Pason Systems Inc. reports second quarter operating results

Stock Exchange: TSX

Symbol: PSI

CALGARY, Aug. 9 /CNW/ - Pason Systems Inc. ("Pason" or "the Company") today announced its results for the three-month and six-month periods ended June 30, 2010.

    
    Performance Data
    -------------------------------------------------------------------------
                       Three Months Ended June 30,  Six Months Ended June 30,
    -------------------------------------------------------------------------
                            2010     2009  Change      2010     2009  Change
    -------------------------------------------------------------------------
    (000s, except per share   ($)      ($)    (%)        ($)      ($)    (%)
    data) (unaudited)
    Revenue                51,031   22,251    129    107,415   76,426     41
    EBITDA(1)              21,512      994  2,064     46,902   24,769     89
      As a % of revenue      42.2      4.5    838       43.7     32.4     35
      Per share - basic      0.26     0.01  2,500       0.58     0.30     93
      Per share - diluted    0.26     0.01  2,500       0.58     0.30     93
    Funds flow from
     operations(1)         18,764    3,058    514     39,218   21,743     80
      Per share - basic      0.23     0.04    475       0.48     0.27     78
      Per share - diluted    0.23     0.04    475       0.48     0.27     78
    Earnings (Loss)         6,453   (8,706)     -     14,850   (3,790)     -
      Per share - basic      0.08    (0.11)     -       0.18    (0.05)     -
      Per share - diluted    0.08    (0.11)     -       0.18    (0.05)     -
    Capital expenditures    7,132    2,755    159     11,451    8,466     35
    Working capital       137,331  157,218    (13)   137,331  157,218    (13)
    Total assets          387,692  392,754     (1)   387,692  392,754     (1)
    Shareholders' equity  312,291  336,915     (7)   312,291  336,915     (7)
    Common shares
     outstanding (No.)
      Basic                81,501   81,473      -     81,495   81,466      -
      Diluted              81,501   81,473      -     81,495   81,466      -
    Shares outstanding
     end of period         81,501   81,475      -     81,501   81,475      -
    -------------------------------------------------------------------------
    (1) EBITDA is defined as earnings before interest expense, income taxes,
        stock-based compensation expense and depreciation and amortization
        expense. Funds flow from operations is defined as earnings adjusted
        for depreciation and amortization expense, stock-based compensation
        expense, future income taxes and other non-cash items impacting
        operations as presented in the Consolidated Statements of Cash Flows.
        These definitions are not recognized measures under Canadian
        generally accepted accounting principles, and accordingly, may not be
        comparable to measures used by other companies.
    

President's Message

Operations Review

The oil and gas industry continues to earn its reputation for volatility as economic trends that were all in a downward spiral at this time last year have shown a surprising reversal towards a relatively strong market for oil and gas drilling. While certainly not back to boom level activity of 2008 in the United States and 2006 in Canada, the current market is providing ample opportunity for Pason to demonstrate its strengths and earn solid returns. During the second quarter Pason recorded revenue of $51.0 million, a 129% improvement over 2009. Again due to Pason's somewhat unusual oilfield service cost structure consisting of primarily fixed costs, this revenue increase amplified into a much greater improvement in EBITDA, cash flow and earnings. EBITDA rose to $21.5 million from less than a million in 2009 and cash flow increased to $18.8 million compared to $3.1 million in the prior year. Profitability returned with last year's $8.7 million loss reversed by a profit of $6.5 million this year.

As is always the case in the second quarter, which is a generally inactive quarter in Canada, Pason's results were dominated by activity in the United States. Leading the return to overall profitability was the segment profit of $14.0 million generated in the United States representing a significant improvement over the loss of $3.5 million logged last year. This dramatic reversal was driven by a surprisingly strong rebound in rig count and a very successful integration of the Petron employees and rental business within the United States. From last year's low of approximately 700 rigs the rig count has risen to about 1,500 rigs, which is not that far off the 2008 peak of 2,000 active rigs. Pason's rig count has rebounded even more from last year's second quarter low of fewer than 400 rigs to a current level of approximately 1,000 rigs or about 65% of all rigs working in the United States. This strengthening rig count allowed us to reverse our price decreases of 2009 during the first quarter and as a result revenue per industry day for the quarter was a very strong $263 compared to $165 in 2009. We have added about 40% of the field technician positions we terminated in 2009, but have done so with greater operating leverage. As a result, the number of rigs per field technician now is tracking at almost 8, which is record leverage for the Company and speaks to the quality of our field technicians and the maturing of the regional rental manager level that we added several years ago. We also improved margin with our decision last year to cease providing manned geological services and concentrate on unmanned geological services. Our revenue fell but we had positive margin of $0.3 million versus $0.1 million in 2009. Finally, results were aided by a smaller undepreciated base of rental assets and because our depreciation is time based, depreciation for the quarter fell even though activity increased. We continue to compete in all basins and are particularly strong in the new Marcellus basin where there was little prior base of oilfield services.

It is difficult for an oilfield service company in Canada with any significant overhead to achieve profitability in the largely dormant second quarter. Therefore we were pleased to almost break even and record only a small loss of $0.3 million versus a $4.8 million loss last year in the Canadian business unit. Canadian drilling days were up 77% which compares to our 75% increase in revenue. However, our Canadian business unit expenses were almost flat year over year which directly contributed to greatly improved margin. Clearly we need new product revenue growth in Canada and believe that if we can enter a relatively stable period, rather than the choppy activity of the last three years, we should be able to demonstrate some meaningful growth with the directional drilling facilitation product and a new version of our total gas system.

International revenue increased to $5.4 million from $2.4 million last year but the 2009 profit of $0.6 million was reduced to $0.3 million in this year's second quarter. Despite increases in profitability in all other International markets, overall profitability was hurt by losses in Pason Offshore. This was due to significant non-cash charges resulting from the Petron acquisition. All other International entities as a group actually contributed $2.4 million of segment profit or a significant improvement over the prior year. International sales opportunities have slowed from 2009 but there was also some loss of momentum during the change of management resulting from Pason's acquisition of the Petron business. We are hopeful that a newly hired general manger and the combination of former Petron employees and Pason Houston employees into a new office later this year, will improve the focus and execution of this business segment.

We recognize that creating material new revenue in an established company is a challenging task and in response to that need, we recently formed a key department called the New Revenue Group to be led by Bob Rodda, formerly our COO. The functions of this group, which will focus on revenue rather than operations, will be to search for new technologies, consolidate and investigate new product ideas within Pason and to help in the initial rollout of new products. The relatively small team in the new revenue group is being assembled with outside hires and transfers internally involving people with a demonstrated skill and interest in building revenue. At the same time we are looking to hire a replacement COO from the outside with experience in managing the organizational structure of a larger, multi-jurisdictional company.

We also continue to investigate the potential for Pason within the oilfield water cleaning and treatment market, which is clearly expanding with a plethora of new technologies and entrants. The key for Pason is whether, similar to the drilling rig instrumentation market, the challenges of deploying, monitoring and servicing water treatment plants, are sufficiently challenging that the role makes sense for a specialty service company rather than the larger participants already involved within the industry. The next 12 months should answer that question.

Outlook

With consistent oil prices, promising new oil targets in North America plus a steady strengthening of natural gas prices, there appears to be more optimism for a stable rig count somewhere between the recent highs and lows the Industry has experienced. Providing a second wave of worldwide macro economic instability does not occur, we would expect to have a reasonable environment within which we can deliver meaningful profits for the balance of the year.

On behalf of the Board of Directors,

(signed)

Jim Hill

Chairman, President & Chief Executive Officer

August 6, 2010

Second Quarter Conference Call

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its second quarter results at 9:00 a.m. (Calgary time) on Tuesday, August 10, 2010. The conference call dial-in number is 1-888-231-8191, conference ID No. 75691639.

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

Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI. Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2009, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

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.

    
    Consolidated Balance Sheets
    -------------------------------------------------------------------------
    As at                                                    June   December
                                                               30,        31,
                                                             2010       2009
    -------------------------------------------------------------------------
    (000s) (unaudited)                                         ($)        ($)

    Assets
    Current
      Cash                                                121,598    109,849
      Accounts receivable                                  54,304     39,102
      Prepaid expenses                                      1,018      1,416
      Income taxes recoverable                              1,785      2,928
      Future income tax assets                             11,134      9,037
    -------------------------------------------------------------------------
                                                          189,839    162,332
    Capital assets                                        157,460    170,678
    Intangible assets (Note 3)                             22,988     19,557
    Future income tax asset                                11,353     14,558
    Goodwill                                                6,052      5,972
    -------------------------------------------------------------------------
                                                          387,692    373,097
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
    Current
      Accounts payable and accrued liabilities             37,218     29,780
      Current portion of stock-based compensation
       liability                                            2,250      1,320
      Dividend payable                                     13,040     11,408
    -------------------------------------------------------------------------
                                                           52,508     42,508
    Stock-based compensation liability                      1,614        906
    Future income tax liabilities                          21,279     21,348
    -------------------------------------------------------------------------
                                                           75,401     64,762
    -------------------------------------------------------------------------
    Shareholders' Equity (Note 2)
    Share capital                                          72,050     71,864
    Contributed surplus                                    14,845     14,029
    Accumulated other comprehensive loss                  (21,507)   (22,651)
    Retained earnings                                     246,903    245,093
    -------------------------------------------------------------------------
                                                          312,291    308,335
    -------------------------------------------------------------------------
                                                          387,692    373,097
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.


    Consolidated Statements of Operations and Retained Earnings
    -------------------------------------------------------------------------
                                    Three Months Ended      Six Months Ended
                                               June 30,              June 30,
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------
    (000s, except per share data)        ($)        ($)        ($)        ($)
    (unaudited)

    Revenue
      Equipment rentals              49,273     20,736    103,747     72,632
      Geological services               804      1,437      2,055      3,480
      Instrumentation sales             860          -      1,418          -
      Interest                           94         78        195        314
    -------------------------------------------------------------------------
                                     51,031     22,251    107,415     76,426
    -------------------------------------------------------------------------
    Expenses
      Rental services                21,377     13,346     43,659     35,349
      Geological services               466      1,352      1,539      3,351
      Cost of instrumentation sales     597          -        775          -
      Manufacturing and distribution    301        106        512        184
      Research and development        4,433      3,081      8,282      6,414
      Corporate services              1,857      1,345      3,707      3,014
      Local administration            1,780        949      3,382      2,463
      Stock-based compensation        1,224      1,624      2,532      2,002
      Depreciation and amortization  12,768     14,346     24,116     30,437
    -------------------------------------------------------------------------
                                     44,803     36,149     88,504     83,214
    -------------------------------------------------------------------------
    Earnings (loss) before the
     under noted items                6,228    (13,898)    18,911     (6,788)
    Other (income) expenses          (1,292)     1,078     (1,343)       882
    -------------------------------------------------------------------------
    Earnings (loss) before income
     taxes                            7,520    (14,976)    20,254     (7,670)
    -------------------------------------------------------------------------
    Income tax expense (recovery)
      Current                           648     (2,813)     4,634      1,606
      Future                            419     (3,457)       770     (5,486)
    -------------------------------------------------------------------------
                                      1,067     (6,270)     5,404     (3,880)
    -------------------------------------------------------------------------
    Earnings (loss)                   6,453     (8,706)    14,850     (3,790)
    Retained earnings, beginning
     of period                      253,490    276,704    245,093    271,788
    Dividends (Note 5)              (13,040)    (9,777)   (13,040)    (9,777)
    -------------------------------------------------------------------------
    Retained earnings, end of
     period                         246,903    258,221    246,903    258,221
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings (loss) per share
      Basic                            0.08      (0.11)      0.18      (0.05)
      Diluted                          0.08      (0.11)      0.18      (0.05)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.


    Consolidated Statements of Comprehensive Income (Loss)
    -------------------------------------------------------------------------
                                    Three Months Ended      Six Months Ended
                                               June 30,              June 30,
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------
    (000s) (unaudited)                   ($)        ($)        ($)        ($)

    Earnings (loss)                   6,453     (8,706)    14,850     (3,790)
    Other comprehensive income
     (loss), net of tax
      Foreign currency translation
       adjustment                     4,298    (12,945)     1,144     (8,074)
    -------------------------------------------------------------------------
    Total comprehensive income
     (loss)                          10,751    (21,651)    15,994    (11,864)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.


    Consolidated Statements of Accumulated Other Comprehensive Loss
    -------------------------------------------------------------------------
                                    Three Months Ended      Six Months Ended
                                               June 30,              June 30,
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------
    (000s) (unaudited)                   ($)        ($)        ($)        ($)

    Accumulated other comprehensive
     (loss) income, beginning of
     period                         (25,805)     7,321    (22,651)     2,450
    Other comprehensive income
     (loss), net of tax
      Foreign currency translation
       adjustment                     4,298    (12,945)     1,144     (8,074)
    -------------------------------------------------------------------------
    Accumulated other comprehensive
     loss, end of period            (21,507)    (5,624)   (21,507)    (5,624)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.


    Consolidated Statements of Cash Flows
    -------------------------------------------------------------------------
                                    Three Months Ended      Six Months Ended
                                               June 30,              June 30,
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------
    (000s) (unaudited)                   ($)        ($)        ($)        ($)

    Cash flows related to the
     following activities:
    Operating
      Earnings (loss)                 6,453     (8,706)    14,850     (3,790)
      Adjustments for non-cash
       items:
        Depreciation and
         amortization                12,768     14,346     24,116     30,437
        Stock-based compensation        414        822        936        502
        Future income taxes             419     (3,457)       770     (5,486)
        Unrealized foreign exchange
         (gain) loss                 (1,290)        53     (1,454)        80
    -------------------------------------------------------------------------
                                     18,764      3,058     39,218     21,743
      Changes in non-cash working
       capital                        2,131     26,735     (2,021)    57,745
    -------------------------------------------------------------------------
                                     20,895     29,793     37,197     79,488
    -------------------------------------------------------------------------
    Financing
      Issue of common shares under
       the stock option plan             11         60        165        165
      Purchase of stock options           -        (55)         -       (218)
      Payment of dividends                -          -    (11,408)    (9,777)
    -------------------------------------------------------------------------
                                         11          5    (11,243)    (9,830)
    -------------------------------------------------------------------------
    Investing
      Additions to capital assets    (6,046)    (2,001)    (9,403)    (6,855)
      Deferred development costs,
       net of investment tax
       credits received              (1,086)      (754)    (2,048)    (1,611)
      Purchase of Australian
       distribution rights                -          -     (2,829)         -
      Proceeds on disposal of
       capital assets                    10        251         22        375
      Changes in non-cash working
       capital                          (89)    (3,157)      (456)    (5,223)
    -------------------------------------------------------------------------
                                     (7,211)    (5,661)   (14,714)   (13,314)
    Effect of exchange rate changes
     on cash                          1,689     (3,475)       509     (2,819)
    -------------------------------------------------------------------------
    Net increase in cash and cash
     equivalents                     15,384     20,662     11,749     53,525
    Cash and cash equivalents,
     beginning of period            106,214    133,473    109,849    100,610
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                  121,598    154,135    121,598    154,135
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Represented by:
      Cash and short-term deposits  108,558    144,358    108,558    144,358
      Cash held in trust (Note 5)    13,040      9,777     13,040      9,777
    -------------------------------------------------------------------------
    Cash and cash equivalents       121,598    154,135    121,598    154,135
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.


    Notes to Interim Consolidated Financial Statements

    Six Months Ended June 30, 2010 and 2009

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

    1.  Significant Accounting Policies

    These interim consolidated financial statements have been prepared in
    accordance with the same accounting policies and methods of computation
    as those outlined in the annual audited financial statements. These
    interim consolidated financial statements do not include all disclosures
    normally provided in annual financial statements and should be read in
    conjunction with the Company's audited annual financial statements for
    the year ended December 31, 2009.

    2.  Share Capital

    Authorized

    Unlimited number of common shares
    Unlimited number of preferred shares, issuable in series

    Issued

    Common shares
    -------------------------------------------------------------------------
                                                           Shares     Amount
    -------------------------------------------------------------------------
                                                             (No.)        ($)
    Balance, December 31, 2009                             81,487     71,864
      Exercise of stock options                                14        165
      Contributed surplus adjustment on exercise of
       stock options                                            -         21
    -------------------------------------------------------------------------
    Balance, June 30, 2010                                 81,501     72,050
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    The basic and diluted weighted average number of common shares
    outstanding for the six months ended June 30, 2010 was 81,495.

    Stock Option Plan

    At June 30, 2010, 5,520 stock options were outstanding for common shares
    at exercise prices ranging from $10.99 to $17.11 per share, expiring
    between 2010 and 2015 as follows:

    -------------------------------------------------------------------------
                                          2010                  2009
    -------------------------------------------------------------------------
                                              Weighted              Weighted
                                               Average               Average
                                      Share   Exercise      Share   Exercise
                                    Options      Price    Options      Price
    -------------------------------------------------------------------------
                                       (No.)        ($)      (No.)        ($)
    Outstanding, beginning of
     period                           6,540      12.05      6,753      12.88
      Granted                            30      11.90         50      12.31
      Exercised                         (17)     12.06        (67)      8.20
      Forfeited                      (1,033)     13.86     (1,320)     14.13
    -------------------------------------------------------------------------
    Outstanding, end of period        5,520      11.71      5,416      12.62
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Exercisable, end of period        1,886      12.12      1,509      13.63
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Available for grant, end of
     period                           2,630                 2,732
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    All options are issued at market price and vest over three years. The
    following table summarizes the life of options issued:

    -------------------------------------------------------------------------
    Date of Issuance                                                   Years
    -------------------------------------------------------------------------
    November 2006 through October 2008                                  3.50
    November 2008 and thereafter                                        5.00

    The following table summarizes information about stock options
    outstanding at June 30, 2010:

    -------------------------------------------------------------------------
    Options Outstanding Options Exercisable
    -------------------------------------------------------------------------
                                   Weighted
                                    Average
                                  Remaining   Weighted              Weighted
                                   Contrac-    Average               Average
             Range of     Options      tual   Exercise Exercisable  Exercise
      Exercise Prices Outstanding      Life      Price    (Vested)     Price
    -------------------------------------------------------------------------
                   ($)       (No.)   (Years)        ($)       (No.)       ($)
        10.99 - 11.79       1,662      4.42      10.99           -         -
        11.80 - 12.00       2,106      3.43      11.80         716     11.80
        12.01 - 13.00       1,691      1.00      12.18       1,121     12.18
        13.01 - 17.11          61      0.88      15.29          49     15.37
    -------------------------------------------------------------------------
                            5,520      2.96      11.71       1,886     12.12
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    The total number of options outstanding must not exceed 10% of the total
    common shares outstanding.

    All stock options granted to employees and directors were accounted for
    using the fair value method estimated on the date of grant using the
    Black-Scholes option pricing model. This method was in effect until the
    shareholders approved adjustments to the stock option plan on October 23,
    2008. As of this date, stock options have been accounted for using a
    combination of both the fair value and intrinsic value methods.

    Contributed Surplus

    Amounts recorded to contributed surplus are as follows:
    -------------------------------------------------------------------------
    Six Months Ended June 30,                                2010       2009
    -------------------------------------------------------------------------
                                                               ($)        ($)
    Balance, beginning of period                           14,029      8,834
      Stock-based compensation expense                        844      1,706
      Stock options exercised                                 (21)       (38)
        Intrinsic value adjustment                             (7)     2,096
    -------------------------------------------------------------------------
    Balance, end of period                                 14,845     12,598
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Restricted Share Unit ("RSU") Plan

    In November of 2008, the Company introduced an RSU program for employees
    and directors. At June 30, 2010, 608 (2009 - 576) RSUs were outstanding.
    All RSUs vest over three years and will result in a cash payment to
    holders based upon the corresponding future market value of the Company's
    common shares. Stock-based compensation expense arising from the RSU plan
    is recorded in the Consolidated Statements of Operations and the
    corresponding liability is recorded in the Consolidated Balance Sheets.

    Stock-based Compensation Expense and Liability

    Stock-based compensation expense can be summarized as follows:
    -------------------------------------------------------------------------
                                    Three Months Ended      Six Months Ended
                                               June 30,              June 30,
                                       2010       2009       2010       2009
    -------------------------------------------------------------------------
                                         ($)        ($)        ($)        ($)

    Stock options                       414        822        936        502
    RSUs                                810        802      1,596      1,500
    -------------------------------------------------------------------------
    Stock-based compensation expense  1,224      1,624      2,532      2,002
    -------------------------------------------------------------------------

    Stock-based compensation liability can be summarized as follows:
    -------------------------------------------------------------------------
    As at                                                    June   December
                                                               30,        31,
                                                             2010       2009
    -------------------------------------------------------------------------
                                                               ($)        ($)
    Stock options                                              84         32
    RSUs                                                    2,166      1,288
    -------------------------------------------------------------------------
    Current portion of stock-based compensation liability   2,250      1,320
    -------------------------------------------------------------------------

    Stock options                                              70         27
    RSUs                                                    1,544        879
    -------------------------------------------------------------------------
    Long-term portion of stock-based compensation
     liability                                              1,614        906
    -------------------------------------------------------------------------
    Total stock-based compensation liability                3,864      2,226
    -------------------------------------------------------------------------

    Purchase of Common Shares

    On March 22, 2010, the Company received regulatory approval to renew its
    normal course issuer bid program. The Company did not purchase any shares
    during the first two quarters of either 2010 or 2009. The Company is
    authorized to purchase and cancel up to 4,000 common shares before the
    bid terminates on March 23, 2011. The daily purchase limit is 26 common
    shares.

    3.  Re-Purchase of Australian Distribution Rights

    In January of 2010, the Company re-purchased its Australian distribution
    rights for US$2,750 from its former partner. This amount was recorded in
    intangible assets on the Company's Consolidated Balance Sheets.

    4.  Contingencies

    Since late 2003, the Company has defended its position in patent
    infringement lawsuits in Canada and the United States regarding the
    Company's automatic driller. Trial on the U.S. lawsuit concluded on
    November 6, 2008. The jury determined Pason's automatic driller infringed
    three claims of the patent at issue, denied the Company's claim that the
    patent was invalid, and awarded damages in the amount of US$14,300. The
    Company accrued this amount in the 2008 consolidated financial
    statements. On April 30, 2009, the trial judge denied Pason's motion to
    reverse the jury verdict and the alternative motion for a new trial,
    approved the jury's damages award of US$14,300, plus interest and court
    costs, and certified the matter for appeal. The judge denied the
    plaintiff's request for enhanced damages based on willful infringement
    and refused the plaintiff's motion for a permanent injunction that would
    have prevented the rental of Pason's automatic driller in the United
    States.

    The Company subsequently filed an appeal with the Federal Circuit Appeals
    Court and posted a bond suspending any enforcement of the verdict while
    the appeal was pending. The plaintiff filed a motion with the Federal
    Circuit Appeals Court arguing that the trial court was premature in
    certifying the judgment as final and appealable without resolving Pason's
    claim that the patent holder was guilty of inequitable conduct in its
    prosecution of the patent. The Federal Circuit Appeals Court agreed,
    dismissed the appeal, and remanded the case to the trial court. Further
    trial proceedings at the trial court level are currently stayed in
    deference to the re-examination proceedings described below.

    Upon application by the Company, the United States Patent and Trademark
    Office ("USPTO") determined in August 2009 that prior art not previously
    considered in the prosecution of the patent at issue raised substantial
    new questions of patentability. In December 2009, the USPTO issued an
    initial office action determining as a preliminary matter that several
    claims of the '142 Patent were invalid, including the three claims
    previously litigated in the U.S. case. In February 2010, the USPTO issued
    a "Final Rejection". In the Final Rejection, the USPTO rejected two
    claims of the '142 Patent but also confirmed two others. In response, the
    plaintiff moved to amend the two rejected claims to overcome the
    rejection. On March 27, 2010, the examiner allowed the plaintiff's
    amendment and issued a Notice of Intent to Issue Re-examination
    Certificate. Once the Re-examination Certificate is issued, this will
    conclude the re-examination proceeding. The matter will then be returned
    to the trial court for further proceedings on Pason's inequitable conduct
    claims and the plaintiff's request for an injunction.

    If the Company does not prevail on its inequitable conduct defense and
    claim, it intends to renew its appeal on all issues.

    In the Canadian case, which is scheduled to come to trial in January
    2011, management's assessment of the outcome continues to be that the
    asserted claims of the patent are not valid, and/or the Company does not
    infringe on any valid claims, and as a result, the Canadian litigation is
    not expected to have a significant adverse impact on the Company's
    financial position or operations. The outcome of the U.S. case does not
    bind a Canadian court. Accordingly, no amount has been accrued for any
    potential loss under the Canadian case in the consolidated financial
    statements at June 30, 2010.

    5.  Common Share Dividend

    During the second quarter of 2010, the Company declared a dividend of
    $13,040 (2009 - $9,777) or $0.16 per common share (2009 - $0.12). The
    Company transferred these funds to the transfer agent to be held in trust
    until the dividend payment was made on July 2, 2010.

    6.  Segmented Information

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

    -------------------------------------------------------------------------
                                                United     Inter-
                                     Canada     States   national      Total
    -------------------------------------------------------------------------
                                         ($)        ($)        ($)        ($)
    Three Months Ended June 30, 2010
    Revenue                           9,983     35,661      5,387     51,031
    Operating costs                   5,172     15,931      3,117     24,220
    Depreciation and amortization     5,084      5,694      1,990     12,768
    -------------------------------------------------------------------------
    Segment operating profit (loss)    (273)    14,036        280     14,043
    --------------------------------------------------------------
    --------------------------------------------------------------
    Research and development                                           4,433
    Stock-based compensation                                           1,224
    Corporate services                                                 1,857
    Manufacturing and distribution                                       301
    Other income                                                      (1,292)
    Income taxes                                                       1,067
                                                                  -----------
    Earnings                                                           6,453
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures                392      4,135      2,605      7,132
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Three Months Ended June 30, 2009
    Revenue                           5,706     14,187      2,358     22,251
    Operating costs                   4,566     10,400        681     15,647
    Depreciation and amortization     5,940      7,291      1,115     14,346
    -------------------------------------------------------------------------
    Segment operating (loss) profit  (4,800)    (3,504)       562     (7,742)
    --------------------------------------------------------------
    --------------------------------------------------------------
    Research and development                                           3,081
    Stock-based compensation                                           1,624
    Corporate services                                                 1,345
    Manufacturing and distribution                                       106
    Other expenses                                                     1,078
    Income taxes                                                      (6,270)
                                                                  -----------
    Loss                                                              (8,706)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures                607        446      1,702      2,755
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                United     Inter-
                                     Canada     States   national      Total
    -------------------------------------------------------------------------
    Six Months Ended June 30, 2010
    Revenue                          36,587     60,583     10,245    107,415
    Operating costs                  11,940     30,892      6,523     49,355
    Depreciation and amortization    10,198     10,441      3,477     24,116
    -------------------------------------------------------------------------
    Segment operating profit (loss)  14,449     19,250        245     33,944
    --------------------------------------------------------------
    --------------------------------------------------------------
    Research and development                                           8,282
    Stock-based compensation                                           2,532
    Corporate services                                                 3,707
    Manufacturing and distribution                                       512
    Other income                                                      (1,343)
    Income taxes                                                       5,404
                                                                  -----------
    Earnings                                                          14,850
                                                                  -----------
                                                                  -----------
    Total assets                    195,446    133,795     58,451    387,692
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures              2,350      5,317      3,784     11,451
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Six Months Ended June 30, 2009
    Revenue                          28,040     43,477      4,909     76,426
    Operating costs                  11,974     26,852      2,337     41,163
    Depreciation and amortization    11,861     16,500      2,076     30,437
    -------------------------------------------------------------------------
    Segment operating profit          4,205        125        496      4,826
    --------------------------------------------------------------
    --------------------------------------------------------------
    Research and development                                           6,414
    Stock-based compensation                                           2,002
    Corporate services                                                 3,014
    Manufacturing and distribution                                       184
    Other expenses                                                       882
    Income taxes                                                      (3,880)
                                                                  -----------
    Loss                                                              (3,790)
                                                                  -----------
    Total assets                    192,073    180,287     20,394    392,754
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures              1,412      3,026      4,028      8,466
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

SOURCE Pason Systems Inc.

For further information: For further information: Pason Systems Inc., Jim Hill, Chairman, President and CEO, Phone: (403) 301-3401, Fax: (403) 301-3499, E-mail: jim.hill@pason.com; Jim Glasspoole, Chief Financial Officer, Phone: (403) 692-3840, Fax: (403) 301-3411, E-mail: jim.glasspoole@pason.com


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