CALGARY, April 27 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced
record results for the first quarter ended March 31, 2006.
CE Franklin reported net income of $8.9 million or $0.47 per share
(diluted) for the first quarter ended March 31, 2006 as compared to net income
of $5.8 million or $0.32 per share (diluted) for the quarter ended March 31,
2005.
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Financial Highlights
--------------------
Three Months Ended Year Ended
March 31 December 31
(millions of Cdn.$ except ----------------------- -----------
per share data) 2006 2005 2005
----------- ----------- -----------
(unaudited)
Sales $ 176.4 $ 128.4 $ 482.4
Gross Profit 32.2 23.7 91.3
Gross Profit - % 18.3% 18.4% 18.9%
EBITDA(1) 15.1 10.7 36.0
EBITDA(1) as a % of sales 8.6% 8.4% 7.5%
Net income $ 8.9 $ 5.8 $ 18.9
Per share
Basic (Cdn. $) $ 0.50 $ 0.34 $ 1.09
Diluted (Cdn. $) $ 0.47 $ 0.32 $ 1.01
Sales increased 37.4% to $176.4 million for the quarter ended March 31,
2006 as compared to $128.4 million for the quarter ended March 31, 2005. Well
completions (excluding dry and service wells) were up 23.0% to 5,770 wells for
the three months ended March 31, 2006 compared to 4,691 for the three months
ended March 31, 2005. Average rig count for the quarter ended March 31, 2006
increased 39.8% to 688 rigs compared to 492 rigs for the quarter ended
March 31, 2005. The 37.4% improvement in sales reflects strong commodity
prices and improved industry economics resulting in an increase in spending by
existing and new customers.
EBITDA(1) for the quarter ended March 31, 2006 increased 40.5% to
$15.1 million from $10.7 million for the quarter ended March 31, 2005. The
$48.0 million increase in sales resulted in an incremental flow through to
EBITDA of 9.1%. EBITDA as a percentage of sales increased to 8.6% for the
quarter ended March 31, 2006 compared to 8.4% for the quarter ended March 31,
2005.
"The best quarter in the Company's history was the result of strong
market activity, and our employees' ability to flow through the business
producing record earnings per share," said Michael West, Chairman, President
and CEO. "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 and the Company's revenue are expected
to 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 the third and fourth quarters of 2006.
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, 2006, which is
open to the public, will be held on Friday, April 28, 2006 at 11:00 a.m.
Eastern Time (9:00 a.m. Mountain Time).
Participants may join the call by dialing 1-800-814-4941 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
21183898 followed by the number sign and may be accessed until midnight
Friday, May 5, 2006.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)1418340 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 net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented, represents
a useful means of assessing the performance of the Company's ongoing
operating activities, as it reflects the Company's earnings trends
without showing the impact of certain charges. The Company is also
presenting EBITDA, incremental flow through to EBITDA and EBITDA as a
percentage of sales because it is used by management as a
supplemental measure of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and amortization
expenses. Interest expense is a necessary component of the Company's
expenses because the Company borrows money to finance its working
capital and capital expenditures. Income tax expense is a necessary
component of the Company's expenses because the Company is required
to pay cash income taxes. Amortization expense is a necessary
component of the Company's expenses because the Company uses property
and equipment to generate sales. Management compensates for these
limitations to the use of EBITDA by using EBITDA as only a
supplementary measure of profitability. EBITDA is not used by
management as an alternative to net income as an indicator of the
Company's operating performance, as an alternative to any other
measure of performance in conformity with generally accepted
accounting principles or as an alternative to cash flow from
operating activities as a measure of liquidity. 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. See page 4 for a reconciliation of net
income to EBITDA.
Forward Looking Statements
--------------------------
Certain statements contained in this press release constitute "forward-
looking statements" within the meaning of securities legislation including
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 are any statements contained in this press
release that are not statements of historical fact and have been identified by
using words such as "may", "will", "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,
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 2006 and beyond could differ materially from those expressed in
the forward looking statements. Additional information on these and other
factors that could affect the Company's operations or financial results are
included in reports on file with Canadian securities regulatory authorities
and may be accessed through the SEDAR website (www.sedar.com) or the Company's
website (www.cefranklin.com). 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, 2005 as filed with
the Securities and Exchange Commission.
Management's Discussion and Analysis as at April 27, 2006
For the quarter ended March 31, 2006 as compared to the quarter ended
March 31, 2005
(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, 2005 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 GAAP and U.S. generally accepted accounting
principles "U.S. GAAP."
Overview
CE Franklin distributes pipe, valves, flanges, fittings, production
equipment, tubular products and other general oilfield supplies to producers
of oil and gas in Canada through its 41 branches and inventory stocking points
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 pipe, vales, flanges and fitting to the oilsands, refining, heavy
oil and petrochemical and non-oilfield related industries such as the forestry
and mining industries.
The Company operates its business in only one operating segment, which is
the distribution of pipe, valves, flanges, fittings, tubular products,
production equipment and general oilfield supplies to the producers of oil and
gas in Canada. CE Franklin considers all of the products it distributes to
have similar economic characteristics, and are sold to the same class of
customers being producers of oil and gas. Operating results by product lines,
geographic area or other lower level components or units of operations are not
regularly reviewed by our chief operating decisions makers to make decisions
about the allocation of resources to, or the assessment of performance of,
such product lines, geographic areas or components or units of operations.
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
-----------------------
2006 2005
----------- -----------
(unaudited)
Statements of Operations
Sales $ 176,357 $ 128,372
Gross Profit 32,247 23,663
Gross Profit - % 18.3% 18.4%
Other expenses (income)
Selling, general and administrative expenses 17,242 12,909
Amortization 701 1,168
Interest 666 509
Other (89) 9
----------- -----------
18,520 14,595
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Income before income taxes 13,727 9,068
Income tax expense 4,848 3,264
----------- -----------
Net income $ 8,879 $ 5,804
----------- -----------
----------- -----------
Net income as a % of sales 5.0% 4.5%
EBITDA(1) 15,094 10,745
EBITDA as a % of sales 8.6% 8.4%
Net income per share
Basic (Cdn. $) $ 0.50 $ 0.34
Diluted (Cdn. $) $ 0.47 $ 0.32
(1) EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented, represents
a useful means of assessing the performance of the Company's ongoing
operating activities, as it reflects the Company's earnings trends
without showing the impact of certain charges. The Company is also
presenting EBITDA, incremental flow through to EBITDA and EBITDA as a
percentage of sales because it is used by management as a
supplemental measure of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and amortization
expenses. Interest expense is a necessary component of the Company's
expenses because the Company borrows money to finance its working
capital and capital expenditures. Income tax expense is a necessary
component of the Company's expenses because the Company is required
to pay cash income taxes. Amortization expense is a necessary
component of the Company's expenses because the Company uses property
and equipment to generate sales. Management compensates for these
limitations to the use of EBITDA by using EBITDA as only a
supplementary measure of profitability. EBITDA is not used by
management as an alternative to net income as an indicator of the
Company's operating performance, as an alternative to any other
measure of performance in conformity with generally accepted
accounting principles or as an alternative to cash flow from
operating activities as a measure of liquidity. 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.
The following is a reconciliation of net income to EBITDA:
(in thousands of Cdn. dollars)
For the three months ended March 31 2006 2005
----------- -----------
Net income 8,879 5,804
Interest expense 666 509
Income tax expense 4,848 3,264
Amortization 701 1,168
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EBITDA 15,094 10,745
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----------- -----------
Quarter Ended March 31, 2006 compared to Quarter Ended March 31, 2005
The price of oil and gas as at March 31, 2006 was U.S. $66.63 per bbl
(West Texas Intermediate) and Cdn. $6.67 per gj (AECO spot) respectively. This
compares to U.S. $55.40 per bbl (West Texas Intermediate) for oil and Cdn.
$7.62 per gj (AECO spot), for gas as at March 31, 2005. The average price of
oil and gas for the quarter ended March 31, 2006 was U.S. $63.29 per bbl (West
Texas Intermediate) and Cdn. $7.50 per gj (AECO spot) respectively. This
compares to an average of U.S. $49.90 per bbl (West Texas Intermediate) for
oil and Cdn. $6.92 per gj (AECO spot), for gas for the quarter ended March 31,
2005.
Well completions (excluding dry and service) increased by 23% to
5,770 wells for the three months ended March 31, 2006 compared to 4,691 wells
for the three months ended March 31, 2005. The average rig count increased
39.8% to 688 rigs in the first three months of 2006 from 492 rigs in the first
three months of 2005.
Sales
Sales for the quarter ended March 31, 2006 increased 37.4% or
$48.0 million to $176.4 million from $128.4 million for the quarter ended
March 31, 2005. The sales increase was due to strong commodity prices,
improved industry economics resulting in an increase in spending by existing
and new customers.
Gross Profit
Gross profit increased 36.3% to $32.2 million for the quarter ended
March 31, 2006 from $23.7 million for the quarter ended March 31, 2005. Gross
profit margins decreased slightly from 18.4% for the quarter ended March 31,
2005 to 18.3% for the quarter ended March 31, 2006.
Gross profit margins have remained consistent as a result of continued
focus on margin initiatives implemented by the Company in 2003, which include
offshore procurement, standardization of certain product lines and a more
disciplined procurement practice. These positive initiatives were offset by
capacity issues of vendors resulting in the Company procuring from non-
standard sources of supply.
Selling, General and Administrative Costs (SG&A)
SG&A costs increased $4.3 million or 33.6% to $17.2 million for the
quarter ended March 31, 2006 from $12.9 million for the quarter ended
March 31, 2005. The increase in SG&A for the quarter related to salaries and
benefits for new employees hired to support the increase in sales, employee
performance pay incentives and agents' commissions due to the increase in
sales and gross profit. Fixed expenses, which exclude agents' commissions and
employee performance pay incentives, increased 25.8% compared to the first
quarter of 2005.
The total number of employees increased 18.3% as at March 31, 2006 to 401
employees compared to 339 employees at the end of March 31, 2005. Revenue per
employee for the quarter ended March 31, 2006 increased 16.1% compared to the
same quarter in 2005. 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. Consulting and audit fees related to the Company's Sarbanes
Oxley section 404 certification were $300,000 in the first quarter. It is
anticipated that the SOX404 certification will cost the Company approximately
$1.5 million to $2.0 million or $0.05 to $0.07 per share (diluted) in 2006.
EBITDA(1)
EBITDA for quarter ended March 31, 2006 increased $4.3 million or 40.5%
to $15.1 million compared to $10.7 million for the quarter ended March 31,
2005. The $48.0 million increase in sales resulted in a 9.1% incremental flow
through to EBITDA. This is slightly lower than the Company's declared target
of 10% reflecting the slight gross profit margin erosion and increase in SG&A
expenses. EBITDA as a percentage of sales was 8.6% for the quarter ended March
31, 2006 versus 8.4% for the quarter ended March 31, 2005. 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.
Income Before Income Taxes
Income before income taxes improved $4.7 million to $13.7 million for the
quarter ended March 31, 2006 compared to $9.1 million for the quarter ended
March 31, 2005. The improvement is a result of the $8.6 million increase in
gross profit and a reduction in amortization expense of $467,000 offset by the
$4.3 million increase in SG&A and other and a $157,000 increase in interest
expense. Amortization expense declined due to the Company's enterprise system
being fully amortized.
The $48.0 million increase in sales resulted in a 9.7% incremental flow
through to income before income taxes.
Income Taxes
The Company's effective tax rate for the quarter ended March 31, 2006 was
35.3%, as compared to an effective tax rate of 36.0% for the quarter ended
March 31, 2005. The Company's combined federal and provincial statutory tax
rate for the quarter ended March 31, 2006 was 34.2%, compared to 34.4% for the
quarter ended March 31, 2005. The reduction in the effective tax rate for the
quarter ended March 31, 2006 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, 2005.
Net Income and Net Income per Share
Net income for the quarter ended March 31, 2006 was $8.9 million or $0.47
per share (diluted) as compared to $5.8 million or $0.32 per share (diluted)
for the quarter ended March 31, 2005. This represents an income improvement of
$3.1 million or $0.15 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 GAAP and U.S. GAAP.
(in thousands of Cdn. dollars except per share data)
Unaudited Q2 Q3 Q4 Q1
2004 2004 2004 2005
----------- ----------- ----------- -----------
Sales 67,002 78,232 104,435 128,372
EBITDA(1) 2,401 3,421 5,958 10,745
EBITDA(1) as a % of sales 3.6% 4.4% 5.7% 8.4%
Net income 518 1,198 2,839 5,804
Net income as a % of sales 0.8% 1.5% 2.7% 4.5%
Net income per share
Basic (Cdn. $) $ 0.03 $ 0.07 $ 0.17 $ 0.34
Diluted (Cdn. $) $ 0.03 $ 0.07 $ 0.16 $ 0.32
Unaudited Q2 Q3 Q4 Q1
2005 2005 2005 2006
----------- ----------- ----------- -----------
Sales 91,899 121,809 140,323 176,357
EBITDA(1) 5,897 8,300 11,061 15,094
EBITDA(1) as a % of sales 6.4% 6.8% 7.9% 8.6%
Net income 2,543 4,214 6,303 8,879
Net income as a % of sales 2.8% 3.5% 4.5% 5.0%
Net income per share
Basic (Cdn. $) $ 0.14 $ 0.25 $ 0.36 $ 0.50
Diluted (Cdn. $) $ 0.14 $ 0.22 $ 0.33 $ 0.47
The Company's sales levels are affected by weather conditions. Many
exploration and production areas in northern Canada are accessible only in the
winter months when the ground is frozen. 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. 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.
Well completions (excluding dry and service) dropped by 10% to 5,770
wells for the first quarter of 2006 compared to 6410 wells for the fourth
quarter of 2005. The average rig count increased 14.3% to 688 rigs in the
first quarter of 2006 from 602 in the fourth quarter of 2005.
Sales for the quarter ended March 31, 2006 increased 25.7% to
$176.4 million from $140.3 million for the quarter ended December 31, 2005.
The increase in sales reflects the increase in capital spending by the
Exploration and Production ("E&P") companies due to the market economics and
the weather conditions described above.
EBITDA(1) for the first quarter of 2006 increased to $15.1 million or
36.5% from $11.1 million in the fourth quarter of 2005. The $36.1 million
increase in sales resulted in an 11.2% incremental flow through to EBITDA. For
a reconciliation of net income to EBITDA, please see page 4.
Net income was $8.9 million or $0.47 per share (diluted) for the quarter
ended March 31, 2006. This represents a net income improvement of $2.6 million
or $0.14 per share (diluted) as compared to the quarter ended December 31,
2005 when the Company reported net income of $6.3 million or $0.33 per share
(diluted).
Liquidity and Capital Resources
The Company's primary internal source of liquidity is cash flow from
operating activities before net changes in non-cash working capital balances.
The Company will use these funds to finance acquisitions and capital
expenditures. Cash flow from operating activities and the Company's 364 day
bank operating facility are used to finance the Company's investment in
working capital, which is primarily comprised of accounts receivable,
inventories and other current assets, net of accounts payable and accrued
liabilities and other current liabilities. Since Q1 2004, the Company has
experienced a 98% growth in quarterly sales and as a result has drawn funds
from its bank operating facility in order to finance its investment in
accounts receivables and inventories.
For the three months ended March 31, 2006 the Company generated
$9.4 million in cash flow from operating activities, before net change in non-
cash working capital balances and $361,000 from the issuance of capital stock
on exercise of employee stock options. Cash used during the quarter was the
result of a $29.7 million investment in working capital (excluding the bank
operating loan), $2.3 million used to purchase a two branch distribution
operation, $887,000 used to purchase capital and other expenditures, and
$56,000 in repayments on capital leases. These activities resulted in a
$23.1 million increase in the bank operating loan.
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. The cash generated 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 an $11.0 million increase in the
bank operating loan.
For the quarter ended March 31, 2006 accounts receivable increased
$33.2 million or 34.4% to $129.7 million from $96.5 million as at December 31,
2005. The increase in accounts receivable reflects a 25.7% increase in sales
to $176.4 million during the first quarter of 2006 as compared to
$140.3 million for the fourth quarter of 2005. Average Days Sales Outstanding
(DSO) was 58.7 days in the first quarter of 2006 as compared to 53.2 days for
the first quarter of 2005 and 56.2 for the fourth quarter of 2005. The
deterioration in DSO for the quarter reflects, in part, slower approval and
processing of paper by both the Company and its customers due to the high
volume of activity.
Total inventory for the Company increased less than 1% to $81.2 million
as at March 31, 2006 as compared to $80.5 million as at December 31, 2005. The
Company measures inventory efficiency by using an inventory turns calculation,
because the higher the inventory turns, the better the Company's inventory is
managed. Inventory turned 7.1 times (annualized) in the first quarter of 2006,
compared to 6.3 times (annualized) in the first quarter of 2005 and 5.8 times
(annualized) for the fourth quarter of 2005. 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 $20.1 million to
$85.0 million as at March 31, 2006 as compared to December 31, 2005. The
increase reflects increased inventory purchases to accommodate the higher
activity levels during the first quarter of 2006, as compared to the previous
quarter.
The Company's bank overdraft and income taxes payable decreased
$12.2 million and $3.9 million, respectively, reflecting payments to suppliers
and income tax payments relating to 2005 earnings.
Property and equipment increased 21.6% to $4.3 million from $3.5 million
at December 31, 2005. This increase reflects capital expenditures of $925,000,
$157,000 in additions to rental equipment assets, and $369,000 in other
capital additions as a result of an acquisition. The additions were offset by
amortization expense of $686,000.
During the first quarter of 2006 the Company purchased an agent that
operated two of the Company's branch locations, for net cash consideration of
$2.3 million. This acquisition will enhance the Company's net income. See
note 2 to the Interim Consolidated Financial Statements of the Company for
further details.
The Company has a $60.0 million 364 day bank operating facility which
bears interest at rates between prime plus 0.5% and prime plus 0.875%. The
increase in borrowing to $52.2 million as at March 31, 2006 is due to an
increase in activity levels during the first quarter of 2006 resulting in a
further investment in working capital, primarily accounts receivables. As warm
weather returns in the second quarter of 2006 and activity levels decrease,
the Company expects to collect its outstanding accounts receivable, and these
funds will be used to reduce the bank operating facility. As at March 31, 2006
the Company was well within the covenant compliance thresholds and was able to
draw up to $60.0 million against its bank operating facility based on the
borrowing base formula.
As at March 31, 2006 the Company's total capitalization (financed debt
plus equity) was comprised of debt of 38.6% and equity of 61.4%. Total
capitalization has remained the same compared to March 31, 2005.
Contractual Obligations
There have been no material changes in any contractual obligations since
the year ended December 31, 2005.
Off-Balance Sheet Arrangements
The Company has not engaged in off-balance sheet financing arrangements.
Related party transactions
Messrs. Douglas L. Rock and John J. Kennedy, directors of the
Corporation, are directors or officers of, or otherwise interested in, Smith
International, Inc. ("Smith"), which owns 53.3% of the Company's outstanding
shares.
The Company is the exclusive distributor of bottom hole pump production
equipment manufactured by Dura, a division of Wilson Supply which is a wholly-
owned subsidiary of Smith. The transactions are in the normal course of
business and at commercial rates.
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 2006, the impact of which was not material, and no such
contracts were outstanding as at March 31, 2006.
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 2006 or 2005. The Company
does not use financial instruments for speculative purposes.
As at March 31, 2006 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,
2005.
Change in Accounting Policies
There have been no changes in accounting policies since the year ended
December 31, 2005.
Other Items
The Company's Annual Report on Form 20F 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, 2006 the Company had 17,879,040 common shares
outstanding.
The Board of Directors may grant options to purchase up to 299,419 common
shares. As at March 31, 2006 options to purchase 1,220,550 common shares were
outstanding at an average exercise price of $3.58 per common share.
Forward Looking Statements
The information in this MD&A may contain "forward-looking statements"
within the meaning of securities legislation including Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All statements, other than statements of historical facts, that address
activities, events, outcomes and other matters that CE Franklin plans,
expects, intends, assumes, believes, budgets, predicts, forecasts, projects,
estimates or anticipates (and other similar expressions) will, should or may
occur in the future are forward-looking statements. These forward-looking
statements are based on management's current belief, based on currently
available information, as to the outcome and timing of future events. When
considering forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this MD&A and those found under the
caption "Risk Factors".
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 electronic
commerce systems;
- the forecasted continuation of high activity levels through the third
and fourth quarters of 2006;
- 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 estimate of amortization savings in 2006;
- the Company's future gross profit and net profit margins;
- the Company's estimate of Sarbanes Oxley section 404 compliance costs
in 2006;
- 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 Factors".
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 Factors
In addition to the information set forth elsewhere in this MD&A, the
following factors should be carefully considered when evaluating CE Franklin.
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, development 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, or threats to, 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;
- the movement of the Canadian dollar relative to its U.S. counterpart
(crude oil and natural gas exports are traded in U.S. dollars);
- general economic and political conditions in North America and
worldwide; 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.
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 pipe, valves, flanges,
fittings, production equipment, tubular products and other general
oilfield supplies directly from the manufacturer rather than from the
Company;
- the ability of new brokers and distributors to enter the market if
the oil and gas industry were to experience significant growth;
- price competition among major supply companies;
- cost of goods being subject to rising or declining commodity prices,
such as the price of steel, and the inability of CE Franklin to pass
these price increases on to customers, or the risk CE Franklin may
have higher-cost inventory during declining commodity prices
resulting in a deterioration in gross profit margins.
CE Franklin and its largest competitors generally operate at low profit
margins due to price competition. Price competition is due in part to customer
price pressure, in addition to the major supply companies competing for the
same business.
The loss of CE Franklin's major supplier for 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. There can be no assurance that a suitable alternate supplier for such
goods would be found.
Labour shortages could adversely affect the Company's ability to service
its customers. The Company faces the challenge of attracting and retaining
workers to meet any increase in demand for its products and services. In a
highly competitive market for employees, the Company may experience periods of
high employee turnover that could result in higher training costs or reduced
levels of service to customers. This could result in increased costs or the
loss of customers and market share.
During periods of high demand for products and services, the Company may
experience product shortages. The frequency and duration of the shortages may
impact the financial performance of the Company. Product shortages may impact
profit margins or could result in the loss of customers.
The Company is exposed to market risks from changes in the Canadian prime
interest rate and foreign exchange rates with respect to the Canadian dollar
and the U.S. dollar for products it purchases outside Canada. The Company may
enter into foreign currency forward exchange contracts and interest rate
contracts to hedge the risks associated with foreign currency and interest
rate fluctuations. Gain or losses with respect to such hedge contracts may
materially affect net income.
The majority of the Company's sales are generated from customers in the
energy sector. This includes major multinational and independent oil
companies, pipeline companies and contract drilling companies operating in
Canada. In addition, for the year ended December 31, 2005 11% of sales (2004 -
12%; 2003 - 14%) were derived from sales to one customer. No other customer
accounted for more than 10% of the Company's sales.
The Company may experience a financial loss if its significant customers
fail to pay CE Franklin for its products or services. The Company's ability to
collect the proceeds from the sale of its products and services from its
customers depends on the payment ability of its customer base, which includes
a significant customer who constitutes 11% of its 2005 annual sales. If this
customer fails to pay CE Franklin for any reason, the Company could experience
a material loss.
Significant downtime at the Company's 100,000 square foot centralized
distribution centre located in Edmonton, Alberta could materially impact net
income and cash flow from operations. The Company operates a hub and spoke
distribution model with the distribution centre strategically located within
reasonable proximity to a majority of its vendors. In addition, the
distribution centre acts as a hub for its 41 branches. Significant downtime at
this facility would impact the Company's gross profit margins net income and
cash flow from operations.
A substantial portion of the Company's sales to customers will depend on
written contracts that are cancelable at any time, or are based on verbal
agreements. The key factors which will determine whether a customer will
continue to use the Company are pricing, service quality and availability,
strategically located service centers and technical knowledge and experience.
There can be no assurance that the Company's relationships with its customers
will continue, and a significant reduction or total loss of business from
these customers, if not offset by increased sales to new or existing
customers, could have a material adverse effect on the Company's net income or
cash flow from operations.
If the Company is unable to successfully address potential material
weakness in its internal controls, or any other control deficiencies, its
ability to report its financial results on a timely and accurate basis and to
comply with disclosure and other requirements may be adversely affected. The
Company is not currently required to comply with Section 404 of the Sarbanes-
Oxley Act of 2002, and is therefore not required to make an assessment of the
effectiveness of its internal controls over financial reporting for that
purpose. A material weakness is defined as a significant deficiency, or a
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
CE Franklin will continue to monitor the effectiveness of these and other
processes, procedures and controls and will make any further changes
management determines appropriate, including to effect compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 when required to make an
assessment of internal controls under Section 404 for fiscal 2006. The steps
CE Franklin has taken and will take in the future may not remediate the
material weakness. In addition, the Company may identify material weaknesses
or other deficiencies in our internal controls in the future.
Any material weaknesses or other deficiencies in the Company's control
systems may affect its ability to comply with reporting requirements and
listing standards or cause its financial statements to contain material
misstatements, which could negatively affect the market price and trading
liquidity of its common stock, cause investors to lose confidence in the
Company's reported financial information, as well as subject CE Franklin to
civil or criminal investigations and penalties.
There are inherent limitations in all control systems, and misstatements
due to error or fraud may occur and not be detected. While CE Franklin has
taken actions designed to address compliance with the internal control,
disclosure control and other requirements of the Sarbanes-Oxley Act of 2002
and the rules and regulations promulgated by the SEC implementing these
requirements, there are inherent limitations in the Company's ability to
control all circumstances. Management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that the Company's internal
controls and disclosure controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. In addition, the design of a control system must reflect the fact
that there are resource constraints and the benefit of controls must be
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, in the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
errors or mistakes. Further, controls can be circumvented by individual acts
of some persons, by collusion of two or more persons, or by management
override of the controls. The design of any system of controls also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, a control may be
inadequate because of changes in conditions, such as growth of the Company or
increased transaction volume, or the degree of compliance with the policies or
procedures may deteriorate. Because of inherent limitations in a cost-
effective control system, misstatements due to error or fraud may occur and
not be detected.
If the Company loses key management and technical personnel, its business
may suffer. CE Franklin relies upon a relatively small group of key management
and technical personnel. Mr. West, in particular, has extensive experience in
oilfield supply and distribution. The Company does not maintain any key man
insurance and it cannot assure you that these individuals will remain with us
in the future. An unexpected partial or total loss of their services may harm
the Company's business.
The Company's share ownership is highly concentrated and, as a result, CE
Franklin's principal shareholder effectively controls the Company's business.
As at the date of this MD&A, CE Franklin's largest shareholder, Smith
International, owned approximately 53.3% of the Company's common outstanding
shares. As a result, Smith International has the voting power to significantly
influence the Company's policies, business and affairs and the outcome of any
corporate transaction or other matter, including mergers, consolidations and
the sale of all, or substantially all, of the Company's assets. In addition,
the concentration of the Company's ownership may have the effect of delaying;
deterring or preventing a change in control that otherwise could result in a
premium in the price of the Company's common shares.
The Company is at risk for certain operating hazards. CE Franklin's
operations are subject to hazards present in the oil and natural gas industry
which can cause personal injury and damage to property or the environment.
Litigation arising from an accident at a location where its products or
services are used or provided may cause the Company to be named as a defendant
in lawsuits asserting potentially large claims. CE Franklin has insurance
coverage against operating hazards, which the Company believes is customary in
the industry. This insurance has deductibles and contains certain coverage
exclusions and limitations. The Company's insurance premiums can be increased
or decreased based on the claims it makes on its insurance policies. Results
of operations could be adversely affected by unexpected claims not covered by
insurance.
CE Franklin Ltd.
Interim Consolidated Statements of Operations
(Unaudited)
Three months ended March 31
(in thousands of Canadian dollars,
except per share data) 2006 2005
-------------------------------------------------------------------------
Sales 176,357 128,372
Cost of sales 144,110 104,709
-------------------------------------------------------------------------
Gross profit 32,247 23,663
-------------------------------------------------------------------------
Other expenses (income)
Selling, general and administrative expenses 17,242 12,909
Amortization 701 1,168
Interest expense 666 509
Foreign exchange loss (gain) (51) 9
Other income (38) -
-------------------------------------------------------------------------
18,520 14,595
-------------------------------------------------------------------------
Income before income taxes 13,727 9,068
-------------------------------------------------------------------------
Income tax expense (recovery) (note 4)
Current 4,949 3,652
Future (101) (388)
-------------------------------------------------------------------------
4,848 3,264
-------------------------------------------------------------------------
Net income for the period 8,879 5,804
-------------------------------------------------------------------------
Net income per share (note 3)
Basic 0.50 0.34
Diluted 0.47 0.32
Weighted average number of shares outstanding
Basic 17,854,137 17,205,634
Diluted 18,837,284 18,149,096
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Consolidated Balance Sheets
(Unaudited)
March 31 December 31
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable 129,749 96,508
Inventories 81,199 80,482
Other 2,739 2,998
-------------------------------------------------------------------------
213,687 179,988
Property and equipment 4,302 3,537
Goodwill 10,479 7,765
Future income taxes (note 4) 1,136 1,038
Other 165 180
-------------------------------------------------------------------------
229,769 192,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank overdraft 1,926 14,090
Bank operating loan 52,164 29,062
Accounts payable 36,962 29,575
Accrued liabilities 48,060 35,354
Income taxes payable 3,928 7,840
Current portion of long term debt 496 217
-------------------------------------------------------------------------
143,536 116,138
Long term debt 929 438
-------------------------------------------------------------------------
144,465 116,576
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 22,319 21,914
Contributed surplus 14,369 14,281
Retained earnings 48,616 39,737
-------------------------------------------------------------------------
85,304 75,932
-------------------------------------------------------------------------
229,769 192,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
Cash flows from operating activities
Net income for the period 8,879 5,804
Items not affecting cash -
Amortization 701 1,168
Gain on disposal of property and equipment (38) -
Future income tax recovery (101) (388)
Increase (decrease) in inventory write-downs (152) 302
Stock option expense 132 146
-------------------------------------------------------------------------
9,421 7,032
Net change in non-cash working capital
balances related to operations -
Accounts receivable (33,241) (22,744)
Inventories (713) (3,561)
Other current assets 259 (493)
Accounts payable 7,387 14,164
Accrued liabilities 12,706 (6,089)
Income taxes payable (3,912) 151
-------------------------------------------------------------------------
(8,093) (11,540)
-------------------------------------------------------------------------
Cash flows from financing activities
Issuance of capital stock 361 121
Increase in bank operating loan 23,102 10,964
Increase (decrease) in bank overdraft (12,164) 613
Decrease in long term debt (56) (71)
-------------------------------------------------------------------------
11,243 11,627
-------------------------------------------------------------------------
Cash flows from investing activities
Purchase of property and equipment (925) (87)
Proceeds on disposal of property and equipment 38 -
Acquisition of distribution operations (note 2) (2,263) -
-------------------------------------------------------------------------
(3,150) (87)
-------------------------------------------------------------------------
Change in cash and cash equivalents
during the period - -
Cash and cash equivalents - Beginning of period - -
-------------------------------------------------------------------------
Cash and cash equivalents - End of period - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash paid during the period for:
Interest on bank operating loan 654 495
Interest on long term debt 12 14
Income taxes 8,862 3,501
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Capital Stock
----------------------
(in thousands of
Canadian dollars, Contri- Share-
except share Number of buted Retained holders'
amounts) Shares $ surplus earnings equity
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance -
December 31, 2005 17,804,554 21,914 14,281 39,737 75,932
Stock options
exercised 74,486 405 (44) - 361
Stock options
granted - - 132 - 132
Net income - - - 8,879 8,879
-------------------------------------------------------------------------
Balance -
March 31, 2006 17,879,040 22,319 14,369 48,616 85,304
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Notes to Consolidated Financial Statements (Unaudited)
-------------------------------------------------------------------------
Note 1 - Accounting policies
These interim consolidated financial statements are prepared following
accounting policies consistent with the Company's financial statements
for the years ended December 31, 2005 and 2004. These consolidated
financial statements 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 consolidated financial
statements should be read in conjunction with the annual audited
financial statements and the notes thereto for the year ended
December 31, 2005.
These unaudited interim consolidated 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 - Acquisition
On February 1, 2006, the Company purchased the outstanding shares of an
agent that operated two of the Company's branch locations, for a net cash
consideration of $2.263 million. In addition to the cash consideration
paid is a $300,000 contingent amount payable at the end of one year from
closing subject to reaching certain purchase conditions. The investment
is accounted for using the purchase method and the results of operations
have been included in these financial statements from the date of
acquisition. Details of the acquisition are as follows:
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
Assets
Property and equipment 369
Goodwill 2,714
-------------------------------------------------------------------------
3,083
-------------------------------------------------------------------------
Assumed Liabilities
Long term debt 817
Future tax liability 3
-------------------------------------------------------------------------
820
-------------------------------------------------------------------------
Net cash consideration 2,263
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 3 - Share data
At March 31, 2006 the Company had 17,879,040 common shares outstanding
and 1,220,550 options to acquire common shares at a weighted average
exercise price of $3.58 per common share. 778,250 of those options were
vested and exercisable at a weighted average exercise price of $3.41 per
common share.
There were no common share options granted in the first quarter of 2006.
The compensation expense recorded in the first quarter of 2006 for common
share options granted subsequent to December 31, 2002 was $132,000. The
compensation expense recorded for the comparative quarter ended March 31,
2005 was $146,000.
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, 2006 would have decreased by $49,000 ($0.00 per
common share). The net income for the comparative quarter ended March 31,
2005 would have decreased by $128,000 ($0.01 per common share).
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
--------------------------------------------
(in thousands of March 31 March 31
Canadian dollars) 2006 2005
-------------------------------------------------------------------------
Income before income taxes 13,727 9,068
-------------------------------------------------------------------------
Incomes taxes calculated at
expected rates 4,693 34.2% 3,116 34.4%
Non-deductible items 97 0.7% 114 1.2%
Capital and large
corporations taxes 19 0.1% 37 0.4%
Other 39 0.3% (3) 0.0%
-------------------------------------------------------------------------
4,848 35.3% 3,264 36.0%
-------------------------------------------------------------------------
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:
(in thousands of March 31 December 31
Canadian dollars) 2006 2005
--------------------------------------------------------------
Assets
Financing and investment
charges 898 909
Property and equipment 557 479
Other 209 199
--------------------------------------------------------------
1,664 1,587
--------------------------------------------------------------
Liabilities
Goodwill 528 549
--------------------------------------------------------------
528 549
--------------------------------------------------------------
Net future income tax asset 1,136 1,038
--------------------------------------------------------------
--------------------------------------------------------------
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.
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