CALGARY, April 25 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced
its results for the first quarter ended March 31, 2005.
CE Franklin reported record net income of $5.8 million or $0.32 per share
(diluted) for the first quarter ended March 31, 2005 as compared to net income
of $1.6 million or $0.09 per share (diluted) for the comparable period in
2004.
Financial Highlights
--------------------
<<
Three Months Ended Year Ended
March 31 December 31
------------------------- ------------
(millions of Cdn.$ except per
share data) 2005 2004 2004
------------ ------------ ------------
(unaudited)
Sales $ 128.4 $ 89.0 $ 338.7
Gross Profit 23.7 14.7 60.2
Gross Profit - % 18.4% 16.5% 17.8%
EBITDA(1) 10.8 4.1 15.9
EBITDA(1) as a % of sales 8.4% 4.6% 4.7%
Net income $ 5.8 $ 1.6 $ 6.1
Per share
Basic $ 0.34 $ 0.09 $ 0.36
Diluted $ 0.32 $ 0.09 $ 0.35
Sales increased 44.2% to $128.4 million for the quarter ended March 31,
2005 as compared to $89.0 million for the quarter ended March 31, 2004. The
44.2% improvement in sales reflects strong commodity prices, improved industry
economics coupled with an increase in market share for all products as a
result of the Company's service, sales and marketing efforts.
EBITDA(1) for the quarter ended March 31, 2005 increased 163.4% to
$10.8 million from $4.1 million for the quarter ended March 31, 2004. The
$39.4 million increase in sales resulted in an incremental flow through to
EBITDA of 17.0% and 10.8% to net income.
"CEF continues to make solid progress with seven consecutive quarters of
profit," said Michael West, Chairman, President and CEO. "Q1 2005 produced
record quarterly sales, EBITDA and earnings per share for the Company. We are
committed to creating value for all stakeholders and we are extremely pleased
with our progress and are more determined than ever to show continued
improvement."
Outlook
-------
The second quarter represents spring breakup in Canada as warm weather
returns and the winter's frost comes out of the ground rendering many
secondary roads incapable of supporting heavy equipment until the roads have
dried out. As a result activity levels will decline dramatically during the
second quarter.
Strong commodity prices continue to support high demand for CE Franklin's
products and services in Canada. Many industry watchers are predicting high
levels of activity to continue through Q3 and Q4 2005. As a result,
CE Franklin management remains optimistic regarding the continuation of strong
demand for the Company's products and services in Canada.
CE Franklin is committed to outperform market activity.
Conference Call and Webcast Information
---------------------------------------
A conference call to review the quarter ended March 31, 2005, which is
open to the public, will be held on Tuesday, April 26, 2005 at 11:00 a.m.
Eastern Time (9:00 a.m. Mountain Time).
Participants may join the call by dialing 1-800-814-4861 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 1-877-289-8525 and entering the pass code of
21120670 No. and may be accessed until midnight Tuesday, May 3, 2005.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)1070520 and
will be available on the Company's website at http://www.cefranklin.com.
Michael West, Chairman, President and Chief Executive Officer will lead
the discussion and will be accompanied by Sam Secreti, Vice President and
Chief Financial Officer. The discussion will be followed by a question and
answer period. The call is scheduled for a maximum of 45 minutes.
--------------------------
(1) EBITDA represents income from continuing operations before interest,
taxes, amortization and other expenses (income). 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 because it is used by management and
some investors as a way to measure a company's ability to incur and
service debt, make capital expenditures and meet working capital
requirements. EBITDA is not intended 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. 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.
Forward Looking Statements
--------------------------
Certain statements contained in this news release constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, Section 21E of the Securities Exchange Act of 1934 and the Private
Securities Litigation Reform Act of 1995. These "forward-looking" statements
have been identified by using words such as "would", "expected", "believe" and
similar phrases and include all statements relating to planned activity,
revenue levels, capital expenditures and statements concerning liquidity and
capital resources. There are numerous risks and uncertainties that can affect
the outcome and timing of such events, including many factors beyond the
control of the Company. These factors include, but are not limited to,
economic conditions, seasonality of drilling activity, the loss of a major
supplier of tubular goods, commodity prices for oil and gas, currency
fluctuations and government regulations. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove incorrect, the
Company's actual results and plans for 2005 and beyond could differ materially
from those expressed in the forward looking statements. CE Franklin Ltd.
assumes no obligation to update publicly any forward-looking statements
whether as a result of new information, future events or otherwise. For a
discussion of other risk factors, which could impact CE Franklin Ltd., please
review CE Franklin' s Annual Report on Form 20-F for the year ended
December 31, 2004 as filed with the Securities and Exchange Commission.
Management's Discussion and Analysis as at April 25, 2005
For the quarter ended March 31, 2005 as compared to the quarter ended
March 31, 2004
(All amounts shown in CDN $ unless otherwise specified)
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is provided to assist readers in
understanding CE Franklin Ltd.'s ("CE Franklin" or the "Company") financial
performance during the periods presented and significant trends that may
impact future performance of CE Franklin Ltd. This discussion should be read
in conjunction with the Financial Statements of CE Franklin Ltd. and the
related notes thereto and should be read in conjunction with the Management's
Discussion and Analysis included in the Company's December 31, 2004 Annual
Report and Financial Statements and notes thereto.
The selected financial data presented below is presented in Canadian
dollars and in accordance with Canadian generally accepted accounting
principles, or "Canadian GAAP". There are no Statements of Operations
differences between Canadian and U.S. GAAP.
Overview
CE Franklin distributes pipe, valves, flanges, fittings, production
equipment and other general oilfield supplies to producers of oil and gas in
Canada through its 37 branches which are situated in towns and cities that
serve particular oil and gas fields of the western Canadian sedimentary basin.
In addition, the Company distributes general oilfield supplies to the
oilsands, refining, heavy oil and petrochemical and non-oilfield related
industries such as the forestry and mining industries.
The Company also distributes tubular products, including the steel pipe
that is used to line oil and gas wells, the tubing that is used to bring the
production to the surface and the line pipe for oil and gas gathering systems,
to producers of oil and gas in Canada. Tubular product sales are made from the
Company's headquarters in Calgary, Alberta, where most Canadian oil and gas
producers also have their headquarters. Deliveries of pipe are made directly
from the field inventories of the manufacturers or from Company owned
inventory to the well site or the site where surface line pipe will be laid.
Results of operations
The following table summarizes CE Franklin's results of operations.
(in thousands of Cdn. dollars except per
share data)
Three months ended
March 31
------------ ------------
2005 2004
------------ ------------
(unaudited)
Statements of Operations
Sales 128,372 89,032
Gross Profit 23,663 14,687
Gross Profit - % 18.4% 16.5%
Other expenses (income)
Selling, general and administrative expenses 12,909 10,604
Amortization 1,168 1,044
Interest 509 341
Other 9 (65)
------------ ------------
14,595 11,924
------------ ------------
Income before income taxes 9,068 2,763
Income tax expense 3,264 1,176
------------ ------------
Income from continuing operations 5,804 1,587
Loss from discontinued operations - (27)
------------ ------------
Net income 5,804 1,560
------------ ------------
------------ ------------
EBITDA(1) 10,754 4,083
EBITDA as a % of sales 8.4% 4.6%
Net income per share
Basic $ 0.34 $ 0.09
Diluted $ 0.32 $ 0.09
(1) EBITDA represents income from continuing operations before interest,
taxes, amortization and other expenses (income). 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 because it is used by management and
some investors as a way to measure a company's ability to incur and
service debt, make capital expenditures and meet working capital
requirements. EBITDA is not intended 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. Not all companies calculate EBITDA
in the same manner and EBITDA does not have a standardized meaning
prescribed by Canadian GAAP. Accordingly, EBITDA, as the term is used
herein, is unlikely to be comparable to EBITDA as reported by other
entities.
The following is a reconciliation of income from continuing operations to
EBITDA:
(in thousands of Cdn. dollars)
For the three months ended March 31 2005 2004
------------ ------------
Income from continuing operations $ 5,804 $ 1,587
Interest expense 509 341
Income tax expense 3,264 1,176
Amortization 1,168 1,044
Other 9 (65)
------------ ------------
EBITDA $ 10,754 $ 4,083
------------ ------------
Quarter Ended March 31, 2005 compared to Quarter Ended March 31, 2004
The price of oil and gas as at March 31, 2005 was U.S. $55.40 per bbl
(West Texas Intermediate) and Cdn. $7.62 per MMBTU (AECO spot) respectively.
This compares to U.S. $35.76 per bbl (West Texas Intermediate) for oil and
Cdn. $6.02 per MMBTU (AECO spot), for gas as at March 31, 2004.
Well completions (excluding dry and service) remained consistent at 4,691
wells for the three months ended March 31, 2005 compared to 4,663 wells for
the three months ended March 31, 2004. The average rig count decreased 7.5% to
492 rigs in the first three months of 2005 from 532 rigs in the first three
months of 2004. Both market indicators do not provide a true reflection of
activity levels during the first quarter. The Company believes that market
activity was up 10-15% Q1 2003 versus Q1 2004.
Sales
Sales for the quarter ended March 31, 2005 increased 44.2% or
$39.4 million to $128.4 million from $89.0 million for the quarter ended
March 31, 2004. The sales increase was due to strong commodity prices,
improved industry economics and an increase in market share for all products
(from new customers and increased sales to existing customers). Sales also
increased due to an increase in prices to customers to reflect the increase in
the price of steel, which is used in many of the products the Company
distributes.
Gross Profit
Gross profit increased 61.1% to $23.7 million for the quarter ended
March 31, 2005 from $14.7 million for the quarter ended March 31, 2004. Gross
profit margins increased to 18.4% for the quarter ended March 31, 2005 from
16.5% for the quarter ended March 31, 2004.
The improvement in gross profit margins is a result of margin initiatives
implemented by the Company in 2003, which include offshore procurement,
standardization of certain product lines and a more disciplined procurement
practice. The Company did not implement price increases to customers in 2004
and the first quarter of 2005 over and above price increases by the Company's
suppliers as a result of the rise in steel prices.
Selling, General and Administrative Costs (SG&A)
SG&A costs increased $2.3 million or 21.7% to $12.9 million for the
quarter ended March 31, 2005 from $10.6 million for the quarter ended
March 31, 2004. The increase in SG&A includes increased salaries and benefits
for additional employees hired to support the 44.2% increase in sales, an
increase in occupancy costs for both new and larger locations and an increase
in consulting costs in connection with compliance with section 404 of the
Sarbanes-Oxley act.
The total number of employees increased 14.5% as at March 31, 2005 to 339
employees compared to 296 employees at the end of March 31, 2004. Revenue per
employee for the quarter ended March 31, 2005 increased 25.9% compared to the
same quarter in 2004. The improvement reflects standardization of processes
and procedures, whereby all internal processes are performed consistently
throughout the Company's operations resulting in process improvement
efficiencies.
EBITDA
EBITDA for quarter ended March 31, 2005 increased $6.7 million or 163.4%
to $10.8 million compared to $4.1 million for the quarter ended March 31,
2004. The $39.4 million increase in sales resulted in a 17.0% incremental flow
through to EBITDA. EBITDA is a supplemental non-GAAP financial measure used by
management, as well as industry analysts, to evaluate operations. For a
reconciliation of net income to EBITDA.
EBITDA as a percentage of sales was 8.4% for the quarter ended March 31,
2005 versus 4.6% for the quarter ended March 31, 2004. Q1 and Q4 typically
represent the busiest quarters for the Company. EBITDA as a percentage of
sales is a measure used by distribution companies to evaluate profitability.
Income Before Income Taxes
Income before income taxes improved $6.3 million to $9.1 million for the
quarter ended March 31, 2005 compared to $2.8 million for the quarter ended
March 31, 2004. The improvement is a result of the $9.0 million increase in
gross profit offset by the $2.3 million increase in SG&A and the $400,000
increase in other costs. Other costs include amortization, interest expense
and foreign exchange.
The $39.4 million increase in sales resulted in a 16.0% incremental flow
through to income before income taxes.
Income Taxes
The Company's effective tax rate for the quarter ended March 31, 2005 was
36.0%, as compared to an effective tax rate of 42.6% for the quarter ended
March 31, 2004. The Company's combined federal and provincial statutory tax
rate for the quarter ended March 31, 2005 was 34.4%, compared to 37.1% for the
quarter ended March 31, 2004. The reduction in the effective tax rate for the
quarter ended March 31, 2005 is due to non-deductible items and capital and
other taxes that were a smaller component of the overall income tax charge as
a result of the increase in income before income taxes as compared to the
quarter ended March 31, 2004.
Income from Continuing Operations
Income from continuing operations increased to $5.8 million or $0.32 per
share (diluted) compared to $1.6 million or $0.09 per share (diluted) for the
quarter ended March 31, 2004.
Loss from Discontinued Operations
On March 31, 2004, the Company sold its 50% interest in its small
horsepower compression operations for cash proceeds of $961,000. No gain or
loss on disposition resulted from this transaction.
Loss from discontinued operations for the quarter ended March 31, 2004
was $27,000.
Net Income and Earnings per Share
Net income for the for the quarter ended March 31, 2005 was $5.8 million
or $0.32 per share (diluted) as compared to $1.6 million or $0.09 per share
(diluted) for the for the quarter ended March 31, 2004. This represents an
income improvement of $4.2 million or $0.23 per share (diluted).
Summary of Quarterly Financial Data
The selected quarterly financial data presented below is presented in
Canadian dollars and in accordance with Canadian GAAP. There are no Statements
of Operations differences between Canadian and U.S. GAAP.
(in thousands of Cdn. dollars except per share data)
Unaudited Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2003 2003 2003 2004 2004 2004 2004 2005
------- ------- ------- ------- ------- ------- ------- -------
Sales 54,807 67,533 72,987 89,032 67,002 78,232 104,435 128,372
EBITDA 591 2,196 3,115 4,083 2,491 3,379 5,991 10,754
Net income
(loss)
from
continuing
operations (297) 404 1,196 1,587 518 1,198 2,839 5,804
Loss from
discon-
tinued
operations (179) (97) (544) (27) - - - -
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss) (476) 307 652 1,560 518 1,198 2,839 5,804
Net income
(loss)
per share
Basic $(0.03) $ 0.02 $ 0.03 $ 0.09 $ 0.03 $ 0.07 $ 0.17 $ 0.34
Diluted $(0.03) $ 0.02 $ 0.03 $ 0.09 $ 0.03 $ 0.07 $ 0.16 $ 0.32
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 and highest sales activity for the
Company. Sales levels drop dramatically during the second quarter until such
time as the roads have dried and road bans have been lifted.
Sales for the quarter ended March 31, 2005 increased 22.9% to
$128.4 million from $104.4 million for the quarter ended December 31, 2004.
Average rig count increased 17.1% Q1 2005 versus Q4 2004, and oil and gas well
completions decreased 12.6% Q1 2005 versus Q4 2004. The 22.9% increase in
sales reflects the increase in capital spending by the Exploration and
Production ("E&P") companies combined with an increase in market share for all
products as a result of the Company's service, sales and marketing efforts.
Net income was $5.8 million or $0.32 per share (diluted) for the quarter
ended quarter ended March 31, 2005. This represents a net income improvement
of $3.0 million or $0.16 per share (diluted) as compared to the quarter ended
December 31, 2004 when the Company reported net income of $2.8 million or
$0.16 per share (diluted).
Liquidity and Capital Resources
For the three months ended March 31, 2005 the Company generated
$7.0 million in cash flow from operating activities, before net change in
non-cash working capital balances and $121,000 in the issuance of capital
stock from the exercise of employee stock options. This was offset by an
$18.0 million increase in working capital (excluding the bank operating loan),
$87,000 in capital and other expenditures and $71,000 in repayments on capital
leases. These activities resulted in a $11.0 million increase in the bank
operating loan.
For the three months ended March 31, 2004 the Company generated
$2.8 million in cash flow from operating activities, before net change in
non-cash working capital balances, and $961,000 from the sale of its 50%
interest in its small horsepower compression operations. This was offset by a
$7.4 million increase in working capital (excluding the bank operating loan),
$178,000 in capital and other expenditures and $105,000 in repayments on
capital leases. These activities resulted in a $4.0 million increase in the
bank operating loan.
The Company's primary internal source of liquidity is cash flow from
operating activities, before net change in non-cash working capital balances,
which increased to $7.0 million for the quarter ended March 31, 2005, an
improvement of $4.2 million as compared to quarter ended March 31, 2004. The
improvement reflects improvement in profitability of the Company due to the
increase in the level of exploration and production activity in the western
Canadian sedimentary basin, increased market share and gross profit margin
improvement.
For the quarter ended March 31, 2005 accounts receivable increased
$22.7 million or 34.2% to $89.3 million from $66.6 million as at December 31,
2004. The increase in accounts receivable reflects a 22.9% increase in sales
to $128.4 million during the first quarter of 2005 as compared to
$104.4 million for the fourth quarter of 2004.
Average Days Sales Outstanding (DSO) was 53.2 days in the first quarter
of 2005 as compared to 52.5 days for the first quarter of 2004 and 50.5 for
the fourth quarter of 2004. Accounts receivable greater than 90 days old was
2.0% of accounts receivable as at March 31, 2005 versus 1.8% as at March 31,
2004 and 1.5% as at December 31, 2004. Trade accounts receivables are tightly
managed by the Company with daily calls to customers to solve payment issues.
In addition, the Company's accounts receivable team works closely with
customers to help simplify payment and approval processes.
Total inventory for the Company increased 4.5% to $67.2 million as at
March 31, 2005 as compared to $64.3 million as at December 31, 2004. The
increase in inventory levels reflects the 22.9% increase in sales during the
first quarter of 2005 as compared to the fourth quarter of 2004. Also, the
Company has increased its investment in offshore tubular products due to long
lead times and in anticipation of higher activity levels continuing in 2005.
The Company measures inventory efficiency by using an inventory turns
calculation. Inventory turned 6.3 times (annualized) in the first quarter of
2005, compared to 5.7 times (annualized) in the first quarter of 2004 and
5.6 times (annualized) for the fourth quarter of 2004. CE Franklin targets
inventory turns of 5.0 times (annualized). The Company monitors its inventory
on a daily basis in order to reduce surplus, improve turns and reduce
obsolescence.
Accounts payable and accrued liabilities have increased $8.2 million to
$66.8 million as at March 31, 2005 as compared to December 31, 2004. The
increase reflects increased inventory purchases due to higher activity levels
during the first quarter of 2005, as compared to the previous quarter, coupled
with the increase in inventory levels in anticipation of high activity levels
in the first half of 2005.
Property and equipment decreased 11.4% to $5.4 million from $6.1 million
at December 31, 2004. This decrease reflects amortization expense of
$1.2 million offset by capital expenditures of $87,000 and $370,000 in
additions to rental equipment assets and capital leases.
The Company finances its working capital requirements: accounts
receivable, inventories, bank overdraft, accounts payable and accrued
liabilities with its demand bank operating loan. This resulted in an
$11.0 million increase in the Company's bank operating loan to $37.1 million
at March 31, 2005 from $26.1 million at December 31, 2004. On July 6, 2004 the
Company increased its bank operating line to $40 million from $35 million. The
increase was required to finance the increased activity levels and the
resulting increase in accounts receivable and inventories. The interest rate
charged for this facility has dropped from Canadian prime plus 1% to Canadian
prime plus 0.875%.
The Company negotiated a $10.0 million temporary increase to its demand
bank operating loan. From December 22, 2004 to May 31, 2005 the facility will
increase to $50.0 million, and will reduce to $40.0 million as at May 31,
2005. The increase is to accommodate the anticipated increase in activity
levels during the first quarter of 2005 resulting in a further investment in
accounts receivable and inventories. As warm weather returns in the second
quarter of 2005 and activity levels decrease, the Company will collect its
outstanding accounts receivable and reduce its inventories.
The Company's borrowing capacity under its demand bank operating loan is
dependent on maintaining compliance with certain financial covenants and a
borrowing base formula applied to accounts receivable and inventories. As at
March 31, 2005, the Company was well within the covenant compliance thresholds
and was able to draw up to $50 million against its bank operating line based
on the borrowing base formula.
Contractual Obligations
There have been no material changes in any contractual obligations since
the year ended December 31, 2004.
Off-Balance Sheet Arrangements
The Company has not engaged in off-balance sheet financing arrangements.
Related party transactions
Messrs. Douglas L. Rock and John L. Kennedy, directors of the
Corporation, are directors or officers of, or otherwise interested in, Smith
International Inc. ("Smith"), which owns 55% of the Company's outstanding
common shares. The Company is the exclusive distributor of bottom hole pump
production equipment manufactured by a subsidiary of Wilson International,
Inc. ("Wilson"), a wholly owned subsidiary of its principal shareholder,
Smith. The transactions with Wilson are in the normal course of business and
at commercial rates.
As at March 31, 2005 and included in accounts receivables was
$3.0 million owing from Smith relating to the costs with respect to the
proposed acquisition of Wilson by CE Franklin which was terminated on April 4,
2005.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from changes in interest rates and
foreign exchange rates. The Company will, from time to time, enter into
foreign currency forward exchange contracts with financial institutions to fix
the value of liabilities on future commitments. These foreign currency
exchange contracts are not designated as hedges for accounting purposes. The
value of the contract is marked to market and the change in value is
recognized in the Company's Statements of Operations. The Company entered into
such contracts in 2005, the impact of which was not material, and no such
contracts were outstanding as at March 31, 2005.
The Company has exposure to interest rate fluctuations on its demand bank
operating loan. The Company has, in the past, entered into interest rate
contracts to hedge its interest rate risk associated with the demand bank
operating loan. No such contracts were in place for 2005 or 2004. The Company
does not use financial instruments for speculative purposes.
As at March 31, 2005 there were no unrecognized gains or losses
associated with the above instruments.
Critical Accounting Estimates
There have been no material changes since the year ended December 31,
2004.
Change in Accounting Policies
There have been no changes in accounting policies since the year ended
December 31, 2004.
Other Items
The Company's Form 20-F is available on SEDAR (at) www.sedar.com.
CE Franklin has authorized an unlimited number of common shares with no
par value. As at March 31, 2005 the Company had 17,221,889 common shares
outstanding.
The Board of Directors may grant options to purchase up to 2,240,925
common shares. As at March 31, 2005 options to purchase 1,963,324 common
shares were outstanding at an average exercise price of $3.93 per common
share.
Forward Looking Statements
Certain statements contained in this MD&A constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
Section 21E of the Securities Exchange Act of 1934 and the Private Securities
Litigation Reform act of 1995. 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 found under the caption "Risk and Uncertainties".
Forward-looking statements appear in a number of places and include
statements with respect to, among other things:
- the continued efficacy of the Company's enterprise and eCommerce
systems;
- the anticipated increase in drilling activity levels;
- the planned decrease in amounts outstanding under the Company's bank
operating loan;
- 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 future gross profit and net profit margins;
- 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 levels of gas and oil exploration and development
activities; and
- fluctuations in the demand for the Company's products and services.
We caution you that these forward-looking statements are subject to risks
and uncertainties, many of which are beyond CE Franklin's control. These risks
include, but are not limited to, economic conditions, seasonality of drilling
activity, commodity price volatility for oil and gas, currency fluctuations,
inflation, regulatory changes and the other risks described under the caption
"Risk and Uncertainties".
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 with the Securities
and Exchange Commission, except as required by law.
Risk and Uncertainties
CE Franklin's financial performance may be influenced favorably or
adversely by certain external factors as described below.
Fluctuations in oil and gas prices could affect the demand for CE
Franklin's products and services and, therefore, CE Franklin's sales, cash
flows and profitability. CE Franklin's operations are materially dependent
upon the level of activity in oil and gas exploration and production. Both
short-term and long-term trends in oil and gas prices affect the level of such
activity. Oil and gas prices and, therefore, the level of drilling,
exploration and production activity can be volatile. Factors that can cause
price fluctuations include:
- relatively minor changes in the worldwide supply of and demand for oil
and natural gas;
- the ability of the members of the Organization of Petroleum Exporting
Countries ("OPEC") to maintain price stability through voluntary
production limits;
- the level of production by non-OPEC countries;
- North American demand for gas;
- general economic and political conditions; and
- the presence or absence of drilling incentives such as Canadian
provincial royalty holidays, fluctuation in the value of the Canadian
dollar, availability of new leases and concessions and government
regulations regarding, among other things, export controls,
environmental protection, taxation, price controls and product
allocation.
Worldwide military, political and economic events, including initiatives
by OPEC, affect both the demand for, and the supply of, oil and gas.
Fluctuations during the last few years in the demand and supply of oil and gas
have contributed to, and are likely to continue to contribute to, price
volatility. CE Franklin believes that any prolonged reduction in oil and gas
prices would depress the level of exploration and production activity. This
would likely result in a corresponding decline in the demand for CE Franklin's
products and services and could have a material adverse effect on CE
Franklin's sales, cash flows and profitability. There can be no assurances as
to the future level of demand for CE Franklin's products and services or
future conditions in the oil and gas and oilfield supply industries.
Adverse weather conditions could temporarily decrease the demand for CE
Franklin's products and services. CE Franklin's financial performance is tied
closely to the seasonality of drilling activity. Higher drilling activity in
Canada is generally experienced in the winter months. In the spring and early
summer, drilling activity slows due to the difficulty in moving equipment
during the spring thaws. To the extent that unseasonable weather conditions
such as excessive rain or unusually warm winters affect the ability of CE
Franklin's customers to access their oil and gas wells, then the demand for CE
Franklin's products and services would temporarily decrease and the Company's
sales, cash flows and profitability would be adversely affected.
CE Franklin operates in a highly competitive industry, which may
adversely affect CE Franklin's sales, cash flows and profitability. The
Canadian oilfield supply industry in which CE Franklin operates is very
competitive. The Company believes that its future profitability is partially
influenced by competitive factors beyond its control, including:
- the ability of some customers to purchase oilfield supplies and
tubular products directly from the manufacturer rather than from
independent oilfield supply distributors and brokers;
- the ability for new brokers and distributors to enter the tubular
supply business and the general supply business if the oil and gas
industry were to experience significant growth in drilling activity;
- price competition among major supply companies;
- cost of goods being subject to raw material shortages such as steel
and the inability of CE Franklin to pass these price increases on to
customers.
CE Franklin and its largest competitors generally operate at low profit
margins due to price competition. Price competition is due in part to consumer
price pressure, in addition to the major supply companies competing for the
same business.
The loss of CE Franklin's major supplier for its tubular products could
adversely affect the Company's sales and gross profit. A portion of CE
Franklin's business is the sale of tubular products that are primarily
obtained from one supplier. Although the Company believes that it has
historically had and continues to have a good relationship with its supplier,
there can be no assurance that such relationship will continue. In the event
the Company is unable to source tubular products from its existing supplier,
then CE Franklin would need to search for an alternate supplier of these
goods.
CE Franklin Ltd.
Interim Statements of Operations
(Unaudited)
Three months ended March 31
(in thousands of Canadian dollars,
except per share data) 2005 2004
-------------------------------------------------------------------------
Sales 128,372 89,032
Cost of sales 104,709 74,345
-------------------------------------------------------------------------
Gross profit 23,663 14,687
-------------------------------------------------------------------------
Other expenses (income)
Selling, general and administrative expenses 12,909 10,604
Amortization 1,168 1,044
Interest expense 509 341
Foreign exchange loss (gain) 9 (52)
Other expenses (income) - (13)
-------------------------------------------------------------------------
14,595 11,924
-------------------------------------------------------------------------
Income before income taxes 9,068 2,763
-------------------------------------------------------------------------
Income tax expense (recovery)
Current 3,652 1,398
Future (388) (222)
-------------------------------------------------------------------------
3,264 1,176
-------------------------------------------------------------------------
Income from continuing operations 5,804 1,587
Loss from discontinued operations (note 2) - (27)
-------------------------------------------------------------------------
Net income for the period 5,804 1,560
-------------------------------------------------------------------------
Net income per share from continuing operations
(note 4)
Basic 0.34 0.09
Diluted 0.32 0.09
Net income per share
Basic 0.34 0.09
Diluted 0.32 0.09
Weighted average basic number of shares
outstanding
Basic 17,205,634 17,178,696
Diluted 18,149,096 17,336,514
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Balance Sheets
(Unaudited)
March 31 December 31
(in thousands of Canadian dollars) 2005 2004
-------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable 89,317 66,573
Inventories 67,187 64,282
Other 1,045 552
-------------------------------------------------------------------------
157,549 131,407
Property and equipment 5,401 6,097
Goodwill 7,765 7,765
Other 225 240
-------------------------------------------------------------------------
170,940 145,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank overdraft 5,883 5,270
Bank operating loan 37,104 26,140
Accounts payable 43,545 29,381
Accrued liabilities 23,272 29,210
Current portion of obligations under
capital lease 214 204
-------------------------------------------------------------------------
110,018 90,205
Obligations under capital lease 561 626
Future income taxes 224 612
-------------------------------------------------------------------------
110,803 91,443
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 19,456 19,335
Contributed surplus 14,004 13,858
Retained earnings 26,677 20,873
-------------------------------------------------------------------------
60,137 54,066
-------------------------------------------------------------------------
170,940 145,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Statements of Cash Flows
(Unaudited)
Three months ended March 31
(in thousands of Canadian dollars) 2005 2004
-------------------------------------------------------------------------
Cash flows from operating activities
Income from continuing operations 5,804 1,587
Items not affecting cash -
Amortization 1,168 1,044
Gain on disposal of property and equipment - (9)
Future income tax recovery (388) (222)
Increase in inventory write-downs 302 293
Stock option expense 146 64
-------------------------------------------------------------------------
7,032 2,757
Net change in non-cash working capital balances
related to operations -
Accounts receivable (22,744) (16,077)
Inventories (3,561) (4,601)
Other current assets (493) (640)
Accounts payable 14,164 2,842
Accrued liabilities (5,938) 5,386
-------------------------------------------------------------------------
Net cash flow from continuing operations (11,540) (10,333)
Net cash flow from discontinued operations
(note 2) - (26)
-------------------------------------------------------------------------
(11,540) (10,359)
-------------------------------------------------------------------------
Cash flows from financing activities
Issuance of capital stock 121 -
Increase in bank operating loan 10,964 3,963
Increase in bank overdraft 613 827
Decrease in obligations under capital lease (71) (105)
-------------------------------------------------------------------------
11,627 4,685
-------------------------------------------------------------------------
Cash flows from investing activities
Purchase of property and equipment (87) (175)
Proceeds on disposal of property and equipment - 9
Proceeds on sale of compression operations (note 2) - 961
-------------------------------------------------------------------------
Net cash flow from continuing operations (87) 795
Net cash flow from discontinued operations (note 2) - (2)
-------------------------------------------------------------------------
(87) 793
-------------------------------------------------------------------------
Change in cash and cash equivalents during the period - (4,881)
Cash and cash equivalents - Beginning of period - 4,881
-------------------------------------------------------------------------
Cash and cash equivalents - End of period - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash paid during the period for:
Interest on bank operating loan 495 350
Interest on obligations under capital lease 14 5
Income taxes 3,501 1,799
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Statements of Changes in Shareholders' Equity
(Unaudited)
Capital Stock
(in thousands of --------------------
Canadian dollars, Share-
except share Number of Contributed Retained holders'
amounts) Shares $ surplus earnings equity
-------------------------------------------------------------------------
Balance - December 31,
2003 17,178,696 19,268 13,602 14,758 47,628
Stock options granted - - 64 - 64
Net income - - - 1,560 1,560
-------------------------------------------------------------------------
Balance - March 31,
2004 17,178,696 19,268 13,666 16,318 49,252
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance - December 31,
2004 17,194,934 19,335 13,858 20,873 54,066
Stock options exercised 26,955 121 - - 121
Stock options granted - - 146 - 146
Net income - - - 5,804 5,804
-------------------------------------------------------------------------
Balance - March 31,
2005 17,221,889 19,456 14,004 26,677 60,137
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Notes to Financial Statements (Unaudited)
-------------------------------------------------------------------------
Note 1 - Accounting policies
These interim financial statements are prepared following accounting
policies consistent with the Company's financial statements for the years
ended December 31, 2004 and 2003, except as described in note 3, and are
in accordance with generally accepted accounting principles in Canada.
The disclosures provided below are incremental to those included in the
annual audited financial statements. The interim financial statements
should be read in conjunction with the annual audited financial
statements and the notes thereto for the year ended December 31, 2004.
These unaudited interim financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair statement
of the results for the interim periods presented; all such adjustments
are of a normal recurring nature.
Note 2 - Discontinued operations
On March 31, 2004, the Company sold its remaining 50% interest in its
small horsepower compression operations for cash proceeds of $961,000.
No gain or loss on disposition resulted from this transaction. The
operating loss from discontinued operations in the first quarter of 2004
was $27,000.
Note 3 - Changes in accounting policy
Effective January 1, 2004, the Company adopted, prospectively, the
Canadian Institute of Chartered Accountants Guideline for "Hedging
Relationships". The Company utilizes foreign currency exchange contracts
with financial institutions to fix the value of liabilities or future
commitments. These foreign currency exchange contracts are not designated
as hedges for accounting purposes. The value of the contract is marked to
market and the change in the value is recognized in the statements of
operations. There were no contracts outstanding at the end of the first
quarter of 2005 as compared to an outstanding contract for $2.2 million
as of March 31, 2004.
Note 4 - Share data
At March 31, 2005 the Company had 17,221,889 common shares outstanding
and 1,963,324 options to acquire common shares at a weighted average
exercise price of $3.93 per common share. 1,081,179 of those options were
vested and exercisable at a weighted average exercise price of $4.11 per
common share.
Effective January 1, 2003, the Company adopted prospectively, the fair
value method of accounting for common share options granted. Under this
method, the Company recognizes compensation expense based on the fair
value of the options on the date of grant which is determined by using
the Black-Scholes options-pricing model. The fair value of the options is
recognized over the vesting period of the options granted as compensation
expense and contributed surplus. The contributed surplus balance is
reduced as options are exercised and the amount initially recorded for
the options in contributed surplus is credited to capital stock.
413,745 common share options were granted in the first quarter of 2005.
The fair value of these common share options granted was $1,003,900. The
fair value of common share options granted is estimated as at the grant
date using the Black-Scholes option pricing model, using the following
assumptions:
Dividend yield nil
Risk-free interest rate 4.50%
Expected life 5 years
Expected volatility 65%
The compensation expense recorded in the quarter ended March 31, 2005 for
common share options granted subsequent to December 31, 2002 was
$146,000. The compensation expense recorded for the quarter ended March
31, 2004 was $64,000.
No compensation expense is recorded for stock options awarded prior to
January 1, 2003 as the Company has continued to apply the intrinsic
method of accounting for stock options granted to employees, officers and
directors. The consideration paid by option holders on the exercise of
these options is and will be credited to capital stock. Had compensation
cost been determined on the basis of fair values, net income for the
quarter ended March 31, 2005 would have decreased by $128,000 or $0.01
per common share. The net income for the quarter ended March 31, 2004
would have decreased by $199,000 or $0.01 per common share.
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