CALGARY, July 23 /PRNewswire-FirstCall/ -- CE FRANKLIN LTD.
(TSX.CFT, NASDAQ.CFK) reported net income of $0.04 per share
(basic) for the second quarter ended June 30, 2009, compared to
$0.05 per share earned in the second quarter ended June 30, 2008.
Financial Highlights -------------------- (millions of Cdn.$ except
Three Months Ended Six Months Ended per share data) June 30 June 30
--------------------- ------------------- 2009 2008 2009 2008
--------------------- ------------------- (unaudited) (unaudited)
Sales $ 109.1 $ 96.4 $ 249.9 $ 237.0 Gross profit 17.5 19.0 43.9
46.0 Gross profit - % of sales 16.0% 19.7% 17.6% 19.4% EBITDA(1)
1.7 2.3 11.3 12.4 EBITDA(1) % of sales 1.6% 2.4% 4.5% 5.2% Net
income $ 0.6 $ 1.0 $ 6.6 $ 7.2 Per share - basic $ 0.04 $ 0.05 $
0.37 $ 0.39 - diluted $ 0.03 $ 0.05 $ 0.36 $ 0.39 Net working
capital(2) $ 137.0 $ 114.9 Bank operating loan(2) $ 25.3 $ 18.4 "CE
Franklin delivered solid results in the second quarter,
significantly outperforming market activity. The integration of an
oilfield supply competitor acquired June 1, 2009 is proceeding well
and will strengthen the Company's competitive position and
profitability going forward," said Michael West, President and
Chief Executive Officer. Net income for the second quarter of 2009
was $0.6 million, down 40% from the second quarter of 2008. Second
quarter sales are seasonally low as oilfield project activity is
impacted by the spring breakup. Sales were $109.1 million, an
increase of $12.7 million (13%) compared to the second quarter of
2008 as strong sales to oil sands customers more than offset the
decline in oilfield supply sales. Capital project business for the
second quarter comprised 58% of total sales (2008 - 54%), and
increased $11.6 million (22%) over the prior year period due to
continued growth of oil sands revenues. Gross profit for the second
quarter was down $1.5 million with gross profit margins reducing by
3.7% from the prior year period to 16.0%. The decrease is a result
of the increase in lower margin oil sands sales. Selling, general
and administrative expenses decreased by $0.9 million for the
quarter compared to the prior year period as compensation, selling
and marketing costs have been managed lower in response to the
reduced oil and gas industry activity levels. The weighted average
number of shares outstanding during the second quarter decreased by
0.6 million shares (3%) from the prior year period principally due
to shares purchased for cancellation pursuant to the Company's
normal course issuer bid. Net income per share (basic) was $0.04 in
the second quarter of 2009, down $0.01 (20%) from that earned in
the second quarter 2008. On June 1, 2009, the Company acquired an
oilfield supply competitor for $12.0 million, subject to post
closing adjustments. The acquired business operated 22 oilfield
supply stores across the western Canadian sedimentary basin of
which 17 locations are proximate to CE Franklin stores and are
being integrated. The remaining 5 locations extend the market reach
of CE Franklin's distribution network to 50 locations. The
acquisition is expected to increase CE Franklin's annualized sales
by more than 10% from current levels. The acquisition contributed
sales of approximately $4.0 million in the second quarter and a net
operating loss before tax of $0.3 million. The integration of the
acquisition is well advanced and is expected to contribute positive
earnings in the third quarter. Net income for the first half of
2009 was $6.6 million, down $0.6 million from the first half of
2008. Sales were $249.9 million, an increase of $12.9 million (5%)
compared to the first half of 2008. Capital project business for
the first half of 2009 comprised 60% of total sales (2008 - 55%),
and increased $21.1 million (16%) over the prior year period due to
increased oil sands, midstream and industrial project sales. Gross
profit for the first six months was down $2.1 million with margins
reducing by 1.8% from the prior year period. The decrease is a
result of the increase in lower margin oil sands sales and
increased competitive pressure. Selling, general and administrative
expenses decreased by $1.0 million for the first half compared to
the prior year period as compensation, selling and marketing costs
have been managed lower in response to the reduced oil and gas
industry activity levels. The weighted average number of shares
outstanding during the first half of the year decreased by 0.4
million shares (2%) from the prior year period principally due to
shares purchased in 2009 for cancellation pursuant to the Company's
normal course issuer bid. Net income per share (basic) was $0.37 in
the first half of 2009, down $0.02 (5%) from the first half of
2008. Business Outlook The ongoing global recession has contributed
to significant capital market volatility, resulting in
deleveraging, repricing of risk and ultimately the retrenchment of
consumption. Oil and gas markets have experienced similar upheaval.
While crude oil prices have rebounded from first quarter lows,
natural gas prices remain at the lowest levels seen in a decade.
Oil and gas well completions and rig counts have declined sharply
in the second quarter compared to 2008 levels and are expected to
continue through 2009 and into 2010 at depressed levels.
Approximately 60% of the Company's sales are driven by our
customers' capital project expenditures. The Company expects these
conditions will contribute to increased consolidation of oil and
gas customers, stable to deflationary product costs and improved
labour availability. For the balance of 2009 and into 2010, sales
levels are expected to decline compared to 2008 as expected lower
oilfield sales are partially offset by expected increased sales to
oil sands, midstream and industrial product end use markets. The
Company will continue to manage its cost structure in response to
weak oil and gas industry demand. The Company has a strong balance
sheet and is positioned to pursue its strategies to increase market
share in both the conventional oilfield and oil sands markets. Over
the medium to longer term, the Company is confident that it can
continue to strengthen and improve the profitability of its
distribution network by expanding its product lines, supplier
relationships and capability to service additional oil and gas and
industrial end use markets. (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, excluding the
bank operating loan. Net working capital and Bank operating loan
are as at quarter end. Additional Information
---------------------- Additional information relating to CE
Franklin, including its second quarter 2009 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 2009 second quarter results, which is open to
the public, will be held on Friday, July 24, 2009 at 11:00 a.m.
Eastern Time (9:00 a.m. Mountain Time). Participants may join the
call by dialing 1-416-644-3417 in Toronto or dialing 1-800-732-9307
at the scheduled time of 11:00 a.m. Eastern Time. For those unable
to listen to the live conference call, a replay will be available
at approximately 1:00 p.m. Eastern Time on the same day by calling
1-416-640-1917 in Toronto or dialing 1-877-289-8525 and entering
the Passcode of 21310334 followed by the pound sign and may be
accessed until midnight Monday, August 1, 2009. The call will also
be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2719200 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 oil sands,
refining, heavy oil, petrochemical, forestry and mining industries.
These products are distributed through its 50 branches, which are
situated in towns and cities serving particular oil and gas fields
of the western Canadian sedimentary basin. Forward-looking
Statements: The information in this news release may contain
"forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and other applicable securities legislation.
All statements, other than statements of historical facts, that
address activities, events, outcomes and other matters that CE
Franklin plans, expects, intends, assumes, believes, budgets,
predicts, forecasts, projects, estimates or anticipates (and other
similar expressions) will, should or may occur in the future are
forward-looking statements. These forward-looking statements are
based on management's current belief, based on currently available
information, as to the outcome and timing of future events. When
considering forward-looking statements, you should keep in mind the
risk factors and other cautionary statements and refer to the Form
20-F or our annual information form for further detail.
Management's Discussion and Analysis as at July 23, 2009 The
following Management's Discussion and Analysis ("MD A") is provided
to assist readers in understanding CE Franklin Ltd.'s ("CE
Franklin" or the "Company") financial performance and position
during the periods presented and significant trends that may impact
future performance of CE Franklin. This discussion should be read
in conjunction with the Company's interim consolidated financial
statements for the three and six month periods ended June 30, 2009,
the interim consolidated financial statements and MD A for the
three month period ended March 31, 2009, and the MD A and the
consolidated financial statements for the year ended December 31,
2008. 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 50 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 industries and
non-oilfield related industries such as forestry and mining. The
Company's branch operations service over 3,000 customers by
providing the right materials where and when they are needed, for
the best value. Our branches, supported by our centralized
Distribution Centre in Edmonton, Alberta, stock over 25,000 stock
keeping units. This infrastructure enables us to provide our
customers with the products they need on a same day or over night
basis. Our centralized inventory and procurement capabilities allow
us to leverage our scale to enable industry leading hub and spoke
purchasing, logistics and project expediting capabilities. Our
branches are also supported by services provided by the Company's
corporate office in Calgary, Alberta including sales, marketing,
product expertise, logistics, invoicing, credit and collection and
other business services. The Company's shares trade on the TSX
("CFT") and NASDAQ ("CFK") stock exchanges. Smith International
Inc., a major oilfield service company based in the United States,
owns 55% of the Company's shares. Business and Operating Strategy
The Company is pursuing the following strategies to grow its
business profitably: - Expand the reach and market share serviced
by our distribution network. We are focusing our sales efforts and
product offering on servicing complex, multi-site needs of large
and emerging customers in the energy sector. On June 1, 2009 the
Company acquired a western Canadian oilfield equipment distributor.
The acquired business operated 22 supply stores across the western
Canadian sedimentary basin of which 17 locations are proximate to
existing CE Franklin supply stores and have been integrated. The
remaining 5 locations will extend the market reach of our
distribution network. In 2009, our Fort St. John and Lloydminster
branches moved to larger locations to support continued growth. In
2008, we continued to invest in our distribution network by opening
a branch operation in Red Earth, Alberta and by expanding our
facilities at five existing branch operations. In the spring of
2008, we successfully completed the move to our new 153,000 square
foot Distribution Centre and nine acre pipe yard located in
Edmonton, Alberta which positions us to service our growing
distribution network. Organic growth is expected to be complemented
by selected acquisitions such as described above. - 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. This will
differentiate our service offering from our competitors and deepen
our relationship with customers. In the first quarter of 2009, we
opened a valve actuation centre at our Distribution Centre, to
service our customers' valve automation requirements. - Focus on
the oil sands and industrial project and MRO business by leveraging
our existing supply chain infrastructure, product and project
expertise. The Company is expanding its product line, supplier
relationships and expertise to provide the automation,
instrumentation and other specialty products that these customers
require. Business Outlook The ongoing global recession has
contributed to significant capital market volatility, resulting in
deleveraging, repricing of risk and ultimately the retrenchment of
consumption. Oil and gas markets have experienced similar upheaval.
While crude oil prices have rebounded from first quarter lows,
natural gas prices remain at the lowest levels seen in a decade.
Oil and gas well completions and rig counts have declined sharply
in the second quarter compared to 2008 levels and are expected to
continue through 2009 and into 2010 at depressed levels.
Approximately 60% of the Company's sales are driven by our
customers' capital project expenditures. The Company expects these
conditions will contribute to increased consolidation of oil and
gas customers, stable to deflationary product costs and improved
labour availability. For the balance of 2009 and into 2010, sales
levels are expected to decline compared to 2008 as expected lower
oilfield sales are partially offset by expected increased sales to
oil sands, midstream and industrial product end use markets. The
Company will continue to manage its cost structure in response to
weak oil and gas industry demand. The Company has a strong balance
sheet and is positioned to pursue its strategies to increase market
share in both the conventional oilfield and oil sands markets. Over
the medium to longer term, the Company is confident that it can
continue to strengthen and improve the profitability of its
distribution network by expanding its product lines, supplier
relationships and capability to service additional oil and gas and
industrial end use markets. Operating Results The following table
summarizes CE Franklin's results of operations: (in millions of
Cdn. dollars except per share data) Three Months Ended June 30 Six
Months Ended June 30 -------------------------------
------------------------------- 2009 2008 2009 2008 ---------------
--------------- --------------- --------------- Sales $109.1 100.0%
$ 96.4 100.0% $249.9 100.0% $237.0 100.0% Cost of sales (91.6)
(84.0)% (77.4) (80.3)% (206.0) (82.4)% (191.0) (80.6)% -------
------- ------- ------- ------- ------- ------- ------- Gross
profit 17.5 16.0% 19.0 19.7% 43.9 17.6% 46.0 19.4% Selling, general
and admin- istrative expenses (15.8) (14.5)% (16.7) (17.3)% (32.6)
(13.0)% (33.6) (14.2)% ------- ------- ------- ------- -------
------- ------- ------- EBITDA(1) 1.7 1.6% 2.3 2.4% 11.3 4.5% 12.4
5.2% Amortiz- ation (0.6) (0.5)% (0.6) (0.6)% (1.1) (0.4)% (1.2)
(0.5)% Interest (0.1) (0.1)% (0.2) (0.2)% (0.4) (0.2)% (0.6) (0.3)%
------- ------- ------- ------- ------- ------- ------- -------
Income before taxes 1.0 0.9% 1.5 1.6% 9.8 3.9% 10.6 4.5% Income tax
expense (0.4) (0.4)% (0.5) (0.6)% (3.2) (1.3)% (3.4) (1.5)% -------
------- ------- ------- ------- ------- ------- ------- Net income
0.6 0.5% 1.0 1.0% 6.6 2.6% 7.2 3.0% ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- Net income per share Basic $ 0.04 $
0.05 $ 0.37 $ 0.39 Diluted $ 0.03 $ 0.05 $ 0.36 $ 0.39 Weighted
average number of shares outstanding (000's) Basic 17,707 18,278
17,871 18,305 Diluted 18,151 18,574 18,189 18,601 (1) EBITDA
represents net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented,
represents a useful means of assessing the performance of the
Company's ongoing operating activities, as it reflects the
Company's earnings trends without showing the impact of certain
charges. The Company is also presenting EBITDA and EBITDA as a
percentage of sales because it is used by management as
supplemental measures of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and amortization
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Amortization expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net income, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net income is provided within the table
above. Not all companies calculate EBITDA in the same manner and
EBITDA does not have a standardized meaning prescribed by GAAP.
Accordingly, EBITDA, as the term is used herein, is unlikely to be
comparable to EBITDA as reported by other entities. Second Quarter
Results Net income for the second quarter of 2009 was $0.6 million,
down 40% from the second quarter of 2008. Second quarter sales are
seasonally low as oilfield project activity is impacted by the
spring breakup. Sales were $109.1 million, an increase of $12.7
million (13%) compared to the second quarter of 2008 as strong
sales to oil sands customers more than offset the decline in
oilfield supply sales. Capital project business for the second
quarter comprised 58% of total sales (2008 - 54%), and increased
$11.6 million (22%) over the prior year period due to continued
growth of oil sands revenues. Gross profit for the second quarter
was down $1.5 million with gross profit margins reducing by 3.7%
from the prior year period to 16.0%. The decrease is a result of
the increase in lower margin oil sands sales. Selling, general and
administrative expenses decreased by $0.9 million for the quarter
compared to the prior year period as compensation, selling and
marketing costs have been managed lower in response to the reduced
oil and gas industry activity levels. The weighted average number
of shares outstanding during the second quarter decreased by 0.6
million shares (3%) from the prior year period principally due to
shares purchased for cancellation pursuant to the Company's normal
course issuer bid. Net income per share (basic) was $0.04 in the
second quarter of 2009, down $0.01 (20%) from that earned in the
second quarter 2008. On June 1, 2009, the Company acquired an
oilfield supply competitor for $12.0 million, subject to post
closing adjustments. The acquired business operated 22 oilfield
supply stores across the western Canadian sedimentary basin of
which 17 locations are proximate to CE Franklin stores and are
being integrated. The remaining 5 locations extend the market reach
of CE Franklin's distribution network to 50 locations. The
acquisition is expected to increase CE Franklin's annualized sales
by more than 10% from current levels. The acquisition contributed
sales of approximately $4.0 million in the second quarter and a net
operating loss before tax of $0.3 million. The integration of the
acquisition is well advanced and is expected to contribute positive
earnings in the third quarter. Year to Date Results Net income for
the first half of 2009 was $6.6 million, down $0.6 million from the
first half of 2008. Sales were $249.9 million, an increase of $12.9
million (5%) compared to the first half of 2008. Capital project
business for the first half of 2009 comprised 60% of total sales
(2008 - 55%), and increased $21.1 million (16%) over the prior year
period due to increased oil sands, midstream and industrial project
sales. Gross profit for the first six months was down $2.1 million
with margins reducing by 1.8% from the prior year period. The
decrease is a result of the increase in lower margin oil sands
sales and increased competitive pressure. Selling, general and
administrative expenses decreased by $1.0 million for the first
half compared to the prior year period as compensation, selling and
marketing costs have been managed lower in response to the reduced
oil and gas industry activity levels. The weighted average number
of shares outstanding during the first half of the year decreased
by 0.4 million shares (2%) from the prior year period principally
due to shares purchased in 2009 for cancellation pursuant to the
Company's normal course issuer bid. Net income per share (basic)
was $0.37 in the first half of 2009, down $0.02 (5%) from the first
half of 2008. A more detailed discussion of the Company's second
quarter results from operations is provided below: Sales Sales for
the quarter ended June 30, 2009 were $109.1 million, an increase of
$12.7 million (13%) compared to the quarter ended June 30, 2008, as
detailed above in the "Second Quarter Results" discussion. (in
millions of Cdn. $) Three months ended June 30 Six months ended
June 30 ---------------------------- ---------------------------
2009 2008 2009 2008 -------------- ------------- -------------
------------- End use sales demand $ % $ % $ % $ % Capital projects
63.7 58 52.1 54 151.2 60 130.1 55 Maintenance, repair and operating
supplies (MRO) 45.4 42 44.3 46 98.7 40 106.9 45 --------------
------------- ------------- ------------- Total sales 109.1 100
96.4 100 249.9 100 237.0 100 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 are 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 three and six months ended 2009
and 2008 are provided in the table below. Q2 Average YTD Average
----------------- % ----------------- % 2009 2008 change 2009 2008
change --------- ------- ------------------ -------- -------- Gas -
Cdn. $/gj (AECO spot) $3.46 $10.22 (66%) $4.19 $9.09 (54%) Oil -
Cdn. $/bbl (Synthetic Crude) $67.42 $125.84 (46%) $61.87 $112.05
(45%) Average rig count 95 180 (47%) 207 337 (39%) Well
completions: Oil 422 940 (55%) 1,376 2,242 (39%) Gas 852 1,667
(49%) 3,845 4,960 (22%) --------- ------- ------------------
-------- -------- Total well completions 1,274 2,607 (51%) 5,221
7,202 (28%) 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 Sales of capital project related products were $63.7
million in the second quarter of 2009, up $11.6 million (22%) from
the second quarter of 2008 due to increased oil sands and midstream
project sales. Total well completions decreased by 51% in the
second quarter of 2009 and the average working rig count decreased
by 47% compared to the prior year period. Gas wells comprised 67%
of the total wells completed in western Canada in the second
quarter of 2009 compared to 64% in the second quarter of 2008. Spot
gas prices ended the second quarter at $3.18 per GJ (AECO) a
decrease of 24% from the second quarter average price. Oil prices
ended the second quarter at $79.33 per bbl (Synthetic Crude) an
increase of 28% from the second quarter average price but have
subsequently moderated. Continued depressed oil and gas prices are
expected to result in reduced industry cash flow, access to capital
and capital expenditure economics, which in turn is expected to
decrease demand for the Company's products through the remainder of
2009 and into 2010. MRO product sales are related to overall oil
and gas industry production levels and tend to be more stable than
capital project sales. MRO product sales for the quarter ended June
30, 2009 increased by $1.1 million (2%) to $45.4 million compared
to the quarter ended June 30, 2008 and comprised 42% of the
Company's total sales (2008 - 46%). The Company's strategy is to
grow profitability by focusing on its core western Canadian
oilfield equipment service business, complemented by an increase in
the product life cycle services provided to its customers and the
focus on the emerging oil sands capital project and MRO sales
opportunities. Sales results of these initiatives to date are
provided below: Q2 2009 Q2 2008 YTD 2009 YTD 2008 -------------
------------- ------------- -------------- Sales ($millions) $ % $
% $ % $ % Oilfield 68.1 63 89.2 92 194.4 78 223.0 94 Oil sands 38.6
35 3.7 4 51.0 20 6.1 3 Production services 2.4 2 3.5 4 4.5 2 7.9 3
------------- ------------- ------------- -------------- Total
sales 109.1 100 96.4 100 249.9 100 237.0 100 Sales of oilfield
products to conventional western Canada oil and gas end use
applications were $68.1 million for the second quarter of 2009,
down 24% from the second quarter of 2008. This decrease was driven
by the 51% decrease in well completions compared to the prior year
period, offset mainly by increased midstream and industrial project
revenue. Sales to oil sands end use applications increased to $38.6
million in the second quarter compared to $3.7 million in the
second quarter of 2008. The increase in sales was mainly due to a
large sale of pipe. The Company continues to position its sales
focus and Distribution Centre and Fort McMurray branch to penetrate
this emerging market for capital project and MRO products.
Production service sales were $2.4 million in the second quarter of
2009 compared to $3.5 million in the second quarter of 2008 as
customers deferred maintenance activities in the face of
challenging commodity prices. Gross Profit Q2 2009 Q2 2008 YTD 2009
YTD 2008 --------- --------- --------- --------- Gross profit
(millions) $17.5 $19.0 $43.9 $46.0 Gross profit margin as a % of
sales 16.0% 19.7% 17.6% 19.4% Gross profit composition by product
sales category: Tubulars 2% 8% 7% 8% Pipe, flanges and fittings 37%
23% 36% 25% Valves and accessories 20% 19% 18% 20% Pumps,
production equipment and services 11% 17% 11% 16% General 30% 33%
28% 31% --------- --------- --------- --------- Total gross profit
100% 100% 100% 100% Gross profit was $17.5 million in the second
quarter of 2009, and gross profit margins were 16.0%, a decrease of
$1.5 million and 3.7% from the prior year second quarter. Gross
profit composition in the second quarter of 2009 saw a shift from
pumps, production equipment, services and general categories into
pipe, fitting and flange categories reflecting the increase in oil
sands sales. Tubular sales and margins are down due to depressed
drilling activity. Selling, General and Administrative ("SG&A")
Costs Q2 2009 Q2 2008 YTD 2009 YTD 2008 ------------- -------------
------------- -------------- ($millions) $ % $ % $ % $ % People
costs 8.7 55 9.1 54 18.8 57 19.4 58 Selling costs 1.8 11 2.1 13 3.5
11 4.3 13 Facility and office costs 3.4 22 3.5 21 6.7 21 6.1 18
Other 1.9 12 2.0 12 3.6 11 3.8 11 ------------- -------------
------------- -------------- SG&A costs 15.8 100 16.7 100 32.6
100 33.6 100 SG&A costs as % of sales 14% 17% 13% 14% SG A
costs decreased by $0.9 million (5%) in the second quarter of 2009
compared to the prior year period. The decrease in people costs of
$0.4 million is mainly due to reduced employee count, incentive
compensation and other cost reduction programs in response to lower
oilfield and production service sales levels. Selling costs were
down $0.3 million compared to the prior year period due mainly to
reduced advertising and promotion expense and accounts receivable
bad debt allowances. Facility and office costs remained flat in the
second quarter compared to the prior year period. The acquisition
of the oilfield supply business on June 1, 2009 contributed $1.0
million of SG A costs in the second quarter. SG A costs are
expected to decrease in the third quarter as the integration of
this business is completed. The Company leases 40 of its 50 branch
locations as well as its corporate office in Calgary and Edmonton
Distribution Centre. Six branch locations are owned and four are
operated by agents. The Company is continuing to take steps to
reduce its variable and fixed costs to adjust to expected lower
industry activity levels. Amortization Expense Amortization expense
of $0.6 million in the second quarter of 2009 was comparable to the
second quarter of 2008. Interest Expense Interest expense of $0.2
million in the second quarter of 2009 was comparable to the second
quarter of 2008. Foreign Exchange (Gain) Loss Foreign exchange
(gains) and losses were nominal in both the second quarter of 2009
and the second quarter of 2008. The Company's foreign exchange
policy has contributed to this result despite significant exchange
rate volatility in both 2008 and the first half of 2009. Income Tax
Expense The Company's effective tax rate for the second quarter of
2009 was 37.5%, compared to 35.2% in the second quarter of 2008.
Substantially all of the Company's tax provision is currently
payable. Summary of Quarterly Financial Data The selected quarterly
financial data presented below is presented in Canadian dollars and
in accordance with Canadian GAAP. This information is derived from
the Company's unaudited quarterly financial statements. (in
millions of Cdn. dollars except per share data) Unaudited Q3 Q4 Q1
Q2 Q3 Q4 Q1 Q2 2007 2007 2008 2008 2008 2008 2009 2009 -------
------- ------- ------- ------- ------- ------- ------- Sales
$116.8 $112.3 $140.6 $96.4 $149.3 $161.2 $140.7 $109.1 Gross profit
21.0 20.4 27.1 19.0 27.8 33.9 26.4 17.5 Gross profit % 18.0% 18.2%
19.2% 19.7% 18.6% 21.0% 18.8% 16.0% EBITDA 7.4 5.1 10.2 2.3 9.1
14.3 9.5 1.7 EBITDA as a % of sales 6.4% 4.5% 7.2% 2.4% 6.1% 8.9%
6.8% 1.6% Net income 4.1 2.4 6.3 1.0 5.7 8.8 6.0 0.6 Net income as
a % of sales 3.6% 2.1% 4.5% 1.0% 3.8% 5.5% 4.3% 0.5% Net income per
share Basic $ 0.22 $ 0.13 $ 0.34 $ 0.05 $ 0.31 $ 0.48 $ 0.33 $ 0.04
Diluted $ 0.22 $ 0.13 $ 0.34 $ 0.05 $ 0.31 $ 0.47 $ 0.33 $ 0.03 Net
working capital (1) 128.7 134.7 117.4 114.9 123.1 142.8 153.2 137.0
Bank operating loan(1) 35.4 44.3 21.8 18.4 20.9 34.9 40.2 25.3
Total well complet- ions 3,877 5,026 4,595 2,607 4,392 6,971 3,947
1,274 (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 decline in sales typically out
paces the decline in SG A costs as the majority of the Company's SG
A costs are fixed in nature. Net working capital (defined as
current assets less accounts payable and accrued liabilities,
income taxes payable and other current liabilities, excluding the
bank operating loan) and bank operating loan borrowing levels
follow similar seasonal patterns as sales. Liquidity and Capital
Resources The Company's primary internal source of liquidity is
cash flow from operating activities before net changes in non-cash
working capital balances. Cash flow from operating activities and
the Company's 364-day bank operating facility are used to finance
the Company's net working capital, capital expenditures required to
maintain its operations, and growth capital expenditures. As at
June 30, 2009, borrowings under the Company's bank operating loan
were $25.3 million, a decrease of $9.6 million from December 31,
2008. Borrowing levels have decreased due to the company generating
$8.8 million in cash flow from operating activities, before net
changes in non-cash working capital balances and a $13.1 million
reduction in net working capital. This was offset by $1.6 million
in capital and other expenditures, $8.1 million related to the
acquisition of the oilfield equipment distributor and $2.6 million
for the purchase of shares to resource stock compensation
obligations and the repurchase of shares under the Company's Normal
Course Issuer Bid ("NCIB"). The remaining $3.9 million acquisition
cost payable (subject to post closing adjustments) is expected to
be paid in the third quarter. Net working capital was $137.0
million at June 30, 2009, a decrease of $5.8 million from December
31, 2008. Accounts receivable decreased by $43.4 million (43%) to
$57.1 million at June 30, 2009 from December 31, 2008 due to the
seasonal decrease in sales in the second quarter and an improvement
in days sales outstanding ("DSO"). DSO in the second quarter of
2009 was 44 days compared to 52 days in the first quarter of 2009
and 73 days in the second quarter of 2008. The improvement in DSO
performance compared to the first quarter of 2009 reflected good
collections performance, as well as the non-recurring impact of the
business acquisition as no receivables were acquired with the
business. The second quarter 2008 DSO result was impacted by
temporary issues associated with the implementation of a new
invoicing system. DSO is calculated using average sales per day for
the quarter compared to the period end accounts receivable balance.
Inventory decreased by $0.6 million at June 30, 2009 from December
31, 2008. Inventory was down approximately $11.6 million prior to
the $11.0 million of inventory that was acquired with the oilfield
supply business on June 1. Inventory turns for the second quarter
of 2009 decreased to 3.1 times compared to 4.0 times in the first
quarter of 2009 and 3.7 times in the second quarter of 2008.
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 plans to adjust its investment in inventory as
the acquired business is integrated and to align with anticipated
lower industry activity levels and compressed supplier lead times
in order to improve inventory turnover efficiency. Accounts payable
and accrued liabilities decreased by $41.6 million (50%) to $41.7
million at June 30, 2009 from December 31, 2008 responsive to the
decreased activity levels. Capital expenditures in the second
quarter of 2009 were $1.1 million, comparable to $1.2 million in
the prior year period. The majority of the expenditures in 2009
have been directed towards branch facility expansions. 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 2010. 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 3.0 times trailing twelve month
EBITDA. As at June 30, 2009, the Company's average debt to EBITDA
ratio was 0.9 times (June 30, 2008 - 1.2 times) which provides a
maximum borrowing ability of $60 million under the facility. As at
June 30, 2009, the ratio of the Company's debt to total
capitalization (debt plus equity) was 15% (June 30, 2008 - 13%).
Contractual Obligations There have been no material changes in
off-balance sheet contractual commitments since December 31, 2008.
Capital Stock As at June 30, 2009 and 2008, the following shares
and securities convertible into shares were outstanding: (millions)
June 30, June 30, 2009 2008 Shares Shares ----------- -----------
Shares outstanding 17.7 18.3 Stock options 1.2 1.3 Share units 0.5
0.2 ----------- ----------- Shares outstanding and issuable 19.4
19.8 The weighted average number of shares outstanding during the
second quarter 2009 was 17.7 million, a decrease of 0.6 million
shares from the prior year's second quarter due principally to the
purchases of common shares under its NCIB and to resource
restricted share unit obligations. The diluted weighted average
number of shares outstanding was 18.2 million, a decrease of 0.4
million shares from the prior year's second quarter. The Company
has established an independent trust to purchase common shares of
the Company on the open market to resource restricted share unit
obligations. During the three and six month period ended June 30,
2009, 25,000 and 75,000 common shares were acquired by the trust at
an average cost per share of $5.68 and $5.23 respectively (Three
and six months ended June 30, 2008 - 25,000 and 100,000 at an
average cost per share of $9.06 and $7.23 respectively). As at June
30, 2009, the trust held 366,087 shares (June 30, 2008 - 151,257
shares). On January 6, 2009, the Company announced a NCIB to
purchase for cancellation, up to 900,000 common shares representing
approximately 5% of its outstanding common shares. As at June 30,
2009, the Company had purchased 454,848 shares at cost of $2.3
million ($4.98 per share). Critical Accounting Estimates There have
been no material changes to critical accounting estimates since
December 31, 2008. 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,
2009, the Company adopted section 3064 - Goodwill and Intangible
Assets. The standard addresses the accounting treatment of
internally developed intangibles and the recognition of such
assets. The adoption of this Standard has had no impact on the
Company. The Company has developed a high level IFRS project plan,
a detailed project charter including resources required and
timelines, and has commenced assessing the differences between IFRS
and Canadian GAAP. Controls and Procedures Internal control over
financial reporting ("ICFR") is designed to provide reasonable
assurance regarding the reliability of the Company's financial
reporting and its compliance with Canadian GAAP in its financial
statements. The President and Chief Executive Officer and the Vice
President and Chief Financial Officer of the Company have evaluated
whether there were changes to its ICFR during the six months ended
June 30, 2009 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 for year ended December 31, 2008
have occurred that would materially change the information
disclosed in the Company's Form 20F. 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
2009 and 2010; - 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. Additional
Information ---------------------- Additional information relating
to CE Franklin, including its second quarter 2009 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/. CE
Franklin Ltd. Interim Consolidated Balance Sheets - Unaudited
-------------------------------------------------------------------------
June 30 December 31 (in thousands of Canadian dollars) 2009 2008
-------------------------------------------------------------------------
Assets Current assets Accounts receivable 57,118 100,513
Inventories 118,850 119,459 Other 2,722 9,529
-------------------------------------------------------------------------
178,690 229,501 Property and equipment 11,078 9,528 Goodwill 20,570
20,570 Future income taxes (note 5) 1,117 1,186 Other 446 649
-------------------------------------------------------------------------
211,901 261,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities Current liabilities Bank operating loan 25,277 34,948
Accounts payable and accrued liabilities 41,683 83,258 Income taxes
payable (note 5) - 3,405
-------------------------------------------------------------------------
66,960 121,611 Long term debt and capital lease obligations 500 500
-------------------------------------------------------------------------
67,460 122,111
-------------------------------------------------------------------------
Shareholders' Equity Capital stock 22,737 22,498 Contributed
surplus 18,756 18,835 Retained earnings 102,948 97,990
-------------------------------------------------------------------------
144,441 139,323
-------------------------------------------------------------------------
211,901 261,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Operations - Unaudited
-------------------------------------------------------------------------
Three months ended Six months Ended (in thousands of Canadian
------------------- ------------------- dollars except shares and
June 30 June 30 June 30 June 30 per share amounts) 2009 2008 2009
2008
-------------------------------------------------------------------------
Sales 109,125 96,395 249,865 236,977 Cost of sales 91,630 77,442
206,002 190,963
-------------------------------------------------------------------------
Gross profit 17,495 18,953 43,863 46,014
-------------------------------------------------------------------------
Other expenses Selling, general and administrative expenses 15,782
16,735 32,642 33,608 Amortization 586 594 1,141 1,211 Interest
expense 154 163 347 601 Foreign exchange gain (30) (8) (29) (10)
-------------------------------------------------------------------------
16,492 17,484 34,101 35,410
-------------------------------------------------------------------------
Income before income taxes 1,003 1,469 9,762 10,604 Income tax
expense (recovery) (note 5) Current 529 651 3,064 3,583 Future
(153) (134) 69 (213)
-------------------------------------------------------------------------
376 517 3,133 3,370
-------------------------------------------------------------------------
Net income and comprehensive income 627 952 6,629 7,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per share (note 4) Basic 0.04 0.05 0.37 0.39 Diluted
0.03 0.05 0.36 0.39
-------------------------------------------------------------------------
Weighted average number of shares outstanding (000's) Basic 17,707
18,278 17,871 18,305 Diluted (note 4e) 18,151 18,574 18,189 18,601
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Cash Flow - Unaudited
-------------------------------------------------------------------------
Three months ended Six months Ended -------------------
------------------- (in thousands of Canadian June 30 June 30 June
30 June 30 dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flows from operating activities Net income for the period 627
952 6,629 7,234 Items not affecting cash - Amortization 586 594
1,141 1,211 Gain on disposal of assets (45) - (45) - Future income
tax recovery (153) (134) 69 (213) Stock based compensation expense
676 552 983 846
-------------------------------------------------------------------------
1,691 1,964 8,777 9,078 Net change in non-cash working capital
balances related to operations - Accounts receivable 33,529 28,027
43,395 4,988 Inventories 6,669 (5,050) 11,559 3,465 Other current
assets (285) (3,375) 7,718 (1,755) Accounts payable and accrued
liabilities (15,983) (14,698) (45,368) 13,068 Income taxes payable
(565) (2,514) (4,190) 132
-------------------------------------------------------------------------
25,056 4,354 21,891 28,976
-------------------------------------------------------------------------
Cash flows (used in)/from financing activities Decrease in bank
operating loan (14,887) (3,420) (9,680) (26,610) Issuance of
capital stock 48 48 166 49 Purchase of capital stock through normal
course issuer bid (881) - (2,266) - Purchase of capital stock in
trust for Share Unit Plans (141) (227) (394) (723)
-------------------------------------------------------------------------
(15,861) (3,599) (12,174) (27,284)
-------------------------------------------------------------------------
Cash flows (used in)/from investing activities Purchase of property
and equipment (1,070) (1,196) (1,592) (2,133) Business acquisition
(note 2) (8,125) 441 (8,125) 441
-------------------------------------------------------------------------
(9,195) (755) (9,717) (1,692)
-------------------------------------------------------------------------
Change in cash and cash equivalents during the period - - - - Cash
and cash equivalents - Beginning and end of period - - - -
-------------------------------------------------------------------------
Cash paid during the period for: Interest on bank operating loan
154 163 347 601 Income taxes 1,094 2,407 7,254 2,570
-------------------------------------------------------------------------
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, 2007 18,370 24,306 17,671 76,243 118,220
Stock based compensation expense - - 845 - 845 Stock options
excercised 10 70 (20) - 50 Share Units exercised 3 62 (62) - -
Purchase of shares in trust for Share Unit Plans (100) (723) - -
(723) Net income - - - 7,234 7,234
-------------------------------------------------------------------------
Balance - June 30, 2008 18,283 23,715 18,434 83,477 125,626
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance - December 31, 2008 18,094 22,498 18,835 97,990 139,323
Stock based compensation expense - - 983 - 983 Normal Course Issuer
Bid (455) (595) - (1,671) (2,266) Stock options exercised 55 248
(82) - 166 Share Units exercised 53 980 (980) - - Purchase of
shares in trust for Share Unit Plans (75) (394) - - (394) Net
income - - - 6,629 6,629
-------------------------------------------------------------------------
Balance - June 30, 2009 17,672 22,737 18,756 102,948 144,441
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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,
2008, except for the adoption of section 3064, as detailed below.
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, 2008, but do not
include all disclosures required by GAAP for annual financial
statements. Effective January 1, 2009 the Company adopted section
3064 - Goodwill and Intangible Assets. The standard addresses the
accounting treatment of internally developed intangibles and the
recognition of such assets. The adoption of this Standard has had
no impact on the Company. Recent Canadian GAAP pronouncements
include section 1582- Business Combinations, CICA 1601 -
Consolidated Financial Statements and CICA 1602 - Non-Controlling
interests. The overall objective of the standards issued was to
update the standards pertaining to business combinations and allow
convergence with IFRS by January 1, 2011. The adoption of these
Standards is expected to have no impact on the Company. 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 - Business Acquisition On June 1, 2009, the Company
acquired a western Canadian oilfield equipment distributor, for a
total cost of $11.95 million, subject to post closing adjustments.
Using the purchase method of accounting for acquisitions, the
Company consolidated the assets from the acquisition date and
allocated the consideration paid as follows: As at June 30, 2009
$'000 ------------------------------------------------------------
Cash consideration paid 8,100 Acquisition cost payable 3,850
----------- Total consideration 11,950 ----------- ----------- Net
assets acquired Inventory 10,950 Property, plant and equipment
1,000 ----------- 11,950 ----------- ----------- Note 3 - Inventory
Inventories consisting primarily of goods purchased for resale are
valued at the lower of average cost or net realizable value.
Inventory obsolescence expense was recognized in the three and six
month period ending June 30, 2009 of nil and $945,000 respectively
(2008 - $90,000 and $326,000). As at June 30, 2009 and December 31,
2008 the Company had recorded reserves for inventory obsolescence
of $6.8 million and $2.8 million respectively. Note 4 - Share Data
At June 30, 2009, the Company had 17.7 million common shares and
1.2 million options outstanding to acquire common shares at a
weighted average exercise price of $5.95 per common share, of which
769,616 options were vested and exercisable at a weighted average
exercise price of $5.01 per common share. a) Stock options Option
activity for each of the six month periods ended June 30 was as
follows: 000's 2009 2008
-------------------------------------------------------------------------
Outstanding at January 1 1,294 1,262 Granted - 75 Exercised (55)
(10) Forfeited (33) (1)
-------------------------------------------------------------------------
Outstanding at June 30 1,206 1,326
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were no options granted during the three and six month
periods ended June 30, 2009. A total of 75,588 stock options were
granted at a weighted average strike price of $6.26 in the six
month period ended June 30, 2008 for a fair value of $274,000. The
fair value of the options granted was estimated as at the grant
date using the Black-Scholes option pricing model, using the
following assumptions: 2008 ---- Dividend yield Nil Risk-free
interest rate 3.88% Expected life 5 years Expected volatility 50%
Stock option compensation expense recorded in the three and six
month periods ended June 30, 2009 was $177,000 (2008 - $180,000)
and $355,000 (2008- $350,000), respectively. Subsequent to June 30,
2009, the Company modified its current option plan to include a
cash settlement mechanism. b) Share Unit Plans The Company has
Restricted Share Unit ("RSU"), Performance Share Unit ("PSU") and
Deferred Share Unit ("DSU") plans (collectively the "Share Unit
Plans"), where by RSU's, PSU's and DSU's are granted entitling the
participant, at the Company's option, to receive either a common
share or cash equivalent value 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% dependant on performance. The vesting period
for RSU's and PSU'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. Share Unit Plan activity for the six
month periods ended June 30 was as follows: 000's 2009 Total 2008
Total
-------------------------------------------------------------------------
RSU PSU DSU RSU PSU DSU Outstanding at January 1 161 - 70 231 178 -
37 215 Granted 176 161 28 365 1 - 33 34 Exercised (53) - - (53) (3)
- - (3) Forfeited - - - - - - - -
-------------------------------------------------------------------------
Oustanding at June 30 284 161 98 543 176 - 70 246
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Share Unit Plan compensation expense recorded in the three and six
month periods ended June 30, 2009 were $501,000 (2008- $373,000)
and $628,000 (2008- $495,000) respectively. c) The Company
purchases its common shares on the open market to satisfy Share
Unit Plan obligations through an independent trust. The trust is
considered to be a variable interest entity and is consolidated in
the Company's financial statements with the number and cost of
shares held in trust, reported as a reduction of capital stock.
During the three and six month periods ended June 30, 2009, 25,000
and 75,000 common shares were acquired, respectively, by the trust
(2008 - 25,000 and 100,000) at a cost of $142,000 for the three
month and $394,000 for the six month period (2008 - $227,000 and
$723,000). d) Normal Course Issuer Bid ("NCIB") On January 6, 2009,
the Company announced a NCIB to purchase for cancellation, up to
900,000 common shares representing approximately 5% of its
outstanding common shares. As at June 30, 2009, the Company had
purchased 454,848 shares at a cost of $2,266,000. e) Reconciliation
of weighted average number of diluted common shares outstanding (in
000's) The following table summarizes the common shares in
calculating net earnings per share. Three Months Ended Six Months
Ended ------------------- ------------------- June 30 June 30 June
30 June 30 2009 2008 2009 2008
-------------------------------------------------------------------------
Weighted average common shares outstanding - basic 17,707 18,278
17,871 18,305 Effect of Stock options and Share Unit Plans 444 296
318 296
-------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 18,151 18,574
18,189 18,601
-------------------------------------------------------------------------
Note 5 - Income taxes a) The difference between the income tax
provision recorded and the provision obtained by applying the
combined federal and provincial statutory rates is as follows:
Three Months Ended Six Months Ended June 30 June 30 June 30 June 30
2009 % 2008 % 2009 % 2008 %
-------------------------------------------------------------------------
Income before income taxes 1,003 1,469 9,762 10,604
-------------------------------------------------------------------------
Income taxes calculated at expected rates 294 29.3 437 29.7 2,859
29.3 3,173 29.9 Non-deductible items (7) (0.7) 116 7.9 158 1.6 199
1.9 Capital and large corporations taxes 14 1.4 15 1.0 30 0.3 23
0.2 Adjustments on filing returns & other 75 7.5 (51) (3.4) 86
0.9 (25) (0.2)
-------------------------------------------------------------------------
376 37.5 517 35.2 3,133 32.1 3,370 31.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at June 30, 2009 included in other current assets are income
taxes receivable of $785,000 (December 31 2008 - $3,405,000
payable). 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: As at June 30 2009 2008
-------------------------------------------------------------------------
Assets Property and equipment 809 963 Share Unit Plan expense 508
922 Other 158 80
-------------------------------------------------------------------------
1,475 1,965 Liabilities Goodwill and other 358 346
-------------------------------------------------------------------------
Net future income tax asset 1,117 1,619
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company believes it is more likely than not that all future
income tax assets will be realized. Note 6 - 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 2010. 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 average
guaranteed debt to 3.0 times trailing 12 month earnings before
interest, amortization and taxes. As at June 30, 2009, this ratio
was 0.9 times (December 31, 2008 - 0.7 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 June 30,
2009. Note 7 - Financial Instruments and Risk Management a) Fair
Values The Company's financial instruments recognized on the
consolidated balance sheet consist of accounts receivable, accounts
payable and accrued liabilities, bank operating loan, long term
debt and obligations under capital leases. The fair values of these
financial instruments, excluding the bank operating loan, long term
debt and obligations under capital leases, approximate their
carrying amounts due to their short- term maturity. At June 30,
2009, the fair value of the bank operating loan 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. The Company follows
a program of credit evaluations of customer's and limits the amount
of credit extended when deemed necessary. The Company maintains
provisions for possible credit losses that are charged to selling,
general and administrative expenses by performing an analysis of
specific accounts. Movement of the allowance for credit losses for
the six month periods ended June 30 was as follows: As at June 30
2009 2008
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Opening balance 2,776 1,454 Increase during period 112 1,082
Write-offs (425) -
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Closing balance 2,463 2,536
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Trade receivables over 90 days were 13% of total trade receivables
as at June 30, 2009 (2008 - 12%). 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
customers typically priced in Canadian dollars, thus leading to
accounts receivable and accounts payable balances that are subject
to foreign exchange gains and losses upon translation. 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 purchase
commitments. The Company's foreign exchange risk arises principally
from the settlement of the United States dollar denominated net
working capital balances as a result of product purchases
denominated in United States dollars. As at June 30, 2009, the
Company had no outstanding contracts. Note 8 - Related Party
Transactions Smith International Inc. ("Smith") owns approximately
55% 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.
Purchases of such equipment conducted in the normal course on
commercial terms were as follows: June 30 June 30 2009 2008
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Cost of sales for the three months ended 771 2,311 Cost of sales
for the six months ended 2,445 5,368 Inventory 3,920 4,578 Accounts
payable and accrued liabilities 603 22 The Company pays facility
rental expense to an operations manager in the capacity of
landlord, reflecting market based rates. For the three and six
month period ended June 30, 2009, these costs totaled $124,000 and
$334,000 respectively (2008: $33,000 and $57,000). Note 9 -
Segmented reporting The Company distributes oilfield products
principally through its networks of 50 branches located in western
Canada to oil and gas industry customers. Accordingly, the Company
has determined that it operated through a single operating segment
and geographic jurisdiction DATASOURCE: CE Franklin Ltd. CONTACT:
Investor Relations, 1-800-345-2858, (403) 531-5604,
Copyright