CALGARY, Jan. 29 /PRNewswire-FirstCall/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) reported record net income of $8.8 million or $0.48 per share (basic) for the fourth quarter ended December 31, 2008, an increase of 267% over the $2.4 million or $0.13 per share earned in the fourth quarter ended December 31, 2007. For 2008, net income was $21.7 million or $1.19 per share (basic), an increase of 60% over the $13.6 million or $0.74 per share of net income earned in 2007.
Financial Highlights
--------------------
(millions of Cdn.$ except Three Months Ended Year Ended
per share data) December 31 December 31
----------------------- -----------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Sales $ 161.2 $ 112.3 $ 547.4 $ 466.3
Gross profit 33.9 20.4 107.7 84.6
Gross profit - % of sales 21.0% 18.2% 19.7% 18.1%
EBITDA(1) 14.3 5.1 35.8 25.7
EBITDA(1) % of sales 8.9% 4.5% 6.5% 5.5%
Net income $ 8.8 $ 2.4 $ 21.7 $ 13.6
Per share - basic $ 0.48 $ 0.13 $ 1.19 $ 0.74
- diluted $ 0.47 $ 0.13 $ 1.17 $ 0.72
Net working capital(2) $ 142.8 $ 134.7
Bank operating loan(2) $ 34.9 $ 44.3
'2008 was the second most profitable year in the Company's history. CE Franklin is entering a challenging business environment in 2009 with a strong balance sheet and attractive strategies to strengthen its distribution network, product lines and end use markets,' said Michael West, President and CEO.
Net income for the fourth quarter of 2008 was a record $8.8 million, up $6.4 million from the fourth quarter of 2007. Sales reached $161.2 million, an increase of $48.9 million (44%) from the fourth quarter of 2007. Capital project business comprised 60% of sales, and increased $34.6 million (55%) over the prior year period, driven by a 39% increase in well completions over the comparable period. Continued growth of oil sands revenues and increased tubular steel sales also contributed to increased capital project sales. Extremely tight tubular steel supply conditions during 2008 have resulted in product cost increases in excess of 50%, and contributed to the increase in sales. The acquisition of JEN Supply Inc. ('JEN Supply') in the fourth quarter of 2007 contributed to the increase in Maintenance, Repair and Operating supplies ('MRO') sales. Gross profit increased by $13.5 million (66%) over the prior year period due to the increase in sales and gross profit margins. Gross profit margins for the fourth quarter were 21.0% up from the prior year period at 18.2%. Selling, general and administrative expenses increased by $4.1 million to $19.4 million for the quarter due to increased variable compensation driven by the increase in earnings, increased facility costs with the opening of the new Edmonton Distribution Centre during the second quarter, and the addition of the JEN Supply operating costs. Lower interest expense was associated with reduced average debt levels and lower floating interest rates in the fourth quarter of 2008 as compared to the same period in 2007. Income taxes increased by $3.2 million in the fourth quarter compared to the prior year period due to higher pre-tax earnings offset slightly by a reduction in income tax rates. The weighted average number of shares outstanding during the fourth quarter was down slightly from the prior year period. Net income per share (basic) was $0.48 in the fourth quarter of 2008, an increase of 269% over the $0.13 earned in the fourth quarter of 2007, consistent with the increase in net earnings.
Net income for the year ended December 31, 2008 was $21.7 million, up $8.1 million (60%) from the year ended December 31, 2007. Sales reached $547.4 million, up $81.2 million (17%) compared to the prior year. The increase in sales was attributable to increased tubular product prices, the acquisitions of JEN Supply and Full Tilt Field Services Limited ('Full Tilt') and increased oil sands and conventional oilfield market share and industry activity. Average rig count increased by 8% and well completions increased by 2% from prior year levels. Gross profit increased by $23.1 million (27%) over the prior year to a record $107.7 million, due to increased sales and gross profit margins. Increased supplier rebates associated with higher purchasing levels, and increased tubular margins were the principal reasons for the improvement in margins. Selling, general and administrative expenses increased by $13.5 million (23%) in 2008 to $71.6 million due to the addition of operating expenses associated with the JEN Supply and Full Tilt acquisitions, increased variable compensation expense driven by the increase in earnings, and increased facility costs associated with the opening of the new Distribution Centre in the second quarter of 2008. Interest expense declined due to reduced average debt levels and floating interest rates in 2008. Income taxes increased by $3.4 million in 2008 due to higher pre-tax earnings offset slightly by a reduction in income tax rates. The weighted average number of shares outstanding during the year was down slightly compared to the prior year. Net income per share (basic) was $1.19 for the year, an increase of 61%, consistent with the increase in net income.
Business Outlook
The recent upheaval in global credit markets has contributed to significant capital market volatility, resulting in deleveraging, repricing of risk and ultimately the retrenchment of consumption. Oil and gas markets have experienced similar upheaval. Our customers continue to assess the impact of these changes on their businesses and capital expenditure plans in 2009. We expect oil and gas well completions will decline sharply in 2009 to levels not seen since 2002. Approximately 60% of the Company's sales are driven by our customers' capital project expenditures.
The Company expects these conditions will contribute to increased consolidation of oil and gas customers, stable to deflationary product costs and improved labour availability. We enter 2009 with a strong balance sheet and are positioned to pursue our strategies to increase market share in both the conventional oilfield and oil sands markets.
Over the medium to longer term, the Company is confident that it can continue to strengthen and improve the profitability of its distribution network by expanding its product lines, supplier relationships and capability to service additional oil and gas and industrial end use markets.
(1) EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA is a supplemental non-GAAP financial measure
used by management, as well as industry analysts, to evaluate
operations. Management believes that EBITDA, as presented, represents
a useful means of assessing the performance of the Company's ongoing
operating activities, as it reflects the Company's earnings trends
without showing the impact of certain charges. The Company is also
presenting EBITDA and EBITDA as a percentage of sales because it is
used by management as supplemental measures of profitability. The use
of EBITDA by the Company has certain material limitations because it
excludes the recurring expenditures of interest, income tax, and
amortization expenses. Interest expense is a necessary component of
the Company's expenses because the Company borrows money to finance
its working capital and capital expenditures. Income tax expense is a
necessary component of the Company's expenses because the Company is
required to pay cash income taxes. Amortization expense is a
necessary component of the Company's expenses because the Company
uses property and equipment to generate sales. Management compensates
for these limitations to the use of EBITDA by using EBITDA as only a
supplementary measure of profitability. EBITDA is not used by
management as an alternative to net income, as an indicator of the
Company's operating performance, as an alternative to any other
measure of performance in conformity with generally accepted
accounting principles or as an alternative to cash flow from
operating activities as a measure of liquidity. A reconciliation of
EBITDA to Net income is provided within the table on page 4 of this
press release. Not all companies calculate EBITDA in the same manner
and EBITDA does not have a standardized meaning prescribed by GAAP.
Accordingly, EBITDA, as the term is used herein, is unlikely to be
comparable to EBITDA as reported by other entities.
(2) Net working capital is defined as current assets less accounts
payable and accrued liabilities, income taxes payable and other
current liabilities. Net working capital and Bank operating loan are
as at quarter end.
Overview
CE Franklin is a leading distributor of pipe, valves, flanges, fittings, production equipment, tubular products and other general industrial supplies primarily to the oil and gas industry in Canada through its 44 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. This infrastructure enables us to provide our customers with the products they need on a same day or over night basis. Our centralized inventory and procurement capabilities allow us to leverage our scale to enable industry leading hub and spoke purchasing and logistics capabilities. The branches are also supported by services provided by the Company's corporate office in Calgary, Alberta including sales, marketing, product expertise, logistics, invoicing, credit and collection and other business services.
The Company's shares trade on the TSX ('CFT') and AMEX ('CFK') stock exchanges. Smith International Inc., a major oilfield service company based in the United States, owns 54% of the Company's shares.
Business and Operating Strategy
The Company is pursuing the following strategies to grow its business
profitably:
- Expand the reach and market share serviced by our distribution
network. We are focusing our sales efforts and product offering on
servicing complex, multi-site needs of large and emerging customers
in the energy sector. In 2008 we continued to invest in our
distribution network by opening a branch operation in Red Earth,
Alberta and by expanding our facilities at five existing branch
operations. Last spring, we successfully completed the move to our
new 151,000 square foot Distribution Centre and nine acre pipe yard
located in Edmonton, Alberta which positions us to service our
growing distribution network. Organic growth is expected to be
complemented by selected acquisitions such as the December 2007
acquisition of JEN Supply which increased our market share in two
existing markets and expanded our presence in two additional markets.
- Expand our production equipment service capability to capture more of
the product life cycle requirements for the equipment we sell such as
down hole pump repair, oilfield engine maintenance, well optimization
and on site project management. This will differentiate our service
offering from our competitors and deepen our relationship with
customers. In the first quarter of 2009, we plan to open a valve
actuation centre at our Distribution Centre, to service our
customers' valve automation requirements. The acquisition of Full
Tilt in July 2007 provided us with the capability to service oilfield
engines and parts that we were previously selling, and, by doing so;
position us to attract new customers to our core oilfield equipment
distribution business.
- Focus on the oil sands and industrial project and MRO business by
leveraging our existing supply chain infrastructure, product and
project expertise. The Company is expanding its product line and
supplier relationships and expertise to provide the automation,
instrumentation and other specialty products that these customers
require.
Fourth Quarter Operating Results
The following table summarizes CE Franklin's results of operations:
(in millions of Cdn. dollars except per share data)
Three Months Ended December 31
-----------------------------------------------
2008 2007
----------------------- -----------------------
Sales $ 161.2 100.0% $ 112.3 100.0%
Cost of sales (127.3) (79.0)% (91.9) (81.8)%
----------- ----------- ----------- -----------
Gross profit 33.9 21.0% 20.4 18.2%
Selling, general and
administrative expenses (19.5) (12.1)% (15.3) (13.6)%
Foreign exchange loss (0.1) - - 0.0%
----------- ----------- ----------- -----------
EBITDA 14.3 8.9% 5.1 4.5%
Amortization (0.6) (0.4)% (0.7) (0.6)%
Interest (0.2) (0.1)% (0.5) (0.4)%
----------- ----------- ----------- -----------
Income before taxes 13.5 8.4% 3.9 3.5%
Income tax expense (4.7) (2.9)% (1.5) (1.3)%
----------- ----------- ----------- -----------
Net income 8.8 5.5% 2.4 2.1%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share
Basic $ 0.48 $ 0.13
Diluted $ 0.47 $ 0.13
Weighted average number of shares outstanding
(000's)
Basic 18,149 18,393
Diluted 18,392 18,863
(in millions of Cdn. dollars except per share data)
Year Ended December 31
-----------------------------------------------
2008 2007
----------------------- -----------------------
Sales $ 547.4 100.0% $466.3 100.0%
Cost of sales (439.7) (80.3)% (381.7) (81.9)%
----------- ----------- ----------- -----------
Gross profit 107.7 19.7% 84.6 18.1%
Selling, general and
administrative expenses (71.6) (13.1)% (58.1) (12.4)%
Foreign exchange loss (0.2) (0.0)% (0.8) (0.2)%
----------- ----------- ----------- -----------
EBITDA 35.8 6.5% 25.7 5.5%
Amortization (2.4) (0.4)% (2.8) (0.6)%
Interest (1.0) (0.2)% (2.0) (0.4)%
----------- ----------- ----------- -----------
Income before taxes 32.4 6.0% 20.9 4.5%
Income tax expense (10.7) (2.0)% (7.3) (1.6)%
----------- ----------- ----------- -----------
Net income 21.7 4.0% 13.6 2.9%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share
Basic $ 1.19 $ 0.74
Diluted $ 1.17 $ 0.72
Weighted average number of shares outstanding
(000's)
Basic 18,255 18,337
Diluted 18,561 18,807
Sales
Sales for the quarter ended December 31, 2008 were $161.2 million, up 44%
from the quarter ended December 31, 2007, as detailed above in the 'Financial
Highlights' discussion.
(in millions of Cdn. $)
Three months ended Dec 31 Year ended Dec 31
------------------------- -------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
End use
sales demand $ % $ % $ % $ %
Capital projects 97.3 60 62.7 56 314.0 57 269.6 58
Maintenance,
repair and
operating
supplies (MRO) 63.9 40 49.6 44 233.4 43 196.7 42
------------ ------------ ------------ ------------
Total sales 161.2 100 112.3 100 547.4 100 466.3 100
Note: Capital project end use sales are defined by the Company as consisting of tubulars and 80% of pipe, flanges and fittings; and valves and accessories product sales respectively; MRO Sales are defined by the Company as consisting of pumps and production equipment, production services; general product and 20% of pipes, flanges and fittings; and valves and accessory product sales respectively.
The 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 good 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. The relative level of oil and gas commodity prices are a key driver of industry capital project activity as product prices directly impact the economic returns realized by oil and gas companies. Well completion, rig count and commodity price information for the fourth quarter and years 2008 and 2007 are provided in the table below.
Q4 Average Year Average
--------------- % --------------- %
2008 2007 change 2008 2007 change
------- ------- --------------- ------- -------
Gas - Cdn. $/gj
(AECO spot) $6.76 $6.16 10% $8.18 $6.47 26%
Oil - Cdn. $/bbl
(Synthetic Crude) $65.19 $85.70 (24%) $103.03 $76.48 35%
Average rig count 387 386 0% 398 367 8%
Well completions:
Oil 2,160 1,480 46% 6,223 5,443 14%
Gas 4,811 3,546 36% 12,342 12,717 (3%)
------- ------- --------------- ------- -------
Total well completions 6,971 5,026 39% 18,565 18,160 2%
Average statistics are shown except for well completions.
Sources: Oil and Gas prices - First Energy Capital Corp.; Rig count
data - Hughes Christensen; Well completion data - Daily Oil Bulletin
Sales of capital project related products were $97.3 million in the fourth quarter of 2008, up 55% ($34.6 million) from the fourth quarter of 2007. Total well completions increased by 39% to 6,971 in the fourth quarter of 2008 while the average working rig count was comparable to the prior year period at 387 rigs. Gas wells comprised 69% of the total wells completed in western Canada in the fourth quarter of 2008 compared to 71% in the fourth quarter of 2007. Oil and gas capital expenditure activity began to recover in the second and third quarters of 2008 and continued through the fourth quarter resulting in part from emerging gas exploration plays in northeast British Columbia and oil pool development in southeast Saskatchewan combined with strong oil and gas prices earlier in the year. Spot gas and oil prices ended the fourth quarter at $6.63 per GJ (AECO) and $34.61 per bbl (Synthetic Crude), a decrease of 2% and 47%, respectively, from fourth quarter average prices. This, in combination with the volatility experienced across global capital markets, is expected to result in reduced industry cash flow, access to capital and capital expenditure economics, which in turn is expected to decrease demand for the Company's products in 2009.
MRO product sales are related to overall oil and gas industry production levels and tend to be more stable than capital project sales. MRO product sales for the quarter ended December 31, 2008 increased by $14.3 million (29%) to $63.9 million compared to the quarter ended December 31, 2007 and comprised 40% of the Company's total sales. The acquisition of JEN Supply in December 2007 contributed incremental sales of $6.4 million.
The Company's strategy is to grow profitability by focusing on its core western Canadian oilfield equipment service business, complemented by an increase in the product life cycle services provided to its customers, and the focus on the emerging oil sands capital project and MRO sales opportunities. Revenue results of these initiatives to date are provided below:
Q4 2008 Q4 2007 2008 2007
------------ ------------ ------------ ------------
Sales ($millions) $ % $ % $ % $ %
Oilfield 141.9 88 107.1 95 491.3 90 431.4 93
Oil sands 14.5 9 2.9 3 39.4 7 23.7 5
Production
services 4.8 3 2.3 2 16.7 3 11.2 2
------------ ------------ ------------ ------------
Total sales 161.2 100 112.3 100 547.4 100 466.3 100
Sales of oilfield products to conventional western Canada oil and gas end use applications were $141.9 million for the fourth quarter of 2008, up 32% from the fourth quarter of 2007. Over half of this increase was comprised of incremental sales from the acquisition of JEN Supply and the increased sale of tubular steel products with the remaining increase driven by the 39% increase in well completions compared to the prior year period.
Sales to oil sands end use applications increased to $14.5 million in the fourth quarter compared to $2.9 million in the fourth quarter of 2007.
