2008-07-24 16:16:00
CE Franklin Ltd. announces 2008 Second Quarter Results
CALGARY, July 24 /EMWNews/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced its results for the second quarter of 2008 CE Franklin reported net income of $1.0 million or $0.05 per share (basic) for the second quarter ended June 30, 2008, a 67% increase compared to net income of $0.6 million or $0.03 per share earned in the second quarter ended June 30, 2007.
Financial Highlights (millions of Cdn.$ except Three Months Ended Six Months Ended per share data) June 30 June 30 ------------------- ------------------- 2008 2007 2008 2007 ------------------- ------------------- (unaudited) (unaudited) Sales $ 96.4 $ 82.9 $ 237.0 $ 237.2 Gross Profit 19.0 16.8 46.0 43.1 Gross Profit - % of sales 19.7% 20.3% 19.4% 18.2% EBITDA(1) 2.3 2.2 12.4 13.2 EBITDA(1) as a % of sales 2.4% 2.7% 5.2% 5.6% Net Income $ 1.0 $ 0.6 $ 7.2 $ 7.0 Per Share Basic $ 0.05 $ 0.03 $ 0.39 $ 0.38 Diluted $ 0.05 $ 0.03 $ 0.39 $ 0.37 Net Working Capital(2) $ 114.9 $ 127.0 Bank Operating Loan(2) $ 18.4 $ 36.0 "Net income improved in the second quarter compared to the prior year period, out pacing the 15% decline in year over year well completions. This is a solid result in a quarter that also saw the successful opening of our new, larger distribution centre, which positions CE Franklin well for the expected recovery in industry activity levels," said Michael West, President and Chief Executive Officer. Net income for the second quarter of 2008 was $1.0 million, up $0.4 million (67%) from the second quarter of 2007. Second quarter sales are seasonally low as oilfield project activity is impacted by the spring break up. Sales increased by 16% over the prior year period. Approximately half of this increase in sales was due to a 17% increase in the sale of products used in our customer's capital projects, outpacing the 12% increase in average rig counts. Adverse weather conditions experienced in the second quarter limited capital project activity with well completions declining by 15% compared to the prior year period. The remaining increase reflected sales from JEN Supply and Full Tilt that were acquired in the second half of 2007. Gross profit increased by $2.2 million over the prior year period due to the increase in sales offset by a reduction in gross profit margins. Gross profit margins for the quarter were 19.7%, down from strong performance in the prior year period at 20.3%. Gross margins improved in the second quarter from 19.3% generated in the first quarter of 2008. Selling, general and administrative expenses increased by $2.6 million to $16.7 million for the quarter due mainly to the addition of people and facility costs associated with the two acquisitions completed in the last half of 2007 and increased facility costs with the opening of the new Edmonton distribution centre during the second quarter. Lower interest expense was associated with reduced average debt levels and floating interest rates in the second quarter of 2008. Income taxes increased by $0.2 million in the second quarter compared to the prior year period due to higher pre-tax earnings offset slightly by a reduction in income tax rates. The weighted average number of shares outstanding during the second quarter was comparable to the prior year period. Net income per share (basic) was $0.05, up 67% from $0.03 earned in the second quarter of 2007, consistent with the increase in net income. Net income for the first half of 2008 was $7.2 million, up $0.2 million (3%) from the first half of 2007. Sales for the first half of 2008 of $237.0 million were comparable to the prior year period. Industry capital expenditure activity levels declined steadily throughout 2007 and the first quarter of 2008, before beginning to recover in the second quarter for reasons discussed in the "Outlook" section. This contributed to a 7% decline in capital project equipment sales compared to the prior year period which was fully offset from the JEN Supply and Full Tilt acquisitions. Gross profit increased by $2.9 million over the prior year period as gross profit margins increased from 18.2% in the first half of 2007 to 19.4% in the first half of 2008. The increases are due to increased high margin, MRO sales in 2008 and a large, low margin oilsands order in the first quarter of 2007. Selling, general and administrative expenses increased by $4.3 million to $33.6 million due mainly to the addition of people and facility costs associated with the two acquisitions completed in the last half of 2007 and increased facility costs associated with the opening of the new distribution centre in the second quarter. Interest expense declined due to reduced average debt levels and floating interest rates in the first half of 2008. Income taxes declined by $0.3 million in the first half of the year compared to the prior year period due primarily to a reduction in income tax rates. The weighted average number of shares outstanding during the first quarter was comparable to the prior year period. Net income per share (basic) was $0.39 in the first half of 2008 compared to $0.38 in the first half of 2007. Outlook ------- The Company's business is dependent on the level of conventional oil and gas capital expenditures and production activity in western Canada. A combination of events experienced in 2007 including lower natural gas prices, the Alberta government royalty task force review and subsequent decision to increase royalty rates, high drilling and operating costs, and the rapid appreciation of the Canadian dollar, reduced the competitiveness of the western Canadian sedimentary basin relative to other international oil and gas producing regions, resulting in a reduction of industry capital expenditures. Through the first half of 2008, natural gas and oil prices have continued to strengthen. On April 10, 2008, the Alberta government announced certain enhancements to royalty rates designed to improve the economics of production from deep wells drilled commencing in 2009. These improvements are being partially offset by significant price increases for steel, which will result in increased costs for our customers and higher working capital investment by CE Franklin. Taken together, industry cash flow economics and in turn activity levels are beginning to improve. Industry forecasts are now expecting drilling activity over the second half of 2008 and 2009 to exceed comparable 2007 activity levels which should translate into increased well completions and improved demand for the Company's products. With the successful opening of its new 153,000 square foot distribution centre in Edmonton during the second quarter, and its established supply store network in northeast British Columbia and southeast Saskatchewan, the Company is well positioned to efficiently service increased industry demand as it arises. Over the medium to longer term, the Company is optimistic that its strong competitive position will enable it to take advantage of available market share as conventional industry activity recovers and demand for the Company's products increase. Effective execution of the Company's oilsands and service diversification strategies provide further opportunities to profitably leverage its supply chain infrastructure.
(1) EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA is a supplemental non-GAAP financial measure used by management, as well as industry analysts, to evaluate operations. Management believes that EBITDA, as presented, represents a useful means of assessing the performance of the Company's ongoing operating activities, as it reflects the Company's earnings trends without showing the impact of certain charges. The Company is also presenting EBITDA and EBITDA as a percentage of sales because it is used by management as supplemental measures of profitability. The use of EBITDA by the Company has certain material limitations because it excludes the recurring expenditures of interest, income tax, and amortization expenses. Interest expense is a necessary component of the Company's expenses because the Company borrows money to finance its working capital and capital expenditures. Income tax expense is a necessary component of the Company's expenses because the Company is required to pay cash income taxes. Amortization expense is a necessary component of the Company's expenses because the Company uses property and equipment to generate sales. Management compensates for these limitations to the use of EBITDA by using EBITDA as only a supplementary measure of profitability. EBITDA is not used by management as an alternative to net income, as an indicator of the Company's operating performance, as an alternative to any other measure of performance in conformity with generally accepted accounting principles or as an alternative to cash flow from operating activities as a measure of liquidity. A reconciliation of EBITDA to Net Income is provided within the Company's Management Discussion and Analysis. Not all companies calculate EBITDA in the same manner and EBITDA does not have a standardized meaning prescribed by GAAP. Accordingly, EBITDA, as the term is used herein, is unlikely to be comparable to EBITDA as reported by other entities. (2) Net Working Capital is defined as current assets less accounts payable and accrued liabilities, income taxes payable and other current liabilities. Net Working Capital and Bank Operating Loan are as at quarter end. Additional Information ---------------------- Additional information relating to CE Franklin, including its second quarter 2008 Management Discussion and Analysis and interim consolidated financial statements and its Form 20-F/Annual Information Form, is available under the Company's profile on the SEDAR website at http://www.sedar.com and at http://www.cefranklin.com. Conference Call and Webcast Information --------------------------------------- A conference call to review the 2008 second quarter results, which is open to the public, will be held on Friday, July 25, 2008 at 11:00 a.m. Eastern Time (9:00 a.m. Mountain Time). Participants may join the call by dialing 1-416-644-3415 in Toronto or dialing 1-800-732-9307 at the scheduled time of 11:00 a.m. Eastern Time. For those unable to listen to the live conference call, a replay will be available at approximately 1:00 p.m. Eastern Time on the same day by calling 1-416-640-1917 in Toronto or dialing 1-877-289-8525 and entering the Passcode of 21275119 followed by the pound sign and may be accessed until midnight Monday, August 4, 2008. The call will also be webcast live at: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2317040 and will be available on the Company's website at http://www.cefranklin.com. Michael West, President and Chief Executive Officer will lead the discussion and will be accompanied by Mark Schweitzer, Vice President and Chief Financial Officer. The discussion will be followed by a question and answer period.
About CE Franklin
For more than half a century, CE Franklin has been a leading supplier
of products and services to the energy industry. CE Franklin distributes
pipe, valves, flanges, fittings, production equipment, tubular products and
other general oilfield supplies to oil and gas producers in Canada as well
as to the oilsands, refining, heavy oil, petrochemical, forestry and mining
industries. These products are distributed through its 44 branches, which
are situated in towns and cities serving particular oil and gas fields of
the western Canadian sedimentary basin.
Forward-looking Statements: The information in this news release may
contain "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 and other applicable securities legislation. All statements, other
than statements of historical facts, that address activities, events,
outcomes and other matters that CE Franklin plans, expects, intends,
assumes, believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may occur in
the future are forward-looking statements. These forward-looking statements
are based on management's current belief, based on currently available
information, as to the outcome and timing of future events. When
considering forward-looking statements, you should keep in mind the risk
factors and other cautionary statements and refer to the Form 20-F or our
annual information form for further detail.
Management's Discussion and Analysis as at July 24, 2008
The following Management's Discussion and Analysis ("MD&A") is provided
to assist readers in understanding CE Franklin Ltd.'s ("CE Franklin" or the
"Company") financial performance and position during the periods presented
and significant trends that may impact future performance of CE Franklin.
This discussion should be read in conjunction with the Company's interim
consolidated financial statements for the three and six month periods ended
June 30, 2008, the MD&A for the three month period ended March 31, 2008 and
the MD&A and the consolidated financial statements for the year ended
December 31, 2007.
All amounts are expressed in Canadian dollars and in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP"), except
where otherwise noted.
Overview
CE Franklin is a leading distributor of pipe, valves, flanges,
fittings, production equipment, tubular products and other general
industrial supplies, primarily to the oil and gas industry in Canada
through its 44 branches situated in towns and cities that serve oil and gas
fields of the western Canadian sedimentary basin. In addition, the Company
distributes similar products to the oilsands, refining, and petrochemical
industries and non-oilfield related industries such as forestry and mining.
The Company's branch operations service over 3,000 customers by
providing the right materials where they are needed, on time, and for the
best value. Our branches, supported by our distribution centre in Edmonton,
Alberta, stock over 25,000 stock keeping units. This hub and spoke supply
chain infrastructure enables us to provide our customers with the products
they need on a same day or over night basis while leveraging our scale to
enable industry leading purchasing and logistics capabilities. Our branches
are also supported by services provided by the Company's corporate office
in Calgary, Alberta including sales, marketing, product expertise,
invoicing, credit and collections and other business services.
The Company's shares trade on the TSX ("CFT") and AMEX ("CFK") stock
exchanges. Smith International Inc. ("Smith"), a major oilfield service
company based in the United States, owns approximately 53% of the Company's
shares.
Business and Operating Strategy
The Company is pursuing four strategies to grow its business profitably:
- Grow market share in our core oilfield equipment distribution
business in western Canada through concentrated sales efforts and
premium customer service complimented by selected acquisitions such
as the acquisition of JEN Supply Inc. ("JEN Supply") in
December 2007.
- Leverage our existing supply chain infrastructure, product and
project expertise by focusing on the emerging oilsands project and
Maintenance, Repair and Operating ("MRO") business.
- Expand our production equipment service capability to capture more of
the product life cycle requirements for the equipment we sell such as
down hole pump repair, oilfield engine maintenance, well optimization
and on site project management, in order to differentiate our service
offering from that of other competitors and deepen our relationship
with customers. The acquisition of Full Tilt Field Services Limited
("Full Tilt") in July 2007 provided us with the capability to service
oilfield engines and related components that we were previously
selling, and by doing so, positions us to attract new customers to
our core oilfield equipment distribution business.
- Leverage our domestic supply chain infrastructure capabilities and
customers by targeting international sales. Selected international
project sales are resourced from our Edmonton distribution centre. An
oilfield equipment distribution joint venture was established in the
2nd quarter of 2007 in Libya with Wilson Supply, a wholly owned
subsidiary of Smith, and a Libyan partner.
Business Outlook
The Company's business is dependent on the level of conventional oil
and gas capital expenditures and production activity in western Canada. A
combination of events experienced in 2007 including lower natural gas
prices, the Alberta government royalty task force review and subsequent
decision to increase royalty rates, high drilling and operating costs, and
the rapid appreciation of the Canadian dollar, reduced the competitiveness
of the western Canadian sedimentary basin relative to other international
oil and gas producing regions, resulting in a reduction of industry capital
expenditures.
Through the first half of 2008, natural gas and oil prices have
continued to strengthen. On April 10, 2008, the Alberta government
announced certain enhancements to royalty rates designed to improve the
economics of production from deep wells drilled commencing in 2009. These
improvements are being partially mitigated by significant price increases
for steel, which will result in increased costs for our customers and
higher working capital investment by CE Franklin. Taken together, industry
cash flow economics and in turn activity levels are beginning to improve.
Industry forecasts are now expecting drilling activity over the second half
of 2008 and 2009 to exceed comparable 2007 activity levels which should
translate into increased well completions and improved demand for the
Company's products. With the successful opening of its new 153,000 square
foot distribution centre in Edmonton during the second quarter, and its
established supply store network in northeast British Columbia and
southeast Saskatchewan, the Company is well positioned to efficiently
service increased industry demand as it arises.
Over the medium to longer term, the Company is optimistic that its
strong competitive position will enable it to take advantage of available
market share as conventional industry activity recovers and demand for the
Company's products increase. Effective execution of the Company's oilsands
and service diversification strategies provide further opportunities to
profitability leverage its supply chain infrastructure.
Operating Results
The following table summarizes CE Franklin's results of operations:
(in millions of Cdn. dollars except per share data)
Three Months Ended June 30
---------------------------------------
2008 2007
------------------- -------------------
Sales $ 96.4 100.0% $ 82.9 100.0%
Cost of sales (77.4) (80.3)% (66.1) (79.7)%
--------- --------- --------- ---------
Gross profit 19.0 19.7% 16.8 20.3%
Selling, general and
administrative expenses (16.7) (17.3)% (14.1) (17.0)%
Foreign exchange loss - 0.0% (0.5) (0.6)%
--------- --------- --------- ---------
EBITDA(1) 2.3 2.4% 2.2 2.7%
Amortization (0.6) (0.6)% (0.7) (0.8)%
Interest (0.2) (0.2)% (0.5) (0.7)%
--------- --------- --------- ---------
Income before taxes 1.5 1.6% 1.0 1.2%
Income tax expense (0.5) (0.6)% (0.4) (0.5)%
--------- --------- --------- ---------
Net income 1.0 1.0% 0.6 0.7%
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share
Basic (Cdn. $) $ 0.05 $ 0.03
Diluted (Cdn. $) $ 0.05 $ 0.03
Weighted average number of shares
outstanding (000's)
Basic 18,278 18,329
Diluted 18,574 18,768
(in millions of Cdn. dollars except per share data)
Six Months Ended June 30
---------------------------------------
2008 2007
------------------- -------------------
Sales $ 237.0 100.0% $ 237.2 100.0%
Cost of sales (191.0) (80.6)% (194.1) (81.8)%
--------- --------- --------- ---------
Gross profit 46.0 19.4% 43.1 18.2%
Selling, general and
administrative expenses (33.6) (14.2)% (29.3) (12.4)%
Foreign exchange loss - 0.0% (0.6) (0.2)%
--------- --------- --------- ---------
EBITDA(1) 12.4 5.2% 13.2 5.6%
Amortization (1.2) (0.5)% (1.5) (0.6)%
Interest (0.6) (0.2)% (1.1) (0.5)%
--------- --------- --------- ---------
Income before taxes 10.6 4.5% 10.6 4.5%
Income tax expense (3.4) (1.5)% (3.6) (1.5)%
--------- --------- --------- ---------
Net income 7.2 3.0% 7.0 3.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share
Basic (Cdn. $) $ 0.39 $ 0.38
Diluted (Cdn. $) $ 0.39 $ 0.37
Weighted average number of shares
outstanding (000's)
Basic 18,305 18,282
Diluted 18,601 18,721
(1) EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented, represents
a useful means of assessing the performance of the Company's ongoing
operating activities, as it reflects the Company's earnings trends
without showing the impact of certain charges. The Company is also
presenting EBITDA and EBITDA as a percentage of sales because it is
used by management as supplemental measures of profitability. The use
of EBITDA by the Company has certain material limitations because it
excludes the recurring expenditures of interest, income tax, and
amortization expenses. Interest expense is a necessary component of
the Company's expenses because the Company borrows money to finance
its working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company is
required to pay cash income taxes. Amortization expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management compensates
for these limitations to the use of EBITDA by using EBITDA as only a
supplementary measure of profitability. EBITDA is not used by
management as an alternative to net income, as an indicator of the
Company's operating performance, as an alternative to any other
measure of performance in conformity with generally accepted
accounting principles or as an alternative to cash flow from
operating activities as a measure of liquidity. A reconciliation of
EBITDA to Net Income is provided within the table above. Not all
companies calculate EBITDA in the same manner and EBITDA does not
have a standardized meaning prescribed by GAAP. Accordingly, EBITDA,
as the term is used herein, is unlikely to be comparable to EBITDA as
reported by other entities.
Second Quarter Results
Net income for the second quarter of 2008 was $1.0 million, up $0.4
million (67%) from the second quarter of 2007. Second quarter sales are
seasonally low as oilfield project activity is impacted by the spring break
up. Sales increased by 16% over the prior year period. Approximately half
of this increase in sales was due to a 17% increase in the sale of products
used in our customer's capital projects, outpacing the 12% increase in
average rig counts. Adverse weather conditions experienced in the second
quarter limited capital project activity, as well completions declined 15%
compared to the prior year period. The remaining increase reflected sales
from JEN Supply and Full Tilt that were acquired in the second half of
2007. Gross profit increased by $2.2 million over the prior year period due
to the increase in sales offset by a reduction in gross profit margins.
Gross profit margins for the quarter were 19.7% down from strong
performance in the prior year period at 20.3%. Gross margins improved in
the second quarter from 19.3% generated in the first quarter of 2008.
Selling, general and administrative expenses increased by $2.6 million to
$16.7 million for the quarter due mainly to the addition of people and
facility costs associated with the two acquisitions completed in the last
half of 2007 and increased facility costs with the opening of the new
Edmonton distribution centre during the second quarter. Lower interest
expense was associated with reduced average debt levels and floating
interest rates in the second quarter of 2008. Income taxes increased by
$0.2 million in the second quarter compared to the prior year period due to
higher pre-tax earnings offset slightly by a reduction in income tax rates.
The weighted average number of shares outstanding during the second quarter
was comparable to the prior year period. Net income per share (basic) was
$0.05 in the second quarter of 2008, an increase of 67% compared to $0.03
in the second quarter of 2007, consistent with the increase in net income.
Year to Date Results
Net income for the first half of 2008 was $7.2 million, up $0.2 million
(3%) from the first half of 2007. Sales from the first half of 2008 of
$237.0 million were comparable to the prior year period. Industry capital
expenditure activity levels declined steadily throughout 2007 and the first
quarter of 2008, before beginning to recover in the second quarter for
reasons discussed in the "Outlook" section. This contributed to a 7%
decline in capital project equipment sales compared to the prior year
period which was fully offset from the JEN Supply and Full Tilt
acquisitions. Gross profit increased by $2.9 million over the prior year
period as gross profit margins increased from 18.2% in the first half of
2007 to 19.4% in the first half of 2008. The increases are due to increased
high margin MRO sales in 2008 and a large, low margin oilsands order in the
first quarter of 2007. Selling, general and administrative expenses
increased by $4.3 million to $33.6 million due mainly to the addition of
people and facility costs associated with the two acquisitions completed in
the last half of 2007 and increased facility costs associated with the
opening of the new distribution centre. Interest expense declined due to
reduced average debt levels and floating interest rates in the first half
of 2008. Income taxes declined by $0.3 million in the first half of the
year compared to the prior year period due primarily to a reduction in
income tax rates. The weighted average number of shares outstanding during
the first quarter was comparable to the prior year period. Net income per
share (basic) was $0.39 in the first half of 2008 compared to $0.38 in the
first half of 2007.
A more detailed discussion of the Company's second quarter results from
operations is provided below:
Sales
Sales for the quarter ended June 30, 2008 were $96.4 million, up 16%
from the quarter ended June 30, 2007, principally due to increased capital
project demand reflecting an increase in the average rig count of 12% for
the quarter compared to the second quarter of 2007, and from higher MRO
product sales due to the acquisition of JEN Supply and Full Tilt in the
last half of 2007.
(in millions of Cdn. $)
Three months ended June 30 Six months ended June 30
---------------------------- ---------------------------
2008 2007 2008 2007
-------------- ------------- ------------- -------------
End use sales
demand $ % $ % $ % $ %
Capital projects 52.2 54 44.5 54 130.2 55 139.4 59
Maintenance,
repair and
operating
supplies (MRO) 44.2 46 38.4 46 106.8 45 97.8 41
-------------- ------------- ------------- -------------
Total sales 96.4 100 82.9 100 237.0 100 237.2 100
Note: Capital project end use sales are defined by the Company as
consisting of tubulars and 80% of pipe, flanges and fittings; and
valves
and accessories product sales respectively; MRO Sales are defined by
the
Company as consisting of pumps and production equipment, production
services; general product and 20% of pipes, flanges and fittings; and
valves and accessory product sales respectively.
The Company uses oil and gas well completions and average rig counts as
industry activity measures to assess demand for oilfield equipment used in
capital projects. Oil and gas well completions require the products sold by
the Company to complete a well and bring production on stream and are a
good general indicator of energy industry activity levels. Average drilling
rig counts are also used by management to assess industry activity levels
as the number of rigs in use ultimately drives well completion
requirements. The relative level of oil and gas commodity prices is a key
driver of industry capital project activity as product prices directly
impact the economic returns realized by oil and gas companies. Well
completion, rig count and commodity price information for the second
quarter and YTD 2008 and 2007 are provided in the table below.
Q2 Average YTD Average
------------------ % ----------------- %
2008 2007 change 2008 2007 change
--------- ------- ------------------ -------- --------
Gas - Cdn. $/gj
(AECO spot) $ 10.23 $ 7.10 44% $ 9.09 $ 7.25 25%
Oil - Cdn. $/bbl
(Edmonton Light) $125.83 $ 72.11 74% $112.04 $ 69.85 60%
Average rig count 180 161 12% 370 362 2%
Well completions:
Gas 1,667 2,118 (21%) 4,960 6,691 (26%)
Oil 940 939 0% 2,242 2,566 (13%)
--------- ------- ------------------ -------- --------
Total well
completions 2,607 3,057 (15%) 7,202 9,257 (22%)
Average statistics are shown except for well completions.
Sources: Oil and Gas prices - First Energy Capital Corp.; Rig count data -
Hughes Christensen; Well completion data - Daily Oil Bulletin
Sales of capital project related products were $52.2 million in the
second quarter of 2008, up 17% ($7.7 million) from the second quarter of
2007. Total well completions declined by 15% to 2,607 in the second quarter
2008 while the average working rig count increased to 180 (12%) compared to
the second quarter of 2007. Gas wells comprised 64% of the total wells
completed in western Canada in the second quarter of 2008 compared to 69%
in the second quarter of 2007. Oil and gas capital expenditure activity
began to recover in the second quarter of 2008 resulting from strengthening
oil and gas commodity prices and emerging gas exploration plays in the
northeast British Columbia and oil pool development in southeast
Saskatchewan. Well completions in the second quarter declined by 15% as
capital project activity was limited by adverse weather conditions. Well
completions for the remainder of 2008 should benefit from the increase in
average rig counts experienced during the second quarter of 2008, which
should translate into stronger demand for the Company's products. Spot gas
and oil prices ended the second quarter at $11.69 per GJ (AECO spot) and
$139.68 per bbl (Edmonton light), an increase of 14% and 11%, respectively,
over second quarter average prices. This should result in improved industry
cash flow and capital expenditure economics, which in turn should increase
demand for the Company's products.
MRO product sales are related to overall oil and gas industry
production levels and tend to be more stable than capital project sales.
MRO product sales for the quarter ended June 30, 2008 increased 15% to
$44.2 million compared to the quarter ended June 30, 2007 and comprised 46%
of the Company's total sales. The increase in sales was mainly attributable
to the acquisition of JEN Supply and Full Tilt in the last half of 2007.
The Company's strategy is to grow profitability by focusing on its core
western Canadian oilfield equipment service business, complemented by an
increase in the product life cycle services provided to its customers, the
focus on the emerging oilsands capital project and MRO sales opportunities,
as well as selected sales to international markets. Revenue results of
these initiatives to date are provided below:
Q2 2008 Q2 2007 YTD 2008 YTD 2007
------------- ------------- ------------- --------------
Sales ($millions) $ % $ % $ % $ %
Western Canada
oilfield 88.1 91 76.7 92 220.4 93 218.2 92
Oilsands 3.7 4 3.8 5 6.1 3 13.0 6
Production
Services 3.5 4 1.3 2 7.8 3 3.3 1
International 1.1 1 1.1 1 2.7 1 2.7 1
------------- ------------- ------------- --------------
Total Sales 96.4 100 82.9 100 237.0 100 237.2 100
Sales of oilfield products to conventional western Canada oil and gas
end use applications were $88.1 million for the second quarter of 2008, up
15% from the second quarter of 2007. The increase reflects an increase in
industry activity in the later part of the second quarter and in December
2007, the Company acquired JEN Supply, an oilfield equipment distributor
that operated four branches in east central Alberta. These locations
contributed approximately $4 million to sales, reducing the impact of the
decline in industry activity for the quarter. Two of these operations were
in existing markets where the Company had operations and have been combined
with the existing branches.
Sales to oilsands end use applications remained consistent with the
second quarter of 2007. The Company continues to position its sales focus
and Edmonton distribution centre to penetrate this emerging market for
capital project related products. The Company's Fort McMurray branch
continues to build on its position to service oilsands' MRO product
requirements.
Production service sales were $3.5 million in the second quarter of
2008, more than double the sales in the second quarter of 2007. The
acquisition of Full Tilt at the end of the 2nd quarter of 2007, which
provides oilfield engine maintenance and crane equipment services based in
Lloydminster, contributed the majority of the increase in revenues. The
Company expects to expand Full Tilt's service to other Company branch
locations during the year in order to capture more of our customer's
product life cycle expenditures while differentiating our services from
other oilfield equipment distributors.
Sales to international customer projects remained consistent at $1.1
million in the second quarter of 2008 and are serviced by our Edmonton
distribution centre. Sales activity from the Libyan oilfield equipment
joint venture established in 2007 has been minimal to date and is
anticipated to increase as operations gain momentum.
Q2 2008 Q2 2007 YTD 2008 YTD 2007
--------- --------- --------- ---------
Gross Profit
Gross profit (millions) $19.0 $16.8 $46.0 $43.1
Gross profit margin as a % of
sales 19.7% 20.3% 19.4% 18.2%
Gross profit composition by product
sales category:
Tubulars 8% 7% 8% 8%
Pipe, flanges and fittings 23% 26% 25% 29%
Valves and accessories 19% 19% 20% 20%
Pumps, production equipment and
services 17% 15% 16% 14%
General 33% 33% 31% 29%
--------- --------- --------- ---------
Total Gross Profit 100% 100% 100% 100%
Gross profit reached $19.0 million in the second quarter of 2008, up
$2.2 million (13%) from the second quarter of 2007 period due to the
increase in sales offset by a reduction in gross profit margins. Gross
profit composition in the second quarter of 2008 remained fairly consistent
with the prior year period, reflecting stable sales margins across product
sales categories and a consistent year over year capital projects/MRO sales
mix.
Selling, General and Administrative ("SG&A") Costs
Three months ended June 30 Six months ended June 30
2008 2007 2008 2007
------------- ------------- ------------- -------------
Sales ($millions) $ % $ % $ % $ %
People costs 9.1 54 7.6 54 19.4 58 16.5 56
Selling costs 2.1 13 1.9 13 4.3 13 4.0 14
Facility and
office costs 3.5 21 2.5 18 6.1 18 5.0 17
Other 2.0 12 2.1 15 3.8 11 3.8 13
------------- ------------- ------------- -------------
SG&A Costs 16.7 100 14.1 100 33.6 100 29.3 100
SG&A costs a %
of sales 17% 17% 14% 12%
SG&A costs increased 19% ($2.6 million) in the second quarter of 2008
from the prior year period and represented 17% of sales consistent with the
prior year period. The increase in people costs of $1.5 million is mainly
associated with the acquisition of JEN Supply and Full Tilt. Selling costs
were up $0.2 million compared to the prior year period due to increased
accounts receivable bad debt allowances. Facility and office costs have
increased in the second quarter of 2008 as the Company moved into a new,
larger distribution centre in Edmonton during the quarter. The addition of
the JEN Supply and Full Tilt facilities and continued occupancy cost
pressure in western Canada contributed the remaining increase in cost. The
Company leases 40 of its 44 branch locations as well as its corporate
office in Calgary and Edmonton distribution centre. The Company mitigates
the cyclical nature of industry activity levels by adjusting its variable
and fixed (primarily salaries and benefits) SG&A costs as activity levels
change.
Amortization Expense
Amortization expense was $0.6 million in the second quarter of 2008
down slightly from $0.7 million in the second quarter of 2007.
Interest Expense
Interest expense was $0.2 million in the second quarter of 2008, down
$0.3 million (66%) from the second quarter of 2007 due to lower average
borrowing levels and a decline in average floating interest rates.
Foreign Exchange Loss (Gain)
Foreign exchange gains were nominal in the second quarter of 2008
compared to a $0.5 million loss in the second quarter of 2007, reflecting
increased risk mitigation efforts undertaken.
Income Tax Expense
The Company's effective tax rate for the second quarter of 2008 was
35.2%, compared to 35.9% in the second quarter of 2007 due principally to a
reduction in statutory tax rates. Substantially all of the Company's tax
provision is currently payable.
Summary of Quarterly Financial Data
The selected quarterly financial data presented below is presented in
Canadian dollars and in accordance with Canadian GAAP. This information is
derived from the Company's unaudited quarterly financial statements.
(in millions of Cdn. dollars except per share data)
Unaudited Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2006 2006 2007 2007 2007 2007 2008 2008
------- ------- ------- ------- ------- ------- ------- -------
Sales $131.7 $130.6 $154.3 $ 82.9 $116.8 $112.3 $140.6 $ 96.4
Gross
profit 23.7 25.0 26.3 16.8 21.0 20.4 27.1 19.0
Gross
profit % 18.0% 19.1% 17.0% 20.3% 18.0% 18.2% 19.3% 19.7%
EBITDA 8.4 9.6 11.0 2.2 7.4 5.1 10.2 2.3
EBITDA as
a %
of sales 6.4% 7.4% 7.1% 2.7% 6.3% 4.5% 7.2% 2.4%
Net income 4.7 5.4 6.4 0.6 4.1 2.4 6.3 1.0
Net income
as a %
of sales 3.6% 4.1% 4.1% 0.7% 3.5% 2.1% 4.5% 1.0%
Net income
per share
Basic
(Cdn. $) $ 0.26 $ 0.30 $ 0.35 $ 0.03 $ 0.22 $ 0.13 $ 0.34 $ 0.05
Diluted
(Cdn. $) $ 0.25 $ 0.29 $ 0.34 $ 0.03 $ 0.22 $ 0.13 $ 0.34 $ 0.05
Net working
capital
(1) 130.6 120.2 124.0 127.0 128.7 134.7 117.4 114.9
Bank
operating
loan(1) 49.6 34.0 33.6 36.0 35.4 44.3 21.8 18.4
(1) Net working capital and bank operating loan amounts are as at quarter
end.
The Company's sales levels are affected by weather conditions. As warm
weather returns in the spring each year the winter's frost comes out of the
ground rendering many secondary roads incapable of supporting the weight of
heavy equipment until they have dried out. In addition, many exploration
and production areas in northern Canada are accessible only in the winter
months when the ground is frozen. As a result, the first and fourth
quarters typically represent the busiest time for oil and gas industry
activity and the highest sales activity for the Company. Sales levels drop
dramatically during the second quarter until such time as roads have dried
and road bans have been lifted. This typically results in a significant
reduction in earnings during the second quarter, as the Company does not
reduce its SG&A expenses during the second quarter to offset the reduction
in sales. Net working capital (defined as current assets less accounts
payable and accrued liabilities, income taxes payable and other current
liabilities) and bank operating loan borrowing levels follow similar
seasonal patterns as sales.
Liquidity and Capital Resources
The Company's primary internal source of liquidity is cash flow from
operating activities before net changes in non-cash working capital
balances. Cash flow from operating activities and the Company's 364-day
bank operating facility are used to finance the Company's net working
capital, capital expenditures required to maintain its operations and
growth capital expenditures.
As at June 30, 2008, borrowings under the Company's bank operating loan
were $18.4 million, a decrease of $25.9 million from December 31, 2007.
Borrowing levels have decreased due to the Company generating $9.1 million
in cash flow from operating activities, before net change in non-cash
working capital balances and a $19.9 million reduction in net working
capital. This was offset by $1.7 million in capital and other expenditures,
$0.7 million in repayments of long term debt and capital lease obligations
and $0.7 million for the purchase of shares to resource stock compensation
obligations.
As at June 30, 2007, borrowings under the Company's bank operating loan
were $36.0 million, an increase of $2.0 million from December 31, 2006.
Borrowing levels increased due to the Company generating $9.3 million in
cash from cash flow from operating activities, before net change in
non-cash working capital balances and $0.6 million in the issuance of
capital stock from the exercise of employee stock options. This was offset
by a $7.7 million increase in net working capital, $2.4 million related to
the acquisition of two agent operated branches, $0.4 million in repayment
of long term debt and capital leases, $0.2 million for the purchase of
shares to resource stock compensation obligations, and $1.2 million in
capital and other expenditures.
Net working capital was $114.9 million at June 30, 2008, a decrease of
$19.8 million from December 31, 2007. Accounts receivable decreased by $5.2
million (6%) to $84.1 million at June 30, 2008 from December 31, 2007, due
to the seasonal decrease in sales in the second quarter offset by an 18%
increase in days sales outstanding in accounts receivable ("DSO") in the
second quarter of 2008 compared to the fourth quarter of 2007. DSO was 73
days for the second quarter of 2008 compared to 62 days in the fourth
quarter 2007 and 63 days in the second quarter 2007. The deterioration in
DSO performance during the second quarter was due in part to temporary
issues associated with the implementation of a new invoicing system that
have now been rectified. DSO is calculated using annualized sales for the
quarter compared to the period end accounts receivable balance. Inventory
decreased by $3.5 million (4%) at June 30, 2008 from December 31, 2007.
Inventory turns for the second quarter of 2008 improved to 3.7 times
compared to 2.8 times in the second quarter of 2007 and 4.3 times in the
fourth quarter of 2007. Inventory turns are calculated using cost of goods
sold for the quarter on an annualized basis compared to the period end
inventory balance. The company will continue to adjust its investment in
inventory in order to align with anticipated activity levels in order to
improve inventory turnover efficiency. Accounts payable and accrued
liabilities increased by $12.6 million (28%) in the second quarter of 2008
from December 31, 2007 due to a seasonal increase in purchasing combined
with slower payment to suppliers.
The Company has a 364 day bank operating loan facility in the amount of
$60.0 million arranged with a syndicate of three banks that matures in July
2009. The loan facility bears interest based on the floating interest rates
and is secured by a general security agreement covering all assets of the
Company. The maximum amount available under the facility is subject to a
borrowing base formula applied to accounts receivable and inventories, and
a covenant restricting the Company's average debt to 2.25 times trailing
twelve month EBITDA. As at June 30, 2008, the Company's average debt to
EBITDA ratio was 1.2 times (June 30, 2007 - 1.3 times) which provides a
maximum borrowing ability of approximately $60 million under the facility.
As at June 30, 2008, the ratio of the Company's debt to total
capitalization (debt plus equity) was 13% (June 30, 2007 - 25%).
CAPITAL STOCK
The weighted average number of shares outstanding during the second
quarter 2008 was 18.3 million, a decrease of 0.1 million shares over the
prior year's second quarter due principally to the purchase of common
shares to resource restricted share unit obligations, offset by the
exercise of stock options and restricted share units. The diluted weighted
average number of shares outstanding at June 30, 2008 was 18.6 million,
consistent with the second quarter of 2007.
As at June 30, 2008 and 2007, the following shares and securities
convertible into shares, were outstanding:
June 30, June 30,
2008 2007
(millions) Shares Shares
----------- -----------
Shares outstanding 18.3 18.4
Stock Options 1.3 0.7
Restricted Share units 0.2 0.2
----------- -----------
Shares outstanding and issuable 19.8 19.3
The Company has established an independent trust to purchase common
shares of the Company on the open market to resource restricted share unit
obligations. During the three and six month periods ended June 30, 2008,
25,000 and 100,000 common shares were acquired by the trust at an average
cost per share of $9.06 and $7.23 respectively (2007 - 15,200 common shares
at an average cost per share of $11.38).
Contractual Obligations
There have been no material changes in off-balance sheet contractual
commitments since December 31, 2007. Capital expenditures in 2008 are
anticipated to be in the $3 million to $5 million range and will be
directed towards the Company's new Edmonton distribution center, computer
systems enhancements and expanding its production service capability.
Critical Accounting Estimates
There have been no material changes to critical accounting estimates
since December 31, 2007. The Company is not aware of any environmental or
asset retirement obligations that could have a material impact on its
operations.
Change in Accounting Policies
Effective January 1, 2008, the Company adopted the Canadian Institute
of Chartered Accountant's Handbook Section 1535 - Capital Disclosures,
Section 3862 - Financial Instruments - Disclosures and Section 3863 -
Financial Instruments - Presentation. The standards establish presentation
guidelines for financial instruments and deal with their classification, as
well as providing readers of the financial statements with information
pertinent to the Company's objectives, policies and processes for managing
capital.
Effective January 1, 2008, the Company adopted Section 3031 -
Inventories. The standard sets out to prescribe the accounting treatment
for inventories and provide guidance on the determination of cost and
subsequent recognition of expenses. The adoption of Section 3031 did not
impact the determination of inventory cost and expenses recorded by the
Company. Inventory obsolescence expense of $326,000 was recognized in the
six month period ending June 30, 2008 (2007- $255,000). As at June 30, 2008
and December 31, 2007 the Company had recorded reserves for inventory
obsolescence of $2.1 million and $1.8 million, respectively.
New Accounting Pronouncements
During the second quarter of 2008, the CICA published CICA 3064 -
Goodwill and Intangible Assets, with an effective date of January 1, 2009.
This standard addresses the accounting treatment of internally developed
intangibles and the recognition of such assets. The Company believes that
the adoption of this standard will not have a material impact on its
financial statements.
Controls and Procedures
Internal control over financial reporting ("ICFR") is designed to
provide reasonable assurance regarding the reliability of the Company's
financial reporting and its compliance with Canadian GAAP in its financial
statements. The President and Chief Executive Officer and the Vice
President and Chief Financial Officer of the Company have evaluated whether
there were changes to its ICFR during the six months ended June 30, 2008
that have materially affected or are reasonably likely to materially affect
the ICFR. No such changes were identified through their evaluation.
Risk Factors
The Company is exposed to certain business and market risks arising
from transactions that are entered into in the normal course of business,
which are primarily related to interest rate changes and fluctuations in
foreign exchange rates. During the reporting period, no events or
transactions have occurred that would materially change the information
disclosed in the Company's 2007 Form 20-F.
Forward Looking Statements
The information in this MD&A may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. All statements, other than
statements of historical facts, that address activities, events, outcomes
and other matters that CE Franklin plans, expects, intends, assumes,
believes, budgets, predicts, forecasts, projects, estimates or anticipates
(and other similar expressions) will, should or may occur in the future are
forward-looking statements. These forward-looking statements are based on
management's current belief, based on currently available information, as
to the outcome and timing of future events. When considering
forward-looking statements, you should keep in mind the risk factors and
other cautionary statements in this MD&A, including those in under the
caption "Risk factors".
Forward-looking statements appear in a number of places and include
statements with respect to, among other things:
- forecasted oil and gas industry activity levels in 2008 and 2009;
- planned capital expenditures and working capital and availability of
capital resources to fund capital expenditures and working capital;
- the Company's future financial condition or results of operations and
future revenues and expenses;
- the Company's business strategy and other plans and objectives for
future operations;
- fluctuations in worldwide prices and demand for oil and gas;
- fluctuations in the demand for the Company's products and services.
Should one or more of the risks or uncertainties described above or
elsewhere in this MD&A occur, or should underlying assumptions prove
incorrect, the Company's actual results and plans could differ materially
from those expressed in any forward-looking statements.
All forward-looking statements expressed or implied, included in this
MD&A and attributable to CE Franklin are qualified in their entirety by
this cautionary statement. This cautionary statement should also be
considered in connection with any subsequent written or oral
forward-looking statements that CE Franklin or persons acting on its behalf
might issue. CE Franklin does not undertake any obligation to update any
forward-looking statements to reflect events or circumstances after the
date of filing this MD&A, except as required by law.
Other Items
Additional information relating to CE Franklin, including its Form
20-F/Annual Information Form, is available under the Company's profile on
SEDAR at http://www.sedar.com and at http://www.cefranklin.com.
CE Franklin Ltd.
Interim Consolidated Balance Sheets - Unaudited
-------------------------------------------------------------------------
(in thousands of Canadian dollars)
June 30 December 31
2008 2007
-------------------------------------------------------------------------
Assets
Current assets
Accounts receivable 84,120 89,305
Inventories 82,906 86,414
Other 5,542 3,781
-------------------------------------------------------------------------
172,568 179,500
Property and equipment 6,762 6,398
Goodwill 20,570 20,523
Future income taxes (note 3) 1,619 1,403
Other 857 891
-------------------------------------------------------------------------
202,376 208,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current liabilities
Bank operating loan 18,396 44,301
Accounts payable and accrued liabilities 57,428 44,807
Income taxes payable (note 3) 243 -
Current portion of long term debt and capital
lease obligations 183 805
-------------------------------------------------------------------------
76,250 89,913
Long term debt and capital lease obligations 500 582
-------------------------------------------------------------------------
76,750 90,495
-------------------------------------------------------------------------
Shareholders' Equity
Capital stock 23,715 24,306
Contributed surplus 18,434 17,671
Retained earnings 83,477 76,243
-------------------------------------------------------------------------
125,626 118,220
-------------------------------------------------------------------------
202,376 208,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements.
CE Franklin Ltd.
Interim Consolidated Statements of Operations - Unaudited
Three months ended Six months Ended
(in thousands of Canadian ------------------- -------------------
dollars except shares and June 30 June 30 June 30 June 30
per share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales 96,395 82,938 236,977 237,193
Cost of sales 77,442 66,107 190,963 194,051
-------------------------------------------------------------------------
Gross profit 18,953 16,831 46,014 43,142
-------------------------------------------------------------------------
Other expenses (income)
Selling, general and
administrative expenses 16,735 14,086 33,608 29,352
Amortization 594 727 1,211 1,486
Interest expense 163 479 601 1,062
Foreign exchange (gain)/loss (8) 535 (10) 589
-------------------------------------------------------------------------
17,484 15,827 35,410 32,489
-------------------------------------------------------------------------
Income before income taxes 1,469 1,004 10,604 10,653
Income tax expense (recovery)
(note 3)
Current 651 654 3,583 3,881
Future (134) (294) (213) (245)
-------------------------------------------------------------------------
517 360 3,370 3,636
-------------------------------------------------------------------------
Net income and comprehensive income 952 644 7,234 7,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per share (note 2)
Basic 0.05 0.03 0.39 0.38
Diluted 0.05 0.03 0.39 0.37
-------------------------------------------------------------------------
Weighted average number of shares
outstanding (000's)
Basic 18,278 18,329 18,305 18,282
Diluted 18,574 18,768 18,601 18,721
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements.
CE Franklin Ltd.
Interim Consolidated Statements of Cash Flow - Unaudited
Three months ended Six months Ended
------------------- -------------------
(in thousands of Canadian June 30 June 30 June 30 June 30
dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from operating
activities
Net income for the period 952 644 7,234 7,017
Items not affecting cash -
Amortization 594 727 1,211 1,486
Future income tax recovery (134) (294) (213) (245)
Stock based compensation
expense 552 676 846 1,062
-------------------------------------------------------------------------
1,964 1,753 9,078 9,320
Net change in non-cash working
capital balances related to
operations -
Accounts receivable 28,027 39,443 4,988 21,166
Inventories (5,050) (4,783) 3,465 1,495
Other current assets (3,375) (1,859) (1,755) (2,645)
Accounts payable and accured
liabilities (14,698) (33,808) 13,068 (24,431)
Income taxes payable (2,514) (2,585) 132 (3,299)
-------------------------------------------------------------------------
4,354 (1,839) 28,976 1,606
-------------------------------------------------------------------------
Cash flows (used in)/from
financing activities
(Decrease)/Increase in bank
operating loan (3,366) (1,233) (25,905) 1,975
Decrease in long term debt and
capital lease obligations (54) (51) (705) (391)
Issuance of capital stock 48 354 49 568
Purchase of capital stock in
trust for RSU Plans (227) - (723) (173)
-------------------------------------------------------------------------
(3,599) (930) (27,284) 1,979
-------------------------------------------------------------------------
Cash flows (used in)/from
investing activities
Purchase of property and
equipment (1,196) (802) (2,133) (1,208)
Business acquisitions 441 - 441 (2,377)
-------------------------------------------------------------------------
(755) (802) (1,692) (3,585)
-------------------------------------------------------------------------
Change in cash and cash
equivalents during the period - (3,571) - -
Cash and cash equivalents -
Beginning of period - 3,571 - -
Cash and cash equivalents -
End of period - - - -
-------------------------------------------------------------------------
Cash paid during the period for:
Interest on bank operating loan 153 472 583 1,047
Interest on capital lease
obligations and long term debt 10 7 18 15
Income taxes 2,407 3,244 2,570 7,185
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements.
CE Franklin Ltd.
Interim Consolidated Statements of Changes in Shareholders' Equity -
Unaudited
-------------------------------------------------------------------------
Capital Stock
------------------
(in thousands of Number Share-
Canadian dollars and of Contributed Retained holders'
number of shares) Shares $ Surplus Earnings Equity
-------------------------------------------------------------------------
Balance - December 31,
2006 18,223 23,586 16,213 62,676 102,475
Stock option compensation
expense - - 1,062 - 1,062
Stock options excercised 174 824 (256) - 568
Restricted share units
(RSU's) exercised 10 204 (204) - -
Purchase of shares in
trust for RSU plans (15) (173) - - (173)
Net income - - - 7,017 7,017
-------------------------------------------------------------------------
Balance - June 30, 2007 18,392 24,441 16,815 69,693 110,949
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance - December 31,
2007 18,370 24,306 17,671 76,243 118,220
Stock option
compensation expense - - 605 - 605
Stock options exercised 10 70 (20) - 50
RSU's exercised 3 62 (62) - -
DSU grant - - 240 - 240
Purchase of shares in
trust for RSU Plans (100) (723) - - (723)
Net income - - - 7,234 7,234
-------------------------------------------------------------------------
Balance - June 30, 2008 18,283 23,715 18,434 83,477 125,626
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements.
CE Franklin Ltd.
Notes to Interim Consolidated Financial Statements - Unaudited
-----------------------------------------------------------------------
--
(tabular amounts in thousands of Canadian dollars except share and per
share amounts)
Note 1 - Accounting Policies
These interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada
applied on a consistent basis with CE Franklin Ltd.'s (the "Company")
annual consolidated financial statements for the year ended December
31,
2007, with the exception of policies relating to financial instruments,
capital disclosures and inventories as noted below. The disclosures
provided below are incremental to those included in the annual
consolidated financial statements. These interim consolidated financial
statements should be read in conjunction with the annual consolidated
financial statements and the notes thereto for the year ended
December 31, 2007.
Effective January 1, 2008, the Company adopted Section 1535 - Capital
Disclosures, Section 3862 - Financial Instruments - Disclosures and
Section 3863 - Financial Instruments - Presentation. The standards
establish presentation guidelines for financial instruments and deal
with
their classification, as well as providing readers of the financial
statements with information pertinent to the Company's objectives,
policies and processes for managing capital.
Effective January 1, 2008, the Company adopted Section 3031 -
Inventories. The standard establishes the accounting treatment for
inventories and provides guidance on the determination of cost and
subsequent recognition of expenses. The adoption of Section 3031 did
not
impact the determination of inventory costs and expense recorded by the
Company. Inventories consisting primarily of goods purchased for resale
are valued at the lower of average cost or net realizable value.
Inventory obsolescence expense was recognized in the three and six
month
periods ending June 30, 2008 of $90,000 and $326,000 respectively (2007
-
-$25,000 and $255,000). As at June 30, 2008 and December 31, 2007 the
Company had recorded reserves for inventory obsolescence of $2.1
million
and $1.8 million respectively.
These unaudited interim consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a
fair
presentation of the results for the interim periods presented; all such
adjustments are of a normal recurring nature.
The Company's sales typically peak in the first quarter when drilling
activity is at its highest levels. They then decline through the second
and third quarters, rising again in the fourth quarter when preparation
for the new drilling season commences. Similarly, net working capital
levels are typically at seasonally high levels at the end of the first
quarter, declining in the second and third quarters, and then rising
again in the fourth quarter.
Note 2 - Share Data
At June 30, 2008, the Company had 18,283,238 common shares and
1,325,638
options outstanding to acquire common shares at a weighted average
exercise price of $5.83 per common share, of which 606,815 options were
vested and exercisable at a weighted average exercise price of $3.80
per
common share.
a) Stock options
Option activity for each of the six month periods ended June 30 was as
follows:
000's 2008 2007
-------------------------------------------------------------------------
Outstanding at January(1) 1,262 804
Granted 75 109
Exercised (10) (174)
Forfeited (1) (1)
-------------------------------------------------------------------------
Outstanding at June 30 1,326 738
-------------------------------------------------------------------------
There were no options granted during the three month periods ended
June 30, 2008 and June 30, 2007. The fair value of the options granted
during the six month period ended June 30, 2008 was $274,000 (June 30,
2007 - $521,000) and were estimated as at the grant date using the Black-
Scholes option pricing model, using the following assumptions:
2008
-----
Dividend yield Nil
Risk-free interest rate 3.88%
Expected life 5 years
Expected volatility 50%
Stock option compensation expense recorded in the three and six month
periods ended June 30, 2008 was $180,000 (2007 - $117,000) and $350,000
(2007- $235,000), respectively.
b) Restricted share units
The Company has Restricted Share unit ("RSU") and Deferred Share Unit
("DSU") plans (collectively the "RSU Plans"), where by RSU's and DSU's
are granted which entitle the participant, at the Company's option, to
receive either a common share or cash equivalent value in exchange for
a
vested unit. The vesting period for RSU's is three years from the grant
date. DSU's vest on the date of grant. Compensation expense related to
the units granted is recognized over the vesting period based on the
fair
value of the units at the date of the grant and is recorded to
compensation expense and contributed surplus. The contributed surplus
balance is reduced as the vested units
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