CE Franklin Ltd. announces Net Income of $4.1 million or $0.22 per share for the third quarter of 2007



    CALGARY, Oct. 25 /CNW/ - CE FRANKLIN LTD. (TSX.CFT, AMEX.CFK) announced
its results for the third quarter ended September 30, 2007.
    CE Franklin reported net income of $4.1 million or $0.22 per share for
the quarter ended September 30, 2007, down 13% from net income of $4.7 million
or $0.26 per share earned in the quarter ended September 30, 2006.

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

    
                          Three Months Ended   Nine Months Ended   Year Ended
                             September 30         September 30    December 31
                         -------------------   ------------------ -----------
    (millions of Cdn.$
     except per
     share data)           2007       2006       2007       2006       2006
                         --------   --------   --------   --------   --------
                             (unaudited)           (unaudited)
    Sales                $ 116.8    $ 131.7    $ 354.0    $ 424.6    $ 555.2

    Gross profit            21.0       23.7       64.2       78.4      103.5
    Gross profit - %       18.0%      18.0%      18.1%      18.5%      18.6%

    EBITDA(1)                7.4        8.4       20.6       30.5       40.1
    EBITDA(1) as a %
     of sales               6.4%       6.4%       5.8%       7.2%       7.2%

    Net income           $   4.1    $   4.7    $  11.1    $  17.5    $  22.9
    Per share
      Basic (Cdn. $)     $  0.22    $  0.26    $  0.61    $  0.97    $  1.27
      Diluted (Cdn. $)   $  0.22    $  0.25    $  0.59    $  0.93    $  1.22
    

    "This is a good result produced in tough industry conditions. Despite the
continued decrease in oil and gas industry activity the Company showed a
disciplined approach to managing expenses and posted strong earnings," said
Michael West, Chairman, President and CEO. "CE Franklin remains committed to
its core, long term strategies."
    Sales decreased 11% to $116.8 million for the quarter ended September 30,
2007 as compared to $131.7 million for the quarter ended September 30, 2006.
The decline in sales reflects the current drop in activity levels which have
been impacted by economic factors including soft natural gas prices and the
strength of the Canadian dollar. The average rig count for the quarter ended
September 30, 2007 decreased 27% to 378 rigs compared to 516 rigs for the
quarter ended September 30, 2006. Well completions (excluding dry and service
wells) decreased 4% to 3,877 wells for the three months ended September 30,
2007 compared to 4,030 for the three months ended September 30, 2006.
    EBITDA(1) for the quarter ended September 30, 2007 decreased 12% to
$7.4 million from $8.4 million for the quarter ended September 30, 2006.
EBITDA as a percentage of sales for the quarter ended September 30, 2007 was
6.4% and remained consistent with the quarter ended September 30, 2006.

    Outlook
    -------
    The Company expects the demand for its products will remain depressed for
the remainder of 2007 and into 2008 as a result of soft natural gas prices,
high 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. Fiscal
uncertainty introduced by the Federal government's announcement to subject oil
and gas royalty trusts to direct taxation and the recently released Alberta
oil and gas royalty task force report is also expected to contribute to
continued low industry activity levels. Continued soft demand for the
Company's products is expected to contribute to increased competitive
activity.
    The Company intends to address these conditions by closely managing its
costs and net working capital investment levels.

    Additional Information
    ----------------------
    The Company's Management, Discussion and Analysis, interim consolidated
financial statements for the quarter along with other additional information,
is available under the Company's profile on the SEDAR website at www.sedar.com
and at www.cefranklin.com

    Conference Call and Webcast Information
    ---------------------------------------
    A conference call to review the quarter ended September 30, 2007, which
is open to the public, will be held on Friday, October 26, 2007 at 11:00 a.m.
Eastern Time (9:00 a.m. Mountain Time).
    Participants may join the call by dialing 1-416-644-3416 in Toronto or
dialing 1-800-732-9303 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 21248142 followed by the pound sign and may be accessed until midnight
Friday, November 2, 2007.
    The call will also be webcast live at:
    http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2024000 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.

    
    --------------------------------
    (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. 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. See MD&A for a reconciliation of net
        income to EBITDA.
    

    Management's Discussion and Analysis as at October 25, 2007

    For the quarter and nine months ended September 30, 2007 as compared to
    the quarter and nine months ended September 30, 2006.

    Forward Looking Statements
    --------------------------
    The information in this MD&A 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 MD&A, including those under the caption "Risk Factors"
    Forward-looking statements appear in a number of places and include
statements with respect to, among other things:

    
      -  forecasted oil and natural gas industry activity levels for the
         remainder of 2007 and 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 MD&A occur, or should underlying assumptions prove
incorrect, the Company's actual results and plans could differ materially from
those expressed in any forward-looking statements.
    All forward-looking statements expressed or implied, included in this
MD&A and attributable to CE Franklin are qualified in their entirety by this
cautionary statement. This cautionary statement should also be considered in
connection with any subsequent written or oral forward-looking statements that
CE Franklin or persons acting on its behalf might issue. CE Franklin does not
undertake any obligation to update any forward-looking statements to reflect
events or circumstances after the date of filing this MD&A except as required
by law.

    (All amounts shown in CDN $ unless otherwise specified)

    The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is provided to assist readers in
understanding CE Franklin's financial performance during the periods presented
and significant trends that may impact future performance of CE Franklin. This
discussion should be read in conjunction with the Management's Discussion and
Analysis and the audited consolidated financial statements and the related
notes thereto which are included in the Company's December 31, 2006 Annual
Report, and the Company's First and Second Quarter MD&A, and unaudited interim
consolidated financial statements for the periods ended March 31, 2007 and
June 30, 2007, respectively.
    The selected financial data presented below is presented in Canadian
dollars and were calculated in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP").

    OVERVIEW

    CE Franklin distributes pipe, valves, flanges, fittings, production
equipment, tubular products and other general oilfield supplies and services
to producers of oil and gas in Canada through its 42 branches and selected
inventory stocking points which are situated in towns and cities that serve
particular oil and gas fields of the western Canadian sedimentary basin. In
addition, the Company distributes pipe, valves, flanges and fittings to the
oilsands, refining, and petrochemical industries and non-oilfield related
industries such as the forestry and mining industries.
    The Company's 42 branches each warehouse an inventory of products to meet
the day to day needs of customers. A 100,000 square-foot centralized
distribution centre located in Edmonton, Alberta, acts as the hub for its
branch operations. Other inventory, such as pipe or tubular products, may be
sourced from various stocking points located throughout the western Canadian
sedimentary basin and shipped direct to the customers' location. The branches
also have access to a sales force located at the Company's headquarters in
Calgary, Alberta that provides product expertise and logistics to get the
product to the customer.
    The primary driver of the Company's profitability is the level of oil and
natural gas exploration and production activity, particularly in the western
Canadian sedimentary basin. The price of oil and natural gas, well completions
and rig counts are common indicators of activity levels in the energy
industry. Other drivers of profitability include activity levels within
specific regions, the mix of products sold and customer mix.
    Activity levels within specific regions will fluctuate due to various
factors including the mix of oil and gas activity within the region and oil
and gas producers entering or leaving the region. The Company responds to
these fluctuations by opening or closing branch locations in order to service
its customer's needs and ensure there is coverage in areas of higher activity.
    The mix of products sold and customers served can affect profitability.
Profit margins will vary for different products and the method of sale.
Walk-in business at the branches will generate higher profit margins compared
to bids, which are typically larger orders where the Company can take
advantage of volume discounts and longer lead times. Customer contracts can
affect profit margin where different customers receive different pricing
structures based on factors such as size, service requirements and complexity.

    Outlook

    The Company expects the demand for its products will remain depressed for
the remainder of 2007 and into 2008 as a result of soft natural gas prices,
high 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. Fiscal
uncertainty introduced by the Federal government's announcement to subject oil
and gas royalty trusts to direct taxation and the recently released Alberta
oil and gas royalty task force report is also expected to contribute to
continued low industry activity levels. Continued soft demand for the
Company's products is expected to contribute to increased competitive
activity.
    The Company intends to address these conditions by closely managing its
costs and net working capital investment levels.

    OPERATING RESULTS

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

    (in thousands of Cdn.
     dollars except per          Three months ended      Nine months ended
     share data)                    September 30            September 30
                              ----------------------- -----------------------
                                    2007        2006        2007        2006
                              ----------- ----------- ----------- -----------
    Statements of Operations

    Sales                     $  116,817  $  131,675  $  354,010  $  424,580
    Gross profit                  21,047      23,740      64,188      78,447
    Gross profit - %               18.0%       18.0%       18.1%       18.5%

    Other expenses (income)
    Selling, general and
     administrative expenses      13,347      15,314      42,699      48,006
    Amortization                     654         660       2,140       2,053
    Interest                         487         643       1,549       2,048
    Foreign exchange loss
     and other                       282          40         871         (62)
                              ----------- ----------- ----------- -----------
                                  14,770      16,657      47,259      52,045
                              ----------- ----------- ----------- -----------

    Income before income taxes     6,277       7,083      16,929      26,402
    Income tax expense             2,153       2,364       5,789       8,890
                              ----------- ----------- ----------- -----------
    Net income                     4,124       4,719      11,140      17,512
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

    Net income as a % of sales      3.5%        3.6%        3.1%        4.1%

    EBITDA(1)                      7,418       8,386      20,618      30,503
    EBITDA as a % of sales          6.4%        6.4%        5.8%        7.2%

    Net income per share

    Basic                     $     0.22  $     0.26  $     0.61  $     0.97
    Diluted                   $     0.22  $     0.25  $     0.59  $     0.93

    Weighted average number
     of shares outstanding
    Basic                     18,391,937  18,232,658  18,282,212  18,053,045
    Diluted                   18,901,268  18,908,634  18,791,543  18,729,021

    The following is a reconciliation of net income to EBITDA:

    (in thousands of Cdn.        Three months ended      Nine months ended
     dollars)                       September 30            September 30
                              ----------------------- -----------------------
                                    2007        2006        2007        2006
                              ----------- ----------- ----------- -----------
    Net income                $    4,124  $    4,719  $   11,140  $   17,512
    Interest expense                 487         643       1,549       2,048
    Income tax expense             2,153       2,364       5,789       8,890
    Amortization                     654         660       2,140       2,053
                              ----------- ----------- ----------- -----------
    EBITDA                    $    7,418  $    8,386  $   20,618  $   30,503
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

    (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. 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.

    Results of Operations - For the Three and Nine Months Ended September 30,
    2007

    Industry Activity Levels

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

                                                Three months     Nine months
                                   As at          ended(5)        ended(5)
                                September 30    September 30    September 30
                              --------------- --------------- ---------------
                                2007    2006    2007    2006    2007    2006
                              ------- ------- ------- ------- ------- -------

    Oil - U.S. $/bbl(1)       $81.66  $62.91  $75.17  $70.47  $65.97  $68.07
    Gas - Cdn. $/gj(2)        $ 5.17  $ 3.64  $ 5.22  $ 5.70  $ 6.58  $ 6.41
    Well completions(3)          n/a     n/a   3,877   4,030  13,134  14,439
    Average rig count(4)         n/a     n/a     378     516     362     499

    (1) West Texas Intermediate per barrel
    (2) AECO spot per giga joule
    (3) excluding dry and service wells
    (4) includes drilling and completing rigs
    (5) for the three and nine months ended September 30, average statistics
        are shown except for well completions
    

    Overall, capital spending by exploration and production companies
continues at reduced levels as a result of higher drilling costs, soft natural
gas prices 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. Finally, the Federal government's
October 2006 announcement concerning the taxation of oil and gas royalty
trusts and the recently released Alberta oil and gas royalty task force
report, 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 September 30, 2007, the total number of wells
completed (excluding dry and service wells) in western Canada decreased 4% to
3,877 wells compared to the prior year period. For the nine months ended
September 30, 2007 the total number of wells completed (excluding dry and
service wells) in western Canada decreased 9% to 13,134 wells compared to the
prior year period.
    The average rig count for the quarter ended September 30, 2007, decreased
27% to 378 average rigs as compared to the prior period. The average rig count
for the nine months ended September 30, 2007, decreased 28% to 362 average
rigs as compared to the prior period.

    Sales

    Sales for the quarter ended September 30, 2007 decreased 11% or
$14.8 million to $116.8 million from the quarter ended September 30, 2006.
Sales for the nine months ended September 30, 2007, declined by 17% or $70.6
million to $354.0 million from the nine months ended September 30, 2006. The
decrease in sales for the three and nine month periods ended September 30,
2007 was principally due to lower 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 third quarter was comparable to the prior year
period and decreased 9% for nine months compared to the 2006 comparative
period. MRO sales comprised an estimated 43% of total Company sales in the
third quarter and 42% of sales for the nine months year to date. The
acquisition of Full Tilt Field Services Ltd. ("Full Tilt") in July 2007
contributed sales of $2.4 million, comprising 2% of CE Franklin's sales for
the three month period ended September 30, 2007.

    Gross Profit

    Gross profit decreased 11% to $21.0 million for the quarter ended
September 30, 2007 from $23.7 million for the prior year period due to the
reduction in sales. Gross profit margins remained consistent with the prior
year period at 18%.
    Gross profit decreased 18% to $64.2 million for the nine months ended
September 30, 2007 from $78.4 million for the nine months ended September 30,
2006 due principally to the reduction in sales. Gross profit margins decreased
to 18.1% from 18.5% in the prior year period due in part to a large, low
margin oil sands order completed during the first quarter of 2007.

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

    SG&A costs decreased $2.0 million or 13% to $13.3 million for the third
quarter ended September 30, 2007 compared to the prior year period and
decreased $5.3 million or 11% to $42.7 million for the nine months ended
September 30, 2007 from $48.0 million for the nine months ended September 30,
2006.
    SG&A costs declined in the three and nine month periods due to lower
incentive compensation costs associated with the company's reduced earnings
per share performance in 2007, reduced Sarbanes Oxley consulting costs and
lower net costs resulting from the acquisition of two agent operated branches
during the first half of 2007. Increased base compensation levels, higher
occupancy costs and the addition of the Full Tilt operations, partially offset
the cost reductions detailed above.

    Interest Expense

    Interest expense declined by $156,000 (24%) and $499,000 (24%) in the
three and nine month periods ended September 30, 2007 compared to the prior
years periods due to a reduction in average funded debt of 32% and 23% in the
same periods respectively, partially offset by an increase in floating
interest rates.

    Foreign Exchange Loss and Other

    Foreign exchange loss and other was $282,000 and $871,000 in the three
and nine month periods ended September 30, 2007. This resulted from the 7% and
17% appreciation respectively of the Canadian/U.S. dollar exchange rate on
U.S.$ net working capital balances during these periods. Steps have been taken
to mitigate the Company's net working capital U.S. $ exposure.

    Income Taxes

    The Company's effective tax rate for the quarter ended September 30, 2007
was 34.3%, and for the nine months ended September 30, 2007 was 34.2% up
marginally from prior year period rates due primarily to non-deductible items
becoming a larger component of income before taxes in 2007. Substantially all
of the company's tax provision is currently payable.

    Net Income

    Net income for the quarter ended September 30, 2007 was $4.1 million,
down $0.6 million (13%) from the prior year period. Net income as a percentage
of sales was 3.5%, down marginally from the prior year period as the Company
was able to reduce expenses in step with the reduction in sales levels. 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
$0.22, down 15% from the prior year period due to the reduction in net income
and increased number of shares outstanding in 2007.
    Net income for the nine months ended September 30, 2007 was
$11.1 million, down $6.4 million (37%), due mainly to the decline in industry
activity compared to the prior year period. Net income per share was $0.61,
down 37% from the prior year period due to lower net income and a slight
increase in the average number of share outstanding.

    SUMMARY OF QUARTERLY FINANCIAL DATA

    The selected quarterly financial data presented below is presented in
Canadian dollars and in accordance with Canadian GAAP.

    
    (in thousands of Cdn. dollars except per share data)

    Unaudited      Q4      Q1      Q2      Q3      Q4      Q1      Q2      Q3
                 2005    2006    2006    2006    2006    2007    2007    2007
              ------- ------- ------- ------- ------- ------- ------- -------

    Sales     141,066 176,957 115,948 131,675 130,648 154,255  82,938 116,817

    EBITDA
     (see
     page 4)   11,061  15,094   7,023   8,386   9,574  10,991   2,210   7,418
    EBITDA as
     a % of
     sales       7.8%    8.5%    6.1%    6.4%    7.3%    7.1%    2.7%    6.4%

    Net income  6,303   8,879   3,914   4,719   5,427   6,373     644   4,124
    Net income
     as a % of
     sales       4.5%    5.0%    3.4%    3.6%    4.2%    4.1%    0.8%    3.5%

    Net income
     per share
      Basic
       (Cdn. $) $0.36   $0.50   $0.21   $0.26   $0.30   $0.35   $0.03   $0.22
      Diluted
       (Cdn. $) $0.33   $0.47   $0.21   $0.25   $0.29   $0.34   $0.03   $0.22

    Net
     working
     capital  107,219 124,837 117,438 130,567 120,207 127,583 127,020 128,625
    

    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 RE

SOURCES 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 September 30, 2007, borrowings under the Company's bank operating loan were $35.4 million, an increase of $1.4 million from December 31, 2006. Borrowing levels have increased as business acquisitions of $5.8 million and investments of $1.4 million to maintain property and equipment, have been substantially funded by cash flow from operations. During the third quarter, the Company's $75 million, 364 day bank operating loan was extended until July 24, 2008 on similar terms and conditions. As at September 30, 2007 the Company's debt was 1.2 times EBITDA for the last 12 months and compared favorably to its debt to EBITDA borrowing covenant of 2.25 times. Business acquisitions completed in the first nine months of 2007 aggregated were $5.8 million and included $3.4 million to acquire the Full Tilt business in the third quarter. Full Tilt provides mechanical services principally to heavy oil production operations situated in the Lloydminster area. Two agent operated branch operations were acquired at a cost of $2.2 million. See Note 2 to the interim consolidated financial statements for further details. These acquisitions contributed to third quarter and year to date EBITDA and have met acquisition expectations. Net working capital was $128.7 million at September 30, 2007, an increase of $8.4 million from December 31, 2006. Accounts receivable increased by $1.1 million (1.2%) to $88.6 million from year end as average days sales outstanding increased 1% to 58.4 days for the third quarter of 2007. Inventory decreased by $11.8 million (12%) from December 31, 2006 due to a reduction in purchasing levels to align with reduced sales levels. Inventory turns, calculated by taking cost of sales for the trailing 12 month period divided by average inventory, were 4.3 times in the third quarter, consistent with the fourth quarter of 2006. 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 $19.5 million (29%) from December 31, 2006 to $47.2 million at September 30, 2007 due to reduced purchasing activity and lower accrued employee incentive compensation. CAPITAL STOCK The weighted average number of shares outstanding during the third quarter was 18.4 million, an increase of 0.2 million shares (1%) over the prior year period due principally to the exercise of stock options. Diluted weighted average number of shares outstanding during the third quarter was 18.9 million a decrease of 0.1 million over the prior period. As at September 30, 2007 and December 31, 2006, the following shares and securities convertible into shares, were outstanding: (millions) September 30, December 31, 2007 2006 Shares Shares ------------- ------------- Shares outstanding 18.4 18.2 Stock Options 0.8 0.8 Performance & Deferred Share units 0.2 0.1 ------------- ------------- Shares outstanding and issuable 19.4 19.1 Contractual Obligations In April 2007, the lease commitment pertaining to the construction of a new distribution centre in Edmonton, Alberta was amended to include updated construction costs and estimated completion date. Construction of the facility is now anticipated to be complete by mid 2008. The following table outlines the contractual obligations based on the revised anticipated completion date: Bank Operating U.S.$ Loan and Operating Forward Capital Lease Long-term Lease Purchase Period Due Obligations Debt Commitments Contracts Total -------------------------- ----------- ----------- ----------- ---------- (thousands of Canadian dollars) 2007 58 35,390 1,654 - 37,102 2008 191 591 5,220 1,993 7,995 2009 87 - 5,309 - 5,396 2010 - - 4,814 - 4,814 2011 - - 3,987 - 3,987 thereafter - - 33,655 - 33,655 ----------- ----------- ----------- ----------- ---------- 336 35,981 54,639 1,993 92,949 ----------- ----------- ----------- ----------- ---------- There have been no other material changes in any contractual obligations since the year ended December 31, 2006. Off-Balance Sheet Arrangements The Company has not engaged in off-balance sheet financing arrangements. Critical Accounting Estimates There have been no material changes since the year ended December 31, 2006. Change in Accounting Policies The Company adopted effective January 1, 2007 CICA Handbook Section 1530 - Comprehensive Income, Section 3855 - Financial Instrument Recognition and Measurement, Section 3861 - Financial Instruments Disclosure and Presentation, and Section 3865 - Hedges in accordance with the transitional provisions in each respective section. The adoption of these provisions 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 adoption of these sections. 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. Internal control over financial reporting ----------------------------------------- Internal control over financial reporting ("ICFR") is designed to provide reasonable assurance regarding the reliability of the Company's financial reporting and its compliance with Canadian GAAP in its financial statements. The President and Chief Executive Officer and the Vice President and Chief Financial Officer of the Company have evaluated whether there were changes to its ICFR during the three months ended September 30, 2007 that have materially affected or are reasonably likely to materially affect the ICFR. No such changes were identified through their evaluation. Risk Factors The Company is exposed to certain business and market risks including risks arising from transactions that are entered into the normal course of business, which are primarily related to interest rate changes and fluctuations in foreign exchange rates. During the reporting period, no events or transactions have occurred that would materially change the information disclosed in the Company's 2006 Annual Information Form. CE Franklin Ltd. Interim Consolidated Balance Sheets (Unaudited) September 30 December 31 (in thousands of Canadian dollars) 2007 2006 ------------------------------------------------------------------------- ASSETS Current assets Accounts receivable 88,614 87,530 Inventories 85,424 97,275 Income taxes receivable 127 - Other 1,695 2,965 ------------------------------------------------------------------------- 175,860 187,770 Property and equipment 6,043 5,546 Goodwill 14,799 10,479 Future income taxes (note 4) 1,472 1,160 Other 864 454 ------------------------------------------------------------------------- 199,038 205,409 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES Current liabilities Bank operating loan 35,390 34,008 Accounts payable 29,375 36,252 Accrued liabilities 17,860 30,492 Income taxes payable - 819 Current portion of obligations under capital lease 210 217 Current portion of long term debt 591 300 ------------------------------------------------------------------------- 83,426 102,088 Obligations under capital lease 126 286 Long term debt - 560 ------------------------------------------------------------------------- 83,552 102,934 ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Capital stock 24,444 23,586 Contributed surplus 17,226 16,213 Retained earnings 73,816 62,676 ------------------------------------------------------------------------- 115,486 102,475 ------------------------------------------------------------------------- 199,038 205,409 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CE Franklin Ltd. Interim Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended ------------------------ ------------------------ (in thousands of September September September September Canadian dollars, 30 30 30 30 except per share data) 2007 2006 2007 2006 ----------------------------------------------- ------------------------ Sales 116,817 131,675 354,010 424,580 Cost of sales 95,770 107,935 289,822 346,133 ------------------------------------------------------------------------- Gross profit 21,047 23,740 64,188 78,447 ------------------------------------------------------------------------- Other expenses (income) Selling, general and administrative expenses 13,347 15,314 42,699 48,006 Amortization 654 660 2,140 2,053 Interest expense 487 643 1,549 2,048 Foreign exchange loss/ (gain) and other 282 40 871 (62) ------------------------------------------------------------------------- 14,770 16,657 47,259 52,045 ------------------------------------------------------------------------- Income before income taxes 6,277 7,083 16,929 26,402 ------------------------------------------------------------------------- Income tax expense (recovery) (note 4) Current 2,219 2,771 6,100 8,757 Future (66) (407) (311) 133 ------------------------------------------------------------------------- 2,153 2,364 5,789 8,890 ------------------------------------------------------------------------- Net and Comprehensive income for the period 4,124 4,719 11,140 17,512 ------------------------------------------------------------------------- Net income per share (note 3) Basic 0.22 0.26 0.61 0.97 Diluted 0.22 0.25 0.59 0.93 Weighted average number of shares outstanding Basic 18,391,937 18,232,658 18,282,212 18,053,045 Diluted 18,901,268 18,908,634 18,791,543 18,729,021 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CE Franklin Ltd. Interim Consolidated Statements of Cash Flows (Unaudited) Three Months Ended Nine Months Ended ------------------------ ------------------------ (in thousands of September September September September Canadian dollars, 30 30 30 30 except per share data) 2007 2006 2007 2006 ----------------------------------------------- ------------------------ Cash flows from operating activities Net income for the period 4,124 4,719 11,140 17,512 Items not affecting cash - Amortization 654 660 2,140 2,053 Future income tax expense (recovery) (66) (407) (311) 133 Stock based compensation expense 412 999 1,474 1,472 Other 228 206 483 (201) ------------------------------------------------------------------------- 5,352 6,177 14,926 20,969 Net change in non-cash working capital balances related to operations - Accounts receivable (20,281) (10,976) 885 (1,830) Inventories 9,749 (2,971) 10,989 (17,967) Other current assets 529 (136) 1,284 1,084 Other non current assets (270) - (478) - Accounts payable 7,740 13,690 (8,187) 6,876 Accrued liabilities (4,128) (12,120) (12,632) (6,577) Income taxes payable 2,352 (1,343) (946) (5,704) ------------------------------------------------------------------------- 1,043 (7,679) 5,841 (3,149) Cash flows from financing activities Issuance of capital stock 1 3 569 1,611 Purchase of capital stock for Performance Share Unit plan - - (173) - Increase/(decrease) in bank operating loan (593) 8,647 1,382 6,492 Decrease in obligations under capital leases (54) - (167) - Increase/(decrease) in long term debt 9 (31) (269) (157) ------------------------------------------------------------------------- (637) 8,619 1,342 7,946 ------------------------------------------------------------------------- Cash flows from investing activities Purchase of property and equipment (359) (592) (1,359) (2,224) Proceeds on disposal of property and equipment - 2 - 40 Business acquisitions (note 2) (47) (350) (5,824) (2,613) Reduction (increase) of other assets - - - - ------------------------------------------------------------------------- (406) (940) (7,183) (4,797) ------------------------------------------------------------------------- Change in cash and cash equivalents during the period - - - - Cash and cash equivalents - Beginning of period - - - - ------------------------------------------------------------------------- Cash and cash equivalents - End of period - - - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash paid during the period for: Interest on bank operating loan 478 592 1,525 1,969 Interest on obligations under capital leases 9 51 24 79 Income taxes 27 4,114 7,212 14,461 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CE Franklin Ltd. Interim Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (in thousands of Canadian Capital Stock dollars, ----------------------- Share- except share Number of Contributed Retained holders' amounts) Shares $ surplus earnings equity ------------------------------------------------------------------------- Balance - December 31, 2005 17,804,554 21,914 14,281 39,737 75,932 Stock based compensation expense - - 1,472 - 1,472 Stock options exercised 428,658 1,902 (291) - 1,611 Net income - - - 17,512 17,512 ------------------------------------------------------------------------- Balance - September 30, 2006 18,233,212 23,816 15,462 57,249 96,527 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Balance - December 31, 2006 18,223,013 23,586 16,213 62,676 102,475 Stock based compensation expense - - 1,474 - 1,474 Stock options exercised 173,887 827 (257) - 570 Performance share units (PSU) exercised 10,310 204 (204) - - Purchase of shares in trust for PSU plan (15,200) (173) - - (173) Net income - - - 11,140 11,140 ------------------------------------------------------------------------- Balance - September 30, 2007 18,392,010 24,444 17,226 73,816 115,486 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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. The 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. Note 2 - Business Acquisitions 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 a net cash consideration of $2.263 million. 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 ------------------------------------------------------- Acquisition Acquisition Contingent Total of Full Tilt of Agent consideration 2007 Cash Consideration Paid 3,400 2,167 210 5,777 Transaction Costs 47 - - 47 ------------------------------------------------------ Total Cash Consideration 3,447 2,167 210 5,824 ------------------------------------------------------ ------------------------------------------------------ Accounts Receivable 1,970 - - 1,970 Inventory 371 - - 371 Other Current Assets 14 - - 14 Property, Equipment and Other 292 167 - 459 Goodwill 2,110 2,000 210 4,320 Accounts Payable (1,310) - - (1,310) Future Tax Liability - - - - Long Term Debt - - - - ------------------------------------------------------ 3,447 2,167 210 5,824 ------------------------------------------------------ ------------------------------------------------------ 2006 ---------------------------------------- Acquisition Contingent Total of Agent consideration 2006 Cash Consideration Paid 2,263 350 2,613 Transaction Costs - - - ---------------------------------------- Total Cash Consideration 2,263 350 2,613 ---------------------------------------- ---------------------------------------- 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) Long Term Debt (817) - (817) ---------------------------------------- 2,263 350 2,613 ---------------------------------------- ---------------------------------------- Note 3 - Share data At September 30, 2007, the Company had 18,392,010 common shares and 849,249 options outstanding to acquire common shares at a weighted average exercise price of $5.47 per common share, 518,457 of those options were vested and exercisable at a weighted average exercise price of $3.48 per common share. a) Stock Options A total of 110,683 share options to acquire common shares were granted at a weighted average strike price of $10.30 in the third quarter of 2007 for a fair value of $507,000. 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 4.46% Expected life 5 years Expected volatility 50% Stock Option compensation expense recorded in the three and nine month periods ended September 30, 2007 was $144,000 (2006 - $146,000) and $380,000 (2006 - $439,000), respectively. b) Share units Effective May 2, 2006, the Company adopted the Performance Share Unit ("PSU") and Deferred Share Unit ("DSU") plans approved by shareholders on that date. Under these plans, PSU'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 PSU'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 8,727 PSU's were granted in the third quarter of 2007. The compensation expense recorded in the three and nine month periods ended September 30, 2007 was $268,500 (2006 - $867,000) and $1,095,000 (2006 - $1,076,000) respectively. As at September 30, 2007, there were 177,544 PSU's and 37,388 DSU's outstanding (December 31, 2006, 120,710 PSU units and 12,104 DSU units) Note 4 - 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 ------------------------------------------------- September 30 September 30 2007 2006 ------------------------------------------------------------------------- Income before income taxes 6,277 7,083 ------------------------------------------------------------------------- Incomes taxes at expected rates 2,048 32.6% 2,301 32.5% Non-deductible items 97 1.6% 35 0.5% Capital and large corporations taxes - 0.0% 11 0.2% Adjustments on filing returns & Other 8 0.1% 17 0.2% ------------------------------------------------------------------------- 2,153 34.3% 2,364 33.4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine Months Ended ------------------------------------------------- September 30 September 30 2007 2006 ------------------------------------------------------------------------- Income before income taxes 16,929 26,402 ------------------------------------------------------------------------- Incomes taxes at expected rates 5,524 32.6% 8,773 33.2% Non-deductible items 345 2.0% 312 1.2% Capital and large corporations taxes 22 0.1% 47 0.2% Adjustments on filing returns & Other (102) -0.6% (242) -0.9% ------------------------------------------------------------------------- 5,789 34.2% 8,890 33.7% ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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: September 30 December 31 2007 2006 ------------------------------------------------------------------------- Assets Financing and investment charges 126 263 Property and equipment 961 610 Other 761 785 ------------------------------------------------------------------------- 1,848 1,658 ------------------------------------------------------------------------- Liabilities Goodwill 376 498 ------------------------------------------------------------------------- 376 498 ------------------------------------------------------------------------- Net future income tax asset 1,472 1,160 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Realization of future income tax assets is dependent on generating sufficient taxable income during the period in which the temporary differences are deductible. Although realization is not assured, management believes it is more likely than not that all future income tax assets will be realized based on projected operating results and tax planning strategies available. Note 5 - 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: September 30 September 30 2007 2006 ------------------------------------------------------------------------- Cost of sales for the three months ended 2,498 2,244 Cost of sales for the nine months ended 7,041 6,557 Inventory 4,074 3,574 Accounts Payable and accrued liabilities 1,064 835 Note 6 - Segmented reporting The Company operates its business as one operating segment in one geographical location, the western Canadian sedimentary basin.

For further information:

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

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CE Franklin Ltd.

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