Pason Systems Inc. reports third quarter operating results

    
    Stock Exchange: TSX
    Symbol: PSI
    

CALGARY, Nov. 4 /CNW/ - Pason Systems Inc. ("Pason" or "the Company") today announced its results for the three and nine-month period ended September 30, 2009.

    
    PERFORMANCE DATA

    -------------------------------------------------------------------------
                                Three Months Ended         Nine Months Ended
                                      September 30,             September 30,
    -------------------------------------------------------------------------
                              2009     2008  Change     2009     2008  Change
    -------------------------------------------------------------------------
    (000s, except per share    ($)      ($)     (%)      ($)      ($)     (%)
     data) (unaudited)

    Revenue                 28,422   80,478    (65)  104,848  207,911    (50)
    EBITDA(1)                8,261   45,698    (82)   33,031  112,468    (71)
      As a % of revenue       29.1     56.8    (49)     31.5     54.1    (42)
      Per share - basic       0.10     0.56    (82)     0.41     1.38    (70)
      Per share - diluted     0.10     0.55    (82)     0.41     1.37    (70)
    Funds flow from
     operations(1)           7,373   37,665    (80)   29,116   93,439    (69)
      Per share - basic       0.09     0.46    (80)     0.36     1.15    (69)
      Per share - diluted     0.09     0.46    (80)     0.36     1.14    (68)
    (Loss) Earnings         (4,200)  21,357      -    (7,990)  48,682      -
      Per share - basic      (0.05)    0.26      -     (0.10)    0.60      -
      Per share - diluted    (0.05)    0.26      -     (0.10)    0.59      -
    Capital expenditures     3,879   16,991    (77)   12,345   43,651    (72)
    Working capital        150,029  144,653      4   150,029  144,653      4
    Total assets           367,147  378,483     (3)  367,147  378,483     (3)
    Shareholders' equity   320,669  334,836     (4)  320,669  334,836     (4)
    Common shares
     outstanding (No.)
      Basic                 81,487   82,010     (1)   81,472   81,314      -
      Diluted               81,487   82,746     (2)   81,472   81,984     (1)
    Shares outstanding
     end of period          81,487   81,890      -    81,487   81,890      -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (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

Due to continuing low levels of oilfield drilling activity, Pason recorded disappointing results in its 2009 third quarter, especially when compared to the third quarter of 2008, which was a Company record for any prior quarter. Revenue for the third quarter decreased 65% from the prior year to $28.4 million, cash flow was off 80% at $7.4 million, earnings fell from a profit of $21.4 million in the prior year to a loss of $4.2 million in the current quarter. This resulted in a loss of $0.05 per diluted share compared to earnings of $0.26 in 2008. Returning to profitability is proving to be a challenge with Canadian drilling days off 58% from the prior year contributing to a decline of 61% in Canadian revenue and even worse reductions in the U.S. with a drop of 51% in drilling days forcing significant price reductions and a 71% fall in revenue. However, slow progress returning to profitability is being made with each month in the quarter improving over the prior month. Sequentially, our loss for the quarter was less than half of the $8.7 million suffered in the second quarter.

United States segment operating results showed a loss of $2.7 million, which was marginally improved over the prior quarter loss of $3.5 million but was off substantially from the record $21.5 million earned in 2008. Revenue per U.S. industry day was $150 compared to $251 in the prior year. Immediately after the quarter, Pason closed the purchase of Petron Industries for a price of US$18.0 million plus up to US$7.0 million in three years' time conditional on the development of a new revenue stream for offshore rigs.

Combining Petron with Pason has proved immediately popular with U.S. customers as Petron's field service benefits from Pason's more efficient field service model and Pason's equipment is enhanced by Petron's recent leading edge software improvements in the field and on their data hub. Pason's market share in the U.S. (percentage of rigs with at least some Pason product) had fallen from a high last year of 62% to a low of 45% last spring. At the end of the third quarter this metric had improved to 53%. With the addition of Petron products and people, the Company expects to achieve a new high for market share early in the new year. We will not provide separate market share numbers for Pason and Petron products on rigs because we expect many rigs to have products from both companies contributing to improved revenue per rig totals. Petron's excellent marketing contacts can be levered to add many products that they did not formerly offer, but now can be supplied from Pason's product suite. For example, to Petron rigs with an EDR, pit volume totalizer and data hub, Pason can add total gas, automatic aiming satellite, hazardous gas, electronic choke and remote geology which results in higher revenue per rig than either company was previously able to achieve in the United States. The management teams from the two companies have made a conscious decision to focus initially on maximizing revenue while delaying work on generating synergy benefits until later. This strategic move is aimed at capitalizing on the current momentum and enthusiasm that both companies are experiencing with their respective field and marketing staffs. As a result, we expect a significant improvement in revenue in the fourth quarter with a corresponding margin improvement coming later.

In Canada, our segment operating profit was $2.0 million for the quarter compared to $14.0 million recorded in 2008. Although a severe drop over the prior year, there was good sequential improvement from the loss of $4.8 million suffered in the second quarter of this year. Further, most of the quarter's profit came from the last month of the quarter indicating that there is momentum for continuing improving earnings. Our revenue per industry drilling day decreased to $674 for the quarter versus $761 a year ago. Our costs continue to slowly trend down, even as activity rises modestly, resulting in improving margins.

International segment operating profit was up to $2.1 million compared to $1.2 million in 2008. Surging gains in activity in Mexico are being temporarily offset by the costs of transporting new equipment to that country, which Pason expenses, and by continuing lower activity levels in South America. At the end of the third quarter Pason had 92 active rigs in Mexico generating gross revenue of triple what was recorded in the prior year. Revenue growth may level off somewhat in 2010, but it will provide an opportunity for more efficiencies and improved margins. There are also expected to be some growth opportunities from the Petron purchase, but not as strong a synergy as is being felt in the United States.

OUTLOOK

Despite oil prices currently around $80 a barrel and gas prices up from the summer lows, most industry analysts are not expecting a meaningful increase in drilling before the end of next year. We are not simply waiting for that turnaround but are actively attempting to develop the assets brought to us in the Petron purchase. Once the two companies' field service structures and products are combined, we feel we will be able to demonstrate a compelling product improvement to customers in 2010. In addition, we will build on new business areas that Petron carried out in a minor way due to financial restrictions. We will be setting up new business units for the eastern hemisphere (rental and sold products), offshore products and rig control products. We are excited by the potential challenges that these three new opportunities will provide and believe we have sufficient management expertise to develop them in concert with rebuilding our profitability in our current activities in Canada, United States and Latin America. After closing the Petron purchase we had $116.2 million in cash and continue to build on that total ensuring we have sufficient resources to fund the new business units.

On behalf of the Board of Directors,

(signed)

Jim Hill

President & Chief Executive Officer

November 4, 2009

THIRD QUARTER CONFERENCE CALL

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its third quarter results at 9:00 a.m. (Calgary time) on Thursday, November 5, 2009. The conference call dial-in number is 1-888-231-8191. Seven-day replay: 1-800-678-0453 and enter 31209629 followed by the number sign.

Pason Systems Inc. is the world's largest provider of rental oilfield instrumentation systems that are designed and manufactured for use on land-based drilling and service rigs. Pason offers a tightly integrated package of complex services, including data acquisition, wellsite reporting software, remote communications and Internet information management tools. Pason now offers offshore instrumentation rentals and sold instrumentation systems.

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, 2008, is available on SEDAR at www.sedar.com or visit 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                                         September 30,  December 31,
                                                          2009          2008
    -------------------------------------------------------------------------
    (000s) (unaudited)                                      ($)           ($)

    Assets
    Current
      Cash and cash equivalents                        135,515       100,610
      Accounts receivable                               28,774        78,568
      Prepaid expenses                                   1,593         2,023
      Income taxes recoverable                           3,218        12,539
      Future income tax assets                           9,617         9,153
    -------------------------------------------------------------------------
                                                       178,717       202,893
    Investment                                           2,453         2,802
    Capital assets                                     167,558       207,342
    Deferred development costs                          10,953         8,979
    Future income tax assets                             7,466         5,000
    -------------------------------------------------------------------------
                                                       367,147       427,016
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
    Current
      Accounts payable and accrued liabilities          26,158        38,123
      Current portion of stock-based
       compensation liability                            2,530         2,656
      Dividend payable                                       -         9,777
    -------------------------------------------------------------------------
                                                        28,688        50,556
    Stock-based compensation liability                   2,283         1,475
    Future income tax liabilities                       15,507        20,396
    -------------------------------------------------------------------------
                                                        46,478        72,427
    -------------------------------------------------------------------------
    Shareholders' Equity (Note 2)
    Share capital                                       71,850        71,517
    Contributed surplus                                 13,035         8,834
    Accumulated other comprehensive (loss) income      (18,237)        2,450
    Retained earnings                                  254,021       271,788
    -------------------------------------------------------------------------
                                                       320,669       354,589
    -------------------------------------------------------------------------
                                                       367,147       427,016
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.



    CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

    -------------------------------------------------------------------------
                                    Three Months Ended     Nine Months Ended
                                          September 30,         September 30,
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    (000s, except per share data)        ($)        ($)        ($)        ($)
    (unaudited)

    Revenue
     Equipment rentals               27,146     75,809     99,778    196,404
     Geological services              1,215      4,303      4,695     10,586
     Interest                            61        366        375        921
    -------------------------------------------------------------------------
                                     28,422     80,478    104,848    207,911
    -------------------------------------------------------------------------
    Expenses
      Rental services                13,053     25,871     48,401     67,979
      Geological services             1,236      2,601      4,587      7,050
      Manufacturing and
       distribution                     188        702        372      2,819
      Research and development        2,990      2,414      9,404      9,366
      Corporate services              1,518      1,675      4,532      4,570
      Local administration              984      1,591      3,447      4,741
      Stock-based compensation        3,188      1,304      5,190      3,976
      Interest                            -         18          1        189
      Depreciation and
       amortization                  11,692     13,707     42,129     39,380
    -------------------------------------------------------------------------
                                     34,849     49,883    118,063    140,070
    -------------------------------------------------------------------------
    (Loss) earnings before the
     under noted items               (6,427)    30,595    (13,215)    67,841
    Other expenses (income)             192        (74)     1,074     (1,082)
    -------------------------------------------------------------------------
    (Loss) earnings before
     income taxes                    (6,619)    30,669    (14,289)    68,923
    -------------------------------------------------------------------------
    Income taxes
      Current                          (258)     8,015      1,348     18,840
      Future                         (2,161)     1,297     (7,647)     1,401
    -------------------------------------------------------------------------
                                     (2,419)     9,312     (6,299)    20,241
    -------------------------------------------------------------------------
    (Loss) earnings                  (4,200)    21,357     (7,990)    48,682
    Retained earnings, beginning
     of period                      258,221    257,737    271,788    238,599
    -------------------------------------------------------------------------
    Dividends (Note 6)                    -          -     (9,777)    (8,187)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Purchase of common shares
     (Note 2)                             -     (4,019)         -     (4,019)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Retained earnings, end
     of period                      254,021    275,075    254,021    275,075
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (Loss) earnings per share
      Basic                           (0.05)      0.26      (0.10)      0.60
      Diluted                         (0.05)      0.26      (0.10)      0.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

    -------------------------------------------------------------------------
                                    Three Months Ended     Nine Months Ended
                                          September 30,         September 30,
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    (000s) (unaudited)                   ($)        ($)        ($)        ($)

    (Loss) earnings                  (4,200)    21,357     (7,990)    48,682
    Other comprehensive (loss)
     income, net of tax
      Foreign currency
       translation adjustment       (12,613)     2,212    (20,687)     7,371
    -------------------------------------------------------------------------
    Total comprehensive (loss)
     income                         (16,813)    23,569    (28,677)    56,053
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.



    CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

    -------------------------------------------------------------------------
                                    Three Months Ended     Nine Months Ended
                                          September 30,         September 30,
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    (000s) (unaudited)                   ($)        ($)        ($)        ($)

    Accumulated other
     comprehensive (loss) income,
     beginning of period             (5,624)   (24,551)     2,450    (29,710)
    Other comprehensive (loss)
     income, net of tax
      Foreign currency
       translation adjustment       (12,613)     2,212    (20,687)     7,371
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive loss,
     end of period                  (18,237)   (22,339)   (18,237)   (22,339)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.



    CONSOLIDATED STATEMENTS OF CASH FLOWS

    -------------------------------------------------------------------------
                                    Three Months Ended     Nine Months Ended
                                          September 30,         September 30,
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    (000s) (unaudited)                   ($)        ($)        ($)        ($)

    Cash flows related to the
     following activities:
    Operating
      (Loss) earnings                (4,200)    21,357     (7,990)    48,682
      Adjustments for non-cash
       items:
        Depreciation and
         amortization                11,692     13,707     42,129     39,380
        Stock-based compensation      1,488      1,304      1,990      3,976
        Future income taxes          (2,161)     1,297     (7,647)     1,401
        Unrealized foreign
         exchange loss                  554          -        634          -
    -------------------------------------------------------------------------
                                      7,373     37,665     29,116     93,439
      Changes in non-cash
       working capital               (7,508)    (2,155)    50,237     17,571
    -------------------------------------------------------------------------
                                       (135)    35,510     79,353    111,010
    -------------------------------------------------------------------------
    Financing
      Issue of common shares under
       the stock option plan            101      2,195        266     16,546
      Purchase of stock options         (22)         -       (240)         -
      Purchase of common shares
       (Note 2)                           -     (4,269)         -     (4,269)
      Payment of dividends           (9,777)    (8,187)   (19,554)   (15,009)
    -------------------------------------------------------------------------
                                     (9,698)   (10,261)   (19,528)    (2,732)
    -------------------------------------------------------------------------
    Investing
      Additions to capital assets    (2,844)   (16,378)    (9,699)   (41,944)
      Deferred development costs,
       net of investment tax
       credits received              (1,035)      (613)    (2,646)    (1,707)
      Proceeds on disposal of
       capital assets                   159         42        534        224
      Proceeds on sale of
       investment                         -          -          -      4,003
      Changes in non-cash
       working capital               (1,072)       668     (6,295)    (3,405)
    -------------------------------------------------------------------------
                                     (4,792)   (16,281)   (18,106)   (42,829)
    -------------------------------------------------------------------------
    Effect of exchange rate
     changes on cash                 (3,995)     2,459     (6,814)     3,508
    -------------------------------------------------------------------------
    Net (decrease) increase in
     cash and cash equivalents      (18,620)    11,427     34,905     68,957
    Cash and cash equivalents,
     beginning of period            154,135     80,689    100,610     23,159
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                  135,515     92,116    135,515     92,116
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Represented by:
      Cash and short-term
       investments                  135,515     92,116    135,515     92,116
    -------------------------------------------------------------------------
    See accompanying notes to the consolidated financial statements.



    NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

    For the Three and Nine Months Ended September 30, 2009 and 2008

    (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, 2008.

    Significant Accounting Changes

    a.  Beginning in the first quarter of 2009, the Company adopted the new
        Section 3064 "Goodwill and Intangible Assets" standard issued by the
        Canadian Institute of Chartered Accountants ("CICA"). The new
        standard establishes guidelines for the recognition, measurement,
        presentation and disclosure of research and development ("R&D")
        costs. This resulted in no significant impact on the Company's
        financial statements.

    Future Changes in Accounting Policies

    a.  The CICA issued Section 1601 "Consolidated Financial Statements".
        This new section will be applicable to financial statements relating
        to the Company's interim and fiscal year beginning on or after
        January 1, 2011. Early adoption is permitted. This section
        establishes standards for the preparation of consolidated financial
        statements. The Company has not yet determined the impact of the
        adoption of this new Section on the Consolidated Financial
        Statements.

    b.  Canada's Accounting Standards Board ratified a plan that will result
        in Canadian generally accepted accounting principles ("GAAP") being
        converged with International Financial Reporting Standards ("IFRS")
        by 2011. Management has completed its initial assessment phase and
        highlighted areas where its current Canadian accounting practices
        differ from IFRS. Measurement of the impact on the Company's
        consolidated financial statements is ongoing.

    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, 2008                             81,456     71,517
      Exercise of stock options                                31        266
      Contributed surplus adjustment on exercise
       of stock options                                         -         67
    -------------------------------------------------------------------------
    Balance, September 30, 2009                            81,487     71,850
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The basic and diluted weighted average number of common shares
    outstanding for the three and nine months ended September 30, 2009 were
    81,487 and 81,472, respectively.

    Stock Option Plan

    At September 30, 2009, 5,068 stock options were outstanding for common
    shares at exercise prices ranging from $11.80 to $17.10 per share,
    expiring between 2009 and 2014 as follows:

    -------------------------------------------------------------------------
    Nine Months Ended September 30,               2009                  2008
    -------------------------------------------------------------------------
                                              Weighted              Weighted
                                               Average               Average
                                      Share   Exercise      Share   Exercise
                                    Options      Price    Options      Price
    -------------------------------------------------------------------------
                                       (No.)        ($)      (No.)        ($)

    Outstanding, beginning
     of period                        6,753      12.88      6,908      11.91
      Granted                            50      12.31         32      15.39
      Exercised                         (91)      8.24     (1,845)      8.97
      Forfeited                      (1,644)     14.01       (340)     14.11
    -------------------------------------------------------------------------
    Outstanding, end of period        5,068      12.58      4,755      12.92
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Exercisable, end of period        1,290      13.82      1,646      12.41
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Available for grant, end
     of period                        3,081                 3,434
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    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
    -------------------------------------------------------------------------

    Prior to November 2004                                              5.00
    November 2004 through October 2006                                  3.17
    November 2006 through October 2008                                  3.50
    November 2008 and thereafter                                        5.00


    The following table summarizes information about stock options
    outstanding at September 30, 2009:

    -------------------------------------------------------------------------

                              Options Outstanding       Options Exercisable
    -------------------------------------------------------------------------
                                   Weighted
                                    Average
                                  Remaining   Weighted              Weighted
                                    Contra-    Average               Average
             Range of     Options     ctual   Exercise Exercisable  Exercise
      Exercise Prices Outstanding      Life      Price    (Vested)     Price
    -------------------------------------------------------------------------
                   ($)      (No.)    (Years)        ($)      (No.)        ($)

        11.80 - 12.00      2,264       4.16      11.80          -      11.80
        12.01 - 13.00      1,823       1.74      12.18        598      12.18
        13.01 - 17.10        981       0.64      15.13        692      15.23
    -------------------------------------------------------------------------
                           5,068       2.61      12.58      1,290      13.82
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    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:

    -------------------------------------------------------------------------
    Nine Months Ended September 30,                          2009       2008
    -------------------------------------------------------------------------
                                                               ($)        ($)

    Balance, beginning of period                            8,834     10,323
      Stock-based compensation expense                      2,468      3,976
      Stock options exercised                                 (67)    (3,152)
        Intrinsic value adjustment                          1,800          -
    -------------------------------------------------------------------------
    Balance, end of period                                 13,035     11,147
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Restricted Share Unit ("RSU") Plan

    In November of 2008, the Company introduced an RSU program for employees
    and directors. At September 30, 2009, 579 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     Nine Months Ended
                                          September 30,         September 30,
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
                                         ($)        ($)        ($)        ($)

    Stock options                     1,488      1,304      1,990      3,976
    RSUs                              1,700          -      3,200          -
    -------------------------------------------------------------------------
    Stock-based compensation expense  3,188      1,304      5,190      3,976
    -------------------------------------------------------------------------


    Stock-based compensation liability can be summarized as follows:

    -------------------------------------------------------------------------
    As at September 30,                                      2009       2008
    -------------------------------------------------------------------------
                                                               ($)        ($)

    Stock options                                             570          -
    RSUs                                                    1,960          -
    -------------------------------------------------------------------------
    Current portion of stock-based compensation liability   2,530          -
    -------------------------------------------------------------------------

    Stock options                                             586          -
    RSUs                                                    1,697          -
    -------------------------------------------------------------------------
    Long-term portion of stock-based compensation
     liability                                              2,283          -
    -------------------------------------------------------------------------
    Total stock-based compensation liability                4,813          -
    -------------------------------------------------------------------------

    Purchase of Common Shares

    On March 20, 2009, the Company received regulatory approval to renew its
    normal course issuer bid program. The Company did not purchase any shares
    during the three and nine months ended September 30, 2009. During the
    third quarter of 2008, the Company purchased 301 common shares at an
    average price of $14.19 per share and cancelled them. This resulted in
    share capital being reduced by $250 and the remaining $4,019 was charged
    to retained earnings. The Company is authorized to purchase and cancel up
    to 4,000 common shares before the bid terminates on March 23, 2010. The
    daily purchase limit is 40 common shares.

    3. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

    Financial Instruments

    The carrying amounts for all of the Company's financial instruments
    approximate their fair values due to the short-term nature of these
    items.

    Industry and Seasonality Risk

    The major area of uncertainty for the Company is that the demand for its
    services is directly related to the strength of its customers' capital
    expenditure programs. The level of capital programs is strongly affected
    by the level and stability of commodity prices, which can be extremely
    difficult to predict and beyond the control of the Company and its
    customers. During periods of uncertainty, oil and gas companies tend to
    bias their capital decisions on conservative outlooks for commodity
    prices.

    In addition to the cyclical nature of its business, the Company is also
    subject to risks and uncertainties associated with weather and
    seasonality. The Company continues to react to unfavourable weather
    conditions and spring breakup, which limit well access in Canada, through
    diversification into geographic regions such as the United States and
    internationally where these factors are less likely to influence
    activity.

    Credit Risk

    Credit risk refers to the possibility that a customer will fail to meet
    its contractual obligations. Credit risk arises from the Company's
    accounts receivable balances which are predominantly with customers who
    explore for and develop oil and natural gas reserves in Canada and the
    United States. The Company has a process in place which assesses the
    credit worthiness of its customers as well as monitoring the age and
    balances outstanding on an ongoing basis. In addition, the Company's
    services are a minor component when looking at the overall cost of
    drilling a well, reducing credit risk accordingly.

    Payment terms with customers are 30 days from invoice date however
    industry practice can extend these terms. As at September 30, 2009, the
    Company had $3,785 in accounts receivable balances greater than 90 days
    past due and had recorded an allowance for doubtful accounts of $2,225.
    The balance of the Company's allowance for doubtful accounts did not
    significantly change during the first nine months of 2009.

    Foreign exchange risk

    The Company operates internationally and is primarily exposed to exchange
    risk relative to the U.S. dollar.

    The Canadian operations are exposed to currency risk on U.S. denominated
    financial assets and liabilities with fluctuations in the rate recognized
    as foreign exchange gains or losses in the Consolidated Statements of
    Operations.

    The Company's self-sustaining international subsidiaries expose the
    Company to exchange rate risk on the translation of its financial assets
    and liabilities to Canadian dollars for consolidation purposes.
    Adjustments arising when translating these subsidiaries into Canadian
    dollars are reflected in the Consolidated Statements of Comprehensive
    Income as unrealized foreign currency translation adjustments.

    The Company has not hedged either one of these risks.

    For the first nine months of 2009, had the Canadian dollar weakened or
    strengthened by 1% against the U.S. dollar, with all other variables held
    constant, earnings and other comprehensive income would have been
    impacted as follows:


    -------------------------------------------------------------------------
                                        Nine Months Ended September 30, 2009
    -------------------------------------------------------------------------
                                                                      Impact
                                                                    to Other
                                                                     Compreh-
                                                        Impact to     ensive
                                                         Earnings     Income
    -------------------------------------------------------------------------
                                                               ($)        ($)

    1% decrease in value of Canadian dollar                   (96)     1,536
    1% increase in value of Canadian dollar                    96     (1,536)


    Interest rate risk

    The Company is exposed to changes in interest rates with respect to its
    credit facility. Management believes this risk to be minor given the
    small amounts drawn periodically on the facility.

    4. SALE OF INVESTMENT

    On April 8, 2008, the Company sold its investment in a privately held
    company and realized a gain of $1.0 million and was included in other
    expenses (income).

    5. 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. In the U.S. case in 2004, the trial court
    refused to grant the requested injunction to prevent the Company from
    renting its automatic driller. In 2006, the Federal Circuit Appeals Court
    ruled that the trial court had misconstrued the language of one of the
    claims in the patent at issue and remanded the case to the trial court to
    hold a full trial on the merits of the claim of infringement and the
    Company's defenses, including that the patent in question is invalid and
    that there is no infringement. 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 deciding upon
    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 for
    further proceedings on Pason's claims and defences. Further trial
    proceedings have not currently been scheduled and are not expected to
    occur until 2010. If the Company does not prevail on its inequitable
    conduct defence and claim, it intends to renew its appeal on all issues.

    Separately, 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. The patent is now in re-
    examination by the USPTO, which could result in affirming the patent's
    validity, the invalidation of the patent, or an amendment of the patent's
    claims. Either of the latter two outcomes could eliminate the jury
    verdict. A determination by the USPTO is not expected until late 2010.

    In the Canadian case, which is not likely to come to a trial until 2010
    at the earliest, 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 September 30, 2009.

    The Company is involved in other legal actions and potential claims in
    the normal course of business. In the opinion of management, the
    aggregate amount of any potential liability is not expected to have a
    material adverse impact on the Company's financial position or results.

    6. COMMON SHARE DIVIDEND

    During the second quarter of 2009, the Company declared a dividend of
    $9,777 (2008 - $8,187) or $0.12 per common share (2008 - $0.10). The
    Company transferred these funds to the transfer agent to be held in trust
    until the dividend payment was made on July 2, 2009.

    7. SUBSEQUENT EVENT

    On October 2, 2009, the Company purchased all of the outstanding common
    shares of Petron Industries, Inc., a privately held company located in
    Houston, Texas. The purchase price was US$18,000, plus up to an
    additional US$7,000 in three years' time conditional on the development
    of a new revenue stream for offshore rigs. The initial amount is subject
    to working capital adjustments at the date of acquisition.

    8. SEGMENTED INFORMATION

    The Company operates in three geographic segments within one industry
    segment. Rental services are provided in Canada, the United States and
    internationally (Latin America and Australia). The amounts related to
    each segment are as follows:


    -------------------------------------------------------------------------
                                                United    Interna-
                                     Canada     States     tional      Total
    -------------------------------------------------------------------------
                                         ($)        ($)        ($)        ($)

    Three Months Ended
     September 30, 2009
    Revenue                          11,709     13,748      2,965     28,422
    Operating costs                   4,202     10,570        501     15,273
    Depreciation and amortization     5,532      5,843        317     11,692
    -------------------------------------------------------------------------
    Segment operating profit(loss)    1,975     (2,665)     2,147      1,457
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    Research and development                                           2,990
    Stock-based compensation                                           3,188
    Corporate services                                                 1,518
    Manufacturing and distribution                                       188
    Other expenses                                                       192
    Income taxes                                                      (2,419)
                                                                   ----------
    Loss                                                              (4,200)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures              2,360        811        708      3,879
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Three Months Ended
     September 30, 2008
    Revenue                          30,158     47,902      2,418     80,478
    Operating costs                   9,589     19,903        571     30,063
    Depreciation and amortization     6,590      6,514        603     13,707
    -------------------------------------------------------------------------
    Segment operating profit         13,979     21,485      1,244     36,708
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    Research and development                                           2,414
    Stock-based compensation                                           1,304
    Corporate services                                                 1,675
    Manufacturing and distribution                                       702
    Interest                                                              18
    Other income                                                         (74)
    Income taxes                                                       9,312
                                                                   ----------
    Earnings                                                          21,357
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures              1,157     13,792      2,042     16,991
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                United    Interna-
                                     Canada     States     tional      Total
    -------------------------------------------------------------------------
                                         ($)        ($)        ($)        ($)

    Nine Months Ended
     September 30, 2009
    Revenue                          39,749     57,225      7,874    104,848
    Operating costs                  16,175     37,422      2,838     56,435
    Depreciation and amortization    17,393     22,343      2,393     42,129
    -------------------------------------------------------------------------
    Segment operating profit (loss)   6,181     (2,540)     2,643      6,284
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    Research and development                                           9,404
    Stock-based compensation                                           5,190
    Corporate services                                                 4,532
    Manufacturing and distribution                                       372
    Interest                                                               1
    Other expenses                                                     1,074
    Income taxes                                                      (6,299)
                                                                   ----------
    Loss                                                              (7,990)
                                                                   ----------
                                                                   ----------
    Total assets                    175,678    169,090     22,379    367,147
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures              3,772      3,837      4,736     12,345
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Nine Months Ended
     September 30, 2008
    Revenue                          79,544    121,771      6,596    207,911
    Operating costs                  27,166     51,437      1,167     79,770
    Depreciation and amortization    19,507     18,138      1,735     39,380
    -------------------------------------------------------------------------
    Segment operating profit         32,871     52,196      3,694     88,761
    ---------------------------------------------------------------
    ---------------------------------------------------------------
    Research and development                                           9,366
    Stock-based compensation                                           3,976
    Corporate services                                                 4,570
    Manufacturing and distribution                                     2,819
    Interest                                                             189
    Other income                                                      (1,082)
    Income taxes                                                      20,241
                                                                   ----------
    Earnings                                                          48,682
                                                                   ----------
    Total assets                    150,474    211,134     16,875    378,483
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures              2,472     36,879      4,300     43,651
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

SOURCE Pason Systems Inc.

For further information: For further information: Pason Systems Inc., Jim Hill, 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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