Pason Reports its 2011 Third Quarter Results

CALGARY, Nov. 4, 2011 /CNW/ - Pason Systems Inc. (TSX: PSI) announced today its 2011 third quarter results.

Performance Data

  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2011 2010 (1) Change 2011 2010 (1) Change
(000s, except per share data) ($) ($) (%) ($) ($) (%)
Revenue 88,733 68,653 29 235,898 176,068 34
EBITDA (2) 54,962 34,606 59 125,541 81,508 54
  As a % of revenue 61.9 50.4 23 53.2 46.3 15
  Per share - basic 0.67 0.42 60 1.53 1.00 53
  Per share - diluted 0.67 0.42 60 1.52 1.00 52
Funds flow from operations (2) 41,270 26,856 54 103,269 66,074 56
  Per share - basic 0.50 0.33 52 1.26 0.81 55
  Per share - diluted 0.50 0.33 52 1.25 0.81 55
Earnings 28,547 11,902 140 54,521 25,949 110
  Per share - basic 0.35 0.15 133 0.67 0.32 109
  Per share - diluted 0.35 0.15 133 0.66 0.32 106
Capital expenditures 19,997 12,499 60 56,431 23,950 136
Working capital 126,152 133,455 (6) 126,152 133,455 (6)
Total assets 435,783 371,566 17 435,783 371,566 17
Total long-term debt -- -- -- -- -- --
Shareholders' equity 357,964 315,424 13 357,964 315,424 13
Market capitalization 1,090,921 996,793 9 1,090,921 996,793 9
Common shares outstanding (#)            
  Basic 81,900 81,502 1 81,836 81,497 1
  Diluted 82,325 81,502 1 82,487 81,497 1
Shares outstanding end of period (#) 81,901 81,504 1 81,901 81,504 1

(1)  2010 comparative figures have been restated to conform to International Financial Reporting Standards.
(2)  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, stock-based compensation expense, future income taxes and other non-cash items impacting operations as presented in the Consolidated 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

Operations Review

The third quarter experienced a robust demand for drilling rigs aided by excellent weather conditions. As a result, drilling activity in North America was up strongly over 2010 with the Canadian drilling industry posting a 36% improvement and the United States drilling industry up by 19%. This surge in drilling activity propelled Pason to record third quarter results. Revenue for the quarter was up 29% to $88.7 million with even greater leverage for EBITDA and cash flow. EBITDA jumped 59% to $55.0 million and cash flow rose 54% to $41.3. Earnings increased impressively by 140% to $28.5 million but was aided by non operating activities such as foreign exchange gain of $6.3 million and recovery of stock based compensation expense of $1.3 million. Earnings per diluted share was $0.35 compared to $0.15 in 2010.

United States segment operating results improved modestly over last year's very strong third quarter with profit of $22.3 million compared to $21.2 million in 2010. As prices were raised in the second quarter of 2010 there was no benefit from unit pricing when comparing this quarter to last year. Revenue per U.S. industry day at $283 was flat with the prior year number of $284. The U.S. rig count continues to climb with another 100 rigs added in the third quarter bringing the active fleet to about 1,950 land rigs. Pason topped 1,110 rigs at the quarter end which represents 57% of the rigs carrying some Pason equipment. Revenue gains continue to come primarily from growth in communications and auto driller rentals. Revenue from newly acquired 3PS is limited to about $1.0 million per month until we begin our rollout of torque sensors for drilling applications, which should start in the first quarter of next year.

Canada had stronger results because of a greater increase in industry drilling days plus the benefit of the late 2010 price increases which were not in effect for the comparable 2010 third quarter. Segment operating profit was almost double the prior year at $16.4 million for the quarter compared to $8.4 million recorded in 2010. Revenue increased by a solid 54%, led mainly by a 73% gain in electronic drilling recorder rentals. However, our profits were also aided by good cost control resulting in only a modest 17% rise in operating costs. Our revenue per industry drilling day, again helped by the price increase of late 2010, increased to $815 for the quarter versus $716 in 2010.

International revenue and operating leverage continues to improve with revenue of $7.0 million up from $5.0 million in 2010 and segment profit of $1.0 million versus a loss of $0.5 million in the prior year. Results in the International segment continue to benefit from recording the full revenue being achieved in Latin America, since the buyout of our former distribution partner. Further, while not providing meaningful profit yet, the activity levels in Mexico and Australia have at least rebounded from their collapses in 2009 and 2010. While our main interest from the Petron purchase of several years ago was to augment domestic US rentals, we continue to benefit from sales of equipment with revenue of $4.6 million for the first nine months of this year.

As announced last quarter, we have ceased operation of mobile water cleaning plants and have several exit possibilities under discussion. We would expect eventual proceeds to come within $2.0 million of our equipment carrying costs, which we have reserved for in this quarter's results. We do however continue to operate our fixed water treatment plant in Colorado built with the expertise acquired from the Auxsol purchase. The plant is profitable and becoming more efficient each quarter while we consider options for this part of our water treatment business.

Outlook

While there is some concern for the impact of low natural gas prices on drilling in the latter half of 2012, overall drilling activity levels are expected to be relatively unchanged next year. We are beginning to ramp up a major enhancement of our electronic drilling recorder platform and capabilities. We currently forecast that our capital expenditure budget for the next 12 months will be $101.6 million, of which $9.2 million will be for EDR upgrades, $18.8 million for torque sub rental equipment and $18.4 million for the new gas analyzer. On balance from our total capital expenditure budget of $101.6 million we would expect $68.2 million would be directed towards equipment that can generate incremental revenue and $33.4 million would be for maintenance capital.

We are confident that our projected cash flow can comfortably cover our capital expenditure budget and an increased dividend. Accordingly the Board of Directors has approved an increased semi-annual dividend to $0.20 per share.

On behalf of the Board of Directors,

(signed)

Jim Hill
Chairman, President & Chief Executive Officer
November 2nd, 2011

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of November 2, 2011 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 consolidated 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 2011 Third Quarter

  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2011 2010 (1) 2009 (1) 2011 2010 (1) 2009 (1)
(000s, except per share data) ($) ($) ($) ($) ($) ($)
Revenue 88,733 68,653 28,422 235,898 176,068 104,848
EBITDA (2) 54,962 34,606 8,261 125,541 81,508 33,031
  As a % of revenue 61.9 50.4 29.1 53.2 46.3 31.5
  Per share - basic 0.67 0.42 0.10 1.53 1.00 0.41
  Per share - diluted 0.67 0.42 0.10 1.52 1.00 0.41
Funds flow from operations (2) 41,270 26,856 7,373 103,269 66,074 29,116
  Per share - basic 0.50 0.33 0.09 1.26 0.81 0.36
  Per share - diluted 0.50 0.33 0.09 1.25 0.81 0.36
Earnings (loss) 28,547 11,902 (4,200) 54,521 25,949 (7,990)
  Per share - basic 0.35 0.15 (0.05) 0.67 0.32 (0.10)
  Per share - diluted 0.35 0.15 (0.05) 0.66 0.32 (0.10)
Total assets 435,783 371,566 367,147 435,783 371,566 367,147
Total long-term debt -- -- -- -- -- --

(1)  2010 comparative figures have been restated to conform to International Financial Reporting Standards. 2009 figures are presented in accordance with the Company's previous accounting framework, Canadian generally accepted accounting principles.
(2)  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, stock-based compensation expense, future income taxes and other non-cash items impacting operations as presented in the Consolidated 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,
  2011 2010 Change 2011 2010 Change
(000s) ($) ($) (%) ($) ($) (%)
Revenue            
  Electronic Drilling Recorder 35,438 27,989 27 94,856 69,833 36
  Pit Volume Totalizer 15,289 12,331 24 41,703 32,078 30
  Communications 11,778 8,472 39 30,642 21,654 42
  Automatic Driller 10,481 7,961 32 27,875 19,806 41
  Total Gas System 5,980 4,488 33 14,893 11,755 27
  Hazardous Gas Alarm System 1,301 779 67 3,768 2,156 75
  Mobilization 2,452 2,102 17 7,042 6,314 12
  Other 6,014 4,531 33 15,119 12,472 21
Total revenue 88,733 68,653 29 235,898 176,068 34

  Canada
  Three Months Ended September 30, Nine Months Ended September 30,
  2011 2010 Change 2011 2010 Change
      (%)     (%)
EDR rental days (#) 38,900 27,900 39 100,400 77,000 30
PVT rental days (#) 37,600 27,400 37 97,500 75,200 30

  United States
  Three Months Ended September 30, Nine Months Ended September 30,
  2011 2010 Change 2011 2010 Change
      (%)     (%)
EDR rental days (#) 98,500 92,000 7 281,500 241,900 16
PVT rental days (#) 68,300 61,600 11 194,100 158,300 23

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 wellsite and customer offices.  The EDR is the base product from which all other rig site 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 27% increase in revenue for the third quarter of 2011 compared to 2010 and an increase of 36% on a year to date basis versus the prior year. These increases are due to increased rig activity in the Company's major markets, price increases in both Canada and the U.S., and expanding demand by customers for EDR peripheral devices.

During the first nine months of 2011, the EDR was installed on 96% of all active rigs in Canada and just under 60% of the rigs in the U.S.

In Canada, until the start of 2011, industry days used to calculate market share were based upon a twenty-four hour period. As a result, since the adoption of the Company's new billing policy described below, Canada was reporting slightly lower market share figures than was actually the case. Starting in 2011, the industry drilling day now recognizes these partial days and brings this method of activity reporting in line with how the Company bills.

In the U.S. the opposite impact is occurring. The Company is tracking EDR rental days under the new partial billing method but the industry days that are reported are still calculated on a twenty-four hour basis. The Company's calculated U.S. market share for 2011 was 57% but management believes this is understated by almost two points because of the inconsistency between Pason's method of tracking rental days and how the industry calculates drilling days.

The method in which the Company bills its customers has impacted both the Canadian and U.S. market share figures. Previously, the Company billed for an entire day's worth of rentals regardless of whether the equipment was activated for the entire twenty-four hour period or not. To address customer concerns, the Company implemented a change to bill in increments, recognizing the fact that during the initial start up or tear down of a rig the equipment is only utilized a portion of the day.

This partial billing process has been in place in Canada since 2009 and was rolled out to the U.S. market beginning in 2011.

The Company believes that there was no underlying change to the Company's relative competitive position in either country.

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 in line with the rise in drilling days in North America, and revenue was enhanced by further penetration in the U.S. During the first nine months of 2011, the PVT was installed on 98% of rigs with a Pason EDR in Canada and 69% in the U.S., compared to 98% and 65%, respectively, in 2010.

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 Internet DataHub, 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).  During 2010, the Company began complimenting 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 90% of the rigs, and on average 85% of these rigs will benefit by HSPA because they have local cell coverage.

Total Gas System

The Pason Total Gas System ("TGAS") measures the total hydrocarbon gases (C1 through C5) exiting the wellbore, and then calculates the lag time to show the formation depth where the gases were produced.  This complex system provides a more accurate gas sample than competitor systems. For the first nine months Pason's TGAS was installed on 42% of Canadian and 17% of U.S. land rigs operating with a Pason EDR system. The market penetration in both countries is an increase of approximately 2% points over 2010 levels.

Automatic Driller

Pason's Automatic Driller ("ADR") is used to maintain constant weight on the drill bit while a well is being drilled. During the first three quarters of 2011, Pason's ADR was installed on 78% of Canadian and 46% of U.S. land rigs operating with a Pason EDR system compared to 76% and 36% respectively in 2010.

Hazardous Gas Alarm System

Pason's Hazardous Gas Alarm System monitors both lower explosive limit gases (LEL) and H2S where both readings and an alarm system are integrated with the EDR.  During the first nine months of 2011, Pason's Hazardous Gas Alarm System was installed on 18% of Canadian rigs, up from 15% for the same period in 2010, and 6% of U.S. land rigs operating with a Pason EDR system, an increase from 2% of U.S. land rigs in the same period in 2010.

Discussion of Operations

United States Operations

  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2011 2010 Change 2011 2010 Change
(000s) ($) ($) (%) ($) ($) (%)
Revenue            
  Electronic Drilling Recorder 21,655 19,737 10 60,355 47,041 28
  Pit Volume Totalizer 8,367 7,964 5 23,664 19,535 21
  Communications 5,539 4,207 32 14,528 9,959 46
  Automatic Driller 5,716 4,675 22 15,670 10,833 45
  Total Gas System 2,030 1,893 7 5,772 4,658 24
  Hazardous Gas Alarm System 398 202 97 1,055 421 151
  Mobilization 1,809 1,866 (3) 5,015 5,129 (2)
  Other 2,522 1,240 103 4,587 4,791 (4)
Total revenue 48,036 41,784 15 130,646 102,367 28
Operating costs 19,444 15,979 22 51,782 46,871 10
Depreciation and amortization 6,260 4,607 36 16,997 15,048 13
Segment operating profit 22,332 21,198 5 61,867 40,448 53

U.S. segment revenue increased by 15% in the third quarter of 2011 over the 2010 comparable period (18% increase when measured in USD), which compared with U.S. drilling industry days that were up 19% over the third quarter of 2010. For the first nine months of 2011, revenue increased 28% versus 2010 results (33% increase when measured in USD), compared to an increase in U.S. drilling industry days of 24%.

Revenue was impacted by the following factors:

  • better pricing. Prices increased by approximately 30% in the second quarter of 2010 and have held steady since .The net impact of average weighted pricing, when comparing the first nine months of 2011 to 2010, was to increase revenue by approximately 12% in USD.
  • more products on each rig.  Revenue was increased by more products on each rig, primarily with gains in ADR rentals, which contributed to approximately a 4% revenue gain for the first nine months of 2011.

The factors explained above resulted in third quarter revenue per industry day of $283 (USD$272) in 2011 compared to $284 (USD$275) in 2010 and $150 (USD$138) in 2009. The U.S. business unit realized year to date revenue per industry day of $264 (USD$270) for 2011, compared to $255 (USD$246) for 2010 and $180 (USD$158) for 2009.

The majority of the increase in "Other" revenue relates to sales realized by 3PS, Inc., the U.S. based company acquired in August of 2011.

Segment profit, as a percentage of revenue, was 46% for the third quarter of 2011, compared to 51% realized in 2010 and a loss of 19% in the third quarter of 2009.

For the first nine months of 2011, segment profit, as a percentage of revenue, was 47%, compared to 39% generated in 2010 and the loss of 4% realized in 2009.

The benefit of the increase in revenue for the three and nine months ending September 30, 2011 was reduced by increases in operating costs from 2010 levels:

  • an increase in rental service costs and repairs to support the increase in rig activity of $1.8 million for the quarter and $5.5 million year to date.
  • increase in net operating expenses of Auxsol, the U.S. water treatment subsidiary, of $0.8 million year to date.
  • increase in depreciation expense for the quarter and year to date of $1.6 million, due in most part to the continuing increase in capital expenditures as well accelerating the depreciation rate on the Company's TGAS systems, which are being phased out by the new gas analyzer.

Canadian Operations

  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2011 2010 Change 2011 2010 Change
(000s) ($) ($) (%) ($) ($) (%)
Revenue            
  Electronic Drilling Recorder 11,403 6,599 73 27,666 17,966 54
  Pit Volume Totalizer 5,940 3,693 61 15,204 10,279 48
  Communications 6,154 4,202 46 15,787 11,418 38
  Automatic Driller 4,239 2,967 43 10,497 7,971 32
  Total Gas System 3,352 2,179 54 7,847 5,481 43
  Hazardous Gas Alarm System 706 407 73 1,921 1,141 68
  Mobilization 211 160 32 583 642 (9)
  Other 1,668 1,708 (2) 4,176 3,604 16
Total revenue 33,673 21,915 54 83,681 58,502 43
Operating costs 8,705 7,468 17 26,939 19,408 39
Depreciation and amortization 8,547 6,090 40 20,837 16,288 28
Segment operating  profit 16,421 8,357 96 35,905 22,806 57

Canadian segment revenue rose 54% for the three months ended September 30, 2011, a significant increase over the change in the number of Canadian drilling industry days of 36%. On a year to date basis, revenue increased 43% compared to industry days increasing by 25%.

The improvement in revenue for both the third quarter and the first nine months of 2011 was due to:

  • an increase in EDR rental days of 39% for the third quarter of 2011 and 30% for the first nine months compared to the corresponding period in 2010 and ,
  • improved pricing. Prices were reduced by approximately 20% in the second quarter of 2009 and did not rise again until a 10% price increase was applied in the fourth quarter of 2010. The net impact of average weighted pricing, when comparing the third quarter and year to date 2011 to 2010, was an increase to revenue of approximately 10%.

The factors explained above resulted in third quarter revenue per industry day of $815 in 2011 compared to $716 in 2010 and $675 in 2009.  For the first nine months of 2011, revenue per industry day was $788, compared to $687 in 2010 and $720 in 2009.

The segment profit for the third quarter of 2011 of $16.4 million is almost double the $8.4 million profit in 2010 and a significant improvement over the $1.9 million profit in 2009. The results for the third quarter of 2011 were impacted by the following items:

  • an increase in rental service costs to support the increase in rig activity of $1.4 million for the quarter.
  • $2.5 million increase in depreciation expense relating mostly to an impairment loss on the water treatment assets located in Canada as well accelerating the depreciation rate on the Company's TGAS systems, which are being replaced by the new gas analyzer.
  • increase in the inventory obsolescence reserve of $0.8 million, which is included in depreciation and amortization expense.

Segment profit, as a percent of revenue, was 43% for the first nine months of 2011, up from 39% or over 10% when compared to 2010 levels, and a significant improvement from the 16% realized in the first nine months of 2009. The profit for the first three quarters of the year was impacted by the following factors:

  • legal costs increased by $1.8 million as the Canadian trial for the ADR litigation took place in 2011.
  • $3.8 million of net expenses relating to water treatment.
  • increase in the inventory obsolescence reserve of $1.5 million.
  • increase in rental service and repair costs of $4.0 million due to the increased rig activity.

International Operations

  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2011 2010 Change 2011 2010 Change
(000s) ($) ($) (%) ($) ($) (%)
Revenue            
  Electronic Drilling Recorder 2,380 1,653 44 6,835 4,826 42
  Pit Volume Totalizer 982 674 46 2,835 2,264 25
  Communications 85 63 35 327 277 18
  Automatic Driller 526 319 65 1,708 1,002 70
  Total Gas System 598 416 44 1,274 1,616 (21)
  Hazardous Gas Alarm System 197 170 16 792 594 33
  Mobilization 432 76 468 1,444 543 166
  Other 1,824 1,583 15 6,356 4,077 56
Total revenue 7,024 4,954 42 21,571 15,199 42
Operating costs 3,986 2,957 35 12,967 9,480 37
Depreciation and amortization 2,028 2,527 (20) 6,193 6,004 3
Segment operating profit (loss) 1,010 (530) 291 2,411 (285) 946

Revenue in the International operations improved 42% from the third quarter of 2010, while operating profit increased by $1.5 million. For the first nine months revenue increased by 42% while operating profit increased by $2.7 million over the same period in 2010.

A number of factors influenced these results:

  • at the close of 2010, the Company purchased the distribution rights and operating companies of its Latin American partner. This purchase increased both revenue and operating profit as the Company now benefits from 100% of the operating results. This increased segmented operating profit by approximately $1.5 million for the first nine months of 2011.
  • drilling activity in Mexico collapsed during the second half of 2010 and while the rig count is increasing in 2011 the operating profit is lower than the results achieved in 2010. Operating profit is down $0.6 million for the first nine months of 2011 compared to the same period in 2010.
  • results in Australia continue to improve with activity reaching levels not seen since the flooding in late 2010. As a result this segment is close to a break even point for the first nine months of 2011, a significant turnaround from the losses incurred during the first half of 2011.
  • our International segment includes Pason Offshore, which represents the offshore portion of the business acquired from Petron. In the first quarter of 2011 a decision was made to only offer Pason equipment for rent in lieu of Petron systems which were historically sold.  Progress has been made with Pason equipment being installed on offshore rigs both in the Gulf of Mexico and internationally.  Offshore operating profit has increased by approximately $1.4 million for the first nine months of 2011 versus 2010.

Summary of Quarterly Results

Three Months Ended(1) Dec 31,
2009
Mar 31,
2010
June 30,
2010
Sep 30,
2010
Dec 31,
2010
Mar 31,
2011
June 30,
2011
Sep 30,
2011
(000s, except per share data) ($) ($) ($) ($) ($) ($) ($) ($)
                 
Revenue 41,013 56,384 51,031 68,653 73,494 84,745 62,420 88,733
EBITDA(2) 13,620 25,390 21,512 34,606 36,016 44,729 25,850 54,962
  Per share - basic 0.17 0.31 0.26 0.42 0.44 0.55 0.31 0.67
  Per share - diluted 0.17 0.31 0.26 0.42 0.44 0.55 0.30 0.67
Funds flow from operations(2) 12,238 20,454 18,764 26,856 27,899 39,082 22,917 41,270
  Per share - basic 0.15 0.25 0.23 0.33 0.34 0.48 0.28 0.50
  Per share - diluted 0.15 0.25 0.23 0.33 0.34 0.48 0.27 0.50
Earnings 2,480 7,891 6,156 11,902 10,525 17,757 8,217 28,547
  Per share - basic 0.03 0.10 0.08 0.15 0.13 0.22 0.10 0.35
  Per share - diluted 0.03 0.10 0.08 0.15 0.13 0.22 0.09 0.35

(1)  2010 comparative figures have been restated to conform to International Financial Reporting Standards. 2009 figures are presented in accordance with the Company's previous accounting framework, Canadian generally accepted accounting principles.
(2)  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, stock-based compensation expense, future income taxes and other non-cash items impacting operations as presented in the Consolidated 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.

Variations in Pason's quarterly financial results are due in part to the seasonality of the oil and gas service industry in Canada, which is somewhat offset by the less seasonal nature of U.S. and International operations.  The first quarter is generally the strongest quarter for the Company due to strong activity in Canada when location access is best during the winter.  The second quarter is always the slowest due to spring break up in Canada when many areas are not accessible due to ground conditions, and therefore, do not permit the movement of heavy equipment.  Activity generally increases in the third quarter, depending on the year, as ground conditions have often improved and location access becomes available; however, a rainy summer can have a significant adverse effect on drilling activity.  By the fourth quarter, often the Company's second strongest quarter, access to most areas in Canada become available with ground freezing.  Consequently, the performance of the Company may not be comparable quarter to consecutive quarter and should be considered on the basis of results for the whole year, or by comparing results in a quarter with results in the same quarter for the previous year.

Current Quarter versus Q3 2010

The active rig count in both Canada and the U.S. improved over the third quarter of 2010, resulting in gains in all of the Company's key metrics. Revenue increased 29%, EBITDA and funds flow from operations were up 59% and 54% respectively.

Net earnings increased to $28.5 million or $0.35 per share compared to $11.9 million or $0.15 per share in the third quarter of 2010. The third quarter consolidated results were impacted by the following items:

  • increase in depreciation expense of $3.5 million, attributable mostly to the write-down of the Company's Canadian water treatment assets and the accelerated depreciation on the Company's TGAS systems.
  • stock-based compensation expense decreased by $4.9 million compared to the third quarter of 2010 due to a reduction in the Company's stock price.
  • as required by generally accepted accounting principles, gains and losses from foreign exchange changes relating to monetary assets and liabilities must be taken into earnings in the period in which they occurred.  The weakening Canadian dollar against the U.S dollar resulted in a foreign exchange gain of $6.3 million. The equivalent amount in the third quarter of 2010 was a gain of $0.1 million.
  • corporate services costs primarily relate to personnel located in the corporate headquarters who directly support the Company's field operations and perform other corporate functions.  The increase in corporate operating expenses from 2010 of $0.6 million is mainly due to higher expenses as a result of more resources dedicated to the Company's growth strategy.

Current Quarter versus Q2 2011

As expected, revenue and operating profit was much higher in the third quarter of 2011 versus the second quarter due to spring break-up occurring in the second quarter in the Canadian operating area. The Canadian business unit realized a profit of $16.4 million compared to a loss of $1.3 in the second quarter.

The U.S. business unit operating profit of $22.3 million was up $2.5 million to the results achieved in the second quarter. Revenue was up 15% while operating profit, as a percentage of revenue, was 46% versus 47% in the previous quarter. The U.S. unit continues to invest in staff and infrastructure to realize on the opportunity of increasing market share and product penetration in a changing operating environment.

Liquidity and Capital Resources

At September 30, 2011, the Company's liquidity position and change over the prior year is detailed in the table below.

  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2011 2010 (1) Change 2011 2010 (1) Change
(000s) ($) ($) (%) ($) ($) (%)
Cash 89,892 112,812 (20) 89,892 112,812 (20)
Working capital 126,152 133,455 (6) 126,152 133,455 (6)
Funds flow from operations 41,270 26,856 54 103,269 66,074 56
Capital expenditures 19,997 12,499 60 56,431 23,950 136
As a % of funds flow 48.5 46.5 4 54.6 36.2 51

(1) 2010 comparative figures have been restated to conform to International Financial Reporting Standards.

The Company's cash balance was down from the prior year. The reduction in cash is a combination of an increase in dividends, capital expenditures, the repurchase of Latin American rights in 2010, and the purchase of 3PS, Inc. in August of 2011. The Company benefited from both higher cash flow from operations and an increase in the exercise of Company stock options, which totalled $2.2 million for the first nine months in 2011 compared to $0.2 million in the first nine months of 2010.

Contractual Obligations

  Less than 1 year 1 - 3 years Thereafter Total
(000s) ($) ($) ($) ($)
Operating leases 3,371 6,346 5,052 14,769

Contractual obligations relate to minimum future lease payments required primarily for operating leases for certain facilities and vehicles.

During the first nine months of 2011 the Company purchased 0.9 million stock options for a total cash consideration of $3.3 million.

At September 30, 2011, the Company had no capital lease obligations, and other than the operating leases detailed above, it has no off-balance sheet arrangements.

The Company has a $5.0 million committed revolving credit facility available.  At September 30, 2011, no amount had been drawn on the facility.

Disclosure of Outstanding Share and Options Data

As at November 2, 2011, there were 81.9 million common shares and 4.6 million options issued and outstanding.

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) Monday, November 7, 2011.  The conference call dial-in number is 1-888-231-8191, conference ID # is 1271333.  You can access the 7-day replay by dialing 1-855-859-2056, password 1271333.

Pason is a leading international provider of specialized rental and sold oilfield instrumentation systems for use on land and offshore rigs.  The Company's tightly integrated package of products and services, including data acquisition, wellsite reporting software, remote communications and Internet information management tools, maximizes rig uptime and minimizes operating costs.

Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.  Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2010, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Condensed Consolidated Interim Financial Statements and Notes

Condensed Consolidated Interim Balance Sheets

As at,   September 30,
2011
December 31,
2010
January 1,
2010
(000s) (unaudited)   ($) ($) ($)
Assets        
Current        
  Cash and cash equivalents   89,892 110,400 109,849
  Trade and other receivables   97,506 79,880 39,102
  Prepaid expenses   4,421 1,489 1,416
  Assets held for sale   2,600 -- --
  Income taxes recoverable   -- -- 2,928
  Total current assets   194,419 191,769 153,295
Non-current        
  Property, plant and equipment   179,257 161,882 169,012
  Intangible assets   62,107 38,588 27,195
  Deferred tax assets   -- 9,843 4,771
  Total non-current assets   241,364 210,313 200,978
Total assets   435,783 402,082 354,273
Liabilities and equity        
Current        
  Trade payables, accruals and provisions   55,259 51,398 29,780
  Income taxes payable   3,180 9,021 --
  Stock-based compensation liability   9,828 11,645 3,994
  Dividend payable   -- 13,890 11,408
  Total current liabilities   68,267 85,954 45,182
Non-current        
  Stock-based compensation liability   3,633 1,360 1,644
  Deferred tax liabilities   5,919 5,084 2,524
  Total non-current liabilities   9,552 6,444 4,168
Equity        
  Share capital   77,579 75,040 71,864
  Contributed surplus   12,927 13,228 15,139
  Accumulated other comprehensive gain (loss)   214 (6,048) --
  Retained earnings   267,244 227,464 217,920
  Total equity   357,964 309,684 304,923
Total liabilities and equity   435,783 402,082 354,273

Condensed Consolidated Interim Statements of Operations

    Three Months Ended
September 30,
Nine Months Ended
September 30,
    2011 2010 2011 2010
(000s, except per share data) (unaudited)   ($) ($) ($) ($)
Revenue          
  Equipment rentals and other   88,733 68,653 235,898 176,068
Operating expenses          
  Rental services   27,885 24,652 80,100 70,625
  Local administration   4,250 1,752 11,588 5,134
  Depreciation and amortization   16,835 13,224 44,027 37,340
    48,970 39,628 135,715 113,099
Operating profit   39,763 29,025 100,183 62,969
Other expenses          
  Research and development   4,347 4,629 11,995 12,911
  Corporate services   3,286 2,657 9,159 6,364
  Stock-based compensation (recovery)   (1,347) 3,505 3,870 6,840
  Manufacturing and distribution   262 404 918 916
  Foreign exchange and other   (6,259) (47) (3,403) (1,390)
    289 11,148 22,539 25,641
Income before income taxes   39,474 17,877 77,644 37,328
  Income taxes   10,927 5,975 23,123 11,379
Net income   28,547 11,902 54,521 25,949
Earnings per share          
  Basic   0.35 0.15 0.67 0.32
  Diluted   0.35 0.15 0.66 0.32

Condensed Consolidated Interim Statements of Comprehensive Income

    Three Months Ended
September 30,
Nine Months Ended
September 30,
    2011 2010 2011 2010
(000s) (unaudited)   ($) ($) ($) ($)
Net income   28,547 11,902 54,521 25,949
Other comprehensive income (loss)          
  Foreign currency translation adjustment   7,245 (4,044) 6,262 (2,900)
Total comprehensive income   35,792 7,858 60,783 23,049

Condensed Consolidated Interim Statements of Changes in Equity

    Share
Capital
Contributed
Surplus
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Equity
(000s) (unaudited)   ($) ($) ($) ($) ($)
Balance at January 1, 2010   71,864 15,139 -- 217,920 304,923
  Net income   -- -- -- 25,949 25,949
  Dividends   -- -- -- (13,041) (13,041)
  Other comprehensive loss   -- -- (2,900) -- (2,900)
  Exercise of stock options   198 -- -- -- 198
  Options exercised that were previously expensed   30 (30) -- -- --
  Stock-based compensation expense   -- 295 -- -- 295
Balance at September 30, 2010   72,092 15,404 (2,900) 230,828 315,424
  Dividends   -- -- -- (13,889) (13,889)
  Net income   -- -- -- 10,525 10,525
  Other comprehensive loss   -- -- (3,148) -- (3,148)
  Exercise of stock options   2,538 -- -- -- 2,538
  Options exercised that were previously expensed   410 (410) -- -- --
  Stock-based compensation expense   -- (1,766) -- -- (1,766)
Balance at December 31, 2010   75,040 13,228 (6,048) 227,464 309,684
  Net income   -- -- -- 54,521 54,521
  Dividends   -- -- -- (14,741) (14,741)
  Other comprehensive income   -- -- 6,262 -- 6,262
  Exercise of stock options   2,232 -- --   2,232
  Options exercised that were previously expensed   307 (307) -- -- --
  Stock-based compensation expense   -- 6 -- -- 6
Balance at September 30, 2011   77,579 12,927 214 267,244 357,964

Condensed Consolidated Interim Statements of Cash Flows

    Three Months Ended
September 30,
Nine Months Ended
September 30,
    2011 2010 2011 2010
(000s) (unaudited)   ($) ($) ($) ($)
Cash flows from operating activities          
  Net income   28,547 11,902 54,521 25,949
Adjustment for non-cash items:          
  Depreciation and amortization   16,835 13,224 44,027 37,340
  Stock-based compensation   (1,937) 2,531 936 4,270
  Deferred income taxes   3,840 (758) 7,989 12
  Unrealized foreign exchange gain   (6,015) (43) (4,204) (1,497)
    41,270 26,856 103,269 66,074
Movements in working capital          
  Increase in  trade and other receivables   (20,351) (16,670) (13,520) (30,235)
  Increase in prepaid expenses   (1,834) (793) (2,927) (391)
  Increase in income taxes   5,241 1,790 10,371 4,424
  Increase in trade payables, accruals and provisions   5,324 4,071 5,665 11,786
  Increase in stock-based compensation liability   564 973 2,792 2,517
  Effects of exchange rate changes   78 2,407 878 3,156
    (10,978) (8,222) 3,259 (8,743)
Cash generated from operating activities   30,292 18,634 106,528 57,331
  Income tax paid   -- -- (16,650) (1,500)
Net cash from operating activities   30,292 18,634 89,878 55,831
Cash flows used in financing activities          
  Proceeds from issuance of common shares under the option plan   90 33 2,232 198
  Purchase of stock options   (185) (5) (3,266) (5)
  Payment of dividends   (14,741) (13,040) (28,631) (24,448)
Net cash used in financing activities   (14,836) (13,012) (29,665) (24,255)
Cash flows used in investing activities          
  Additions to property, plant and equipment   (18,122) (12,450) (50,735) (21,853)
  Deferred development costs, net of investment tax credits received   (1,875) (49) (5,696) (2,097)
  Proceeds on disposal of property, plant and equipment   -- 72 -- 94
  Business acquisitions, net of cash acquired   (23,569) -- (23,569) (2,829)
  Changes in non-cash working capital   (615) (837) (2,768) (1,293)
Net cash used in investing activities   (44,181) (13,264) (82,768) (27,978)
Effect of exchange rate changes on cash   3,684 (1,144) 2,047 (635)
Net (decrease) increase  in cash and cash equivalents   (25,041) (8,786) (20,508) 2,963
Cash and cash equivalents, beginning of period   114,933 121,598 110,400 109,849
Cash and cash equivalents, end of period   89,892 112,812 89,892 112,812

Operating Segments

The Group has three reportable segments, as described below, which are the Group's strategic business units. The strategic business units offer the same services, but are managed separately. For each of the strategic business units, the Group's senior management reviews internal management reports on a monthly basis.

Information regarding the results of each reportable segment is included below. Performance is measured based on operating profit as included in the internal management reports. Operating profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm's length basis.

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, 2011 Canada United States International Total
  ($) ($) ($) ($)
Revenue 33,673 48,036 7,024 88,733
Operating costs 8,705 19,444 3,986 32,135
Depreciation and amortization 8,547 6,260 2,028 16,835
Segment operating profit 16,421 22,332 1,010 39,763
Research and development       4,347
Corporate services       3,286
Stock-based compensation recovery       (1,347)
Manufacturing and distribution       262
Foreign exchange and other       (6,259)
Income taxes       10,927
Earnings       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
         
         
Three Months Ended September 30, 2010        
         
Revenue 21,915 41,784 4,954 68,653
Operating costs 7,468 15,979 2,957 26,404
Depreciation and amortization 6,090 4,607 2,527 13,224
Segment operating profit (loss) 8,357 21,198 (530) 29,025
Research and development       4,629
Corporate services       2,657
Stock-based compensation       3,505
Manufacturing and distribution       404
Foreign exchange and other       (47)
Income taxes       5,975
Earnings       11,902
Capital expenditures 3,820 6,369 2,310 12,499
Goodwill -- 5,876 -- 5,876
Intangible assets 11,836 1,965 8,657 22,458
Segment assets 157,890 157,397 56,279 371,566
Segment liabilities 38,861 13,221 4,060 56,142

Nine Months Ended September 30, 2011 Canada United States International Total
  ($) ($) ($) ($)
Revenue 83,681 130,646 21,571 235,898
Operating costs 26,939 51,782 12,967 91,688
Depreciation and amortization 20,837 16,997 6,193 44,027
Segment operating profit 35,905 61,867 2,411 100,183
Research and development       11,995
Corporate services       9,159
Stock-based compensation       3,870
Manufacturing and distribution       918
Foreign exchange and other       (3,403)
Income taxes       23,123
Earnings       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
         
         
Nine Months Ended September 30, 2010        
         
Revenue 58,502 102,367 15,199 176,068
Operating costs 19,408 46,871 9,480 75,759
Depreciation and amortization 16,288 15,048 6,004 37,340
Segment operating profit (loss) 22,806 40,448 (285) 62,969
Research and development       12,911
Corporate services       6,364
Stock-based compensation       6,840
Manufacturing and distribution       916
Foreign exchange and other       (1,390)
Income taxes       11,379
Earnings       25,949
Capital expenditures 6,170 11,686 6,094 23,950
Goodwill -- 5,876 -- 5,876
Intangible assets 11,836 1,965 8,657 22,458
Segment assets 157,890 157,397 56,279 371,566
Segment liabilities 38,861 13,221 4,060 56,142

 

For further information:
Jim Hill 
Chairman, President, and CEO
403-301-3401
jim.hill@pason.com
        David Elliott
Chief Financial Officer
403-301-3441
david.elliott@pason.com