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Last updated on April 16, 2014 at 1:21 EDT

CE Franklin Ltd. announces 2012 First Quarter Results

April 26, 2012

CALGARY, April 26, 2012 /PRNewswire/ – CE FRANKLIN LTD. (TSX.CFT, NASDAQ.CFK) reported net earnings of $7.9 million or $0.46 per share (basic) for the
first quarter ended March 31, 2012, a significant increase from net
earnings of $3.4 million or $0.19 per share (basic) generated in the
first quarter ended March 31, 2011.

Financial Highlights


    (millions of Cdn. $ except per
    share data)                                                       

                                                  Three Months Ended

                                                          March31

                                               2012              2011 

                                                     Unaudited        

    Revenues                                 $ 160.3           $ 137.7

    Gross Profit                              $ 29.4            $ 22.3

    Gross Profit - % of sales                  18.3%             16.2%

    EBITDA(1)                                 $ 11.3             $ 5.3

    EBITDA % of sales(1)                        7.0%              3.8%

    Net earnings                               $ 7.9             $ 3.4

    Per share                                                         

    Basic                                     $ 0.46            $ 0.19

    Diluted                                   $ 0.44            $ 0.19

    Net working capital(2)                   $ 137.8           $ 120.1

    Long term debt                               $ -             $ 0.3

“Solid revenue growth, improved product margins and disciplined cost
management lead to increased profitability.  Activity levels are
expected to remain at prior year levels as strong oil and oilsands
activity offsets softer gas activity,” said Michael West, President and
CEO.

Net earnings for the first quarter of 2012, were $7.9 million, an
increase of $4.5 million (132%) from the first quarter of 2011. 
Revenues were $160.3 million, an increase of $22.6 million (16%) from
the first quarter of 2011. Despite well completions decreasing by 26%
compared to the first quarter of 2011, both the capital project
business and maintenance repair and operating (“MRO”) revenues grew by
$7.3 million and $15.1 million respectively year over year. The
increase in capital projects revenue was driven by higher sales to oil
and oilsands projects.  Increased MRO activity came from all areas of
the business.  Spring break up arrived earlier than normal and dampened
activity levels late in the quarter.  Gross profits increased by $7.1
million (32%) due to the increase in revenues and improved gross profit
margins year over year. Average gross profit margins improved
sequentially compared to the fourth quarter of 2011 and improved over
the first quarter 2011 due to improved supply chain costs and increased
volume rebate income arising from increased purchasing levels. Selling,
general and administrative expenses increased by $0.8 million (5%) to
$17.8 million for the quarter as compensation and operating costs have
increased in response to higher revenue levels. The weighted average
number of shares outstanding during the first quarter was consistent
with the prior year period as the rise in share price during the last
year has limited the activity occurring under the normal course issuer
bid program. Net earnings per share (basic) was $0.46 in the first
quarter of 2012, compared to net earnings of $0.19 per share in the
first quarter of 2011.

Business Outlook
Oil and gas industry activity in 2012 is expected to remain at 2011
levels for the remainder of the year.  Natural gas prices remain
depressed as North American production capacity and inventory levels
continue to exceed demand.  Natural gas capital expenditure activity is
focused on liquid rich gas plays and the Company is well positioned to
service customers pursuing these gas plays.  Conventional and heavy oil
economics are attractive at current price levels leading to continuing
activity in on these plays.  Activity is especially strong in southeast
Saskatchewan.  Oil sands project announcements are expected to continue
with current oil price levels. Approximately 50% to 60% of the
Company’s total revenues are driven by our customers’ capital
expenditure requirements. CE Franklin’s revenues are expected to
increase modestly in 2012 through organic growth as the oil and gas
industry activity levels remain relatively consistent with 2011 levels.

Gross profit margins are expected to remain under pressure as customers
that produce natural gas focus on reducing their costs to maintain
acceptable project economics and due to continued aggressive oilfield
supply industry competition as industry activity levels remain below
the five year average. The Company will continue to manage its cost
structure to protect profitability while maintaining service capacity
and advancing strategic initiatives.

Over the medium to longer term, the Company’s strong financial and
competitive positions should enable profitable growth of its
distribution network through the expansion of its product lines,
supplier relationships and capability to service additional oil and gas
and other industrial end use markets.


    (1)       EBITDA represents net earnings before interest, taxes,
              depreciation and amortization. EBITDA is supplemental
              non-GAAP financial measure used by management, as well as
              industry analysts, to evaluate operations. Management
              believes that EBITDA, as presented, represents a useful means
              of assessing the performance of the Company's ongoing
              operating activities, as it reflects the Company's earnings
              trends without showing the impact of certain charges. The
              Company is also presenting EBITDA and EBITDA as a percentage
              of revenues because it is used by management as supplemental
              measures of profitability. The use of EBITDA by the Company
              has certain material limitations because it excludes the
              recurring expenditures of interest, income tax, and
              depreciation expenses. Interest expense is a necessary
              component of the Company's expenses because the Company
              borrows money to finance its working capital and capital
              expenditures. Income tax expense is a necessary component of
              the Company's expenses because the Company is required to pay
              cash income taxes. Depreciation expense is a necessary
              component of the Company's expenses because the Company uses
              property and equipment to generate revenues. Management
              compensates for these limitations to the use of EBITDA by
              using EBITDA as only a supplementary measure of
              profitability. EBITDA is not used by management as an
              alternative to net earnings, as an indicator of the Company's
              operating performance, as an alternative to any other measure
              of performance in conformity with generally accepted
              accounting principles or as an alternative to cash flow from
              operating activities as a measure of liquidity. A
              reconciliation of EBITDA to Net earnings is provided within
              the Company's Management Discussion and Analysis. Not all
              companies calculate EBITDA in the same manner and EBITDA does
              not have a standardized meaning prescribed by IFRS.
              Accordingly, EBITDA, as the term is used herein, is unlikely
              to be comparable to EBITDA as reported by other entities.

    (2)       Net working capital is defined as current assets less cash
              and cash equivalents, accounts payable and accrued
              liabilities, current taxes payable and other current
              liabilities. Net working capital and long term debt/bank
              operating loan amounts are as at quarter end.

Additional Information

Additional information relating to CE Franklin, including its first
quarter 2012 Management Discussion and Analysis and interim
consolidated financial statements and its Form 20-F / Annual
Information Form, is available under the Company’s profile on the SEDAR
website at www.sedar.com and at www.cefranklin.com.

Conference Call and Webcast Information

A conference call to review the 2012 first quarter results, which is
open to the public, will be held on Friday, April 27, 2012 at 11:00
a.m. Eastern Time (9:00a.m. Mountain Time).

Participants may join the call by dialing 1-647-427-7450 in Toronto or
dialing 1-888-231-8191 at the scheduled time of 11:00 a.m. Eastern
Time.
  For those unable to listen to the live conference call, a replay will
be available at approximately 2:00 p.m. Eastern Time on the same day by
calling 1-416-849-0833 in Toronto or dialing 1-855-859-2056 and entering the Passcode of 63408715 and may be accessed until midnight May 3, 2012.

The call will also be webcast live at: http://www.newswire.ca/en/webcast/detail/938361/1004129 and will be available on the Company’s website at http://www.cefranklin.com.

Michael West, President and Chief Executive Officer will lead the
discussion and will be accompanied by Derrren Newell, Vice President
and Chief Financial Officer. The discussion will be followed by a
question and answer period.

About CE Franklin

For more than 75 years, CE Franklin has been a leading supplier of
products and services to the energy industry.  CE Franklin distributes
pipe, valves, flanges, fittings, production equipment, tubular products
and other general oilfield supplies to oil and gas producers in Canada
as well as to the oil sands, refining, heavy oil, petrochemical,
forestry and mining industries.  These products are distributed through
its 39 branches, which are situated in towns and cities serving
particular oil and gas fields of the western Canadian sedimentary
basin.

Forward-looking Statements: The information in this news release may contain “forward-looking
statements” within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and other
applicable securities legislation.  All statements, other than
statements of historical facts, that address activities, events,
outcomes and other matters that CE Franklin plans, expects, intends,
assumes, believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may occur
in the future are forward-looking statements.  These forward-looking
statements are based on management’s current belief, based on currently
available information, as to the outcome and timing of future events. 
When considering forward-looking statements, you should keep in mind
the risk factors and other cautionary statements and refer to the Form
20-F or our annual information form for further detail.

The following is provided to assist readers in understanding CE Franklin
Ltd.’s (“CE Franklin” or the “Company”) financial performance and
position during the periods presented and significant trends that may
impact future performance of CE Franklin. This should be read in
conjunction with the Company’s condensed interim consolidated financial
statements for the three month period ended March 31, 2012 and the MD&A
and consolidated financial statements for the year ended December 31,
2011. All amounts are expressed in Canadian dollars and are in
accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”), except
where otherwise noted.

Overview

CE Franklin is a leading distributor of pipe, valves, flanges, fittings,
production equipment, tubular products and other general industrial
supplies, primarily to the oil and gas industry in Canada through its
39 branches situated in towns and cities that serve oil and gas fields
of the Western Canadian sedimentary basin. In addition, the Company
distributes similar products to the oil sands, midstream, refining,
petrochemical and non-oilfield related industries such as forestry and
mining.

The Company’s branch operations service over 3,000 customers by
providing the right materials where and when they are needed, and for
the best value.  Our branches, supported by our centralized
Distribution Centre in Edmonton, Alberta, stock over 25,000 stock
keeping units sourced from over 2,000 suppliers.  This infrastructure
enables us to provide our customers with the products they need on a
same day or overnight basis.  Our centralized inventory and procurement
capabilities allow us to leverage our scale to enable industry leading
hub and spoke purchasing, logistics and project execution capabilities.
The branches are also supported by services provided by the Company’s
corporate office in Calgary, Alberta including sales, marketing,
product expertise, logistics, invoicing, credit and collection, and
other business services.

The Company’s common shares trade on the TSX (“CFT”) and NASDAQ (“CFK”)
stock exchanges.  Schlumberger Limited (“Schlumberger”), a major
oilfield service company based in Paris, France, indirectly owns
approximately 56% of the Company’s shares.

Business Strategy

The Canadian oilfield equipment supply industry is highly competitive
and fragmented.  There are approximately 230 oilfield supply stores in
Canada which generate annual estimated sales of $2 billion to $3
billion.  CE Franklin competes with three other large oilfield product
distributors and with numerous local and regional distributors as well
as specialty equipment distributors and manufacturers.  The oilfield
equipment market is part of the larger industrial equipment supply
market, which is also serviced by numerous competitors.  The oil sands
and niche industrial product markets are more specialized and solutions
oriented and require more in-depth product knowledge and supplier
relationships to service specific customer requirements.

Oilfield equipment distributors compete based on price and level of
service.  Service includes the ability to consistently provide required
products to a customer’s operating site when needed, project management
services, product expertise and support, billing and expenditure
management services, and related equipment services.

Demand for oilfield products and services is driven by the level of
capital expenditures in the oil and gas industry in the Western
Canadian sedimentary basin as well as by production related
maintenance, repair and operating (“MRO”) requirements.  MRO demand
tends to be relatively stable over time and predictable in terms of
product and service requirements and typically comprises 40% to 50% of
the Company’s annual sales.  Capital project demand fluctuates over
time with oil and gas commodity prices, which directly impacts the
economic returns realized by oil and gas companies.

The size, scope, and product mix of each order will affect
profitability.  Local walk in relationship business with smaller orders
or more specialized products will typically generate higher profit
margins compared to large project bids for alliance customers where the
Company can take advantage of volume discounts and longer lead times. 
Larger oil and gas customers tend to have a broader geographic
operating reach requiring multi-site service capability, conducting
larger capital projects, and requiring more sophisticated billing and
project management services than do smaller customers.  The Company has
entered into numerous alliances with larger customers where the scale
and repeat nature of business enables efficiencies which are shared
with the customer through lower profit margins.

Barriers to entry in the oilfield supply business are low with start-up
operations typically focused on servicing local relationship based MRO
customers.  To compete effectively on capital project business and to
service larger customers requires multi-location branch operations,
increased financial, procurement, product expertise and breadth of
product lines, information systems and process capability, which
significantly increases the barriers to entry.

The Company’s 39 branch operations provide substantial geographic
coverage across the oil and gas producing regions in western Canada. 
Each branch services and competes for local business and services the
Company’s alliance customers supported by centralized support services
provided by the Company’s Distribution Centre and corporate office in
Calgary. The Company’s large branch network, coupled with its
centralized capabilities enables it to develop strong supply chain
relationships with suppliers and provide it with a competitive
advantage over local independent oilfield and specialty equipment
distributors for large alliance customers who are seeking
multi-location, one stop shopping, and more comprehensive service.

The Company is pursuing the following strategies to grow its business
profitably:

        --  Expand the reach and market share serviced by the Company's
            distribution network.  The Company is focusing its sales
            efforts and product offering on servicing complex,
            multi-location needs of large and emerging customers in the
            energy sector.  Organic growth may be complemented by selected
            acquisitions.

        --  Expand production equipment service capability to capture more
            of the product life cycle requirements for the equipment the
            Company sells such as downhole pump repair, oilfield engine
            maintenance, well optimization and onsite project management.
            This will differentiate the Company's service offering from its
            competitors and deepen relationships with its customers.

        --  Expand oil sands, industrial project and MRO business by
            leveraging our existing supply chain infrastructure, product,
            and major project expertise.

        --  Increase the resourcing of customer project sales quotation and
            order fulfillment services provided by our Distribution Centre
            to augment local branch capacity to address seasonal and
            project driven fluctuations in customer demand.  By doing so,
            we aim to increase our capacity flexibility and improve
            operating efficiency while providing consistent customer
            service.

Business Outlook

Oil and gas industry activity in 2012 is expected to remain at 2011
levels for the remainder of the year.  Natural gas prices remain
depressed as North American production capacity and inventory levels
continue to exceed demand.  Natural gas capital expenditure activity is
focused on liquid rich gas plays and the Company is well positioned to
service customers pursuing these gas plays.  Conventional and heavy oil
economics are attractive at current price levels leading to continuing
activity in on these plays.  Activity is especially strong in southeast
Saskatchewan.  Oil sands project announcements continue at current oil
price levels. Approximately 50% to 60% of the Company’s total revenues
are driven by our customers’ capital expenditure requirements. CE
Franklin’s revenues are expected to increase modestly in 2012 through
organic growth as the oil and gas industry activity levels remain
relatively consistent with 2011 levels.

Gross profit margins are expected to remain under pressure as customers
that produce natural gas focus on reducing their costs to maintain
acceptable project economics and due to continued aggressive oilfield
supply industry competition as industry activity levels remain below
the last five year average. The Company will continue to manage its
cost structure to protect profitability while maintaining service
capacity and advancing strategic initiatives.

Over the medium to longer term, the Company’s strong financial and
competitive positions should enable profitable growth of its
distribution network through the expansion of its product lines,
supplier relationships and capability to service additional oil and gas
and other industrial end use markets.


                                            ThreeMonthsEndedMarch 31        

                                      2012                       2011       

    Revenues                160.3      100.0  %        137.7      100.0  %  

    Cost of Sales          (130.9)     (81.7) %       (115.4)     (83.9) %  

    Gross Profit             29.4       18.3  %         22.3       16.1  %  

    Selling,
    general and
    administrative
    expenses                (17.8)     (11.1) %        (17.0)     (12.8) %

    Foreign
    exchange and
    other                    (0.3)      (0.2) %            -          -  %

    EBITDA(1)                11.3        7.0  %          5.3        3.4  %  

    Depreciation             (0.6)      (0.4) %         (0.6)      (0.5) %  

    Interest                 (0.1)      (0.1) %         (0.2)      (0.2) %  

    Earnings
    before tax               10.6        6.5  %          4.6        2.7  %

    Income tax
    expense                  (2.7)      (1.6) %         (1.2)      (0.9) %

    Net earnings              7.9        4.9  %          3.4        1.8  %  

    Net earnings
    per share                                                             

    Basic                $   0.46                   $   0.19                

    Diluted              $   0.44                   $   0.19                

    Weighted average number of shares outstanding (000's)                   

    Basic                  17,443                     17,488                

    Diluted                18,149                     18,052                

    (1)     EBITDA represents net earnings before interest,
    taxes, depreciation and amortization. EBITDA is a
    supplemental non-GAAP financial measure used by management,
    as well as industry analysts, to evaluate operations.
    Management believes that EBITDA, as presented, represents a
    useful means of assessing the performance of the Company's
    ongoing operating activities, as it reflects the Company's
    earnings trends without showing the impact of certain
    charges. The Company is also presenting EBITDA and EBITDA as
    a percentage of revenues because it is used by management as
    supplemental measures of profitability. The use of EBITDA by
    the Company has certain material limitations because it
    excludes the recurring expenditures of interest, income tax,
    and depreciation expenses. Interest expense is a necessary
    component of the Company's expenses because the Company
    borrows money to finance its working capital and capital
    expenditures. Depreciation expense is a necessary component
    of the Company's expenses because the Company is required to
    pay cash to acquire equipment to generate revenues.
    Management compensates for these limitations to the use of
    EBITDA by using EBITDA as only a supplementary measure of
    profitability. EBITDA is not used by management as an
    alternative to net earnings, as an indicator of the Company's
    operating performance, as an alternative to any other measure
    of performance in conformity with generally accepted
    accounting principles or as an alternative to cash flow from
    operating activities as a measure of liquidity. A
    reconciliation of EBITDA to net earnings is provided within
    the table above. Not all companies calculate EBITDA in the
    same manner and EBITDA does not have a standardized meaning
    prescribed by IFRS. Accordingly, EBITDA, as the term is used
    herein, is unlikely to be comparable to EBITDA as reported by
    other entities.

First Quarter Results

Net earnings for the first quarter of 2012, were $7.9 million, an
increase of $4.5 million (132%) from the first quarter of 2011. 
Revenues were $160.3 million, an increase of $22.6 million (16%) from
the first quarter of 2011. Despite well completions decreasing by 26%
compared to the first quarter of 2011, both the capital project
business and maintenance repair and operating (“MRO”) revenues grew by
$7.3 million and $15.1 million respectively year over year. The
increase in capital projects revenue was driven by higher sales to oil
and oilsands projects.  Increased MRO activity came from all areas of
the business.  Spring break up arrived earlier than normal and dampened
activity levels late in the quarter.  Gross profits increased by $7.1
million (32%) due to the increase in revenues and improved gross profit
margins year over year. Average gross profit margins improved
sequentially compared to the fourth quarter of 2011 and improved over
the first quarter 2011 due to improved supply chain costs and increased
volume rebate income arising from increased purchasing levels. Selling,
general and administrative expenses increased by $0.8 million (5%) to
$17.8 million for the quarter as compensation and operating costs have
increased in response to higher revenue levels. The weighted average
number of shares outstanding during the first quarter was consistent
with the prior year period as the rise in share price during the last
year has limited the activity occurring under the normal course issuer
bid program. Net earnings per share (basic) was $0.46 in the first
quarter of 2012, compared to net earnings of $0.19 per share in the
first quarter of 2011.

Revenues

Revenues for the quarter ended March 31, 2012, were $160.3 million, an
increase of 16% from the quarter ended March 31, 2011.

Oil and gas commodity prices are a key driver of industry capital
project activity as commodity prices directly impact the economic
returns realized by oil and gas companies. The Company uses oil and gas
well completions and average rig counts as industry activity measures
to assess demand for oilfield equipment used in capital projects.  Oil
and gas well completions require the products sold by the Company to
complete a well and bring production on stream and are a general
indicator of energy industry activity levels.  Average drilling rig
counts are also used by management to assess industry activity levels
as the number of rigs in use ultimately drives well completion
requirements.  Well completion, rig count and commodity price
information for the three and three month periods ended March 31, 2012
and 2011 are provided in the table below.


                                         Q1 Average               %          

                                 2012             2011         change        

    Gas - Cdn.             $      2.14      $      3.76         (43)%
    $/gj (AECO
    spot)

    Oil - Cdn.             $     94.49      $     99.63          (5)%
    $/bbl
    (synthetic
    crude)

    Average rig                    541              532           2 %
    count

    Well
    completions:

         Oil                     2,262            2,201           3 %        

         Gas                       611            1,660         (63)%        

    Total well                   2,873            3,861         (26)%
    completions

Average statistics are shown except for well completions.

Sources: Oil and Gas prices – First Energy Capital Corp.; Rig count data
– CAODC; Well completion data – Daily Oil Bulletin


    (in millions of                           Three monthsended March31
    Cdn. $)

                                           2012                    2011

    End use revenue                  $           %           $           %
    demand

    Capital projects               83.5          52        76.0          55

    Maintenance, repair            76.8          48        61.7          45
    and operating
    supplies ("MRO")

    Total Revenues                160.3         100       137.7         100

Revenues from capital project related products were $83.5 million in the
first quarter of 2012, an increase of 10% ($7.5 million) from the first
quarter of 2011 due to increased oil and oil sands based sales. Total
well completions decreased by 26% in the first quarter of 2012.  Gas
well completions comprised 21% of the total wells completed in western
Canada in the first quarter of 2012 compared to 43% in the first
quarter 2011.  The average working rig count increased by 2% compared
to the prior year period. Spot gas prices ended the first quarter at
$2.14 per GJ (AECO) a decrease of 43% from first quarter 2011 average
prices.  Oil prices ended the first quarter at $94.49 per bbl
(Synthetic Crude) a decrease of 5% from the first quarter 2011 average.
Depressed gas prices are expected to continue to negatively impact gas
drilling and well completion activity over the remainder of 2012, which
in turn is expected to constrain demand for the Company’s products.
Natural gas customers continue to utilize a high level of competitive
bid activity to procure the products they require in an effort to
reduce their costs. The Company is addressing this industry trend by
pursuing initiatives focused on improving revenue quotation processes
and increasing the operating flexibility and efficiency of its branch
network.  Activity related to oil and oilsands activity remains strong
and the Company is well positioned to support customers who are
pursuing oil plays and more particularly tight oil plays.  Spring break
up arrived in late March which dampened activity levels late in the
quarter.

MRO product revenues are related to overall oil and gas industry
production levels and tend to be more stable than capital project
revenues. MRO product revenues for the quarter ended March 31, 2012
increased by $15.1 million (24%) to $76.8 million compared to the
quarter ended March 31, 2011 and comprised 48% of the Company’s total
revenues (2011 – 45%) as both oil and gas MRO activities were strong in
the quarter.

The Company’s strategy is to grow profitability by focusing on its core
western Canadian oilfield product distribution business, complemented
by an increase in the product life cycle services provided to its
customers and the focus on the emerging oil sands capital project and
MRO revenues opportunities. Revenues from these initiatives to date are
provided below:


                                          Q12012                  Q12011

    Revenues($millions)              $           %           $           %

    Oilfield                      140.4          87       122.6          89

    Oil sands                      12.1           8        10.0           7

    Production services             7.8           5         5.1           4

    Total Revenues                160.3         100       137.7         100

Revenues from oilfield products to conventional western Canada oil and
gas end use applications were $120.3 million for the first quarter of
2012, backing out tubular product sales, year over year oilfield
revenue was up 19.4%. This increase was driven by oil related capital
projects and strong MRO demand.

Revenues from oil sands end use applications were $12.1 million in the
first quarter, an increase of $2.1 million (21%) from the first quarter
of 2011 reflecting the timing of project revenues. The Company
continues to position its major project execution capability and the
Fort McMurray branch to penetrate this emerging market for capital
projects and MRO products.

Production service revenues were $7.8 million in the first quarter of
2012, a 53% increase from the $5.1 million of revenues in the first
quarter of 2011, reflecting improved oil production economics resulting
in increased customer maintenance activities.


    Gross Profit                                                          

                                        Q12012                  Q1 2011

    Gross profit ($              $     29.4               $     22.3
    millions)

    Gross profit margin as             18.3     %               16.1     %
    a % of revenues

    Gross profit
    composition by product
    revenue category:

    Tubulars                              3     %                  6     %

    Pipe, flanges and                    30     %                 26     %
    fittings

    Valves and accessories               19     %                 21     %

    Pumps, production                    19     %                 15     %
    equipment and services

    General                              29     %                 32     %

    Total gross profit                  100     %                100     %

Gross profit was $29.4 million in the first quarter of 2012, an increase
of $7.1 million (32%) from the first quarter of 2011 due to increased
revenues and average gross profit margins compared to the prior year
period. Gross profit margins for the quarter were improved due to
improved supply chain costs and recognition of higher volume rebate
income due to higher purchasing levels.  Increased pipe flanges and
fittings gross profit composition was due to improved gross profit
margins.  Other gross profit composition categories were impacted by
having more sales to our larger lower margin customers.  The decrease
in tubular gross profit composition reflects larger lower margin sales
and the disposal of surplus tubular inventory.


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

    ($millions)                          Q12012                  Q1 2011

                                    $           %            $           %

    People Costs                  11.0          61         10.3          60

    Facility and office            3.5          20          3.7          22
    costs

    Selling Costs                  1.9          11          1.5           9

    Other                          1.4           8          1.5           9

    SG&A costs                    17.8         100         17.0         100

    SG&A costs as % of             11%                      12%
    revenues

SG&A costs increased $0.8 million (5%) in the first quarter of 2012 from
the prior year period and represented 11% of revenues compared to 12%
in the prior year period. The $0.8 million increase in expenses was
attributable to higher incentive and selling costs reflecting the
improved performance of the business year over year.

Depreciation Expense

Depreciation expense of $0.6 million in the first quarter of 2012 was
comparable to the first quarter of 2011.

Interest Expense

Interest expense was minimal in the first quarter of 2012 and was lower
than the prior year due to lower borrowing levels.

Foreign Exchange and other

Foreign exchange and other in the quarter was a loss of $0.3 million as
the Canadian dollar strengthened which increased the translation loss
from US denominated net working capital assets.  The Company recognized
a $0.3 million unrealized foreign exchange loss on $11.6 million of
foreign currency forward contracts it had outstanding at quarter end. 
As at March 31, 2012, a one percent change in the Canadian dollar
relative to the US dollar would decrease or increase the Company’s
annual net income by approximately $0.1 million.

Income Tax Expense

The Company’s effective tax rate for the first quarter of 2012 was 25.5%
down from a 26.5% effective rate in the first quarter 2011. The current
effective tax rate is lower than the prior year due to lower statutory
rates.

Summary of Quarterly Financial Data

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


    (in millions of Cdn. $ except per sharedata)  

                      Q2           Q3           Q4           Q1           Q2           Q3           Q4           Q1

    Unaudited       2010         2010         2010         2011         2011         2011         2011         2012

    Revenues       99.9        132.2        135.6        137.7        113.9        140.5        154.3        160.3   

    Gross
    Profit         15.6         19.2         20.5         22.3         19.3         23.9         25.3         29.4 

    Gross                %            %            %            %            %            %            %            %
    Profit %       15.6         14.5         15.1         16.2         16.9         17.0         16.4         18.3 

    EBITDA          0.7          3.8          3.8          5.3          3.1          7.6          6.6         11.3   

    EBITDA as a          %            %            %            %            %            %            %            %
    % of
    revenues        0.7          2.9          2.8          3.8          2.7          5.4          4.3          7.0 

    Net
    earnings
    (loss)         (0.1)         2.2          1.6          3.4          1.7          4.8          4.5          7.9 

    Net
    earnings
    (loss) as a
    % of                                                                                                           

    revenues       (0.1) %       1.7  %       1.2  %       2.5  %       1.5  %       3.4  %       2.9  %       4.9  %

    Net
    earnings
    (loss) per
    share                                                                                                          

      Basic     $ (0.01)     $  0.12      $  0.09      $  0.19      $  0.10      $  0.27         0.26      $  0.46   

      Diluted   $ (0.01)     $  0.12      $  0.09      $  0.19      $  0.09      $  0.26         0.25      $  0.44   

    Net working
    capital(1)    111.8        129.0        125.7        120.1        136.5        134.6        116.9        137.8 

    Long term
    debt /                                                                                                         

    bank
    operating
    loan(1)         0.3         14.4          6.4          0.3         12.2          5.8            -            - 

    Total well
    completions   2,197        2,611        4,760        3,861        2,765        3,495        4,350        2,873 

    (1) Net working capital and long term debt/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.  In addition,
many exploration and production areas in northern Canada are accessible
only in the winter months when the ground is frozen.  As a result, the
first and fourth quarters typically represent the busiest time for oil
and gas industry activity and the highest oilfield sales activity for
the Company.  Oilfield sales levels drop dramatically during the second
quarter until such time as roads have dried and road bans have been
lifted. This typically results in a significant reduction in earnings
during the second quarter, as the decline in sales typically outpaces
the decline in SG&A costs as the majority of the Company’s SG&A costs
are fixed in nature.  Net working capital (defined as current assets
less cash and cash equivalents, accounts payable and accrued
liabilities, current taxes payable, note payable and other current
liabilities) and borrowing levels follow similar seasonal patterns as
sales.

Liquidity and Capital Resources

The Company’s primary internal source of liquidity is cash flow from
operating activities before changes in non-cash net working capital
balances.  Cash flow from operating activities and the Company’s $60.0
million revolving term credit facility are used to finance the
Company’s net working capital, capital expenditures and acquisitions.

As at March 31, 2012, the Company had $3.6 million of cash on hand and
had no long term debt. Cash decreased by $12.2 million from December
31, 2011 as the Company generated $9.7 million of cashflow from
operating activities, before net changes in non-cash working capital
balances. Net working capital increased by $22.0 million in the
quarter.  Capital expenditures in the quarter amounted to $0.3
million.  Nominal activity occurred under the Company’s Normal Course
Issuer bid (“NCIB”) program.  Subsequent to quarter end, the Company
terminated its NCIB program for this year.

As at March 31, 2011, the Company had $3.2 million of cash and cash
equivalents and no borrowings under its revolving term credit facility,
a net decrease of $9.4 million from December 31, 2010.  Borrowing
levels have decreased due to the Company generating $4.4 million in
cash flow from operating activities, before net changes in non-cash
working capital balances of a $5.6 million reduction in net working
capital.  This was offset by $0.5 million in capital and other
expenditures and $0.2 million for the purchase of shares to resource
share unit plan obligations and the repurchase of shares under the NCIB
program.

Net working capital was $137.8 million at March 31, 2012, an increase of
$21.0 million from December 31, 2011. Accounts receivable at March 31,
2012 was $103.9 million, an increase of $5.7 million (5.8%) from
December 31, 2011, due to the 4% increase in first quarter sales
compared to the fourth quarter of 2011.  Days sales outstanding in
accounts receivable (“DSO”) at the end of the first quarter of 2012 was
52 days which is consistent with where the fourth quarter of 2011
ended.  DSO is calculated using average sales per day for the quarter
compared to the period end customer accounts receivable balance. 
Inventory at March 31, 2012 was $113.1 million, up $1.4 million (1.3%)
from December 31, 2011.  Inventory turns at the end of the first
quarter of 2012 were 4.6 turns were consistent with the fourth quarter
of 2011.  Inventory turns are calculated using cost of goods sold for
the quarter on an annualized basis, compared to the period end
inventory balance.  Accounts payable and accrued liabilities at March
31, 2012 were $79.9 million, a decrease of $13.7 million (15%) compared
to the fourth quarter of 2011.

Capital expenditures in Q1 2012 were $0.3 million, an increase of $0.2
million (49%) from Q4 2011 expenditures. Expenditures in 2012 were
directed towards facility expansion and maintenance, business system
expansion and vehicles and operating equipment.  The majority of the
expenditures in Q1 2012 were directed towards similar items as they
were in 2011. Capital expenditures in 2012 are anticipated to be in the
$4.0 million to $5.0 million range and will be directed towards
business system, branch facility, vehicle and operating equipment
upgrades and replacements.

In July 2011, the Company renewed its $60.0 million revolving term
credit facility that matures in July 2014 (the “Credit Facility”).  
Borrowings under the Credit Facility bear interest based on floating
interest rates and are secured by a general security agreement covering
all assets of the Company.  The maximum amount available under the
Credit Facility is subject to a borrowing base formula applied to
accounts receivable and inventories. The Credit Facility requires the
Company to maintain the ratio of its debt to debt plus equity at less
than 40%.  As at December 31, 2011, this ratio was 0%.  The Company
must also maintain coverage of its net operating cash flow as defined
in the Credit Facility agreement over interest expense for the trailing
twelve month period of greater than 1.25 times.  As at March 31, 2012,
this ratio was 51.3 times.  The Credit Facility contains certain other
covenants with which the Company is in compliance.  As at March 31,
2012, the Company had no borrowings under the facility and had
available undrawn borrowing capacity of $60.0 million under the Credit
Facility.

Contractual Obligations

There have been no material changes in off-balance sheet contractual
commitments since December 31, 2011.

Capital Stock

As at March 31, 2012 and 2011, the following shares and securities
convertible into shares were outstanding:


    (millions)                       March 31, 2012           March31, 2011

                                           Shares                  Shares

    Shares outstanding                        17.5                    17.5 

    Stock options                              0.7                     1.0 

    Share unit plan                            0.7                     0.7
    obligations

    Shares outstanding                        18.9                    19.2
    and issuable

The weighted average number of shares outstanding during the first
quarter of 2012 was 17.4 million, which was consistent with the prior
year period as the rise in the Company’s share price during the last
year has limited the activity occurring under the normal course issuer
bid program. The diluted weighted average number of shares outstanding
was 18.1 million, which is also consistent with the prior year quarter.

The Company has established an independent trust to purchase common
shares of the Company on the open market to resource share unit plan
obligations. During the three month period ended March 31, 2012, nil
common shares were purchased by the trust (March 31, 2011 – 25,000
common shares at an average cost of $8.75 per share). As at March 31,
2012, the trust held 566,277 shares (March 31, 2011 – 462,753).

On December 20, 2011, the Company announced the renewal of the NCIB
effective January 3, 2012, to purchase up to 850,000 common shares
through the facilities of NASDAQ, representing approximately 5% of its
outstanding common shares.  During the three month period ended March
31, 2012, the Company purchased 8,625 shares at an average cost of
$8.11 (March 31, 2011: 3,102 shares purchased at an average cost of
$7.56).

Subsequent to the quarter end, the Company has cancelled its NCIB
program.  At the time the program was cancelled, the Company had
acquired 9,225 shares at an average cost of $8.59 per share.

Critical Accounting Estimates

There have been no material changes to critical accounting estimates
since December 31, 2011. The Company is not aware of any environmental
or asset retirement obligations that could have a material impact on
its operations.

Subsequent Events

Subsequent to March 31, 2012, the Company announced that the Board of
Directors and the Special Committee of the Board of Directors have
decided it is in the best interest of CE Franklin and all shareholders
to formally commence a strategic review process.  Further to the
announcement of a Strategic Review Process, the Company adopted a
Shareholders’ Rights Plan to ensure that, in the context of a bid for
control of CE Franklin, the Board of Directors would have sufficient
time to consider the bid and conduct the Strategic Review Process. 
Additionally, the Shareholders’ Rights Plan gives shareholders an equal
opportunity to participate in such a bid; and gives them adequate time
to properly assess the bid.  The Shareholders’ Rights Plan is not
intended to and will not prevent a sale of CE Franklin.

Controls and Procedures

Internal control over financial reporting (“ICFR”) is designed to
provide reasonable assurance regarding the reliability of the Company’s
financial reporting and its compliance with IFRS in its financial
statements. The President and Chief Executive Officer and the Vice
President and Chief Financial Officer of the Company have evaluated
whether there were changes to its ICFR during the three months ended
March 31, 2012 that have materially affected or are reasonably likely
to materially affect the ICFR. No such changes were identified through
their evaluation.

Risk Factors

The Company is exposed to certain business and market risks including
risks arising from transactions that are entered into the normal course
of business, which are primarily related to interest rate changes and
fluctuations in foreign exchange rates. During the reporting period, no
events or transactions since the year ended December 31, 2011 have
occurred that would materially change the business and market risk
information disclosed in the Company’s Form 20F.

Forward Looking Statements

The information in the MD&A may contain “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements,
other than statements of historical facts, that address activities,
events, outcomes and other matters that CE Franklin plans, expects,
intends, assumes, believes, budgets, predicts, forecasts, projects,
estimates or anticipates (and other similar expressions) will, should
or may occur in the future are forward-looking statements. These
forward-looking statements are based on management’s current belief,
based on currently available information, as to the outcome and timing
of future events. When considering forward-looking statements, you
should keep in mind the risk factors and other cautionary statements in
this MD&A, including those in under the caption “Risk Factors”.

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

        --  forecasted oil and gas industry activity levels in 2012 and
            beyond;

        --  planned capital expenditures and working capital and
            availability of capital resources to fund capital expenditures
            and working capital;

        --  the Company's future financial condition or results of
            operations and future revenues and expenses;

        --  the outcome of the Company's strategic review process

        --  the Company's business strategy and other plans and objectives
            for future operations;

        --  fluctuations in worldwide prices and demand for oil and gas;

        --  fluctuations in the demand for the Company's products and
            services.

Should one or more of the risks or uncertainties described above or
elsewhere in this MD&A occur, or should underlying assumptions prove
incorrect, the Company’s actual results and plans could differ
materially from those expressed in any forward-looking statements.

All forward-looking statements expressed or implied, included in this
MD&A and attributable to CE Franklin are qualified in their entirety by
this cautionary statement. This cautionary statement should also be
considered in connection with any subsequent written or oral
forward-looking statements that CE Franklin or persons acting on its
behalf might issue. CE Franklin does not undertake any obligation to
update any forward-looking statements to reflect events or circumstance
after the date of filing this MD&A, except as required by law.

Additional Information

Additional information relating to CE Franklin, including its first
quarter 2012 Management Discussion and Analysis and interim
consolidated financial statements and its Form 20-F / Annual
Information Form, is available under the Company’s profile on the SEDAR
website at www.sedar.com and at www.cefranklin.com.


    CE Franklin Ltd.

    CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION -
    UNAUDITED

                                        As at March 31 As at December 31

    (in thousands of Canadian dollars)            2012              2011

    Assets                                                              

    Current assets                                                      

      Cash and cash equivalents  (Note          3,619            15,830
      3)

      Accounts receivable  (Note 4)           103,887            98,190 

      Inventories  (Note 5)                   113,122           111,661 

      Other                                     3,050             2,565 

                                              223,678           228,246 

    Non-current assets                                                  

      Property and equipment                    9,403             9,709 

      Goodwill                                 20,570            20,570 

      Deferred tax assets  (Note 6)             1,741             1,969 

      Other assets                                155               171 

    Total Assets                              255,547           260,665 

    Liabilities                                                         

    Current liabilities                                                 

      Accounts payable and accrued             79,874            93,613
      liabilities  (Note 7)

      Current taxes payable  (Note 6)           2,079             1,663 

      Note payable  (Note 8)                      290               290 

    Total Liabilities                          82,243            95,566 

    Shareholders' equity                                                

      Capital stock  (Note 11)                 22,930            22,536 

      Contributed surplus                      20,459            20,529 

      Retained earnings                       129,915           122,034 

                                              173,304           165,099 

    Total Liabilities and Shareholders'       255,547           260,665
    Equity

    See accompanying notes to these condensed interim consolidated
    financial statements

    CE Franklin Ltd.

    CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
    EQUITY - UNAUDITED

    (Canadian       Capital Stock
    dollars and
    number of
    shares in
    thousands)

                 Number of           Contributed   Retained   Shareholders'

                    Shares     $        Surplus    Earnings        Equity

    Balance -      17,474  23,078        19,716    107,742         150,536
    January 1,
    2011

    Stock based         -       -           426          -             426
    compensation
    expense
    (Note 11 (b)
    and (c))

    Normal             (3)     (4)            -        (19)            (23)
    course
    issuer bid
    (Note 11
    (d))

    Stock              51     400          (400)         -               -
    options
    exercised
    (Note 11
    (b))

    Share Units        13      77           (77)         -               -
    exercised
    (Note 11
    (c))

    Purchase of       (25)   (219)            -          -            (219)
    shares in
    trust for
    Share Unit
    Plans (Note
    11 (c))

    Net earnings        -       -             -      3,375           3,375 

    Balance -      17,510  23,332        19,665    111,098         154,095
    March 31,
    2011

    Balance -      17,440  22,536        20,529    122,034         165,099
    January 1,
    2012

    Stock based         -       -           335          -             335
    compensation
    expense
    (Note 11 (b)
    and (c))

    Normal             (9)    (11)            -        (59)            (70)
    Course
    Issuer Bid
    (Note 11
    (d))

    Stock              11      71           (71)         -               -
    options
    exercised
    (Note 11
    (b))

    Share Units        14     334          (334)         -               -
    exercised
    (Note 11
    (c))

    Net earnings        -       -             -      7,940           7,940 

    Balance -      17,456  22,930        20,459    129,915         173,304
    March 31,
    2012

    See accompanying notes to these condensed interim consolidated
    financial statements

    CE Franklin Ltd.

    CONDENSED INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE
    INCOME - UNAUDITED

                                                         Three Months Ended

                                                         March 31  March 31

    (in thousands of Canadian dollars)                      2012      2011 

    Revenue                                              160,253   137,701 

    Cost of sales                                        130,901   115,424 

    Gross profit                                          29,352    22,277 

    Other expenses                                                         

         Selling, general and  administrative expenses    17,771    16,980
    (Note 14)

         Depreciation                                        579       602 

                                                          18,350    17,582 

    Operating profit                                      11,002     4,695 

         Foreign exchange loss and other                     320        10 

         Interest expense                                     34        94 

    Earnings before tax                                   10,648     4,591 

    Income tax expense (recovery) (Note 6)                                 

         Current                                           2,480     1,360 

         Deferred                                            228      (144)

                                                           2,708     1,216 

    Net earnings and comprehensive income                  7,940     3,375 

    Net earnings per share (Note 12)                                       

         Basic                                              0.46      0.19 

         Diluted                                            0.44      0.19 

    Weighted average number of share outstanding ('000s)                   

         Basic                                            17,443    17,488 

         Diluted (Note 12)                                18,149    18,052 

    See accompanying notes to these condensed interim consolidated
    financial statements

    CE Franklin Ltd.

    CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

                                                        Three months ended

                                                        March 31  March 31

    (in thousands of Canadian dollars)                  2012         2011 

    Cash flows from operating activities                          

      Net earnings for the period                         7,940     3,375 

      Items not affecting cash:                                           

        Depreciation                                        579       602 

        Deferred income tax expense (recovery)              228      (144)

        Stock based compensation expense                    385       466 

        Foreign exchange and other                          534        90 

                                                          9,666     4,389 

    Net change in non-cash working capital balances               

    related to operations:                                        

      Accounts receivable                                (5,714)     (678)

      Inventories                                        (1,461)   (5,853)

      Other current assets                               (1,006)      (79)

      Accounts payable and accrued liabilities          (13,790)   12,208 

      Current taxes payable                                 416       101 

                                                        (11,889)   10,088 

    Cash flows used in investing activities                       

      Net purchase of property and equipment               (252)     (492)

                                                           (252)     (492)

    Cash flows used in financing activities                       

      Decrease in bank operating loan                         -    (6,140)

      Purchase of capital stock through normal course       (70)      (23)
      issuer bid

      Purchase of capital stock in trust for Share Unit       -      (219)
      Plans

                                                            (70)   (6,382)

    Change in cash and cash equivalents during the      (12,211)    3,214
    period

    Cash and cash equivalents at the beginning of the    15,830         -
    period

    Cash and cash equivalents at the end of the period    3,619     3,214 

    Cash paid during the period for:                              

      Interest                                               34        94 

      Income taxes                                        2,158     1,260 

    See accompanying notes to these condensed interim consolidated
    financial statements

CE Franklin Ltd.

Notes to Condensed Interim Consolidated Financial Statements – Unaudited

(Tabular amounts in thousands of Canadian dollars, except share and per
share amounts)

1. General information

CE Franklin Ltd. (the “Company”) is headquartered and domiciled in
Calgary, Alberta, Canada. The Company is an indirect subsidiary of
Schlumberger Limited, a global energy services company. The address of
the Company’s registered office is 1800, 635 8(th) Ave SW, Calgary, Alberta, Canada and it is incorporated under the
Alberta Business Corporations Act. The Company is a distributor of
pipe, valves, flanges, fittings, production equipment, tubular products
and other general industrial supplies primarily to the oil and gas
industry through its 39 branches situated in towns and cities that
serve oil and gas fields of the Western Canadian sedimentary basin. In
addition, the Company distributes similar products to the oil sands,
refining and petrochemical industries and non-oilfield related
industries such as forestry and mining.

2. Basis of preparation and accounting policies

Basis of preparation

These condensed interim consolidated financial statements for the three
months ended March 31, 2012 have been prepared in accordance with IAS
34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”)These condensed interim consolidated financial statements should be read
in conjunction with the annual financial statements for the year ended
December 31, 2011, which have been prepared in accordance with
International Financial Reporting Standards (“IFRS”).

Accounting policies

The accounting policies adopted are consistent with those of the
previous financial year.

3. Cash and cash equivalents


                               March 31, 2012   December 31, 2011

      Cash at bank and on hand         3,619               15,830

Cash is held at a major Canadian chartered bank.

4. Accounts receivable


                                 March 31, 2012   December 31, 2011  

    Current                             53,205              46,556   

    Less than 60 days overdue           37,041              36,732   

    Greater than 60 days overdue         6,220               8,328   

    Total Trade receivables             96,466              91,616   

    Allowance for credit losses         (1,737)             (1,615)  

    Net trade receivables               94,729              90,001   

    Other receivables                    9,158               8,189   

                                       103,887              98,190   

A substantial portion of the Company’s accounts receivable balance is
with customers within the oil and gas industry and is subject to normal
industry credit risks. Concentration of credit risk in trade
receivables is limited as the Company’s customer base is large and
diversified. The Company follows a program of credit evaluations of
customers and limits the amount of credit extended when deemed
necessary.

The Company has established procedures in place to review and collect
outstanding receivables. Significant outstanding and overdue balances
are reviewed on a regular basis and resulting actions are put in place
on a timely basis. Appropriate provisions are made for debts that may
be impaired on a timely basis.

The Company maintains an allowance for possible credit losses that are
charged to selling, general and administrative expenses by performing
an analysis of specific accounts.

5. Inventories

The Company maintains net realizable value allowances against slow
moving, obsolete and damaged inventories that are charged to cost of
goods sold on the statement of earnings. These allowances are included
in the inventory value disclosed above. Movement of the allowance for
net realizable value is as follows:


                                    Three months ended          Year ended

                                         March31, 2012   December 31, 2011

    Opening balance as at January 1             4,590               5,000 

    Additions                                     478               2,495 

    Utilization through write-downs              (558)             (2,905)

    Closing balance                             4,510               4,590 

6. Taxation

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


                                                     Three Months Ended

                                                            March 31

                                                2012      %  2011      %

    Earnings before income taxes               10,648        4,591       

    Income taxes calculated at statutory rates  2,694  25.3  1,227  26.7 

    Non-deductible items                           26   0.2     18   0.4 

    Share based compensation                        5   0.1     12   0.3 

    Adjustments for filing returns and others     (17) (0.1)   (41) (0.9)

                                                2,708  25.5  1,216  26.5 

As at March 31, 2012, income taxes payable was $1.6 million (December
31, 2011 – $1.7 million payable). Income tax expense is based on
management’s best estimate of the weighted average annual income tax
rate expected for the full financial year.


      As at                      March 31, 2012   December 31, 2011  

      Assets                                                         

      Property and equipment               896                 883   

      Stock based compensation           1,044                 951
      expense

      Other                                156                 609   

                                         2,096               2,443   

      Liabilities                                                    

      Goodwill and other                  (355)               (474)  

      Net Deferred taxasset              1,741               1,969   

Deductible temporary differences are recognized to the extent that it is
probable that taxable profit will be available against which the
deductible temporary differences can be utilized.

7. Accounts payable and accrued liabilities


                                    March31, 2012   December 31, 2011  

    Current                                                            

    Trade payables                        13,269              10,919   

    Other payables                         2,235               3,834   

    Accrued compensation expenses          1,478               4,683   

    Other accrued liabilities             62,892              74,177   

                                          79,874              93,613   

8. Note payable


                      March 31,2012   December 31, 2011  

    JEN Supply debt            290                 290   

In July of 2011, the Company renewed its $60.0 million revolving term
credit facility that matures in July 2014.  Borrowings under the credit
facility bear interest based on floating interest rates and are secured
by a general security agreement covering all assets of the Company. The
maximum amount available under the credit facility is subject to a
borrowing base formula applied to accounts receivable and inventories.
The credit facility requires that the Company maintains the ratio of
its debt to debt plus equity at less than 40%. As at March 31, 2012,
this ratio was nil (December 31, 2011 – nil). The Company must also
maintain coverage of its net operating cash flow as defined in the
credit facility agreement, over interest expense for the trailing
twelve month period, at greater than 1.25 times. As at March 31, 2012,
this ratio was 51.3 times (December 31, 2011 – 34.5 times).  The credit
facility contains certain other covenants, with which the Company is in
compliance and has been for the comparative periods. As at March 31,
2012, the Company had borrowed nil and had available undrawn borrowing
capacity of $60.0 million under the credit facility. In management’s
opinion, the Company’s available borrowing capacity under its Credit
Facility and ongoing cash flow from operations, are sufficient to
resource its ongoing obligations.

The JEN Supply note payable is unsecured and bears interest at the
floating Canadian bank prime rate and is repayable in November 2012.

9. Capital management

The Company’s primary source of capital is its shareholders’ equity and
cash flow from operating activities before net changes in non-cash
working capital balances. The Company augments these capital sources
with a $60 million, revolving bank term loan facility maturing in July
2014 (see Note 8) which is used to finance its net working capital and
general corporate requirements. The Company’s objective is to maintain adequate capital resources to
sustain current operations including meeting seasonal demands of the
business and the economic cycle.  The Company’s capital is summarised
as follows:


                         March 31, 2012   December 31, 2011

    Shareholders' equity       173,466             165,099 

    Net working capital        137,816              116,850

Net working capital is defined as current assets less cash and cash
equivalents, accounts payable and accrued liabilities, current taxes
payable, note payable and other current liabilities.

10. Related party transactions

Schlumberger indirectly owns approximately 56% of the Company’s
outstanding shares. The Company is the exclusive distributor in Canada
of downhole pump production equipment manufactured by Wilson Supply, a
division of Schlumberger. Purchases of such equipment conducted in the
normal course on commercial terms were as follows:


    For the three months ended March 31         2012     2011   

    Cost of sales for the three months ended   3,761    2,285   

    Inventory                                  5,971    4,443   

    Accounts payable and accrued liabilities   1,935    1,081   

    Accounts receivable                          203         -  

11. Capital Stock

a) The Company has authorized an unlimited number of common shares with
no par value. As at March 31, 2012, the Company had 17.5 million common
shares, 0.7 million stock options and 0.7 million share units
outstanding.

b) The Board of Directors may grant options to purchase common shares to
substantially all employees, officers and directors and to persons or
corporations who provide management or consulting services to the
Company.  The exercise period and the vesting schedule after the grant
date are not to exceed 10 years.

Option activity for each of the three month periods ended March 31 was
as follows:


    (000's)                   2012     2011   

    Outstanding - January 1    745    1,073   

    Exercised                  (11)     (51)  

    Forfeited                   (4)     (32)  

    Outstanding at March 31    730      990   

    Exercisable at March 31    730      826   

Stock based compensation expense recorded for the three month period
ended March 31, 2012 was $2,000 (2011 – $67,000) and is included in
selling, general and administrative expenses on the consolidated
statement of earnings and comprehensive income.  No options were
granted during the three month period ended March 31, 2012. Options
vest one third or one fourth per year from the date of grant.

c) Share Unit Plans

The Company has Restricted Share Unit (“RSU”), Performance Share Unit
(“PSU”) and Deferred Share Unit (“DSU”) plans (collectively the “Share
Unit Plans”), whereby RSUs, PSUs and DSUs are granted entitling the
participant, at the Company’s option, to receive either a common share
or cash equivalent in exchange for a vested unit. For the PSU plan the
number of units granted is dependent on the Company meeting certain
return on net asset (“RONA”) performance thresholds during the year of
grant. The multiplier within the plan ranges from 0% – 200% dependent
on performance. RSU and PSU grants vest one third per year over the
three year period following the date of the grant. DSUs vest on the
date of grant and can only be redeemed when the Director resigns from
the Board.  Compensation expense related to the units granted is
recognized over the vesting period based on the fair value of the units
at the date of the grant and is recorded to contributed surplus.  The
contributed surplus balance is reduced as the vested units are
exchanged for either common shares or cash. During the three month
period ended March 31, 2012 the fair value of the RSU, PSU and DSU
units granted was $1,660,000 (2011 – $1,830,000) and $383,000 of
compensation expense was recorded (2011 – $358,000).


    Share Unit Plan activity for the periods ended March 31, 2012, and
    December 31, 2011 was as follows:

    (000's)                      March 31, 2012       December 31, 2011

                                Number of Units        Number of Units

                              RSU  PSU  DSU Total    RSU  PSU  DSU Total

    Outstanding at January 1 307  162  102   571    273   97   80   450 

    Granted                   88   86     -  174    130  117   22   269 

    Performance adjustments     -    -    -     -      -   4     -    4 

    Exercised                (11)  (3)    -  (14)   (34) (12)    -  (46)

    Forfeited                 (1)    -    -   (1)   (62) (44)    - (106)

    Outstanding at end of    383  245  102   730    307  162  102   571
    period

    Exercisable at end of    184   81  102   367     93   33  102   228
    period

The Company has established an independent trust to purchase common
shares of the Company on the open-market to satisfy Share Unit Plan
obligations. The Company’s intention is to settle all share based
obligations with shares delivered from the trust. The trust is
considered to be a special interest entity and is consolidated in the
Company’s financial statements with the cost of the shares held in
trust reported as a reduction to capital stock.  For the three month
period ended March 31, 2012, nil common shares were purchased by the
trust (2011 – 25,000 common shares at an average cost of $8.75 per
share).  As at March 31, 2012, the trust held 566,277 shares (2011 -
462,753).

d) Normal Course Issuer Bid (“NCIB”)

On December 20, 2011, the Company announced the renewal of the NCIB
effective January 3, 2012, to purchase up to 850,000 common shares
through the facilities of NASDAQ, representing approximately 5% of its
outstanding common shares.  During the three month period ended March
31, 2012, the Company purchased 8,625 shares at an average cost of
$8.11 (2011: 3,102 shares purchased at an average cost of $7.56).

Subsequent to the quarter end, the Company has cancelled its NCIB
program.  At the time the program was cancelled, the Company had
acquired 9,225 shares at an average cost of $8.59 per share.

12. Earnings per share

Basic

Basic earnings per share is calculated by dividing the net income
attributable to shareholders by the weighted average number of ordinary
shares in issue during the year.

Dilutive

Diluted earnings per share are calculated using the treasury stock
method, as if RSUs, PSUs, DSUs and stock options were exercised at the
beginning of the year and funds received were used to purchase the
Company’s common shares on the open market at the average price for the
year.


                                                     Three Months Ended  

                                                            March 31     

                                                       2012       2011   

    Net earnings and comprehensive income             7,940      3,375   

    Weighted average number of common shares issued  17,443     17,488
    (000's)

    Adjustments for:                                                     

    Stock options                                       291        255   

    Share Units                                         415        309   

    Weighted average number of ordinary shares for   18,149     18,052
    dilutive

    Net earnings per share: Basic                      0.46       0.19   

    Net earnings per share: Diluted                    0.44       0.19   

13. Financial instruments

a) Fair values

The Company’s financial instruments recognized on the consolidated
statements of financial position consist of accounts receivable,
accounts payable and accrued liabilities and note payable. The fair
values of these financial instruments approximate their carrying
amounts due to their short-term maturity.

b) Credit Risk is described in Note 4.

c) Market Risk and Risk Management

The Company’s long term debt bears interest based on floating interest
rates. As a result the Company is exposed to market risk from changes
in the Canadian prime interest rate which can impact its borrowing
costs. Based on the Company’s borrowing levels as at March 31, 2012, a
change of one percent in interest rates would decrease or increase the
Company’s annual net income by nil.

From time to time the Company enters into foreign exchange forward
contracts to manage its foreign exchange market risk by fixing the
value of its liabilities and future commitments. The Company is exposed
to possible losses in the event of non-performance by counterparties.
The Company manages this credit risk by entering into agreements with
counterparties that are substantially all investment grade financial
institutions. The Company’s foreign exchange risk arises principally
from the settlement of United States dollar dominated net working
capital balances as a result of product purchases denominated in United
States dollars. As at March 31, 2012, the Company had contracted to
purchase US$11.6 million at fixed exchange rates with terms not
exceeding two months (December 31, 2011 – $18.3 million). The fair
market values of the contracts were a loss of $0.3 million at March 31,
2012 (a gain of $0.2 million at December 31, 2011). The Company
recorded on these contracts an unrealized loss of $0.3 million for the
three months ended March 31, 2012, which has been recorded in foreign
exchange loss and other in the condensed interim consolidated
statements of earnings and comprehensive income.  As at March 31, 2012,
a one percent change in the Canadian dollar relative to the US dollar
would decrease or increase the Company’s annual net income by $0.1
million.

14. Selling, general and administrative (“SG&A”) Costs

Selling, general and administrative costs for the three month period
ended March 31 are as follows:


                                   Three months ended    

                                   2012         2011     

                                  $     %      $     %   

    Salaries and Benefits     10,960   61% 10,291   61%  

    Selling Costs              1,910   11%  1,472    9%  

    Facility and office costs  3,476   20%  3,712   22%  

    Other                      1,425    8%  1,505    8%  

    SG&A costs                17,771  100% 16,980  100%  

15. Segmented reporting

The Company distributes oilfield products principally through its
network of 39 branches located in western Canada primarily to oil and
gas industry customers.  Accordingly, the Company has determined that
it operates through a single operating segment and geographic
jurisdiction.

16. Seasonality

The Company’s sales levels are affected by weather conditions. As warm
weather returns in the spring each year, the winter’s frost comes out
of the ground rendering many secondary roads incapable of supporting
the weight of heavy equipment until they have dried out. In addition,
many exploration and production areas in northern Canada are accessible
only in the winter months when the ground is frozen. As a result, the
first and fourth quarters typically represent the busiest time for oil
and gas industry activity and the highest sales activity for the
Company. Revenue levels drop dramatically during the second quarter
until such time as roads have dried and road bans have been lifted.
This typically results in a significant reduction in earnings during
the second quarter, as the decline in revenues typically outpaces the
decline in SG&A costs as the majority of the Company’s SG&A costs are
fixed in nature. Net working capital (defined as current assets less
cash and cash equivalents, accounts payable and accrued liabilities,
income taxes payable and other current liabilities) and bank revolving
loan borrowing levels follow similar seasonal patterns as revenues.

17. Subsequent events

Subsequent to March 31, 2012, the Company announced that the Board of
Directors and the Special Committee of the Board of Directors have
decided it is in the best interest of CE Franklin and all shareholders
to formally commence a strategic review process.  Further to the
announcement of a Strategic Review Process, the Company adopted a
Shareholders’ Rights Plan to ensure that, in the context of a bid for
control of CE Franklin, the Board of Directors would have sufficient
time to consider the bid and conduct the Strategic Review Process. 
Additionally, the Shareholders’ Rights Plan gives shareholders an equal
opportunity to participate in such a bid; and gives them adequate time
to properly assess the bid.  The Shareholders’ Rights Plan is not
intended to and will not prevent a sale of CE Franklin.

SOURCE CE Franklin Ltd.


Source: PR Newswire