CALGARY, Jan. 31 /PRNewswire-FirstCall/ -- CE FRANKLIN LTD.
(TSX.CFT, AMEX.CFK) announced its results for the 2007 fourth
quarter and year end results. CE Franklin reported net income of
$2.4 million or $0.13 per share (basic) for the fourth quarter
ended December 31, 2007 as compared to net income of $5.4 million
or $0.30 per share for the fourth quarter ended December 31, 2006.
For 2007, net income was $13.6 million or $0.74 per share (basic)
as compared to $22.9 million or $1.27 per share of net income
earned in 2006. Financial Highlights -------------------- (millions
of Cdn.$ except Three Months Ended Year Ended per share data)
December 31 December 31 -----------------------
----------------------- 2007 2006 2007 2006 ----------- -----------
----------- ----------- (unaudited) (unaudited) Sales $ 112.3 $
130.6 $ 466.3 $ 555.2 Gross Profit 20.4 25.0 84.6 103.5 Gross
Profit - % of sales 18.2% 19.1% 18.1% 18.6% EBITDA(1) 5.1 9.6 25.7
40.1 EBITDA(1) as a % of sales 4.5% 7.4% 5.5% 7.2% Net income $ 2.4
$ 5.4 $ 13.6 $ 22.9 Per share Basic $ 0.13 $ 0.30 $ 0.74 $ 1.27
Diluted $ 0.13 $ 0.29 $ 0.72 $ 1.22 "Despite significantly reduced
oil and gas activity in western Canada in 2007, the Company
remained profitable," said Michael West, Chairman, President and
CEO. "In December, we advanced our competitive position in the
east-central Alberta market through the acquisition of JEN Supply
Inc. CE Franklin will continue to invest in its strategies to
diversify its products and services in its pursuit to build market
share over time." Sales decreased 14% to $112.3 million for the
quarter ended December 31, 2007 as compared to $130.6 million for
the quarter ended December 31, 2006. The 14% decrease in sales
reflects an overall reduction in industry activity during the
fourth quarter compared to the prior year period. The average rig
count for the fourth quarter decreased by 19% and well completions
(excluding dry and service wells) were down 23% from the prior year
period. EBITDA(1) for the quarter ended December 31, 2007 decreased
47% to $5.1 million compared to $9.6 million for the quarter ended
December 31, 2006 due to a similar reduction in gross profit. The
decrease in gross profit reflected lower sales levels combined with
a reduction in supplier rebates which contributed to the reduction
in gross profit margin. Net income for 2007 was $13.6 million, down
$9.3 million (41%) from 2006 levels. Sales declined by 16% due to
reduced oil and gas industry capital expenditures in 2007 and gross
profit margins declined by 3% due to reduced supplier rebates,
resulting in a $18.9 million (18%) decline in gross profit.
Selling, general and administrative expenses declined by $5.2
million (8%) due to lower incentive compensation costs, reduced
Sarbanes Oxley compliance costs, and lower selling costs resulting
from the acquisition of two agent operated branches during the
first half of 2007. Lower interest expense associated with reduced
average debt levels in 2007 was offset by foreign exchange losses
driven by the rapid appreciation in the Canadian dollar during
2007. Income taxes declined by $4.4 million in 2007 due to the
reduced level of pre-tax earnings. Net income per share (basic) was
$0.74 in 2007, down 42% due principally to the decline in net
income combined with a 1% increase in the weighted average number
of shares outstanding. 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 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. A reconciliation of
EBITDA to Net Income is provided within the table on page 3. 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. Outlook ------- The Company's
business is dependent on the level of conventional oil and gas
capital expenditures and production activity in western Canada. A
combination of events experienced in 2007 including soft natural
gas prices, the Alberta government royalty task force review and
subsequent decision to increase royalty rates, high drilling and
operating costs, and the rapid appreciation of the Canadian dollar,
have reduced the competitiveness of the western Canadian
sedimentary basin relative to other international oil and gas
producing regions. This has resulted in reduced oil and gas
industry activity in 2007 in western Canada that is expected to
continue through 2008. The Company expects these conditions will
contribute to increased consolidation of oil and gas customers,
coupled with increased competitive activity amongst oil field
equipment distributors. The Company intends to address these
conditions by pursuing its strategies while closely managing its
costs and net working capital investment levels. Over the medium to
longer term, the Company is optimistic that its strong competitive
status will position it favorably to take advantage of available
market share when natural gas prices recover to historic energy
equivalent price relationships to oil, resulting in renewed
conventional industry activity and demand for the Company's
products. Effective execution of the Company's oil sands and
service diversification strategies provide further opportunities to
leverage its supply chain infrastructure. Conference Call and
Webcast Information --------------------------------------- A
conference call to review the 2007 fourth quarter and year end
results, which is open to the public, will be held on Friday,
February 1, 2008 at 11:00 a.m. Eastern Time (9:00 a.m. Mountain
Time). Participants may join the call by dialing 1-416-644-3414 in
Toronto or dialing 1-800-733-7571 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 1-416-640-1917 in
Toronto or dialing 1-877-289-8525 and entering the pass code of
21259515 followed by the pound sign and may be accessed until
midnight Friday, February 8, 2008. The call will also be webcast
live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2137520 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 Mark Schweitzer, Vice President and Chief Financial
Officer. The discussion will be followed by a question and answer
period. OPERATING RESULTS The following table summarizes CE
Franklin's results of operations. Three Months Ended Years Ended
(in thousands of Cdn. December 31 December 31 dollars and number of
----------------------- ----------------------- shares, except per
2007 2006 2007 2006 share data) ----------- ----------- -----------
----------- Sales $ 112,263 $ 130,648 $ 466,275 $ 555,227 Cost of
sales 91,871 105,601 381,694 451,733 ----------- -----------
----------- ----------- Gross profit 20,392 25,047 84,581 103,494
Other expenses (income) Selling, general and administrative
expenses 15,352 15,281 58,053 63,287 Foreign exchange (gain) loss
and other (35) 192 837 130 ----------- ----------- -----------
----------- EBITDA 5,075 9,574 25,691 40,077 Amortization 656 766
2,795 2,819 Interest 482 613 2,031 2,661 ----------- -----------
----------- ----------- Income before income taxes 3,937 8,195
20,865 34,597 Income tax expense 1,510 2,768 7,298 11,658
----------- ----------- ----------- ----------- Net income 2,427
5,427 13,567 22,939 ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- Net income per
share Basic $ 0.13 $ 0.30 $ 0.74 $ 1.27 Diluted $ 0.13 $ 0.29 $
0.72 $ 1.22 Weighted average number of shares outstanding Basic
18,393 18,236 18,337 18,099 Diluted 18,863 18,861 18,807 18,724
Industry Activity Levels The following are selected western
Canadian oil and natural gas industry activity measures: As at
Three months ended Years ended December 31 December 31(1) December
31(1) ---------------- ---------------- ---------------- 2007 2006
2007 2006 2007 2006 ------- ------- ------- ------- ------- -------
Gas - Cdn. $/gj (AECO spot) $6.44 $6.00 $6.16 $6.98 $6.47 $6.55 Oil
- U.S. $/bbl (Edmonton Light) $93.35 $67.21 $85.70 $64.90 $76.48
$72.96 Average rig count n/a n/a 386 474 367 498 Well completions:
Gas n/a n/a 3,546 4,470 12,717 15,317 Oil n/a n/a 1,480 2,017 5,443
5,609 ------- ------- ------- ------- ------- ------- Total well
completions n/a n/a 5,026 6,487 18,160 20,926 Sources: Oil and gas
prices - First Energy Capital Corp.; Rig count data - Hughes
Christensen; Well completion data - Daily Oil Bulletin (1) For the
three and twelve months ended December 31, average statistics are
shown except for well completions. Overall, capital spending by
exploration and production companies continues at reduced levels as
a result of soft natural gas prices, higher drilling and operating
costs and the appreciation of the Canadian dollar which reduces the
competitiveness of the western Canadian sedimentary basin relative
to other international oil and gas producing regions. Additionally,
the Federal government's October 2006 announcement concerning the
taxation of oil and gas royalty trusts and the Alberta oil and gas
royalty task force report released in late October, have increased
fiscal uncertainty and contributed to reduced industry activity.
The Company uses oil and gas well completions and average rig
counts as industry activity measures. Oil and gas well completions
require the products sold by the Company and therefore are a good
general indicator of market activity. Average rig counts also
provide a general indication of energy industry activity levels as
there may be time lags in reporting well completions that may
impact quarterly statistics. For the quarter ended December 31,
2007, the total number of wells completed (excluding dry and
service wells) in western Canada decreased 23% to 5,026 wells
compared to the prior year period. The average rig count for the
quarter ended December 31, 2007, decreased 19% to 386 average rigs
as compared to the prior period. Sales Sales for the quarter ended
December 31, 2007 decreased 14% or $18.3 million to $112.3 million
from the quarter ended December 31, 2006. The reduction in sales
for the three month period ended December 31, 2007 was principally
due to an 18% decrease in sales to exploration and development
capital projects due to soft industry activity levels as described
previously. Sales for maintenance repair and operating supplies
("MRO") used in customer production activities in the fourth
quarter decreased by 9% compared to the prior year period and
decreased 9% for twelve months compared to the 2006 comparative
period. MRO sales comprised an estimated 43% of total Company sales
in the fourth quarter (2006 - 41%) and 42% of sales for the year
(2006 - 39%). In December 2007, the Company completed the
acquisition of JEN Supply, an oil field equipment distributor that
operated four branches in east-central Alberta. Two of these
branches were in existing markets where the Company had operations
and are being combined. This will enable the Company to grow its
market share in these markets while improving its operating
efficiency. JEN Supply's other two branch operations are in new
market areas and extend the Company's market reach. The integration
of JEN Supply is expected to be completed by the end of the first
quarter of 2008. Gross Profit Gross profit decreased 19% to $20.4
million for the quarter ended December 31, 2007 from $25.0 million
for the prior year period due to the reduction in sales. Gross
profit margins declined in the fourth quarter to 18.2% from 19.1%
in the prior year period. The decline was primarily due to a
reduction in supplier rebates. Selling, General and Administrative
("SG&A") Costs SG&A costs remained consistent at $15.3
million for the fourth quarter ended December 31, 2007 compared to
the prior year period. Lower selling costs associated with the
acquisition of two agent operated branch operations in early 2007
were offset by increased base compensation costs related in part to
the addition of $1.0 million associated with the Full Tilt and JEN
Supply operations. Compared to the third quarter, SG&A costs
increased by $1.8 million due to increased compensation costs,
allowance for doubtful accounts and the addition of JEN Supply
costs. Other Expenses Amortization, interest and foreign exchange
(gain) loss in the fourth quarter were comparable to the prior year
period. Income Taxes The Company's effective tax rate for the
quarter ended December 31, 2007 was 38%, up marginally from the
prior year period rate due primarily to non-deductible items
becoming a larger component of pre-tax income in 2007.
Substantially all of the company's tax provision is currently
payable. Net Income Net income for the quarter ended December 31,
2007 was $2.4 million, down $3.0 million (55%) from the prior year
period. Net income as a percentage of sales was 2%, down from 4% in
the prior year period due to the reduction in sales activity. The
weighted average number of shares outstanding increased by 1% over
the prior year period due to the exercise of stock options. Net
income per share was $0.13, down 57% from the prior year period due
to the reduction in net income and the increased number of shares
outstanding in 2007. Summary of Quarterly Financial Data The
selected quarterly financial data presented below 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 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2006 2006 2006 2006 2007
2007 2007 2007 ------ ------ ------ ------ ------ ------ ------
------ Sales 177.0 115.9 131.7 130.6 154.3 82.9 116.8 112.3 Gross
profit 32.2 22.5 23.7 25.0 26.3 16.8 21.0 20.4 EBITDA 15.1 7.0 8.4
9.6 11.0 2.2 7.4 5.1 EBITDA as a % of sales 8.5% 6.0% 6.4% 7.4%
7.1% 2.7% 6.3% 4.5% Net income 8.9 3.9 4.7 5.4 6.4 0.6 4.1 2.4 Net
Income as a % of sales 5.0% 3.4% 3.6% 4.1% 4.1% 0.7% 3.5% 2.1% Net
income per share Basic (Cdn. $) $ 0.50 $ 0.21 $ 0.26 $ 0.30 $ 0.35
$ 0.03 $ 0.22 $ 0.13 Diluted (Cdn. $) $ 0.47 $ 0.21 $ 0.25 $ 0.29 $
0.34 $ 0.03 $ 0.22 $ 0.13 Net working capital(1) 124.7 117.4 130.6
120.2 127.6 126.8 128.7 134.7 Bank operating loan(1) 54.1 41.0 49.6
34.0 33.6 36.0 35.4 44.3 (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. As a result, the
first and fourth quarters typically represent the busiest time and
highest sales activity for the Company. Sales levels drop
significantly during the second quarter until such time as the
roads have dried and road bans have been lifted. This typically
results in a significant reduction in earnings during the second
quarter, as the Company does not reduce its SG&A expenses
during this period to offset the reduction in sales. Once the road
bans have been lifted activity levels start to increase and sales
levels increase in the third quarter. Net working capital (defined
as current assets less accounts payable, accrued liabilities,
income taxes payable and other current liabilities) levels follow
the seasonality of 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
working capital, capital expenditures and acquisitions. As at
December 31, 2007, borrowings under the Company's bank operating
loan were $44.3 million, an increase of $10.3 million from December
31, 2006. Borrowing levels have increased as cash consideration
paid for business acquisitions of $18.0 million and net investments
of $2.0 million to maintain property and equipment have been
substantially funded by bank borrowings and cash flow from
operations of $9.8 million. Business acquisitions completed during
2007 aggregated $18.0 million and included $12.1 million to acquire
JEN Supply in December, $3.4 million to acquire Full Tilt in the
third quarter and $2.2 million to acquire two agent operated
branches early in 2007. See note 2 to the audited consolidated
financial statements for further details. Net working capital was
$134.7 million at December 31, 2007, an increase of $14.5 million
from December 31, 2006. Accounts receivable increased by $1.8
million (2.0%) to $89.3 million at December 31, 2007 from December
31, 2006. After adjusting for the acquisition of JEN Supply in
December, account's receivable day's sale outstanding increased 12%
to 62.0 days for the fourth quarter compared to 55.2 days in the
prior year period. Day's sales outstanding is calculated using
fourth quarter sales compared to the December 31 accounts
receivable balance. Inventory decreased by $10.9 million (11%) from
December 31, 2006 due to a reduction in purchasing levels to align
with reduced sales levels. After adjusting for the acquisition of
JEN Supply in December, inventory turns were 4.3 times, consistent
with the prior years fourth quarter. Inventory turns are calculated
using fourth quarter cost of goods sold on an annualized basis
compared to the December 31 inventory balance. The company will
continue to adjust its investment in inventory in order to align
with anticipated lower sales levels in order to improve inventory
turnover efficiency. Accounts payable and accrued liabilities
decreased by $21.9 million (33%) from December 31, 2006 to $44.8
million at December 31, 2007 due to reduced purchasing activity and
lower accrued employee incentive compensation. The Company has a
364 day bank operating loan facility in the amount of $75.0 million
(2006 - $75.0 million) arranged with a syndicate of four banks that
matures in July 2008. The loan facility bears interest based on
floating Canadian bank prime rate 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 debt to 2.25 times trading
twelve months EBITDA. As at December 31, 2007, the Company's debt
to EBITDA ratio was 1.7 times (2006 - 1.2 times) which provides a
maximum borrowing ability of approximately $60 million under the
facility (2006 - $75 million). This facility contains certain other
restrictive covenants. As at December 31, 2007, the Company was not
in compliance with a covenant under its loan facility agreement
which has subsequently been waived and amended by the Company's
lenders. As at December 31, 2007, the ratio of the Company's debt
to total capitalization (debt plus equity) was comprised of 28%
debt (2006 - 26% debt). Other Items Additional information relating
to CE Franklin, including its Annual Information Form, is available
under the Company's profile on SEDAR at http://www.sedar.com/ and
at http://www.cefranklin.com/. Forward Looking Statements
-------------------------- The information in this press release
contains "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 and other applicable securities legislation.
All statements, other than statements of historical facts, that
address activities, events, outcomes and other matters that CE
Franklin Ltd. ("CE Franklin" or the "Company") 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 press release. 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 have occurred that would
materially change the information disclosed in the Company's 2006
Form 20F. Forward-looking statements appear in a number of places
and include statements with respect to, among other things: -
forecasted oil and natural gas industry activity levels for 2008; -
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, gross profit margins 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; and - 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 press release,
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 press release 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 press release
except as required by law. CE Franklin Ltd. Interim Consolidated
Balance Sheets (Unaudited) December 31 December 31 (in thousands of
Canadian dollars) 2007 2006
-------------------------------------------------------------------------
ASSETS Current assets Accounts receivable 89,305 87,530 Inventories
86,414 97,275 Other 3,781 2,965
-------------------------------------------------------------------------
179,500 187,770 Property and equipment 6,398 5,546 Goodwill 20,523
10,479 Future income taxes (note 7) 1,403 1,160 Other 891 454
-------------------------------------------------------------------------
208,715 205,409
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES Current liabilities Bank operating loan (note 3) 44,301
34,008 Accounts payable and accrued liabilities 44,807 66,744
Income taxes payable - 819 Current portion of long term debt and
obligations under capital lease 805 517
-------------------------------------------------------------------------
89,913 102,088 Long term debt and obligations under capital lease
582 846
-------------------------------------------------------------------------
90,495 102,934
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SHAREHOLDERS' EQUITY Capital stock 24,306 23,586 Contributed
surplus 17,671 16,213 Retained earnings 76,243 62,676
-------------------------------------------------------------------------
118,220 102,475
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208,715 205,409
-------------------------------------------------------------------------
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(See notes to the Interim Consolidated Financial Statements) CE
Franklin Ltd. Interim Consolidated Statements of Operations
(Unaudited) (in thousands of Canadian dollars, Three Months Ended
Twelve Months Ended except shares --------------------------
-------------------------- and per share December 31 December 31
December 31 December 31 amounts) 2007 2006 2007 2006
---------------------------------------------
-------------------------- Sales 112,263 130,648 466,275 555,227
Cost of sales 91,871 105,601 381,694 451,733
-------------------------------------------------------------------------
Gross profit 20,392 25,047 84,581 103,494
-------------------------------------------------------------------------
Other expenses (income) Selling, general and administrative
expenses 15,352 15,281 58,053 63,287 Amortization 656 766 2,795
2,819 Interest expense 482 613 2,031 2,661 Foreign exchange
loss/(gain) and other (35) 192 837 130
-------------------------------------------------------------------------
16,455 16,852 63,716 68,897
-------------------------------------------------------------------------
Income before income taxes 3,937 8,195 20,865 34,597
-------------------------------------------------------------------------
Income tax expense (recovery) (note 7) Current 1,442 3,026 7,541
11,783 Future 68 (258) (243) (125)
-------------------------------------------------------------------------
1,510 2,768 7,298 11,658
-------------------------------------------------------------------------
Net and Comprehensive income for the period 2,427 5,427 13,567
22,939
-------------------------------------------------------------------------
Net income per share (note 6) Basic 0.13 0.30 0.74 1.27 Diluted
0.13 0.29 0.72 1.22 Weighted average number of shares outstanding
(000's) Basic 18,393 18,236 18,337 18,099 Diluted 18,863 18,861
18,807 18,724
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See notes to the Interim Consolidated Financial Statements) CE
Franklin Ltd. Interim Consolidated Statements of Cash Flows
(Unaudited) Three Months Ended Twelve Months Ended
-------------------------- -------------------------- (in thousands
of December 31 December 31 December 31 December 31 Canadian
dollars) 2007 2006 2007 2006
---------------------------------------------
-------------------------- Cash flows from operating activities Net
income for the period 2,427 5,427 13,567 22,939 Items not affecting
cash - Amortization 656 766 2,795 2,819 Future income tax expense
(recovery) 68 (258) (243) (125) Stock based compensation expense
450 760 1,924 2,232 Other - - - (36)
-------------------------------------------------------------------------
3,601 6,695 18,043 27,829 Net change in non-cash working capital
balances related to operations - Accounts receivable 4,748 10,808
5,633 8,978 Inventories 1,502 113 12,974 (18,019) Other current
assets (1,206) (1,051) 79 33 Accounts payable and accrued
liabilities (4,395) 1,516 (25,214) 1,815 Income taxes payable (721)
(1,317) (1,667) (7,021)
-------------------------------------------------------------------------
3,529 16,764 9,848 13,615 Cash flows from financing activities
Issuance of capital stock 10 52 579 1,663 Purchase of capital stock
in trust for Restricted Share Unit (RSU) Plans (152) (291) (325)
(291) Increase/(decrease) in bank operating loan 8,911 (15,636)
10,293 (9,144) Decrease in obligations under capital leases and
long term debt (40) (20) (476) (177)
-------------------------------------------------------------------------
8,729 (15,895) 10,071 (7,949)
-------------------------------------------------------------------------
Cash flows from investing activities Purchase of property and
equipment (119) (869) (1,956) (3,053) Business acquisitions (note
2) (12,139) 0 (17,963) (2,613)
-------------------------------------------------------------------------
(12,258) (869) (19,919) (5,666)
-------------------------------------------------------------------------
Change in cash and cash equivalents during the period - - - - Cash
and cash equivalents - Beginning and end of period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash paid during the period for: Interest on bank operating loan
474 604 1,999 2,632 Interest on obligations under capital leases 8
9 32 29 Income taxes 2,163 4,343 9,375 18,804
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See notes to the Interim Consolidated Financial Statements) CE
Franklin Ltd. Notes to Interim Consolidated Financial Statements
(Unaudited) (Tabular amounts in thousands of Canadian dollars)
-------------------------------------------------------------------------
Note 1 - Accounting policies These interim consolidated financial
statements have been prepared following accounting policies applied
on a consistent basis with CE Franklin Ltd.'s (the "Company")
annual financial statements for the year ended December 31, 2006,
with exception of policies relating to financial instruments as
noted below. The disclosures provided below are incremental to
those included in the annual audited financial statements. These
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, 2006. Effective
January 1, 2007, the Company adopted Section 1530 - Comprehensive
Income, Section 3855 - Financial Instrument Recognition and
Measurement, Section 3861 - Financial Instruments Disclosure and
Presentation, and Section 3865 - Hedges of the Canadian Institute
of Chartered Accountants Handbook in accordance with the
transitional provisions in each respective section. The adoption of
Sections 1530, 3855 and 3861 did not have a material impact on the
financial statements of the Company and did not result in any
adjustments for the recognition, de-recognition or measurement of
financial instruments as compared to the financial statements for
periods prior to the adoption of these sections. In addition, since
the Company currently does not utilize hedge accounting, the
adoption of Section 3865 currently has no material impact on the
financial statements of the Company. 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. Certain
comparative figures have been reclassified to conform to the
current year's presentation. Note 2 - Business Acquisitions On
December 3, 2007, the Company acquired the outstanding shares of
Jen Supply Ltd. ("JEN Supply"), an oil field equipment distributor
operating in east-central Alberta, for consideration of $12.639
million of which $12.139 million was paid in cash, subject to post
closing adjustments. The remaining $0.5 million is repayable in
five years and bears interest at the bank prime rate. Additional
consideration of up to $2.5 million is contingently payable over a
two year period to the extent that revenues from existing JEN
Supply customers exceed specified annual amounts. Any future
contingent payments will be accounted for as additional
consideration as the amounts become payable with a corresponding
increase to goodwill. On July 1, 2007, the Company purchased the
outstanding shares of Full Tilt Field Services Ltd. (""Full
Tilt""), for total consideration of $3.447 million, subject to post
closing adjustments. On January 31, 2007, the Company purchased the
assets of an agent that operated two of the Company's branch
locations, for total consideration of $2.167 million. On February
1, 2006, the Company purchased the outstanding shares of an agent
that operated two of the Company's branch locations, for total
consideration of $3.080 million, of which $2.263 million was paid
in cash and $0.817 million over a two year period. In accordance
with the purchase agreement, an additional $210,000 was paid in the
first quarter of 2007 (2006- $350,000). These amounts were
contingent on reaching certain performance conditions and have been
accounted for under the purchase method as an addition to goodwill.
Using the purchase method of accounting for acquisitions, the
Company consolidated the assets and liabilities from the
acquisitions and included earnings as of the closing dates. The
consideration paid for these acquisitions has been allocated as
follows: 2007 ------------------------------------------------
Acquisi- Acquisi- tion tion Acquisi- Contingent of JEN of Full tion
consider- Total Supply Tilt of Agent ation 2007 Cash Consideration
Paid 12,000 3,400 2,167 210 17,777 Transaction Costs 139 47 - - 186
------------------------------------------------
------------------------------------------------ Total Cash
Consideration 12,139 3,447 2,167 210 17,963 Deferred Consideration
500 - - - 500 ------------------------------------------------
Total Consideration 12,639 3,447 2,167 210 18,463
------------------------------------------------
------------------------------------------------ Accounts
Receivable 5,438 1,970 - - 7,408 Inventory 2,596 371 - - 2,967
Other Current Assets 46 14 - - 60 Property, Equipment and Other 805
292 167 - 1,264 Goodwill 5,724 2,110 2,000 210 10,044 Accounts
Payable (1,970) (1,310) - - (3,280) Future Tax Liability - - - - -
------------------------------------------------ 12,639 3,447 2,167
210 18,463 ------------------------------------------------
------------------------------------------------ 2006
--------------------------- Acquisi- Contingent tion consider-
Total of Agent ation 2006 Cash Consideration Paid 2,263 350 2,613
Transaction Costs - - - ----------------------------
---------------------------- Total Cash Consideration 2,263 350
2,613 Deferred Consideration 817 - 817 ----------------------------
Total Consideration 3,080 350 3,430 ----------------------------
---------------------------- Accounts Receivable - - - Inventory -
- - Other Current Assets - - - Property, Equipment and Other 369 -
369 Goodwill 2,714 350 3,064 Accounts Payable - - - Future Tax
Liability (3) - (3) ---------------------------- 3,080 350 3,430
---------------------------- ---------------------------- Note 3 -
Bank Operating Loan The Company has a 364 day bank operating loan
facility in the amount of $75.0 million (2006 - $75.0 million)
arranged through a syndicate of four banks, that matures in July,
2008. Amounts drawn against this facility bear interest at floating
rates based on the Canadian Bank prime rate and an applicable
borrowing margin. The weighted average interest rate as at December
31, 2007 was 6.23% (2006 - 6.33%). The maximum amount available
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 months earnings before
interest, amortization and taxes. As at December 31, 2007, the
maximum available under this facility, was approximately $60.0
million (2006 - $75.0 million). The facility is collateralized by a
general security agreement covering all present and after-acquired
property of the Company including accounts receivable, inventories
and property and equipment. This facility contains certain other
restrictive covenants. As at December 31, 2007, the Company was not
in compliance with a covenant under its loan facility agreement
which has been subsequently waived by the Company's lenders. Note 4
- Long Term Debt and Obligations Under Capital Leases 2007 2006
-------- -------- Agent Acquisition(a) 599 860 Obligations under
Capital Lease(b) 288 503 JEN Supply deferred consideration(c) 500 -
-------- -------- Total long-term obligation 1,387 1,363 Less
current portion (805) (517) -------- -------- Long-term debt and
obligation under capital leases 582 846 -------- -------- --------
-------- Principal repayments are due as follows: Current portion
805 Due in 2009 82 Due in 2012 500 -------- Total 1,387 --------
-------- a) The loan is unsecured and bears no interest and is
repayable in 2008. The effective interest rate on the loan is 5.65%
due to the discount applied on the initial recording of the loan.
b) Capital leases bear interest at various rates of up to 8% (2006
- 8%) and are collateralized by the underlying assets. c) The JEN
Supply deferred consideration was issued as part of the acquisition
consideration (see note 2). The deferred consideration is unsecured
and bears interest based on the floating Canadian bank prime rate
and is repayable in 2012. Note 5 - Contingencies and Commitments a)
The Company leases certain office, warehouse and store facilities
and automobiles under long-term operating leases. Commitments for
such operating leases for the next five years and thereafter are as
follows: Years ending December 31, 2008 5,429 2009 5,653 2010 5,156
2011 4,230 2012 3,856 Thereafter 29,226 ---------------------
53,550 --------------------- --------------------- b) The Company
is involved in various lawsuits, the losses from which, if any, are
not anticipated to be material to the financial statements. Note 6
- Share Data At December 31, 2007, the Company had 18,369,817
common shares and 1,261,484 options outstanding to acquire common
shares at a weighted average exercise price of $5.78 per common
share, 589,656 of those options were vested and exercisable at a
weighted average exercise price of $4.12 per common share. a) Stock
Options A total of 428,808 share options to acquire common shares
were granted at a weighted average strike price of $6.50 in the
fourth quarter of 2007. The fair value of the options granted was
$1,215,000. The fair value of common share options granted was
estimated as at the grant date using the Black-Scholes option
pricing model, using the following assumptions: Dividend yield nil
Risk-free interest rate 3.93% Expected life 5 years Expected
volatility 50% Stock Option compensation expense recorded in the
three and twelve month periods ended December 31, 2007 was $149,000
(2006- $133,000) and $528,000 (2006- $529,000), respectively. b)
Restricted share units Effective May 2, 2006, the Company adopted
the Restricted Share Unit ("RSU") and Deferred Share Unit ("DSU")
plans approved by shareholders on that date. Under these plans,
RSU's and DSU's are granted which entitle 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. A total of 2,265 RSU's were granted in the fourth quarter
of 2007. The compensation expense recorded in the three and twelve
month periods ended December 31, 2007 was $301,000 (2006- $627,000)
and $1,396,000 (2006- $1,703,000) respectively. As at December 31,
2007, there were 178,159 RSU's and 37,388 DSU's outstanding
(December 31, 2006, 120,710 RSU units and 12,104 DSU units). The
Company purchases its common shares on the open market to satisfy
performance 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 fourth quarter, 25,000 common shares were
acquired by the trust (2006 - 24,800 common shares) at a cost of
$152,000 (2006 - $291,000). c) Reconciliation of weighted average
number of diluted common shares outstanding (in 000's) The
following table summarizes the common shares used in calculating
net earnings per common share. Three Months Ended Twelve Months
Ended ------------------- -------------------- December December
December December 31 31 31 31 2007 2006 2007 2006 ---- ---- ----
---- Weighted average common shares outstanding - basic 18,393
18,236 18,337 18,099 Effect of Stock options, RSU's and DSU's 470
625 470 625 -------------------- -------------------- Weighted
average common shares outstanding - diluted 18,863 18,861 18,807
18,724 -------------------- -------------------- Note 7 - 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
--------------------------------------- December 31 December 31
2007 2006
-------------------------------------------------------------------------
Income before income taxes 3,937 8,195
-------------------------------------------------------------------------
Incomes taxes at expected rates 1,285 32.6% 2,686 32.8%
Non-deductible items 92 2.3% 98 1.2% Capital and large corporations
taxes 22 0.6% 12 0.2% Adjustments on filing returns & Other 111
2.8% (28) (0.3%)
-------------------------------------------------------------------------
1,510 38.4% 2,768 33.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve Months Ended ---------------------------------------
December 31 December 31 2007 2006
-------------------------------------------------------------------------
Income before income taxes 20,865 34,597
-------------------------------------------------------------------------
Incomes taxes at expected rates 6,807 32.6% 11,459 33.1%
Non-deductible items 434 2.1% 410 1.2% Capital and large
corporations taxes 44 0.2% 59 0.2% Adjustments on filing returns
& Other 13 0.1% (270) (0.8%)
-------------------------------------------------------------------------
7,298 35.0% 11,658 33.7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2007, included in other current assets are
income taxes receivable of $0.848 million (2006 - Income taxes
payable of $0.819 million). 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: December
31 December 31 2007 2006
----------------------------------------------- Assets Financing
charges 103 263 Property and equipment 874 610 Other 786 785
----------------------------------------------- 1,763 1,658
Liabilities Goodwill 360 498 Net future income tax asset 1,403
1,160 -----------------------------------------------
----------------------------------------------- The Company
believes it is more likely than not that all future income tax
assets will be realized. Note 8 - Related Party Transactions Smith
International Inc. ("Smith") owns approximately 52% 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: December 31 December 31 2007 2006
-------------------------------------------------------------------------
Cost of sales for the Three months ended 2,371 2,386 Cost of sales
for the Twelve months ended 9,253 8,943 Inventory 4,295 3,767
Accounts Payable and accrued liabilities 313 1,076 Note 9 -
Segmented reporting The Company distributes oilfield equipment
products principally through its network of 44 branches located in
western Canada to oil and gas industry customers. Accordingly, the
Company has determined that it operates through a single operating
segment and geographic jurisdiction. DATASOURCE: CE Franklin Ltd.
CONTACT: Michael West, Chairman, President and CEO, (403) 531-5602;
Mark Schweitzer, Vice President and CFO, (403) 531-5603
Copyright