CALGARY, Oct. 27 /PRNewswire-FirstCall/ -- CE FRANKLIN LTD.
(TSX.CFT, AMEX.CFK) announced its results for the third quarter of
2008. CE Franklin reported record third quarter net income of $5.7
million or $0.31 per share (basic) for the quarter ended September
30, 2008, a 39% increase compared to net income of $4.1 million or
$0.22 per share earned in the third quarter ended September 30,
2007. Financial Highlights -------------------- (millions of Cdn.$
except Three Months Ended Nine Months Ended per share data)
September 30 September 30 ------------------- -------------------
2008 2007 2008 2007 --------- -------- --------- --------
(unaudited) (unaudited) Sales $ 149.3 $ 116.8 $ 386.2 $ 354.0 Gross
Profit 27.8 21.0 73.8 64.2 Gross Profit - % of sales 18.6% 18.0%
19.1% 18.1% EBITDA(1) 9.1 7.4 21.6 20.6 EBITDA(1) as a % of sales
6.1% 6.4% 5.6% 5.8% Net Income $ 5.7 $ 4.1 $ 13.0 $ 11.1 Per Share
Basic $ 0.31 $ 0.22 $ 0.71 $ 0.61 Diluted $ 0.31 $ 0.22 $ 0.70 $
0.59 Net Working Capital(2) $ 123.1 $ 134.7 Bank Operating Loan(2)
$ 20.9 $ 44.3 "Net income improved in the third quarter compared to
the prior year period by 39% to a record $0.31 per share, outpacing
the 13% increase in industry well completions for the same period.
This is a solid result and CE Franklin is well positioned to remain
profitable in this volatile market," said Michael West, President
and Chief Executive Officer. Net income for the third quarter of
2008 was $5.7 million, up $1.6 million (39%) from the third
quarter of 2007. Sales reached $149.3 million, an increase of $32.5
million (28%) from the third quarter of 2007. Capital project
business comprised 58% of sales, and increased $22.2 million (34%)
over the prior year period. Continued growth of oilsands revenues
and increased tubular steel sales contributed the majority of the
increase in capital project sales. Extremely tight tubular steel
supply conditions have resulted in product cost increases in excess
of 50% during 2008, and contributed to the increase in sales.
Industry well completions increased by 13% over the prior year
period, resulting in increased demand for products used in capital
projects, and contributed to the remaining increase in capital
project sales. The acquisition of JEN Supply in the fourth quarter
of 2007 contributed to the increase in Maintenance, Repair and
Operating Supply sales ("MRO"). Gross profit increased by $6.8
million (32%) over the prior year period due to the increase in
sales and gross profit margins. Gross profit margins for the
quarter were 18.6% up from the prior year period at 18.0%. Selling,
general and administrative expenses increased by $5.2 million to
$18.5 million for the quarter due to increased variable
compensation driven by the increase in earnings, increased facility
costs with the opening of the new Edmonton distribution centre
during the second quarter, and the addition of the JEN Supply
operating costs. Lower interest expense was associated with reduced
average debt levels and floating interest rates in the third
quarter of 2008. Income taxes increased by $0.5 million in the
third 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
third quarter was down slightly from the prior year period. Net
income per share (basic) was $0.31 in the third quarter of 2008, an
increase of 41% compared to $0.22 in the third quarter of 2007. Net
income for the nine months ended September 30, 2008 was
$13.0 million, up $1.9 million (17%) from the nine months
ended September 30, 2007. Sales reached $386.2 million, up $32.2
million (9%) compared to the prior year period due to increased
revenues in the 3rd quarter of 2008. Increased oilsands and tubular
steel revenues, and additional sales from the acquisitions of JEN
Supply, and Full Tilt Field Services Limited ("Full Tilt") at the
end of the 2nd quarter of 2007, more than offset the impact of
lower year to date industry activity in 2008 compared to 2007 as
reflected in the decline in well completions by 12%. Gross profit
increased by $9.6 million over the prior year period as gross
profit margins increased from 18.1% in the nine months ended
September 30, 2007 to 19.1% in the nine months ended September 30,
2008. Selling, general and administrative expenses increased by
$9.4 million to $52.1 million due to the addition of operating
expenses associated with the JEN Supply and Full Tilt acquisitions,
increased variable compensation from the increase in earnings, and
increased facility costs associated with the opening of the new
distribution centre in Q2 of 2008. Interest expense declined due to
reduced average debt levels and floating interest rates in the
first nine months of 2008. Income taxes increased by $0.2 million
in the first nine months of the year 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 first nine months was comparable to
the prior year period. Net income per share (basic) was $0.71 in
the first nine months of 2008 compared to $0.61 in the first nine
months of 2007. Business Outlook The Company's business is
dependent on the level of conventional oil and gas capital
expenditures and production activity in western Canada. Increasing
oil and gas industry activity experienced in the 3rd quarter is
anticipated to continue over the remainder of 2008, as capital
projects initiated earlier in the year when oil and gas prices were
strong, are completed. Recent global capital market volatility
coupled with the decline in oil and gas commodity prices in the 3rd
quarter and rising costs, suggest flat to declining industry
activity in 2009 compared to 2008. Over the 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 third 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 third quarter results, which is open to the public, will
be held on Tuesday, October 28, 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 1-800-732-6179 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 21284854 followed by the pound sign and may be
accessed until midnight Sunday, November 9, 2008. The call will
also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2427700 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 October 27, 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 MD&A and consolidated
financial statements for the year ended December 31, 2007 and the
Company's MD&A and interim consolidated financial statements
for the periods ended March 31, 2008 and June 30, 2008,
respectively. 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 the following 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 and by expanding our branch network. In
October 2008, we have opened our 45th branch in Red Earth, Alberta.
- 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. Business Outlook The Company's
business is dependent on the level of conventional oil and gas
capital expenditures and production activity in western Canada.
Increasing oil and gas industry activity experienced in the 3rd
quarter is anticipated to continue over the remainder of 2008, as
capital projects initiated earlier in the year when oil and gas
prices were strong, are completed. Recent global capital market
volatility coupled with the decline in oil and gas commodity prices
in the 3rd quarter and rising costs, suggest flat to declining
industry activity in 2009 compared to 2008. Over the 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. Operating Results The following table summarizes CE
Franklin's results of operations: (in millions of Cdn. dollars
except per share data) Three Months Ended September 30
--------------------------------------- 2008 2007
------------------- ------------------- Sales $ 149.3 100.0% $
116.8 100.0% Cost of sales (121.5) (81.4)% (95.8) (82.0)% ---------
--------- --------- --------- Gross profit 27.8 18.6% 21.0 18.0%
Selling, general and administrative expenses (18.5) (12.4)% (13.3)
(11.3)% Foreign exchange loss (0.1) (0.1)% (0.3) (0.3)% ---------
--------- --------- --------- EBITDA(1) 9.1 6.1% 7.4 6.4%
Amortization (0.6) (0.4)% (0.6) (0.5)% Interest (0.2) (0.1)% (0.5)
(0.4)% --------- --------- --------- --------- Income before taxes
8.3 5.6% 6.3 5.5% Income tax expense (2.6) (1.7)% (2.2) (1.9)%
--------- --------- --------- --------- Net income 5.7 3.8% 4.1
3.6% --------- --------- --------- --------- --------- ---------
--------- --------- Net income per share Basic (Cdn. $) $ 0.31 $
0.22 Diluted (Cdn. $) $ 0.31 $ 0.22 Weighted average number of
shares outstanding (000's) Basic 18,254 18,392 Diluted 18,495
18,901 (in millions of Cdn. dollars except per share data) Nine
Months Ended September 30 ---------------------------------------
2008 2007 ------------------- ------------------- Sales $ 386.2
100.0% $354.0 100.0% Cost of sales (312.4) (80.9)% (289.8) (81.9)%
--------- --------- --------- --------- Gross profit 73.8 19.1%
64.2 18.1% Selling, general and administrative expenses (52.1)
(13.5)% (42.7) (12.0)% Foreign exchange loss (0.1) (0.0)% (0.9)
(0.3)% --------- --------- --------- --------- EBITDA(1) 21.6 5.6%
20.6 5.8% Amortization (1.8) (0.5)% (2.1) (0.6)% Interest (0.8)
(0.2)% (1.6) (0.5)% --------- --------- --------- --------- Income
before taxes 19.0 4.9% 16.9 4.7% Income tax expense (6.0) (1.6)%
(5.8) (1.6)% --------- --------- --------- --------- Net income
13.0 3.3% 11.1 3.1% --------- --------- --------- ---------
--------- --------- --------- --------- Net income per share Basic
(Cdn. $) $ 0.71 $ 0.61 Diluted (Cdn. $) $ 0.70 $ 0.59 Weighted
average number of shares outstanding (000's) Basic 18,290 18,283
Diluted 18,674 18,792 (1) EBITDA represents net income before
interest, taxes, depreciation and amortization. EBITDA is a
supplemental non-GAAP financial measure used by management, as well
as industry analysts, to evaluate operations. Management believes
that EBITDA, as presented, represents a useful means of assessing
the performance of the Company's ongoing operating activities, as
it reflects the Company's earnings trends without showing the
impact of certain charges. The Company is also presenting EBITDA
and EBITDA as a percentage of sales because it is used by
management as supplemental measures of profitability. The use of
EBITDA by the Company has certain material limitations because it
excludes the recurring expenditures of interest, income tax, and
amortization expenses. Interest expense is a necessary component of
the Company's expenses because the Company borrows money to finance
its working capital and capital expenditures. Income tax expense is
a necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Amortization expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net income, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net Income is provided within the table
above. Not all companies calculate EBITDA in the same manner and
EBITDA does not have a standardized meaning prescribed by GAAP.
Accordingly, EBITDA, as the term is used herein, is unlikely to be
comparable to EBITDA as reported by other entities. Third Quarter
Results Net income for the third quarter of 2008 was $5.7 million,
up $1.6 million (39%) from the third quarter of 2007. Sales
reached $149.3 million, an increase of $32.5 million (28%) from the
third quarter of 2007. Capital project business comprised 58% of
sales, and increased $22.2 million (34%) over the prior year
period. Continued growth of oilsands revenues and increased tubular
steel sales contributed the majority of the increase in capital
project sales. Extremely tight tubular steel supply conditions have
resulted in product cost increases in excess of 50% during 2008,
and contributed to the increase in sales. Industry well completions
increased by 13% over the prior year period, resulting in increased
demand for products used in capital projects, and contributed to
the remaining increase in capital project sales. The acquisition of
JEN Supply in the fourth quarter of 2007 contributed to the
increase in Maintenance, Repair and Operating Supply sales ("MRO").
Gross profit increased by $6.8 million (32%) over the prior year
period due to the increase in sales and gross profit margins. Gross
profit margins for the quarter were 18.6% up from the prior year
period at 18.0%. Selling, general and administrative expenses
increased by $5.2 million to $18.5 million for the quarter due to
increased variable compensation driven by the increase in earnings,
increased facility costs with the opening of the new Edmonton
distribution centre during the second quarter, and the addition of
the JEN Supply operating costs. Lower interest expense was
associated with reduced average debt levels and floating interest
rates in the third quarter of 2008. Income taxes increased by $0.5
million in the third 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 third quarter was down slightly from the prior year period. Net
income per share (basic) was $0.31 in the third quarter of 2008, an
increase of 41% compared to $0.22 in the third quarter of 2007.
Year to Date Results Net income for the nine months ended September
30, 2008 was $13.0 million, up $1.9 million (17%) from the
nine months ended September 30, 2007. Sales reached $386.2 million,
up $32.2 million (9%) compared to the prior year period due to
increased revenues in the 3rd quarter of 2008. Increased oilsands
and tubular steel revenues, and additional sales from the
acquisitions of JEN Supply, and Full Tilt Field Services Limited
("Full Tilt") at the end of the 2nd quarter of 2007, more than
offset the impact of lower year to date industry activity in 2008
compared to 2007 as reflected in the decline in well completions by
12%. Gross profit increased by $9.6 million over the prior year
period as gross profit margins increased from 18.1% in the nine
months ended September 30, 2007 to 19.1% in the nine months ended
September 30, 2008. Selling, general and administrative expenses
increased by $9.4 million to $52.1 million due to the addition of
operating expenses associated with the JEN Supply and Full Tilt
acquisitions, increased variable compensation from the increase in
earnings, and increased facility costs associated with the opening
of the new distribution centre in Q2 of 2008. Interest expense
declined due to reduced average debt levels and floating interest
rates in the first nine months of 2008. Income taxes increased by
$0.2 million in the first nine months of the year 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 first nine months was comparable to
the prior year period. Net income per share (basic) was $0.71 in
the first nine months of 2008 compared to $0.61 in the first nine
months of 2007. A more detailed discussion of the Company's third
quarter results from operations is provided below: Sales Sales for
the quarter ended September 30, 2008 were $149.3 million, up 28%
from the quarter ended September 30, 2007, as detailed above in the
"Third Quarter Results" discussion. (in millions of Cdn. $) Three
months ended Sept 30 Nine months ended Sept 30
---------------------------- --------------------------- 2008 2007
2008 2007 -------------- ------------- ------------- -------------
End use sales demand $ % $ % $ % $ % Capital projects 86.6 58 64.4
55 216.8 56 203.7 58 Maintenance, repair and operating supplies
(MRO) 62.7 42 52.4 45 169.4 44 150.3 42 --------------
------------- ------------- ------------- Total sales 149.3 100
116.8 100 386.2 100 354.0 100 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 third quarter and YTD 2008 and
2007 are provided in the table below. Q3 Average YTD Average
------------------ % ------------------ % 2008 2007 change 2008
2007 change --------- -------- ----------------- -------- --------
Gas - Cdn. $/gj (AECO spot) $7.78 $5.22 49% $8.65 $6.58 31% Oil -
Cdn. $/bbl (Edmonton Light) $122.84 $80.52 53% $115.65 $73.41 58%
Average rig count 454 352 29% 401 368 9% Well completions: Oil
1,821 1,397 30% 4,063 3,963 3% Gas 2,571 2,480 4% 7,531 9,171 (18%)
--------- -------- ----------------- -------- -------- Total well
completions 4,392 3,877 13% 11,594 13,134 (12%) 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 $86.6 million in the third quarter of 2008,
up 34% ($22.2 million) from the third quarter of 2007. Total well
completions increased by 13% to 4,392 in the third quarter of 2008
while the average working rig count increased to 454 (29%) compared
to the third quarter of 2007. Gas wells comprised 59% of the total
wells completed in western Canada in the third quarter of 2008
compared to 64% in the third quarter of 2007. Oil and gas capital
expenditure activity began to recover in the second and third
quarters of 2008 resulting in part from emerging gas exploration
plays in northeast British Columbia and oil pool development in
southeast Saskatchewan. Well completions in the third quarter
increased by 13% as capital project activity returned after being
delayed by adverse weather conditions experienced in the second
quarter. Well completions for the remainder of 2008 should benefit
from the increase in average rig counts experienced during the
third quarter of 2008, which should translate into stronger demand
for the Company's products. Spot gas and oil prices ended the third
quarter at $6.13 per GJ (AECO spot) and $95.76 per bbl (Edmonton
light), a decrease of 21% and 22%, respectively, over third quarter
average prices. This, in combination with the volatility
experienced across global capital markets, could result in reduced
industry cash flow, access to capital and capital expenditure
economics, which in turn may decrease demand for the Company's
products in 2009. 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
September 30, 2008 increased by $10.3 million (20%) to $62.7
million compared to the quarter ended September 30, 2007 and
comprised 42% of the Company's total sales. The acquisition of JEN
Supply in the fourth quarter of 2007 contributed incremental sales
of $5.3 million. The Company's strategy is to grow profitability by
focusing on its core western Canadian oilfield equipment service
business, complemented by an increase in the product life cycle
services provided to its customers, and the focus on the emerging
oilsands capital project and MRO sales opportunities. Revenue
results of these initiatives to date are provided below: Q3 2008 Q3
2007 YTD 2008 YTD 2007 ------------- ------------- -------------
------------- Sales ($millions) $ % $ % $ % $ % Western Canada
oilfield 125.4 84 105.1 91 345.7 90 323.4 92 Oilsands 18.8 12 6.3 5
24.9 6 19.2 5 Production Services 4.1 3 4.0 3 11.9 3 7.4 2
International 1.0 1 1.4 1 3.7 1 4.0 1 ------------- -------------
------------- ------------- Total Sales 149.3 100 116.8 100 386.2
100 354.0 100 Sales of oilfield products to conventional western
Canada oil and gas end use applications were $125.4 million for the
third quarter of 2008, up 19% from the third quarter of 2007. Over
half of this increase was comprised of incremental sales from the
acquisition of JEN Supply and the increased sale of tubular steel
products with the remaining increase reflective of the 13% increase
in well completions compared to the prior year period. Sales to
oilsands end use applications increased to $18.8 million in the
third quarter compared to $6.3 million in the third quarter of
2007. The Company continues to position its sales focus and
Edmonton distribution centre and Fort McMurray branch to penetrate
this emerging market for capital project and MRO products. Bid
quotation flow is increasing. Production service sales were $4.1
million in the third quarter of 2008 consistent with sales in the
third quarter 2007. Full Tilt was acquired at the end of the 2nd
quarter of 2007, which provides oilfield engine maintenance and
crane equipment services based in Lloydminster. The Company has
commenced expanding Full Tilt's service to other Company branch
locations 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 declined $0.4 million to $1.0 million in the third 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. Q3 2008 Q3 2007 YTD
2008 YTD 2007 --------- --------- --------- --------- Gross Profit
Gross profit (millions) $27.8 $21.0 $73.8 $64.2 Gross profit margin
as a % of sales 18.6% 18.0% 19.1% 18.1% Gross profit composition by
product sales category: Tubulars 18% 8% 11% 8% Pipe, flanges and
fittings 23% 26% 24% 28% Valves and accessories 14% 18% 18% 19%
Pumps, production equipment and services 15% 17% 16% 15% General
30% 31% 31% 30% --------- --------- --------- --------- Total Gross
Profit 100% 100% 100% 100% Gross profit reached $27.8 million in
the third quarter of 2008, up $6.8 million (32%) from the
third quarter of 2007 due to the increase in sales and gross profit
margins. Gross profit composition in the third quarter of 2008
remained fairly consistent with the prior year period with the
exception of tubulars, where sales and gross profit increased due
in part to the product cost inflation of steel and tight product
supply conditions. Selling, General and Administrative ("SG&A")
Costs Three months ended Sept 30 Nine months ended Sept 30 2008
2007 2008 2007 ------------- ------------- -------------
------------- Sales ($millions) $ % $ % $ % $ % People costs 10.5
57 7.7 57 29.9 57 24.2 57 Selling costs 2.7 15 1.4 11 7.0 13 5.4 13
Facility and office costs 3.3 18 2.3 17 9.4 18 7.3 17 Other 2.0 10
2.0 15 5.8 12 5.8 13 ------------- ------------- -------------
------------- SG&A Costs 18.5 100 13.4 100 52.1 100 42.7 100
SG&A costs a % of sales 12% 11% 14% 12% SG&A costs
increased 38% ($5.1 million) in the third quarter of 2008 from the
prior year period and represented 12% of sales compared to 11% the
prior year period. The increase in people costs of $2.8 million
reflects increased variable compensation due to the increase in
earnings and the addition of JEN Supply employees. Selling costs
were up $1.3 million compared to the prior year period due to
increased sales commissions and accounts receivable bad debt
allowances. Facility and office costs have increased in the third
quarter of 2008 as the Company moved into a new, larger
distribution centre in Edmonton in the second quarter. The addition
of the JEN Supply 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 third quarter
of 2008 down slightly from $0.7 million in the third quarter of
2007. Interest Expense Interest expense was $0.2 million in the
third quarter of 2008, down $0.3 million (58%) from the third
quarter of 2007 due to lower average borrowing levels and a decline
in average floating interest rates. Foreign Exchange Loss Foreign
exchange losses of $0.1 million in the third quarter of 2008
compared to a $0.3 million loss in the third quarter of 2007.
Losses reflect the impact of the weakening Canadian dollar on
United States dollar denominated product purchases and net working
capital liabilities. Income Tax Expense The Company's effective tax
rate for the third quarter of 2008 was 31.2%, compared to 34.3% in
the third 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 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2006 2007 2007 2007 2007
2008 2008 2008 ------- ------- ------- ------- ------- -------
------- ------- Sales $130.6 $154.3 $ 82.9 $116.8 $112.3 $140.6 $
96.4 $149.3 Gross profit 25.0 26.3 16.8 21.0 20.4 27.1 19.0 27.8
Gross profit % 19.1% 17.0% 20.3% 18.0% 18.2% 19.3% 19.7% 18.6%
EBITDA 9.6 11.0 2.2 7.4 5.1 10.2 2.3 9.1 EBITDA as a % of sales
7.4% 7.1% 2.7% 6.4% 4.5% 7.2% 2.4% 6.1% Net income 5.4 6.4 0.6 4.1
2.4 6.3 1.0 5.7 Net income as a % of sales 4.1% 4.1% 0.7% 3.6% 2.1%
4.5% 1.0% 3.8% Net income per share Basic (Cdn. $)$ 0.30 $ 0.35 $
0.03 $ 0.22 $ 0.13 $ 0.34 $ 0.05 $ 0.31 Diluted (Cdn. $)$ 0.29 $
0.34 $ 0.03 $ 0.22 $ 0.13 $ 0.34 $ 0.05 $ 0.31 Net working capital
(1) 120.2 124.0 127.0 128.7 134.7 117.4 114.9 123.1 Bank operating
loan(1) 34.0 33.6 36.0 35.4 44.3 21.8 18.4 20.9 (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
September 30, 2008, borrowings under the Company's bank operating
loan were $20.9 million, a decrease of $23.4 million from December
31, 2007. Borrowing levels have decreased due to the Company
generating $15.8 million in cash flow from operating activities,
before net changes in non-cash working capital balances, and an
$11.9 million reduction in net working capital. This was offset by
$1.9 million in capital and other expenditures, $0.8 million in
repayments of long term debt and capital lease obligations and $1.6
million for the purchase of shares to resource stock compensation
obligations. As at September 30, 2007, borrowings under the
Company's bank operating loan were $35.4 million, an increase of
$1.4 million from December 31, 2006. Borrowing levels increased due
to the Company generating $14.4 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 $8.6
million increase in net working capital, $5.8 million related to
business acquisitions, $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 $1.4 million in
capital and other expenditures. Net working capital was $123.1
million at September 30, 2008, a decrease of $11.6 million from
December 31, 2007 and $5.6 million from September 30, 2007.
Accounts receivable increased by $11.9 million (13%) to $101.2
million at September 30, 2008 from December 31, 2007, due to
increased sales in the third quarter offset by an 8% decrease in
days sales outstanding in accounts receivable ("DSO") in the third
quarter of 2008 compared to the fourth quarter of 2007. DSO was 57
days for the third quarter of 2008 compared to 62 days in the
fourth quarter 2007 and 63 days in the third quarter 2007. The
improvement in DSO performance during the third quarter was due in
part to the resolution of the temporary issues associated with the
implementation of a new invoicing system that negatively impacted
DSO in the first half of 2008 and a general improvement in
collections performance. DSO is calculated using average sales per
day for the quarter compared to the period end accounts receivable
balance. Inventory increased by $0.4 million (0%) at September 30,
2008 from December 31, 2007. Inventory turns for the third quarter
of 2008 improved to 5.6 times compared to 4.6 times in the third
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 to align with anticipated activity levels in order to
improve inventory turnover efficiency. Accounts payable and accrued
liabilities increased by $28.3 million (63%) in the third quarter
of 2008 from December 31, 2007 due mainly to an increase in
purchasing to resource higher sales levels. 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 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 September
30, 2008, the Company's average debt to EBITDA ratio was 1.0 times
(September 30, 2007 - 1.2 times) which provides a maximum borrowing
ability of $60 million under the facility. As at September 30,
2008, the ratio of the Company's debt to total capitalization (debt
plus equity) was 14% (September 30, 2007 - 37%). CAPITAL STOCK The
weighted average number of shares outstanding during the third
quarter 2008 was 18.3 million, a decrease of 0.1 million shares
over the prior year's third 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
September 30, 2008 was 18.7 million, a decrease of 0.2 million
shares from the prior year's third quarter. As at September 30,
2008 and 2007, the following shares and securities convertible into
shares, were outstanding: September 30, September 30, 2008 2007
(millions) Shares Shares -------------- -------------- Shares
outstanding 18.2 18.4 Stock Options 1.3 0.8 Restricted Share units
0.2 0.2 -------------- -------------- Shares outstanding and
issuable 19.7 19.4 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
nine month periods ended September 30, 2008, 100,095 and 200,095
common shares were acquired by the trust at an average cost per
share of $9.22 and $8.23 respectively (2007 - nil for the three
month period and 15,200 common shares for the nine month period and
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 $301,000 was recognized in the nine month
period ending September 30, 2008 (2007 - $500,000). As at September
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 nine months ended September 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) September 30 December 31 2008
2007
-------------------------------------------------------------------------
Assets Current assets Accounts receivable 101,214 89,305
Inventories 86,792 86,414 Other 8,218 3,781
-------------------------------------------------------------------------
196,224 179,500 Property and equipment 6,520 6,398 Goodwill 20,570
20,523 Future income taxes (note 3) 1,562 1,403 Other 586 891
-------------------------------------------------------------------------
225,462 208,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities Current liabilities Bank operating loan 20,902 44,301
Accounts payable and accrued liabilities 73,108 44,807 Current
portion of long term debt and capital lease obligations 197 805
-------------------------------------------------------------------------
94,207 89,913 Long term debt and capital lease obligations 500 582
-------------------------------------------------------------------------
94,707 90,495
-------------------------------------------------------------------------
Shareholders' Equity (note 2) Capital stock 22,914 24,306
Contributed surplus 18,619 17,671 Retained earnings 89,222 76,243
-------------------------------------------------------------------------
130,755 118,220
-------------------------------------------------------------------------
225,462 208,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Operations - Unaudited
-------------------------------------------------------------------------
Three months ended Nine months Ended (in thousands of Canadian
-------------------- -------------------- dollars except shares and
September 30 September 30 per share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales 149,256 116,817 386,233 354,010 Cost of sales 121,460 95,770
312,423 289,822
-------------------------------------------------------------------------
Gross profit 27,796 21,047 73,810 64,188
-------------------------------------------------------------------------
Other expenses Selling, general and administrative expenses 18,534
13,347 52,144 42,699 Amortization 586 654 1,797 2,140 Interest
expense 205 487 805 1,549 Foreign exchange loss 119 282 109 871
-------------------------------------------------------------------------
19,444 14,770 54,855 47,259
-------------------------------------------------------------------------
Income before income taxes 8,352 6,277 18,955 16,929 Income tax
expense (recovery) (note 3) Current 2,548 2,219 6,131 6,100 Future
58 (66) (155) (311)
-------------------------------------------------------------------------
2,606 2,153 5,976 5,789
-------------------------------------------------------------------------
Net and comprehensive income for the period 5,746 4,124 12,979
11,140
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per share (note 2) Basic 0.31 0.22 0.71 0.61 Diluted
0.31 0.22 0.70 0.59
-------------------------------------------------------------------------
Weighted average number of shares outstanding (000's) (note 2)
Basic 18,254 18,392 18,290 18,283 Diluted 18,495 18,901 18,674
18,792
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Cash Flow - Unaudited
-------------------------------------------------------------------------
Three months ended Nine months ended --------------------
-------------------- September September September September (in
thousands of Canadian 30 30 30 30 dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from operating activities Net income for the period
5,746 4,124 12,979 11,140 Items not affecting cash - Amortization
586 654 1,797 2,140 Future income tax (recovery) expense 58 (66)
(155) (311) Stock based compensation expense 303 412 1,149 1,474
-------------------------------------------------------------------------
6,693 5,124 15,770 14,443 Net change in non-cash working capital
balances related to operations - Accounts receivable (17,008)
(20,281) (12,020) 885 Inventories (3,451) 9,977 14 11,472 Other
current assets (2,176) 259 (3,931) 806 Accounts payable and accured
liabilities 15,597 3,612 28,666 (20,819) Income taxes payable (925)
2,352 (793) (946)
-------------------------------------------------------------------------
(1,270) 1,043 27,706 5,841
-------------------------------------------------------------------------
Cash flows (used in)/from financing activities Increase/(Decrease)
in bank operating loan 2,506 (593) (23,399) 1,382 Decrease in long
term debt and capital lease obligations (54) (45) (759) (436)
Issuance of capital stock - 1 49 569 Purchase of capital stock in
trust for RSU Plans (919) - (1,642) (173)
-------------------------------------------------------------------------
1,533 (637) (25,751) 1,342
-------------------------------------------------------------------------
Cash flows used in investing activities Purchase of property and
equipment (263) (359) (2,396) (1,359) Business acquisitions - (47)
441 (5,824)
-------------------------------------------------------------------------
(263) (406) (1,955) (7,183)
-------------------------------------------------------------------------
Change in cash and cash equivalents during the period - - - - Cash
and cash equivalents - Beginning of period - - - - Cash and cash
equivalents - End of period - - - -
-------------------------------------------------------------------------
Cash paid during the period for: Interest on bank operating loan
195 478 777 1,525 Interest on capital lease obligations and long
term debt 10 9 28 24 Income taxes 3,315 27 5,884 7,212
-------------------------------------------------------------------------
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 based compensation expense - - 1,474 - 1,474 Stock options
exercised 174 827 (257) - 570 Restricted share units (RSU's)
exercised 10 204 (204) - - Purchase of shares in trust for RSU
plans (15) (173) - - (173) Net income - - - 11,140 11,140
-------------------------------------------------------------------------
Balance - September 30, 2007 18,392 24,444 17,226 73,816 115,486
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance - December 31, 2007 18,370 24,306 17,671 76,243 118,220
Stock based compensation expense - - 1,149 - 1,149 Stock options
exercised 10 70 (20) - 50 Restricted share units (RSU's) exercised
11 181 (181) - - Purchase of shares in trust for RSU Plans (200)
(1,643) - - (1,643) Net income - - - 12,979 12,979
-------------------------------------------------------------------------
Balance - September 30, 2008 18,191 22,914 18,619 89,222 130,755
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 nine month periods ending September 30, 2008 of $25,000
recovery and $301,000 expense respectively (2007 - $245,000 and
$500,000). A recovery of $25,000 was recorded in the three month
period ended September 30, 2008 due to a general improvement in
inventory turnover performance. As at September 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 September 30, 2008, the Company had
18.2 million common shares and 1.3 million options outstanding to
acquire common shares at a weighted average exercise price of $5.85
per common share, of which 667,164 options were vested and
exercisable at a weighted average exercise price of $4.23 per
common share. a) Stock options Option activity for each of the nine
month periods ended September 30 was as follows: 000's 2008 2007
-------------------------------------------------------------------------
Outstanding at January 1 1,262 804 Granted 75 220 Exercised (10)
(174) Forfeited (1) (1)
-------------------------------------------------------------------------
Outstanding at September 30 1,326 849
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were no options granted during the three month period ended
September 30, 2008. A total of 110,683 share options were granted
at a weighted average strike price of $10.30 in the three month
period ended September 30, 2007 for a fair value of $507,000. The
fair value of the options granted during the nine month period
ended September 30, 2008 was $274,000 (September 30, 2007 -
$1,027,000) 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 nine month periods
ended September 30, 2008 was $170,000 (2007 - $144,000) and
$520,000, (2007 - $379,000), 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 entitling 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
79 25 Exercised (11) - (10) - Forfeited - - (9) -
-------------------------------------------------------------------------
Outstanding at September 30 168 67 180 37
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RSU plan compensation expense recorded in the three and nine month
periods ended September 30, 2008 was $133,000 (2007 - $269,000) and
$629,000 (2007 - $1,095,000) 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 nine month periods ended September 30, 2008,
100,095 and 200,095 common shares were acquired respectively by the
trust (2007 - nil for the three month period and 15,200 common
shares for the nine month period) at a cost of $922,000 for the
three month period and $1,643,000 for the nine 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 Nine Months Ended ---------------------
--------------------- September September September September 30 30
30 30 2008 2007 2008 2007
-------------------------------------------------------------------------
Weighted average common shares outstanding - basic 18,254 18,392
18,290 18,283 Effect of Stock options and RSU Plans 241 509 384 509
-------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 18,495 18,901
18,674 18,792
-------------------------------------------------------------------------
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 Nine Months Ended ---------------------------
--------------------------- September 30 September 30 2008 % 2007 %
2008 % 2007 %
-------------------------------------------------------------------------
Income before income taxes 8,351 6,279 18,955 16,930
-------------------------------------------------------------------------
Income taxes calculated at expected rates 2,498 29.9 2,048 32.6
5,670 29.9 5,522 32.6 Non-deductible items 122 1.5 97 1.6 319 1.7
345 2.0 Capital and large corporations taxes 13 0.2 - 0.0 35 0.2 22
0.1 Adjustments on filing returns & other (27) (0.4) 8 0.1 (48)
(0.3) (100) (0.6)
-------------------------------------------------------------------------
2,606 31.2 2,153 34.3 5,976 31.5 5,789 34.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2008, income taxes receivable included in other
current assets are $0.524 million (December 31 2007 - Income taxes
receivable $0.848 million). 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: September
30 December 31 2008 2007
-------------------------------------------------------------------------
Assets Financing charges 71 103 Property and equipment 910 874
Stock compensation expense & Other 934 786
-------------------------------------------------------------------------
1,915 1,763 Liabilities Goodwill 353 360
-------------------------------------------------------------------------
Net future income tax asset 1,562 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 bank operating loan facility
which is used to finance its net working capital and general
corporate requirements. The bank operating facility is arranged
through a syndicate of three banks and matures in July 2009. 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 September 30, 2008, this ratio was 1.0 times (December
31, 2007 - 1.4 times) and the maximum amount available to be
borrowed under the facility was $60 million. In management's
opinion, the Company's available borrowing capacity under its bank
operating facility and ongoing cash flow from operations, are
sufficient to resource its anticipated contractual commitments. The
facility contains certain other restrictive covenants, which the
Company was in compliance with as at September 30, 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 September
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. The Company's foreign exchange risk arises principally
from the settlement of United States dollar denominated net working
capital balances as a result of product purchases denominated in
United States dollars. As at September 30, 2008, the Company had
contracted to purchase US$5.1 million at fixed exchange rates with
terms not exceeding six months. The fair market values 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: September 30 September 30 2008 2007
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Cost of sales for the three months ended 2,570 2,498 Cost of sales
for the nine months ended 7,938 7,041 Inventory 4,849 4,074
Accounts payable and accrued liabilities 535 1,064 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, (800) 345-2858, (403) 531-5604,
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