CALGARY, Feb. 2 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced
its results for the fourth quarter and year ended December 31, 2005.
CE Franklin reported net income of $6.3 million or $0.33 per share
(diluted) for the fourth quarter ended December 31, 2005 as compared to net
income of $2.8 million or $0.16 per share (diluted) for the fourth quarter
ended December 31, 2004.
Financial Highlights
--------------------
<<
Three Months Ended Year Ended
December 31 December 31
(millions of Cdn.$ except ---------------------- ----------------------
per share data) 2005 2004 2005 2004
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Sales $ 140.3 $ 104.4 $ 482.4 $ 338.7
Gross Profit 27.5 19.1 91.3 60.2
Gross Profit - % 19.6% 18.2% 18.9% 17.8%
EBITDA(1) 11.1 6.0 36.0 15.9
EBITDA(1) as a % of sales 7.9% 5.7% 7.5% 4.7%
Net income $ 6.3 $ 2.8 $ 18.9 $ 6.1
Per share
Basic $ 0.36 $ 0.17 $ 1.09 $ 0.36
Diluted $ 0.33 $ 0.16 $ 1.01 $ 0.35
Sales increased 34.4% to $140.3 million for the quarter ended
December 31, 2005 as compared to $104.4 million for the quarter ended
December 31, 2004. Well completions (excluding dry and service wells) were up
by 19.4% to 6,410 wells completed for the three months ended December 31, 2005
compared to 5,368 wells for the three months ended December 31, 2004. Average
rig count for the quarter ended December 31, 2005 was 602 active rigs, which
represents a 43.3% increase as compared to the quarter ended December 31,
2004. The 34.4% improvement in sales reflects strong commodity prices,
improved industry economics resulting in an increase in drilling activity,
coupled with an increase in market share due to sales to new customers and
increased sales to existing customers.
EBITDA(1) for the quarter ended December 31, 2005 increased 85.6% to
$11.1 million from $6.0 million for the quarter ended December 31, 2004. The
$35.9 million increase in sales resulted in an incremental flow through to
EBITDA of 14.2% and 9.7% to net income. EBITDA and net income as a percentage
of sales increased to 7.9% and 4.5%, respectively, for the quarter ended
December 31, 2005.
Net income for the year ended December 31, 2005 increased to
$18.9 million or $1.01 per share (diluted) as compared to $6.1 million or
$0.35 per share (diluted) for the year ended December 31, 2004. The
$143.7 million increase in sales for the year ended December 31, 2005 compared
to the year ended December 31, 2004 resulted in an incremental flow through to
EBITDA of 14.0% and net income of 8.9%.
"I am extremely pleased with the Company's record results, and more
excited that the employees and management remain focused and committed to
continued improvement and growth." said Michael West, Chairman, President and
CEO. "This is the 13th quarter in a row the Company has delivered year over
year improvement as well as a Company historical best result for the quarter
and year ended December 31, 2005."
Outlook
-------
Activity levels have increased in the fourth quarter and strong commodity
prices have supported the demand for CE Franklin's products and services in
Canada. The Petroleum Services Association of Canada is predicting another
record year for well completions in 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 outperforming market activity.
Conference Call and Webcast Information
---------------------------------------
A conference call to review the quarter and year ended December 31, 2005,
which is open to the public, will be held on Friday, February 3, 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
21172003 followed by the number sign and may be accessed until midnight
Friday, February 10, 2006.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)1339580 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.
(All amounts shown in Canadian dollars unless otherwise specified.)
Forward Looking Statements
--------------------------
Certain statements contained in this press release and Financial
Statement Review 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, sales levels, selling, general and
administrative costs, capital expenditures and statements concerning liquidity
and capital resources. There are numerous risks and uncertainties that can
affect the outcome and timing of such events, including many factors beyond
the control of the Company. These factors include, but are not limited to,
economic conditions, seasonality of drilling activity, the loss of a major
supplier of tubular goods, commodity prices for oil and gas, currency
fluctuations and government regulations. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove incorrect, the
Company's actual results and plans for 2006 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.
Financial Statement Review as at February 2, 2006
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 41 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 of the Canadian oil and
gas producers also have their headquarters and from certain of its branches in
the western Canadian sedimentary basin. Deliveries of pipe are made directly
from the field inventories of the manufacturers or from Company owned
inventory to the well site or the site where surface line pipe will be laid.
OPERATING RESULTS
The following table summarizes CE Franklin's results of operations.
(in thousands of Cdn. dollars except
per share data)
For the years ended December 31 2005 2004 2003
---------- ---------- ----------
Statements of Operations
Sales $ 482,403 $ 338,701 $ 257,125
Gross Profit 91,314 60,243 43,550
Gross Profit - % 18.9% 17.8% 16.9%
Other expenses (income)
Selling, general and administrative
expenses 55,303 44,299 36,416
Amortization 4,393 4,328 4,130
Interest 1,945 1,455 959
Other 8 16 (749)
---------- ---------- ----------
61,649 50,098 40,756
---------- ---------- ----------
Income before income taxes 29,665 10,145 2,794
Income tax expense 10,801 4,003 1,494
---------- ---------- ----------
Income from continuing operations 18,864 6,142 1,300
Loss from discontinued operations - (27) (879)
---------- ---------- ----------
Net income $ 18,864 $ 6,115 $ 421
---------- ---------- ----------
---------- ---------- ----------
EBITDA(1) 36,003 15,928 7,883
EBITDA as a % of sales 7.5% 4.7% 3.1%
Net income per share
Basic $ 1.09 $ 0.36 $ 0.02
Diluted $ 1.01 $ 0.35 $ 0.02
The following is a reconciliation of income from continuing operations to
EBITDA:
(in thousands of Cdn. dollars)
For the years ended December 31 2005 2004 2003
---------- ---------- ----------
Income from continuing operations $ 18,864 $ 6,142 $ 1,300
Interest expense 1,945 1,455 959
Income tax expense 10,801 4,003 1,494
Amortization 4,393 4,328 4,130
---------- ---------- ----------
EBITDA $ 36,003 $ 15,928 $ 7,883
---------- ---------- ----------
---------- ---------- ----------
Activity Levels
Commodity prices generally remained high in 2005. The price of oil and
the price of gas as at December 31, 2005 were U.S. $61.04 per bbl (West Texas
Intermediate) and Cdn. $9.01 per gj (AECO spot) respectively, and the average
price of oil and the average price of gas for the year ended December 31, 2005
were U.S. $56.57 per bbl and Cdn $8.31 per gj respectively. This compares to
U.S. $43.45 per bbl for oil and Cdn. $5.90 per gj for gas as at December 31,
2004, and to an average of U.S. $41.37 per bbl for oil and an average of
Cdn. $6.22 per gj for gas for the year ended December 31, 2004. As at
December 31, 2003 the price of oil and the price of gas were U.S. $32.79 per
bbl and Cdn $6.88 per gj respectively, and the average price of oil and the
average price for gas for the year ended December 31, 2003 were U.S. $31.04
per bbl and Cdn. $6.32 per gj respectively. The strong commodity prices
resulted in Canadian oil and gas producers having increased cash flow and,
therefore, being able to increase capital spending on exploration and
production activities.
The Company uses oil and gas well completions and average rig counts as
industry activity measures. Oil and gas well completions require the products
sold by the Company and therefore are a good general indicator of market
activity. Average rig counts provide a general indication of energy industry
activity levels.
For the year ended December 31, 2005 the total number of wells completed
(excluding dry and service wells) in western Canada increased 0.6% to 20,238
wells compared to 20,118 wells for the year ended December 31, 2004. For the
year ended December 31, 2004, the total number of wells completed (excluding
dry and service wells) in western Canada increased 12.4% to 20,118 wells,
compared to 17,905 wells for the year ended December 31, 2003.
The average rig count for the year ended December 31, 2005 increased
26.4% to 469 average rigs as compared to 371 average rigs for the year ended
December 31, 2004. The average rig count for the year ended December 31, 2004
was 371 average rigs, which was the same as the average rig count for the year
ended December 31, 2003.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Sales
Sales for the year ended December 31, 2005 increased 42.4% or
$143.7 million to $482.4 million from $338.7 million for the year ended
December 31, 2004. The sales increase was due to strong commodity prices,
which resulted in improved industry economics, coupled with an increase in
market share from sales to new customers and increased sales to existing
customers. Sales also increased due to increasing supplier prices reflecting
an increase in energy, raw materials and operational costs.
Gross Profit
Gross profit increased 51.6% to $91.3 million for the year ended
December 31, 2005 from $60.2 million for the year ended December 31, 2004.
Gross profit margins increased to 18.9% for the year ended December 31, 2005
from 17.8% for the year ended December 31, 2004.
The overall improvement in gross profit margins for the year ended
December 31, 2005 is a result of a reduction in inventory write-downs from
$1.5 million in 2004 to $280,000 in 2005, coupled with 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 2005 over and above price increases by the Company's suppliers as a result
of the rise in supplier pricing.
Selling, General and Administrative Costs
SG&A costs increased $11.0 million or 24.8% to $55.3 million for the year
ended December 31, 2005 from $44.3 million for the year ended December 31,
2004. The increase in SG&A for the year ended December 31, 2005 related to
salaries and benefits for new employees hired to support the increase in sales
for the year, employee performance pay incentives and agents' commissions due
to the increase in sales and gross profit. Fixed expenses, which exclude
agent's commissions and employee performance pay incentives, increased 15.8%
as compared to 2004.
The total number of employees increased 16.8% to 383 employees as at
December 31, 2005 compared to 328 employees as at December 31, 2004. Average
revenue per employee for the year ended December 31, 2005 increased 23.3% to
$1.4 million per employee as compared to $1.1 million per employee the
previous year. 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.
In 2006, SG&A expenses will include costs associated with the Company's
SOX404 certification (outside consulting and audit fees). 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 the year ended December 31, 2005 increased $20.1 million or
126.0% to $36.0 million compared to $15.9 million for the year ended
December 31, 2004. The $143.7 million increase in sales resulted in a 14.0%
incremental flow through to EBITDA. EBITDA as a percentage of sales was 7.5%
for the year ended December 31, 2005 versus 4.7% for the year ended
December 31, 2004. EBITDA is a supplemental non-GAAP financial measure used by
management, as well as industry analysts, to evaluate operations.
Income Before Income Taxes
Income before income taxes improved $19.6 million to $29.7 million for
the year ended December 31, 2005 compared to $10.1 million for the year ended
December 31, 2004. The improvement is a result of the $31.1 million increase
in gross profit offset by the $11.0 million increase in SG&A and an increase
of $547,000 in other costs. Other costs include amortization, interest expense
and foreign exchange. The $143.7 million increase in sales for the year ended
December 31, 2005 resulted in a 13.6% incremental flow through to income
before income taxes.
Income Taxes
The Company's effective tax rate for the year ended December 31, 2005 was
36.4%, as compared to an effective tax rate of 39.5% for the year ended
December 31, 2004. The Company's combined federal and provincial statutory tax
rate for the period ended December 31, 2005 was 34.4%, compared to 34.6% for
the period ended December 31, 2004. The reduction in the effective tax rate
for the year ended December 31, 2005 is due to non-deductible items and
capital and other taxes totaling $608,000 (2004 - $493,000) becoming a smaller
component of the overall income tax charge in 2005 due to the increase in
income before income taxes. See note 4 to the financial statements for a
detailed reconciliation of the effective tax rate.
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 year ended December 31, 2004
was $27,000.
Net Income
Net Income increased 208% to $18.9 million or $1.01 per share (diluted)
for the year ended December 31, 2005 as compared to $6.1 million or $0.35 per
share (diluted) for the year ended December 31, 2004.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Sales
Sales for the year ended December 31, 2004 increased 31.7% or
$81.6 million to $338.7 million from $257.1 million for the year ended
December 31, 2003. The sales increase was due to a 12.4% increase in well
completions, as well as an increase in market share from new customers and
increased sales to existing customers. Sales revenues 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 38.3% to $60.2 million for the year ended
December 31, 2004 from $43.6 million for the year ended December 31, 2003.
Gross profit margins increased to 17.8% for the year ended December 31, 2004
from 16.9% for the year ended December 31, 2003.
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
over and above price increases by the Company's suppliers as a result of the
rise in steel prices described above.
Selling, General and Administrative Costs
SG&A costs increased $7.9 million or 21.6% to $44.3 million for the year
ended December 31, 2004 from $36.4 million for the year ended December 31,
2003. The majority of the increase in SG&A relates to variable expenses such
as performance pay incentives to employees and agents commissions that are a
result of the 31.7% increase in sales for the year ended December 31, 2004.
Excluding these variable expenses, which will fluctuate with sales, fixed SG&A
increased 6.7% due primarily to an increase in salaries and benefits and
occupancy costs.
The total number of employees increased 12.7% as at December 31, 2004 to
328 employees compared to 291 employees at the end of 2003.
Revenue per employee based on the December 31, 2004 and 2003 employee
counts increased 16.7% to $1.1 million per employee as compared to $884,000
per employee for 2003. The improvement reflects standardization of processes
and procedures, whereby all critical processes are performed consistently
throughout the Company's operations resulting in process improvement
efficiencies.
EBITDA(1)
EBITDA for the year ended December 31, 2004 increased $8.0 million or
102.1% to $15.9 million compared to $7.9 million for the year ended
December 31, 2003. The $81.6 million increase in sales resulted in a 9.9%
incremental flow through to EBITDA. EBITDA is a supplemental non-GAAP
financial measure used by management, as well as industry analysts, to
evaluate operations.
EBITDA as a percentage of sales was 4.7% for the year ended December 31,
2004 versus 3.1% for the year ended 2003. The Company's target for fiscal 2005
was 5.0%.
Income Before Income Taxes
Income before income taxes improved $7.4 million to $10.1 million for the
year ended December 31, 2004 compared to $2.8 million for the year ended
December 31, 2003. The improvement is a result of the $16.7 million increase
in gross profit offset by the $7.9 million increase in SG&A and $1.4 million
increase in other costs. Other costs include an increase in amortization of
$198,000, an increase in interest expense of $496,000 from investments in
accounts receivables and inventories with the increased activity levels
resulting in an overall increase in the demand bank operating loan, a decrease
in foreign exchange gains of $551,000 and a decrease in other income of
$214,000. The decrease in foreign exchange gains is due to a relatively lower
level of movement in the Canadian dollar in 2004 as compared to 2003, which
saw significant improvement in the Canadian dollar over the same period.
The $81.6 million increase in sales resulted in a 9.0% incremental flow
through to income before income taxes.
Income Taxes
The Company's effective tax rate for the year ended December 31, 2004 was
39.5%, as compared to an effective tax rate of 53.5% for the year ended
December 31, 2003. The Company's combined federal and provincial statutory tax
rate for the year ended December 31, 2004 was 34.6%, compared to 37.1% for the
year ended December 31, 2003. The reduction in the effective tax rate in 2004
is due to non-deductible items and capital and other taxes totaling $493,000
(2003 - $457,000) that were a smaller component of the overall income tax
charge in 2004 due to the increase in income before income taxes.
Income from Continuing Operations
Income from continuing operations increased to $6.1 million or $0.35 per
share (diluted) compared to $1.3 million or $0.07 per share (diluted) for the
year ended December 31, 2003.
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 year ended December 31, 2004
was $27,000 as compared to a loss of $879,000 for the year ended December 31,
2003.
Net Income and Earnings per Share
Net income for the year ended December 31, 2004 was $6.1 million or $0.35
per share (diluted) as compared to $421,000 or $0.02 per share (diluted) for
the year ended December 31, 2003. This represents an income improvement of
$5.7 million or $0.33 per share (diluted).
SUMMARY OF QUARTERLY FINANCIAL DATA
The selected quarterly financial data presented below is presented in
Canadian dollars and in accordance with Canadian GAAP. There are no Statements
of Operations differences between Canadian and U.S. GAAP.
(in thousands of Cdn.
dollars except per share
data)
Unaudited Q1 Q2 Q3 Q4
2004 2004 2004 2004
---------- ---------- ---------- ----------
Sales 89,032 67,002 78,232 104,435
Net income from continuing
operations 1,587 518 1,198 2,839
Loss from discontinued
operations (27) - - -
---------- ---------- ---------- ----------
Net income 1,560 518 1,198 2,839
---------- ---------- ---------- ----------
EBITDA(1) 4,148 2,401 3,421 5,958
EBITDA(1) as a % of sales 4.7% 3.6% 4.4% 5.7%
Net income as a % of sales 1.8% 0.8% 1.5% 2.7%
Net income per share
Basic $ 0.09 $ 0.03 $ 0.07 $ 0.17
Diluted $ 0.09 $ 0.03 $ 0.07 $ 0.16
(in thousands of Cdn.
dollars except per share
data)
Unaudited Q1 Q2 Q3 Q4
2005 2005 2005 2005
---------- ---------- ---------- ----------
Sales 128,372 91,899 121,809 140,323
Net income from continuing
operations 5,804 2,543 4,214 6,303
Loss from discontinued
operations - - - -
---------- ---------- ---------- ----------
Net income 5,804 2,543 4,214 6,303
---------- ---------- ---------- ----------
EBITDA(1) 10,745 5,897 8,300 11,061
EBITDA(1) as a % of sales 8.4% 6.4% 6.8% 7.9%
Net income as a % of sales 4.5% 2.8% 3.5% 4.5%
Net income per share
Basic $ 0.34 $ 0.14 $ 0.25 $ 0.36
Diluted $ 0.32 $ 0.14 $ 0.22 $ 0.33
The Company's sales levels are affected by weather conditions. As warm
weather returns in the spring each year the winter's frost comes out of the
ground rendering many secondary roads incapable of supporting the weight of
heavy equipment until they have dried out. In addition, many exploration and
production areas in northern Canada are accessible only in the winter months
when the ground is frozen. As a result, the first and fourth quarters
typically represent the busiest time and highest sales activity for the
Company. Sales levels drop dramatically during the second quarter until such
time as the roads have dried and road bans have been lifted.
Sales for the quarter ended December 31, 2005 increased 34.4% to
$140.3 million from $104.4 million for the quarter ended December 31, 2004
reflecting a general increase in activity levels coupled with an increase in
market share. The $35.9 million increase in sales resulted in an incremental
flow through to EBITDA of 14.2% and 9.7% to net income. Net income was
$6.3 million or $0.33 per share (diluted) for the quarter ended December 31,
2005 compared to $2.8 million or $0.16 per share (diluted) for the quarter
ended December 31, 2004.
As indicated above, the first and fourth quarters typically represent the
busiest time and highest sales activity for the Company. Sales for the quarter
ended December 31, 2005 were $140.3 million as compared to sales for the
quarter ended March 31, 2005 of $128.4 million. Net income for the quarter
ended December 31, 2005 was $6.3 or $0.33 per share (diluted) versus
$6.0 million or $0.32 per share (diluted) for the quarter ended March 31,
2005. The $12.0 million increase in sales resulted in an incremental flow
through of 4.2%. This was due to a 74.5% increase in variable SG&A costs
(agents commissions and employee performance pay incentives) and a 10.3%
increase in fixed SG&A costs Q4 2005 versus Q1 2005, respectively reflecting
on increase in staffing to prepare for 2006 activity levels.
LIQUIDITY AND CAPITAL RESOURCES
In 2005, the Company generated $21.9 million in cash from cash flow from
operating activities, before net change in non-cash working capital balances,
and $2.5 million in the issuance of capital stock from the exercise of
employee stock options. This was offset by a $26.5 million increase in working
capital (including bank overdraft but excluding the bank operating loan),
$587,000 in capital and other expenditures and $261,000 in repayments on
capital leases. These activities resulted in a $2.9 million increase in the
bank operating loan.
In 2004, the Company generated $11.4 million in cash from cash flow from
operating activities, before net change in non-cash working capital balances,
$50,000 from proceeds on the disposal of property and equipment, and $961,000
from proceeds on the sale of its 50% interest in its small horsepower
compression operations. This was offset by a $14.1 million increase in working
capital (including bank overdraft and cash but excluding the bank operating
loan), $861,000 in capital and other expenditures and $327,000 in repayments
on capital leases. These activities resulted in a $2.8 million increase in the
bank operating loan.
In 2003, the Company generated $4.7 million in cash flow from operating
activities, before net change in non-cash working capital balances, $247,000
from proceeds on disposal of property and equipment and $538,000 from the sale
of a 50% interest in its small horsepower compression operations. This was
offset by a $6.2 million increase in working capital (including bank overdraft
and cash but excluding the bank operating loan), $881,000 in capital and other
expenditures and $343,000 in repayments on capital leases. These activities
resulted in a $1.9 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 $21.9 million for the year ended December 31, 2005, an
improvement of $10.5 million as compared to 2004. The improvement reflects
improvement in profitability of the Company during 2005 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.
The $21.9 million in cash flow from operating activities in 2005 was
reinvested into accounts receivable, inventories and other current assets, net
of accounts payable and accrued liabilities and other current liabilities. The
42.4% increase in sales in 2005 required a reinvestment in accounts receivable
and inventories in order to maintain activity levels.
As at December 31, 2005 accounts receivable increased $29.9 million or
45.0% to $96.5 million from $66.6 million as at December 31, 2004. The
increase in accounts receivable reflects a 34.4% increase in sales to
$140.3 million during the fourth quarter of 2005 as compared to $104.4 million
for the fourth quarter of 2004. Average days sales outstanding (DSO) for the
quarter ended December 31, 2005 was 56.2 days as compared to 50.9 days for the
quarter ended December 31, 2004. 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.
DSO was 53.4 days in 2005 as compared to 52.7 days in 2004. Accounts
receivable greater than 90 days old was 3.3% of accounts receivable as at
December 31, 2005 versus 1.5% as at December 31, 2004. Trade accounts
receivables are tightly managed by the Company with daily calls to customers
to solve payment issues. In addition, the Company's accounts receivable team
works closely with customers to help simplify payment and approval processes.
Bad debt expense in 2005 was $459,000 (0.1% of sales) as compared to $244,000
(0.1% of sales) for the year ended December 31, 2004 and $266,000 (0.1% of
sales) for the year ended December 31, 2003. Although accounts receivable
greater than 90 days old increased as compared to the previous year, bad debt
expense remained within acceptable levels.
Total inventory for the Company increased 25.2% to $80.5 million as at
December 31, 2005 as compared to $64.3 million as at December 31, 2004. The
increase in inventory levels reflects the 34.4% increase in sales during Q4
2005 as compared to the previous year. Also, the Company has increased its
inventory of high turning items in anticipation of higher activity levels in
the first quarter of 2006.
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 turns are calculated by taking cost of sales
for the year divided by average inventory. Inventory turned 5.3 times in 2005,
compared to 4.9 times in 2004 and 5.0 times in 2003. CE Franklin targets
inventory turns of 5.0 times. The Company monitors its inventory on a daily
basis in order to reduce surplus, improve turns and reduce obsolescence. The
Company's inventory write-down expense declined substantially in 2005 to
$280,000 (approximately 0.1% of sales) compared to $1.5 million (0.4% of
sales) in 2004 and $1.5 million (0.6% of sales) in 2003.
Accounts payable, accrued liabilities and bank overdraft have increased
$18.2 million to $79.0 million as at December 31, 2005 as compared to the
previous year. The increase reflects increased inventory purchases due to
higher activity levels during Q4 2005, as compared to the previous year,
coupled with the increase in inventory levels at year-end in anticipation of
high activity levels in the first quarter of 2006.
Property and equipment decreased 42.0% to $3.5 million from $6.1 million.
This decrease reflects amortization expense of $4.4 million offset by capital
expenditures of $587,000 and $1.2 million in additions to rental equipment
assets, through transfers from inventory, and capital leases. As at
December 31, 2005, approximately $388,000 in property and equipment (original
cost of $16.0 million) relates to the Company's investment in its enterprise
software and electronic commerce systems. For the year-ended December 31,
2005, $2.3 million in amortization expense was incurred relating to these
assets. This will decrease to $388,000 in 2006. The Company currently
anticipates that its enterprise and electronic commerce systems will operate
well beyond 2006 without any significant costs for upgrades in the range of
its initial investments. However, there can be no assurances in this regard.
As at December 31, 2005 the Company's total capitalization (financed debt
plus equity) was comprised of debt of 28.1% compared to 33.3% as at
December 31, 2004 and equity of 71.9% compared to 66.7% as at December 31,
2004.
On July 29, 2005, the Company renewed its 364 day bank operating
facility. The facility has been increased to $60.0 million, bears interest at
rates between prime plus 0.5% and prime plus 0.875%. The Company's borrowing
capacity under its 364 day bank operating facility is dependent on maintaining
compliance with certain financial covenants and a borrowing base formula
applied to accounts receivable and inventories. As at December 31, 2005, the
Company was well within the covenant compliance thresholds and was able to
draw up to $60.0 million against its bank operating line based on the
borrowing base formula.
The Company will fund capital expenditures from cash flow from operating
activities and capital leases where available. The Company anticipates its
capital expenditures in 2006 to be related to standard upgrades to its
enterprise and electronic commerce systems, purchase of new locations if
leasing of these facilities prove to be uneconomical, as well as leasehold
improvements to its 41 locations, and potential increases to its rental
assets.
Risks and Uncertainties
-----------------------
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 of 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;
- price competition among major supply companies;
- cost of goods being subject to raw material shortages or surpluses,
such as for 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 raw material surpluses and declining
prices resulting in a deteriorations in margins.
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. There can be no assurance that a suitable alternate supplier for such
goods would be found.
(1) EBITDA represents income from continuing operations 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. 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.
CE Franklin Ltd.
Interim Statements of Operations
(Unaudited)
Three Months Ended Year Ended
(in thousands of ----------------------- -----------------------
Canadian dollars, December December December December
except per share data) 31 2005 31 2004 31 2005 31 2004
-------------------------------------------------------------------------
Sales 140,323 104,435 482,403 338,701
Cost of sales 112,813 85,381 391,089 278,458
-------------------------------------------------------------------------
Gross profit 27,510 19,054 91,314 60,243
-------------------------------------------------------------------------
Other expenses (income)
Selling, general and
administrative expenses 16,337 13,063 55,303 44,299
Amortization 840 1,092 4,393 4,328
Interest expense 500 436 1,945 1,455
Foreign exchange loss 113 35 18 28
Other income (1) (2) (10) (12)
-------------------------------------------------------------------------
17,789 14,624 61,649 50,098
-------------------------------------------------------------------------
Income before income taxes 9,721 4,430 29,665 10,145
-------------------------------------------------------------------------
Income tax expense
(recovery) (note 4)
Current 3,563 1,843 12,451 4,804
Future (145) (252) (1,650) (801)
-------------------------------------------------------------------------
3,418 1,591 10,801 4,003
-------------------------------------------------------------------------
Income from continuing
operations 6,303 2,839 18,864 6,142
Loss from discontinued
operations (note 2) - - - (27)
-------------------------------------------------------------------------
Net income for the period 6,303 2,839 18,864 6,115
-------------------------------------------------------------------------
Net income per share (note 3)
Basic 0.36 0.17 1.09 0.36
Diluted 0.33 0.16 1.01 0.35
Weighted average number of
shares outstanding
Basic 17,535,646 17,194,236 17,326,637 17,187,720
Diluted 18,680,002 17,605,599 18,680,002 17,605,599
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Balance Sheets
(Unaudited)
December December
(in thousands of Canadian dollars) 31 2005 31 2004
-------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable 96,508 66,573
Inventories 80,482 64,282
Other 2,998 552
-------------------------------------------------------------------------
179,988 131,407
Property and equipment 3,537 6,097
Goodwill 7,765 7,765
Future income taxes (note 4) 1,038 -
Other 180 240
-------------------------------------------------------------------------
192,508 145,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank overdraft 14,090 5,270
Bank operating loan 29,062 26,140
Accounts payable 29,575 29,381
Accrued liabilities 35,354 26,136
Income taxes payable 7,840 3,074
Current portion of obligations under capital lease 217 204
-------------------------------------------------------------------------
116,138 90,205
Obligations under capital lease 438 626
Future income taxes (note 4) - 612
-------------------------------------------------------------------------
116,576 91,443
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 21,914 19,335
Contributed surplus 14,281 13,858
Retained earnings 39,737 20,873
-------------------------------------------------------------------------
75,932 54,066
-------------------------------------------------------------------------
192,508 145,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Statements of Cash Flows
(Unaudited)
Three Months Ended Year Ended
----------------------- -----------------------
(in thousands of December December December December
Canadian dollars) 31 2005 31 2004 31 2005 31 2004
-------------------------------------------------------------------------
Cash flows from operating
activities
Income from continuing
operations 6,303 2,839 18,864 6,142
Items not affecting cash -
Amortization 840 1,092 4,393 4,328
Gain on disposal of
property and equipment - (1) (9) (6)
Future income tax
recovery (145) (252) (1,650) (801)
Increase in inventory
write-downs (333) 1,006 (207) 1,528
Stock option expense 113 64 552 256
-------------------------------------------------------------------------
6,778 4,748 21,943 11,447
Net change in non-cash
working capital balances
related to operations -
Accounts receivable (16,568) (11,549) (29,935) (20,730)
Inventories (987) (9,164) (17,114) (18,364)
Other current assets (8) 493 (2,446) 335
Accounts payable (3,585) 10,504 194 1,385
Accrued liabilities 599 4,272 9,218 11,623
Income taxes payable 2,164 1,412 4,766 1,519
-------------------------------------------------------------------------
Net cash flow from
continuing operations (11,607) 716 (13,374) (12,785)
Net cash flow from
discontinued operations
(note 2) - - - (26)
-------------------------------------------------------------------------
(11,607) 716 (13,374) (12,811)
-------------------------------------------------------------------------
Cash flows from financing
activities
Issuance of capital stock 1,408 4 2,450 67
Increase (decrease) in
bank operating loan (100) (308) 2,922 2,772
Increase (decrease) in
bank overdraft 10,656 (222) 8,820 5,270
Decrease in obligations
under capital lease (56) (31) (261) (327)
-------------------------------------------------------------------------
11,908 (557) 13,931 7,782
-------------------------------------------------------------------------
Cash flows from investing
activities
Purchase of property and
equipment (301) (160) (587) (861)
Proceeds on disposal of
property and equipment - 1 30 50
Proceeds on sale of
compression operations
(note 2) - - - 961
-------------------------------------------------------------------------
Net cash flow from
continuing operations (301) (159) (557) 150
Net cash flow from
discontinued operations
(note 2) - - - (2)
-------------------------------------------------------------------------
(301) (159) (557) 148
-------------------------------------------------------------------------
Change in cash and cash
equivalents during the
period - - - (4,881)
Cash and cash equivalents -
Beginning of period - - - 4,881
-------------------------------------------------------------------------
Cash and cash equivalents -
End of period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash paid during the
period for:
Interest on bank
operating loan 489 415 1,899 1,419
Interest on obligations
under capital lease 11 21 46 50
Income taxes 1,399 431 7,685 3,249
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Statements of Changes in Shareholders' Equity
(Unaudited)
Capital Stock
-------------------
(in thousands of Contrib- Share-
Canadian dollars, Number of uted Retained holders'
except share amounts) Shares $ surplus earnings equity
-------------------------------------------------------------------------
Balance - December 31,
2003 17,178,696 19,268 13,602 14,758 47,628
Stock options exercised 16,238 67 - - 67
Stock options granted - - 256 - 256
Net income - - - 6,115 6,115
-------------------------------------------------------------------------
Balance - December 31,
2004 17,194,934 19,335 13,858 20,873 54,066
Stock options exercised 609,620 2,579 (129) - 2,450
Stock options granted - - 552 - 552
Net income - - - 18,864 18,864
-------------------------------------------------------------------------
Balance - December 31,
2005 17,804,554 21,914 14,281 39,737 75,932
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 31, 2005 the Company had 17,804,554 common shares outstanding
and 1,295,036 options to acquire common shares at a weighted average
exercise price of $3.65 per common share. 729,828 of those options were
vested and exercisable at a weighted average exercise price of $3.31 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 remaining quarters of
the year. The fair value of the common share options granted in the first
quarter was $898,372. 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 4.08%
Expected life 5 years
Expected volatility 56%
The compensation expense recorded in the fourth quarter of 2005 and in
the year ended December 31, 2005 for common share options granted
subsequent to December 31, 2002 was $113,000 and $552,000 respectively.
The compensation expense recorded for the quarter and the year ended
December 31, 2004 was $64,000 and $256,000 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 year ended December 31, 2005 would have decreased by
$127,000 ($0.01 per common share) and $551,000 ($0.03 per common share)
respectively. The net income for the quarter and year ended December 31,
2004 would have decreased by $200,000 ($0.02 per common share) and
$798,000 ($0.05 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
-----------------------------------------------
December December
31 2005 31 2004
-------------------------------------------------------------------------
Income before income
taxes 9,721 4,430
-------------------------------------------------------------------------
Incomes taxes calculated
at expected rates 3,340 34.4% 1,535 34.6%
Non-deductible items 97 1.0% 88 2.0%
Capital and large
corporations taxes 25 0.3% (26) -0.6%
Other (44) -0.5% (6) -0.1%
-------------------------------------------------------------------------
3,418 35.2% 1,591 35.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year Ended
-----------------------------------------------
December December
31 2005 31 2004
-------------------------------------------------------------------------
Income before income
taxes 29,665 10,145
-------------------------------------------------------------------------
Incomes taxes calculated
at expected rates 10,193 34.4% 3,510 34.6%
Non-deductible items 634 2.1% 290 2.9%
Capital and large
corporations taxes 66 0.2% 61 0.6%
Other (92) -0.3% 142 1.4%
-------------------------------------------------------------------------
10,801 36.4% 4,003 39.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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:
December December
31 2005 31 2004
-------------------------------------------------
Assets
Financing and investment
charges 909 109
Property and equipment 479 -
Other 199 135
-------------------------------------------------
1,587 244
-------------------------------------------------
Liabilities
Property and equipment - 303
Goodwill 549 553
-------------------------------------------------
549 856
-------------------------------------------------
Net future income tax asset
(liability) 1,038 (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.
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