CALGARY, July 31 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced a
50% increase in earnings per share for the second quarter ended June 30, 2006.
CE Franklin reported net income of $3.9 million or $0.21 per share
(diluted) for the second quarter ended June 30, 2006 as compared to net income
of $2.5 million or $0.14 per share (diluted) for the quarter ended
June 30, 2005.
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Financial Highlights
--------------------
Three Months Ended Six Months Ended Year Ended
June 30 June 30 December 31
------------------ ---------------- -----------
(millions of Cdn.$
except per share data) 2006 2005 2006 2005 2005
------- ------- ------- ------ -------
(unaudited) (unaudited)
Sales $115.5 $ 91.9 $291.8 $220.3 $482.4
Gross Profit 22.5 18.2 54.7 41.8 91.3
Gross Profit - % 19.5% 19.8% 18.7% 19.0% 18.9%
EBITDA(1) 7.0 5.9 22.1 16.6 36.0
EBITDA(1) as a
% of sales 6.1% 6.4% 7.6% 7.6% 7.5%
Net income $ 3.9 $ 2.5 $ 12.8 $ 8.3 $ 18.9
Per share
Basic (Cdn. $) $ 0.21 $ 0.14 $ 0.7 $ 0.48 $ 1.09
Diluted (Cdn. $) $ 0.21 $ 0.14 $ 0.68 $ 0.46 $ 1.01
>>
Sales increased 25.6% to $115.5 million for the quarter ended
June 30, 2006 as compared to $91.9 million for the quarter ended June 30,
2005. The 25.6% improvement in sales reflects strong commodity prices and
improved industry economics resulting in an increase in spending by existing
and new customers. Key industry statistics include well completions and rig
counts. Well completions (excluding dry and service wells) were up 20.1% to
4,639 wells for the three months ended June 30, 2006 compared to 3,864 for the
three months ended June 30, 2005. Average rig count for the quarter ended
June 30, 2006 increased by 28.4% to 312 rigs compared to 243 rigs for the
quarter ended June 30, 2005.
Average rig count decreased 54.7% during the second quarter of 2006 as
compared to the first quarter of 2006. The second quarter brings spring
breakup in Canada as warm weather returns and the winter's frost comes out of
the ground resulting in secondary roads becoming incapable of supporting heavy
equipment until the roads have dried out. As a result activity levels decline
during the second quarter as compared to the first quarter. Sales for the
quarter ended June 30, 2006 dropped by 34.5% as compared to the quarter ended
March 31, 2006 due to the factors associated with spring breakup.
EBITDA(1) for the quarter ended June 30, 2006 increased 19.1% to
$7.0 million from $5.9 million for the quarter ended June 30, 2005. The
$23.6 million increase in sales resulted in an incremental flow through to
EBITDA of 4.8% and 5.8% to net income.
"A benchmark of success for oilfield service companies is to be
profitable during spring breakup when activity levels drop of significantly,"
said Michael West, Chairman, President and CEO. This is the third year in a
row we have been profitable during breakup."
Outlook
-------
With the conclusion of spring breakup activity levels are expected to
increase, and continued strong commodity prices are expected to support the
demand for CE Franklin's products and services in Canada. Although industry
activity levels are difficult to forecast with certainty, many industry
watchers are predicting high levels of activity through the third and fourth
quarters 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 outperform market activity.
Conference Call and Webcast Information
---------------------------------------
A conference call to review the quarter ended June 30, 2006, which is
open to the public, will be held on Tuesday, August 1, 2006 at 11:00 a.m.
Eastern Time (9:00 a.m. Mountain Time).
Participants may join the call by dialing 1-800-796-7558 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
21194648 followed by the number sign. and may be accessed until midnight
Tuesday, August 8, 2006.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)1519760 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 Randy Henderson, Vice President and
Chief Financial Officer. The discussion will be followed by a question and
answer period. The call is scheduled for a maximum of 45 minutes.
<<
-----------------------------------
(1) EBITDA represents net income before interest, taxes, depreciation
and amortization. EBITDA is a supplemental non-GAAP financial
measure used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented, represents
a useful means of assessing the performance of the Company's ongoing
operating activities, as it reflects the Company's earnings trends
without showing the impact of certain charges. The Company is also
presenting EBITDA, incremental flow through to EBITDA and EBITDA as a
percentage of sales because it is used by management as a
supplemental measure of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and amortization
expenses. Interest expense is a necessary component of the Company's
expenses because the Company borrows money to finance its working
capital and capital expenditures. Income tax expense is a necessary
component of the Company's expenses because the Company is required
to pay cash income taxes. Amortization expense is a necessary
component of the Company's expenses because the Company uses property
and equipment to generate sales. Management compensates for these
limitations to the use of EBITDA by using EBITDA as only a
supplementary measure of profitability. EBITDA is not used by
management as an alternative to net income as an indicator of the
Company's operating performance, as an alternative to any other
measure of performance in conformity with generally accepted
accounting principles or as an alternative to cash flow from
operating activities as a measure of liquidity. Not all companies
calculate EBITDA in the same manner and EBITDA does not have a
standardized meaning prescribed by GAAP. Accordingly, EBITDA, as the
term is used herein, is unlikely to be comparable to EBITDA as
reported by other entities. See page 5 for a reconciliation of net
income to EBITDA.
>>
Forward-Looking Statements
--------------------------
The information in this MD&A contains "forward-looking statements" within
the meaning of securities legislation including Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All
statements, other than statements of historical facts, that address
activities, events, outcomes and other matters that CE Franklin plans,
expects, intends, assumes, believes, budgets, predicts, forecasts, projects,
estimates or anticipates (and other similar expressions) will, should or may
occur in the future are forward-looking statements. These forward-looking
statements are based on management's current belief, based on currently
available information, as to the outcome and timing of future events. When
considering forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this MD&A and those found under the
caption "Risk Factors".
Additional information on these and other factors that could affect the
Company's operations or financial results are included in reports on file with
Canadian securities regulatory authorities and may be accessed through the
SEDAR website (www.sedar.com) or the Company's website (www.cefranklin.com).
For a discussion of other risk factors, which could impact CE Franklin Ltd.,
please review CE Franklin's Annual Report on Form 20-F for the year ended
December 31, 2005 as filed with the Securities and Exchange Commission.
Forward-looking statements appear in a number of places and include
statements with respect to, among other things:
<<
- the forecasted continuation of high activity levels through the third
and fourth quarters of 2006;
- 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 estimate of Sarbanes Oxley section 404 compliance costs
in 2006;
- the Company's business strategy and other plans and objectives for
future operations;
- fluctuations in worldwide prices and demand for oil and gas;
- fluctuations in levels of gas and oil exploration and development
activities; and
- fluctuations in the demand for the Company's products and services.
>>
We caution you that these forward-looking statements are subject to risks
and uncertainties, many of which are beyond CE Franklin's control. These risks
include, but are not limited to, economic conditions, seasonality of drilling
activity, commodity price volatility for oil and gas, currency fluctuations,
inflation, regulatory changes and the other risks described under the caption
"Risk Factors".
Should one or more of the risks or uncertainties described above or
elsewhere in this MD&A occur, or should underlying assumptions prove
incorrect, the Company's actual results and plans could differ materially from
those expressed in any forward-looking statements.
All forward-looking statements expressed or implied, included in this
MD&A and attributable to CE Franklin are qualified in their entirety by this
cautionary statement. This cautionary statement should also be considered in
connection with any subsequent written or oral forward-looking statements that
CE Franklin or persons acting on its behalf might issue. CE Franklin does not
undertake any obligation to update any forward-looking statements to reflect
events or circumstances after the date of filing this MD&A with the Securities
and Exchange Commission, except as required by law.
Management's Discussion and Analysis as at July 31, 2006
For the quarter and six months ended June 30, 2006 as compared to the
quarter and six months ended June 30, 2005
(All amounts shown in CDN $ unless otherwise specified)
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is provided to assist readers in
understanding CE Franklin Ltd.'s ("CE Franklin" or the "Company") financial
performance during the periods presented and significant trends that may
impact future performance of CE Franklin Ltd. This discussion should be read
in conjunction with the Financial Statements of CE Franklin Ltd. and the
related notes thereto and should be read in conjunction with the Management's
Discussion and Analysis included in the Company's December 31, 2005 Annual
Report and Financial Statements and notes thereto.
The selected financial data presented below is presented in Canadian
dollars and in accordance with Canadian generally accepted accounting
principles, or "Canadian GAAP". There are no Statements of Operations
differences between Canadian GAAP and U.S. generally accepted accounting
principles "U.S. GAAP."
Overview
CE Franklin distributes pipe, valves, flanges, fittings, production
equipment, tubular products and other general oilfield supplies to producers
of oil and gas in Canada through its 42 branches and various inventory
stocking points which are situated in towns and cities that serve particular
oil and gas fields of the western Canadian sedimentary basin. One branch was
opened during the second quarter. In addition, the Company distributes pipe,
valves, flanges and fittings to the oilsands, refining, heavy oil and
petrochemical industries and non-oilfield related industries such as the
forestry and mining industries.
The Company operates its business in only one operating segment, which is
the distribution of pipe, valves, flanges, fittings, tubular products,
production equipment and general oilfield supplies. CE Franklin considers all
of the products it distributes to have similar economic characteristics, and
are sold to the same class of customers. Operating results by product lines,
geographic area or other lower level components or units of operations are not
regularly reviewed by our chief operating decisions makers to make decisions
about the allocation of resources to, or the assessment of performance of,
such product lines, geographic areas or components or units of operations.
<<
Results of operations
The following table summarizes CE Franklin's results of operations.
Three months Six months
ended June 30 ended June 30
-------------------- --------------------
(in thousands of Cdn. Dollars
except per share data) 2006 2005 2006 2005
--------- --------- --------- ---------
Statements of Operations (unaudited) (unaudited)
Sales $115,464 $ 91,899 $291,821 $220,271
Gross Profit 22,460 18,164 54,707 41,827
Gross Profit - % 19.5% 19.8% 18.7% 19.0%
Other expenses (income)
Selling, general and
administrative expenses 15,450 12,204 32,692 25,113
Amortization 692 1,178 1,393 2,346
Interest 739 493 1,405 1,002
Other (13) 63 (102) 72
--------- --------- --------- ---------
16,868 13,938 35,388 28,533
--------- --------- --------- ---------
Income before income taxes 5,592 4,226 19,319 13,294
Income tax expense 1,678 1,683 6,526 4,947
--------- --------- --------- ---------
Net income $ 3,914 $ 2,543 $ 12,793 $ 8,347
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income as a % of sales 3.4% 2.8% 4.4% 3.8%
EBITDA (1) 7,023 5,897 22,117 16,642
EBITDA as a % of sales 6.1% 6.4% 7.6% 7.6%
Net income per share
Basic (Cdn. $) $ 0.21 $ 0.14 $ 0.71 $ 0.48
Diluted (Cdn. $) $ 0.21 $ 0.14 $ 0.68 $ 0.46
(1) EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented, represents
a useful means of assessing the performance of the Company's ongoing
operating activities, as it reflects the Company's earnings trends
without showing the impact of certain charges. The Company is also
presenting EBITDA, incremental flow through to EBITDA and EBITDA as a
percentage of sales because it is used by management as a
supplemental measure of profitability. The use of EBITDA by the
Company has certain material limitations because it excludes the
recurring expenditures of interest, income tax, and amortization
expenses. Interest expense is a necessary component of the Company's
expenses because the Company borrows money to finance its working
capital and capital expenditures. Income tax expense is a necessary
component of the Company's expenses because the Company is required
to pay cash income taxes. Amortization expense is a necessary
component of the Company's expenses because the Company uses property
and equipment to generate sales. Management compensates for these
limitations to the use of EBITDA by using EBITDA as only a
supplementary measure of profitability. EBITDA is not used by
management as an alternative to net income as an indicator of the
Company's operating performance, as an alternative to any other
measure of performance in conformity with generally accepted
accounting principles or as an alternative to cash flow from
operating activities as a measure of liquidity. Not all companies
calculate EBITDA in the same manner and EBITDA does not have a
standardized meaning prescribed by GAAP. Accordingly, EBITDA, as the
term is used herein, is unlikely to be comparable to EBITDA as
reported by other entities.
The following is a reconciliation of net income to EBITDA:
(in thousands of Cdn. dollars)
Three months Six months
ended June 30 ended June 30
-------------------- --------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net income $ 3,914 $ 2,543 $ 12,793 $ 8,347
Interest expense 739 493 1,405 1,002
Income tax expense 1,678 1,683 6,526 4,947
Amortization 692 1,178 1,393 2,346
--------- --------- --------- ---------
EBITDA $ 7,023 $ 5,897 $ 22,117 $ 16,642
--------- --------- --------- ---------
>>
Results of Operations - For the Three and Six Months Ended June 30, 2006
The price of oil and gas as at June 30, 2006 was U.S. $73.93 per bbl
(West Texas Intermediate) and Cdn. $5.27 per gj (AECO spot) respectively. This
compares to U.S. $58.75 per bbl (West Texas Intermediate) for oil and Cdn.
$6.65 per gj (AECO spot), for gas as at June 30, 2005. The average price of
oil and gas for the quarter ended June 30, 2006 was U.S. $70.56 per bbl (West
Texas Intermediate) and Cdn. $6.01 per gj (AECO spot) respectively. This
compares to an average of U.S. $53.22 per bbl (West Texas Intermediate) for
oil and Cdn. $7.37 per gj (AECO spot), for gas for the quarter ended
June 30, 2005.
Well completions (excluding dry and service) increased by 20.1% to 4,639
wells for the three months ended June 30, 2006 compared to 3,864 wells for the
three months ended June 30, 2005. Well completions were up 21.7% in the first
six months of 2006 to 10,409 wells compared to 8,555 wells in the first six
months of 2005. The average rig count increased 28.4% to 312 rigs in the
second quarter of 2006 from 243 rigs in the second quarter of 2005. The
average rig count for the first six months of 2006 increased 35.9% to 500 rigs
compared to 368 rigs in the first six months of 2005.
Sales
Sales for the quarter ended June 30, 2006 increased 25.6% or
$23.6 million to $115.5 million from $91.9 million for the quarter ended
June 30, 2005. Sales for the six months ended June 30, 2006 increased 32.5% or
$71.5 million to $291.8 million from $220.3 million for the six months ended
June 30, 2005. The sales increase was due to strong commodity prices and
improved industry economics resulting in an increase in spending by existing
and new customers.
Gross Profit
Gross profit increased 23.7% or $4.3 million to $22.5 million for the
quarter ended June 30, 2006 from $18.2 million for the quarter ended
June 30, 2005. Gross profit margins showed a small decline from 19.8% for the
quarter ended June 30, 2005 to 19.5% for the quarter ended June 30, 2006.
Gross profit increased 30.8% or $12.9 million to $54.7 million for the
six months ended June 30, 2006 from $41.8 million for the six months ended
June 30, 2005. Gross profit margins decreased slightly from 19.0% for the six
months ended June 30, 2005 to 18.7% for the six months ended June 30, 2006.
Gross profit margins have remained generally consistent as a result of
continued focus on margin initiatives implemented by the Company in 2003,
which include offshore procurement, standardization of certain product lines
and a more disciplined procurement practice. These positive initiatives were
somewhat offset by capacity issues of vendors resulting in the Company
procuring certain product from non-standard sources of supply.
Selling, General and Administrative Costs (SG&A)
SG&A costs increased $3.2 million or 26.6% to $15.4 million for the
quarter ended June 30, 2006 from $12.2 million for the quarter ended
June 30, 2005. SG&A costs increased $7.6 million or 30.2% to $32.7 million for
the six months ended June 30, 2006 from $25.1 million for the six months ended
June 30, 2005. The increase in SG&A for the quarter and first six months of
2006 related to salaries and benefits for new employees hired to support the
increase in sales, employee performance pay incentives and agents' commissions
due to the increase in sales and gross profit, occupancy costs related to new
and expanded locations to support the increase in sales and costs related to
compliance with the Sarbanes-Oxley act of 2002 ("SOX").
The total number of employees increased 23.9% as at June 30, 2006 to 420
employees compared to 339 employees as at June 30, 2005. Revenue per employee
for the first half of 2006 increased 6.9% compared to the first half of 2005.
The improvement reflects standardization of processes and procedures, whereby
all internal processes are performed consistently throughout the Company's
operations resulting in process improvement efficiencies. Consulting and audit
fees related to the Company's SOX Section 404 certification were $0.8 million
in the first six months of the year. It is anticipated that the SOX404
certification initiative will cost the Company approximately $1.5 million to
$2.0 million or $0.05 to $0.07 per share (diluted) in 2006.
EBITDA(1)
EBITDA for quarter ended June 30, 2006 increased $1.1 million or 19.1% to
$7.0 million compared to $5.9 million for the quarter ended June 30, 2005. The
$23.6 million increase in sales resulted in a 4.8% incremental flow through to
EBITDA. EBITDA as a percentage of sales was 6.1% for the quarter ended
June 30, 2006 versus 6.4% for the quarter ended June 30, 2005.
EBITDA for the six months ended June 30, 2006 increased 32.9% or
$5.5 million to $22.1 million compared to $16.6 million for the six months
ended June 30, 2005. The $71.5 million increase in sales resulted in a 7.7%
incremental flow through to EBITDA. EBITDA as a percentage of sales was 7.6%
for both the six months ended June 30, 2006 and June 30, 2005.
EBITDA is a supplemental non-GAAP financial measure used by management,
as well as industry analysts, to evaluate operations. For a reconciliation of
net income to EBITDA, please see page 5.
Income Before Income Taxes
Income before income taxes improved 32.3% or $1.4 million to $5.6 million
for the quarter ended June 30, 2006 compared to $4.2 million for the quarter
ended June 30, 2005. The improvement is a result of the $4.3 million increase
in gross profit and a reduction in amortization expense of $0.5 million offset
by the $3.2 million increase in SG&A and other and a $0.2 million increase in
interest expense. Amortization expense declined due to the Company's
enterprise system being fully amortized. The $23.6 million increase in sales
resulted in a 5.8% incremental flow through to income before income taxes.
Income before income taxes improved 45.3% or $6.0 million to
$19.3 million for the six months ended June 30, 2006 compared to $13.3 million
for the six months ended June 30, 2005. The improvement is a result of the
$12.9 million increase in gross profit and a reduction in amortization expense
of $1.0 million offset by the $7.5 million increase in SG&A and other and a
$0.4 million increase in interest expense. The $71.5 million increase in sales
resulted in an 8.4% incremental flow through to income before income taxes.
Income Taxes
The Company's effective tax rate for the quarter ended June 30, 2006 was
30.0%, as compared to an effective tax rate of 39.8% for the quarter ended
June 30, 2005. The Company's effective tax rate for the six months ended
June 30, 2006 was 33.8%, as compared to an effective tax rate of 37.2% for the
six months ended June 30, 2005. The reduction in the effective tax rate for
the quarter and six months ended June 30, 2006 is due to a reduction in tax
rates, a reduction in taxes upon filing of return from those previously
accrued and non-deductible items.
Net Income and Net Income per Share
Net income for the for the quarter ended June 30, 2006 was $3.9 million
or $0.21 per share (diluted) as compared to $2.5 million or $0.14 per share
(diluted) for the for the quarter ended June 30, 2005. This represents an
income improvement of $1.4 million or $0.07 per share (diluted).
Net income for the for the six months ended June 30, 2006 was $12.8
million or $0.68 per share (diluted) as compared to $8.3 million or $0.46 per
share (diluted) for the for the six months ended June 30, 2005. This
represents an income improvement of $4.5 million or $0.22 per share (diluted).
Summary of Quarterly Financial Data
The selected quarterly financial data presented below is presented in
Canadian dollars and in accordance with Canadian GAAP. There are no Statements
of Operations differences between Canadian GAAP and U.S. GAAP.
<<
(in thousands of Cdn. dollars except per share data)
Unaudited Q3 Q4 Q1 Q2
2004 2004 2005 2005
--------- --------- --------- ---------
Sales $ 78,232 $104,435 $128,372 $ 91,899
EBITDA(1) 3,421 5,958 10,745 5,897
EBITDA(1) as a % of sales 4.4% 5.7% 8.4% 6.4%
Net income 1,198 2,839 5,804 2,543
Net income as a % of sales 1.5% 2.7% 4.5% 2.8%
Net income per share
Basic (Cdn. $) $ 0.07 $ 0.17 $ 0.34 $ 0.14
Diluted (Cdn. $) $ 0.07 $ 0.16 $ 0.32 $ 0.14
(in thousands of Cdn. dollars except per share data)
Unaudited Q3 Q4 Q1 Q2
2005 2005 2006 2006
--------- --------- --------- ---------
Sales $121,809 $140,323 $176,357 $115,464
EBITDA(1) 8,300 11,061 15,094 7,023
EBITDA(1) as a % of sales 6.8% 7.9% 8.6% 6.1%
Net income 4,214 6,303 8,879 3,914
Net income as a % of sales 3.5% 4.5% 5.0% 3.4%
Net income per share
Basic (Cdn. $) $ 0.25 $ 0.36 $ 0.50 $ 0.21
Diluted (Cdn. $) $ 0.22 $ 0.33 $ 0.47 $ 0.21
>>
The Company's sales levels are affected by seasonable weather conditions.
Many exploration and production areas in northern Canada are accessible only
in the winter months when the ground is frozen. As warm weather returns in the
spring each year the winter's frost comes out of the ground rendering many
secondary roads incapable of supporting the weight of heavy equipment until
they have dried out. As a result, the first and fourth quarters typically
represent the busiest time and highest sales activity for the Company. Sales
levels drop dramatically during the second quarter spring breakup until such
time as the roads have dried and road bans have been lifted.
Well completions (excluding dry and service) dropped by 19.6% to 4,639
wells for the second quarter of 2006 compared to 5,770 wells for the first
quarter of 2006. The average rig count decreased by 54.7% to 312 rigs in the
second quarter of 2006 from 688 in the first quarter of 2006.
Sales for the quarter ended June 30, 2006 decreased 34.5% to
$115.5 million from $176.4 million for the quarter ended March 31, 2006.
Net income was $3.9 million or $0.21 per share (diluted) for the quarter
ended June 30, 2006 compared to $8.9 million or $0.47 per share (diluted) for
the quarter ended March 31, 2005. The decline in sales and net income is due
to the overall decrease in market activity that is typical for the second
quarter due to the weather conditions described above. The Company has
remained profitable during the second quarter for three consecutive years.
Liquidity and Capital Resources
The Company's primary internal source of liquidity is cash flow from
operating activities before net changes in non-cash working capital balances.
The Company will use these funds to finance acquisitions and capital
expenditures. Cash flow from operating activities and the Company's 364 day
bank operating facility are used to finance the Company's investment in
working capital, which is primarily comprised of accounts receivable,
inventories and other current assets, net of accounts payable and accrued
liabilities and other current liabilities.
For the three months ended June 30, 2006 the Company generated
$5.4 million in cash flow from operating activities, before net change in
non-cash working capital balances, $10.6 million from working capital
(excluding the bank operating loan), and $1.2 million from the issuance of
capital stock on exercise of employee stock options. Cash used during the
quarter was $0.7 million for purchases of capital and other expenditures, and
$0.1 million in repayments on capital leases. These activities resulted in a
$16.5 million reduction in the bank operating loan.
For the three months ended June 30, 2005 the Company generated
$2.6 million in cash flow from operating activities, before net change in
non-cash working capital balances, $6.9 million from working capital
(excluding the bank operating loan) and $0.1 million in the issuance of
capital stock from the exercise of employee stock options. This was offset by
$31,000 in capital and other expenditures and $55,000 in repayments on capital
leases. These activities resulted in a $9.6 million reduction in the bank
operating loan.
For the six months ended June 30, 2006 the Company generated
$14.8 million in cash flow from operating activities, before net change in
non-cash working capital balances and $1.6 million in the issuance of capital
stock from the exercise of employee stock options. The cash generated was
offset by a $19.0 million increase in working capital (excluding the bank
operating loan), $2.3 million to purchase a two branch distribution operation,
$1.6 million in capital and other expenditures and $0.1 million in repayments
on capital leases. These activities resulted in a $6.6 million increase in the
bank operating loan.
For the six months ended June 30, 2005 the Company generated $9.7 million
in cash flow from operating activities, before net change in non-cash working
capital balances and $0.3 million in the issuance of capital stock from the
exercise of employee stock options. This was offset by an $11.0 million
increase in working capital (excluding the bank operating loan), $0.1 million
in capital and other expenditures and $0.1 million in repayments on capital
leases. These activities resulted in a $1.3 million increase in the bank
operating loan.
For the quarter ended June 30, 2006 accounts receivable decreased
$42.4 million or 32.7% to $87.4 million from $129.7 million as at March 31,
2006. For the six months ended June 30, 2006 accounts receivable decreased
$9.1 million or 9.5% to $87.4 million from $96.5 million as at December 31,
2005. The decrease in accounts receivable reflects collections and the
reduction in activity levels during the second quarter.
Average Days Sales Outstanding (DSO) was 60.5 days in the second quarter
of 2006 and 59.6 days in the first six months of 2006. This compares to 58.2
days for the second quarter of 2005 and 53.8 days for the first six months of
2005. The deterioration in DSO for the quarter reflects, in part, slower
approval and processing of transactions by both the Company and its customers
due to the high volume of activity in the first quarter.
Total inventory for the Company increased to $95.4 million as at
June 30, 2006 as compared to $81.2 million as at March 31, 2006 and $80.5
million as at December 31, 2005. The Company has increased its investment in
inventory in anticipation of increased activity in the third and fourth
quarters of 2006, the longer order lead times being experienced and the
potential for certain product shortages from suppliers capacity constraints.
The Company measures inventory efficiency by using an inventory turns
calculation, because the higher the inventory turns, the better the Company's
inventory is managed. Inventory turned 4.1 times (annualized) in the second
quarter of 2006 and 5.6 times (annualized) in the first six months of 2006.
This compares to 4.0 times (annualized) in the second quarter of 2005 and 5.1
times (annualized) for the first six months of 2005. CE Franklin targets
inventory turns of 5.0 times (annualized). The Company monitors its inventory
on a daily basis in order to reduce surplus, improve turns and reduce
obsolescence.
Accounts payable and accrued liabilities have decreased $21.4 million to
$63.7 million as at June 30, 2006 compared to $85.0 million as at
March 31, 2006. For the six months ended June 30, 2006 accounts payable and
accrued liabilities decreased by $1.3 million to $63.7 million as compared to
$64.9 million as at December 31, 2005. The decrease reflects the decrease in
purchases in the second quarter due to lower activity levels.
Property and equipment increased 31.1% to $4.6 million from $3.5 million
at December 31, 2005. This increase reflects capital expenditures of
$1.6 million, $0.5 million in additions to rental equipment assets, and
$0.4 million in other capital additions as a result of an acquisition. The
additions were offset by amortization expense of $1.4 million.
During the first quarter of 2006 the Company purchased agency operations
at two of the Company's branch locations, for net cash consideration of
$2.3 million. This acquisition will enhance the Company's net income. See note
2 to the Interim Consolidated Financial Statements of the Company for further
details.
The Company has a $60.0 million 364 day bank operating facility. The
decrease in borrowing to $35.6 million as at June 30, 2006 compared to
$52.2 million as at March 31, 2006 is due to a decrease in activity levels
during the second quarter of 2006 and the application of collected accounts
receivable to the bank operating loan. As at June 30, 2006 the Company was
well within its covenant compliance thresholds and was able to draw up to
$60.0 million against its bank operating loan based on the borrowing base
formula. Effective July 27, 2006 the Company has negotiated a new
$75.0 million 364 day bank operating facility.
As at June 30, 2006 the Company's total capitalization (financed debt
plus equity) was comprised of debt of 29.0% and equity of 71.0% compared to
30.9% debt and 69.1% equity as at June 30, 2005.
Contractual Obligations
There have been no material changes in any contractual obligations since
the year ended December 31, 2005.
Off-Balance Sheet Arrangements
The Company has not engaged in off-balance sheet financing arrangements.
Related party transactions
Messrs. Douglas L. Rock and John J. Kennedy, directors of the
Corporation, are directors or officers of, or otherwise interested in, Smith
International, Inc. ("Smith"), which owns 50% of the Company's outstanding
shares (diluted).
The Company is the exclusive distributor of bottom hole pump production
equipment manufactured by Dura, a division of Wilson Supply, which is a
wholly-owned subsidiary of Smith. All transactions with Smith and its
subsidiaries are in the normal course of business and at commercial rates.
Included in inventory at June 30, 2006 and June 30, 2005 was $3.8 million and
$2.9 million, respectively, of this bottom hole pump production equipment
purchased from Wilson. For the three months ended June 30, 2006 and 2005, cost
of sales includes $2.0 million and $1.8 million, respectively, relating to the
inventory purchased from Wilson. For the six months ended June 30, 2006 and
2005, cost of sales includes $4.3 million and $3.7 million, respectively,
relating to the inventory purchased from Wilson. Accounts payable and accrued
liabilities, which are non-interest bearing and are payable within commercial
supplier payment terms, include $1.4 million and $1.2 million at June 30, 2006
and 2005, respectively, owing to Wilson.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from changes in interest rates and
foreign exchange rates. The Company will, from time to time, enter into
foreign currency forward exchange contracts with financial institutions to fix
the value of liabilities on future commitments. These foreign currency
exchange contracts are not designated as hedges for accounting purposes. The
value of the contract is marked to market and the change in value is
recognized in the Company's Statements of Operations. The Company entered into
such contracts in 2006, the impact of which was not material, and no such
contracts were outstanding as at June 30, 2006.
The Company has exposure to interest rate fluctuations on its bank
operating loan. The Company has, in the past, entered into interest rate
contracts to hedge its interest rate risk associated with the demand bank
operating loan. No such contracts were in place for 2006 or 2005. The Company
does not use financial instruments for speculative purposes.
As at June 30, 2006 there were no unrecognized gains or losses associated
with the above instruments.
Critical Accounting Estimates
There have been no material changes since the year ended
December 31, 2005.
Change in Accounting Policies
There have been no changes in accounting policies since the year ended
December 31, 2005.
Other Items
The Company's Annual Report on Form 20-F is available on SEDAR (at)
www.sedar.com.
CE Franklin has authorized an unlimited number of common shares with no
par value. As at June 30, 2006 the Company had 18,232,202 common shares
outstanding.
As at June 30, 2006 options to purchase 863,883 common shares were
outstanding at an average exercise price of $3.60 per common share. The Board
of Directors may grant further options to purchase up to 302,924 common
shares.
Risk Factors
In addition to the information set forth elsewhere in this MD&A, the
following factors should be carefully considered when evaluating CE Franklin.
Fluctuations in oil and gas prices could affect the demand for CE
Franklin's products and services and, therefore, CE Franklin's sales, cash
flows and profitability. CE Franklin's operations are materially dependent
upon the level of activity in oil and gas exploration, development and
production. Both short-term and long-term trends in oil and gas prices affect
the level of such activity. Oil and gas prices and, therefore, the level of
drilling, exploration and production activity can be volatile. Factors that
can cause price fluctuations include:
<<
- relatively minor changes in, or threats to, the worldwide supply of
and demand for oil and natural gas;
- the ability of the members of the Organization of Petroleum Exporting
Countries ("OPEC") to maintain price stability through voluntary
production limits;
- the level of production by non-OPEC countries;
- North American demand for gas;
- the movement of the Canadian dollar relative to its U.S. counterpart
(crude oil and natural gas exports are traded in U.S. dollars);
- general economic and political conditions in North America and
worldwide; and
- the presence or absence of drilling incentives such as Canadian
provincial royalty holidays, fluctuation in the value of the Canadian
dollar, availability of new leases and concessions and government
regulations regarding, among other things, export controls,
environmental protection, taxation, price controls and product
allocation.
>>
CE Franklin believes that any prolonged reduction in oil and gas prices
would depress the level of exploration and production activity. This would
likely result in a corresponding decline in the demand for CE Franklin's
products and services and could have a material adverse effect on CE
Franklin's sales, cash flows and profitability. There can be no assurances as
to the future level of demand for CE Franklin's products and services or
future conditions in the oil and gas and oilfield supply industries.
Adverse weather conditions could temporarily decrease the demand for CE
Franklin's products and services. CE Franklin's financial performance is tied
closely to the seasonality of drilling activity. Higher drilling activity in
Canada is generally experienced in the winter months. In the spring and early
summer, drilling activity slows due to the difficulty in moving equipment
during the spring thaws. To the extent that unseasonable weather conditions
such as excessive rain or unusually warm winters affect the ability of CE
Franklin's customers to access their oil and gas wells, then the demand for CE
Franklin's products and services would temporarily decrease and the Company's
sales, cash flows and profitability would be adversely affected.
CE Franklin operates in a highly competitive industry, which may
adversely affect CE Franklin's sales, cash flows and profitability. The
Canadian oilfield supply industry in which CE Franklin operates is very
competitive. The Company believes that its future profitability is partially
influenced by competitive factors beyond its control, including:
<<
- the ability of some customers to purchase pipe, valves, flanges,
fittings, production equipment, tubular products and other general
oilfield supplies directly from the manufacturer rather than from the
Company;
- the ability of new brokers and distributors to enter the market if
the oil and gas industry were to experience significant growth;
- price competition among major supply companies;
- cost of goods being subject to rising or declining commodity prices,
such as the price of steel, and the inability of CE Franklin to pass
these price increases on to customers, or the risk CE Franklin may
have higher-cost inventory during declining commodity prices
resulting in a deterioration in gross profit margins.
>>
CE Franklin and its largest competitors generally operate at low profit
margins due to price competition. Price competition is due in part to customer
price pressure, in addition to the major supply companies competing for the
same business.
The loss of CE Franklin's major supplier for tubular products could
adversely affect the Company's sales and gross profit. A portion of CE
Franklin's business is the sale of tubular products that are primarily
obtained from one supplier. Although the Company believes that it has
historically had and continues to have a good relationship with its supplier,
there can be no assurance that such relationship will continue. In the event
the Company is unable to source tubular products from its existing supplier,
then CE Franklin would need to search for an alternate supplier of these
goods. There can be no assurance that a suitable alternate supplier for such
goods would be found.
Labour shortages could adversely affect the Company's ability to service
its customers. The Company faces the challenge of attracting and retaining
workers to meet any increase in demand for its products and services. In a
highly competitive market for employees, the Company may experience periods of
high employee turnover that could result in higher training costs or reduced
levels of service to customers. The Company may also experience increased
wages paid to workers due to a highly competitive market for employees. These
could result in increased costs or the loss of customers and market share.
During periods of high demand for products and services, the Company may
experience product shortages. The frequency and duration of the shortages may
impact the financial performance of the Company. Product shortages may impact
profit margins or could result in the loss of customers.
The Company is exposed to market risks from changes in the Canadian prime
interest rate and foreign exchange rates with respect to the Canadian dollar
and the U.S. dollar for products it purchases outside Canada. The Company may
enter into foreign currency forward exchange contracts and interest rate
contracts to hedge the risks associated with foreign currency and interest
rate fluctuations. Gain or losses with respect to such hedge contracts may
materially affect net income.
The majority of the Company's sales are generated from customers in the
energy sector. This includes major multinational and independent oil
companies, pipeline companies and contract drilling companies operating in
Canada. In addition, for the year ended December 31, 2005 11% of sales (2004 -
12%; 2003 - 14%) were derived from sales to one customer. No other customer
accounted for more than 10% of the Company's sales.
The Company may experience a financial loss if its significant customers
fail to pay CE Franklin for its products or services. The Company's ability to
collect the proceeds from the sale of its products and services from its
customers depends on the payment ability of its customer base, which includes
a significant customer who constitutes 11% of its 2005 annual sales. If this
customer fails to pay CE Franklin for any reason, the Company could experience
a material loss.
Significant downtime at the Company's 100,000 square foot centralized
distribution centre located in Edmonton, Alberta could materially impact net
income and cash flow from operations. The Company operates a hub and spoke
distribution model with the distribution centre strategically located within
reasonable proximity to a majority of its vendors. In addition, the
distribution centre acts as a hub for its 42 branches. Significant downtime at
this facility would impact the Company's gross profit margins net income and
cash flow from operations.
A substantial portion of the Company's sales to customers will depend on
written contracts that are cancelable at any time, or are based on verbal
agreements. The key factors which will determine whether a customer will
continue to use the Company are pricing, service quality and availability,
strategically located service centers and technical knowledge and experience.
There can be no assurance that the Company's relationships with its customers
will continue, and a significant reduction or total loss of business from
these customers, if not offset by increased sales to new or existing
customers, could have a material adverse effect on the Company's net income or
cash flow from operations.
If the Company is unable to successfully address potential material
weakness in its internal controls, or any other control deficiencies, its
ability to report its financial results on a timely and accurate basis and to
comply with disclosure and other requirements may be adversely affected. The
Company is not currently required to comply with Section 404 of the
Sarbanes-Oxley Act of 2002, and is therefore not required to make an
assessment of the effectiveness of its internal controls over financial
reporting for that purpose. A material weakness is defined as a significant
deficiency, or a combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
CE Franklin will continue to monitor the effectiveness of these and other
processes, procedures and controls and will make any further changes
management determines appropriate, including to effect compliance with Section
404 of the Sarbanes-Oxley Act of 2002 when required to make an assessment of
internal controls under Section 404 for fiscal 2006. The steps CE Franklin has
taken and will take in the future may not remediate the material weakness. In
addition, the Company may identify material weaknesses or other deficiencies
in our internal controls in the future.
Any material weaknesses or other deficiencies in the Company's control
systems may affect its ability to comply with reporting requirements and
listing standards or cause its financial statements to contain material
misstatements, which could negatively affect the market price and trading
liquidity of its common stock, cause investors to lose confidence in the
Company's reported financial information, as well as subject CE Franklin to
civil or criminal investigations and penalties.
There are inherent limitations in all control systems, and misstatements
due to error or fraud may occur and not be detected. While CE Franklin has
taken actions designed to address compliance with the internal control,
disclosure control and other requirements of the Sarbanes-Oxley Act of 2002
and the rules and regulations promulgated by the SEC implementing these
requirements, there are inherent limitations in the Company's ability to
control all circumstances. Management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that the Company's internal
controls and disclosure controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. In addition, the design of a control system must reflect the fact
that there are resource constraints and the benefit of controls must be
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, in the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
errors or mistakes. Further, controls can be circumvented by individual acts
of some persons, by collusion of two or more persons, or by management
override of the controls. The design of any system of controls also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, a control may be
inadequate because of changes in conditions, such as growth of the Company or
increased transaction volume, or the degree of compliance with the policies or
procedures may deteriorate. Because of inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
If the Company loses key management and technical personnel, its business
may suffer. CE Franklin relies upon a relatively small group of key management
and technical personnel. Mr. West, in particular, has extensive experience in
oilfield supply and distribution. The Company does not maintain any key man
insurance and it cannot assure you that these individuals will remain with us
in the future. An unexpected partial or total loss of their services may harm
the Company's business.
The Company's share ownership is highly concentrated and, as a result, CE
Franklin's principal shareholder effectively controls the Company's business.
As at the date of this MD&A, CE Franklin's largest shareholder, Smith
International, owned approximately 50% of the Company's common outstanding
shares (diluted). As a result, Smith International has the voting power to
significantly influence the Company's policies, business and affairs and the
outcome of any corporate transaction or other matter, including mergers,
consolidations and the sale of all, or substantially all, of the Company's
assets.
In addition, the concentration of the Company's ownership may have the
effect of delaying; deterring or preventing a change in control that otherwise
could result in a premium in the price of the Company's common shares.
The Company is at risk for certain operating hazards. CE Franklin's
operations are subject to hazards present in the oil and natural gas industry
which can cause personal injury and damage to property or the environment.
Litigation arising from an accident at a location where its products or
services are used or provided may cause the Company to be named as a defendant
in lawsuits asserting potentially large claims. CE Franklin has insurance
coverage against operating hazards, which the Company believes is customary in
the industry. This insurance has deductibles and contains certain coverage
exclusions and limitations. The Company's insurance premiums can be increased
or decreased based on the claims it makes on its insurance policies. Results
of operations could be adversely affected by unexpected claims not covered by
insurance.
<<
CE Franklin Ltd.
Interim Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
(in thousands of -------------------- --------------------
Canadian dollars, June 30 June 30 June 30 June 30
except per share data) 2006 2005 2006 2005
-------------------------------------------------------------------------
Sales 115,464 91,899 291,821 220,271
Cost of sales 93,004 73,735 237,114 178,444
-------------------------------------------------------------------------
Gross profit 22,460 18,164 54,707 41,827
-------------------------------------------------------------------------
Other expenses (income)
Selling, general and
administrative expenses 15,450 12,204 32,692 25,113
Amortization 692 1,178 1,393 2,346
Interest expense 739 493 1,405 1,002
Foreign exchange loss (gain) (13) 63 (64) 72
Other income - - (38) -
-------------------------------------------------------------------------
16,868 13,938 35,388 28,533
-------------------------------------------------------------------------
Income before income taxes 5,592 4,226 19,319 13,294
-------------------------------------------------------------------------
Income tax expense
(recovery) (note 4)
Current 1,037 2,593 5,986 6,245
Future 641 (910) 540 (1,298)
-------------------------------------------------------------------------
1,678 1,683 6,526 4,947
-------------------------------------------------------------------------
Net income for the period 3,914 2,543 12,793 8,347
-------------------------------------------------------------------------
Net income per share
(note 3)
Basic 0.21 0.14 0.71 0.48
Diluted 0.21 0.14 0.68 0.46
Weighted average number
of shares outstanding
Basic 18,068,179 17,233,449 17,961,750 17,219,618
Diluted 18,920,581 18,192,171 18,920,581 18,192,171
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Consolidated Balance Sheets
(Unaudited)
June 30 December 31
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable 87,362 96,508
Inventories 95,435 80,482
Other 1,778 2,998
-------------------------------------------------------------------------
184,575 179,988
Property and equipment 4,638 3,537
Goodwill 10,479 7,765
Future income taxes (note 4) 495 1,038
Other 150 180
-------------------------------------------------------------------------
200,337 192,508
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank overdraft 5,362 14,090
Bank operating loan 35,635 29,062
Accounts payable 22,761 29,575
Accrued liabilities 40,897 35,354
Income taxes payable 3,479 7,840
Current portion of long term debt 490 217
-------------------------------------------------------------------------
108,624 116,138
Long term debt 907 438
-------------------------------------------------------------------------
109,531 116,576
SHAREHOLDERS' EQUITY
Capital stock 23,812 21,914
Contributed surplus 14,464 14,281
Retained earnings 52,530 39,737
-------------------------------------------------------------------------
90,806 75,932
-------------------------------------------------------------------------
200,337 192,508
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Six Months Ended
-------------------- --------------------
(in thousands of June 30 June 30 June 30 June 30
Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash flows from operating
activities
Net income for the period 3,914 2,543 12,793 8,347
Items not affecting cash -
Amortization 692 1,178 1,393 2,346
Gain on disposal of
property and equipment - - (38) -
Future income tax expense
(recovery) 641 (910) 540 (1,298)
Inventory write-downs
recovered (217) (311) (369) (9)
Stock option/Performance
share unit expense 341 147 473 293
-------------------------------------------------------------------------
5,371 2,647 14,792 9,679
Net change in non-cash
working capital balances
related to operations -
Accounts receivable 42,387 28,812 9,146 6,068
Inventories (14,283) (8,467) (14,996) (12,028)
Other current assets 961 (1,802) 1,220 (2,295)
Accounts payable (14,201) (8,837) (6,814) 5,327
Accrued liabilities (7,163) 1,592 5,543 (4,496)
Income taxes payable (449) 1,143 (4,361) 1,293
-------------------------------------------------------------------------
12,623 15,088 4,530 3,548
-------------------------------------------------------------------------
Cash flows from financing
activities
Issuance of capital stock 1,247 144 1,608 265
Increase (decrease) in
bank operating loan (16,529) (9,634) 6,573 1,330
Increase (decrease) in
bank overdraft 3,436 (5,512) (8,728) (4,899)
Decrease in long term debt (70) (55) (126) (126)
-------------------------------------------------------------------------
(11,916) (15,057) (673) (3,430)
-------------------------------------------------------------------------
Cash flows from investing
activities
Purchase of property and
equipment (707) (31) (1,632) (118)
Proceeds on disposal of
property and equipment - - 38 -
Acquisition of distribution
operations (note 2) - - (2,263) -
-------------------------------------------------------------------------
(707) (31) (3,857) (118)
-------------------------------------------------------------------------
Change in cash and cash
equivalents during the period - - - -
Cash and cash equivalents
- Beginning of period - - - -
-------------------------------------------------------------------------
Cash and cash equivalents
- End of period - - - -
-------------------------------------------------------------------------
Cash paid during the period
for:
Interest on bank operating
loan 723 485 1,377 980
Interest on long term debt 16 8 28 22
Income taxes 1,485 1,450 10,347 4,951
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(in thousands of Capital Stock
Canadian dollars, -------------------- Share-
except share Number of Contributed Retained holders'
amounts) Shares $ surplus earnings equity
-------------------------------------------------------------------------
Balance -
December 31,
2004 17,194,934 19,335 13,858 20,873 54,066
Stock options
exercised 64,825 285 (20) - 265
Stock options
granted - - 293 - 293
Net income - - - 8,347 8,347
-------------------------------------------------------------------------
Balance -
June 30, 2005 17,259,759 19,620 14,131 29,220 62,971
-------------------------------------------------------------------------
Balance -
December 31,
2005 17,804,554 21,914 14,281 39,737 75,932
Stock options
exercised 427,648 1,898 (290) - 1,608
Stock options/
Performance share
units granted - - 473 - 473
Net income - - - 12,793 12,793
-------------------------------------------------------------------------
Balance -
June 30, 2006 18,232,202 23,812 14,464 52,530 90,806
-------------------------------------------------------------------------
CE Franklin Ltd.
Notes to Consolidated Financial Statements (Unaudited)
-------------------------------------------------------------------------
>>
Note 1 - Accounting policies
These interim consolidated financial statements are prepared following
accounting policies consistent with the Company's financial statements
for the years ended December 31, 2005 and 2004. These consolidated
financial statements are in accordance with generally accepted accounting
principles in Canada.
The disclosures provided below are incremental to those included in the
annual audited financial statements. The interim consolidated financial
statements should be read in conjunction with the annual audited
financial statements and the notes thereto for the year ended December
31, 2005.
These unaudited interim consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented; all such
adjustments are of a normal recurring nature.
Note 2 - Acquisition
On February 1, 2006, the Company purchased the outstanding shares of an
agent that operated two of the Company's branch locations, for a net cash
consideration of $2.263 million. In addition to the cash consideration
paid is a $300,000 contingent amount payable at the end of one year from
closing subject to achieving certain purchase conditions. The investment
is accounted for using the purchase method and the results of operations
have been included in these financial statements from the date of
acquisition. Details of the acquisition are as follows:
<<
(in thousands of Canadian dollars)
-------------------------------------------------------------------------
Assets
Property and equipment 369
Goodwill 2,714
-------------------------------------------------------------------------
3,083
-------------------------------------------------------------------------
Assumed Liabilities
Long term debt 817
Future tax liability 3
-------------------------------------------------------------------------
820
-------------------------------------------------------------------------
Net cash consideration 2,263
-------------------------------------------------------------------------
>>
Note 3 - Share data
At June 30, 2006 the Company had 18,232,202 common shares outstanding and
863,883 options to acquire common shares at a weighted average exercise
price of $3.60 per common share. Of the outstanding options, 421,248 were
vested and exercisable at a weighted average exercise price of $3.31 per
common share.
a) Stock options
There were no common share options granted in the first two quarters of
2006. The compensation expense recorded in the second quarter of 2006 and
in the six month period ended June 30, 2006 for common share options
granted subsequent to December 31, 2002 was $132,000 and $264,000
respectively. The compensation expense recorded for the comparative
quarter and six month period ended June 30, 2005 was $147,000 and
$293,000 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 six month period ended June 30, 2006 would have decreased by
$49,000 ($0.00 per common share) and $98,000 ($0.01 per common share)
respectively. The net income for the comparative quarter and six month
period ended June 30, 2005 would have decreased by $128,000 ($0.01 per
common share) and $256,000 ($0.02 per common share) respectively.
b) Performance share units
Effective May 2, 2006, the Company adopted the Performance Share Unit
("PSU") plan approved by shareholders on that date. Under this plan,
PSU's are granted which entitle the participant to receive either a
common share or cash equivalent, at the Company's discretion, in exchange
for a vested unit. Compensation expense related to the PSU's granted is
recognized over the vesting period based on the fair value of the units
at the date of the grant and is recorded to compensation expense and
contributed surplus. The contributed surplus balance is reduced as the
vested PSU's are exchanged for either common shares or cash.
A total of 120,712 PSU's were granted in the second quarter of 2006 with
a fair value, as determined by reference to share price, of approximately
$2.4 million. The compensation expense recorded in both the second
quarter of 2006 and in the six month period ended June 30, 2006 was
$209,000 (2005 - nil).
Note 4 - Income taxes
a) The difference between the income tax provision recorded and the
provision obtained by applying the combined federal and provincial
statutory rates is as follows:
<<
Three Months Ended Six Months Ended
---------------------------- -----------------------------
(in thousands
of Canadian June 30 June 30 June 30 June 30
dollars) 2006 2005 2006 2005
------------------------------------------- -----------------------------
Income before
income taxes 5,592 4,226 19,319 13,294
------------------------------------------- -----------------------------
Incomes taxes
calculated at
expected rates 1,779 31.8% 1,452 34.4% 6,472 33.5% 4,568 34.4%
Non-deductible
items 180 3.2% 339 8.0% 277 1.4% 453 3.4%
Adjustments on
filing returns (343) -6.1% - 0.0% (343) -1.8% - 0.0%
Capital and
large corporations
taxes 17 0.3% (12) -0.3% 36 0.2% 25 0.2%
Other 45 0.8% (96) -2.3% 84 0.5% (99) -0.7%
------------------------------------------- -----------------------------
1,678 30.0% 1,683 39.8% 6,526 33.8% 4,947 37.2%
------------------------------------------- -----------------------------
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:
June 30 December 31
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
Assets
Financing and investment
charges 252 909
Property and equipment 594 479
Other 144 199
-------------------------------------------------------------------------
990 1,587
-------------------------------------------------------------------------
Liabilities
Goodwill 495 549
-------------------------------------------------------------------------
495 549
-------------------------------------------------------------------------
Net future income tax asset 495 1,038
-------------------------------------------------------------------------
Realization of future income tax assets is dependent on generating
sufficient taxable income during the period in which the temporary
differences are deductible. Although realization is not assured,
management believes it is more likely than not that all future income tax
assets will be realized based on projected operating results and tax
planning strategies available.
>>
