Pason Systems Inc. reports first quarter operating results
Stock Exchange: TSX
Symbol: PSI
CALGARY, May 4 /CNW/ - Pason Systems Inc. ("Pason" or "the Company") today announced its results for the three-month period ended March 31, 2010.
PERFORMANCE DATA
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Three Months Ended March 31, 2010 2009 Change
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(000s, except per share data) ($) ($) (%)
(unaudited)
Revenue 56,384 54,175 4
EBITDA(1) 25,390 23,775 7
As a % of revenue 45.0 43.9 3
Per share - basic 0.31 0.29 7
Per share - diluted 0.31 0.29 7
Funds flow from operations(1) 20,454 18,685 9
Per share - basic 0.25 0.23 9
Per share - diluted 0.25 0.23 9
Earnings 8,397 4,916 71
Per share - basic 0.10 0.06 67
Per share - diluted 0.10 0.06 67
Capital expenditures 4,319 5,711 (24)
Working capital 134,270 172,637 (22)
Total assets 372,707 425,646 (12)
Shareholders' equity 314,157 367,461 (15)
Common shares outstanding (No.)
(weighted average)
Basic 81,491 81,461 -
Diluted 81,491 81,461 -
Shares outstanding end of period 81,500 81,467 -
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(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
The North American drilling recovery that began in late 2009 continued throughout the first quarter resulting in improved financial returns for Pason compared to 2009 when the drilling industry was in a rapid decline. Revenue increased 4% from the prior year to $56.4 million, funds flow from operations improved by 9% to $20.5 million and net earnings rose 71% to $8.4 million compared to $4.9 million in 2009. Earnings per diluted share were $0.10 compared to $0.06 in the first quarter of last year.
Pason's U.S. business unit continued its upward trend with March being the cross over month where rig count and profit finally exceeded the previous year's month for the first time in over a year. The average number of rigs employing at least some of Pason's equipment was approximately 800, over twice the levels of the 2009 low point. The U.S. unit's revenue was $24.9 million (although up 3% in U.S. currency) compared to $29.3 million recorded in 2009 but profit was somewhat improved at $4.4 million up 20% from the prior year. Product price increases that effectively return us to 2008 level pricing were made as of the beginning of March so that action had limited effect in the quarter. We were pleased that although industry drilling days were down 2% compared to the first quarter of the prior year our electronic drilling recorder days were up 27%. We accomplished this with a reduced field service staff so that margin per field tech was up a strong 20% indicating our operational leverage continues to improve. Revenue per U.S. drilling day was $206 versus $233 in the prior year. During the quarter we ceased manned geological services at the wellsite. These services were limited to the United States and were inherited when we entered the United States in 1997. We made this decision because we were unable to obtain a satisfactory markup on the costly wages required to hire contract geologists or mudloggers. We will continue to offer remote geological services such as log analysis and geo-steering from our command centre in Denver. We would expect going forward that our revenues and expenses for this product line will be greatly reduced but that our margin might actually increase.
Canadian first quarter business unit profit also had a good lift to $14.8 million from $9.0 million in 2009. This was accomplished with lower prices than we benefited from in last year's first quarter. The improved margin came from significantly improved operating leverage. The surprisingly strong winter quarter and some market share recovery contributed to a 32% increase in EDR rental days which our field staff handled very effectively despite a reduction of 18% in field technicians from the prior year. This resulted in an improvement in margin per field tech of 57%. Revenue per Canadian industry day was $680 down from $768 achieved in last year's first quarter, due mainly to price decreases effective last spring. Our remote directional drilling facilitation product continued to gain positive reviews and traction and we would hope to start earning meaningful revenues from this product beginning in the third quarter.
As mentioned in our Annual Report, we are continuing to invest in water reclamation technology at Auxsol. We are constructing a portable plant for Eastern Colorado and a mobile plant for an as of yet undetermined location. Both plants will employ our electro coagulation water treatment process. The objective of the plants is to assess the water treatment technology under volume, gain a better understanding of market value and logistical challenges to the movement of the water.
Our International segment recorded profit of $0.7 million, up from a loss of $0.1 million in 2009. Results were very mixed across the many countries in this group. The best returns occurred in Australia where our revenue tripled year over year due to us taking over full control of the business and thus earning 100% of the revenue generated, plus continuing increases in our market penetration. Mexico was also up substantially year over year but the trend is clearly downward at this point due to a lack of drilling funding available to the national oil company, PEMEX. Most of the South American countries continue to lag behind their activity levels of two years ago. In the second quarter we will be shipping equipment to Oman to begin operations in a drilling market that has much to offer in a stable and active country. In further eastern hemisphere expansion we have formed a company in Singapore which will pursue retrofit instrumentation sales on offshore rigs in the Singapore shipyards plus land rentals in the region.
We are encouraged by oil prices resting solidly above $80 a barrel which will contribute to oil well drilling near historical highs in Canada. However, gas prices around $4 an mcf remain a concern. In the U.S. the rig count continues to climb but at a slower rate and there is some concern that much of the drilling is being directed at meeting lease commitments and might back off by the summer. As a result, we are very reluctant to add any further field service technicians and are concentrating on improving our field margins and leverage.
Our cash position at $106.2 million remains strong and the Board of Directors has set our first half dividend at $0.16 per share.
On behalf of the Board of Directors,
(signed)
Jim Hill
Chairman, President & Chief Executive Officer
May 4, 2010
FIRST QUARTER CONFERENCE CALL AND ANNUAL GENERAL MEETING
Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its first quarter results at 9:00 a.m. (Calgary time) on Wednesday, May 5, 2010. The conference call dial-in number is 1-888-231-8191, conference ID No. 63691145. Seven-day replay: 1-800-642-1687 and enter 63691145.
Shareholders are also invited to attend the Company's Annual General Meeting on Monday, May 10, 2010 at 3:30 p.m. (Calgary time) in the offices of Pason Systems Inc., 6120 Third Street S.E., Calgary, Alberta.
Pason is a leading international provider of specialized rental and sold oilfield instrumentation systems for use on land and offshore rigs. The Company's tightly integrated package of products and services, including data acquisition, wellsite reporting software, remote communications and Internet information management tools, maximizes rig uptime and minimizes operating costs.
Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI. Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2009, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.
Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.
CONSOLIDATED BALANCE SHEETS
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As at March 31, December 31,
2010 2009
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(000s) (unaudited) ($) ($)
Assets
Current
Cash 106,214 109,849
Accounts receivable 53,347 39,102
Prepaid expenses 1,240 1,416
Income taxes recoverable - 2,928
Future income tax assets 8,823 9,037
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169,624 162,332
Capital assets 160,503 170,678
Intangible assets (Note 3) 22,129 19,557
Future income tax asset 14,656 14,558
Goodwill 5,795 5,972
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372,707 373,097
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Liabilities
Current
Accounts payable and accrued liabilities 32,725 29,780
Income taxes payable 842 -
Current portion of stock-based compensation
liability 1,787 1,320
Dividend payable - 11,408
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35,354 42,508
Stock-based compensation liability 1,266 906
Future income tax liabilities 21,930 21,348
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58,550 64,762
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Shareholders' Equity (Note 2)
Share capital 72,037 71,864
Contributed surplus 14,435 14,029
Accumulated other comprehensive loss (25,805) (22,651)
Retained earnings 253,490 245,093
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314,157 308,335
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372,707 373,097
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See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
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Three Months Ended March 31, 2010 2009
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(000s, except per share data) (unaudited) ($) ($)
Revenue
Equipment rentals 54,474 51,896
Geological services 1,251 2,043
Instrumentation sales 558 -
Interest 101 236
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56,384 54,175
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Expenses
Rental services 22,282 22,003
Geological services 1,073 1,999
Cost of instrumentation sales 178 -
Manufacturing and distribution 211 78
Research and development 3,849 3,333
Corporate services 1,850 1,669
Local administration 1,602 1,514
Stock-based compensation 1,308 378
Depreciation and amortization 11,348 16,091
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43,701 47,065
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Earnings before the under noted item 12,683 7,110
Other income 51 196
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Earnings before income taxes 12,734 7,306
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Income tax expense (recovery)
Current 3,986 4,419
Future 351 (2,029)
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4,337 2,390
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Earnings 8,397 4,916
Retained earnings, beginning of period 245,093 271,788
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Retained earnings, end of period 253,490 276,704
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Earnings per share
Basic 0.10 0.06
Diluted 0.10 0.06
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See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Three Months Ended March 31, 2010 2009
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(000s) (unaudited) ($) ($)
Earnings 8,397 4,916
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment (3,154) 4,871
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Total comprehensive income 5,243 9,787
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See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
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Three Months Ended March 31, 2010 2009
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(000s) (unaudited) ($) ($)
Accumulated other comprehensive (loss) income,
beginning of period (22,651) 2,450
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment (3,154) 4,871
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Accumulated other comprehensive (loss) income,
end of period (25,805) 7,321
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See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended March 31, 2010 2009
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(000s) (unaudited) ($) ($)
Cash flows related to the following activities:
Operating
Earnings 8,397 4,916
Adjustments for non-cash items:
Depreciation and amortization 11,348 16,091
Stock-based compensation 522 (320)
Future income taxes 351 (2,029)
Unrealized foreign exchange (gain) loss (164) 27
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20,454 18,685
Changes in non-cash working capital (4,152) 31,010
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16,302 49,695
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Financing
Issue of common shares under the stock
option plan 154 105
Purchase of stock options - (163)
Payment of dividends (11,408) (9,777)
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(11,254) (9,835)
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Investing
Additions to capital assets (3,357) (4,854)
Deferred development costs, net of
investment tax credits received (962) (857)
Purchase of Australian distribution rights
(Note 3) (2,829) -
Proceeds on disposal of capital assets 12 124
Changes in non-cash working capital (367) (2,066)
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(7,503) (7,653)
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Effect of exchange rate changes on cash (1,180) 656
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Net (decrease) increase in cash and cash
equivalents (3,635) 32,863
Cash and cash equivalents, beginning of period 109,849 100,610
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Cash and cash equivalents, end of period 106,214 133,473
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Represented by:
Cash and cash equivalents 106,214 133,473
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See accompanying notes to the consolidated financial statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 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.
Future Changes in Accounting Policies
a. The Canadian Institute of Chartered Accountants ("CICA") issued
Section 1582 "Business Combinations" which replaces section 1581
"Business Combinations". The new Section establishes standards
for the accounting for business combinations and provides the
Canadian equivalent to the International Financial Reporting
Standards ("IFRS") practice. The Section applies prospectively
to business combinations for which the acquisition date is on or
after October 1, 2011 and allows for earlier application. CICA
Section 1601, "Consolidated Financial Statements" and Section
1602 "Non-Controlling Interests" were also issued replacing
Section 1600, "Consolidated Financial Statements". These
sections establish standards for the preparation of consolidated
financial statements and accounting for non-controlling
interests in a subsidiary subsequent to a business combination.
The sections are equivalent to the corresponding provisions of
the IFRS standard. The Sections apply to interim and annual
consolidated financial statements relating to fiscal years
beginning on or after October 2011 and allow for earlier
adoption. The Company is currently evaluating the impact of the
adoption of these new Standards on its consolidated financial
statements.
b. Canada's Accounting Standards Board ratified a plan that will
result in GAAP being converged with IFRS by 2011. Management has
completed its detailed assessment and design phase. In this
area, the Company has focused primarily on the areas with the
highest potential impact to the Company, including capital
assets, impairment of assets and stock based compensation.
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
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Shares Amount
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(No.) ($)
Balance, December 31, 2009 81,487 71,864
Exercise of stock options 13 154
Contributed surplus adjustment on
exercise of stock options - 19
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Balance, March 31, 2010 81,500 72,037
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Stock Option Plan
At March 31, 2010, 6,380 stock options were outstanding for common
shares at exercise prices ranging from $10.99 to $17.11 per share,
expiring between 2010 and 2015 as follows:
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2010 2009
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Weighted Weighted
Average Average
Share Exercise Share Exercise
Options Price Options Price
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(No.) ($) (No.) ($)
Outstanding, beginning of
period 6,540 12.05 6,753 12.88
Granted - - 50 12.31
Exercised (16) 12.07 (44) 9.37
Forfeited (144) 11.74 (942) 13.75
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Outstanding, end of period 6,380 12.06 5,817 12.76
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Exercisable, end of period 2,652 12.84 1,772 13.82
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Available for grant, end of
period 1,770 2,330
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All options are issued at market price and vest over three years. The
following table summarizes the life of options issued:
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Date of Issuance Years
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November 2006 through October 2008 3.50
November 2008 and thereafter 5.00
The following table summarizes information about stock options
outstanding at March 31, 2010:
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Options Outstanding Options Exercisable
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Weighted
Average Weighted Weighted
Range of Options Remaining Average Exercis- Average
Exercise Out- Contractual Exercise able Exercise
Prices standing Life Price (Vested) Price
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($) (No.) (Years) ($) (No.) ($)
10.99 - 11.79 1,715 4.67 10.99 - -
11.80 - 12.00 2,155 3.66 11.80 747 11.80
12.01 - 13.00 1,750 1.24 12.18 1,164 12.18
13.01 - 17.11 760 0.26 14.92 741 14.91
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6,380 2.86 12.06 2,652 12.84
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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:
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Three Months Ended March 31, 2010 2009
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($) ($)
Balance, beginning of period 14,029 8,834
Stock-based compensation expense 432 880
Stock options exercised (19) (21)
Intrinsic value adjustment (7) 2,100
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Balance, end of period 14,435 11,793
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Restricted Share Unit ("RSU") Plan
In November of 2008, the Company introduced an RSU program for
employees and directors. At March 31, 2010, 611 (2009 - 602) RSUs
were outstanding. All RSU's 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 of $786 (2009 - $698) was recorded
in the Consolidated Statements of Operations and the corresponding
liability is recorded in the March 31, 2010 Consolidated Balance
Sheets.
Stock-based Compensation Expense and Liability
The stock option and RSU plans can be summarized as follows:
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Three Months Ended March 31, 2010 2009
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($) ($)
Stock options 522 (320)
RSUs 786 698
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Stock-based compensation expense 1,308 378
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March 31, December 31,
As at 2010 2009
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($) ($)
Stock options 84 32
RSUs 1,703 1,288
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Current portion of stock-based compensation
liability 1,787 1,320
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Stock options 70 27
RSUs 1,196 879
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Long-term portion of stock-based
compensation liability 1,266 906
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Total stock-based compensation liability 3,053 2,226
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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 quarter 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 March 31, 2010.
5. 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:
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United Inter-
Canada States national Total
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($) ($) ($) ($)
Three Months Ended
March 31, 2010
Revenue 26,604 24,922 4,858 56,384
Operating costs 6,768 15,375 2,992 25,135
Depreciation and amortization 5,022 5,176 1,150 11,348
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Segment operating profit 14,814 4,371 716 19,901
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Research and development 3,849
Stock-based compensation 1,308
Corporate services 1,850
Manufacturing and distribution 211
Other income (51)
Income taxes 4,337
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Earnings 8,397
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Total assets 188,711 129,896 54,100 372,707
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Capital expenditures 1,958 1,182 1,179 4,319
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Three Months Ended March 31,
2009
Revenue 22,334 29,290 2,551 54,175
Operating costs 7,408 16,452 1,656 25,516
Depreciation and amortization 5,921 9,209 961 16,091
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Segment operating profit (loss) 9,005 3,629 (66) 12,568
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Research and development 3,333
Stock-based compensation 378
Corporate services 1,669
Manufacturing and distribution 78
Other income (196)
Income taxes 2,390
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Earnings 4,916
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Total assets 200,456 206,777 18,413 425,646
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Capital expenditures 805 2,580 2,326 5,711
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For further information: Pason Systems Inc.: Jim Hill, Chairman, President and CEO, Phone: (403) 301-3401, Fax: (403) 301-3499, E-mail: [email protected]; Jim Glasspoole, Chief Financial Officer, Phone: (403) 692-3840, Fax: (403) 301-3411, E-mail: [email protected]
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