Pason Reports Third Quarter 2013 Results

CALGARY, Nov. 4, 2013 /CNW/ - Pason Systems Inc. (PSI.TO) announced today its 2013 third quarter results.

Performance Data

  Three Months Ended September 30, Nine Months Ended September 30,
  2013 2012
(reclassified)
(restated)
Change 2013 2012
(reclassified)
(restated)
Change
(CDN 000s, except per share data) ($) ($) (%) ($) ($) (%)
Revenue (1) 104,016 96,262   8 295,670 295,519   —
EBITDA (2) 50,131 47,665   5 82,104 143,467   (43)
  As a % of revenue 48.2 49.5   (3) 27.8 48.5   (43)
  Per share - basic 0.61 0.58   5 1.00 1.75   (43)
  Per share - diluted 0.60 0.58   3 1.00 1.74   (43)
Cash flow from operating activities (2) 39,837 41,854   (5) 137,267 134,963   2
  Per share - basic 0.49 0.51   (4) 1.67 1.65   1
  Per share - diluted 0.48 0.51   (6) 1.67 1.64   2
Earnings (loss) (3) 9,135 17,742   (49) (633) 53,587   —
  Per share - basic 0.11 0.22   (50) (0.01) 0.65   —
  Per share - diluted 0.11 0.21   (48) (0.01) 0.65   —
Capital expenditures 22,402 16,983   32 50,384 55,778   (10)
Working capital (3) 120,346 165,486   (27) 120,346 165,486   (27)
Total assets 555,869 480,637   16 555,869 480,637   16
Total long-term debt   —   —
Total equity 343,950 398,851   (14) 343,950 398,851   (14)
Market capitalization 1,865,218 1,345,702   39 1,865,218 1,345,702   39
Cash dividends declared (4) 0.13   — 0.39 0.22   77
Common shares outstanding (#)                      
  Basic 82,122 81,985   — 82,087 81,948   —
  Diluted 83,269 82,757   1 82,087 82,500   (1)
Shares outstanding end of period (#) 82,132 82,005   — 82,132 82,005   —
(1)  Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly. This change has no impact on reported EBITDA, cash flow from operating activities, or earnings.
(2)  EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation expense, and depreciation and amortization expense. Cash flow from operating activities 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 and changes in non-cash items 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. These Non-GAAP measures provide readers with additional information regarding the Company's ability to generate funds to finance its operations, research and development, and capital expenditure program.
(3)  Earnings for the three months ended September 30, 2012, have been restated to correct a $1,600 non-cash error relating to stock-based compensation expense. The 2012 year-to-date correction was $3,700. Per share amounts have been adjusted accordingly.
(4)  The Company changed its dividend policy whereby, effective for 2013, the Company adopted a quarterly dividend to replace the semi-annual dividend.

President's Message

Pason demonstrated robust operational performance during the third quarter, despite continued declines in drilling activity in North America. Drilling days in the United States were 8% lower in the third quarter of 2013 than in the third quarter of the previous year. In Canada, drilling days were up 1% for the period. As in previous periods, activity in international markets was higher than a year ago, but the picture there varied widely between countries.

Total revenue increased 8% to $104.0 million, an all-time high for the third quarter. As in previous quarters, all of Pason's major product categories generated revenue growth above drilling industry activity, with the exception of the Hazardous Gas Alarm and AutoDriller. The Communications segment demonstrated the highest year-over-year growth rate, at 35%, followed by the Gas Analyzer segment at 16%.

EBITDA for the third quarter was up 5% to $50.1 million, while cash flow from operating activities was down 5% to $39.8 million due to an increase in working capital for the quarter.

The Company recorded a net profit of $9.1 million, or $0.11 per share, compared to earnings of $17.7 million, or $0.22 per share, in the third quarter of 2012. This year's third quarter results, when compared to 2012 figures, were impacted by the following items:

  • Stock-based compensation expense increased by $10.3 million due to a significant increase in the Company's stock price;
  • The 2009 purchase of Petron contained an earn-out clause that was conditional on the successful commercialization of a revenue stream based on a technology developed by Petron. Pason and the former shareholders of Petron agreed to an amount of $3.1 million;
  • R&D and Corporate service costs increased by $2.2 million as the Company hired additional staff to support product development and business development initiatives;
  • Income taxes were higher by $2.2 million, given that the effective tax rate for the quarter was significantly higher than the statutory rate of 25% due to a number of factors, including non-deductible accounting expenses (primarily stock-based compensation expense).

Capital expenditures for the third quarter were $22.4 million, up from $17.0 million the previous year, as deployment of new hardware - including Pason Rig Display (a ruggedized Touch Screen Computer) and components of the EDR evolution- ramped up.

On September 30, our cash position stood at $198.1 million. The payment of US$112.0 million, announced on August 2nd, required to resolve all claims against Pason regarding the infringement lawsuits relating to our AutoDriller, will be made during the fourth quarter. There is no debt on the balance sheet.

We are increasing our quarterly dividend by 8% to $0.14 per share.

United States

The US segment, our largest business unit, includes our US rental business and 3PS Inc., our Austin-based equipment manufacturer.

Drilling activity in the United States continued its downward trend. Activity in the key oil plays, including Bakken, Permian and Eagle Ford remained robust, but there has been a pullback in conventional oil activity.

While industry days were down 8% in the third quarter of 2013 compared to third quarter of 2012, revenue was up 7% to $60.2 million. On average, 964 US land rigs were operating Pason equipment during the third quarter of 2013, compared to 1,019 in the same period of 2012. Revenue growth above industry day growth was achieved through higher product penetration and a change to the Communications pricing model.

Average daily revenue per rig increased by 7%, from US$573 in the third quarter of 2012 to US$615 in 2013. Communications and Gas Analyzer showed above average growth rates during the period. EDR market share for the third quarter of 2013 was 57%, unchanged from the previous quarter and up 2% from the same period in 2012.

Revenue for 3PS for the quarter was $4.9 million and EBITDA was $0.5 million.

Overall, operating costs in the US segment increased by 6% due to the purchase of additional satellite bandwidth (which is treated as an operating expense), and depreciation and amortization decreased by 12%. As a result, our US business unit was able to generate an operating profit of $30.5 million in the third quarter, an increase of 13% over 2012.

Canada

Drilling activity in Canada was slightly higher in the third quarter of 2013 than in the previous year, with industry days up 1%. Unfavourable weather and hesitance by producers to commit additional capital spending limited activity during the period. Our Canadian business unit was able to modestly grow market share and increase product penetration. Revenue for the third quarter was up 6% to $32.3 million. On average, 309 Canadian land rigs were operating Pason equipment compared to 299 the year before. EDR market share in the third quarter of 2013 was 93% compared to 91% the previous year and 87% the previous quarter.

Average daily revenue per rig increased by 3% from $1,088 in the third quarter of 2012 to $1,123 in 2013. EDR (including Workstations and Sidekicks), Communications, and Gas Analyzer showed above average growth rates during the period.

Operating costs were up by 10% due to the purchase of additional satellite bandwidth, and depreciation and amortization decreased by 3%. As a result, our Canadian business unit was able to generate an operating profit of $15.9 million for the third quarter, compared to $14.6 million for the same period in 2012.

International

Our International business unit, which includes our businesses in Latin America, Australia, and Offshore & Eastern Hemisphere, had a good quarter. Revenue increased by 21% to $11.5 million for the third quarter 2013 compared to the third quarter 2012. Revenue was up 12% from the previous quarter.

Strong revenue growth in Australia, Argentina and Offshore & Eastern Hemisphere was partially offset by continued industry weakness in Brazil and Mexico.

Operating costs were up 22% and depreciation and amortization were down 14%. The increase in operating costs was driven primarily by higher importation costs as we delivered additional equipment to certain markets. As a result, the International business unit was able to generate a quarterly operating profit of $2.5 million, up 67% the previous year and up 127% from the previous quarter.

Outlook

Beyond the seasonal increase in Canadian drilling activity in the winter drilling season, we expect to see an increase in capital spending by the larger producers in 2014, and a gradual increase in natural gas directed drilling in Northeastern British Columbia related to West Coast LNG projects. In the United States, we expect modest activity increases primarily from higher natural gas activity going forward. Internationally, we anticipate robust but uneven growth across countries and regions.

In 2014, we anticipate that some of the new products and product enhancements, both on the hardware and software sides, will start gaining traction in the North American market. We also expect continued growth in the Offshore & frontier segment where Pason equipment is already deployed on about 30 drilling rigs.

Our capital expenditure budget for the next 12 months is $96 million, $61 million of which is directed towards new hardware that can generate incremental revenue or save operating costs, $21 million for maintenance capital, and $14 million for capitalized R&D.

Our cash-generating capacity and our cash position are more than sufficient to cover new business development, planned equipment upgrades and the dividend.

(Signed)

Marcel Kessler
President and Chief Executive Officer
November 4, 2013

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of November 4, 2013, 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 2013 Third Quarter

  Three Months Ended September 30, Nine Months Ended September 30,
  2013 2012
(reclassified)
(restated)
2011
(reclassified)
2013 2012
(reclassified)
(restated)
2011
(reclassified)
(000s, except per share data) ($) ($) ($) ($) ($) ($)
Revenue (1) 104,016 96,262   91,461 295,670 295,519   245,225
EBITDA (2) 50,131 47,665   53,162 82,104 143,467   123,741
  As a % of revenue 48.2 49.5   58.1 27.8 48.5   50.5
  Per share - basic 0.61 0.58   0.65 1.00 1.75   1.51
  Per share - diluted 0.60 0.58   0.64 1.00 1.74   1.50
Cash flow from operating activities (2) 39,837 41,854   30,292 137,267 134,963   89,878
  Per share - basic 0.49 0.51   0.37 1.67 1.65   1.10
  Per share - diluted 0.48 0.51   0.37 1.67 1.64   1.09
Earnings (loss) (3) 9,135 17,742   28,547 (633) 53,587   54,521
  Per share - basic 0.11 0.22   0.35 (0.01) 0.65   0.67
  Per share - diluted 0.11 0.21   0.35 (0.01) 0.65   0.66
Total assets 555,869 480,637   435,783 555,869 480,637   435,783
Total long-term debt   —   —

(1)  Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly. This change has no impact on reported EBITDA, cash flow from operating activities, or earnings.
(2)  EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation expense, and depreciation and amortization expense. Cash flow from operating activities 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 and changes in non-cash items 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. These Non-GAAP measures provide readers with additional information regarding the Company's ability to generate funds to finance its operations, research and development, and capital expenditure program.
(3) Earnings for the three months ended September 30, 2012, have been restated to correct a $1,600 non-cash error relating to stock-based compensation expense. The 2012 year-to-date correction was $3,700. Per share amounts have been adjusted accordingly.

Overall Performance

  Three Months Ended September 30, Nine Months Ended September 30,
  2013 2012
(reclassified)
Change 2013 2012
(reclassified)
Change
(000s) ($) ($) (%) ($) ($) (%)
Revenue            
  Electronic Drilling Recorder (1) 42,770 39,626 8 121,858 121,159 1
  Pit Volume Totalizer 15,624 14,623 7 44,658 45,120 (1)
  Communications (1) 10,478 7,764 35 29,233 24,694 18
  Software 6,457 6,271 3 18,587 18,728 (1)
  AutoDriller 9,698 9,935 (2) 27,549 30,989 (11)
  Gas Analyzer/Total Gas System 8,267 7,117 16 22,916 20,406 12
  Hazardous Gas Alarm System 1,240 1,781 (30) 3,934 5,413 (27)
  Mobilization 2,946 3,180 (7) 8,395 9,167 (8)
  Other 6,536 5,965 10 18,540 19,843 (7)
Total revenue 104,016 96,262 8 295,670 295,519
(1)  Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly.

Change in Accounting Classification

In the fourth quarter of 2012, the Company changed the way it records expenses associated with data transmission costs. Previously, the Company recorded these costs as a reduction in revenue. Effective for 2012, these costs have been reclassified to rental services expense. This change, which does not impact EBITDA or net income, was applied retroactively, with all comparative figures being restated accordingly. All revenue and operating cost figures, as well as key metrics based upon revenue, in the following Management Discussion and Analysis, have been calculated based upon this new presentation.

The impact of this reclassification on the 2012 comparative figures presented above is as follows:

Three Months Ended September 30, 2012       Reported Previously
Disclosed
Change
(000s)       ($) ($) ($)
Revenue              
Electronic Drilling Recorder (1)       39,626 36,852   2,774
Communications (1)       7,764 7,357   407
Total revenue       96,262 93,081   3,181

Nine Months Ended September 30, 2012       Reported Previously
Disclosed
Change
(000s)       ($) ($) ($)
Revenue            
Electronic Drilling Recorder (1)       121,159 112,716   8,443
Communications (1)       24,694 23,406   1,288
Total revenue       295,519 285,788   9,731

EDR and PVT rental day performance for Canada and the United States is reported below:

Canada
  Three Months Ended September 30,   Nine Months Ended September 30,  
  2013 2012 Change 2013 2012 Change
      (%)     (%)
EDR rental days (#) 28,400 27,500 3 83,000 87,400 (5)
PVT rental days (#) 28,000 27,300 3 81,400 86,300 (6)
             
United States
  Three Months Ended September 30,   Nine Months Ended September 30,  
  2013 2012 Change 2013 2012 Change
      (%)     (%)
EDR rental days (#) 88,700 93,700 (5) 262,800 292,700 (10)
PVT rental days (#) 68,100 66,800 2 197,000 205,700 (4)

Electronic Drilling Recorder

The Pason Electronic Drilling Recorder (EDR) remains the Company's primary 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. Revenue generated from the EDR increased  8% for the third quarter of 2013 compared to the same period in 2012 and on a year-to-date basis revenue was up 1%. This increase is attributable to continued growth in demand for EDR peripheral devices in all of the Company's major markets, an increase in US market share over the third quarter of 2012 (57% vs 55%), a similar increase in the Canadian market share (93% vs 91%), a strengthening US dollar relative to the Canadian dollar, and new revenue in frontier markets. These factors were offset by a drop in rig activity in the US market (third quarter and year-to-date) while third quarter Canadian rig activity was relatively flat year-over-year, but down 6% on a year-to-date basis. Canadian EDR days were up 3% in the three months ended September 2013, while US EDR days dropped by 5%. On a year-to-date basis, EDR days dropped 5% in Canada and 10% in the US.

During the first nine months of 2013, the Pason EDR was installed on 95% 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 the quarter was impacted by an increase in product penetration in the US market and the foreign exchange fluctuation, offset by the change in rig activity previously described above. During the first nine months of 2013, the PVT was installed on 98% of rigs with a Pason EDR in Canada and 75% in the US, compared to 99% and 70%, respectively, in 2012.

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 among 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 with positive results. In addition, the US business unit increased its revenue as a result of a shift in the pricing model for communication services.

Software

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

  • Live Rig View (LRV), which provides advanced data viewing, directional drilling, and 3D visualization of drilling data in real time via a web browser.

  • Mobile Viewer and Mobile, which allow users to access their data on mobile devices including iPhone, iPad, BlackBerry, and Android.

  • 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 2013, 97% of the Company's Canadian customers and 90% of customers in the US were using all or a portion of the functionality of the DataHub, compared to 98% and 86%, respectively, in 2012.

Gas Analyzer and Total Gas System

The Pason Gas Analyzer, which has replaced the Total Gas System (TGAS) in the Canadian and US markets, measures the total hydrocarbon gases (C1 through C4) exiting the wellbore, and then calculates the lag time to show the formation depth where the gases were produced. The Gas Analyzer increases the functionality that was found in the TGAS product to include the actual composition of the gas 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. The Company continues to realize increased product penetration for this product. For 2013, the Gas Analyzer was installed on 55% of Canadian and 23% of US land rigs operating with a Pason EDR system. The penetration in Canada is an increase of approximately 4% in market share over 2012 levels while the US has seen an increase of 7%. The roll out of the Gas Analyzer in the International markets continues with anticipated completion in most of the major markets by the end of 2013.

AutoDriller

Pason's AutoDriller is used to maintain constant weight on the drill bit while a well is being drilled. During the first nine months of 2013, the AutoDriller was installed on 73% of Canadian and 46% of US land rigs operating with a Pason EDR system, compared to 78% and 49%, respectively, in 2012. Pason's market share for this particular product has declined from previous levels due to the introduction and advancement of integrated drilling rigs.

Hazardous Gas Alarm System

The Pason Hazardous Gas Alarm System (HGAS) monitors lower explosive limit (LEL) gases and H2S gases and displays the readings on the EDR. If a hazardous rig atmosphere is detected, the system reacts immediately, sounding an alarm and flashing a strobe light. Early in 2013, the Company identified a sensor on the H2S product, a part of the HGAS system, which was not performing to the manufacturer's standards. As a result, the Company suspended the functionality of this portion of the HGAS while it investigates a solution to the problem. The Company initiated field trials with a new technology in the third quarter of 2013 and while results showed improvements in performance the Company continues to research alternatives.

Discussion of Operations

United States Operations

  Three Months Ended September 30, Nine Months Ended September 30,
  2013 2012
(reclassified)
Change   2013 2012
(reclassified)
Change
(000s) ($) ($) (%)   ($) ($) (%)
Revenue              
  Electronic Drilling Recorder (1) 25,620 24,434   5   73,427 75,264   (2)
  Pit Volume Totalizer 8,836 8,312   6   25,204 25,774   (2)
  Communications (1) 5,645 3,523   60   15,451 11,255   37
  Software 4,442 4,309   3   12,878 12,666   2
  AutoDriller 5,212 5,791   (10)   15,343 18,149   (15)
  Gas Analyzer/Total Gas System 3,479 2,957   18   9,824 8,645   14
  Hazardous Gas Alarm System 525 810   (35)   1,666 2,369   (30)
  Mobilization 2,233 2,334   (4)   6,387 6,934   (8)
  Other 4,234 3,928   8   12,018 12,989   (7)
Total revenue 60,226 56,398   7   172,198 174,045   (1)
Operating costs 22,268 20,922   6   67,036 67,738   (1)
Depreciation and amortization 7,480 8,469   (12)   22,145 24,668   (10)
Segment operating profit 30,478 27,007   13   83,017 81,639   2
(1)  Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly.

The impact of the accounting reclassification of data transmission costs from revenue to operating costs previously discussed had the following impact on the 2012 comparative figures presented above:

             
Three Months Ended September 30, 2012 Reported Previously
Disclosed
Change
(000s) ($) ($) ($)
Revenue      
Electronic Drilling Recorder (1) 24,434 22,800   1,634
Communications (1) 3,523 3,402   121
Total revenue 56,398 54,643   1,755
Operating costs 20,922 19,167   1,755
Revenue per EDR day 570 551   19
Revenue per Industry day 316 305   11
Nine Months Ended September 30, 2012 Reported Previously
Disclosed
Change
(000s) ($) ($) ($)
Revenue      
Electronic Drilling Recorder (1) 75,264 70,440   4,824
Communications (1) 11,255 10,883   372
Total revenue 174,045 168,849   5,196
Operating costs 67,738 62,542   5,196
Revenue per EDR day 560 542   18
Revenue per Industry day 316 306   10

US segment revenue increased by 7% in the third quarter of 2013 over the 2012 comparable period (5% increase when measured in USD), while revenue from the rental of instrumentation equipment increased 6% for the quarter (USD 2%).

For the first nine months of 2013, US segment revenue decreased by 1% (USD 3%) over the previous year.

The number of US drilling days decreased approximately 8% in the third quarter of 2013 versus the third quarter of 2012 due to a pullback in drilling for both natural gas and oil. However, revenue from the rental of instrumentation compared favorably to the drop in activity, with an increase of 6% (USD 2%) over 2012 levels.

Year-to-date drilling days decreased 11% over 2012 levels while rental revenue continued to hold up well against the drop in activity with only a modest decrease of 1% (USD 3%).

Revenue was impacted by the following factors:

  • More products on each rig, new product adoption and a favorable exchange rate. Revenue increased as a result of a shift in the business units pricing model for communications service, additional product penetration, primarily with gains in EDR peripheral devices (Workstations and SideKicks), increased PVT market share, customer acceptance of the Company's Live Rig View (LRV) real-time data software, and an increase in the adoption of the Gas Analyzer. These factors combined resulted in an increase in revenue per EDR day in the third quarter of 2013 over 2012 levels of $68 (USD $42).

  • A decrease in EDR rental days of 5% for the three months ended September 30, 2013, over the same time period in 2012, and a decrease of 10% for the first nine months of 2013 over 2012 levels.

The factors explained above resulted in the US segment being able to realize revenue per EDR day during the third quarter of 2013 of $638 (USD $615) compared to $570 (USD $573) during the same time period in 2012. For the first nine months, revenue per EDR day increase by $57 (USD $45) to $617 (USD $603) over 2012 amounts.

Revenue per industry day for the third quarter of the year was $365 (USD $351) compared to $316 (USD $317) in 2012. On a year-to-date basis this metric increased by $36 (USD $28) to $352 (USD $344).

US market share was 57% during the first nine months of 2013, a slight increase from the same level as the corresponding period in 2012.

Segment profit, as a percentage of revenue, was 51% for the third quarter of 2013 compared to 48% for the corresponding period in 2012.

The 2013 third quarter and year-to-date segment profit percentage was impacted by the following factors:

  • An increase in communication-related expenses due to the US business unit implementing a more robust level of service to its customers. The business unit revised its pricing structure to reflect this increased level of performance.

  • Field technician-related costs in the third quarter of 2013 compared to 2012 increased due to an increase in employee benefit related expenses (mostly health care claims) reduced by a  drop in field parts, repairs costs, and other consumables due to the change in rig activity.

  • Third quarter 2013 depreciation and amortization expense was down compared to the same period in 2012 due to the following:

  • the Company began to accelerate the depreciation on its TGAS system in 2012 to recognize the fact that it was being replaced by the Gas Analyzer. The TGAS systems are now fully depreciated, resulting in a drop in depreciation expense.

  • in the first quarter of 2012, the Company began to accelerate the depreciation on a portion of its base EDR system, which will become obsolete as a result of the EDR evolution project. Later in 2012, the Company re-evaluated the assumption of when the equipment being replaced will become obsolete and reduced the amount of accelerated depreciation being recorded.

  • the above reductions were offset by an increase in depreciation on the Gas Analyzer system and upgrades to its communication infrastructure to accommodate increased functionality.

Canadian Operations

  Three Months Ended September 30, Nine Months Ended September 30,
  2013 2012
(reclassified)
Change   2013 2012
(reclassified)
Change
(000s) ($) ($) (%)   ($) ($) (%)
Revenue              
  Electronic Drilling Recorder (1) 12,326 11,279 9   35,322 34,768   2
  Pit Volume Totalizer 4,983 4,782 4   14,363 14,992   (4)
  Communications (1) 4,409 4,122 7   12,652 13,015   (3)
  Software 1,899 1,839 3   5,402 5,724   (6)
  AutoDriller 3,232 3,260 (1)   9,047 10,132   (11)
  Gas Analyzer/Total Gas System 3,593 3,169 13   9,705 8,946   8
  Hazardous Gas Alarm System 326 545 (40)   1,143 1,834   (38)
  Mobilization 114 154 (26)   355 460   (23)
  Other 1,371 1,193 15   3,780 3,828   (1)
Total revenue 32,253 30,343 6   91,769 93,699   (2)
Operating costs 9,383 8,518 10   26,888 27,433   (2)
Depreciation and amortization 6,995 7,245 (3)   18,331 20,718   (12)
Segment operating profit 15,875 14,580 9   46,550 45,548   2
(1) Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly.

The impact of the accounting reclassification of data transmission costs from revenue to operating costs previously discussed had the following impact on the 2012 comparative figures presented above:

               
Three Months Ended September 30, 2012 Reported   Previously
Disclosed
  Change  
(000s) ($)   ($)   ($)  
Revenue            
Electronic Drilling Recorder (1) 11,279   10,247   1,032  
Communications (1) 4,122   3,836   286  
Total revenue 30,343   29,025   1,318  
Operating costs 8,518   7,200   1,318  
Revenue per EDR day 1,088   1,040   48  
Revenue per Industry day 984   948   36  
Nine Months Ended September 30, 2012 Reported   Previously
Disclosed
  Change  
(000s) ($)   ($)   ($)  
Revenue          
Electronic Drilling Recorder (1) 34,768   31,362   3,406  
Communications (1) 13,015   12,099   916  
Total revenue 93,699   89,377   4,322  
Operating costs 27,433   23,111   4,322  
Revenue per EDR day 1,058   1,009   49  
Revenue per Industry day 987   943   44  

Canadian segment revenue increased 6% for the three months ended September 30, 2013, compared to the same period in 2012. This increase is a result of a 1% increase in the number of drilling industry days from 2012 levels, combined with increased product penetration in a number of different products and an increase in market share to 93% vs 91% in 2012. On a year-to-date basis, revenue decreased by 2%, compared to the first nine months of 2012.

EDR rental days increased 3% in the third quarter of 2013 over 2012 levels. The decrease in EDR rental days for the first nine months of 2013 was 5%, compared to a decrease in industry days of 6%.

Canadian market share was 95% during the first nine months of 2013, compared to 94% in the corresponding period in 2012.

The Canadian business unit was able to increase its revenue over and above the change in industry activity in the third quarter mostly through increased product adoption, notably EDR peripherals including SideKicks and Workstations. In addition, the business unit continued to gain market acceptance of the Gas Analyzer. These factors combined to lessen the impact of the drop in AutoDriller revenue and Hazardous Gas Alarm System described previously.

The factors above combined to result in:

  • An increase in revenue per EDR day during the third quarter of 2013 compared to 2012 of 3% ($35) to $1,123. For the first nine months of 2013, revenue per EDR increased by $35 to $1,093.

  • Third quarter revenue per industry day of $1,041 in 2013 compared to $984 in 2012. This metric for the first nine months of 2013 was $1,034, an increase of 5% over the similar period in 2012.

The segment profit for the third quarter of 2013 of $15.9 million is up $1.3 million over the 2012 amount. Factors impacting the third quarter results include:

  • Third quarter activity levels in Canada were modestly stronger year-over-year, although  unfavorable weather (flooding in Southern Alberta and wet conditions in Northern Alberta and Northeast British Columbia) impacted drilling activity in the Western Canadian Sedimentary Basin (WCSB).

  • Third quarter operating expenses include an increase in satellite bandwidth costs as an additional segment was added to improve the customer experience at the rig. These costs should drop slightly going forward as a portion of the bandwidth considered to be redundant is returned to the supplier.
  • A decrease in depreciation and amortization expense due to:
    • the replaced TGAS being fully depreciated, resulting in a decline in the expense, combined with a drop in the acceleration of depreciation on a portion of its base EDR system,

    • the above reductions in depreciation and amortization expense were offset by an increase in depreciation costs relating to the Gas Analyzer, increased costs relating to the amortization of capitalized research and development (R&D) costs (as a result of the deployment of new software applications), and the write-off of previously capitalized R&D costs.

The segment profit, as a percent of revenue, was 49% for the third quarter of 2013, compared to 48% for the 2012 time period. Factors impacting the year-to-date results include weakness in drilling activity in the first half of 2013, which led to a decrease in industry days of 5,900  for the nine months ended, with a corresponding decrease in EDR rental days of 4,400, combined with similar cost factors that impacted the third quarter results, described above.


International Operations

  Three Months Ended September 30,    Nine Months Ended September 30,  
  2013 2012
(reclassified)
Change 2013 2012
(reclassified)
Change  
(000s) ($) ($) (%) ($) ($) (%)  
Revenue              
  Electronic Drilling Recorder (1) 4,824   3,913   23   13,109   11,127   18  
  Pit Volume Totalizer 1,805   1,529   18   5,091   4,354   17  
  Communications (1) 424   119   256   1,130   424   167  
  Software 116   123   (6)   307   338   (9)  
  AutoDriller 1,254   884   42   3,159   2,708   17  
  Gas Analyzer/Total Gas System 1,195   991   21   3,387   2,815   20  
  Hazardous Gas Alarm System 389   426   (9)   1,125   1,210   (7)  
  Mobilization 599   692   (13)   1,653   1,773   (7)  
  Other 931   844   10   2,742   3,026   (9)  
Total revenue 11,537   9,521   21   31,703   27,775   14  
Operating costs 7,179   5,879   22   20,987   16,921   24  
Depreciation and amortization 1,844   2,138   (14)   5,183   6,350   (18)  
Segment operating profit 2,514   1,504   67   5,533   4,504   23  

(1) Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly.

The impact of the accounting reclassification of data transmission costs from revenue to operating costs previously discussed had the following impact on the 2012 comparative figures presented above:

                     
Three Months Ended September 30, 2012       Reported     Previously
Disclosed
    Change
(000s)       ($)     ($)     ($)
Revenue                      
Electronic Drilling Recorder (1)       3,913     3,805     108
Communications (1)       119     119    
Total revenue       9,521     9,413     108
Operating costs       5,879     5,771     108
Nine Months Ended September 30, 2012       Reported     Previously
Disclosed
    Change
(000s)       ($)     ($)     ($)
Revenue                      
Electronic Drilling Recorder (1)       11,127     10,914     213
Communications (1)       424     424    
Total revenue       27,775     27,562     213
Operating costs       16,921     16,708     213

Revenue in the International operations increased 21% in the third quarter of 2013 from the same period in 2012. Year-to-date revenue increased 14%.

Operating profit is up by $1.0 million for the third quarter of 2013 over 2012 results. Operating profit for the first nine months of 2013 is up 23% over the similar period in 2012.

A number of factors influenced these results:

  • In Latin America, increased activity in Argentina and the Andean region offset continued market weakness in Brazil and Mexico. Revenue was up almost 7% over the similar period in 2012.

  • Australia revenue increased almost 60% from 2012 levels as drilling activity continues to increase across the region, translating to a doubling of operating profit.

  • Company continues to increase its customer base in areas the Company has identified as "frontier markets", including the Middle East and North Africa (MENA) regions. These new markets, combined with increases in market share in the Gulf of Mexico, resulted in an increase in year-to-date revenue of 45% over 2012 levels.

  • Operating costs increased due to importation-related expenses in getting additional equipment into certain markets and one time administrative costs.

Consolidated Results

        Three Months Ended September 30, Nine Months Ended September 30,
        2013   2012
(restated)
  Change   2013   2012
(restated)
  Change  
(000s)       ($)   ($)   (%)   ($)   ($)   (%)  
Other expenses                  
Research and development       6,557   5,381   22   20,432   15,434   32  
Corporate services       4,414   3,435   29   13,054   11,397   15  
Stock-based compensation (1)       15,746   5,391   192   26,367   16,554   59  
Other                  
  Litigation provision             61,614   5,413   1,038  
  Foreign exchange loss (gain)       629   1,528   (59)   (622)   4,563    
  Earn-out provision       3,071       3,071      
  Impairment loss         2,636   (100)     2,636   (100)  
  Other       384   298   29   1,106   517   114  
        30,801   18,669   65   125,022   56,514   121  

(1) During the year ended December 31, 2012, the Company identified a non-cash accounting error related to stock-based compensation being understated. Three months ended September 30, 2012 has been restated by $1,600 and 2012 year-to-date has been restated by $3,700.


Q3 2013 versus Q3 2012

The active rig count in US dropped by approximately 8% over the third quarter of 2012, while the Canadian market increased marginally, while both segments saw an increase in their market share. The International market saw a modest increase in total drilling days, with pockets of significant growth (Offshore, Australia) combined with continued weakness in other markets (Brazil, Mexico). This change in activity, combined with a significant increase in stock-based compensation expense recorded in the third quarter of 2013 and a  relatively high effective tax rate led to a decline in net profit in the third quarter of the current year relative to the similar period in 2012.

The Company recorded a net profit of $9.1 million or $0.11 per share in the third quarter of 2013 compared to earnings of $17.7 million or $0.22 per share in the third quarter of 2012. The third quarter consolidated results, when compared to 2012 figures, were impacted by the following significant items:

  • An increase in research and development costs in the third quarter of 2013 as the Company completed the hiring of additional staff in the second half of 2012 to support the EDR innovation project and other product development initiatives.

  • Corporate service costs relate primarily to personnel located in the corporate headquarters who directly support the field operations and perform other corporate functions. These costs have increased over the third quarter of 2012 as a result of additional resources being dedicated to business development and initiatives to enhance our customers' experience. In addition, the Company incurred legal expenses during the third quarter of 2013 relating to the Autodriller litigation.

  • Stock-based compensation expense increased over the third quarter of 2012 due to a significant increase in the Company's stock price during the three months ended September, 2013.

  • Part of the 2009 purchase of Petron was an earn-out clause that was conditional on the successful commercialization of a revenue stream generated from a product designed by Petron. In the third quarter of 2013, the Company and the previous shareholders of Petron agreed to an amount of $3.1 million and a provision for this amount was recorded.

  • In the first half of 2012, the Company made a formal decision to dispose of its US water treatment facility. As a result, a non-cash impairment loss of $2.6 million was recorded in the third quarter of 2012.

  • The effective tax rate for the third quarter of 2013 is significantly higher than the expected statutory rate of 25% due to the following factors:
    • The significant non-deductible, non-cash expense provision for the expensing of common share options under the Black-Scholes pricing model.

    • The Petron earn-out provision which is non-deductible in the current quarter.

    • Larger profits, in relative terms, realized in tax jurisdictions with higher tax rates than the statutory rate.

Q3 2013 versus Q2 2013

The Company's second quarter is usually its weakest due in most part to the seasonality of the Canadian market. The Canadian business unit realized a profit of $15.9 million for the three months ended September 2013, compared to a $0.3 million profit in the second quarter of 2013. The US business unit realized a profit of $30.5 million for the three months ended September 2013 compared to a $28.7 million profit in the second quarter of 2013.

The following items also impacted the comparison to the second quarter 2013 results:

  • In the second quarter of 2013 an additional provision of $61.6 million relating to the AutoDriller litigation was recorded.

  • An increase in stock-based compensation expense of $8.8 million compared to the second quarter of the current year due to an increase in the Company's stock price of 19% during the third quarter.

  • Increase in depreciation and amortization expense of $1.9 million due to the Company recording into income in the second quarter of 2013 R&D tax credits received combined with a third quarter write-off of previously capitalized R&D costs.

  • A foreign exchange loss versus a gain recorded in the previous quarter, due in most part to a weakening Canadian dollar versus the US dollar.

  • Petron earn-out provision of $3.1 million recorded in the third quarter of 2013.

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 Tuesday, November 5, 2013. 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 1-416-849-0833, using password 35071566.

Pason Systems Inc. is a leading global provider of specialized data management systems for drilling rigs. Our solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, enable collaboration between the rig and the office. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.TO.

Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2012, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Condensed Consolidated Interim Balance Sheets

As at   September 30, 2013   December 31, 2012  
(CDN 000s) (unaudited)   ($)   ($)  
Assets      
Current      
  Cash and cash equivalents   198,149   157,944  
  Trade and other receivables   88,749   84,506  
  Prepaid expenses   3,520   2,920  
  Income taxes recoverable   22,657    
  Total current assets   313,075   245,370  
Non-current      
  Property, plant and equipment   177,080   174,651  
  Intangible assets   65,714   59,593  
  Deferred tax assets     8,764  
  Total non-current assets   242,794   243,008  
Total assets   555,869   488,378  
Liabilities and equity      
Current      
  Trade payables and accruals   39,614   25,674  
  Litigation provision   115,192   19,533  
  Income taxes payable   1,341   3,313  
  Stock-based compensation liability   25,905   13,788  
  Dividend payable   10,677   19,691  
  Total current liabilities   192,729   81,999  
Non-current      
  Stock-based compensation liability   10,097   2,583  
  Deferred tax liabilities   9,093   2,600  
  Litigation provision     32,500  
  Total non-current liabilities   19,190   37,683  
Equity      
  Share capital   80,413   79,393  
  Share-based benefits reserve   12,927   12,927  
  Foreign currency translation reserve   (1,463)   (8,348)  
  Retained earnings   252,073   284,724  
  Total equity   343,950   368,696  
Total liabilities and equity   555,869   488,378  



Condensed Consolidated Interim Statements of Operations

    Three Months Ended September 30,   Nine Months Ended September 30,  
    2013   2012
(reclassified
restated)
  2013   2012
(reclassified
restated)
 
(CDN 000s, except per share data) (unaudited)   ($)   ($)   ($)   ($)  
Revenue              
  Equipment rentals and other   104,016   96,262   295,670   295,519  
Operating expenses            
  Rental services   34,438   31,047   101,506   96,617  
  Local administration   4,392   4,272   13,405   15,475  
  Depreciation and amortization   16,319   17,852   45,659   51,736  
    55,149   53,171   160,570   163,828  
             
Operating profit   48,867   43,091   135,100   131,691  
Other expenses            
  Research and development   6,557   5,381   20,432   15,434  
  Corporate services   4,414   3,435   13,054   11,397  
  Stock-based compensation   15,746   5,391   26,367   16,554  
  Other expenses   4,084   4,462   65,169   13,129  
    30,801   18,669   125,022   56,514  
             
Income before income taxes   18,066   24,422   10,078   75,177  
  Income taxes   8,931   6,680   10,711   21,590  
Net income (loss)   9,135   17,742   (633)   53,587  
Earnings (loss) per share            
  Basic   0.11   0.22   (0.01)   0.65  
  Diluted   0.11   0.21   (0.01)   0.65  

Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly. This change has no impact on reported EBITDA, funds flow from operations, or earnings.

Earnings for the three months ended September 30, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $1,600. The 2012 year-to-date correction was $3,700. Per share amounts have been adjusted accordingly.



Condensed Consolidated Interim Statements of Other Comprehensive Income

  Three Months Ended September 30,  Nine Months Ended September 30,  
  2013 2012
(restated)
2013 2012
(restated)
 
(CDN 000s) (unaudited) ($) ($) ($) ($)  
Net income (loss) 9,135 17,742 (633) 53,587  
Other comprehensive (loss) income            
  Foreign currency translation adjustment (6,574) (9,986) 6,885 (5,194)  
Total comprehensive income 2,561 7,756 6,252 48,393  



Condensed Consolidated Interim Statements of Changes in Equity

    Share Capital   Share-Based
Benefits
Reserve
  Foreign
Currency
Translation
Reserve
  Retained
Earnings
  Total
Equity
 
(CDN 000s) (unaudited)   ($)   ($)   ($)   ($)   ($)  
Balance at January 1, 2012   77,613   12,927   (5,835)   282,564   367,269  
  Net income (restated)         53,587   53,587  
  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)   318,118   398,851  
  Net loss         (13,703)   (13,703)  
  Dividends         (19,691)   (19,691)  
  Other comprehensive income       2,681     2,681  
  Exercise of stock options   558         558  
Balance at December 31, 2012   79,393   12,927   (8,348)   284,724   368,696  
  Net loss         (633)   (633)  
  Dividends         (32,018)   (32,018)  
  Other comprehensive income       6,885     6,885  
  Exercise of stock options   1,020         1,020  
Balance at September 30, 2013   80,413   12,927   (1,463)   252,073   343,950  

Earnings for the three months ended September 30, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $1,600. The 2012 year-to-date correction was $3,700. Per share amounts have been adjusted accordingly.

Condensed Consolidated Interim Statements of Cash Flows

    Three Months Ended September 30,  Nine Months Ended September 30,  
    2013   2012
(restated)
  2013   2012
(restated)
 
(CDN 000s) (unaudited)   ($)   ($)   ($)   ($)  
Cash flows from operating activities          
  Net income (loss)   9,135   17,742   (633)   53,587  
Adjustment for non-cash items:          
  Depreciation and amortization   16,319   17,852   45,659   51,736  
  Impairment loss     2,636     2,636  
  Stock-based compensation   11,429   3,051   16,988   10,526  
  Deferred income taxes   17,396   (1,475)   15,257   2,204  
  Unrealized foreign exchange loss   1,647   355   2,104   1,981  
Movements in non-cash items:          
  (Increase) decrease in trade and other receivables   (12,689)   (749)   (3,711)   8,985  
  (Increase) in prepaid expenses   (2,076)   (1,883)   (588)   (2,847)  
  (Decrease) increase in income taxes   (11,150)   5,510   (14,262)   14,559  
  Increase in litigation provision       63,159   4,773  
  Increase in trade payables and accruals   7,981   319   14,477   (1,798)  
  Increase in stock-based compensation liability   4,266   2,471   9,152   5,876  
  Effects of exchange rate changes   (2,408)   (977)   181   (1,030)  
Cash generated from operating activities   39,850   44,852   147,783   151,188  
  Income tax paid   (13)   (2,998)   (10,516)   (16,225)  
Net cash from operating activities   39,837   41,854   137,267   134,963  
Cash flows from (used in) financing activities          
  Proceeds from issuance of common shares   217   393   1,020   1,222  
  Purchase of stock options   (3,458)   (3,151)   (6,510)   (5,240)  
  Payment of dividends   (10,674)   (18,033)   (41,032)   (34,413)  
Net cash used in financing activities   (13,915)   (20,791)   (46,522)   (38,431)  
Cash flows (used in) from investing activities          
  Additions to property, plant and equipment   (18,087)   (14,500)   (38,753)   (48,067)  
  Additions to intangibles   (14)     (153)   (400)  
  Deferred development costs   (4,315)   (2,483)   (11,631)   (7,711)  
  Proceeds on disposal of property, plant and equipment   281     325   300  
  Acquisitions, net of cash acquired     44     (1,230)  
  Changes in non-cash working capital   8   (514)   (507)   (2,911)  
Net cash used in investing activities   (22,127)   (17,453)   (50,719)   (60,019)  
Effect of exchange rate on cash and cash equivalents   (1,091)   (2,409)   179   (1,694)  
Net increase in cash and cash equivalents   2,704   1,201   40,205   34,819  
Cash and cash equivalents, beginning of period   195,445   138,611   157,944   104,993  
Cash and cash equivalents, end of period   198,149   139,812   198,149   139,812  

Earnings for the three months ended September 30, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $1,600. The 2012 year-to-date correction was $3,700. Per share amounts have been adjusted accordingly.

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

Three Months Ended September 30, 2013       Canada   United States   International   Total  
        ($)   ($)   ($)   ($)  
Revenue       32,253   60,226   11,537   104,016  
Operating costs       9,383   22,268   7,179   38,830  
Depreciation and amortization       6,995   7,480   1,844   16,319  
Segment operating profit       15,875   30,478   2,514   48,867  
Research and development             6,557  
Corporate services             4,414  
Stock-based compensation             15,746  
Other expenses             4,084  
Income taxes             8,931  
Net income             9,135  
Capital expenditures       13,760   8,326   316   22,402  
Goodwill         19,379   2,600   21,979  
Intangible assets       32,322   8,439   2,974   43,735  
Segment assets       280,968   213,164   61,737   555,869  
Segment liabilities       168,663   32,518   10,738   211,919  
               
Three Months Ended September 30, 2012 (reclassified, restated)          
               
Revenue       30,343   56,398   9,521   96,262  
Operating costs       8,518   20,922   5,879   35,319  
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             5,391  
Other expenses             4,462  
Income taxes             6,680  
Net income             17,742  
Capital expenditures       6,748   7,170   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       54,448   18,568   8,770   81,786  
                       
                       
Nine Months Ended September 30, 2013       Canada   United States   International   Total  
        ($)   ($)   ($)   ($)  
Revenue       91,769   172,198   31,703   295,670  
Operating costs       26,888   67,036   20,987   114,911  
Depreciation and amortization       18,331   22,145   5,183   45,659  
Segment operating profit       46,550   83,017   5,533   135,100  
Research and development             20,432  
Corporate services             13,054  
Stock-based compensation             26,367  
Other expenses             65,169  
Income taxes             10,711  
Net loss             (633)  
Capital expenditures       27,559   18,095   4,730   50,384  
Goodwill         19,379   2,600   21,979  
Intangible assets       32,322   8,439   2,974   43,735  
Segment assets       280,968   213,164   61,737   555,869  
Segment liabilities       168,663   32,518   10,738   211,919  
               
Nine Months Ended September 30, 2012 (reclassified, restated)          
               
Revenue       93,699   174,045   27,775   295,519  
Operating costs       27,433   67,738   16,921   112,092  
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             16,554  
Other expenses             13,129  
Income taxes             21,590  
Net income             53,587  
Capital expenditures       19,875   30,681   5,222   55,778  
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       54,448   18,568   8,770   81,786  
                       
    Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly. This change has no impact on reported EBITDA, cash flow from operating activities, or earnings.

Earnings for the three months ended September 30, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $1,600. The 2012 year-to-date correction was $3,700. Per share amounts have been adjusted accordingly

.

Correction of Error

During the year ended December 31, 2012, the Company identified a non-cash accounting error related to stock-based compensation being understated. The error was corrected in the Company's consolidated financial statements for the year ended December 31, 2012. The Company determined the error impacted the interim financial statements for both the three and nine month periods ended September 30, 2012 and has corrected the comparative periods included in these condensed consolidated financial statements.

Three Months Ended September 30, 2012 Previously
Disclosed
  Adjustment   Restated  
  ($)   ($)   ($)  
Statement of Operations      
  Stock-based compensation expense 3,791   1,600   5,391  
  Net Income 19,342   (1,600)   17,742  
               
               
Nine Months Ended September 30, 2012 Previously
Disclosed
  Adjustment   Restated  
  ($)   ($)   ($)  
Balance Sheet      
  Stock-based compensation liability - current 9,790   3,700   13,490  
  Retained earnings 321,818   (3,700)   318,118  
Statement of Operations      
  Stock-based compensation expense 12,854   3,700   16,554  
  Net Income 57,287   (3,700)   53,587  
               

Other Expenses

  Three Months Ended September 30,   Nine Months Ended September 30,  
  2013 2012   2013   2012  
  ($) ($)   ($)   ($)  
Litigation provision   61,614   5,413  
Foreign exchange loss (gain) 629 1,528   (622)   4,563  
Earn-out provision 3,071   3,071    
Impairment loss 2,636     2,636  
Other 384 298   1,106   517  
Other expenses 4,084 4,462   65,169   13,129  

Part of the 2009 purchase of Petron was an earn-out clause that was conditional on the successful commercialization of a revenue stream generated from a product designed by Petron. There had been some uncertainty around whether an amount would be due to the formal shareholders of Petron. Management concluded in the third quarter of 2013 that an amount was owing and the Company and former shareholders of Petron agreed to $3.1 million. The Company anticipates that the payment will be made in the fourth quarter of 2013.

In 2012 the Company made a formal decision to dispose of its US water treatment facility. As a result, a non-cash impairment loss of $2,636 was recorded in the third quarter of 2012.

Pason Systems Inc.

Pason Systems Inc. is a leading global provider of specialized data management systems for drilling rigs. Our solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, enable collaboration between the rig and the office. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.TO.

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.

For further information:

For more information about Pason Systems Inc., visit the company's website at www.pason.com or contact:

Marcel Kessler 
President and CEO
403-301-3400
marcel.kessler@pason.com

David Elliott
Chief Financial Officer
403-301-3441
david.elliott@pason.com



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