CE Franklin Ltd.
Interim Consolidated Balance Sheets - Unaudited
(in thousands of Canadian dollars)
|
| September 30 |
| December 31 |
|
| 2008 |
| 2007 |
Assets |
|
| ||
|
|
|
|
|
Current assets |
|
|
|
|
Accounts receivable |
| 101,214 |
| 89,305 |
Inventories |
| 86,792 |
| 86,414 |
Other |
| 8,217.632 |
| 3,781 |
|
| 196,223.632 |
| 179,500 |
|
|
|
|
|
Property and equipment |
| 6,520 |
| 6,398 |
Goodwill |
| 20,570 |
| 20,523 |
Future income taxes(note 3) |
| 1,562 |
| 1,403 |
Other |
| 586 |
| 891 |
|
| 225,461.632 |
| 208,715 |
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Bank operating loan |
| 20,902 |
| 44,301 |
Accounts payable and accrued liabilities |
| 73,108 |
| 44,807 |
Income taxes payable |
| - |
| - |
Current portion of long term debt and capital lease obligations |
| 197 |
| 805 |
|
| 94,207 |
| 89,913 |
|
|
|
|
|
Long term debt and capital lease obligations |
| 500 |
| 582 |
|
| 94,707 |
| 90,495 |
|
|
|
|
|
Shareholders* Equity(note 2) |
|
|
|
|
Capital stock |
| 22,914 |
| 24,306 |
Contributed surplus |
| 18,619 |
| 17,671 |
Retained earnings |
| 89,222 |
| 76,243 |
|
| 130,755 |
| 118,220 |
|
| 225,462 |
| 208,715 |
|
|
|
|
|
See accompanying notes to these interim consolidated financial statements.
Page 1 of 8
CE Franklin Ltd.
Interim Consolidated Statements of Operations - Unaudited
|
| Three months ended |
| Six months Ended | ||
|
|
|
|
|
|
|
(in thousands of Canadian dollars except shares and per share amounts) |
| June 30 | June 30 |
| June 30 | June 30 |
| 2008 | 2007 |
| 2008 | 2007 | |
|
|
|
|
|
|
|
Sales |
| 96,395 | 82,938 |
| 236,977 | 237,193 |
Cost of sales |
| 77,442 | 66,107 |
| 190,963 | 194,051 |
Gross profit |
| 18,953 | 16,831 |
| 46,014 | 43,142 |
|
|
|
|
|
|
|
Other expenses (income) |
|
|
|
|
|
|
Selling, general and administrative expenses |
| 16,735 | 14,086 |
| 33,608 | 29,352 |
Amortization |
| 594 | 727 |
| 1,211 | 1,486 |
Interest expense |
| 163 | 479 |
| 601 | 1,062 |
Foreign exchange (gain)/loss |
| (8) | 535 |
| (10) | 589 |
|
| 17,484 | 15,827 |
| 35,410 | 32,489 |
|
|
|
|
|
|
|
Income before income taxes |
| 1,469 | 1,004 |
| 10,604 | 10,653 |
|
|
|
|
|
|
|
Income tax expense (recovery)(note 3) |
|
|
|
|
|
|
Current |
| 651 | 654 |
| 3,583 | 3,881 |
Future |
| (134) | (294) |
| (213) | (245) |
|
| 517 | 360 |
| 3,370 | 3,636 |
|
|
|
|
|
|
|
Net income and comprehensive income |
| 952 | 644 |
| 7,234 | 7,017 |
|
|
|
|
|
|
|
Net income per share(note 2) |
|
|
|
|
|
|
Basic |
| 0.05 | 0.03 |
| 0.39 | 0.38 |
Diluted |
| 0.05 | 0.03 |
| 0.39 | 0.37 |
|
|
|
|
|
|
|
Weighted average number of shares outstanding (000's) |
|
|
|
|
|
|
Basic |
| 18,278 | 18,329 |
| 18,305 | 18,282 |
Diluted |
| 18,574 | 18,768 |
| 18,601 | 18,721 |
See accompanying notes to these interim consolidated financial statements.
Page 2 of 8
CE Franklin Ltd.
Interim Consolidated Statements of Cash Flow - Unaudited
|
| Three months ended |
| Six months ended | ||
|
| June 30 | June 30 |
| June 30 | June 30 |
(in thousands of Canadian dollars) |
| 2008 | 2007 |
| 2008 | 2007 |
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
Net income for the period |
| 952 | 644 |
| 7,234 | 7,017 |
Items not affecting cash - |
|
|
|
|
|
|
Amortization |
| 594 | 727 |
| 1,211 | 1,486 |
Future income tax recovery |
| (134) | (294) |
| (213) | (245) |
Stock based compensation expense |
| 552 | 676 |
| 846 | 1,062 |
|
| 1,964 | 1,753 |
| 9,078 | 9,320 |
Net change in non-cash working capital balances |
|
|
|
|
|
|
related to operations - |
|
|
|
|
|
|
Accounts receivable |
| 28,027 | 39,443 |
| 4,988 | 21,166 |
Inventories |
| (5,050) | (4,783) |
| 3,465 | 1,495 |
Other current assets |
| (3,375) | (1,859) |
| (1,755) | (2,645) |
Accounts payable and accured liabilities |
| (14,698) | (33,808) |
| 13,068 | (24,431) |
Income taxes payable |
| (2,514) | (2,585) |
| 132 | (3,299) |
|
| 4,354 | (1,839) |
| 28,976 | 1,606 |
|
|
|
|
|
|
|
Cash flows (used in)/ from financing activities |
|
|
|
|
|
|
(Decrease)/Increase in bank operating loan |
| (3,366) | (1,233) |
| (25,905) | 1,975 |
Decrease in long term debt and capital lease obligations |
| (54) | (51) |
| (705) | (391) |
Issuance of capital stock |
| 48 | 354 |
| 49 | 568 |
Purchase of capital stock in trust for RSU Plans |
| (227) | - |
| (723) | (173) |
|
| (3,599) | (930) |
| (27,284) | 1,979 |
|
|
|
|
|
|
|
Cash flows (used in)/from investing activities |
|
|
|
|
|
|
Purchase of property and equipment |
| (1,196) | (802) |
| (2,133) | (1,208) |
Business acquisitions |
| 441 | - |
| 441 | (2,377) |
|
| (755) | (802) |
| (1,692) | (3,585) |
|
|
|
|
|
|
|
Change in cash and cash equivalents during the period |
| - | (3,571) |
| - | - |
|
|
|
|
|
|
|
Cash and cash equivalents- Beginning of period |
| - | 3,571 |
| - | - |
|
|
|
|
|
|
|
Cash and cash equivalents * End of period |
| - | - |
| - | - |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
Interest on bank operating loan |
| 153 | 472 |
| 583 | 1,047 |
Interest on capital lease obligations and long term debt |
| 10 | 7 |
| 18 | 15 |
Income taxes |
| 2,407 | 3,244 |
| 2,570 | 7,185 |
See accompanying notes to these interim consolidated financial statements.
Page 3 of 8
CE Franklin Ltd.
Interim Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
(in thousands of Canadian dollars and number of shares) | Capital Stock |
|
|
|
|
|
| |
| Number of Shares | $ |
| Contributed Surplus |
| Retained Earnings |
| Shareholders' Equity |
|
|
|
|
|
|
|
|
|
Balance - December 31, 2006 | 18,223 | 23,586 |
| 16,213 |
| 62,676 |
| 102,475 |
|
|
|
|
|
|
|
|
|
Stock option compensation expense | - | - |
| 1,062 |
| - |
| 1,062 |
Stock options excercised | 174 | 824 |
| (256) |
| - |
| 568 |
Restricted share units (RSU's) exercised | 10 | 204 |
| (204) |
| - |
| - |
Purchase of shares in trust for RSU plans | (15) | (173) |
| - |
| - |
| (173) |
Net income | - | - |
| - |
| 7,017 |
| 7,017 |
Balance - June 30, 2007 | 18,392 | 24,441 |
| 16,815 | 0 | 69,693 |
| 110,949 |
|
|
|
|
|
|
|
|
|
Balance - December 31, 2007 | 18,370 | 24,306 |
| 17,671 |
| 76,243 |
| 118,220 |
Stock option compensation expense | - | - |
| 605 |
| - |
| 605 |
Stock options exercised | 10 | 70 |
| (20) |
| - |
| 50 |
RSU's exercised | 3 | 62 |
| (62) |
| - |
| - |
DSU grant | - | - |
| 240 |
| - |
| 240 |
Purchase of shares in trust for RSU Plans | (100) | (723) |
| - |
| - |
| (723) |
Net income | - | - |
| - |
| 7,234 |
| 7,234 |
Balance - June 30, 2008 | 18,283 | 23,715 | - | 18,434 | - | 83,477 | - | 125,626 |
See accompanying notes to these interim consolidated financial statements.
Page 4 of 8
CE Franklin Ltd.
Notes to Interim Consolidated Financial Statements - Unaudited
(tabular amounts in thousands of Canadian dollars except share and per share amounts)
Note 1 - Accounting Policies
These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada applied on a consistent basis with CE Franklin Ltd.’s (the “Company”) annual consolidated financial statements for the year ended December 31, 2007, with the exception of policies relating to financial instruments, capital disclosures and inventories as noted below. The disclosures provided below are incremental to those included in the annual consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto for the year ended December 31, 2007.
Effective January 1, 2008, the Company adopted Section 1535 – Capital Disclosures, Section 3862 – Financial Instruments – Disclosures and Section 3863 – Financial Instruments – Presentation. The standards establish presentation guidelines for financial instruments and deal with their classification, as well as providing readers of the financial statements with information pertinent to the Company’s objectives, policies and processes for managing capital.
Effective January 1, 2008, the Company adopted Section 3031 – Inventories. The standard establishes the accounting treatment for inventories and provides guidance on the determination of cost and subsequent recognition of expenses. The adoption of Section 3031 did not impact the determination of inventory costs and expense recorded by the Company. Inventories consisting primarily of goods purchased for resale are valued at the lower of average cost or net realizable value. Inventory obsolescence expense was recognized in the three and nine month periods ending September 30, 2008 of $25,000 recovery and $301,000 expense respectively (2007 - $245,000 and $500,000). A recovery of $25,000 was recorded in the three month period ended September 30, 2008 due to a general improvement in inventory turnover performance. As at September 30, 2008 and December 31, 2007 the Company had recorded reserves for inventory obsolescence of $2.1 million and $1.8 million respectively.
These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented; all such adjustments are of a normal recurring nature.
The Company’s sales typically peak in the first quarter when drilling activity is at its highest levels. They then decline through the second and third quarters, rising again in the fourth quarter when preparation for the new drilling season commences. Similarly, net working capital levels are typically at seasonally high levels at the end of the first quarter, declining in the second and third quarters, and then rising again in the fourth quarter.
Note 2 – Share Data
At September 30, 2008, the Company had 18.2 million common shares and 1.3 million options outstanding to acquire common shares at a weighted average exercise price of $5.85 per common share, of which 667,164 options were vested and exercisable at a weighted average exercise price of $4.23 per common share.
a) Stock options
Option activity for each of the nine month periods ended September 30 was as follows:
000's |
| 2008 |
| 2007 |
Outstanding at January 1 |
| 1,262 |
| 804 |
Granted |
| 75 |
| 220 |
Exercised |
| (10) |
| (174) |
Forfeited |
| (1) |
| (1) |
Outstanding at September 30 |
| 1,326 |
| 849 |
Page 5 of 8
CE Franklin Ltd.
Notes to Interim Consolidated Financial Statements - Unaudited
(tabular amounts in thousands of Canadian dollars except share and per share amounts)
There were no options granted during the three month period ended September 30, 2008. A total of 110,683 share options were granted at a weighted average strike price of $10.30 in the three month period ended September 30, 2007 for a fair value of $507,000. The fair value of the options granted during the nine month period ended September 30, 2008 was $274,000 (September 30, 2007- $1,027,000) and were estimated as at the grant date using the Black-Scholes option pricing model, using the following assumptions:
| 2008 |
Dividend yield | Nil |
Risk-free interest rate | 3.88% |
Expected life | 5 years |
Expected volatility | 50% |
Stock Option compensation expense recorded in the three and nine month periods ended September 30, 2008 was $170,000 (2007 - $144,000) and $520,000, (2007- $379,000), respectively.
b) Restricted share units
The Company has Restricted Share Unit (“RSU”) and Deferred Share Unit (“DSU”) plans (collectively the “RSU Plans”), where by RSU’s and DSU’s are granted entitling the participant, at the Company’s option, to receive either a common share or cash equivalent value in exchange for a vested unit. The vesting period for RSU’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.
000's |
| 2008 |
| 2007 | ||
|
| RSU | DSU |
| RSU | DSU |
Outstanding at January 1 |
| 178 | 37 |
| 120 | 12 |
Granted |
| 1 | 30 |
| 79 | 25 |
Exercised |
| (11) | - |
| (10) | - |
Forfeited |
| - | - |
| (9) | - |
Outstanding at September 30 |
| 168 | 67 |
| 180 | 37 |
RSU plan compensation expense recorded in the three and nine month periods ended September 30, 2008 was $133,000 (2007- $269,000) and $629,000 (2007- $1,095,000) respectively.
The Company purchases its common shares on the open market to satisfy restricted share unit obligations through an independent trust. The trust is considered to be a variable interest entity and is consolidated in the Company’s financial statements with the number and cost of shares held in trust, reported as a reduction of capital stock. During the three and nine month periods ended September 30, 2008, 100,095 and 200,095 common shares were acquired respectively by the trust (2007 – nil for the three month period and 15,200 common shares for the nine month period) at a cost of $922,000 for the three month period and $1,643,000 for the nine month period (2007 - $173,000).
c) Reconciliation of weighted average number of diluted common shares outstanding (in 000’s)
The following table summarizes the common shares in calculating net earnings per share.
|
| Three Months Ended |
| Nine Months Ended | ||
|
| September 30 | September 30 |
| September 30 | September 30 |
|
| 2008 | 2007 |
| 2008 | 2007 |
Weighted average common shares outstanding- basic |
| 18,254 | 18,392 |
| 18,290 | 18,283 |
Effect of Stock options and RSU Plans |
| 241 | 509 |
| 384 | 509 |
Weighted average common shares outstanding- diluted |
| 18,495 | 18,901 |
| 18,674 | 18,792 |
Page 6 of 8
CE Franklin Ltd.
Notes to Interim Consolidated Financial Statements - Unaudited
(tabular amounts in thousands of Canadian dollars except share and per share amounts)
Note 3 – Income taxes
a)
The difference between the income tax provision recorded and the provision obtained by applying the combined federal and provincial statutory rates is as follows:
|
| Three Months Ended |
| Nine Months Ended | ||||||
|
| September 30 |
| September 30 | ||||||
|
| 2008 | % | 2007 | % |
| 2008 | % | 2007 | % |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| 8,351 |
| 6,279 |
|
| 18,955 |
| 16,930 |
|
Income taxes calculated at expected rates |
| 2,498 | 29.9 | 2,048 | 32.6 |
| 5,670 | 29.9 | 5,522 | 32.6 |
Non-deductible items |
| 122 | 1.5 | 97 | 1.6 |
| 319 | 1.7 | 345 | 2.0 |
Capital and large corporations taxes |
| 13 | 0.2 | - | 0.0 |
| 35 | 0.2 | 22 | 0.1 |
Adjustments on filing returns & other |
| (27) | (0.4) | 8 | 0.1 |
| (48) | (0.3) | (100) | (0.6) |
|
| 2,606 | 31.2 | 2,153 | 34.3 |
| 5,976 | 31.5 | 5,789 | 34.1 |
As at September 30, 2008, income taxes receivable included in other current assets are $0.524 million (December 31 2007 – Income taxes receivable $0.848 million).
b)
Future income taxes reflect the net effects of temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purpose. Significant components of future income tax assets and liabilities are as follows:
| September 30 |
| December 31 |
| 2008 |
| 2007 |
Assets |
|
|
|
Financing charges | 71 |
| 103 |
Property and equipment | 910 |
| 874 |
Stock compensation expense & Other | 934 |
| 786 |
| 1,915 |
| 1,763 |
Liabilities |
|
|
|
Goodwill | 353 |
| 360 |
Net future income tax asset | 1,562 |
| 1,403 |
The Company believes it is more likely than not that all future income tax assets will be realized.
Note 4- Capital Management
The Company’s primary source of capital is its shareholders equity and cash flow from operating activities before net changes in non-cash working capital balances. The Company augments these capital sources with a $60 million, 364 day bank operating loan facility which is used to finance its net working capital and general corporate requirements. The bank operating facility is arranged through a syndicate of three banks and matures in July 2009.
The maximum amount available to borrow under this facility is subject to a borrowing base formula applied to accounts receivable and inventories, and a covenant restricting the Company’s debt to 2.25 times trailing 12 month earnings before interest, amortization and taxes. As at September 30, 2008, this ratio was 1.0 times (December 31, 2007 – 1.4 times) and the maximum amount available to be borrowed under the facility was $60 million. In management’s opinion, the Company’s available borrowing capacity under its bank operating facility and ongoing cash flow from operations, are sufficient to resource its anticipated contractual commitments. The facility contains certain other restrictive covenants, which the Company was in compliance with as at September 30, 2008.
Page 7 of 8
CE Franklin Ltd.
Notes to Interim Consolidated Financial Statements - Unaudited
(tabular amounts in thousands of Canadian dollars except share and per share amounts)
Note 5 – Financial Instruments and Risk Management
a)
Fair Values
The Company’s financial instruments recognized on the consolidated balance sheet consist of accounts receivable, accounts payable and accrued liabilities, bank operating loan, long term debt and obligations under capital leases. The fair values of these financial instruments, excluding the bank operating loan, long term debt and obligations under capital leases, approximate their carrying amounts due to their short- term maturity. At September 30, 2008, the fair value of the bank operating loan, long term debt and obligations under capital leases approximated their carrying values due to their floating interest rate nature and short term maturity.
b)
Credit Risk
A substantial portion of the Company’s accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks.
c)
Market Risk
The Company is exposed to market risk from changes in the Canadian prime interest rate which can impact its borrowing costs. The Company purchases certain products in US dollars and sells such products to its customer typically priced in Canadian dollars. As a result, fluctuations in the value of the Canadian dollar relative to the US dollar can result in foreign exchange gains and losses.
d)
Risk Management
From time to time the Company enters into foreign exchange forward contracts to manage its foreign exchange market risk by fixing the value of its liabilities and future commitments. The Company’s foreign exchange risk arises principally from the settlement of United States dollar denominated net working capital balances as a result of product purchases denominated in United States dollars. As at September 30, 2008, the Company had contracted to purchase US$5.1 million at fixed exchange rates with terms not exceeding six months. The fair market values of the contracts are nominal.
Note 6 – Related Party Transactions
Smith International Inc. (“Smith”) owns approximately 53% of the Company’s outstanding shares. The Company is the exclusive distributor in Canada of down hole pump production equipment manufactured by Wilson Supply, a division of Smith. Purchase of such equipment conducted in the normal course on commercial terms were as follows:
|
|
|
|
| September 30*2008 |
| September 30*2007 |
Cost of sales for the three months ended | 2,570 |
| 2,498 |
|
|
|
|
Cost of sales for the nine months ended | 7,938 |
| 7,041 |
|
|
|
|
Inventory | 4,849 |
| 4,074 |
|
|
|
|
Accounts payable and accrued liabilities | 535 |
| 1,064 |
|
|
|
|
Note 7 -Segmented reporting
The Company distributes oilfield products principally through its networks of 44 branches located in western Canada to oil and gas industry customers. Accordingly, the Company has determined that it operated through a single operating segment and geographic jurisdiction.
Page 8 of 8
