Management’s Discussion and Analysis at April 27, 2010
The following Management’s Discussion and Analysis (“MD&A”) is provided to assist readers in understanding CE Franklin Ltd.’s (“CE Franklin” or the “Company”) financial performance and position during the periods presented and significant trends that may impact future performance of CE Franklin. This discussion should be read in conjunction with the Company’s interim consolidated financial statements for the three month period ended March 31, 2010 and the Management’s Discussion and Analysis and the consolidated financial statements for the year ended December 31, 2009. All amounts are expressed in Canadian dollars and in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”), except otherwise noted.
Overview
CE Franklin is a leading distributor of pipe, valves, flanges, fittings, production equipment, tubular products and other general industrial supplies primarily to the oil and gas industry through its 49 branches situated in towns and cities that serve oil and gas fields of the western Canadian sedimentary basin. In addition, the Company distributes similar products to the oil sands, refining, and petrochemical industries and non-oilfield related industries such as forestry and mining.
The Company’s branch operations service over 3,000 customers by providing the right materials where and when they are needed, and for the best value. Our branches, supported by our centralized Distribution Centre in Edmonton, Alberta, stock over 25,000 stock keeping units sourced from over 2,000 suppliers. This infrastructure enables us to provide our customers with the products they need on a same day or over-night basis. Our centralized inventory and procurement capabilities allow us to leverage our scale to enable industry leading hub and spoke purchasing and logistics capabilities. Our branches are also supported by services provided by the Company’s corporate office in Calgary, Alberta including sales, marketing, product expertise, logistics, invoicing, credit and collection and other business services.
The Company’s shares trade on the TSX (“CFT”) and NASDAQ (“CFK”) stock exchanges. Smith International Inc. (“Smith”), a major oilfield service company based in the United States, owns approximately 55% of the Company’s shares.
Business Strategy
The Company is pursuing the following strategies to grow its business profitably:
·
Expand the reach and market share serviced by the Company’s distribution network. The Company is focusing its sales efforts and product offering on servicing complex, multi-site needs of large and emerging customers in the energy sector. Organic growth is expected to be complemented by selected acquisitions.
·
Expand production equipment service capability to capture more of the product life cycle requirements for the equipment the Company sells such as down hole pump repair, oilfield engine maintenance, well optimization and on site project management. This will differentiate the Company’s service offering from its competitors and deepen relationships with its customers.
·
Expand oil sands and industrial project and Maintenance, Repair and Operating Supplies (“ MRO”) business by leveraging our existing supply chain infrastructure, product and project expertise.
Business Outlook
Oil and gas industry activity in 2010 is expected to increase modestly from the decade-low levels experienced in 2009. Natural gas prices remain depressed as North American production capacity and inventory levels currently dominate demand. Natural gas capital expenditure activity is focused on the emerging shale gas plays in north eastern British Columbia where the Company has a strong market position. Conventional and heavy oil economics are reasonable at current price levels leading to moderate activity in eastern Alberta and south east Saskatchewan. Oil sands project announcements are gaining momentum with the recovery in oil prices and access to capital markets. The year to date average rig count is significantly higher than comparable 2009 levels, while well completions, which drive demand for the Company’s capital project related products, continue to lag last year’s levels. As 2010 p rogresses, the increase in rig activity should result in higher well completions which are expected to in turn increase demand for the Company’s products. Approximately 50% to 60% of the Company’s total sales are driven by our customer’s capital expenditure requirements. CE Franklin’s revenues are expected to increase modestly in 2010 due to a full year’s contribution of sales from the oilfield equipment distributor acquired in June 2009, increased oil and gas industry activity and the expansion of the Company’s product lines.
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The oilfield supply industry continues to work off excess inventories, complicated by product deflation in certain product lines that will support continued aggressive price competition and lower realized gross profit margins. The Company will continue to manage its cost structure to protect profitability while maintaining service capacity and advancing strategic initiatives.
Over the medium to longer term, the Company’s strong financial and competitive positions will enable profitable growth of its distribution network through the expansion of its product lines, supplier relationships and capability to service additional oil and gas and other industrial end use markets.
First Quarter Operating Results
The following table summarizes CE Franklin’s results of operations:
| |
| (In millions of Cdn. Dollars except per share data) | | | | | |
| | Three Months Ended March 31 | |
|
| | 2010 | | 2009 |
|
| Sales | 121.9 | 100.0% | | 140.7 | 100.0% |
| Cost of Sales | (102.2) | (83.9)% | | (114.3) | (81.2)% |
| Gross profit | 19.7 | 16.1% | | 26.4 | 18.8% |
| Selling, general and administrative expenses | (15.6) | (12.8)% | | (16.8) | (11.9)% |
| EBITDA(1) | 4.1 | 3.4% | | 9.6 | 6.8% |
| Amortization | (0.6) | (0.5)% | | (0.6) | (0.4)% |
| Interest | (0.2) | (0.2)% | | (0.3) | (0.2)% |
| Income before taxes | 3.3 | 2.7% | | 8.7 | 6.2% |
| Income tax expense | (1.1) | (0.9)% | | (2.7) | (1.9)% |
| Net income | 2.2 | 1.8% | | 6.0 | 4.3% |
| Net income per share | | | | | |
| Basic | $ 0.13 | | | $ 0.33 | |
| Diluted | $ 0.12 | | | $ 0.33 | |
| Weighted average number of shares outstanding (000's) | | | | |
| Basic | 17,576 | | | 18,013 | |
| Diluted | 17,803 | | | 18,189 | |
(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 and EBITDA as a percentage of sales because it is used by management as supplemental measures 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 fin ance its working capital and capital income taxes. Amortization expense is a necessary component of the Company’s expenses because the Company is required to pay cash 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 incomes, 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. A reconciliation of EBITDA to Net income is provided within the table above. 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.
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First Quarter Results
Net income for the first quarter of 2010 was $2.2 million, down $3.8 million from the first quarter of 2009.
Sales were $121.9 million, a decrease of $18.8 million (13%) from the first quarter of 2009. Capital project business comprised 50% of total sales (2009 – 62%), and decreased $26.0 million (30%) from the prior year period, consistent with the 28% decrease in well completions from the comparable period. The rollover in tubular and other steel product prices also contributed to the reduction in capital project sales and margins. Lower capital project sales were partially offset by the acquisition of a western Canadian oilfield supply competitor (the “Acquired Business”) in the second quarter of 2009, which contributed an estimated 17% of first quarter 2010 oilfield sales. Gross profit was down $6.7 million (25%) due to the reduction of sales combined with a 2.7% decline in average margins from the prior year period. The highly competitive environment continues to impact margins. Selling, general and administrative expenses decreased by $1.2 million (7%) to $15.6 million for the quarter as compen sation and operating costs have been managed to lower levels in response to reduced sales levels. Income taxes decreased by $1.7 million (61%) in first quarter of 2010 compared to the prior year period due to lower pre-tax earnings. The weighted average number of shares outstanding during the first quarter decreased by 0.4 million shares (2%) from the prior year period principally due to shares purchased for cancellation pursuant to the Company’s Normal Course Issuer Bid (“NCIB”). Net income per share (basic) was $0.13 in the first quarter of 2010, down 61% from that earned in the first quarter 2009.
Sales
Sales for the quarter ended March 31, 2010, were $121.9 million, down 13% from the quarter ended March 31, 2009, as detailed above in the “First Quarter results” discussion.
| (in millions of Cdn. $) | | | | | |
| | | Three months ended March 31 | |
| | | 2010 | | 2009 | |
|
| End use sales demand | | $ % | $ % |
| Capital projects | | 61.5 | 50 | 87.5 | 62 |
| Maintenance, repair and operating supplies | | 60.4 | 50 | 53.2 | 38 |
| Total Sales | | 121.9 | 100 | 140.7 | 100 |
Note:Capital project end use sales are defined by the Company as consisting of the tubular and 80% of pipe, flanges and fittings; and valves and accessories product sales respectively; MRO Sales are defined by the Company as consisting of pumps and production equipment, production services; general product and 20% of pipes, flanges and fittings; and valves and accessory product sales respectively.
The relative level of oil and gas commodity prices are a key driver of industry capital project activity as product prices directly impact the economic returns realized by oil and gas companies. The Company uses oil and gas well completions and average rig counts as industry activity measures to assess demand for oilfield equipment used in capital projects. Oil and gas well completions require the products sold by the Company to complete a well and bring production on stream and are a general indicator of energy industry activity levels. Average drilling rig counts are also used by management to assess industry activity levels as the number of rigs in use ultimately drives well completion requirements. Well completion, rig count and commodity price information for the 2010 and 2009 first quarters are provided in the table below.
| | Q1 Average | % |
| | 2010 | 2009 | | change |
| Gas - Cdn. $/gj (AECO spot) | $ 4.93 | $ 4.94 | | (0)% |
| Oil - Cdn. $/bbl (synthetic crude) | $ 82.49 | $ 56.23 | | 47% |
| Average rig count | 425 | 310 | | 37% |
| Well completions: | | | | |
| Oil | 1,355 | 954 | | 42% |
| Gas | 1,491 | 2,993 | | (50)% |
| Total well completions | 2,846 | 3,947 | | (28)% |
Average statistics are shown except for well completions.
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Sources:Oil and Gas prices – First Energy Capital Corp.; Rig count data – CAODC; well completion data – Daily Oil Bulletin
Sales of capital project related products were $61.5 million in the first quarter of 2010, down 30% ($26 million) from the first quarter of 2009. Total well completions decreased by 28% in the first quarter of 2010 and the average working rig count increased by 37% compared to the prior year period. Gas wells comprised 52% of the total wells completed in western Canada in the first quarter of 2010 compared to 76% in the first quarter of 2009. Spot gas prices ended the first quarter at $3.68 per GJ (AECO) and $83.29 per bbl (Synthetic Crude), a decrease of 25% and an increase of 1%, respectively, from first quarter average prices. Depressed gas prices are expected to continue to negatively impact gas drilling activity over the remainder of 2010, which in turn is expected to constrain demand for the Company’s products.
MRO product sales are related to overall oil and gas industry production levels and tend to be more stable than capital project sales. MRO product sales for the quarter ended March 31, 2010, increased by $7.2 million (14%) to $60.4 million compared to the quarter ended March 31, 2009 and comprised 50% of the Company’s total sales. The increase in sales reflects sales contributed by the Acquired Business.
The Company’s strategy is to grow profitability by focusing on its core western Canadian oilfield product distribution business, complemented by an increase in the product life cycle services provided to its customers and the focus on the emerging oil sands capital project and MRO sales opportunities. Sales results of these initiatives to date are provided below:
| | | Q1 2010 | | | | Q1 2009 | | |
| Sales ($millions) | | $ % | | $ % |
| Oilfield | | 102.9 | | 85 | | 126.3 | | 90 |
| Oil sands | | 15.1 | | 12 | | 12.4 | | 9 |
| Production services | | 3.9 | | 3 | | 2.0 | | 1 |
| Total sales | | 121.9 | | 100 | | 140.7 | | 100 |
Sales of oilfield products to conventional western Canada oil and gas end use applications were $102.9 million for the first quarter of 2010, down 19% from the first quarter of 2009. This decrease was driven by the 28% decrease in well completions compared to the prior year period, partially offset by sales contributed by the Acquired Business which comprised approximately 17% of first quarter 2010 oilfield sales.
Sales to oil sands end use applications reached $15.1 million in the first quarter, an increase of $2.7 million (22%) compared to $12.4 million in the first quarter of 2009 reflecting increased capital project sales. The Company continues to position its sales focus, Distribution Centre and Fort McMurray branch to penetrate this emerging market for capital project and MRO products.
Production service sales were $3.9 million in the first quarter of 2010, double the $2.0 million of sales in the first quarter of 2009, reflecting improved oil production economics resulting in increased customer maintenance activities that were deferred in 2009.
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Gross Profit
| Gross Profit | | | | |
| |
| | | Q1 2010 | | Q1 2009 |
| Gross profit(millions) | | $ 19.7 | | $ 26.4 |
| Gross profit margin as a % of sales | | 16.1% | | 18.8% |
| |
| Gross profit composition by product sales category: | | | | |
| Tubulars | | 2% | | 11% |
| Pipe, flanges and fittings | | 28% | | 36% |
| Valves and accessories | | 19% | | 18% |
| Pumps, production equipment and services | | 17% | | 9% |
| General | | 34% | | 26% |
| Total gross profit | | 100% | | 100% |
Gross profit was $19.7 million in the first quarter of 2010, down $6.7 million (25%) from the first quarter of 2009 due to the 13% decline in sales combined with lower gross profit margins. Gross profit margins declined from 18.8% in the first quarter of 2009 to 16.1% in the first quarter of 2010. The reduction in tubular gross profit composition in the first quarter was affected by lower sales and margins due to continued market inventory surpluses and product cost deflation compared to the first quarter of 2009. Reduced pipe, flange and fittings gross profit composition in the first quarter of 2010 reflect the impacts of lower margin oil sands orders and product cost deflation. Increased pumps, production equipment and services gross profit composition reflects the doubling of sales over the prior year period. The increase in general products gross profit composition reflects the increase in MRO end use sales to 50% of total sales in the quarter, compared to 38% in the prior year period.
Selling, General and Administrative (“SG&A”) Costs
| Selling, General and Administrative (“SG&A”) Costs | | | | | | | | |
| |
| ($millions) | | Q1 2010 | | | | Q1 2009 | | |
| | | $ % | | $ % |
| People costs | | 8.9 | | 57 | | 10.1 | | 60 |
| Facility and office costs | | 3.4 | | 21 | | 3.4 | | 20 |
| Selling costs | | 1.8 | | 12 | | 1.7 | | 10 |
| Other | | 1.5 | | 10 | | 1.6 | | 10 |
|
| SG&A costs | | 15.6 | | 100 | | 16.8 | | 100 |
|
| SG&A costs as % of sales | | 13% | | | | 12% | | |
SG&A costs decreased $1.2 million (7%) in the first quarter of 2010 from the prior year period and represented 13% of sales compared to 12% in the prior year period. The majority of the $1.2 million decrease in expenses was attributable to a $1.2 million (12%) reduction in people costs reflecting a 1% reduction in employee count, lower overtime and incentive compensation costs. The expansion of the Company’s branch network from 44 to 49 branches resulting from the acquisition of the Acquired Business increased operating costs by approximately $0.8 million in the first quarter compared to the prior year period.
Amortization Expense
Amortization expense of $0.6 million in the first quarter of 2010 was comparable to the first quarter of 2009.
Interest Expense
Interest expense of $0.2 million in the first quarter of 2010 was comparable to the first quarter of 2009.
Foreign Exchange (Gain) Loss
Foreign exchange gains and losses on United States dollar denominated product purchases and net working capital liabilities were nominal in both the first quarter of 2010 and the first quarter of 2009.
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Income Tax Expense
The Company’s effective tax rate for the first quarter of 2010 was 32.6%, comparable to the first quarter of 2009. Substantially all of the Company’s tax provision is currently payable.
Summary of Quarterly Financial Data
The selected quarterly financial data is presented in Canadian dollars and in accordance with Canadian GAAP. This information is derived from the Company’s unaudited quarterly financial statements.
| (in millions of Cdn. dollars except per share data) | | | | | | | | | | | | | | |
| Unaudited | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 |
| | | 2008 | | 2008 | | 2008 | | 2009 | | 2009 | | 2009 | | 2009 | | 2010 |
| Sales | | $ 96.4 | | $ 149.3 | | $ 161.2 | | $ 140.7 | | $ 109.1 | | $ 94.1 | | $ 93.0 | | $ 121.9 |
| Gross profit | | 19.0 | | 27.8 | | 33.9 | | 26.4 | | 17.5 | | 17.4 | | 15.3 | | 19.7 |
| Gross profit % | | 19.7% | | 18.6% | | 21.0% | | 18.8% | | 16.0% | | 18.5% | | 16.5% | | 16.1% |
| EBITDA | | 2.3 | | 9.1 | | 14.3 | | 9.6 | | 1.7 | | 0.5 | | 0.6 | | 4.1 |
| EBITDA as a % of sales | | 2.4% | | 6.1% | | 8.9% | | 6.8% | | 1.6% | | 0.5% | | 0.6% | | 3.4% |
| Net income (loss) | | 1.0 | | 5.7 | | 8.8 | | 6.0 | | 0.6 | | 0.2 | | (0.5) | | 2.2 |
| Net income (loss) as a % of sales | | 1.0% | | 3.8% | | 5.5% | | 4.3% | | 0.5% | | 0.2% | | (0.5%) | | 1.8% |
| Net income (loss) per share | | | | | | | | | | | | | | | | |
| Basic | | $ 0.05 | | $ 0.31 | | $ 0.48 | | $ 0.33 | | $ 0.04 | | $ 0.01 | | ($0.03) | | $ 0.13 |
| Diluted | | $ 0.05 | | $ 0.31 | | $ 0.47 | | $ 0.33 | | $ 0.03 | | $ 0.01 | | ($0.03) | | $ 0.12 |
| |
| Net working capital(1) | | 114.9 | | 123.1 | | 142.8 | | 153.2 | | 137.0 | | 131.1 | | 136.6 | | 113.9 |
| Bank operating loan(1) | | 18.4 | | 20.9 | | 34.9 | | 40.2 | | 25.3 | | 21.3 | | 26.5 | | 1.1 |
| |
| Total well completions | | 2,607 | | 4,392 | | 6,971 | | 3,947 | | 1,274 | | 1,468 | | 1,576 | | 2,846 |
(1)Net working capital and bank operating loan amounts are as at quarter end.
The Company’s sales levels are affected by weather conditions. As warm weather returns in the spring each year, the winter’s frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have dried out. In addition, many exploration and production areas in northern Canada are accessible only in the winter months when the ground is frozen. As a result, the first and fourth quarters typically represent the busiest time for oil and gas industry activity and the highest sales activity for the Company. Sales levels drop dramatically during the second quarter until such time as roads have dried and road bans have been lifted. This typically results in a significant reduction in earnings during the second quarter, as the decline in sales typically out paces the decline in SG&A costs as the majority of the Company’s SG&A costs are fixed in nature. Net working capital (defined as current assets less accounts payable and accrued liabilities, income taxes payable and other current liabilities, excluding the bank operating loan) and bank operating loan borrowing levels follow similar seasonal patterns as sales.
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 net working capital, capital expenditures and acquisitions.
As at March 31, 2010, borrowings under the Company’s bank operating loan were $1.1 million, a decrease of $25.4 million from December 31, 2009. Borrowing levels have decreased due to the Company generating $3.2 million in cash flow from operating activities, before net changes in non-cash working capital balances and a $22.7 million reduction in net working capital. This was offset by $0.1 million in capital and other expenditures and $0.4 million for the purchase of shares to resource stock compensation obligations and the repurchase of shares under the Company’s NCIB.
As at March 31, 2009, borrowings under the Company’s bank operating loan were $40.2 million, an increase of $5.2 million from December 31, 2008. Borrowing levels increased due to a $10.3 million increase in net working capital, $0.5 million in capital and other expenditures and $1.6 million for the purchase of shares to resource stock compensation obligations and the repurchase of shares under the Company’s NCIB. This was offset by $7.1 million in cash flow from operating activities, before net changes in non-cash working capital balances.
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Net working capital was $113.9 million at March 31, 2010, a decrease of $22.7 million from December 31, 2009. Accounts receivable increased by $7.4 million (11%) to $74.9 million at March 31, 2010 from December 31, 2009 due to the 31% increase in sales in the first quarter compared to the fourth quarter of 2009, partially offset by an improvement in Days Sales Outstanding (“DSO”). DSO in the first quarter of 2010 was 51 days compared to 60 days in the fourth quarter of 2009 and 52 days in the first quarter of 2009. DSO is calculated using average sales per day for the quarter compared to the period end accounts receivable balance. Inventory decreased by $12.8 million (12%) at March 31, 2010 from December 31, 2009. Inventory turns for the first quarter of 2010 improved to 4.6 turns compared to 3.0 turns in the fourth quarter of 2009 and 4.0 turns in the first quarter of 2009. Inventory turns are calculated u sing cost of goods sold for the quarter on an annualized basis compared to the period end inventory balance. The Company continues to adjust its investment in inventory to align with anticipated industry activity levels and supplier lead times in order to improve inventory turnover efficiency. Accounts payable and accrued liabilities increased by $13.6 million (35%) to $52.1 million at March 31, 2010 from December 31, 2009 responsive to increased sales levels.
Capital expenditures in the first quarter of 2010 were $0.1 million, comparable to $0.5 million in the prior year period.
The Company has a 364 day bank operating loan facility in the amount of $60.0 million arranged with a syndicate of three banks that matures in July 2010. The Company anticipates that its bank operating facility will be renewed in the normal course. The loan facility bears interest based on floating interest rates and is secured by a general security agreement covering all assets of the Company. The maximum amount available under the facility is subject to a borrowing base formula applied to accounts receivable and inventories, and a covenant restricting the Company’s average trailing 12 month debt to 3.0 times trailing twelve month EBITDA. As at March 31, 2010, the Company’s average debt to EBITDA ratio was 2.5 times (March 31, 2009 –0.8 times) which provides a maximum borrowing ability of $31 million under the facility. As at March 31, 2010, the ratio of the Company’s debt to total ca pitalization (debt plus equity) was 1.0% (March 31, 2009 – 22%).
Contractual Obligations
There have been no material changes in off-balance sheet contractual commitments since December 31, 2009.
Capital Stock
As at March 31, 2010 and 2009, the following shares and securities convertible into shares were outstanding:
| (millions) | | March 31, 2010 | | March 31, 2009 |
| | | Shares | | Shares |
| Shares outstanding | | 17.6 | | 17.8 |
| Stock options | | 1.2 | | 1.2 |
| Share unit plan obligations | | 0.6 | | 0.5 |
| Shares outstanding and issuable | | 19.4 | | 19.5 |
The weighted average number of shares outstanding during the first quarter of 2010 was 17.6 million, a decrease of 0.4 million shares from the prior year’s first quarter due principally to the purchases of common shares under its NCIB and to resource share unit plan obligations. The diluted weighted average number of shares outstanding was 17.8 million, a decrease of 0.4 million shares from the prior year’s first quarter.
The Company has established an independent trust to purchase common shares of the Company on the open market to resource share unit plan obligations. During the three month period ended March 31, 2010, 36,800 common shares were acquired by the trust at an average cost per share of $6.78 (March 31, 2009 – 50,000 at an average cost per share of $5.00). As at March 31, 2009, the trust held 357,463 shares (March 31, 2009 – 363,258 shares).
On December 23, 2009, the Company announced the renewal of the NCIB, to purchase up to 880,000 common shares representing approximately 5% of its outstanding common shares. Shares may be purchased up to December 31, 2010. As at March 31, 2010 the Company had purchased 29,498 shares at an average cost of $6.61 per share (March 31, 2009 - 302,800 shares at an average cost of $4.57 per share).
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The Company settles exercises of stock options through payment of cash in order to manage share dilution while resourcing its long term incentive plan on a tax efficient basis. As a result, the Company’s stock option obligations (subject to vesting) are classified as a current liability (March 31, 2010 - $1.7 million) based on the positive difference between the Company’s closing stock price at period end and the underlying option exercise price. The offset to the generation of the current liability is contributed surplus, up to the cumulative expensed Black Scholes valuation, and compensation expense for the excess of the intrinsic value over the cumulative expensed Black Scholes value. The liability is marked to market at each period end, with any adjustment allocated to the relevant account as detailed above. On March 4, 2010, the federal government introduced its 2010 budget which contained provisions which if enacte d, could result in future stock option settlement payments no longer being deductible by the Company for tax purposes. This would result in the accounting write off of approximately $0.5 million of related future tax assets. No accounting recognition will be made until such time and to the extent that proposed changes to the deductibility of stock option payments for tax purposes has been substantively enacted.
Critical Accounting Estimates
There have been no material changes to critical accounting estimates since December 31, 2009. The Company is not aware of any environmental or asset retirement obligations that could have a material impact on its operations.
Change in Accounting Policies
There have been no changes to accounting policies since December 31, 2009.
Transition to International Financial Reporting Standards (“IFRS”)
In February 2008, the Canadian Accounting Standards Board confirmed that the basis for financial reporting by Canadian publicly accountable enterprises will change from Canadian GAAP to IFRS effective for January 1, 2011, including the preparation and reporting of one year of comparative figures. This change is part of a global shift to provide consistency in financial reporting in the global marketplace.
Project Structure and Governance
A Steering Committee has been established to provide leadership and guidance to the project team, assist in developing accounting policy recommendations and ensure there is adequate resources and training available. Management provides status updates to the Audit Committee on a quarterly basis.
Resources and Training
CE Franklin’s project team has been assembled and has developed a detailed workplan that includes training, detailed Canadian GAAP to IFRS analysis, technical research, policy recommendations and implementation. The project team completed initial training and ongoing training will continue through the project as required. The Company’s Leadership Team and the Audit Committee have also participated in IFRS awareness sessions.
IFRS Progress
The project team is advanced in its assessment of the differences between Canadian GAAP and IFRS. A risk based approach has been used to identify significant differences based on possible financial impact and complexity. No significant accounting policy differences have been identified to date. Similarly, there have been no significant information system change requirements identified in order to adopt IFRS. The project team is currently assessing changes to financial statement presentation, disclosure and related internal controls over financial reporting that will be required to adopt IRFS. There are a number of IFRS standards in the process of being amended by the International Accounting Standards Board and are expected to continue until the transition date of January 1, 2011. The Company is actively monitoring proposed changes.
At this stage in the project, CE Franklin cannot reasonably determine the full impact that adopting IFRS would have on its financial position and future results.
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Controls and Procedures
Internal control over financial reporting (“ICFR”) is designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and its compliance with Canadian GAAP in its financial statements. The President and Chief Executive Officer and the Vice President and Chief Financial Officer of the Company have evaluated whether there were changes to its ICFR during the three months ended March 31, 2010 that have materially affected or are reasonably likely to materially affect the ICFR. No such changes were identified through their evaluation.
Risk Factors
The Company is exposed to certain business and market risks including risks arising from transactions that are entered into the normal course of business, which are primarily related to interest rate changes and fluctuations in foreign exchange rates. During the reporting period, no events or transactions for year ended December 31, 2009 have occurred that would materially change the information disclosed in the Company’s Form 20F.
Forward Looking Statements
The information in the MD&A may contain “forward-looking statements” within the meaning of 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, including those in under the caption“Risk Factors”.
Forward-looking statements appear in a number of places and include statements with respect to, among other things:
·
forecasted oil and gas industry activity levels in 2010 and beyond;
·
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 business strategy and other plans and objectives for future operations;
·
fluctuations in worldwide prices and demand for oil and gas;
·
fluctuations in the demand for the Company’s products and services.
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 circumstance after the date of filing this MD&A, except as required by law.
Additional Information
Additional information relating to CE Franklin, including its first quarter 2010 Management Discussion and Analysis and interim consolidated financial statements and its Form 20-F/ Annual Information Form, is available under the Company’s profile on the SEDAR website atwww.sedar.com and atwww.cefranklin.com.
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