CALGARY, Jan. 28 /PRNewswire-FirstCall/ -- CE FRANKLIN LTD.
(TSX.CFT, NASDAQ.CFK) reported a net loss of $0.5 million or $0.03
per share (basic) for the fourth quarter ended December 31, 2009,
compared to net income of $8.8 million or $0.48 per share (basic)
for the fourth quarter ended December 31, 2008. For 2009, net
income was $6.3 million or $0.36 per share (basic), a decrease of
71% over the $21.7 million or $1.19 per share earned in 2008.
Financial Highlights -------------------- (millions of Cdn.$ except
Three months ended Year ended per share data) December 31 December
31 ------------------- ------------------- 2009 2008 2009 2008
--------- --------- --------- --------- (unaudited) (unaudited)
Sales $ 93.0 $ 161.2 $ 437.0 $ 547.4 Gross profit 15.3 33.9 76.6
107.7 Gross profit - % of sales 16.5% 21.0% 17.5% 19.7% EBITDA(1)
0.6 14.3 12.4 35.8 EBITDA(1) % of sales 0.6% 8.9% 2.8% 6.5% Net
income (loss) $ (0.5) $ 8.8 $ 6.3 $ 21.7 Per share - basic $ (0.03)
$ 0.48 $ 0.36 $ 1.19 - diluted $ (0.03) $ 0.47 $ 0.35 $ 1.17 Net
working capital(2) $ 136.6 $ 142.8 Bank operating loan(2) $ 26.5 $
34.9 "2009 was a very challenging business environment for CE
Franklin with the Canadian oil and gas industry reaching decade-low
activity levels. Given these conditions, the Company remained
diligent in executing its strategies, balancing short term results
with long term goals," said Michael West, President and CEO. Net
loss for the fourth quarter of 2009 was $0.5 million, down $9.3
million from the fourth quarter of 2008. Sales were $93.0 million,
a decrease of $68.2 million (42%) from the fourth quarter of 2008.
Capital project business comprised 50% of sales (2008 - 60%), and
decreased $50.8 million (52%) from the prior year period,
outperforming the 77% decrease in well completions from the
comparable period. The rollover in tubular steel product prices
from peak levels experienced in the fourth quarter of 2008 also
contributed to the reduction in capital project sales. In the
second quarter of 2009 the acquisition of a western Canadian
oilfield supply competitor (the "Acquired Business") increased
oilfield sales in the fourth quarter of 2009 by an estimated 17%.
Gross profit decreased by $18.6 million (55%) from the prior year
period due to the decrease in sales and gross profit margins. Gross
profit margins for the fourth quarter were 16.5%, down from 21.0%
in the prior year period, due to lower tubular and oil sands sales
margins and supplier rebates. Selling, general and administrative
expenses decreased by $4.9 million (25%) to $14.6 million for the
quarter as compensation, selling and marketing costs have been
managed to a lower level in response to reduced sales levels.
Income taxes decreased by $4.5 million in the fourth quarter
compared to the prior year period due to lower pre-tax earnings.
The weighted average number of shares outstanding during the fourth
quarter was decreased by 0.5 million (3%) from the prior year
period principally due to shares purchased for cancellation
pursuant to the Company's normal course issuer bid. Net loss per
share (basic) was $0.03 in the fourth quarter of 2009, a decrease
of $0.51 from the $0.48 earned in the fourth quarter of 2008. Net
income for the year ended December 31, 2009 was $6.3 million, down
$15.4 million (71%) from the year ended December 31, 2008. Sales
were $437.0 million, down $110.4 million (20%) from the prior year
due to decreased conventional oilfield sales offset partially by an
estimated $30 million in sales (8% of 2009 oilfield sales)
contributed by the Acquired Business as well as increased oil sands
sales. Well completions, which tend to drive demand for oilfield
equipment used in capital projects, decreased by 55% from prior
year levels, contributing to the decline in the Company's sales in
2009. Gross profit decreased by $31.1 million (29%) from the prior
year. The decrease was a result of the reduction in sales combined
with lower average sales margins reflecting increased lower margin
oil sands and major project sales, lower tubular product margins
and increased competitive pressure. Selling, general and
administrative expenses decreased by $7.4 million (10%) in 2009
from the prior year as compensation, selling and marketing costs
have been managed to a lower level in response to the reduced oil
and gas industry activity levels, partially offset by increased
costs associated with the expansion of the Company's store network
resulting from the Acquired Business. Costs incurred to complete
the integration of the Acquired Business were $1.5 million. Income
taxes decreased by $8.1 million in 2009 compared to the prior year
period due to lower pre-tax earnings. The weighted average number
of shares outstanding during the year was down by 0.5 million (3%)
from the prior year principally due to shares purchased for
cancellation pursuant to the Company's normal course issuer bid.
Net income per share (basic) was $0.36 for the year, a decrease of
70% from 2008, consistent with the decrease in net income. (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 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
Company's Management Discussion and Analysis. 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. (2) Net working capital is defined as
current assets less accounts payable and accrued liabilities,
income taxes payable and other current liabilities. Net working
capital and Bank operating loan are as at quarter end. 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. The 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 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 MRO business by leveraging our existing supply chain
infrastructure, product and project expertise. Strategy
Accomplishments - In the spring of 2008, the Company moved into a
new 153,000 square foot Distribution Centre and nine acre pipe yard
located in Edmonton, Alberta. The new Distribution Centre provided
a 76% increase in functional warehousing capacity over our previous
facility, increasing our capability to support and grow sales
through our branch network. The larger facility also enabled us to
increase the Company's central project execution capability and
processes, to service larger projects and ship direct to customers,
avoiding double handling of material by branches. The Company
opened a new branch operation in Red Earth, Alberta and expanded
two existing branch facilities. - In June of 2009, the Company
increased its market share, customer base, and branch network
through the acquisition of the Acquired Business. The Acquired
Business operated 23 supply stores of which 18 stores were
proximate to existing Company branches and have been integrated.
The remaining 5 operations were focused in the east Alberta heavy
oil corridor, and have extended the Company's distribution network
reach. Total oilfield supply sales have increased an estimated 15%
as a result of the acquisition. The Company's Fort St. John and
Lloydminster branches moved to larger locations during the year,
increasing capacity to service customer requirements in these
important markets. Sales to oil sands customers increased for the
fifth year in a row, reaching a record $64.5 million in 2009,
comprising 15% of total Company sales. The Company added process
automation products to its product line and opened a valve
actuation centre at our Edmonton Distribution Centre, to broaden
the spectrum of solutions the Company provides to existing
oilfield, oil sands, and other industrial customers, and enhancing
its ability to attract new customers. The Company recruited new
product, operations and supply chain expertise into the
organization to advance its strategies. Business Outlook Oil and
gas industry activity in 2010 is expected to be comparable to 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. 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
and the expansion of the Company's product lines. 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. Fourth 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
Year ended December 31 December 31 -------------------------------
------------------------------- 2009 2008 2009 2008 ---------------
--------------- --------------- --------------- Sales $ 93.0 100.0%
$161.2 100.0% $437.0 100.0% $547.4 100.0% Cost of sales (77.7)
(83.5)% (127.3) (79.0)% (360.4) (82.5)% (439.7)(80.3)%
--------------- --------------- --------------- ---------------
Gross profit 15.3 16.5% 33.9 21.0% 76.6 17.5% 107.7 19.7% Selling,
general and admin- istrative expenses (14.6) (15.7)% (19.5) (12.1)%
(64.2) (14.7)% (71.6) (13.1)% Foreign exchange loss (0.1) - (0.1) -
- - (0.2) (0.0)% --------------- --------------- ---------------
--------------- EBITDA 0.6 0.8% 14.3 8.9% 12.4 2.8% 35.8 6.5%
Amortiz- ation (0.8) (0.9)% (0.6) (0.4)% (2.5) (0.6)% (2.4) (0.4)%
Interest (0.2) (0.2)% (0.2) (0.1)% (0.9) (0.2)% (1.0) (0.2)%
--------------- --------------- --------------- ---------------
Income (loss) before taxes (0.4) (0.3)% 13.5 8.4% 8.9 2.0% 32.4
6.0% Income tax expense (0.1) (0.1)% (4.7) (2.9)% (2.6) (0.6)%
(10.7) (2.0)% --------------- --------------- ---------------
--------------- Net income (loss) (0.5) (0.4)% 8.8 5.5% 6.3 1.5%
21.7 4.0% --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
--------------- Net income (loss) per share Basic $(0.03) $ 0.48 $
0.36 $ 1.19 Diluted $(0.03) $ 0.47 $ 0.35 $ 1.17 Weighted average
number of shares outstanding (000's) Basic 17,630 18,149 17,750
18,255 Diluted 17,884 18,392 17,953 18,561 Sales Sales for the
quarter ended December 31, 2009 were $93.0 million, down 42% from
the quarter ended December 31, 2008, as detailed above in the
"Financial Highlights" discussion. The following table summarizes
end use sales demand: (in millions of Cdn. $) Three months ended
Dec 31 Year ended Dec 31 ---------------------------
--------------------------- 2009 2008 2009 2008 -------------
------------- ------------- ------------- End use sales demand $ %
$ % $ % $ % Capital projects 46.5 50 97.3 60 246.0 56 314.0 57
Maintenance, repair and operating supplies (MRO) 46.5 50 63.9 40
191.0 44 233.4 43 ------------- ------------- -------------
------------- Total sales 93.0 100 161.2 100 437.0 100 547.4 100
Note: Capital project end use sales are defined by the Company as
consisting of tubulars 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 fourth quarter and years 2009 and 2008 are
provided in the table below. Q4 average Year average
----------------- % ----------------- % 2009 2008 change 2009 2008
change -------- -------- ----------------- -------- -------- Gas -
Cdn. $/gj (AECO spot) $4.54 $6.76 (33%) $3.97 $8.18 (51%) Oil -
Cdn. $/bbl (Synthetic Crude) $78.82 $65.19 21% $69.09 $103.03 (33%)
Average rig count 273 387 (29%) 215 398 (46%) Well completions: Oil
999 2,160 (54%) 3,197 6,223 (49%) Gas 577 4,811 (88%) 5,068 12,342
(59%) -------- -------- ----------------- -------- -------- Total
well completions 1,576 6,971 (77%) 8,265 18,565 (55%) Average
statistics are shown except for well completions. 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 $46.5 million in the fourth quarter of 2009,
down 52% ($50.8 million) from the fourth quarter of 2008. Total
well completions decreased by 77% to 1,576 in the fourth quarter of
2009 and the average working rig count was down 29% compared to the
prior year period to 273 rigs. Gas wells comprised 37% of the total
wells completed in western Canada in the fourth quarter of 2009
compared to 69% in the fourth quarter of 2008. Spot gas and oil
prices ended the fourth quarter at $5.99 per GJ (AECO) and $84.99
per bbl (Synthetic Crude), an increase of 32% and 8%, respectively,
from fourth quarter average prices. Although oil and gas prices are
starting to show signs of recovery, it is expected that a
continuation of reduced industry cash flow, access to capital and
capital expenditure economics, will depress demand for the
Company's products into 2010. 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 December 31, 2009 decreased by $17.4 million (27%) to
$46.5 million compared to the quarter ended December 31, 2008 and
comprised 50% of the Company's total sales (2008 - 40%). The
Company's strategy is to grow profitability by focusing on its core
western Canadian oilfield equipment supply business, complemented
by an increase in product life cycle services provided to its
customers and the focus on the emerging oil sands capital project
and MRO sales opportunities. Sales results of these initiatives to
date are provided below: Q4 2009 Q4 2008 YTD 2009 YTD 2008
------------- ------------- ------------- ------------- Sales
($millions) $ % $ % $ % $ % Oilfield 79.8 85 141.9 88 362.0 83
491.3 90 Oil sands 10.1 11 14.5 9 64.5 15 39.4 7 Production
services 3.1 4 4.8 3 10.5 2 16.7 3 ------------- -------------
------------- ------------- Total sales 93.0 100 161.2 100 437.0
100 547.4 100 Sales of oilfield products to conventional western
Canada oil and gas end use applications were $79.8 million for the
fourth quarter of 2009, down 44% from the fourth quarter of 2008.
This decrease was driven by the 77% decrease in well completions
compared to the prior year period, partially offset by sales
contributed by the Acquired Business which comprised approximately
17% of fourth quarter oilfield sales. Sales to oil sands end use
applications in the fourth quarter decreased by $4.4 million (30%)
to $10.1 million compared to $14.5 million in the fourth quarter of
2008. The decrease in sales reflected the decline in line pipe
prices compared to the prior year period. 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 $3.1 million in the
fourth quarter of 2009 compared to $4.8 million in the fourth
quarter of 2008 as customers deferred maintenance activities in the
face of challenging commodity prices. Gross Profit Q4 2009 Q4 2008
YTD 2009 YTD 2008 --------- --------- --------- --------- Gross
profit (millions) $15.3 $33.9 $76.6 $107.7 Gross profit margin as a
% of sales 16.5% 21.0% 17.5% 19.7% Gross profit composition by
product sales category: Tubulars 3% 15% 5% 13% Pipe, flanges and
fittings 22% 32% 31% 31% Valves and accessories 22% 15% 19% 17%
Pumps, production equipment and services 15% 13% 12% 15% General
38% 25% 33% 24% --------- --------- --------- --------- Total 100%
100% 100% 100% Gross profit was $15.3 million in the fourth quarter
of 2009, down $18.6 million (55%) from the fourth quarter of 2008
due to the 42% decline in sales combined with lower gross profit
margins. Gross profit margins declined from 21.0% in the fourth
quarter of 2008 to 16.5% in the fourth quarter of 2009. Lower
realized supplier rebates in the fourth quarter of 2009 due to
reduced purchasing levels in 2009 and the relative increase of
lower margin oil sands sales, contributed to the decline in average
gross profit margins. The most significant change in gross profit
composition in the fourth quarter of 2009 compared to the fourth
quarter of 2008 was the reduction in tubular gross profit
contribution. Tubular sales and margins in 2009 have been affected
by depressed drilling activity, market inventory surpluses and
product cost deflation compared to the fourth quarter of 2008 when
sales and margins were high due to product cost inflation and tight
product supply conditions. Reduced pipe, flange and fittings
margins in the fourth quarter of 2009 reflect the impacts of a low
margin oil sands order and product cost deflation. The increase in
general products gross profit composition reflects the increase in
MRO end use sales to 50% of total sales in the quarter, compared to
40% in the prior year period. Selling, General and Administrative
("SG&A") Costs Q4 2009 Q4 2008 YTD 2009 YTD 2008 -------------
------------- ------------- ------------- ($millions) $ % $ % $ % $
% People costs 8.2 56 11.4 59 36.2 56 41.3 58 Selling costs 1.5 10
3.2 16 7.5 12 10.2 14 Facility and office costs 3.2 22 3.3 17 13.3
21 12.8 18 Other 1.7 12 1.6 8 7.2 11 7.3 10 -------------
------------- ------------- ------------- SG&A costs 14.6 100
19.5 100 64.2 100 71.6 100 SG&A costs as % of sales 16% 12% 15%
13% SG&A costs decreased $4.9 million (25%) in the fourth
quarter of 2009 from the prior year period and represented 16% of
sales compared to 12% in the prior year period. The decrease in
people costs of $3.2 million reflects a decrease in variable
compensation due to the decrease in earnings and a 5% decrease in
the number of employees. Selling costs were down $1.7 million
compared to the prior year period due to decreased sales
commissions and a reduction in accounts receivable bad debt
expense. Facility and office costs are consistent with the fourth
quarter of 2008. 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 fourth quarter. The Company leases 39 of its 49 branch
locations as well as its corporate office in Calgary and
Distribution Centre. Six branch locations are owned and four are
operated by agents. The Company continues to take steps to reduce
its variable and fixed costs to adjust to lower industry activity
levels while maintaining service capacity and advancing strategic
initiatives. Amortization Expense Amortization expense of $0.8
million in the fourth quarter of 2009 compared to $0.6 million in
the fourth quarter of 2008. The increase was associated mainly with
the move to a larger, company owned facility in Fort St. John and
the assets acquired from the Acquired Business in the second
quarter of 2009. Interest Expense Interest expense was $0.2 million
in the fourth quarter of 2009, consistent with the fourth quarter
of 2008. Foreign Exchange Loss Foreign exchange losses on United
States dollar denominated product purchases and net working capital
liabilities were nominal at $0.1 million, in the fourth quarter of
2009 despite increased exchange rate volatility, and amounts were
consistent with losses incurred in the fourth quarter of 2008.
Income Tax Expense The Company's effective tax rate for the fourth
quarter of 2009 was (46.4%) compared to 35.0% in the fourth quarter
of 2008. The change in effective tax rates reflects the larger
relative impact of non-deductible items in the quarter due to
reduced pre-tax operating loss/earnings in the fourth quarter of
2009 compared to the prior year period. Substantially all of the
Company's tax provision is currently payable. 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
2008 2008 2008 2008 2009 2009 2009 2009 ------- ------- -------
------- ------- ------- ------- ------- Sales $140.6 $ 96.4 $149.3
$161.2 $140.7 $109.1 $ 94.1 $ 93.0 Gross profit 27.1 19.0 27.8 33.9
26.4 17.5 17.4 15.3 Gross profit % 19.2% 19.7% 18.6% 21.0% 18.8%
16.0% 18.5% 16.5% EBITDA 10.2 2.3 9.1 14.3 9.5 1.7 0.5 0.6 EBITDA
as a % of sales 7.2% 2.4% 6.1% 8.9% 6.8% 1.6% 0.5% 0.6% Net income
(loss) 6.3 1.0 5.7 8.8 6.0 0.6 0.2 (0.5) Net income (loss) as a %
of sales 4.5% 1.0% 3.8% 5.5% 4.3% 0.5% 0.2% (0.5%) Net income
(loss) per share Basic $ 0.34 $ 0.05 $ 0.31 $ 0.48 $ 0.33 $ 0.04 $
0.01 ($0.03) Diluted $ 0.34 $ 0.05 $ 0.31 $ 0.47 $ 0.33 $ 0.03 $
0.01 ($0.03) Net working capital (1) 117.4 114.9 123.1 142.8 153.2
137.0 131.1 136.6 Bank operating loan(1) 21.8 18.4 20.9 34.9 40.2
25.3 21.3 26.5 Total well complet- ions 4,595 2,607 4,392 6,971
3,947 1,274 1,468 1,576 (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
changes in non-cash net 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 December 31, 2009,
borrowings under the Company's bank operating loan were $26.5
million, a decrease of $8.4 million from December 31, 2008.
Borrowing levels have decreased due to the Company generating $10.9
million in cash flow from operating activities, before net changes
in non-cash working capital balances and a $14.8 million reduction
in net working capital. This was offset by $2.6 million in capital
and other expenditures, $11.3 million related to the acquisition of
the Acquired Business and $3.4 million for the purchase of shares
to resource stock compensation obligations and the repurchase of
shares under the Company's Normal Course Issuer Bid ("NCIB"). As at
December 31, 2008, borrowings under the Company's bank operating
loan were $34.9 million, a decrease of $9.4 million from December
31, 2007. Borrowing levels have decreased due to the Company
generating $25.8 million in cash flow from operating activities,
before net changes in non-cash working capital balances. This was
offset by an $8.3 million increase in net working capital, $5.2
million in capital and other expenditures, $0.9 million in
repayments of long term debt and capital lease obligations and $2.0
million for the purchase of shares to resource stock compensation
obligations. Net working capital was $136.6 million at December 31,
2009, a decrease of $6.2 million from December 31, 2008. Accounts
receivable decreased by $33.1 million (33%) to $67.4 million at
December 31, 2009 from December 31, 2008, due to the 42% decrease
in fourth quarter sales partially offset by a 17% increase in days
sales outstanding in accounts receivable ("DSO") in the fourth
quarter of 2009 to 60 days compared to 51 days in the fourth
quarter of 2008. DSO is calculated using average sales per day for
the quarter compared to the period end accounts receivable balance.
Inventory decreased by $16.8 million (14%) at December 31, 2009
from December 31, 2008. Excluding the additional $10.5 million of
inventory from the Acquired Business, inventory was down $27.3
million (23%) from December 31, 2008. Inventory turns for the
fourth quarter of 2009 decreased to 3.0 times compared to 4.2 times
in the fourth quarter of 2008 due to sales declines outpacing the
reduction in inventory. Inventory turns are calculated using cost
of goods sold for the quarter on an annualized basis compared to
the period end inventory balance. The company will continue to
adjust its investment in inventory to align with anticipated lower
industry activity levels and compressed supplier lead times in
order to improve inventory turnover efficiency. Accounts payable
and accrued liabilities decreased by $44.8 million (54%) to $38.5
million at December 31, 2009 from December 31, 2008 due to
decreased purchasing activity. Capital expenditures in 2009 were
$2.6 million, a decrease of $3.0 million from 2008. The majority of
the expenditures in 2009 and 2008 were directed towards branch and
Distribution Centre facility expansions. 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 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
debt to 3.0 times trailing twelve month EBITDA. As at December 31,
2009, the Company's average debt to EBITDA ratio was 2.0 times
(December 31, 2008 - 0.7 times) which provides a maximum borrowing
ability of $51 million under the facility (2008 - $60 million). As
at December 31, 2009, the ratio of the Company's debt to total
capitalization (debt plus equity) was 16% (December 31, 2008 -
20%). Long term debt was reduced by $0.2 million during the year to
$0.3 million in consideration for the settlement of a JEN Supply
acquisition indemnity claim. Contractual Obligations There have
been no material changes in off-balance sheet contractual
commitments since December 31, 2008. Capital Stock As at December
31, 2009 and 2008, the following shares and securities convertible
into shares were outstanding: (millions) December 31, December 31,
2009 2008 Shares Shares -------------- -------------- Shares
outstanding 17.6 18.1 Stock options 1.2 1.3 Restricted share units
0.4 0.2 -------------- -------------- Shares outstanding and
issuable 19.2 19.6 The basic weighted average number of shares
outstanding during the fourth quarter of 2009 was 17.6 million, a
decrease of 0.5 million shares from the prior year's fourth quarter
due principally to the purchases of common shares under its NCIB
and to resource share unit obligations. The diluted weighted
average number of shares outstanding was 17.9 million, a decrease
of 0.5 million shares from the prior year's fourth quarter,
comparable to the decrease in the basic weighted average number of
shares outstanding. The Company has established an independent
trust to purchase common shares of the Company on the open market
to resource share unit obligations. There were 45,700 common shares
acquired by the trust in the fourth quarter of 2009 at an average
cost per share of $6.22. For the year ended December 31, 2009,
there were 120,700 common shares acquired by the trust at an
average cost per share $5.68. (Three and twelve months ended
December 31, 2008 - 100,000 and 300,095 at an average cost per
share of $4.13 and $6.86 respectively). As at December 31, 2009,
the trust held 360,576 shares (December 31, 2008 - 343,892 shares).
A stock option cash settlement mechanism was introduced during the
third quarter of 2009 which allows the Company to manage share
dilution while resourcing its long term incentive compensation plan
on a tax efficient basis. The Company's intention is to settle
stock option exercises with cash going forward. As a result, the
Company's stock option obligations are now classified as current
obligations (subject to vesting) 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 January 6, 2009, the Company announced a NCIB to
purchase for cancellation through the facilities of NASDAQ, up to
900,000 common shares representing approximately 5% of its
outstanding common shares. As at December 31, 2009, the Company had
purchased 553,710 shares at a cost of $2.9 million ($5.17 per
share). On December 23, 2009, the Company announced the renewal of
the NCIB, effective January 4, 2010, 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.
Critical Accounting Estimates There have been no material changes
to critical accounting estimates since December 31, 2008. 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 Effective January 1, 2009, the
Company adopted section 3064 - Goodwill and Intangible Assets. The
standard addresses the accounting treatment of internally developed
intangibles and the recognition of such assets. The adoption of
this Standard has had no impact on the Company. 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 currently assessing 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. The significant differences have been identified and
the impact to financial reporting, information systems and internal
controls over financial reporting is being assessed. 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. 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 twelve months ended December
31, 2009 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 have occurred that would materially change the
information disclosed in the Company Form 20F. Forward Looking
Statements The information in this press release 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 press release, 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 press release
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
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. Conference
Call and Webcast Information
--------------------------------------- A conference call to review
the 2009 fourth quarter results, which is open to the public, will
be held on Friday, January 29, 2010 at 11:00 a.m. Eastern Time
(9:00 a.m. Mountain Time). Participants may join the call by
dialing 1-647-427-7450 in Toronto or dialing 1-888-231-8191 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 2:00 p.m. Eastern Time on the same day by calling
1-416-849-0833 in Toronto or dialing 1-800-642-1687 and entering
the Passcode of 48313698 and may be accessed until midnight Monday,
February 12, 2010. The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2918520 and
will be available on the Company's website at
http://www.cefranklin.com/. Michael West, 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.
Additional Information ---------------------- Additional
information relating to CE Franklin, including its annual and
quarterly 2009 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 at http://www.sedar.com/ and at
http://www.cefranklin.com/. CE Franklin Ltd. Interim Consolidated
Balance Sheet - Unaudited
-------------------------------------------------------------------------
December December (in thousands of Canadian dollars) 31 2009 31
2008
-------------------------------------------------------------------------
Assets Current assets Accounts receivable 67,443 100,513
Inventories 102,669 119,459 Other 4,960 9,529
-------------------------------------------------------------------------
175,072 229,501 Property and equipment 10,517 9,528 Goodwill 20,570
20,570 Future income taxes (note 5) 1,457 1,186 Other 339 649
-------------------------------------------------------------------------
207,955 261,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities Current liabilities Bank operating loan 26,549 34,948
Accounts payable and accrued liabilities 38,489 83,258 Income taxes
payable (note 5) - 3,405
-------------------------------------------------------------------------
65,038 121,611 Long term debt 290 500
-------------------------------------------------------------------------
65,328 122,111
-------------------------------------------------------------------------
Shareholders' Equity Capital stock 23,284 22,498 Contributed
surplus 17,184 18,835 Retained earnings 102,159 97,990
-------------------------------------------------------------------------
142,627 139,323
-------------------------------------------------------------------------
207,955 261,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Operations - Unaudited
-------------------------------------------------------------------------
Three months ended Twelve months ended (in thousands of Canadian
------------------ ------------------- dollars except shares and
December December December December per share amounts) 31 2009 31
2008 31 2009 31 2008
-------------------------------------------------------------------------
Sales 93,013 161,196 437,027 547,429 Cost of sales 77,666 127,337
360,370 439,760
-------------------------------------------------------------------------
Gross profit 15,347 33,859 76,657 107,669
-------------------------------------------------------------------------
Other expenses Selling, general and administrative expenses 14,568
19,443 64,226 71,587 Amortization 759 570 2,535 2,367 Interest
expense 245 226 915 1,031 Foreign exchange loss 137 133 37 242
-------------------------------------------------------------------------
15,709 20,372 67,713 75,227
-------------------------------------------------------------------------
Income/(loss) before income taxes (362) 13,487 8,944 32,442 Income
tax expense (recovery) (note 5) Current 44 4,343 2,894 10,474
Future 124 376 (258) 221
-------------------------------------------------------------------------
168 4,719 2,636 10,695
-------------------------------------------------------------------------
Net income/(loss) and comprehensive income/(loss) (530) 8,768 6,308
21,747
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income/(loss) per share (note 4) Basic (0.03) 0.48 0.36 1.19
Diluted (0.03) 0.47 0.35 1.17
-------------------------------------------------------------------------
Weighted average number of shares outstanding (000's) Basic 17,630
18,149 17,750 18,255 Diluted (note 4(e)) 17,884 18,392 17,953
18,561
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Cash Flow - Unaudited
-------------------------------------------------------------------------
Three months ended Twelve months ended --------------------
------------------- (in thousands of Canadian December 31 December
31 dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flows from operating activities Net income/(loss) for the
period (530) 8,768 6,308 21,747 Items not affecting cash -
Amortization 759 570 2,535 2,367 Future income tax expense/
(recovery) 124 376 (258) 221 Stock based compensation expense 224
217 2,306 1,365 Other 45 74 - 74
-------------------------------------------------------------------------
622 10,005 10,891 25,774 Net change in non-cash working capital
balances related to operations - Accounts receivable (3,000) 701
33,070 (10,997) Inventories 1,762 (32,667) 27,042 (33,138) Other
current assets (477) (1,836) 5,800 (6,619) Accounts payable and
accrued liabilities (3,379) 10,140 (46,702) 38,128 Income taxes
payable 61 3,929 (4,434) 4,253
-------------------------------------------------------------------------
(4,411) (9,728) 25,667 17,401
-------------------------------------------------------------------------
Cash flows (used in)/from financing activities Decrease in bank
operating loan 5,222 13,927 (8,399) (10,231) Issuance of capital
stock- Stock options exercises (99) - 149 49 Purchase of capital
stock through normal course issuer bid (136) - (2,863) - Purchase
of capital stock in trust for Share Unit Plans (282) (416) (676)
(2,058)
-------------------------------------------------------------------------
4,705 13,511 (11,789) (12,240)
-------------------------------------------------------------------------
Cash flows (used in)/from investing activities Purchase of property
and equipment (294) (3,783) (2,592) (5,602) Business combinations
(note 2) - - (11,286) 441
-------------------------------------------------------------------------
(294) (3,783) (13,878) (5,161)
-------------------------------------------------------------------------
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 245 226 915 1,031 Income
taxes - 415 7,230 6,594
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Interim Consolidated Statements of
Changes in Shareholders' Equity - Unaudited
-------------------------------------------------------------------------
Capital Stock ----------------- (in thousands of Number Share-
Canadian dollars and of Contributed Retained holders' number of
shares) Shares $ Surplus Earnings Equity
-------------------------------------------------------------------------
Balance - December 31, 2007 18,370 24,306 17,671 76,243 118,220
Stock based compensation expense (note 4 (a) and (b )) - - 1,365 -
1,365 Stock options excercised (note 4 (a)) 13 69 (20) - 49
Purchase of shares in trust for Share Unit Plans (note 4 (c ))
(300) (2,058) - - (2,058) Share Units exercised (note 4 (b)) 11 181
(181) - - Net income - - - 21,747 21,747
-------------------------------------------------------------------------
Balance - December 31, 2008 18,094 22,498 18,835 97,990 139,323
Normal Course Issuer Bid (554) (724) - (2,139) (2,863) Stock based
compensation expense (note 4 (a) and (b )) - - 1,662 - 1,662
Modification of Stock Option plan (Note 4(a)) - - (1,276) - (1,276)
Stock options excercised (note 4 (a)) 57 235 (86) - 149 Purchase of
shares in trust for Share Unit Plans (note 4 (c )) (121) (676) - -
(676) Share Units exercised (note 4 (b)) 105 1,951 (1,951) - - Net
income - - - 6,308 6,308
-------------------------------------------------------------------------
Balance - December 31, 2009 17,581 23,284 17,184 102,159 142,627
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to these interim consolidated financial
statements. CE Franklin Ltd. Notes to Interim Consolidated
Financial Statements - Unaudited
-------------------------------------------------------------------------
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, 2008, except
for the adoption of section 3064, as detailed below. 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, 2008, but do not include
all disclosures required by Generally Accepted Accounting
Principles (GAAP) for annual financial statements. Effective
January 1, 2009, the Company adopted Section 3064 - Goodwill and
intangible assets. The standard replaced Section 3062 and addressed
the accounting treatment of internally developed intangibles and
the recognition of such assets. The adoption of this standard has
been applied retroactively and has had no material impact on the
Company's consolidated financial statements. Effective January 1,
2009, the Company adopted the amendments to Section 3855 -
Financial instruments. The standard was amended to change the
categories into which a debt instrument is required or permitted to
be classified, changed the impairment model for held to maturity
financial assets to the incurred credit loss model and required the
reversal of previously recognized impairment losses on available
for sale financial assets in specified circumstances. Management
reviewed the amendments to section 3855 and concluded that there
will be no change to the current classification of the financial
instruments held, as they are either 'loans and receivables' or
'other financial instruments' in nature. This also means that the
changes to the impairment model would not affect the Company.
Effective September 30, 2009, the Company adopted the amendments to
Section 3862 - Financial Instruments - Disclosures. The standard
was amended to include additional disclosure requirements about
fair value measurements of financial instruments and to enhance the
liquidity risk disclosure requirements for publicly accountable
enterprises. Management reviewed the amendments to section 3862 and
has incorporated the amendments in the respective notes. Recent
Canadian GAAP pronouncements include CICA section 1582- Business
Combinations, CICA section 1601 - Consolidated Financial Statements
and CICA section 1602 - Non- Controlling interests. The overall
objective of the standards issued is to update the standards
pertaining to business combinations and allow convergence with
International Financial Reporting Standards by January 1, 2011. The
adoption of these standards is expected to have no impact on 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. 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 next 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 - Business Combinations On June 1, 2009, the
Company acquired the net assets of a western Canadian oilfield
equipment distributor, for total consideration of $11.3 million,
after $0.7 million of post closing adjustments, related principally
to inventory reductions. Using the purchase method of accounting
for acquisitions, the Company consolidated the assets from the
acquisition date and allocated the consideration paid as follows:
Cash consideration paid: 11,286 -------- -------- Net assets
acquired: Inventory 10,462 Property, equipment and other 824
-------- 11,286 -------- -------- Note 3 - Inventory Inventories
consisting primarily of goods purchased for resale are valued at
the lower of average cost or net realizable value. Inventory net
realizable value reserve expense of $105,000 and $1,155,000 was
charged to cost of goods sold in the three and twelve month period
ending December 31, 2009, respectively (2008 - $1,064,000 and
$1,366,000). As at December 31, 2009 and December 31, 2008 the
Company had recorded inventory net realizable value reserves of
$6.3 million and $2.8 million respectively. During the year ended
December 31, 2009, there was $0.6 million (2008 - $0.4 million) of
write downs to inventory. No reversals of previously written down
inventory were recorded in either period. Note 4 - Capital Stock At
December 31, 2009, the Company had 17.6 million common shares, 1.2
million stock options and 0.4 million share units outstanding. a)
Stock options Option activity for the years ended December 31 was
as follows: 000's 2009 2008
-------------------------------------------------------------------------
Outstanding at January 1 1,294 1,262 Granted - 75 Exercised (59)
(13) Forfeited (40) (30)
-------------------------------------------------------------------------
Outstanding at December 31 1,195 1,294
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable at December 31 842 822 There were no options granted
during the three and twelve month periods ended December 31, 2009.
A total of 75,588 stock options were granted at a weighted average
strike price of $6.26 in the twelve month period ended December 31,
2008 for a fair value of $274,000. The fair value of the options
granted was 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% During the quarter ended September
30, 2009, the Company modified its stock option plan to include a
cash settlement mechanism. As a result, the Company's stock option
obligations are now classified as current obligations (subject to
vesting) based on the positive difference between the Company's
closing stock price at period end and the underlying option
exercise price. As at December 31, 2009, the Company's accrued
stock option liability was $1,918,000 representing a cumulative
$642,000 increase in compensation expense since implementing the
cash settlement mechanism, over the equity obligation of $1,276,000
previously recorded to shareholders equity (contributed surplus)
using the Black Scholes valuation model. As the stock option
obligations are now recorded as a liability on the Company's
balance sheet, stock options are no longer included in the
calculation of the diluted number of shares outstanding (note
4(e)). Stock option compensation expense recorded in the three and
twelve month periods ended December 31, 2009 was $7,000 (2008 -
$323,000) and $1,358,000 (2008- $843,000), respectively and is
included in selling, general and administrative expenses on the
Consolidated Statement of Operations. b) Share Unit Plans The
Company has Restricted Share Unit ("RSU"), Performance Share Unit
("PSU") and Deferred Share Unit ("DSU") plans (collectively the
"Share Unit Plans"), whereby RSUs, PSUs and DSUs are granted
entitling the participant, at the Company's option, to receive
either a common share or cash equivalent in exchange for a vested
unit. RSUs and PSUs are granted to the Company's officers and
employees and vest one third per year over the three year period
from the date of grant. DSUs are granted to the independent members
of the Company's Board of Directors ("Board"), vest on the date of
grant, and can only be redeemed when the Director resigns from the
Board. For the PSU plan, which was introduced in 2009, the number
of units granted is dependent on the Company meeting certain return
on net asset ("RONA") performance thresholds during the year of
grant. The multiplier within the plan ranges from 0% - 200%
dependent on performance. For 2009, the PSU performance adjustment
was a reduction of 66% from target, resulting in a 103,000 unit
adjustment. 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 settled. Share Unit Plan activity
for the years ended December 31 was as follows: 000's 2009 2008
-----------------------------------------------------
------------------- RSU PSU DSU Total RSU DSU Total --- --- ---
----- --- --- ----- Outstanding at January 1 165 - 67 232 182 37
219 Granted 172 161 31 364 1 30 31 Performance adjustment - (103) -
(103) - - - Exercised (105) - - (105) (11) - (11) Forfeited (9) (5)
- (14) (7) - (7)
-----------------------------------------------------
------------------- Outstanding at December 31 223 53 98 374 165 67
232 -----------------------------------------------------
-------------------
-----------------------------------------------------
------------------- Exercisable at December 31 33 - 98 131 73 67
140 Share Unit Plan compensation expense recorded in the three and
twelve month periods ended December 31, 2009, net of the PSU
adjustment was $215,000 (2008- $108,000 recovery) and $948,000
(2008- $521,000) respectively. c) The Company's intention is to
settle Share Unit Plan obligations from an independent trust
established by the Company to purchase common shares of the Company
on the open market. 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
twelve month periods ended December 31, 2009, 45,700 and 120,700
common shares were acquired, respectively, by the trust (2008 -
100,000 and 300,095) at a cost of $284,000 for the three month
period (2008 - $413,000) and $676,000 for the twelve month period
(2008 - $2,058,000). d) Normal Course Issuer Bid ("NCIB") On
January 6, 2009, the Company announced a NCIB to purchase for
cancellation, up to 900,000 common shares through the facilities of
NASDAQ, representing approximately 5% of its outstanding common
shares. During the year ended December 31, 2009, the Company
purchased 553,710 shares at a cost of $5.17 per share for an
aggregate cost of $2,863,000. On December 23, 2009, the Company
announced the renewal of the NCIB effective January 4, 2010, to
purchase up to 880,000 common shares through the facilities of
NASDAQ, representing approximately 5% of its outstanding common
shares. Shares may be purchased up to December 31, 2010. e)
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
Twelve months ended -------------------- -------------------
December 31 December 31 2009 2008 2009 2008
-------------------------------------------------------------------------
Weighted average common shares outstanding - basic 17,630 18,149
17,750 18,255 Effect of Stock options - 46 - 101 Effect of Share
Unit Plans 254 197 203 205
-------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 17,884 18,392
17,953 18,561
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 5 - 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 Twelve months ended December 31 December 31 2009
% 2008 % 2009 % 2008 %
-------------------------------------------------------------------------
Income (loss) before income taxes (362) 13,487 8,944 32,442
-------------------------------------------------------------------------
Income taxes calculated at expected rates (107) 29.6 4,033 29.9
2,628 29.4 9,700 29.9 Non-deductible items 28 (7.7) (16) (0.1) 119
1.3 164 0.5 Capital taxes (26) 7.2 21 0.2 19 0.2 56 0.2 Share based
compensation 254 (70.2) 596 4.4 (70) (0.8) 735 2.3 Adjustments on
filing returns & other 19 (5.2) 85 0.6 (60) (0.7) 40 0.1
-------------------------------------------------------------------------
Income tax expense 168 (46.4) 4,719 35.0 2,636 29.5 10,695 33.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2009 included in other current assets are income
taxes receivable of $1,029,000 (December 31 2008 - $3,405,000
payable). 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: As at December 31 2009
2008
---------------------------------------------------------------------
Assets Property and equipment 852 855 Share based compensation 856
289 Other 127 395
---------------------------------------------------------------------
1,835 1,539 Liabilities Goodwill and other 378 353
---------------------------------------------------------------------
Net future income tax asset 1,457 1,186
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company believes it is more likely than not that all future
income tax assets will be realized. Note 6 - 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 2010. 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 average
guaranteed debt to 3.0 times trailing 12 month earnings before
interest, amortization and taxes. As at December 31, 2009, this
ratio was 2.0 times (December 31, 2008 - 0.7 times) and the maximum
amount available to be borrowed under the facility was $51 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 December
31, 2009. Note 7 - 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 and long term
debt. The fair values of these financial instruments, excluding the
long term debt, approximate their carrying amounts due to their
short-term maturity. At December 31, 2009, the fair value of the
long term debt approximated its carrying value due to its floating
interest rate nature and short term maturity. There is no
observable market for these financial instruments. 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. The Company follows a program of credit
evaluations of customers and limits the amount of credit extended
when deemed necessary. The Company maintains provisions for
possible credit losses that are charged to selling, general and
administrative expenses by performing an analysis of specific
accounts. Movement of the allowance for credit losses for the
twelve month periods ended December 31 and the allowance for credit
losses deducted from accounts receivables as at December 31 was as
follows: As at December 31 2009 2008
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Opening balance 2,776 1,454 Write-offs (1,026) (1,216) Recoveries
440 232 Increase during period 145 2,306
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Closing balance 2,335 2,776
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Trade receivables outstanding greater than 90 days were 10% of
total trade receivables as at December 31, 2009 (2008 - 9%). c)
Market Risk The Company's bank operating loan and long term debt
bear interest based on floating interest rates. As a result the
Company is exposed to market risk from changes in the Canadian
prime interest rate which can impact its borrowing costs. Based on
the Company's borrowings levels as at December 31, 2009, a change
of one percent in interest rates would be expected to decrease or
increase the Company's annual net income by $0.2 million. The
Company purchases certain products in US dollars and sells such
products to its customers typically priced in Canadian dollars,
thus leading to accounts receivable and accounts payable balances
that are subject to foreign exchange gains and losses upon
translation. As a result, fluctuations in the value of the Canadian
dollar relative to the US dollar can result in foreign exchange
gains and losses. As at December 31, 2009, a one percent change in
the Canadian dollar relative to the US dollar would be expected to
have no meaningful impact on net income. 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 purchase 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 December 31, 2009, the Company had contracted
to purchase US$930,000 at a fixed exchange rate with terms not
exceeding three months. The fair market value of the contract was
nominal. Note 8 - Related Party Transactions Smith International
Inc. ("Smith") owns approximately 55% 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. Purchases of such equipment conducted in the
normal course on commercial terms were as follows: December 31
December 31 2009 2008
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Cost of sales for the three months ended 1,932 2,749 Cost of sales
for the twelve months ended 6,703 10,680 Inventory 3,759 4,549
Accounts payable and accrued liabilities 991 759 The Company pays
facility rental expense to an operations manager in the capacity of
landlord, reflecting market based rates. For the three and twelve
month periods ended December 31, 2009, these costs totaled $245,000
and $765,000 respectively (2008: $47,000 and $137,000). Note 9 -
Segmented reporting The Company distributes oilfield products
principally through its network of 49 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. DATASOURCE: CE Franklin Ltd. CONTACT:
Investor Relations, 800-345-2858, (403) 531-5604,
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