PSI Pason Systems Inc

CALGARY, Aug. 3, 2012 /CNW/ - Pason Systems Inc. announced today its 2012 second quarter results. Performance Data Three Months Ended June 30, Six Months Ended June 30, 2012 2011 Change 2012 2011 Change (CDN 000s, ($) ($) (%) ($) ($) (%) except per share data) Revenue 81,052 62,420 30 192,707 147,165 31 EBITDA (1) 31,656 25,850 22 95,802 70,579 36 As a % of 39.1 41.4 (6) 49.7 48.0 4 revenue Per share - 0.39 0.31 26 1.17 0.86 36 basic Per share - 0.38 0.30 27 1.16 0.85 36 diluted Funds flow from 30,132 22,917 31 81,839 61,999 32 operations (1) Per share - 0.37 0.28 32 1.00 0.76 32 basic Per share - 0.37 0.27 37 0.99 0.75 32 diluted Earnings 8,472 8,217 3 37,945 25,974 46 Per share - 0.10 0.10 -- 0.46 0.32 44 basic Per share - 0.10 0.09 11 0.46 0.31 48 diluted Capital 19,712 15,141 30 39,195 36,434 8 expenditures Working capital 153,872 116,032 33 153,872 116,032 33 Total assets 485,166 405,437 20 485,166 405,437 20 Total long-term -- -- -- -- -- -- debt Shareholders' 392,802 322,082 22 392,802 322,082 22 equity Market 1,219,758 1,190,724 2 1,219,758 1,190,724 2 capitalization Common shares outstanding (#) Basic 81,943 81,877 -- 81,924 81,808 -- Diluted 82,590 82,699 -- 82,492 82,573 -- Shares 81,973 81,893 -- 81,973 81,893 -- outstanding end of period (#) (1) EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation expense, and depreciation and amortization expense. Funds flow from operations is defined as earnings adjusted for depreciation and amortization expense, impairment losses, stock-based compensation expense, deferred income taxes and other non-cash items impacting operations as presented in the Condensed Consolidated Interim Statements of Cash Flows. These definitions are not recognized measures under International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies. President's Message Despite declining oil prices and continued low natural gas prices, drilling activity in the United States and Canada in the second quarter of 2012 was 6% higher than in the second quarter 2011 with 188,291 industry days and a combined rig count of 2,069, compared to 177,791 industry days and1,954 rigs the previous year. This development, combined with strong operational performance for Pason, led to solid second quarter results. The second quarter is usually the weakest, due in most part to the seasonality of Canadian drilling activity. Overall, revenue increased by 30%, while EBITDA increased by 22%, and funds flow from operations was up 31%. Net earnings were $8.5 million or $0.10 per share compared to $8.2 million or $0.10 per share in the second quarter of 2011. Net earnings were flat because we recorded an additional charge of $5.4 million relating to the US AutoDriller lawsuit. Year to date, net earnings are $37.9 million or $0.46 per share compared to $26.0 million or $0.32 per share in the first six months in 2011, an increase of 46%. As in the first quarter, all product categories generated revenue growth rates above drilling industry activity with Software and the Gas Analyzer/Total Gas System (TGAS) categories showing the highest year-over-year growth rates with 103% and 58% respectively. The software category includes revenue generated through DataHub updates with live data (enhanced Live Rig View), specialized software (e.g., Directional System, WellView) and data delivery (WITSML Service) products. 86% of US customers using the Pason DataHub and 98% of Canadian customers are currently subscribing to live data. This compares to 68% and 96% the previous year. Growth in the Gas Analyzer/Total Gas System category is driven by the deployment of the new Pason Gas Analyzer that started in North America toward the end of last year and continued throughout the first six months of 2012. The Pason Gas Analyzer is a step-change in gas detector reliability and gas analysis capability. It provides on-demand real-time compositional analysis of hydrocarbons and CO(2). Market reception for the new system continues to be very positive. EBITDA as a percentage of revenue was 39% in the second quarter compared to 41% in the second quarter of the previous year. The EBITDA margin was impacted by an additional charge relating to the AutoDriller lawsuit in the United States, as well as to higher R&D costs to support new product development. EBITDA, as a percentage of revenue, increased from 48% to 50% for the first six months of the year. During the quarter, a judgment was issued in the US patent infringement lawsuit regarding the Pason AutoDriller, which has been ongoing since 2003. The Company's inequitable conduct claims were dismissed and a prior jury award entered in 2008 was upheld. The plaintiff was awarded post-verdict damages resulting in a total award of USD$19.6 million. The plaintiff`s claim for treble damages and injunctive relief was denied. Following the jury verdict in 2008, Pason accrued USD$14.3 million and increased this accrual by USD$5.3 million in the current quarter to reflect the updated amount. Pason contends that the AutoDriller does not infringe the patent at issue and intends to renew its appeal of the judgment. The Company's AutoDriller no longer utilizes the same technology as its predecessor that was under scrutiny in this case. The results of this decision will have no impact on the Company`s operations. United States Drilling activity in the United States continued its slow downward trend. Industry days were down 1% in the second quarter of 2012 compared to the first quarter of 2012, while revenue for our largest business unit was up 2%. Year-over-year, United States drilling industry days increased 7%, while our US business was able to grow second quarter revenue 37% to $57.8 million. On average, 1,079 US land rigs were operating Pason equipment during the second quarter of 2012 compared to 1,032 in 2011. Revenue growth above industry day growth was achieved with higher product penetration and a price increase at the beginning of 2012. This resulted in a 19% increase of average daily revenue generated on each rig with a Pason product installed to US$546 in 2012 from US$460 in 2011. Software, Gas Analyzer/Total Gas System, and the Gas Alarm achieved above-average revenue growth. Our calculated US market share for the second quarter of 2012 was 57%, unchanged from the previous quarter and down 1% from 2011. Operating costs increased 33% and depreciation and amortization increased by 57%. Higher operating costs were driven by an increase in field technician-related costs, as we kept pace with rapid rig movements away from dry gas plays to oil plays and continued strengthening our US sales and marketing capabilities. Higher depreciation charges are driven by the accelerated depreciation of our TGAS and EDR  systems. As a result, our US business unit was able to generate an operating profit of $26.9 million in the second quarter, an increase of 36% from 2011 levels. EBITDA as a percentage of revenue of the business unit was 61% in 2012 compared to 60% in 2011. Despite concerns regarding a continuing downward trend in US drilling activity, we remain positive about the outlook for our US business. With strengthened sales and marketing, ongoing emphasis on outstanding field service capabilities, continuous improvements to existing products, and new product introductions, we expect to maintain our trajectory of growing revenue per rig while growing market share. Canada An early spring break-up compared to the previous year, combined with sustained wet conditions across much of Western Canada, led to a 7% decrease in industry drilling days in the second quarter compared to the previous year. However, our Canadian business unit was able to grow revenue for the period by 7% to $13.8 million. On average, 149 Canadian land rigs were operating Pason equipment compared to 169 the year before. Market share was 90% compared to 94% the previous year. Revenue growth above industry day growth was achieved with a price increase in October 2011 and better product penetration. The average daily revenue generated on each rig with a Pason product installed grew to $996 in the second quarter of 2012 from $822 in 2011. The Electronic Drilling Recorder (especially Workstations and SideKicks recorded in this category), Software and the Gas Analyzer/Total Gas System showed above average growth rates during the period. Operating costs decreased by 15% and depreciation and amortization decreased by 5%. As a result, our Canadian business unit was able to generate an operating profit of $1.1 million for the quarter, compared to a loss of $1.3 million for the same period in 2011. EBITDA as a percentage of revenue of the business unit was 54% in 2012 compared to 42% in 2011. As drilling activity picks up going into the third quarter, we expect to get back to a market share in the mid-nineties while continuing to grow the average daily revenue generated on each rig with a Pason product installed. International Our International business unit, which includes our businesses in Latin America, Australia and Pason Offshore, had an excellent second quarter. Revenue increased 26% in the period and 25% on a year to date basis to $9.4 million and $18.1 million respectively. This represents 12% of Pason's total revenue for the period. We realized gains in all major international markets with notable gains in Argentina, Brazil, Australia, and Mexico, as well as for offshore rentals. Operating costs were up 32% and depreciation and amortization were down 3%. As a result, the International business unit was able to generate an operating profit of $1.6 million, up 64% from the previous year. With the integration issues behind us, the international business unit is realizing accelerated growth and improved profitability. Outlook Volatile oil prices and continued low natural gas prices in North America are negatively affecting E&P operator cash flows and capital budgets. Overall, we expect to see a further slow decline in North American drilling activity. However, certain regions are expected to grow. For example, the Permian and Bakken basins are expected to demonstrate significant growth and we believe that Pason is well positioned to capture these growth opportunities. We have reduced our capital expenditure budget for the next 12 months to $82.7 million. This reflects the industry outlook, as well as the slow progress with the Torque and Tension Sub in the current environment. We are directing $49.7 million towards equipment that can generate incremental revenue or save operating costs, $21.0 million for maintenance capital, and $12.0 million for capitalized R&D. The amount earmarked for growth includes capital for new components for the EDR system and the new Pason Gas Analyzer. We expect the new Pason Gas Analyzer to completely replace the existing Total Gas System before the end of 2012, while gaining market share and generating higher revenue per unit. Our cash generating capacity and our cash position at $120.6 million (which excludes the amount reserved for our semi-annual dividend payment) are strong enough to comfortably cover new business development, planned equipment upgrades, and our semi-annual dividend. As the industry leader in field services, with outstanding technical support, a competitive product suite, and a promising R&D project pipeline, Pason is well positioned to get through a period of lower North American drilling activity and to capitalize on growth opportunities in North America and internationally. Signed Marcel Kessler President and Chief Executive Officer August 2, 2012 Management's Discussion and Analysis The following discussion and analysis has been prepared by management as of August 2, 2012 and is a review of the financial condition and results of operations of Pason Systems Inc. (Pason or the Company) based on International Financial Reporting Standards (IFRS) and should be read in conjunction with the condensed consolidated interim financial statements and accompanying notes. Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements. All financial measures presented in this quarterly report are expressed in Canadian dollars unless otherwise indicated. Overview of the 2012 Second Quarter Three Months Ended June 30, Six Months Ended June 30, 2012 2011 2010 2012 2011 2010 (000s, except per share data) ($) ($) ($) ($) ($) ($) Revenue 81,052 62,420 51,031 192,707 147,165 107,415 EBITDA (1) 31,656 25,850 21,512 95,802 70,579 46,902 As a % of 39.1 41.4 42.2 49.7 48.0 43.7 revenue Per share 0.39 0.31 0.26 1.17 0.86 0.58 - basic Per share 0.38 0.30 0.26 1.16 0.85 0.58 - diluted Funds flow from operations (1) 30,132 22,917 18,764 81,839 61,999 39,218 Per share 0.37 0.28 0.23 1.00 0.76 0.48 - basic Per share 0.37 0.27 0.23 0.99 0.75 0.48 - diluted Earnings 8,472 8,217 6,156 37,945 25,974 14,047 Per share 0.10 0.10 0.08 0.46 0.32 0.17 - basic Per share 0.10 0.09 0.08 0.46 0.31 0.17 - diluted Total assets 485,166 405,437 368,866 485,166 405,437 368,866 Total long-term debt -- -- -- -- -- -- (1) EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation expense, and depreciation and amortization expense. Funds flow from operations is defined as earnings adjusted for depreciation and amortization expense, impairment losses, stock-based compensation expense, deferred income taxes and other non-cash items impacting operations as presented in the Condensed Consolidated Interim Statements of Cash Flows. These definitions are not recognized measures under International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies. Overall Performance Three Months Ended June Six Months Ended June 30, 30, 2012 2011 Change 2012 2011 Change (000s) ($) ($) (%) ($) ($) (%) Revenue Electronic 32,202 25,987 24 75,864 59,418 28 Drilling Recorder Pit Volume 12,551 11,042 14 30,497 26,414 15 Totalizer Communications 5,669 5,070 12 16,049 13,372 20 (1) Software (1) 5,384 2,653 103 12,457 6,373 95 Automatic 8,603 7,326 17 21,054 17,394 21 Driller Gas 5,654 3,589 58 13,289 8,913 49 Analyzer/Total Gas System Hazardous Gas 1,618 991 63 3,632 2,467 47 Alarm System Mobilization 3,004 2,386 26 5,987 4,590 30 Other 6,367 3,376 89 13,878 8,224 69 Total revenue 81,052 62,420 30 192,707 147,165 31 (1) 2011 revenue associated with the Company's software applications has been reclassified from Communications to Software. Canada Three Months Ended June Six Months Ended June 30, 30, 2012 2011 Change 2012 2011 Change (%) (%) EDR rental 13,600 15,400 (12) 59,900 61,500 (3) days (#) PVT rental 13,100 14,800 (11) 59,000 59,900 (2) days (#) United States Three Months Ended June Six Months Ended June 30, 30, 2012 2011 Change 2012 2011 Change (%) (%) EDR rental 98,200 93,900 5 199,000 183,000 9 days (#) PVT rental 69,200 63,700 9 138,900 125,800 10 days (#) Electronic Drilling Recorder Consistent with prior years, the Pason Electronic Drilling Recorder (EDR) remains the Company's prime product. The EDR provides a complete system of drilling data acquisition, data networking, and drilling management tools and reports at both the rigsite and customer offices. The EDR is the base product from which all other rigsite instrumentation products are linked. By linking these products, a number of otherwise redundant elements such as data processing, display, storage, and networking are eliminated. This ensures greater reliability and a more robust system of instrumentation for the customer. The EDR generated a 24% increase in revenue for the second quarter of 2012 compared to the same period in 2011 and a 28% increase for the first six months of 2012 versus the 2011 comparative. These increases are due to increased rig activity in the Company's United States (US) and International markets, price increases in both Canada and the US, and expanding demand by customers for EDR peripheral devices in all of its markets. During the first six months of 2012, the Pason EDR was installed on 95% of all active land rigs in Canada and 57% of the land rigs in the US, and is consistent with the prior year percentages. 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. Revenue increases for this product were as a result of a combination of increased product penetration in both Canada and the US, an increase in US drilling days year over year, and Canadian price increases. During the first half of 2012, the PVT was installed on 99% of rigs with a Pason EDR in Canada and 70% in the US, compared to 98% and 69%, respectively, in 2011. 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. Software DataHub is the Company's data management system that collects, stores, and displays drilling data, reports, and real-time information from drilling operations. DataHub provides access to data through a number of innovative applications or services including: -- Enhanced Live Rig View, which provides advanced data viewing, directional drilling, and 3D visualization of drilling data in real-time via a web browser. -- Mobile Viewer and Pason Mobile, which allows users to access their data on mobile devices including iPhone, iPad, and BlackBerry. -- WITSML, which provides seamless data sharing with third party applications enhancing the value of data hosted by Pason. -- Additional specialized software. During the first two quarters of 2012, 98% of the Company's Canadian customers were using all or a portion of the functionality of the DataHub and 86% of customers in the US, compared to 96% and 68%, respectively, in 2011. The 2012 revenue generated from customers using the applications included with the DataHub rose 95% over the first six months of 2011. Gas Analyzer and Total Gas System The Pason Gas Analyzer, which has replaced the Total Gas System (TGAS) in the Company's major markets, measures the total hydrocarbon gases (C1 through C4(1)) 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 six months of 2012, the Gas Analyzer generated $9.2 million of revenue compared to $4.1 million for TGAS. The Company has almost completed this switch-out in both Canada and the US and is realizing increased product penetration for the Gas Analyzer as compared to TGAS in both markets. For the first six months of 2012 both of these systems combined were installed on 48% of Canadian and 18% of US land rigs operating with a Pason EDR system. The combined market penetration of both products in Canada is an increase of approximately 8% over 2011 levels while the US has seen an increase of 2%. Automatic Driller Pason's Automatic Driller (AutoDriller) is used to maintain constant weight on the drill bit while a well is being drilled. During the first six months of 2012, Pason's AutoDriller was installed on 77% of Canadian and 50% of US land rigs operating with a Pason EDR system, compared to 75% and 45%, respectively, in 2011. Hazardous Gas Alarm System Pason's Hazardous Gas Alarm System (HGAS) monitors both lower explosive limit gases (LEL) and H(2)S where both readings and an alarm system are integrated with the EDR. The Hazardous Gas Alarm System was installed on 21% of Canadian rigs in the first six months of 2012, up from 18% for the same period in 2011, and 8% of US land rigs operating with a Pason EDR system, an increase from 5% in 2011. ------------------------------ (1)C4 also includes nC5 Discussion of Operations United States Operations Three Months Ended June Six Months Ended June 30, 30, 2012 2011 Change 2012 2011 Change (000s) ($) ($) (%) ($) ($) (%) Revenue Electronic 23,835 19,547 22 47,640 38,700 23 Drilling Recorder Pit Volume 8,740 7,677 14 17,462 15,297 14 Totalizer Communications 3,697 3,169 17 7,481 6,072 23 (1) Software (1) 4,395 1,896 132 8,357 3,485 140 Automatic 6,177 5,126 21 12,358 9,954 24 Driller Gas 3,159 1,858 70 5,688 3,742 52 Analyzer/Total Gas System Hazardous Gas 842 330 155 1,559 657 137 Alarm System Mobilization 2,303 1,674 38 4,600 3,206 43 Other 4,635 772 500 9,061 1,497 505 Total revenue 57,783 42,049 37 114,206 82,610 38 Operating costs 22,313 16,774 33 43,375 32,338 34 Depreciation and 8,580 5,449 57 16,199 10,737 51 amortization Segment 26,890 19,826 36 54,632 39,535 38 operating profit (1) 2011 revenue associated with the Company's software applications has been reclassified from Communications to Software. US segment revenue increased by 37% in the second quarter of 2012 over the 2011 comparable period (33% increase when measured in US dollars). Included in the second quarter 2012 figures is $2.3 million of revenue generated from the sale of sensors and other products by 3PS, Inc., the US-based company acquired in August of 2011. For the first six months of 2012, US segment revenue increased by 38% (USD 34%), which includes $6.5 million of sales by 3PS. Revenue from the rental of instrumentation equipment increased 29% (USD 24%) for the second quarter of 2012 from 2011 levels, which compared very favourably with US drilling industry days that were up 7% over the second quarter of 2011. On a year to date basis rental instrumentation revenue increased 30% (USD 26%) over 2011 levels, compared to an increase in industry days of 12%. Revenue was impacted by the following factors: -- An increase in EDR rental days of 5% for the three months ended June 2012 over the same time period in 2011 and an increase of 9% on a year to date basis over 2011 levels. -- More products on each rig; new product adoption; and better pricing. Revenue was increased by additional product penetration on each rig, primarily with gains in ADR rentals, customer acceptance of the Company's Live Rig View and rig data software, and increased adoption of the Gas Analyzer compared to the previous TGAS system. In addition, prices on specific products increased at the beginning of 2012. These factors combined resulted in an increase of approximately $77 per EDR day over 2011 amounts. The factors explained above resulted in the US segment being able to realize revenue per EDR day during the second quarter of 2012 of $556 (USD$546) compared to $444 (USD$460) during the same time period in 2011. For the first six months of 2012 revenue per EDR day was $537 (USD$534) compared to $449 (USD$460) in 2011. Revenue per industry day for the second quarter of the year was $316 (USD$310) compared to $259 (USD$268) in 2011. Year to date figures were $307 (USD$305) compared to 2011 amounts of $264 (USD$270). The majority of the increase in "Other" revenue relates to sales realized by 3PS, Inc. Segment profit, as a percentage of revenue, was 47% for the second quarter of 2012 and 48% year to date, the same percent as 2011 levels. The US business unit was able to maintain its operating margin year over year, even with a significant increase in depreciation and amortization costs, by leveraging its fixed cost structure while at the same time continuing to control variable costs. The 2012 segment profit percentage was impacted by the following factors: -- An increase in field technician related costs, to support the increase in rig activity, of $0.8 million in the second quarter (year to date $2.9 million), mostly attributable to increased staff levels and the costs associated to support such an increase. -- An increase in support costs of $0.5 million for the second quarter over 2011 amounts as the US business unit continues to strengthen its sales and marketing presence. For the first six months these costs rose $1.0 million from 2011 levels. -- An increase in depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems. The TGAS system was replaced with the Gas Analyzer, while a portion of the Company's base EDR system will become obsolete as a result of the EDR evolution project. This contributed to an increase in depreciation costs over 2011 levels of approximately $2.1 million for the second quarter and $4.0 million for the first six months. This increase was partially off-set by a reduction in repair costs associated with the new Gas Analyzer as compared to the TGAS system. -- Figures for 2012 include the results of 3PS Inc., which generates a lower margin than the US rental business. Canadian Operations Three Months Ended June Six Months Ended June 30, 30, 2012 2011 Change 2012 2011 Change (000s) ($) ($) (%) ($) ($) (%) Revenue Electronic 4,656 4,066 15 21,115 16,263 30 Drilling Recorder Pit Volume 2,288 2,350 (3) 10,210 9,264 10 Totalizer Communications 1,832 1,784 3 8,263 7,099 16 (1) Software (1) 864 686 26 3,885 2,743 42 Automatic 1,533 1,586 (3) 6,872 6,258 10 Driller Gas 1,534 1,314 17 5,777 4,495 29 Analyzer/Total Gas System Hazardous Gas 331 385 (14) 1,289 1,215 6 Alarm System Mobilization 104 106 (2) 306 372 (18) Other 702 642 9 2,635 2,299 15 Total revenue 13,844 12,919 7 60,352 50,008 21 Operating costs 6,344 7,478 (15) 15,911 18,234 (13) Depreciation and 6,430 6,750 (5) 13,473 12,290 10 amortization Segment 1,070 (1,309) -- 30,968 19,484 59 operating profit (loss) (1) 2011 revenue associated with the Company's software applications has been reclassified from Communications to Software. Canadian segment revenue rose 7% for the three months ended June 2012 compared to the second quarter of 2011. This increase is a significant result given a 7% decrease in the number of Canadian drilling industry days for the same period. On a year to date basis, revenue increased 21% compared to a small decline in the number of Canadian drilling days. The improvement in revenue for both the second quarter and the first six months was due to: -- Better pricing; new product adoption; and more products on each rig. The Canadian business unit implemented a price increase on most of its key products in the fourth quarter of 2011 and this, combined with increased market penetration of the Gas Analyzer, and more products on each rig, primarily with gains in EDR peripheral devices, increased revenue. These factors combined resulted in an increase of approximately $195 per EDR day over 2011 amounts. The revenue improvements above were off-set by a reduction in EDR rental days of 12% for the second quarter of 2012 compared to the second quarter of 2011. On a year to date basis EDR rental days declined by approximately 3% over 2011 levels. The factors explained above resulted in: -- An increase in revenue per EDR day during the second quarter of 2012 compared to 2011 of 21% ($174) to $996. For the first six months of 2012, revenue per EDR day increased by $194 to $994. -- Second quarter revenue per industry day of $892 in 2012 compared to $773 in 2011. On a year to date basis revenue per industry day increased 22% to $941. The segment profit for the second quarter of 2012 of $1.1 million is an improvement over the $1.3 million loss recorded in 2011. Factors impacting the second quarter results include: -- The month of June 2012 saw unseasonably wet conditions in a large part of the WCSB which, combined with softening commodity prices and a shortened spring break-up in 2011, resulted in a decline in rig activity compared to last year. This, together with a slight decrease in the Company's market share, resulted in 1,800 less EDR days during the second quarter of 2012 compared to 2011, resulting in lower revenue than originally anticipated. -- An increase in depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems of approximately $0.9 million, off-set by a decline in the inventory obsolescence charge, which is included in depreciation and amortization. -- A decrease in repair costs associated with the new Gas Analyzer as compared to the TGAS system. -- An increase of $1.0 million in field costs, which is mostly attributed to the expansion of our field work force. This was deemed necessary given the shifting footprint of the WCSB, anticipation of additional product adoption opportunities and an adjustment to our shift schedule. -- In 2011, $0.8 million of net expenses relating to the water treatment business were incurred. This business segment was disposed of in the third quarter of 2011. -- In the second quarter of 2011, the Canadian business unit incurred $0.4 million in costs associated with the Automatic Driller lawsuit. These costs were insignificant in the second quarter of 2012. The segment profit, as a percent of revenue, was 51% for the first six months of 2012, compared to 39% for the 2011 time period. Factors impacting the year to date results include: -- An increase in depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems of approximately $1.8 million. -- An increase in field costs of $1.8 million, due to the change in head count noted above. -- A decrease in repair costs of $1.1 million, mostly attributable to the roll out of the new Gas Analyzer System, resulting in a drop in TGAS repairs. -- In 2011, the Canadian business unit incurred $1.8 million in legal costs associated with the Automatic Driller lawsuit. -- $1.5 million of net expenses relating to the water treatment business were recorded in the first six months of 2011. International Operations Three Months Ended June Six Months Ended June 30, 30, 2012 2011 Change 2012 2011 Change (000s) ($) ($) (%) ($) ($) (%) Revenue Electronic 3,711 2,374 56 7,109 4,455 60 Drilling Recorder Pit Volume 1,523 1,015 50 2,825 1,853 52 Totalizer Communications 140 117 20 305 201 52 (1) Software (1) 125 71 76 215 145 48 Automatic 893 614 45 1,824 1,182 54 Driller Gas 961 417 130 1,824 676 170 Analyzer/Total Gas System Hazardous Gas 445 276 61 784 595 32 Alarm System Mobilization 597 606 (1) 1,081 1,012 7 Other 1,030 1,962 (48) 2,182 4,428 (51) Total revenue 9,425 7,452 26 18,149 14,547 25 Operating costs 5,833 4,420 32 10,937 8,981 22 Depreciation and 1,977 2,048 (3) 4,212 4,165 1 amortization Segment 1,615 984 64 3,000 1,401 114 operating profit (1) 2011 revenue associated with the Company's software applications has been reclassified from Communications to Software. Revenue in the International operations improved 26% in the second quarter of 2012 from the same period in 2011. On a year to date basis revenue has increased approximately $3.6 million or 25% over 2011 amounts. The Company realized gains in all of its major markets, with notable gains in Argentina, Brazil, Australia, and Mexico. Operating profit increased by $0.7 million for the second quarter of 2012 and by $1.6 million on a year to date basis over 2011 results. A number of factors influenced these results: -- Increased market share combined with price increases in Argentina contributed to significant gains in both revenue and operating profit. Year over year operating profit has increased $0.5 million. -- Triple-digit revenue growth in Brazil as a result of a 130% increase in the number of rigs deploying the Company's equipment, resulting in an increase in the year to date operating profit of $1.0 million over 2011 levels. -- An increase in drilling activity in both Mexico and Australia has led to these two segments realizing increases in operating profit from 2011 levels of $0.9 million and $1.4 million, respectively. -- The Company's International segment includes our Offshore business unit which generated a 312% increase in its rental revenue for the first six months of 2012 over the same period in 2011. These gains are as a result of the deployment of Pason hardware onto offshore drilling rigs in the Gulf of Mexico and internationally. Q2 2012 versus Q2 2011 The active rig count in the US improved over the second quarter of 2011, while the Canadian market saw a drop in drilling days. The strong US results, combined with increased revenue and profitability in the international markets resulted in gains in all of the Company's key metrics. Revenue increased 30%, while EBITDA increased by 22% and funds flow from operations was up 31%. Net earnings increased to $8.5 million or $0.10 per share compared to $8.2 million or $0.10 per share in the second quarter of 2011. The second quarter consolidated results, when compared to 2011 figures, were impacted by the following significant items: -- In the second quarter of 2012, the Company recorded an additional charge of $5.4 million relating to the US Automatic Driller lawsuit. -- Increase in depreciation expense of $2.7 million in 2012 compared to 2011 amounts, attributable mostly to increased capital expenditures and the accelerated depreciation on the Company's TGAS and EDR systems. -- Increase in research and developments costs in the second quarter of 2012 of $1.0 million as the Company hired additional staff to support the EDR evolution project and other product developments. -- Corporate services costs primarily relate to personnel located in the corporate headquarters that directly support the Company's field operations and perform other corporate functions. The increase in corporate operating expenses from 2011 levels is mainly due to higher expenses as a result of more resources dedicated to the Company's growth strategy. -- Stock-based compensation increased by $2.8 million compared to the second quarter of 2011 due to an increase in the Company's stock price, which impacts the pricing under the Black-Scholes pricing model. The Company's stock price declined in the corresponding period in 2011. Q2 2012 versus Q1 2012 The Company's second quarter is usually its weakest due in most part to the seasonality of the Canadian industry. The Canadian business unit realized a profit of $1.1 million compared to a $29.9 million profit in the first quarter. The Company anticipates breaking even in this market in the second quarter of any particular year. The U.S business unit operating profit of $26.9 million was down slightly from the profit realized in the first quarter of 2012. The following items also impacted the comparison to the 2012 first quarter results: -- In the second quarter, the Company recorded an additional charge of $5.4 million relating to the US Automatic Driller lawsuit. -- A decrease in stock-based compensation expense of $4.0 million due to a smaller increase in the Company's stock price during the second quarter of 2012 compared to the first quarter. Second Quarter Conference Call Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its second quarter results at 9:00 a.m. (Calgary time) on Tuesday, August 7, 2012. The conference call dial-in number is 1-888-231-8191 or 1-647-427-7450. You can access the seven-day replay by dialing 1-855-859-2056 or 416-849-0833 (password 98195316). Pason Systems Inc. is a leading provider of instrumentation systems to land-based and offshore drilling rigs worldwide. The company's rental solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, maximize rig uptime, improve work efficiency, and minimize operating costs. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI. Additional information, including the Company's Annual Report for the year ended December 31, 2011, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com. Condensed Consolidated Interim Financial Statements Condensed Consolidated Interim Balance Sheets As at June 30, 2012 December 31,2011 (CDN 000s) (unaudited) ($) ($) Assets Current Cash and cash equivalents 138,611 104,993 Trade and other receivables 93,087 102,321 Prepaid expenses 2,929 1,970 Assets held for sale 3,352 -- Total current assets 237,979 209,284 Non-current Property, plant and equipment 183,766 183,007 Intangible assets 61,222 58,071 Deferred tax assets 2,199 5,539 Total non-current assets 247,187 246,617 Total assets 485,166 455,901 Liabilities and equity Current Trade payables and accruals 35,244 40,668 Litigation provision 19,986 14,543 Income taxes payable 1,126 5,318 Stock-based compensation 9,718 5,770 liability Dividend payable 18,033 16,380 Total current liabilities 84,107 82,679 Non-current Stock-based compensation 3,930 1,030 liability Deferred tax liabilities 4,327 4,923 Total non-current liabilities 8,257 5,953 Equity Share capital 78,442 77,613 Employee benefits reserve 12,927 12,927 Foreign currency translation (1,043) (5,835) reserve Retained earnings 302,476 282,564 Total equity 392,802 367,269 Total liabilities and equity 485,166 455,901 Condensed Consolidated Interim Statements of Operations Three Months Ended June Six Months Ended June 30, 30, 2012 2011 2012 2011 (CDN 000s, except ($) ($) ($) ($) per share data) (unaudited) Revenue Equipment 81,052 62,420 192,707 147,165 rentals and other Operating expenses Rental services 28,809 24,158 59,020 49,690 Local 5,681 4,514 11,203 9,863 administration Depreciation and 16,987 14,247 33,884 27,192 amortization 51,477 42,919 104,107 86,745 Operating profit 29,575 19,501 88,600 60,420 Other expenses Research and 4,801 3,789 10,053 7,648 development Corporate 3,498 2,711 7,962 5,873 services Stock-based 2,544 (230) 9,063 5,217 compensation (recovery) Other expenses 6,607 1,398 8,667 3,512 17,450 7,668 35,745 22,250 Income before 12,125 11,833 52,855 38,170 income taxes Income taxes 3,653 3,616 14,910 12,196 Net income 8,472 8,217 37,945 25,974 Earnings per share Basic 0.10 0.10 0.46 0.32 Diluted 0.10 0.09 0.46 0.31 Condensed Consolidated Interim Statements of Comprehensive Income Three Months Ended June Six Months Ended June 30, 30, 2012 2011 2012 2011 (CDN 000s) ($) ($) ($) ($) (unaudited) Net income 8,472 8,217 37,945 25,974 Other comprehensive loss Foreign currency 6,303 2,247 4,792 (983) translation adjustment Total comprehensive 14,775 10,464 42,737 24,991 income Condensed Consolidated Interim Statements of Changes in Equity Foreign Employee Currency Share Benefits Translation Retained Total Capital Reserve Reserve Earnings Equity (CDN 000s) (unaudited) ($) ($) ($) ($) ($) Balance at January 1, 2011 75,040 13,228 (6,048) 227,464 309,684 Net Income -- -- -- 25,974 25,974 Dividends -- -- -- (14,741) (14,741) Other comprehensive loss -- -- (983) -- (983) Exercise of stock options 2,142 -- -- -- 2,142 Options exercised that were previously expensed 307 (307) -- -- -- Stock-based compensation -- 6 -- -- 6 Balance at June 30, 2011 77,489 12,927 (7,031) 238,697 322,082 Net Income -- -- -- 60,249 60,249 Dividends -- -- -- (16,382) (16,382) Other comprehensive loss -- -- 1,196 -- 1,196 Exercise of stock options 123 -- -- -- 123 Options exercised that were previously expensed 1 (1) -- -- -- Stock-based compensation -- 1 -- -- 1 Balance at December 31,2011 77,613 12,927 (5,835) 282,564 367,269 Net Income -- -- -- 37,945 37,945 Dividends -- -- -- (18,033) (18,033) Other comprehensive loss -- -- 4,792 -- 4,792 Exercise of stock options 829 -- -- -- 829 Balance at June 30, 2012 78,442 12,927 (1,043) 302,476 392,802 Condensed Consolidated Interim Statements of Cash Flows Three Months Ended June Six Months Ended June 30, 30, 2012 2011 2012 2011 (CDN 000s) ($) ($) ($) ($) (unaudited) Cash flows from operating activities Net income 8,472 8,217 37,945 25,974 Adjustment for non-cash items: Depreciation 16,987 14,247 33,884 27,192 and amortization Stock-based 736 (995) 5,375 2,873 compensation Deferred income 4,228 1,005 3,679 4,149 taxes Unrealized (291) 443 956 1,811 foreign exchange (gain) loss 30,132 22,917 81,839 61,999 Movements in non-cash working capital Decrease in 16,268 12,223 9,734 6,831 trade and other receivables Increase in (539) (1,552) (964) (1,094) prepaid expenses Increase in 857 1,045 9,049 5,131 income taxes payable Increase in 5,244 1,336 3,326 341 trade payables, accruals and provisions Increase in 1,600 711 3,405 2,229 stock-based compensation liability Effects of (457) (174) (53) 799 exchange rate changes 22,973 13,589 24,497 14,237 Cash generated 53,105 36,506 106,336 76,236 from operating activities Income tax paid (5,000) (5,750) (13,227) (16,650) Net cash from 48,105 30,756 93,109 59,586 operating activities Cash flows used in financing activities Proceeds from 547 700 829 2,142 issuance of common shares Purchase of (1,685) (838) (2,089) (3,081) stock options Payment of -- -- (16,380) (13,890) dividends Net cash used in (1,138) (138) (17,640) (14,829) financing activities Cash flows used in investing activities Additions to (16,731) (13,246) (33,967) (32,613) property, plant and equipment Deferred (2,981) (1,895) (5,228) (3,821) development costs Additions to (1,274) -- (1,274) -- investments Changes in (1,235) (66) (2,097) (2,153) non-cash working capital Net cash used in (22,221) (15,207) (42,566) (38,587) investing activities Effect of 1,490 (407) 715 (1,637) exchange rate on cash and cash equivalents Net increase in 26,236 15,004 33,618 4,533 cash and cash equivalents Cash and cash 112,375 99,929 104,993 110,400 equivalents, beginning of period Cash and cash 138,611 114,933 138,611 114,933 equivalents, end of period Operating Segments 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 Canada United States International Total June 30, 2012 ($) ($) ($) ($) Revenue 13,844 57,783 9,425 81,052 Operating costs 6,344 22,313 5,833 34,490 Depreciation and 6,430 8,580 1,977 16,987 amortization Segment operating 1,070 26,890 1,615 29,575 profit Research and 4,801 development Corporate services 3,498 Stock-based 2,544 compensation Other expenses 6,607 Income taxes 3,653 Net income 8,472 Capital 7,085 11,011 1,616 19,712 expenditures Goodwill -- 18,862 2,600 21,462 Intangible assets 23,692 12,165 3,903 39,760 Segment assets 133,765 286,338 65,063 485,166 Segment liabilities 65,992 15,154 11,218 92,364 Three Months Ended June 30, 2011 Revenue 12,919 42,049 7,452 62,420 Operating costs 7,478 16,774 4,420 28,672 Depreciation and 6,750 5,449 2,048 14,247 amortization Segment operating (1,309) 19,826 984 19,501 (loss) profit Research and 3,789 development Corporate services 2,711 Stock-based (230) compensation Other expenses 1,398 Income taxes 3,616 Net income 8,217 Capital 1,416 10,453 3,272 15,141 expenditures Goodwill -- 5,503 2,600 8,103 Intangible assets 19,147 5,288 6,353 30,788 Segment assets 149,580 190,128 65,729 405,437 Segment liabilities 54,474 18,443 10,437 83,354 Six Months Ended Canada United States International Total June 30, 2012 ($) ($) ($) ($) Revenue 60,352 114,206 18,149 192,707 Operating costs 15,911 43,375 10,937 70,223 Depreciation and 13,473 16,199 4,212 33,884 amortization Segment operating 30,968 54,632 3,000 88,600 profit Research and 10,053 development Corporate services 7,962 Stock-based 9,063 compensation Other expenses 8,667 Income taxes 14,910 Net income 37,945 Capital 13,127 23,911 2,157 39,195 expenditures Goodwill -- 18,862 2,600 21,462 Intangible assets 23,692 12,165 3,903 39,760 Segment assets 133,765 286,338 65,063 485,166 Segment liabilities 65,992 15,154 11,218 92,364 Six Months Ended June 30, 2011 Revenue 50,008 82,610 14,547 147,165 Operating costs 18,234 32,338 8,981 59,553 Depreciation and 12,290 10,737 4,165 27,192 amortization Segment operating 19,484 39,535 1,401 60,420 profit Research and 7,648 development Corporate services 5,873 Stock-based 5,217 compensation Other expenses 3,512 Income taxes 12,196 Net income 25,974 Capital 10,200 19,892 6,342 36,434 expenditures Goodwill -- 5,503 2,600 8,103 Intangible assets 19,147 5,288 6,353 30,788 Segment assets 149,580 190,128 65,729 405,437 Segment liabilities 54,474 18,443 10,437 83,354 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. 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. Pason Systems Inc. CONTACT: about Pason Systems Inc., visit the company's website atwww.pason.comor contact:Marcel Kessler President and CEO403-301-3400marcel.kessler@pason.comDavid Elliott Chief Financial Officer403-301-3441david.elliott@pason.com

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