Pason Reports Third Quarter 2012 Results

CALGARY, Nov. 6, 2012 /CNW/ - Pason Systems Inc. (TSX: PSI) announced today its 2012 third quarter results.

Performance Data

		Three Months Ended September 30,				Nine Months Ended September 30,
		2012	2011	Change		2012	2011	Change
(CDN 000s, except per share data)		($)	($)	(%)		($)	($)	(%)
Revenue		93,081	88,733	5		285,788	235,898	21
EBITDA (1)		47,665	53,162	(10)		143,467	123,741	16
	As a % of revenue	51.2	59.9	(15)		50.2	52.5	(4)
	Per share - basic	0.58	0.65	(10)		1.75	1.51	16
	Per share - diluted	0.58	0.64	(10)		1.74	1.50	16
Funds flow from operations (1)		40,831	41,270	(1)		122,670	103,269	19
	Per share - basic	0.50	0.50	--		1.50	1.26	19
	Per share - diluted	0.50	0.50	--		1.49	1.25	19
Earnings		19,342	28,547	(32)		57,287	54,521	5
	Per share - basic	0.24	0.35	(31)		0.70	0.67	4
	Per share - diluted	0.23	0.35	(34)		0.69	0.66	5
Capital expenditures		16,983	19,997	(15)		56,178	56,431	--
Working capital		169,186	126,152	34		169,186	126,152	34
Total assets		480,637	435,783	10		480,637	435,783	10
Total long-term debt		--	--	--		--	--	--
Shareholders' equity		402,551	357,964	12		402,551	357,964	12
Market capitalization		1,345,700	1,090,921	23		1,345,700	1,090,921	23
Common shares outstanding (#)
	Basic	81,985	81,900	--		81,948	81,836	--
	Diluted	82,757	82,325	--		82,500	82,487	--
Shares outstanding end of period (#)		82,005	81,901	--		82,005	81,901	--

(1)	EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation, and depreciation and amortization expense.  2011 figures have been restated to exclude the add back of impairment losses in calculating EBITDA.
	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

In both the United States and Canadian markets, drilling days and the active rig counts were lower in the third quarter of 2012 compared with the third quarter of the previous year, with the decline in Canadian activity significantly steeper than in the United States. International markets saw an activity increase.

Increased revenue in the International markets and a solid performance by our US business unit were largely offset by a revenue drop in Canada. Overall, revenue increased 5% in the third quarter of 2012 compared to the third quarter of 2011 and revenue was up 21% for the first nine months of the year. Revenue was up 15% in the third quarter compared to the second quarter driven primarily by the seasonality of Canadian drilling activity with the second quarter typically seeing the lowest activity levels.

As in the first and second quarters of this year, all product categories generated growth rates above drilling industry activity with the Software segment showing the highest year-over-year growth rates with 67%. The Software segment includes revenue generated through DataHub updates with LiveData (Enhanced Live Rig View), specialized software (e.g., the Directional System) and data delivery products (e.g., WITSML Service). 86% of US customers and 98% of Canadian customers using the Pason DataHub are currently subscribing to LiveData. This compares to 73% and 95%, respectively, for the previous year.

EBITDA dropped by 10% and funds flow from operations was down 1%. EBITDA, as a percentage of revenue, was 51% in the third quarter compared to 60% in the third quarter of the previous year, and 50% versus 53% for the first nine months of the year. Net earnings decreased to $19.3 million or $0.23 per share compared to $28.5 million or $0.35 per share in the third quarter of 2011. Third quarter net earnings, when compared to 2011 figures, were negatively impacted by a number of significant items:

A foreign exchange loss of $1.5 million compared to a foreign exchange gain of $6.3 million in the previous year quarter as the Canadian dollar strengthened against the US dollar

An increase in stock-based compensation increased by $5.1 million due to an increase in the Company's stock price

An increase in depreciation expense of $2.8 million due to the accelerated depreciation of the Company's TGAS and EDR systems

An impairment loss of $2.6 million on our US water treatment assets as we are shutting down operations of our fixed site water treatment plant in Colorado

On September 30, our cash position stood at $139.8 million and our working capital stood at $169.2 million. We are increasing our semi-annual dividend by 9% to $0.24 per share.

United States

The US segment includes our US rental business, 3PS — our Austin-based equipment manufacturer — and Auxsol, the fixed-site water treatment plant in Colorado.

Drilling activity in the United States continued its slow downward trend. Industry days were down 3% in the third quarter 2012 compared to the third quarter of 2011, while revenue for our largest business unit was up 14% to $54.6 million. On average, 1,019 US land rigs were operating Pason equipment during the third quarter of 2012 compared to 1,070 in 2011.

Revenue growth above industry day growth was achieved with higher product penetration and a price increase at the beginning of 2012 resulting in a 15% increase of average daily revenue generated on each rig from US$480 in 2011 to US$554 in 2012. Software, Gas Analyzer, and Hazardous Gas Alarm System again achieved above-average revenue growth. Our US market share for the second quarter of 2012 was 55%, compared to 57% in the previous quarter and 57% in the previous year period.

Operating costs decreased 1% and depreciation and amortization increased by 35%. Higher depreciation charges continue to be 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 $27.0 million in the third quarter, an increase of 21% over 2011. EBITDA, as a percentage of revenue of the business unit, was 65% in the third quarter of 2012 compared to 60% in 2011.

Most analysts predict that oil and gas prices will remain subdued going into 2013. The natural gas glut generated by unconventional plays will likely lead to a further reduction of gas rig counts and lower drilling activity in the United States, challenging our ability to significantly grow revenue in the short term.

Canada

Drilling activity in Canada was significantly lower in the third quarter of 2012 than in the previous year with industry days down 26%. Our Canadian business unit was able to partially offset this significant reduction in activity levels through better pricing, new product adoption, and more products on each rig.

Revenue for the third quarter was down 14% to $29.0 million. On average, 299 Canadian land rigs were operating Pason equipment compared to 423 the year before. Market share was 91% compared to 90% in the previous quarter and 96% 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 $1,040 in the second quarter of 2012 from $853 in 2011. Electronic Drilling Recorder peripherals, especially Workstations and SideKicks recorded in this category, Software, and the Gas Analyzer, showed above average growth rates during the period.

Operating costs decreased by 17% and depreciation and amortization increased by 7%. As in the United States, higher depreciation charges continue to be driven by the accelerated depreciation of our TGAS and EDR systems. As a result, our Canadian business unit was able to generate an operating profit of $14.6 million for the quarter, compared to $18.2 million for the same period in 2011. EBITDA, as a percentage of revenue of the business unit, was 75% in 2012 compared to 74% in 2011.

As drilling activity picks up going into the winter drilling season, we are working hard to increase our market share.

International

Our International business unit, which includes our businesses in Latin America, Australia, and Pason Offshore, had an excellent third quarter. Revenue increased 34% to $9.4 million. We realized gains in all major international markets with notable gains in Argentina, Brazil, Australia, and Mexico, as well as offshore rentals.

Operating costs were up 45% and depreciation and amortization were up 5%. As a result, the International business unit was able to generate an operating profit of $1.5 million, up 49% from the previous year. For the first nine months of the year, the operating profit was up 87% to $4.5 million.

Going forward, we expect the International business unit to continue to realize accelerated growth and improved profitability.

Outlook

We anticipate a further reduction in drilling industry activity in North America. However, certain regions are expected to grow. For example, the Permian and Bakken basins in the United States are expected to demonstrate growth and we believe that Pason is well positioned to capture these growth opportunities. We expect to be able to partially offset the overall reduction with modest improvements in revenue per EDR day. We also expect continued significant profitable growth from our International operations.

Our capital expenditure budget for the next 12 months is $82 million. $50 million is directed towards equipment that can generate incremental revenue or save operating costs, $17 million for maintenance capital, and $15 million for capitalized R&D.

Our cash-generating capacity, cash position at $139.8 million, and working capital position at $169.2 million are strong enough to comfortably cover new business development, planned equipment upgrades, and the dividend. The Pason Board of Directors has made the decision to adopt a quarterly dividend policy starting in 2013.

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 weather 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
November 5, 2012

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of November 5, 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 Third Quarter

		Three Months Ended September 30,				Nine Months Ended September 30,
		2012	2011	2010		2012	2011	2010
(000s, except per share data)		($)	($)	($)		($)	($)	($)
Revenue		93,081	88,733	68,653		285,788	235,898	176,068
EBITDA (1)		47,665	53,162	34,606		143,467	123,741	81,508
	As a % of revenue	51.2	59.9	50.4		50.2	52.5	46.3
	Per share - basic	0.58	0.65	0.42		1.75	1.51	1.00
	Per share - diluted	0.58	0.64	0.42		1.74	1.50	1.00
Funds flow from operations(1)		40,831	41,270	26,856		122,670	103,269	66,074
	Per share - basic	0.50	0.50	0.33		1.50	1.26	0.81
	Per share - diluted	0.50	0.50	0.33		1.49	1.25	0.81
Earnings		19,342	28,547	11,902		57,287	54,521	25,949
	Per share - basic	0.24	0.35	0.15		0.70	0.67	0.32
	Per share - diluted	0.23	0.35	0.15		0.69	0.66	0.32
Total assets		480,637	435,783	371,566		480,637	435,783	371,566
Total long-term debt		--	--	--		--	--	--

(1)	EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation, and depreciation and amortization expense.  Prior figures have been restated to exclude the add back of impairment losses in calculating EBITDA.
	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 September 30,				Nine Months Ended September 30,
		2012	2011	Change		2012	2011	Change
(000s)		($)	($)	(%)		($)	($)	(%)
Revenue
	Electronic Drilling Recorder	36,852	35,438	4		112,716	94,856	19
	Pit Volume Totalizer	14,623	15,289	(4)		45,120	41,703	8
	Communications(1)	7,357	8,324	(12)		23,406	21,696	8
	Software (1)	6,271	3,763	67		18,728	10,136	85
	Automatic Driller	9,935	10,481	(5)		30,989	27,875	11
	Gas Analyzer/Total Gas System	7,117	5,980	19		20,406	14,893	37
	Hazardous Gas Alarm System	1,781	1,301	37		5,413	3,768	44
	Mobilization	3,180	2,452	30		9,167	7,042	30
	Other	5,965	5,705	5		19,843	13,929	42
Total revenue		93,081	88,733	5		285,788	235,898	21

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

	Canada
	Three Months Ended September 30,				Nine Months Ended September 30,
	2012	2011	Change		2012	2011	Change
			(%)				(%)
EDR rental days (#)	27,600	38,900	(29)		87,500	100,400	(13)
PVT rental days (#)	27,200	37,600	(28)		86,200	97,500	(12)

		United States
		Three Months Ended September 30,				Nine Months Ended September 30,
		2012	2011	Change		2012	2011	Change
				(%)				(%)
EDR rental days (#)		93,700	98,500	(5)		292,700	281,500	4
PVT rental days (#)		66,800	68,300	(2)		205,700	194,100	6

Electronic Drilling Recorder

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 wellsite and customer offices. The EDR is the base product from which all other wellsite 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 4% increase in revenue for the third quarter of 2012 compared to the same period in 2011 and a 19% increase for the first nine months of 2012 versus the 2011 comparative. The increase in the third quarter is due to previous price increases and an increase in rig activity in the Company's International markets reduced by a decrease in rig activity in both the United States (US) and Canadian markets. The year to date increase is due in most part to an increase in US and International drilling activity and the aforementioned price increases offset by a reduction in Canadian rig count. The Company continues to realize increased demand by customers for EDR peripheral devices in all of its markets.

During the first nine months of 2012, the Pason EDR was installed on 94% of all active land rigs in Canada and 57% of the land rigs in the US.

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. PVT revenue for both the quarter and year to date were impacted by an increase in product penetration in all of the Company's markets as well as changes to rig activity and price increases previously described above under EDR. During the first three quarters 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 nine months 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 95% and 73%, respectively, in 2011. The 2012 revenue generated from customers using the applications included with the DataHub rose 85% over the first nine 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 nine months of 2012, the Gas Analyzer generated $15.2 million of revenue compared to $5.2 million for TGAS. The Company has 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 nine months of 2012, both of these systems combined were installed on 51% of Canadian and 19% of US land rigs operating with a Pason EDR system. The combined market penetration of both products in Canada is an increase of approximately 9% 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 nine months of 2012, Pason's AutoDriller was installed on 78% of Canadian and 50% of US land rigs operating with a Pason EDR system, compared to 78% and 46%, 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 nine months of 2012, up from 18% for the same period in 2011, and 9% of US land rigs operating with a Pason EDR system, an increase from 6% in 2011.

Discussion of Operations

United States Operations

		Three Months Ended September 30,				Nine Months Ended September 30,
		2012	2011	Change		2012	2011	Change
(000s)		($)	($)	(%)		($)	($)	(%)
Revenue
	Electronic Drilling Recorder	22,800	21,655	5		70,440	60,355	17
	Pit Volume Totalizer	8,312	8,367	(1)		25,774	23,664	9
	Communications(1)	3,402	3,703	(8)		10,883	9,775	11
	Software (1)	4,309	2,010	114		12,666	5,495	131
	Automatic Driller	5,791	5,716	1		18,149	15,670	16
	Gas Analyzer/Total Gas System	2,957	2,030	46		8,645	5,772	50
	Hazardous Gas Alarm System	810	398	104		2,369	1,055	125
	Mobilization	2,334	1,809	29		6,934	5,015	38
	Other	3,928	2,348	67		12,989	3,845	238
Total revenue		54,643	48,036	14		168,849	130,646	29
Operating costs		19,167	19,444	(1)		62,542	51,782	21
Depreciation and amortization		8,469	6,260	35		24,668	16,997	45
Segment operating profit		27,007	22,332	21		81,639	61,867	32

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

US segment revenue increased by 14% in the third quarter of 2012 over the 2011 comparable period (13% increase when measured in US dollars). Included in the third quarter 2012 figures is $2.8 million (2011 - $1.4 million) of revenue generated from the sale of sensors and other products by 3PS, Inc., the US-based company acquired in 2011.

For the first nine months of 2012, US segment revenue increased by 29% (USD 27%), which includes $9.3 million of sales by 3PS.

The number of US drilling days was down approximately 3% in the third quarter of 2012 versus the third quarter of 2011 due to a pull back of natural gas drilling that was not totally off-set by an increase in oil drilling. However, revenue from the rental of instrumentation equipment increased 12% (USD 10%) for the third quarter of 2012 from 2011 levels, which compared very favourably to the drop in activity. On a year to date basis rental instrumentation revenue increased 23% (USD 20%) over 2011 levels, compared to an increase in industry days of 7%.

Revenue was impacted by the following factors:

• 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 EDR peripheral devices, 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 in revenue per EDR day in the third quarter of 2012 over 2011 levels of  $81 (USD $74). On a year to date basis revenue per EDR day increased 19% or $85 (USD $74).
  
  
• A decrease in EDR rental days of 5% for the three months ended September 2012 over the same time period in 2011 and an increase of 4% on a year to date basis over 2011 levels.

The factors explained above resulted in the US segment being able to realize revenue per EDR day during the third quarter of 2012 of $551 (USD $554) compared to $470 (USD $480) during the same time period in 2011. For the first nine months of 2012 revenue per EDR day was $542 (USD $541) compared to $456 (USD $467) in 2011.

Revenue per industry day for the third quarter of the year was $305 (USD $307) compared to $267 (USD $272) in 2011. Year to date figures were $306 (USD $306) 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 50% for the third quarter of 2012 and 48% year to date, compared to 46% and 47% for the respective periods in 2011.

The US business unit was able to increase 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 and implementing changes to operations to adapt to changing market conditions. The 2012 segment profit percentage was impacted by the following factors:

• A decrease in field technician related costs in the third quarter of 2012 compared to 2011 of approximately $1.0 million as a result of a slowdown in industry drilling days. On a year to date basis these costs increased by $2.4 million due in most part to an increase in market activity over 2011.
  
  
• A continuous strengthening of its sales presence led to an increase in sales and marketing costs of $0.3 million for the third quarter of 2012 over 2011 amounts. For the first nine months these costs rose $1.3 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 $1.2 million for the third quarter and $5.3 million for the first nine 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.
  
  
• Year to date 2012 figures include a full nine months of the results of 3PS Inc., which generates a lower margin than the US rental business.

Canadian Operations

		Three Months Ended September 30,				Nine Months Ended September 30,
		2012	2011	Change		2012	2011	Change
(000s)		($)	($)	(%)		($)	($)	(%)
Revenue
	Electronic Drilling Recorder	10,247	11,403	(10)		31,362	27,666	13
	Pit Volume Totalizer	4,782	5,940	(19)		14,992	15,204	(1)
	Communications(1)	3,836	4,544	(16)		12,099	11,643	4
	Software (1)	1,839	1,675	10		5,724	4,418	30
	Automatic Driller	3,260	4,239	(23)		10,132	10,497	(3)
	Gas Analyzer/Total Gas System	3,169	3,352	(5)		8,946	7,847	14
	Hazardous Gas Alarm System	545	706	(23)		1,834	1,921	(5)
	Mobilization	154	211	(27)		460	583	(21)
	Other	1,193	1,603	(26)		3,828	3,902	(2)
Total revenue		29,025	33,673	(14)		89,377	83,681	7
Operating costs		7,200	8,705	(17)		23,111	26,939	(14)
Depreciation and amortization(2)		7,245	6,747	7		20,718	19,037	9
Segment operating profit		14,580	18,221	(20)		45,548	37,705	21

(1)	2011 revenue associated with the Company's software applications has been reclassified from Communications to Software.
(2)	2011 impairment loss of $1.8 million relating to water assets has been reclassified from depreciation and amortization to Other Expenses and is not included in the Canadian business unit's operating results.

Canadian segment revenue decreased 14% for the three months ended September 2012 compared to the third quarter of 2011. This decrease is a result of a 26% decrease in the number of Canadian drilling industry days from 2011 levels. On a year to date basis, revenue increased 7% compared to a decline in the number of Canadian drilling days of 11%.

EDR rental days declined 29% in the third quarter of 2012 over the third quarter of 2011. On a year to date basis, EDR rental days declined by approximately 13% over 2011 levels.

The Canadian business unit was able to lessen the impact of the significant reduction in activity levels in Canada, due to the wet weather at the start of the third quarter and weakness in oil and natural gas prices, through new product adoption, more products on each rig and better pricing. The business unit increased pricing on most of its key products in the fourth quarter of 2011 and this combined with increased market penetration of the Gas Analyzer, customer acceptance of the Company's Live Rig View and rig data software, and more products on each rig, primarily with gains in EDR peripheral devices, lessened the impact of the significant drop in the number of wells being drilled.

The factors above combined to result in:

• An increase in revenue per EDR day during the third quarter of 2012 compared to 2011 of 22% ($187) to $1,040. For the first nine months of 2012, revenue per EDR day increased by $188 to $1,009.
• Third quarter revenue per industry day of $948 in 2012 compared to $815 in 2011. On a year to date basis, revenue per industry day increased 20% to $943.

The segment profit for the third quarter of 2012 of $14.6 million is a decrease of $3.6 million over the 2011 amount. Factors impacting the third quarter results include:

• The weak drilling activity in the WCSB, together with a slight decrease in the Company's market share, resulted in 11,300 less EDR days during the third quarter of 2012 compared to 2011, resulting in much 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.
• A decrease in most repair cost categories, including a significant reduction in costs associated with the new Gas Analyzer as compared to the TGAS system.

The segment profit, as a percent of revenue, was 51% for the first nine months of 2012, compared to 45% 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 $2.6 million.
• An increase in field costs of $2.0 million, which is mostly attributable to the expansion of the work force. This was deemed necessary given the shifting footprint of the WCSB, anticipation of additional product opportunities and an adjustment to the shift schedule.
• A decrease in repair costs of $2.2 million, mostly attributable to the roll out of the new Gas Analyzer, resulting in a drop in TGAS repairs, and a decline in costs due to lower drilling activity.
• In 2011, the Canadian business unit incurred $1.8 million in legal costs associated with the Automatic Driller lawsuit.
• $2.0 million of net expenses relating to the water treatment business were recorded in the first nine months of 2011. This business unit was disposed of in the third quarter of 2011.

International Operations

			Three Months Ended September 30,				Nine Months Ended September 30,
			2012	2011	Change		2012	2011	Change
(000s)			($)	($)	(%)		($)	($)	(%)
Revenue
	Electronic Drilling Recorder		3,805	2,380	60		10,914	6,835	60
	Pit Volume Totalizer		1,529	982	56		4,354	2,835	54
	Communications(1)		119	77	55		424	278	53
	Software (1)		123	78	58		338	223	52
	Automatic Driller		884	526	68		2,708	1,708	59
	Gas Analyzer/Total Gas System		991	598	66		2,815	1,274	121
	Hazardous Gas Alarm System		426	197	116		1,210	792	53
	Mobilization		692	432	60		1,773	1,444	23
	Other		844	1,754	(52)		3,026	6,182	(51)
Total revenue			9,413	7,024	34		27,562	21,571	28
Operating costs			5,771	3,986	45		16,708	12,967	29
Depreciation and amortization			2,138	2,028	5		6,350	6,193	3
Segment operating profit			1,504	1,010	49		4,504	2,411	87

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

Revenue in International operations improved 34% in the third quarter of 2012 from the same period in 2011. On a year to date basis, revenue has increased approximately $6.0 million or 28% over 2011 amounts. The Company realized gains in all of its major markets, with notable gains in both revenue and segment profit in Argentina, Brazil, Australia, and Mexico.

Operating profit increased by $0.5 million for the third quarter of 2012 and by $2.1 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 $0.6 million.
• Triple-digit revenue growth in Brazil as a result of a doubling of the number of rigs deploying the Company's equipment, resulting in an increase in the year to date revenue of $2.2 million and an increase in operating profit of $0.9 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 $1.5 million and $1.7 million, respectively.
• The Company's International segment includes our Offshore business unit which generated a 210% increase in its rental revenue for the first nine 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.

Q3 2012 versus Q3 2011

The active rig count in both the US and Canadian markets declined from the third quarter of 2011, with Canadian drop in activity much more severe than the US decline. The International market saw an increase in drilling days. The strong US results, combined with increased revenue and profitability in the International markets were not sufficient enough to offset the drop in operating results in Canada. Revenue increased 5%, while EBITDA dropped by 10% and funds flow from operations was down 1%.

Net earnings decreased to $19.3 million or $0.23 per share compared to $28.5 million or $0.35 per share in the third quarter of 2011. The third quarter consolidated results, when compared to 2011 figures, were impacted by the following significant items:

• A change in the amount of foreign exchange recorded of $7.8 million in 2012 compared to 2011 amounts. The strengthening Canadian dollar against the US dollar resulted in a loss of $1.5 million in the third quarter of 2012. The equivalent amount in the third quarter of 2011 was a gain of $6.3 million. The majority of these amounts are unrealized and relate to the translation of certain inter-company balances into CDN dollars.
• Increase in depreciation expense of $2.8 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 third quarter of 2012 of $1.0 million as the Company completes the hiring of additional staff to support the EDR evolution project and other product developments.
• Stock-based compensation increased by $5.1 million compared to the third 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 went up approximately 10% during the third quarter of 2012 compared to a decline in the corresponding period in 2011.
• During the third quarter of 2012 the Company recorded a non-cash impairment loss of $2.6 million on its US water treatment asset. In the third quarter of 2011 a non-cash impairment loss of $1.8 million was recorded against the Canadian water treatment assets.

Q3 2012 versus Q2 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 $14.6 million for the three months ended September, 2012 compared to a $1.1 million profit in the second quarter. The US business unit realized a slight increase in profit of $0.1 million over the second quarter of 2012 even though drilling activity declined.

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

• In the second quarter of 2012, the Company recorded an additional charge of $5.4 million relating to the US Automatic Driller lawsuit.
• During the third quarter of 2012, the Company recorded a non-cash impairment loss of $2.6 million on its US water treatment assets
• An increase in stock-based compensation expense of $1.2 million due to an increase in the Company's stock price during the third quarter of 2012.

Third Quarter Conference Call

Pason will be conducting a conference call for interested analysts, brokers, investors, and media representatives to review its third quarter results at 9:00 a.m. (Calgary time) on Wednesday, November 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 35767272).

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				September 30, 2012		December 31,2011
(CDN 000s) (unaudited)				($)		($)
Assets
Current
	Cash and cash equivalents			139,812		104,993
	Trade and other receivables			92,980		102,321
	Prepaid expenses			4,714		1,970
	Total current assets			237,506		209,284
Non-current
	Property, plant and equipment			179,387		183,007
	Intangible assets			59,745		58,071
	Deferred tax assets			3,999		5,539
	Total non-current assets			243,131		246,617
Total assets				480,637		455,901
Liabilities and equity
Current
	Trade payables and accruals			34,390		40,668
	Litigation provision			19,315		14,543
	Income taxes payable			4,825		5,318
	Stock-based compensation liability			9,790		5,770
	Dividend payable			--		16,380
	Total current liabilities			68,320		82,679
Non-current
	Stock-based compensation liability			6,047		1,030
	Deferred tax liabilities			3,719		4,923
	Total non-current liabilities			9,766		5,953
Equity
	Share capital			78,835		77,613
	Employee benefits reserve			12,927		12,927
	Foreign currency translation reserve			(11,029)		(5,835)
	Retained earnings			321,818		282,564
	Total equity			402,551		367,269
Total liabilities and equity				480,637		455,901

Condensed Consolidated Interim Statements of Operations

			Three Months Ended September 30,			Nine Months Ended September 30,
			2012	2011		2012	2011
(CDN 000s, except per share data) (unaudited)			($)	($)		($)	($)
Revenue
	Equipment rentals and other		93,081	88,733		285,788	235,898
Operating expenses
	Rental services		27,466	26,622		86,886	76,512
	Local administration		4,672	5,513		15,475	15,176
	Depreciation and amortization		17,852	15,035		51,736	42,227
			49,990	47,170		154,097	133,915
Operating profit			43,091	41,563		131,691	101,983
Other expenses
	Research and development		5,381	4,347		15,434	11,995
	Corporate services		3,435	3,286		11,397	9,159
	Stock-based compensation (recovery)		3,791	(1,347)		12,854	3,870
	Other expenses (income)		4,462	(4,197)		13,129	(685)
			17,069	2,089		52,814	24,339
Income before income taxes			26,022	39,474		78,877	77,644
	Income taxes		6,680	10,927		21,590	23,123
Net income			19,342	28,547		57,287	54,521
Earnings per share
	Basic		0.24	0.35		0.70	0.67
	Diluted		0.23	0.35		0.69	0.66

Condensed Consolidated Interim Statements of Comprehensive Income

			Three Months Ended September 30,			Nine  Months Ended September 30,
			2012	2011		2012	2011
(CDN 000s) (unaudited)			($)	($)		($)	($)
Net income			19,342	28,547		57,287	54,521
Other comprehensive loss
	Foreign currency translation adjustment		(9,986)	7,245		(5,194)	6,262
Total comprehensive income			9,356	35,792		52,093	60,783

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		--		--		--		54,521		54,521
	Dividends		--		--		--		(14,741)		(14,741)
	Other comprehensive loss		--		--		6,262		--		6,262
	Exercise of stock options		2,232		--		--		--		2,232
	Options exercised that were previously expensed		307		(307)		--		--		--
	Stock-based compensation		--		6		--		--		6
Balance at September 30, 2011			77,579		12,927		214		267,244		357,964
	Net Income		--		--		--		31,702		31,702
	Dividends		--		--		--		(16,382)		(16,382)
	Other comprehensive loss		--		--		(6,049)		--		(6,049)
	Exercise of stock options		33		--		--		--		33
	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		--		--		--		57,287		57,287
	Dividends		--		--		--		(18,033)		(18,033)
	Other comprehensive loss		--		--		(5,194)		--		(5,194)
	Exercise of stock options		1,222		--		--		--		1,222
Balance at September 30, 2012			78,835		12,927		(11,029)		321,818		402,551

Condensed Consolidated Interim Statements of Cash Flows

			Three Months Ended September 30,			Nine Months Ended September 30,
			2012	2011		2012	2011
(CDN 000s) (unaudited)			($)	($)		($)	($)
Cash flows from operating activities
	Net income		19,342	28,547		57,287	54,521
Adjustment for non-cash items:
	Depreciation and amortization		17,852	15,035		51,736	42,227
	Impairment loss		2,636	1,800		2,636	1,800
	Stock-based compensation		1,451	(1,937)		6,826	936
	Deferred income taxes		(1,475)	3,840		2,204	7,989
	Unrealized foreign exchange loss (gain)		1,025	(6,015)		1,981	(4,204)
			40,831	41,270		122,670	103,269
Movements in non-cash working capital
	(Increase) decrease in trade and other receivables		(749)	(20,351)		8,985	(13,520)
	Increase in prepaid expenses		(1,883)	(1,834)		(2,847)	(2,927)
	Increase in income taxes payable		5,510	5,241		14,559	10,371
	(Decrease) increase in trade payables, accruals and provisions		(351)	5,324		2,975	5,665
	Increase in stock-based compensation liability		2,471	564		5,876	2,792
	Effects of exchange rate changes		(977)	78		(1,030)	878
			4,021	(10,978)		28,518	3,259
Cash generated from operating activities			44,852	30,292		151,188	106,528
	Income tax paid		(2,998)	--		(16,225)	(16,650)
Net cash from operating activities			41,854	30,292		134,963	89,878
Cash flows used in financing activities
	Proceeds from issuance of common shares		393	90		1,222	2,232
	Purchase of stock options		(3,151)	(185)		(5,240)	(3,266)
	Payment of dividends		(18,033)	(14,741)		(34,413)	(28,631)
Net cash used in financing activities			(20,791)	(14,836)		(38,431)	(29,665)
Cash flows used in investing activities
	Additions to property, plant and equipment		(14,500)	(18,122)		(48,467)	(50,735)
	Deferred development costs		(2,483)	(1,875)		(7,711)	(5,696)
	Acquisitions, net of cash acquired		--	(23,569)		--	(23,569)
	Additions to investments		--	--		(1,230)	--
	Changes in non-cash working capital		(470)	(615)		(2,611)	(2,768)
Net cash used in investing activities			(17,453)	(44,181)		(60,019)	(82,768)
Effect of exchange rate on cash and cash equivalents			(2,409)	3,684		(1,694)	2,047
Net increase (decrease) in cash and cash equivalents			1,201	(25,041)		34,819	(20,508)
Cash and cash equivalents, beginning of period			138,611	114,933		104,993	110,400
Cash and cash equivalents, end of period			139,812	89,892		139,812	89,892

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 September 30, 2012		Canada		United States		International		Total
		($)		($)		($)		($)
Revenue		29,025		54,643		9,413		93,081
Operating costs		7,200		19,167		5,771		32,138
Depreciation and amortization		7,245		8,469		2,138		17,852
Segment operating profit		14,580		27,007		1,504		43,091
Research and development								5,381
Corporate services								3,435
Stock-based compensation								3,791
Other expenses								4,462
Income taxes								6,680
Net income								19,342
Capital expenditures		7,148		6,770		3,065		16,983
Goodwill		--		18,206		2,600		20,806
Intangible assets		24,255		11,162		3,522		38,939
Segment assets		117,432		300,501		62,704		480,637
Segment liabilities		52,248		17,068		8,770		78,086
Three Months Ended September 30, 2011
Revenue		33,673		48,036		7,024		88,733
Operating costs		8,705		19,444		3,986		32,135
Depreciation and amortization		6,747		6,260		2,028		15,035
Segment operating profit		18,221		22,332		1,010		41,563
Research and development								4,347
Corporate services								3,286
Stock-based compensation								(1,347)
Other income								(4,197)
Income taxes								10,927
Net income								28,547
Capital expenditures		9,018		8,103		2,876		19,997
Goodwill		--		19,232		2,600		21,832
Intangible assets		19,845		14,848		5,582		40,275
Segment assets		119,244		194,411		60,021		373,676
Segment liabilities		41,680		25,189		10,950		77,819

Nine Months Ended September 30, 2012		Canada		United States		International		Total
		($)		($)		($)		($)
Revenue		89,377		168,849		27,562		285,788
Operating costs		23,111		62,542		16,708		102,361
Depreciation and amortization		20,718		24,668		6,350		51,736
Segment operating profit		45,548		81,639		4,504		131,691
Research and development								15,434
Corporate services								11,397
Stock-based compensation								12,854
Other expenses								13,129
Income taxes								21,590
Net income								57,287
Capital expenditures		20,275		30,681		5,222		56,178
Goodwill		--		18,206		2,600		20,806
Intangible assets		24,255		11,162		3,522		38,939
Segment assets		117,432		300,501		62,704		480,637
Segment liabilities		52,248		17,068		8,770		78,086
Nine Months Ended September 30, 2011
Revenue		83,681		130,646		21,571		235,898
Operating costs		26,939		51,782		12,967		91,688
Depreciation and amortization		19,037		16,997		6,193		42,227
Segment operating profit		37,705		61,867		2,411		101,983
Research and development								11,995
Corporate services								9,159
Stock-based compensation								3,870
Other income								(685)
Income taxes								23,123
Net income								54,521
Capital expenditures		19,218		27,995		9,218		56,431
Goodwill		--		19,232		2,600		21,832
Intangible assets		19,845		14,848		5,582		40,275
Segment assets		119,244		194,411		60,021		373,676
Segment liabilities		41,680		25,189		10,950		77,819

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.