Pason Reports Second Quarter 2012 Results

CALGARY, Aug. 3, 2012 /CNW/ - Pason Systems Inc. (TSX: PSI) announced today its 2012 second quarter results.

Performance Data

		Three Months Ended June 30,			Six Months Ended June 30,
		2012	2011	Change	2012	2011	Change
(CDN 000s, except per share data)		($)	($)	(%)	($)	($)	(%)
Revenue		81,052	62,420	30	192,707	147,165	31
EBITDA (1)		31,656	25,850	22	95,802	70,579	36
	As a % of revenue	39.1	41.4	(6)	49.7	48.0	4
	Per share - basic	0.39	0.31	26	1.17	0.86	36
	Per share - diluted	0.38	0.30	27	1.16	0.85	36
Funds flow from operations (1)		30,132	22,917	31	81,839	61,999	32
	Per share - basic	0.37	0.28	32	1.00	0.76	32
	Per share - diluted	0.37	0.27	37	0.99	0.75	32
Earnings		8,472	8,217	3	37,945	25,974	46
	Per share - basic	0.10	0.10	--	0.46	0.32	44
	Per share - diluted	0.10	0.09	11	0.46	0.31	48
Capital expenditures		19,712	15,141	30	39,195	36,434	8
Working capital		153,872	116,032	33	153,872	116,032	33
Total assets		485,166	405,437	20	485,166	405,437	20
Total long-term debt		--	--	--	--	--	--
Shareholders' equity		392,802	322,082	22	392,802	322,082	22
Market capitalization		1,219,758	1,190,724	2	1,219,758	1,190,724	2
Common shares outstanding (#)
	Basic	81,943	81,877	--	81,924	81,808	--
	Diluted	82,590	82,699	--	82,492	82,573	--
Shares outstanding end of period (#)		81,973	81,893	--	81,973	81,893	--

(1)	EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation expense, and depreciation and amortization expense.
	Funds flow from operations is defined as earnings adjusted for depreciation and amortization expense, impairment losses, stock-based compensation expense, deferred income taxes and other non-cash items impacting operations as presented in the Condensed Consolidated Interim Statements of Cash Flows.
	These definitions are not recognized measures under International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies.

President's Message

Despite declining oil prices and continued low natural gas prices, drilling activity in the United States and Canada in the second quarter of 2012 was 6% higher than in the second quarter 2011 with 188,291 industry days and a combined rig count of 2,069, compared to 177,791 industry days and1,954 rigs the previous year.

This development, combined with strong operational performance for Pason, led to solid second quarter results. The second quarter is usually the weakest, due in most part to the seasonality of Canadian drilling activity. Overall, revenue increased by 30%, while EBITDA increased by 22%, and funds flow from operations was up 31%. Net earnings were $8.5 million or $0.10 per share compared to $8.2 million or $0.10 per share in the second quarter of 2011. Net earnings were flat because we recorded an additional charge of $5.4 million relating to the US AutoDriller lawsuit. Year to date, net earnings are $37.9 million or $0.46 per share compared to $26.0 million or $0.32 per share in the first six months in 2011, an increase of 46%.

As in the first quarter, all product categories generated revenue growth rates above drilling industry activity with Software and the Gas Analyzer/Total Gas System (TGAS) categories showing the highest year-over-year growth rates with 103% and 58% respectively.

The software category includes revenue generated through DataHub updates with live data (enhanced Live Rig View), specialized software (e.g., Directional System, WellView) and data delivery (WITSML Service) products. 86% of US customers using the Pason DataHub and 98% of Canadian customers are currently subscribing to live data. This compares to 68% and 96% the previous year.

Growth in the Gas Analyzer/Total Gas System category is driven by the deployment of the new Pason Gas Analyzer that started in North America toward the end of last year and continued throughout the first six months of 2012. The Pason Gas Analyzer is a step-change in gas detector reliability and gas analysis capability. It provides on-demand real-time compositional analysis of hydrocarbons and CO₂. Market reception for the new system continues to be very positive.

EBITDA as a percentage of revenue was 39% in the second quarter compared to 41% in the second quarter of the previous year. The EBITDA margin was impacted by an additional charge relating to the AutoDriller lawsuit in the United States, as well as to higher R&D costs to support new product development. EBITDA, as a percentage of revenue, increased from 48% to 50% for the first six months of the year.

During the quarter, a judgment was issued in the US patent infringement lawsuit regarding the Pason AutoDriller, which has been ongoing since 2003. The Company's inequitable conduct claims were dismissed and a prior jury award entered in 2008 was upheld. The plaintiff was awarded post-verdict damages resulting in a total award of USD$19.6 million. The plaintiff`s claim for treble damages and injunctive relief was denied. Following the jury verdict in 2008, Pason accrued USD$14.3 million and increased this accrual by USD$5.3 million in the current quarter to reflect the updated amount. Pason contends that the AutoDriller does not infringe the patent at issue and intends to renew its appeal of the judgment. The Company's AutoDriller no longer utilizes the same technology as its predecessor that was under scrutiny in this case. The results of this decision will have no impact on the Company`s operations.

United States

Drilling activity in the United States continued its slow downward trend. Industry days were down 1% in the second quarter of 2012 compared to the first quarter of 2012, while revenue for our largest business unit was up 2%.

Year-over-year, United States drilling industry days increased 7%, while our US business was able to grow second quarter revenue 37% to $57.8 million. On average, 1,079 US land rigs were operating Pason equipment during the second quarter of 2012 compared to 1,032 in 2011. Revenue growth above industry day growth was achieved with higher product penetration and a price increase at the beginning of 2012. This resulted in a 19% increase of average daily revenue generated on each rig with a Pason product installed to US$546 in 2012 from US$460 in 2011. Software, Gas Analyzer/Total Gas System, and the Gas Alarm achieved above-average revenue growth.

Our calculated US market share for the second quarter of 2012 was 57%, unchanged from the previous quarter and down 1% from 2011. Operating costs increased 33% and depreciation and amortization increased by 57%. Higher operating costs were driven by an increase in field technician-related costs, as we kept pace with rapid rig movements away from dry gas plays to oil plays and continued strengthening our US sales and marketing capabilities. Higher depreciation charges are driven by the accelerated depreciation of our TGAS and EDR  systems.

As a result, our US business unit was able to generate an operating profit of $26.9 million in the second quarter, an increase of 36% from 2011 levels. EBITDA as a percentage of revenue of the business unit was 61% in 2012 compared to 60% in 2011.

Despite concerns regarding a continuing downward trend in US drilling activity, we remain positive about the outlook for our US business. With strengthened sales and marketing, ongoing emphasis on outstanding field service capabilities, continuous improvements to existing products, and new product introductions, we expect to maintain our trajectory of growing revenue per rig while growing market share.

Canada

An early spring break-up compared to the previous year, combined with sustained wet conditions across much of Western Canada, led to a 7% decrease in industry drilling days in the second quarter compared to the previous year. However, our Canadian business unit was able to grow revenue for the period by 7% to $13.8 million.

On average, 149 Canadian land rigs were operating Pason equipment compared to 169 the year before. Market share was 90% compared to 94% the previous year. Revenue growth above industry day growth was achieved with a price increase in October 2011 and better product penetration. The average daily revenue generated on each rig with a Pason product installed grew to $996 in the second quarter of 2012 from $822 in 2011.

The Electronic Drilling Recorder (especially Workstations and SideKicks recorded in this category), Software and the Gas Analyzer/Total Gas System showed above average growth rates during the period.

Operating costs decreased by 15% and depreciation and amortization decreased by 5%. As a result, our Canadian business unit was able to generate an operating profit of $1.1 million for the quarter, compared to a loss of $1.3 million for the same period in 2011. EBITDA as a percentage of revenue of the business unit was 54% in 2012 compared to 42% in 2011.

As drilling activity picks up going into the third quarter, we expect to get back to a market share in the mid-nineties while continuing to grow the average daily revenue generated on each rig with a Pason product installed.

International

Our International business unit, which includes our businesses in Latin America, Australia and Pason Offshore, had an excellent second quarter. Revenue increased 26% in the period and 25% on a year to date basis to $9.4 million and $18.1 million respectively. This represents 12% of Pason's total revenue for the period. We realized gains in all major international markets with notable gains in Argentina, Brazil, Australia, and Mexico, as well as for offshore rentals.

Operating costs were up 32% and depreciation and amortization were down 3%. As a result, the International business unit was able to generate an operating profit of $1.6 million, up 64% from the previous year.

With the integration issues behind us, the international business unit is realizing accelerated growth and improved profitability.

Outlook

Volatile oil prices and continued low natural gas prices in North America are negatively affecting E&P operator cash flows and capital budgets. Overall, we expect to see a further slow decline in North American drilling activity. However, certain regions are expected to grow. For example, the Permian and Bakken basins are expected to demonstrate significant growth and we believe that Pason is well positioned to capture these growth opportunities.

We have reduced our capital expenditure budget for the next 12 months to $82.7 million. This reflects the industry outlook, as well as the slow progress with the Torque and Tension Sub in the current environment. We are directing $49.7 million towards equipment that can generate incremental revenue or save operating costs, $21.0 million for maintenance capital, and $12.0 million for capitalized R&D. The amount earmarked for growth includes capital for new components for the EDR system and the new Pason Gas Analyzer. We expect the new Pason Gas Analyzer to completely replace the existing Total Gas System before the end of 2012, while gaining market share and generating higher revenue per unit.

Our cash generating capacity and our cash position at $120.6 million (which excludes the amount reserved for our semi-annual dividend payment) are strong enough to comfortably cover new business development, planned equipment upgrades, and our semi-annual dividend.

As the industry leader in field services, with outstanding technical support, a competitive product suite, and a promising R&D project pipeline, Pason is well positioned to get through a period of lower North American drilling activity and to capitalize on growth opportunities in North America and internationally.

Signed

Marcel Kessler
President and Chief Executive Officer
August 2, 2012

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of August 2, 2012 and is a review of the financial condition and results of operations of Pason Systems Inc. (Pason or the Company) based on International Financial Reporting Standards (IFRS) and should be read in conjunction with the condensed consolidated interim financial statements and accompanying notes.

Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.

All financial measures presented in this quarterly report are expressed in Canadian dollars unless otherwise indicated.

Overview of the 2012 Second Quarter

			Three Months Ended June 30,						Six Months Ended June 30,
			2012		2011		2010		2012		2011		2010
(000s, except per share data)			($)		($)		($)		($)		($)		($)
Revenue			81,052		62,420		51,031		192,707		147,165		107,415
EBITDA (1)			31,656		25,850		21,512		95,802		70,579		46,902
	As a % of revenue		39.1		41.4		42.2		49.7		48.0		43.7
	Per share - basic		0.39		0.31		0.26		1.17		0.86		0.58
	Per share - diluted		0.38		0.30		0.26		1.16		0.85		0.58
Funds flow from operations(1)			30,132		22,917		18,764		81,839		61,999		39,218
	Per share - basic		0.37		0.28		0.23		1.00		0.76		0.48
	Per share - diluted		0.37		0.27		0.23		0.99		0.75		0.48
Earnings			8,472		8,217		6,156		37,945		25,974		14,047
	Per share - basic		0.10		0.10		0.08		0.46		0.32		0.17
	Per share - diluted		0.10		0.09		0.08		0.46		0.31		0.17
Total assets			485,166		405,437		368,866		485,166		405,437		368,866
Total long-term debt			--		--		--		--		--		--

(1)	EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation expense, and depreciation and amortization expense.
	Funds flow from operations is defined as earnings adjusted for depreciation and amortization expense, impairment losses, stock-based compensation expense, deferred income taxes and other non-cash items impacting operations as presented in the Condensed Consolidated Interim Statements of Cash Flows.
	These definitions are not recognized measures under International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies.

Overall Performance

			Three Months Ended June 30,						Six Months Ended June 30,
			2012		2011		Change		2012		2011		Change
(000s)			($)		($)		(%)		($)		($)		(%)
Revenue
	Electronic Drilling Recorder		32,202		25,987		24		75,864		59,418		28
	Pit Volume Totalizer		12,551		11,042		14		30,497		26,414		15
	Communications(1)		5,669		5,070		12		16,049		13,372		20
	Software (1)		5,384		2,653		103		12,457		6,373		95
	Automatic Driller		8,603		7,326		17		21,054		17,394		21
	Gas Analyzer/Total Gas System		5,654		3,589		58		13,289		8,913		49
	Hazardous Gas Alarm System		1,618		991		63		3,632		2,467		47
	Mobilization		3,004		2,386		26		5,987		4,590		30
	Other		6,367		3,376		89		13,878		8,224		69
Total revenue			81,052		62,420		30		192,707		147,165		31

(1)	2011 revenue associated with the Company's software applications has been reclassified from Communications to Software.

				Canada
				Three Months Ended June 30,				Six Months Ended June 30,
				2012	2011	Change		2012	2011	Change
						(%)				(%)
EDR rental days (#)				13,600	15,400	(12)		59,900	61,500	(3)
PVT rental days (#)				13,100	14,800	(11)		59,000	59,900	(2)

				United States
				Three Months Ended June 30,				Six Months Ended June 30,
				2012	2011	Change		2012	2011	Change
						(%)				(%)
EDR rental days (#)				98,200	93,900	5		199,000	183,000	9
PVT rental days (#)				69,200	63,700	9		138,900	125,800	10

Electronic Drilling Recorder

Consistent with prior years, the Pason Electronic Drilling Recorder (EDR) remains the Company's prime product. The EDR provides a complete system of drilling data acquisition, data networking, and drilling management tools and reports at both the rigsite and customer offices. The EDR is the base product from which all other rigsite instrumentation products are linked. By linking these products, a number of otherwise redundant elements such as data processing, display, storage, and networking are eliminated. This ensures greater reliability and a more robust system of instrumentation for the customer. The EDR generated a 24% increase in revenue for the second quarter of 2012 compared to the same period in 2011 and a 28% increase for the first six months of 2012 versus the 2011 comparative. These increases are due to increased rig activity in the Company's United States (US) and International markets, price increases in both Canada and the US, and expanding demand by customers for EDR peripheral devices in all of its markets.

During the first six months of 2012, the Pason EDR was installed on 95% of all active land rigs in Canada and 57% of the land rigs in the US, and is consistent with the prior year percentages.

Pit Volume Totalizer

The Pit Volume Totalizer (PVT) is Pason's proprietary solution for the detection and early warning of "kicks" that are caused by hydrocarbons entering the wellbore under high-pressure and expanding as they migrate to the surface. Revenue increases for this product were as a result of a combination of increased product penetration in both Canada and the US, an increase in US drilling days year over year, and Canadian price increases. During the first half of 2012, the PVT was installed on 99% of rigs with a Pason EDR in Canada and 70% in the US, compared to 98% and 69%, respectively, in 2011.

Communications

Pason's communications rental revenue is derived from the Company's automatic aiming satellite system. This system provides high-speed wellsite communications for email and web application management tools. Pason displays all data in standard forms on its DataHub web application, although if customers require greater analysis or desire to have the information transferred to another supplier's database, data is available for export from the Pason DataHub using WITSML (a specification for transferring data amongst oilfield service companies, drilling contractors, and operators). The Company continues to complement its satellite equipment with High Speed Packet Access (HSPA), a high-speed wireless ground system that requires lower capital cost, less service, and lower cost per Internet kilobyte, benefiting company margins. In Canada, HSPA has been installed on all rigs, and the majority of the rigs running will benefit from the investment in HSPA given the growth in cellular coverage. In the US, field coverage tests for HSPA are continuing.

Software

DataHub is the Company's data management system that collects, stores, and displays drilling data, reports, and real-time information from drilling operations. DataHub provides access to data through a number of innovative applications or services including:

• Enhanced Live Rig View, which provides advanced data viewing, directional drilling, and 3D visualization of drilling data in real-time via a web browser.
  
  
• Mobile Viewer and Pason Mobile, which allows users to access their data on mobile devices including iPhone, iPad, and BlackBerry.
  
  
• WITSML, which provides seamless data sharing with third party applications enhancing the value of data hosted by Pason.
  
  
• Additional specialized software.

During the first two quarters of 2012, 98% of the Company's Canadian customers were using all or a portion of the functionality of the DataHub and 86% of customers in the US, compared to 96% and 68%, respectively, in 2011. The 2012 revenue generated from customers using the applications included with the DataHub rose 95% over the first six months of 2011.

Gas Analyzer and Total Gas System

The Pason Gas Analyzer, which has replaced the Total Gas System (TGAS) in the Company's major markets, measures the total hydrocarbon gases (C1 through C4¹) exiting the wellbore, and then calculates the lag time to show the formation depth where the gases were produced. The new Gas Analyzer increases the functionality that was found in the TGAS product to include the actual composition of the gas, much like a gas chromatograph, and further calculates geologic ratios from the gas composition to assist in indicating the type of gas, natural gas liquid, or oil in the formation. For the first six months of 2012, the Gas Analyzer generated $9.2 million of revenue compared to $4.1 million for TGAS. The Company has almost completed this switch-out in both Canada and the US and is realizing increased product penetration for the Gas Analyzer as compared to TGAS in both markets. For the first six months of 2012 both of these systems combined were installed on 48% of Canadian and 18% of US land rigs operating with a Pason EDR system. The combined market penetration of both products in Canada is an increase of approximately 8% over 2011 levels while the US has seen an increase of 2%.

Automatic Driller

Pason's Automatic Driller (AutoDriller) is used to maintain constant weight on the drill bit while a well is being drilled. During the first six months of 2012, Pason's AutoDriller was installed on 77% of Canadian and 50% of US land rigs operating with a Pason EDR system, compared to 75% and 45%, respectively, in 2011.

Hazardous Gas Alarm System

Pason's Hazardous Gas Alarm System (HGAS) monitors both lower explosive limit gases (LEL) and H₂S where both readings and an alarm system are integrated with the EDR. The Hazardous Gas Alarm System was installed on 21% of Canadian rigs in the first six months of 2012, up from 18% for the same period in 2011, and 8% of US land rigs operating with a Pason EDR system, an increase from 5% in 2011.

---

¹C4 also includes nC5

Discussion of Operations

United States Operations

			Three Months Ended June 30,						Six Months Ended June 30,
			2012		2011		Change		2012		2011		Change
(000s)			($)		($)		(%)		($)		($)		(%)
Revenue
	Electronic Drilling Recorder		23,835		19,547		22		47,640		38,700		23
	Pit Volume Totalizer		8,740		7,677		14		17,462		15,297		14
	Communications(1)		3,697		3,169		17		7,481		6,072		23
	Software (1)		4,395		1,896		132		8,357		3,485		140
	Automatic Driller		6,177		5,126		21		12,358		9,954		24
	Gas Analyzer/Total Gas System		3,159		1,858		70		5,688		3,742		52
	Hazardous Gas Alarm System		842		330		155		1,559		657		137
	Mobilization		2,303		1,674		38		4,600		3,206		43
	Other		4,635		772		500		9,061		1,497		505
Total revenue			57,783		42,049		37		114,206		82,610		38
Operating costs			22,313		16,774		33		43,375		32,338		34
Depreciation and amortization			8,580		5,449		57		16,199		10,737		51
Segment operating profit			26,890		19,826		36		54,632		39,535		38

(1)	2011 revenue associated with the Company's software applications has been reclassified from Communications to Software.

US segment revenue increased by 37% in the second quarter of 2012 over the 2011 comparable period (33% increase when measured in US dollars). Included in the second quarter 2012 figures is $2.3 million of revenue generated from the sale of sensors and other products by 3PS, Inc., the US-based company acquired in August of 2011.

For the first six months of 2012, US segment revenue increased by 38% (USD 34%), which includes $6.5 million of sales by 3PS.

Revenue from the rental of instrumentation equipment increased 29% (USD 24%) for the second quarter of 2012 from 2011 levels, which compared very favourably with US drilling industry days that were up 7% over the second quarter of 2011. On a year to date basis rental instrumentation revenue increased 30% (USD 26%) over 2011 levels, compared to an increase in industry days of 12%.

Revenue was impacted by the following factors:

• An increase in EDR rental days of 5% for the three months ended June 2012 over the same time period in 2011 and an increase of 9% on a year to date basis over 2011 levels.
  
  
• More products on each rig; new product adoption; and better pricing. Revenue was increased by additional product penetration on each rig, primarily with gains in ADR rentals, customer acceptance of the Company's Live Rig View and rig data software, and increased adoption of the Gas Analyzer compared to the previous TGAS system. In addition, prices on specific products increased at the beginning of 2012. These factors combined resulted in an increase of approximately $77 per EDR day over 2011 amounts.

The factors explained above resulted in the US segment being able to realize revenue per EDR day during the second quarter of 2012 of $556 (USD$546) compared to $444 (USD$460) during the same time period in 2011. For the first six months of 2012 revenue per EDR day was $537 (USD$534) compared to $449 (USD$460) in 2011.

Revenue per industry day for the second quarter of the year was $316 (USD$310) compared to $259 (USD$268) in 2011. Year to date figures were $307 (USD$305) compared to 2011 amounts of $264 (USD$270).

The majority of the increase in "Other" revenue relates to sales realized by 3PS, Inc.

Segment profit, as a percentage of revenue, was 47% for the second quarter of 2012 and 48% year to date, the same percent as 2011 levels.

The US business unit was able to maintain its operating margin year over year, even with a significant increase in depreciation and amortization costs, by leveraging its fixed cost structure while at the same time continuing to control variable costs. The 2012 segment profit percentage was impacted by the following factors:

• An increase in field technician related costs, to support the increase in rig activity, of $0.8 million in the second quarter (year to date $2.9 million), mostly attributable to increased staff levels and the costs associated to support such an increase.
  
  
• An increase in support costs of $0.5 million for the second quarter over 2011 amounts as the US business unit continues to strengthen its sales and marketing presence. For the first six months these costs rose $1.0 million from 2011 levels.
  
  
• An increase in depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems. The TGAS system was replaced with the Gas Analyzer, while a portion of the Company's base EDR system will become obsolete as a result of the EDR evolution project. This contributed to an increase in depreciation costs over 2011 levels of approximately $2.1 million for the second quarter and $4.0 million for the first six months. This increase was partially off-set by a reduction in repair costs associated with the new Gas Analyzer as compared to the TGAS system.
  
  
• Figures for 2012 include the results of 3PS Inc., which generates a lower margin than the US rental business.

Canadian Operations

			Three Months Ended June 30,						Six Months Ended June 30,
			2012		2011		Change		2012		2011		Change
(000s)			($)		($)		(%)		($)		($)		(%)
Revenue
	Electronic Drilling Recorder		4,656		4,066		15		21,115		16,263		30
	Pit Volume Totalizer		2,288		2,350		(3)		10,210		9,264		10
	Communications(1)		1,832		1,784		3		8,263		7,099		16
	Software (1)		864		686		26		3,885		2,743		42
	Automatic Driller		1,533		1,586		(3)		6,872		6,258		10
	Gas Analyzer/Total Gas System		1,534		1,314		17		5,777		4,495		29
	Hazardous Gas Alarm System		331		385		(14)		1,289		1,215		6
	Mobilization		104		106		(2)		306		372		(18)
	Other		702		642		9		2,635		2,299		15
Total revenue			13,844		12,919		7		60,352		50,008		21
Operating costs			6,344		7,478		(15)		15,911		18,234		(13)
Depreciation and amortization			6,430		6,750		(5)		13,473		12,290		10
Segment operating profit (loss)			1,070		(1,309)		--		30,968		19,484		59

(1)	2011 revenue associated with the Company's software applications has been reclassified from Communications to Software.

Canadian segment revenue rose 7% for the three months ended June 2012 compared to the second quarter of 2011. This increase is a significant result given a 7% decrease in the number of Canadian drilling industry days for the same period. On a year to date basis, revenue increased 21% compared to a small decline in the number of Canadian drilling days.

The improvement in revenue for both the second quarter and the first six months was due to:

• Better pricing; new product adoption; and more products on each rig. The Canadian business unit implemented a price increase on most of its key products in the fourth quarter of 2011 and this, combined with increased market penetration of the Gas Analyzer, and more products on each rig, primarily with gains in EDR peripheral devices, increased revenue. These factors combined resulted in an increase of approximately $195 per EDR day over 2011 amounts. 

The revenue improvements above were off-set by a reduction in EDR rental days of 12% for the second quarter of 2012 compared to the second quarter of 2011. On a year to date basis EDR rental days declined by approximately 3% over 2011 levels.

The factors explained above resulted in:

• An increase in revenue per EDR day during the second quarter of 2012 compared to 2011 of 21% ($174) to $996. For the first six months of 2012, revenue per EDR day increased by $194 to $994.
  
  
• Second quarter revenue per industry day of $892 in 2012 compared to $773 in 2011. On a year to date basis revenue per industry day increased 22% to $941.

The segment profit for the second quarter of 2012 of $1.1 million is an improvement over the $1.3 million loss recorded in 2011. Factors impacting the second quarter results include:

• The month of June 2012 saw unseasonably wet conditions in a large part of the WCSB  which, combined with softening commodity prices and a shortened spring break-up in 2011, resulted in a decline in rig activity compared to last year. This, together with a slight decrease in the Company's market share, resulted in 1,800 less EDR days during the second quarter of 2012 compared to 2011, resulting in lower revenue than originally anticipated.
  
  
• An increase in depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems of approximately $0.9 million, off-set by a decline in the inventory obsolescence charge, which is included in depreciation and amortization.
  
  
• A decrease in repair costs associated with the new Gas Analyzer as compared to the TGAS system.
  
  
• An increase of $1.0 million in field costs, which is mostly attributed to the expansion of our field work force. This was deemed necessary given the shifting footprint of the WCSB, anticipation of additional product adoption opportunities and an adjustment to our shift schedule.
  
  
• In 2011, $0.8 million of net expenses relating to the water treatment business were incurred. This business segment was disposed of in the third quarter of 2011.
  
  
• In the second quarter of 2011, the Canadian business unit incurred $0.4 million in costs associated with the Automatic Driller lawsuit. These costs were insignificant in the second quarter of 2012.

The segment profit, as a percent of revenue, was 51% for the first six months of 2012, compared to 39% for the 2011 time period. Factors impacting the year to date results include:

• An increase in depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems of approximately $1.8 million.
  
  
• An increase in field costs of $1.8 million, due to the change in head count noted above.
  
  
• A decrease in repair costs of $1.1 million, mostly attributable to the roll out of the new Gas Analyzer System, resulting in a drop in TGAS repairs.
  
  
• In 2011, the Canadian business unit incurred $1.8 million in legal costs associated with the Automatic Driller lawsuit.
  
  
• $1.5 million of net expenses relating to the water treatment business were recorded in the first six months of 2011.

International Operations

			Three Months Ended June 30,				Six Months Ended June 30,
			2012	2011	Change		2012	2011	Change
(000s)			($)	($)	(%)		($)	($)	(%)
Revenue
	Electronic Drilling Recorder		3,711	2,374	56		7,109	4,455	60
	Pit Volume Totalizer		1,523	1,015	50		2,825	1,853	52
	Communications(1)		140	117	20		305	201	52
	Software (1)		125	71	76		215	145	48
	Automatic Driller		893	614	45		1,824	1,182	54
	Gas Analyzer/Total Gas System		961	417	130		1,824	676	170
	Hazardous Gas Alarm System		445	276	61		784	595	32
	Mobilization		597	606	(1)		1,081	1,012	7
	Other		1,030	1,962	(48)		2,182	4,428	(51)
Total revenue			9,425	7,452	26		18,149	14,547	25
Operating costs			5,833	4,420	32		10,937	8,981	22
Depreciation and amortization			1,977	2,048	(3)		4,212	4,165	1
Segment operating profit			1,615	984	64		3,000	1,401	114

(1)	2011 revenue associated with the Company's software applications has been reclassified from Communications to Software.

Revenue in the International operations improved 26% in the second quarter of 2012 from the same period in 2011. On a year to date basis revenue has increased approximately $3.6 million or 25% over 2011 amounts. The Company realized gains in all of its major markets, with notable gains in Argentina, Brazil, Australia, and Mexico.

Operating profit increased by $0.7 million for the second quarter of 2012 and by $1.6 million on a year to date basis over 2011 results.

A number of factors influenced these results:

• Increased market share combined with price increases in Argentina contributed to significant gains in both revenue and operating profit. Year over year operating profit has increased $0.5 million.
  
  
• Triple-digit revenue growth in Brazil as a result of a 130% increase in the number of rigs deploying the Company's equipment, resulting in an increase in the year to date operating profit of $1.0 million over 2011 levels.
  
  
• An increase in drilling activity in both Mexico and Australia has led to these two segments realizing increases in operating profit from 2011 levels of $0.9 million and $1.4 million, respectively.
  
  
• The Company's International segment includes our Offshore business unit which generated a 312% increase in its rental revenue for the first six months of 2012 over the same period in 2011. These gains are as a result of the deployment of Pason hardware onto offshore drilling rigs in the Gulf of Mexico and internationally.

Q2 2012 versus Q2 2011

The active rig count in the US improved over the second quarter of 2011, while the Canadian market saw a drop in drilling days. The strong US results, combined with increased revenue and profitability in the international markets resulted in gains in all of the Company's key metrics. Revenue increased 30%, while EBITDA increased by 22% and funds flow from operations was up 31%.

Net earnings increased to $8.5 million or $0.10 per share compared to $8.2 million or $0.10 per share in the second quarter of 2011. The second quarter consolidated results, when compared to 2011 figures, were impacted by the following significant items:

• In the second quarter of 2012, the Company recorded an additional charge of $5.4 million relating to the US Automatic Driller lawsuit.
  
  
• Increase in depreciation expense of $2.7 million in 2012 compared to 2011 amounts, attributable mostly to increased capital expenditures and the accelerated depreciation on the Company's TGAS and EDR systems.
  
  
• Increase in research and developments costs in the second quarter of 2012 of $1.0 million as the Company hired additional staff to support the EDR evolution project and other product developments.
  
  
• Corporate services costs primarily relate to personnel located in the corporate headquarters that directly support the Company's field operations and perform other corporate functions. The increase in corporate operating expenses from 2011 levels is mainly due to higher expenses as a result of more resources dedicated to the Company's growth strategy.
  
  
• Stock-based compensation increased by $2.8 million compared to the second quarter of 2011 due to an increase in the Company's stock price, which impacts the pricing under the Black-Scholes pricing model. The Company's stock price declined in the corresponding period in 2011.

Q2 2012 versus Q1 2012

The Company's second quarter is usually its weakest due in most part to the seasonality of the Canadian industry. The Canadian business unit realized a profit of $1.1 million compared to a $29.9 million profit in the first quarter. The Company anticipates breaking even in this market in the second quarter of any particular year.

The U.S business unit operating profit of $26.9 million was down slightly from the profit realized in the first quarter of 2012.

The following items also impacted the comparison to the 2012 first quarter results:

• In the second quarter, the Company recorded an additional charge of $5.4 million relating to the US Automatic Driller lawsuit.
  
  
• A decrease in stock-based compensation expense of $4.0 million due to a smaller increase in the Company's stock price during the second quarter of 2012 compared to the first quarter.

Second Quarter Conference Call

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its second quarter results at 9:00 a.m. (Calgary time) on Tuesday, August 7, 2012. The conference call dial-in number is 1-888-231-8191 or 1-647-427-7450. You can access the seven-day replay by dialing 1-855-859-2056 or 416-849-0833 (password 98195316).

Pason Systems Inc. is a leading provider of instrumentation systems to land-based and offshore drilling rigs worldwide. The company's rental solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, maximize rig uptime, improve work efficiency, and minimize operating costs. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.

Additional information, including the Company's Annual Report for the year ended December 31, 2011, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Condensed Consolidated Interim Financial Statements

Condensed Consolidated Interim Balance Sheets

As at				June 30, 2012		December 31,2011
(CDN 000s) (unaudited)				($)		($)
Assets
Current
	Cash and cash equivalents			138,611		104,993
	Trade and other receivables			93,087		102,321
	Prepaid expenses			2,929		1,970
	Assets held for sale			3,352		--
	Total current assets			237,979		209,284
Non-current
	Property, plant and equipment			183,766		183,007
	Intangible assets			61,222		58,071
	Deferred tax assets			2,199		5,539
	Total non-current assets			247,187		246,617
Total assets				485,166		455,901
Liabilities and equity
Current
	Trade payables and accruals			35,244		40,668
	Litigation provision			19,986		14,543
	Income taxes payable			1,126		5,318
	Stock-based compensation liability			9,718		5,770
	Dividend payable			18,033		16,380
	Total current liabilities			84,107		82,679
Non-current
	Stock-based compensation liability			3,930		1,030
	Deferred tax liabilities			4,327		4,923
	Total non-current liabilities			8,257		5,953
Equity
	Share capital			78,442		77,613
	Employee benefits reserve			12,927		12,927
	Foreign currency translation reserve			(1,043)		(5,835)
	Retained earnings			302,476		282,564
	Total equity			392,802		367,269
Total liabilities and equity				485,166		455,901

Condensed Consolidated Interim Statements of Operations

			Three Months Ended June 30,			Six Months Ended June 30,
			2012	2011		2012	2011
(CDN 000s, except per share data) (unaudited)			($)	($)		($)	($)
Revenue
	Equipment rentals and other		81,052	62,420		192,707	147,165
Operating expenses
	Rental services		28,809	24,158		59,020	49,690
	Local administration		5,681	4,514		11,203	9,863
	Depreciation and amortization		16,987	14,247		33,884	27,192
			51,477	42,919		104,107	86,745
Operating profit			29,575	19,501		88,600	60,420
Other expenses
	Research and development		4,801	3,789		10,053	7,648
	Corporate services		3,498	2,711		7,962	5,873
	Stock-based compensation (recovery)		2,544	(230)		9,063	5,217
	Other expenses		6,607	1,398		8,667	3,512
			17,450	7,668		35,745	22,250
Income before income taxes			12,125	11,833		52,855	38,170
	Income taxes		3,653	3,616		14,910	12,196
Net income			8,472	8,217		37,945	25,974
Earnings per share
	Basic		0.10	0.10		0.46	0.32
	Diluted		0.10	0.09		0.46	0.31

Condensed Consolidated Interim Statements of Comprehensive Income

			Three Months Ended June 30,				Six Months Ended June 30,
			2012	2011			2012	2011
(CDN 000s) (unaudited)			($)	($)			($)	($)
Net income			8,472	8,217			37,945	25,974
Other comprehensive loss
	Foreign currency translation adjustment		6,303	2,247			4,792	(983)
Total comprehensive income			14,775	10,464			42,737	24,991

Condensed Consolidated Interim Statements of Changes in Equity

			Share Capital		Employee Benefits Reserve		Foreign Currency Translation Reserve		Retained Earnings		Total Equity
(CDN 000s) (unaudited)			($)		($)		($)		($)		($)
Balance at January 1, 2011			75,040		13,228		(6,048)		227,464		309,684
	Net Income		--		--		--		25,974		25,974
	Dividends		--		--		--		(14,741)		(14,741)
	Other comprehensive loss		--		--		(983)		--		(983)
	Exercise of stock options		2,142		--		--		--		2,142
	Options exercised that were previously expensed		307		(307)		--		--		--
	Stock-based compensation		--		6		--		--		6
Balance at June 30, 2011			77,489		12,927		(7,031)		238,697		322,082
	Net Income		--		--		--		60,249		60,249
	Dividends		--		--		--		(16,382)		(16,382)
	Other comprehensive loss		--		--		1,196		--		1,196
	Exercise of stock options		123		--		--		--		123
	Options exercised that were previously expensed		1		(1)		--		--		--
	Stock-based compensation		--		1		--		--		1
Balance at December 31,2011			77,613		12,927		(5,835)		282,564		367,269
	Net Income		--		--		--		37,945		37,945
	Dividends		--		--		--		(18,033)		(18,033)
	Other comprehensive loss		--		--		4,792		--		4,792
	Exercise of stock options		829		--		--		--		829
Balance at June 30, 2012			78,442		12,927		(1,043)		302,476		392,802

Condensed Consolidated Interim Statements of Cash Flows

			Three Months Ended June 30,			Six Months Ended June 30,
			2012	2011		2012	2011
(CDN 000s) (unaudited)			($)	($)		($)	($)
Cash flows from operating activities
	Net income		8,472	8,217		37,945	25,974
Adjustment for non-cash items:
	Depreciation and amortization		16,987	14,247		33,884	27,192
	Stock-based compensation		736	(995)		5,375	2,873
	Deferred income taxes		4,228	1,005		3,679	4,149
	Unrealized foreign exchange (gain) loss		(291)	443		956	1,811
			30,132	22,917		81,839	61,999
Movements in non-cash working capital
	Decrease in trade and other receivables		16,268	12,223		9,734	6,831
	Increase in prepaid expenses		(539)	(1,552)		(964)	(1,094)
	Increase in income taxes payable		857	1,045		9,049	5,131
	Increase in trade payables, accruals and provisions		5,244	1,336		3,326	341
	Increase in stock-based compensation liability		1,600	711		3,405	2,229
	Effects of exchange rate changes		(457)	(174)		(53)	799
			22,973	13,589		24,497	14,237
Cash generated from operating activities			53,105	36,506		106,336	76,236
	Income tax paid		(5,000)	(5,750)		(13,227)	(16,650)
Net cash from operating activities			48,105	30,756		93,109	59,586
Cash flows used in financing activities
	Proceeds from issuance of common shares		547	700		829	2,142
	Purchase of stock options		(1,685)	(838)		(2,089)	(3,081)
	Payment of dividends		--	--		(16,380)	(13,890)
Net cash used in financing activities			(1,138)	(138)		(17,640)	(14,829)
Cash flows used in investing activities
	Additions to property, plant and equipment		(16,731)	(13,246)		(33,967)	(32,613)
	Deferred development costs		(2,981)	(1,895)		(5,228)	(3,821)
	Additions to investments		(1,274)	--		(1,274)	--
	Changes in non-cash working capital		(1,235)	(66)		(2,097)	(2,153)
Net cash used in investing activities			(22,221)	(15,207)		(42,566)	(38,587)
Effect of exchange rate on cash and cash equivalents			1,490	(407)		715	(1,637)
Net increase in cash and cash equivalents			26,236	15,004		33,618	4,533
Cash and cash equivalents, beginning of period			112,375	99,929		104,993	110,400
Cash and cash equivalents, end of period			138,611	114,933		138,611	114,933

Operating Segments

The Company operates in three geographic segments: Canada, the United States, and Internationally (Latin America, Offshore, and the Eastern Hemisphere). The amounts related to each segment are as follows:

Three Months Ended June 30, 2012		Canada		United States		International		Total
		($)		($)		($)		($)
Revenue		13,844		57,783		9,425		81,052
Operating costs		6,344		22,313		5,833		34,490
Depreciation and amortization		6,430		8,580		1,977		16,987
Segment operating profit		1,070		26,890		1,615		29,575
Research and development								4,801
Corporate services								3,498
Stock-based compensation								2,544
Other expenses								6,607
Income taxes								3,653
Net income								8,472
Capital expenditures		7,085		11,011		1,616		19,712
Goodwill		--		18,862		2,600		21,462
Intangible assets		23,692		12,165		3,903		39,760
Segment assets		133,765		286,338		65,063		485,166
Segment liabilities		65,992		15,154		11,218		92,364
Three Months Ended June 30, 2011
Revenue		12,919		42,049		7,452		62,420
Operating costs		7,478		16,774		4,420		28,672
Depreciation and amortization		6,750		5,449		2,048		14,247
Segment operating (loss) profit		(1,309)		19,826		984		19,501
Research and development								3,789
Corporate services								2,711
Stock-based compensation								(230)
Other expenses								1,398
Income taxes								3,616
Net income								8,217
Capital expenditures		1,416		10,453		3,272		15,141
Goodwill		--		5,503		2,600		8,103
Intangible assets		19,147		5,288		6,353		30,788
Segment assets		149,580		190,128		65,729		405,437
Segment liabilities		54,474		18,443		10,437		83,354

Six Months Ended June 30, 2012		Canada		United States		International		Total
		($)		($)		($)		($)
Revenue		60,352		114,206		18,149		192,707
Operating costs		15,911		43,375		10,937		70,223
Depreciation and amortization		13,473		16,199		4,212		33,884
Segment operating profit		30,968		54,632		3,000		88,600
Research and development								10,053
Corporate services								7,962
Stock-based compensation								9,063
Other expenses								8,667
Income taxes								14,910
Net income								37,945
Capital expenditures		13,127		23,911		2,157		39,195
Goodwill		--		18,862		2,600		21,462
Intangible assets		23,692		12,165		3,903		39,760
Segment assets		133,765		286,338		65,063		485,166
Segment liabilities		65,992		15,154		11,218		92,364
Six Months Ended June 30, 2011
Revenue		50,008		82,610		14,547		147,165
Operating costs		18,234		32,338		8,981		59,553
Depreciation and amortization		12,290		10,737		4,165		27,192
Segment operating profit		19,484		39,535		1,401		60,420
Research and development								7,648
Corporate services								5,873
Stock-based compensation								5,217
Other expenses								3,512
Income taxes								12,196
Net income								25,974
Capital expenditures		10,200		19,892		6,342		36,434
Goodwill		--		5,503		2,600		8,103
Intangible assets		19,147		5,288		6,353		30,788
Segment assets		149,580		190,128		65,729		405,437
Segment liabilities		54,474		18,443		10,437		83,354

Pason Systems Inc.

Pason Systems Inc. is a leading provider of instrumentation systems to land-based and offshore drilling rigs worldwide. The company's rental solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, maximize rig uptime, improve work efficiency, and minimize operating costs. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.

Certain information regarding the Company contained herein may constitute forward-looking information under applicable securities law.  The words "anticipate", "expect", "believe", "may", "should", "will", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward-looking information and statements.  Forward-looking statements in this document may include statements, express or implied regarding the anticipated business prospects and financial performance of Pason; expectations or projections about future strategies and goals for growth and expansion; expected and future cash flows and revenues; and expected impact of future commitments.  These forward-looking statements are based upon various underlying factors and assumptions, including the state of the economy and the oil and gas exploration and production business, in particular; the Company's business prospects and opportunities; and estimates of the financial and operational performance of Pason.

Forward-looking information and statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking information and statements.  Risk factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of Pason to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of Pason's assets and businesses, the price of energy commodities, competitive factors in the energy industry, changes in laws and regulations affecting Pason's businesses, technological developments, and general economic conditions.

Readers are cautioned not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur.  Such forward looking statements, although considered reasonable by management as of the date hereof, may prove to be incorrect and actual results may differ materially from those anticipated.  Forward-looking statements contained in this press release are expressly qualified by this cautionary statement.

Additional information on risks and uncertainties and other factors that could affect Pason's operations or financial results are included in Pason's reports on file with the Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com or through Pason's website www.pason.com).  Furthermore, any forward looking statements contained in this news release are made as of the date of this news release, and Pason does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by securities law.

SOURCE: Pason Systems Inc.