CALGARY, Oct. 31 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced a
14% increase in earnings per share for the third quarter ended September 30,
2006.
CE Franklin reported net income of $4.7 million or $0.25 per share
(diluted) for the third quarter ended September 30, 2006 as compared to net
income of $4.2 million or $0.22 per share (diluted) for the quarter ended
September 30, 2005.
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Financial Highlights
--------------------
Three Months Ended Nine Months Ended Year Ended
September 30 September 30 December 31
----------------------- ----------------------- -----------
(millions of
Cdn.$ except
per share
data) 2006 2005 2006 2005 2005
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
Sales $ 131.2 $ 121.8 $ 423.0 $ 342.1 $ 482.4
Gross Profit 23.7 22.0 78.4 63.8 91.3
Gross
Profit - % 18.1% 18.0% 18.5% 18.7% 18.9%
EBITDA(1) 8.4 8.3 30.5 24.9 36.0
EBITDA(1) as
a % of sales 6.4% 6.8% 7.2% 7.3% 7.5%
Net income $ 4.7 $ 4.2 $ 17.5 $ 12.6 $ 18.9
Per share
Basic
(Cdn. $) $ 0.26 $ 0.25 $ 0.97 $ 0.73 $ 1.09
Diluted
(Cdn. $) $ 0.25 $ 0.22 $ 0.93 $ 0.68 $ 1.01
>>
Sales increased 7.7% to $131.2 million for the quarter ended
September 30, 2006 as compared to $121.8 million for the quarter ended
September 30, 2005. Key statistics CE Franklin uses to measure industry
activity levels include well completions and rig counts. Well completions
(excluding dry and service wells) were down 23.6% to 4,030 wells for the three
months ended September 30, 2006 compared to 5,273 for the three months ended
September 30, 2005. Average rig count for the quarter ended September 30, 2006
decreased by 4.1% to 516 rigs compared to 538 rigs for the quarter ended
September 30, 2005.
The 7.7% increase in sales has softened compared to the increases in
sales seen in the first six months of 2006. This is due to the reduction in
industry activity, as evidenced by the well completions and rig count data
above.
EBITDA(1) for the quarter ended September 30, 2006 increased 1% to
$8.4 million from $8.3 million for the quarter ended September 30, 2005. The
$9.4 million increase in sales resulted in an incremental flow through to
EBITDA of 0.9% and 5.4% to net income, as amortization charges were reduced
year over year.
"The Company reported the 16th quarter in a row of year over year
improvement despite the decrease in market activity," said Michael West,
Chairman, President and CEO. "The Company remains committed to its long term
strategies."
Outlook
-------
Although industry activity levels are difficult to forecast with
certainty, many industry watchers are now anticipating a softening in activity
levels in the fourth quarter of 2006 and into 2007. The decline in gas prices
may result in further reduction in activity levels for Canadian exploration
and production entities, as gas drilling in 2006 comprises approximately 70%
of all wells drilled.
Conference Call and Webcast Information
---------------------------------------
A conference call to review the quarter ended September 30, 2006, which
is open to the public, will be held on Wednesday, November 1, 2006 at
11:00 a.m. Eastern Time (9:00 a.m. Mountain Time).
Participants may join the call by dialing 1-800-814-4890 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
21204608 followed by the number sign and may be accessed until midnight
Wednesday, November 8, 2006.
The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)1607100 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 activity levels through the fourth quarter of 2006 and
into 2007;
- 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 of, 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 October 31, 2006
For the quarter and nine months ended September 30, 2006 as compared to
the quarter and nine months ended September 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, ("Canadian GAAP"). There are no Statements of Operations
differences between Canadian GAAP and U.S. generally accepted accounting
principles ("U.S. GAAP") that impact the Company.
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. 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
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.
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Three months ended Nine months ended
September 30 September 30
---------------------- ----------------------
(in thousands of Cdn.
Dollars except per share
data) 2006 2005 2006 2005
---------- ---------- ---------- ----------
Statements of Operations (unaudited) (unaudited)
Sales $ 131,159 $ 121,809 $ 422,980 $ 342,080
Gross Profit 23,740 21,977 78,447 63,804
Gross Profit - % 18.1% 18.0% 18.5% 18.7%
Other expenses (income)
Selling, general and
administrative expenses 15,314 13,853 48,006 38,966
Amortization 660 1,207 2,053 3,553
Interest 643 443 2,048 1,445
Other 40 (176) (62) (104)
---------- ---------- ---------- ----------
16,657 15,327 52,045 43,860
---------- ---------- ---------- ----------
Income before income
taxes 7,083 6,650 26,402 19,944
Income tax expense 2,364 2,436 8,890 7,383
---------- ---------- ---------- ----------
Net income $ 4,719 $ 4,214 $ 17,512 $ 12,561
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income as a % of
sales 3.6% 3.5% 4.1% 3.7%
EBITDA(1) 8,386 8,300 30,503 24,942
EBITDA as a % of sales 6.4% 6.8% 7.2% 7.3%
Net income per share
Basic (Cdn. $) $ 0.26 $ 0.25 $ 0.97 $ 0.73
Diluted (Cdn. $) $ 0.25 $ 0.22 $ 0.93 $ 0.68
(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 ended Nine months ended
September 30 September 30
---------------------- ----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net income $ 4,719 $ 4,214 $ 17,512 $ 12,561
Amortization 660 1,207 2,053 3,553
Interest expense 643 443 2,048 1,445
Income tax expense 2,364 2,436 8,890 7,383
---------- ---------- ---------- ----------
EBITDA $ 8,386 $ 8,300 $ 30,503 $ 24,942
---------- ---------- ---------- ----------
>>
Results of Operations - For the Three and Nine Months Ended September 30,
2006
The price of oil and gas as at September 30, 2006 was U.S. $62.91 per bbl
and Cdn. $3.64 per gj respectively. This compares to U.S. $66.24 per bbl for
oil and Cdn. $12.16 per gj for gas as at September 30, 2005. The average price
of oil and gas for the quarter ended September 30, 2006 was U.S. $70.47 per
bbl and Cdn. $5.70 per gj respectively. This compares to an average of U.S.
$63.22 per bbl for oil and Cdn. $9.43 per gj for gas for the quarter ended
September 30, 2005. All prices quoted are West Texas Intermediate for oil and
AECO spot for gas.
Well completions (excluding dry and service) decreased by 23.6% to 4,030
wells for the three months ended September 30, 2006 compared to 5,273 wells
for the three months ended September 30, 2005. Well completions were up 4.4%
in the first nine months of 2006 to 14,439 wells compared to 13,828 wells in
the first nine months of 2005. The average rig count decreased 4.1% to 516
rigs in the third quarter of 2006 from 538 rigs in the third quarter of 2005.
The average rig count for the first nine months of 2006 increased 19.1% to 505
rigs compared to 424 rigs in the first nine months of 2005.
Sales
Sales for the quarter ended September 30, 2006 increased 7.7% or
$9.4 million to $131.2 million from $121.8 million for the quarter ended
September 30, 2005. Sales for the nine months ended September 30, 2006
increased 23.6% or $80.9 million to $423.0 million from $342.1 million for the
nine months ended September 30, 2005. The sales increase of 7.7% in the third
quarter has softened compared to the sales increase during the first half of
2006 due to reduced industry activity as evidenced by the reduction in both
well completions and rig counts for the third quarter.
Gross Profit
Gross profit increased 7.7% or $1.7 million to $23.7 million for the
quarter ended September 30, 2006 from $22.0 million for the quarter ended
September 30, 2005. Gross profit margins showed a small increase from 18.0%
for the quarter ended September 30, 2005 to 18.1% for the quarter ended
September 30, 2006.
Gross profit increased 22.9% or $14.6 million to $78.4 million for the
nine months ended September 30, 2006 from $63.8 million for the nine months
ended September 30, 2005. Gross profit margins decreased slightly from 18.7%
for the nine months ended September 30, 2005 to 18.5% for the nine months
ended September 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. The benefits of these 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 $1.4 million or 10.1% to $15.3 million for the
quarter ended September 30, 2006 from $13.9 million for the quarter ended
September 30, 2005. SG&A costs increased $9.0 million or 23.1% to
$48.0 million for the nine months ended September 30, 2006 from $39.0 million
for the nine months ended September 30, 2005. The increase in SG&A for the
quarter and first nine months of 2006 related mainly to salaries and related
costs for new employees hired to support the increase in sales, 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 18.2% as at September 30, 2006 to
428 employees compared to 362 employees as at September 30, 2005. Average
revenue per employee for the first nine months of 2006 increased 3.5% compared
to the first nine months of 2005. The improvement reflects efficiencies from
higher activity levels and the 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 $1.1 million in the first nine months of the year. It is
anticipated that the SOX Section 404 certification initiative will cost the
Company approximately $1.2 million to $1.6 million or $0.04 to $0.06 per share
(diluted) in 2006.
EBITDA
EBITDA for quarter ended September 30, 2006 increased $0.1 million or
1.0% to $8.4 million compared to $8.3 million for the quarter ended
September 30, 2005. The $9.4 million increase in sales resulted in a 0.9%
incremental flow through to EBITDA. EBITDA as a percentage of sales was 6.4%
for the quarter ended September 30, 2006 versus 6.8% for the quarter ended
September 30, 2005.
EBITDA for the nine months ended September 30, 2006 increased 22.5% or
$5.6 million to $30.5 million compared to $24.9 million for the nine months
ended September 30, 2005. The $80.9 million increase in sales resulted in a
6.9% incremental flow through to EBITDA. EBITDA as a percentage of sales was
7.2% for the nine months ended September 30, 2006 versus 7.3% for the nine
months ended September 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 6.0% or $0.4 million to $7.1 million
for the quarter ended September 30, 2006 compared to $6.7 million for the
quarter ended September 30, 2005. The improvement is a result of the factors
previously discussed as well as a reduction in amortization expense of
$0.5 million offset by the $0.4 million increase in interest expense and
other. Amortization expense declined due to the Company's enterprise system
being fully amortized. Interest expense and other increased from higher levels
of financing, interest rates and changes in foreign currency gains and losses.
Income before income taxes improved 32.7% or $6.5 million to
$26.4 million for the nine months ended September 30, 2006 compared to
$19.9 million for the nine months ended September 30, 2005. The improvement is
a result of the factors previously discussed, a reduction in amortization
expense of $1.5 million and a $0.6 million increase in interest expense and
other. The $80.9 million increase in sales resulted in an 8.0% incremental
flow through to income before income taxes.
Income Taxes
The Company's effective tax rate for the quarter ended September 30, 2006
was 33.4%, as compared to an effective tax rate of 36.6% for the quarter ended
September 30, 2005. The Company's effective tax rate for the nine months ended
September 30, 2006 was 33.7%, as compared to an effective tax rate of 37.0%
for the nine months ended September 30, 2005. The reduction in the effective
tax rate for the quarter and nine months ended September 30, 2006 is due to a
reduction to statutory tax rates and from changes in non-deductible items.
Net Income and Net Income per Share
Net income for the for the quarter ended September 30, 2006 was
$4.7 million or $0.25 per share (diluted) as compared to $4.2 million or $0.22
per share (diluted) for the for the quarter ended September 30, 2005. This
represents an income improvement of $0.5 million or $0.03 per share (diluted).
Net income for the for the nine months ended September 30, 2006 was
$17.5 million or $0.93 per share (diluted) as compared to $12.6 million or
$0.68 per share (diluted) for the for the nine months ended September 30,
2005. This represents an income improvement of $4.9 million or $0.25 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 that impact the
Company.
<<
(in thousands of Cdn.
dollars except per share
data)
Unaudited Q4 Q1 Q2 Q3
2004 2005 2005 2005
---------- ---------- ---------- ----------
Sales $ 104,435 $ 128,372 $ 91,899 $ 121,809
EBITDA(1) 5,958 10,745 5,897 8,300
EBITDA(1) as a % of sales 5.7% 8.4% 6.4% 6.8%
Net income 2,839 5,804 2,543 4,214
Net income as a % of sales 2.7% 4.5% 2.8% 3.5%
Net income per share
Basic (Cdn. $) $ 0.17 $ 0.34 $ 0.14 $ 0.25
Diluted (Cdn. $) $ 0.16 $ 0.32 $ 0.14 $ 0.22
(in thousands of Cdn.
dollars except per share
data)
Unaudited Q4 Q1 Q2 Q3
2005 2006 2006 2006
---------- ---------- ---------- ----------
Sales $ 140,323 $ 176,357 $ 115,464 $ 131,159
EBITDA(1) 11,061 15,094 7,023 8,386
EBITDA(1) as a % of sales 7.9% 8.6% 6.1% 6.4%
Net income 6,303 8,879 3,914 4,719
Net income as a % of sales 4.5% 5.0% 3.4% 3.6%
Net income per share
Basic (Cdn. $) $ 0.36 $ 0.50 $ 0.21 $ 0.26
Diluted (Cdn. $) $ 0.33 $ 0.47 $ 0.21 $ 0.25
>>
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 times and highest sales activity levels 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 13.1% to 4,030
wells for the third quarter of 2006 compared to 4,639 wells for the second
quarter of 2006. The average rig count increased by 65.4% to 516 rigs in the
third quarter of 2006 from 312 in the second quarter of 2006.
Sales for the quarter ended September 30, 2006 increased 13.6% to
$131.2 million from $115.5 million for the quarter ended June 30, 2006. The
increase in sales is due to the typical increase experienced in the third
quarter as spring breakup concludes during the summer months, offset by a
softening in the market in terms of well completions.
Net income was $4.7 million or $0.25 per share (diluted) for the quarter
ended September 30, 2006 compared to $3.9 million or $0.21 per share (diluted)
for the quarter ended June 30, 2006.
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.
Cash flow from operating activities and the Company's 364-day bank operating
facility are used to finance the Company's working capital, capital
expenditures and potential acquisitions. 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 September 30, 2006, the Company generated
$6.2 million in cash flow from operating activities, before net change in
non-cash working capital balances. This was offset by a $7.9 million increase
in working capital (excluding the bank operating loan) and $0.9 million for
purchases of capital and other expenditures. These activities resulted in a
$2.6 million increase in the bank operating loan.
For the three months ended September 30, 2005, the Company generated
$5.5 million in cash flow from operating activities, before net change in
non-cash working capital balances, and $0.8 million 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
$0.2 million investment in capital and other expenditures and $0.1 million 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, 2006, the Company generated
$21.0 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 $26.8 million increase in working capital (excluding the bank
operating loan), $2.3 million to purchase a two branch distribution operation,
$2.5 million in capital and other expenditures and $0.1 million in repayments
on capital leases. These activities resulted in a $9.1 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 $0.3 million investment in capital and other expenditures and $0.2 million
in cash used to repay capital leases. These activities resulted in a $3.1
million increase in the bank operating loan.
For the quarter ended September 30, 2006, accounts receivable increased
$10.9 million or 12.5% to $98.3 million from $87.4 million as at June 30,
2006. As at September 30, 2006 accounts receivable increased $1.8 million or
1.9% to $98.3 million from $96.5 million as at December 31, 2005. The increase
in accounts receivable during the third quarter reflects the increase in sales
during the third quarter.
Average Days Sales Outstanding (DSO) was 59.3 days in the third quarter
of 2006 and 59.5 days in the first nine months of 2006. This compares to 49.4
days for the third quarter of 2005 and 52.2 days for the first nine 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.
Total inventory for the Company increased to $97.7 million as at
September 30, 2006 as compared to $95.4 million as at June 30, 2006 and
$80.5 million as at December 31, 2005. The Company has increased its
investment in inventory due to both the growth in its business and the longer
order lead times being experienced that results in the potential for certain
product shortages from suppliers' capacity constraints.
The Company measures inventory efficiency by using an inventory turns
calculation. The higher the number of inventory turns, the better the
Company's inventory is managed. Inventory turned 4.5 times (annualized) in the
third quarter of 2006 and 5.2 times (annualized) in the first nine months of
2006. This compares to 5.1 times (annualized) in the third quarter of 2005 and
5.2 times (annualized) for the first nine months of 2005. CE Franklin targets
inventory turns of 5.0 times (annualized). Reduced turns in the third quarter
of 2006 reflect the recent reduction in activity levels. The Company monitors
its inventory on a daily basis in order to reduce surplus, improve turns and
reduce obsolescence.
Accounts payable and accrued liabilities have increased $1.6 million to
$65.3 million as at September 30, 2006 compared to $63.7 million as at
June 30, 2006. For the nine months ended September 30, 2006 accounts payable
and accrued liabilities increased by $0.4 million to $65.3 million as compared
to $64.9 million as at December 31, 2005
Property and equipment increased 45.7% to $5.1 million from $3.5 million
at December 31, 2005. This increase reflects capital expenditures of
$2.3 million, $0.9 million in additions to rental equipment assets, and
$0.4 million in other capital additions. The additions were offset by
amortization expense of $2.0 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 is expected to enhance the Company's net
income. See note 2 to the Interim Consolidated Financial Statements of the
Company for further details.
Effective July 27, 2006, the Company has implemented a new $75.0 million
364-day bank operating facility. There was an increase in borrowing to
$38.2 million as at September 30, 2006 compared to $35.6 million as at June
30, 2006. As at September 30, 2006 the Company was well within its covenant
compliance thresholds and was able to draw up to $75.0 million against its
bank operating loan based on the borrowing base formula.
As at September 30, 2006 the Company's total capitalization (financed
debt plus equity) was comprised of debt of 29.1% and equity of 70.9% compared
to 30.5% debt and 69.5% equity as at September 30, 2005.
Contractual Obligations
In July 2006, the Company entered into a lease commitment with a 15-year
initial term pertaining to the construction of a new distribution centre in
Edmonton, Alberta. Construction of the property is anticipated to be completed
by November 2007.
There have been no other 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 approximately 51% 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 September 30, 2006 and September 30, 2005 was
$3.6 million and $2.8 million, respectively, of this bottom hole pump
production equipment purchased from Wilson. For the three months ended
September 30, 2006 and 2005, cost of sales includes $2.2 million and $2.1
million, respectively, relating to the equipment purchased from Wilson. For
the nine months ended September 30, 2006 and 2005, cost of sales includes $6.5
million and $5.8 million, respectively, relating to the equipment purchased
from Wilson. Accounts payable and accrued liabilities, which are non-interest
bearing and are payable on commercial supplier payment terms, include $0.9
million and $1.2 million at September 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 September 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 September 30, 2006 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
previously described in the Management Discussion and Analysis for 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 October 27, 2006 the Company had 18,233,212 common shares
outstanding.
As at October 27, 2006, options to purchase 862,873 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 change 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, 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.
Unusual 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 additional
customers account 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.
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, product
availability, location of service centers and technical knowledge and
experience of its staff. 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 by choosing 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 be assured that these individuals will remain with the
Company in the future. An unexpected partial or total loss of their services
may harm the Company's business.
The Company's major shareholder may influence the Company's affairs. 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 51% of the Company's common outstanding
shares (diluted). As a result, Smith International Inc. 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's operations are subject to hazards. 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 Nine Months Ended
----------------------- -----------------------
(in thousands of September September September September
Canadian dollars, 30 30 30 30
except per share data) 2006 2005 2006 2005
------------------------------------------------- -----------------------
Sales 131,159 121,809 422,980 342,080
Cost of sales 107,419 99,832 344,533 278,276
-------------------------------------------------------------------------
Gross profit 23,740 21,977 78,447 63,804
-------------------------------------------------------------------------
Other expenses (income)
Selling, general and
administrative expenses 15,314 13,853 48,006 38,966
Amortization 660 1,207 2,053 3,553
Interest expense 643 443 2,048 1,445
Foreign exchange loss (gain) 38 (167) (26) (95)
Other 2 (9) (36) (9)
-------------------------------------------------------------------------
16,657 15,327 52,045 43,860
-------------------------------------------------------------------------
Income before income taxes 7,083 6,650 26,402 19,944
-------------------------------------------------------------------------
Income tax expense
(recovery) (note 4)
Current 2,771 2,643 8,757 8,888
Future (407) (207) 133 (1,505)
-------------------------------------------------------------------------
2,364 2,436 8,890 7,383
-------------------------------------------------------------------------
Net income for the period 4,719 4,214 17,512 12,561
-------------------------------------------------------------------------
Net income per share (note 3)
Basic 0.26 0.25 0.97 0.73
Diluted 0.25 0.22 0.93 0.68
Weighted average number of
shares outstanding
Basic 18,232,658 17,328,175 18,053,045 17,256,201
Diluted 18,908,634 18,439,928 18,729,021 18,439,928
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Consolidated Balance Sheets
(Unaudited)
September December
30 31
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable 98,338 96,508
Inventories 97,679 80,482
Other 1,914 2,998
-------------------------------------------------------------------------
197,931 179,988
Property and equipment 5,117 3,537
Goodwill 10,479 7,765
Future income taxes (note 4) 902 1,038
Other 481 180
-------------------------------------------------------------------------
214,910 192,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Bank overdraft 11,438 14,090
Bank operating loan 38,206 29,062
Accounts payable 36,451 29,575
Accrued liabilities 28,777 35,354
Income taxes payable 2,136 7,840
Current portion of long-term debt 492 217
-------------------------------------------------------------------------
117,500 116,138
Long-term debt 883 438
-------------------------------------------------------------------------
118,383 116,576
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 23,816 21,914
Contributed surplus 15,462 14,281
Retained earnings 57,249 39,737
-------------------------------------------------------------------------
96,527 75,932
-------------------------------------------------------------------------
214,910 192,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- -----------------------
September September September September
(in thousands of 30 30 30 30
Canadian dollars) 2006 2005 2006 2005
------------------------------------------------- -----------------------
Cash flows from
operating activities
Net income for the period 4,719 4,214 17,512 12,561
Items not affecting cash -
Amortization 660 1,207 2,053 3,553
Future income tax expense
(recovery) (407) (207) 133 (1,505)
Stock based compensation
expense 999 146 1,472 439
Other 206 126 (201) 117
-------------------------------------------------------------------------
6,177 5,486 20,969 15,165
Net change in non-cash
working capital balances
related to operations -
Accounts receivable (10,976) (19,435) (1,830) (13,367)
Inventories (2,971) (4,099) (17,967) (16,127)
Other current assets (136) (143) 1,084 (2,438)
Accounts payable 13,690 (1,548) 6,876 3,779
Accrued liabilities (12,120) 13,115 (6,577) 8,619
Income taxes payable (1,343) 1,309 (5,704) 2,602
-------------------------------------------------------------------------
(7,679) (5,315) (3,149) (1,767)
-------------------------------------------------------------------------
Cash flows from financing
activities
Issuance of capital stock 3 777 1,611 1,042
Increase in bank
operating loan 2,571 1,692 9,144 3,022
Increase (decrease)
in bank overdraft 6,076 3,063 (2,652) (1,836)
Decrease in long-term debt (31) (79) (157) (205)
-------------------------------------------------------------------------
8,619 5,453 7,946 2,023
-------------------------------------------------------------------------
Cash flows from investing
activities
Purchase of property
and equipment (592) (168) (2,224) (286)
Proceeds on disposal of
property and equipment 2 30 40 30
Acquisition of distribution
operations (note 2) - - (2,263) -
Increase in other assets (350) - (350) -
-------------------------------------------------------------------------
(940) (138) (4,797) (256)
-------------------------------------------------------------------------
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 592 430 1,969 1,410
Interest on long-term
debt 51 13 79 35
Income taxes 4,114 1,335 14,461 6,286
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CE Franklin Ltd.
Interim Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(in thousands of Capital Stock
Canadian --------------------- Share-
dollars, except Number of Contributed Retained holders'
share amounts) Shares $ surplus earnings equity
-------------------------------------------------------------------------
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 based
compensation
expense - - 439 - 439
Net income - - - 12,561 12,561
-------------------------------------------------------------------------
Balance -
September 30,
2005 17,430,499 20,431 14,243 33,434 68,108
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance -
December 31,
2005 17,804,554 21,914 14,281 39,737 75,932
Stock options
exercised 428,658 1,902 (291) - 1,611
Stock based
compensation
expense - - 1,472 - 1,472
Net income - - - 17,512 17,512
-------------------------------------------------------------------------
Balance -
September 30,
2006 18,233,212 23,816 15,462 57,249 96,527
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, a
$300,000 contingent amount is payable on February 1, 2007 subject to the
achievement of certain 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 September 30, 2006 the Company had 18,233,212 common shares
outstanding and 862,873 options to acquire common shares at a weighted
average exercise price of $3.60 per common share. Of the outstanding
options, 420,208 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 three quarters of
2006. The compensation expense recorded in the third quarter of 2006 and
in the nine month period ended September 30, 2006 for common share
options granted subsequent to December 31, 2002 was $132,000 and $396,000
respectively. The compensation expense recorded for the comparative
quarter and nine month period ended September 30, 2005 was $146,000 and
$439,000 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 nine month period ended September 30, 2006 would have
decreased by $49,000 ($0.00 per common share) and $147,000 ($0.01 per
common share) respectively. The net income for the comparative quarter
and 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.
b) Share units
Effective May 2, 2006, the Company adopted the Performance Share Unit
("PSU") and Deferred Share Unit ("DSU") plans approved by shareholders on
that date. Under these plans, PSU's and DSU's are granted which entitle
the participant, at the Company's option, to receive either a common
share or cash equivalent in exchange for a vested unit. The vesting
period for PSU's is three years from the grant date. DSU's vest on the
date of grant. Compensation expense related to the units 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 units are exchanged for either common shares or cash.
A total of 132,816 PSU's and DSU's were granted in the second quarter of
2006. The compensation expense recorded in the third quarter and the nine
month period ended September 30, 2006 was $867,000 (2005 - nil) and
$1,076,000 (2005 - nil) 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
--------------------------- ---------------------------
(in thousands of September 30 September 30 September 30 September 30
Canadian dollars) 2006 2005 2006 2005
--------------------------------------------- ---------------------------
Income before
income taxes 7,083 6,650 26,402 19,944
--------------------------------------------- ---------------------------
Incomes taxes
calculated at
expected rates 2,301 32.5% 2,285 34.4% 8,773 33.2% 6,853 34.4%
Non-deductible
items 35 0.5% 97 1.5% 312 1.2% 550 2.7%
Adjustments on
filing returns - 0.0% - 0.0% (343) (1.3%) - 0.0%
Capital and large
corporations
taxes 11 0.2% 17 0.2% 47 0.2% 42 0.2%
Other 17 0.2% 37 0.5% 101 0.4% (62) (0.3%)
--------------------------------------------- ---------------------------
2,364 33.4% 2,436 36.6% 8,890 33.7% 7,383 37.0%
--------------------------------------------- ---------------------------
--------------------------------------------- ---------------------------
b) Future income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of future income tax assets and liabilities are as
follows:
September December
30 31
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
Assets
Financing and investment charges 254 909
Property and equipment 633 479
Other 510 199
-------------------------------------------------------------------------
1,397 1,587
-------------------------------------------------------------------------
Liabilities
Goodwill 495 549
-------------------------------------------------------------------------
495 549
-------------------------------------------------------------------------
Net future income tax asset 902 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.
>>
