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Pason Systems Inc.

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Pason Reports Third Quarter 2019 Results
Pason Reports Third Quarter 2019 Results

Canada NewsWire

CALGARY, Nov. 6, 2019 /CNW/ - Pason Systems Inc. (TSX:PSI) announced today its 2019 third quarter results.

Performance Data


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

Change

2019

2018

Change

(CDN 000s, except per share data)

($)

($)

(%)

($)

($)

(%)

Revenue

72,195

82,344

(12)

227,232

224,428

1

EBITDA (1)

33,167

44,633

(26)

99,208

100,467

(1)

Adjusted EBITDA (1)

31,557

42,473

(26)

102,873

106,684

(4)

As a % of revenue

43.7

51.6

(790) bps

45.3

47.5

(220) bps

Funds flow from operations

29,899

36,039

(17)

89,592

97,833

(8)

Per share – basic

0.35

0.42

(17)

1.04

1.15

(10)

Per share – diluted

0.35

0.42

(17)

1.04

1.13

(8)

Cash from operating activities

37,453

31,809

18

83,833

83,770

Capital expenditures

4,058

4,858

(16)

18,591

15,426

21

Free cash flow (1)

33,067

26,880

23

65,999

68,919

(4)

Cash dividends declared

0.19

0.18

6

0.55

0.52

6

Net Income

15,418

24,386

(37)

43,707

42,224

4

Per share – basic

0.18

0.29

(37)

0.51

0.50

3

Per share – diluted

0.18

0.28

(36)

0.51

0.49

3

Total interest bearing debt

Shares outstanding end of period (#000's)

85,299

85,431

85,299

85,431



(1)

Non-IFRS financial measures are defined in the Management's Discussion and Analysis section.


Current period amounts are in accordance with IFRS following the adoption of IFRS 16, Leases as discussed in Note 3 in the Consolidated Financial
Statements. Prior periods have not been restated.

 

Q3 2019 vs Q3 2018

The Company generated consolidated revenue of $72.2 million in the third quarter of 2019, a decrease of 12% from the same period in 2018. The decrease is attributable to a drop in North American drilling activity, offset by a slight increase in activity in the International business unit, increased market share in the US business unit, and continued increases in product penetration in all major business units, leading to increases in Revenue per EDR day.

Adjusted EBITDA decreased to $31.6 million in the third quarter, a decrease of 26% from the same period in 2018. The decrease in adjusted EBITDA was driven by the decrease in consolidated gross profit and an increase in research and development expense.

Funds flow from operations was $29.9 million in the third quarter, a decrease of 17% from the same period in 2018. Cash from operating activities was $37.5 million in the third quarter of 2019, an increase of 18% from the same period in 2018. This financial metric was significantly impacted by movements in working capital, mostly due to the release of trade and other receivables.

Free cash flow was $33.1 million in the third quarter of 2019, an increase of 23% from the same period in 2018. The increase was driven by the increase in cash from operating activities and a decline in capital expenditures.

The Company recorded net income of $15.4 million ($0.18 per share) in the third quarter of 2019, compared to net income of $24.4 million ($0.28 per share) recorded in the same period in 2018. Net income was negatively impacted by the drop in drilling activity, and this combined with the Company's fixed cost structure led to a drop in consolidated gross profit of $11.6 million. In addition, higher research and development costs and an increase in foreign exchange losses contributed to the decline in net income. These negative factors were off-set by recording a non-cash net monetary gain of $2.4 million as a result of applying hyperinflationary accounting to the Company's Argentina subsidiary.

President's Message

Pason's operating environment across North America has deteriorated in the third quarter. Industry activity in Canada remains at low levels as transportation constraints collide with political intransigence to sap E&P producers' confidence to increase spending levels. As a result, third quarter industry activity in Canada decreased 37% compared to the previous year. The situation in the United States is also challenging with drilling activity down 14% driven by the industry facing pressure from equity and debt investors to constrain spending within cash flows.

These headwinds were partially offset by higher activity in Pason's international markets, market share increases in the United States, and continued growth in product penetration in all geographies, leading to higher Revenue per EDR Day. Leading the increase in Revenue per EDR Day were the higher adoption of data delivery and certain other peripheral products.

The company generated revenue of $72.2 million in the period, a decrease of 12% compared to the same quarter last year, and essentially unchanged from the second quarter. Adjusted EBITDA was $31.6 million for the quarter, a decrease of 26% compared to the prior year, and up slightly from the second quarter. Adjusted EBITDA as a percentage of revenue was 44% compared to 52% one year ago. Pason recorded net income for the quarter of $15.4 million ($0.18 per share) compared to $24.4 million ($0.28 per share) in the prior year quarter, and up from $9.2 million ($0.11 per share) in the second quarter.

At September 30, 2019, our working capital position stood at $230 million, including cash and short-term investments of $181 million. We are maintaining our quarterly dividend at $0.19 share.

With drilling activity levels declining since the second quarter and operators maintaining disciplined spending levels, visibility remains poor with respect to operator budgets as we move into 2020. There is a chance that rig counts will bottom in the fourth quarter and they may stay low for some time. As a result, we are likely to see further oilfield services industry consolidation; the industry simply has too many assets and too much debt.

However, we believe that there are good reasons for optimism regarding drilling activity in the medium term. Demand for oil continues to increase each year. Consumption of oil-based products has gone from 75 million barrels per day in 1999 to 101 million barrels per day this year. The industry needs to add more than 1 million barrels per year of new supply each year. The world relies on hydrocarbons and there is nothing on the horizon that can replace it. Fears that the trade war between the US and China will significantly reduce oil demand seem overblown and the International Energy Agency has reduced their oil demand forecast by only a hundred thousand barrels per day. It is not possible for US oil production to keep increasing, or even stay flat, if drilling activity is low and dropping. Oil prices must go higher at some point to avoid a supply shortage.

In this environment, we are keeping our fixed costs low and maintaining flexibility for our go-forward plans, which gives us the means and confidence to address any activity scenario. We do not plan to reduce our R&D efforts. Our capital expenditures will be relatively modest going forward with a larger portion of development efforts focused on software and analytics. We continue to intend to spend up to $30 million in capital expenditures in 2019 and expect capital spending levels to be up to $25 million in 2020.

Our highly capable and flexible IT and communications platform can host additional new Pason and third-party software at the rigsite and in the cloud. Our market positions remain strong, and we expect to be able to deliver growth in our international markets and through higher product adoption going forward. We are the service provider of choice for many leading operators and drilling contractors with Pason equipment installed on over 65% of all active land drilling rigs in the Western Hemisphere.

Pason recently made two investments which provide avenues for us to deploy our distinctive capabilities in two additional end markets.

In September, we announced the acquisition of a majority interest of Energy Toolbase LLC ("ETB"), a private US-based software-as-a-service company, for US$20 million. ETB provides an industry-leading software package to model the economics and build proposals for solar and energy storage (battery) projects. The ETB product is utilized by a significant number of distributed energy project developers across the United States. Building on Pason's deep data management expertise, we are combining the capabilities of Pason Power and ETB. Over the last two years, Pason Power has been building a foundation in the solar and energy storage market through its iEMS control system and Energy DataHub products. With this investment, we are positioning ourselves for meaningful long-term growth in the solar and energy storage market.

In October, we announced a C$25 million investment to acquire a minority interest in Intelligent Wellhead Solutions ("IWS"). IWS is a privately-owned oilfield technology and service company that provides unique surface control systems for well completions and workover operations. Pason has been looking to enter the completions space for several years and IWS represents the first truly compelling opportunity we have seen where we believe we can build on Pason's expertise in end-to-end data management and ruggedized field technologies. We are excited to play a role in IWS' continued growth.

The timing of these two investments close each other was coincidental. We had been investigating opportunities to make an investment in the completions space, as well as to accelerate our efforts in the solar and energy storage market, for several years. There are no additional investments planned in the short term in either area. However, we will continue to scan the drilling, completions and power markets for attractive long-term growth opportunities.

(signed)

Marcel Kessler
President and Chief Executive Officer
November 6, 2019

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of November 6, 2019, 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 report are expressed in Canadian dollars unless otherwise indicated.

Impact of IFRS 16

The Company adopted IFRS 16, Leases, effective January 1, 2019, using the modified retrospective approach. This new standard supersedes IAS 17, Leases, and introduces a single lessee accounting model by eliminating a lessee's classification of leases as either operating leases or finance leases. Comparative figures have not been restated. Further disclosure is provided in Note 3 to the Condensed Consolidated Interim Financial Statements.

The impact of adopting this new standard on IFRS Measures and Non-IFRS Measures is described below. The figures presented below are the 2019 actual numbers that are classified differently than the 2018 comparative figures. Effectively, the operating expense line items recognized under the previous standard will be bifurcated between depreciation expense and interest expense.

Impact on IFRS Measures


Three Months Ended
September 30, 2019

Nine Months Ended
September 30, 2019

(000s)

($)

($)

Reduction in rental services and local administration expenses

270

827

Reduction in research and development expenses

99

234

Reduction in corporate services costs

324

916

(Increase) in depreciation of right of use assets

(653)

(1,933)

(Increase) in net interest expense on lease liabilities

(115)

(345)

Reduction in Income tax provision

20

81

(Decrease) in net income

(55)

(220)

Increase in depreciation of right of use assets

653

1,933

(Reduction) in Income tax provision

(20)

(81)

Total increase in funds flow from operations and cash from operating
activities

578

1,632

 

Impact on Non-IFRS Measures


Three Months Ended
September 30, 2019

Nine Months Ended
September 30, 2019

(000s)

($)

($)

Decrease in rental services and local administration - Canada operating
segment

40

120

Decrease in rental services and local administration - United States operating
segment

200

596

Decrease in rental services and local administration - International operating
segment

30

111

Decrease in research and development expenses

99

234

Decrease in corporate services costs

324

916

Total increase in EBITDA and Adjusted EBITDA

693

1,977

 

Impact of Hyperinflation

In 2018 the Company concluded that its Argentinian subsidiary is operating in a hyperinflationary economy. This conclusion impacts the application of two accounting standards, IAS 21, The Effects of Changes in Foreign Exchange, and IAS 29, Financial Reporting in Hyperinflationary Economies.

The impact of applying IAS 21 to the operating results of Argentina subsidiary for the three and nine months ended September 30, 2019 was to reduce revenue and segment gross profit by approximately $1,747 and $950 respectively.

The impact of applying ISA 29 to the non-monetary assets and liabilities, and shareholders' equity of the Argentina subsidiary was to recorded a non-cash net monetary gain of $2,376 for the three and nine months ended September 30, 2019.

Impact on IFRS Measures


Three and Nine Months Ended
September 30, 2019

(000s)

($)

Reduction in revenue

(1,747)

Reduction in rental services and local administration expenses

1,055

Increase in depreciation expense

(258)

(Decrease) in segment gross profit

(950)

Reduction in other expense

2,376

Reduction in Income tax provision

80

Increase in net income

1,506

 

Impact on Non-IFRS Measures


Three and Nine Months Ended
September 30, 2019

(000s)

($)

Reduction in revenue income

(1,747)

Reduction in rental services and local administration expenses

1,055

Reduction in other expense

2,376

Increase in EBITDA

1,684

(Reduction) in other expense

(2,376)

Decrease in Adjusted EBITDA

(692)

 

Additional IFRS Measures

In its Consolidated Financial Statements, the Company uses certain additional IFRS measures. Management believes these measures provide useful supplemental information to readers.

Funds flow from operations

Management believes that funds flow from operations, as reported in the Consolidated Statements of Cash Flows, is a useful additional measure as it represents the cash generated during the period, regardless of the timing of collection of receivables and payment of payables. Funds flow from operations represents the cash flow from continuing operations, excluding non-cash items. Funds flow from operations is defined as net income adjusted for depreciation and amortization expense, non-cash, stock-based compensation expense, deferred taxes, and other non-cash items impacting operations.

Cash from operating activities

Cash from operating activities is defined as funds flow from operations adjusted for changes in working capital items.

Non-IFRS Financial Measures

These definitions are not recognized measures under IFRS, and accordingly, may not be comparable to measures used by other companies. These Non-IFRS measures provide readers with additional information regarding the Company's ability to generate funds to finance its operations, fund its research and development and capital expenditure program, and pay dividends.

Revenue per EDR day

Revenue per EDR day is defined as the daily revenue generated from all products that the Company has on rent on a drilling rig that has the Company's base EDR installed. This metric provides a key measure on the Company's ability to increase production adoption and evaluate product pricing.

EBITDA

EBITDA  is defined as net income before interest expense, income taxes, stock-based compensation expense, depreciation and amortization expense, and gains on disposal of investments.

Adjusted EBITDA

Adjusted EBITDA is defined as EBITDA, adjusted for foreign exchange, impairment of property, plant, and equipment, restructuring costs, net monetary adjustments, and other items which the Company does not consider to be in the normal course of continuing operations.

Management believes that EBITDA and Adjusted EBITDA are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities prior to the consideration of how these results are taxed in multiple jurisdictions, how the results are impacted by foreign exchange or how the results are impacted by the Company's accounting policies for equity-based compensation plans.

Free cash flow

Free cash flow is defined as cash from operating activities plus proceeds on disposal of property, plant, and equipment, less capital expenditures (including changes to non-cash working capital associated with capital expenditures), and deferred development costs. This metric provides a key measure on the Company's ability to generate cash from its principal business activities after funding the capital expenditure program, and provides an indication of the amount of cash available to finance, among other items, the Company's dividend and other investment opportunities.

Overall Performance


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

Change

2019

2018

Change

(000s)

($)

($)

(%)

($)

($)

(%)

Revenue







Drilling Data

37,771

42,090

(10)

120,293

114,805

5

Mud Management and Safety

21,243

22,299

(5)

66,059

62,863

5

Communications

4,783

7,504

(36)

15,322

21,413

(28)

Drilling Intelligence

5,141

7,111

(28)

15,702

16,066

(2)

Analytics and Other

3,257

3,340

(2)

9,856

9,281

6

Total revenue

72,195

82,344

(12)

227,232

224,428

1

 

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 at 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.

Total revenue decreased by 12% in the third quarter of 2019 compared to the corresponding period in 2018. This decrease is mostly attributable to a decline in Canada and US drilling activity, offset by a market share increase in the US combined with increases in revenue per EDR day in all three operating segments.

Industry activity in the US market decreased by 14% in the third quarter of 2019 compared to the corresponding period in 2018, while third quarter Canadian industry activity decreased by 37%.

US EDR days decreased by 12% in the third quarter of 2019 compared to the corresponding period in 2018, while Canadian EDR days, which includes non-oil and gas-related activity, decreased 39% from 2018 levels.

In the third quarter of 2019, the Pason EDR was installed on 63% of the land rigs in the US market, an increase of 200bps over the same time period in 2018.

In the third quarter of 2019, the Pason EDR was installed on 81% of the land rigs in the Canadian market, a decrease of 400bps over the same period in 2018. For the purposes of market share, the Company uses the number of EDR days billed and oil and gas drilling days as reported by accepted industry sources.

For the third quarter of 2019, the Company saw an increase in revenue in all major regions of the International business unit with the largest absolute increases in Australia.

Communication revenue decreased 36% in the third quarter of 2019 compared to the corresponding period in 2018. In the Company's major operating segments, wellsite communications have been transitioning from satellite to terrestrial bandwidth. The transition has resulted in a lower rental service cost to Pason with cost savings shared with its customers.

Drilling intelligence revenue decreased 28% in the third quarter of 2019 compared to the corresponding period in 2018 as a result of the decrease in drilling activity in the North American markets as well as the mix of rig types and customers which were active in the period.

Discussion of Operations

United States Operations


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

Change

2019

2018

Change

(000s)

($)

($)

(%)

($)

($)

(%)

Revenue







Drilling Data

26,980

29,640

(9)

85,398

80,311

6

Mud Management and Safety

15,918

15,274

4

50,173

43,153

16

Communications

2,712

4,099

(34)

9,042

11,997

(25)

Drilling Intelligence

2,773

3,774

(27)

9,053

8,827

3

Analytics and Other

1,417

1,382

3

4,230

4,267

(1)

Total revenue

49,800

54,169

(8)

157,896

148,555

6

Rental services and local administration

19,383

18,317

6

58,723

52,657

12

Depreciation and amortization

4,535

4,200

8

14,371

12,128

18

Segment gross profit

25,882

31,652

(18)

84,802

83,770

1


Current period amounts are in accordance with IFRS following the adoption of IFRS 16, Leases as discussed in Note 3 in the Consolidated Financial
Statements. Prior periods have not been restated.

 


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

(%)

2019

2018

(%)

(000s)

         (#)

          (#)


          (#)

          (#)


Electronic Drilling Recorder (EDR) Rental Days

50,800

57,500

(12)

160,100

164,700

(3)

 


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

(%)

2019

2018

(%)


($)

($)


($)

($)


Revenue per EDR day - USD

736

716

3

736

694

6

Revenue per EDR day - CAD

972

936

4

978

893

10

 

Revenue from the US operations decreased by 8% in the third quarter of 2019 over the 2018 comparable period (9% when measured in USD).

Industry activity in the US market decreased by 14% in the third quarter of 2019 over the 2018 comparable period as US producers continue to take a more conservative approach to the deployment of capital, with weakness accelerating during the latter part of the quarter. Active rig count declined in most major plays.

On a year to date basis, industry activity in the US market decreased by 4%.

US market share was 63% for the third quarter of 2019 compared to 61% during the same period in 2018.

EDR rental days decreased by 12% in the third quarter of 2019 over the 2018 comparable period. Revenue per EDR day increased to US$736 in the third quarter of 2019, an increase of US$20 over the same period in 2018. The increase in revenue per EDR day was driven by higher adoption of peripheral products.

Rental services and local administration increased by 6% in the third quarter of 2019 over the 2018 comparative period (7% when measured in USD). The increase in operating costs is attributable mostly to higher field staff levels to support the additional activity in the latter half of 2018 and the early stages of 2019 combined with repair costs which were previously committed. Included in these costs are administrative expenses relating to Pason Power, which increased approximately $0.3 million over 2018 levels.

Depreciation expense increased by 8% in the third quarter of 2019 over the 2018 comparative period. The majority of the increase is due to the adoption of IFRS 16, Leases and an up-tick in capital expenditures.

Canadian Operations


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

Change

2019

2018

Change

(000s)

($)

($)

(%)

($)

($)

(%)

Revenue







Drilling Data

5,581

7,804

(28)

17,315

21,904

(21)

Mud Management and Safety

3,498

5,333

(34)

10,477

14,956

(30)

Communications

1,752

3,028

(42)

5,104

8,303

(39)

Drilling Intelligence

2,012

2,869

(30)

5,681

6,104

(7)

Analytics and Other

1,003

981

2

2,997

2,837

6

Total revenue

13,846

20,015

(31)

41,574

54,104

(23)

Rental services and local administration

5,301

6,046

(12)

15,883

19,510

(19)

Depreciation and amortization

4,285

3,900

10

12,664

12,508

1

Segment gross profit

4,260

10,069

(58)

13,027

22,086

(41)


Current period amounts are in accordance with IFRS following the adoption of IFRS 16, Leases as discussed in Note 3 in the Consolidated Financial
Statements. Prior periods have not been restated.

 


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018


2019

2018


(000s)

       (#)

          (#)

(%)

        (#)

        (#)

(%)

Electronic Drilling Recorder (EDR) Rental Days

9,800

16,100

(39)

31,700

45,500

(30)

 


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018


2019

2018

Change


($)

($)

(%)

($)

($)

(%)

Revenue per EDR day - CAD

1,325

1,191

11

1,228

1,133

8

 

Canadian drilling activity in the third quarter of 2019 decreased by 37% relative to the same period in 2018, while EDR rental days decreased 39% in the third quarter of 2019 compared to 2018. On a year to date basis, Canadian drilling activity has decreased 32%. The decrease in drilling activity was impacted by continued spending constraints and unfavourable weather in several regions. Third quarter 2019 activity is at the lowest levels in over 25 years.

Revenue in the Canadian business unit decreased by 31% in the third quarter of 2019 over the 2018 comparative period. Canadian market share was 81% for the third quarter of 2019 compared to 85% during the same period of 2018.

Revenue per EDR day increased by $134 to $1,325 during the third quarter of 2019 compared to the same period in 2018. The increase is driven by continued acceptance of drilling intelligence products and increased data delivery functionality.

Rental services and local administration decreased by 12% in the third quarter of 2019 relative to the same period in 2018, primarily due to the bandwidth cost savings the Company has achieved in its communications category and the implementation of cost saving measures.

Depreciation and amortization expense increased by 10% in the third quarter of 2019 over the 2018 comparative period. The majority of the increase is due to the adoption of IFRS 16, Leases and the Company initiating the amortization of previously deferred research and development projects.

Segment gross profit for the third quarter of 2019 decreased 58% to $4.3 million compared to $10.1 million in segment gross profit in the 2018 comparative period.

International Operations


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

Change

2019

2018

Change

(000s)

($)

($)

(%)

($)

($)

(%)

Revenue







Drilling Data

5,210

4,646

12

17,580

12,590

40

Mud Management and Safety

1,827

1,692

8

5,409

4,754

14

Communications

319

377

(15)

1,176

1,113

6

Drilling Intelligence

356

468

(24)

968

1,135

(15)

Analytics and Other

837

977

(14)

2,629

2,177

21

Total revenue

8,549

8,160

5

27,762

21,769

28

Rental services and local administration

4,525

4,434

2

15,371

13,882

11

Depreciation and amortization

1,097

804

36

3,082

2,663

16

Segment gross profit

2,927

2,922

9,309

5,224

78


Current period amounts are in accordance with IFRS following the adoption of IFRS 16, Leases as discussed in Note 3 in the Consolidated Financial
Statements. Prior periods have not been restated.

 

In 2018, management concluded that its Argentinian subsidiary is operating in a hyperinflationary economy. As a result of applying hyperinflation accounting to the operating results of this subsidiary, revenue and segment gross profit for the three months and nine months ended September 30, 2019, was reduced by approximately $1,747 and $950 respectively. The 2018 impact was not material.

Drilling activity increased in Australia and the Andean region in the third quarter of 2019 over 2018 levels. Revenue increased in all of the Company's international markets, with the majority of the absolute gains seen in Australia.

Revenue in the International business unit increased by 5% in the third quarter of 2019 compared to the same period in 2018.

Rental services and local administration expenses increased by 2% in the third quarter of 2019 compared to the same period in 2018. Depreciation expense increased by 36% in the third quarter of 2019 compared to the same period in 2018 as a result of higher capital expenditures incurred to support additional activity.

Segment gross profit was $2.9 million for the third quarter of 2019, unchanged from the same period in 2018.

Corporate Expenses


Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

Change

2019

2018

Change

(000s)

($)

($)

(%)

($)

($)

(%)

Other expenses







Research and development

7,564

6,711

13

22,969

19,687

17

Corporate services

3,865

4,363

(11)

11,413

12,008

(5)

Stock-based compensation

2,446

2,589

(6)

9,359

8,978

4

Other







Foreign exchange loss (gain)

615

(1,516)

(141)

1,269

6,675

(81)

Net interest expense - lease liability

159

404

Interest income - short term investments

(258)

(726)

Derecognition of lease receivable

4,289

Net monetary adjustment

(2,376)

(2,376)

Other

151

(644)

(123)

483

(458)

Total corporate expenses

12,166

11,503

6

47,084

46,890


Current period amounts are in accordance with IFRS following the adoption of IFRS 16, Leases as discussed in Note 3 in the Consolidated Financial
Statements. Prior periods have not been restated.

 

Research and development expenses increased in the third quarter of 2019 over the 2018 comparative period. This is due to a greater proportion of research and development project costs being expensed for accounting purposes and the Company's continued transition towards more cloud-based IT infrastructure.

The majority of the decrease in corporate service costs is due to the adoption of IFRS 16, Leases.

In 2018, the Company commenced applying IAS 29, Financial Reporting in Hyperinflationary Economies for its Argentina subsidiary. Accordingly, the application of hyperinflation accounting has been applied to the non-monetary assets and liabilities, and shareholders' equity of the Argentina subsidiary. In the third quarter of 2019, a non-cash net monetary gain of $2,376 was recorded. The impact of applying this accounting standard on 2018 amounts was not material.

In July 2019, the Company was notified that the tenant that was leasing the Company's previous office space in Colorado, USA filed for Chapter 7 bankruptcy. As a result, the Company derecognized the lease receivable that it had previously recorded and reported a non-cash charge of $4.3 million in the second quarter of 2019. Management intends to initiate the process of finding a tenant for the remaining lease term.

The Company recorded an unrealized foreign exchange loss in the third quarter of 2018 on inter-company advances made to the Company's Argentinian subsidiary as a result of a significant devaluation of the Argentina peso relative to the Canadian dollar.

Q3 2019 vs Q2 2019

Consolidated revenue was $72.2 million in the third quarter of 2019 compared to $72.9 million in the second quarter of 2019, a decrease of $0.7 million. The second quarter of the year is typically the weakest for the Company due to the seasonality of Canadian drilling activity.

Revenue in the US business unit was $49.8 million in the third quarter of 2019 compared to $53.6 million in the second quarter of 2019. Sequentially, EDR rental days decreased 5% while industry activity declined 6%. Revenue per EDR day decreased slightly. US market share increased 100bps to 63%.

Revenue in the Canadian business unit was $13.8 million in the third quarter of 2019 compared to $9.2 million in the second quarter of 2019. Revenue per EDR day increased by $35.

The International business unit reported revenue of $8.5 million in the third quarter of 2019 compared to $10.0 million in the second quarter of 2019. Third quarter revenue was negatively impacted by a $1.7 million adjustment to the application of hyperinflation accounting in Argentina.

Adjusted EBITDA, which adjusts EBITDA for foreign exchange and certain non-recurring charges, was $31.6 million in the third quarter of 2019 compared to $30.7 million in the second quarter of 2019. Funds flow from operations was $29.9 million in the third quarter of 2019 compared to $23.8 million in the second quarter of 2019.

The Company recorded net income in the third quarter of 2019 of $15.4 million ($0.18 per share) compared to net income of $9.2 million ($0.11 per share) in the second quarter of 2019.

Condensed Consolidated Interim Balance Sheets

As at

September 30, 2019

December 31, 2018

(CDN 000s) (unaudited)

($)

($)

Assets



Current



Cash and cash equivalents

180,865

203,838

Trade and other receivables

65,903

80,020

Income tax recoverable - other

15,304

15,304

Prepaid expenses

3,813

3,934

Income taxes recoverable

1,937

6,203

Total current assets

267,822

309,299

Non-current



Property, plant and equipment

122,471

120,417

Intangible assets and goodwill

55,869

32,000

Total non-current assets

178,340

152,417

Total assets

446,162

461,716




Liabilities and equity



Current



Trade payables and accruals

27,768

34,229

Income taxes payable - other

15,304

Stock-based compensation liability

6,918

3,301

Lease liability

2,926

312

Total current liabilities

37,612

53,146

Non-current



Deferred tax liabilities

10,008

17,060

Lease liability

12,297

2,233

Stock-based compensation liability

5,580

3,200

Gross obligation under put option

9,923

Total non-current liabilities

37,808

22,493

Equity



Share capital

167,827

164,723

Share-based benefits reserve

29,922

27,287

Foreign currency translation reserve

61,781

63,574

Equity reserve

(9,079)

Retained earnings

119,047

130,493

Total equity attributable to shareholders

369,498

386,077

Non-controlling interest

1,244

Total equity

370,742

386,077

Total liabilities and equity

446,162

461,716

 

Condensed Consolidated Interim Statements of Operations


Three Months Ended September
30,

Nine Months Ended September 30,


2019

2018

2019

2018

(CDN 000s) (unaudited)

($)

($)

($)

($)

Revenue

72,195

82,344

227,232

224,428

Operating expenses





Rental services

25,779

25,648

79,837

76,896

Local administration

3,430

3,149

10,140

9,153

Depreciation and amortization

9,917

8,904

30,117

27,299


39,126

37,701

120,094

113,348






Gross profit

33,069

44,643

107,138

111,080

Other expenses





Research and development

7,564

6,711

22,969

19,687

Corporate services

3,865

4,363

11,413

12,008

Stock-based compensation expense

2,446

2,589

9,359

8,978

Other expense

(1,709)

(2,160)

3,343

6,217


12,166

11,503

47,084

46,890






Income before income taxes

20,903

33,140

60,054

64,190

Income tax provision

5,485

8,754

16,347

21,966

Net income

15,418

24,386

43,707

42,224

Income per share





Basic

0.18

0.29

0.51

0.50

Diluted

0.18

0.28

0.51

0.49

 

Condensed Consolidated Interim Statements of Other Comprehensive Income


Three Months Ended September
30,

Nine Months Ended September 30,


2019

2018

2019

2018

(CDN 000s) (unaudited)

($)

($)

($)

($)

Net income

15,418

24,386

43,707

42,224

Items that may be reclassified subsequently to net
income:





Tax recovery (expense) on net investment in
foreign operations related to an inter-company
financing

632

10,481

(1,134)

Foreign currency translation adjustment

819

(9,813)

(12,274)

8,841

Other comprehensive gain (loss)

819

(9,181)

(1,793)

7,707

Total comprehensive income

16,237

15,205

41,914

49,931

 

Condensed Consolidated Interim Statements of Cash Flows


Three Months Ended September
30,

Nine Months Ended September 30,


2019

2018

2019

2018

(CDN 000s) (unaudited)

($)

 

($)

($)

($)

Cash from (used in) operating activities





Net income

15,418

24,386

43,707

42,224

Adjustment for non-cash items:





Depreciation and amortization

9,917

8,904

30,117

27,299

Stock-based compensation

2,446

2,589

9,359

8,978

Deferred income taxes

2,101

1,328

3,520

11,992

Derecognition of lease receivable

4,289

Unrealized foreign exchange loss (gain) and other

1,523

(1,168)

106

7,340

Hyperinflationary adjustment

(1,506)

(1,506)

Funds flow from operations

29,899

36,039

89,592

97,833

Movements in non-cash working capital items:





Decrease (increase) in trade and other receivables

4,922

(11,941)

9,021

(18,688)

Decrease in prepaid expenses

(1,066)

(1,374)

(45)

(99)

Increase in income taxes

3,476

10,324

4,699

11,594

Increase (decrease) in trade payables, accruals
and stock-based compensation liability

2,270

2,989

(3,894)

2,011

Effects of exchange rate changes

(1,850)

(75)

(262)

235

Cash generated from operating activities

37,651

35,962

99,111

92,886

Income tax paid

(198)

(4,153)

(15,278)

(9,116)

Net cash from operating activities

37,453

31,809

83,833

83,770

Cash flows from (used in) financing activities





Proceeds from issuance of common shares

239

993

3,366

4,665

Payment of dividends

(16,199)

(15,378)

(47,055)

(44,349)

Repurchase and cancellation of shares under
Normal Course Issuer Bid

(1,944)

(13,063)

Repayment of lease liability

(840)

(1,893)

Net cash used in financing activities

(18,744)

(14,385)

(58,645)

(39,684)

Cash flows (used in) from investing activities





Acquisition

(23,830)

(23,830)

Additions to property, plant and equipment

(3,398)

(3,819)

(17,482)

(12,144)

Development costs

(660)

(1,039)

(1,109)

(3,282)

Proceeds on disposal of investment and property,
plant and equipment

188

92

806

188

Purchase of short-term investments

(65,840)

Changes in non-cash working capital

(516)

(163)

(49)

387

Net cash used in investing activities

(28,216)

(4,929)

(41,664)

(80,691)

Effect of exchange rate on cash and cash
equivalents

1,239

(4,075)

(6,497)

2,238

Net (decrease) increase in cash and cash
equivalents

(8,268)

8,420

(22,973)

(34,367)

Cash and cash equivalents, beginning of period

189,133

111,342

203,838

154,129

Cash and cash equivalents, end of period

180,865

119,762

180,865

119,762

 

Operating Segments

The Company operates in three geographic segments: Canada, the United States, and International (Latin America, Offshore, the Eastern Hemisphere, and the Middle East). The following table represents a disaggregation of revenue from contracts with customers along with the reportable segment for each category:

Three Months Ended September 30, 2019

Canada

United States

International

Total

(CDN 000s) (unaudited)

($)

($)

($)

($)

Revenue





Drilling Data

5,581

26,980

5,210

37,771

Mud Management and Safety

3,498

15,918

1,827

21,243

Communications

1,752

2,712

319

4,783

Drilling Intelligence

2,012

2,773

356

5,141

Analytics and Other

1,003

1,417

837

3,257

Total Revenue

13,846

49,800

8,549

72,195

Rental services and local administration

5,301

19,383

4,525

29,209

Depreciation and amortization

4,285

4,535

1,097

9,917

Segment gross profit

4,260

25,882

2,927

33,069

Research and development




7,564

Corporate services




3,865

Stock-based compensation




2,446

Other income




(1,709)

Income tax expense




5,485

Net Income




15,418

Capital expenditures

1,042

2,125

891

4,058

As at September 30, 2019





Property plant and equipment

40,759

66,396

15,316

122,471

Intangible assets and goodwill

17,148

36,121

2,600

55,869

Segment assets

112,971

278,619

54,572

446,162

Segment liabilities

28,321

41,033

6,066

75,420

 

Three Months Ended September 30, 2018

Canada

United States

International

Total

(CDN 000s) (unaudited)

($)

($)

($)

($)

Revenue





Drilling Data

7,804

29,640

4,646

42,090

Mud Management and Safety

5,333

15,274

1,692

22,299

Communications

3,028

4,099

377

7,504

Drilling Intelligence

2,869

3,774

468

7,111

Analytics and Other

981

1,382

977

3,340

Total Revenue

20,015

54,169

8,160

82,344

Rental services and local administration

6,046

18,317

4,434

28,797

Depreciation and amortization

3,900

4,200

804

8,904

Segment gross profit

10,069

31,652

2,922

44,643

Research and development




6,711

Corporate services




4,363

Stock-based compensation




2,589

Other income




(2,160)

Income tax expense




8,754

Net income




24,386

Capital expenditures

1,285

2,298

1,275

4,858

As at September 30, 2018





Property plant and equipment

38,216

65,503

13,604

117,323

Intangible assets and goodwill

22,349

7,428

2,600

32,377

Segment assets

112,550

271,754

45,380

429,684

Segment liabilities

48,696

15,145

4,575

68,416

 

Nine Months Ended September 30, 2019

Canada

United States

International

Total

(CDN 000s) (unaudited)

($)

($)

($)

($)

Revenue





Drilling Data

17,315

85,398

17,580

120,293

Mud Management and Safety

10,477

50,173

5,409

66,059

Communications

5,104

9,042

1,176

15,322

Drilling Intelligence

5,681

9,053

968

15,702

Analytics and Other

2,997

4,230

2,629

9,856

Total Revenue

41,574

157,896

27,762

227,232

Rental services and local administration

15,883

58,723

15,371

89,977

Depreciation and amortization

12,664

14,371

3,082

30,117

Segment gross profit

13,027

84,802

9,309

107,138

Research and development




22,969

Corporate services




11,413

Stock-based compensation




9,359

Other expense




3,343

Income tax expense




16,347

Net Income




43,707

Capital expenditures

2,538

13,297

2,756

18,591

As at September 30, 2019





Property plant and equipment

40,759

66,396

15,316

122,471

Intangible assets and goodwill

17,148

36,121

2,600

55,869

Segment assets

112,971

278,619

54,572

446,162

Segment liabilities

28,321

41,033

6,066

75,420

 

Nine Months Ended September 30, 2018

Canada

United States

International

Total

(CDN 000s) (unaudited)

($)

($)

($)

($)

Revenue





Drilling Data

21,904

80,311

12,590

114,805

Mud Management and Safety

14,956

43,153

4,754

62,863

Communications

8,303

11,997

1,113

21,413

Drilling Intelligence

6,104

8,827

1,135

16,066

Analytics and Other

2,837

4,267

2,177

9,281

Total Revenue

54,104

148,555

21,769

224,428

Rental services and local administration

19,510

52,657

13,882

86,049

Depreciation and amortization

12,508

12,128

2,663

27,299

Segment gross profit

22,086

83,770

5,224

111,080

Research and development




19,687

Corporate services




12,008

Stock-based compensation




8,978

Other expense




6,217

Income tax expense




21,966

Net Income




42,224

Capital expenditures

4,336

9,097

1,993

15,426

As at September 30, 2018





Property plant and equipment

38,216

65,503

13,604

117,323

Intangible assets and goodwill

22,349

7,428

2,600

32,377

Segment assets

112,550

271,754

45,380

429,684

Segment liabilities

48,696

15,145

4,575

68,416

 

Other (Income) Expense


Three Months Ended September
30,

Nine Months Ended September 30,


2019

2018

2019

2018

(CDN 000s) (unaudited)

($)

($)

($)

($)

Foreign exchange loss (gain)

615

(1,516)

1,269

6,675

Net interest expense - lease liabilities

159

404

Interest income - short term investments

(258)

(726)

Derecognition of lease receivable

4,289

Net monetary gain

(2,376)

(2,376)

Other

151

(644)

483

(458)

Other (income) expense

(1,709)

(2,160)

3,343

6,217

 

Net interest expense - lease liabilities is a result of the adoption of IFRS 16, Leases.

In 2018, the Company commenced applying IAS 29, Financial Reporting in Hyperinflationary Economies for its Argentina subsidiary. Accordingly, the application of hyperinflation accounting has been applied to the non-monetary assets and liabilities, and shareholders' equity of the Argentina subsidiary. In the third quarter of 2019, a non-cash net monetary gain of $2,376 was recorded. The impact of applying this accounting standard on 2018 amounts was not material.

In July 2019, the Company was notified that the tenant that was leasing the Company's previous office space in Colorado, USA filed for Chapter 7 bankruptcy. As a result, the Company derecognized the lease receivable that it had previously recorded and reported a non-cash charge in the second quarter of 2019.

The Company recorded an unrealized foreign exchange loss in the second quarter of 2018 on inter-company advances made to the Company's Argentinian subsidiary as a result of a significant devaluation of the Argentina peso relative to the Canadian dollar.

Acquisition

On September 10, 2019, a US subsidiary of the Company, Pason US Holdings Corp. ("Holdco") entered into an agreement with Energy Toolbase LLC (ETB LLC), whereby Holdco and ETB LLC formed Energy Toolbase Software Inc (ETB Inc).  ETB LLC is a private, US-based software-as-a-service (SaaS) company in the software development of a platform that specializes in modeling and proposing the economics of solar PV and energy storage projects.

For further details on the acquisition, see note 7 of the Company's Condensed Consolidated Interim Financial Statements.

Events After the Reporting Period

On October 2, 2019 the Company announced that it has entered into an agreement to invest $25,000 to acquire a minority interest in Intelligent Wellhead Systems Inc. (IWS). IWS is a privately-owned oil and gas technology and service company that provides proprietary and unique surface control systems for various markets globally, including unconventional shale, subsea intervention, critical well intervention, and offshore operations.

On November 6, 2019, the Company announced a quarterly dividend of $0.19 per share on the Company's common shares. The dividend will be paid on December 30, 2019 to shareholders of record at the close of business on December 16, 2019.

Third Quarter Conference Call

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its third quarter 2019 results at 9:00 am (Calgary time) on Thursday, November 7, 2019. 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 5875214.

Pason Systems Inc. is a leading global provider of specialized data management systems for drilling rigs. Our solutions, which include data acquisition, wellsite reporting, remote communications, web-based information management, and analytics, enable collaboration between the rig and the office. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.

Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2018, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Pason Systems Inc.

Pason Systems Inc. is a leading global provider of specialized data management systems for drilling rigs. Our solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, enable collaboration between the rig and the office. 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.

View original content: http://www.newswire.ca/en/releases/archive/November2019/06/c0995.html

about Pason Systems Inc., visit the company's website at www.pason.com or contact: Marcel Kessler, President and CEO, 403-301-3400; Jon Faber, Chief Financial Officer, 403-301-3400Copyright CNW Group 2019

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