CALGARY, July 28, 2011 /CNW/ -- CALGARY, July 28, 2011 /CNW/ - CE
FRANKLIN LTD. (TSX.CFT) (NASDAQ.CFK) reported net earnings of $1.7
million or $0.10 per share for the second quarter ended June 30,
2011, a significant increase from the $0.01 loss per share
generated in the second quarter ended June 30, 2010. Financial
Highlights (millions of Cdn. $ except per share data) Three Months
Ended Six Months Ended June 30 June 30 2011 2010 2011 2010
Unaudited Unaudited Revenues 113.9 99.9 251.6 221.8 Gross Profit
19.3 15.6 41.6 35.2 Gross Profit - % of sales 16.9% 15.6% 16.5%
15.9% EBITDA((1)) 3.1 0.7 8.4 4.8 EBITDA ((1))% of sales 2.7% 0.7%
3.3% 2.2% Net earnings 1.7 (0.1) 5.1 2.1 Per share Basic 0.10
(0.01) 0.29 0.12 Diluted 0.09 (0.01) 0.28 0.12 Net working
capital((2)) 136.5 111.8 Long term debt / Bank operating $12.2 $0.3
loan((2)) "The traditional seasonal activity slowdown caused
by spring break up had rig count and well completions drop
sequentially from the first quarter by 64% and 28% respectively.
Break up was extended this year by an extremely wet spring in the
south and forest fires in the North. Despite the weather, second
quarter activity levels were up year over year and strengthened as
the quarter progressed, momentum that should continue for the
remainder of 2011," said Michael West, President and CEO. The June
30, 2011 interim consolidated financial statements are prepared
under International Financial Reporting Standards ("IFRS").
Consequently the comparative figures for 2010 and the Company's
statement of financial position as at January 1, 2010 have been
restated from accounting principles generally accepted in Canada
("Canadian GAAP") to comply with IFRS. The reconciliations from the
previously published Canadian GAAP financial statements are
summarized in Note 3 to the consolidated interim financial
statements, and there were no material differences. Net earnings
for the second quarter of 2011, were $1.7 million, an increase of
$1.8 million from the second quarter of 2010. Revenues were
$113.9 million, an increase of $14.0 million (14%) from the second
quarter of 2010. Industry activity continued to improve and is
focused on oil, oil sands and liquid rich natural gas plays. Well
completions increased 26% compared to the second quarter of 2010.
Capital project business revenue grew $2.3 million year over year
despite the wet weather which negatively impacted both construction
work as well as tubular product related work. Gross profits
increased by $3.7 million (24%) due to the increase in revenues
year over year. Average gross profit margins improved sequentially
from first quarter 2011 levels and improved over the second quarter
2010 average gross profit margin, as increased purchasing levels
contributed to higher volume rebate income. Selling, general and
administrative expenses increased by $1.7 million (12%) to $16.4
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 second 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 income per share (basic) was
$0.10 in the second quarter of 2011, compared to a loss of $0.01
per share in the second quarter of 2010. Net income for the first
half of 2011, at $5.1 million, was more than double 2010's first
half net income. Sales were $251.6 million, an increase of $29.8
million (13%) over the comparable 2010 period due to improvements
in capital project and maintenance repair and operating sales. Well
completions have increased 31% year over year as industry activity
continues to build. Gross profit was up $6.4 million (18%) due to
the increase in sales combined with an increase in vendor rebate
income due to increased purchasing levels. Selling, general and
administrative expenses increased by $3.1 million (10%) to $33.4
million for the first half of the year for the same reasons they
were higher in the second quarter. Income taxes increased by $0.8
million in the first half of 2011 compared to the prior year period
due to higher pre-tax earnings. The weighted average number of
shares outstanding (basic) during the first half 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 income per share (basic) was $0.29
in the first half of 2011, compared to $0.12 earned in the first
half of 2010. Business Outlook Oil and gas industry activity in
2011 is expected to increase from 2010 levels. Natural gas
prices remain depressed as North American production capacity and
inventory levels continue to dominate demand. Natural gas
capital expenditure activity is focused on the emerging shale gas
plays in north-eastern British Columbia and liquids rich gas plays
in north-western Alberta where the Company has a strong market
position. Conventional and heavy oil economics are attractive
at current price levels leading to moderate increases in capital
expenditure activity in eastern Alberta and south-east
Saskatchewan. Oil sands project announcements continue to
gain momentum 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 continue to increase modestly in 2011 due to increased
oil and gas industry activity and the expansion of the Company's
product lines. 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 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. ((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 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 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 2011 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 2011 second quarter results, which is open to the public, will
be held on Friday, July 29, 2011 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 75008644 and may be accessed until midnight August
12, 2011. The call will also be webcast live at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3570600 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 half a century, 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 45
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. Management's Discussion and
Analysis at July 28, 2011 The following Management's Discussion and
Analysis ("MD&A") is provided to assist readers in
understanding CE Franklin Ltd.'s ("CE Franklin" or the "Company")
financial performance and position during the periods presented and
significant trends that may impact future performance of CE
Franklin. This MD&A should be read in conjunction with the
Company's interim consolidated financial statements for the three
and six month period ended June 30, 2011 and the MD&A and the
consolidated financial statements for the period ended March 31,
2011(the Company's first financial statements under IFRS) and the
MD&A and consolidated financial statements for the year ended
December 31, 2010. All amounts are expressed in Canadian dollars
and are in accordance with International Financial Reporting
Standards ("IFRS"), except otherwise noted. The June 30, 2011
interim consolidated financial statements are prepared under IFRS.
Consequently the comparative figures for 2010 and the Company's
statement of financial position as at January 1, 2010 have been
restated from accounting principles generally accepted in Canada
("Canadian GAAP") to comply with IFRS. The reconciliations from the
previously published Canadian GAAP financial statements are
summarized in Note 3 to the consolidated interim financial
statements, and there were no material differences. In addition,
IFRS 1 on first time adoption allows certain exemptions from
retrospective application of IFRS in the opening statement of
financial position. Where these exemptions have been used they have
also been explained in Note 3 to the consolidated interim financial
statements. 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 45 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 supply
chain infrastructure enables us to provide our customers with the
products they need on a same day or over-night basis. Our
centralized inventory and procurement capabilities allow us to
leverage our scale to enable industry leading hub and spoke
purchasing and logistics capabilities. Our branches are also
supported by services provided by the Company's corporate office in
Calgary, Alberta including sales, marketing, product expertise,
logistics, invoicing, credit and collection and other business
services. The Company's shares trade on the TSX ("CFT") and NASDAQ
("CFK") stock exchanges. Schlumberger Limited
("Schlumberger"), a major oilfield service company based in Paris,
France, owns approximately 56% 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-location needs of large and emerging customers in
the energy sector. Organic growth is expected to be complemented by
selected acquisitions over time. -- Expand production equipment
service capability to capture more of the product life cycle
requirements for the equipment the Company sells such as down hole
pump repair, oilfield engine maintenance, well optimization and on
site project management. This will differentiate the Company's
service offering from its competitors and deepen relationships with
its customers. -- Expand oil sands and industrial project and
Maintenance, Repair and Operating Supplies ("MRO") business by
leveraging our existing supply chain infrastructure, product and
project expertise. -- 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 service. Business
Outlook Oil and gas industry activity in 2011 is expected to
increase from 2010 levels. Natural gas prices remain
depressed as North American production capacity and inventory
levels continue to dominate demand. Natural gas capital
expenditure activity is focused on the emerging shale gas plays in
north eastern British Columbia and liquids rich gas plays in
north-western Alberta where the Company has a strong market
position. Conventional and heavy oil economics are attractive
at current price levels leading to moderate increases to capital
expenditure activity in eastern Alberta and south-east
Saskatchewan. Oil sands project announcements continue to
gain momentum 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 continue to increase modestly in 2011 due to increased
oil and gas industry activity and the expansion of the Company's
product lines. 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 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. Second Quarter Operating Results The following table
summarizes CE Franklin's results of operations: (In millions of
Canadian Dollars except per share data) Three Months Ended June 30
Six Months Ended June 30 2011 2010 2011 2010 Revenues 113.9 100.0%
99.9 100.0% 251.6 100.0% 221.8 100.0% Cost of Sales (94.6) (83.1)%
(84.3) (84.4)% (210.0) (83.5)% (186.6) (84.1)% Gross Profit 19.3
16.9% 15.6 15.6% 41.6 16.5% 35.2 15.9% Selling, general and (16.4)
(14.4)% (14.7) (14.7)% (33.4) (13.3)% (30.3) (13.7)% administrative
expenses Foreign exchange and 0.2 0.2% (0.2) (0.2)% 0.2 0.1% (0.1)
(0.0)% other EBITDA((1)) 3.1 2.7% 0.7 0.7% 8.4 3.3% 4.8 2.2%
Depreciation (0.6) (0.5)% (0.6) (0.6)% (1.2) (0.5)% (1.2) (0.5)%
Interest (0.1) (0.1)% (0.2) (0.2)% (0.2) (0.1)% (0.4) (0.2)%
Earnings 2.4 2.1% (0.1) (0.1)% 7.0 2.7% 3.2 1.4% before tax Income
tax (0.7) (0.6)% 0.0 (0.0)% (1.9) (0.7)% (1.1) (0.5)% expense Net
earnings 1.7 1.5% (0.1) (0.1)% 5.1 2.0% 2.1 0.9% Net earnings per
share Basic $0.10 ($0.01) $0.29 $0.12 Diluted $0.09 ($0.01) $0.28
$0.12 Weighted average number of shares outstanding (000's) Basic
17,504 17,514 17,496 17,546 Diluted 18,225 17,514 18,157 17,818
((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 income taxes. Depreciation expense is a
necessary component of the Company's expenses because the Company
is required to pay cash 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 GAAP.
Accordingly, EBITDA, as the term is used herein, is unlikely to be
comparable to EBITDA as reported by other entities. Second Quarter
Results Net earnings for the second quarter of 2011, were $1.7
million, an increase of $1.8 million from the second quarter of
2010. Revenues were $113.9 million, an increase of $14.0
million (14%) from the second quarter of 2010. Industry activity
continued to improve and is focused on oil, oil sands and liquid
rich natural gas plays. Well completions increased 26% compared to
the second quarter of 2010. Capital project business revenue grew
$2.3 million year over year despite the wet weather which
negatively impacted both construction work as well as tubular
product related work. Gross profits increased by $3.7 million (24%)
due to the increase in revenues year over year. Average gross
profit margins improved sequentially from first quarter 2011 levels
and improved over the second quarter 2010 average gross profit
margin, as increased purchasing levels contributed to higher volume
rebate income. Selling, general and administrative expenses
increased by $1.7 million (12%) to $16.4 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 second 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 income per share (basic) was $0.10 in the second
quarter of 2011, compared to a loss of $0.01 per share in the
second quarter of 2010. Year to date Results Net Income for the
first half of 2011 at $5.1 million was more than double 2010's
first half net income. Sales were $251.6 million, an increase of
$29.8 million (13%) over the comparable 2010 period due to
improvements in capital project and maintenance repair and
operating sales. Well completions have increased 31% year over year
as industry activity continues to build. Gross profit was up $6.4
million (18%) due to the increase in sales combined with an
increase in vendor rebate income due to increased purchasing
levels. Selling, general and administrative expenses increased by
$3.1 million (10%) to $33.4 million for the first half of the year
for the same reasons they were higher in the second quarter. Income
taxes increased by $0.8 million in the first half of 2011 compared
to the prior year period due to higher pre-tax earnings. The
weighted average number of shares outstanding (basic) during the
second 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 income
per share (basic) was $0.29 in the first half of 2011, compared to
$0.12 earned in the first half of 2010. Revenues Revenues for the
quarter ended June 30, 2011, were $113.9 million, an increase of
14% from the quarter ended June 30, 2010, as detailed above in the
"Second Quarter Results" discussion. 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 six month periods
ended June 30, 2011 and 2010 are provided in the table below. Q2
Average % YTD Average % 2011 2010 change 2011 2010 change Gas -
Cdn. $/gj $3.89 $3.91 (1)% $3.83 $4.42 (13)% (AECO spot) Oil - Cdn.
$/bbl $109.38 $78.07 40% $104.54 $80.28 21% (syntetic crude)
Average rig count 188 161 17% 360 293 25% Well completions: Oil
1,785 1,077 66% 3,986 2,432 64% Gas 980 1,120 (13)% 2,640 2,611
(1)% Total well 2,765 2,197 26% 6,626 5,043 31% 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 months ended June 30 Six months ended June 30
Cdn. $) 2011 2010 2011 2010 End use revenue $ % $ % $ % $ % demand
Capital projects 56.6 50% 54.3 54% 132.8 53% 115.8 52% Maintenance,
repair and 57.3 50% 45.6 46% 118.8 47% 106.0 48% operating supplies
("MRO") Total Revenues 113.9 100% 99.9 100% 251.6 100% 221.8 100%
Note: Capital project end use revenues are defined by the
Company as consisting of the tubular and 80% of pipe, flanges and
fittings; and valves and accessories product revenues respectively;
MRO revenues 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
revenues respectively. Revenues from capital project related
products were $56.6 million in the second quarter of 2011, an
increase of 4% ($2.3 million) from the second quarter of 2010.
Total well completions increased by 26% in the second quarter of
2011 and the average working rig count increased by 17% compared to
the prior year period. Gas wells comprised 35% of the total wells
completed in western Canada in the second quarter of 2011 compared
to 51% in the second quarter of 2010. Spot gas prices ended the
second quarter at $3.71 per GJ (AECO) a decrease of 5% from second
quarter average prices. Oil prices ended the second quarter at
$98.56 per bbl (Synthetic Crude) a decrease of 10% from the second
quarter average. Depressed gas prices are expected to continue to
negatively impact gas drilling activity over the remainder of 2011,
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
revenues quotation processes and increasing the operating
flexibility and efficiency of its branch network. The Company
is well positioned to support customers who are pursuing oil plays
and more particularly tight oil plays. The Company dealt with
the impacts of a very wet second quarter particularly in southern
Saskatchewan and responsibly bid requests for proposals for
drilling and completions programs, which resulted in improved gross
profits. The Company's results were also impacted by the
forest fires in the North as two branches were closed temporarily
in the quarter for evacuation notices. They are both back up and
running though the Slave Lake operation was on a limited basis
during 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 June 30, 2011, increased by $11.7 million (26%) to $57.3
million compared to the quarter ended June 30, 2010 and comprised
50% of the Company's total revenues (2010 - 46%). The Company's
strategy is to grow profitability by focusing on its core western
Canadian oilfield product distribution business, complemented by an
increase in the product life cycle services provided to its
customers and the focus on the emerging oil sands capital project
and MRO revenues opportunities. Revenues from these initiatives to
date are provided below: Q2 2011 Q2 2010 YTD 2011 YTD 2010 Revenues
($millions) $ % $ % $ % $ % Oilfield 89.6 79% 85.6 86% 212.2 84%
188.4 85% Oil sands 19.4 17% 10.9 11% 29.4 12% 26.1 12% Production
services 4.9 4% 3.4 3% 10.0 4% 7.3 3% Total Revenues 113.9 100%
99.9 100% 251.6 100% 221.8 100% Revenues from oilfield
products to conventional western Canada oil and gas end use
applications were $89.6 million for the second quarter of 2011, an
increase of 5% from the second quarter of 2010. This increase was
driven by the 26% increase in well completions compared to the
prior year period. Revenues from oil sands end use applications
were $19.4 million in the second quarter, an increase of $8.5
million (78%) compared to $10.9 million in the second quarter of
2010 reflecting the timing of project revenues and a large order of
specialized material for an engineering, procurement and
construction customer. The Company continues to position its major
project execution capability and Fort McMurray branch to penetrate
this emerging market for capital project and MRO products.
Production service revenues were $4.9 million in the second quarter
of 2011, a 44% increase from the $3.4 million of revenues in the
second quarter of 2010, reflecting improved oil production
economics resulting in increased customer maintenance activities.
Gross Profit Q2 2011 Q2 2010 YTD 2011 YTD 2010 Gross profit ($
millions) $19.3 $15.6 $41.6 $35.2 Gross profit margin as a % 16.9%
15.6% 16.5% 15.9% of revenues Gross profit composition by product
revenue category: Tubulars 2% 2% 4% 2% Pipe, flanges and fittings
30% 30% 28% 29% Valves and accessories 21% 19% 21% 19% Pumps,
production 12% 13% 13% 13% equipment and services General 35% 36%
34% 37% Total gross profit 100% 100% 100% 100% Gross profit
was $19.3 million in the second quarter of 2011, an increase of
$3.7 million (24%) from the second quarter of 2010 due to increased
revenues compared to the prior year period. Gross profit margins
for the quarter improved sequentially from first quarter 2011
levels and were better than the prior year period at 16.9% as
increased purchasing levels contributed to higher volume rebate
income. Increased valves and accessories gross profit composition
was due to improved gross profit margins. The decrease in pumps,
production equipment and services and general products gross profit
composition reflects some larger low margin sales to customers
under contract. Selling, General and Administrative ("SG&A")
Costs ($millions) Q2 2011 Q2 2010 YTD 2011 YTD 2010 $ % $ % $ % $ %
People Costs 10.0 61 8.7 59 20.3 61 17.6 58 Facility and office
costs 3.5 22 3.4 23 7.3 22 6.9 23 Selling Costs 1.1 7 1.0 6 2.6 8
2.7 9 Other 1.8 10 1.6 12 3.2 9 3.1 10 SG&A costs 16.4 100 14.7
100 33.4 100 30.3 100 SG&A costs as % of revenues 14% 15% 13%
14% SG&A costs increased $1.7 million (12%) in the second
quarter of 2011 from the prior year period and represented 14% of
revenues compared to 15% in the prior year period. The $1.7 million
increase in expenses was attributable to higher people costs
reflecting a 9% increase in employee count, to service the
additional sales volumes, and higher incentive compensation costs
reflecting the improved profit performance of the business year
over year. Depreciation Expense Depreciation expense of $0.6
million in the second quarter of 2011 was comparable to the second
quarter of 2010. Interest Expense Interest expense of $0.1 million
in the second quarter of 2011 was $0.1 million below the second
quarter of 2010 due to lower borrowing levels throughout the
quarter. Foreign Exchange (Gain) Loss and other Foreign exchange
gains and losses on United States dollar denominated product
purchases and net working capital liabilities were gains of $0.1
million for the second quarter ended June 30, 2011 ($0.2 million -
June 30, 2010). In the quarter a number of individually small
miscellaneous settlement gains totaling $0.1 million were realized.
Income Tax Expense The Company's effective tax rate for the second
quarter of 2011 was 29.4%, up from (2.0%) in the second quarter of
2010 as the prior year tax recovery was offset by the impact of the
other adjustments. The current effective tax rate is higher than
the statutory rate due to the impact of the non-deductible items
and other adjustments. Substantially all of the Company's tax
provision is currently payable. Summary of Quarterly Financial Data
The selected quarterly financial data is presented in Canadian
dollars and in accordance with IFRS. This information is derived
from the Company's unaudited quarterly financial statements. As
noted above the June 30, 2011 interim consolidated financial
statements have been prepared under IFRS. The comparative figures
shown in the table below for 2010 and 2009 have been restated from
Canadian GAAP. The reconciliations from Canadian GAAP to IFRS have
been completed and there were no material differences noted. The
conversion from Canadian GAAP to IFRS is further discussed in Note
3 of the interim consolidated financial statements. (in millions of
Cdn. $ except per share data) Q3 Q4 2009 Unaudited 2009 ( ((2)) Q1
Q3 (2)) 2010 Q2 2010 2010 Q4 2010 Q1 2011 Q2 2011 Revenues 94.1
93.0 121.9 99.9 132.2 135.6 137.7 113.9 Gross 17.4 15.3 19.7 15.6
19.2 20.5 22.3 19.3 Profit Gross 18.5% 16.5% 16.1% 15.6% 14.5%
15.1% 16.2% 16.9% Profit % EBITDA 0.5 0.6 4.1 0.7 3.8 3.8 5.3 3.1
EBITDA as a % of 0.5% 0.6% 3.4% 0.7% 2.9% 2.8% 3.8% 2.7% revenues
Net earnings 0.2 (0.5) 2.2 (0.1) 2.2 1.6 3.4 1.7 (loss) Net
earnings (loss) as a 0.2% (0.5%) 1.8% (0.1%) 1.7% 1.2% 2.5% 1.5% %
of revenues Net earnings (loss) per share Basic $0.01 ($0.03) $0.13
($0.01) $0.12 $0.09 $0.19 $0.10 Diluted $0.01 ($0.03) $0.12 ($0.01)
$0.12 $0.09 $0.19 $0.09 Net working capital( 131.1 136.6 113.9
111.8 129.0 125.7 120.1 136.5 (1)) Long term debt/bank 21.6 26.8
1.4 0.3 14.4 6.4 0.3 12.2 operating loan((1)) Total well 1,468
1,576 2,846 2,197 2,611 4,760 3,861 2,765 completions (1)Net
working capital and long term debt/bank operating loan amounts are
as at quarter end. (2) prepared using Canadian GAAP The
Company's revenue 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. An exceptionally wet second quarter in 2011 could impact
customer capital programs in the third quarter. As a result, the
first and fourth quarters typically represent the busiest time for
oil and gas industry activity and the highest revenue 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 revenue
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 cash and cash equivalents,
accounts payable and accrued liabilities, income taxes payable and
other current liabilities) and borrowing levels follow similar
seasonal patterns as revenue. Liquidity and Capital Resources The
Company's primary internal source of liquidity is cash flow from
operating activities before net changes in non-cash working capital
balances related to operations. 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 June 30, 2011 the Company had
$12.2 million in borrowings under its revolving term credit
facility, a net increase of $5.8 million from December 31, 2010.
Borrowing levels have increased as the increase in net working
capital levels has outpaced the $7.2 million in cash flow from
operating activities, before net changes in non-cash working
capital balances generated year to date. Also contributing to the
increase in borrowing levels was $1.4 million in capital and other
expenditures and $0.7 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
June 30, 2010, there were no borrowings under the Company's bank
operating loan, a decrease of $26.5 million from December 31, 2009.
The Company had cash of $0.9 million at June 30, 2010 (2009 - nil).
Borrowing levels have decreased due to the Company generating $4.2
million in cash flow from operating activities before net changes
in working capital and a $25.1 million reduction in net working
capital. This was offset by $0.5 million in capital and other
expenditures, $0.2 million for the settlement of share obligations
and $1.2 million for the purchase of shares to resource stock
compensation obligations and the repurchase of shares under the
Company's NCIB. Net working capital was $136.5 million at June 30,
2011, an increase of $10.8 million from December 31, 2010. Accounts
receivable decreased by $11.8 million to $81.2 million at June 30,
2011 from December 31, 2010 due to the 16% decrease in revenues in
the second quarter compared to the fourth quarter of 2010,
partially offset by a weaker Days Sales Outstanding ("DSO"). DSO in
the second quarter of 2011 was 60 days compared to 56 days in the
fourth quarter of 2010 and 52 days in the second quarter of 2010.
DSO is calculated using average revenues per day for the quarter
compared to the period end accounts receivable balance. Inventory
increased by $13.2 million (14%) at June 30, 2011 from December 31,
2010. Inventory turns for the second quarter of 2011 decreased to
3.5 turns compared to 4.9 turns in the fourth quarter of 2010, but
were comparable to the second quarter of 2010. 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 continues to adjust its investment in inventory and
inventory practices to align with anticipated industry activity
levels and supplier lead times in order to improve inventory
turnover efficiency. Accounts payable and accrued liabilities
decreased by $7.0 million (11%) to $56.3 million at June 30, 2011
from December 31, 2010 due to the seasonal slowdown in activity.
Capital expenditures in the second quarter of 2011 were $1.0
million, $0.7 million higher than the prior year period and were
comprised primarily of vehicles, warehouse equipment replacements
and branch improvements. The Company has a $60.0 million revolving
term credit facility that matures in July 2013 (the "Credit
Facility"). 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 Credit Facility is subject to a borrowing base formula
applied to accounts receivable and inventories. The Credit Facility
requires the Company to maintain the ration of its debt to debt
plus equity at less than 40%. As at June 30, 2011, this ratio was
7%. 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 June 30, 2011 this ratio was 28.5 times. The
Credit Facility contains certain other covenants with which the
Company is in compliance. As at June 30, 2011 the Company had
available undrawn borrowing capacity of $48.1 million under this
Credit facility. Contractual Obligations There have been no
material changes in off-balance sheet contractual commitments since
March 31, 2011. Capital Stock As at June 30, 2011 and 2010, the
following shares and securities convertible into shares were
outstanding: (millions) June 30, 2011 June 30, 2010 Shares Shares
Shares outstanding 17.5 17.4 Stock options 0.9 1.2 Share unit plan
obligations 0.7 0.6 Shares outstanding and issuable 19.1 19.2
The weighted average number of shares outstanding during the
second quarter of 2011 was 17.5 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 18.2 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 and six month periods ended June 30, 2011, 50,000 common
shares and 75,000 common shares were acquired by the trust at an
average cost per share of $9.25 and $9.27 per share
respectively (Three and six months ended June 30, 2010 - 92,500 and
129,300 common shares at an average cost per share of $6.85 and
$6.83 respectively). As at June 30, 2011, the trust held 511,895
shares (June 30, 2010 - 448,581 shares). On December 21, 2010, the
Company announced the renewal of the NCIB, to purchase up to
850,000 common shares representing approximately 5% of its
outstanding common shares. Shares may be purchased up to December
31, 2011. As at June 30, 2011 the Company had purchased 3,102
shares at an average cost of $7.56 per share (June 30, 2010 -
49,278 shares at an average cost of $6.61 per share). Critical
Accounting Estimates There have been no material changes to
critical accounting estimates since December 31, 2010. 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 These interim consolidated financial statements
for the period ended June 30, 2011 are prepared under IFRS. For all
accounting periods prior to this, the Company prepared its
financial statements under Canadian GAAP. 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. Over the transition period the Company assessed the
differences between Canadian GAAP and IFRS. A risk based approach
was used to identify possibly significant differences based on
possible financial impact and complexity. As described in Note 3 to
the interim consolidated financial statements no material
differences were identified. As such there are no reconciling items
that materially changed the reporting requirements upon the
transition from Canadian GAAP to IFRS. Similarly, no
significant information system changes were required in order to
adopt IFRS. IFRS 1 allows first time adopters of IFRS to take
advantage of a number of voluntary exemptions from the general
principal of retroactive restatement. In adopting IFRS, the Company
did take advantage of the following voluntary exemptions under IFRS
1. Property and equipment The Company has elected to use the
historic cost model, as presently used under Canadian GAAP and
acceptable under IFRS. Therefore the historical cost of Property
and Equipment has been brought forward into the consolidated
interim financial statements for the period ended June 30, 2011.
The Company wanted to maintain as much comparability as possible
upon transition given the nature and magnitude of the Company's
property and equipment. Business Combinations The Company has not
applied IFRS 3, the Business Combinations standard to acquisitions
of subsidiaries that occurred before January 1, 2010, the Company's
transition date to IFRS. As such there is no retrospective change
in accounting for business combinations. The Company used this
exemption to simplify its IFRS conversion plan and improve
comparability between its Canadian GAAP statements and its IFRS
statements. Borrowing Costs IAS 23 requires that borrowing costs
directly attributable to the acquisition, construction or
production of a qualifying asset (one that takes a substantial
period of time to get ready for use or sale) be capitalized as part
of the cost of that asset. The option of immediately expensing
those borrowing costs has been removed. The Company has elected to
account for such transactions on a go forward basis, and as such
there is no retrospective change in accounting for borrowing
standards. The Company used this exemption to simplify its IFRS
conversion plan and improve comparability between its Canadian GAAP
statements and its IFRS statements. Stock Options The Company has
assessed and quantified the difference in accounting for stock
based compensation under IFRS compared to Canadian GAAP and has
deemed the difference to be immaterial. The Company has elected to
not apply IFRS 2 to share based payments granted and full vested
before the Company's date of transition to IFRS. The Company
used this exemption to simplify its IFRS conversion plan and
improve comparability between its Canadian GAAP statements and its
IFRS statements. 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 six months ended June 30,
2011 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, 2010 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
2011 and beyond; -- planned capital expenditures and working
capital and availability of capital resources to fund capital
expenditures and working capital; -- the Company's future financial
condition or results of operations and future revenues and
expenses; -- the Company's business strategy and other plans and
objectives for future operations; -- fluctuations in worldwide
prices and demand for oil and gas; -- fluctuations in the demand
for the Company's products and services. Should one or more of the
risks or uncertainties described above or elsewhere in this
MD&A occur, or should underlying assumptions prove incorrect,
the Company's actual results and plans could differ materially from
those expressed in any forward-looking statements. All
forward-looking statements expressed or implied, included in this
MD&A and attributable to CE Franklin are qualified in their
entirety by this cautionary statement. This cautionary statement
should also be considered in connection with any subsequent written
or oral forward-looking statements that CE Franklin or persons
acting on its behalf might issue. CE Franklin does not undertake
any obligation to update any forward-looking statements to reflect
events or circumstance after the date of filing this MD&A,
except as required by law. Additional Information Additional
information relating to CE Franklin, including its first quarter
2011 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 June 30 As at December 31 (in thousands of Canadian dollars)
2011 2010 Assets Current assets Accounts receivable (Note 4) 81,194
92,950 Inventories (Note 5) 108,047 94,838 Other 3,619 1,625
192,860 189,413 Non-current assets Property and equipment 9,711
9,431 Goodwill 20,570 20,570 Deferred tax assets (Note 6) 1,408
1,116 Other assets 104 147 Total Assets 224,653 220,677 Liabilities
Current liabilities Accounts payable and accrued 56,344 63,363
liabilities (Note 7) Current taxes payable - 348 56,344 63,711 Non
current liabilities Long term debt (Note 8) 12,225 6,430 Total
liabilities 68,569 70,141 Shareholders' equity Capital stock (Note
11) 23,060 23,078 Contributed surplus 20,245 19,716 Retained
earnings 112,779 107,742 156,084 150,536 Total liabilities and
shareholders' 224,653 220,677 equity (See accompanying notes to
these condensed interim consolidated financial statements ) CE
Franklin Ltd. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY - UNAUDITED (in thousands of Canadian
Capital Stock dollars and number of shares) Number of Contributed
Retained Shareholders' Shares $ Surplus Earnings Equity Balance -
23,284 17,184 102,159 142,627 January 1, 17,581 2010 Stock based -
1,183 - 1,183 compensation expense - (Note 11 (b) and (c)) Normal
(65) 0 (261) (326) Course Issuer Bid (49) (Note 11 (d)) Share Units
281 (281) 0 0 exercised 38 (Note 11 (c)) Purchase of (883) 0 0
(883) shares in trust for (129) Share Unit Plans (Note 11 (c))
Options 20 - - 20 excercised 3 from treasury Deferred - (178) -
(178) stock unit - excerise Net earnings - - - 2,105 2,105 Balance
- 22,637 17,908 104,003 144,548 June 30, 17,444 2010 Balance -
23,078 19,716 107,742 150,536 January 1, 17,474 2011 Stock based -
1,222 - 1,222 compensation expense - (Note 11 (b) and (c)) Normal
(4) - (19) (23) Course Issuer Bid (3) (Note 11 (d)) Stock 611 (611)
- - options exercised 87 (Note 11 (b)) Share Units 82 (82) - -
exercised 14 (Note 11 (c)) Purchase of (707) - - (707) shares in
trust for (75) Share Unit Plans (Note 11 (c)) Net earnings - - -
5,056 5,056 Balance - 23,060 20,245 112,779 156,084 June 30, 17,497
2011 (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 Six months
ended (in thousands of Canadian June 30 June 30 June 30 June 30
dollars except per share 2011 2010 2011 2010 amounts) Revenue
113,866 99,905 251,567 221,784 Cost of sales 94,587 84,335 210,011
186,554 Gross profit 19,279 15,570 41,556 35,230 Other expenses
Selling, general and administrative expenses 16,399 14,700 33,380
30,304 (Note 14) Depreciation 601 618 1,203 1,235 17,000 15,318
34,583 31,539 Operating profit 2,279 252 6,973 3,691 Foreign
exchange (gain) (182) 161 (172) 85 loss and other Interest expense
78 191 172 431 Earnings before tax 2,383 (100) 6,973 3,175 Income
tax expense (recovery) (Note 6) Current 808 61 2,168 1,076 Deferred
(107) (59) (251) (6) 701 2 1,917 1,070 Net earnings (loss) and
1,682 (102) 5,056 2,105 comprehensive income (loss) Net earnings
(loss) per share (Note 12) Basic 0.10 (0.01) 0.29 0.12 Diluted 0.09
(0.01) 0.28 0.12 Weighted average number of shares outstanding
(000's) Basic 17,504 17,514 17,496 17,546 Diluted (Note 12) 18,225
17,514 18,157 17,818 (See accompanying notes to these
condensed interim consolidated financial statements ) CE
Franklin Ltd. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF
CASHFLOWS - UNAUDITED Three months ended Six months ended June 30
June 30 June 30 June 30 (in thousands of Canadian 2011 2010 2011
2010 dollars) Cash flows from operating activities Net earnings
(loss) for the 1,682 (102) 5,056 2,105 period Items not affecting
cash - Amortization 601 618 1,203 1,235 Future income tax
(recovery) (107) (59) (251) (6) Stock based compensation 656 418
1,122 792 expense Foreign exchange and other (24) 189 46 113 2,808
1,064 7,176 4,239 Net change in non-cash working capital balances
related to operations - Accounts receivable 12,316 13,144 11,756
5,737 Inventories (7,357) (5,442) (13,209) 7,348 Other current
assets (1,894) (731) (1,994) 1,966 Accounts payable and accrued
(19,238) (4,682) (7,019) 9,099 liabilities Current taxes payable
(361) (62) (348) 948 (13,726) 3,291 (3,638) 29,337 Cash flows used
in investing activities Purchase of property and (980) (327)
(1,472) (458) equipment Proceeds on disposal of 45 - 45 - property
and eqipment (935) (327) (1,427) (458) Cash flows (used in)/ from
financing activities (Decrease) in bank operating - (1,078) -
(26,549) loan Increase in long term debt 11,935 - 5,795 - Issuance
of capital stock - - 19 - 19 stock options exercised Settlement of
share unit - (178) - (178) plan obligations Purchase of capital
stock - (131) (23) (326) through normal course issuer bid Purchase
of capital stock in (488) (634) (707) (883) trust for Share Unit
Plans 11,447 (2,002) 5,065 (27,917) Change in cash and cash (3,214)
962 - 962 equivalents during the period Cash and cash equivalents
at 3,214 - - - the beginning of the period Cash and cash
equivalents at - 962 - - the end of the period Cash paid during the
period for: Interest 40 191 134 431 Income taxes 1,189 240 2,449
240 (See accompanying notes to these condensed interim
consolidated financial statements ) CE Franklin Ltd. Notes to
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, Canada. The
Company is a subsidiary of Schlumberger Limited, a global energy
services company. The address of the Company's registered office is
1900, 300 5th 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 45
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. Accounting policies Basis of preparation
and adoption of IFRS The Company prepares its financial statements
in accordance with Canadian generally accepted accounting
principles as set out in the Handbook of the Canadian Institute of
Chartered Accountants ("CICA Handbook"). In 2010, the CICA Handbook
was revised to incorporate International Financial Reporting
Standards ("IFRS"), and require publicly accountable enterprises to
apply such standards effective for years beginning on or after
January 1, 2011. Accordingly, the Company commenced reporting on
this basis in its 2011 interim consolidated financial statements.
In these financial statements, the term "Canadian GAAP" refers to
Canadian GAAP before the adoption of IFRS. These interim
consolidated financial statements have been prepared in accordance
with IFRS applicable to the preparation of interim financial
statements, including IAS 34, Interim Financial Reporting, and IFRS
1, First-time Adoption of International Financial Reporting
Standards. The accounting policies followed in these interim
financial statements are the same as those applied in the Company's
interim financial statements for the period ended March 31, 2011.
The Company has consistently applied the same accounting policies
throughout all periods presented, as if these polices had always
been in effect. Note 3 discloses the impact of the transition to
IFRS on the Company's reported equity as at June 30, 2010 and
comprehensive income for the three and six months ended June 30,
2010, including the nature and effect of significant changes in
accounting policies from those used in the Company's consolidated
financial statements for the year ended December 31, 2010. The
accounting policies applied in these condensed interim consolidated
financial statements are based on IFRS effective for the year ended
December 31, 2011, as issued and outstanding as of July 28, 2011,
the date the Board of Directors approved the statements. Any
subsequent changes to IFRS that are given effect in the Company's
annual consolidated financial statements for the year ending
December 31, 2011 could result in the restatement of these interim
consolidated financial statements, including transition adjustments
recognized on change-over to IFRS. The condensed interim
consolidated financial statements should be read in conjunction
with the Company's Canadian GAAP annual financial statements for
the year ended December 31, 2010, and the Company's interim
financial statements for the quarter ended March 31, 2011 prepared
in accordance with IFRS applicable to interim financial statements.
3. Explanation of transition to IFRS The Company does not have any
material differences between IFRS and Canadian GAAP. As such there
are no reconciling items that would materially change the reporting
requirements under Canadian GAAP to IFRS. The interim consolidated
financial statements for the period ended March 31, 2011 were the
Company's first financial statements prepared under IFRS. For all
accounting periods prior to this, the Company prepared its
financial statements under Canadian GAAP. IFRS 1 allows first time
adopters to IFRS to take advantage of a number of voluntary
exemptions from the general principal of retrospective restatement.
The Company has taken the following exemptions: Property and
equipment The Company has continued to use the historic cost model,
as was used under Canadian GAAP and acceptable under IFRS.
Therefore the historical cost of Property and Equipment has been
brought forward into these financial statements, as was previously
recorded under Canadian GAAP. IFRS 2 Share based payments The
Company has elected to not apply IFRS 2 to share based payments
granted and fully vested before the Company's date of transition to
IFRS. The Company has assessed and quantified the difference in
accounting for stock based compensation under IFRS compared to
Canadian GAAP and has deemed the difference to be immaterial. IFRS
3 Business combinations This standard has not been applied to
acquisitions of subsidiaries that occurred before January 1, 2010,
the Company's transition date to IFRS. As such, there is no
retrospective change in accounting for business combinations. IAS
23 Borrowing costs Borrowing costs requires an entity to capitalize
borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset (one that takes a
substantial period of time to get ready for use or sale) as part of
the cost of that asset. The option of immediately expensing those
borrowing costs has been removed. The Company has elected to
account for such transactions on a go forward basis. As such there
is no retrospective change in accounting for borrowing costs. 4.
Accounts receivable June 30, 2011 December 31, 2010 Current 45,222
40,014 Less than 60 days overdue 27,379 41,253 Greater than 60 days
overdue 7,889 5,519 Total Trade receivables 80,490 86,786 Allowance
for credit losses (1,551) (1,887) Net trade receivables 78,939
84,899 Other receivables 2,255 8,051 81,194 92,950 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: Six months ended
June Year ended December 31, 30, 2011 2010 Opening balance as at
5,000 6,300 January 1, Additions 630 900 Utilization through (write
downs) / (1,230) (2,200) recoveries Closing balance 4,400 5,000
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 Six Months Ended June 30 June 30 2011 % 2010 % 2011 % 2010 %
Earnings before 2,383 (100) 6,973 3,175 income taxes Income taxes
calculated at 635 26.6% (29) 28.5% 1,862 26.6% 905 28.5% statutory
rates Non-deductible 15 0.6% 28 (28.0)% 33 0.6% 55 1.7% items Share
based 48 2.0% 55 (55.0)% 62 0.9% 130 4.1% compensation Capital
taxes 2 0.1% - - 5 0.1% - - Adjustments for filing returns 1 0.1%
(52) 52.5% (45) (0.6)% (20) (0.6)% and others 701 29.4% 2 (2.0)%
1,917 27.6% 1,070 33.7% As at June 30, 2011, income taxes
receivable was $21,000 (June 30, 2010 - $111,000 receivable).
Income tax expense is based on management's best estimate of the
weighted average annual income tax rate expected for the full
financial year. Significant components of deferred tax assets and
liabilities are as follows: As at June 30, 2011 December 31, 2010
Assets Property and equipment 907 870 Stock based compensation
expense 768 487 Other 135 156 1,810 1,513 Liabilities Goodwill and
other 402 397 Net Deferred tax asset 1,408 1,116 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 June 30, 2011 December 31, 2010
Current Trade payables 23,304 23,966 Other payables 5,660 7,057
Accrued compensation expenses 2,175 2,434 Other accrued liabilities
25,205 29,906 56,344 63,363 8. Long term debt and bank
operating loan June 30, 2011 December 31, 2010 JEN Supply debt 290
290 Bank operating loan 11,935 6,140 Long term debt 12,225 6,430
In July of 2010, the Company entered into a $60.0 million
revolving term Credit Facility that matures in July 2013. The
Credit Facility replaced the existing $60.0 million, 364 day bank
operating loan. 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 June 30, 2011, this ratio was 7% (December 31, 2010 -
4%). 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 June 30, 2011, this ratio was 28.5 times
(December 31, 2010 - 14.1 times). The Credit Facility
contains certain other covenants, with which the Company is in
compliance and has been for the comparative periods. As at June 30,
2011, the Company had borrowed $11.9 million and had available
undrawn borrowing capacity of $48.1 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 debt is unsecured and bears interest at
the floating Canadian bank prime rate and is repayable in 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 2013 (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: June 30, 2011 December
31, 2010 Shareholders' equity 156,084 150,536 Long term debt / Bank
operating 12,225 6,430 loan Net working capital 136,516 125,702 Net
working capital is defined as current assets less cash and cash
equivalents, accounts payable and accrued liabilities, income taxes
payable and other current liabilities. 10. Related party
transactions Schlumberger owns approximately 56% 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 Schlumberger. Purchases of such
equipment conducted in the normal course on commercial terms were
as follows: For the six months ended June 30 2011 2010 Cost of
sales for the three months ended 1,803 1,582 Cost of sales for the
six months ended 4,088 3,697 Inventory 4,842 3,631 Accounts payable
and accrued liabilities 1,141 601 Accounts receivable 2 -
11. Capital Stock a) The Company has
authorized an unlimited number of common shares with no par value.
At June 30, 2011, the Company had 17.5 million common shares, 0.9
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 six month
periods ended June 30 was as follows: 000's 2011 2010 Outstanding -
January 1 1,073 1,195 Granted - - Exercised (87) (15) Forfeited
(54) (7) Outstanding at June 30 932 1,173 Exercisable at June 30
799 870 Stock based compensation expense recorded for the three and
six month period ended June 30, 2011 was $164,000 (2010 - $117,000)
and $231,000 (2010 - $171,000) respectively and is included in
selling, general and administrative expenses on the Consolidated
Statement of Earnings and Comprehensive Income. No options
were granted during the six month period ended June 30, 2011 or the
year ended December 31, 2010. Options vest one third or one fourth
per year from the date of grant. Prior to the fourth quarter of
2010, the Company's stock option plan included a cash settlement
mechanism. Stock options were revalued at each period end using the
Black Scholes pricing model, using the following assumptions: 2010
Dividend yield Nil Risk-free interest rate 3.48% Expected life 5
years Expected volatility 63.2% Note: Expected volatility is based
on historical volatility. During the fourth quarter of 2010, the
Company discontinued the settlement of stock option obligations
with cash payments in favour of issuing shares from treasury. At
the time of this plan modification, the current liability of
$2,075,000 was transferred to contributed surplus on the Company's
consolidated statement of financial position.
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"), where by RSU's, PSU's and DSU's 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. DSU's 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 six month
period ended June 30, 2011 and 2010, the fair value of the RSU, PSU
and DSU units granted was $2,009,000 (2010 - $1,956,000) and
compensation expense recorded in the three and six month period
ended June 30, 2011, were $433,000 (2010 - $301,000) and $791,000
(2010 - $621,000). Share Unit Plan activity for the periods ended
June 30, 2011, and December 31, 2010 was as follows: June 30, 2011
December 31, 2010 (000's) Number of Units Number of Units RSU PSU
DSU Total RSU PSU DSU Total Outstanding at January 1 273 97 80 450
223 53 98 374 Granted 116 101 22 239 145 132 31 308 Performance
adjustments - - - - - (77) - (77) Excercised (10) (3) - (13) (82)
(7) (49) (138) Forfeited - - - - (13) (4) - (17) Outstanding at end
of period 379 195 102 676 273 97 80 450 Exercisable at end of
period 116 43 102 261 30 10 80 120 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 six month
period ended June 30, 2011, 75,000 common shares were purchased by
the trust (2010 - 129,300) at an average cost of $9.27 per share
(2010 - $6.83). As at June 30, 2011, the trust held 511,895
shares (2010 - 448,581). d) Normal
Course Issuer Bid ("NCIB") On December 21, 2010, the Company
announced a NCIB to purchase for cancellation up to 850,000 common
shares representing approximately 5% of its outstanding common
shares. During the six months ended June 30, 2011, the company
purchased 3,102 shares at an average cost of $7.56 (2010: 49,278
shares purchased at an average cost of $6.61). 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 RSU's, PSU's, DSU's 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 Six Months Ended
June 30 June 30 2011 2010 2011 2010 Total Comprehensive income
1,682 (102) 5,056 2,105 attributable to shareholders Weighted
average number of 17,504 17,514 17,496 17,546 common shares issued
(000's) Adjustments for: Stock options 295 326 256 326 Share Units
426 (55) 405 (53) Weighted average number of 18,225 17,785 18,157
17,819 ordinary shares for dilutive Net earnings per share: Basic
0.10 (0.01) 0.29 0.12 Net earnings per share: Diluted 0.09 (0.01)
0.28 0.12 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 long term debt. The fair values of these
financial instruments, excluding long term debt, approximate their
carrying amounts due to their short- term maturity. At June 30,
2011, the fair value of the long term debt approximated their
carrying values due to their floating interest rate nature and
short term maturity. Long term debt is initially recorded at fair
value and subsequently measured at amortized cost using the
effective interest rate method.
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 June
30, 2011, a change of one percent in interest rates would decrease
or increase the Company's annual net income by $0.1 million. 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 June
30, 2011, the Company had contracted to purchase US$19.4 million at
fixed exchange rates with terms not exceeding nine months (December
31, 2010 - $6.5 million). The fair market values of the contracts
were nominal at June 30, 2011 and December 31, 2010 respectively.
As at June 30, 2011, a one percent change in the Canadian dollar
relative to the US dollar would be expected to not have a material
impact on net earnings. 14. Selling, general and administrative
("SG&A") Costs Selling, general and administrative costs for
the three and six month periods ended June 30 are as follows: Three
months ended Six months ended 2011 2010 2011 2010 $ % $ % $ % $ %
Salaries and Benefits 10,021 61% 8,699 59% 20,313 61% 17,565 58%
Selling Costs 1,081 7% 940 6% 2,553 8% 2,739 9% Facility and office
3,540 22% 3,436 23% 7,252 22% 6,865 23% costs Other 1,757 10% 1,625
12% 3,262 9% 3,135 10% SG&A costs 16,399 100% 14,700 100%
33,380 100% 30,304 100% 15. Segmented reporting The Company
distributes oilfield products principally through its network of 45
branches located in western Canada primarily to oil and gas
industry customers. Accordingly, the Company has determined
that it operated 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 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 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. To view
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