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Press release from CNW Group

Pason Reports First Quarter 2013 Results

Wednesday, May 01, 2013

Pason Reports First Quarter 2013 Results

20:33 EDT Wednesday, May 01, 2013

CALGARY, May 1, 2013 /CNW/ - Pason Systems Inc. (PSI.TO) announced today its 2013 first quarter results.

Performance Data

Three Months Ended March 31, 2013   2012
(reclassified)
(restated)
  Change
(CDN 000s, except per share data) ($)   ($)   (%)
Revenue (1) 109,267   115,145   (5)
EBITDA (2) 59,790   64,146   (7)
  As a % of revenue 54.7   55.7   (2)
  Per share - basic 0.73   0.78   (6)
  Per share - diluted 0.72   0.78   (8)
Funds flow from operations (2) 47,835   51,707   (7)
  Per share - basic 0.58   0.63   (8)
  Per share - diluted 0.58   0.63   (8)
Earnings (3) 29,608   29,073   2
  Per share - basic 0.36   0.35   3
  Per share - diluted 0.36   0.35   3
Capital expenditures 13,939   19,483   (28)
Working capital (3) 190,487   155,515   22
Total assets 509,914   469,546   9
Total long-term debt    
Total equity 393,505   395,113  
Market capitalization 1,453,926   1,150,273   26
Cash dividends declared (4) 0.13    
Common shares outstanding (#)          
  Basic 82,050   81,916  
  Diluted 82,928   82,445   1
Shares outstanding end of period (#) 82,050   81,928  

(1)  Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly. This change has no impact on reported EBITDA, funds flow from operations, or earnings.
(2)  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, impairment losses, stock-based compensation expense, deferred 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 International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies.
(3)  Earnings for the quarter ended March 31, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $400.  Per share amounts have been adjusted accordingly.
(4)  The Company changed its dividend policy whereby effective for 2013, the Company adopted a quarterly dividend to replace the semi-annual dividend.

President's Message
Drilling days and active rig counts in North America were lower in the first quarter of 2013 than in the first quarter of the previous year, with a decline in industry days of 14% and 9% in the United States and Canada, respectively. Activity in international markets was higher than a year ago; however, revenue growth in the International markets was more than offset by a decline in revenue in North America. As a result, total Pason revenue decreased 5% to $109.3 million in the first quarter of 2013 compared to the first quarter of 2012.

All major product categories generated revenue growth above drilling industry activity with the exception of the Hazardous Gas Alarm and AutoDriller. Market penetration of the Hazardous Gas Alarm was negatively affected by the temporary suspension of the H2S sensor functionality due to reliability issues. AutoDriller market penetration was lower, in part, because a larger number of coring rigs - which do not typically utilize the AutoDriller - were active during the Canadian winter drilling season. The Gas Analyzer segment demonstrated the highest year-over-year growth rates at 14%, followed by Software at 4%.

EBITDA for the first quarter dropped by 7% to $59.8 million and cash flow from operations was down 7% to $47.8 million. EBITDA, as a percentage of revenue, was 55% in the first quarter compared to 56% in the first quarter of the previous year. Net earnings increased by 2% to $29.6 million, or $0.36 per share, compared to $29.1 million, or $0.35 per share, in the first quarter of 2012. First quarter net earnings were impacted by the following factors:

  • A $3.2 million decrease in stock-based compensation due to a smaller increase in our stock price during the first quarter of 2013 compared to the first quarter of 2012;
  • A $1.0 million increase in R&D costs as we completed the hiring of staff to support our Electronic Drilling Recorder (EDR) evolution projects;
  • A drop in foreign exchange loss of $1.5 million.

Capital expenditures for the first quarter were $13.9 million, down from $19.5 million the previous year, as the North American roll-out of the new Gas Analyzer was completed over the previous summer.

On March 31, our cash position stood at $168.9 million and our working capital stood at $190.5 million. There is no debt on the balance sheet. We are maintaining our quarterly dividend at $0.13 per share.

United States
The US segment, our largest business unit, includes our US rental business and 3PS Inc., our Austin-based equipment manufacturer.

Drilling activity in the United States continued its downward trend. While industry days were down 14% in the first quarter of 2013 compared to the first quarter of 2012, revenue was down 8% to $53.5 million. On average, 955 US land rigs were operating Pason equipment during the first quarter of 2013, compared to 1,107 in the same period of 2012. Revenue growth above industry day growth was achieved through higher product penetration and a change to the Communications pricing model. Average daily revenue per rig increased by 9% from USD $539 in the first quarter of 2012 to USD $590 in 2013, and was up 4% from the previous quarter. Software, Gas Analyzer, and Communications achieved above-average revenue growth. Our EDR market share for the first quarter of 2013 was 57%, compared to 54% in the fourth quarter of 2012.

Operating costs decreased by 2% and depreciation and amortization decreased by 3%. As a result, our US business unit was able to generate an operating profit of $23.9 million in the first quarter, a decrease of 14% over 2012.

Canada
Drilling activity in Canada was lower in the first quarter of 2013 than in the previous year, with industry days down 9%. Our Canadian business unit was able to partially offset this reduction in activity levels through increased product penetration and market share gains. Revenue for the first quarter was down 5% to $46.0 million. On average, 475 Canadian land rigs were operating Pason equipment compared to 509 the year before. EDR market share in the first quarter of 2013 was 98% compared to 92% in the fourth quarter of 2012.

Average daily revenue generated on each rig with a Pason product installed grew 3% to $1,061 in the first quarter of 2013. Compared to the previous quarter, revenue per EDR days was down by 5%, primarily because a larger number of coring rigs, which use less Pason equipment, were active during the winter drilling season. As in the United States, Gas Analyzer and Software showed above average growth rates during the period.

Operating costs were down by 16% and depreciation and amortization decreased by 15%. As a result, our Canadian business unit was able to generate an operating profit of $30.3 million for the first quarter, compared to $29.9 million for the same period in 2012, an increase of 1%.

International
Our International business unit, which includes our businesses in Latin America, Australia, and offshore, had another good quarter. Revenue increased by 12% to $9.8 million for the first quarter 2013 compared to the first quarter 2012. We realized gains in most of our major international markets with notable gains in Argentina, Australia, and Mexico. However, compared to the fourth quarter of 2012, International's revenue was essentially flat as growth in Mexico and Brazil stalled and Australia experienced some weather related delays.

Operating costs were up 24% and depreciation and amortization were down 32% driven by improved asset utilization. As a result, the International business unit was able to generate a quarterly operating profit of $1.9 million, up 38% from $1.4 million the previous year.

Outlook
There continues to be uncertainty regarding the outlook for North American drilling activity going forward. The natural gas glut generated by unconventional plays does limit gas-directed drilling activity, thereby challenging our ability to significantly grow revenue in the short term. However, the outlook has improved somewhat and industry observers are expecting a modest recovery in North America during the second half of 2013 and beyond.  As with every year, the duration of spring break-up in Canada will be a key driver of second quarter 2013 results. We expect the International business unit to continue to realize profitable growth this year.

Our capital expenditure budget for the next 12 months is $79 million, $56 million of which is directed towards equipment that can generate incremental revenue or save operating costs, $10 million for maintenance capital, and $13 million for capitalized R&D.

Our cash-generating capacity, cash position at $168.9 million, and working capital position at $190.5 million are strong enough to comfortably cover new business development, planned equipment upgrades, and the dividend.

(Signed)

Marcel Kessler
President and Chief Executive Officer
May 1, 2013

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of May 1, 2013 and is a review of the financial condition and results of operations of Pason Systems Inc. (Pason or the Company) based on International Financial Reporting Standards (IFRS) and should be read in conjunction with the consolidated financial statements and accompanying notes.

Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.

All financial measures presented in this quarterly report are expressed in Canadian dollars unless otherwise indicated.

Overview of the 2013 First Quarter

Three Months Ended March 31, 2013   2012
(reclassified)
(restated)
  2011
(reclassified)
(000s, except per share data) ($)   ($)   ($)
Revenue (1) 109,267   115,145   88,218
EBITDA (2) 59,790   64,146   44,729
  As a % of revenue 54.7   55.7   50.7
  Per share - basic 0.73   0.78   0.55
  Per share - diluted 0.72   0.78   0.55
Funds flow from operations (2) 47,835   51,707   39,082
  Per share - basic 0.58   0.63   0.48
  Per share - diluted 0.58   0.63   0.48
Earnings (3) 29,608   29,073   17,757
  Per share - basic 0.36   0.35   0.22
  Per share - diluted 0.36   0.35   0.22
Total assets 509,914   469,546   396,792
Total long-term debt    

(1)  Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly. This change has no impact on reported EBITDA, funds flow from operations, or earnings.
(2)  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, impairment losses, stock-based compensation expense, deferred 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 International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies.
(3) Earnings for the quarter ended March 31, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $400.  Per share amounts have been adjusted accordingly.

Overall Performance

Three Months Ended March 31, 2013   2012
(reclassified)
  Change
(000s) ($)   ($)   (%)
Revenue          
  Electronic Drilling Recorder (1) 44,664   46,535   (4)
  Pit Volume Totalizer 16,870   17,946   (6)
  Communications (1) 10,954   10,997  
  Software 7,363   7,073   4
  AutoDriller 10,510   12,451   (16)
  Gas Analyzer/Total Gas System 8,734   7,635   14
  Hazardous Gas Alarm System 1,602   2,014   (20)
  Mobilization 2,595   2,983   (13)
  Other 5,975   7,511   (20)
Total revenue 109,267   115,145   (5)

(1)  Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly.

Change in Accounting Classification
In the fourth quarter of 2012, the Company changed the way it records expenses associated with data transmission costs. Previously, the Company recorded these costs as a reduction in revenue. Effective for 2012, these costs have been reclassified to rental services expense. This change, which does not impact EBITDA or net income, was applied retroactively, with all comparative figures being restated accordingly. All revenue and operating cost figures, as well as key metrics based upon revenue, in the following Management Discussion and Analysis, have been calculated based upon this new presentation.

The impact of this reclassification on the 2012 comparative figures presented above is as follows:

Three Months Ended March 31, 2012   Reported   Previously
Disclosed
  Change
(000s)   ($)   ($)   ($)
Revenue            
Electronic Drilling Recorder (1)   46,535   43,662   2,873
Communications (1)   10,997   10,380   617
Total revenue   115,145   111,655   3,490

EDR and PVT rental day performance for Canada and the United States is reported below:

Canada  
Three Months Ended March 31, 2013   2012   Change
          (%)
EDR rental days (#) 42,800   46,300   (8)
PVT rental days (#) 41,800   45,900   (9)
           
United States  
Three Months Ended March 31, 2013   2012   Change
          (%)
EDR rental days (#) 85,900   100,800   (15)
PVT rental days (#) 63,600   69,700   (9)

Electronic Drilling Recorder
The Pason Electronic Drilling Recorder (EDR) remains the Company's primary product. The EDR provides a complete system of drilling data acquisition, data networking, and drilling management tools and reports at both the wellsite and customer offices. The EDR is the base product from which all other wellsite instrumentation products are linked. By linking these products, a number of otherwise redundant elements such as data processing, display, storage, and networking are eliminated. This ensures greater reliability and a more robust system of instrumentation for the customer. Revenue generated from the EDR declined 4% for the first quarter of 2013 compared to the same period in 2012. The decrease in the first quarter is attributable mostly to a decrease in rig activity in both the US and Canadian markets offset by an increase in the Company's International markets. Canadian EDR days were down 8% in the first three months of 2013 compared to the same time period in 2012 while US EDR days dropped by 15%.

During the first three months of 2013, the Pason EDR was installed on 98% of all active land rigs in Canada and 57% of the land rigs in the US.

Pit Volume Totalizer
The 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 the quarter was impacted by the drop in rig activity previously described above, off-set by increased product penetration in the US market. During the first quarter of 2013, the PVT was installed on 99% of rigs with a Pason EDR in Canada and 74% in the US, compared to 99% and 70%, respectively, in 2012.

Communications
Pason'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 with positive results.

Software
The Pason DataHub is the Company's data management system that collects, stores, and displays drilling data, reports, and real-time information from drilling operations. The DataHub provides access to data through a number of innovative applications or services including:

  • Enhanced Live Rig View (eLRV), which provides advanced data viewing, directional drilling, and 3D visualization of drilling data in real time via a web browser.
  • Mobile Viewer and Mobile, which allow users to access their data on mobile devices including iPhone, iPad, and BlackBerry, and Android.
  • WITSML, which provides seamless data sharing with third-party applications enhancing the value of data hosted by Pason.
  • Additional specialized software.

During the first quarter of 2013, 97% of the Company's Canadian customers and 88% of customers in the US were using all or a portion of the functionality of the DataHub, compared to 98% and 84%, respectively, in 2012.

Gas Analyzer and Total Gas System
The Pason Gas Analyzer, which has replaced the Total Gas System (TGAS) in the Canadian and US 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 quarter of 2013, both systems combined generated $8.7 million of revenue compared to $7.6 million in 2012. The Company is realizing increased product penetration compared to TGAS. For 2013, Gas Analyzer was installed on 51% of Canadian and 22% of US land rigs operating with a Pason EDR system. The combined market penetration in Canada is an increase of approximately 6% over 2012 levels while the US has seen an increase of 4%. The rollout of the Gas Analyzer in the International markets started in late 2012, and is accelerating in 2013.

AutoDriller
Pason's AutoDriller is used to maintain constant weight on the drill bit while a well is being drilled. During the first three months of 2013, the AutoDriller was installed on 72% of Canadian and 46% of US land rigs operating with a Pason EDR system, compared to 77% and 50%, respectively, in 2012. The drop in market penetration on this product is not a result of a decrease in customer acceptance but due to the Company increasing its presence with its EDR base system on rigs that traditionally do not require the functionality of the AutoDriller.

Hazardous Gas Alarm System
The Pason Hazardous Gas Alarm System (HGAS) monitors lower explosive limit (LEL) gases and H2S gases and displays the readings on the EDR. If a hazardous rig atmosphere is detected, the system reacts immediately, sounding an alarm and flashing a strobe light. Early in 2013, the Company identified a sensor on the H2S product, a part of the HGAS system, which was not performing to the manufacturer's standards. As a result, the Company has temporarily suspended the functionality of this portion of the HGAS while it investigates a solution to the problem. The effect on the Canadian market was greater than any other business unit as the H2S sensor is more widely used in Canada. As a result, market penetration for this product was impacted in the first quarter of 2013; the product was installed on 15% of Canadian rigs, down from 20% for the same period in 2012, and 8% of US land rigs operating with a Pason EDR system, a similar level to 2012. The company estimates that the impact on revenue in the first quarter of 2013 was approximately $0.4 million. The Company is currently investigating alternative sensor manufacturers and technologies to ensure that the replacement H2S product meets industry standards and customer expectations. Replacement of the sensor will happen in the second half of 2013.


Discussion of Operations

United States Operations

Three Months Ended March 31,   2013   2012
(reclassified)
  Change
(000s)   ($)   ($)   (%)
Revenue            
Electronic Drilling Recorder (1)   23,350   25,290   (8)
Pit Volume Totalizer   8,019   8,722   (8)
Communications (1)   4,239   3,905   9
Software   4,260   3,962   8
AutoDriller   4,980   6,181   (19)
Gas Analyzer/Total Gas System   3,002   2,529   19
Hazardous Gas Alarm System   646   717   (10)
Mobilization   1,961   2,297   (15)
Other   3,027   4,426   (32)
Total revenue   53,484   58,029   (8)
Operating costs   22,240   22,668   (2)
Depreciation and amortization   7,384   7,619   (3)
Segment operating profit   23,860   27,742   (14)

(1)  Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly.

The impact of the accounting reclassification of data transmission costs from revenue to operating costs previously discussed had the following impact on the 2012 comparative figures presented above:

Three Months Ended March 31, 2012        Reported   Previously
Disclosed
  Change
(000s)   ($)   ($)   ($)
Revenue            
Electronic Drilling Recorder (1)   25,290   23,805   1,485
Communications (1)   3,905   3,784   121
Total revenue   58,029   56,423   1,606
Operating costs   22,668   21,062   1,606
Revenue per EDR day   540   523   17
Revenue per Industry day   310   300   10

US segment revenue decreased by 8% in the first quarter of 2013 over the 2012 comparable period (9% decrease when measured in USD). Rental service revenue decreases were 6% for the quarter (USD 7%), while sales at 3PS, Inc. dropped in the first quarter of 2013 compared to 2012.

As expected, the number of US drilling days were down approximately 14% in the first quarter of 2013 versus the first quarter of 2012 due to a pullback in drilling for both natural gas and oil. However, revenue from the rental of instrumentation compared favorably to the drop in activity, with a decrease of 6% (USD 7%) over 2012 levels.

Revenue was impacted by the following factors:

  • More products on each rig and new product adoption. Revenue increased by additional product penetration on each rig, primarily with gains in EDR peripheral devices, increased PVT market share, customer acceptance of the Company's Enhanced Live Rig View (eLRV) real-time data software, an increase in WITSML revenue, and increased adoption of the Gas Analyzer compared to the TGAS. These factors combined resulted in an increase in revenue per EDR day in the first quarter of 2013 over 2012 levels of $55 (USD $51).
  • A decrease in EDR rental days of 15% for the three months ended March 2013, over the same time period in 2012. The US market share stayed constant at 57%.

The factors explained above resulted in the US segment being able to realize revenue per EDR day during the first quarter of 2013 of $595 (USD $590) compared to $540 (USD $539) during the same time period in 2012.

Revenue per industry day for the first quarter of the year was $337 (USD $334) compared to $310 (USD $309) in 2012.

The majority of the decrease in "Other" revenue relates to a drop in sales at 3PS, Inc. compared to 2012 levels. This is a result of a decline in sales of the Torque and Tension Sub to the Canadian and US business units due to a lack of demand for the rental of these assets.

Segment profit, as a percentage of revenue, was 45% for the first quarter of 2013 compared to 48% for the corresponding period in 2012.

The US business was able to maintain a robust margin despite the drop in activity and its fixed cost structure by managing its variable costs and implementing changes to operations to adapt to changing market conditions. The 2013 segment profit percentage was impacted by the following factors (all amounts in $CDN):

  • An increase in communication-related expenses of $0.9 million due to the US business unit implementing a more robust level of service to its customers.
  • Field technician-related costs and repair costs in the first quarter of 2013 compared to 2012 decreased by approximately $1.3 million. This reduction was attributable to the change in rig activity which led to a reduction in repair costs and a drop in field parts and other consumables.
  • First quarter 2013 depreciation and amortization expense was down $0.3 million compared to the same period in 2012
  • the Company began to accelerate the depreciation on its TGAS system in 2012 to recognize the fact that it was being replaced by the Gas Analyzer. The TGAS systems are now fully depreciated, resulting in a drop in depreciation expense of $1.0 million,
  • the Company, in the first quarter of 2012, began to accelerate the depreciation on a portion of its base EDR system, which will become obsolete as a result of the EDR evolution project. Later in 2012, the Company re-evaluated the assumption of when the equipment being replaced will become obsolete and adjusted downwards the amount of accelerated depreciation being recorded, resulting in a drop in depreciation expense of $1.0 million,
  • the above reduction was offset by depreciation on the new Gas Analyzer system and other new additions.




Canadian Operations

Three Months Ended March 31,   2013   2012
(reclassified)
  Change
(000s)   ($)   ($)   (%)
Revenue            
Electronic Drilling Recorder (1)   17,374   17,799   (2)
Pit Volume Totalizer   7,291   7,922   (8)
Communications (1)   6,379   6,927   (8)
Software   3,003   3,021   (1)
AutoDriller   4,619   5,339   (13)
Gas Analyzer/Total Gas System   4,654   4,243   10
Hazardous Gas Alarm System   538   958   (44)
Mobilization   176   202   (13)
Other   1,921   1,933   (1)
Total revenue   45,955   48,344   (5)
Operating costs   9,607   11,403   (16)
Depreciation and amortization   6,021   7,043   (15)
Segment operating profit   30,327   29,898   1

(1) Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly.

The impact of the accounting reclassification of data transmission costs from revenue to operating costs previously discussed had the following impact on the 2012 comparative figures presented above:

             
Three Months Ended March 31, 2012   Reported   Previously
Disclosed
  Change
(000s)   ($)   ($)   ($)
Revenue            
Electronic Drilling Recorder (1)   17,799   16,459   1,340
Communications (1)   6,927   6,431   496
Total revenue   48,344   46,508   1,836
Operating costs   11,403   9,567   1,836
Revenue per EDR day   1,034   994   40
Revenue per Industry day   995   935   60

Canadian segment revenue decreased 5% for the three months ended March 2013, compared to the first quarter of 2012. This decrease is a result of a 9% decrease in the number of Canadian drilling industry days from 2012 levels.

EDR rental days declined 8% in the first quarter of 2013 over 2012 levels. Canadian market share was 98% during the first quarter of 2013, compared to 95% in the corresponding period in 2012.

The Canadian business unit was able to lessen the impact of the reduction in activity levels in Canada through new product adoption, and more products on each rig. The business unit continued to increase the market penetration of the Gas Analyzer and continued to realize gains in EDR peripheral devices and an increase in WITSML revenue. These factors combined to lessen the impact of the drop in HGAS revenue described previously and the drop in the number of wells being drilled.

The factors above combined to result in:

  • An increase in revenue per EDR day during the first quarter of 2013 compared to 2012 of 3% ($27) to $1,061.
  • First quarter revenue per industry day of $1,042 in 2013 compared to $995 in 2012.

The segment profit for the first quarter of 2013 of $30.3 million is an increase of $0.4 million over the 2012 amount. The segment profit, as a percent of revenue, was 66% for the three months ended March 2013, compared to 62% for 2012. Factors impacting the first quarter results include:

  • The weak drilling activity in the Western Canadian Sedimentary Basin (WCSB) resulted in 3,500 fewer EDR days during the first quarter of 2013 compared to 2012.
  • A decrease in field costs of $0.8 million, which is mostly attributable to the decline in drilling activity.
  • A decrease in most repair cost categories, totaling $0.5 million.
  • A decrease in depreciation and amortization expense of $1.0 million
  • a decrease in the loss on disposal of assets of $0.4 million,
  • the TGAS being fully depreciated, described above, resulting in a decline in the expense of $0.3 million,
  • a drop in the acceleration of depreciation on a portion of its base EDR system, described above, resulting in a drop in depreciation of $0.5 million,
  • the above reductions in depreciation and amortization expense were offset by depreciation on the new Gas Analyzer system as well as an increase in amortization costs relating to capitalized research and development costs, as a result of the deployment of new software applications.
  • In the first quarter of 2012, $0.3 million of legal fees were incurred, mostly relating to the AutoDriller litigation. These costs were minimal in the first quarter of 2013.


International Operations

Three Months Ended March 31,   2013   2012
(reclassified)
  Change
(000s)   ($)   ($)   (%)
Revenue            
Electronic Drilling Recorder (1)   3,940   3,446   14
Pit Volume Totalizer   1,560   1,302   20
Communications (1)   336   165   104
Software   100   90   11
AutoDriller   911   931   (2)
Gas Analyzer/Total Gas System   1,078   863   25
Hazardous Gas Alarm System   418   339   23
Mobilization   458   484   (5)
Other   1,027   1,152   (11)
Total revenue   9,828   8,772   12
Operating costs   6,394   5,152   24
Depreciation and amortization   1,529   2,235   (32)
Segment operating profit   1,905   1,385   38

(1) Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly.

The impact of the accounting reclassification of data transmission costs from revenue to operating costs previously discussed had the following impact on the 2012 comparative figures presented above:

             
Three Months Ended March 31, 2012   Reported   Previously
Disclosed
  Change
(000s)   ($)   ($)   ($)
Revenue            
Electronic Drilling Recorder (1)   3,446   3,398   48
Communications (1)   165   165  
Total revenue   8,772   8,724   48
Operating costs   5,152   5,104   48

Revenue in the International operations improved 12% in the first quarter of 2013 from the same period in 2012.

Operating profit increased by $0.5 million for the first quarter of 2013 over 2012 results.

A number of factors influenced these results:

  • Increased EDR days in both Mexico and Argentina contributed to an increase revenue of $0.6 million.
  • Australia revenue continues to ramp up at an impressive rate. Revenue increased by approximately $0.9 million compared to the first quarter of 2012. This increase in revenue translated into an increase in operating profit of $0.4 million over 2012 levels.
  • Depreciation expense is down due to a decrease in capital expenditures in prior periods as a result of a concerted effort to increase the utilization of equipment within this market, combined with gains realized on the disposal of non-rental assets and intangible assets that are now fully amortized.

Consolidated Results

Three Months Ended March 31,   2013   2012   Change
(000s)   ($)   ($)   (%)
Other expenses            
Research and development   6,526   5,540   18
Corporate services   4,160   4,406   (6)
Stock-based compensation   3,750   6,919   (46)
Other            
  Foreign exchange loss   220   1,711   (87)
  Other   330   119   177
    14,986   18,695   (20)

Q1 2013 versus Q1 2012
The active rig count in both the US and Canadian markets declined from the first quarter of 2012, with the US drop in activity much more severe than the Canadian decline. The International market saw a slight increase in drilling days. This change in activity led to a decline in most of the Company's key consolidated financial metrics. Revenue decreased 5%, while EBITDA dropped by 7% and funds flow from operations was down 7%.

The company realized net earnings of $29.6 million or $0.36 per share compared to earnings of $29.1 million or $0.35 per share in the first quarter of 2012. The first quarter consolidated results, when compared to 2012 figures, were impacted by the following significant items:

  • An increase in research and development costs in the first quarter of 2013 of $1.0 million as the Company completed the hiring of additional staff in the second half of 2012 to support the EDR evolution project and other product development initiatives.
  • Stock-based compensation decreased by $3.2 million compared to the first quarter of 2012 due to a large increase in the  Company's stock price in the first three months in 2012 compared to the increase that occurred in the stock price during the first quarter of 2013.
  • A decrease in the foreign exchange loss recorded in the first quarter of 2013 of $1.5 million compared to the corresponding period in 2012.

Q1 2013 versus Q4 2012
The Company's first quarter is usually its strongest due in most part to the seasonality of the Canadian market. Revenue was higher in the first quarter of 2013 versus the fourth quarter of 2012 by $18.3 million. The Canadian business unit realized an increase in revenue of $13.9 million, while the US rental market realized an increase in revenue of $4.5 million, due in part to a strengthening US dollar (increase in USD of $1.3 million). The Canadian business unit realized a profit of $30.3 million for the three months ended March 2013, compared to a $16.9 million profit in the fourth quarter of 2012. The US business unit profit was little changed, profit increased from $23.2 million in the previous quarter to a profit of $23.9 million in the current quarter.

The following items also impacted the comparison to the 2012 fourth quarter results:

  • In the fourth quarter of 2012, the Company recorded an additional non-cash accrual relating to the AutoDriller litigation of $32.5 million.
  • In the fourth of 2012, the Company recorded a non-cash impairment loss of $4.7 million against its Torque and Tension Sub (TTS) program and an additional $0.6 million against the US water treatment business.
  • A decrease in corporate service costs of $0.5 million, due in most part to staff restructuring costs incurred in the fourth quarter of 2012.
  • A decrease in stock-based compensation expense of $3.5 million due to a smaller increase  in the Company's stock price in the first quarter of 2013 compared to the increase in stock price that occurred in the fourth quarter of 2012. The stock price increased by 5% in the fourth quarter of 2012, which impacts the valuation under the Black-Scholes pricing model. The change in the Company's stock price during the first quarter of 2013 was smaller, resulting in a decline in the expense.

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 Thursday, May 2, 2013. The conference call dial-in number is 1-888-231-8191 or 1-647-427-7450. You can access the seven-day replay by dialing 1-855-859-2056 or 1-416-849-0833, using password 20487585.

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.TO.

Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2012, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Shareholders are also invited to attend the Company's Annual General Meeting on Thursday, May 2, 2013, at 3:30 pm at the offices of Pason Systems Inc., 6120 Third Street SE, Calgary, Alberta.

Condensed Consolidated Interim Financial Statements and Notes

Condensed Consolidated Interim Balance Sheets

As at   March 31, 2013   December 31, 2012
(CDN 000s) (unaudited)   ($)   ($)
Assets        
Current        
  Cash and cash equivalents   168,868   157,944
  Trade and other receivables   95,377   84,506
  Prepaid expenses   2,556   2,920
  Total current assets   266,801   245,370
Non-current        
  Property, plant and equipment   174,341   174,651
  Intangible assets   61,684   59,593
  Deferred tax assets   7,088   8,764
  Total non-current assets   243,113   243,008
Total assets   509,914   488,378
Liabilities and equity        
  Current        
  Trade payables and accruals   26,157   25,674
  Litigation provision   19,684   19,533
  Income taxes payable   5,703   3,313
  Stock-based compensation liability   14,103   13,788
  Dividend payable   10,667   19,691
  Total current liabilities   76,314   81,999
Non-current        
  Stock-based compensation liability   4,062   2,583
  Deferred tax liabilities   2,600   2,600
  Litigation provision   33,433   32,500
  Total non-current liabilities   40,095   37,683
Equity        
  Share capital   79,411   79,393
  Share-based reserve   12,927   12,927
  Foreign currency translation reserve   (2,498)   (8,348)
  Retained earnings   303,665   284,724
  Total equity   393,505   368,696
Total liabilities and equity   509,914   488,378




Condensed Consolidated Interim Statements of Operations

Three Months Ended March 31,     2013 2012
(reclassified
restated)
(CDN 000s, except per share data) (unaudited)     ($) ($)
Revenue        
  Equipment rentals and other     109,267 115,145
Operating expenses        
  Rental services     33,876 33,701
  Local administration     4,365 5,522
  Depreciation and amortization     14,934 16,897
      53,175 56,120
         
Operating profit     56,092 59,025
Other expenses        
  Research and development     6,526 5,540
  Corporate services     4,160 4,406
  Stock-based compensation     3,750 6,919
  Other expenses     550 1,830
      14,986 18,695
         
Income before income taxes     41,106 40,330
  Income taxes     11,498 11,257
Net income     29,608 29,073
Earnings per share        
  Basic     0.36 0.35
  Diluted     0.36 0.35

Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly. This change has no impact on reported EBITDA, funds flow from operations, or earnings.
Earnings for the quarter ended March 31, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $400.  Per share amounts have been adjusted accordingly.

Condensed Consolidated Interim Statements of Other Comprehensive Income

Three Months Ended March 31,   2013   2012
(restated)
(CDN 000s) (unaudited)   ($)   ($)
Net income   29,608   29,073
Other comprehensive income (loss)        
  Foreign currency translation adjustment   5,850   (1,511)
Total comprehensive income   35,458   27,562




Condensed Consolidated Interim Statements of Changes in Equity

    Share
Capital
  Share-
based
Reserve
  Foreign
Currency
Translation
Reserve
  Retained
Earnings
  Total Equity
(CDN 000s) (unaudited)   ($)   ($)   ($)   ($)   ($)
Balance at January 1, 2012   77,613   12,927   (5,835)   282,564   367,269
  Net income (restated)         29,073   29,073
  Other comprehensive income       (1,511)     (1,511)
  Exercise of stock options   282         282
Balance at March 31, 2012   77,895   12,927   (7,346)   311,637   395,113
  Net income         10,811   10,811
  Dividends         (37,724)   (37,724)
  Other comprehensive loss       (1,002)     (1,002)
  Exercise of stock options   1,498         1,498
Balance at December 31, 2012   79,393   12,927   (8,348)   284,724   368,696
  Net income         29,608   29,608
  Dividends         (10,667)   (10,667)
  Other comprehensive income       5,850     5,850
  Exercise of stock options   18         18
Balance at March 31, 2013   79,411   12,927   (2,498)   303,665   393,505

Earnings for the quarter ended March 31, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $400.




Condensed Consolidated Interim Statements of Cash Flows

Three Months Ended March 31,   2013   2012
(restated)
(CDN 000s) (unaudited)   ($)   ($)
Cash flows from operating activities        
  Net income   29,608   29,073
Adjustment for non-cash items:        
  Depreciation and amortization   14,934   16,897
  Stock-based compensation   1,495   5,039
  Deferred income taxes   1,720   (549)
  Unrealized foreign exchange loss   78   1,247
Funds flow from operations   47,835   51,707
Movements in non-cash working capital        
  Increase in trade and other receivables   (9,681)   (6,534)
  Decrease (increase) in prepaid expenses   406   (425)
  Increase in income taxes payable   6,870   8,192
  Increase (decrease) in trade payables, accruals and provisions   1,961   (1,918)
  Increase in stock-based compensation liability   2,221   1,805
  Effects of exchange rate changes   1,082   404
Changes in non-cash working capital   2,859   1,524
Cash generated from operating activities   50,694   53,231
  Income tax paid   (4,500)   (8,227)
Net cash from operating activities   46,194   45,004
Cash flows from (used in) financing activities        
  Proceeds from issuance of common shares   18   282
  Purchase of stock options   (1,922)   (404)
  Payment of dividends   (19,691)   (16,380)
Net cash used in financing activities   (21,595)   (16,502)
Cash flows (used in) from investing activities        
  Additions to property, plant and equipment   (10,196)   (17,236)
  Additions to intangibles   (5)  
  Deferred development costs   (3,743)   (2,247)
  Proceeds on disposal of property, plant and equipment   44  
  Changes in non-cash working capital   (754)   (862)
Net cash used in investing activities   (14,654)   (20,345)
Effect of exchange rate on cash and cash equivalents   979   (775)
Net increase in cash and cash equivalents   10,924   7,382
Cash and cash equivalents, beginning of period   157,944   104,993
Cash and cash equivalents, end of period   168,868   112,375

Earnings for the quarter ended March 31, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $400.




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:

Three Months Ended March 31, 2013   Canada   United States   International   Total
    ($)   ($)   ($)   ($)
Revenue   45,955   53,484   9,828   109,267
Operating costs   9,607   22,240   6,394   38,241
Depreciation and amortization   6,021   7,384   1,529   14,934
Segment operating profit   30,327   23,860   1,905   56,092
Research and development               6,526
Corporate services                 4,160
Stock-based compensation               3,750
Other expenses                 550
Income taxes               11,498
Net income                 29,608
Capital expenditures   7,027   4,306   2,606   13,939
Goodwill     18,797   2,600   21,397
Intangible assets   27,523   9,353   3,411   40,287
Segment assets   188,825   255,898   65,191   509,914
Segment liabilities   91,469   15,518   9,422   116,409
                 
Three Months Ended March 31, 2012 (reclassified, restated)      
                 
Revenue   48,344   58,029   8,772   115,145
Operating costs   11,403   22,668   5,152   39,223
Depreciation and amortization   7,043   7,619   2,235   16,897
Segment operating profit   29,898   27,742   1,385   59,025
Research and development               5,540
Corporate services               4,406
Stock-based compensation               6,919
Other expenses               1,830
Income taxes               11,257
Net income               29,073
Capital expenditures   6,042   12,900   541   19,483
Goodwill     20,909   2,600   23,509
Intangible assets   21,340   8,702   4,393   34,435
Segment assets   139,380   269,870   60,296   469,546
Segment liabilities   45,204   20,738   8,491   74,433

Data transmission expenses have been reclassified from revenue to rental service expense. All comparative figures have been restated accordingly. This change has no impact on reported EBITDA, funds flow from operations, or earnings.
Earnings for the quarter ended March 31, 2012, have been restated to correct a non-cash error relating to stock-based compensation expense of $400.

Correction of Error

During the year ended December 31, 2012, the Company identified a non-cash accounting error related to stock-based compensation being understated.  The error was corrected in the Company's consolidated financial statements for the year ended December 31, 2012.  The Company determined the error impacted the interim financial statements for the three month period ended March 31, 2012 and has corrected the comparative period included in these condensed consolidated financial statements.

Three Months Ended March 31, 2012   Previously
Disclosed
  Adjustment   Restated
    ($)   ($)   ($)
Balance Sheet            
  Stock based compensation liability - current   10,371   400   10,771
  Retained earnings   312,037   (400)   311,637
Statement of Operations            
  Stock based compensation expense   6,519   400   6,919
  Net Income   29,473   (400)   29,073

Pason 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.TO.

Certain information regarding the Company contained herein may constitute forward-looking information under applicable securities law.  The words "anticipate", "expect", "believe", "may", "should", "will", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward-looking information and statements.  Forward-looking statements in this document may include statements, express or implied regarding the anticipated business prospects and financial performance of Pason; expectations or projections about future strategies and goals for growth and expansion; expected and future cash flows and revenues; and expected impact of future commitments.  These forward-looking statements are based upon various underlying factors and assumptions, including the state of the economy and the oil and gas exploration and production business, in particular; the Company's business prospects and opportunities; and estimates of the financial and operational performance of Pason.

Forward-looking information and statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking information and statements.  Risk factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of Pason to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of Pason's assets and businesses, the price of energy commodities, competitive factors in the energy industry, changes in laws and regulations affecting Pason's businesses, technological developments, and general economic conditions.

Readers are cautioned not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur.  Such forward looking statements, although considered reasonable by management as of the date hereof, may prove to be incorrect and actual results may differ materially from those anticipated.  Forward-looking statements contained in this press release are expressly qualified by this cautionary statement.

Additional information on risks and uncertainties and other factors that could affect Pason's operations or financial results are included in Pason's reports on file with the Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) or through Pason's website (www.pason.com).  Furthermore, any forward looking statements contained in this news release are made as of the date of this news release, and Pason does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by securities law. 

 

SOURCE: Pason Systems Inc.

For further information:

For more 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

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