CALGARY, July 21 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced
its results for the second quarter ended June 30, 2005.
CE Franklin reported record second quarter net income of $2.5 million or
$0.14 per share (diluted) as compared to net income of $518,000 or $0.03 per
share (diluted) for the comparable period in 2004.
<<
Financial Highlights
--------------------
Three Months Ended Six Months Ended Year Ended
(millions of June 30 June 30 December 31
Cdn.$ except ----------------------- ----------------------- -----------
per share 2005 2004 2005 2004 2004
data) ----------------------- ----------------------- -----------
(unaudited) (unaudited)
Sales $ 91.9 $ 67.0 $ 220.3 $ 156.0 $ 338.7
Gross Profit 18.2 12.1 41.8 26.8 60.2
Gross Profit - % 19.8% 18.1% 19.0% 17.2% 17.8%
EBITDA(1) 6.0 2.5 16.7 6.6 15.9
EBITDA(1) as a
% of sales 6.5% 3.7% 7.6% 4.2% 4.7%
Net income $ 2.5 $ 0.5 $ 8.3 $ 2.1 $ 6.1
Per share
Basic $ 0.14 $ 0.03 $ 0.48 $ 0.12 $ 0.36
Diluted $ 0.14 $ 0.03 $ 0.46 $ 0.12 $ 0.35
Sales increased 37.2% to $91.9 million for the quarter ended June 30,
2005 as compared to $67.0 million for the quarter ended June 30, 2004. The
37.2% improvement in sales reflects strong commodity prices, improved industry
economics coupled with an increase in market share for all product groups as a
result of the Company's service, sales and marketing efforts. Average rig
count decreased 50.6% during the second quarter of 2005 as compared to the
first quarter of 2005. The second quarter brings spring breakup in Canada as
warm weather returns and the winter's frost comes out of the ground resulting
in secondary roads becoming incapable of supporting heavy equipment until the
roads have dried out. As a result activity levels decline during the second
quarter as compared to the first quarter. Sales for the quarter ended June 30,
2005 dropped by only 28.4% as compared to the quarter ended March 31, 2005 due
to the factors associated with spring breakup.
EBITDA(1) for the quarter ended June 30, 2005 increased 139.3% to
$6.0 million from $2.5 million for the quarter ended June 30, 2004. The
$24.9 million increase in sales resulted in an incremental flow through to
EBITDA of 13.9% and 8.1% to net income.
"CE Franklin is pleased with the Company's results during spring
breakup," said Michael West, Chairman, President and CEO. "A benchmark of
success for oilfield service companies is to be profitable during spring
breakup when activity levels drop. This is the second year in a row we have
been profitable during breakup and the 11th quarter in a row with year over
year improvement."
Outlook
-------
With the conclusion of spring breakup activity levels will increase, and
strong commodity prices will support the demand for CE Franklin's products and
services in Canada. Many industry watchers are predicting high levels of
activity during Q3 and Q4 2005 as well as 2006. As a result, CE Franklin's
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 June 30, 2005, which is
open to the public, will be held on Monday, July 25 at 2:00 p.m. Eastern Time
(12:00 p.m. Mountain Time).
Participants may join the call by dialing 1-800-814-4861 at the scheduled
time of 2:00 p.m. Eastern Time. For those unable to listen to the live
conference call, a replay will be available at approximately 4:00 p.m. Eastern
Time on the same day by calling 1-877-289-8525 and entering the pass code of
21130495 followed by the number sign and may be accessed until midnight
Monday, August 1, 2005.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)1169740 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.
(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.
Management's Discussion and Analysis as at July 21, 2005
for the Quarter Ended June 30, 2005
(All amounts shown in Canadian dollars unless otherwise specified.)
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 including 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 July 21, 2005
For the quarter and six months ended June 30, 2005 as compared to the
quarter and six months ended June 30, 2004
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. This discussion should be read in
conjunction with both the Financial Statements of CE Franklin and the related
notes thereto and the Management's Discussion and Analysis included in the
Company's December 31, 2004 Annual Report.
The selected financial data presented below is presented in Canadian
dollars and in accordance with Canadian generally accepted accounting
principles, or "Canadian 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 38 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 tubular products 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 Six months ended
June 30 June 30
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
(unaudited) (unaudited)
Statements of Operations
Sales 91,899 67,002 220,271 156,034
Gross Profit 18,164 12,112 41,827 26,799
Gross Profit - % 19.8% 18.1% 19.0% 17.2%
Other expenses (income)
Selling, general and
administrative expenses 12,204 9,621 25,113 20,225
Amortization 1,178 1,085 2,346 2,129
Interest 493 333 1,002 674
Other 63 90 72 25
-------- -------- -------- --------
13,938 11,129 28,533 23,053
-------- -------- -------- --------
Income before income taxes 4,226 983 13,294 3,746
Income tax expense 1,683 465 4,947 1,641
-------- -------- -------- --------
Income from continuing
operations 2,543 518 8,347 2,105
Loss from discontinued
operations - - - (27)
-------- -------- -------- --------
Net income 2,543 518 8,347 2,078
-------- -------- -------- --------
-------- -------- -------- --------
EBITDA(1) 5,960 2,491 16,714 6,574
EBITDA as a % of sales 6.5% 3.7% 7.6% 4.2%
Net income per share
Basic $ 0.14 $ 0.03 $ 0.48 $ 0.12
Diluted $ 0.14 $ 0.03 $ 0.46 $ 0.12
(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)
Three months ended Six months ended
June 30 June 30
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Income from continuing
operations $ 2,543 $ 518 $ 8,347 $ 2,105
Interest expense 493 333 1,002 674
Income tax expense 1,683 465 4,947 1,641
Amortization 1,178 1,085 2,346 2,129
Other 63 90 72 25
-------- -------- -------- --------
EBITDA $ 5,960 $ 2,491 $16,714 $ 6,574
-------- -------- -------- --------
Results of Operations - For the Three and Six Months Ended June 30, 2005
The price of oil and gas as at June 30, 2005 was U.S. $58.75 per bbl
(West Texas Intermediate) and Cdn. $6.65 per MMBTU (AECO spot) respectively.
This compares to U.S. $37.05 per bbl (West Texas Intermediate) for oil and
Cdn. $6.27 per MMBTU (AECO spot), for gas as at June 30, 2004.
Well completions (excluding dry and service) were down by 17.8% to 3,864
wells for the three months ended June 30, 2005 compared to 4,698 wells for the
three months ended June 30, 2004. Well completions for the first six months of
2005 were down by 8.6% to 8,556 wells compared to 9,361 wells in the first six
months of 2004. The average rig count increased 13.6% to 243 rigs for the
three months ended June 30, 2005 from 214 rigs in the same period last year.
Overall average rig count for the first half of 2005 was down by 1.6% to 367
rigs compared to 373 rigs in the first half of 2004. Well completions and
average rig counts typically decline in the second quarter of each year due to
spring breakup in Canada as warm weather returns and the winter's frost comes
out of the ground resulting in secondary roads becoming incapable of
supporting heavy equipment until the roads have dried out. As a result,
average rig count decreased 50.6% during the second quarter of 2005 as
compared to the first quarter of 2005.
Sales
Sales for the quarter ended June 30, 2005 increased 37.2% or
$24.9 million to $91.9 million from $67.0 million for the quarter ended
June 30, 2004. Sales for the six months ended June 30, 2005 increased
$64.2 million or 41.2% to $220.3 million compared to $156.0 million for the
six months ended June 30, 2004. The sales increase was due to strong commodity
prices, improved industry economics and an increase in market share for all
product groups (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 50.0% to $18.2 million for the quarter ended June
30, 2005 from $12.1 million for the quarter ended June 30, 2004. Gross profit
margins increased to 19.8% for the quarter ended June 30, 2005 from 18.1% for
the quarter ended June 30, 2004.
Gross profit for the first six months of 2005 increased 56.1% to
$41.8 million compared to $26.8 million for the first six months of 2004.
Gross profit margins increased to 19.0% in the first six months of 2005 from
17.2% in the first six months of 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 half 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 $2.6 million or 26.8% to $12.2 million for the
quarter ended June 30, 2005 from $9.6 million for the quarter ended June 30,
2004. SG&A costs increased $4.9 million or 24.2% to $25.1 million for the six
months ended June 30, 2005 compared to $20.2 million for the six months ended
June 30, 2004. The increase in SG&A relates to salaries and benefits for new
employees hired to support the 41.2% increase in sales for the first six
months, employee performance pay incentives, agents' commissions due to the
increase in sales, occupancy costs for both new and larger locations and
consulting costs in connection with preparation for section 404 of the
Sarbanes-Oxley Act of 2002.
The total number of employees increased 12.3% as at June 30, 2005 to 339
employees compared to 302 employees as at June 30, 2004. Revenue per employee
for the first half of 2005 increased 23.8% compared to the first half of 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 June 30, 2005 increased $3.5 million or 139.3%
to $6.0 million compared to $2.5 million for the quarter ended June 30, 2004.
The $24.9 million increase in sales resulted in a 13.9% incremental flow
through to EBITDA. EBITDA as a percentage of sales was 6.5% for the quarter
ended June 30, 2005 versus 3.7% for the quarter ended June 30, 2004. 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, please see page 4.
EBITDA for the six months ended June 30, 2005 increased 154.2% to
$16.7 million compared to $6.6 million for the six months ended June 30, 2004.
EBITDA as a percentage of sales increased to 7.6% for the first half of 2005
compared to 4.2% for the first half of 2004.
Income Before Income Taxes
Income before income taxes improved $3.2 million to $4.2 million for the
quarter ended June 30, 2005 compared to $983,000 for the quarter ended
June 30, 2004. The improvement is a result of the $6.1 million increase in
gross profit offset by the $2.6 million increase in SG&A and approximately
$300,000 increase in other costs. Other costs include amortization, interest
expense and foreign exchange. The $24.9 million increase in sales for the
quarter ended June 30, 2005 resulted in a 13.0% incremental flow through to
income before income taxes.
Income before income taxes for the six months ended June 30, 2005 was
$13.3 million compared to $3.7 million for the six months ended June 30, 2004.
The improvement is a result of the $15.0 million increase in gross profit
offset by the $4.9 million increase in SG&A and approximately $500,000
increase in other costs. Other costs include amortization, interest expense
and foreign exchange. The $64.2 million increase in sales for the six months
ended June 30, 2005 resulted in a 14.9% incremental flow through to income
before income taxes.
Income Taxes
The Company's effective tax rate for the quarter ended June 30, 2005 was
39.8%, as compared to an effective tax rate of 47.3% for the quarter ended
June 30, 2004. The Company's effective tax rate for the six months ended
June 30, 2005 was 37.2%, as compared to an effective tax rate of 43.8% for the
six months ended June 30, 2004. The Company's combined federal and provincial
statutory tax rate for the period ended June 30, 2005 was 34.4%, compared to
34.6% for the period ended June 30, 2004. The reduction in the effective tax
rate for the three and six months ended June 30, 2005 is due to non-deductible
items and capital and other taxes that became a smaller component of the
overall income tax charge in relation to the increase in income before income
taxes as compared to the three and six months ended June 30, 2004.
Income from Continuing Operations
Income from continuing operations increased to $2.5 million or $0.14 per
share (diluted) for the quarter ended June 30, 2005 as compared to $518,000 or
$0.03 per share (diluted) for the quarter ended June 30, 2004.
Income from continuing operations increased to $8.3 million or $0.46 per
share (diluted) for the six months ended June 30, 2005 as compared to
$2.1 million or $0.12 per share (diluted) for the six months ended June 30,
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 six months ended June 30, 2004
was $27,000.
Net Income and Earnings per Share
Net income for the for the quarter ended June 30, 2005 was $2.5 million
or $0.14 per share (diluted) as compared to $518,000 or $0.03 per share
(diluted) for the quarter ended June 30, 2004. This represents an income
improvement of $2.0 million or $0.11 per share (diluted). The $24.9 million
increase in sales for the quarter resulted in an incremental flow through to
net income of 8.1%.
Net income for the six months ended June 30, 2005 was $8.3 million or
$0.46 per share (diluted) as compared to $2.1 million or $0.12 per share
(diluted) for the six months ended June 30, 2004. This represents an income
improvement of $6.2 million or $0.34 per share (diluted). The $64.2 million
increase in sales for the first half of 2005 resulted in an incremental flow
through to net income of 9.8%.
Summary of Quarterly Financial Data
The selected quarterly financial data presented below is presented in
Canadian dollars and in accordance with Canadian GAAP.
(in thousands of Cdn. dollars except per share data)
Unaudited Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2003 2003 2004 2004 2004 2004 2005 2005
------- ------- ------- ------- ------ ------- -------- -------
Sales 67,533 72,987 89,032 67,002 78,232 104,435 128,372 91,899
Net income
from
continuing
operations 404 1,196 1,587 518 1,198 2,839 5,804 2,543
Loss from
discon-
tinued
operations (97) (544) (27) - - - - -
------- ------- ------- ------- ------ ------- -------- -------
Net income 307 652 1,560 518 1,198 2,839 5,804 2,543
------- ------- ------- ------- ------ ------- -------- -------
EBITDA 2,196 3,115 4,083 2,491 3,379 5,991 10,754 5,960
EBITDA as
a % of
sales 3.3% 4.3% 4.6% 3.7% 4.3% 5.7% 8.4% 6.5%
Net income
per share
Basic $ 0.02 $ 0.03 $ 0.09 $ 0.03 $ 0.07 $ 0.17 $ 0.34 $ 0.14
Diluted $ 0.02 $ 0.03 $ 0.09 $ 0.03 $ 0.07 $ 0.16 $ 0.32 $ 0.14
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.
Average rig count decreased 50.6% during the second quarter of 2005 as
compared to the first quarter of 2005. Sales for the quarter ended June 30,
2005 decreased 28.4% to $91.9 million from $128.4 million for the quarter
ended March 31, 2005. Sales for the quarter ended June 30, 2004 decreased
24.7% to $67.0 million from $89.0 million for the quarter ended March 31,
2004. The decrease in sales reflects the overall decrease in market activity
due to spring breakup as described above.
Net income was $2.5 million or $0.14 per share (diluted) for the quarter
ended June 30, 2005 compared to $5.8 million or $0.32 per share (diluted) for
the quarter ended March 31, 2005. The decline in net income is due to the
decline in sales that is typical for the second quarter due to the weather
conditions described above. The Company has remained profitable during the
second quarter for two consecutive years.
Excluding the second quarter where activity levels are affected by
weather conditions, the Company's level of sales and net earnings have
increased. Although activity levels have increased, the Company's sales have
outpaced the increase in activity levels reflecting an increase in market
share for all products.
Liquidity and Capital Resources
For the three months ended June 30, 2005 the Company generated
$2.6 million in cash flow from operating activities, before net change in
non-cash working capital balances, $6.9 million from working capital
(excluding the bank operating loan) and $144,000 in the issuance of capital
stock from the exercise of employee stock options. This was offset by $31,000
in capital and other expenditures and $55,000 in repayments on capital leases.
These activities resulted in a $9.6 million reduction in the bank operating
loan.
For the six months ended June 30, 2005 the Company generated $9.7 million
in cash flow from operating activities, before net change in non-cash working
capital balances and $265,000 in the issuance of capital stock from the
exercise of employee stock options. This was offset by a $11.0 million
increase in working capital (excluding the bank operating loan), $118,000 in
capital and other expenditures and $126,000 in repayments on capital leases.
These activities resulted in a $1.3 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 $2.6 million for the quarter ended June 30, 2005, and
$9.7 million for the six months ended June 30, 2005. This is an improvement of
$1.2 million and $5.5 million respectively compared to the same periods in
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 June 30, 2005 accounts receivable decreased
$28.8 million or 32.3% to $60.5 million from $89.3 million as at March 31,
2005. For the six months ended June 30, 2005 accounts receivable decreased
$6.1 million or 9.1% to $60.5 million from $66.6 million as at December 31,
2004. The reduced activity levels in the second quarter due to the onset of
warm weather resulted in outstanding accounts receivable being collected and
the proceeds being used to reduce the bank operating loan in the second
quarter.
Average Days Sales Outstanding (DSO) was 58.2 days for the quarter ended
June 30, 2005 and 53.8 days in the first half of 2005 as compared to 58.4 days
for the quarter ended June 30, 2004 and 53.9 days for the first half of 2004.
DSO increases during the second quarter as a result of the seasonal reduction
in sales. Accounts receivable greater than 90 days old was 3.8% of accounts
receivable as at June 30, 2005 versus 5.1% as at June 30, 2004 and 2.0% as at
March 31, 2005. 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 12.8% to $75.8 million as at
June 30, 2005 as compared to $67.2 million as at March 31, 2005. Total
inventory for the six months ended June 30, 2005 increased $11.5 million or
17.9% to $75.8 million from $64.3 million as at December 31, 2004. The Company
has increased its investment in offshore products due to long lead times and
steel shortages in order to accommodate activity levels during the remainder
of 2005.
The Company measures inventory efficiency by using an inventory turns
calculation. Inventory turned 4.0 times (annualized) in the second quarter of
2005 and 5.1 times (annualized) in the first half of 2005, compared to 3.9
times (annualized) in the second quarter of 2004 and 4.7 times (annualized) in
the first half of 2004 and 4.9 times for the year ended December 31, 2004.
CE Franklin targets inventory turns of 5.0 times (annualized).
Accounts payable and accrued liabilities have decreased $6.1 million to
$60.7 million as at June 30, 2005 as compared to $66.8 million as at March 31,
2005. The decrease reflects an overall decrease in inventory purchases during
the second quarter due to reduced activity levels.
Property and equipment decreased 26.6% to $4.5 million from $6.1 million
at December 31, 2004. This decrease reflects amortization expense of
$2.3 million offset by capital expenditures of $118,000 and $574,000 in
addition to rental equipment assets and capital leases.
The Company finances accounts receivable, inventories, bank overdraft,
accounts payable and accrued liabilities with its demand bank operating loan.
The demand bank operating loan decreased $9.6 million to $27.5 million at
June 30, 2005 from $37.1 million at March 31, 2005 and increased $1.3 million
from $26.1 million at December 31, 2004.
The Company negotiated a $10.0 million temporary increase to its
$40 million demand bank operating loan. From December 22, 2004 to May 31, 2005
the facility increased to $50.0 million, and was reduced back to $40.0 million
as at May 31, 2005. The increase was 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 returned in
the second quarter of 2005 and activity levels decreased, the Company collects
its outstanding accounts receivable and reduced its bank operating loan.
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
June 30, 2005, the Company was well within the covenant compliance thresholds
and was able to draw up to $40 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 Company,
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.
Accounts receivables as at March 31, 2005 included $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. As at June 30,
2005 the majority of these amounts have been collected.
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 June 30, 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 June 30, 2005 there were no unrecognized gains or losses associated
with the above instruments.
Critical Accounting Estimates
There have been no material changes in critical accounting estimates
since the year ended December 31, 2004.
Change in Accounting Policies
There have been no changes in critical 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 June 30, 2005 the Company had 17,259,759 common shares
outstanding.
The Board of Directors may grant options to purchase up to 2,240,925
common shares, with 298,413 future options remaining available to grant. As at
June 30, 2005 options to purchase 1,840,844 common shares were outstanding at
an average exercise price of $3.76 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 drilling activity levels;
- the planned 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 Six Months Ended
(in thousands of Canadian -------------------- --------------------
dollars, except per June 30 June 30 June 30 June 30
share data) 2005 2004 2005 2004
------------------------------------------------- --------------------
Sales 91,899 67,002 220,271 156,034
Cost of sales 73,735 54,890 178,444 129,235
-------------------------------------------------------------------------
Gross profit 18,164 12,112 41,827 26,799
-------------------------------------------------------------------------
Other expenses (income)
Selling, general and
administrative expenses 12,204 9,621 25,113 20,225
Amortization 1,178 1,085 2,346 2,129
Interest expense 493 333 1,002 674
Foreign exchange loss 63 86 72 34
Other expenses (income) - 4 - (9)
-------------------------------------------------------------------------
13,938 11,129 28,533 23,053
-------------------------------------------------------------------------
Income before income taxes 4,226 983 13,294 3,746
-------------------------------------------------------------------------
Income tax expense (recovery)
(note 4)
Current 2,593 632 6,245 2,030
Future (910) (167) (1,298) (389)
-------------------------------------------------------------------------
1,683 465 4,947 1,641
-------------------------------------------------------------------------
Income from continuing
operations 2,543 518 8,347 2,105
Loss from discontinued
operations (note 2) - - - (27)
-------------------------------------------------------------------------
Net income for the period 2,543 518 8,347 2,078
-------------------------------------------------------------------------
Net income per share (note 3)
Basic 0.14 0.03 0.48 0.12
Diluted 0.14 0.03 0.46 0.12
Weighted average number of
shares outstanding
Basic 17,233,449 17,186,439 17,219,618 17,182,568
Diluted 18,192,171 17,501,958 18,192,171 17,501,958
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Balance Sheets
(Unaudited)
June 30 December 31
(in thousands of Canadian dollars) 2005 2004
-------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable 60,505 66,573
Inventories 75,789 64,282
Other 2,847 552
-------------------------------------------------------------------------
139,141 131,407
Property and equipment 4,473 6,097
Goodwill 7,765 7,765
Future income taxes (note 4) 686 -
Other 210 240
-------------------------------------------------------------------------
152,275 145,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank overdraft 371 5,270
Bank operating loan 27,470 26,140
Accounts payable 34,708 29,381
Accrued liabilities 26,007 29,210
Current portion of obligations under capital lease 231 204
-------------------------------------------------------------------------
88,787 90,205
Obligations under capital lease 517 626
Future income taxes (note 4) - 612
-------------------------------------------------------------------------
89,304 91,443
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 19,620 19,335
Contributed surplus 14,131 13,858
Retained earnings 29,220 20,873
-------------------------------------------------------------------------
62,971 54,066
-------------------------------------------------------------------------
152,275 145,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Statements of Cash Flows
(Unaudited)
Three Months Ended Six Months Ended
-------------------- --------------------
(in thousands of Canadian June 30 June 30 June 30 June 30
dollars) 2005 2004 2005 2004
------------------------------------------------- --------------------
Cash flows from operating
activities
Income from continuing
operations 2,543 518 8,347 2,105
Items not affecting cash -
Amortization 1,178 1,085 2,346 2,129
Loss (gain) on disposal
of property and equipment - 5 - (4)
Future income tax recovery (910) (167) (1,298) (389)
Increase (decrease) in
inventory write-downs (311) (62) (9) 231
Stock option expense 147 64 293 128
-------------------------------------------------------------------------
2,647 1,443 9,679 4,200
Net change in non-cash
working capital balances
related to operations -
Accounts receivable 28,812 17,862 6,068 1,785
Inventories (8,467) (5,569) (12,028) (10,170)
Other current assets (1,802) 216 (2,295) (424)
Accounts payable (8,837) (9,236) 5,327 (6,394)
Accrued liabilities 2,735 (3,981) (3,203) 1,405
-------------------------------------------------------------------------
Net cash flow from
continuing operations 15,088 735 3,548 (9,598)
Net cash flow from
discontinued operations
(note 2) - - - (26)
-------------------------------------------------------------------------
15,088 735 3,548 (9,624)
-------------------------------------------------------------------------
Cash flows from financing
activities
Issuance of capital stock 144 51 265 51
Increase (decrease) in
bank operating loan (9,634) 3,073 1,330 7,036
Decrease in bank overdraft (5,512) (827) (4,899) -
Decrease in obligations
under capital lease (55) (104) (126) (209)
-------------------------------------------------------------------------
(15,057) 2,193 (3,430) 6,878
-------------------------------------------------------------------------
Cash flows from investing
activities
Purchase of property and
equipment (31) (264) (118) (439)
Proceeds on disposal of
property and equipment - 22 - 31
Proceeds on sale of
compression operations
(note 2) - - - 961
-------------------------------------------------------------------------
Net cash flow from
continuing operations (31) (242) (118) 553
Net cash flow from discontinued
operations (note 2) - - - (2)
-------------------------------------------------------------------------
(31) (242) (118) 551
-------------------------------------------------------------------------
Change in cash and cash
equivalents during
the period - 2,686 - (2,195)
Cash and cash equivalents -
Beginning of period - - - 4,881
-------------------------------------------------------------------------
Cash and cash equivalents -
End of period - 2,686 - 2,686
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash paid during the period
for:
Interest on bank operating
loan 485 327 980 677
Interest on obligations
under capital lease 8 6 22 11
Income taxes 1,450 599 4,951 2,398
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 exercised 11,566 51 - - 51
Stock options granted - - 128 - 128
Net income - - - 2,078 2,078
-------------------------------------------------------------------------
Balance - June 30, 2004 17,190,262 19,319 13,730 16,836 49,885
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance -
December 31, 2004 17,194,934 19,335 13,858 20,873 54,066
Stock options exercised 64,825 285 (20) - 265
Stock options granted - - 293 - 293
Net income - - - 8,347 8,347
-------------------------------------------------------------------------
Balance - June 30, 2005 17,259,759 19,620 14,131 29,220 62,971
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 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 - Share data
At June 30, 2005 the Company had 17,259,759 common shares outstanding and
1,840,844 options to acquire common shares at a weighted average exercise
price of $3.76 per common share. 958,701 of those options were vested and
exercisable at a weighted average exercise price of $3.81 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.
There were no common share options granted in the second quarter. The
fair value of the common share options granted in the first quarter 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 second quarter of 2005 and in
the six month period ended June 30, 2005 for common share options granted
subsequent to December 31, 2002 was $147,000 and $293,000 respectively.
The compensation expense recorded for the quarter and the six month
period ended June 30, 2004 was $64,000 and $128,000 respectively.
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 and the six month period ended June 30, 2005 would have decreased
by $128,000 ($0.01 per common share) and $256,000 ($0.02 per common
share) respectively. The net income for the quarter and six month period
ended June 30, 2004 would have decreased by $199,000 ($0.01 per common
share) and $398,000 ($0.02 per common share) respectively.
Note 4 - Income taxes
a) The difference between the income tax provision recorded and the
provision obtained by applying the combined federal and provincial
statutory rates is as follows:
Three Months Ended Six Months Ended
--------------------------- -----------------------------
June 30 June 30 June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Income before
income taxes 4,226 983 13,294 3,746
-------------------------------------------------------------------------
Incomes taxes
calculated
at expected
rates 1,452 34.4% 340 34.6% 4,568 34.4% 1,295 34.6%
Non-deductible
items 339 8.0% 64 6.5% 453 3.4% 135 3.6%
Capital and
large
corporations
taxes (12) -0.3% 26 2.6% 25 0.2% 69 1.8%
Other (96) -2.3% 35 3.6% (99) -0.7% 142 3.8%
-------------------------------------------------------------------------
1,683 39.8% 465 47.3% 4,947 37.2% 1,641 43.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Future income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of future income tax assets and liabilities
are as follows:
June 30 December 31
2005 2004
-------------------------------------------------------------------------
Assets
Financing and investment charges 961 109
Property and equipment 131 -
Other 143 135
-------------------------------------------------------------------------
1,235 244
-------------------------------------------------------------------------
Liabilities
Property and equipment - 303
Goodwill 549 553
-------------------------------------------------------------------------
549 856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net future income tax asset (liability) 686 (612)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Realization of future income tax assets is dependent on generating
sufficient taxable income during the period in which the temporary
differences are deductible. Although realization is not assured,
management believes it is more likely than not that all future income tax
assets will be realized based on projected operating results and tax
planning strategies available.
>>
Powered by 
Google Übersetzer
Google Übersetzer