CALGARY, Oct. 27 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced
its results for the third quarter ended September 30, 2005.
CE Franklin reported record third quarter net income of $4.2 million or
$0.22 per share (diluted) as compared to net income of $1.2 million or $0.07
per share (diluted) for the comparable period in 2004.
Financial Highlights
--------------------
<<
Three Months Ended Nine Months Ended Year Ended
(millions of September 30 September 30 December 31
Cdn.$ except --------------------- -------------------- -----------
per share data) 2005 2004 2005 2004 2004
---------- ---------- ---------- --------- -----------
(unaudited) (unaudited)
Sales $ 121.8 $ 78.2 $ 342.1 $ 234.3 $ 338.7
Gross Profit 22.0 14.4 63.8 41.2 60.2
Gross Profit - % 18.0% 18.4% 18.7% 17.6% 17.8%
EBITDA(1) 8.3 3.4 24.9 10.0 15.9
EBITDA(1) as a
% of sales 6.8% 4.4% 7.3% 4.3% 4.7%
Net income $ 4.2 $ 1.2 $ 12.6 $ 3.3 $ 6.1
Per share
Basic $ 0.25 $ 0.07 $ 0.73 $ 0.19 $ 0.36
Diluted $ 0.22 $ 0.07 $ 0.68 $ 0.19 $ 0.35
Sales increased 55.7% to $121.8 million for the quarter ended September
30, 2005 as compared to $78.2 million for the quarter ended September 30,
2004. Well completions (excluding dry and service wells) were down by 2.2% to
5,273 wells completed for the three months ended September 30, 2005 compared
to 5,389 wells for the three months ended September 30, 2004. Average rig
count for the quarter ended September 30, 2005 was 538 active rigs, which
represents a 66.6% increase as compared to the quarter ended September 30,
2004. The 55.7% improvement in sales reflects strong commodity prices,
improved industry economics resulting in an increase in drilling activity,
coupled with an increase in market share for all product groups as a result of
the Company's service, sales and marketing efforts.
EBITDA(1) for the quarter ended September 30, 2005 increased 142.6% to
$8.3 million from $3.4 million for the quarter ended September 30, 2004. The
$43.6 million increase in sales resulted in an incremental flow through to
EBITDA of 11.2% and 6.9% to net income. EBITDA and net income as a percentage
of sales increased to 6.8% and 3.5%, respectively, for the quarter ended
September 30, 2005.
Net income for the nine months ended September 30, 2005 increased to
$12.6 million or $0.68 per share (diluted) as compared to $3.3 million or
$0.19 per share (diluted) for the comparable 2004 period.
"The Company's strategies have resulted in CE Franklin breaking its
previous record for annualized EPS ($0.65 per share diluted in 1997) with one
quarter still remaining," said Michael West, Chairman, President and CEO.
"This is the 3rd quarter in a row the Company has achieved record breaking
results for the comparable quarter, and the 12th quarter in a row with year
over year improvement."
Outlook
-------
Activity levels have increased in the third quarter and strong commodity
prices have supported the demand for CE Franklin's products and services in
Canada. Many industry watchers are predicting high levels of activity during
Q4 2005 as well as all of 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 ended September 30, 2005, which
is open to the public, will be held on Friday, October 28, 2005 at 11:00 a.m.
Eastern Time (9:00 a.m. Mountain Time).
Participants may join the call by dialing 1-800-814-4857 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
21156776 followed by the number sign and may be accessed until midnight
Friday, November 4, 2005.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)1254880 and
will be available on the Company's website at http://www.cefranklin.com.
Michael West, Chairman, President and Chief Executive Officer will lead
the discussion and will be accompanied by Sam Secreti, Vice President and
Chief Financial Officer. The discussion will be followed by a question and
answer period.
----------------------
(1) EBITDA represents income from continuing operations before interest,
taxes, 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 in determining
revenue and expense efficiency as it relates to increasing or decreasing
revenues. EBITDA is not intended as an alternative to income from
continuing operations or 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. A reconciliation of
EBITDA to income from continuing operations can be found in the Company's
Management's Discussion and Analysis.
Management's Discussion and Analysis as at October 27, 2005
for the Quarter Ended September 30, 2005
(All amounts shown in Canadian dollars unless otherwise specified.)
Forward Looking Statements
--------------------------
Certain statements contained in this news release constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, Section 21E of the Securities Exchange Act of 1934 and the Private
Securities Litigation Reform Act of 1995. These "forward-looking" statements
have been identified by using words such as "would", "expected", "believe" and
similar phrases and include all statements relating to planned activity, sales
levels, capital expenditures and statements concerning liquidity and capital
resources. There are numerous risks and uncertainties that can affect the
outcome and timing of such events, including many factors beyond the control
of the Company. These factors include, but are not limited to, economic
conditions, seasonality of drilling activity, the loss of a major supplier of
tubular goods, commodity prices including oil and gas, currency fluctuations
and government regulations. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove incorrect, the Company's actual
results and plans for 2005 and beyond could differ materially from those
expressed in the forward looking statements. CE Franklin Ltd. assumes no
obligation to update publicly any forward looking statements whether as a
result of new information, future events or otherwise. For a discussion of
other risk factors, which could impact CE Franklin Ltd., please review CE
Franklin' s Annual Report on Form 20-F for the year ended December 31, 2004 as
filed with the Securities and Exchange Commission.
Management's Discussion and Analysis as at October 27, 2005
For the quarter and nine months ended September 30, 2005 as compared to
the quarter and nine months ended September 30, 2004
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is provided to assist readers in
understanding CE Franklin Ltd.'s ("CE Franklin" or the "Company") financial
performance during the periods presented and significant trends that may
impact future performance of CE Franklin. This discussion should be read in
conjunction with both the Financial Statements of CE Franklin and the related
notes thereto and the Management's Discussion and Analysis included in the
Company's December 31, 2004 Annual Report.
The selected financial data presented below is presented in Canadian
dollars and in accordance with Canadian generally accepted accounting
principles, or "Canadian GAAP".
Overview
CE Franklin distributes pipe, valves, flanges, fittings, production
equipment and other general oilfield supplies to producers of oil and gas in
Canada through its 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 Canadian oil and gas
producers also have their headquarters. Deliveries of tubular products are
made directly from the field inventories of the manufacturers or from Company-
owned inventory to the well site or the site where surface line pipe will be
laid.
Results of operations
The following table summarizes CE Franklin's results of operations.
(in thousands of Cdn. dollars except per share data)
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(unaudited) (unaudited)
Statements of Operations
Sales 121,809 78,232 342,080 234,266
Gross Profit 21,977 14,390 63,804 41,189
Gross Profit - % 18.0% 18.4% 18.7% 17.6%
Other expenses (income)
Selling, general and
administrative expenses 13,853 11,011 38,966 31,236
Amortization 1,207 1,107 3,553 3,236
Interest 443 345 1,445 1,019
Other (176) (42) (104) (17)
--------- --------- --------- ---------
15,327 12,421 43,860 35,474
--------- --------- --------- ---------
Income before income taxes 6,650 1,969 19,944 5,715
Income tax expense 2,436 771 7,383 2,412
--------- --------- --------- ---------
Income from continuing operations 4,214 1,198 12,561 3,303
Loss from discontinued operations - - - (27)
--------- --------- --------- ---------
Net income 4,214 1,198 12,561 3,276
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share
Basic $ 0.25 $ 0.07 $ 0.73 $ 0.19
Diluted $ 0.22 $ 0.07 $ 0.68 $ 0.19
EBITDA(1) 8,300 3,421 24,942 9,970
EBITDA as a % of sales 6.8% 4.4% 7.3% 4.3%
Net income as a % of sales 3.5% 1.5% 3.7% 1.4%
(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 in determining revenue and expense efficiency as
it relates to increasing or decreasing revenues. EBITDA is not
intended as an alternative to income from continuing operations or
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. A reconciliation of EBITDA to income from
continuing operations can be found in the Company's Management's
Discussion and Analysis.
The following is a reconciliation of income from continuing operations to
EBITDA:
(in thousands of Cdn. dollars)
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Income from continuing operations $ 4,214 $ 1,198 $ 12,561 $ 3,303
Interest expense 443 345 1,445 1,019
Income tax expense 2,436 771 7,383 2,412
Amortization 1,207 1,107 3,553 3,236
--------- --------- --------- ---------
EBITDA $ 8,300 $ 3,421 $ 24,942 $ 9,970
--------- --------- --------- ---------
Results of Operations - For the Three and Nine Months Ended September 30,
2005
The Company's sales are dependent upon the level of oil and gas
exploration and production activity in the Western Canadian Sedimentary basin.
This activity may be influenced by large swings in oil and gas commodity
prices.
The price of oil and gas as at September 30, 2005 was U.S. $66.18 per bbl
(West Texas Intermediate) and Cdn. $10.15 per MMBTU (AECO spot) respectively.
This compares to U.S. $49.65 per bbl (West Texas Intermediate) for oil and
Cdn. $5.35 per MMBTU (AECO spot) for gas as at September 30, 2004.
The Company uses oil and gas well completions and average rig counts as
general industry activity measures. Well completions (excluding dry and
service wells) were down by 2.2% to 5,273 wells for the three months ended
September 30, 2005 compared to 5,389 wells for the three months ended
September 30, 2004. Well completions for the first nine months of 2005 were
down by 6.3% to 13,828 wells compared to 14,750 wells in the first nine months
of 2004. The average rig count increased 66.6% to 538 rigs for the three
months ended September 30, 2005 from 323 rigs in the same period last year.
Overall average rig count for the first nine months of 2005 was up by 19.1% to
424 rigs compared to 356 rigs in the first nine months of 2004. Well
completions and average rig counts typically increase in the third quarter of
each year as compared to the second quarter as spring breakup in Canada ends.
Spring breakup occurs in the second quarter as warm weather returns and the
winter's frost comes out of the ground resulting in secondary roads becoming
incapable of supporting heavy equipment until the roads have dried out.
Sales
Sales for the quarter ended September 30, 2005 increased 55.7% or
$43.6 million to $121.8 million from $78.2 million for the quarter ended
September 30, 2004. Sales for the nine months ended September 30, 2005
increased $107.8 million or 46.0% to $342.1 million compared to $234.3 million
for the nine months ended September 30, 2004. The sales increase was due to
strong commodity prices and 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 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 52.7% to $22.0 million for the quarter ended
September 30, 2005 from $14.4 million for the quarter ended September 30,
2004. Gross profit margins decreased marginally to 18.0% for the quarter ended
September 30, 2005 from 18.4% for the quarter ended September 30, 2004 due to
a large low margin line pipe sale during the quarter.
Gross profit for the first nine months of 2005 increased 54.9% to
$63.8 million from $41.2 million for the first nine months of 2004. Gross
profit margins increased to 18.7% in the first nine months of 2005 from 17.6%
in the first nine months of 2004.
The overall improvement in gross profit margins for the nine months ended
September 30, 2005 is a result of margin initiatives implemented by the
Company in 2003, which include offshore procurement, standardization of
certain product lines and a more disciplined procurement practice. The Company
did not implement price increases to customers in 2004 and 2005 over and above
price increases by the Company's suppliers as a result of the rise in steel
prices.
Selling, General and Administrative Costs (SG&A)
SG&A costs increased $2.8 million or 25.8% to $13.9 million for the
quarter ended September 30, 2005 from $11.0 million for the quarter ended
September 30, 2004. SG&A costs increased $7.7 million or 24.7% to
$39.0 million for the nine months ended September 30, 2005 compared to
$31.2 million for the nine months ended September 30, 2004. The increase in
SG&A for the three and nine months ended September 30, 2005 relates to
salaries and benefits for new employees hired to support the increase in sales
for the three and nine months ended September 30, 2005, employee performance
pay incentives and agents' commissions due to the increase in sales.
The total number of employees increased 17.5% to 362 employees as at
September 30, 2005 compared to 308 employees as at September 30, 2004. Revenue
per employee for the first three and nine months ended September 30, 2005
increased 32.5% and 24.2%, respectively, as compared to 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.
EBITDA(1)
EBITDA(1) for quarter ended September 30, 2005 increased $4.9 million or
142.6% to $8.3 million compared to $3.4 million for the quarter ended
September 30, 2004. The $43.6 million increase in sales resulted in an 11.2%
incremental flow through to EBITDA. EBITDA as a percentage of sales was 6.8%
for the quarter ended September 30, 2005 versus 4.4% for the quarter ended
September 30, 2004. EBITDA is a supplemental non-GAAP financial measure used
by management, as well as industry analysts, to evaluate operations. For a
reconciliation of income from continuing operations to EBITDA, please see page
4.
EBITDA(1) for the nine months ended September 30, 2005 increased 150.2%
to $24.9 million compared to $10.0 million for the nine months ended September
30, 2004. EBITDA as a percentage of sales increased to 7.3% for the first nine
months of 2005 compared to 4.3% for the first nine months of 2004.
Income Before Income Taxes
Income before income taxes improved $4.7 million to $6.7 million for the
quarter ended September 30, 2005 compared to $2.0 million for the quarter
ended September 30, 2004. The improvement is a result of the $7.6 million
increase in gross profit offset by the $2.8 million increase in SG&A and an
increase of $64,000 in other costs. Other costs include amortization, interest
expense and foreign exchange. The $43.6 million increase in sales for the
quarter ended September 30, 2005 resulted in a 10.7% incremental flow through
to income before income taxes.
Income before income taxes for the nine months ended September 30, 2005
was $19.9 million compared to $5.7 million for the nine months ended September
30, 2004. The improvement is a result of the $22.6 million increase in gross
profit offset by the $7.7 million increase in SG&A and an increase of $656,000
in other costs. Other costs include amortization, interest expense and foreign
exchange. The $107.8 million increase in sales for the nine months ended
September 30, 2005 resulted in a 13.2% incremental flow through to income
before income taxes.
Income Taxes
The Company's effective tax rate for the quarter ended September 30, 2005
was 36.6%, as compared to an effective tax rate of 39.2% for the quarter ended
September 30, 2004. The Company's effective tax rate for the nine months ended
September 30, 2005 was 37.0%, as compared to an effective tax rate of 42.2%
for the nine months ended September 30, 2004. The Company's combined federal
and provincial statutory tax rate for the period ended September 30, 2005 was
34.4%, compared to 34.6% for the period ended September 30, 2004. The
reduction in the effective tax rate for the three and nine months ended
September 30, 2005 is due to non-deductible items and capital and other taxes
that became a smaller component of the overall income tax charge in relation
to the increase in income before income taxes as compared to the three and
nine months ended September 30, 2004.
Income from Continuing Operations
Income from continuing operations increased to $4.2 million or $0.22 per
share (diluted) for the quarter ended September 30, 2005 as compared to
$1.2 million or $0.07 per share (diluted) for the quarter ended September 30,
2004.
Income from continuing operations increased to $12.6 million or $0.68 per
share (diluted) for the nine months ended September 30, 2005 as compared to
$3.3 million or $0.19 per share (diluted) for the nine months ended September
30, 2004.
Loss from Discontinued Operations
On March 31, 2004, the Company sold its 50% interest in its small
horsepower compression operations for cash proceeds of $961,000. No gain or
loss on disposition resulted from this transaction.
Loss from discontinued operations for the nine months ended September 30,
2004 was $27,000.
Net Income and Net Income per Share
Net income for the quarter ended September 30, 2005 was $4.2 million or
$0.22 per share (diluted) as compared to $1.2 million or $0.07 per share
(diluted) for the quarter ended September 30, 2004. This represents an income
improvement of $3.0 million or $0.15 per share (diluted). The $43.6 million
increase in sales for the quarter resulted in an incremental flow through to
net income of 6.9%.
Net income for the nine months ended September 30, 2005 was $12.6 million
or $0.68 per share (diluted) as compared to $3.3 million or $0.19 per share
(diluted) for the nine months ended September 30, 2004. This represents an
income improvement of $9.3 million or $0.49 per share (diluted). The
$107.8 million increase in sales for the first nine months of 2005 resulted in
an incremental flow through to net income of 8.6%.
Summary of Quarterly Financial Data
The selected quarterly financial data presented below is presented in
Canadian dollars.
(in thousands of Cdn. dollars except per share data)
Unaudited Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2003 2004 2004 2004 2004 2005 2005 2005
------ ------ ------ ------ ------- ------- ------ -------
Sales 72,987 89,032 67,002 78,232 104,435 128,372 91,899 121,809
Net income from
continuing
operations 1,196 1,587 518 1,198 2,839 5,804 2,543 4,214
Loss from
discontinued
operations (544) (27) - - - - - -
------ ------ ------ ------ ------- ------- ------ -------
Net income 652 1,560 518 1,198 2,839 5,804 2,543 4,214
------ ------ ------ ------ ------- ------- ------ -------
EBITDA(1) 3,485 4,148 2,401 3,421 5,958 10,745 5,897 8,300
EBITDA(1) as
a % of sales 4.8% 4.7% 3.6% 4.4% 5.7% 8.4% 6.4% 6.8%
Net income as
a % of sales 0.9% 1.8% 0.8% 1.5% 2.7% 4.5% 2.8% 3.5%
Net income
per share
Basic $ 0.03 $ 0.09 $ 0.03 $ 0.07 $ 0.17 $ 0.34 $ 0.14 $ 0.25
Diluted $ 0.03 $ 0.09 $ 0.03 $ 0.07 $ 0.16 $ 0.32 $ 0.14 $ 0.22
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 September 30, 2005 increased 32.5% to
$121.8 million from $91.9 million for the quarter ended June 30, 2005. Sales
for the quarter ended September 30, 2004 increased 16.8% to $78.2 million from
$67.0 million for the quarter ended June 30, 2004. The quarterly increase in
sales reflects the overall increase in market activity due to conclusion of
spring breakup as described above.
Net income was $4.2 million or $0.22 per share (diluted) for the quarter
ended September 30, 2005 compared to $2.5 million or $0.14 per share (diluted)
for the quarter ended June 30, 2005. The increase in net income is due to the
increase in sales that is typical for the third quarter due to the weather
conditions described above. Excluding the second quarter where activity levels
are affected by weather conditions, the Company's level of sales and net
earnings have increased since Q4 of 2003. Although activity levels have
increased, the Company's sales have outpaced the increase in activity levels
reflecting an increase in market share for all products.
Liquidity and Capital Resources
For the three months ended September 30, 2005, the Company generated
$5.5 million in cash from operating activities, before net change in non-cash
working capital balances, and $777,000 in the issuance of capital stock from
the exercise of employee stock options. This was offset by a $7.7 million
increase in working capital (excluding the bank operating loan), a $168,000
investment in capital and other expenditures and $79,000 in cash used to repay
capital leases. These activities resulted in a $1.7 million increase in the
bank operating loan.
For the nine months ended September 30, 2005 the Company generated
$15.2 million in cash from operating activities, before net change in non-cash
working capital balances, and $1.0 million in the issuance of capital stock
from the exercise of employee stock options. This was offset by an
$18.8 million increase in working capital (excluding the bank operating loan),
a $286,000 investment in capital and other expenditures and $205,000 in cash
used to repay capital leases. These activities resulted in a $3.1 million
increase in the bank operating loan. Cash generated from operating activities
was reinvested back into accounts receivable and inventory, net of accounts
payable for the nine months ended September 30, 2005.
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 $5.5 million for the quarter ended September 30, 2005, and
$15.2 million for the nine months ended September 30, 2005. This is an
improvement of $3.0 million and $8.5 million respectively compared to the same
periods in 2004. The improvement reflects improvement in profitability of the
Company due to the increase in the level of exploration and production
activity in the western Canadian sedimentary basin, increased market share and
gross profit margin improvement.
For the quarter ended September 30, 2005 accounts receivable increased
$19.4 million or 32.1% to $79.9 million from $60.5 million as at June 30,
2005. For the nine months ended September 30, 2005 accounts receivable
increased $13.4 million or 20.1% to $79.9 million from $66.6 million as at
December 31, 2004.
Average Days Sales Outstanding (DSO) was 49.4 days for the quarter ended
September 30, 2005 and 52.2 days in the first nine months of 2005 as compared
to 53.0 days for the quarter ended September 30, 2004 and 53.5 days for the
first nine months of 2004. Accounts receivable greater than 90 days old were
0.8% of accounts receivable as at September 30, 2005 versus 2.7% as at
September 30, 2004 and 3.8% as at June 30, 2005. Trade accounts receivables
are tightly managed by the Company with daily calls to customers to solve
payment issues. In addition, the Company's accounts receivable team works
closely with customers to help simplify payment and approval processes.
Total inventory for the Company increased 4.8% to $79.5 million as at
September 30, 2005 as compared to $75.9 million as at June 30, 2005. Total
inventory for the nine months ended September 30, 2005 increased $15.2 million
or 23.6% to $79.5 million from $64.3 million as at December 31, 2004. The
Company has increased its investment in offshore tubular products due to long
lead times and steel shortages in order to accommodate activity levels for the
remainder of 2005 and the first quarter of 2006.
The Company measures inventory efficiency by using an inventory turns
calculation. Inventory turned 5.1 times (annualized) in the third quarter of
2005 and 5.2 times (annualized) in the first nine months of 2005, compared to
4.5 times (annualized) in the third quarter of 2004 and 4.7 times (annualized)
in the first nine months of 2004 and 4.9 times for the year ended December 31,
2004. CE Franklin targets inventory turns of 5.0 times (annualized).
Accounts payable and accrued liabilities have increased $11.6 million to
$67.9 million as at September 30, 2005 as compared to $56.3 million as at June
30, 2005. The increase reflects an overall increase in inventory purchases
during the third quarter.
Property and equipment decreased 38.7% to $3.7 million from $6.1 million
at December 31, 2004. This decrease reflects amortization expense of
$3.5 million offset by capital expenditures of $286,000 and $862,000 in
additions to rental equipment assets and capital leases.
The Company finances accounts receivable, inventories, bank overdraft,
accounts payable, accrued liabilities and income taxes payable with its demand
bank operating loan. The demand bank operating loan increased $1.7 million to
$29.2 million at September 30, 2005 from $27.5 million at June 30, 2005 and
increased $3.0 million from $26.1 million at December 31, 2004.
As at September 30, 2005 the Company's total capitalization (financed
debt plus equity) was comprised of debt of 30.5% and equity of 69.5%.
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%, and is payable on demand.
The Company's borrowing capacity under its demand bank operating loan is
dependent on maintaining compliance with certain financial covenants and a
borrowing base formula applied to accounts receivable and inventories. As at
September 30, 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.
Contractual Obligations
There have been no material changes in any contractual obligations since
the year ended December 31, 2004.
Off-Balance Sheet Arrangements
The Company has not engaged in off-balance sheet financing arrangements.
Related party transactions
Messrs. Douglas L. Rock and John L. Kennedy, directors of the Company,
are directors or officers of, or otherwise interested in, Smith International
Inc. ("Smith"), which owns 55% of the Company's outstanding common shares. The
Company is the exclusive distributor of bottom hole pump production equipment
manufactured by a subsidiary of Wilson International, Inc. ("Wilson"), a
wholly owned subsidiary of its principal shareholder, Smith. The transactions
with Wilson are in the normal course of business and at commercial rates.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from changes in interest rates and
foreign exchange rates. The Company will, from time to time, enter into
foreign currency forward exchange contracts with financial institutions to fix
the value of liabilities on future commitments. These foreign currency
exchange contracts are not designated as hedges for accounting purposes. The
value of the contract is marked to market and the change in value is
recognized in the Company's Statements of Operations. The Company entered into
such contracts in 2005, the impact of which was not material. As at September
30, 2005 there was an outstanding contract for $2.3 million.
The Company has exposure to interest rate fluctuations on its demand bank
operating loan. The Company has, in the past, entered into interest rate
contracts to hedge its interest rate risk associated with the demand bank
operating loan. No such contracts were in place for 2005 or 2004. The Company
does not use financial instruments for speculative purposes.
As at September 30, 2005 there were no unrecognized gains or losses
associated with the above instruments.
Critical Accounting Estimates
There have been no material changes in critical accounting estimates
since the year ended December 31, 2004.
Change in Accounting Policies
There have been no changes in critical accounting policies since the year
ended December 31, 2004.
Other Items
The Company's Form 20-F is available on SEDAR (at) www.sedar.com.
CE Franklin has authorized an unlimited number of common shares with no
par value. As at September 30, 2005 the Company had 17,430,499 common shares
outstanding.
The Board of Directors may grant options to purchase up to 2,240,925
common shares, with 298,413 future options remaining available to grant. As at
September 30, 2005 options to purchase 1,669,092 common shares were
outstanding at an average exercise price of $3.68 per common share.
Forward-Looking Statements
Certain statements contained in this MD&A constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
Section 21E of the Securities Exchange Act of 1934 and the Private Securities
Litigation Reform act of 1995. All statements, other than statements of
historical facts, that address activities, events, outcomes and other matters
that CE Franklin plans, expects, intends, assumes, believes, budgets,
predicts, forecasts, projects, estimates or anticipates (and other similar
expressions) will, should or may occur in the future are forward-looking
statements. These forward-looking statements are based on management's current
belief, based on currently available information, as to the outcome and timing
of future events. When considering forward-looking statements, you should keep
in mind the risk factors and other cautionary statements in this MD&A,
including those found under the caption "Risk and Uncertainties".
Forward-looking statements appear in a number of places and include
statements with respect to, among other things:
- the continued efficacy of the Company's enterprise systems;
- the anticipated drilling activity levels;
- the planned amounts outstanding under the Company's bank operating
loan;
- planned capital expenditures and working capital and availability of
capital resources to fund capital expenditures and working capital;
- the Company's future financial condition or results of operations and
future revenues and expenses;
- the Company's future gross profit and net profit margins;
- the Company's business strategy and other plans and objectives for
future operations;
- fluctuations in worldwide prices and demand for oil and gas;
- fluctuations in levels of gas and oil exploration and development
activities; and
- fluctuations in the demand for the Company's products and services.
We caution you that these forward-looking statements are subject to risks
and uncertainties, many of which are beyond CE Franklin's control. These risks
include, but are not limited to, economic conditions, seasonality of drilling
activity, commodity price volatility for oil and gas, currency fluctuations,
inflation, regulatory changes and the other risks described under the caption
"Risk and Uncertainties".
Should one or more of the risks or uncertainties described above or
elsewhere in this MD&A occur, or should underlying assumptions prove
incorrect, the Company's actual results and plans could differ materially from
those expressed in any forward-looking statements.
All forward-looking statements expressed or implied, included in this
MD&A and attributable to CE Franklin are qualified in their entirety by this
cautionary statement. This cautionary statement should also be considered in
connection with any subsequent written or oral forward-looking statements that
CE Franklin or persons acting on its behalf might issue. CE Franklin does not
undertake any obligation to update any forward-looking statements to reflect
events or circumstances after the date of filing this MD&A with the Securities
and Exchange Commission, except as required by law.
Risk and Uncertainties
CE Franklin's financial performance may be influenced favorably or
adversely by certain external factors as described below.
Fluctuations in oil and gas prices could affect the demand for CE
Franklin's products and services and, therefore, CE Franklin's sales, cash
flows and profitability. CE Franklin's operations are materially dependent
upon the level of activity in oil and gas exploration and production. Both
short-term and long-term trends in oil and gas prices affect the level of such
activity. Oil and gas prices and, therefore, the level of drilling,
exploration and production activity can be volatile. Factors that can cause
price fluctuations include:
- relatively minor changes in the worldwide supply of and demand for oil
and natural gas;
- the ability of the members of the Organization of Petroleum Exporting
Countries ("OPEC") to maintain price stability through voluntary
production limits;
- the level of production by non-OPEC countries;
- North American demand for gas;
- general economic and political conditions; and
- the presence or absence of drilling incentives such as Canadian
provincial royalty holidays, fluctuation in the value of the Canadian
dollar, availability of new leases and concessions and government
regulations regarding, among other things, export controls,
environmental protection, taxation, price controls and product
allocation.
Worldwide military, political and economic events, including initiatives
by OPEC, affect both the demand for, and the supply of, oil and gas.
Fluctuations during the last few years in the demand and supply of oil and gas
have contributed to, and are likely to continue to contribute to, price
volatility. CE Franklin believes that any prolonged reduction in oil and gas
prices would depress the level of exploration and production activity. This
would likely result in a corresponding decline in the demand for CE Franklin's
products and services and could have a material adverse effect on CE
Franklin's sales, cash flows and profitability. There can be no assurances as
to the future level of demand for CE Franklin's products and services or
future conditions in the oil and gas and oilfield supply industries.
Adverse weather conditions could temporarily decrease the demand for CE
Franklin's products and services. CE Franklin's financial performance is tied
closely to the seasonality of drilling activity. Higher drilling activity in
Canada is generally experienced in the winter months. In the spring and early
summer, drilling activity slows due to the difficulty in moving equipment
during the spring thaws. To the extent that unseasonable weather conditions
such as excessive rain or unusually warm winters affect the ability of CE
Franklin's customers to access their oil and gas wells, then the demand for CE
Franklin's products and services would temporarily decrease and the Company's
sales, cash flows and profitability would be adversely affected.
CE Franklin operates in a highly competitive industry, which may
adversely affect CE Franklin's sales, cash flows and profitability. The
Canadian oilfield supply industry in which CE Franklin operates is very
competitive. The Company believes that its future profitability is partially
influenced by competitive factors beyond its control, including:
- the ability of some customers to purchase oilfield supplies and
tubular products directly from the manufacturer rather than from
independent oilfield supply distributors and brokers;
- the ability for new brokers and distributors to enter the tubular
supply business and the general supply business if the oil and gas
industry were to experience significant growth in drilling activity;
- price competition among major supply companies;
- cost of goods being subject to raw material shortages such as steel
and the inability of CE Franklin to pass these price increases on to
customers.
CE Franklin and its largest competitors generally operate at low profit
margins due to price competition. Price competition is due in part to consumer
price pressure, in addition to the major supply companies competing for the
same business.
The loss of CE Franklin's major supplier for its tubular products could
adversely affect the Company's sales and gross profit. A portion of CE
Franklin's business is the sale of tubular products that are primarily
obtained from one supplier. Although the Company believes that it has
historically had and continues to have a good relationship with its supplier,
there can be no assurance that such relationship will continue. In the event
the Company is unable to source tubular products from its existing supplier,
then CE Franklin would need to search for an alternate supplier of these
goods.
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%, and is payable on demand.
The Company's borrowing capacity under its demand bank operating loan is
dependent on maintaining compliance with certain financial covenants and a
borrowing base formula applied to accounts receivable and inventories. As at
September 30, 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.
Contractual Obligations
There have been no material changes in any contractual obligations since
the year ended December 31, 2004.
Off-Balance Sheet Arrangements
The Company has not engaged in off-balance sheet financing arrangements.
Related party transactions
Messrs. Douglas L. Rock and John L. Kennedy, directors of the Company,
are directors or officers of, or otherwise interested in, Smith International
Inc. ("Smith"), which owns 55% of the Company's outstanding common shares. The
Company is the exclusive distributor of bottom hole pump production equipment
manufactured by a subsidiary of Wilson International, Inc. ("Wilson"), a
wholly owned subsidiary of its principal shareholder, Smith. The transactions
with Wilson are in the normal course of business and at commercial rates.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from changes in interest rates and
foreign exchange rates. The Company will, from time to time, enter into
foreign currency forward exchange contracts with financial institutions to fix
the value of liabilities on future commitments. These foreign currency
exchange contracts are not designated as hedges for accounting purposes. The
value of the contract is marked to market and the change in value is
recognized in the Company's Statements of Operations. The Company entered into
such contracts in 2005, the impact of which was not material. As at September
30, 2005 there was an outstanding contract for $2.3 million.
The Company has exposure to interest rate fluctuations on its demand bank
operating loan. The Company has, in the past, entered into interest rate
contracts to hedge its interest rate risk associated with the demand bank
operating loan. No such contracts were in place for 2005 or 2004. The Company
does not use financial instruments for speculative purposes.
As at September 30, 2005 there were no unrecognized gains or losses
associated with the above instruments.
Critical Accounting Estimates
There have been no material changes in critical accounting estimates
since the year ended December 31, 2004.
Change in Accounting Policies
There have been no changes in critical accounting policies since the year
ended December 31, 2004.
Other Items
The Company's Form 20-F is available on SEDAR (at) www.sedar.com.
CE Franklin has authorized an unlimited number of common shares with no
par value. As at September 30, 2005 the Company had 17,430,499 common shares
outstanding.
The Board of Directors may grant options to purchase up to 2,240,925
common shares, with 298,413 future options remaining available to grant. As at
September 30, 2005 options to purchase 1,669,092 common shares were
outstanding at an average exercise price of $3.68 per common share.
Forward-Looking Statements
Certain statements contained in this MD&A constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
Section 21E of the Securities Exchange Act of 1934 and the Private Securities
Litigation Reform act of 1995. All statements, other than statements of
historical facts, that address activities, events, outcomes and other matters
that CE Franklin plans, expects, intends, assumes, believes, budgets,
predicts, forecasts, projects, estimates or anticipates (and other similar
expressions) will, should or may occur in the future are forward-looking
statements. These forward-looking statements are based on management's current
belief, based on currently available information, as to the outcome and timing
of future events. When considering forward-looking statements, you should keep
in mind the risk factors and other cautionary statements in this MD&A,
including those found under the caption "Risk and Uncertainties".
Forward-looking statements appear in a number of places and include
statements with respect to, among other things:
- the continued efficacy of the Company's enterprise systems;
- the anticipated drilling activity levels;
- the planned amounts outstanding under the Company's bank operating
loan;
- planned capital expenditures and working capital and availability of
capital resources to fund capital expenditures and working capital;
- the Company's future financial condition or results of operations and
future revenues and expenses;
- the Company's future gross profit and net profit margins;
- the Company's business strategy and other plans and objectives for
future operations;
- fluctuations in worldwide prices and demand for oil and gas;
- fluctuations in levels of gas and oil exploration and development
activities; and
- fluctuations in the demand for the Company's products and services.
We caution you that these forward-looking statements are subject to risks
and uncertainties, many of which are beyond CE Franklin's control. These risks
include, but are not limited to, economic conditions, seasonality of drilling
activity, commodity price volatility for oil and gas, currency fluctuations,
inflation, regulatory changes and the other risks described under the caption
"Risk and Uncertainties".
Should one or more of the risks or uncertainties described above or
elsewhere in this MD&A occur, or should underlying assumptions prove
incorrect, the Company's actual results and plans could differ materially from
those expressed in any forward-looking statements.
All forward-looking statements expressed or implied, included in this
MD&A and attributable to CE Franklin are qualified in their entirety by this
cautionary statement. This cautionary statement should also be considered in
connection with any subsequent written or oral forward-looking statements that
CE Franklin or persons acting on its behalf might issue. CE Franklin does not
undertake any obligation to update any forward-looking statements to reflect
events or circumstances after the date of filing this MD&A with the Securities
and Exchange Commission, except as required by law.
Risk and Uncertainties
CE Franklin's financial performance may be influenced favorably or
adversely by certain external factors as described below.
Fluctuations in oil and gas prices could affect the demand for CE
Franklin's products and services and, therefore, CE Franklin's sales, cash
flows and profitability. CE Franklin's operations are materially dependent
upon the level of activity in oil and gas exploration and production. Both
short-term and long-term trends in oil and gas prices affect the level of such
activity. Oil and gas prices and, therefore, the level of drilling,
exploration and production activity can be volatile. Factors that can cause
price fluctuations include:
- relatively minor changes in the worldwide supply of and demand for oil
and natural gas;
- the ability of the members of the Organization of Petroleum Exporting
Countries ("OPEC") to maintain price stability through voluntary
production limits;
- the level of production by non-OPEC countries;
- North American demand for gas;
- general economic and political conditions; and
- the presence or absence of drilling incentives such as Canadian
provincial royalty holidays, fluctuation in the value of the Canadian
dollar, availability of new leases and concessions and government
regulations regarding, among other things, export controls,
environmental protection, taxation, price controls and product
allocation.
Worldwide military, political and economic events, including initiatives
by OPEC, affect both the demand for, and the supply of, oil and gas.
Fluctuations during the last few years in the demand and supply of oil and gas
have contributed to, and are likely to continue to contribute to, price
volatility. CE Franklin believes that any prolonged reduction in oil and gas
prices would depress the level of exploration and production activity. This
would likely result in a corresponding decline in the demand for CE Franklin's
products and services and could have a material adverse effect on CE
Franklin's sales, cash flows and profitability. There can be no assurances as
to the future level of demand for CE Franklin's products and services or
future conditions in the oil and gas and oilfield supply industries.
Adverse weather conditions could temporarily decrease the demand for CE
Franklin's products and services. CE Franklin's financial performance is tied
closely to the seasonality of drilling activity. Higher drilling activity in
Canada is generally experienced in the winter months. In the spring and early
summer, drilling activity slows due to the difficulty in moving equipment
during the spring thaws. To the extent that unseasonable weather conditions
such as excessive rain or unusually warm winters affect the ability of CE
Franklin's customers to access their oil and gas wells, then the demand for CE
Franklin's products and services would temporarily decrease and the Company's
sales, cash flows and profitability would be adversely affected.
CE Franklin operates in a highly competitive industry, which may
adversely affect CE Franklin's sales, cash flows and profitability. The
Canadian oilfield supply industry in which CE Franklin operates is very
competitive. The Company believes that its future profitability is partially
influenced by competitive factors beyond its control, including:
- the ability of some customers to purchase oilfield supplies and
tubular products directly from the manufacturer rather than from
independent oilfield supply distributors and brokers;
- the ability for new brokers and distributors to enter the tubular
supply business and the general supply business if the oil and gas
industry were to experience significant growth in drilling activity;
- price competition among major supply companies;
- cost of goods being subject to raw material shortages such as steel
and the inability of CE Franklin to pass these price increases on to
customers.
CE Franklin and its largest competitors generally operate at low profit
margins due to price competition. Price competition is due in part to consumer
price pressure, in addition to the major supply companies competing for the
same business.
The loss of CE Franklin's major supplier for its tubular products could
adversely affect the Company's sales and gross profit. A portion of CE
Franklin's business is the sale of tubular products that are primarily
obtained from one supplier. Although the Company believes that it has
historically had and continues to have a good relationship with its supplier,
there can be no assurance that such relationship will continue. In the event
the Company is unable to source tubular products from its existing supplier,
then CE Franklin would need to search for an alternate supplier of these
goods.
CE Franklin Ltd.
Interim Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
(in thousands of ----------------------- -----------------------
Canadian dollars, September September September September
except per share 30 30 30 30
data) 2005 2004 2005 2004
-------------------------------------------------------------------------
Sales 121,809 78,232 342,080 234,266
Cost of sales 99,832 63,842 278,276 193,077
-------------------------------------------------------------------------
Gross profit 21,977 14,390 63,804 41,189
-------------------------------------------------------------------------
Other expenses (income)
Selling, general and
administrative expenses 13,853 11,011 38,966 31,236
Amortization 1,207 1,107 3,553 3,236
Interest expense 443 345 1,445 1,019
Foreign exchange gain (167) (41) (95) (7)
Other income (9) (1) (9) (10)
-------------------------------------------------------------------------
15,327 12,421 43,860 35,474
-------------------------------------------------------------------------
Income before income taxes 6,650 1,969 19,944 5,715
-------------------------------------------------------------------------
Income tax expense
(recovery) (note 4)
Current 2,643 931 8,888 2,961
Future (207) (160) (1,505) (549)
-------------------------------------------------------------------------
2,436 771 7,383 2,412
-------------------------------------------------------------------------
Income from continuing
operations 4,214 1,198 12,561 3,303
Loss from discontinued
operations (note 2) - - - (27)
-------------------------------------------------------------------------
Net income for
the period 4,214 1,198 12,561 3,276
-------------------------------------------------------------------------
Net income per share
(note 3)
Basic 0.25 0.07 0.73 0.19
Diluted 0.22 0.07 0.68 0.19
Weighted average number
of shares outstanding
Basic 17,328,175 17,191,397 17,256,201 17,185,532
Diluted 18,439,928 17,554,562 18,439,928 17,554,562
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Balance Sheets
(Unaudited)
September December
30 31
(in thousands of Canadian dollars) 2005 2004
-------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable 79,940 66,573
Inventories 79,453 64,282
Other 2,990 552
-------------------------------------------------------------------------
162,383 131,407
Property and equipment 3,737 6,097
Goodwill 7,765 7,765
Future income taxes (note 4) 893 -
Other 195 240
-------------------------------------------------------------------------
174,973 145,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank overdraft 3,434 5,270
Bank operating loan 29,162 26,140
Accounts payable 33,160 29,381
Accrued liabilities 34,755 26,136
Income taxes payable 5,676 3,074
Current portion of obligations under capital lease 200 204
-------------------------------------------------------------------------
106,387 90,205
Obligations under capital lease 478 626
Future income taxes (note 4) - 612
-------------------------------------------------------------------------
106,865 91,443
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 20,431 19,335
Contributed surplus 14,243 13,858
Retained earnings 33,434 20,873
-------------------------------------------------------------------------
68,108 54,066
-------------------------------------------------------------------------
174,973 145,509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Statements of Cash Flows
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- -----------------------
September September September September
(in thousands of 30 30 30 30
Canadian dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
Cash flows from operating
activities
Income from continuing
operations 4,214 1,198 12,561 3,303
Items not affecting cash -
Amortization 1,207 1,107 3,553 3,236
Gain on disposal of
property and equipment (9) (1) (9) (5)
Future income tax
recovery (207) (160) (1,505) (549)
Increase in inventory
write-downs 135 291 126 522
Stock option expense 146 64 439 192
-------------------------------------------------------------------------
5,486 2,499 15,165 6,699
Net change in non-cash
working capital balances
related to operations -
Accounts receivable (19,435) (10,966) (13,367) (9,181)
Inventories (4,099) 970 (16,127) (9,200)
Other current assets (143) 266 (2,438) (158)
Accounts payable (1,548) (2,725) 3,779 (9,119)
Accrued liabilities 3,115 5,542 8,619 5,939
Income taxes payable 1,309 511 2,602 1,519
-------------------------------------------------------------------------
Net cash flow from
continuing operations (5,315) (3,903) (1,767) (13,501)
Net cash flow from
discontinued operations
(note 2) - - - (26)
-------------------------------------------------------------------------
(5,315) (3,903) (1,767) (13,527)
-------------------------------------------------------------------------
Cash flows from financing
activities
Issuance of capital stock 777 12 1,042 63
Increase (decrease) in
bank operating loan 1,692 (3,956) 3,022 3,080
Increase (decrease) in
bank overdraft 3,063 5,492 (1,836) 5,492
Decrease in obligations
under capital lease (79) (87) (205) (296)
-------------------------------------------------------------------------
5,453 1,461 2,023 8,339
-------------------------------------------------------------------------
Cash flows from investing
activities
Purchase of property
and equipment (168) (262) (286) (701)
Proceeds on disposal of
property and equipment 30 18 30 49
Proceeds on sale of
compression operations
(note 2) - - - 961
-------------------------------------------------------------------------
Net cash flow from
continuing operations (138) (244) (256) 309
Net cash flow from
discontinued operations
(note 2) - - - (2)
-------------------------------------------------------------------------
(138) (244) (256) 307
-------------------------------------------------------------------------
Change in cash and cash
equivalents during the
period - (2,686) - (4,881)
Cash and cash equivalents
- Beginning of period - 2,686 - 4,881
-------------------------------------------------------------------------
Cash and cash equivalents
- End of period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash paid during the
period for:
Interest on bank
operating loan 430 327 1,410 1,004
Interest on obligations
under capital lease 13 18 35 29
Income taxes 1,335 420 6,286 2,818
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Statements of Changes in Shareholders' Equity
(Unaudited)
(in thousands
of Canadian Capital Stock
dollars, -------------------- Share-
except share Number of Contributed Retained holders'
amounts) Shares $ surplus earnings equity
-------------------------------------------------------------------------
Balance -
December 31,
2003 17,178,696 19,268 13,602 14,758 47,628
Stock options
exercised 15,236 63 - - 63
Stock options
granted - - 192 - 192
Net income - - - 3,276 3,276
-------------------------------------------------------------------------
Balance -
September 30,
2004 17,193,932 19,331 13,794 18,034 51,159
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance -
December 31,
2004 17,194,934 19,335 13,858 20,873 54,066
Stock options
exercised 235,565 1,096 (54) - 1,042
Stock options
granted - - 439 - 439
Net income - - - 12,561 12,561
-------------------------------------------------------------------------
Balance -
September 30,
2005 17,430,499 20,431 14,243 33,434 68,108
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 September 30, 2005 the Company had 17,430,499 common shares
outstanding and 1,669,092 options to acquire common shares at a weighted
average exercise price of $3.68 per common share. 788,299 of those
options were vested and exercisable at a weighted average exercise price
of $3.64 per common share.
Effective January 1, 2003, the Company adopted prospectively, the fair
value method of accounting for common share options granted. Under this
method, the Company recognizes compensation expense based on the fair
value of the options on the date of grant which is determined by using
the Black-Scholes options-pricing model. The fair value of the options is
recognized over the vesting period of the options granted as compensation
expense and contributed surplus. The contributed surplus balance is
reduced as options are exercised and the amount initially recorded for
the options in contributed surplus is credited to capital stock.
413,745 common share options were granted in the first quarter of 2005.
There were no common share options granted in the second or third
quarters. The fair value of the common share options granted in the first
quarter was $1,003,900. The fair value of common share options granted is
estimated as at the grant date using the Black-Scholes option pricing
model, using the following assumptions:
Dividend yield nil
Risk-free interest rate 4.50%
Expected life 5 years
Expected volatility 65%
The compensation expense recorded in the third quarter of 2005 and in the
nine month period ended September 30, 2005 for common share options
granted subsequent to December 31, 2002 was $146,000 and $439,000
respectively. The compensation expense recorded for the quarter and the
nine month period ended September 30, 2004 was $64,000 and $192,000
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 nine month period ended September 30, 2005 would have
decreased by $128,000 ($0.01 per common share) and $384,000 ($0.02 per
common share) respectively. The net income for the quarter and nine month
period ended September 30, 2004 would have decreased by $200,000 ($0.01
per common share) and $598,000 ($0.03 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 Nine Months Ended
----------------------------- -----------------------------
September September September September
30 30 30 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Income before
income taxes 6,650 1,969 19,944 5,715
-------------------------------------------------------------------------
Incomes taxes
calculated
at expected
rates 2,285 34.4% 680 34.6% 6,853 34.4% 1,975 34.6%
Non-deductible
items 97 1.5% 67 3.4% 550 2.7% 202 3.5%
Capital and
large
corporations
taxes 17 0.2% 18 0.9% 42 0.2% 87 1.5%
Other 37 0.5% 6 0.3% (62) -0.3% 148 2.6%
-------------------------------------------------------------------------
2,436 36.6% 771 39.2% 7,383 37.0% 2,412 42.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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:
September December
30 31
2005 2004
-------------------------------------------------------------------------
Assets
Financing and investment charges 915 109
Property and equipment 376 -
Other 151 135
-------------------------------------------------------------------------
1,442 244
-------------------------------------------------------------------------
Liabilities
Property and equipment - 303
Goodwill 549 553
-------------------------------------------------------------------------
549 856
-------------------------------------------------------------------------
Net future income tax asset (liability) 893 (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.
>>
