyan partner. Business Outlook The
Company's business is dependent on the level of conventional oil
and gas capital expenditures and production activity in western
Canada. A combination of events experienced in 2007 including lower
natural gas prices, the Alberta government royalty task force
review and subsequent decision to increase royalty rates, high
drilling and operating costs, and the rapid appreciation of the
Canadian dollar, reduced the competitiveness of the western
Canadian sedimentary basin relative to other international oil and
gas producing regions, resulting in a reduction of industry capital
expenditures. Through the first half of 2008, natural gas and oil
prices have continued to strengthen. On April 10, 2008, the Alberta
government announced certain enhancements to royalty rates designed
to improve the economics of production from deep wells drilled
commencing in 2009. These improvements are being partially
mitigated by significant price increases for steel, which will
result in increased costs for our customers and higher working
capital investment by CE Franklin. Taken together, industry cash
flow economics and in turn activity levels are beginning to
improve. Industry forecasts are now expecting drilling activity
over the second half of 2008 and 2009 to exceed comparable 2007
activity levels which should translate into increased well
completions and improved demand for the Company's products. With
the successful opening of its new 153,000 square foot distribution
centre in Edmonton during the second quarter, and its established
supply store network in northeast British Columbia and southeast
Saskatchewan, the Company is well positioned to efficiently service
increased industry demand as it arises. Over the medium to longer
term, the Company is optimistic that its strong competitive
position will enable it to take advantage of available market share
as conventional industry activity recovers and demand for the
Company's products increase. Effective execution of the Company's
oilsands and service diversification strategies provide further
opportunities to profitability leverage its supply chain
infrastructure. Operating Results The following table summarizes CE
Franklin's results of operations: (in millions of Cdn. dollars
except per share data) Three Months Ended June 30
--------------------------------------- 2008 2007
------------------- ------------------- Sales $ 96.4 100.0% $ 82.9
100.0% Cost of sales (77.4) (80.3)% (66.1) (79.7)% ---------
--------- --------- --------- Gross profit 19.0 19.7% 16.8 20.3%
Selling, general and administrative expenses (16.7) (17.3)% (14.1)
(17.0)% Foreign exchange loss - 0.0% (0.5) (0.6)% ---------
--------- --------- --------- EBITDA(1) 2.3 2.4% 2.2 2.7%
Amortization (0.6) (0.6)% (0.7) (0.8)% Interest (0.2) (0.2)% (0.5)
(0.7)% --------- --------- --------- --------- Income before taxes
1.5 1.6% 1.0 1.2% Income tax expense (0.5) (0.6)% (0.4) (0.5)%
--------- --------- --------- --------- Net income 1.0 1.0% 0.6
0.7% --------- --------- --------- --------- --------- ---------
--------- --------- Net income per share Basic (Cdn. $) $ 0.05 $
0.03 Diluted (Cdn. $) $ 0.05 $ 0.03 Weighted average number of
shares outstanding (000's) Basic 18,278 18,329 Diluted 18,574
18,768 (in millions of Cdn. dollars except per share data) Six
Months Ended June 30 --------------------------------------- 2008
2007 ------------------- ------------------- Sales $ 237.0 100.0% $
237.2 100.0% Cost of sales (191.0) (80.6)% (194.1) (81.8)%
--------- --------- --------- --------- Gross profit 46.0 19.4%
43.1 18.2% Selling, general and administrative expenses (33.6)
(14.2)% (29.3) (12.4)% Foreign exchange loss - 0.0% (0.6) (0.2)%
--------- --------- --------- --------- EBITDA(1) 12.4 5.2% 13.2
5.6% Amortization (1.2) (0.5)% (1.5) (0.6)% Interest (0.6) (0.2)%
(1.1) (0.5)% --------- --------- --------- --------- Income before
taxes 10.6 4.5% 10.6 4.5% Income tax expense (3.4) (1.5)% (3.6)
(1.5)% --------- --------- --------- --------- Net income 7.2 3.0%
7.0 3.0% --------- --------- --------- --------- ---------
--------- --------- --------- Net income per share Basic (Cdn. $) $
0.39 $ 0.38 Diluted (Cdn. $) $ 0.39 $ 0.37 Weighted average number
of shares outstanding (000's) Basic 18,305 18,282 Diluted 18,601
18,721 (1) EBITDA represents net income before interest, taxes,
depreciation and amortization. EBITDA is a supplemental non-GAAP
financial measure used by management, as well as industry analysts,
to evaluate operations. Management believes that EBITDA, as
presented, represents a useful means of assessing the performance
of the Company's ongoing operating activities, as it reflects the
Company's earnings trends without showing the impact of certain
charges. The Company is also presenting EBITDA and EBITDA as a
percentage of sales because it is used by management as
supplemental measures of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and amortization
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Amortization expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net income, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net Income is provided within the table
above. Not all companies calculate EBITDA in the same manner and
EBITDA does not have a standardized meaning prescribed by GAAP.
Accordingly, EBITDA, as the term is used herein, is unlikely to be
comparable to EBITDA as reported by other entities. Second Quarter
Results Net income for the second quarter of 2008 was $1.0 million,
up $0.4 million (67%) from the second quarter of 2007. Second
quarter sales are seasonally low as oilfield project activity is
impacted by the spring break up. Sales increased by 16% over the
prior year period. Approximately half of this increase in sales was
due to a 17% increase in the sale of products used in our
customer's capital projects, outpacing the 12% increase in average
rig counts. Adverse weather conditions experienced in the second
quarter limited capital project activity, as well completions
declined 15% compared to the prior year period. The remaining
increase reflected sales from JEN Supply and Full Tilt that were
acquired in the second half of 2007. Gross profit increased by $2.2
million over the prior year period due to the increase in sales
offset by a reduction in gross profit margins. Gross profit margins
for the quarter were 19.7% down from strong performance in the
prior year period at 20.3%. Gross margins improved in the second
quarter from 19.3% generated in the first quarter of 2008. Selling,
general and administrative expenses increased by $2.6 million to
$16.7 million for the quarter due mainly to the addition of people
and facility costs associated with the two acquisitions completed
in the last half of 2007 and increased facility costs with the
opening of the new Edmonton distribution centre during the second
quarter. Lower interest expense was associated with reduced average
debt levels and floating interest rates in the second quarter of
2008. Income taxes increased by $0.2 million in the second quarter
compared to the prior year period due to higher pre-tax earnings
offset slightly by a reduction in income tax rates. The weighted
average number of shares outstanding during the second quarter was
comparable to the prior year period. Net income per share (basic)
was $0.05 in the second quarter of 2008, an increase of 67%
compared to $0.03 in the second quarter of 2007, consistent with
the increase in net income. Year to Date Results Net income for the
first half of 2008 was $7.2 million, up $0.2 million (3%) from the
first half of 2007. Sales from the first half of 2008 of
$237.0 million were comparable to the prior year period.
Industry capital expenditure activity levels declined steadily
throughout 2007 and the first quarter of 2008, before beginning to
recover in the second quarter for reasons discussed in the
"Outlook" section. This contributed to a 7% decline in capital
project equipment sales compared to the prior year period which was
fully offset from the JEN Supply and Full Tilt acquisitions. Gross
profit increased by $2.9 million over the prior year period as
gross profit margins increased from 18.2% in the first half of 2007
to 19.4% in the first half of 2008. The increases are due to
increased high margin MRO sales in 2008 and a large, low margin
oilsands order in the first quarter of 2007. Selling, general and
administrative expenses increased by $4.3 million to $33.6 million
due mainly to the addition of people and facility costs associated
with the two acquisitions completed in the last half of 2007 and
increased facility costs associated with the opening of the new
distribution centre. Interest expense declined due to reduced
average debt levels and floating interest rates in the first half
of 2008. Income taxes declined by $0.3 million in the first half of
the year compared to the prior year period due primarily to a
reduction in income tax rates. The weighted average number of
shares outstanding during the first quarter was comparable to the
prior year period. Net income per share (basic) was $0.39 in the
first half of 2008 compared to $0.38 in the first half of 2007. A
more detailed discussion of the Company's second quarter results
from operations is provided below: Sales Sales for the quarter
ended June 30, 2008 were $96.4 million, up 16% from the quarter
ended June 30, 2007, principally due to increased capital project
demand reflecting an increase in the average rig count of 12% for
the quarter compared to the second quarter of 2007, and from higher
MRO product sales due to the acquisition of JEN Supply and Full
Tilt in the last half of 2007. (in millions of Cdn. $) Three months
ended June 30 Six months ended June 30 ----------------------------
--------------------------- 2008 2007 2008 2007 --------------
------------- ------------- ------------- End use sales demand $ %
$ % $ % $ % Capital projects 52.2 54 44.5 54 130.2 55 139.4 59
Maintenance, repair and operating supplies (MRO) 44.2 46 38.4 46
106.8 45 97.8 41 -------------- ------------- -------------
------------- Total sales 96.4 100 82.9 100 237.0 100 237.2 100
Note: Capital project end use sales are defined by the Company as
consisting of tubulars and 80% of pipe, flanges and fittings; and
valves and accessories product sales respectively; MRO Sales are
defined by the Company as consisting of pumps and production
equipment, production services; general product and 20% of pipes,
flanges and fittings; and valves and accessory product sales
respectively. The Company uses oil and gas well completions and
average rig counts as industry activity measures to assess demand
for oilfield equipment used in capital projects. Oil and gas well
completions require the products sold by the Company to complete a
well and bring production on stream and are a good general
indicator of energy industry activity levels. Average drilling rig
counts are also used by management to assess industry activity
levels as the number of rigs in use ultimately drives well
completion requirements. The relative level of oil and gas
commodity prices is a key driver of industry capital project
activity as product prices directly impact the economic returns
realized by oil and gas companies. Well completion, rig count and
commodity price information for the second quarter and YTD 2008 and
2007 are provided in the table below. Q2 Average YTD Average
------------------ % ----------------- % 2008 2007 change 2008 2007
change --------- ------- ------------------ -------- -------- Gas -
Cdn. $/gj (AECO spot) $ 10.23 $ 7.10 44% $ 9.09 $ 7.25 25% Oil -
Cdn. $/bbl (Edmonton Light) $125.83 $ 72.11 74% $112.04 $ 69.85 60%
Average rig count 180 161 12% 370 362 2% Well completions: Gas
1,667 2,118 (21%) 4,960 6,691 (26%) Oil 940 939 0% 2,242 2,566
(13%) --------- ------- ------------------ -------- -------- Total
well completions 2,607 3,057 (15%) 7,202 9,257 (22%) Average
statistics are shown except for well completions. Sources: Oil and
Gas prices - First Energy Capital Corp.; Rig count data - Hughes
Christensen; Well completion data - Daily Oil Bulletin Sales of
capital project related products were $52.2 million in the second
quarter of 2008, up 17% ($7.7 million) from the second quarter of
2007. Total well completions declined by 15% to 2,607 in the second
quarter 2008 while the average working rig count increased to 180
(12%) compared to the second quarter of 2007. Gas wells comprised
64% of the total wells completed in western Canada in the second
quarter of 2008 compared to 69% in the second quarter of 2007. Oil
and gas capital expenditure activity began to recover in the second
quarter of 2008 resulting from strengthening oil and gas commodity
prices and emerging gas exploration plays in the northeast British
Columbia and oil pool development in southeast Saskatchewan. Well
completions in the second quarter declined by 15% as capital
project activity was limited by adverse weather conditions. Well
completions for the remainder of 2008 should benefit from the
increase in average rig counts experienced during the second
quarter of 2008, which should translate into stronger demand for
the Company's products. Spot gas and oil prices ended the second
quarter at $11.69 per GJ (AECO spot) and $139.68 per bbl (Edmonton
light), an increase of 14% and 11%, respectively, over second
quarter average prices. This should result in improved industry
cash flow and capital expenditure economics, which in turn should
increase demand for the Company's products. MRO product sales are
related to overall oil and gas industry production levels and tend
to be more stable than capital project sales. MRO product sales for
the quarter ended June 30, 2008 increased 15% to $44.2 million
compared to the quarter ended June 30, 2007 and comprised 46% of
the Company's total sales. The increase in sales was mainly
attributable to the acquisition of JEN Supply and Full Tilt in the
last half of 2007. The Company's strategy is to grow profitability
by focusing on its core western Canadian oilfield equipment service
business, complemented by an increase in the product life cycle
services provided to its customers, the focus on the emerging
oilsands capital project and MRO sales opportunities, as well as
selected sales to international markets. Revenue results of these
initiatives to date are provided below: Q2 2008 Q2 2007 YTD 2008
YTD 2007 ------------- ------------- ------------- --------------
Sales ($millions) $ % $ % $ % $ % Western Canada oilfield 88.1 91
76.7 92 220.4 93 218.2 92 Oilsands 3.7 4 3.8 5 6.1 3 13.0 6
Production Services 3.5 4 1.3 2 7.8 3 3.3 1 International 1.1 1 1.1
1 2.7 1 2.7 1 ------------- ------------- -------------
-------------- Total Sales 96.4 100 82.9 100 237.0 100 237.2 100
Sales of oilfield products to conventional western Canada oil and
gas end use applications were $88.1 million for the second quarter
of 2008, up 15% from the second quarter of 2007. The increase
reflects an increase in industry activity in the later part of the
second quarter and in December 2007, the Company acquired JEN
Supply, an oilfield equipment distributor that operated four
branches in east central Alberta. These locations contributed
approximately $4 million to sales, reducing the impact of the
decline in industry activity for the quarter. Two of these
operations were in existing markets where the Company had
operations and have been combined with the existing branches. Sales
to oilsands end use applications remained consistent with the
second quarter of 2007. The Company continues to position its sales
focus and Edmonton distribution centre to penetrate this emerging
market for capital project related products. The Company's Fort
McMurray branch continues to build on its position to service
oilsands' MRO product requirements. Production service sales were
$3.5 million in the second quarter of 2008, more than double the
sales in the second quarter of 2007. The acquisition of Full Tilt
at the end of the 2nd quarter of 2007, which provides oilfield
engine maintenance and crane equipment services based in
Lloydminster, contributed the majority of the increase in revenues.
The Company expects to expand Full Tilt's service to other Company
branch locations during the year in order to capture more of our
customer's product life cycle expenditures while differentiating
our services from other oilfield equipment distributors. Sales to
international customer projects remained consistent at
$1.1 million in the second quarter of 2008 and are serviced by
our Edmonton distribution centre. Sales activity from the Libyan
oilfield equipment joint venture established in 2007 has been
minimal to date and is anticipated to increase as operations gain
momentum. Q2 2008 Q2 2007 YTD 2008 YTD 2007 --------- ---------
--------- --------- Gross Profit Gross profit (millions) $19.0
$16.8 $46.0 $43.1 Gross profit margin as a % of sales 19.7% 20.3%
19.4% 18.2% Gross profit composition by product sales category:
Tubulars 8% 7% 8% 8% Pipe, flanges and fittings 23% 26% 25% 29%
Valves and accessories 19% 19% 20% 20% Pumps, production equipment
and services 17% 15% 16% 14% General 33% 33% 31% 29% ---------
--------- --------- --------- Total Gross Profit 100% 100% 100%
100% Gross profit reached $19.0 million in the second quarter of
2008, up $2.2 million (13%) from the second quarter of 2007
period due to the increase in sales offset by a reduction in gross
profit margins. Gross profit composition in the second quarter of
2008 remained fairly consistent with the prior year period,
reflecting stable sales margins across product sales categories and
a consistent year over year capital projects/MRO sales mix.
Selling, General and Administrative ("SG&A") Costs Three months
ended June 30 Six months ended June 30 2008 2007 2008 2007
------------- ------------- ------------- ------------- Sales
($millions) $ % $ % $ % $ % People costs 9.1 54 7.6 54 19.4 58 16.5
56 Selling costs 2.1 13 1.9 13 4.3 13 4.0 14 Facility and office
costs 3.5 21 2.5 18 6.1 18 5.0 17 Other 2.0 12 2.1 15 3.8 11 3.8 13
------------- ------------- ------------- ------------- SG&A
Costs 16.7 100 14.1 100 33.6 100 29.3 100 SG&A costs a % of
sales 17% 17% 14% 12% SG&A costs increased 19% ($2.6 million)
in the second quarter of 2008 from the prior year period and
represented 17% of sales consistent with the prior year period. The
increase in people costs of $1.5 million is mainly associated with
the acquisition of JEN Supply and Full Tilt. Selling costs were up
$0.2 million compared to the prior year period due to increased
accounts receivable bad debt allowances. Facility and office costs
have increased in the second quarter of 2008 as the Company moved
into a new, larger distribution centre in Edmonton during the
quarter. The addition of the JEN Supply and Full Tilt facilities
and continued occupancy cost pressure in western Canada contributed
the remaining increase in cost. The Company leases 40 of its 44
branch locations as well as its corporate office in Calgary and
Edmonton distribution centre. The Company mitigates the cyclical
nature of industry activity levels by adjusting its variable and
fixed (primarily salaries and benefits) SG&A costs as activity
levels change. Amortization Expense Amortization expense was $0.6
million in the second quarter of 2008 down slightly from $0.7
million in the second quarter of 2007. Interest Expense Interest
expense was $0.2 million in the second quarter of 2008, down $0.3
million (66%) from the second quarter of 2007 due to lower average
borrowing levels and a decline in average floating interest rates.
Foreign Exchange Loss (Gain) Foreign exchange gains were nominal in
the second quarter of 2008 compared to a $0.5 million loss in the
second quarter of 2007, reflecting increased risk mitigation
efforts undertaken. Income Tax Expense The Company's effective tax
rate for the second quarter of 2008 was 35.2%, compared to 35.9% in
the second quarter of 2007 due principally to a reduction in
statutory tax rates. Substantially all of the Company's tax
provision is currently payable. Summary of Quarterly Financial Data
The selected quarterly financial data presented below is presented
in Canadian dollars and in accordance with Canadian GAAP. This
information is derived from the Company's unaudited quarterly
financial statements. (in millions of Cdn. dollars except per share
data) Unaudited Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2006 2007 2007 2007
2007 2008 2008 ------- ------- ------- ------- ------- -------
------- ------- Sales $131.7 $130.6 $154.3 $ 82.9 $116.8 $112.3
$140.6 $ 96.4 Gross profit 23.7 25.0 26.3 16.8 21.0 20.4 27.1 19.0
Gross profit % 18.0% 19.1% 17.0% 20.3% 18.0% 18.2% 19.3% 19.7%
EBITDA 8.4 9.6 11.0 2.2 7.4 5.1 10.2 2.3 EBITDA as a % of sales
6.4% 7.4% 7.1% 2.7% 6.3% 4.5% 7.2% 2.4% Net income 4.7 5.4 6.4 0.6
4.1 2.4 6.3 1.0 Net income as a % of sales 3.6% 4.1% 4.1% 0.7% 3.5%
2.1% 4.5% 1.0% Net income per share Basic (Cdn. $) $ 0.26 $ 0.30 $
0.35 $ 0.03 $ 0.22 $ 0.13 $ 0.34 $ 0.05 Diluted (Cdn. $) $ 0.25 $
0.29 $ 0.34 $ 0.03 $ 0.22 $ 0.13 $ 0.34 $ 0.05 Net working capital
(1) 130.6 120.2 124.0 127.0 128.7 134.7 117.4 114.9 Bank operating
loan(1) 49.6 34.0 33.6 36.0 35.4 44.3 21.8 18.4 (1) Net working
capital and bank operating loan amounts are as at quarter end. The
Company's sales levels are affected by weather conditions. As warm
weather returns in the spring each year the winter's frost comes
out of the ground rendering many secondary roads incapable of
supporting the weight of heavy equipment until they have dried out.
In addition, many exploration and production areas in northern
Canada are accessible only in the winter months when the ground is
frozen. As a result, the first and fourth quarters typically
represent the busiest time for oil and gas industry activity and
the highest sales activity for the Company. Sales levels 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 Company does not reduce its SG&A expenses during the
second quarter to offset the reduction in sales. Net working
capital (defined as current assets less accounts payable and
accrued liabilities, income taxes payable and other current
liabilities) and bank operating loan borrowing levels follow
similar seasonal patterns as sales. Liquidity and Capital Resources
The Company's primary internal source of liquidity is cash flow
from operating activities before net changes in non-cash working
capital balances. Cash flow from operating activities and the
Company's 364-day bank operating facility are used to finance the
Company's net working capital, capital expenditures required to
maintain its operations and growth capital expenditures. As at June
30, 2008, borrowings under the Company's bank operating loan were
$18.4 million, a decrease of $25.9 million from December 31, 2007.
Borrowing levels have decreased due to the Company generating $9.1
million in cash flow from operating activities, before net change
in non-cash working capital balances and a $19.9 million reduction
in net working capital. This was offset by $1.7 million in capital
and other expenditures, $0.7 million in repayments of long term
debt and capital lease obligations and $0.7 million for the
purchase of shares to resource stock compensation obligations. As
at June 30, 2007, borrowings under the Company's bank operating
loan were $36.0 million, an increase of $2.0 million from December
31, 2006. Borrowing levels increased due to the Company generating
$9.3 million in cash from cash flow from operating activities,
before net change in non-cash working capital balances and $0.6
million in the issuance of capital stock from the exercise of
employee stock options. This was offset by a $7.7 million increase
in net working capital, $2.4 million related to the acquisition of
two agent operated branches, $0.4 million in repayment of long term
debt and capital leases, $0.2 million for the purchase of shares to
resource stock compensation obligations, and $1.2 million in
capital and other expenditures. Net working capital was $114.9
million at June 30, 2008, a decrease of $19.8 million from December
31, 2007. Accounts receivable decreased by $5.2 million (6%)
to $84.1 million at June 30, 2008 from December 31, 2007, due to
the seasonal decrease in sales in the second quarter offset by an
18% increase in days sales outstanding in accounts receivable
("DSO") in the second quarter of 2008 compared to the fourth
quarter of 2007. DSO was 73 days for the second quarter of 2008
compared to 62 days in the fourth quarter 2007 and 63 days in the
second quarter 2007. The deterioration in DSO performance during
the second quarter was due in part to temporary issues associated
with the implementation of a new invoicing system that have now
been rectified. DSO is calculated using annualized sales for the
quarter compared to the period end accounts receivable balance.
Inventory decreased by $3.5 million (4%) at June 30, 2008 from
December 31, 2007. Inventory turns for the second quarter of 2008
improved to 3.7 times compared to 2.8 times in the second quarter
of 2007 and 4.3 times in the fourth quarter of 2007. 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 will continue to adjust its investment in inventory in
order to align with anticipated activity levels in order to improve
inventory turnover efficiency. Accounts payable and accrued
liabilities increased by $12.6 million (28%) in the second quarter
of 2008 from December 31, 2007 due to a seasonal increase in
purchasing combined with slower payment to suppliers. The Company
has a 364 day bank operating loan facility in the amount of $60.0
million arranged with a syndicate of three banks that matures in
July 2009. The loan facility bears interest based on the
floating interest rates and is secured by a general security
agreement covering all assets of the Company. The maximum amount
available under the facility is subject to a borrowing base formula
applied to accounts receivable and inventories, and a covenant
restricting the Company's average debt to 2.25 times trailing
twelve month EBITDA. As at June 30, 2008, the Company's average
debt to EBITDA ratio was 1.2 times (June 30, 2007 - 1.3 times)
which provides a maximum borrowing ability of approximately $60
million under the facility. As at June 30, 2008, the ratio of the
Company's debt to total capitalization (debt plus equity) was 13%
(June 30, 2007 - 25%). CAPITAL STOCK The weighted average number of
shares outstanding during the second quarter 2008 was 18.3 million,
a decrease of 0.1 million shares over the prior year's second
quarter due principally to the purchase of common shares to
resource restricted share unit obligations, offset by the exercise
of stock options and restricted share units. The diluted weighted
average number of shares outstanding at June 30, 2008 was 18.6
million, consistent with the second quarter of 2007. As at June 30,
2008 and 2007, the following shares and securities convertible into
shares, were outstanding: June 30, June 30, 2008 2007 (millions)
Shares Shares ----------- ----------- Shares outstanding 18.3 18.4
Stock Options 1.3 0.7 Restricted Share units 0.2 0.2 -----------
----------- Shares outstanding and issuable 19.8 19.3 The Company
has established an independent trust to purchase common shares of
the Company on the open market to resource restricted share unit
obligations. During the three and six month periods ended June 30,
2008, 25,000 and 100,000 common shares were acquired by the trust
at an average cost per share of $9.06 and $7.23 respectively (2007
- 15,200 common shares at an average cost per share of $11.38).
Contractual Obligations There have been no material changes in
off-balance sheet contractual commitments since December 31, 2007.
Capital expenditures in 2008 are anticipated to be in the $3
million to $5 million range and will be directed towards the
Company's new Edmonton distribution center, computer systems
enhancements and expanding its production service capability.
Critical Accounting Estimates There have been no material changes
to critical accounting estimates since December 31, 2007. 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 Effective January 1, 2008, the
Company adopted the Canadian Institute of Chartered Accountant's
Handbook Section 1535 - Capital Disclosures, Section 3862 -
Financial Instruments - Disclosures and Section 3863 - Financial
Instruments - Presentation. The standards establish presentation
guidelines for financial instruments and deal with their
classification, as well as providing readers of the financial
statements with information pertinent to the Company's objectives,
policies and processes for managing capital. Effective January 1,
2008, the Company adopted Section 3031 - Inventories. The standard
sets out to prescribe the accounting treatment for inventories and
provide guidance on the determination of cost and subsequent
recognition of expenses. The adoption of Section 3031 did not
impact the determination of inventory cost and expenses recorded by
the Company. Inventory obsolescence expense of $326,000 was
recognized in the six month period ending June 30, 2008 (2007-
$255,000). As at June 30, 2008 and December 31, 2007 the
Company had recorded reserves for inventory obsolescence of $2.1
million and $1.8 million, respectively. New Accounting
Pronouncements During the second quarter of 2008, the CICA
published CICA 3064 - Goodwill and Intangible Assets, with an
effective date of January 1, 2009. This standard addresses the
accounting treatment of internally developed intangibles and the
recognition of such assets. The Company believes that the adoption
of this standard will not have a material impact on its financial
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 Canadian GAAP in its financial statements. The
President and Chief Executive Officer and the Vice President and
Chief Financial Officer of the Company have evaluated whether there
were changes to its ICFR during the six months ended June 30, 2008
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 arising from transactions that are
entered into in the normal course of business, which are primarily
related to interest rate changes and fluctuations in foreign
exchange rates. During the reporting period, no events or
transactions have occurred that would materially change the
information disclosed in the Company's 2007 Form 20-F. Forward
Looking Statements The information in this MD&A may contain
"forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of
historical facts, that address activities, events, outcomes and
other matters that CE Franklin plans, expects, intends, assumes,
believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may
occur in the future are forward-looking statements. These
forward-looking statements are based on management's current
belief, based on currently available information, as to the outcome
and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other
cautionary statements in this MD&A, including those in under
the caption "Risk factors". Forward-looking statements appear in a
number of places and include statements with respect to, among
other things: - forecasted oil and gas industry activity levels in
2008 and 2009; - planned capital expenditures and working capital
and availability of capital resources to fund capital expenditures
and working capital; - the Company's future financial condition or
results of operations and future revenues and expenses; - the
Company's business strategy and other plans and objectives for
future operations; - fluctuations in worldwide prices and demand
for oil and gas; - fluctuations in the demand for the Company's
products and services. Should one or more of the risks or
uncertainties described above or elsewhere in this MD&A occur,
or should underlying assumptions prove incorrect, the Company's
actual results and plans could differ materially from those
expressed in any forward-looking statements. All forward-looking
statements expressed or implied, included in this MD&A and
attributable to CE Franklin are qualified in their entirety by this
cautionary statement. This cautionary statement should also be
considered in connection with any subsequent written or oral
forward-looking statements that CE Franklin or persons acting on
its behalf might issue. CE Franklin does not undertake any
obligation to update any forward-looking statements to reflect
events or circumstances after the date of filing this MD&A,
except as required by law. Other Items Additional information
relating to CE Franklin, including its Form 20-F/Annual Information
Form, is available under the Company's profile on SEDAR at
http://www.sedar.com/ and at http://www.cefranklin.com/. CE
Franklin Ltd. Interim Consolidated Balance Sheets - Unaudited
-------------------------------------------------------------------------
(in thousands of Canadian dollars) June 30 December 31 2008 2007
-------------------------------------------------------------------------
Assets Current assets Accounts receivable 84,120 89,305 Inventories
82,906 86,414 Other 5,542 3,781
-------------------------------------------------------------------------
172,568 179,500 Property and equipment 6,762 6,398 Goodwill 20,570
20,523 Future income taxes (note 3) 1,619 1,403 Other 857 891
-------------------------------------------------------------------------
202,376 208,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities Current liabilities Bank operating loan 18,396 44,301
Accounts payable and accrued liabilities 57,428 44,807 Income taxes
payable (note 3) 243 - Current portion of long term debt and
capital lease obligations 183 805
-------------------------------------------------------------------------
76,250 89,913 Long term debt and capital lease obligations 500 582
-------------------------------------------------------------------------
76,750 90,495
-------------------------------------------------------------------------
Shareholders' Equity Capital stock 23,715 24,306 Contributed
surplus 18,434 17,671 Retained earnings 83,477 76,243
-------------------------------------------------------------------------
125,626 118,220
-------------------------------------------------------------------------
202,376 208,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Operations - Unaudited Three months ended Six months Ended (in
thousands of Canadian ------------------- -------------------
dollars except shares and June 30 June 30 June 30 June 30 per share
amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales 96,395 82,938 236,977 237,193 Cost of sales 77,442 66,107
190,963 194,051
-------------------------------------------------------------------------
Gross profit 18,953 16,831 46,014 43,142
-------------------------------------------------------------------------
Other expenses (income) Selling, general and administrative
expenses 16,735 14,086 33,608 29,352 Amortization 594 727 1,211
1,486 Interest expense 163 479 601 1,062 Foreign exchange
(gain)/loss (8) 535 (10) 589
-------------------------------------------------------------------------
17,484 15,827 35,410 32,489
-------------------------------------------------------------------------
Income before income taxes 1,469 1,004 10,604 10,653 Income tax
expense (recovery) (note 3) Current 651 654 3,583 3,881 Future
(134) (294) (213) (245)
-------------------------------------------------------------------------
517 360 3,370 3,636
-------------------------------------------------------------------------
Net income and comprehensive income 952 644 7,234 7,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per share (note 2) Basic 0.05 0.03 0.39 0.38 Diluted
0.05 0.03 0.39 0.37
-------------------------------------------------------------------------
Weighted average number of shares outstanding (000's) Basic 18,278
18,329 18,305 18,282 Diluted 18,574 18,768 18,601 18,721
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Cash Flow - Unaudited Three months ended Six months Ended
------------------- ------------------- (in thousands of Canadian
June 30 June 30 June 30 June 30 dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from operating activities Net income for the period 952
644 7,234 7,017 Items not affecting cash - Amortization 594 727
1,211 1,486 Future income tax recovery (134) (294) (213) (245)
Stock based compensation expense 552 676 846 1,062
-------------------------------------------------------------------------
1,964 1,753 9,078 9,320 Net change in non-cash working capital
balances related to operations - Accounts receivable 28,027 39,443
4,988 21,166 Inventories (5,050) (4,783) 3,465 1,495 Other current
assets (3,375) (1,859) (1,755) (2,645) Accounts payable and accured
liabilities (14,698) (33,808) 13,068 (24,431) Income taxes payable
(2,514) (2,585) 132 (3,299)
-------------------------------------------------------------------------
4,354 (1,839) 28,976 1,606
-------------------------------------------------------------------------
Cash flows (used in)/from financing activities (Decrease)/Increase
in bank operating loan (3,366) (1,233) (25,905) 1,975 Decrease in
long term debt and capital lease obligations (54) (51) (705) (391)
Issuance of capital stock 48 354 49 568 Purchase of capital stock
in trust for RSU Plans (227) - (723) (173)
-------------------------------------------------------------------------
(3,599) (930) (27,284) 1,979
-------------------------------------------------------------------------
Cash flows (used in)/from investing activities Purchase of property
and equipment (1,196) (802) (2,133) (1,208) Business acquisitions
441 - 441 (2,377)
-------------------------------------------------------------------------
(755) (802) (1,692) (3,585)
-------------------------------------------------------------------------
Change in cash and cash equivalents during the period - (3,571) - -
Cash and cash equivalents - Beginning of period - 3,571 - - Cash
and cash equivalents - End of period - - - -
-------------------------------------------------------------------------
Cash paid during the period for: Interest on bank operating loan
153 472 583 1,047 Interest on capital lease obligations and long
term debt 10 7 18 15 Income taxes 2,407 3,244 2,570 7,185
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Changes in Shareholders' Equity - Unaudited
-------------------------------------------------------------------------
Capital Stock ------------------ (in thousands of Number Share-
Canadian dollars and of Contributed Retained holders' number of
shares) Shares $ Surplus Earnings Equity
-------------------------------------------------------------------------
Balance - December 31, 2006 18,223 23,586 16,213 62,676 102,475
Stock option compensation expense - - 1,062 - 1,062 Stock options
excercised 174 824 (256) - 568 Restricted share units (RSU's)
exercised 10 204 (204) - - Purchase of shares in trust for RSU
plans (15) (173) - - (173) Net income - - - 7,017 7,017
-------------------------------------------------------------------------
Balance - June 30, 2007 18,392 24,441 16,815 69,693 110,949
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance - December 31, 2007 18,370 24,306 17,671 76,243 118,220
Stock option compensation expense - - 605 - 605 Stock options
exercised 10 70 (20) - 50 RSU's exercised 3 62 (62) - - DSU grant -
- 240 - 240 Purchase of shares in trust for RSU Plans (100) (723) -
- (723) Net income - - - 7,234 7,234
-------------------------------------------------------------------------
Balance - June 30, 2008 18,283 23,715 18,434 83,477 125,626
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Notes to Interim Consolidated
Financial Statements - Unaudited
-------------------------------------------------------------------------
(tabular amounts in thousands of Canadian dollars except share and
per share amounts) Note 1 - Accounting Policies These interim
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada applied on
a consistent basis with CE Franklin Ltd.'s (the "Company") annual
consolidated financial statements for the year ended December 31,
2007, with the exception of policies relating to financial
instruments, capital disclosures and inventories as noted below.
The disclosures provided below are incremental to those included in
the annual consolidated financial statements. These interim
consolidated financial statements should be read in conjunction
with the annual consolidated financial statements and the notes
thereto for the year ended December 31, 2007. Effective January 1,
2008, the Company adopted Section 1535 - Capital Disclosures,
Section 3862 - Financial Instruments - Disclosures and Section 3863
- Financial Instruments - Presentation. The standards establish
presentation guidelines for financial instruments and deal with
their classification, as well as providing readers of the financial
statements with information pertinent to the Company's objectives,
policies and processes for managing capital. Effective January 1,
2008, the Company adopted Section 3031 - Inventories. The standard
establishes the accounting treatment for inventories and provides
guidance on the determination of cost and subsequent recognition of
expenses. The adoption of Section 3031 did not impact the
determination of inventory costs and expense recorded by the
Company. Inventories consisting primarily of goods purchased for
resale are valued at the lower of average cost or net realizable
value. Inventory obsolescence expense was recognized in the three
and six month periods ending June 30, 2008 of $90,000 and $326,000
respectively (2007 - -$25,000 and $255,000). As at June 30, 2008
and December 31, 2007 the Company had recorded reserves for
inventory obsolescence of $2.1 million and $1.8 million
respectively. These unaudited interim consolidated financial
statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for
the interim periods presented; all such adjustments are of a normal
recurring nature. The Company's sales typically peak in the first
quarter when drilling activity is at its highest levels. They then
decline through the second and third quarters, rising again in the
fourth quarter when preparation for the new drilling season
commences. Similarly, net working capital levels are typically at
seasonally high levels at the end of the first quarter, declining
in the second and third quarters, and then rising again in the
fourth quarter. Note 2 - Share Data At June 30, 2008, the Company
had 18,283,238 common shares and 1,325,638 options outstanding to
acquire common shares at a weighted average exercise price of $5.83
per common share, of which 606,815 options were vested and
exercisable at a weighted average exercise price of $3.80 per
common share. a) Stock options Option activity for each of the six
month periods ended June 30 was as follows: 000's 2008 2007
-------------------------------------------------------------------------
Outstanding at January(1) 1,262 804 Granted 75 109 Exercised (10)
(174) Forfeited (1) (1)
-------------------------------------------------------------------------
Outstanding at June 30 1,326 738
-------------------------------------------------------------------------
There were no options granted during the three month periods ended
June 30, 2008 and June 30, 2007. The fair value of the options
granted during the six month period ended June 30, 2008 was
$274,000 (June 30, 2007 - $521,000) and were estimated as at the
grant date using the Black- Scholes option pricing model, using the
following assumptions: 2008 ----- Dividend yield Nil Risk-free
interest rate 3.88% Expected life 5 years Expected volatility 50%
Stock option compensation expense recorded in the three and six
month periods ended June 30, 2008 was $180,000 (2007 - $117,000)
and $350,000 (2007- $235,000), respectively. b) Restricted share
units The Company has Restricted Share unit ("RSU") and Deferred
Share Unit ("DSU") plans (collectively the "RSU Plans"), where by
RSU's and DSU's are granted which entitle the participant, at the
Company's option, to receive either a common share or cash
equivalent value in exchange for a vested unit. The vesting period
for RSU's is three years from the grant date. DSU's vest on the
date of grant. Compensation expense related to the units granted is
recognized over the vesting period based on the fair value of the
units at the date of the grant and is recorded to compensation
expense and contributed surplus. The contributed surplus balance is
reduced as the vested units are exchanged for either common shares
or cash. 000's 2008 2007
-------------------------------------------------------------------------
RSU DSU RSU DSU Outstanding at January 1 178 37 120 12 Granted 1 30
67 25 Exercised (3) - (10) - Forfeited - - - -
-------------------------------------------------------------------------
Outstanding at June 30 176 67 177 37
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RSU compensation expense recorded in the three and six month
periods ended June 30, 2008 were $373,000 (2007- $559,000) and
$495,000 (2007 - $827,000) respectively. The Company purchases its
common shares on the open market to satisfy restricted share unit
obligations through an independent trust. The trust is considered
to be a variable interest entity and is consolidated in the
Company's financial statements with the number and cost of shares
held in trust, reported as a reduction of capital stock. During the
three and six month periods ended June 30, 2008, 25,000 and 100,000
common shares were acquired, respectively, by the trust (2007 -
15,200 common shares for both the three and six month periods) at a
cost of $227,000 for the three month period and $723,000 for the
six month period (2007 - $173,000). c) Reconciliation of weighted
average number of diluted common shares outstanding (in 000's) The
following table summarizes the common shares in calculating net
earnings per share. Three Months Ended Six Months Ended
------------------- ------------------- June 30 June 30 June 30
June 30 2008 2007 2008 2007
-------------------------------------------------------------------------
Weighted average common shares outstanding - basic 18,278 18,329
18,305 18,282 Effect of Stock options and RSU Plans 296 439 296 439
-------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 18,574 18,768
18,601 18,721
-------------------------------------------------------------------------
Note 3 - Income taxes a) The difference between the income tax
provision recorded and the provision obtained by applying the
combined federal and provincial statutory rates is as follows:
Three Months Ended Six Months Ended June 30 June 30 June 30 June 30
2008 % 2007 % 2008 % 2007 %
-------------------------------------------------------------------------
Income before income taxes 1,469 1,004 10,604 10,653
-------------------------------------------------------------------------
Income taxes calculated at expected rates 437 29.7 332 33.1 3,173
29.9 3,479 32.7 Non-deductible items 116 7.9 112 11.2 199 1.9 247
2.3 Capital and large corporations taxes 15 1.0 11 1.1 23 0.2 22
0.2 Adjustments on filing returns & other (51) (3.4) (95) (9.5)
(25) (0.2) (112) (1.1)
-------------------------------------------------------------------------
517 35.2 360 35.9 3,370 31.8 3,636 34.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at June 30, 2008, income taxes payable are $243,000 (December 31
2007 - Income taxes receivable included in other current assets
were $848,000). b) Future income taxes reflect the net effects of
temporary difference between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purpose. Significant components of future income tax
assets and liabilities are as follows: June 30 December 31 2008
2007
-------------------------------------------------------------------------
Assets Financing charges 80 103 Property and equipment 963 874
Stock compensation expense & Other 922 786
-------------------------------------------------------------------------
1,965 1,763 Liabilities Goodwill 346 360
-------------------------------------------------------------------------
Net future income tax asset 1,619 1,403
-------------------------------------------------------------------------
The Company believes it is more likely than not that all future
income tax assets will be realized. Note 4 - Capital Management The
Company's primary source of capital is its shareholders equity and
cash flow from operating activities before net changes in non-cash
working capital balances. The Company augments these capital
sources with a $60 million, 364 day secured bank operating facility
which is used to finance its net working capital and general
corporate requirements. The bank operating facility is arranged
through a syndicate of three banks and matures in July 2009. The
Company's bank operating facility limits its annual average debt to
EBITDA ratio to 2.25 times. As at June 30, 2008 this ratio was 1.2
times (December 31, 2007 - 1.4 times). The maximum amount available
to borrow under this facility is subject to a borrowing base
formula applied to accounts receivable and inventories, and a
covenant restricting the Company's debt to 2.25 times trailing 12
month earnings before interest, amortization and taxes. As at June
30, 2008, the maximum amount available to be borrowed under this
facility was $60 million. In management's opinion, the Company's
available borrowing capacity under its bank operating facility and
ongoing cash flow from operations, are sufficient to resource its
anticipated contractual commitments. The facility contains certain
other restrictive covenants, which the Company was in compliance
with as at June 30, 2008. Note 5 - Financial Instruments and Risk
Management a) Fair Values The Company's financial instruments
recognized on the consolidated balance sheet consist of accounts
receivable, accounts payable and accrued liabilities, bank
operating loan, long term debt and obligations under capital
leases. The fair values of these financial instruments, excluding
the bank operating loan, long term debt and obligations under
capital leases, approximate their carrying amounts due to their
short- term maturity. At June 30, 2008, the fair value of the bank
operating loan, long term debt and obligations under capital leases
approximated their carrying values due to their floating interest
rate nature and short term maturity. b) Credit Risk A substantial
portion of the Company's accounts receivable balance is with
customers in the oil and gas industry and is subject to normal
industry credit risks. c) Market Risk The Company is exposed to
market risk from changes in the Canadian prime interest rate which
can impact its borrowing costs. The Company purchases certain
products in US dollars and sells such products to its customer
typically priced in Canadian dollars. As a result, fluctuations in
the value of the Canadian dollar relative to the US dollar can
result in foreign exchange gains and losses. d) Risk Management
From time to time the Company enters into foreign exchange forward
contracts to manage its foreign exchange market risk by fixing the
value of its liabilities and future commitments. As at June 30,
2008, the Company had contracted to purchase US $6.0 million at
fixed exchange rates maturing in 2008. The fair market value of the
contracts are nominal. Note 6 - Related Party Transactions Smith
International Inc. ("Smith") owns approximately 53% of the
Company's outstanding shares. The Company is the exclusive
distributor in Canada of down hole pump production equipment
manufactured by Wilson Supply, a division of Smith. Purchase of
such equipment conducted in the normal course on commercial terms
were as follows: June 30 June 30 2008 2007
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Cost of sales for the three months ended 2,311 2,083 Cost of sales
for the six months ended 5,368 4,385 Inventory 4,578 3,911 Accounts
payable and accrued liabilities 22 953 Note 7 - Segmented reporting
The Company distributes oilfield products principally through its
networks of 44 branches located in western Canada to oil and gas
industry customers. Accordingly, the Company has determined that it
operated through a single operating segment and geographic
jurisdiction DATASOURCE: CE Franklin Ltd. CONTACT: Investor
Relations, 1-800-345-2858, (403) 531-5604,
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