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Press release from CNW Group

Pason Reports Third Quarter 2012 Results

Tuesday, November 06, 2012

Pason Reports Third Quarter 2012 Results00:26 EST Tuesday, November 06, 2012CALGARY, Nov. 6, 2012 /CNW/ - Pason Systems Inc. (TSX: PSI) announced today its 2012 third quarter results.Performance Data Three Months Ended September 30, Nine Months Ended September 30, 20122011Change 20122011Change(CDN 000s, except per share data)($)($)(%) ($)($)(%)Revenue93,08188,7335 285,788235,89821EBITDA (1)47,66553,162(10) 143,467123,74116 As a % of revenue51.259.9(15) 50.252.5(4) Per share - basic0.580.65(10) 1.751.5116 Per share - diluted0.580.64(10) 1.741.5016Funds flow from operations (1)40,83141,270(1) 122,670103,26919 Per share - basic0.500.50-- 1.501.2619 Per share - diluted0.500.50-- 1.491.2519Earnings19,34228,547(32) 57,28754,5215 Per share - basic0.240.35(31) 0.700.674 Per share - diluted0.230.35(34) 0.690.665Capital expenditures16,98319,997(15) 56,17856,431--Working capital169,186126,15234 169,186126,15234Total assets480,637435,78310 480,637435,78310Total long-term debt------ ------Shareholders' equity402,551357,96412 402,551357,96412Market capitalization1,345,7001,090,92123 1,345,7001,090,92123Common shares outstanding (#)        Basic81,98581,900-- 81,94881,836-- Diluted82,75782,325-- 82,50082,487--Shares outstanding end of period (#)82,00581,901-- 82,00581,901--(1)     EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation, and depreciation and amortization expense.  2011 figures have been restated to exclude the add back of impairment losses in calculating EBITDA. Funds flow from operations is defined as earnings adjusted for depreciation and amortization expense, impairment losses, stock-based compensation expense, deferred income taxes and other non-cash items impacting operations as presented in the Condensed Consolidated Interim Statements of Cash Flows. These definitions are not recognized measures under International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies.President's MessageIn both the United States and Canadian markets, drilling days and the active rig counts were lower in the third quarter of 2012 compared with the third quarter of the previous year, with the decline in Canadian activity significantly steeper than in the United States. International markets saw an activity increase.Increased revenue in the International markets and a solid performance by our US business unit were largely offset by a revenue drop in Canada. Overall, revenue increased 5% in the third quarter of 2012 compared to the third quarter of 2011 and revenue was up 21% for the first nine months of the year. Revenue was up 15% in the third quarter compared to the second quarter driven primarily by the seasonality of Canadian drilling activity with the second quarter typically seeing the lowest activity levels.As in the first and second quarters of this year, all product categories generated growth rates above drilling industry activity with the Software segment showing the highest year-over-year growth rates with 67%. The Software segment includes revenue generated through DataHub updates with LiveData (Enhanced Live Rig View), specialized software (e.g., the Directional System) and data delivery products (e.g., WITSML Service). 86% of US customers and 98% of Canadian customers using the Pason DataHub are currently subscribing to LiveData. This compares to 73% and 95%, respectively, for the previous year.EBITDA dropped by 10% and funds flow from operations was down 1%. EBITDA, as a percentage of revenue, was 51% in the third quarter compared to 60% in the third quarter of the previous year, and 50% versus 53% for the first nine months of the year. Net earnings decreased to $19.3 million or $0.23 per share compared to $28.5 million or $0.35 per share in the third quarter of 2011. Third quarter net earnings, when compared to 2011 figures, were negatively impacted by a number of significant items:A foreign exchange loss of $1.5 million compared to a foreign exchange gain of $6.3 million in the previous year quarter as the Canadian dollar strengthened against the US dollarAn increase in stock-based compensation increased by $5.1 million due to an increase in the Company's stock priceAn increase in depreciation expense of $2.8 million due to the accelerated depreciation of the Company's TGAS and EDR systemsAn impairment loss of $2.6 million on our US water treatment assets as we are shutting down operations of our fixed site water treatment plant in ColoradoOn September 30, our cash position stood at $139.8 million and our working capital stood at $169.2 million. We are increasing our semi-annual dividend by 9% to $0.24 per share.United States The US segment includes our US rental business, 3PS — our Austin-based equipment manufacturer — and Auxsol, the fixed-site water treatment plant in Colorado.Drilling activity in the United States continued its slow downward trend. Industry days were down 3% in the third quarter 2012 compared to the third quarter of 2011, while revenue for our largest business unit was up 14% to $54.6 million. On average, 1,019 US land rigs were operating Pason equipment during the third quarter of 2012 compared to 1,070 in 2011.Revenue growth above industry day growth was achieved with higher product penetration and a price increase at the beginning of 2012 resulting in a 15% increase of average daily revenue generated on each rig from US$480 in 2011 to US$554 in 2012. Software, Gas Analyzer, and Hazardous Gas Alarm System again achieved above-average revenue growth. Our US market share for the second quarter of 2012 was 55%, compared to 57% in the previous quarter and 57% in the previous year period.Operating costs decreased 1% and depreciation and amortization increased by 35%. Higher depreciation charges continue to be driven by the accelerated depreciation of our TGAS and EDR systems. As a result, our US business unit was able to generate an operating profit of $27.0 million in the third quarter, an increase of 21% over 2011. EBITDA, as a percentage of revenue of the business unit, was 65% in the third quarter of 2012 compared to 60% in 2011.Most analysts predict that oil and gas prices will remain subdued going into 2013. The natural gas glut generated by unconventional plays will likely lead to a further reduction of gas rig counts and lower drilling activity in the United States, challenging our ability to significantly grow revenue in the short term.Canada Drilling activity in Canada was significantly lower in the third quarter of 2012 than in the previous year with industry days down 26%. Our Canadian business unit was able to partially offset this significant reduction in activity levels through better pricing, new product adoption, and more products on each rig.Revenue for the third quarter was down 14% to $29.0 million. On average, 299 Canadian land rigs were operating Pason equipment compared to 423 the year before. Market share was 91% compared to 90% in the previous quarter and 96% the previous year.Revenue growth above industry day growth was achieved with a price increase in October 2011 and better product penetration. The average daily revenue generated on each rig with a Pason product installed grew to $1,040 in the second quarter of 2012 from $853 in 2011. Electronic Drilling Recorder peripherals, especially Workstations and SideKicks recorded in this category, Software, and the Gas Analyzer, showed above average growth rates during the period.Operating costs decreased by 17% and depreciation and amortization increased by 7%. As in the United States, higher depreciation charges continue to be driven by the accelerated depreciation of our TGAS and EDR systems. As a result, our Canadian business unit was able to generate an operating profit of $14.6 million for the quarter, compared to $18.2 million for the same period in 2011. EBITDA, as a percentage of revenue of the business unit, was 75% in 2012 compared to 74% in 2011.As drilling activity picks up going into the winter drilling season, we are working hard to increase our market share.InternationalOur International business unit, which includes our businesses in Latin America, Australia, and Pason Offshore, had an excellent third quarter. Revenue increased 34% to $9.4 million. We realized gains in all major international markets with notable gains in Argentina, Brazil, Australia, and Mexico, as well as offshore rentals.Operating costs were up 45% and depreciation and amortization were up 5%. As a result, the International business unit was able to generate an operating profit of $1.5 million, up 49% from the previous year. For the first nine months of the year, the operating profit was up 87% to $4.5 million.Going forward, we expect the International business unit to continue to realize accelerated growth and improved profitability.OutlookWe anticipate a further reduction in drilling industry activity in North America. However, certain regions are expected to grow. For example, the Permian and Bakken basins in the United States are expected to demonstrate growth and we believe that Pason is well positioned to capture these growth opportunities. We expect to be able to partially offset the overall reduction with modest improvements in revenue per EDR day. We also expect continued significant profitable growth from our International operations.Our capital expenditure budget for the next 12 months is $82 million. $50 million is directed towards equipment that can generate incremental revenue or save operating costs, $17 million for maintenance capital, and $15 million for capitalized R&D.Our cash-generating capacity, cash position at $139.8 million, and working capital position at $169.2 million are strong enough to comfortably cover new business development, planned equipment upgrades, and the dividend. The Pason Board of Directors has made the decision to adopt a quarterly dividend policy starting in 2013.As the industry leader in field services, with outstanding technical support, a competitive product suite, and a promising R&D project pipeline, Pason is well positioned to weather a period of lower North American drilling activity and to capitalize on growth opportunities in North America and internationally.(signed)Marcel KesslerPresident and Chief Executive OfficerNovember 5, 2012Management's Discussion and AnalysisThe following discussion and analysis has been prepared by management as of November 5, 2012 and is a review of the financial condition and results of operations of Pason Systems Inc. (Pason or the Company) based on International Financial Reporting Standards (IFRS) and should be read in conjunction with the condensed consolidated interim financial statements and accompanying notes.Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.All financial measures presented in this quarterly report are expressed in Canadian dollars unless otherwise indicated.Overview of the 2012 Third Quarter     Three Months Ended September 30, Nine Months Ended September 30, 201220112010 201220112010(000s, except per share data)($)($)($) ($)($)($)Revenue93,08188,73368,653 285,788235,898176,068EBITDA (1)47,66553,16234,606 143,467123,74181,508 As a % of revenue51.259.950.4 50.252.546.3 Per share - basic0.580.650.42 1.751.511.00 Per share - diluted0.580.640.42 1.741.501.00Funds flow from operations(1)40,83141,27026,856 122,670103,26966,074 Per share - basic0.500.500.33 1.501.260.81 Per share - diluted0.500.500.33 1.491.250.81Earnings 19,34228,54711,902 57,28754,52125,949 Per share - basic0.240.350.15 0.700.670.32 Per share - diluted0.230.350.15 0.690.660.32Total assets480,637435,783371,566 480,637435,783371,566Total long-term debt------ ------(1)EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation, and depreciation and amortization expense.  Prior figures have been restated to exclude the add back of impairment losses in calculating EBITDA. Funds flow from operations is defined as earnings adjusted for depreciation and amortization expense, impairment losses, stock-based compensation expense, deferred income taxes and other non-cash items impacting operations as presented in the Condensed Consolidated Interim Statements of Cash Flows. These definitions are not recognized measures under International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies.Overall Performance Three Months Ended September 30, Nine Months Ended September 30, 20122011Change 20122011Change(000s)($)($)(%) ($)($)(%)Revenue        Electronic Drilling Recorder36,85235,4384 112,71694,85619 Pit Volume Totalizer14,62315,289(4) 45,12041,7038 Communications(1)7,3578,324(12) 23,40621,6968 Software (1)6,2713,76367 18,72810,13685 Automatic Driller9,93510,481(5) 30,98927,87511 Gas Analyzer/Total Gas System7,1175,98019 20,40614,89337 Hazardous Gas Alarm System1,7811,30137 5,4133,76844 Mobilization3,1802,45230 9,1677,04230 Other5,9655,7055 19,84313,92942Total revenue93,08188,7335 285,788235,89821(1)     2011 revenue associated with the Company's software applications has been reclassified from Communications to Software. Canada Three Months Ended September 30, Nine Months Ended September 30, 20122011Change 20122011Change   (%)   (%)EDR rental days (#)27,60038,900(29) 87,500100,400(13)PVT rental days (#)27,20037,600(28) 86,20097,500(12)  United States  Three Months Ended September 30, Nine Months Ended September 30,  20122011Change 20122011Change    (%)   (%)EDR rental days (#) 93,70098,500(5) 292,700281,5004PVT rental days (#) 66,80068,300(2) 205,700194,1006Electronic Drilling RecorderThe Pason Electronic Drilling Recorder (EDR) remains the Company's prime product. The EDR provides a complete system of drilling data acquisition, data networking, and drilling management tools and reports at both the wellsite and customer offices. The EDR is the base product from which all other wellsite instrumentation products are linked. By linking these products, a number of otherwise redundant elements such as data processing, display, storage, and networking are eliminated. This ensures greater reliability and a more robust system of instrumentation for the customer. The EDR generated a 4% increase in revenue for the third quarter of 2012 compared to the same period in 2011 and a 19% increase for the first nine months of 2012 versus the 2011 comparative. The increase in the third quarter is due to previous price increases and an increase in rig activity in the Company's International markets reduced by a decrease in rig activity in both the United States (US) and Canadian markets. The year to date increase is due in most part to an increase in US and International drilling activity and the aforementioned price increases offset by a reduction in Canadian rig count. The Company continues to realize increased demand by customers for EDR peripheral devices in all of its markets.During the first nine months of 2012, the Pason EDR was installed on 94% of all active land rigs in Canada and 57% of the land rigs in the US.Pit Volume TotalizerThe Pit Volume Totalizer (PVT) is Pason's proprietary solution for the detection and early warning of "kicks" that are caused by hydrocarbons entering the wellbore under high-pressure and expanding as they migrate to the surface. PVT revenue for both the quarter and year to date were impacted by an increase in product penetration in all of the Company's markets as well as changes to rig activity and price increases previously described above under EDR. During the first three quarters of 2012, the PVT was installed on 99% of rigs with a Pason EDR in Canada and 70% in the US, compared to 98% and 69%, respectively, in 2011.CommunicationsPason's communications rental revenue is derived from the Company's automatic aiming satellite system. This system provides high-speed wellsite communications for email and web application management tools. Pason displays all data in standard forms on its DataHub web application, although if customers require greater analysis or desire to have the information transferred to another supplier's database, data is available for export from the Pason DataHub using WITSML (a specification for transferring data amongst oilfield service companies, drilling contractors, and operators). The Company continues to complement its satellite equipment with High Speed Packet Access (HSPA), a high-speed wireless ground system that requires lower capital cost, less service, and lower cost per Internet kilobyte, benefiting company margins. In Canada, HSPA has been installed on all rigs, and the majority of the rigs running will benefit from the investment in HSPA given the growth in cellular coverage. In the US, field coverage tests for HSPA are continuing.SoftwareDataHub is the Company's data management system that collects, stores, and displays drilling data, reports, and real-time information from drilling operations. DataHub provides access to data through a number of innovative applications or services including:Enhanced Live Rig View, which provides advanced data viewing, directional drilling, and 3D visualization of drilling data in real-time via a web browser.Mobile Viewer and Pason Mobile, which allows users to access their data on mobile devices including iPhone, iPad, and BlackBerry.WITSML, which provides seamless data sharing with third party applications enhancing the value of data hosted by Pason.Additional specialized software.During the first nine months of 2012, 98% of the Company's Canadian customers were using all or a portion of the functionality of the DataHub and 86% of customers in the US, compared to 95% and 73%, respectively, in 2011. The 2012 revenue generated from customers using the applications included with the DataHub rose 85% over the first nine months of 2011.Gas Analyzer and Total Gas SystemThe Pason Gas Analyzer, which has replaced the Total Gas System (TGAS) in the Company's major markets, measures the total hydrocarbon gases (C1 through C41) exiting the wellbore, and then calculates the lag time to show the formation depth where the gases were produced. The new Gas Analyzer increases the functionality that was found in the TGAS product to include the actual composition of the gas, much like a gas chromatograph, and further calculates geologic ratios from the gas composition to assist in indicating the type of gas, natural gas liquid, or oil in the formation. For the first nine months of 2012, the Gas Analyzer generated $15.2 million of revenue compared to $5.2 million for TGAS. The Company has completed this switch-out in both Canada and the US and is realizing increased product penetration for the Gas Analyzer as compared to TGAS in both markets. For the first nine months of 2012, both of these systems combined were installed on 51% of Canadian and 19% of US land rigs operating with a Pason EDR system. The combined market penetration of both products in Canada is an increase of approximately 9% over 2011 levels while the US has seen an increase of 2%.Automatic DrillerPason's Automatic Driller (AutoDriller) is used to maintain constant weight on the drill bit while a well is being drilled. During the first nine months of 2012, Pason's AutoDriller was installed on 78% of Canadian and 50% of US land rigs operating with a Pason EDR system, compared to 78% and 46%, respectively, in 2011.Hazardous Gas Alarm SystemPason's Hazardous Gas Alarm System (HGAS) monitors both lower explosive limit gases (LEL) and H2S where both readings and an alarm system are integrated with the EDR. The Hazardous Gas Alarm System was installed on 21% of Canadian rigs in the first nine months of 2012, up from 18% for the same period in 2011, and 9% of US land rigs operating with a Pason EDR system, an increase from 6% in 2011.Discussion of OperationsUnited States Operations Three Months Ended September 30, Nine Months Ended September 30, 20122011Change 20122011Change(000s)($)($)(%) ($)($)(%)Revenue        Electronic Drilling Recorder22,80021,6555 70,44060,35517 Pit Volume Totalizer8,3128,367(1) 25,77423,6649 Communications(1)3,4023,703(8) 10,8839,77511 Software (1)4,3092,010114 12,6665,495131 Automatic Driller5,7915,7161 18,14915,67016 Gas Analyzer/Total Gas System2,9572,03046 8,6455,77250 Hazardous Gas Alarm System810398104 2,3691,055125 Mobilization2,3341,80929 6,9345,01538 Other3,9282,34867 12,9893,845238Total revenue54,64348,03614 168,849130,64629Operating costs19,16719,444(1) 62,54251,78221Depreciation and amortization8,4696,26035 24,66816,99745Segment operating profit27,00722,33221 81,63961,86732(1)     2011 revenue associated with the Company's software applications has been reclassified from Communications to Software.US segment revenue increased by 14% in the third quarter of 2012 over the 2011 comparable period (13% increase when measured in US dollars). Included in the third quarter 2012 figures is $2.8 million (2011 - $1.4 million) of revenue generated from the sale of sensors and other products by 3PS, Inc., the US-based company acquired in 2011.For the first nine months of 2012, US segment revenue increased by 29% (USD 27%), which includes $9.3 million of sales by 3PS.The number of US drilling days was down approximately 3% in the third quarter of 2012 versus the third quarter of 2011 due to a pull back of natural gas drilling that was not totally off-set by an increase in oil drilling. However, revenue from the rental of instrumentation equipment increased 12% (USD 10%) for the third quarter of 2012 from 2011 levels, which compared very favourably to the drop in activity. On a year to date basis rental instrumentation revenue increased 23% (USD 20%) over 2011 levels, compared to an increase in industry days of 7%.Revenue was impacted by the following factors:More products on each rig; new product adoption; and better pricing. Revenue was increased by additional product penetration on each rig, primarily with gains in EDR peripheral devices, ADR rentals, customer acceptance of the Company's Live Rig View and rig data software, and increased adoption of the Gas Analyzer compared to the previous TGAS system. In addition, prices on specific products increased at the beginning of 2012. These factors combined resulted in an increase in revenue per EDR day in the third quarter of 2012 over 2011 levels of  $81 (USD $74). On a year to date basis revenue per EDR day increased 19% or $85 (USD $74).A decrease in EDR rental days of 5% for the three months ended September 2012 over the same time period in 2011 and an increase of 4% on a year to date basis over 2011 levels.The factors explained above resulted in the US segment being able to realize revenue per EDR day during the third quarter of 2012 of $551 (USD $554) compared to $470 (USD $480) during the same time period in 2011. For the first nine months of 2012 revenue per EDR day was $542 (USD $541) compared to $456 (USD $467) in 2011.Revenue per industry day for the third quarter of the year was $305 (USD $307) compared to $267 (USD $272) in 2011. Year to date figures were $306 (USD $306) compared to 2011 amounts of $264 (USD $270).The majority of the increase in "Other" revenue relates to sales realized by 3PS, Inc.Segment profit, as a percentage of revenue, was 50% for the third quarter of 2012 and 48% year to date, compared to 46% and 47% for the respective periods in 2011.The US business unit was able to increase its operating margin year over year, even with a significant increase in depreciation and amortization costs, by leveraging its fixed cost structure while at the same time continuing to control variable costs and implementing changes to operations to adapt to changing market conditions. The 2012 segment profit percentage was impacted by the following factors:A decrease in field technician related costs in the third quarter of 2012 compared to 2011 of approximately $1.0 million as a result of a slowdown in industry drilling days. On a year to date basis these costs increased by $2.4 million due in most part to an increase in market activity over 2011.A continuous strengthening of its sales presence led to an increase in sales and marketing costs of $0.3 million for the third quarter of 2012 over 2011 amounts. For the first nine months these costs rose $1.3 million from 2011 levels.An increase in depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems. The TGAS system was replaced with the Gas Analyzer, while a portion of the Company's base EDR system will become obsolete as a result of the EDR evolution project. This contributed to an increase in depreciation costs over 2011 levels of approximately $1.2 million for the third quarter and $5.3 million for the first nine months. This increase was partially off-set by a reduction in repair costs associated with the new Gas Analyzer as compared to the TGAS system.Year to date 2012 figures include a full nine months of the results of 3PS Inc., which generates a lower margin than the US rental business.Canadian Operations Three Months Ended September 30, Nine Months Ended September 30, 20122011Change 20122011Change(000s)($)($)(%) ($)($)(%)Revenue        Electronic Drilling Recorder10,24711,403(10) 31,36227,66613 Pit Volume Totalizer4,7825,940(19) 14,99215,204(1) Communications(1)3,8364,544(16) 12,09911,6434 Software (1)1,8391,67510 5,7244,41830 Automatic Driller3,2604,239(23) 10,13210,497(3) Gas Analyzer/Total Gas System3,1693,352(5) 8,9467,84714 Hazardous Gas Alarm System545706(23) 1,8341,921(5) Mobilization154211(27) 460583(21) Other1,1931,603(26) 3,8283,902(2)Total revenue29,02533,673(14) 89,37783,6817Operating costs7,2008,705(17) 23,11126,939(14)Depreciation and amortization(2)7,2456,7477 20,71819,0379Segment operating profit14,58018,221(20) 45,54837,70521(1)     2011 revenue associated with the Company's software applications has been reclassified from Communications to Software.(2)     2011 impairment loss of $1.8 million relating to water assets has been reclassified from depreciation and amortization to Other Expenses and is not included in the Canadian business unit's operating results.Canadian segment revenue decreased 14% for the three months ended September 2012 compared to the third quarter of 2011. This decrease is a result of a 26% decrease in the number of Canadian drilling industry days from 2011 levels. On a year to date basis, revenue increased 7% compared to a decline in the number of Canadian drilling days of 11%.EDR rental days declined 29% in the third quarter of 2012 over the third quarter of 2011. On a year to date basis, EDR rental days declined by approximately 13% over 2011 levels.The Canadian business unit was able to lessen the impact of the significant reduction in activity levels in Canada, due to the wet weather at the start of the third quarter and weakness in oil and natural gas prices, through new product adoption, more products on each rig and better pricing. The business unit increased pricing on most of its key products in the fourth quarter of 2011 and this combined with increased market penetration of the Gas Analyzer, customer acceptance of the Company's Live Rig View and rig data software, and more products on each rig, primarily with gains in EDR peripheral devices, lessened the impact of the significant drop in the number of wells being drilled.The factors above combined to result in:An increase in revenue per EDR day during the third quarter of 2012 compared to 2011 of 22% ($187) to $1,040. For the first nine months of 2012, revenue per EDR day increased by $188 to $1,009.Third quarter revenue per industry day of $948 in 2012 compared to $815 in 2011. On a year to date basis, revenue per industry day increased 20% to $943.The segment profit for the third quarter of 2012 of $14.6 million is a decrease of $3.6 million over the 2011 amount. Factors impacting the third quarter results include:The weak drilling activity in the WCSB, together with a slight decrease in the Company's market share, resulted in 11,300 less EDR days during the third quarter of 2012 compared to 2011, resulting in much lower revenue than originally anticipated.An increase in depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems.A decrease in most repair cost categories, including a significant reduction in costs associated with the new Gas Analyzer as compared to the TGAS system.The segment profit, as a percent of revenue, was 51% for the first nine months of 2012, compared to 45% for the 2011 time period. Factors impacting the year to date results include:An increase in depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems of approximately $2.6 million.An increase in field costs of $2.0 million, which is mostly attributable to the expansion of the work force. This was deemed necessary given the shifting footprint of the WCSB, anticipation of additional product opportunities and an adjustment to the shift schedule.A decrease in repair costs of $2.2 million, mostly attributable to the roll out of the new Gas Analyzer, resulting in a drop in TGAS repairs, and a decline in costs due to lower drilling activity.In 2011, the Canadian business unit incurred $1.8 million in legal costs associated with the Automatic Driller lawsuit.$2.0 million of net expenses relating to the water treatment business were recorded in the first nine months of 2011. This business unit was disposed of in the third quarter of 2011.International Operations  Three Months Ended September 30, Nine Months Ended September 30,  20122011Change 20122011Change(000s) ($)($)(%) ($)($)(%)Revenue         Electronic Drilling Recorder 3,8052,38060 10,9146,83560 Pit Volume Totalizer 1,52998256 4,3542,83554 Communications(1) 1197755 42427853 Software (1) 1237858 33822352 Automatic Driller 88452668 2,7081,70859 Gas Analyzer/Total Gas System 99159866 2,8151,274121 Hazardous Gas Alarm System 426197116 1,21079253 Mobilization 69243260 1,7731,44423 Other 8441,754(52) 3,0266,182(51)Total revenue 9,4137,02434 27,56221,57128Operating costs 5,7713,98645 16,70812,96729Depreciation and amortization 2,1382,0285 6,3506,1933Segment operating profit 1,5041,01049 4,5042,41187(1)     2011 revenue associated with the Company's software applications has been reclassified from Communications to Software.Revenue in International operations improved 34% in the third quarter of 2012 from the same period in 2011. On a year to date basis, revenue has increased approximately $6.0 million or 28% over 2011 amounts. The Company realized gains in all of its major markets, with notable gains in both revenue and segment profit in Argentina, Brazil, Australia, and Mexico.Operating profit increased by $0.5 million for the third quarter of 2012 and by $2.1 million on a year to date basis over 2011 results.A number of factors influenced these results:Increased market share combined with price increases in Argentina contributed to significant gains in both revenue and operating profit. Year over year operating profit has increased $0.6 million.Triple-digit revenue growth in Brazil as a result of a doubling of the number of rigs deploying the Company's equipment, resulting in an increase in the year to date revenue of $2.2 million and an increase in operating profit of $0.9 million over 2011 levels.An increase in drilling activity in both Mexico and Australia has led to these two segments realizing increases in operating profit from 2011 levels of $1.5 million and $1.7 million, respectively.The Company's International segment includes our Offshore business unit which generated a 210% increase in its rental revenue for the first nine months of 2012 over the same period in 2011. These gains are as a result of the deployment of Pason hardware onto offshore drilling rigs in the Gulf of Mexico and internationally.Q3 2012 versus Q3 2011The active rig count in both the US and Canadian markets declined from the third quarter of 2011, with Canadian drop in activity much more severe than the US decline. The International market saw an increase in drilling days. The strong US results, combined with increased revenue and profitability in the International markets were not sufficient enough to offset the drop in operating results in Canada. Revenue increased 5%, while EBITDA dropped by 10% and funds flow from operations was down 1%.Net earnings decreased to $19.3 million or $0.23 per share compared to $28.5 million or $0.35 per share in the third quarter of 2011. The third quarter consolidated results, when compared to 2011 figures, were impacted by the following significant items:A change in the amount of foreign exchange recorded of $7.8 million in 2012 compared to 2011 amounts. The strengthening Canadian dollar against the US dollar resulted in a loss of $1.5 million in the third quarter of 2012. The equivalent amount in the third quarter of 2011 was a gain of $6.3 million. The majority of these amounts are unrealized and relate to the translation of certain inter-company balances into CDN dollars.Increase in depreciation expense of $2.8 million in 2012 compared to 2011 amounts, attributable mostly to increased capital expenditures and the accelerated depreciation on the Company's TGAS and EDR systems.Increase in research and developments costs in the third quarter of 2012 of $1.0 million as the Company completes the hiring of additional staff to support the EDR evolution project and other product developments.Stock-based compensation increased by $5.1 million compared to the third quarter of 2011 due to an increase in the Company's stock price, which impacts the pricing under the Black-Scholes pricing model. The Company's stock price went up approximately 10% during the third quarter of 2012 compared to a decline in the corresponding period in 2011.During the third quarter of 2012 the Company recorded a non-cash impairment loss of $2.6 million on its US water treatment asset. In the third quarter of 2011 a non-cash impairment loss of $1.8 million was recorded against the Canadian water treatment assets.Q3 2012 versus Q2 2012The Company's second quarter is usually its weakest due in most part to the seasonality of the Canadian industry. The Canadian business unit realized a profit of $14.6 million for the three months ended September, 2012 compared to a $1.1 million profit in the second quarter. The US business unit realized a slight increase in profit of $0.1 million over the second quarter of 2012 even though drilling activity declined.The following items also impacted the comparison to the 2012 second quarter results:In the second quarter of 2012, the Company recorded an additional charge of $5.4 million relating to the US Automatic Driller lawsuit.During the third quarter of 2012, the Company recorded a non-cash impairment loss of $2.6 million on its US water treatment assetsAn increase in stock-based compensation expense of $1.2 million due to an increase in the Company's stock price during the third quarter of 2012.Third Quarter Conference CallPason will be conducting a conference call for interested analysts, brokers, investors, and media representatives to review its third quarter results at 9:00 a.m. (Calgary time) on Wednesday, November 7, 2012. The conference call dial-in number is 1-888-231-8191 or 1-647-427-7450. You can access the seven-day replay by dialing 1-855-859-2056 or 416-849-0833 (password 35767272).Pason Systems Inc. is a leading provider of instrumentation systems to land-based and offshore drilling rigs worldwide. The company's rental solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, maximize rig uptime, improve work efficiency, and minimize operating costs. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.Additional information, including the Company's Annual Report for the year ended December 31, 2011, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.Condensed Consolidated Interim Financial Statements Condensed Consolidated Interim Balance Sheets       As at   September 30, 2012 December 31,2011(CDN 000s) (unaudited)  ($) ($)Assets     Current      Cash and cash equivalents  139,812 104,993 Trade and other receivables  92,980 102,321 Prepaid expenses  4,714 1,970 Total current assets  237,506 209,284Non-current      Property, plant and equipment  179,387 183,007 Intangible assets  59,745 58,071 Deferred tax assets  3,999 5,539 Total non-current assets  243,131 246,617Total assets  480,637 455,901Liabilities and equity     Current      Trade payables and accruals  34,390 40,668 Litigation provision  19,315 14,543 Income taxes payable  4,825 5,318 Stock-based compensation liability  9,790 5,770 Dividend payable  -- 16,380 Total current liabilities  68,320 82,679Non-current      Stock-based compensation liability  6,047 1,030 Deferred tax liabilities  3,719 4,923 Total non-current liabilities  9,766 5,953Equity      Share capital  78,835 77,613 Employee benefits reserve  12,927 12,927 Foreign currency translation reserve  (11,029) (5,835) Retained earnings  321,818 282,564 Total equity  402,551 367,269Total liabilities and equity  480,637 455,901Condensed Consolidated Interim Statements of Operations       Three Months EndedSeptember 30,  Nine Months EndedSeptember 30,  20122011 20122011(CDN 000s, except per share data) (unaudited) ($)($) ($)($)Revenue       Equipment rentals and other 93,08188,733 285,788235,898Operating expenses       Rental services 27,46626,622 86,88676,512 Local administration 4,6725,513 15,47515,176 Depreciation and amortization 17,85215,035 51,73642,227  49,99047,170 154,097133,915       Operating profit 43,09141,563 131,691101,983Other expenses       Research and development 5,3814,347 15,43411,995 Corporate services 3,4353,286 11,3979,159 Stock-based compensation (recovery) 3,791(1,347) 12,8543,870 Other expenses (income) 4,462(4,197) 13,129(685)  17,0692,089 52,81424,339       Income before income taxes 26,02239,474 78,87777,644 Income taxes 6,68010,927 21,59023,123Net income 19,34228,547 57,28754,521Earnings per share       Basic 0.240.35 0.700.67 Diluted 0.230.35 0.690.66Condensed Consolidated Interim Statements of Comprehensive Income  Three Months EndedSeptember 30, Nine  Months EndedSeptember 30,  20122011 20122011(CDN 000s) (unaudited) ($)($) ($)($)Net income 19,34228,547 57,28754,521Other comprehensive loss       Foreign currency translation adjustment (9,986)7,245 (5,194)6,262Total comprehensive income 9,35635,792 52,09360,783Condensed Consolidated Interim Statements of Changes in Equity             Share Capital EmployeeBenefitsReserve ForeignCurrencyTranslationReserve RetainedEarnings TotalEquity(CDN 000s) (unaudited) ($) ($) ($) ($) ($)Balance at January 1, 2011 75,040 13,228 (6,048) 227,464 309,684 Net Income -- -- -- 54,521 54,521 Dividends -- -- -- (14,741) (14,741) Other comprehensive loss -- -- 6,262 -- 6,262 Exercise of stock options 2,232 -- -- -- 2,232 Options exercised that were previously expensed 307 (307) -- -- -- Stock-based compensation -- 6 -- -- 6Balance at September 30, 2011 77,579 12,927 214 267,244 357,964 Net Income -- -- -- 31,702 31,702 Dividends -- -- -- (16,382) (16,382) Other comprehensive loss -- -- (6,049) -- (6,049) Exercise of stock options 33 -- -- -- 33 Options exercised that were previously expensed 1 (1) -- -- -- Stock-based compensation -- 1 -- -- 1Balance at December 31,2011 77,613 12,927 (5,835) 282,564 367,269 Net Income -- -- -- 57,287 57,287 Dividends -- -- -- (18,033) (18,033) Other comprehensive loss -- -- (5,194) -- (5,194) Exercise of stock options 1,222 -- -- -- 1,222Balance at September 30, 2012 78,835 12,927 (11,029) 321,818 402,551Condensed Consolidated Interim Statements of Cash Flows       Three Months EndedSeptember 30, Nine Months EndedSeptember 30,         20122011 20122011(CDN 000s) (unaudited) ($)($) ($)($)Cash flows from operating activities       Net income 19,34228,547 57,28754,521Adjustment for non-cash items:       Depreciation and amortization 17,85215,035 51,73642,227 Impairment loss 2,6361,800 2,6361,800 Stock-based compensation 1,451(1,937) 6,826936 Deferred income taxes (1,475)3,840 2,2047,989 Unrealized foreign exchange loss (gain) 1,025(6,015) 1,981(4,204)  40,83141,270 122,670103,269Movements in non-cash working capital       (Increase) decrease in trade and other receivables (749)(20,351) 8,985(13,520) Increase in prepaid expenses (1,883)(1,834) (2,847)(2,927) Increase in income taxes payable 5,5105,241 14,55910,371 (Decrease) increase in trade payables, accruals and provisions (351)5,324 2,9755,665 Increase in stock-based compensation liability 2,471564 5,8762,792 Effects of exchange rate changes (977)78 (1,030)878  4,021(10,978) 28,5183,259Cash generated from operating activities 44,85230,292 151,188106,528 Income tax paid (2,998)-- (16,225)(16,650)Net cash from operating activities 41,85430,292 134,96389,878Cash flows used in financing activities       Proceeds from issuance of common shares 39390 1,2222,232 Purchase of stock options (3,151)(185) (5,240)(3,266) Payment of dividends (18,033)(14,741) (34,413)(28,631)Net cash used in financing activities (20,791)(14,836) (38,431)(29,665)Cash flows used in investing activities       Additions to property, plant and equipment (14,500)(18,122) (48,467)(50,735) Deferred development costs (2,483)(1,875) (7,711)(5,696) Acquisitions, net of cash acquired --(23,569) --(23,569) Additions to investments ---- (1,230)-- Changes in non-cash working capital (470)(615) (2,611)(2,768)Net cash used in investing activities (17,453)(44,181) (60,019)(82,768)Effect of exchange rate on cash and cash equivalents (2,409)3,684 (1,694)2,047Net increase (decrease) in cash and cash equivalents 1,201(25,041) 34,819(20,508)Cash and cash equivalents, beginning of period 138,611114,933 104,993110,400Cash and cash equivalents, end of period 139,81289,892 139,81289,892The 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:         Three Months Ended September 30, 2012 Canada United States International Total  ($) ($) ($) ($)Revenue 29,025 54,643 9,413 93,081Operating costs 7,200 19,167 5,771 32,138Depreciation and amortization 7,245 8,469 2,138 17,852Segment operating profit 14,580 27,007 1,504 43,091Research and development       5,381Corporate services       3,435Stock-based compensation       3,791Other expenses       4,462Income taxes       6,680Net income       19,342Capital expenditures 7,148 6,770 3,065 16,983Goodwill -- 18,206 2,600 20,806Intangible assets 24,255 11,162 3,522 38,939Segment assets 117,432 300,501 62,704 480,637Segment liabilities 52,248 17,068 8,770 78,086                  Three Months Ended September 30, 2011                 Revenue 33,673 48,036 7,024 88,733Operating costs 8,705 19,444 3,986 32,135Depreciation and amortization 6,747 6,260 2,028 15,035Segment operating profit 18,221 22,332 1,010 41,563Research and development       4,347Corporate services       3,286Stock-based compensation       (1,347)Other income       (4,197)Income taxes       10,927Net income       28,547Capital expenditures 9,018 8,103 2,876 19,997Goodwill -- 19,232 2,600 21,832Intangible assets 19,845 14,848 5,582 40,275Segment assets 119,244 194,411 60,021 373,676Segment liabilities 41,680 25,189 10,950 77,819         Nine Months Ended September 30, 2012 Canada United States International Total  ($) ($) ($) ($)Revenue 89,377 168,849 27,562 285,788Operating costs 23,111 62,542 16,708 102,361Depreciation and amortization 20,718 24,668 6,350 51,736Segment operating profit 45,548 81,639 4,504 131,691Research and development       15,434Corporate services       11,397Stock-based compensation       12,854Other expenses       13,129Income taxes       21,590Net income       57,287Capital expenditures 20,275 30,681 5,222 56,178Goodwill -- 18,206 2,600 20,806Intangible assets 24,255 11,162 3,522 38,939Segment assets 117,432 300,501 62,704 480,637Segment liabilities 52,248 17,068 8,770 78,086                  Nine Months Ended September 30, 2011                 Revenue 83,681 130,646 21,571 235,898Operating costs 26,939 51,782 12,967 91,688Depreciation and amortization 19,037 16,997 6,193 42,227Segment operating profit 37,705 61,867 2,411 101,983Research and development       11,995Corporate services       9,159Stock-based compensation       3,870Other income       (685)Income taxes       23,123Net income       54,521Capital expenditures 19,218 27,995 9,218 56,431Goodwill -- 19,232 2,600 21,832Intangible assets 19,845 14,848 5,582 40,275Segment assets 119,244 194,411 60,021 373,676Segment liabilities 41,680 25,189 10,950 77,819Pason Systems Inc. Pason Systems Inc. is a leading provider of instrumentation systems to land-based and offshore drilling rigs worldwide. The company's rental solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, maximize rig uptime, improve work efficiency, and minimize operating costs. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.Certain information regarding the Company contained herein may constitute forward-looking information under applicable securities law.  The words "anticipate", "expect", "believe", "may", "should", "will", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward-looking information and statements.  Forward-looking statements in this document may include statements, express or implied regarding the anticipated business prospects and financial performance of Pason; expectations or projections about future strategies and goals for growth and expansion; expected and future cash flows and revenues; and expected impact of future commitments.  These forward-looking statements are based upon various underlying factors and assumptions, including the state of the economy and the oil and gas exploration and production business, in particular; the Company's business prospects and opportunities; and estimates of the financial and operational performance of Pason.Forward-looking information and statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking information and statements.  Risk factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of Pason to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of Pason's assets and businesses, the price of energy commodities, competitive factors in the energy industry, changes in laws and regulations affecting Pason's businesses, technological developments, and general economic conditions.Readers are cautioned not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur.  Such forward looking statements, although considered reasonable by management as of the date hereof, may prove to be incorrect and actual results may differ materially from those anticipated.  Forward-looking statements contained in this press release are expressly qualified by this cautionary statement.Additional information on risks and uncertainties and other factors that could affect Pason's operations or financial results are included in Pason's reports on file with the Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com or through Pason's website www.pason.com).  Furthermore, any forward looking statements contained in this news release are made as of the date of this news release, and Pason does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by securities law.    SOURCE: Pason Systems Inc.For further information: about Pason Systems Inc., visit the company's website at www.pason.com or contact: Marcel Kessler  President and CEO 403-301-3400 marcel.kessler@pason.com David Elliott  Chief Financial Officer 403-301-3441 david.elliott@pason.com