CALGARY, April 26, 2012 /PRNewswire/ - CE FRANKLIN LTD.
(TSX.CFT, NASDAQ.CFK) reported net earnings of $7.9 million or $0.46 per share (basic) for the first quarter
ended March 31, 2012, a significant
increase from net earnings of $3.4
million or $0.19 per share
(basic) generated in the first quarter ended March 31, 2011.
Financial Highlights
(millions of Cdn. $ except per
share data) |
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Three Months Ended |
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March 31 |
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2012 |
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2011 |
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Unaudited |
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Revenues |
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$ 160.3 |
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$ 137.7 |
Gross Profit |
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$ 29.4 |
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$ 22.3 |
Gross Profit - % of sales |
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18.3% |
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16.2% |
EBITDA(1) |
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$ 11.3 |
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$ 5.3 |
EBITDA % of sales(1) |
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7.0% |
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3.8% |
Net earnings |
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$ 7.9 |
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$ 3.4 |
Per share |
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Basic |
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$ 0.46 |
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$ 0.19 |
Diluted |
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$ 0.44 |
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$ 0.19 |
Net working
capital(2) |
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$ 137.8 |
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$ 120.1 |
Long term debt |
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$ - |
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$ 0.3 |
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"Solid revenue growth, improved product margins
and disciplined cost management lead to increased
profitability. Activity levels are expected to remain at
prior year levels as strong oil and oilsands activity offsets
softer gas activity," said Michael
West, President and CEO.
Net earnings for the first quarter of 2012, were
$7.9 million, an increase of
$4.5 million (132%) from the first
quarter of 2011. Revenues were $160.3
million, an increase of $22.6
million (16%) from the first quarter of 2011. Despite well
completions decreasing by 26% compared to the first quarter of
2011, both the capital project business and maintenance repair and
operating ("MRO") revenues grew by $7.3
million and $15.1 million
respectively year over year. The increase in capital projects
revenue was driven by higher sales to oil and oilsands
projects. Increased MRO activity came from all areas of the
business. Spring break up arrived earlier than normal and
dampened activity levels late in the quarter. Gross profits
increased by $7.1 million (32%) due
to the increase in revenues and improved gross profit margins year
over year. Average gross profit margins improved sequentially
compared to the fourth quarter of 2011 and improved over the first
quarter 2011 due to improved supply chain costs and increased
volume rebate income arising from increased purchasing levels.
Selling, general and administrative expenses increased by
$0.8 million (5%) to $17.8 million for the quarter as compensation and
operating costs have increased in response to higher revenue
levels. The weighted average number of shares outstanding during
the first quarter was consistent with the prior year period as the
rise in share price during the last year has limited the activity
occurring under the normal course issuer bid program. Net earnings
per share (basic) was $0.46 in the
first quarter of 2012, compared to net earnings of $0.19 per share in the first quarter of 2011.
Business Outlook
Oil and gas industry activity in 2012 is expected to remain at 2011
levels for the remainder of the year. Natural gas prices
remain depressed as North American production capacity and
inventory levels continue to exceed demand. Natural gas
capital expenditure activity is focused on liquid rich gas plays
and the Company is well positioned to service customers pursuing
these gas plays. Conventional and heavy oil economics are
attractive at current price levels leading to continuing activity
in on these plays. Activity is especially strong in southeast
Saskatchewan. Oil sands
project announcements are expected to continue with current oil
price levels. Approximately 50% to 60% of the Company's total
revenues are driven by our customers' capital expenditure
requirements. CE Franklin's revenues are expected to increase
modestly in 2012 through organic growth as the oil and gas industry
activity levels remain relatively consistent with 2011 levels.
Gross profit margins are expected to remain
under pressure as customers that produce natural gas focus on
reducing their costs to maintain acceptable project economics and
due to continued aggressive oilfield supply industry competition as
industry activity levels remain below the five year average. The
Company will continue to manage its cost structure to protect
profitability while maintaining service capacity and advancing
strategic initiatives.
Over the medium to longer term, the Company's
strong financial and competitive positions should enable profitable
growth of its distribution network through the expansion of its
product lines, supplier relationships and capability to service
additional oil and gas and other industrial end use markets.
(1) |
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EBITDA represents net earnings before interest, taxes,
depreciation and amortization. EBITDA is supplemental non-GAAP
financial measure used by management, as well as industry analysts,
to evaluate operations. Management believes that EBITDA, as
presented, represents a useful means of assessing the performance
of the Company's ongoing operating activities, as it reflects the
Company's earnings trends without showing the impact of certain
charges. The Company is also presenting EBITDA and EBITDA as a
percentage of revenues because it is used by management as
supplemental measures of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and depreciation
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Depreciation expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate revenues. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net earnings, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net earnings is provided within the
Company's Management Discussion and Analysis. Not all companies
calculate EBITDA in the same manner and EBITDA does not have a
standardized meaning prescribed by IFRS. Accordingly, EBITDA, as
the term is used herein, is unlikely to be comparable to EBITDA as
reported by other entities. |
(2) |
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Net working capital is defined as current assets less cash and
cash equivalents, accounts payable and accrued liabilities, current
taxes payable and other current liabilities. Net working capital
and long term debt/bank operating loan amounts are as at quarter
end. |
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Additional Information
Additional information relating to CE Franklin,
including its first quarter 2012 Management Discussion and Analysis
and interim consolidated financial statements and its Form 20-F /
Annual Information Form, is available under the Company's profile
on the SEDAR website at www.sedar.com and at
www.cefranklin.com.
Conference Call and Webcast
Information
A conference call to review the 2012 first
quarter results, which is open to the public, will be held on
Friday, April 27, 2012 at
11:00 a.m. Eastern Time (9:00a.m. Mountain Time).
Participants may join the call by dialing
1-647-427-7450 in Toronto or
dialing 1-888-231-8191 at the scheduled time of 11:00 a.m. Eastern Time. For those
unable to listen to the live conference call, a replay will be
available at approximately 2:00 p.m. Eastern
Time on the same day by calling 1-416-849-0833 in
Toronto or dialing
1-855-859-2056 and entering the Passcode of 63408715
and may be accessed until midnight May 3,
2012.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/detail/938361/1004129 and will be
available on the Company's website at
http://www.cefranklin.com.
Michael West,
President and Chief Executive Officer will lead the discussion and
will be accompanied by Derrren Newell, Vice President and Chief
Financial Officer. The discussion will be followed by a question
and answer period.
About CE Franklin
For more than 75 years, CE Franklin has been a
leading supplier of products and services to the energy
industry. CE Franklin distributes pipe, valves, flanges,
fittings, production equipment, tubular products and other general
oilfield supplies to oil and gas producers in Canada as well as to the oil sands, refining,
heavy oil, petrochemical, forestry and mining industries.
These products are distributed through its 39 branches, which are
situated in towns and cities serving particular oil and gas fields
of the western Canadian sedimentary basin.
Forward-looking Statements: The
information in this news release may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934 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.
The following is provided to assist readers
in understanding CE Franklin Ltd.'s ("CE Franklin" or the
"Company") financial performance and position during the periods
presented and significant trends that may impact future performance
of CE Franklin. This should be read in conjunction with the
Company's condensed interim consolidated financial statements for
the three month period ended March 31,
2012 and the MD&A and consolidated financial statements
for the year ended December 31, 2011.
All amounts are expressed in Canadian dollars and are in accordance
with International Financial Reporting Standards ("IFRS") as issued
by the International Accounting Standards Board ("IASB"), except
where otherwise noted.
Overview
CE Franklin is a leading distributor of pipe,
valves, flanges, fittings, production equipment, tubular products
and other general industrial supplies, primarily to the oil and gas
industry in Canada through its 39
branches situated in towns and cities that serve oil and gas fields
of the Western Canadian sedimentary basin. In addition, the Company
distributes similar products to the oil sands, midstream, refining,
petrochemical and non-oilfield related industries such as forestry
and mining.
The Company's branch operations service over
3,000 customers by providing the right materials where and when
they are needed, and for the best value. Our branches,
supported by our centralized Distribution Centre in Edmonton, Alberta, stock over 25,000 stock
keeping units sourced from over 2,000 suppliers. This
infrastructure enables us to provide our customers with the
products they need on a same day or overnight basis. Our
centralized inventory and procurement capabilities allow us to
leverage our scale to enable industry leading hub and spoke
purchasing, logistics and project execution capabilities. The
branches are also supported by services provided by the Company's
corporate office in Calgary,
Alberta including sales, marketing, product expertise,
logistics, invoicing, credit and collection, and other business
services.
The Company's common shares trade on the TSX
("CFT") and NASDAQ ("CFK") stock exchanges. Schlumberger
Limited ("Schlumberger"), a major oilfield service company based in
Paris, France, indirectly owns
approximately 56% of the Company's shares.
Business Strategy
The Canadian oilfield equipment supply industry
is highly competitive and fragmented. There are approximately
230 oilfield supply stores in Canada which generate annual estimated sales
of $2 billion to $3 billion. CE
Franklin competes with three other large oilfield product
distributors and with numerous local and regional distributors as
well as specialty equipment distributors and manufacturers.
The oilfield equipment market is part of the larger industrial
equipment supply market, which is also serviced by numerous
competitors. The oil sands and niche industrial product
markets are more specialized and solutions oriented and require
more in-depth product knowledge and supplier relationships to
service specific customer requirements.
Oilfield equipment distributors compete based on
price and level of service. Service includes the ability to
consistently provide required products to a customer's operating
site when needed, project management services, product expertise
and support, billing and expenditure management services, and
related equipment services.
Demand for oilfield products and services is
driven by the level of capital expenditures in the oil and gas
industry in the Western Canadian sedimentary basin as well as by
production related maintenance, repair and operating ("MRO")
requirements. MRO demand tends to be relatively stable over
time and predictable in terms of product and service requirements
and typically comprises 40% to 50% of the Company's annual
sales. Capital project demand fluctuates over time with oil
and gas commodity prices, which directly impacts the economic
returns realized by oil and gas companies.
The size, scope, and product mix of each order
will affect profitability. Local walk in relationship
business with smaller orders or more specialized products will
typically generate higher profit margins compared to large project
bids for alliance customers where the Company can take advantage of
volume discounts and longer lead times. Larger oil and gas
customers tend to have a broader geographic operating reach
requiring multi-site service capability, conducting larger capital
projects, and requiring more sophisticated billing and project
management services than do smaller customers. The Company
has entered into numerous alliances with larger customers where the
scale and repeat nature of business enables efficiencies which are
shared with the customer through lower profit margins.
Barriers to entry in the oilfield supply
business are low with start-up operations typically focused on
servicing local relationship based MRO customers. To compete
effectively on capital project business and to service larger
customers requires multi-location branch operations, increased
financial, procurement, product expertise and breadth of product
lines, information systems and process capability, which
significantly increases the barriers to entry.
The Company's 39 branch operations provide
substantial geographic coverage across the oil and gas producing
regions in western Canada.
Each branch services and competes for local business and services
the Company's alliance customers supported by centralized support
services provided by the Company's Distribution Centre and
corporate office in Calgary. The
Company's large branch network, coupled with its centralized
capabilities enables it to develop strong supply chain
relationships with suppliers and provide it with a competitive
advantage over local independent oilfield and specialty equipment
distributors for large alliance customers who are seeking
multi-location, one stop shopping, and more comprehensive
service.
The Company is pursuing the following strategies
to grow its business profitably:
- Expand the reach and market share serviced by the Company's
distribution network. The Company is focusing its sales
efforts and product offering on servicing complex, multi-location
needs of large and emerging customers in the energy sector.
Organic growth may be complemented by selected acquisitions.
- Expand production equipment service capability to capture more
of the product life cycle requirements for the equipment the
Company sells such as downhole pump repair, oilfield engine
maintenance, well optimization and onsite project management. This
will differentiate the Company's service offering from its
competitors and deepen relationships with its customers.
- Expand oil sands, industrial project and MRO business by
leveraging our existing supply chain infrastructure, product, and
major project expertise.
- Increase the resourcing of customer project sales quotation and
order fulfillment services provided by our Distribution Centre to
augment local branch capacity to address seasonal and project
driven fluctuations in customer demand. By doing so, we aim
to increase our capacity flexibility and improve operating
efficiency while providing consistent customer service.
Business Outlook
Oil and gas industry activity in 2012 is
expected to remain at 2011 levels for the remainder of the
year. Natural gas prices remain depressed as North American
production capacity and inventory levels continue to exceed
demand. Natural gas capital expenditure activity is focused
on liquid rich gas plays and the Company is well positioned to
service customers pursuing these gas plays. Conventional and
heavy oil economics are attractive at current price levels leading
to continuing activity in on these plays. Activity is
especially strong in southeast Saskatchewan. Oil sands project
announcements continue at current oil price levels. Approximately
50% to 60% of the Company's total revenues are driven by our
customers' capital expenditure requirements. CE Franklin's revenues
are expected to increase modestly in 2012 through organic growth as
the oil and gas industry activity levels remain relatively
consistent with 2011 levels.
Gross profit margins are expected to remain
under pressure as customers that produce natural gas focus on
reducing their costs to maintain acceptable project economics and
due to continued aggressive oilfield supply industry competition as
industry activity levels remain below the last five year average.
The Company will continue to manage its cost structure to protect
profitability while maintaining service capacity and advancing
strategic initiatives.
Over the medium to longer term, the Company's
strong financial and competitive positions should enable profitable
growth of its distribution network through the expansion of its
product lines, supplier relationships and capability to service
additional oil and gas and other industrial end use markets.
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Three Months
Ended March
31 |
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2012 |
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2011 |
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Revenues |
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160.3 |
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100.0 |
% |
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137.7 |
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100.0 |
% |
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Cost of Sales |
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(130.9) |
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(81.7) |
% |
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(115.4) |
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(83.9) |
% |
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Gross Profit |
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29.4 |
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18.3 |
% |
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22.3 |
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16.1 |
% |
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Selling, general and
administrative expenses |
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(17.8) |
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(11.1) |
% |
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(17.0) |
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(12.8) |
% |
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Foreign exchange and other |
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(0.3) |
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(0.2) |
% |
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- |
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- |
% |
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EBITDA(1) |
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11.3 |
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7.0 |
% |
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5.3 |
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3.4 |
% |
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Depreciation |
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(0.6) |
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(0.4) |
% |
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(0.6) |
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(0.5) |
% |
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Interest |
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(0.1) |
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(0.1) |
% |
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(0.2) |
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(0.2) |
% |
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Earnings before tax |
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10.6 |
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6.5 |
% |
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4.6 |
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2.7 |
% |
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Income tax expense |
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(2.7) |
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(1.6) |
% |
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(1.2) |
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(0.9) |
% |
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Net earnings |
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7.9 |
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4.9 |
% |
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3.4 |
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1.8 |
% |
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Net earnings per share |
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Basic |
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$ |
0.46 |
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$ |
0.19 |
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Diluted |
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$ |
0.44 |
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$ |
0.19 |
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Weighted average number of shares
outstanding (000's) |
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Basic |
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17,443 |
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17,488 |
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Diluted |
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18,149 |
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18,052 |
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(1) EBITDA represents net earnings
before interest, taxes, depreciation and amortization. EBITDA is a
supplemental non-GAAP financial measure used by management, as well
as industry analysts, to evaluate operations. Management believes
that EBITDA, as presented, represents a useful means of assessing
the performance of the Company's ongoing operating activities, as
it reflects the Company's earnings trends without showing the
impact of certain charges. The Company is also presenting EBITDA
and EBITDA as a percentage of revenues because it is used by
management as supplemental measures of profitability. The use of
EBITDA by the Company has certain material limitations because it
excludes the recurring expenditures of interest, income tax, and
depreciation expenses. Interest expense is a necessary component of
the Company's expenses because the Company borrows money to finance
its working capital and capital expenditures. Depreciation expense
is a necessary component of the Company's expenses because the
Company is required to pay cash to acquire equipment to generate
revenues. Management compensates for these limitations to the use
of EBITDA by using EBITDA as only a supplementary measure of
profitability. EBITDA is not used by management as an alternative
to net earnings, as an indicator of the Company's operating
performance, as an alternative to any other measure of performance
in conformity with generally accepted accounting principles or as
an alternative to cash flow from operating activities as a measure
of liquidity. A reconciliation of EBITDA to net earnings is
provided within the table above. Not all companies calculate EBITDA
in the same manner and EBITDA does not have a standardized meaning
prescribed by IFRS. Accordingly, EBITDA, as the term is used
herein, is unlikely to be comparable to EBITDA as reported by other
entities. |
First Quarter Results
Net earnings for the first quarter of 2012, were
$7.9 million, an increase of
$4.5 million (132%) from the first
quarter of 2011. Revenues were $160.3
million, an increase of $22.6
million (16%) from the first quarter of 2011. Despite well
completions decreasing by 26% compared to the first quarter of
2011, both the capital project business and maintenance repair and
operating ("MRO") revenues grew by $7.3
million and $15.1 million
respectively year over year. The increase in capital projects
revenue was driven by higher sales to oil and oilsands
projects. Increased MRO activity came from all areas of the
business. Spring break up arrived earlier than normal and
dampened activity levels late in the quarter. Gross profits
increased by $7.1 million (32%) due
to the increase in revenues and improved gross profit margins year
over year. Average gross profit margins improved sequentially
compared to the fourth quarter of 2011 and improved over the first
quarter 2011 due to improved supply chain costs and increased
volume rebate income arising from increased purchasing levels.
Selling, general and administrative expenses increased by
$0.8 million (5%) to $17.8 million for the quarter as compensation and
operating costs have increased in response to higher revenue
levels. The weighted average number of shares outstanding during
the first quarter was consistent with the prior year period as the
rise in share price during the last year has limited the activity
occurring under the normal course issuer bid program. Net earnings
per share (basic) was $0.46 in the
first quarter of 2012, compared to net earnings of $0.19 per share in the first quarter of 2011.
Revenues
Revenues for the quarter ended March 31,
2012, were $160.3 million, an
increase of 16% from the quarter ended March
31, 2011.
Oil and gas commodity prices are a key driver of
industry capital project activity as commodity prices directly
impact the economic returns realized by oil and gas companies. The
Company uses oil and gas well completions and average rig counts as
industry activity measures to assess demand for oilfield equipment
used in capital projects. Oil and gas well completions
require the products sold by the Company to complete a well and
bring production on stream and are a general indicator of energy
industry activity levels. Average drilling rig counts are
also used by management to assess industry activity levels as the
number of rigs in use ultimately drives well completion
requirements. Well completion, rig count and commodity price
information for the three and three month periods ended
March 31, 2012 and 2011 are provided
in the table below.
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Q1
Average |
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% |
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2012 |
|
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2011 |
|
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change |
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Gas - Cdn. $/gj (AECO spot) |
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$ |
|
|
2.14 |
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$ |
|
|
3.76 |
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(43)% |
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Oil - Cdn. $/bbl (synthetic crude) |
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$ |
|
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94.49 |
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$ |
|
|
99.63 |
|
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(5)% |
|
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Average rig count |
|
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|
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|
541 |
|
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532 |
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2 % |
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Well completions: |
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Oil |
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2,262 |
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|
2,201 |
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3 % |
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Gas |
|
|
|
|
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|
|
611 |
|
|
|
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|
1,660 |
|
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(63)% |
|
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Total well completions |
|
|
|
|
|
|
|
|
2,873 |
|
|
|
|
|
3,861 |
|
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(26)% |
|
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Average statistics are shown except for well completions.
Sources: Oil and Gas prices - First Energy Capital Corp.; Rig
count data - CAODC; Well completion data - Daily Oil Bulletin
(in millions of Cdn. $) |
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Three months
ended March 31 |
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|
2012 |
|
|
|
2011 |
End use revenue demand |
|
|
|
|
|
$ |
|
|
|
|
% |
|
|
|
$ |
|
|
|
|
% |
Capital projects |
|
|
|
|
|
83.5 |
|
|
|
|
52 |
|
|
|
76.0 |
|
|
|
|
55 |
Maintenance, repair and operating
supplies ("MRO") |
|
|
|
|
|
76.8 |
|
|
|
|
48 |
|
|
|
61.7 |
|
|
|
|
45 |
Total Revenues |
|
|
|
|
|
160.3 |
|
|
|
|
100 |
|
|
|
137.7 |
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from capital project related products
were $83.5 million in the first
quarter of 2012, an increase of 10% ($7.5
million) from the first quarter of 2011 due to increased oil
and oil sands based sales. Total well completions decreased by 26%
in the first quarter of 2012. Gas well completions comprised
21% of the total wells completed in western Canada in the first quarter of 2012 compared
to 43% in the first quarter 2011. The average working rig
count increased by 2% compared to the prior year period. Spot gas
prices ended the first quarter at $2.14 per GJ (AECO) a decrease of 43% from first
quarter 2011 average prices. Oil prices ended the first
quarter at $94.49 per bbl (Synthetic
Crude) a decrease of 5% from the first quarter 2011 average.
Depressed gas prices are expected to continue to negatively impact
gas drilling and well completion activity over the remainder of
2012, which in turn is expected to constrain demand for the
Company's products. Natural gas customers continue to utilize a
high level of competitive bid activity to procure the products they
require in an effort to reduce their costs. The Company is
addressing this industry trend by pursuing initiatives focused on
improving revenue quotation processes and increasing the operating
flexibility and efficiency of its branch network. Activity
related to oil and oilsands activity remains strong and the Company
is well positioned to support customers who are pursuing oil plays
and more particularly tight oil plays. Spring break up
arrived in late March which dampened activity levels late in the
quarter.
MRO product revenues are related to overall oil
and gas industry production levels and tend to be more stable than
capital project revenues. MRO product revenues for the quarter
ended March 31, 2012 increased by
$15.1 million (24%) to $76.8 million compared to the quarter ended
March 31, 2011 and comprised 48% of
the Company's total revenues (2011 - 45%) as both oil and gas MRO
activities were strong in the quarter.
The Company's strategy is to grow profitability
by focusing on its core western Canadian oilfield product
distribution business, complemented by an increase in the product
life cycle services provided to its customers and the focus on the
emerging oil sands capital project and MRO revenues opportunities.
Revenues from these initiatives to date are provided below:
|
|
|
|
|
|
Q1 2012 |
|
|
|
Q1 2011 |
Revenues
($millions) |
|
|
|
|
|
$ |
|
|
|
|
% |
|
|
|
$ |
|
|
|
|
% |
Oilfield |
|
|
|
|
|
140.4 |
|
|
|
|
87 |
|
|
|
122.6 |
|
|
|
|
89 |
Oil sands |
|
|
|
|
|
12.1 |
|
|
|
|
8 |
|
|
|
10.0 |
|
|
|
|
7 |
Production services |
|
|
|
|
|
7.8 |
|
|
|
|
5 |
|
|
|
5.1 |
|
|
|
|
4 |
Total Revenues |
|
|
|
|
|
160.3 |
|
|
|
|
100 |
|
|
|
137.7 |
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from oilfield products to conventional
western Canada oil and gas end use
applications were $120.3 million for
the first quarter of 2012, backing out tubular product sales, year
over year oilfield revenue was up 19.4%. This increase was
driven by oil related capital projects and strong MRO demand.
Revenues from oil sands end use applications
were $12.1 million in the first
quarter, an increase of $2.1 million
(21%) from the first quarter of 2011 reflecting the timing of
project revenues. The Company continues to position its major
project execution capability and the Fort
McMurray branch to penetrate this emerging market for
capital projects and MRO products.
Production service revenues were $7.8 million in the first quarter of 2012, a 53%
increase from the $5.1 million of
revenues in the first quarter of 2011, reflecting improved oil
production economics resulting in increased customer maintenance
activities.
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2012 |
|
|
|
|
Q1 2011 |
Gross profit ($ millions) |
|
|
|
$ |
|
|
29.4 |
|
|
|
|
|
|
|
$ |
|
|
22.3 |
|
|
|
Gross profit margin as a % of revenues |
|
|
|
|
|
|
18.3 |
|
|
% |
|
|
|
|
|
|
|
16.1 |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit composition by
product revenue category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tubulars |
|
|
|
|
|
|
3 |
|
|
% |
|
|
|
|
|
|
|
6 |
|
|
% |
Pipe, flanges and fittings |
|
|
|
|
|
|
30 |
|
|
% |
|
|
|
|
|
|
|
26 |
|
|
% |
Valves and accessories |
|
|
|
|
|
|
19 |
|
|
% |
|
|
|
|
|
|
|
21 |
|
|
% |
Pumps, production equipment and services |
|
|
|
|
|
|
19 |
|
|
% |
|
|
|
|
|
|
|
15 |
|
|
% |
General |
|
|
|
|
|
|
29 |
|
|
% |
|
|
|
|
|
|
|
32 |
|
|
% |
Total gross profit |
|
|
|
|
|
|
100 |
|
|
% |
|
|
|
|
|
|
|
100 |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit was $29.4
million in the first quarter of 2012, an increase of
$7.1 million (32%) from the first
quarter of 2011 due to increased revenues and average gross profit
margins compared to the prior year period. Gross profit margins for
the quarter were improved due to improved supply chain costs and
recognition of higher volume rebate income due to higher purchasing
levels. Increased pipe flanges and fittings gross profit
composition was due to improved gross profit margins. Other
gross profit composition categories were impacted by having more
sales to our larger lower margin customers. The decrease in
tubular gross profit composition reflects larger lower margin sales
and the disposal of surplus tubular inventory.
Selling, General
and Administrative ("SG&A")
Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($millions) |
|
|
|
|
|
Q1 2012 |
|
|
|
|
Q1 2011 |
|
|
|
|
|
|
$ |
|
|
|
|
% |
|
|
|
|
$ |
|
|
|
|
% |
People Costs |
|
|
|
|
|
11.0 |
|
|
|
|
61 |
|
|
|
|
10.3 |
|
|
|
|
60 |
Facility and office costs |
|
|
|
|
|
3.5 |
|
|
|
|
20 |
|
|
|
|
3.7 |
|
|
|
|
22 |
Selling Costs |
|
|
|
|
|
1.9 |
|
|
|
|
11 |
|
|
|
|
1.5 |
|
|
|
|
9 |
Other |
|
|
|
|
|
1.4 |
|
|
|
|
8 |
|
|
|
|
1.5 |
|
|
|
|
9 |
SG&A costs |
|
|
|
|
|
17.8 |
|
|
|
|
100 |
|
|
|
|
17.0 |
|
|
|
|
100 |
SG&A costs as % of
revenues |
|
|
|
|
|
11% |
|
|
|
|
|
|
|
|
|
12% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A costs increased $0.8 million (5%) in the first quarter of 2012
from the prior year period and represented 11% of revenues compared
to 12% in the prior year period. The $0.8
million increase in expenses was attributable to higher
incentive and selling costs reflecting the improved performance of
the business year over year.
Depreciation Expense
Depreciation expense of $0.6 million in the first quarter of 2012 was
comparable to the first quarter of 2011.
Interest Expense
Interest expense was minimal in the first
quarter of 2012 and was lower than the prior year due to lower
borrowing levels.
Foreign Exchange and other
Foreign exchange and other in the quarter was a
loss of $0.3 million as the Canadian
dollar strengthened which increased the translation loss from US
denominated net working capital assets. The Company
recognized a $0.3 million unrealized
foreign exchange loss on $11.6
million of foreign currency forward contracts it had
outstanding at quarter end. As at March 31, 2012, a one percent change in the
Canadian dollar relative to the US dollar would decrease or
increase the Company's annual net income by approximately
$0.1 million.
Income Tax Expense
The Company's effective tax rate for the first
quarter of 2012 was 25.5% down from a 26.5% effective rate in the
first quarter 2011. The current effective tax rate is lower than
the prior year due to lower statutory rates.
Summary of Quarterly Financial Data
The selected quarterly financial data below is presented in
Canadian dollars and in accordance with IFRS. This
information is derived from the Company's unaudited quarterly
financial statements.
(in millions of
Cdn. $ except per share
data) |
|
|
Q2 |
|
Q3 |
|
Q4 |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
Q1 |
Unaudited |
2010 |
|
2010 |
|
2010 |
|
2011 |
|
2011 |
|
2011 |
|
2011 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
99.9 |
|
|
|
132.2 |
|
|
|
135.6 |
|
|
|
137.7 |
|
|
|
113.9 |
|
|
|
140.5 |
|
|
|
154.3 |
|
|
|
160.3 |
|
Gross Profit |
|
15.6 |
|
|
|
19.2 |
|
|
|
20.5 |
|
|
|
22.3 |
|
|
|
19.3 |
|
|
|
23.9 |
|
|
|
25.3 |
|
|
|
29.4 |
|
Gross Profit % |
|
15.6 |
% |
|
|
14.5 |
% |
|
|
15.1 |
% |
|
|
16.2 |
% |
|
|
16.9 |
% |
|
|
17.0 |
% |
|
|
16.4 |
% |
|
|
18.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
0.7 |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
5.3 |
|
|
|
3.1 |
|
|
|
7.6 |
|
|
|
6.6 |
|
|
|
11.3 |
|
EBITDA as a % of revenues |
|
0.7 |
% |
|
|
2.9 |
% |
|
|
2.8 |
% |
|
|
3.8 |
% |
|
|
2.7 |
% |
|
|
5.4 |
% |
|
|
4.3 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
(0.1) |
|
|
|
2.2 |
|
|
|
1.6 |
|
|
|
3.4 |
|
|
|
1.7 |
|
|
|
4.8 |
|
|
|
4.5 |
|
|
|
7.9 |
|
Net earnings (loss) as
a % of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
|
(0.1) |
% |
|
|
1.7 |
% |
|
|
1.2 |
% |
|
|
2.5 |
% |
|
|
1.5 |
% |
|
|
3.4 |
% |
|
|
2.9 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
(0.01) |
|
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
$ |
0.10 |
|
|
$ |
0.27 |
|
|
|
0.26 |
|
|
$ |
0.46 |
|
|
Diluted |
$ |
(0.01) |
|
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
$ |
0.09 |
|
|
$ |
0.26 |
|
|
|
0.25 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net working
capital(1) |
|
111.8 |
|
|
|
129.0 |
|
|
|
125.7 |
|
|
|
120.1 |
|
|
|
136.5 |
|
|
|
134.6 |
|
|
|
116.9 |
|
|
|
137.8 |
|
Long term debt / |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bank operating
loan(1) |
|
0.3 |
|
|
|
14.4 |
|
|
|
6.4 |
|
|
|
0.3 |
|
|
|
12.2 |
|
|
|
5.8 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total well completions |
|
2,197 |
|
|
|
2,611 |
|
|
|
4,760 |
|
|
|
3,861 |
|
|
|
2,765 |
|
|
|
3,495 |
|
|
|
4,350 |
|
|
|
2,873 |
|
(1) |
Net working capital and long term debt/bank operating loan
amounts are as at quarter end |
|
|
The Company's sales levels are affected by
weather conditions. As warm weather returns in the spring
each year, the winter's frost comes out of the ground rendering
many secondary roads incapable of supporting the weight of heavy
equipment until they have dried out. In addition, many
exploration and production areas in northern Canada are accessible only in the winter
months when the ground is frozen. As a result, the first and
fourth quarters typically represent the busiest time for oil and
gas industry activity and the highest oilfield sales activity for
the Company. Oilfield sales levels drop dramatically during
the second quarter until such time as roads have dried and road
bans have been lifted. This typically results in a significant
reduction in earnings during the second quarter, as the decline in
sales typically outpaces the decline in SG&A costs as the
majority of the Company's SG&A costs are fixed in nature.
Net working capital (defined as current assets less cash and cash
equivalents, accounts payable and accrued liabilities, current
taxes payable, note payable and other current liabilities) and
borrowing levels follow similar seasonal patterns as sales.
Liquidity and Capital Resources
The Company's primary internal source of
liquidity is cash flow from operating activities before changes in
non-cash net working capital balances. Cash flow from
operating activities and the Company's $60.0
million revolving term credit facility are used to finance
the Company's net working capital, capital expenditures and
acquisitions.
As at March 31,
2012, the Company had $3.6
million of cash on hand and had no long term debt. Cash
decreased by $12.2 million from
December 31, 2011 as the Company
generated $9.7 million of cashflow
from operating activities, before net changes in non-cash working
capital balances. Net working capital increased by $22.0 million in the quarter. Capital
expenditures in the quarter amounted to $0.3
million. Nominal activity occurred under the Company's
Normal Course Issuer bid ("NCIB") program. Subsequent to
quarter end, the Company terminated its NCIB program for this
year.
As at March 31,
2011, the Company had $3.2
million of cash and cash equivalents and no borrowings under
its revolving term credit facility, a net decrease of $9.4 million from December
31, 2010. Borrowing levels have decreased due to the
Company generating $4.4 million in
cash flow from operating activities, before net changes in non-cash
working capital balances of a $5.6
million reduction in net working capital. This was
offset by $0.5 million in capital and
other expenditures and $0.2 million
for the purchase of shares to resource share unit plan obligations
and the repurchase of shares under the NCIB program.
Net working capital was $137.8 million at March
31, 2012, an increase of $21.0
million from December 31,
2011. Accounts receivable at March
31, 2012 was $103.9 million,
an increase of $5.7 million (5.8%)
from December 31, 2011, due to the 4%
increase in first quarter sales compared to the fourth quarter of
2011. Days sales outstanding in accounts receivable ("DSO")
at the end of the first quarter of 2012 was 52 days which is
consistent with where the fourth quarter of 2011 ended. DSO
is calculated using average sales per day for the quarter compared
to the period end customer accounts receivable balance.
Inventory at March 31, 2012 was
$113.1 million, up $1.4 million (1.3%) from December 31, 2011. Inventory turns at the
end of the first quarter of 2012 were 4.6 turns were consistent
with the fourth quarter of 2011. Inventory turns are
calculated using cost of goods sold for the quarter on an
annualized basis, compared to the period end inventory
balance. Accounts payable and accrued liabilities at
March 31, 2012 were $79.9 million, a decrease of $13.7 million (15%) compared to the fourth
quarter of 2011.
Capital expenditures in Q1 2012 were
$0.3 million, an increase of
$0.2 million (49%) from Q4 2011
expenditures. Expenditures in 2012 were directed towards facility
expansion and maintenance, business system expansion and vehicles
and operating equipment. The majority of the expenditures in
Q1 2012 were directed towards similar items as they were in 2011.
Capital expenditures in 2012 are anticipated to be in the
$4.0 million to $5.0 million range
and will be directed towards business system, branch facility,
vehicle and operating equipment upgrades and replacements.
In July 2011, the
Company renewed its $60.0 million
revolving term credit facility that matures in July 2014 (the "Credit Facility").
Borrowings under the Credit Facility bear interest based on
floating interest rates and are secured by a general security
agreement covering all assets of the Company. The maximum
amount available under the Credit Facility is subject to a
borrowing base formula applied to accounts receivable and
inventories. The Credit Facility requires the Company to maintain
the ratio of its debt to debt plus equity at less than 40%.
As at December 31, 2011, this ratio
was 0%. The Company must also maintain coverage of its net
operating cash flow as defined in the Credit Facility agreement
over interest expense for the trailing twelve month period of
greater than 1.25 times. As at March
31, 2012, this ratio was 51.3 times. The Credit
Facility contains certain other covenants with which the Company is
in compliance. As at March 31,
2012, the Company had no borrowings under the facility and
had available undrawn borrowing capacity of $60.0 million under the Credit Facility.
Contractual Obligations
There have been no material changes in
off-balance sheet contractual commitments since December 31, 2011.
Capital Stock
As at March 31,
2012 and 2011, the following shares and securities
convertible into shares were outstanding:
(millions) |
|
|
|
|
|
|
|
March 31, 2012 |
|
|
|
|
|
March 31,
2011 |
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
Shares |
Shares outstanding |
|
|
|
|
|
|
|
17.5 |
|
|
|
|
|
17.5 |
Stock options |
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
1.0 |
Share unit plan obligations |
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
0.7 |
Shares outstanding and
issuable |
|
|
|
|
|
|
|
18.9 |
|
|
|
|
|
19.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average number of shares
outstanding during the first quarter of 2012 was 17.4 million,
which was consistent with the prior year period as the rise in the
Company's share price during the last year has limited the activity
occurring under the normal course issuer bid program. The diluted
weighted average number of shares outstanding was 18.1 million,
which is also consistent with the prior year quarter.
The Company has established an independent trust
to purchase common shares of the Company on the open market to
resource share unit plan obligations. During the three month period
ended March 31, 2012, nil common
shares were purchased by the trust (March
31, 2011 - 25,000 common shares at an average cost of
$8.75 per share). As at March 31, 2012, the trust held 566,277 shares
(March 31, 2011 - 462,753).
On December 20,
2011, the Company announced the renewal of the NCIB
effective January 3, 2012, to
purchase up to 850,000 common shares through the facilities of
NASDAQ, representing approximately 5% of its outstanding common
shares. During the three month period ended March 31, 2012, the Company purchased 8,625
shares at an average cost of $8.11
(March 31, 2011: 3,102 shares
purchased at an average cost of $7.56).
Subsequent to the quarter end, the Company has
cancelled its NCIB program. At the time the program was
cancelled, the Company had acquired 9,225 shares at an average cost
of $8.59 per share.
Critical Accounting Estimates
There have been no material changes to critical
accounting estimates since December 31,
2011. The Company is not aware of any environmental or asset
retirement obligations that could have a material impact on its
operations.
Subsequent Events
Subsequent to March 31,
2012, the Company announced that the Board of Directors and
the Special Committee of the Board of Directors have decided it is
in the best interest of CE Franklin and all shareholders to
formally commence a strategic review process. Further to the
announcement of a Strategic Review Process, the Company adopted a
Shareholders' Rights Plan to ensure that, in the context of a bid
for control of CE Franklin, the Board of Directors would have
sufficient time to consider the bid and conduct the Strategic
Review Process. Additionally, the Shareholders' Rights Plan
gives shareholders an equal opportunity to participate in such a
bid; and gives them adequate time to properly assess the bid.
The Shareholders' Rights Plan is not intended to and will not
prevent a sale of CE Franklin.
Controls and Procedures
Internal control over financial reporting
("ICFR") is designed to provide reasonable assurance regarding the
reliability of the Company's financial reporting and its compliance
with IFRS in its financial statements. The President and Chief
Executive Officer and the Vice President and Chief Financial
Officer of the Company have evaluated whether there were changes to
its ICFR during the three months ended March
31, 2012 that have materially affected or are reasonably
likely to materially affect the ICFR. No such changes were
identified through their evaluation.
Risk Factors
The Company is exposed to certain business and
market risks including risks arising from transactions that are
entered into the normal course of business, which are primarily
related to interest rate changes and fluctuations in foreign
exchange rates. During the reporting period, no events or
transactions since the year ended December
31, 2011 have occurred that would materially change the
business and market risk information disclosed in the Company's
Form 20F.
Forward Looking Statements
The information in the MD&A may contain
"forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of
historical facts, that address activities, events, outcomes and
other matters that CE Franklin plans, expects, intends, assumes,
believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may
occur in the future are forward-looking statements. These
forward-looking statements are based on management's current
belief, based on currently available information, as to the outcome
and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other
cautionary statements in this MD&A, including those in under
the caption "Risk Factors".
Forward-looking statements appear in a number of
places and include statements with respect to, among other
things:
- forecasted oil and gas industry activity levels in 2012 and
beyond;
- planned capital expenditures and working capital and
availability of capital resources to fund capital expenditures and
working capital;
- the Company's future financial condition or results of
operations and future revenues and expenses;
- the outcome of the Company's strategic review process
- the Company's business strategy and other plans and objectives
for future operations;
- fluctuations in worldwide prices and demand for oil and
gas;
- fluctuations in the demand for the Company's products and
services.
Should one or more of the risks or uncertainties
described above or elsewhere in this MD&A occur, or should
underlying assumptions prove incorrect, the Company's actual
results and plans could differ materially from those expressed in
any forward-looking statements.
All forward-looking statements expressed or
implied, included in this MD&A and attributable to CE Franklin
are qualified in their entirety by this cautionary statement. This
cautionary statement should also be considered in connection with
any subsequent written or oral forward-looking statements that CE
Franklin or persons acting on its behalf might issue. CE Franklin
does not undertake any obligation to update any forward-looking
statements to reflect events or circumstance after the date of
filing this MD&A, except as required by law.
Additional Information
Additional information relating to CE Franklin,
including its first quarter 2012 Management Discussion and Analysis
and interim consolidated financial statements and its Form 20-F /
Annual Information Form, is available under the Company's profile
on the SEDAR website at www.sedar.com and at
www.cefranklin.com.
CE Franklin
Ltd. |
CONDENSED INTERIM
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - UNAUDITED |
|
|
|
|
|
|
|
As at March 31 |
As at December 31 |
(in thousands of Canadian
dollars) |
2012 |
2011 |
Assets |
|
|
|
|
|
|
Current assets |
|
|
|
Cash and cash equivalents (Note
3) |
3,619 |
15,830 |
|
Accounts receivable (Note
4) |
103,887 |
98,190 |
|
Inventories (Note 5) |
113,122 |
111,661 |
|
Other |
3,050 |
2,565 |
|
|
223,678 |
228,246 |
Non-current assets |
|
|
|
Property and equipment |
9,403 |
9,709 |
|
Goodwill |
20,570 |
20,570 |
|
Deferred tax assets (Note
6) |
1,741 |
1,969 |
|
Other assets |
155 |
171 |
Total Assets |
255,547 |
260,665 |
|
|
|
|
Liabilities |
|
|
|
|
|
|
Current liabilities |
|
|
|
Accounts payable and accrued
liabilities (Note 7) |
79,874 |
93,613 |
|
Current taxes payable (Note
6) |
2,079 |
1,663 |
|
Note payable (Note 8) |
290 |
290 |
Total Liabilities |
82,243 |
95,566 |
|
|
|
|
|
|
|
|
Shareholders' equity |
|
|
|
Capital stock (Note 11) |
22,930 |
22,536 |
|
Contributed surplus |
20,459 |
20,529 |
|
Retained earnings |
129,915 |
122,034 |
|
|
173,304 |
165,099 |
Total Liabilities and Shareholders'
Equity |
255,547 |
260,665 |
|
|
|
|
See accompanying notes to
these condensed interim consolidated financial statements |
CE Franklin Ltd. |
CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED |
|
|
|
|
|
|
|
|
|
(Canadian dollars and number of shares
in thousands) |
Capital Stock |
|
|
|
|
|
|
|
Number of |
|
|
Contributed |
|
Retained |
|
Shareholders' |
|
Shares |
$ |
|
Surplus |
|
Earnings |
|
Equity |
|
|
|
|
|
|
|
|
|
Balance - January 1, 2011 |
17,474 |
23,078 |
|
19,716 |
|
107,742 |
|
150,536 |
|
|
|
|
|
|
|
|
|
Stock based compensation expense (Note 11
(b) and (c)) |
- |
- |
|
426 |
|
- |
|
426 |
Normal course issuer bid (Note 11 (d)) |
(3) |
(4) |
|
- |
|
(19) |
|
(23) |
Stock options exercised (Note 11 (b)) |
51 |
400 |
|
(400) |
|
- |
|
- |
Share Units exercised (Note 11 (c)) |
13 |
77 |
|
(77) |
|
- |
|
- |
Purchase of shares in trust for Share Unit Plans
(Note 11 (c)) |
(25) |
(219) |
|
- |
|
- |
|
(219) |
Net earnings |
- |
- |
|
- |
|
3,375 |
|
3,375 |
Balance - March 31, 2011 |
17,510 |
23,332 |
|
19,665 |
|
111,098 |
|
154,095 |
|
|
|
|
|
|
|
|
|
Balance - January 1, 2012 |
17,440 |
22,536 |
|
20,529 |
|
122,034 |
|
165,099 |
Stock based compensation expense (Note 11
(b) and (c)) |
- |
- |
|
335 |
|
- |
|
335 |
Normal Course Issuer Bid (Note 11 (d)) |
(9) |
(11) |
|
- |
|
(59) |
|
(70) |
Stock options exercised (Note 11 (b)) |
11 |
71 |
|
(71) |
|
- |
|
- |
Share Units exercised (Note 11 (c)) |
14 |
334 |
|
(334) |
|
- |
|
- |
Net earnings |
- |
- |
|
- |
|
7,940 |
|
7,940 |
Balance - March 31, 2012 |
17,456 |
22,930 |
|
20,459 |
|
129,915 |
|
173,304 |
|
|
|
|
|
|
|
|
|
See accompanying notes to these
condensed interim consolidated financial statements |
|
|
|
CE Franklin Ltd. |
CONDENSED INTERIM
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME -
UNAUDITED |
|
|
|
|
Three
Months Ended |
|
March 31 |
March 31 |
(in thousands of Canadian dollars) |
2012 |
2011 |
|
|
|
Revenue |
160,253 |
137,701 |
Cost of sales |
130,901 |
115,424 |
Gross profit |
29,352 |
22,277 |
|
|
|
Other expenses |
|
|
Selling, general
and administrative expenses (Note 14) |
17,771 |
16,980 |
Depreciation |
579 |
602 |
|
18,350 |
17,582 |
|
|
|
Operating profit |
11,002 |
4,695 |
Foreign exchange loss and
other |
320 |
10 |
Interest expense |
34 |
94 |
Earnings before tax |
10,648 |
4,591 |
|
|
|
Income tax expense (recovery) (Note 6) |
|
|
Current |
2,480 |
1,360 |
Deferred |
228 |
(144) |
|
2,708 |
1,216 |
|
|
|
|
|
|
Net earnings and comprehensive income |
7,940 |
3,375 |
|
|
|
Net earnings per share (Note 12) |
|
|
Basic |
0.46 |
0.19 |
Diluted |
0.44 |
0.19 |
|
|
|
Weighted average number of share outstanding
('000s) |
|
|
Basic |
17,443 |
17,488 |
Diluted (Note 12) |
18,149 |
18,052 |
|
|
|
See accompanying notes to these
condensed interim consolidated financial statements |
CE Franklin
Ltd. |
CONDENSED INTERIM
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED |
|
|
|
|
|
|
|
|
Three
months ended |
|
|
|
March 31 |
March 31 |
(in thousands of Canadian
dollars) |
2012 |
2011 |
|
|
|
Cash flows from operating
activities |
|
|
|
Net earnings for the
period |
7,940 |
3,375 |
|
Items not affecting
cash: |
|
|
|
|
Depreciation |
579 |
602 |
|
|
Deferred income tax expense
(recovery) |
228 |
(144) |
|
|
Stock based compensation expense |
385 |
466 |
|
|
Foreign exchange and other |
534 |
90 |
|
|
|
9,666 |
4,389 |
Net change in non-cash working capital
balances |
|
|
related to operations: |
|
|
|
Accounts receivable |
(5,714) |
(678) |
|
Inventories |
(1,461) |
(5,853) |
|
Other current assets |
(1,006) |
(79) |
|
Accounts payable and
accrued liabilities |
(13,790) |
12,208 |
|
Current taxes
payable |
416 |
101 |
|
|
|
(11,889) |
10,088 |
|
|
|
|
|
Cash flows used in investing
activities |
|
|
|
Net purchase of property
and equipment |
(252) |
(492) |
|
|
|
(252) |
(492) |
|
|
|
|
|
Cash flows used in financing
activities |
|
|
|
Decrease in bank
operating loan |
- |
(6,140) |
|
Purchase of capital stock
through normal course issuer bid |
(70) |
(23) |
|
Purchase of capital stock
in trust for Share Unit Plans |
- |
(219) |
|
|
|
(70) |
(6,382) |
|
|
|
|
|
Change in cash and cash equivalents
during the period |
(12,211) |
3,214 |
|
|
|
|
|
Cash and cash equivalents at the
beginning of the period |
15,830 |
- |
|
|
|
Cash and cash equivalents at the
end of the period |
3,619 |
3,214 |
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
Interest |
34 |
94 |
|
Income taxes |
2,158 |
1,260 |
|
|
|
|
|
See accompanying notes to
these condensed interim consolidated financial statements |
CE Franklin Ltd.
Notes to Condensed Interim Consolidated
Financial Statements - Unaudited
(Tabular amounts in thousands of Canadian
dollars, except share and per share amounts)
1. General information
CE Franklin Ltd. (the "Company") is
headquartered and domiciled in Calgary,
Alberta, Canada. The Company is an indirect subsidiary of
Schlumberger Limited, a global energy services company. The address
of the Company's registered office is 1800, 635 8th Ave
SW, Calgary, Alberta, Canada and
it is incorporated under the Alberta Business Corporations Act. The
Company is a distributor of pipe, valves, flanges, fittings,
production equipment, tubular products and other general industrial
supplies primarily to the oil and gas industry through its 39
branches situated in towns and cities that serve oil and gas fields
of the Western Canadian sedimentary basin. In addition, the Company
distributes similar products to the oil sands, refining and
petrochemical industries and non-oilfield related industries such
as forestry and mining.
2. Basis of preparation and accounting
policies
Basis of preparation
These condensed interim consolidated financial
statements for the three months ended March
31, 2012 have been prepared in accordance with IAS 34,
Interim Financial Reporting, as issued by the International
Accounting Standards Board ("IASB"). These condensed
interim consolidated financial statements should be read in
conjunction with the annual financial statements for the year ended
December 31, 2011, which have been
prepared in accordance with International Financial Reporting
Standards ("IFRS").
Accounting policies
The accounting policies adopted are consistent
with those of the previous financial year.
3. Cash and cash equivalents
|
|
March 31,
2012 |
|
December 31, 2011 |
|
Cash at bank and on hand |
3,619 |
|
15,830 |
Cash is held at a major Canadian chartered bank.
4. Accounts receivable
|
|
|
|
|
|
March
31, 2012 |
|
December 31, 2011 |
|
Current |
53,205 |
|
46,556 |
|
Less than 60 days overdue |
37,041 |
|
36,732 |
|
Greater than 60 days overdue |
6,220 |
|
8,328 |
|
Total Trade receivables |
96,466 |
|
91,616 |
|
Allowance for credit losses |
(1,737) |
|
(1,615) |
|
Net trade receivables |
94,729 |
|
90,001 |
|
Other receivables |
9,158 |
|
8,189 |
|
|
103,887 |
|
98,190 |
|
A substantial portion of the Company's accounts
receivable balance is with customers within the oil and gas
industry and is subject to normal industry credit risks.
Concentration of credit risk in trade receivables is limited as the
Company's customer base is large and diversified. The Company
follows a program of credit evaluations of customers and limits the
amount of credit extended when deemed necessary.
The Company has established procedures in place
to review and collect outstanding receivables. Significant
outstanding and overdue balances are reviewed on a regular basis
and resulting actions are put in place on a timely basis.
Appropriate provisions are made for debts that may be impaired on a
timely basis.
The Company maintains an allowance for possible
credit losses that are charged to selling, general and
administrative expenses by performing an analysis of specific
accounts.
5. Inventories
The Company maintains net realizable value allowances against
slow moving, obsolete and damaged inventories that are charged to
cost of goods sold on the statement of earnings. These allowances
are included in the inventory value disclosed above. Movement of
the allowance for net realizable value is as follows:
|
Three months ended |
|
Year ended |
|
March 31,
2012 |
|
December 31, 2011 |
Opening balance as at January 1 |
4,590 |
|
5,000 |
Additions |
478 |
|
2,495 |
Utilization through write-downs |
(558) |
|
(2,905) |
Closing balance |
4,510 |
|
4,590 |
6. Taxation
The difference between the income tax provision recorded and the
provision obtained by applying the combined federal and provincial
statutory rates is as follows:
|
Three Months
Ended |
|
March 31 |
|
2012 |
% |
2011 |
% |
Earnings before income taxes |
10,648 |
|
4,591 |
|
Income taxes calculated at statutory
rates |
2,694 |
25.3 |
1,227 |
26.7 |
Non-deductible items |
26 |
0.2 |
18 |
0.4 |
Share based compensation |
5 |
0.1 |
12 |
0.3 |
Adjustments for filing returns and
others |
(17) |
(0.1) |
(41) |
(0.9) |
|
2,708 |
25.5 |
1,216 |
26.5 |
As at March 31,
2012, income taxes payable was $1.6
million (December 31, 2011 -
$1.7 million payable). Income tax
expense is based on management's best estimate of the weighted
average annual income tax rate expected for the full financial
year.
|
As
at |
|
March 31,
2012 |
|
December 31, 2011 |
|
|
Assets |
|
|
|
|
|
|
Property and equipment |
|
896 |
|
883 |
|
|
Stock based compensation expense |
|
1,044 |
|
951 |
|
|
Other |
|
156 |
|
609 |
|
|
|
|
2,096 |
|
2,443 |
|
|
Liabilities |
|
|
|
|
|
|
Goodwill
and other |
|
(355) |
|
(474) |
|
|
Net Deferred tax asset |
|
1,741 |
|
1,969 |
|
Deductible temporary differences are recognized
to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences can be
utilized.
7. Accounts payable and accrued
liabilities
|
|
|
|
|
|
|
|
March 31,
2012 |
|
December 31, 2011 |
|
Current |
|
|
|
|
|
Trade payables |
|
13,269 |
|
10,919 |
|
Other payables |
|
2,235 |
|
3,834 |
|
Accrued compensation expenses |
|
1,478 |
|
4,683 |
|
Other accrued liabilities |
|
62,892 |
|
74,177 |
|
|
|
79,874 |
|
93,613 |
|
8. Note payable
|
|
|
March 31,
2012 |
|
December 31, 2011 |
|
JEN Supply debt |
|
290 |
|
290 |
|
|
|
|
|
|
|
In July of 2011, the Company renewed its
$60.0 million revolving term credit
facility that matures in July
2014. Borrowings under the credit facility bear
interest based on floating interest rates and are secured by a
general security agreement covering all assets of the Company. The
maximum amount available under the credit facility is subject to a
borrowing base formula applied to accounts receivable and
inventories. The credit facility requires that the Company
maintains the ratio of its debt to debt plus equity at less than
40%. As at March 31, 2012, this ratio
was nil (December 31, 2011 - nil).
The Company must also maintain coverage of its net operating cash
flow as defined in the credit facility agreement, over interest
expense for the trailing twelve month period, at greater than 1.25
times. As at March 31, 2012, this
ratio was 51.3 times (December 31,
2011 - 34.5 times). The credit facility contains
certain other covenants, with which the Company is in compliance
and has been for the comparative periods. As at March 31, 2012, the Company had borrowed nil and
had available undrawn borrowing capacity of $60.0 million under the credit facility. In
management's opinion, the Company's available borrowing capacity
under its Credit Facility and ongoing cash flow from operations,
are sufficient to resource its ongoing obligations.
The JEN Supply note payable is unsecured and
bears interest at the floating Canadian bank prime rate and is
repayable in November 2012.
9. Capital management
The Company's primary source of capital is its
shareholders' equity and cash flow from operating activities before
net changes in non-cash working capital balances. The Company
augments these capital sources with a $60
million, revolving bank term loan facility maturing in
July 2014 (see Note 8) which is used
to finance its net working capital and general corporate
requirements. The Company's objective is to maintain adequate
capital resources to sustain current operations including meeting
seasonal demands of the business and the economic cycle. The
Company's capital is summarised as follows:
|
March 31,
2012 |
|
December 31, 2011 |
Shareholders' equity |
173,466 |
|
165,099 |
Net working capital |
137,816 |
|
116,850 |
Net working capital is defined as current assets less cash
and cash equivalents, accounts payable and accrued liabilities,
current taxes payable, note payable and other current
liabilities.
10. Related party transactions
Schlumberger indirectly owns approximately 56%
of the Company's outstanding shares. The Company is the exclusive
distributor in Canada of downhole
pump production equipment manufactured by Wilson Supply, a division
of Schlumberger. Purchases of such equipment conducted in the
normal course on commercial terms were as follows:
For the
three months ended March 31 |
|
2012 |
|
2011 |
|
Cost of sales for the three months
ended |
|
3,761 |
|
2,285 |
|
Inventory |
|
5,971 |
|
4,443 |
|
Accounts payable and accrued
liabilities |
|
1,935 |
|
1,081 |
|
Accounts receivable |
|
203 |
|
- |
|
11. Capital Stock
a) The Company has authorized an unlimited
number of common shares with no par value. As at March 31, 2012, the Company had 17.5 million
common shares, 0.7 million stock options and 0.7 million share
units outstanding.
b) The Board of Directors may grant options to
purchase common shares to substantially all employees, officers and
directors and to persons or corporations who provide management or
consulting services to the Company. The exercise period and
the vesting schedule after the grant date are not to exceed 10
years.
Option activity for each of the three month
periods ended March 31 was as
follows:
(000's) |
|
2012 |
|
2011 |
|
Outstanding - January 1 |
|
745 |
|
1,073 |
|
Exercised |
|
(11) |
|
(51) |
|
Forfeited |
|
(4) |
|
(32) |
|
Outstanding at March 31 |
|
730 |
|
990 |
|
Exercisable at March 31 |
|
730 |
|
826 |
|
Stock based compensation expense recorded for
the three month period ended March 31,
2012 was $2,000 (2011 -
$67,000) and is included in selling,
general and administrative expenses on the consolidated statement
of earnings and comprehensive income. No options were granted
during the three month period ended March
31, 2012. Options vest one third or one fourth per year from
the date of grant.
c) Share Unit Plans
The Company has Restricted Share Unit ("RSU"),
Performance Share Unit ("PSU") and Deferred Share Unit ("DSU")
plans (collectively the "Share Unit Plans"), whereby RSUs, PSUs and
DSUs are granted entitling the participant, at the Company's
option, to receive either a common share or cash equivalent in
exchange for a vested unit. For the PSU plan the number of units
granted is dependent on the Company meeting certain return on net
asset ("RONA") performance thresholds during the year of grant. The
multiplier within the plan ranges from 0% - 200% dependent on
performance. RSU and PSU grants vest one third per year over the
three year period following the date of the grant. DSUs vest on the
date of grant and can only be redeemed when the Director resigns
from the Board. Compensation expense related to the units
granted is recognized over the vesting period based on the fair
value of the units at the date of the grant and is recorded to
contributed surplus. The contributed surplus balance is
reduced as the vested units are exchanged for either common shares
or cash. During the three month period ended March 31, 2012 the fair value of the RSU, PSU and
DSU units granted was $1,660,000
(2011 - $1,830,000) and $383,000 of compensation expense was recorded
(2011 - $358,000).
Share Unit Plan activity for the
periods ended March 31, 2012, and December 31, 2011 was as
follows: |
|
|
|
|
|
|
|
|
|
|
(000's) |
March 31, 2012 |
|
December 31, 2011 |
|
Number of Units |
|
Number
of Units |
|
RSU |
PSU |
DSU |
Total |
|
RSU |
PSU |
DSU |
Total |
Outstanding at January 1 |
307 |
162 |
102 |
571 |
|
273 |
97 |
80 |
450 |
Granted |
88 |
86 |
- |
174 |
|
130 |
117 |
22 |
269 |
Performance adjustments |
- |
- |
- |
- |
|
- |
4 |
- |
4 |
Exercised |
(11) |
(3) |
- |
(14) |
|
(34) |
(12) |
- |
(46) |
Forfeited |
(1) |
- |
- |
(1) |
|
(62) |
(44) |
- |
(106) |
Outstanding at end of
period |
383 |
245 |
102 |
730 |
|
307 |
162 |
102 |
571 |
Exercisable at end of period |
184 |
81 |
102 |
367 |
|
93 |
33 |
102 |
228 |
The Company has established an independent trust
to purchase common shares of the Company on the open-market to
satisfy Share Unit Plan obligations. The Company's intention is to
settle all share based obligations with shares delivered from the
trust. The trust is considered to be a special interest entity and
is consolidated in the Company's financial statements with the cost
of the shares held in trust reported as a reduction to capital
stock. For the three month period ended March 31, 2012, nil common shares were purchased
by the trust (2011 - 25,000 common shares at an average cost of
$8.75 per share). As at
March 31, 2012, the trust held
566,277 shares (2011 - 462,753).
d) Normal Course Issuer Bid ("NCIB")
On December 20,
2011, the Company announced the renewal of the NCIB
effective January 3, 2012, to
purchase up to 850,000 common shares through the facilities of
NASDAQ, representing approximately 5% of its outstanding common
shares. During the three month period ended March 31, 2012, the Company purchased 8,625
shares at an average cost of $8.11
(2011: 3,102 shares purchased at an average cost of $7.56).
Subsequent to the quarter end, the Company has
cancelled its NCIB program. At the time the program was
cancelled, the Company had acquired 9,225 shares at an average cost
of $8.59 per share.
12. Earnings per share
Basic
Basic earnings per share is calculated by
dividing the net income attributable to shareholders by the
weighted average number of ordinary shares in issue during the
year.
Dilutive
Diluted earnings per share are calculated using
the treasury stock method, as if RSUs, PSUs, DSUs and stock options
were exercised at the beginning of the year and funds received were
used to purchase the Company's common shares on the open market at
the average price for the year.
|
Three
Months Ended |
|
|
March 31 |
|
|
2012 |
2011 |
|
Net earnings and comprehensive
income |
7,940 |
3,375 |
|
Weighted average number of common
shares issued (000's) |
17,443 |
17,488 |
|
Adjustments for: |
|
|
|
Stock options |
291 |
255 |
|
Share Units |
415 |
309 |
|
Weighted average number of ordinary
shares for dilutive |
18,149 |
18,052 |
|
Net earnings per share: Basic |
0.46 |
0.19 |
|
Net earnings per share: Diluted |
0.44 |
0.19 |
|
13. Financial instruments
a) Fair values
The Company's financial instruments recognized
on the consolidated statements of financial position consist of
accounts receivable, accounts payable and accrued liabilities and
note payable. The fair values of these financial instruments
approximate their carrying amounts due to their short-term
maturity.
b) Credit Risk is described in Note 4.
c) Market Risk and Risk Management
The Company's long term debt bears interest
based on floating interest rates. As a result the Company is
exposed to market risk from changes in the Canadian prime interest
rate which can impact its borrowing costs. Based on the Company's
borrowing levels as at March 31,
2012, a change of one percent in interest rates would
decrease or increase the Company's annual net income by nil.
From time to time the Company enters into foreign exchange
forward contracts to manage its foreign exchange market risk by
fixing the value of its liabilities and future commitments. The
Company is exposed to possible losses in the event of
non-performance by counterparties. The Company manages this credit
risk by entering into agreements with counterparties that are
substantially all investment grade financial institutions. The
Company's foreign exchange risk arises principally from the
settlement of United States dollar
dominated net working capital balances as a result of product
purchases denominated in United
States dollars. As at March 31,
2012, the Company had contracted to purchase US$11.6 million at fixed exchange rates with
terms not exceeding two months (December 31,
2011 - $18.3 million). The
fair market values of the contracts were a loss of $0.3 million at March 31,
2012 (a gain of $0.2 million
at December 31, 2011). The Company
recorded on these contracts an unrealized loss of $0.3 million for the three months ended
March 31, 2012, which has been
recorded in foreign exchange loss and other in the condensed
interim consolidated statements of earnings and comprehensive
income. As at March 31, 2012, a
one percent change in the Canadian dollar relative to the US dollar
would decrease or increase the Company's annual net income by
$0.1 million.
14. Selling, general and administrative ("SG&A")
Costs
Selling, general and administrative costs for the three month
period ended March 31 are as
follows:
|
Three months
ended |
|
|
2012 |
2011 |
|
|
$ |
% |
$ |
% |
|
Salaries and Benefits |
10,960 |
61% |
10,291 |
61% |
|
Selling Costs |
1,910 |
11% |
1,472 |
9% |
|
Facility and office costs |
3,476 |
20% |
3,712 |
22% |
|
Other |
1,425 |
8% |
1,505 |
8% |
|
SG&A costs |
17,771 |
100% |
16,980 |
100% |
|
15. Segmented reporting
The Company distributes oilfield products
principally through its network of 39 branches located in western
Canada primarily to oil and gas
industry customers. Accordingly, the Company has determined
that it operates through a single operating segment and geographic
jurisdiction.
16. Seasonality
The Company's sales levels are affected by
weather conditions. As warm weather returns in the spring each
year, the winter's frost comes out of the ground rendering many
secondary roads incapable of supporting the weight of heavy
equipment until they have dried out. In addition, many exploration
and production areas in northern Canada are accessible only in the winter
months when the ground is frozen. As a result, the first and fourth
quarters typically represent the busiest time for oil and gas
industry activity and the highest sales activity for the Company.
Revenue levels drop dramatically during the second quarter until
such time as roads have dried and road bans have been lifted. This
typically results in a significant reduction in earnings during the
second quarter, as the decline in revenues typically outpaces the
decline in SG&A costs as the majority of the Company's SG&A
costs are fixed in nature. Net working capital (defined as current
assets less cash and cash equivalents, accounts payable and accrued
liabilities, income taxes payable and other current liabilities)
and bank revolving loan borrowing levels follow similar seasonal
patterns as revenues.
17. Subsequent events
Subsequent to March 31,
2012, the Company announced that the Board of Directors and
the Special Committee of the Board of Directors have decided it is
in the best interest of CE Franklin and all shareholders to
formally commence a strategic review process. Further to the
announcement of a Strategic Review Process, the Company adopted a
Shareholders' Rights Plan to ensure that, in the context of a bid
for control of CE Franklin, the Board of Directors would have
sufficient time to consider the bid and conduct the Strategic
Review Process. Additionally, the Shareholders' Rights Plan
gives shareholders an equal opportunity to participate in such a
bid; and gives them adequate time to properly assess the bid.
The Shareholders' Rights Plan is not intended to and will not
prevent a sale of CE Franklin.
SOURCE CE Franklin Ltd.