CALGARY, April 26, 2012 /CNW/ - CE FRANKLIN LTD. (TSX.CFT,
NASDAQ.CFK) reported net earnings of $7.9 million or $0.46 per
share (basic) for the first quarter ended March 31, 2012, a
significant increase from net earnings of $3.4 million or $0.19 per
share (basic) generated in the first quarter ended March 31, 2011.
Financial Highlights (millions of Cdn. $ except per share data)
Three Months Ended March31 2012 2011 Unaudited Revenues $ 160.3 $
137.7 Gross Profit $ 29.4 $ 22.3 Gross Profit - % of sales 18.3%
16.2% EBITDA(1) $ 11.3 $ 5.3 EBITDA % of sales(1) 7.0% 3.8% Net
earnings $ 7.9 $ 3.4 Per share Basic $ 0.46 $ 0.19 Diluted $ 0.44 $
0.19 Net working capital(2) $ 137.8 $ 120.1 Long term debt $ - $
0.3 "Solid revenue growth, improved product margins and disciplined
cost management lead to increased profitability. Activity
levels are expected to remain at prior year levels as strong oil
and oilsands activity offsets softer gas activity," said Michael
West, President and CEO. Net earnings for the first quarter of
2012, were $7.9 million, an increase of $4.5 million (132%) from
the first quarter of 2011. Revenues were $160.3 million, an
increase of $22.6 million (16%) from the first quarter of 2011.
Despite well completions decreasing by 26% compared to the first
quarter of 2011, both the capital project business and maintenance
repair and operating ("MRO") revenues grew by $7.3 million and
$15.1 million respectively year over year. The increase in capital
projects revenue was driven by higher sales to oil and oilsands
projects. Increased MRO activity came from all areas of the
business. Spring break up arrived earlier than normal and
dampened activity levels late in the quarter. Gross profits
increased by $7.1 million (32%) due to the increase in revenues and
improved gross profit margins year over year. Average gross profit
margins improved sequentially compared to the fourth quarter of
2011 and improved over the first quarter 2011 due to improved
supply chain costs and increased volume rebate income arising from
increased purchasing levels. Selling, general and administrative
expenses increased by $0.8 million (5%) to $17.8 million for the
quarter as compensation and operating costs have increased in
response to higher revenue levels. The weighted average number of
shares outstanding during the first quarter was consistent with the
prior year period as the rise in share price during the last year
has limited the activity occurring under the normal course issuer
bid program. Net earnings per share (basic) was $0.46 in the first
quarter of 2012, compared to net earnings of $0.19 per share in the
first quarter of 2011. Business Outlook Oil and gas industry
activity in 2012 is expected to remain at 2011 levels for the
remainder of the year. Natural gas prices remain depressed as
North American production capacity and inventory levels continue to
exceed demand. Natural gas capital expenditure activity is
focused on liquid rich gas plays and the Company is well positioned
to service customers pursuing these gas plays. Conventional
and heavy oil economics are attractive at current price levels
leading to continuing activity in on these plays. Activity is
especially strong in southeast Saskatchewan. Oil sands
project announcements are expected to continue with current oil
price levels. Approximately 50% to 60% of the Company's total
revenues are driven by our customers' capital expenditure
requirements. CE Franklin's revenues are expected to increase
modestly in 2012 through organic growth as the oil and gas industry
activity levels remain relatively consistent with 2011 levels.
Gross profit margins are expected to remain under pressure as
customers that produce natural gas focus on reducing their costs to
maintain acceptable project economics and due to continued
aggressive oilfield supply industry competition as industry
activity levels remain below the five year average. 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 should 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. (1) EBITDA
represents net earnings before interest, taxes, depreciation and
amortization. EBITDA is 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 revenues 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 depreciation
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. Depreciation expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate revenues. 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 earnings, 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 earnings 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 IFRS. 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 cash and cash equivalents, accounts payable and
accrued liabilities, current taxes payable and other current
liabilities. Net working capital and long term debt/bank operating
loan amounts are as at quarter end. Additional Information
Additional information relating to CE Franklin, including its first
quarter 2012 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 www.sedar.com and at www.cefranklin.com.
Conference Call and Webcast Information A conference call to review
the 2012 first quarter results, which is open to the public, will
be held on Friday, April 27, 2012 at 11:00 a.m. Eastern Time
(9:00a.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 1-855-859-2056 and entering
the Passcode of 63408715 and may be accessed until midnight May 3,
2012. The call will also be webcast live at:
http://www.newswire.ca/en/webcast/detail/938361/1004129 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 Derrren Newell, Vice
President and Chief Financial Officer. The discussion will be
followed by a question and answer period. About CE Franklin For
more than 75 years, CE Franklin has been a leading supplier of
products and services to the energy industry. CE Franklin
distributes pipe, valves, flanges, fittings, production equipment,
tubular products and other general oilfield supplies to oil and gas
producers in Canada as well as to the oil sands, refining, heavy
oil, petrochemical, forestry and mining industries. These
products are distributed through its 39 branches, which are
situated in towns and cities serving particular oil and gas fields
of the western Canadian sedimentary basin. Forward-looking
Statements: The information in this news 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 and other applicable securities
legislation. 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 and refer to the Form 20-F or our annual
information form for further detail. The following is provided to
assist readers in understanding CE Franklin Ltd.'s ("CE Franklin"
or the "Company") financial performance and position during the
periods presented and significant trends that may impact future
performance of CE Franklin. This should be read in conjunction with
the Company's condensed interim consolidated financial statements
for the three month period ended March 31, 2012 and the MD&A
and consolidated financial statements for the year ended December
31, 2011. All amounts are expressed in Canadian dollars and are in
accordance with International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standards Board
("IASB"), except where otherwise noted. Overview CE Franklin is a
leading distributor of pipe, valves, flanges, fittings, production
equipment, tubular products and other general industrial supplies,
primarily to the oil and gas industry in Canada through its 39
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, midstream, refining,
petrochemical 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 overnight
basis. Our centralized inventory and procurement capabilities
allow us to leverage our scale to enable industry leading hub and
spoke purchasing, logistics and project execution 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 common shares trade on the
TSX ("CFT") and NASDAQ ("CFK") stock exchanges. Schlumberger
Limited ("Schlumberger"), a major oilfield service company based in
Paris, France, indirectly owns approximately 56% of the Company's
shares. Business Strategy The Canadian oilfield equipment supply
industry is highly competitive and fragmented. There are
approximately 230 oilfield supply stores in Canada which generate
annual estimated sales of $2 billion to $3 billion. CE
Franklin competes with three other large oilfield product
distributors and with numerous local and regional distributors as
well as specialty equipment distributors and manufacturers.
The oilfield equipment market is part of the larger industrial
equipment supply market, which is also serviced by numerous
competitors. The oil sands and niche industrial product
markets are more specialized and solutions oriented and require
more in-depth product knowledge and supplier relationships to
service specific customer requirements. Oilfield equipment
distributors compete based on price and level of service.
Service includes the ability to consistently provide required
products to a customer's operating site when needed, project
management services, product expertise and support, billing and
expenditure management services, and related equipment services.
Demand for oilfield products and services is driven by the level of
capital expenditures in the oil and gas industry in the Western
Canadian sedimentary basin as well as by production related
maintenance, repair and operating ("MRO") requirements. MRO
demand tends to be relatively stable over time and predictable in
terms of product and service requirements and typically comprises
40% to 50% of the Company's annual sales. Capital project
demand fluctuates over time with oil and gas commodity prices,
which directly impacts the economic returns realized by oil and gas
companies. The size, scope, and product mix of each order will
affect profitability. Local walk in relationship business
with smaller orders or more specialized products will typically
generate higher profit margins compared to large project bids for
alliance customers where the Company can take advantage of volume
discounts and longer lead times. Larger oil and gas customers
tend to have a broader geographic operating reach requiring
multi-site service capability, conducting larger capital projects,
and requiring more sophisticated billing and project management
services than do smaller customers. The Company has entered
into numerous alliances with larger customers where the scale and
repeat nature of business enables efficiencies which are shared
with the customer through lower profit margins. Barriers to entry
in the oilfield supply business are low with start-up operations
typically focused on servicing local relationship based MRO
customers. To compete effectively on capital project business
and to service larger customers requires multi-location branch
operations, increased financial, procurement, product expertise and
breadth of product lines, information systems and process
capability, which significantly increases the barriers to entry.
The Company's 39 branch operations provide substantial geographic
coverage across the oil and gas producing regions in western
Canada. Each branch services and competes for local business
and services the Company's alliance customers supported by
centralized support services provided by the Company's Distribution
Centre and corporate office in Calgary. The Company's large branch
network, coupled with its centralized capabilities enables it to
develop strong supply chain relationships with suppliers and
provide it with a competitive advantage over local independent
oilfield and specialty equipment distributors for large alliance
customers who are seeking multi-location, one stop shopping, and
more comprehensive service. 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-location needs of large and emerging
customers in the energy sector. Organic growth may 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 downhole pump repair,
oilfield engine maintenance, well optimization and onsite project
management. This will differentiate the Company's service offering
from its competitors and deepen relationships with its customers.
-- Expand oil sands, industrial project and MRO business by
leveraging our existing supply chain infrastructure, product, and
major project expertise. -- Increase the resourcing of customer
project sales quotation and order fulfillment services provided by
our Distribution Centre to augment local branch capacity to address
seasonal and project driven fluctuations in customer demand. By
doing so, we aim to increase our capacity flexibility and improve
operating efficiency while providing consistent customer service.
Business Outlook Oil and gas industry activity in 2012 is expected
to remain at 2011 levels for the remainder of the year.
Natural gas prices remain depressed as North American production
capacity and inventory levels continue to exceed demand.
Natural gas capital expenditure activity is focused on liquid rich
gas plays and the Company is well positioned to service customers
pursuing these gas plays. Conventional and heavy oil
economics are attractive at current price levels leading to
continuing activity in on these plays. Activity is especially
strong in southeast Saskatchewan. Oil sands project
announcements continue at current oil price levels. Approximately
50% to 60% of the Company's total revenues are driven by our
customers' capital expenditure requirements. CE Franklin's revenues
are expected to increase modestly in 2012 through organic growth as
the oil and gas industry activity levels remain relatively
consistent with 2011 levels. Gross profit margins are expected to
remain under pressure as customers that produce natural gas focus
on reducing their costs to maintain acceptable project economics
and due to continued aggressive oilfield supply industry
competition as industry activity levels remain below the last five
year average. 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 should 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. ThreeMonthsEndedMarch 31 2012
2011 Revenues 160.3 100.0 % 137.7 100.0 % Cost of Sales (130.9)
(81.7) % (115.4) (83.9) % Gross Profit 29.4 18.3 % 22.3 16.1 %
Selling, general and administrative expenses (17.8) (11.1) % (17.0)
(12.8) % Foreign exchange and other (0.3) (0.2) % - - % EBITDA(1)
11.3 7.0 % 5.3 3.4 % Depreciation (0.6) (0.4) % (0.6) (0.5) %
Interest (0.1) (0.1) % (0.2) (0.2) % Earnings before tax 10.6 6.5 %
4.6 2.7 % Income tax expense (2.7) (1.6) % (1.2) (0.9) % Net
earnings 7.9 4.9 % 3.4 1.8 % Net earnings per share Basic $ 0.46 $
0.19 Diluted $ 0.44 $ 0.19 Weighted average number of shares
outstanding (000's) Basic 17,443 17,488 Diluted 18,149 18,052 (1)
EBITDA represents net earnings 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 revenues 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 depreciation
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. Depreciation expense is a
necessary component of the Company's expenses because the Company
is required to pay cash to acquire equipment to generate revenues.
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 earnings,
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 earnings is provided within the
table above. Not all companies calculate EBITDA in the same manner
and EBITDA does not have a standardized meaning prescribed by IFRS.
Accordingly, EBITDA, as the term is used herein, is unlikely to be
comparable to EBITDA as reported by other entities. First Quarter
Results Net earnings for the first quarter of 2012, were $7.9
million, an increase of $4.5 million (132%) from the first quarter
of 2011. Revenues were $160.3 million, an increase of $22.6
million (16%) from the first quarter of 2011. Despite well
completions decreasing by 26% compared to the first quarter of
2011, both the capital project business and maintenance repair and
operating ("MRO") revenues grew by $7.3 million and $15.1 million
respectively year over year. The increase in capital projects
revenue was driven by higher sales to oil and oilsands
projects. Increased MRO activity came from all areas of the
business. Spring break up arrived earlier than normal and
dampened activity levels late in the quarter. Gross profits
increased by $7.1 million (32%) due to the increase in revenues and
improved gross profit margins year over year. Average gross profit
margins improved sequentially compared to the fourth quarter of
2011 and improved over the first quarter 2011 due to improved
supply chain costs and increased volume rebate income arising from
increased purchasing levels. Selling, general and administrative
expenses increased by $0.8 million (5%) to $17.8 million for the
quarter as compensation and operating costs have increased in
response to higher revenue levels. The weighted average number of
shares outstanding during the first quarter was consistent with the
prior year period as the rise in share price during the last year
has limited the activity occurring under the normal course issuer
bid program. Net earnings per share (basic) was $0.46 in the first
quarter of 2012, compared to net earnings of $0.19 per share in the
first quarter of 2011. Revenues Revenues for the quarter ended
March 31, 2012, were $160.3 million, an increase of 16% from the
quarter ended March 31, 2011. Oil and gas commodity prices are a
key driver of industry capital project activity as commodity 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 three and three month periods
ended March 31, 2012 and 2011 are provided in the table below. Q1
Average % 2012 2011 change Gas - Cdn. $ 2.14 $ 3.76 (43)% $/gj
(AECO spot) Oil - Cdn. $ 94.49 $ 99.63 (5)% $/bbl (synthetic crude)
Average rig 541 532 2 % count Well completions: Oil 2,262 2,201 3 %
Gas 611 1,660 (63)% Total well 2,873 3,861 (26)% completions
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 (in millions of
Three monthsended March31 Cdn. $) 2012 2011 End use revenue $ % $ %
demand Capital projects 83.5 52 76.0 55 Maintenance, repair 76.8 48
61.7 45 and operating supplies ("MRO") Total Revenues 160.3 100
137.7 100 Revenues from capital project related products were $83.5
million in the first quarter of 2012, an increase of 10% ($7.5
million) from the first quarter of 2011 due to increased oil and
oil sands based sales. Total well completions decreased by 26% in
the first quarter of 2012. Gas well completions comprised 21%
of the total wells completed in western Canada in the first quarter
of 2012 compared to 43% in the first quarter 2011. The
average working rig count increased by 2% compared to the prior
year period. Spot gas prices ended the first quarter at $2.14 per
GJ (AECO) a decrease of 43% from first quarter 2011 average
prices. Oil prices ended the first quarter at $94.49 per bbl
(Synthetic Crude) a decrease of 5% from the first quarter 2011
average. Depressed gas prices are expected to continue to
negatively impact gas drilling and well completion activity over
the remainder of 2012, which in turn is expected to constrain
demand for the Company's products. Natural gas customers continue
to utilize a high level of competitive bid activity to procure the
products they require in an effort to reduce their costs. The
Company is addressing this industry trend by pursuing initiatives
focused on improving revenue quotation processes and increasing the
operating flexibility and efficiency of its branch network.
Activity related to oil and oilsands activity remains strong and
the Company is well positioned to support customers who are
pursuing oil plays and more particularly tight oil plays.
Spring break up arrived in late March which dampened activity
levels late in the quarter. MRO product revenues are related to
overall oil and gas industry production levels and tend to be more
stable than capital project revenues. MRO product revenues for the
quarter ended March 31, 2012 increased by $15.1 million (24%) to
$76.8 million compared to the quarter ended March 31, 2011 and
comprised 48% of the Company's total revenues (2011 - 45%) as both
oil and gas MRO activities were strong in the quarter. The
Company's strategy is to grow profitability by focusing on its core
western Canadian oilfield product distribution business,
complemented by an increase in the product life cycle services
provided to its customers and the focus on the emerging oil sands
capital project and MRO revenues opportunities. Revenues from these
initiatives to date are provided below: Q12012 Q12011
Revenues($millions) $ % $ % Oilfield 140.4 87 122.6 89 Oil sands
12.1 8 10.0 7 Production services 7.8 5 5.1 4 Total Revenues 160.3
100 137.7 100 Revenues from oilfield products to conventional
western Canada oil and gas end use applications were $120.3 million
for the first quarter of 2012, backing out tubular product sales,
year over year oilfield revenue was up 19.4%. This increase
was driven by oil related capital projects and strong MRO demand.
Revenues from oil sands end use applications were $12.1 million in
the first quarter, an increase of $2.1 million (21%) from the first
quarter of 2011 reflecting the timing of project revenues. The
Company continues to position its major project execution
capability and the Fort McMurray branch to penetrate this emerging
market for capital projects and MRO products. Production service
revenues were $7.8 million in the first quarter of 2012, a 53%
increase from the $5.1 million of revenues in the first quarter of
2011, reflecting improved oil production economics resulting in
increased customer maintenance activities. Gross Profit Q12012 Q1
2011 Gross profit ($ $ 29.4 $ 22.3 millions) Gross profit margin as
18.3 % 16.1 % a % of revenues Gross profit composition by product
revenue category: Tubulars 3 % 6 % Pipe, flanges and 30 % 26 %
fittings Valves and accessories 19 % 21 % Pumps, production 19 % 15
% equipment and services General 29 % 32 % Total gross profit 100 %
100 % Gross profit was $29.4 million in the first quarter of 2012,
an increase of $7.1 million (32%) from the first quarter of 2011
due to increased revenues and average gross profit margins compared
to the prior year period. Gross profit margins for the quarter were
improved due to improved supply chain costs and recognition of
higher volume rebate income due to higher purchasing levels.
Increased pipe flanges and fittings gross profit composition was
due to improved gross profit margins. Other gross profit
composition categories were impacted by having more sales to our
larger lower margin customers. The decrease in tubular gross
profit composition reflects larger lower margin sales and the
disposal of surplus tubular inventory. Selling, General and
Administrative ("SG&A")Costs ($millions) Q12012 Q1 2011 $ % $ %
People Costs 11.0 61 10.3 60 Facility and office 3.5 20 3.7 22
costs Selling Costs 1.9 11 1.5 9 Other 1.4 8 1.5 9 SG&A costs
17.8 100 17.0 100 SG&A costs as % of 11% 12% revenues SG&A
costs increased $0.8 million (5%) in the first quarter of 2012 from
the prior year period and represented 11% of revenues compared to
12% in the prior year period. The $0.8 million increase in expenses
was attributable to higher incentive and selling costs reflecting
the improved performance of the business year over year.
Depreciation Expense Depreciation expense of $0.6 million in the
first quarter of 2012 was comparable to the first quarter of 2011.
Interest Expense Interest expense was minimal in the first quarter
of 2012 and was lower than the prior year due to lower borrowing
levels. Foreign Exchange and other Foreign exchange and other in
the quarter was a loss of $0.3 million as the Canadian dollar
strengthened which increased the translation loss from US
denominated net working capital assets. The Company
recognized a $0.3 million unrealized foreign exchange loss on $11.6
million of foreign currency forward contracts it had outstanding at
quarter end. As at March 31, 2012, a one percent change in
the Canadian dollar relative to the US dollar would decrease or
increase the Company's annual net income by approximately $0.1
million. Income Tax Expense The Company's effective tax rate for
the first quarter of 2012 was 25.5% down from a 26.5% effective
rate in the first quarter 2011. The current effective tax rate is
lower than the prior year due to lower statutory rates. Summary of
Quarterly Financial Data The selected quarterly financial data
below is presented in Canadian dollars and in accordance with
IFRS. This information is derived from the Company's
unaudited quarterly financial statements. (in millions of Cdn. $
except per sharedata) Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Unaudited 2010 2010
2010 2011 2011 2011 2011 2012 Revenues 99.9 132.2 135.6 137.7 113.9
140.5 154.3 160.3 Gross Profit 15.6 19.2 20.5 22.3 19.3 23.9 25.3
29.4 Gross % % % % % % % % Profit % 15.6 14.5 15.1 16.2 16.9 17.0
16.4 18.3 EBITDA 0.7 3.8 3.8 5.3 3.1 7.6 6.6 11.3 EBITDA as a % % %
% % % % % % of revenues 0.7 2.9 2.8 3.8 2.7 5.4 4.3 7.0 Net
earnings (loss) (0.1) 2.2 1.6 3.4 1.7 4.8 4.5 7.9 Net earnings
(loss) as a % of revenues (0.1) % 1.7 % 1.2 % 2.5 % 1.5 % 3.4 % 2.9
% 4.9 % Net earnings (loss) per share Basic $ (0.01) $ 0.12 $ 0.09
$ 0.19 $ 0.10 $ 0.27 0.26 $ 0.46 Diluted $ (0.01) $ 0.12 $ 0.09 $
0.19 $ 0.09 $ 0.26 0.25 $ 0.44 Net working capital(1) 111.8 129.0
125.7 120.1 136.5 134.6 116.9 137.8 Long term debt / bank operating
loan(1) 0.3 14.4 6.4 0.3 12.2 5.8 - - Total well completions 2,197
2,611 4,760 3,861 2,765 3,495 4,350 2,873 (1) Net working capital
and long term debt/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 oilfield sales
activity for the Company. Oilfield 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 outpaces 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
cash and cash equivalents, accounts payable and accrued
liabilities, current taxes payable, note payable and other current
liabilities) and 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 $60.0 million
revolving term credit facility are used to finance the Company's
net working capital, capital expenditures and acquisitions. As at
March 31, 2012, the Company had $3.6 million of cash on hand and
had no long term debt. Cash decreased by $12.2 million from
December 31, 2011 as the Company generated $9.7 million of cashflow
from operating activities, before net changes in non-cash working
capital balances. Net working capital increased by $22.0 million in
the quarter. Capital expenditures in the quarter amounted to
$0.3 million. Nominal activity occurred under the Company's
Normal Course Issuer bid ("NCIB") program. Subsequent to
quarter end, the Company terminated its NCIB program for this year.
As at March 31, 2011, the Company had $3.2 million of cash and cash
equivalents and no borrowings under its revolving term credit
facility, a net decrease of $9.4 million from December 31,
2010. Borrowing levels have decreased due to the Company
generating $4.4 million in cash flow from operating activities,
before net changes in non-cash working capital balances of a $5.6
million reduction in net working capital. This was offset by
$0.5 million in capital and other expenditures and $0.2 million for
the purchase of shares to resource share unit plan obligations and
the repurchase of shares under the NCIB program. Net working
capital was $137.8 million at March 31, 2012, an increase of $21.0
million from December 31, 2011. Accounts receivable at March 31,
2012 was $103.9 million, an increase of $5.7 million (5.8%) from
December 31, 2011, due to the 4% increase in first quarter sales
compared to the fourth quarter of 2011. Days sales
outstanding in accounts receivable ("DSO") at the end of the first
quarter of 2012 was 52 days which is consistent with where the
fourth quarter of 2011 ended. DSO is calculated using average
sales per day for the quarter compared to the period end customer
accounts receivable balance. Inventory at March 31, 2012 was
$113.1 million, up $1.4 million (1.3%) from December 31,
2011. Inventory turns at the end of the first quarter of 2012
were 4.6 turns were consistent with the fourth quarter of
2011. Inventory turns are calculated using cost of goods sold
for the quarter on an annualized basis, compared to the period end
inventory balance. Accounts payable and accrued liabilities
at March 31, 2012 were $79.9 million, a decrease of $13.7 million
(15%) compared to the fourth quarter of 2011. Capital expenditures
in Q1 2012 were $0.3 million, an increase of $0.2 million (49%)
from Q4 2011 expenditures. Expenditures in 2012 were directed
towards facility expansion and maintenance, business system
expansion and vehicles and operating equipment. The majority
of the expenditures in Q1 2012 were directed towards similar items
as they were in 2011. Capital expenditures in 2012 are anticipated
to be in the $4.0 million to $5.0 million range and will be
directed towards business system, branch facility, vehicle and
operating equipment upgrades and replacements. In July 2011, the
Company renewed its $60.0 million revolving term credit facility
that matures in July 2014 (the "Credit Facility").
Borrowings under the Credit Facility bear interest based on
floating interest rates and are secured by a general security
agreement covering all assets of the Company. The maximum
amount available under the Credit Facility is subject to a
borrowing base formula applied to accounts receivable and
inventories. The Credit Facility requires the Company to maintain
the ratio of its debt to debt plus equity at less than 40%.
As at December 31, 2011, this ratio was 0%. The Company must
also maintain coverage of its net operating cash flow as defined in
the Credit Facility agreement over interest expense for the
trailing twelve month period of greater than 1.25 times. As
at March 31, 2012, this ratio was 51.3 times. The Credit
Facility contains certain other covenants with which the Company is
in compliance. As at March 31, 2012, the Company had no
borrowings under the facility and had available undrawn borrowing
capacity of $60.0 million under the Credit Facility. Contractual
Obligations There have been no material changes in off-balance
sheet contractual commitments since December 31, 2011. Capital
Stock As at March 31, 2012 and 2011, the following shares and
securities convertible into shares were outstanding: (millions)
March 31, 2012 March31, 2011 Shares Shares Shares outstanding 17.5
17.5 Stock options 0.7 1.0 Share unit plan 0.7 0.7 obligations
Shares outstanding 18.9 19.2 and issuable The weighted average
number of shares outstanding during the first quarter of 2012 was
17.4 million, which was consistent with the prior year period as
the rise in the Company's share price during the last year has
limited the activity occurring under the normal course issuer bid
program. The diluted weighted average number of shares outstanding
was 18.1 million, which is also consistent with the prior year
quarter. The Company has established an independent trust to
purchase common shares of the Company on the open market to
resource share unit plan obligations. During the three month period
ended March 31, 2012, nil common shares were purchased by the trust
(March 31, 2011 - 25,000 common shares at an average cost of $8.75
per share). As at March 31, 2012, the trust held 566,277 shares
(March 31, 2011 - 462,753). On December 20, 2011, the Company
announced the renewal of the NCIB effective January 3, 2012, to
purchase up to 850,000 common shares through the facilities of
NASDAQ, representing approximately 5% of its outstanding common
shares. During the three month period ended March 31, 2012,
the Company purchased 8,625 shares at an average cost of $8.11
(March 31, 2011: 3,102 shares purchased at an average cost of
$7.56). Subsequent to the quarter end, the Company has cancelled
its NCIB program. At the time the program was cancelled, the
Company had acquired 9,225 shares at an average cost of $8.59 per
share. Critical Accounting Estimates There have been no material
changes to critical accounting estimates since December 31, 2011.
The Company is not aware of any environmental or asset retirement
obligations that could have a material impact on its operations.
Subsequent Events Subsequent to March 31, 2012, the Company
announced that the Board of Directors and the Special Committee of
the Board of Directors have decided it is in the best interest of
CE Franklin and all shareholders to formally commence a strategic
review process. Further to the announcement of a Strategic
Review Process, the Company adopted a Shareholders' Rights Plan to
ensure that, in the context of a bid for control of CE Franklin,
the Board of Directors would have sufficient time to consider the
bid and conduct the Strategic Review Process. Additionally,
the Shareholders' Rights Plan gives shareholders an equal
opportunity to participate in such a bid; and gives them adequate
time to properly assess the bid. The Shareholders' Rights
Plan is not intended to and will not prevent a sale of CE Franklin.
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 IFRS in its financial statements. The President and Chief
Executive Officer and the Vice President and Chief Financial
Officer of the Company have evaluated whether there were changes to
its ICFR during the three months ended March 31, 2012 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 since the
year ended December 31, 2011 have occurred that would materially
change the business and market risk information disclosed in the
Company's Form 20F. Forward Looking Statements The information in
the MD&A may contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. All statements, other
than statements of historical facts, that address activities,
events, outcomes and other matters that CE Franklin plans, expects,
intends, assumes, believes, budgets, predicts, forecasts, projects,
estimates or anticipates (and other similar expressions) will,
should or may occur in the future are forward-looking statements.
These forward-looking statements are based on management's current
belief, based on currently available information, as to the outcome
and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other
cautionary statements in this MD&A, including those in under
the caption "Risk Factors". Forward-looking statements appear in a
number of places and include statements with respect to, among
other things: -- forecasted oil and gas industry activity levels in
2012 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 outcome of the Company's strategic review process
-- the Company's business strategy and other plans and objectives
for future operations; -- fluctuations in worldwide prices and
demand for oil and gas; -- fluctuations in the demand for the
Company's products and services. Should one or more of the risks or
uncertainties described above or elsewhere in this MD&A occur,
or should underlying assumptions prove incorrect, the Company's
actual results and plans could differ materially from those
expressed in any forward-looking statements. All forward-looking
statements expressed or implied, included in this MD&A and
attributable to CE Franklin are qualified in their entirety by this
cautionary statement. This cautionary statement should also be
considered in connection with any subsequent written or oral
forward-looking statements that CE Franklin or persons acting on
its behalf might issue. CE Franklin does not undertake any
obligation to update any forward-looking statements to reflect
events or circumstance after the date of filing this MD&A,
except as required by law. Additional Information Additional
information relating to CE Franklin, including its first quarter
2012 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
www.sedar.com and at www.cefranklin.com. CE Franklin Ltd. CONDENSED
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - UNAUDITED
As at March 31 As at December 31 (in thousands of Canadian dollars)
2012 2011 Assets Current assets Cash and cash equivalents (Note
3,619 15,830 3) Accounts receivable (Note 4) 103,887 98,190
Inventories (Note 5) 113,122 111,661 Other 3,050 2,565 223,678
228,246 Non-current assets Property and equipment 9,403 9,709
Goodwill 20,570 20,570 Deferred tax assets (Note 6) 1,741 1,969
Other assets 155 171 Total Assets 255,547 260,665 Liabilities
Current liabilities Accounts payable and accrued 79,874 93,613
liabilities (Note 7) Current taxes payable (Note 6) 2,079 1,663
Note payable (Note 8) 290 290 Total Liabilities 82,243 95,566
Shareholders' equity Capital stock (Note 11) 22,930 22,536
Contributed surplus 20,459 20,529 Retained earnings 129,915 122,034
173,304 165,099 Total Liabilities and Shareholders' 255,547 260,665
Equity See accompanying notes to these condensed interim
consolidated financial statements CE Franklin Ltd. CONDENSED
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- UNAUDITED (Canadian Capital Stock dollars and number of shares in
thousands) Number of Contributed Retained Shareholders' Shares $
Surplus Earnings Equity Balance - 17,474 23,078 19,716 107,742
150,536 January 1, 2011 Stock based - - 426 - 426 compensation
expense (Note 11 (b) and (c)) Normal (3) (4) - (19) (23) course
issuer bid (Note 11 (d)) Stock 51 400 (400) - - options exercised
(Note 11 (b)) Share Units 13 77 (77) - - exercised (Note 11 (c))
Purchase of (25) (219) - - (219) shares in trust for Share Unit
Plans (Note 11 (c)) Net earnings - - - 3,375 3,375 Balance - 17,510
23,332 19,665 111,098 154,095 March 31, 2011 Balance - 17,440
22,536 20,529 122,034 165,099 January 1, 2012 Stock based - - 335 -
335 compensation expense (Note 11 (b) and (c)) Normal (9) (11) -
(59) (70) Course Issuer Bid (Note 11 (d)) Stock 11 71 (71) - -
options exercised (Note 11 (b)) Share Units 14 334 (334) - -
exercised (Note 11 (c)) Net earnings - - - 7,940 7,940 Balance -
17,456 22,930 20,459 129,915 173,304 March 31, 2012 See
accompanying notes to these condensed interim consolidated
financial statements CE Franklin Ltd. CONDENSED INTERIM
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME -
UNAUDITED Three Months Ended March 31 March 31 (in thousands of
Canadian dollars) 2012 2011 Revenue 160,253 137,701 Cost of sales
130,901 115,424 Gross profit 29,352 22,277 Other expenses Selling,
general and administrative expenses 17,771 16,980 (Note 14)
Depreciation 579 602 18,350 17,582 Operating profit 11,002 4,695
Foreign exchange loss and other 320 10 Interest expense 34 94
Earnings before tax 10,648 4,591 Income tax expense (recovery)
(Note 6) Current 2,480 1,360 Deferred 228 (144) 2,708 1,216 Net
earnings and comprehensive income 7,940 3,375 Net earnings per
share (Note 12) Basic 0.46 0.19 Diluted 0.44 0.19 Weighted average
number of share outstanding ('000s) Basic 17,443 17,488 Diluted
(Note 12) 18,149 18,052 See accompanying notes to these condensed
interim consolidated financial statements CE Franklin Ltd.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three months ended March 31 March 31 (in thousands of Canadian
dollars) 2012 2011 Cash flows from operating activities Net
earnings for the period 7,940 3,375 Items not affecting cash:
Depreciation 579 602 Deferred income tax expense (recovery) 228
(144) Stock based compensation expense 385 466 Foreign exchange and
other 534 90 9,666 4,389 Net change in non-cash working capital
balances related to operations: Accounts receivable (5,714) (678)
Inventories (1,461) (5,853) Other current assets (1,006) (79)
Accounts payable and accrued liabilities (13,790) 12,208 Current
taxes payable 416 101 (11,889) 10,088 Cash flows used in investing
activities Net purchase of property and equipment (252) (492) (252)
(492) Cash flows used in financing activities Decrease in bank
operating loan - (6,140) Purchase of capital stock through normal
course (70) (23) issuer bid Purchase of capital stock in trust for
Share Unit - (219) Plans (70) (6,382) Change in cash and cash
equivalents during the (12,211) 3,214 period Cash and cash
equivalents at the beginning of the 15,830 - period Cash and cash
equivalents at the end of the period 3,619 3,214 Cash paid during
the period for: Interest 34 94 Income taxes 2,158 1,260 See
accompanying notes to these condensed interim consolidated
financial statements CE Franklin Ltd. Notes to Condensed Interim
Consolidated Financial Statements - Unaudited (Tabular amounts in
thousands of Canadian dollars, except share and per share amounts)
1. General information CE Franklin Ltd. (the "Company") is
headquartered and domiciled in Calgary, Alberta, Canada. The
Company is an indirect subsidiary of Schlumberger Limited, a global
energy services company. The address of the Company's registered
office is 1800, 635 8(th) Ave SW, Calgary, Alberta, Canada and it
is incorporated under the Alberta Business Corporations Act. The
Company is a distributor of pipe, valves, flanges, fittings,
production equipment, tubular products and other general industrial
supplies primarily to the oil and gas industry through its 39
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. 2. Basis of preparation and accounting
policies Basis of preparation These condensed interim consolidated
financial statements for the three months ended March 31, 2012 have
been prepared in accordance with IAS 34, Interim Financial
Reporting, as issued by the International Accounting Standards
Board ("IASB"). These condensed interim consolidated
financial statements should be read in conjunction with the annual
financial statements for the year ended December 31, 2011, which
have been prepared in accordance with International Financial
Reporting Standards ("IFRS"). Accounting policies The accounting
policies adopted are consistent with those of the previous
financial year. 3. Cash and cash equivalents March 31, 2012
December 31, 2011 Cash at bank and on hand 3,619 15,830 Cash is
held at a major Canadian chartered bank. 4. Accounts receivable
March 31, 2012 December 31, 2011 Current 53,205 46,556 Less than 60
days overdue 37,041 36,732 Greater than 60 days overdue 6,220 8,328
Total Trade receivables 96,466 91,616 Allowance for credit losses
(1,737) (1,615) Net trade receivables 94,729 90,001 Other
receivables 9,158 8,189 103,887 98,190 A substantial portion of the
Company's accounts receivable balance is with customers within the
oil and gas industry and is subject to normal industry credit
risks. Concentration of credit risk in trade receivables is limited
as the Company's customer base is large and diversified. The
Company follows a program of credit evaluations of customers and
limits the amount of credit extended when deemed necessary. The
Company has established procedures in place to review and collect
outstanding receivables. Significant outstanding and overdue
balances are reviewed on a regular basis and resulting actions are
put in place on a timely basis. Appropriate provisions are made for
debts that may be impaired on a timely basis. The Company maintains
an allowance for possible credit losses that are charged to
selling, general and administrative expenses by performing an
analysis of specific accounts. 5. Inventories The Company maintains
net realizable value allowances against slow moving, obsolete and
damaged inventories that are charged to cost of goods sold on the
statement of earnings. These allowances are included in the
inventory value disclosed above. Movement of the allowance for net
realizable value is as follows: Three months ended Year ended
March31, 2012 December 31, 2011 Opening balance as at January 1
4,590 5,000 Additions 478 2,495 Utilization through write-downs
(558) (2,905) Closing balance 4,510 4,590 6. Taxation 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 March 31 2012 %
2011 % Earnings before income taxes 10,648 4,591 Income taxes
calculated at statutory rates 2,694 25.3 1,227 26.7 Non-deductible
items 26 0.2 18 0.4 Share based compensation 5 0.1 12 0.3
Adjustments for filing returns and others (17) (0.1) (41) (0.9)
2,708 25.5 1,216 26.5 As at March 31, 2012, income taxes payable
was $1.6 million (December 31, 2011 - $1.7 million payable). Income
tax expense is based on management's best estimate of the weighted
average annual income tax rate expected for the full financial
year. As at March 31, 2012 December 31, 2011 Assets Property and
equipment 896 883 Stock based compensation 1,044 951 expense Other
156 609 2,096 2,443 Liabilities Goodwill and other (355) (474) Net
Deferred taxasset 1,741 1,969 Deductible temporary differences are
recognized to the extent that it is probable that taxable profit
will be available against which the deductible temporary
differences can be utilized. 7. Accounts payable and accrued
liabilities March31, 2012 December 31, 2011 Current Trade payables
13,269 10,919 Other payables 2,235 3,834 Accrued compensation
expenses 1,478 4,683 Other accrued liabilities 62,892 74,177 79,874
93,613 8. Note payable March 31,2012 December 31, 2011 JEN Supply
debt 290 290 In July of 2011, the Company renewed its $60.0 million
revolving term credit facility that matures in July 2014.
Borrowings under the credit facility bear interest based on
floating interest rates and are secured by a general security
agreement covering all assets of the Company. The maximum amount
available under the credit facility is subject to a borrowing base
formula applied to accounts receivable and inventories. The credit
facility requires that the Company maintains the ratio of its debt
to debt plus equity at less than 40%. As at March 31, 2012, this
ratio was nil (December 31, 2011 - nil). The Company must also
maintain coverage of its net operating cash flow as defined in the
credit facility agreement, over interest expense for the trailing
twelve month period, at greater than 1.25 times. As at March 31,
2012, this ratio was 51.3 times (December 31, 2011 - 34.5
times). The credit facility contains certain other covenants,
with which the Company is in compliance and has been for the
comparative periods. As at March 31, 2012, the Company had borrowed
nil and had available undrawn borrowing capacity of $60.0 million
under the credit facility. In management's opinion, the Company's
available borrowing capacity under its Credit Facility and ongoing
cash flow from operations, are sufficient to resource its ongoing
obligations. The JEN Supply note payable is unsecured and bears
interest at the floating Canadian bank prime rate and is repayable
in November 2012. 9. 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, revolving bank term loan facility maturing in July 2014
(see Note 8) which is used to finance its net working capital and
general corporate requirements. The Company's objective is to
maintain adequate capital resources to sustain current operations
including meeting seasonal demands of the business and the economic
cycle. The Company's capital is summarised as follows: March
31, 2012 December 31, 2011 Shareholders' equity 173,466 165,099 Net
working capital 137,816 116,850 Net working capital is defined as
current assets less cash and cash equivalents, accounts payable and
accrued liabilities, current taxes payable, note payable and other
current liabilities. 10. Related party transactions Schlumberger
indirectly owns approximately 56% of the Company's outstanding
shares. The Company is the exclusive distributor in Canada of
downhole pump production equipment manufactured by Wilson Supply, a
division of Schlumberger. Purchases of such equipment conducted in
the normal course on commercial terms were as follows: For the
three months ended March 31 2012 2011 Cost of sales for the three
months ended 3,761 2,285 Inventory 5,971 4,443 Accounts payable and
accrued liabilities 1,935 1,081 Accounts receivable 203 - 11.
Capital Stock a) The Company has authorized an unlimited number of
common shares with no par value. As at March 31, 2012, the Company
had 17.5 million common shares, 0.7 million stock options and 0.7
million share units outstanding. b) The Board of Directors may
grant options to purchase common shares to substantially all
employees, officers and directors and to persons or corporations
who provide management or consulting services to the Company.
The exercise period and the vesting schedule after the grant date
are not to exceed 10 years. Option activity for each of the three
month periods ended March 31 was as follows: (000's) 2012 2011
Outstanding - January 1 745 1,073 Exercised (11) (51) Forfeited (4)
(32) Outstanding at March 31 730 990 Exercisable at March 31 730
826 Stock based compensation expense recorded for the three month
period ended March 31, 2012 was $2,000 (2011 - $67,000) and is
included in selling, general and administrative expenses on the
consolidated statement of earnings and comprehensive income.
No options were granted during the three month period ended March
31, 2012. Options vest one third or one fourth per year from the
date of grant. c) 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. For the PSU plan 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. RSU and PSU grants vest one third per
year over the three year period following the date of the grant.
DSUs vest on the date of grant and can only be redeemed when the
Director resigns from the Board. 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 contributed surplus. The contributed surplus
balance is reduced as the vested units are exchanged for either
common shares or cash. During the three month period ended March
31, 2012 the fair value of the RSU, PSU and DSU units granted was
$1,660,000 (2011 - $1,830,000) and $383,000 of compensation expense
was recorded (2011 - $358,000). Share Unit Plan activity for the
periods ended March 31, 2012, and December 31, 2011 was as follows:
(000's) March 31, 2012 December 31, 2011 Number of Units Number of
Units RSU PSU DSU Total RSU PSU DSU Total Outstanding at January 1
307 162 102 571 273 97 80 450 Granted 88 86 - 174 130 117 22 269
Performance adjustments - - - - - 4 - 4 Exercised (11) (3) - (14)
(34) (12) - (46) Forfeited (1) - - (1) (62) (44) - (106)
Outstanding at end of 383 245 102 730 307 162 102 571 period
Exercisable at end of 184 81 102 367 93 33 102 228 period The
Company has established an independent trust to purchase common
shares of the Company on the open-market to satisfy Share Unit Plan
obligations. The Company's intention is to settle all share based
obligations with shares delivered from the trust. The trust is
considered to be a special interest entity and is consolidated in
the Company's financial statements with the cost of the shares held
in trust reported as a reduction to capital stock. For the
three month period ended March 31, 2012, nil common shares were
purchased by the trust (2011 - 25,000 common shares at an average
cost of $8.75 per share). As at March 31, 2012, the trust
held 566,277 shares (2011 - 462,753). d) Normal Course Issuer Bid
("NCIB") On December 20, 2011, the Company announced the renewal of
the NCIB effective January 3, 2012, to purchase up to 850,000
common shares through the facilities of NASDAQ, representing
approximately 5% of its outstanding common shares. During the
three month period ended March 31, 2012, the Company purchased
8,625 shares at an average cost of $8.11 (2011: 3,102 shares
purchased at an average cost of $7.56). Subsequent to the quarter
end, the Company has cancelled its NCIB program. At the time
the program was cancelled, the Company had acquired 9,225 shares at
an average cost of $8.59 per share. 12. Earnings per share Basic
Basic earnings per share is calculated by dividing the net income
attributable to shareholders by the weighted average number of
ordinary shares in issue during the year. Dilutive Diluted earnings
per share are calculated using the treasury stock method, as if
RSUs, PSUs, DSUs and stock options were exercised at the beginning
of the year and funds received were used to purchase the Company's
common shares on the open market at the average price for the year.
Three Months Ended March 31 2012 2011 Net earnings and
comprehensive income 7,940 3,375 Weighted average number of common
shares issued 17,443 17,488 (000's) Adjustments for: Stock options
291 255 Share Units 415 309 Weighted average number of ordinary
shares for 18,149 18,052 dilutive Net earnings per share: Basic
0.46 0.19 Net earnings per share: Diluted 0.44 0.19 13. Financial
instruments a) Fair values The Company's financial instruments
recognized on the consolidated statements of financial position
consist of accounts receivable, accounts payable and accrued
liabilities and note payable. The fair values of these financial
instruments approximate their carrying amounts due to their
short-term maturity. b) Credit Risk is described in Note 4. c)
Market Risk and Risk Management The Company's long term debt bears
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 borrowing levels as at March 31, 2012, a change of one
percent in interest rates would decrease or increase the Company's
annual net income by nil. From time to time the Company enters into
foreign exchange forward contracts to manage its foreign exchange
market risk by fixing the value of its liabilities and future
commitments. The Company is exposed to possible losses in the event
of non-performance by counterparties. The Company manages this
credit risk by entering into agreements with counterparties that
are substantially all investment grade financial institutions. The
Company's foreign exchange risk arises principally from the
settlement of United States dollar dominated net working capital
balances as a result of product purchases denominated in United
States dollars. As at March 31, 2012, the Company had contracted to
purchase US$11.6 million at fixed exchange rates with terms not
exceeding two months (December 31, 2011 - $18.3 million). The fair
market values of the contracts were a loss of $0.3 million at March
31, 2012 (a gain of $0.2 million at December 31, 2011). The Company
recorded on these contracts an unrealized loss of $0.3 million for
the three months ended March 31, 2012, which has been recorded in
foreign exchange loss and other in the condensed interim
consolidated statements of earnings and comprehensive income.
As at March 31, 2012, a one percent change in the Canadian dollar
relative to the US dollar would decrease or increase the Company's
annual net income by $0.1 million. 14. Selling, general and
administrative ("SG&A") Costs Selling, general and
administrative costs for the three month period ended March 31 are
as follows: Three months ended 2012 2011 $ % $ % Salaries and
Benefits 10,960 61% 10,291 61% Selling Costs 1,910 11% 1,472 9%
Facility and office costs 3,476 20% 3,712 22% Other 1,425 8% 1,505
8% SG&A costs 17,771 100% 16,980 100% 15. Segmented reporting
The Company distributes oilfield products principally through its
network of 39 branches located in western Canada primarily to oil
and gas industry customers. Accordingly, the Company has
determined that it operates through a single operating segment and
geographic jurisdiction. 16. Seasonality 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. Revenue 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 revenues
typically outpaces 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 cash and cash equivalents,
accounts payable and accrued liabilities, income taxes payable and
other current liabilities) and bank revolving loan borrowing levels
follow similar seasonal patterns as revenues. 17. Subsequent events
Subsequent to March 31, 2012, the Company announced that the Board
of Directors and the Special Committee of the Board of Directors
have decided it is in the best interest of CE Franklin and all
shareholders to formally commence a strategic review process.
Further to the announcement of a Strategic Review Process, the
Company adopted a Shareholders' Rights Plan to ensure that, in the
context of a bid for control of CE Franklin, the Board of Directors
would have sufficient time to consider the bid and conduct the
Strategic Review Process. Additionally, the Shareholders'
Rights Plan gives shareholders an equal opportunity to participate
in such a bid; and gives them adequate time to properly assess the
bid. The Shareholders' Rights Plan is not intended to and
will not prevent a sale of CE Franklin. CE Franklin Ltd. CONTACT:
Investor Relations800-345-2858403-531-5604investor@cefranklin.com
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