CALGARY, Oct. 27, 2011 /PRNewswire/ - CE FRANKLIN LTD.
(TSX.CFT, NASDAQ.CFK) reported net earnings of $4.8 million or $0.27 per share for the third quarter ended
September 30, 2011 a significant
increase from net earnings of $2.2
million or $0.12 per share
generated in the third quarter ended September 30, 2010.
Financial Highlights
| (millions of Cdn. $ except per
share data) |
|
| |
|
Three Months Ended |
|
Nine Months Ended |
|
| |
|
|
September 30 |
|
September 30 |
|
| |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
| |
|
|
Unaudited |
|
Unaudited |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
|
140.5 |
|
|
132.2 |
|
392.0 |
|
353.9 |
|
| Gross Profit |
|
23.9 |
|
|
19.2 |
|
65.4 |
|
54.5 |
|
| Gross Profit - % of sales |
|
17.0 |
% |
|
14.5 |
% |
16.7 |
% |
15.4 |
% |
| EBITDA
(1) |
|
7.7 |
|
|
3.8 |
|
16.0 |
|
8.7 |
|
| EBITDA (1)
- % of sales |
|
5.5 |
% |
|
2.9 |
% |
4.1 |
% |
2.5 |
% |
| Net earnings |
|
4.8 |
|
|
2.2 |
|
9.8 |
|
4.3 |
|
| Per share |
|
|
|
|
|
|
|
|
|
|
| |
Basic |
|
0.27 |
|
|
0.12 |
|
0.56 |
|
0.24 |
|
| |
Diluted |
|
0.26 |
|
|
0.12 |
|
0.54 |
|
0.24 |
|
| Net working capital
(2) |
|
134.6 |
|
|
129.0 |
|
|
|
|
|
| Long term debt / Bank operating
loan (2) |
$ |
5.8 |
|
$ |
14.4 |
|
|
|
|
|
"Improved product margins, supported by
disciplined revenue growth lead to increased profitability.
Activity levels are expected to remain at or above prior year
levels as the industry works through this period of economic
volatility" said Michael West,
President and CEO.
The September 30,
2011 condensed interim consolidated financial statements are
prepared under International Financial Reporting Standards
("IFRS"). Consequently the comparative figures for 2010 and the
Company's statement of financial position as at January 1, 2010 have been restated from
accounting principles generally accepted in Canada ("Canadian GAAP") to comply with IFRS.
The reconciliations from the previously published Canadian GAAP
financial statements are summarized in Note 3 to the condensed
interim consolidated financial statements, and there were no
material differences.
Net earnings for the third quarter of 2011, were
$4.8 million, an increase of
$2.6 million from the third quarter
of 2010. Revenues were $140.5
million, an increase of $8.3
million (6%) from the third quarter of 2010. Industry
activity continued to improve and is focused on oil, oil sands and
liquid rich natural gas plays. Well completions increased 34%
compared to the third quarter of 2010. Capital project business
revenue grew $6.2 million year over
year due to improved industry activity levels. Gross profits
increased by $4.7 million (24%) due
to the increase in revenues and improved gross profit margins year
over year. Average gross profit margins were consistent with the
second quarter of 2011 but improved over the third quarter 2010
average gross profit margin, as increased purchasing levels
contributed to higher volume rebate income. Selling, general and
administrative expenses increased by $2.3
million (15%) from prior year to $17.8 million for the quarter as compensation and
operating costs have increased in response to higher revenue
levels. During the quarter, the Company moved its head office
location within downtown Calgary
and as a consequence recorded a one time lease charge of
$0.7 million in relation to its old
head office lease obligations net of expected sublease revenue. The
Company also recorded an unrealized foreign exchange gain of
$1.0 million in the quarter on
foreign exchange contracts used to manage currency exposure on US
denominated product purchases. The weighted average number of
shares outstanding during the third quarter was consistent with the
prior year period as the rise in share price during the last year
has limited the activity occurring under the normal course issuer
bid program. Net earnings per share (basic) was $0.27 in the third quarter of 2011, compared to
net earnings of $0.12 per share in
the third quarter of 2010.
Net earnings for the nine months ended
September 30, 2011 at $9.8 million was more than double the net income
for the same prior year period. Revenues were $392.0 million, an increase of $38.1 million (11%) over the comparable 2010
period due to improvements in capital project and maintenance
repair and operating revenues. Well completions have increased 32%
year over year as industry activity continues to build. Gross
profit was up $10.9 million (20%) due
to the increase in revenues combined with an increase in vendor
rebate income due to increased purchasing levels. Selling, general
and administrative expenses increased by $5.4 million (12%) to $51.2 million for the nine months ended for the
same reasons they were higher in the third quarter. Income taxes
increased by $1.9 million for the
nine months ended September 30, 2011
compared to the prior year period due to higher pre-tax earnings.
The weighted average number of shares outstanding (basic) during
the third quarter was consistent with the prior year period as the
rise in share price during the last year has limited the activity
occurring under the normal course issuer bid program. Net
earnings per share (basic) was $0.56
for the nine months ended September 30,
2011, compared to $0.24 earned
in same prior year period.
Business Outlook
Oil and gas industry activity in 2011 is
expected to remain at or above 2010 levels for the remainder of the
year. Natural gas prices remain depressed as North American
production capacity and inventory levels continue to dominate
demand. Natural gas capital expenditure activity is focused
on the emerging shale gas plays in northeastern British Columbia and liquid rich gas plays in
northwestern Alberta where the
Company has a strong market position. Conventional and heavy
oil economics are attractive at current price levels leading to
continuing activity in eastern Alberta and southeast Saskatchewan. Oil sands project
announcements continue at current oil price levels. Approximately
50% to 60% of the Company's total revenues are driven by our
customers' capital expenditure requirements. CE Franklin's revenues
are expected to increase modestly in 2012 as the oil and gas
industry activity levels remain relatively consistent with 2011
levels.
Gross profit margins are expected to remain
under pressure as customers that produce natural gas focus on
reducing their costs to maintain acceptable project economics and
due to continued aggressive oilfield supply industry competition as
industry activity levels remain below the last five year average.
The Company will continue to manage its cost structure to protect
profitability while maintaining service capacity and advancing
strategic initiatives.
Over the medium to longer term, the Company's
strong financial and competitive positions should enable profitable
growth of its distribution network through the expansion of its
product lines, supplier relationships and capability to service
additional oil and gas and other industrial end use markets.
| (1) |
EBITDA represents net earnings before interest, taxes,
depreciation and amortization. EBITDA is supplemental non-GAAP
financial measure used by management, as well as industry analysts,
to evaluate operations. Management believes that EBITDA, as
presented, represents a useful means of assessing the performance
of the Company's ongoing operating activities, as it reflects the
Company's earnings trends without showing the impact of certain
charges. The Company is also presenting EBITDA and EBITDA as a
percentage of revenues because it is used by management as
supplemental measures of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and depreciation
expenses. Interest expense is a necessary component of the
Company's expenses because the Company borrows money to finance its
working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company
is required to pay cash income taxes. Depreciation expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate revenues. Management
compensates for these limitations to the use of EBITDA by using
EBITDA as only a supplementary measure of profitability. EBITDA is
not used by management as an alternative to net earnings, as an
indicator of the Company's operating performance, as an alternative
to any other measure of performance in conformity with generally
accepted accounting principles or as an alternative to cash flow
from operating activities as a measure of liquidity. A
reconciliation of EBITDA to Net earnings is provided within the
Company's Management Discussion and Analysis. Not all companies
calculate EBITDA in the same manner and EBITDA does not have a
standardized meaning prescribed by 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 cash and
cash equivalents, accounts payable and accrued liabilities, current
taxes payable and other current liabilities. Net working capital
and long term debt / bank operating loan amounts are as at quarter
end. |
Additional Information
Additional information relating to CE Franklin,
including its third quarter 2011 Management Discussion and Analysis
and interim consolidated financial statements and its Form 20-F /
Annual Information Form, is available under the Company's profile
on the SEDAR website at www.sedar.com and at
www.cefranklin.com.
Conference Call and Webcast
Information
A conference call to review the 2011 third
quarter results, which is open to the public, will be held on
Friday, October 28, 2011 at
11:00 a.m. Eastern Time (9:00a.m. Mountain Time).
Participants may join the call by dialing
1-647-427-7450 in Toronto or
dialing 1-888-231-8191 at the scheduled time of 11:00 a.m. Eastern Time. For those
unable to listen to the live conference call, a replay will be
available at approximately 2:00 p.m. Eastern
Time on the same day by calling 1-416-849-0833 in
Toronto or dialing
1-855-859-2056 and entering the Passcode of 15091601
and may be accessed until midnight November
4, 2011.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3683680 and
will be available on the Company's website at
http://www.cefranklin.com.
Michael West,
President and Chief Executive Officer will lead the discussion and
will be accompanied by Derrren Newell, Vice President and Chief
Financial Officer. The discussion will be followed by a question
and answer period.
About CE Franklin
For more than 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 43 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 at
October 27, 2011
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 MD&A should be read in conjunction with the
Company's condensed interim consolidated financial statements for
the three and nine month period ended September 30, 2011 and the MD&A and the
consolidated financial statements for the three and six month
periods ended June 30, 2011 and the
three month period ended March 31,
2011 (the Company's first financial statements under IFRS)
and the MD&A and consolidated financial statements for the year
ended December 31, 2010. All amounts
are expressed in Canadian dollars and are in accordance with
International Financial Reporting Standards ("IFRS"), except where
otherwise noted. The September 30,
2011 condensed interim consolidated financial statements are
prepared under IFRS. Consequently the comparative figures for 2010
and the Company's statement of financial position as at
January 1, 2010 have been restated
from accounting principles generally accepted in Canada ("Canadian GAAP") to comply with IFRS.
The reconciliations from the previously published Canadian GAAP
financial statements are summarized in Note 3 to the condensed
interim consolidated financial statements, and there were no
material differences. In addition, IFRS 1 on first time adoption
allows certain exemptions from retrospective application of IFRS in
the opening statement of financial position. Where these exemptions
have been used they have also been explained in Note 3 to the
condensed interim consolidated financial statements.
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 through its 43 branches situated in towns and cities that
serve oil and gas fields of the western Canadian sedimentary basin.
In addition, the Company distributes similar products to the oil
sands, refining, and petrochemical industries and non-oilfield
related industries such as forestry and mining.
The Company's branch operations service over
3,000 customers by providing the right materials where and when
they are needed, and for the best value. Our branches,
supported by our centralized Distribution Centre in Edmonton, Alberta, stock over 25,000 stock
keeping units sourced from over 2,000 suppliers. This supply
chain 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 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, logistics, invoicing, credit and
collection and other business services.
The Company's shares trade on the TSX ("CFT")
and NASDAQ ("CFK") stock exchanges. Schlumberger Limited
("Schlumberger"), a major oilfield service company based in
Paris, France, owns approximately
56% of the Company's shares.
Business Strategy
The Company is pursuing the following strategies
to grow its business profitably:
- Expand the reach and market share serviced by the Company's
distribution network. The Company is focusing its sales
efforts and product offering on servicing complex, multi-location
needs of large and emerging customers in the energy sector.
Organic growth is expected to be complemented by selected
acquisitions over time.
- Expand production equipment service capability to capture more
of the product life cycle requirements for the equipment the
Company sells such as down hole pump repair, oilfield engine
maintenance, well optimization and on site project management. This
will differentiate the Company's service offering from its
competitors and deepen relationships with its customers.
- Expand oil sands and industrial project and Maintenance, Repair
and Operating Supplies ("MRO") business by leveraging our existing
supply chain infrastructure, product and project expertise.
- Increase the resourcing of customer project sales quotation and
order fulfillment services provided by our Distribution Centre to
augment local branch capacity to address seasonal and project
driven fluctuations in customer demand. By doing so, we aim to
increase our capacity flexibility and improve operating efficiency
while providing consistent service.
Business Outlook
Oil and gas industry activity in 2011 is
expected to remain at or above 2010 levels for the remainder of the
year. Natural gas prices remain depressed as North American
production capacity and inventory levels continue to dominate
demand. Natural gas capital expenditure activity is focused
on the emerging shale gas plays in northeastern British Columbia and liquid rich gas plays in
northwestern Alberta where the
Company has a strong market position. Conventional and heavy
oil economics are attractive at current price levels leading to
continuing activity in eastern Alberta and southeast Saskatchewan. Oil sands project
announcements continue at current oil price levels. Approximately
50% to 60% of the Company's total revenues are driven by our
customers' capital expenditure requirements. CE Franklin's revenues
are expected to increase modestly in 2012 as the oil and gas
industry activity levels remain relatively consistent with 2011
levels.
Gross profit margins are expected to remain
under pressure as customers that produce natural gas focus on
reducing their costs to maintain acceptable project economics and
due to continued aggressive oilfield supply industry competition as
industry activity levels remain below the last five year average.
The Company will continue to manage its cost structure to protect
profitability while maintaining service capacity and advancing
strategic initiatives.
Over the medium to longer term, the Company's
strong financial and competitive positions should enable profitable
growth of its distribution network through the expansion of its
product lines, supplier relationships and capability to service
additional oil and gas and other industrial end use markets.
| Third Quarter Operating
Results |
|
| The following table summarizes CE
Franklin's results of operations: |
|
| (In millions of Canadian Dollars
except per share data) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Three Months Ended September
30 |
|
Nine Months Ended September 30 |
| |
2011 |
|
2010 |
|
2011 |
|
2010 |
| Revenues |
140.5 |
100.0 |
% |
|
132.2 |
100.0 |
% |
|
392.0 |
100.0 |
% |
|
353.9 |
100.0 |
% |
| Cost of Sales |
(116.6) |
(83.0) |
% |
|
(113.0) |
(85.5) |
% |
|
(326.6) |
(83.3) |
% |
|
(299.5) |
(84.6) |
% |
| Gross Profit |
23.9 |
17.0 |
% |
|
19.2 |
14.5 |
% |
|
65.4 |
16.7 |
% |
|
54.4 |
15.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Selling, general and administrative expenses |
(17.8) |
(12.7) |
% |
|
(15.5) |
(11.7) |
% |
|
(51.2) |
(13.1) |
% |
|
(45.8) |
(12.9) |
% |
| Foreign exchange and other |
1.6 |
1.1 |
% |
|
0.1 |
0.1 |
% |
|
1.8 |
0.5 |
% |
|
- |
- |
% |
| EBITDA(1) |
7.7 |
5.5 |
% |
|
3.8 |
2.9 |
% |
|
16.0 |
4.1 |
% |
|
8.6 |
2.5 |
% |
| Depreciation |
(0.6) |
(0.4) |
% |
|
(0.6) |
(0.5) |
% |
|
(1.8) |
(0.5) |
% |
|
(1.8) |
(0.5) |
% |
| Interest |
(0.2) |
(0.1) |
% |
|
(0.1) |
(0.1) |
% |
|
(0.4) |
(0.1) |
% |
|
(0.5) |
(0.1) |
% |
| Earnings before tax |
6.9 |
4.9 |
% |
|
3.1 |
2.3 |
% |
|
13.8 |
3.5 |
% |
|
6.3 |
1.9 |
% |
| Income tax expense |
(2.1) |
(1.5) |
% |
|
(0.9) |
(0.7) |
% |
|
(4.0) |
(1.0) |
% |
|
(2.0) |
(0.6) |
% |
| Net earnings |
4.8 |
3.4 |
% |
|
2.2 |
1.7 |
% |
|
9.8 |
2.5 |
% |
|
4.3 |
1.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
$ |
0.27 |
|
|
$ |
0.12 |
|
|
$ |
0.56 |
|
|
$ |
0.24 |
|
| Diluted |
$ |
0.26 |
|
|
$ |
0.12 |
|
|
$ |
0.54 |
|
|
$ |
0.24 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average number of shares outstanding
(000's) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
17,537 |
|
|
|
17,461 |
|
|
|
17,507 |
|
|
|
17,518 |
|
| Diluted |
|
18,165 |
|
|
|
17,783 |
|
|
|
18,142 |
|
|
|
17,838 |
|
| (1) EBITDA represents net earnings
before interest, taxes, depreciation and amortization. EBITDA is a
supplemental non-GAAP financial measure used by management, as well
as industry analysts, to evaluate operations. Management believes
that EBITDA, as presented, represents a useful means of assessing
the performance of the Company's ongoing operating activities, as
it reflects the Company's earnings trends without showing the
impact of certain charges. The Company is also presenting EBITDA
and EBITDA as a percentage of revenues because it is used by
management as supplemental measures of profitability. The use of
EBITDA by the Company has certain material limitations because it
excludes the recurring expenditures of interest, income tax, and
depreciation expenses. Interest expense is a necessary component of
the Company's expenses because the Company borrows money to finance
its working capital and capital expenditures. Depreciation expense
is a necessary component of the Company's expenses because the
Company is required to pay cash to acquire equipment to generate
revenues. Management compensates for these limitations to the use
of EBITDA by using EBITDA as only a supplementary measure of
profitability. EBITDA is not used by management as an alternative
to net earnings, as an indicator of the Company's operating
performance, as an alternative to any other measure of performance
in conformity with generally accepted accounting principles or as
an alternative to cash flow from operating activities as a measure
of liquidity. A reconciliation of EBITDA to net earnings is
provided within the table above. Not all companies calculate EBITDA
in the same manner and EBITDA does not have a standardized meaning
prescribed by GAAP. Accordingly, EBITDA, as the term is used
herein, is unlikely to be comparable to EBITDA as reported by other
entities. |
Third Quarter Results
Net earnings for the third quarter of 2011, were
$4.8 million, an increase of
$2.6 million from the third quarter
of 2010. Revenues were $140.5
million, an increase of $8.3
million (6%) from the third quarter of 2010. Industry
activity continued to improve and is focused on oil, oil sands and
liquid rich natural gas plays. Well completions increased 34%
compared to the third quarter of 2010. Capital project business
revenue grew $6.2 million year over
year due to improved industry activity levels. Gross profits
increased by $4.7 million (24%) due
to the increase in revenues and improved gross profit margins year
over year. Average gross profit margins were consistent with the
second quarter of 2011 but improved over the third quarter 2010
average gross profit margin, as increased purchasing levels
contributed to higher volume rebate income. Selling, general and
administrative expenses increased by $2.3
million (15%) to $17.8 million
for the quarter as compensation and operating costs have increased
in response to higher revenue levels. During the quarter, the
Company moved its head office location within downtown Calgary and as a consequence recorded a one
time lease charge of $0.7 million in
relation to its old head office lease obligations net of expected
sublease revenue. The Company also recorded an unrealized foreign
exchange gain of $1.0 million in the
quarter on foreign exchange contracts used to manage currency
exposure on US denominated product purchases. The weighted average
number of shares outstanding during the third quarter was
consistent with the prior year period as the rise in share price
during the last year has limited the activity occurring under the
normal course issuer bid program. Net earnings per share (basic)
was $0.27 in the third quarter of
2011, compared to net earnings of $0.12 per share in the third quarter of 2010.
Year to date Results
Net Income for the nine months ended
September 30, 2011 at $9.8 million was more than double the net income
for the same prior year period. Revenues were $392.0 million, an increase of $38.1 million (11%) over the comparable 2010
period due to improvements in capital project and maintenance
repair and operating revenues. Well completions have increased 32%
year over year as industry activity continues to build. Gross
profit was up $10.9 million (20%) due
to the increase in revenues combined with an increase in vendor
rebate income due to increased purchasing levels. Selling, general
and administrative expenses increased by $5.4 million (12%) to $51.2 million for the nine months ended for the
same reasons they were higher in the third quarter. Income taxes
increased by $1.9 million for the
nine months ended September 30, 2011
compared to the prior year period due to higher pre-tax earnings.
The weighted average number of shares outstanding (basic) during
the third quarter was consistent with the prior year period as the
rise in share price during the last year has limited the activity
occurring under the normal course issuer bid program. Net
earnings per share (basic) was $0.56
for the nine months ended September 30,
2011, compared to $0.24 earned
in the same prior year period.
Revenues
Revenues for the quarter ended September
30, 2011, were $140.5 million,
an increase of 6% from the quarter ended September 30, 2010, as detailed above in the
"Third Quarter Results" discussion.
Oil and gas commodity prices are a key driver of
industry capital project activity as commodity prices directly
impact the economic returns realized by oil and gas companies. The
Company uses oil and gas well completions and average rig counts as
industry activity measures to assess demand for oilfield equipment
used in capital projects. Oil and gas well completions
require the products sold by the Company to complete a well and
bring production on stream and are a general indicator of energy
industry activity levels. Average drilling rig counts are
also used by management to assess industry activity levels as the
number of rigs in use ultimately drives well completion
requirements. Well completion, rig count and commodity price
information for the three and nine month periods ended September 30, 2011 and 2010 are provided in the
table below.
| |
|
|
Q3
Average |
|
% |
|
|
YTD
Average |
|
% |
| |
|
|
2011 |
|
|
2010 |
|
change |
|
|
2011 |
|
|
2010 |
|
change |
| Gas - Cdn. $/gj (AECO spot) |
$ |
3.67 |
|
$ |
3.55 |
|
3 |
% |
|
$ |
3.77 |
|
$ |
4.12 |
|
(8) |
% |
| Oil - Cdn. $/bbl (synthetic
crude) |
$ |
99.16 |
|
$ |
77.37 |
|
28 |
% |
|
$ |
102.74 |
|
$ |
79.30 |
|
30 |
% |
| Average rig count |
|
456 |
|
|
325 |
|
40 |
% |
|
|
392 |
|
|
309 |
|
27 |
% |
| Well completions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Oil |
|
2,699 |
|
|
1,484 |
|
82 |
% |
|
|
6,685 |
|
|
3,916 |
|
71 |
% |
| |
Gas |
|
796 |
|
|
1,127 |
|
(29) |
% |
|
|
3,436 |
|
|
3,738 |
|
(8) |
% |
| Total well completions |
|
3,495 |
|
|
2,611 |
|
34 |
% |
|
|
10,121 |
|
|
7,654 |
|
32 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average statistics are shown
except for well completions. |
| Sources: Oil and Gas prices
- First Energy Capital Corp.; Rig count data - CAODC; well
completion data - Daily Oil Bulletin |
| (in millions of Cdn.
$) |
Three
months ended September 30 |
|
Nine
months ended September 30 |
| |
2011 |
|
2010 |
|
2011 |
|
2010 |
| End use revenue demand |
$ |
% |
|
$ |
% |
|
$ |
% |
|
$ |
% |
| Capital projects |
72.9 |
52 |
% |
|
66.7 |
50 |
% |
|
205.7 |
52 |
% |
|
182.4 |
52 |
% |
| Maintenance, repair and operating
supplies ("MRO") |
67.6 |
48 |
% |
|
65.5 |
50 |
% |
|
186.3 |
48 |
% |
|
171.5 |
48 |
% |
| Total Revenues |
140.5 |
100 |
% |
|
132.2 |
100 |
% |
|
392.0 |
100 |
% |
|
353.9 |
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Note: Capital
project end use revenues are defined by the Company as consisting
of the tubular and 80% of pipe, flanges and fittings; and valves
and accessories product revenues respectively; MRO revenues 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 revenues
respectively. |
|
Revenues from capital project related products
were $72.9 million in the third
quarter of 2011, an increase of 9% ($6.2
million) from the third quarter of 2010. Total well
completions increased by 34% in the third quarter of 2011 and the
average working rig count increased by 40% compared to the prior
year period. Gas wells comprised 23% of the total wells completed
in western Canada in the third
quarter of 2011 compared to 43% in the third quarter of 2010. Spot
gas prices ended the third quarter at $3.52 per GJ (AECO) a decrease of 4% from third
quarter average prices. Oil prices ended the third quarter at
$90.34 per bbl (Synthetic Crude) a
decrease of 9% from the third quarter average. Depressed gas prices
are expected to continue to negatively impact gas drilling activity
over the remainder of 2011, which in turn is expected to constrain
demand for the Company's products. Natural gas customers continue
to utilize a high level of competitive bid activity to procure the
products they require in an effort to reduce their costs. The
Company is addressing this industry trend by pursuing initiatives
focused on improving revenue quotation processes and increasing the
operating flexibility and efficiency of its branch network.
The Company is well positioned to support customers who are
pursuing oil plays and more particularly tight oil plays.
MRO product revenues are related to overall oil
and gas industry production levels and tend to be more stable than
capital project revenues. MRO product revenues for the quarter
ended September 30, 2011 increased by
$2.1 million (3%) to $67.6 million compared to the quarter ended
September 30, 2010 and comprised 48%
of the Company's total revenues (2010 - 50%).
The Company's strategy is to grow profitability
by focusing on its core western Canadian oilfield product
distribution business, complemented by an increase in the product
life cycle services provided to its customers and the focus on the
emerging oil sands capital project and MRO revenues opportunities.
Revenues from these initiatives to date are provided below:
| |
Q3
2011 |
|
Q3
2010 |
|
YTD
2011 |
|
YTD 2010 |
|
| Revenues ($millions) |
$ |
% |
|
$ |
% |
|
$ |
% |
|
$ |
% |
|
| Oilfield |
115.1 |
82 |
% |
|
104.2 |
79 |
% |
|
327.2 |
84 |
% |
|
292.5 |
84 |
% |
|
| Oil sands |
18.9 |
13 |
% |
|
23.7 |
18 |
% |
|
48.3 |
12 |
% |
|
49.8 |
14 |
% |
|
| Production services |
6.5 |
5 |
% |
|
4.3 |
3 |
% |
|
16.5 |
4 |
% |
|
11.6 |
3 |
% |
|
| Total Revenues |
140.5 |
100 |
% |
|
132.2 |
100 |
% |
|
392.0 |
100 |
% |
|
353.9 |
100 |
% |
|
Revenues from oilfield products to conventional
western Canada oil and gas end use
applications were $115.1 million for
the third quarter of 2011, backing out tubular product sales, which
were down $0.7 million in the third
quarter year over year, oilfield revenue was up 12.2%. This
increase was driven by the 34% increase in well completions
compared to the prior year period.
Revenues from oil sands end use applications
were $18.9 million in the third
quarter, a decrease of $4.8 million
(20%) compared to $23.7 million in
the third quarter of 2010 reflecting lower turnaround activity and
no tailing pipe sales in 2011. The Company continues to
position its major project execution capability and the
Fort McMurray branch to penetrate
this emerging market for capital projects and MRO products.
Production service revenues were $6.5 million in the third quarter of 2011, a 51%
increase from the $4.3 million of
revenues in the third quarter of 2010, reflecting improved oil
production economics resulting in increased customer maintenance
activities.
| Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Q3
2011 |
|
Q3
2010 |
|
YTD 2011 |
|
YTD
2010 |
| Gross profit ($ millions) |
$ |
23.9 |
|
|
$ |
19.2 |
|
|
$ |
65.4 |
|
|
$ |
54.5 |
|
| Gross profit margin as a % of revenues |
|
17.0 |
% |
|
|
14.5 |
% |
|
|
16.7 |
% |
|
|
15.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit composition by product revenue
category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Tubulars |
|
1 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
2 |
% |
| Pipe, flanges and fittings |
|
33 |
% |
|
|
28 |
% |
|
|
30 |
% |
|
|
29 |
% |
| Valves and accessories |
|
21 |
% |
|
|
20 |
% |
|
|
21 |
% |
|
|
20 |
% |
| Pumps, production equipment and services |
|
17 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
14 |
% |
| General |
|
28 |
% |
|
|
34 |
% |
|
|
31 |
% |
|
|
35 |
% |
| Total gross profit |
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Gross profit was $23.9
million in the third quarter of 2011, an increase of
$4.7 million (24%) from the third
quarter of 2010 due to increased revenues and average gross profit
margins compared to the prior year period. Gross profit margins for
the quarter remained consistent with the second quarter 2011 levels
and were better than the prior year period at 16.9% as increased
purchasing levels contributed to higher volume rebate income.
In the quarter the Company effectively passed along price increases
related to increasing steel costs from our suppliers to our
customers. Increased pipe, flanges and fittings and valves
and accessories gross profit composition was due to improved gross
profit margins. The decrease in tubular gross profit composition
reflects larger lower margin sales and the disposal of surplus
tubular inventory.
| Selling, General and
Administrative ("SG&A") Costs |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ($millions) |
Q3
2011 |
|
Q3
2010 |
|
YTD 2011 |
|
YTD
2010 |
|
| |
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
|
$ |
|
% |
|
| People Costs |
10.6 |
|
60 |
|
8.9 |
|
57 |
|
30.9 |
|
61 |
|
26.5 |
|
58 |
|
| Facility and office costs |
4.3 |
|
24 |
|
3.3 |
|
21 |
|
11.5 |
|
22 |
|
10.1 |
|
22 |
|
| Selling Costs |
1.7 |
|
10 |
|
1.8 |
|
12 |
|
4.2 |
|
8 |
|
4.5 |
|
10 |
|
| Other |
1.2 |
|
6 |
|
1.5 |
|
10 |
|
4.6 |
|
9 |
|
4.7 |
|
10 |
|
| SG&A costs |
17.8 |
|
100 |
|
15.5 |
|
100 |
|
51.2 |
|
100 |
|
45.8 |
|
100 |
|
| SG&A costs as % of revenues |
12.7 |
% |
|
|
11.7 |
% |
|
|
13.1 |
% |
|
|
12.9 |
% |
|
|
SG&A costs increased $2.3 million (15%) in the third quarter of 2011
from the prior year period and represented 12.7% of revenues
compared to 11.7% in the prior year period. The $2.3 million increase in expenses was
attributable to higher people costs reflecting a 6% increase in
employee head count to service the additional sales volumes and
higher incentive compensation costs reflecting the improved profit
performance of the business year over year. Facility and
office costs also increased in the quarter as the Company moved its
head office location within downtown Calgary and as a consequence recorded a one
time lease charge of $0.7 million for
its old head office lease obligations net of expected sublease
revenue.
Depreciation Expense
Depreciation expense of $0.6 million in the third quarter of 2011 was
comparable to the third quarter of 2010.
Interest Expense
Interest expense of $0.2
million in the third quarter of 2011 was higher than the
prior year as fees related to the renewal of the Company's banking
facility were expensed in the period.
Foreign Exchange Gain and other
Foreign exchange gains and other in the quarter
amounted to $1.6 million as the
significant weakening of the Canadian dollar at the end of the
quarter increased the translation gains from US denominated net
working capital assets. The Company recognized a $1.0 million unrealized foreign currency gain on
$14.2 million of foreign currency
forward contracts it had outstanding at quarter end. As at
September 30, 2011, a one percent
change in the Canadian dollar relative to the US dollar would
decrease or increase the Company's annual net income by
$0.1 million.
Income Tax Expense
The Company's effective tax rate for the third
quarter of 2011 was 29.8%, down 0.5% from the third quarter of 2010
as the decline in the statutory rate was partially offset by the
impact of permanent differences. The current effective tax rate is
higher than the statutory rate due to the impact of non-deductible
items and other adjustments. Substantially all of the Company's tax
provision is currently payable.
Summary of Quarterly Financial Data
The selected quarterly financial data is
presented in Canadian dollars and in accordance with IFRS. This
information is derived from the Company's unaudited quarterly
financial statements. As noted above the September 30, 2011 interim consolidated financial
statements have been prepared under IFRS. The comparative figures
shown in the table below for 2010 have been restated from Canadian
GAAP. The reconciliations from Canadian GAAP to IFRS have been
completed and there were no material differences noted. The
conversion from Canadian GAAP to IFRS is further discussed in Note
3 of the condensed interim consolidated financial statements.
| (in millions of Cdn. $ except per
share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Q4 |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
Q1 |
|
Q2 |
|
Q3 |
| Unaudited |
2009 (2) |
|
2010 |
|
2010 |
|
2010 |
|
2010 |
|
2011 |
|
2011 |
|
2011 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
|
93.0 |
|
|
|
121.9 |
|
|
|
99.9 |
|
|
|
132.2 |
|
|
|
135.6 |
|
|
|
137.7 |
|
|
|
113.9 |
|
|
|
140.5 |
|
| Gross Profit |
|
15.3 |
|
|
|
19.7 |
|
|
|
15.6 |
|
|
|
19.2 |
|
|
|
20.5 |
|
|
|
22.3 |
|
|
|
19.3 |
|
|
|
23.9 |
|
| Gross Profit % |
|
16.5 |
% |
|
|
16.1 |
% |
|
|
15.6 |
% |
|
|
14.5 |
% |
|
|
15.1 |
% |
|
|
16.2 |
% |
|
|
16.9 |
% |
|
|
17.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| EBITDA |
|
0.6 |
|
|
|
4.1 |
|
|
|
0.7 |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
5.3 |
|
|
|
3.1 |
|
|
|
7.7 |
|
| EBITDA as a % of revenues |
|
0.6 |
% |
|
|
3.4 |
% |
|
|
0.7 |
% |
|
|
2.9 |
% |
|
|
2.8 |
% |
|
|
3.8 |
% |
|
|
2.7 |
% |
|
|
5.5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings (loss) |
|
(0.5) |
|
|
|
2.2 |
|
|
|
(0.1) |
|
|
|
2.2 |
|
|
|
1.6 |
|
|
|
3.4 |
|
|
|
1.7 |
|
|
|
4.8 |
|
| Net earnings (loss) as a % of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| revenues |
|
(0.5) |
% |
|
|
1.8 |
% |
|
|
(0.1) |
% |
|
|
1.7 |
% |
|
|
1.2 |
% |
|
|
2.5 |
% |
|
|
1.5 |
% |
|
|
3.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings (loss) per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic |
$ |
(0.03) |
|
|
$ |
0.13 |
|
|
$ |
(0.01) |
|
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
|
0.10 |
|
|
$ |
0.27 |
|
| |
Diluted |
$ |
(0.03) |
|
|
$ |
0.12 |
|
|
$ |
(0.01) |
|
|
$ |
0.12 |
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
|
0.09 |
|
|
$ |
0.26 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net working
capital(1) |
|
136.6 |
|
|
|
113.9 |
|
|
|
111.8 |
|
|
|
129.0 |
|
|
|
125.7 |
|
|
|
120.1 |
|
|
|
136.5 |
|
|
|
134.6 |
|
| Long term debt/bank
operating loan(1) |
|
26.8 |
|
|
|
1.4 |
|
|
|
0.3 |
|
|
|
14.4 |
|
|
|
6.4 |
|
|
|
0.3 |
|
|
|
12.2 |
|
|
|
5.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total well completions |
|
1,576 |
|
|
|
2,846 |
|
|
|
2,197 |
|
|
|
2,611 |
|
|
|
4,760 |
|
|
|
3,861 |
|
|
|
2,765 |
|
|
|
3,495 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) Net working capital and long
term debt/bank operating loan amounts are as at quarter
end |
| (2) Prepared using Canadian
GAAP |
The Company's revenue 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. An exceptionally wet second
quarter in 2011 had some impact on customer capital programs in the
third quarter. As a result, the first and fourth quarters typically
represent the busiest time for oil and gas industry activity and
the highest revenue activity for the Company. Revenue levels drop
dramatically during the second quarter until such time as roads
have dried and road bans have been lifted. This typically results
in a significant reduction in earnings during the second quarter,
as the decline in revenue 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 cash and cash equivalents, accounts payable and accrued
liabilities, income taxes payable and other current liabilities)
and borrowing levels follow similar seasonal patterns as
revenue.
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 related to operations. Cash
flow from operating activities and the Company's $60.0 million revolving term credit facility are
used to finance the Company's net working capital, capital
expenditures and acquisitions.
As at September 30,
2011 the Company had $5.8
million in borrowings under its revolving term credit
facility, a net decrease of $0.6
million from December 31,
2010. Borrowing levels have decreased due to the Company
generating $10.8 million in cash flow
from operating activities before net changes in working
capital. This was offset by $2.1
million in capital and other expenditures and $0.7 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").
As at September 30,
2010, there were $14.1 million
in borrowings under the Company's debt facility, a decrease of
$12.5 million from December 31, 2009. Borrowing levels have
decreased since December 31, 2009 due
to the Company generating $7.5
million in cash flow from operating activities before net
changes in working capital and a $7.7
million reduction in net working capital. This was offset by
$1.1 million in capital and other
expenditures, $0.4 million for the
settlement of share obligations and $1.2
million for the purchase of shares to resource stock
compensation obligations and the repurchase of shares under the
Company's NCIB.
Net working capital was $134.6 million at September 30, 2011, an increase of $8.9 million from December
31, 2010. Accounts receivable increased by $3.1 million to $96.1
million at September 30, 2011
from December 31, 2010 due to the 4%
increase in revenues in the third quarter compared to the fourth
quarter of 2010, partially offset by a weaker Days Sales
Outstanding ("DSO"). DSO in the third quarter of 2011 was 58 days
compared to 56 days in the fourth quarter of 2010 and 58 days in
the third quarter of 2010. DSO is calculated using average revenues
per day for the quarter compared to the period end accounts
receivable balance. Inventory increased by $7.7 million at September
30, 2011 from December 31,
2010. Inventory turns for the third quarter of 2011
decreased to 4.5 turns compared to 4.9 turns in the fourth quarter
of 2010. 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 continues to adjust its investment
in inventory to align with anticipated industry activity levels and
supplier lead times in order to improve inventory turnover
efficiency. Accounts payable and accrued liabilities increased by
$6.6 million (10%) to $70.0 million at September
30, 2011 from December 31,
2010 due to the seasonal increase in activity.
Capital expenditures in the third quarter of
2011 were $1.1 million, $0.5 million higher than the prior year period
and were comprised primarily of vehicles, warehouse equipment
replacements and branch improvements. In the quarter the
Company disposed of a surplus building and some surplus vehicles
for net proceeds of $0.4 million.
The Company has a $60.0
million revolving term credit facility that matures in
July 2014 (the "Credit Facility").
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 Credit
Facility is subject to a borrowing base formula applied to accounts
receivable and inventories. The Credit Facility requires the
Company to maintain the ratio of its debt to debt plus equity at
less than 40%. As at September 30,
2011, this ratio was 3%. The Company must also maintain
coverage of its net operating cash flow as defined in the Credit
Facility agreement over interest expense for the trailing twelve
month period of greater than 1.25 times. As at September 30, 2011 this ratio was 24.9 times. The
Credit Facility contains certain other covenants with which the
Company is in compliance. As at September
30, 2011 the Company had available undrawn borrowing
capacity of $54.5 million under this
Credit facility.
Contractual Obligations
There have been no material changes in
off-balance sheet contractual commitments since June 30, 2011.
| Capital Stock |
| As at September 30, 2011 and 2010, the
following shares and securities convertible into shares were
outstanding: |
| |
|
|
|
|
| (millions) |
|
September 30, 2011 |
|
September 30, 2010 |
| |
|
Shares |
|
Shares |
| Shares outstanding |
|
17.5 |
|
17.4 |
| Stock options |
|
0.6 |
|
1.1 |
| Share unit plan obligations |
|
0.7 |
|
0.6 |
| Shares outstanding and issuable |
|
18.8 |
|
19.1 |
The weighted average number of shares
outstanding during the third quarter of 2011 was 17.5 million,
which was consistent with the prior year period as the rise in the
Company's share price during the last year has limited the activity
occurring under the normal course issuer bid program. The diluted
weighted average number of shares outstanding was 18.2 million,
which is also consistent with the prior year quarter.
The Company has established an independent trust
to purchase common shares of the Company on the open market to
resource share unit plan obligations. During the three and nine
month periods ended September 30,
2011, 500 common shares and 75,500 common shares were
acquired by the trust at an average cost per share of $8.28 and $9.26 per
share respectively (three and nine months ended September 30, 2010 - 92,500 and 129,300 common
shares at an average cost per share of $6.79 and $6.83
respectively). As at September 30,
2011, the trust held 481,726 shares (September 30, 2010 - 471,610 shares).
On December 21,
2010, the Company announced the renewal of the NCIB, to
purchase up to 850,000 common shares representing approximately 5%
of its outstanding common shares. Shares may be purchased up to
December 31, 2011. As at September 30, 2011 the Company had purchased
3,102 shares at an average cost of $7.56 per share (September
30, 2010 - 57,878 shares at an average cost of $6.61 per share).
Critical Accounting Estimates
There have been no material changes to critical
accounting estimates since December 31,
2010. 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
Transition to International Financial Reporting Standards
("IFRS")
In February 2008,
the Canadian Accounting Standards Board confirmed that the basis
for financial reporting by Canadian publicly accountable
enterprises will change from Canadian GAAP to IFRS effective for
January 1, 2011, including the
preparation and reporting of one year of comparative figures. This
change is part of a global shift to provide consistency in
financial reporting in the global marketplace.
Over the transition period the Company assessed
the differences between Canadian GAAP and IFRS. A risk based
approach was used to identify possibly significant differences
based on possible financial impact and complexity. As described in
Note 3 to the condensed interim consolidated financial statements
no material differences were identified. As such there are no
reconciling items that materially changed the reporting
requirements upon the transition from Canadian GAAP to IFRS.
Similarly, no significant information system changes were required
in order to adopt IFRS.
IFRS 1 allows first time adopters of IFRS to
take advantage of a number of voluntary exemptions from the general
principal of retroactive restatement. In adopting IFRS, the Company
did take advantage of the following voluntary exemptions under IFRS
1.
Business Combinations
The Company has not applied IFRS 3, the Business
Combinations standard to acquisitions of subsidiaries that occurred
before January 1, 2010, the Company's
transition date to IFRS. As such there is no retrospective change
in accounting for business combinations. The Company used this
exemption to simplify its IFRS conversion plan and improve
comparability between its Canadian GAAP statements and its IFRS
statements.
Borrowing Costs
IAS 23 requires that borrowing costs directly
attributable to the acquisition, construction or production of a
qualifying asset (one that takes a substantial period of time to
get ready for use or sale) be capitalized as part of the cost of
that asset. The option of immediately expensing those borrowing
costs has been removed. The Company has elected to account for such
transactions on a go forward basis, and as such there is no
retrospective change in accounting for borrowing standards. The
Company used this exemption to simplify its IFRS conversion plan
and improve comparability between its Canadian GAAP statements and
its IFRS statements.
Stock Options
The Company has assessed and quantified the
difference in accounting for stock based compensation under IFRS
compared to Canadian GAAP and has deemed the difference to be
immaterial. The Company has elected to not apply IFRS 2 to share
based payments granted and fully vested before the Company's date
of transition to IFRS. The Company used this exemption to
simplify its IFRS conversion plan and improve comparability between
its Canadian GAAP statements and its IFRS statements.
As part of the transition to IFRS the Company
established that the carrying value of its property and equipment
were substantially equivalent between IFRS and Canadian GAAP and
therefore the Company has continued to carry its property and
equipment at the historic costs model as was used under Canadian
GAAP in these 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 IFRS in its financial statements. The President and Chief
Executive Officer and the Vice President and Chief Financial
Officer of the Company have evaluated whether there were changes to
its ICFR during the nine months ended September 30, 2011 that have materially affected
or are reasonably likely to materially affect the ICFR. No such
changes were identified through their evaluation.
Risk Factors
The Company is exposed to certain business and
market risks including risks arising from transactions that are
entered into the normal course of business, which are primarily
related to interest rate changes and fluctuations in foreign
exchange rates. During the reporting period, no events or
transactions since the year ended December
31, 2010 have occurred that would materially change the
business and market risk information disclosed in the Company's
Form 20F.
Forward Looking Statements
The information in the MD&A may contain
"forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of
historical facts, that address activities, events, outcomes and
other matters that CE Franklin plans, expects, intends, assumes,
believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may
occur in the future are forward-looking statements. These
forward-looking statements are based on management's current
belief, based on currently available information, as to the outcome
and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other
cautionary statements in this MD&A, including those in under
the caption "Risk Factors".
Forward-looking statements appear in a number of
places and include statements with respect to, among other
things:
- forecasted oil and gas industry activity levels in 2011 and
beyond;
- planned capital expenditures and working capital and
availability of capital resources to fund capital expenditures and
working capital;
- the Company's future financial condition or results of
operations and future revenues and expenses;
- the Company's business strategy and other plans and objectives
for future operations;
- fluctuations in worldwide prices and demand for oil and
gas;
- fluctuations in the demand for the Company's products and
services.
Should one or more of the risks or uncertainties
described above or elsewhere in this MD&A occur, or should
underlying assumptions prove incorrect, the Company's actual
results and plans could differ materially from those expressed in
any forward-looking statements.
All forward-looking statements expressed or
implied, included in this MD&A and attributable to CE Franklin
are qualified in their entirety by this cautionary statement. This
cautionary statement should also be considered in connection with
any subsequent written or oral forward-looking statements that CE
Franklin or persons acting on its behalf might issue. CE Franklin
does not undertake any obligation to update any forward-looking
statements to reflect events or circumstance after the date of
filing this MD&A, except as required by law.
Additional Information
Additional information relating to CE Franklin,
including its third quarter 2011 Management Discussion and Analysis
and interim consolidated financial statements and its Form 20-F /
Annual Information Form, is available under the Company's profile
on the SEDAR website at www.sedar.com and at
www.cefranklin.com.
CE Franklin Ltd.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- UNAUDITED
| |
|
As at September 30 |
As at December 31 |
| (in thousands of Canadian
dollars) |
2011 |
2010 |
| Assets |
|
|
| |
|
|
|
| Current assets |
|
|
| |
Accounts receivable (Note 4) |
96,089 |
92,950 |
| |
Inventories (Note 5) |
102,504 |
94,838 |
| |
Other |
6,966 |
1,625 |
| |
|
205,559 |
189,413 |
| Non-current assets |
|
|
| |
Property and equipment |
10,035 |
9,431 |
| |
Goodwill |
20,570 |
20,570 |
| |
Deferred tax assets (Note 6) |
1,593 |
1,116 |
| |
Other assets |
188 |
147 |
| Total Assets |
237,945 |
220,677 |
| |
|
|
|
| Liabilities |
|
|
| |
|
|
|
| Current liabilities |
|
|
| |
Accounts payable and accrued liabilities
(Note 7) |
69,956 |
63,363 |
| |
Current taxes payable (Note 6) |
1,002 |
348 |
| |
|
70,958 |
63,711 |
| Non current liabilities |
|
|
| |
Long term debt (Note 8) |
5,782 |
6,430 |
| Total liabilities |
76,740 |
70,141 |
| |
|
|
|
| |
|
|
|
| Shareholders' equity |
|
|
| |
Capital stock (Note 11) |
23,376 |
23,078 |
| |
Contributed surplus |
20,271 |
19,716 |
| |
Retained earnings |
117,558 |
107,742 |
| |
|
161,205 |
150,536 |
| Total liabilities and shareholders'
equity |
237,945 |
220,677 |
| |
|
|
|
| See accompanying notes to these
condensed interim consolidated financial statements |
CE Franklin Ltd.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY - UNAUDITED
| (Canadian dollars and number of shares in
thousands) |
Capital Stock |
|
|
|
|
|
|
|
Number of
Shares |
$ |
|
Contributed
Surplus |
|
Retained
Earnings |
|
Shareholders'
Equity |
| |
|
|
|
|
|
|
|
|
| Balance - January 1, 2010 |
17,581 |
23,284 |
|
17,184 |
|
102,159 |
|
142,627 |
| Stock based compensation expense (Note 11 (b) and
(c)) |
- |
- |
|
1,485 |
|
- |
|
1,485 |
| Normal Course Issuer Bid (Note 11 (d)) |
(58) |
(76) |
|
- |
|
(298) |
|
(374) |
| Modification of Stock option plan (Note 11
(a) and (b)) |
- |
- |
|
103 |
|
- |
|
103 |
| Share Units exercised (Note 11 (c)) |
67 |
464 |
|
(464) |
|
- |
|
- |
| Purchase of shares in trust for Share Unit Plans
(Note 11 (c)) |
(179) |
(1,229) |
|
- |
|
- |
|
(1,229) |
| Options exercised from treasury |
33 |
259 |
|
(100) |
|
- |
|
159 |
| Directors Share Unit Plan exercise (Note 11
(c)) |
- |
73 |
|
(251) |
|
- |
|
(178) |
| Net earnings |
- |
- |
|
- |
|
4,272 |
|
4,272 |
| Balance - September 30, 2010 |
17,444 |
22,775 |
|
17,957 |
|
106,133 |
|
146,865 |
| |
|
|
|
|
|
|
|
|
| Balance - January 1, 2011 |
17,474 |
23,078 |
|
19,716 |
|
107,742 |
|
150,536 |
| Stock based compensation expense (Note 11 (b) and
(c)) |
- |
- |
|
1,556 |
|
- |
|
1,556 |
| Normal Course Issuer Bid (Note 11 (d)) |
(3) |
(4) |
|
- |
|
(19) |
|
(23) |
| Stock options exercised (Note 11 (b)) |
97 |
735 |
|
(735) |
|
- |
|
- |
| Share Units exercised (Note 11 (c)) |
45 |
266 |
|
(266) |
|
- |
|
- |
| Purchase of shares in trust for Share Unit Plans
(Note 11 (c)) |
(76) |
(699) |
|
- |
|
- |
|
(699) |
| Net earnings |
- |
- |
|
- |
|
9,835 |
|
9,835 |
| Balance - September 30, 2011 |
17,537 |
23,376 |
|
20,271 |
|
117,558 |
|
161,205 |
| |
|
|
|
|
|
|
|
|
| See accompanying notes to these
condensed interim consolidated financial statements |
CE Franklin Ltd.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND
COMPREHENSIVE INCOME - UNAUDITED
| |
|
Three months ended |
|
Nine months ended |
| |
|
|
|
|
|
|
| (in thousands of Canadian dollars
except per share amounts) |
September 30
2011 |
September 30
2010 |
|
September 30
2011 |
September 30
2010 |
| |
|
|
|
|
|
| Revenue |
140,454 |
132,159 |
|
392,021 |
353,944 |
| Cost of sales |
116,581 |
112,928 |
|
326,592 |
299,485 |
| Gross profit |
23,873 |
19,231 |
|
65,429 |
54,459 |
| |
|
|
|
|
|
|
| Other expenses |
|
|
|
|
|
| |
Selling, general and administrative expenses (Note
14) |
17,801 |
15,511 |
|
51,181 |
45,821 |
| |
Depreciation |
633 |
620 |
|
1,836 |
1,855 |
| |
|
18,434 |
16,131 |
|
53,017 |
47,676 |
| |
|
|
|
|
|
|
| Operating profit |
5,439 |
3,100 |
|
12,412 |
6,783 |
| |
Foreign exchange gain and other |
(1,596) |
(130) |
|
(1,768) |
(45) |
| |
Interest expense |
226 |
108 |
|
398 |
539 |
| Earnings before tax |
6,809 |
3,122 |
|
13,782 |
6,289 |
| |
|
|
|
|
|
|
| Income tax expense (recovery)
(Note 6) |
|
|
|
|
|
| |
Current |
2,215 |
1,120 |
|
4,383 |
2,124 |
| |
Deferred |
(185) |
(173) |
|
(436) |
(107) |
| |
|
2,030 |
947 |
|
3,947 |
2,017 |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Net earnings and comprehensive
income |
4,779 |
2,175 |
|
9,835 |
4,272 |
| |
|
|
|
|
|
|
| Net earnings per share (Note
12) |
|
|
|
|
|
| |
Basic |
0.27 |
0.12 |
|
0.56 |
0.24 |
| |
Diluted |
0.26 |
0.12 |
|
0.54 |
0.24 |
| |
|
|
|
|
|
|
| Weighted average number of shares
outstanding ('000s) |
|
|
|
|
| |
Basic |
17,537 |
17,461 |
|
17,507 |
17,518 |
| |
Diluted (Note 12) |
18,165 |
17,783 |
|
18,142 |
17,838 |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| See accompanying notes to these
condensed interim consolidated financial statements |
CE Franklin Ltd.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASHFLOWS -
UNAUDITED
| |
|
|
Three
months ended |
Nine
months ended |
| |
|
|
September 30 |
September 30 |
September 30 |
September 30 |
| (in thousands of Canadian
dollars) |
2011 |
2010 |
2011 |
2010 |
| |
|
|
|
|
| Cash flows from operating
activities |
|
|
|
|
| |
Net earnings for the
period |
4,779 |
2,175 |
9,835 |
4,272 |
| |
Items not affecting cash
- |
|
|
|
|
| |
|
Depreciation |
633 |
620 |
1,836 |
1,855 |
| |
|
Deferred income tax (recovery) |
(185) |
(173) |
(436) |
(107) |
| |
|
Stock based compensation expense |
384 |
728 |
1,506 |
1,520 |
| |
|
Foreign exchange and other |
(1,995) |
(130) |
(1,948) |
(52) |
| |
|
|
3,616 |
3,220 |
10,793 |
7,488 |
| Net change in non-cash working capital
balance related to operations - |
|
|
|
|
| |
Accounts receivable |
(14,916) |
(30,000) |
(2,997) |
(24,263) |
| |
Inventories |
5,543 |
(788) |
(7,666) |
6,560 |
| |
Other current assets |
(1,624) |
(3,340) |
(3,644) |
(1,454) |
| |
Accounts payable and
accrued liabilities |
13,530 |
16,555 |
6,374 |
25,725 |
| |
Current taxes
payable |
1,002 |
237 |
653 |
1,156 |
| |
|
|
7,151 |
(14,116) |
3,513 |
15,212 |
| |
|
|
|
|
|
|
| Cash flows used in investing
activities |
|
|
|
|
| |
Purchase of property and
equipment |
(1,068) |
(629) |
(2,540) |
(1,099) |
| |
Proceeds on disposal of
property and eqipment |
352 |
- |
397 |
- |
| |
Business
acquisition |
- |
- |
- |
12 |
| |
|
|
(716) |
(629) |
(2,143) |
(1,087) |
| |
|
|
|
|
|
|
| Cash flows (used in)/ from
financing activities |
|
|
|
|
| |
Increase (decrease) in
bank operating loan |
- |
14,094 |
- |
(12,455) |
| |
(Decrease) in long term
debt |
(6,443) |
- |
(648) |
- |
| |
Issuance of capital stock
-
stock options exercised |
- |
92 |
- |
111 |
| |
Settlement of share unit
plan obligations |
- |
- |
- |
(178) |
| |
Purchase of capital stock
through normal course issuer bid |
- |
(56) |
(23) |
(374) |
| |
Purchase of capital
stock in trust for
Share Unit Plans |
8 |
(347) |
(699) |
(1,229) |
| |
|
|
(6,435) |
13,783 |
(1,370) |
(14,125) |
| |
|
|
|
|
|
|
| Change in cash and cash
equivalent during the period |
- |
(962) |
- |
- |
| |
|
|
|
|
|
|
| Cash and cash equivalents at
the beginning of the period |
- |
962 |
- |
- |
| |
|
|
|
|
| Cash and cash equivalents at
the end of the period |
- |
- |
- |
- |
| |
|
|
|
|
| |
|
|
|
|
| Cash paid during the period for: |
|
|
|
|
| |
Interest |
89 |
146 |
223 |
393 |
| |
Income taxes |
1,189 |
717 |
3,638 |
957 |
| |
|
|
|
|
|
|
| See accompanying notes to these
condensed interim consolidated financial statements |
CE Franklin Ltd.
Notes to Condensed Interim Consolidated
Financial Statements - Unaudited
(Tabular amounts in thousands of Canadian
dollars, except share and per share amounts)
1. General information
CE Franklin Ltd. (the "Company") is
headquartered and domiciled in Calgary,
Canada. The Company is a subsidiary of Schlumberger Limited,
a global energy services company. The address of the Company's
registered office is 1800, 635 8th Ave SW, Calgary, Alberta, Canada and it is
incorporated under the Alberta Business Corporations Act. The
Company is a distributor of pipe, valves, flanges, fittings,
production equipment, tubular products and other general industrial
supplies primarily to the oil and gas industry through its 43
branches situated in towns and cities that serve oil and gas fields
of the western Canadian sedimentary basin. In addition, the Company
distributes similar products to the oil sands, refining, and
petrochemical industries and non-oilfield related industries such
as forestry and mining.
2. Accounting policies
Basis of preparation and adoption of
IFRS
The Company prepares its financial statements in
accordance with Canadian generally accepted accounting principles
as set out in the Handbook of the Canadian Institute of Chartered
Accountants ("CICA Handbook"). In 2010, the CICA Handbook was
revised to incorporate International Financial Reporting Standards
("IFRS"), and require publicly accountable enterprises to apply
such standards effective for years beginning on or after
January 1, 2011. Accordingly, the
Company commenced reporting on this basis in its 2011 interim
consolidated financial statements. In these financial statements,
the term "Canadian GAAP" refers to Canadian GAAP before the
adoption of IFRS.
These interim consolidated financial statements
have been prepared in accordance with IFRS applicable to the
preparation of interim financial statements, including IAS 34,
Interim Financial Reporting, and IFRS 1, First-time
Adoption of International Financial Reporting Standards. The
accounting policies followed in these interim financial statements
are the same as those applied in the Company's interim financial
statements for the period ended March 31,
2011. The Company has consistently applied the same
accounting policies throughout all periods presented, as if these
polices had always been in effect. Note 3 discloses the impact of
the transition to IFRS on the Company's reported equity as at
September 30, 2011 and comprehensive
income for the three and nine months ended September 30, 2011, including the nature and
effect of significant changes in accounting policies from those
used in the Company's consolidated financial statements for the
year ended December 31, 2010.
The accounting policies applied in these
condensed interim consolidated financial statements are based on
IFRS effective for the year ended December
31, 2011, as issued and outstanding as of October 27, 2011, the date the Board of Directors
approved the statements. Any subsequent changes to IFRS that are
given effect in the Company's annual consolidated financial
statements for the year ending December 31,
2011 could result in the restatement of these interim
consolidated financial statements, including transition adjustments
recognized on change-over to IFRS.
The condensed interim consolidated financial
statements should be read in conjunction with the Company's
Canadian GAAP annual financial statements for the year ended
December 31, 2010, and the Company's
interim financial statements for the quarter ended March 31, 2011 prepared in accordance with IFRS
applicable to interim financial statements.
3. Explanation of transition to
IFRS
The Company does not have any material
differences between IFRS and Canadian GAAP. As such there are no
reconciling items that would materially change the reporting
requirements under Canadian GAAP to IFRS.
The interim consolidated financial statements
for the period ended March 31, 2011
were the Company's first financial statements prepared under IFRS.
For all accounting periods prior to this, the Company prepared its
financial statements under Canadian GAAP.
IFRS 1 allows first time adopters to IFRS to
take advantage of a number of voluntary exemptions from the general
principal of retrospective restatement. The Company has taken the
following exemptions:
IFRS 2 Share based payments
The Company has elected to not apply IFRS 2 to
share based payments granted and fully vested before the Company's
date of transition to IFRS. The Company has assessed and quantified
the difference in accounting for stock based compensation under
IFRS compared to Canadian GAAP and has deemed the difference to be
immaterial.
IFRS 3 Business combinations
This standard has not been applied to
acquisitions of subsidiaries that occurred before January 1, 2010, the Company's transition date to
IFRS. As such, there is no retrospective change in accounting for
business combinations.
IAS 23 Borrowing costs
Borrowing costs requires an entity to capitalize
borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset (one that takes a
substantial period of time to get ready for use or sale) as part of
the cost of that asset. The option of immediately expensing those
borrowing costs has been removed. The Company has elected to
account for such transactions on a go forward basis. As such there
is no retrospective change in accounting for borrowing costs.
As part of the transition to IFRS the Company
established that the carrying values of its property and equipment
were substantially equivalent between IFRS and Canadian GAAP and
therefore the Company has continued to carry its property and
equipment at the historic costs model as was used under Canadian
GAAP in these statements.
| 4. Accounts receivable |
|
|
|
| |
|
|
|
| |
September 30,
2011 |
|
December 31,
2010 |
| Current |
50,060 |
|
40,014 |
| Less than 60 days overdue |
34,301 |
|
41,253 |
| Greater than 60 days overdue |
7,193 |
|
5,519 |
| Total Trade receivables |
91,554 |
|
86,786 |
| Allowance for credit losses |
(1,504) |
|
(1,887) |
| Net trade receivables |
90,050 |
|
84,899 |
| Other receivables |
6,039 |
|
8,051 |
| |
96,089 |
|
92,950 |
A substantial portion of the Company's accounts
receivable balance is with customers within the oil and gas
industry and is subject to normal industry credit risks.
Concentration of credit risk in trade receivables is limited as the
Company's customer base is large and diversified. The Company
follows a program of credit evaluations of customers and limits the
amount of credit extended when deemed necessary.
The Company has established procedures in place
to review and collect outstanding receivables. Significant
outstanding and overdue balances are reviewed on a regular basis
and resulting actions are put in place on a timely basis.
Appropriate provisions are made for debts that may be impaired on a
timely basis.
The Company maintains an allowance for possible
credit losses that are charged to selling, general and
administrative expenses by performing an analysis of specific
accounts.
5. Inventories
The Company maintains net realizable value allowances against
slow moving, obsolete and damaged inventories that are charged to
cost of goods sold on the statement of earnings. These allowances
are included in the inventory value disclosed above. Movement of
the allowance for net realizable value is as follows:
| |
Nine months ended |
|
Year ended |
| |
September
30, 2011 |
|
December 31,
2010 |
| Opening balance as at January 1, |
5,000 |
|
6,300 |
| Additions |
728 |
|
900 |
| Utilization through write downs |
(1,358) |
|
(2,200) |
| Closing balance |
4,370 |
|
5,000 |
6. Taxation
The difference between the income tax provision recorded and the
provision obtained by applying the combined federal and provincial
statutory rates is as follows:
| |
Three Months Ended |
|
Nine Months Ended |
| |
September 30 |
|
September 30 |
| |
2011 |
% |
2010 |
% |
|
2011 |
% |
2010 |
% |
| Earnings before income
taxes |
6,809 |
|
3,121 |
|
|
13,782 |
|
6,289 |
|
| Income taxes calculated at statutory rates |
1,825 |
26.8 |
887 |
28.4 |
|
3,680 |
26.7 |
1,787 |
28.4 |
| Non-deductible items |
22 |
0.3 |
25 |
0.8 |
|
55 |
0.4 |
80 |
1.3 |
| Share based compensation |
19 |
0.3 |
46 |
1.5 |
|
81 |
0.6 |
159 |
2.5 |
| Adjustments for filing
returns and others |
164 |
2.4 |
(11) |
(0.4) |
|
131 |
0.9 |
(9) |
(0.1) |
| |
2,030 |
29.8 |
947 |
30.3 |
|
3,947 |
28.6 |
2,017 |
32.1 |
As at September 30,
2011, income taxes payable was $1.0
million (December 31, 2010 -
$0.3 million payable). Income tax
expense is based on management's best estimate of the weighted
average annual income tax rate expected for the full financial
year.
| |
As
at |
|
September
30, 2011 |
|
December 31,
2010 |
|
| |
Assets |
|
|
|
|
|
| |
Property and equipment |
|
887 |
|
870 |
|
| |
Stock based compensation expense |
|
830 |
|
487 |
|
| |
Other |
|
536 |
|
156 |
|
| |
|
|
2,253 |
|
1,513 |
|
| |
Liabilities |
|
|
|
|
|
| |
Goodwill
and other |
|
660 |
|
397 |
|
| |
Net Deferred tax asset |
|
1,593 |
|
1,116 |
|
Deductible temporary differences are recognized
to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences can be
utilized.
7. Accounts payable and accrued
liabilities
| |
|
|
September 30,
2011 |
|
December 31,
2010 |
|
| |
Current |
|
|
|
|
|
| |
Trade payables |
|
24,899 |
|
23,966 |
|
| |
Other payables |
|
9,477 |
|
7,057 |
|
| |
Accrued compensation expenses |
|
2,951 |
|
2,434 |
|
| |
Other accrued liabilities |
|
32,629 |
|
29,906 |
|
| |
|
|
69,956 |
|
63,363 |
|
8. Long term debt and bank operating loan
| |
|
|
September
30, 2011 |
|
December 31,
2010 |
|
| |
JEN Supply debt |
|
290 |
|
290 |
|
| |
Bank operating loan |
|
5,492 |
|
6,140 |
|
| |
Long term debt |
|
5,782 |
|
6,430 |
|
In July of 2011, the Company entered into a
$60.0 million revolving term Credit
Facility that matures in July
2014. Borrowings under the Credit Facility bear
interest based on floating interest rates and are secured by a
general security agreement covering all assets of the Company. The
maximum amount available under the Credit Facility is subject to a
borrowing base formula applied to accounts receivable and
inventories. The Credit Facility requires that the Company
maintains the ratio of its debt to debt plus equity at less than
40%. As at September 30, 2011, this
ratio was 3% (December 31, 2010 -
4%). The Company must also maintain coverage of its net operating
cash flow as defined in the Credit Facility agreement, over
interest expense for the trailing twelve month period, at greater
than 1.25 times. As at September 30,
2011, this ratio was 24.9 times (December 31, 2010 - 14.1 times). The Credit
Facility contains certain other covenants, with which the Company
is in compliance and has been for the comparative periods. As at
September 30, 2011, the Company had
borrowed $5.5 million and had
available undrawn borrowing capacity of $54.5 million under the Credit Facility. In
management's opinion, the Company's available borrowing capacity
under its Credit Facility and ongoing cash flow from operations,
are sufficient to resource its ongoing obligations.
The JEN Supply debt is unsecured and bears
interest at the floating Canadian bank prime rate and is repayable
in 2012.
9. Capital management
The Company's primary source of capital is its
shareholders' equity and cash flow from operating activities before
net changes in non-cash working capital balances. The Company
augments these capital sources with a $60
million, revolving bank term loan facility maturing in
July 2014 (see Note 8) which is used
to finance its net working capital and general corporate
requirements. The Company's objective is to maintain adequate
capital resources to sustain current operations including meeting
seasonal demands of the business and the economic cycle. The
Company's capital is summarised as follows:
| |
|
September 30,
2011 |
|
December 31,
2010 |
|
| |
Shareholders' equity |
161,205 |
|
150,536 |
|
| |
Long term debt / Bank operating
loan |
5,782 |
|
6,430 |
|
| |
Net working capital |
134,601 |
|
125,702 |
|
| |
|
|
|
|
|
| |
Net working capital is
defined as current assets less cash and cash equivalents, accounts
payable and accrued liabilities, current taxes payable and other
current liabilities. |
|
10. Related party transactions
Schlumberger owns approximately 56% of the
Company's outstanding shares. The Company is the exclusive
distributor in Canada of downhole
pump production equipment manufactured by Wilson Supply, a division
of Schlumberger. Purchases of such equipment conducted in the
normal course on commercial terms were as follows:
| |
For the
nine months ended September 30 |
|
2011 |
|
2010 |
| |
Cost of sales for the three months
ended |
|
3,357 |
|
2,232 |
| |
Cost of sales for the nine months
ended |
|
7,446 |
|
5,932 |
| |
Inventory |
|
4,854 |
|
3,323 |
| |
Accounts payable and accrued
liabilities |
|
1,264 |
|
953 |
| |
Accounts receivable |
|
4 |
|
- |
11. Capital Stock
a) The Company has authorized an unlimited
number of common shares with no par value. At September 30, 2011, the Company had 17.5 million
common shares, 0.7 million stock options and 0.6 million share
units outstanding.
b) The Board of Directors may grant options to
purchase common shares to substantially all employees, officers and
directors and to persons or corporations who provide management or
consulting services to the Company. The exercise period and
the vesting schedule after the grant date are not to exceed 10
years.
Option activity for each of the nine month
periods ended September 30 was as
follows:
| |
(000's) |
|
2011 |
|
2010 |
|
| |
Outstanding - January 1 |
|
1,073 |
|
1,195 |
|
| |
Exercised |
|
(97) |
|
(73) |
|
| |
Forfeited |
|
(228) |
|
(26) |
|
| |
Outstanding at September 30 |
|
748 |
|
1,096 |
|
| |
Exercisable at September 30 |
|
662 |
|
824 |
|
Stock based compensation expense recorded for
the three and nine month period ended September 30, 2011 was $72,000 (2010 - $517,000) and $302,000 (2010 - $1,271,000) respectively and is included in
selling, general and administrative expenses on the Consolidated
Statement of Earnings and Comprehensive Income. No options
were granted during the nine month period ended September 30, 2011 or the year ended December 31, 2010. Options vest one third or one
fourth per year from the date of grant.
Prior to the fourth quarter of 2010, the
Company's stock option plan included a cash settlement mechanism.
During the fourth quarter of 2010, the Company discontinued the
settlement of stock option obligations with cash payments in favour
of issuing shares from treasury. At the time of this plan
modification, the current liability of $2,075,000 was transferred to contributed surplus
on the Company's consolidated statement of financial position.
Stock options were revalued at each period end using the Black
Scholes pricing model, the following assumptions were used:
| |
|
2010 |
|
| Dividend yield |
|
Nil |
|
| Risk-free interest rate |
|
3.48% |
|
| Expected life |
|
5 years |
|
| Expected volatility |
|
63.2% |
|
Note: Expected volatility is based on
historical volatility.
c) Share Unit Plans
The Company has Restricted Share Unit ("RSU"),
Performance Share Unit ("PSU") and Deferred Share Unit ("DSU")
plans (collectively the "Share Unit Plans"), 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 in
exchange for a vested unit. For the PSU plan the number of units
granted is dependent on the Company meeting certain return on net
asset ("RONA") performance thresholds during the year of grant. The
multiplier within the plan ranges from 0% - 200% dependent on
performance. RSU and PSU grants vest one third per year over the
three year period following the date of the grant. DSU's vest on
the date of grant, and can only be redeemed when the Director
resigns from the Board. Compensation expense related to the
units granted is recognized over the vesting period based on the
fair value of the units at the date of the grant and is recorded to
contributed surplus. The contributed surplus balance is
reduced as the vested units are exchanged for either common shares
or cash. During the nine month period ended September 30, 2011 and 2010 the fair value of the
RSU, PSU and DSU units granted was $2,219,000 (2010 - $1,968,000) and compensation expense recorded in
the three and nine month period ended September 30, 2011, were $262,000 (2010 - $349,000) and $1,053,000 (2010 - $961,000).
Share Unit Plan activity for the periods ended
September 30, 2011, and December 31, 2010 was as follows:
| (000's) |
September 30, 2011 |
|
December 31, 2010 |
| |
Number of Units |
|
Number of Units |
| |
RSU |
PSU |
DSU |
Total |
|
RSU |
PSU |
DSU |
Total |
| Outstanding at January 1 |
273 |
97 |
80 |
450 |
|
223 |
53 |
98 |
374 |
| Granted |
128 |
117 |
22 |
267 |
|
145 |
132 |
31 |
308 |
| Performance adjustments |
- |
- |
- |
- |
|
- |
(77) |
- |
(77) |
| Exercised |
(35) |
(10) |
- |
(45) |
|
(82) |
(7) |
(49) |
(138) |
| Forfeited |
(55) |
(42) |
- |
(97) |
|
(13) |
(4) |
- |
(17) |
| Outstanding at end of period |
311 |
162 |
102 |
575 |
|
273 |
97 |
80 |
450 |
| Exercisable at end of period |
96 |
35 |
102 |
233 |
|
30 |
10 |
80 |
120 |
The Company has established an independent trust
to purchase common shares of the Company on the open-market to
satisfy Share Unit Plan obligations. The Company's intention is to
settle all share based obligations with shares delivered from the
trust. The trust is considered to be a special interest entity and
is consolidated in the Company's financial statements with the cost
of the shares held in trust reported as a reduction to capital
stock. For the nine month period ended September 30, 2011, 75,500 common shares were
purchased by the trust (2010 - 179,300) at an average cost of
$9.26 per share (2010 - $6.79). As at September 30, 2011, the trust held 481,726 shares
(2010 - 471,610).
d) Normal Course Issuer Bid ("NCIB")
On December 21,
2010, the Company announced a NCIB to purchase for
cancellation up to 850,000 common shares representing approximately
5% of its outstanding common shares. During the nine months ended
September 30, 2011, the company
purchased 3,102 shares at an average cost of $7.56 (2010: 57,878 shares purchased at an
average cost of $6.61).
12. Earnings per share
Basic
Basic earnings per share is calculated by
dividing the net income attributable to shareholders by the
weighted average number of ordinary shares in issue during the
year.
Dilutive
Diluted earnings per share are calculated using
the treasury stock method, as if RSU's, PSU's, DSU's and stock
options were exercised at the beginning of the year and funds
received were used to purchase the Company's common shares on the
open market at the average price for the year.
| |
Three
Months Ended |
|
Nine
Months Ended |
| |
September 30 |
|
September 30 |
| |
2011 |
2010 |
|
2011 |
2010 |
| Total Comprehensive income attributable to
shareholders |
4,779 |
2,175 |
|
9,835 |
4,272 |
| Weighted average number of common shares issued
(000's) |
17,537 |
17,461 |
|
17,507 |
17,518 |
| Adjustments for: |
|
|
|
|
|
| Stock options |
250 |
39 |
|
380 |
- |
| Share Units |
378 |
283 |
|
255 |
320 |
| Weighted average number of ordinary shares for
dilutive |
18,165 |
17,783 |
|
18,142 |
17,838 |
| Net earnings per share: Basic |
0.27 |
0.12 |
|
0.56 |
0.24 |
| Net earnings per share: Diluted |
0.26 |
0.12 |
|
0.54 |
0.24 |
13. Financial instruments
a) Fair values
The Company's financial instruments recognized
on the consolidated statements of financial position consist of
accounts receivable, accounts payable and accrued liabilities and
long term debt. The fair values of these financial instruments,
excluding long term debt, approximate their carrying amounts due to
their short-term maturity. At September 30,
2011, the fair value of the long term debt approximated
their carrying values due to their floating interest rate nature
and short term maturity. Long term debt is initially recorded at
fair value and subsequently measured at amortized cost using the
effective interest rate method.
b) Credit Risk is described in Note 4.
c) Market Risk and Risk Management
The Company's long term debt bears interest
based on floating interest rates. As a result the Company is
exposed to market risk from changes in the Canadian prime interest
rate which can impact its borrowing costs. Based on the Company's
borrowing levels as at September 30,
2011, a change of one percent in interest rates would
decrease or increase the Company's annual net income by
$0.1 million.
From time to time the Company enters into
foreign exchange forward contracts to manage its foreign exchange
market risk by fixing the value of its liabilities and future
commitments. The Company is exposed to possible losses in the event
of non-performance by counterparties. The Company manages this
credit risk by entering into agreements with counterparties that
are substantially all investment grade financial institutions. The
Company's foreign exchange risk arises principally from the
settlement of United States dollar
dominated net working capital balances as a result of product
purchases denominated in United
States dollars. As at September 30,
2011, the Company had contracted to purchase US$14.2 million at fixed exchange rates with
terms not exceeding nine months (December
31, 2010 - $6.5 million). The
fair market values of the contracts were $1.0 million at September
30, 2011 and nominal at December 31,
2010. The Company recorded on these contracts an unrealized
gain of $1.0 million for the three
and nine month periods ended September 30,
2011 which has been recorded in foreign exchange (gain)
loss. As at September 30, 2011,
a one percent change in the Canadian dollar relative to the US
dollar would decrease or increase the Company's annual net income
by $0.1 million.
Selling, general and administrative
("SG&A") Costs
Selling, general and administrative costs for the three and nine
month periods ended September 30 are
as follows:
| |
Three months ended |
|
Nine months ended |
| |
2011 |
2010 |
|
2011 |
2010 |
| |
$ |
% |
$ |
% |
|
$ |
% |
$ |
% |
| Salaries and Benefits |
10,596 |
60% |
8,938 |
58% |
|
30,908 |
60% |
26,500 |
58% |
| Selling Costs |
1,663 |
9% |
1,843 |
12% |
|
4,216 |
8% |
4,583 |
10% |
| Facility and office costs |
4,268 |
24% |
3,211 |
21% |
|
11,520 |
23% |
10,081 |
22% |
| Other |
1,274 |
7% |
1,519 |
9% |
|
4,537 |
9% |
4,657 |
10% |
| SG&A costs |
17,801 |
100% |
15,511 |
100% |
|
51,181 |
100% |
45,821 |
100% |
15. Segmented reporting
The Company distributes oilfield products
principally through its network of 43 branches located in western
Canada primarily to oil and gas
industry customers. Accordingly, the Company has determined
that it operated through a single operating segment and geographic
jurisdiction.
16. Seasonality
The Company's sales levels are affected by
weather conditions. As warm weather returns in the spring each
year, the winter's frost comes out of the ground rendering many
secondary roads incapable of supporting the weight of heavy
equipment until they have dried out. In addition, many exploration
and production areas in northern Canada are accessible only in the winter
months when the ground is frozen. As a result, the first and fourth
quarters typically represent the busiest time for oil and gas
industry activity and the highest sales activity for the Company.
Revenue levels drop dramatically during the second quarter until
such time as roads have dried and road bans have been lifted. This
typically results in a significant reduction in earnings during the
second quarter, as the decline in revenues typically 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 cash and cash equivalents, accounts payable and accrued
liabilities, income taxes payable and other current liabilities)
and bank revolving loan borrowing levels follow similar seasonal
patterns as revenues.
SOURCE CE Franklin Ltd.