SEC Company Response from CE FRANKLIN LTD (CIK 0000912151) — Oct 13, 2005
CE FRANKLIN LTD (CIK 0000912151)
Date: Oct. 13, 2005 · CIK: 0000912151 · Accession: 0001137171-05-001719
AI Filing Summary & Sentiment
Letter
United States Security and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. Fax No.: (202) 772-9369 Re: File No. 1-12570
Dear Mr. Cash:
Thank you for your letter of September 9, 2005 with respect to your review of our Form 20-F for the year ended December 31, 2004. I will respond to your questions in the order that they were presented in your letter.
Business Overview – Operations, page 9 of 59
1.
We note that sales include “product account management and inside sales.” Please tell us the specific nature of these activities and explain to us when and how you recognize revenues related to these activities. Also, please be advised that if services are greater than 10% of sales, you should separately disclose service sales and related cost of sales in the US GAAP footnote as required by Rule 5-03 of Regulation S-X.
CE Franklin Response:
This section currently reads: “CE Franklin's operations are divided into: sales, which includes product, account management and inside sales.” The above groups represent sales functions within CE Franklin.
The product management sales group has special expertise in the product lines we sell, such as bottom hole pumps and other production equipment, steel and fiberglass tubular products and valves. The account management sales group is responsible for maintaining contact with our customers in Calgary, Alberta where the majority of our customers’ head offices are located, and sell all of the products the Company carries. The inside sales group is responsible for coordination and preparation of hundreds of competitive bid packages each year for all of the products the Company carries.
The Company does not charge its customers with respect to the above sales functions.
2.
If you continue to present a non-GAAP measure, please revise your disclosure in future filing to fully with Item 10 (e) of Regulation S-K.
CE Franklin Response:
CE Franklin will comply with this request in future filings.
Page 1 of 5
Note 1 – Accounting Policies – Revenue Recognition, page 46 to 59
3.
We note your policy of recognizing product sales when title transfer to the customer. Tell us when the title is transferred. If other than shipment or delivery, tell us how your policy complies with SAB 101.
CE Franklin Response:
Title transfers to our customers when products are shipped to the customer.
4.
We also note your reference to consignment of inventory on page 12 of 59. Tell us and revise future filings to include an accounting policy footnote for consignment sales.
CE Franklin Response:
For the fiscal years ended December 31, 2004, 2003 and 2002, consignment sales represent 0.9%, 1.0% and 1.0%, respectively, of the Company’s sales. As a result, CE Franklin has not included a separate revenue recognition accounting policy footnote with respect to consignment sales in its financial statements and feels its current revenue negotiation policy note is adequate.
Note 13c Commitments and Contingencies
5.
We note that the Company is involved in various lawsuits. Please provide supplementally a brief description of each material lawsuit. Also, please be advised that if you believe the likelihood of a material loss from such lawsuits is probable or reasonably possible, you should revise future filings to provide the disclosure required by SFAS 5.
CE Franklin Response:
Enclosed is a brief summary of CE Franklin’s lawsuits. These lawsuits are reviewed with the Company’s audit committee on a quarterly basis prior to release of our financial results and filings.
Waterous Detroit Diesel and Integrated Power Systems vs. CE Franklin Ltd.
A Statement of Claim in the amount of $4,252,113 (representing 520 engines at $7,800.00 per engine) was filed by Waterous Detroit Diesel and Integrated Power Systems against CE Franklin Ltd. on February 28, 2001. The claim by Waterous relates to the alleged purchase order and subsequent cancellation for the purchase of GM engines by CE Franklin. CE Franklin has denied a contract existed and filed a counterclaim for approximately $1.2 million in June 2001. The counterclaim by CE Franklin asserts that the engines provided by Waterous were faulty, and therefore CE Franklin incurred significant costs to repair such engines.
Waterous has sold a significant portion of its inventory relating to this claim, and has therefore mitigated a material portion of its damages. The Company discovered, through discoveries, the actual damages incurred by Waterous is below $1.0 million. The Company considers its offsetting claim for $1.2 million valid.
CE Franklin believes that the likelihood of a material loss from this lawsuit is not probable or reasonably possible.
Page 2 of 5
Alliance Pipeline Limited Partnership and Alliance Pipeline L.P. vs. CE Franklin Ltd., Stream-Flo Industries Ltd., Entech Deutschland GMBH and Mannesmann Demag AG
On December 16, 2002 a Statement of Claim for Cdn. $5,665,000 and U.S. $2,445,000 was filed against CE Franklin Ltd. and the above manufacturers relating to costs incurred by Alliance Pipelines to replace all of the check valves purchased by Alliance from CE Franklin for use in Alliance’s compressor stations.
The Company filed its statement of defence on July 25, 2003. During December 2003, CE Franklin Ltd. filed a Third Party Notice against the manufacturers of these products claiming entitlement to indemnity from the manufacturer because the product sold was defective.
CE Franklin believes that the likelihood of a material loss from this lawsuit is not probable or reasonably possible.
CE Franklin vs. Elenor Enterprises Ltd.
On January 26, 2000, a Statement of Claim for $146,846 was filed by CE Franklin Ltd. against Elenor Enterprises Ltd. relating to unpaid invoices for fiberglass pipe and other products sold to Elenor and subsequently installed for Gulf Canada Resources Ltd. CE Franklin has recorded a receivables provision against this receivable. On February 14, 2000, Elenor Enterprises counter claimed for $2,027,840 against CE Franklin and Smith Fiberglass Product, the manufacturer of the fiberglass pipe and fittings. The counter claim asserts that the fiberglass pipe and fittings provided by the manufacturer were defective, and as a result, Elenor incurred significant costs in replacing the product.
The Company has filed a Third Party Notice against Smith Fiberglass claiming entitlement to indemnity from Smith Fiberglass because they were the manufacturer of the product, and the product sold was defective.
There has been no action on this suit since September 13, 2002.
CE Franklin believes that the likelihood of a material loss from this lawsuit is not probable or reasonably possible.
Note 17- Reconciliation of Canadian and United States Generally Accepted Accounting Principles – Segments, page 53 of 59
6.
We note your disclosures regarding your production equipments and supplies as well as your tubular products in the Business Overview and related sections.
Please tell us what considerations you gave to whether these represent two reportable segments under US GAAP.
CE Franklin Response:
CE Franklin distributes pipe, valves, flanges, fittings, production equipment, tubular goods and other general oilfield supplies to producers of oil and gas in Canada through its 41 branches and tubular stocking points which are situated in towns and cities that serve particular oil and gas fields of the western Canadian
Page 3 of 5
sedimentary basin. Each of the above represents distinct products that can be distributed through CE Franklin’s distribution network.
CE Franklin considers all of the product groups that it distributes to have similar economic characteristics such as:
i.
The products distributed are similar in that they assist our customers with the production of oil and gas;
ii.
The products are sold to the same class of customer, being exploration and production companies; and
iii.
Are subject to the same method of distribution, our 41 branches and tubular stocking points.
The Company maintains a centralized distribution facility in Edmonton, Alberta and operates a hub and spoke distribution model, as well as centralized service groups such as: sales; marketing and supply which includes purchasing and product pricing; customer service, safety and quality; finance and administration; and business effectiveness (human resources). All of these groups support the sale of the products CE Franklin distributes (pipe, valves, flanges, fitting, production equipment, tubular goods and other general oilfield supplies).
In addition, the Company maintains a state of the art ERP system which is used by all parts of the business. A significant portion of the depreciation charge in the Company’s Statements of Operations relate to this system.
Finally, the Company finances accounts receivable, inventories, bank overdraft, accounts payable and accrued liabilities with its demand bank operating loan. As a result, the interest expense reported in the Statement’s of Operations relates to all products distributed by the Company.
Other than revenue, gross profit margin and the product manager sales groups it is difficult to identify any of the above expenses to any of the discreet product lines that the Company distributes. As a result, product group segment reporting is not possible or meaningful to CE Franklin.
There is not a segment manager responsible for the profitability of each product group, and the Company’s chief operating decision maker does not evaluate performance or make decisions to allocate resources based on product group performance.
Tell us what discrete financial information is prepared at the business level and explain to us who utilizes this information and for what purpose.
CE Franklin Response:
The Company prepares discreet financial information for the key decision makers within the organization that concentrates on sales and gross profit margins by product group and customers; detailed selling, general and administrative analysis by cost category (i.e. salaries and benefits) and cost center; inventory reporting by product category; detailed profit and loss statements by branch cost (sales and gross profit margins broken down by product group within each branch) and cost
Page 4 of 5
center and summary balance sheet, statement of operations, and cash flow statements. Key company decision makers, or the chief operating decision maker does not evaluate profitability by product group.
Provide us the internal reports prepared for and used by management and the board of directors.
CE Franklin Response:
Enclosed is the summary profit and loss statement used by management, audit committee and board of directors of CE Franklin Ltd. when making key decisions.
If you have any questions with respect to the above responses, please give me a call at 403-531-5603.
Sincerely,
Salvatore Secreti
Show Raw Text
CORRESP
1
filename1.htm
Mr
October 7, 2005
Mr. John Cash
Accounting Branch Chief
United States Security and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.
20549
Fax No.: (202) 772-9369
Re: File No. 1-12570
Dear Mr. Cash:
Thank you for your letter of September 9, 2005 with respect to your review of our Form 20-F for the year ended December 31, 2004. I will respond to your questions in the order that they were presented in your letter.
Business Overview – Operations, page 9 of 59
1.
We note that sales include “product account management and inside sales.” Please tell us the specific nature of these activities and explain to us when and how you recognize revenues related to these activities. Also, please be advised that if services are greater than 10% of sales, you should separately disclose service sales and related cost of sales in the US GAAP footnote as required by Rule 5-03 of Regulation S-X.
CE Franklin Response:
This section currently reads: “CE Franklin's operations are divided into: sales, which includes product, account management and inside sales.” The above groups represent sales functions within CE Franklin.
The product management sales group has special expertise in the product lines we sell, such as bottom hole pumps and other production equipment, steel and fiberglass tubular products and valves. The account management sales group is responsible for maintaining contact with our customers in Calgary, Alberta where the majority of our customers’ head offices are located, and sell all of the products the Company carries. The inside sales group is responsible for coordination and preparation of hundreds of competitive bid packages each year for all of the products the Company carries.
The Company does not charge its customers with respect to the above sales functions.
2.
If you continue to present a non-GAAP measure, please revise your disclosure in future filing to fully with Item 10 (e) of Regulation S-K.
CE Franklin Response:
CE Franklin will comply with this request in future filings.
Page 1 of 5
Note 1 – Accounting Policies – Revenue Recognition, page 46 to 59
3.
We note your policy of recognizing product sales when title transfer to the customer. Tell us when the title is transferred. If other than shipment or delivery, tell us how your policy complies with SAB 101.
CE Franklin Response:
Title transfers to our customers when products are shipped to the customer.
4.
We also note your reference to consignment of inventory on page 12 of 59. Tell us and revise future filings to include an accounting policy footnote for consignment sales.
CE Franklin Response:
For the fiscal years ended December 31, 2004, 2003 and 2002, consignment sales represent 0.9%, 1.0% and 1.0%, respectively, of the Company’s sales. As a result, CE Franklin has not included a separate revenue recognition accounting policy footnote with respect to consignment sales in its financial statements and feels its current revenue negotiation policy note is adequate.
Note 13c Commitments and Contingencies
5.
We note that the Company is involved in various lawsuits. Please provide supplementally a brief description of each material lawsuit. Also, please be advised that if you believe the likelihood of a material loss from such lawsuits is probable or reasonably possible, you should revise future filings to provide the disclosure required by SFAS 5.
CE Franklin Response:
Enclosed is a brief summary of CE Franklin’s lawsuits. These lawsuits are reviewed with the Company’s audit committee on a quarterly basis prior to release of our financial results and filings.
Waterous Detroit Diesel and Integrated Power Systems vs. CE Franklin Ltd.
A Statement of Claim in the amount of $4,252,113 (representing 520 engines at $7,800.00 per engine) was filed by Waterous Detroit Diesel and Integrated Power Systems against CE Franklin Ltd. on February 28, 2001. The claim by Waterous relates to the alleged purchase order and subsequent cancellation for the purchase of GM engines by CE Franklin. CE Franklin has denied a contract existed and filed a counterclaim for approximately $1.2 million in June 2001. The counterclaim by CE Franklin asserts that the engines provided by Waterous were faulty, and therefore CE Franklin incurred significant costs to repair such engines.
Waterous has sold a significant portion of its inventory relating to this claim, and has therefore mitigated a material portion of its damages. The Company discovered, through discoveries, the actual damages incurred by Waterous is below $1.0 million. The Company considers its offsetting claim for $1.2 million valid.
CE Franklin believes that the likelihood of a material loss from this lawsuit is not probable or reasonably possible.
Page 2 of 5
Alliance Pipeline Limited Partnership and Alliance Pipeline L.P. vs. CE Franklin Ltd., Stream-Flo Industries Ltd., Entech Deutschland GMBH and Mannesmann Demag AG
On December 16, 2002 a Statement of Claim for Cdn. $5,665,000 and U.S. $2,445,000 was filed against CE Franklin Ltd. and the above manufacturers relating to costs incurred by Alliance Pipelines to replace all of the check valves purchased by Alliance from CE Franklin for use in Alliance’s compressor stations.
The Company filed its statement of defence on July 25, 2003. During December 2003, CE Franklin Ltd. filed a Third Party Notice against the manufacturers of these products claiming entitlement to indemnity from the manufacturer because the product sold was defective.
CE Franklin believes that the likelihood of a material loss from this lawsuit is not probable or reasonably possible.
CE Franklin vs. Elenor Enterprises Ltd.
On January 26, 2000, a Statement of Claim for $146,846 was filed by CE Franklin Ltd. against Elenor Enterprises Ltd. relating to unpaid invoices for fiberglass pipe and other products sold to Elenor and subsequently installed for Gulf Canada Resources Ltd. CE Franklin has recorded a receivables provision against this receivable. On February 14, 2000, Elenor Enterprises counter claimed for $2,027,840 against CE Franklin and Smith Fiberglass Product, the manufacturer of the fiberglass pipe and fittings. The counter claim asserts that the fiberglass pipe and fittings provided by the manufacturer were defective, and as a result, Elenor incurred significant costs in replacing the product.
The Company has filed a Third Party Notice against Smith Fiberglass claiming entitlement to indemnity from Smith Fiberglass because they were the manufacturer of the product, and the product sold was defective.
There has been no action on this suit since September 13, 2002.
CE Franklin believes that the likelihood of a material loss from this lawsuit is not probable or reasonably possible.
Note 17- Reconciliation of Canadian and United States Generally Accepted Accounting Principles – Segments, page 53 of 59
6.
We note your disclosures regarding your production equipments and supplies as well as your tubular products in the Business Overview and related sections.
Please tell us what considerations you gave to whether these represent two reportable segments under US GAAP.
CE Franklin Response:
CE Franklin distributes pipe, valves, flanges, fittings, production equipment, tubular goods and other general oilfield supplies to producers of oil and gas in Canada through its 41 branches and tubular stocking points which are situated in towns and cities that serve particular oil and gas fields of the western Canadian
Page 3 of 5
sedimentary basin. Each of the above represents distinct products that can be distributed through CE Franklin’s distribution network.
CE Franklin considers all of the product groups that it distributes to have similar economic characteristics such as:
i.
The products distributed are similar in that they assist our customers with the production of oil and gas;
ii.
The products are sold to the same class of customer, being exploration and production companies; and
iii.
Are subject to the same method of distribution, our 41 branches and tubular stocking points.
The Company maintains a centralized distribution facility in Edmonton, Alberta and operates a hub and spoke distribution model, as well as centralized service groups such as: sales; marketing and supply which includes purchasing and product pricing; customer service, safety and quality; finance and administration; and business effectiveness (human resources). All of these groups support the sale of the products CE Franklin distributes (pipe, valves, flanges, fitting, production equipment, tubular goods and other general oilfield supplies).
In addition, the Company maintains a state of the art ERP system which is used by all parts of the business. A significant portion of the depreciation charge in the Company’s Statements of Operations relate to this system.
Finally, the Company finances accounts receivable, inventories, bank overdraft, accounts payable and accrued liabilities with its demand bank operating loan. As a result, the interest expense reported in the Statement’s of Operations relates to all products distributed by the Company.
Other than revenue, gross profit margin and the product manager sales groups it is difficult to identify any of the above expenses to any of the discreet product lines that the Company distributes. As a result, product group segment reporting is not possible or meaningful to CE Franklin.
There is not a segment manager responsible for the profitability of each product group, and the Company’s chief operating decision maker does not evaluate performance or make decisions to allocate resources based on product group performance.
Tell us what discrete financial information is prepared at the business level and explain to us who utilizes this information and for what purpose.
CE Franklin Response:
The Company prepares discreet financial information for the key decision makers within the organization that concentrates on sales and gross profit margins by product group and customers; detailed selling, general and administrative analysis by cost category (i.e. salaries and benefits) and cost center; inventory reporting by product category; detailed profit and loss statements by branch cost (sales and gross profit margins broken down by product group within each branch) and cost
Page 4 of 5
center and summary balance sheet, statement of operations, and cash flow statements. Key company decision makers, or the chief operating decision maker does not evaluate profitability by product group.
Provide us the internal reports prepared for and used by management and the board of directors.
CE Franklin Response:
Enclosed is the summary profit and loss statement used by management, audit committee and board of directors of CE Franklin Ltd. when making key decisions.
If you have any questions with respect to the above responses, please give me a call at 403-531-5603.
Sincerely,
Salvatore Secreti
Vice President and Chief Financial Officer
CE Franklin Ltd.
Page 5 of 5
CE
Franklin Ltd.
Review
of Profit and Loss Statement
Six Months Ended
June 30, 2005
(thousands
of Canadian dollars - except well / rig count data)
Three
months ended June 30
Six
months ended June 30
2005
2004
Variance
Budget
2005
2004
Variance
Budget
Well Completions
(excluding dry)
Oil
736
977
(241)
n/a
1,754
2,191
(437)
n/a
Gas
3,128
3,721
(593)
n/a
6,801
7,170
(369)
n/a
Total
3,864
4,698
(834)
n/a
8,555
9,361
(806)
n/a
Average Rig
Count
243
214
29
n/a
368
373
(5)
n/a
Sales
General Supplies
79,044
54,927
24,117
66,385
174,855
127,562
47,293
151,913
Tubulars
12,855
12,075
780
14,939
45,416
28,472
16,944
37,844
Total Sales
91,899
67,002
24,897
81,324
220,271
156,034
64,237
189,757
Gross Profit
General Supplies
16,847
11,300
5,547
13,321
38,462
25,060
13,402
30,495
Tubulars
1,317
812
505
1,008
3,365
1,739
1,626
2,441
Total Gross
Profit
18,164
12,112
6,052
14,329
41,827
26,799
15,028
32,936
Gross Profit %
General Supplies
21.3%
20.6%
0.8%
20.1%
22.0%
19.6%
2.4%
20.1%
Tubulars
10.2%
6.7%
3.5%
6.7%
7.4%
6.1%
1.3%
6.5%
Total Gross
Profit %
19.8%
18.1%
1.7%
17.6%
19.0%
17.2%
1.8%
17.4%
SG&A
Salaries &
Benefits
6,348
4,883
(1,465)
5,849
13,220
10,577
(2,643)
12,637
Sales &
Marketing
2,787
2,079
(708)
2,694
5,449
4,272
(1,177)
5,205
Occupancy &
Warehouse
1,268
1,194
(74)
1,243
2,663
2,383
(281)
2,518
Office
492
503
11
540
1,065
998
(67)
1,081
Vehicle
640
467
(173)
660
1,303
1,131
(172)
1,337
Other
668
495
(173)
609
1,413
863
(549)
1,263
Total SG&A
12,204
9,621
(2,583)
11,595
25,113
20,225
(4,888)
24,041
EBITDA
5,960
2,491
3,469
2,734
16,714
6,574
10,140
8,895
EBITDA as a % of
Sales
6.5%
3.7%
2.8%
3.4%
7.6%
4.2%
3.4%
4.7%
Amortization
Buildings,
& leasehold improvements
72
63
(9)
94
143
123
(20)
186
Computer
equipment and software
795
859
64
799
1,629
1,713
84
1,642
Equipment and
machinery
268
128
(140)
124
489
227
(262)
264
Furniture and
equipment
28
20
(8)
28
55
36
(19)
56
Other
15
15
-
15
30
30
-
30
1,178
1,085
(93)
1,060
2,346
2,129
(217)
2,178
Interest
Bank operating
loan
485
327
(158)
327
980
663
(317)
870
Long-term debt
8
6
(2)
-
22
11
(11)
-
493
333
(160)
327
1,002
674
(328)
870
Other
Loss
(gain) on disposal of capital assets
-
5
5
-
-
(4)
(4)
-
Other
-
(1)
(1)
-
-
(5)
(5)
-
-
4
4
-
-
(9)
(9)
-
Exchange loss
(gain)
63
86
23
-
72
34
(38)
-
63
90
27
-
72
25
(47)
-
Income Before
Income Taxes
4,226
983
3,243
1,347
13,294
3,746
9,548
5,847