Pason Reports Third Quarter 2018 Results

CALGARY, Nov. 7, 2018 /CNW/ - Pason Systems Inc. (TSX: PSI) announced today its 2018 third quarter results.

Performance Data

		Three Months Ended September 30,						Nine Months Ended September 30,
		2018		2017 (Restated)		Change		2018		2017 (Restated)		Change
(CDN 000s, except per share data)		($)		($)		(%)		($)		($)		(%)
Revenue		82,344		64,576		28		224,428		179,417		25
Net Income ^(1)		24,386		7,404		229		42,224		20,176		109
	Per share – basic ^(1)	0.29		0.08		228		0.50		0.24		106
	Per share – diluted ^(1)	0.28		0.08		227		0.49		0.24		105
EBITDA ^(2)		44,633		25,493		75		100,467		70,012		43
	As a % of revenue	54.2		39.5		1,470	bps	44.8		39.0		574	bps
Adjusted EBITDA ^(2)		42,473		26,158		62		106,684		70,427		51
	As a % of revenue	51.6		40.5		1,107	bps	47.5		39.3		828	bps
Funds flow from operations		36,039		19,896		81		97,833		59,765		64
	Per share – basic	0.42		0.23		80		1.15		0.71		63
	Per share – diluted	0.42		0.23		80		1.14		0.70		62
Cash from operating activities		31,809		15,128		110		83,770		69,160		21
Free cash flow ^(2)		26,880		11,002		144		68,919		59,141		17
Capital expenditures		4,858		5,371		(10)		15,426		11,604		33
Working capital		234,771		190,518		23		234,771		190,518		23
Total assets		429,684		398,926		8		429,684		398,926		8
Total long-term debt		—		—		—		—		—		—
Cash dividends declared		0.18		0.17		6		0.52		0.51		2
Shares outstanding end of period (#000's)		85,431		84,916		1		85,431		84,916		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.

(2)

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

Q3 2018 vs Q3 2017

The Company generated consolidated revenue of $82.3 million in the third quarter of 2018, an increase of 28% from the same period in 2017. In the US operations, industry activity increased by 12% while market share increased to 61% from 59%. In Canada, industry activity was comparable while market share decreased to 85% from 88%. The International business unit saw increases in activity in each of the Company's major markets. In the Argentinian business unit, the increase in activity was partially offset by the weakness in the Argentinian peso.

Consolidated adjusted EBITDA increased to $42.5 million in the third quarter, an increase of 62% from the same period in 2017. For the nine-month period, consolidated adjusted EBITDA was $106.7 million, an increase of 51% over the 2017 comparative period. Increases in revenue in all operating segments, combined with significant operating leverage, led to the improvement in this key measure.

The Company recorded net income of $24.4 million ($0.28 per share) in the third quarter of 2018, compared to net income of $7.4 million ($0.08 per share) recorded in the same period in 2017. Net income was positively impacted from the increased level of activity, increased market share in the US operations, and reduction in depreciation expense.

President's Message

Pason achieved strong results in the third quarter of 2018 and our teams continue to perform very well in all geographies. We generated revenue of $82.3 million in the period, an increase of 28% compared to the same quarter last year. The main drivers of revenue growth were increased drilling activity and market share gains in the United States, and higher activity levels in all of Pason's international markets.

Adjusted EBITDA was $42.5 million for the quarter, an increase of 62%. Adjusted EBITDA as a percentage of revenue was 52% compared to 41% one year ago. The drivers of this improvement were the significant increase in revenue with high incremental margins. Pason recorded net income for the quarter of $24.4 million ($0.28 per share) compared to $7.4 million ($0.08 per share) in the prior year quarter.

Capital expenditures for the quarter were $4.9 million and free cash flow was $26.9 million. At September 30, 2018, our working capital position stood at $235 million, including cash and short-term investments of $184 million. There is no debt on our balance sheet. We are maintaining our quarterly dividend at $0.18 share.

At the beginning of this year, we began reporting our revenue along five product categories to better reflect the changing nature of Pason's business as follows:

• Drilling Data contains all products and services associated with acquiring, displaying, storing, and delivering drilling data. Revenue in this segment increased 32% in the third quarter compared to the prior year period and accounted for 51% of our total revenue. The increase was driven by a 12% increase in total US land drilling activity and US market share gains from 59% to 61%. Drilling industry days and segment revenue in Canada were flat. Internationally, drilling activity increased in all major markets.
  
  
• Mud Management & Safety includes products such as the Pit Volume Totalizer (PVT), Gas Analyzer, Hazardous Gas Alarm, and the Electronic Choke Actuator. In the third quarter, Mud Management & Safety generated 27% of total revenue.
  
  
• Communications includes satellite and terrestrial Internet bandwidth, Wireless Rigsite, VoIP and Intercom services and accounted for 9% of total revenue. Revenue in this segment is showing lower growth because of the transition from satellite to terrestrial bandwidth with lower pricing and better user experience for customers.
  
  
• Drilling Intelligence bundles Pason's product offerings targeted at enabling our customers' drilling optimization and automation efforts. It contains products such as autodrillers, abbl Directional Advisor®, the ExxonMobil Drilling Advisory System® and Pivot, a pipe oscillation system for improving slide drilling. Drilling Intelligence is our highest growth segment as revenue increased 73% in the third quarter compared to the prior year and accounted for 9% of our total revenue. Our level of confidence in the successful commercialization of new drilling intelligence products continues to grow. There currently are over 150 drilling rig installations of new Drilling Intelligence software in North America.
  
• Analytics & Other includes our Verdazo Discovery Analytics product suite, various reports, and other revenue streams. This segment is not as directly correlated to drilling activity and accounted for 4% of revenue.

We have increased our investment in R&D and IT in the first nine months of 2018 compared to the previous year period with a focus on machine learning algorithms, particularly in Drilling Intelligence and Mud Management & Safety. 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 up to $25 million in capital expenditures in 2018 and up to $30 million in 2019. Our highly capable and flexible IT and communications platform can host additional new Pason and third-party software at the rigsite and in the Cloud.

From a macro perspective, the oil market continued to tighten in the third quarter. Despite continued strong production from the US and increasing output from OPEC countries, we had seen a further draw in global inventories and an increase in oil prices. The tightening supply and demand balance was driven by accelerating decline rates in the international production base and by the reduction in exports from Venezuela and Iran.

In the United States there are concerns for industry activity in the coming few quarters given take-away constraints across several basins, especially in the Permian in Texas and New Mexico. However, we have not yet seen any signs of a slowdown and we expect activity levels to plateau, rather than decline significantly. It is expected that the Permian takeaway constraints will be addressed in the next 12-18 months.

In Canada, we expect activity in the upcoming winter drilling season to be somewhat lower than last year. We continue to be concerned about the medium-term outlook for Canadian oil and gas as the ongoing crude oil and natural gas takeaway capacity issues, and price differentials, continue to create an environment of extreme caution for Canadian E&P companies.

In aggregate, we expect drilling activity in Pason's core markets to be largely flat in 2019 compared to 2018. Our market positions remain strong, and we expect to be able to deliver growth through higher product adoption going forward. We are the service provider of choice for many leading operators and drilling contractors with Pason equipment installed on over 65% of all active land drilling rigs in the Western Hemisphere. We continue to be very well-positioned to participate in the industry's recovery and growth.

(signed)

Marcel Kessler
President and Chief Executive Officer
November 7, 2018

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of November 7, 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 interim condensed consolidated financial statements, the Company uses certain additional IFRS measures. Management believes these measures provide useful supplemental information to readers.

Funds flow from operations

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

Cash from operating activities

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

Non-IFRS Financial Measures

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

Revenue per EDR day

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

EBITDA

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

Adjusted EBITDA

Adjusted EBITDA is defined as EBITDA, adjusted for foreign exchange, impairment of property, plant, and equipment, restructuring costs, 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 September 30,						Nine Months Ended September 30,
		2018		2017		Change		2018		2017		Change
(000s)		($)		($)		(%)		($)		($)		(%)
Revenue
	Drilling Data	42,090		31,889		32		114,805		88,974		29
	Mud Management and Safety	22,299		19,288		16		62,863		53,225		18
	Communications	7,504		6,567		14		21,413		18,440		16
	Drilling Intelligence	7,111		4,099		73		16,066		11,313		42
	Analytics and Other	3,340		2,733		22		9,281		7,465		24
Total revenue		82,344		64,576		28		224,428		179,417		25

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

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

Pason Electronic Drilling Recorder (EDR) Rental Days
	Three Months Ended September 30,						Nine Months Ended September 30,
	2018		2017		Change		2018		2017		Change
	#		#		(%)		#		#		(%)
Canada	16,100		16,900		(5)		45,500		49,900		(9)
United States	57,500		49,500		16		164,700		128,500		28

Total revenue increased 28% and 25% for the three and nine months ending September 2018, over the same period in 2017. This increase is attributable to an increase in revenue per EDR day in all three operating segments combined with an increase in the activity in the US operating segment.

Industry activity in the US market increased 12% in the third quarter of 2018 compared to the corresponding period in 2017, while third quarter Canadian industry activity was consistent in the third quarter of 2018 compared to the corresponding period in 2017. US EDR days increased by 16% in the third quarter of 2018 compared to the corresponding period in 2017, while third quarter Canadian EDR days, which includes non-oil and gas-related activity, decreased 5% from 2017 levels.

In the third quarter of 2018, the Pason EDR was installed on 61% of the land rigs in the US market compared to 59% during the same time period of 2017.

In the third quarter of 2018, the Pason EDR was installed on 85% of the land rigs in the Canadian market compared to 88% during the same period of 2017. 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.

Revenue generated from the Company's other wellsite instrumentation products was largely driven by the increase in drilling activity in the US market combined with increases in the adoption of certain EDR peripherals, most notably the alarms and sensors, and an increase in revenue from the Company's drilling intelligence products.

For the third quarter of 2018, the Company saw an increase in activity in all major regions of the International operating segment with the largest increases in Australia and Argentina.

Discussion of Operations

United States Operations

		Three Months Ended September 30,						Nine Months Ended September 30,
		2018		2017		Change		2018		2017		Change
(000s)		($)		($)		(%)		($)		($)		(%)
Revenue
	Drilling Data	29,640		20,888		42		80,311		56,630		42
	Mud Management and Safety	15,274		12,763		20		43,153		34,352		26
	Communications	4,099		3,458		19		11,997		9,443		27
	Drilling Intelligence	3,774		2,266		67		8,827		5,723		54
	Analytics and Other	1,382		1,303		6		4,267		3,691		16
Total revenue		54,169		40,678		33		148,555		109,839		35
Rental services and local administration		18,317		17,130		7		52,657		47,642		11
Depreciation and amortization		4,200		4,151		1		12,128		13,322		(9)
Segment gross profit		31,652		19,397		63		83,770		48,875		71

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	$		$		$		$
Revenue per EDR day - USD	716		647		694		648
Revenue per EDR day - CAD	936		809		893		847

Revenue from the US operations increased by 33% in the third quarter of 2018 over the 2017 comparable period (28% when measured in USD). For the first nine months of 2018, revenue increased 35% compared to the prior period (37% when measured in USD).

Industry activity in the US market increased by 12% in the third quarter of 2018 over the 2017 comparable period. For the first nine months of 2018, industry activity increased by 19% compared to the prior period. US market share was 61% for the third quarter of 2018 compared to 59% during the same period of 2017. For the first nine months of 2018, US market share was 61% compared to 57% during the same period of 2017. The increase in market share is driven by market share growth in key US regions combined with changes in the mix of active customers.

EDR rental days increased by 16% in the third quarter of 2018 over the 2017 comparable period. Revenue per EDR day increased to US$716 in the third quarter of 2018, an increase of US$69 over the same period in 2017. The increase in revenue per EDR day was driven by higher adoption of certain peripheral products and selective price increases on certain products.

Revenue per EDR day for the first nine months of 2018 was US$694, an increase of US$46 from the same period of 2017.

Rental services and local administration increased by 7% in the third quarter of 2018 over the 2017 comparative period (6% when measured in USD). For the first nine months of 2018, rental services and local administration increased 11% over the 2017 comparative period (15% when measured in USD). The increase in operating costs is attributable higher field staff levels and higher direct costs to support additional activity.

Depreciation expense increased by 1% in the third quarter of 2018 over the 2017 comparative period. For the first nine months of 2018, depreciation expense decreased 9% over the 2017 comparative period.

Segment gross profit increased by $12.3 million or 63% in the third quarter of 2018 over the 2017 comparative period. For the first nine months of 2018, segment gross profit was $83.8 million. This represents an increase of 71% over the 2017 comparative period.

Canadian Operations

		Three Months Ended September 30,						Nine Months Ended September 30,
		2018		2017		Change		2018		2017		Change
(000s)		($)		($)		(%)		($)		($)		(%)
Revenue
	Drilling Data	7,804		7,763		1		21,904		22,365		(2)
	Mud Management and Safety	5,333		5,366		(1)		14,956		15,475		(3)
	Communications	3,028		2,869		6		8,303		8,222		1
	Drilling Intelligence	2,869		1,414		103		6,104		4,192		46
	Analytics and Other	981		908		8		2,837		2,532		12
Total revenue		20,015		18,320		9		54,104		52,786		2
Rental services and local administration		6,046		6,473		(7)		19,510		17,826		9
Depreciation and amortization		3,900		6,053		(36)		12,508		17,632		(29)
Segment gross profit		10,069		5,794		74		22,086		17,328		27

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	$		$		$		$
Revenue per EDR day - CAD	1,191		1,041		1,133		1,010

Canadian drilling activity in the third quarter of 2018 was flat relative to the same period in 2017. The level of activity during the quarter was affected by weather-related issues during September. For the first nine months of 2018, drilling activity decreased by 6% compared to the same period in 2017. Rig activity reflected the challenging industry outlook and takeaway capacity issues in the WCSB.

Canadian segment revenue increased by 9% in the third quarter of 2018 over the 2017 comparative period. For the first nine months of 2018, revenue increased by 2% compared to the prior period.

Canadian market share was 85% for the third quarter of 2018 compared to 88% during the same period of 2017. For the first nine months of 2018, Canadian market share was 86% compared to 89% during the same period of 2017.

EDR rental days decreased 5% in the third quarter of 2018 compared to 2017. On a year-to-date basis EDR rental days decreased 9% over 2017 levels. Revenue per EDR day increased by $150 to $1,191 during the third quarter of 2018 compared to 2017. For the first nine months of 2018, revenue per EDR day increased by $123 to $1,133. The increase is driven by higher adoption of certain EDR peripherals and the successful introduction of drilling intelligence products.

Rental services and local administration decreased by 7% in the third quarter of 2018 relative to the same period in 2017. For the first nine months of 2018, rental services and local administration increased 9% compared to the same period in 2017. The increase is due to repair costs and other direct field costs incurred primarily in the first two quarters of 2018.

Depreciation and amortization expense decreased by 36% in the third quarter of 2018 over the 2017 comparative period. The decrease is a result of lower capital programs since 2014 and a drop in amortization expense of previously deferred research and development costs as fewer project costs are being capitalized for accounting purposes.

Segment gross profit for the third quarter of 2018 increased 74% to $10.1 million in the third quarter of 2018 compared to $5.8 million in segment gross profit in the 2017 comparative period.

International Operations

		Three Months Ended September 30,						Nine Months Ended September 30,
		2018		2017		Change		2018		2017		Change
(000s)		($)		($)		(%)		($)		($)		(%)
Revenue
	Drilling Data	4,646		3,238		43		12,590		9,979		26
	Mud Management and Safety	1,692		1,159		46		4,754		3,398		40
	Communications	377		240		57		1,113		775		44
	Drilling Intelligence	468		419		12		1,135		1,398		(19)
	Analytics and Other	977		522		87		2,177		1,242		75
Total revenue		8,160		5,578		46		21,769		16,792		30
Rental services and local administration		4,434		4,317		3		13,882		13,282		5
Depreciation and amortization		804		980		(18)		2,663		3,026		(12)
Segment gross profit		2,922		281		940		5,224		484		979

Drilling activity increased in the Company's major international markets, although the majority of the absolute gains were seen in Australia, Argentina, and the Andean region. The increase in activity in Argentina was offset by a weaker Argentinian peso compared to the prior year.

Revenue in the International segment increased by 46% in the third quarter of 2018 compared to the same period in 2017. For the first nine months of 2018, revenue increased by 30% compared to the prior period.

Rental services and local administration expenses increased by 3% in the third quarter of 2018 compared to the same period in 2017. For the first nine months of 2018, rental services and local administration expense increased by 5% compared to the prior period.

Depreciation expense decreased by 18% in the third quarter of 2018 compared to the same period in 2017.

Segment gross profit was $2.9 million for the third quarter of 2018, an improvement from the $0.3 million profit recorded in the corresponding period in 2017. For the first nine months of 2018, segment gross profit was $5.2 million compared to $0.5 million in 2017.

Corporate Expenses

		Three Months Ended September 30,						Nine Months Ended September 30,
		2018		2017		Change		2018		2017		Change
(000s)		($)		($)		(%)		($)		($)		(%)
Other expenses
Research and development		6,711		6,945		(3)		19,687		19,083		3
Corporate services		4,363		3,553		23		12,008		11,157		8
Stock-based compensation		2,589		3,145		(18)		8,978		8,869		1
Other
	Foreign exchange (gain) loss	(1,516)		113		—		6,675		(353)		—
	Other	(644)		552		—		(458)		768		—
Total corporate expenses		11,503		14,308		(20)		46,890		39,524		19

Corporate service expenses increased in the third quarter of 2018 over the 2017 comparative period due to one time costs combined with certain expenses being recognized in different periods in 2018 as compared to 2017.

Q3 2018 vs Q2 2018

Consolidated revenue was $82.3 million in the third quarter of 2018 compared to $68.3 million in the second quarter of 2018, an increase of $14.0 million or 21%. The second quarter of the year is typically the weakest for the Company due to the seasonality of Canadian drilling activity. US and international activity levels continued to increase and this partially offset the anticipated drop in Canadian activity.

Revenue in the US segment was $54.2 million in the third quarter of 2018 compared to $50.3 million in the second quarter of 2018, an increase of $3.9 million or 8% as industry activity, market share and revenue per EDR day all increased. The Canadian segment earned revenue of $20.0 million in the third quarter of 2018 compared to $10.7 million in the second quarter of 2018, an increase of $9.4 million or 88%. The International segment earned revenue of $8.2 million in the third quarter of 2018 compared to $7.3 million in the second quarter of 2018, an increase of $0.8 million or 11%.

Adjusted EBITDA, which adjusts EBITDA for foreign exchange and certain non-recurring charges, was $42.5 million in the third quarter of 2018 compared to $29.5 million in the second quarter of 2018. Funds flow from operations was $36.0 million in the third quarter of 2018 compared to $27.8 million in the second quarter of 2018.

The Company recorded net income in the third quarter of 2018 of $24.4 million ($0.28 per share) compared to a profit of $5.5 million ($0.06 per share) in the second quarter of 2018. The Company recorded an unrealized foreign exchange gain in the third quarter of 2018 compared to a significant unrealized foreign exchange loss in the second quarter of 2018.

Third Quarter Conference Call

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its third quarter 2018 results at 9:00 am (Calgary time) on Thursday, November 8, 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 3476978.

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.

Condensed Consolidated Interim Balance Sheets

As at			September 30, 2018		December 31, 2017
(CDN 000s) (unaudited)			($)		($)
Assets
Current
	Cash and cash equivalents		119,762		154,129
	Short-term investments		64,725		—
	Trade and other receivables		70,684		55,069
	Income tax recoverable other		15,304		17,881
	Prepaid expenses		4,096		4,028
	Income taxes recoverable		5,413		3,946
	Total current assets		279,984		235,053
Non-current
	Property, plant and equipment		117,323		127,685
	Intangible assets and goodwill		32,377		34,318
	Deferred tax assets		—		1,390
	Total non-current assets		149,700		163,393
Total assets			429,684		398,446
Liabilities and equity
Current
	Trade payables and accruals		23,511		20,391
	Income taxes payable other		15,304		17,881
	Stock-based compensation liability		6,398		3,089
	Total current liabilities		45,213		41,361
Non-current
	Stock-based compensation liability		4,849		2,758
	Deferred tax liabilities		16,165		4,515
	Onerous lease obligation		2,189		2,326
	Total non-current liabilities		23,203		9,599
Equity
	Share capital		156,440		150,887
	Share-based benefits reserve		27,072		24,425
	Foreign currency translation reserve		48,065		40,358
	Retained earnings		129,691		131,816
	Total equity		361,268		347,486
Total liabilities and equity			429,684		398,446

Condensed Consolidated Interim Statements of Operations

			Three Months Ended September 30,				Nine Months Ended September 30,
			2018		2017 (Restated)		2018		2017 (Restated)
(CDN 000s, except per share data) (unaudited)			($)		($)		($)		($)
Revenue			82,344		64,576		224,428		179,417
Operating expenses
	Rental services		25,648		25,245		76,896		70,827
	Local administration		3,149		2,675		9,153		7,923
	Depreciation and amortization		8,904		11,184		27,299		33,980
			37,701		39,104		113,348		112,730
Gross profit			44,643		25,472		111,080		66,687
Other expenses
	Research and development		6,711		6,945		19,687		19,083
	Corporate services		4,363		3,553		12,008		11,157
	Stock-based compensation expense		2,589		3,145		8,978		8,869
	Other (income) expense		(2,160)		665		6,217		415
			11,503		14,308		46,890		39,524
Income before income taxes			33,140		11,164		64,190		27,163
	Income tax provision		8,754		3,760		21,966		6,987
Net income			24,386		7,404		42,224		20,176
Income per share
	Basic		0.29		0.08		0.50		0.24
	Diluted		0.28		0.08		0.49		0.24

Condensed Consolidated Interim Statements of Other Comprehensive Income

			Three Months Ended September 30,					Nine Months Ended September 30,
			2018		2017 (Restated)			2018		2017 (Restated)
(CDN 000s) (unaudited)			($)		($)			($)		($)
Net income			24,386		7,404			42,224		20,176
Items that may be reclassified subsequently to net income:
	Tax expense (recovery) on net investment in foreign operations related to an inter-company financing		632		1,409			(1,134)		2,685
	Foreign currency translation adjustment		(9,813)		(12,613)			8,841		(23,351)
Other comprehensive gain (loss)			(9,181)		(11,204)			7,707		(20,666)
Total comprehensive income (loss)			15,205		(3,800)			49,931		(490)

Condensed Consolidated Interim Statements of Changes in Equity

			Share Capital		Share-Based Benefits Reserve		Foreign Currency Translation Reserve		Retained Earnings		Total Equity
(CDN 000s) (unaudited)			($)		($)		($)		($)		($)
Balance at January 1, 2017 - Previously reported			139,730		23,026		69,443		154,452		386,651
	Correction of error		—		—		(9,871)		9,871		—
Balance at January 1, 2017 - Currently reported			139,730		23,026		59,572		164,323		386,651
	Net income - as restated		—		—		—		20,176		20,176
	Dividends		—		—		—		(43,238)		(43,238)
	Other comprehensive loss - as restated		—		—		(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 - as restated		—		—		—		5,014		5,014
	Dividends		—		—		—		(14,459)		(14,459)
	Other comprehensive loss		—		—		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
	Net income		—		—		—		42,224		42,224
	Dividends		—		—		—		(44,349)		(44,349)
	Other comprehensive income		—		—		7,707		—		7,707
	Exercise of stock options		5,553		(888)		—		—		4,665
	Expense related to vesting of options		—		3,535		—		—		3,535
Balance at September 30, 2018			156,440		27,072		48,065		129,691		361,268

Condensed Consolidated Interim Statements of Cash Flows

			Three Months Ended September 30,				Nine Months Ended September 30,
			2018		2017 (Restated)		2018		2017 (Restated)
(CDN 000s) (unaudited)			($)		($)		($)		($)
Cash from (used in) operating activities
	Net income		24,386		7,404		42,224		20,176
Adjustment for non-cash items:
	Depreciation and amortization		8,904		11,184		27,299		33,980
	Stock-based compensation		2,589		3,145		8,978		8,869
	Deferred income taxes		1,328		(20)		11,992		(685)
	Unrealized foreign exchange (gain) loss and other		(1,168)		(1,817)		7,340		(2,575)
Funds flow from operations			36,039		19,896		97,833		59,765
Movements in non-cash working capital items:
	Decrease in trade and other receivables		(11,941)		(6,954)		(18,688)		(5,138)
	Decrease in prepaid expenses		(1,374)		(1,418)		(99)		(1,160)
	Decrease in income taxes		10,324		3,811		11,594		13,377
	Increase in trade payables, accruals and stock-based compensation liability		2,989		2,609		2,011		5,743
	Effects of exchange rate changes		(75)		(23)		235		962
Cash generated from operating activities			35,962		17,921		92,886		73,549
	Income tax paid		(4,153)		(2,793)		(9,116)		(4,389)
Net cash from operating activities			31,809		15,128		83,770		69,160
Cash flows from (used in) financing activities
	Proceeds from issuance of common shares		993		1,694		4,665		4,774
	Payment of dividends		(15,378)		(14,425)		(44,349)		(43,238)
Net cash used in financing activities			(14,385)		(12,731)		(39,684)		(38,464)
Cash flows (used in) from investing activities
	Additions to property, plant and equipment		(3,819)		(5,126)		(12,144)		(10,406)
	Development costs		(1,039)		(245)		(3,282)		(1,198)
	Proceeds on disposal of investment and property, plant and equipment		92		47		188		61
	Purchase of short-term investments		—		—		(65,840)		—
	Acquisition		—		—		—		(4,750)
	Proceeds on sale of net operating assets		—		—		—		7,123
	Changes in non-cash working capital		(163)		1,198		387		1,524
Net cash used in investing activities			(4,929)		(4,126)		(80,691)		(7,646)
Effect of exchange rate on cash and cash equivalents			(4,075)		(5,354)		2,238		(10,092)
Net increase (decrease) in cash and cash equivalents			8,420		(7,083)		(34,367)		12,958
Cash and cash equivalents, beginning of period			111,342		166,520		154,129		146,479
Cash and cash equivalents, end of period			119,762		159,437		119,762		159,437

Operating Segments

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

Three Months Ended September 30, 2018		Canada		United States		International		Total
		($)		($)		($)		($)
Revenue
	Drilling Data	7,804		29,640		4,646		42,090
	Mud Management and Safety	5,333		15,274		1,692		22,299
	Communications	3,028		4,099		377		7,504
	Drilling Intelligence	2,869		3,774		468		7,111
	Analytics and Other	981		1,382		977		3,340
Total Revenue		20,015		54,169		8,160		82,344
Rental services and local administration		6,046		18,317		4,434		28,797
Depreciation and amortization		3,900		4,200		804		8,904
Segment gross profit		10,069		31,652		2,922		44,643
Research and development								6,711
Corporate services								4,363
Stock-based compensation								2,589
Other (income)								(2,160)
Income tax								8,754
Net income								24,386
Capital expenditures		1,285		2,298		1,275		4,858
As at September 30, 2018
Property plant and equipment		38,216		65,503		13,604		117,323
Goodwill		1,259		7,387		2,600		11,246
Intangible assets		21,090		41		—		21,131
Segment assets		112,550		271,754		45,380		429,684
Segment liabilities		48,696		15,145		4,575		68,416

Three Months Ended September, 2017 (Restated)		Canada		United States		International		Total
		($)		($)		($)		($)
Revenue
	Drilling Data	7,763		20,888		3,238		31,889
	Mud Management and Safety	5,366		12,763		1,159		19,288
	Communications	2,869		3,458		240		6,567
	Drilling Intelligence	1,414		2,266		419		4,099
	Analytics and Other	908		1,303		522		2,733
Total Revenue		18,320		40,678		5,578		64,576
Rental services and local administration		6,473		17,130		4,317		27,920
Depreciation and amortization		6,053		4,151		980		11,184
Segment gross profit		5,794		19,397		281		25,472
Research and development								6,945
Corporate services								3,553
Stock-based compensation								3,145
Other expense								665
Income tax								3,760
Net income								7,404
Capital expenditures		(363)		5,213		521		5,371
As at September 30, 2017
Property plant and equipment		43,187		67,393		17,453		128,033
Goodwill		1,259		7,183		2,600		11,042
Intangible assets		25,304		141		—		25,445
Segment assets		109,863		243,696		45,367		398,926
Segment liabilities		25,954		10,253		12,405		48,612

Nine Months Ended September 30, 2018		Canada		United States		International		Total
		($)		($)		($)		($)
Revenue
	Drilling Data	21,904		80,311		12,590		114,805
	Mud Management and Safety	14,956		43,153		4,754		62,863
	Communications	8,303		11,997		1,113		21,413
	Drilling Intelligence	6,104		8,827		1,135		16,066
	Analytics and Other	2,837		4,267		2,177		9,281
Total Revenue		54,104		148,555		21,769		224,428
Rental services and local administration		19,510		52,657		13,882		86,049
Depreciation and amortization		12,508		12,128		2,663		27,299
Segment gross profit		22,086		83,770		5,224		111,080
Research and development								19,687
Corporate services								12,008
Stock-based compensation								8,978
Other expenses								6,217
Income tax								21,966
Net income								42,224
Capital expenditures		4,336		9,097		1,993		15,426
As at September 30, 2018
Property plant and equipment		38,216		65,503		13,604		117,323
Goodwill		1,259		7,387		2,600		11,246
Intangible assets		21,090		41		—		21,131
Segment assets		112,550		271,754		45,380		429,684
Segment liabilities		48,696		15,145		4,575		68,416

Nine Months Ended September 30, 2017 (Restated)		Canada		United States		International		Total
		($)		($)		($)		($)
Revenue
	Drilling Data	22,365		56,630		9,979		88,974
	Mud Management and Safety	15,475		34,352		3,398		53,225
	Communications	8,222		9,443		775		18,440
	Drilling Intelligence	4,192		5,723		1,398		11,313
	Analytics and Other	2,532		3,691		1,242		7,465
Total Revenue		52,786		109,839		16,792		179,417
Rental services and local administration		17,826		47,642		13,282		78,750
Depreciation and amortization		17,632		13,322		3,026		33,980
Segment gross profit		17,328		48,875		484		66,687
Research and development								19,083
Corporate services								11,157
Stock-based compensation								8,869
Other income								415
Income tax								6,987
Net income								20,176
Capital expenditures		(245)		11,428		421		11,604
As at September 30, 2017
Property plant and equipment		43,187		67,393		17,453		128,033
Goodwill		1,259		7,183		2,600		11,042
Intangible assets		25,304		141		—		25,445
Segment assets		109,863		243,696		45,367		398,926
Segment liabilities		25,954		10,253		12,405		48,612

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, 2017 was to increase retained earnings and reduce Foreign Currency Translation Reserve by $9,871.

For the third quarter of 2017, the income tax provision increased by $1,409. For the nine month period ended September 30, 2017, the income tax provision increased by $2,685.

Other (Income) Expenses

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	($)		($)		($)		($)
Foreign exchange (gain) loss	(1,516)		113		6,675		(353)
Other	(644)		552		(458)		768
Other (income) expenses	(2,160)		665		6,217		415

The Company recorded a significant unrealized loss for the nine months ended September 30, 2018 as a result of the significant devaluation of the Argentinian peso relative to the Canadian dollar.

Short-term investments

During the second quarter of 2018, the Company invested in a USD $50,000 term deposit bearing an interest rate of 2.30% maturing in November, 2018. This is reflected on the Condensed Consolidated Interim Balance Sheet as Short-term investments.

Events After the Reporting Period

On November 7, 2018, the Company announced a quarterly dividend of $0.18 per share on the Company's common shares. The dividend will be paid on December 31, 2018 to shareholders of record at the close of business on December 14, 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.TO.

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

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

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

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

SOURCE Pason Systems Inc.

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

Related Links

http://www.pason.com