Pason Reports Fourth Quarter and Year End 2017 Results

CALGARY, Feb. 27, 2018 /CNW/ - Pason Systems Inc. (PSI.TO) announced today its 2017 fourth quarter and year end results.

Performance Data

		Three Months Ended December 31,			Years Ended December 31,
		2017	2016 (Restated)	Change	2017	2016 (Restated)	Change
(CDN 000s, except per share data)		($)	($)	(%)	($)	($)	(%)
Revenue		66,226	48,827	36	245,643	160,446	53
Net Income (loss )^(1)		5,014	(10,446)	—	25,190	(41,792)	—
	Per share – basic ^(1)	0.06	(0.12)	—	0.30	(0.49)	—
	Per share – diluted ^(1)	0.06	(0.12)	—	0.30	(0.49)	—
EBITDA ^(2)		26,651	(2,291)	—	96,663	3,472	—
	As a % of revenue	40.2	(4.7)	—	39.4	2.2	—
Adjusted EBITDA ^(2)		27,797	15,225	83	98,224	31,005	217
	As a % of revenue	42.0	31.2	—	40.0	19.3	—
Funds flow from operations		27,356	15,324	79	87,121	26,815	225
	Per share – basic	0.32	0.18	77	1.03	0.32	222
	Per share – diluted	0.32	0.18	77	1.02	0.32	222
Cash from operating activities		16,637	665	—	85,797	19,642	337
Free cash flow ^(2)		6,690	(153)	—	65,831	5,931	1,010
Capital expenditures		9,160	(30)	—	20,764	12,856	62
Working capital		193,692	198,419	(2)	193,692	198,419	(2)
Total assets		398,446	435,251	(8)	398,446	435,251	(8)
Total long-term debt		—	—	—	—	—	—
Cash dividends declared		0.17	0.17	—	0.68	0.68	—
Shares outstanding end of period (#)		85,158	84,628	1	85,158	84,628	1

(1)

As disclosed in Note 2 to the consolidated financial statements, the Company identified an immaterial non-cash re-classification error with respect to a component of its deferred income tax expense associated with accounting for the deferred tax on its net investment in foreign operations related to an inter-company financing. The reclassification is between the deferred tax provision in the statement of operations and foreign currency translation reserve in equity. This adjustment  has been corrected on a retrospective basis with all prior period comparative figures being restated. Management is reviewing tax planning strategies to address this taxable gain and is confident that the Company can mitigate taxes owing when the inter-company financing expires. The Company believes that the impact is not material to its results of operations, financial position or cash flows.

(2)

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

Q4 2017 vs Q4 2016

The Company generated consolidated revenue of $66.2 million in the fourth quarter of 2017, up 36% from $48.8 million in the same period of 2016.  An increase in the price of oil continues to support optimism within the petroleum industry and this combined with other macro-economic factors has led to increased drilling activity in most of the Company's major markets. US drilling activity in the fourth quarter of 2017 was up 59% from 2016 levels while Canadian activity was up 12%.  An increase in US market share combined with increased activity in key International markets also contributed to the increase in revenue. Fourth quarter revenue was negatively impacted by a stronger Canadian dollar relative to the US dollar.     

Consolidated Adjusted EBITDA was $27.8 million in the fourth quarter of 2017, an 83% increase from the same period of 2016 driven by stronger gross profit in each of the Company's three segments.  Consolidated EBITDA increased by $28.9 million from the fourth quarter of 2016. 2016 EBITDA included a non-cash impairment charge of $17.5 million, the majority of which related to the write-off of intangible assets as a result of the Company's divestiture of the operating assets of 3PS, Inc., a previous wholly-owned subsidiary.  Funds flow from operations increased by 79%.

The Company recorded net income of $5.0 million ($0.06 per share) in the fourth quarter of 2017, an increase of $15.4 million from the net loss of $10.4 million ($0.12 per share) recorded in the same period of 2016. The Company is benefiting from the cost reduction programs previously implemented, and this combined with a decline in depreciation expense from 2016 levels, are having a positive effect on operating results.

Included in the 2017 fourth quarter results is an increase in the Company's tax provision of $3.3 million as a result of recording the impact of the change in the Company's transfer pricing methodology, which is further described in Note 12 to the Consolidated Financial Statements. Management believes this change in methodology provides a long term benefit to the Company. The fourth quarter 2016 results include the impairment charge referred to above.

President's Message

Pason achieved robust fourth quarter results. We generated revenue of $66.2 million in the period, an increase of 36% from the prior year quarter and 3% from the third quarter. The main drivers of revenue growth were increased drilling activity in the North American land market and market share gains in the United States. As in the second quarter, revenue growth was again negatively impacted by a stronger Canadian dollar relative to the US dollar. Revenue from the International business unit was up 14% year over year, driven by activity improvements in Australia and the Andean region.

Adjusted EBITDA was $27.8 million for the quarter, an increase of 83% from the prior year quarter and 6% from the third quarter. Adjusted EBITDA as a percentage of revenue increased to 42%. The drivers of this improvement were the significant increase in revenue with high incremental margins and cost reduction programs that were executed during the downturn.

Pason recorded net income of $5.0 million ($0.06 per share) compared to a net loss of $10.4 million ($0.12 per share) in the prior year quarter. Free cash flow for the quarter was $6.7 million.

Full-year 2017 results include revenue of $245.6 million, up 53% from 2016, adjusted EBITDA of $98.2 million, up from $31.0 million in 2016, and net income of $25.2 million, compared to a net loss of $41.8 million in 2016. The incremental EBITDA margin on revenue growth in 2017, compared to 2016, was 79%. At December 31, 2017, our working capital position stood at $193.7 million, including cash of $154.1 million. There is no debt on our balance sheet. We are maintaining our quarterly dividend at $0.17 share.

Over the past three years of unprecedented market downturn, we have restructured all relevant parts of the company resulting in a leaner and more agile Pason. At the same time, we have continued to invest significant resources in R&D and IT. Our development efforts are focused on strengthening our position as a key enabler of big data analytics strategies and of drilling optimization and automation efforts pursued by our customers. In addition, we continuously enhance the functionality and performance of existing products.

Many of our products directly improve the efficiency, effectiveness and safety of drilling operations and wellbore quality. Examples of this include our PVT Smart Alarms, AutoDrillers, abbl Directional Advisor® and the deployment of the advanced Exxon Drilling Advisory System®. We are building on our acquisition of Verdazo Analytics to provide customers with a holistic platform to analyze drilling, completions, production, financial and operational data. The deployment of an enhanced Pason Live web service to our cloud-based offering benefits office-based users of Pason data.

In response to the evolving needs of our customers, we increased our investment in R&D and IT by 10% in 2017 compared to 2016, with further growth planned in 2018. Our capital expenditures will be relatively modest going forward with a larger portion of development efforts focused on software and analytics. We intend to spend about $25 million in capital expenditures in 2018. Our highly capable and flexible IT and communications platform can host additional new Pason and third-party software at the rig site and in the cloud.

Led by a strong global economy, growth in demand for oil is projected to continue in 2018. On the supply side, the extension of the OPEC and Russia-led production cuts is translating into significant inventory draws. In the United States, 2018 shale oil production is set for another year of strong growth, as the positive oil market sentiment is likely to increase both investment appetite and availability of financing. US E&P spend is predicted to grow 15 to 20% in 2018, while the international market is expected to grow for the first time in four years, with a projected 5% increase in E&P spend.

As we enter 2018, there is enthusiasm throughout our organization. Our level of confidence in the successful commercialization of new products and services steadily grows as the number of successful technical and commercial trials increases. Pason's market positions are very strong. We are the service provider of choice for many leading operators and drilling contractors with Pason equipment installed on almost 1,000 drilling rigs, or over 65% of all active land drilling rigs in the Western Hemisphere. We are uniquely positioned to participate in the industry's growth.

(signed)
Marcel Kessler
President and Chief Executive Officer
February 27, 2018

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of February 27, 2018, 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.

Additional IFRS Measures

In its audited consolidated financial statements, the Corporation 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, 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, 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 it's 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 December 31,			Years Ended December 31,
		2017	2016	Change	2017	2016	Change
(000s)		($)	($)	(%)	($)	($)	(%)
Revenue
	Electronic Drilling Recorder	27,876	19,982	40	110,226	66,799	65
	Pit Volume Totalizer/ePVT	11,862	8,001	48	37,555	22,833	64
	Communications	6,820	4,840	41	25,234	15,228	66
	Software	5,660	3,517	61	20,906	11,104	88
	AutoDriller	3,556	2,815	26	14,244	9,357	52
	Gas Analyzer	5,149	3,803	35	18,376	12,084	52
	Other	5,303	5,869	(10)	19,102	23,041	(17)
Total revenue		66,226	48,827	36	245,643	160,446	53

Electronic Drilling Recorder (EDR), Pit Volume Totalizer (PVT), and Enhanced Pit Volume Totalizer (ePVT)  rental day performance for Canada and the United States is reported below:

Canada
	Three Months Ended December 31,			Years Ended December 31,
	2017	2016	Change	2017	2016	Change
			(%)			(%)
EDR rental days (#)	15,900	14,600	9	65,800	44,500	48
PVT/ePVT rental days (#)	14,600	13,300	10	60,600	40,900	48
United States
	Three Months Ended December 31,			Years Ended December 31,
	2017	2016	Change	2017	2016	Change
			(%)			(%)
EDR rental days (#)	50,800	30,100	69	179,300	97,500	84
PVT/ePVT rental days (#)	38,700	24,000	61	139,600	75,500	85

The Pason EDR remains the Company's primary product. The EDR provides a complete system of drilling data acquisition, data networking, and drilling management tools and reports at both the wellsite and customer offices. The EDR is the base product from which all other wellsite instrumentation products are linked. By linking these products, a number of otherwise redundant elements such as data processing, display, storage, and networking are eliminated. This ensures greater reliability and a more robust system of instrumentation for the customer.

Total revenue increased 36% and 53% for the three and twelve months ending December 31, 2017, over the same period in 2016. This increase is attributable to an increase in drilling activity in the Company's  Canadian, and US markets. The 2017 revenue results were negatively impacted from a stronger Canadian dollar relative to the US dollar.

Industry activity in the US market increased 59% in the fourth quarter of 2017 compared to the corresponding period in 2016 (76% on a year-to-date basis), while fourth quarter Canadian rig activity increased 12% (59% on a year-to-date basis). Canadian EDR days, which includes some non-oil and gas-related activity, increased 9% in the fourth quarter of 2017 from 2016 levels (48% on a year-to-date basis), while US EDR days increased by 69% from the fourth quarter of 2016 (84% on a year-to-date basis).

For the fourth quarter of 2017 the Pason EDR was installed on 61% of the land rigs in the US compared to 58% in the corresponding period in 2016. On full-year basis, the EDR was installed on 57% of the land rigs in the US compared to 55% during the same time period in 2016.

For the three months ended December 31, 2017, the Pason EDR was installed on 85% of the land rigs in the Canadian market; for the same time period in 2016 the EDR was installed on 88%. For the twelve months ending December 31, 2017 the EDR was installed on 88% of all Canadian rigs, compared to 95% in 2016.  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.

The percentage increase in revenue generated from the Company's other wellsite instrumentation products was similar to the increase in drilling activity. The notable exceptions were:

• increased product adoption of EDR peripherals, including workstations and Rig Display
  
  
• continued customer growth in the Company's software solutions which enhance drilling performance and increase efficiency at the wellsite

Included in the Software category is revenue from the Company's data analytics subsidiary, Verdazo.

The decrease in Other revenue is a result of the sale of the net operating assets of 3PS, Inc. (3PS) effective January 1, 2017.

For the fourth quarter of 2017, the Company saw an increase in activity in Australia and all of its key South American markets.

Discussion of Operations

United States Operations

		Three Months Ended December 31,			Years Ended December 31,
		2017	2016	Change	2017	2016	Change
(000s)		($)	($)	(%)	($)	($)	(%)
Revenue
	Electronic Drilling Recorder	18,813	12,057	56	74,795	40,168	86
	Pit Volume Totalizer/ePVT	8,799	5,235	68	25,331	13,487	88
	Communications	3,627	2,345	55	13,053	6,893	89
	Software	3,556	2,367	50	12,623	7,291	73
	AutoDriller	1,940	1,194	62	7,221	3,731	94
	Gas Analyzer	2,813	1,871	50	9,381	5,974	57
	Other	2,598	3,563	(27)	9,581	13,423	(29)
Total revenue		42,146	28,632	47	151,985	90,967	67
Rental services and local administration		16,519	14,324	15	64,161	52,971	21
Depreciation and amortization		3,981	5,651	(30)	17,303	23,130	(25)
Segment gross profit		21,646	8,657	150	70,521	14,866	374

	Three Months Ended December 31,		Years Ended December 31,
	2017	2016	2017	2016
	$	$	$	$
Revenue per EDR day - USD	645	667	648	643
Revenue per EDR day - CAD	820	890	841	852

US land-based drilling activity in 2017 was significantly higher than 2016 activity. US segment revenue increased by 47% in the fourth quarter of 2017 over the 2016 comparable period (54% increase when measured in USD). For the year, US segment revenue increased by 67% over the 2016 comparable period (71% increase when measured in USD). Included in the prior year results was revenue (included in other revenue) from 3PS, the net operating assets of which were sold January 1, 2017. Removing 3PS revenue from the comparative figures, revenue increased by 56% in the fourth quarter compared to 2016 (63% increase when measured in USD.)  For the year ended December 31, 2017, and removing 3PS revenue increased by 81% (86% increase when measured in USD).

The increase in industry activity accounted for the majority of the gain in revenue for both the three and twelve months periods ended December 31, 2017. Industry activity in the US market during the fourth quarter of 2017 increased by 59% from the prior year and 76% for the full year. EDR rental days increased by 69% and 84%, respectively, for the three and twelve months ended December 31, 2017 over the same time periods in 2016, resulting in an increase in market share for both periods; 350bps for the fourth quarter of 2017 and a 260bsp for the full year. 

Revenue per EDR day in the fourth quarter of 2017 decreased to US$645, a decrease of US$22 over the same period in 2016. For the year, revenue per EDR day was US$648, relatively flat compared to 2016. The increase in market share in the US business unit impacted the customer mix between operators and contractors which led to a decrease in this key metric. Also impacting this metric was selective discounts provided on some of the Company's products.

The fourth quarter and twelve months ended December 31, 2017 results were negatively impacted from a stronger Canadian dollar relative to the US dollar.

Operating costs increased by 15% in the fourth quarter relative to the same period in the prior year. When measured in USD, and removing 3PS costs, operating costs increased 53%. The increase in operating cost is attributable to the increase in activity; the hiring of additional staff and higher repairs costs associated with updating capital assets that were previously idle due to the downturn in activity in prior years.

Depreciation expense for the fourth quarter and the full year of 2017 is down significantly from the corresponding periods in 2016 primarily due to the lower capital expenditure program.

Segment gross profit increased by $12.9 million in the fourth quarter of 2017 compared to the corresponding period in 2016. Segment profit of $70.5 million for the twelve months of 2017 is an increase of 374% from the same period in 2016.

Canadian Operations

		Three Months Ended December 31,			Years Ended December 31,
		2017	2016	Change	2017	2016	Change
(000s)		($)	($)	(%)	($)	($)	(%)
Revenue
	Electronic Drilling Recorder	6,511	5,481	19	25,405	17,198	48
	Pit Volume Totalizer/ePVT	2,438	2,254	8	9,903	7,347	35
	Communications	2,867	2,265	27	11,080	7,129	55
	Software	1,958	1,060	85	7,837	3,534	122
	AutoDriller	1,261	1,095	15	5,297	3,296	61
	Gas Analyzer	1,949	1,604	22	7,709	4,865	58
	Other	761	861	(12)	3,300	2,831	17
Total revenue		17,745	14,620	21	70,531	46,200	53
Rental services and local administration		7,109	4,570	56	24,935	17,706	41
Depreciation and amortization		6,618	3,920	69	24,250	24,036	1
Segment gross profit		4,018	6,130	(34)	21,346	4,458	379

	Three Months Ended December 31,		Years Ended December 31,
	2017	2016	2017	2016
	$	$	$	$
Revenue per EDR day - CAD	1,072	993	1,024	1,030

Growth in the Canadian rig count slowed during the fourth quarter after showing significant increase during the first three quarters of 2017.

Canadian segment revenue increased by 21% for the three months ended December 31, 2017, and 53% for the year as compared to the same periods in 2016. The increase is a result of higher activity levels, off set by the run-rate effects of previously established pricing arrangements with customers and a reduction in calculated market share. Included in the software category for 2017 is revenue earned by Verdazo.

On a year-to-date basis, revenue increased by 53% while industry days increased by 59%.

EDR rental days increased 9% in the fourth quarter compared to 2016 levels and 48% for the full twelve months of 2017.

Revenue per EDR day increased $79 to $1,072 during the fourth quarter of 2017 compared to 2016. The increase is a result of product penetration gains on certain key products during the fourth quarter of 2017. Revenue per EDR day for the year ended December 31, 2017, was $1,024, relatively flat from the same period in 2016.

Operating costs increased by 56% in the fourth quarter of 2017 relative to the same period in 2016 (41% on a year-to-date basis), with repair and direct field costs increasing due to higher activity, combined with the inclusion of Verdazo operating costs in the 2017 results.

Depreciation expense increased 69% in the fourth quarter of 2017 from 2016.  The increase in deprecation expense is primarily the amortization of intangibles that were recognized on the acquisition of Verdazo.

The fourth quarter 2017 gross profit of $4.0 million is a decrease of $2.0 million over the prior year period. Segment gross profit for the twelve months ended December 31, 2017, was up 379% from last year's comparatives.

International Operations

		Three Months Ended December 31,			Years Ended December 31,
		2017	2016	Change	2017	2016	Change
(000s)		($)	($)	(%)	($)	($)	(%)
Revenue
	Electronic Drilling Recorder	2,552	2,444	4	10,026	9,433	6
	Pit Volume Totalizer/ePVT	625	512	22	2,321	1,999	16
	Communications	326	230	42	1,101	1,206	(9)
	Software	146	90	62	446	279	60
	AutoDriller	355	526	(33)	1,726	2,330	(26)
	Gas Analyzer	387	328	18	1,286	1,245	3
	Other	1,944	1,445	35	6,221	6,787	(8)
Total revenue		6,335	5,575	14	23,127	23,279	(1)
Rental services and local administration		4,681	5,077	(8)	17,963	19,158	(6)
Depreciation and amortization		1,102	944	17	4,128	8,218	(50)
Segment gross profit (loss)		552	(446)	—	1,036	(4,097)	—

The international rig count was in up in all of the Company's major markets in the fourth quarter of 2017 compared to the same period in 2016.

Revenue in the International operations segment increased 14% in the fourth quarter of 2017 compared to the same period in 2016. For the year ended December 31, 2017, revenue decreased by 1%, or $0.2 million.

The gross profit in the fourth quarter of 2017 of $0.6 million is $1.0 million higher than the loss recorded in the same period in 2016. Year-to-date profit increased by $5.1 million with the Company's Australia market and the Andean region of South America contributing to the majority of the increase.

Corporate Expenses

		Three Months Ended December 31,			Years Ended December 31,
		2017	2016	Change	2017	2016	Change
(000s)		($)	($)	(%)	($)	($)	(%)
Other expenses
Research and development		6,136	5,233	17	25,219	22,848	10
Corporate services		3,984	4,398	(9)	15,141	16,758	(10)
Stock-based compensation		2,893	1,538	88	11,762	6,195	90
Other
	Foreign exchange loss (gain)	1,459	284	414	1,106	(1,943)	—
	Impairment loss	—	17,474	—	—	17,474	—
	Restructuring costs	—	—	—	—	10,861	—
	Other	(313)	(242)	29	455	1,141	(60)
Total corporate expenses		14,159	28,685	(51)	53,683	73,334	(27)

During 2016, the Company initiated a review of its investment in 3PS, Inc. (3PS). In the fourth quarter of 2016 a final agreement was entered into for the sale of the net operating assets of 3PS, effective January 2017. As a result of this divestiture, the Company recorded a non-cash impairment loss of $17.5 million in the fourth quarter of 2016, the majority of which is attributable to the write-down of goodwill that arose as a result of the initial acquisition of 3PS.

In the first quarter of 2016, the Company initiated additional cost reduction initiatives to address the prolonged downturn in oil and gas drilling activity. As a result, the Company recorded a restructuring charge of $10.9 million, which is comprised of $6.0 million for employee termination and other staff-related costs, an onerous lease obligation charge of $3.7 million, which is calculated at the present value of the expected net cost of continuing with the lease after adjusting for anticipated sublease rentals, and the write-off of leasehold improvements and other related costs totaling $1.2 million.

Q4 2017 versus Q3 2017

Consolidated revenue was $66.2 million in the fourth quarter of 2017 compared to $64.6 million in the third  quarter of 2017, an increase of $1.6 million. Drilling activity in the Company's major markets was relatively flat over the third quarter. Canadian activity was down 2% when compared to the third quarter while US activity was down 3%. The Canadian segment earned revenue of $17.7 million in the fourth quarter compared to $18.3 million in the third quarter of 2017. Revenue in the US market increased from $40.7 million in the third quarter to $42.1 in the fourth quarter of 2017. The International segment revenue increased from $5.6 million in the third quarter of 2017 to $6.3 million in the fourth quarter of 2017.

Adjusted EBITDA of $27.8 million in the fourth quarter compared to $26.2 million in the third quarter of 2017, with the increase largely attributable to an increase in the gross profit realized in the US operating segment. The Company recorded a net profit in the fourth quarter of 2017 of $5.0 million ($0.06 per share) compared to $7.4 million ($0.08 per share) in the third quarter of 2017. Included in the 2017 fourth quarter results is an increase in the Company's tax provision of $3.3 million as a result of recording the impact of the change in the Company's transfer pricing methodology, which is further described in Note 12 to the Consolidated Financial Statements. Funds flow from operations increased by $7.5 million.

Fourth Quarter & Year End Conference Call

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its fourth quarter and year-end results at 9:00 am (Calgary time) on Wednesday, February 28, 2018. 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 2169947.

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, 2017, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Shareholders are also invited to attend the Company's Annual General and Special Meeting on Thursday, May 3, 2018, at 3:30 pm at the offices of Pason Systems Inc., 6120 Third Street SE, Calgary, Alberta.

Consolidated Balance Sheets

As at		December 31, 2017	December 31, 2016 (Restated)
(CDN 000s)		($)	($)
Assets
Current
	Cash and cash equivalents	154,129	146,479
	Trade and other receivables	55,069	50,721
	Income tax recoverable other	17,881	—
	Prepaid expenses	4,028	3,826
	Income taxes recoverable	3,946	15,066
	Assets held for sale	—	8,413
	Total current assets	235,053	224,505
Non-current
	Property, plant and equipment	127,685	150,504
	Intangible assets and goodwill	34,318	43,698
	Deferred tax assets	1,390	16,544
	Total non-current assets	163,393	210,746
Total assets		398,446	435,251
Liabilities and equity
Current
	Trade payables and accruals	20,391	24,347
	Income tax payable other	17,881	—
	Stock-based compensation liability	3,089	1,516
	Liabilities held for sale	—	223
	Total current liabilities	41,361	26,086
Non-current
	Stock-based compensation liability	2,758	2,941
	Deferred tax liabilities	4,515	16,656
	Onerous lease provision	2,326	2,917
Total non-current liabilities		9,599	22,514
Equity
	Share capital	150,887	139,730
	Share-based benefits reserve	24,425	23,026
	Foreign currency translation reserve	40,358	59,572
	Retained earnings	131,816	164,323
	Total equity	347,486	386,651
Total liabilities and equity		398,446	435,251

Consolidated Statements of Operations

		Three Months Ended December 31,		Years Ended December 31,
		2017	2016 (Restated)	2017	2016 (Restated)
(CDN 000s, except per share data)		($)	($)	($)	($)
Revenue		66,226	48,827	245,643	160,446
Operating expenses
	Rental services	25,085	21,271	95,912	80,115
	Local administration	3,224	2,700	11,147	9,720
	Depreciation and amortization	11,701	10,515	45,681	55,384
		40,010	34,486	152,740	145,219
Gross profit		26,216	14,341	92,903	15,227
Other expenses
	Research and development	6,136	5,233	25,219	22,848
	Corporate services	3,984	4,398	15,141	16,758
	Stock-based compensation	2,893	1,538	11,762	6,195
	Other expenses	1,146	17,516	1,561	27,533
		14,159	28,685	53,683	73,334
Net income (loss) before income taxes		12,057	(14,344)	39,220	(58,107)
	Income taxes	7,043	(3,898)	14,030	(16,315)
Net income (loss)		5,014	(10,446)	25,190	(41,792)
Net income (loss) per share
	Basic	0.06	(0.12)	0.30	(0.49)
	Diluted	0.06	(0.12)	0.30	(0.49)

Consolidated Statements of Other Comprehensive Income

	Three Months Ended December 31,		Years Ended December 31,
	2017	2016 (Restated)	2017	2016 (Restated)
(CDN 000s)	($)	($)	($)	($)
Net Income (loss)	5,014	(10,446)	25,190	(41,792)
Items that may be reclassified subsequently to net income:
Tax recovery (expense) on net investment in foreign operations related to an inter-company financing	186	879	(2,500)	(1,171)
Foreign currency translation adjustment	1,266	3,666	(16,714)	(13,818)
Other comprehensive income  (loss)	1,452	4,545	(19,214)	(14,989)
Total comprehensive income (loss)	6,466	(5,901)	5,976	(56,781)

Consolidated Statements of Changes in Equity

		Share Capital	Share-Based Benefits Reserve	Foreign Currency Translation Reserve	Retained Earnings	Total Equity
(CDN 000s)		($)	($)	($)	($)	($)
Balance at January 1, 2016-Previously reported		128,067	23,367	85,603	252,411	489,448
	Correction of error			(11,042)	11,042	—
Balance at January 1, 2016- Currently reported		128,067	23,367	74,561	263,453	489,448
	Net loss	—	—	—	(31,346)	(31,346)
	Dividends	—	—	—	(42,963)	(42,963)
	Other comprehensive income- as restated	—	—	(19,534)	—	(19,534)
	Exercise of stock options	6,407	(1,954)	—	—	4,453
	Expense related to vesting of options	—	2,226	—	—	2,226
Balance at September 30, 2016		134,474	23,639	55,027	189,144	402,284
	Net loss	—	—	—	(10,446)	(10,446)
	Dividends	—	—	—	(14,375)	(14,375)
	Other comprehensive income- as restated	—	—	4,545	—	4,545
	Exercise of stock options	4,006	(1,383)	—	—	2,623
	Expense related to vesting of options	—	770	—	—	770
	Verdazo Acquisition	1,250	—	—	—	1,250
Balance at December 31, 2016		139,730	23,026	59,572	164,323	386,651
	Net income	—	—	—	20,176	20,176
	Dividends	—	—	—	(43,238)	(43,238)
	Other comprehensive income	—	—	(20,666)	—	(20,666)
	Exercise of stock options	6,290	(1,516)	—	—	4,774
	Expense related to vesting of options	—	2,617	—	—	2,617
Balance at September 30, 2017		146,020	24,127	38,906	141,261	350,314
	Net income	—	—	—	5,014	5,014
	Dividends	—	—	—	(14,459)	(14,459)
	Other comprehensive income	—	—	1,452	—	1,452
	Exercise of stock options	3,117	(731)	—	—	2,386
	Expense related to vesting of options	—	1,029	—	—	1,029
	Verdazo Acquisition	1,750	—	—	—	1,750
Balance at December 31, 2017		150,887	24,425	40,358	131,816	347,486

Consolidated Statements of Cash Flows

		Three Months Ended December 31,		Years Ended December 31,
		2017	2016 (Restated)	2017	2016 (Restated)
(CDN 000s)		($)	($)	($)	($)
Cash from (used in) operating activities
	Net Income (loss)	5,014	(10,446)	25,190	(41,792)
Adjustment for non-cash items:
	Depreciation and amortization	11,701	10,515	45,681	55,384
	Impairment loss	—	17,474	—	17,474
	Stock-based compensation	2,893	1,538	11,762	6,195
	Non-cash restructuring costs	—	—	—	4,833
	Deferred income taxes	5,447	(3,882)	4,762	(12,773)
	Unrealized foreign exchange loss (gain) and other	2,301	125	(274)	(2,506)
Funds flow from operations		27,356	15,324	87,121	26,815
Movements in non-cash working capital items:
	Increase in trade and other receivables	(3,011)	(12,411)	(8,149)	(6,791)
	Decrease (increase)  in prepaid expenses	934	516	(226)	(193)
	Increase (decrease) in income taxes	2,141	(774)	15,518	9,570
	Decrease in trade payables, accruals and stock-based compensation liability	(9,462)	(1,826)	(3,719)	(3,940)
	Effects of exchange rate changes	(1,323)	448	(361)	1,606
Cash generated from operating activities		16,635	1,277	90,184	27,067
	Income tax paid	2	(612)	(4,387)	(7,425)
Net cash from operating activities		16,637	665	85,797	19,642
Cash flows from (used in) financing activities
	Proceeds from issuance of common shares	2,386	2,623	7,160	7,076
	Payment of dividends	(14,459)	(14,375)	(57,697)	(57,338)
Net cash used in financing activities		(12,073)	(11,752)	(50,537)	(50,262)
Cash flows (used in) from investing activities
	Additions to property, plant and equipment	(7,962)	(979)	(18,368)	(10,492)
	Development costs	(1,198)	1,009	(2,396)	(2,364)
	Proceeds on disposal of investment and property, plant and equipment	24	(294)	85	398
	(Cash spent) acquired pursuant to business acquisition	(1,000)	1,243	(5,750)	1,243
	Proceeds on sale of net operating assets	1,036	—	8,159	—
	Changes in non-cash working capital	(811)	(554)	713	(1,253)
Net cash used in investing activities		(9,911)	425	(17,557)	(12,468)
Effect of exchange rate on cash and cash equivalents		39	2,543	(10,053)	(6,279)
Net (decrease) increase in cash and cash equivalents		(5,308)	(8,119)	7,650	(49,367)
Cash and cash equivalents, beginning of period		159,437	154,598	146,479	195,846
Cash and cash equivalents, end of period		154,129	146,479	154,129	146,479

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 amounts related to each segment are as follows:

Three Months Ended December 31, 2017	Canada	United States	International	Total
(CDN 000s)	($)	($)	($)	($)
Revenue	17,745	42,146	6,335	66,226
Rental services and local administration	7,109	16,519	4,681	28,309
Depreciation and amortization	6,618	3,981	1,102	11,701
Segment gross profit	4,018	21,646	552	26,216
Research and development				6,136
Corporate services				3,984
Stock-based compensation				2,893
Other expenses				1,146
Income taxes				7,043
Net lncome				5,014
Capital expenditures	5,726	2,888	546	9,160
As at December 31, 2017
Property plant and equipment	44,650	66,360	16,675	127,685
Goodwill	1,259	7,159	2,600	11,018
Intangible assets	23,129	171	—	23,300
Segment assets	94,331	261,635	42,480	398,446
Segment liabilities	37,739	7,854	5,367	50,960
Three Months Ended December 31, 2016 (Restated)
(CDN 000s)
Revenue	14,620	28,632	5,575	48,827
Rental services and local administration	4,570	14,324	5,077	23,971
Depreciation and amortization	3,920	5,651	944	10,515
Segment gross profit (loss)	6,130	8,657	(446)	14,341
Research and development				5,233
Corporate services				4,398
Stock-based compensation				1,538
Other income				17,516
Income taxes				(3,898)
Net loss				(10,446)
Capital expenditures	(1,465)	1,861	(426)	(30)
As at December 31, 2016
Property plant and equipment	54,019	74,806	21,679	150,504
Goodwill	1,284	7,850	2,600	11,734
Intangible assets	31,817	147	—	31,964
Segment assets	130,792	248,762	55,697	435,251
Segment liabilities	33,425	9,570	5,605	48,600

Year Ended December 31, 2017	Canada	United States	International	Total
(CDN 000s)	($)	($)	($)	($)
Revenue	70,531	151,985	23,127	245,643
Rental services and local administration	24,935	64,161	17,963	107,059
Depreciation and amortization	24,250	17,303	4,128	45,681
Segment gross profit	21,346	70,521	1,036	92,903
Research and development				25,219
Corporate services				15,141
Stock-based compensation				11,762
Other expenses				1,561
Income taxes				14,030
Net lncome				25,190
Capital expenditures	5,481	14,316	967	20,764
As at December 31, 2017
Property plant and equipment	44,650	66,360	16,675	127,685
Goodwill	1,259	7,159	2,600	11,018
Intangible assets	23,129	171	—	23,300
Segment assets	94,331	261,635	42,480	398,446
Segment liabilities	37,739	7,854	5,367	50,960
Year Ended December 31, 2016 (Restated)
(CDN 000s)
Revenue	46,200	90,967	23,279	160,446
Rental services and local administration	17,706	52,971	19,158	89,835
Depreciation and amortization	24,036	23,130	8,218	55,384
Segment gross profit (loss)	4,458	14,866	(4,097)	15,227
Research and development				22,848
Corporate services				16,758
Stock-based compensation				6,195
Other expenses				27,533
Income taxes				(16,315)
Net loss				(41,792)
Capital expenditures	1,465	11,667	(276)	12,856
As at December 31, 2016
Property plant and equipment	54,019	74,806	21,679	150,504
Goodwill	1,284	7,850	2,600	11,734
Intangible assets	31,817	147	—	31,964
Segment assets	130,792	248,762	55,697	435,251
Segment liabilities	33,425	9,570	5,605	48,600

Correction of Error

During the fourth quarter of 2017, the Company adjusted for a re-classification of an immaterial non-cash error in the recognition of a component of its deferred income tax expense. The error was a result of the Company recognizing in the statement of operations the deferred income tax effect of the future taxable foreign exchange gain adjustment associated with its net investment in foreign operations related to an inter-company financing, when the amount should have been adjusted through the foreign currency translation reserve within equity. Accordingly, this adjustment has been corrected on a retrospective basis with all prior period comparative figures being restated.

The cumulative impact of this error as of January 1, 2016 was to increase retained earnings and reduce Foreign Currency Translation Reserve by $11,042.

For the 12 months ended December 31, 2016, the income tax provision increased by $1,171 (Q4-2016 impact was to reduce the income tax provision by $879).

Management is reviewing tax planning strategies to address this taxable gain and is confident that the Company can mitigate taxes owing when the inter-company financing expires. The Company believes that the impact is not material to its results of operations, financial position or cash flows.

Other Expenses

	Three Months Ended December 31,		Years Ended December 31,
	2017	2016	2017	2016
(CDN 000s)	($)	($)	($)	($)
Foreign exchange loss (gain)	1,459	284	1,106	(1,943)
Impairment loss	—	17,474	—	17,474
Restructuring  costs	—	—	—	10,861
Other	(313)	(242)	455	1,141
Other expenses	1,146	17,516	1,561	27,533

During 2016, the Company initiated a review of its investment in 3PS, Inc. (3PS). In the fourth quarter of 2016 a final agreement was entered into for the sale of the net operating assets of 3PS, effective January, 2017. As a result of this divestiture, the Company recorded a non-cash impairment loss of $17,474 in the fourth quarter of 2016, the majority of which is attributable to the write-down of goodwill that arose as a result of the initial acquisition of 3PS.

In the first quarter of 2016, the Company initiated additional cost reduction initiatives to address the prolonged downturn in oil and gas drilling activity. These actions included further staff reductions and office space consolidation.  As a result, the Company recorded a restructuring charge of $10,861, which is comprised of $6,028 for employee termination and other staff related costs, an onerous lease obligation charge of $3,682, which is calculated at the present value of the expected net cost of continuing with the lease after adjusting for anticipated sublease rentals, and the write-off of leasehold improvements and other related costs totaling $1,151.

Events After the Reporting Period

On February 27, 2018, the Company announced a quarterly dividend of $0.17 per share on the Company's common shares. The dividend will be paid on March 30, 2018 to shareholders of record at the close of business on March 16, 2018.

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.

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.

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

Related Links

http://www.pason.com