CE Franklin Ltd. announces 2007 Fourth Quarter and Year End Results



    CALGARY, Jan. 31 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced
its results for the 2007 fourth quarter and year end results.
    CE Franklin reported net income of $2.4 million or $0.13 per share
(basic) for the fourth quarter ended December 31, 2007 as compared to net
income of $5.4 million or $0.30 per share for the fourth quarter ended
December 31, 2006. For 2007, net income was $13.6 million or $0.74 per share
(basic) as compared to $22.9 million or $1.27 per share of net income earned
in 2006.

    
    Financial Highlights
    --------------------

    (millions of Cdn.$ except      Three Months Ended         Year Ended
     per share data)                  December 31             December 31
                              ----------------------- -----------------------
                                    2007        2006        2007        2006
                              ----------- ----------- ----------- -----------
                                       (unaudited)             (unaudited)
    Sales                     $    112.3  $    130.6  $    466.3  $    555.2

    Gross Profit                    20.4        25.0        84.6       103.5
    Gross Profit - % of sales      18.2%       19.1%       18.1%       18.6%

    EBITDA(1)                        5.1         9.6        25.7        40.1
    EBITDA(1) as a % of sales       4.5%        7.4%        5.5%        7.2%

    Net income                $      2.4  $      5.4  $     13.6  $     22.9
    Per share
      Basic                   $     0.13  $     0.30  $     0.74  $     1.27
      Diluted                 $     0.13  $     0.29  $     0.72  $     1.22
    

    "Despite significantly reduced oil and gas activity in western Canada in
2007, the Company remained profitable," said Michael West, Chairman, President
and CEO. "In December, we advanced our competitive position in the
east-central Alberta market through the acquisition of JEN Supply Inc. CE
Franklin will continue to invest in its strategies to diversify its products
and services in its pursuit to build market share over time."
    Sales decreased 14% to $112.3 million for the quarter ended December 31,
2007 as compared to $130.6 million for the quarter ended December 31, 2006.
The 14% decrease in sales reflects an overall reduction in industry activity
during the fourth quarter compared to the prior year period. The average rig
count for the fourth quarter decreased by 19% and well completions (excluding
dry and service wells) were down 23% from the prior year period.
    EBITDA(1) for the quarter ended December 31, 2007 decreased 47% to
$5.1 million compared to $9.6 million for the quarter ended December 31, 2006
due to a similar reduction in gross profit. The decrease in gross profit
reflected lower sales levels combined with a reduction in supplier rebates
which contributed to the reduction in gross profit margin.
    Net income for 2007 was $13.6 million, down $9.3 million (41%) from 2006
levels. Sales declined by 16% due to reduced oil and gas industry capital
expenditures in 2007 and gross profit margins declined by 3% due to reduced
supplier rebates, resulting in a $18.9 million (18%) decline in gross profit.
Selling, general and administrative expenses declined by $5.2 million (8%) due
to lower incentive compensation costs, reduced Sarbanes Oxley compliance
costs, and lower selling costs resulting from the acquisition of two agent
operated branches during the first half of 2007. Lower interest expense
associated with reduced average debt levels in 2007 was offset by foreign
exchange losses driven by the rapid appreciation in the Canadian dollar during
2007. Income taxes declined by $4.4 million in 2007 due to the reduced level
of pre-tax earnings. Net income per share (basic) was $0.74 in 2007, down 42%
due principally to the decline in net income combined with a 1% increase in
the weighted average number of shares outstanding.

    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
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 3.
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.

    Outlook
    -------

    The Company's business is dependent on the level of conventional oil and
gas capital expenditures and production activity in western Canada. A
combination of events experienced in 2007 including soft natural gas prices,
the Alberta government royalty task force review and subsequent decision to
increase royalty rates, high drilling and operating costs, and the rapid
appreciation of the Canadian dollar, have reduced the competitiveness of the
western Canadian sedimentary basin relative to other international oil and gas
producing regions. This has resulted in reduced oil and gas industry activity
in 2007 in western Canada that is expected to continue through 2008. The
Company expects these conditions will contribute to increased consolidation of
oil and gas customers, coupled with increased competitive activity amongst oil
field equipment distributors. The Company intends to address these conditions
by pursuing its strategies while closely managing its costs and net working
capital investment levels.
    Over the medium to longer term, the Company is optimistic that its strong
competitive status will position it favorably to take advantage of available
market share when natural gas prices recover to historic energy equivalent
price relationships to oil, resulting in renewed conventional industry
activity and demand for the Company's products. Effective execution of the
Company's oil sands and service diversification strategies provide further
opportunities to leverage its supply chain infrastructure.

    Conference Call and Webcast Information
    ---------------------------------------

    A conference call to review the 2007 fourth quarter and year end results,
which is open to the public, will be held on Friday, February 1, 2008 at
11:00 a.m. Eastern Time (9:00 a.m. Mountain Time).
    Participants may join the call by dialing 1-416-644-3414 in Toronto or
dialing 1-800-733-7571 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 1:00 p.m. Eastern Time on the same day by calling
1-416-640-1917 in Toronto or dialing 1-877-289-8525 and entering the pass code
of 21259515 followed by the pound sign and may be accessed until midnight
Friday, February 8, 2008.
    The call will also be webcast live at: 
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2137520 and will be
available on the Company's website at http://www.cefranklin.com.
    Michael West, Chairman, President and Chief Executive Officer will lead
the discussion and will be accompanied by Mark Schweitzer, Vice President and
Chief Financial Officer. The discussion will be followed by a question and
answer period.

    OPERATING RESULTS

    The following table summarizes CE Franklin's results of operations.

    
                                   Three Months Ended         Years Ended
    (in thousands of Cdn.             December 31             December 31
     dollars and number of    ----------------------- -----------------------
     shares, except per             2007        2006        2007        2006
     share data)              ----------- ----------- ----------- -----------

    Sales                     $  112,263  $  130,648  $  466,275  $  555,227
    Cost of sales                 91,871     105,601     381,694     451,733
                              ----------- ----------- ----------- -----------
    Gross profit                  20,392      25,047      84,581     103,494

    Other expenses (income)
    Selling, general and
     administrative expenses      15,352      15,281      58,053      63,287
    Foreign exchange (gain)
     loss and other                  (35)        192         837         130
                              ----------- ----------- ----------- -----------
    EBITDA                         5,075       9,574      25,691      40,077

    Amortization                     656         766       2,795       2,819
    Interest                         482         613       2,031       2,661
                              ----------- ----------- ----------- -----------

    Income before income taxes     3,937       8,195      20,865      34,597
    Income tax expense             1,510       2,768       7,298      11,658
                              ----------- ----------- ----------- -----------
    Net income                     2,427       5,427      13,567      22,939
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

    Net income per share
    Basic                     $     0.13  $     0.30  $     0.74  $     1.27
    Diluted                   $     0.13  $     0.29  $     0.72  $     1.22

    Weighted average number
     of shares outstanding
    Basic                         18,393      18,236      18,337      18,099
    Diluted                       18,863      18,861      18,807      18,724



    Industry Activity Levels

    The following are selected western Canadian oil and natural gas industry
    activity measures:

                               As at      Three months ended   Years ended
                            December 31     December 31(1)    December 31(1)
                         ----------------  ----------------  ----------------
                           2007     2006     2007     2006     2007     2006
                         -------  -------  -------  -------  -------  -------

    Gas - Cdn. $/gj
     (AECO spot)          $6.44    $6.00    $6.16    $6.98    $6.47    $6.55
    Oil - U.S. $/bbl
     (Edmonton Light)    $93.35   $67.21   $85.70   $64.90   $76.48   $72.96
    Average rig count       n/a      n/a      386      474      367      498
    Well completions:
      Gas                   n/a      n/a    3,546    4,470   12,717   15,317
      Oil                   n/a      n/a    1,480    2,017    5,443    5,609
                         -------  -------  -------  -------  -------  -------
    Total well
     completions            n/a      n/a    5,026    6,487   18,160   20,926


    Sources: Oil and gas prices - First Energy Capital Corp.; Rig count data
    - Hughes Christensen; Well completion data - Daily Oil Bulletin

    (1) For the three and twelve months ended December 31, average statistics
        are shown except for well completions.
    

    Overall, capital spending by exploration and production companies
continues at reduced levels as a result of soft natural gas prices, higher
drilling and operating costs and the appreciation of the Canadian dollar which
reduces the competitiveness of the western Canadian sedimentary basin relative
to other international oil and gas producing regions. Additionally, the
Federal government's October 2006 announcement concerning the taxation of oil
and gas royalty trusts and the Alberta oil and gas royalty task force report
released in late October, have increased fiscal uncertainty and contributed to
reduced industry activity.
    The Company uses oil and gas well completions and average rig counts as
industry activity measures. Oil and gas well completions require the products
sold by the Company and therefore are a good general indicator of market
activity. Average rig counts also provide a general indication of energy
industry activity levels as there may be time lags in reporting well
completions that may impact quarterly statistics. For the quarter ended
December 31, 2007, the total number of wells completed (excluding dry and
service wells) in western Canada decreased 23% to 5,026 wells compared to the
prior year period. The average rig count for the quarter ended December 31,
2007, decreased 19% to 386 average rigs as compared to the prior period.

    Sales

    Sales for the quarter ended December 31, 2007 decreased 14% or
$18.3 million to $112.3 million from the quarter ended December 31, 2006. The
reduction in sales for the three month period ended December 31, 2007 was
principally due to an 18% decrease in sales to exploration and development
capital projects due to soft industry activity levels as described previously.
Sales for maintenance repair and operating supplies ("MRO") used in customer
production activities in the fourth quarter decreased by 9% compared to the
prior year period and decreased 9% for twelve months compared to the 2006
comparative period. MRO sales comprised an estimated 43% of total Company
sales in the fourth quarter (2006 - 41%) and 42% of sales for the year (2006 -
39%).
    In December 2007, the Company completed the acquisition of JEN Supply, an
oil field equipment distributor that operated four branches in east-central
Alberta. Two of these branches were in existing markets where the Company had
operations and are being combined. This will enable the Company to grow its
market share in these markets while improving its operating efficiency. JEN
Supply's other two branch operations are in new market areas and extend the
Company's market reach. The integration of JEN Supply is expected to be
completed by the end of the first quarter of 2008.

    Gross Profit

    Gross profit decreased 19% to $20.4 million for the quarter ended
December 31, 2007 from $25.0 million for the prior year period due to the
reduction in sales. Gross profit margins declined in the fourth quarter to
18.2% from 19.1% in the prior year period. The decline was primarily due to a
reduction in supplier rebates.

    Selling, General and Administrative ("SG&A") Costs

    SG&A costs remained consistent at $15.3 million for the fourth quarter
ended December 31, 2007 compared to the prior year period. Lower selling costs
associated with the acquisition of two agent operated branch operations in
early 2007 were offset by increased base compensation costs related in part to
the addition of $1.0 million associated with the Full Tilt and JEN Supply
operations. Compared to the third quarter, SG&A costs increased by
$1.8 million due to increased compensation costs, allowance for doubtful
accounts and the addition of JEN Supply costs.

    Other Expenses

    Amortization, interest and foreign exchange (gain) loss in the fourth
quarter were comparable to the prior year period.

    Income Taxes

    The Company's effective tax rate for the quarter ended December 31, 2007
was 38%, up marginally from the prior year period rate due primarily to
non-deductible items becoming a larger component of pre-tax income in 2007.
Substantially all of the company's tax provision is currently payable.

    Net Income

    Net income for the quarter ended December 31, 2007 was $2.4 million, down
$3.0 million (55%) from the prior year period. Net income as a percentage of
sales was 2%, down from 4% in the prior year period due to the reduction in
sales activity. The weighted average number of shares outstanding increased by
1% over the prior year period due to the exercise of stock options. Net income
per share was $0.13, down 57% from the prior year period due to the reduction
in net income and the increased number of shares outstanding in 2007.

    Summary of Quarterly Financial Data

    The selected quarterly financial data presented below is presented in
Canadian dollars and in accordance with Canadian GAAP.  This information is
derived from the Company's unaudited quarterly financial statements.

    
    (in millions of Cdn. Dollars except per share data )

    Unaudited           Q1     Q2     Q3     Q4     Q1     Q2     Q3     Q4
                       2006   2006   2006   2006   2007   2007   2007   2007
                      ------ ------ ------ ------ ------ ------ ------ ------

    Sales             177.0  115.9  131.7  130.6  154.3   82.9  116.8  112.3

    Gross profit       32.2   22.5   23.7   25.0   26.3   16.8   21.0   20.4

    EBITDA             15.1    7.0    8.4    9.6   11.0    2.2    7.4    5.1
    EBITDA as a
     % of sales        8.5%   6.0%   6.4%   7.4%   7.1%   2.7%   6.3%   4.5%

    Net income          8.9    3.9    4.7    5.4    6.4    0.6    4.1    2.4
    Net Income as a
     % of sales        5.0%   3.4%   3.6%   4.1%   4.1%   0.7%   3.5%   2.1%

    Net income
     per share
      Basic
       (Cdn. $)      $ 0.50 $ 0.21 $ 0.26 $ 0.30 $ 0.35 $ 0.03 $ 0.22 $ 0.13
      Diluted
       (Cdn. $)      $ 0.47 $ 0.21 $ 0.25 $ 0.29 $ 0.34 $ 0.03 $ 0.22 $ 0.13

    Net working
     capital(1)       124.7  117.4  130.6  120.2  127.6  126.8  128.7  134.7

    Bank operating
     loan(1)           54.1   41.0   49.6   34.0   33.6   36.0   35.4   44.3

    (1) Net working capital and bank operating loan amounts are as at
        quarter end.
    

    The Company's sales levels are affected by weather conditions. As warm
weather returns in the spring each year the winter's frost comes out of the
ground rendering many secondary roads incapable of supporting the weight of
heavy equipment until they have dried out. As a result, the first and fourth
quarters typically represent the busiest time and highest sales activity for
the Company. Sales levels drop significantly during the second quarter until
such time as the roads have dried and road bans have been lifted. This
typically results in a significant reduction in earnings during the second
quarter, as the Company does not reduce its SG&A expenses during this period
to offset the reduction in sales. Once the road bans have been lifted activity
levels start to increase and sales levels increase in the third quarter. Net
working capital (defined as current assets less accounts payable, accrued
liabilities, income taxes payable and other current liabilities) levels follow
the seasonality of sales.

    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.
Cash flow from operating activities and the Company's 364-day bank operating
facility are used to finance the Company's working capital, capital
expenditures and acquisitions.
    As at December 31, 2007, borrowings under the Company's bank operating
loan were $44.3 million, an increase of $10.3 million from December 31, 2006.
Borrowing levels have increased as cash consideration paid for business
acquisitions of $18.0 million and net investments of $2.0 million to maintain
property and equipment have been substantially funded by bank borrowings and
cash flow from operations of $9.8 million.
    Business acquisitions completed during 2007 aggregated $18.0 million and
included $12.1 million to acquire JEN Supply in December, $3.4 million to
acquire Full Tilt in the third quarter and $2.2 million to acquire two agent
operated branches early in 2007. See note 2 to the audited consolidated
financial statements for further details.
    Net working capital was $134.7 million at December 31, 2007, an increase
of $14.5 million from December 31, 2006. Accounts receivable increased by
$1.8 million (2.0%) to $89.3 million at December 31, 2007 from December 31,
2006. After adjusting for the acquisition of JEN Supply in December, account's
receivable day's sale outstanding increased 12% to 62.0 days for the fourth
quarter compared to 55.2 days in the prior year period. Day's sales
outstanding is calculated using fourth quarter sales compared to the December
31 accounts receivable balance. Inventory decreased by $10.9 million (11%)
from December 31, 2006 due to a reduction in purchasing levels to align with
reduced sales levels. After adjusting for the acquisition of JEN Supply in
December, inventory turns were 4.3 times, consistent with the prior years
fourth quarter. Inventory turns are calculated using fourth quarter cost of
goods sold on an annualized basis compared to the December 31 inventory
balance. The company will continue to adjust its investment in inventory in
order to align with anticipated lower sales levels in order to improve
inventory turnover efficiency. Accounts payable and accrued liabilities
decreased by $21.9 million (33%) from December 31, 2006 to $44.8 million at
December 31, 2007 due to reduced purchasing activity and lower accrued
employee incentive compensation.
    The Company has a 364 day bank operating loan facility in the amount of
$75.0 million (2006 - $75.0 million) arranged with a syndicate of four banks
that matures in July 2008. The loan facility bears interest based on floating
Canadian bank prime rate and is secured by a general security agreement
covering all assets of the Company. The maximum amount available under the
facility is subject to a borrowing base formula applied to accounts receivable
and inventories, and a covenant restricting the Company's debt to 2.25 times
trading twelve months EBITDA. As at December 31, 2007, the Company's debt to
EBITDA ratio was 1.7 times (2006 - 1.2 times) which provides a maximum
borrowing ability of approximately $60 million under the facility (2006 -
$75 million). This facility contains certain other restrictive covenants. As
at December 31, 2007, the Company was not in compliance with a covenant under
its loan facility agreement which has subsequently been waived and amended by
the Company's lenders. As at December 31, 2007, the ratio of the Company's
debt to total capitalization (debt plus equity) was comprised of 28% debt
(2006 - 26% debt).

    Other Items

    Additional information relating to CE Franklin, including its Annual
Information Form, is available under the Company's profile on SEDAR at
www.sedar.com and at www.cefranklin.com.

    Forward Looking Statements
    --------------------------

    The information in this press release contains "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 Ltd. ("CE Franklin" or the "Company") plans, expects, intends,
assumes, believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may occur in the
future are forward-looking statements. These forward-looking statements are
based on management's current belief, based on currently available
information, as to the outcome and timing of future events. When considering
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this press release.
    The Company is exposed to certain business and market risks including
risks arising from transactions that are entered into the normal course of
business, which are primarily related to interest rate changes and
fluctuations in foreign exchange rates. During the reporting period, no events
or transactions have occurred that would materially change the information
disclosed in the Company's 2006 Form 20F.

    Forward-looking statements appear in a number of places and include
statements with respect to, among other things:

    
        -  forecasted oil and natural gas industry activity levels for 2008;
        -  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, gross profit margins 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; and
        -  fluctuations in the demand for the Company's products and
           services.
    

    Should one or more of the risks or uncertainties described above or
elsewhere in this press release, or should underlying assumptions prove
incorrect, the Company's actual results and plans could differ materially from
those expressed in any forward-looking statements.
    All forward-looking statements expressed or implied, included in this
press release and attributable to CE Franklin are qualified in their entirety
by this cautionary statement. This cautionary statement should also be
considered in connection with any subsequent written or oral forward-looking
statements that CE Franklin or persons acting on its behalf might issue. CE
Franklin does not undertake any obligation to update any forward-looking
statements to reflect events or circumstances after the date of filing this
press release except as required by law.


    
    CE Franklin Ltd.
    Interim Consolidated Balance Sheets
    (Unaudited)

                                                   December 31   December 31
    (in thousands of Canadian dollars)                    2007          2006
    -------------------------------------------------------------------------
    ASSETS
    Current assets
    Accounts receivable                                 89,305        87,530
    Inventories                                         86,414        97,275
    Other                                                3,781         2,965
    -------------------------------------------------------------------------
                                                       179,500       187,770
    Property and equipment                               6,398         5,546
    Goodwill                                            20,523        10,479
    Future income taxes (note 7)                         1,403         1,160
    Other                                                  891           454
    -------------------------------------------------------------------------
                                                       208,715       205,409
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES
    Current liabilities
    Bank operating loan (note 3)                        44,301        34,008
    Accounts payable and accrued liabilities            44,807        66,744
    Income taxes payable                                     -           819
    Current portion of long term debt and
     obligations under capital lease                       805           517
    -------------------------------------------------------------------------
                                                        89,913       102,088
    Long term debt and obligations under
     capital lease                                         582           846
    -------------------------------------------------------------------------
                                                        90,495       102,934
    -------------------------------------------------------------------------
    SHAREHOLDERS' EQUITY
    Capital stock                                       24,306        23,586
    Contributed surplus                                 17,671        16,213
    Retained earnings                                   76,243        62,676
    -------------------------------------------------------------------------
                                                       118,220       102,475
    -------------------------------------------------------------------------
                                                       208,715       205,409
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (See notes to the Interim Consolidated Financial Statements)



    CE Franklin Ltd.
    Interim Consolidated Statements of Operations
    (Unaudited)

    (in thousands of
    Canadian dollars,         Three Months Ended         Twelve Months Ended
    except shares     --------------------------   --------------------------
    and per share      December 31   December 31   December 31   December 31
    amounts)                  2007          2006          2007          2006
    ---------------------------------------------  --------------------------
    Sales                  112,263       130,648       466,275       555,227
    Cost of sales           91,871       105,601       381,694       451,733
    -------------------------------------------------------------------------
    Gross profit            20,392        25,047        84,581       103,494
    -------------------------------------------------------------------------

    Other expenses
     (income)
    Selling, general
     and administrative
     expenses               15,352        15,281        58,053        63,287
    Amortization               656           766         2,795         2,819
    Interest expense           482           613         2,031         2,661
    Foreign exchange
     loss/(gain) and other     (35)          192           837           130
    -------------------------------------------------------------------------
                            16,455        16,852        63,716        68,897
    -------------------------------------------------------------------------

    Income before income
     taxes                   3,937         8,195        20,865        34,597
    -------------------------------------------------------------------------

    Income tax expense
     (recovery) (note 7)
    Current                  1,442         3,026         7,541        11,783
    Future                      68          (258)         (243)         (125)
    -------------------------------------------------------------------------
                             1,510         2,768         7,298        11,658
    -------------------------------------------------------------------------

    Net and Comprehensive
     income for the period   2,427         5,427        13,567        22,939
    -------------------------------------------------------------------------

    Net income per share
     (note 6)
      Basic                   0.13          0.30          0.74          1.27
      Diluted                 0.13          0.29          0.72          1.22

    Weighted average number
     of shares outstanding
     (000's)
      Basic                 18,393        18,236        18,337        18,099
      Diluted               18,863        18,861        18,807        18,724
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (See notes to the Interim Consolidated Financial Statements)



    CE Franklin Ltd.
    Interim Consolidated Statements of Cash Flows
    (Unaudited)

                           Three Months Ended         Twelve Months Ended
                      --------------------------   --------------------------
    (in thousands of   December 31   December 31   December 31   December 31
    Canadian dollars)         2007          2006          2007          2006
    ---------------------------------------------  --------------------------

    Cash flows from
     operating
     activities
    Net income for
     the period              2,427         5,427        13,567        22,939
    Items not affecting
     cash -
      Amortization             656           766         2,795         2,819
      Future income tax
       expense (recovery)       68          (258)         (243)         (125)
      Stock based
       compensation
       expense                 450           760         1,924         2,232
      Other                      -             -             -           (36)
    -------------------------------------------------------------------------
                             3,601         6,695        18,043        27,829
    Net change in
     non-cash working
     capital balances
     related to
     operations -
      Accounts
       receivable            4,748        10,808         5,633         8,978
      Inventories            1,502           113        12,974       (18,019)
      Other current
       assets               (1,206)       (1,051)           79            33
      Accounts payable
       and accrued
       liabilities          (4,395)        1,516       (25,214)        1,815
      Income taxes
       payable                (721)       (1,317)       (1,667)       (7,021)
    -------------------------------------------------------------------------
                             3,529        16,764         9,848        13,615
    Cash flows from
     financing activities
    Issuance of capital
     stock                      10            52           579         1,663
    Purchase of capital
     stock in trust for
     Restricted Share
     Unit (RSU) Plans         (152)         (291)         (325)         (291)
    Increase/(decrease)
     in bank operating
     loan                    8,911       (15,636)       10,293        (9,144)
    Decrease in
     obligations under
     capital leases and
     long term debt            (40)          (20)         (476)         (177)
    -------------------------------------------------------------------------
                             8,729       (15,895)       10,071        (7,949)
    -------------------------------------------------------------------------

    Cash flows from
     investing activities
    Purchase of property
     and equipment            (119)         (869)       (1,956)       (3,053)
    Business
     acquisitions
     (note 2)              (12,139)            0       (17,963)       (2,613)
    -------------------------------------------------------------------------
                           (12,258)         (869)      (19,919)       (5,666)
    -------------------------------------------------------------------------
    Change in cash and
     cash equivalents
     during the period           -             -             -             -
    Cash and cash
     equivalents -
     Beginning and end
     of period                   -             -             -             -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash paid during the
     period for:
      Interest on bank
       operating loan          474           604         1,999         2,632
      Interest on
       obligations under
       capital leases            8             9            32            29
      Income taxes           2,163         4,343         9,375        18,804
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (See notes to the Interim Consolidated Financial Statements)


    CE Franklin Ltd.
    Notes to Interim Consolidated Financial Statements (Unaudited)
    (Tabular amounts in thousands of Canadian dollars)
    -------------------------------------------------------------------------

    Note 1 - Accounting policies

    These interim consolidated financial statements have been prepared
    following accounting policies applied on a consistent basis with CE
    Franklin Ltd.'s (the "Company") annual financial statements for the year
    ended December 31, 2006, with exception of policies relating to financial
    instruments as noted below. The disclosures provided below are
    incremental to those included in the annual audited financial statements.
    These interim consolidated financial statements should be read in
    conjunction with the annual audited financial statements and the notes
    thereto for the year ended December 31, 2006.

    Effective January 1, 2007, the Company adopted Section 1530 -
    Comprehensive Income, Section 3855 - Financial Instrument Recognition and
    Measurement, Section 3861 - Financial Instruments Disclosure and
    Presentation, and Section 3865 - Hedges of the Canadian Institute of
    Chartered Accountants Handbook in accordance with the transitional
    provisions in each respective section. The adoption of Sections 1530,
    3855 and 3861 did not have a material impact on the financial statements
    of the Company and did not result in any adjustments for the recognition,
    de-recognition or measurement of financial instruments as compared to the
    financial statements for periods prior to the adoption of these sections.
    In addition, since the Company currently does not utilize hedge
    accounting, the adoption of Section 3865 currently has no material impact
    on the financial statements of the Company.

    These unaudited interim consolidated financial statements reflect all
    adjustments which are, in the opinion of management, necessary for a fair
    presentation of the results for the interim periods presented; all such
    adjustments are of a normal recurring nature. Certain comparative figures
    have been reclassified to conform to the current year's presentation.

    Note 2 - Business Acquisitions

    On December 3, 2007, the Company acquired the outstanding shares of Jen
    Supply Ltd. ("JEN Supply"), an oil field equipment distributor
    operating in east-central Alberta, for consideration of $12.639 million
    of which $12.139 million was paid in cash, subject to post closing
    adjustments. The remaining $0.5 million is repayable in five years and
    bears interest at the bank prime rate. Additional consideration of up to
    $2.5 million is contingently payable over a two year period to the extent
    that revenues from existing JEN Supply customers exceed specified annual
    amounts. Any future contingent payments will be accounted for as
    additional consideration as the amounts become payable with a
    corresponding increase to goodwill.

    On July 1, 2007, the Company purchased the outstanding shares of Full
    Tilt Field Services Ltd. (""Full Tilt""), for total consideration of
    $3.447 million, subject to post closing adjustments.

    On January 31, 2007, the Company purchased the assets of an agent that
    operated two of the Company's branch locations, for total consideration
    of $2.167 million.

    On February 1, 2006, the Company purchased the outstanding shares of an
    agent that operated two of the Company's branch locations, for total
    consideration of $3.080 million, of which $2.263 million was paid in cash
    and $0.817 million over a two year period. In accordance with the
    purchase agreement, an additional $210,000 was paid in the first quarter
    of 2007 (2006- $350,000). These amounts were contingent on reaching
    certain performance conditions and have been accounted for under the
    purchase method as an addition to goodwill.

    Using the purchase method of accounting for acquisitions, the Company
    consolidated the assets and liabilities from the acquisitions and
    included earnings as of the closing dates. The consideration paid for
    these acquisitions has been allocated as follows:



                                                     2007
                             ------------------------------------------------
                              Acquisi-  Acquisi-
                               tion      tion    Acquisi- Contingent
                              of JEN    of Full    tion    consider-  Total
                              Supply     Tilt    of Agent   ation      2007

    Cash Consideration Paid   12,000     3,400     2,167       210    17,777
    Transaction Costs            139        47         -         -       186
                             ------------------------------------------------
                             ------------------------------------------------
    Total Cash Consideration  12,139     3,447     2,167       210    17,963
    Deferred Consideration       500         -         -         -       500
                             ------------------------------------------------
    Total Consideration       12,639     3,447     2,167       210    18,463
                             ------------------------------------------------
                             ------------------------------------------------

    Accounts Receivable        5,438     1,970         -         -     7,408
    Inventory                  2,596       371         -         -     2,967
    Other Current Assets          46        14         -         -        60
    Property, Equipment
     and Other                   805       292       167         -     1,264
    Goodwill                   5,724     2,110     2,000       210    10,044
    Accounts Payable          (1,970)   (1,310)        -         -    (3,280)
    Future Tax Liability           -         -         -         -         -
                             ------------------------------------------------
                              12,639     3,447     2,167       210    18,463
                             ------------------------------------------------
                             ------------------------------------------------


                                         2006
                             ---------------------------
                             Acquisi- Contingent
                               tion    consider-  Total
                             of Agent   ation     2006

    Cash Consideration Paid    2,263       350     2,613
    Transaction Costs              -         -         -
                             ----------------------------
                             ----------------------------
    Total Cash Consideration   2,263       350     2,613
    Deferred Consideration       817         -       817
                             ----------------------------
    Total Consideration        3,080       350     3,430
                             ----------------------------
                             ----------------------------

    Accounts Receivable            -         -         -
    Inventory                      -         -         -
    Other Current Assets           -         -         -
    Property, Equipment
     and Other                   369         -       369
    Goodwill                   2,714       350     3,064
    Accounts Payable               -         -         -
    Future Tax Liability          (3)        -        (3)
                             ----------------------------
                               3,080       350     3,430
                             ----------------------------
                             ----------------------------


    Note 3 - Bank Operating Loan

    The Company has a 364 day bank operating loan facility in the amount of
    $75.0 million (2006 - $75.0 million) arranged through a syndicate of four
    banks, that matures in July, 2008. Amounts drawn against this facility
    bear interest at floating rates based on the Canadian Bank prime rate and
    an applicable borrowing margin. The weighted average interest rate as at
    December 31, 2007 was 6.23% (2006 - 6.33%). The maximum amount available
    under this facility is subject to a borrowing base formula applied to
    accounts receivable and inventories and a covenant restricting the
    company's debt to 2.25 times trailing 12 months earnings before interest,
    amortization and taxes. As at December 31, 2007, the maximum available
    under this facility, was approximately $60.0 million (2006 - $75.0
    million).

    The facility is collateralized by a general security agreement covering
    all present and after-acquired property of the Company including accounts
    receivable, inventories and property and equipment.

    This facility contains certain other restrictive covenants. As at
    December 31, 2007, the Company was not in compliance with a covenant
    under its loan facility agreement which has been subsequently waived by
    the Company's lenders.

    Note 4 - Long Term Debt and Obligations Under Capital Leases

                                                2007        2006
                                             --------    --------
    Agent Acquisition(a)                         599         860
    Obligations under Capital Lease(b)           288         503
    JEN Supply deferred consideration(c)         500           -
                                             --------    --------
    Total long-term obligation                 1,387       1,363
    Less current portion                        (805)       (517)
                                             --------    --------
    Long-term debt and obligation under
     capital leases                              582         846
                                             --------    --------
                                             --------    --------

    Principal repayments are due as follows:

    Current portion                              805
    Due in 2009                                   82
    Due in 2012                                  500
                                             --------
    Total                                      1,387
                                             --------
                                             --------

    a) The loan is unsecured and bears no interest and is repayable in 2008.
       The effective interest rate on the loan is 5.65% due to the discount
       applied on the initial recording of the loan.
    b) Capital leases bear interest at various rates of up to 8% (2006 - 8%)
       and are collateralized by the underlying assets.
    c) The JEN Supply deferred consideration was issued as part of the
       acquisition consideration (see note 2). The deferred consideration is
       unsecured and bears interest based on the floating Canadian bank prime
       rate and is repayable in 2012.

    Note 5 - Contingencies and Commitments

    a) The Company leases certain office, warehouse and store facilities and
    automobiles under long-term operating leases. Commitments for such
    operating leases for the next five years and thereafter are as follows:


    Years ending December 31,    2008           5,429
                                 2009           5,653
                                 2010           5,156
                                 2011           4,230
                                 2012           3,856
                                 Thereafter    29,226
                                 ---------------------
                                               53,550
                                 ---------------------
                                 ---------------------

    b) The Company is involved in various lawsuits, the losses from which, if
    any, are not anticipated to be material to the financial statements.

    Note 6 - Share Data

    At December 31, 2007, the Company had 18,369,817 common shares and
    1,261,484 options outstanding to acquire common shares at a weighted
    average exercise price of $5.78 per common share, 589,656 of those
    options were vested and exercisable at a weighted average exercise price
    of $4.12 per common share.

    a) Stock Options

    A total of 428,808 share options to acquire common shares were granted at
    a weighted average strike price of $6.50 in the fourth quarter of 2007.
    The fair value of the options granted was $1,215,000. The fair value of
    common share options granted was estimated as at the grant date using the
    Black-Scholes option pricing model, using the following assumptions:

    Dividend yield                nil
    Risk-free interest rate     3.93%
    Expected life             5 years
    Expected volatility           50%

    Stock Option compensation expense recorded in the three and twelve month
    periods ended December 31, 2007 was $149,000 (2006- $133,000) and
    $528,000 (2006- $529,000), respectively.

    b) Restricted share units

    Effective May 2, 2006, the Company adopted the Restricted Share Unit
    ("RSU") and Deferred Share Unit ("DSU") plans approved by shareholders on
    that date. Under these plans, RSU's and DSU's are granted which entitle
    the participant, at the Company's option, to receive either a common
    share or cash equivalent value in exchange for a vested unit. The vesting
    period for RSU's is three years from the grant date. DSU's vest on the
    date of grant. Compensation expense related to the units granted is
    recognized over the vesting period based on the fair value of the units
    at the date of the grant and is recorded to compensation expense and
    contributed surplus. The contributed surplus balance is reduced as the
    vested units are exchanged for either common shares or cash.

    A total of 2,265 RSU's were granted in the fourth quarter of 2007. The
    compensation expense recorded in the three and twelve month periods ended
    December 31, 2007 was $301,000 (2006- $627,000) and $1,396,000
    (2006- $1,703,000) respectively. As at December 31, 2007, there were
    178,159 RSU's and 37,388 DSU's outstanding (December 31, 2006, 120,710
    RSU units and 12,104 DSU units).

    The Company purchases its common shares on the open market to satisfy
    performance share unit obligations through an independent trust. The
    trust is considered to be a variable interest entity and is consolidated
    in the Company's financial statements with the number and cost of shares
    held in trust, reported as a reduction of capital stock. During the
    fourth quarter, 25,000 common shares were acquired by the trust (2006 -
    24,800 common shares) at a cost of $152,000 (2006 - $291,000).

    c) Reconciliation of weighted average number of diluted common shares
    outstanding (in 000's)

    The following table summarizes the common shares used in calculating net
    earnings per common share.

                                     Three Months Ended  Twelve Months Ended
                                     ------------------- --------------------
                                     December  December   December  December
                                           31        31         31        31
                                         2007      2006       2007      2006
                                         ----      ----       ----      ----

    Weighted average common shares
     outstanding - basic               18,393    18,236     18,337    18,099
    Effect of Stock options, RSU's
     and DSU's                            470       625        470       625
                                    -------------------- --------------------
    Weighted average common shares
     outstanding - diluted             18,863    18,861     18,807    18,724
                                    -------------------- --------------------

    Note 7 - Income taxes

    a) The difference between the income tax provision recorded and the
    provision obtained by applying the combined federal and provincial
    statutory rates is as follows:

                                                   Three Months Ended
                                      ---------------------------------------
                                      December 31       December 31
                                             2007              2006
    -------------------------------------------------------------------------
    Income before income taxes              3,937             8,195
    -------------------------------------------------------------------------
    Incomes taxes at expected rates         1,285    32.6%    2,686    32.8%
    Non-deductible items                       92     2.3%       98     1.2%
    Capital and large corporations taxes       22     0.6%       12     0.2%
    Adjustments on filing returns & Other     111     2.8%      (28)   (0.3%)
    -------------------------------------------------------------------------
                                            1,510    38.4%    2,768    33.8%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                   Twelve Months Ended
                                      ---------------------------------------
                                      December 31       December 31
                                             2007              2006
    -------------------------------------------------------------------------
    Income before income taxes             20,865            34,597
    -------------------------------------------------------------------------
    Incomes taxes at expected rates         6,807    32.6%   11,459    33.1%
    Non-deductible items                      434     2.1%      410     1.2%
    Capital and large corporations taxes       44     0.2%       59     0.2%
    Adjustments on filing returns & Other      13     0.1%     (270)   (0.8%)
    -------------------------------------------------------------------------
                                            7,298    35.0%   11,658    33.7%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    As at December 31, 2007, included in other current assets are income
    taxes receivable of $0.848 million (2006 - Income taxes payable of $0.819
    million).

    b) Future income taxes reflect the net effects of temporary differences
    between the carrying amounts of assets and liabilities for financial
    reporting purposes and the amounts used for income tax purposes.
    Significant components of future income tax assets and liabilities are as
    follows:

                         December 31   December 31
                                2007          2006
    -----------------------------------------------
    Assets
      Financing charges          103           263
      Property and equipment     874           610
      Other                      786           785
    -----------------------------------------------
                               1,763         1,658
    Liabilities
      Goodwill                   360           498

    Net future income
     tax asset                 1,403         1,160
    -----------------------------------------------
    -----------------------------------------------

    The Company believes it is more likely than not that all future income
    tax assets will be realized.

    Note 8 - Related Party Transactions

    Smith International Inc. ("Smith") owns approximately 52% of the
    Company's outstanding shares. The Company is the exclusive distributor in
    Canada of down hole pump production equipment manufactured by Wilson
    Supply, a division of Smith. Purchase of such equipment conducted in the
    normal course on commercial terms were as follows:

                                                    December 31  December 31
                                                           2007         2006
    -------------------------------------------------------------------------
    Cost of sales for the Three months ended              2,371        2,386

    Cost of sales for the Twelve months ended             9,253        8,943

    Inventory                                             4,295        3,767

    Accounts Payable and accrued liabilities                313        1,076


    Note 9 - Segmented reporting

    The Company distributes oilfield equipment products principally through
    its network of 44 branches located in western Canada to oil and gas
    industry customers. Accordingly, the Company has determined that it
    operates through a single operating segment and geographic jurisdiction.
    





For further information:

For further information: Michael West, Chairman, President and CEO,
(403) 531-5602; Mark Schweitzer, Vice President and CFO, (403) 531-5603

Organization Profile

CE Franklin Ltd.

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