Pason Reports Second Quarter 2015 Results

CALGARY, Aug. 11, 2015 /CNW/ - Pason Systems Inc. (TSX:PSI) announced today its 2015 second quarter results.

Performance Data


Three Months Ended June 30,

Six Months Ended June 30,


2015

2014

Change

2015

2014

Change

(CDN 000s, except per share data)

($)

($)

(%)

($)

($)

(%)

Revenue

57,440

103,851

(45)

156,842

227,025

(31)

(Loss) income

(9,404)

17,606

-

4,787

38,427

(88)


Per share – basic

(0.11)

0.21

-

0.06

0.47

(87)


Per share – diluted

(0.11)

0.21

-

0.06

0.47

(87)

EBITDA (1)

7,485

45,999

(84)

51,611

116,468

(56)


As a % of revenue

13.0

44.3

(71)

32.9

51.3

(36)

Funds flow from operations

9,277

44,255

(79)

52,539

100,566

(48)


Per share – basic

0.11

0.54

(80)

0.63

1.22

(48)


Per share – diluted

0.11

0.53

(79)

0.63

1.20

(48)

Cash from operating
activities

31,300

55,980

(44)

102,833

120,365

(15)

Free cash flow (1)

21,298

37,763

(44)

69,517

85,725

(19)


Per share – basic

0.25

0.46

(46)

0.83

1.04

(20)


Per share – diluted

0.25

0.45

(44)

0.83

1.02

(19)

Capital expenditures

10,002

18,315

(45)

33,515

34,824

(4)

Working capital

227,046

162,896

39

227,046

162,896

39

Total assets

549,310

503,254

9

549,310

503,254

9

Total long-term debt

Cash dividends declared

0.17

0.15

13

0.34

0.30

13

Shares outstanding end of period (#000's)

83,656

82,678

1

83,656

82,678

1

(1) Non-IFRS financial measures are defined in the Management's Discussion and Analysis section.

Q2 2015 vs Q2 2014
The Company generated consolidated revenue of $57.4 million in the second quarter of 2015, down 45% from $103.9 million in the same period of 2014. The continued slowdown in oil and gas drilling activity, combined with a reduction in product adoption on certain products and pricing pressure from customers,contributed to the decrease in revenue, which was partially offset by the strengthening of the US dollar relative to the Canadian dollar.

Consolidated EBITDA was $7.5 million in the second quarter, a decrease of $38.5 million from the second quarter of 2014.

The Company recorded a net loss of $9.4 million ($0.11 per share) in the second quarter, a decrease of $27.0 million from the net income of $17.6 million ($0.21 per share) recorded in same period in 2014. Included in the 2015 second quarter results are restructuring costs totaling $2.6 million.


President's Message
The second quarter is usually the weakest for Pason due to the seasonality of Canadian drilling activity. More importantly, the full impact of the downturn caused by low oil prices has adversely impacted  Pason's financial results in the second quarter.

On June 25, 2014, the price for West Texas Intermediate (WTI) oil was US$106.50. Since reaching that  peak, the oil price has declined sharply with the Organization of Petroleum Exporting Countries (OPEC) and North American shale fighting for market share. Oil bottomed out at US$43.46 on March 26 this year before recovering to above US$55 by the beginning of June. As I write this message, it is again below US$45.

Operators looking to conserve cash in this lower oil price environment, particularly in the United States and in Canada, have cut capital expenditures, staffing levels, and existing operations. Land drilling activity in North America is down more than 50% compared to one year ago. As a result, we have experienced a severe contraction in revenue and margins.

Pason generated revenue of $57.4 million in the second quarter of 2015, down 45% from $103.9 million in the same period of 2014. The continued slowdown in oil and gas drilling activity, combined with a reduction in product adoption for certain products and pricing pressure from customers, contributed to the decrease in revenue. EBITDA was $7.5 million in the second quarter, a decrease of $38.5 million from the second quarter of 2014. Pason recorded a net loss of $9.4 million ($0.11 per share), a decrease of $27.0 million from the net income of $17.6 million in the same period last year.

Over the last several months, we responded to this challenging environment by taking the necessary steps to ensure Pason remains a strong and viable company by reducing our capital expenditures and lowering operating costs. Our capital expenditure plan for 2015 is $65 million compared to $121 million in 2014. We reduced our staffing levels (employees and contractors) by 20% which resulted in the Company recording a restructuring charge of $2.6 million in the second quarter of 2015 (for a run-rate savings of  approximately $15.0 million per annum) and cut back on discretionary spending. We are closely monitoring the industry outlook to determine if, and when, further operating  (including excess satellite bandwidth) and capital reductions may be required.

It is encouraging that we have been able to defend our market share in all core markets and that declines in revenue per EDR day have been relatively modest, attesting to the value of our product suite and our pricing power.

Based on what we know today, it looks unlikely that industry activity, and Pason's results, will rebound as quickly as they did in the last downturn six years ago. Analysts are calling for an oil price of approximately US$60 for 2016 to 2018. As operators look to conserve cash, new capital expenditures will likely be delayed or canceled. This will particularly affect offshore and heavy oil projects. North American shale, with its enormous resources, scalability, and flexible development, will be more resilient but also very volatile. Shale developments will also expand internationally in regions like Vaca Muerte, in Argentina.

At current oil prices, new North American shale developments are operating at, or below, break-even, despite the fact that costs have fallen around US$20/barrel over the last year as drilling and completions efficiency has increased (and operators have received significant pricing concessions from service companies). We therefore expect that the emphasis on efficiency and pricing will persist going forward.

Implications for Pason are twofold: 1) more than ever, we are focusing efforts to develop and market products and services that create significant and visible value, either by saving costs, or by increasing revenue for our customers; and 2) we are strengthening our market presence in OPEC countries, with a focus on the Middle East.

It is clear that we need to continue to invest in future growth, including investments in new product development, in service capabilities, in infrastructure and systems, and in our international footprint as outlined below:

  • New Product Development: Our product development objectives are structured around four themes:
  1. Innovating EDR and key peripherals for advanced drilling rigs
  2. Providing reliable, fast, and price competitive communication and IT services to rigsite users
  3. Pursuing opportunities in advanced well control and mud management
  4. Developing real-time, collaborative drilling optimization and wellbore quality applications.
  • Service Capabilities: We continue to enhance our service capabilities, which includes our Field Technicians and Technical Support.
  • Infrastructure and Systems: We continue to focus on improving the stability and reliability, security, and disaster recovery capability of core infrastructure and systems.
  • International Footprint: We are increasing our international footprint, including our Saudi joint venture, and we recently opened a small business development office in Dubai.

On June 30, 2015, our cash position stood at $195.3 million and working capital at $227.0 million. There is no debt on the balance sheet. We are maintaining our quarterly dividend at $0.17 per share.

(signed)
Marcel Kessler
President and Chief Executive Officer
August 11, 2015

Management's Discussion and Analysis
The following discussion and analysis has been prepared by management as of August 11, 2015, 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 report are expressed in Canadian dollars unless otherwise indicated.

Additional IFRS Measures
In its interim condensed consolidated financial statements, the Corporation uses certain additional IFRS measures. Management believes these measures provide useful supplemental information to readers.

Funds flow from operations
Management believes that funds flow from operations, as reported in the Consolidated Statements of Cash Flows, is a useful additional measure as it represents the cash generated during the period, regardless of the timing of collection of receivables and payment of payables. Funds flow from operations represents the cash flow from continuing operations, excluding non-cash items. Funds flow from operations is defined as net income adjusted for depreciation and amortization expense, non-cash stock-based compensation expense, deferred taxes, and other non-cash items impacting operations.

Cash from operating activities
Cash from operating activities is defined as funds flow from operations adjusted for changes in working capital items.

Non-IFRS Financial Measures
These definitions are not recognized measures under IFRS, and accordingly, may not be comparable to measures used by other companies. These Non-IFRS measures provide readers with additional information regarding the Company's ability to generate funds to finance its operations, fund its research and development and capital expenditure program, and pay dividends.

EBITDA
EBITDA is defined as net income before interest expense, income taxes, stock-based compensation expense,   depreciation and amortization expense, and gains on disposal of investments.

Free cash flow
Free cash flow is defined as cash from operating activities plus proceeds on disposal of property, plant and equipment, less capital expenditures, and deferred development costs.


Overall Performance


Three Months Ended June 30,


Six Months Ended June 30,


2015


2014


Change


2015


2014


Change

(000s)

($)


($)


(%)


($)


($)


(%)

Revenue













Electronic Drilling Recorder

24,926


46,739


(47)


66,327


100,254


(34)


Pit Volume Totalizer/ePVT

7,579


15,135


(50)


21,746


33,776


(36)


Communications

5,149


8,057


(36)


15,112


18,212


(17)


Software

3,902


6,795


(43)


10,581


15,505


(32)


AutoDriller

3,908


9,136


(57)


11,514


20,615


(44)


Gas Analyzer

3,845


7,514


(49)


11,526


17,564


(34)


Other

8,131


10,475


(22)


20,036


21,099


(5)

Total revenue

57,440


103,851


(45)


156,842


227,025


(31)

Electronic Drilling Recorder (EDR) and Pit Volume Totalizer (PVT) rental day performance for Canada and the United States is reported below:

Canada


Three Months Ended June 30,

Six Months Ended June 30,


2015


2014


Change


2015


2014


Change


#


#


(%)


#


#


(%)

EDR rental days

8,400


16,400


(49)


34,600


59,100


(41)

PVT rental days

7,900


15,800


(50)


32,700


57,100


(43)















United States


Three Months Ended June 30,

Six Months Ended June 30,


2015


2014


Change


2015


2014


Change


#


#


(%)


#


#


(%)

EDR rental days

47,200


97,700


(52)


113,200


186,800


(39)

PVT rental days

35,400


75,000


(53)


87,300


143,300


(39)

Electronic Drilling Recorder (EDR)
The Pason 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 decreased 47% for the second quarter of 2015 compared to the same period in 2014. This decrease is attributable to the industry slowdown, lower product adoption of certain peripheral devices, and pricing pressures from customers which were offset by a strengthening US dollar relative to the Canadian dollar and the continued acceptance of the Company's Rig Display.  Industry activity in the US market decreased 51% in the second quarter of 2015 compared to the corresponding period in 2014 (37% on a year-to-date basis), while second quarter Canadian rig activity decreased 52% compared to the same period in 2014 (47% on a year-to-date basis). Canadian EDR days decreased 49% in the second quarter of 2015  from 2014 levels (41% on a year-to-date basis), while US EDR days decreased by 52% for the second quarter of 2015 (39% on a year-to-date basis).

During the first half of the year, the Pason EDR was installed on 97% of all active land rigs in Canada and 57% of the land rigs in the US, compared to 94% and 60% respectively in the first half of 2014.


Pit Volume Totalizer (PVT) and Electronic Pit Volume Totalizer (ePVT)
The 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 first six months of 2015 was impacted by the decline in rig count activity, offset partially with continued customer adoption of the new ePVT. During the first six months of 2015, the PVT was installed on 94% of rigs with a Pason EDR in Canada and 77% in the US, compared to 97% and 76% respectively, in the same period of 2014.


Communications
Pason's Communications revenue is derived from the provision of communications services including the provision of bandwidth through the Company's automatically-aiming satellite system and terrestrial networks. This system provides reliable 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 complements its satellite equipment with High Speed Packet Access (HSPA), a high-speed wireless ground system which provides automatic fail-over between satellite and terrestrial networks to achieve greater reliability in its service offering.

Communications revenue decreased by 17% in the first six months of 2015 compared to the same period in 2014 due to the industry slowdown, offset by both the increased usage of the Company's premium product offerings in the Canadian and US markets, and the strengthening of the US dollar relative to the Canadian dollar.


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.
  • LRV Mobile, which allows 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, including directional offerings.

During the first half of 2015, 96% of the Company's Canadian customers and 88% of customers in the US were using all or a portion of the functionality of the DataHub, compared to 97% and 91% respectively in the first half of 2014.


AutoDriller
Pason's AutoDriller is used to maintain constant weight on the drill bit while a well is being drilled. During the six months ended June 30, 2015, the AutoDriller was installed on 64% of Canadian and 35% of US land rigs operating with a Pason EDR system, compared to 74% and 46%, respectively, in 2014.


Gas Analyzer
The Pason Gas Analyzer measures the total hydrocarbon gases (C1 through C4 and CO2) exiting the wellbore, and then calculates the lag time to show the formation depth where the gases were produced. The Gas Analyzer provides information about the 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. During the first six months of 2015, the Gas Analyzer was installed on 57% of Canadian and 28% of US land rigs operating with a Pason EDR system, compared to 60% and 24% for the Canadian and US segments respectively in the prior year period.


Other
Other is comprised mostly of the rental of service rig recorders in Latin America, the Electronic Choke Actuator, Hazardous Gas Alarm products, Mobilization revenue, sales of sensors and other systems sold by 3PS,  and spare parts sold by Pason Offshore.

Discussion of Operations

United States Operations


Three Months Ended June 30,

Six Months Ended June 30,


2015


2014


Change


2015


2014


Change

(000s)

($)


($)


(%)


($)


($)


(%)

Revenue













Electronic Drilling Recorder

17,612


33,608


(48)


43,444


64,061


(32)


Pit Volume Totalizer/ePVT

5,005


10,262


(51)


13,041


19,655


(34)


Communications

3,234


5,194


(38)


7,832


8,976


(13)


Software

3,053


5,223


(42)


7,259


10,272


(29)


AutoDriller

2,103


6,126


(66)


5,825


11,624


(50)


Gas Analyzer

2,355


4,118


(43)


5,959


7,748


(23)


Other

5,116


7,231


(29)


12,633


13,558


(7)

Total revenue

38,478


71,762


(46)


95,993


135,894


(29)

Operating costs

19,375


23,455


(17)


44,350


46,602


(5)

Depreciation and amortization

8,254


8,133


1


18,012


15,693


15

Segment operating profit

10,849


40,174


(73)


33,631


73,599


(54)


Three Months Ended June 30,


2015


2014


USD


CAD


USD


CAD


$


$


$


$

Revenue per EDR day

620


761


643


704

Revenue per industry day

373


458


390


427








Six Months Ended June 30,


2015

2014


USD


CAD


USD


CAD


$


$


$


$

Revenue per EDR day

650


803


636


698

Revenue per industry day

372


460


379


416

US segment revenue decreased by 46% in the second quarter of 2015 over the 2014 comparable period (53% decrease when measured in USD). For the first six months, revenue decreased by 29% (38% decrease when measured in USD).

Industry activity in the US market during the second quarter of 2015 decreased 51% from the prior year, while revenue from the rental of instrumentation decreased by 48% for the quarter over 2014 levels (53% decrease when measured in USD). For the first six months, industry activity decreased 37% from 2014 levels, while instrumentation revenue decreased 30% (38% decrease when measured in USD).

EDR rental days decreased by 52% for the quarter ended June 30, 2015 over the same time period in 2014, while revenue per EDR day in the second quarter of 2015 decreased to US$620, a decrease of US$23 over the same period in 2014. For the first six months, EDR rental days decreased 39%, while revenue per EDR day increased by US$14 to US$650.

The decrease in industry activity, combined with pricing pressure from customers and lower product adoption on certain products accounted for the drop in revenue for both the quarter and six months ended June 30, 2015. This decrease was offset by the favourable movement in the USD/CAD exchange rate and continued customer usage of premium communication services. US market share was 60% during the three months ended June 30, 2015, down slightly from 61% in the same period of 2014.  

Operating costs decreased by 17% in the second quarter relative to the same period in the prior year. When measured in USD, operating costs decreased 27% (USD 15% on a year-to-date basis) as the business unit continues to identify and implement changes to its fixed cost structure to meet the challenging business environment while maintaining customer service.

Depreciation expense for the first six months of 2015 increased 15% over 2014 amounts. This increase is due to the roll out of the capital equipment associated with the commercialization of the ePVT, including the continued roll out of the Rig Display, the upgrade program to the Company's fleet of workstations, and the introduction of the new Versatile Services Platform (VSP) server, all of which occurred during the latter half of 2014.

Segment profit, as a percentage of revenue, was 28% for the second quarter of 2015 compared to 56% for the corresponding period in 2014, or a decrease of $29.3 million. Segment profit decreased to $33.6 million for the first six months of 2015, a drop of 54% from the same period in 2014.


Canadian Operations


Three Months Ended June 30,


Six Months Ended June 30,


2015


2014


Change


2015


2014


Change

(000s)

($)


($)


(%)


($)


($)


(%)

Revenue













Electronic Drilling Recorder

3,471


7,952


(56)


14,145


26,390


(46)


Pit Volume Totalizer/ePVT

1,471


2,954


(50)


6,024


10,401


(42)


Communications

1,387


2,401


(42)


6,180


8,395


(26)


Software

718


1,377


(48)


3,026


4,879


(38)


AutoDriller

690


1,711


(60)


3,187


6,527


(51)


Gas Analyzer

891


2,243


(60)


3,989


7,488


(47)


Other

613


1,200


(49)


2,049


3,619


(43)

Total revenue

9,241


19,838


(53)


38,600


67,699


(43)

Operating costs

6,798


9,467


(28)


15,703


20,390


(23)

Depreciation and amortization

9,332


5,916


58


18,961


12,395


53

Segment operating (loss) profit

(6,889)


4,455


-


3,936


34,914


(89)


Three Months Ended June 30,


2015


2014


CAD


CAD


$


$

Revenue per EDR day

1,082


1,195

Revenue per industry day

1,032


1,070








Six Months Ended June 30,


2015


2014


CAD


CAD


$


$

Revenue per EDR day

1,103


1,136

Revenue per industry day

1,135


1,064

Canadian segment revenue decreased by 53% for the quarter ended June 30, 2015 compared to the same period in 2014. This drop is the result of a 52% decrease in the number of drilling industry days in the second quarter compared to 2014 levels, pricing pressures from customers, and lower product adoption on some products. On a year-to-date basis, revenue decreased 43% while industry days declined 47%.

EDR rental days decreased 49% in the second quarter compared to 2014 (41% for the first six months of 2015).

The factors above combined to result in a decrease in revenue per EDR day of $113 to $1,082 during the second quarter of 2015 compared to 2014. Revenue per EDR day for the first half of 2015 was $1,103, down $33 from the same period in 2014.

Operating costs decreased by 28% in the second quarter of 2015 relative to the same period in 2014 (23% on a year-to-date basis), primarily due to a drop in activity combined with cost control initiatives implemented by all of the business units.  

Depreciation expense increased by approximately 50% for both the three month and six month periods ended June 30, 2015 due to the Company's 2014 capital expenditure program explained above in the United States operations update, combined with the amortization of previously deferred research and development costs.

Second quarter operating loss of $6.9 million is a decrease of $11.3 million over the prior year. Segment operating profit for the first six months of 2015 is down 89% from last year's comparatives.


International Operations


Three Months Ended June 30,


Six Months Ended June 30,


2015


2014


Change


2015


2014


Change

(000s)

($)


($)


(%)


($)


($)


(%)

Revenue













Electronic Drilling Recorder

3,843


5,179


(26)


8,738


9,803


(11)


Pit Volume Totalizer/ePVT

1,103


1,919


(43)


2,681


3,720


(28)


Communications

528


462


14


1,100


841


31


Software

131


195


(33)


296


354


(16)


AutoDriller

1,115


1,299


(14)


2,502


2,464


2


Gas Analyzer

599


1,153


(48)


1,578


2,328


(32)


Other

2,402


2,044


18


5,354


3,922


37

Total revenue

9,721


12,251


(21)


22,249


23,432


(5)

Operating costs

7,035


6,854


3


15,567


13,345


17

Depreciation and amortization

3,012


1,855


62


5,347


3,558


50

Segment operating (loss)profit

(326)


3,542


(109)


1,335


6,529


(80)

The market forces impacting the Company's US and Canadian segments also exist in the majority of the Company's International markets, with Argentina being the exception.

Revenue in the International operations segment decreased 21% in the second quarter of 2015 compared to the same period in 2014. For the first half of 2015, revenue decreased $1.2 million, or 5%.

Operating profit decreased by $3.9 million for the second quarter of 2015 over 2014 amounts. Year-to-date profit declined 80%, or $5.2 million

A number of factors influenced these results:

  • Argentina revenue increased $0.8 million or 21% for the second quarter of 2015 compared to 2014. For the first six months of 2015 revenue increased 41% or $2.9 million.
  • Operating costs increased for the first six months due to the increased drilling activity in Argentina combined with an increase in equipment importation costs for Argentina. All International business units saw a decline in their controllable costs. 
  • Depreciation costs increased due to 2014 capital expenditures and a write-off of obsolete spare parts. 


Corporate Expenses


Three Months Ended June 30,


Six Months Ended June 30,


2015


2014


Change


2015


2014


Change

(000s)

($)


($)


(%)


($)


($)


(%)

Other expenses












Research and development

8,813


8,517


3


18,143


16,175


12

Corporate services

4,720


5,715


(17)


9,906


10,191


(3)

Stock-based compensation

5,563


7,136


(22)


3,788


24,804


(85)

Other








Restructuring costs

2,572




2,572




Foreign exchange (gain) loss

(12)


3,359



(2,459)


2,909



Gain on sale of investment




(2,290)




Other

654


485


35


1,449


945


53

Total corporate expenses

22,310


25,212


(12)


31,109


55,024


(43)

In response to the current business environment, the Company reduced its staffing levels during the second quarter of 2015 and recorded a restructuring charge of $2.6 million.

In the first quarter of 2015, the Company disposed of its investment in a small privately held company and realized a gain of $2.3 million.

Q2 2015 vs Q1 2015
Consolidated revenue was $57.4 million in the second quarter of 2015 compared to $99.4 million in the first quarter of 2015, a decrease of $42.0 million or 42%. The second quarter is usually the Company's weakest due to the spring break-up in Canada, but the second quarter of 2015 was impacted further by a continuing deterioration in drilling activity in most major markets. The Canadian segment earned revenue of $9.2 million in the second quarter as compared to $29.4 million in the first quarter of 2015, a decrease of $20.2 million. Revenue in the US market decreased by $19.0 million while the International segment experienced a revenue decrease of $2.8 million.

Sequentially, EBITDA decreased from $44.1 million in the first quarter of 2015 to $7.5 million in the second quarter of 2015, while funds flow from operations decreased to $9.3 million in the second quarter from $43.3 million in the first quarter of 2015.

The Company recorded a net loss in the second quarter of 2015 of $9.4 million ($0.11 per share) compared to net income of $14.2 million ($0.17 per share) in the first quarter of 2015. A continuing decline in activity  during the second quarter, an increase in stock-based compensation expense due to the increase in the Company's share price, and the restructuring costs contributed to the reported loss.

In May 2015, shareholders approved a modification to the Option Plan to eliminate the ability for the option holder to settle options for cash. As a result of this change, stock-based compensation expense relating to the Option Plan will be less volatile going forward as the fair value of the option is calculated at the time of grant and is not subsequently re-valued at the end of each reporting period.


Second Quarter Conference Call
Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its second quarter 2015 results at 9:00 am (Calgary time) on Wednesday, August 12, 2015. 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 48514919.

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.

Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2014, 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


June 30, 2015


December 31, 2014

(CDN 000s) (unaudited)


($)


($)

Assets




Current





Cash and cash equivalents


195,254


144,858


Trade and other receivables


49,734


122,494


Prepaid expenses


3,234


5,811


Income taxes recoverable


5,312


491


Total current assets


253,534


273,654

Non-current





Property, plant and equipment


235,330


234,344


Intangible assets and goodwill


60,446


62,068


Total non-current assets


295,776


296,412

Total assets


549,310


570,066

Liabilities and equity




Current





Trade payables and accruals


19,931


47,414


Income taxes payable


1,497


3,544


Stock-based compensation liability


5,060


16,125


Total current liabilities


26,488


67,083

Non-current





Stock-based compensation liability


3,962


3,018


Deferred tax liabilities


17,049


16,442


Total non-current liabilities


21,011


19,460

Equity





Share capital


119,667


113,827


Share-based benefits reserve


24,870


12,927


Foreign currency translation reserve


56,937


32,807


Retained earnings


300,337


323,962


Total equity


501,811


483,523

Total liabilities and equity


549,310


570,066

Condensed Consolidated Interim Statements of Operations



Three Months Ended June 30,


Six Months Ended June 30,



2015


2014


2015


2014

(CDN 000s, except per share data) (unaudited)


($)


($)


($)


($)










Revenue


57,440


103,851


156,842


227,025

Operating expenses







Rental services


28,947


35,181


66,443


70,753


Local administration


4,261


4,595


9,177


9,584


Depreciation and amortization


20,598


15,904


42,320


31,646



53,806


55,680


117,940


111,983







Operating profit


3,634


48,171


38,902


115,042

Other expenses







Research and development


8,813


8,517


18,143


16,175


Corporate services


4,720


5,715


9,906


10,191


Stock-based compensation expense


5,563


7,136


3,788


24,804


Other expense (income)


3,214


3,844


(728)


3,854



22,310


25,212


31,109


55,024







(Loss) income before income taxes


(18,676)


22,959


7,793


60,018


Income tax (recovery) expense


(9,272)


5,353


3,006


21,591

Net (loss) income


(9,404)


17,606


4,787


38,427

(Loss) income per share







Basic


(0.11)


0.21


0.06


0.47


Diluted


(0.11)


0.21


0.06


0.47


Condensed Consolidated Interim Statements of Other Comprehensive (Loss) Income



Three Months Ended June 30,


Six Months Ended June 30,



2015


2014


2015


2014

(CDN 000s) (unaudited)


($)


($)


($)


($)

Net (loss) income


(9,404)


17,606


4,787


38,427

Items that may be reclassified subsequently to net income:







Foreign currency translation adjustment


(6,829)


(6,896)


24,130


1,774

Total comprehensive (loss) income


(16,233)


10,710


28,917


40,201


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, 2014


80,725


12,927


7,958


264,859


366,469


Net lncome





38,427


38,427


Dividends





(24,755)


(24,755)


Other comprehensive income




1,774



1,774


Exercise of stock options


15,100





15,100

Balance at June 30, 2014


95,825


12,927


9,732


278,531


397,015


Net income





73,677


73,677


Dividends





(28,246)


(28,246)


Other comprehensive income




23,075



23,075


Exercise of stock options


18,002





18,002

Balance at December 31, 2014


113,827


12,927


32,807


323,962


483,523


Net income





4,787


4,787


Dividends





(28,412)


(28,412)


Other comprehensive income




24,130



24,130


Exercise of stock options


5,840


(306)




5,534


Expense related to vesting of options



576




576


Reclassification of equity settled options



11,673




11,673

Balance at June 30, 2015


119,667


24,870


56,937


300,337


501,811


Condensed Consolidated Interim Statements of Cash Flows



Three Months Ended June 30,


Six Months Ended June 30,


2015


2014


2015


2014

(CDN 000s) (unaudited)


($)


($)


($)


($)

Cash from (used in) operating activities







Net (loss) income


(9,404)


17,606


4,787


38,427

Adjustment for non-cash items:







Depreciation and amortization


20,598


15,904


42,320


31,646


Gain on sale of investment




(2,290)




Stock-based compensation


5,563


7,136


3,788


24,804


Deferred income taxes


(7,591)


(48)


431


2,609


Unrealized foreign exchange loss


111


3,657


3,503


3,080

Funds flow from operations


9,277


44,255


52,539


100,566

Movements in non-cash working capital items:







Decrease in trade and other receivables


33,594


12,483


78,184


2,889


Decrease/(increase) in prepaid expenses


1,455


(675)


2,716


249


(Decrease)/increase in income taxes


(3,868)


2,340


620


13,114


(Decrease)/increase in trade payables, accruals and stock-based compensation liability


(8,360)


1,740


(21,407)


7,033


Effects of exchange rate changes


831


(2,778)


(2,358)


(1,000)

Cash generated from operating activities


32,929


57,365


110,294


122,851


Income tax paid


(1,629)


(1,385)


(7,461)


(2,486)

Net cash from operating activities


31,300


55,980


102,833


120,365

Cash flows from (used in) financing activities







Proceeds from issuance of common shares


1,348


3,473


4,041


7,035


Purchase of stock options





(2,589)


Payment of dividends


(14,219)


(12,356)


(28,412)


(23,857)

Net cash used in financing activities


(12,871)


(8,883)


(24,371)


(19,411)

Cash flows (used in) from investing activities







Additions to property, plant and equipment and investment in joint venture


(7,595)


(17,209)


(29,030)


(31,662)


Deferred development costs


(2,407)


(1,106)


(4,485)


(3,162)


Proceeds on disposal of investment and property, plant and equipment



98


3,288


184


Changes in non-cash working capital


(2,126)


363


(7,253)


1,360

Net cash used in investing activities


(12,128)


(17,854)


(37,480)


(33,280)

Effect of exchange rate on cash and cash equivalents


(2,833)


(1,423)


9,414


(215)

Net increase in cash and cash equivalents


3,468


27,820


50,396


67,459

Cash and cash equivalents, beginning of period


191,786


129,159


144,858


89,520

Cash and cash equivalents, end of period


195,254


156,979


195,254


156,979


Operating Segments

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

Three Months Ended June 30, 2015

Canada


United States


International


Total


($)


($)


($)


($)

Revenue

9,241


38,478


9,721


57,440

Operating costs

6,798


19,375


7,035


33,208

Depreciation and amortization

9,332


8,254


3,012


20,598

Segment operating (loss) profit

(6,889)


10,849


(326)


3,634

Research and development




8,813

Corporate services




4,720

Stock-based compensation




5,563

Other expenses




3,214

Income taxes




(9,272)

Net loss




(9,404)

Capital expenditures

4,981


3,347


1,674


10,002

Goodwill


23,087


2,600


25,687

Intangible assets

31,394


1,600


1,765


34,759

Segment assets

139,763


333,969


75,578


549,310

Segment liabilities

10,284


16,859


20,356


47,499






Three Months Ended June 30, 2014










Revenue

19,838


71,762


12,251


103,851

Operating costs

9,467


23,455


6,854


39,776

Depreciation and amortization

5,916


8,133


1,855


15,904

Segment operating profit

4,455


40,174


3,542


48,171

Research and development




8,517

Corporate services




5,715

Stock-based compensation




7,136

Other expenses




3,844

Income taxes




5,353

Net Income




17,606

Capital expenditures

6,160


9,684


2,471


18,315

Goodwill


19,759


2,600


22,359

Intangible assets

32,395


6,504


2,533


41,432

Segment assets

152,415


288,690


62,149


503,254

Segment liabilities

62,702


32,784


10,753


106,239
















Six Months Ended June 30, 2015

Canada


United States


International


Total


($)


($)


($)


($)

Revenue

38,600


95,993


22,249


156,842

Operating costs

15,703


44,350


15,567


75,620

Depreciation and amortization

18,961


18,012


5,347


42,320

Segment operating profit

3,936


33,631


1,335


38,902

Research and development




18,143

Corporate services




9,906

Stock-based compensation




3,788

Other income




(728)

Income taxes




3,006

Net Income




4,787

Capital expenditures

10,905


15,169


7,441


33,515

Goodwill


23,087


2,600


25,687

Intangible assets

31,394


1,600


1,765


34,759

Segment assets

139,763


333,969


75,578


549,310

Segment liabilities

10,284


16,859


20,356


47,499






Six Months Ended June 30, 2014










Revenue

67,699


135,894


23,432


227,025

Operating costs

20,390


46,602


13,345


80,337

Depreciation and amortization

12,395


15,693


3,558


31,646

Segment operating profit

34,914


73,599


6,529


115,042

Research and development




16,175

Corporate services




10,191

Stock-based compensation




24,804

Other expenses




3,854

Income taxes




21,591

Net lncome




38,427

Capital expenditures

10,073


20,702


4,049


34,824

Goodwill


19,759


2,600


22,359

Intangible assets

32,395


6,504


2,533


41,432

Segment assets

152,415


288,690


62,149


503,254

Segment liabilities

62,702


32,784


10,753


106,239


Other Expenses (Income)


Three Months Ended June 30,


Six Months Ended June 30,


2015


2014


2015


2014


($)


($)


($)


($)

Foreign exchange (gain) loss

(12)


3,359


(2,459)


2,909

Gain on sale of investment



(2,290)


Restructuring costs

2,572



2,572


Other

654


485


1,449


945

Other expenses (income)

3,214


3,844


(728)


3,854

In response to the current business environment, the Company reduced its staffing levels during the second quarter of 2015 and recorded a restructuring charge of $2,572.

During the first quarter of 2015, the Company disposed of its investment in a small, privately held company and realized a gain of $2,290.

Incentive Plan Liabilities

In May 2015, shareholders' approved a modification of the Option Plan to eliminate the ability for the option holder to settle options for cash. As a result of this change;

  • The grant date fair value, which is still calculated using the Black-Scholes option pricing model, is no longer revalued at the end of each reporting period, and   
  • The stock-based compensation liability of $11,700 ($10,900 recorded as a current liability and $800 recorded as a non-current liability) relating to the stock options was reclassified to contributed surplus.

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: 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; Jon Faber, Chief Financial Officer, 403-301-3400, jon.faber@pason.com

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