PASON SYSTEMS INC. REPORTS THIRD QUARTER OPERATING RESULTS
Stock Exchange: TSX
Symbol: PSI
CALGARY, Nov. 2 /CNW/ - Pason Systems Inc. ("Pason" or "the Company") today announced its results for the three-month and nine-month periods ended September 30, 2010.
Performance Data
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Three Months Ended Nine Months Ended
September 30, September 30,
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2010 2009 Change 2010 2009 Change
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(000s, except per share ($) ($) (%) ($) ($) (%)
data) (unaudited)
Revenue 68,653 28,422 142 176,068 104,848 68
EBITDA(1) 34,606 8,261 319 81,508 33,030 147
As a % of revenue 50.4 29.1 73 46.3 31.5 47
Per share - basic 0.42 0.10 320 1.00 0.41 144
Per share - diluted 0.42 0.10 320 1.00 0.41 144
Funds flow from
operations(1) 26,856 7,373 264 66,074 29,116 127
Per share - basic 0.33 0.09 267 0.81 0.36 125
Per share - diluted 0.33 0.09 267 0.81 0.36 125
Earnings (loss) 12,449 (4,200) - 27,299 (7,990) -
Per share - basic 0.16 (0.05) - 0.34 (0.10) -
Per share - diluted 0.16 (0.05) - 0.34 (0.10) -
Capital expenditures 12,499 3,879 222 23,950 12,345 94
Working capital 154,993 150,029 3 154,993 150,029 3
Total assets 392,582 367,147 7 392,582 367,147 7
Shareholders'
equity 321,025 320,669 - 321,025 320,669 -
Common shares
outstanding (No.)
Basic 81,502 81,487 - 81,497 81,472 -
Diluted 81,502 81,487 - 81,497 81,472 -
Shares outstanding
end of period 81,504 81,487 - 81,504 81,487 -
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(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, stock-based compensation
expense, future income taxes and other non-cash items impacting
operations as presented in the Consolidated Statements of Cash Flows.
These definitions are not recognized measures under Canadian
generally accepted accounting principles, and accordingly, may not be
comparable to measures used by other companies.
President's Message
Operations Review
Due to stronger drilling activity in Canada and the United States plus improved pricing and market share in the United States, Pason recorded a marked improvement in third quarter financial results as compared to 2009. Revenue for the third quarter jumped 142% from the prior year to $68.7 million, cash flow rose 264% to $26.9 million and earnings reversed from a loss of $4.2 million in the prior year to a profit of $12.4 million in the current quarter. Earnings per diluted share was $0.16 compared to a loss per share of $0.05 in 2009. While the third quarter benefited from higher prices in the United States when compared to 2009, the price increases in Canada did not take place until the beginning of the fourth quarter and thus all of the earnings improvement in that country came from higher volume and better operating margins.
United States segment operating results dramatically reversed from last year's loss of $2.7 million to a profit of $21.2 million and just a shade behind our record U.S. quarter of $21.5 million earned in the third quarter of 2008. Revenue per U.S. industry day was a record $284 compared to $150 in the prior year and $251 in 2008. The competitive strength of the of U.S. business unit allowed us to recover the market share losses and price decreases created by the precipitous drop in drilling activity from late 2008 until June of 2009. This was reflected in a 204% increase in revenue for the quarter against an industry improvement of 71% in drilling days. The revenue gain was also clearly helped by the successful integration of Petron employees and customers into the Pason business. At the end of the quarter Pason had at least some of its equipment installed on 1,060 rigs or 65% of the active rigs. Going forward our focus will be to increase the product content on each of the rigs that we are working with.
Canada also had a strong rebound from 2009 with segment operating profit of $8.4 million for the quarter compared to $2.0 million recorded in 2009. This was still behind the $14.0 million we earned in the 2008 third quarter but that quarter had 30% more drilling days than 2010 plus our prices for our main two products, electronic drilling recorders and pit volume totalizers, were 20% higher. Despite those advantages, margin per field technician was only 19% lower in 2010 than 2008. Our revenue per industry drilling day increased to $716 for the quarter versus $675 a year ago. Since we had not raised prices over the prior year, the gains came from modest improvements in market share and product content on rigs.
International revenue was $5.0 million, up from $3.0 million in 2009 despite a major decline in drilling activity in Mexico. Overall, the segment posted a loss of $0.5 million versus a profit of $2.1 million in 2009. This was caused by a number of issues including the collapse of drilling activity in Mexico, a significant loss in exiting a redundant satellite service contract formerly held by Petron, and non-cash amortization of the Australian distribution rights repurchase and the Petron purchase. In addition, Petron's international business was not as strong as its domestic portion and is currently operating at breakeven. In the past 12 months, we have actively been revamping our international business model. While the financial numbers have been modest, we believe we are on the right track to augment our North American business success.
We continue our entry into the frac and produced water treatment market. There is increasing interest from producers to recycle rather than sending water on a one-way trip to a disposal well. We are on the cusp of starting the operation of one water treatment plant in Colorado and three mobile plants in Canada and possibly the United States. Following time for commissioning and demonstration tests for customers, we expect to be earning water treatment revenue in the first quarter of 2011. We anticipate confronting numerous competitors in the early days of this business. However, we believe success in water treatment will fall into deployment, remote monitoring, minimizing labour at the wellsite and optimizing design for a robust range of operating characteristics skills. These are all skills that Pason has delivered in its mainstream data acquisition and rig controls businesses.
Outlook
Both oil and natural gas have traded in fairly narrow ranges for the past year while drilling activity has steadily increased in North America. This drilling increase is not likely to continue. In fact, some reduction in gas drilling is now anticipated for 2011.
We continue to carry a healthy cash reserve of approximately $110 million or just over 10% of our market capitalization. We continue to staff up our New Revenue Group with business development people from within and outside the company charged with seeking new revenue opportunities that will utilize our cash and provide shareholder returns commensurate with Pason's record.
On behalf of the Board of Directors,
(signed)
Jim Hill
Chairman, President & Chief Executive Officer
November 2, 2010
Third Quarter Conference Call
Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its third quarter results at 9:00 a.m. (Calgary time) on Wednesday, November 3, 2010. The conference call dial-in number is 1-888-231-8191; Conference ID No. 11036182.
Pason Systems Inc. is a leading provider of instrumentation systems to land-based and offshore drilling rigs worldwide. The Company's rental and sold solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, maximize rig uptime, improve work efficiency, and minimize operating costs. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.
Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2009, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.
Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.
CONSOLIDATED BALANCE SHEETS
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As at September 30, December 31,
2010 2009
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(000s) (unaudited) ($) ($)
Assets
Current
Cash 112,812 109,849
Accounts receivable 69,937 39,102
Prepaid expenses 1,792 1,416
Income taxes recoverable - 2,928
Future income tax assets 17,125 9,037
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201,666 162,332
Capital assets 156,963 170,678
Intangible assets (Note 3) 21,342 19,557
Future income tax asset 6,735 14,558
Goodwill 5,876 5,972
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392,582 373,097
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Liabilities
Current
Accounts payable and accrued liabilities 40,122 29,780
Income taxes payable 2,964 -
Current portion of stock-based compensation
liability (Note 2) 3,587 1,320
Dividend payable - 11,408
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46,673 42,508
Stock-based compensation liability (Note 2) 2,938 906
Future income tax liabilities 21,946 21,348
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71,557 64,762
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Shareholders' Equity (Note 2)
Share capital 72,092 71,864
Contributed surplus 15,132 14,029
Accumulated other comprehensive loss (25,551) (22,651)
Retained earnings 259,352 245,093
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321,025 308,335
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392,582 373,097
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See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
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Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
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(000s, except per share data) ($) ($) ($) ($)
(unaudited)
Revenue
Equipment rentals 66,387 27,146 170,134 99,778
Instrumentation sales 1,728 - 3,146 -
Geological services 383 1,215 2,438 4,695
Interest 155 61 350 375
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68,653 28,422 176,068 104,848
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Expenses
Rental services 23,830 13,053 67,489 48,402
Cost of instrumentation sales 606 - 1,381 -
Geological services 216 1,236 1,755 4,587
Manufacturing and distribution 404 188 916 372
Research and development 4,629 2,990 12,911 9,404
Corporate services 2,657 1,518 6,364 4,532
Local administration 1,752 984 5,134 3,447
Stock-based compensation 2,958 3,188 5,490 5,190
Depreciation and amortization 13,224 11,692 37,340 42,129
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50,276 34,849 138,780 118,063
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Earnings (loss) before the
under noted items 18,377 (6,427) 37,288 (13,215)
Other income (expenses) 47 (192) 1,390 (1,074)
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Earnings (loss) before income
taxes 18,424 (6,619) 38,678 (14,289)
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Income taxes
Current 6,733 (258) 11,367 1,348
Future (758) (2,161) 12 (7,647)
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5,975 (2,419) 11,379 (6,299)
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Earnings (loss) 12,449 (4,200) 27,299 (7,990)
Retained earnings, beginning
of period 246,903 258,221 245,093 271,788
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Dividends (Note 5) - - (13,040) (9,777)
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Retained earnings, end
of period 259,352 254,021 259,352 254,021
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Earnings (loss) per share
Basic 0.16 (0.05) 0.34 (0.10)
Diluted 0.16 (0.05) 0.34 (0.10)
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See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
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(000s) (unaudited) ($) ($) ($) ($)
Earnings (loss) 12,449 (4,200) 27,299 (7,990)
Other comprehensive loss,
net of tax
Foreign currency
translation adjustment (4,044) (12,613) (2,900) (20,687)
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Total comprehensive income
(loss) 8,405 (16,813) 24,399 (28,677)
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See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
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(000s) (unaudited) ($) ($) ($) ($)
Accumulated other comprehensive
(loss) income, beginning
of period (21,507) (5,624) (22,651) 2,450
Other comprehensive loss,
net of tax
Foreign currency
translation adjustment (4,044) (12,613) (2,900) (20,687)
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Accumulated other comprehensive
loss, end of period (25,551) (18,237) (25,551) (18,237)
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See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
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(000s) (unaudited) ($) ($) ($) ($)
Cash flows related to the
following activities:
Operating
Earnings (loss) 12,449 (4,200) 27,299 (7,990)
Adjustments for non-cash
items:
Depreciation and
amortization 13,224 11,692 37,340 42,129
Stock-based compensation 1,984 1,488 2,920 1,990
Future income taxes (758) (2,161) 12 (7,647)
Unrealized foreign exchange
(gain) loss (43) 554 (1,497) 634
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26,856 7,373 66,074 29,116
Changes in non-cash working
capital (8,222) (7,508) (10,243) 50,237
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18,634 (135) 55,831 79,353
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Financing
Issue of common shares under
the stock option plan 33 101 198 266
Purchase of stock options (5) (22) (5) (240)
Payment of dividends (13,040) (9,777) (24,448) (19,554)
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(13,012) (9,698) (24,255) (19,528)
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Investing
Additions to capital assets (12,450) (2,844) (21,853) (9,699)
Deferred development costs,
net of investment tax
credits received (49) (1,035) (2,097) (2,646)
Purchase of Australian
distribution rights - - (2,829) -
Proceeds on disposal of
capital assets 72 159 94 534
Changes in non-cash working
capital (837) (1,072) (1,293) (6,295)
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(13,264) (4,792) (27,978) (18,106)
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Effect of exchange rate
changes on cash (1,144) (3,995) (635) (6,814)
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Net (decrease) increase in
cash and cash equivalents (8,786) (18,620) 2,963 34,905
Cash and cash equivalents,
beginning of period 121,598 154,135 109,849 100,610
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Cash and cash equivalents,
end of period 112,812 135,515 112,812 135,515
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Represented by:
Cash and short-term deposits 112,812 135,515 112,812 135,515
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See accompanying notes to the consolidated financial statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(000s, except per share data) (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements have been prepared in
accordance with the same accounting policies and methods of
computation as those outlined in the annual audited financial
statements. These interim consolidated financial statements do not
include all disclosures normally provided in annual financial
statements and should be read in conjunction with the Company's
audited annual financial statements for the year ended December 31,
2009.
2. SHARE CAPITAL
Authorized
Unlimited number of common shares
Unlimited number of preferred shares, issuable in series
Issued
Common shares
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Shares Amount
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(No.) ($)
Balance, December 31, 2009 81,487 71,864
Exercise of stock options 17 198
Contributed surplus adjustment on exercise
of stock options - 30
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Balance, September 30, 2010 81,504 72,092
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The basic and diluted weighted average number of common shares
outstanding for the three and nine months ended September 30, 2010
were 81,502 and 81,497 (2009 - 81,487 and 81,472), respectively.
Stock Option Plan
At September 30, 2010, 5,390 stock options were outstanding for
common shares at exercise prices ranging from $10.99 to $17.11 per
share, expiring between 2010 and 2015 as follows:
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Nine Months Ended September 30, 2010 2009
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Weighted Weighted
Average Average
Share Exercise Share Exercise
Options Price Options Price
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(No.) ($) (No.) ($)
Outstanding, beginning
of period 6,540 12.05 6,753 12.88
Granted 62 11.67 50 12.31
Exercised (23) 12.04 (91) 8.24
Expired and/or forfeited (1,189) 13.64 (1,644) 14.01
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Outstanding, end of period 5,390 11.70 5,068 12.58
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Exercisable, end of period 1,813 12.10 1,290 13.82
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Available for grant, end
of period 2,760 3,081
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All options are issued at market price and vest over three years. The
following table summarizes the life of options issued:
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Date of Issuance Years
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November 2006 through October 2008 3.50
November 2008 and thereafter 5.00
The following table summarizes information about stock options
outstanding at September 30, 2010:
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Options Outstanding Options Exercisable
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Weighted
Average
Remaining Weighted Weighted
Contrac- Average Average
Range of Options tual Exercise Exercisable Exercise
Exercise Prices Outstanding Life Price (Vested) Price
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($) (No.) (Years) ($) (No.) ($)
10.99 - 11.79 1,648 4.18 10.99 - -
11.80 - 12.00 2,047 3.18 11.80 692 11.80
12.01 - 13.00 1,658 0.78 12.18 1,092 12.18
13.01 - 17.11 37 1.01 15.74 29 15.95
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5,390 2.73 11.70 1,813 12.10
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The total number of options outstanding must not exceed 10% of the total
common shares outstanding.
All stock options granted to employees and directors were accounted
for using the fair value method estimated on the date of grant using
the Black-Scholes option pricing model. This method was in effect
until the shareholders approved adjustments to the stock option plan
on October 23, 2008. As of this date, stock options have been
accounted for using a combination of both the fair value and
intrinsic value methods.
Contributed Surplus
Amounts recorded to contributed surplus are as follows:
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Nine Months Ended September 30, 2010 2009
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($) ($)
Balance, beginning of period 14,029 8,834
Stock-based compensation expense 1,220 2,468
Stock options exercised (30) (67)
Intrinsic value adjustment (87) 1,800
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Balance, end of period 15,132 13,035
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Restricted Share Unit ("RSU") Plan
In November of 2008, the Company introduced an RSU program for
employees and directors. At September 30, 2010, 601 (2009 - 579) RSUs
were outstanding. All RSUs vest over three years and will result in a
cash payment to holders based upon the corresponding future market
value of the Company's common shares. Stock-based compensation
expense arising from the RSU plan is recorded in the Consolidated
Statements of Operations and the corresponding liability is recorded
in the Consolidated Balance Sheets.
Stock-based Compensation Expense and Liability
Stock-based compensation expense can be summarized as follows:
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Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
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($) ($) ($) ($)
Stock options 1,984 1,488 2,920 1,990
RSUs 974 1,700 2,570 3,200
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Stock-based compensation
expense 2,958 3,188 5,490 5,190
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Stock-based compensation liability can be summarized as follows:
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As at September 30, December 31,
2010 2009
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($) ($)
Stock options 879 32
RSUs 2,708 1,288
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Current portion of stock-based
compensation liability 3,587 1,320
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Stock options 963 27
RSUs 1,975 879
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Long-term portion of stock-based
compensation liability 2,938 906
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Total stock-based compensation liability 6,525 2,226
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Purchase of Common Shares
On March 22, 2010, the Company received regulatory approval to renew
its normal course issuer bid program. The Company did not purchase
any shares during the three and nine months ended September 30, 2010.
The Company is authorized to purchase and cancel up to 4,000 common
shares before the bid terminates on March 23, 2011. The daily
purchase limit is 26 common shares.
3. RE-PURCHASE OF AUSTRALIAN DISTRIBUTION RIGHTS
In January of 2010, the Company re-purchased its Australian
distribution rights for US$2,750 from its former partner. This amount
was recorded in intangible assets on the Company's Consolidated
Balance Sheets.
4. CONTINGENCIES
Since late 2003, the Company has defended its position in patent
infringement lawsuits in Canada and the United States regarding the
Company's automatic driller. Trial on the U.S. lawsuit concluded on
November 6, 2008. The jury determined Pason's automatic driller
infringed three claims of the patent at issue, denied the Company's
claim that the patent was invalid, and awarded damages in the amount
of US$14,300. The Company accrued this amount in the 2008
consolidated financial statements. On April 30, 2009, the trial judge
denied Pason's motion to reverse the jury verdict and the alternative
motion for a new trial, approved the jury's damages award of
US$14,300, plus interest and court costs, and certified the matter
for appeal. The judge denied the plaintiff's request for enhanced
damages based on willful infringement and refused the plaintiff's
motion for a permanent injunction that would have prevented the
rental of Pason's automatic driller in the United States.
The Company subsequently filed an appeal with the Federal Circuit
Appeals Court and posted a bond suspending any enforcement of the
verdict while the appeal was pending. The plaintiff filed a motion
with the Federal Circuit Appeals Court arguing that the trial court
was premature in certifying the judgment as final and appealable
without resolving Pason's claim that the patent holder was guilty of
inequitable conduct in its prosecution of the patent. The Federal
Circuit Appeals Court agreed, dismissed the appeal, and remanded the
case to the trial court. Further trial proceedings at the trial court
level are currently stayed in deference to the re-examination
proceedings described below.
Upon application by the Company, the United States Patent and
Trademark Office ("USPTO") determined in August 2009 that prior art
not previously considered in the prosecution of the patent at issue
raised substantial new questions of patentability. In December 2009,
the USPTO issued an initial office action determining as a
preliminary matter that several claims of the '142 Patent were
invalid, including the three claims previously litigated in the U.S.
case. In February 2010, the USPTO issued a "Final Rejection". In the
Final Rejection, the USPTO rejected two claims of the '142 Patent but
also confirmed two others. In response, the plaintiff moved to amend
the two rejected claims to overcome the rejection. On March 27, 2010,
the examiner allowed the plaintiff's amendment and issued a Notice of
Intent to Issue Re-examination Certificate, which occurred in August
2010 and concluded the re-examination proceeding. The matter is ready
to be returned to the trial court for further proceedings on Pason's
inequitable conduct claims and the plaintiff's request for an
injunction.
If the Company does not prevail on its inequitable conduct defense
and claim, it intends to renew its appeal on all issues.
In the Canadian case, which is scheduled to come to trial in January
2011, management's assessment of the outcome continues to be that the
asserted claims of the patent are not valid, and/or the Company does
not infringe on any valid claims, and as a result, the Canadian
litigation is not expected to have a significant adverse impact on
the Company's financial position or operations. The outcome of the
U.S. case does not bind a Canadian court. Accordingly, no amount has
been accrued for any potential loss under the Canadian case in the
consolidated financial statements at September 30, 2010.
5. COMMON SHARE DIVIDEND
During the second quarter of 2010, the Company declared a dividend of
$13,040 (2009 - $9,777) or $0.16 per common share (2009 - $0.12). The
Company transferred these funds to the transfer agent to be held in
trust until the dividend payment was made on July 2, 2010.
6. SUBSEQUENT EVENT
On October 13, 2010, the Company announced that effective January 1,
2011, it intends to repurchase the distribution rights for marketing
Pason
products in Latin American countries from the current holder. The
countries involved in the repurchase agreement are Mexico, Colombia,
Brazil, Peru, Ecuador and Argentina.
7. SEGMENTED INFORMATION
The Company operates in three geographic segments: Canada, the United
States and internationally (Latin America, Offshore and the Eastern
Hemisphere). The amounts related to each segment are as follows:
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United Inter-
Canada States national Total
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($) ($) ($) ($)
Three Months Ended
September 30, 2010
Revenue 21,915 41,784 4,954 68,653
Operating costs 7,468 15,979 2,957 26,404
Depreciation and
amortization 6,090 4,607 2,527 13,224
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Segment operating profit
(loss) 8,357 21,198 (530) 29,025
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Research and development 4,629
Stock-based compensation 2,958
Corporate services 2,657
Manufacturing and distribution 404
Other income (47)
Income taxes 5,975
-----------
Earnings 12,449
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Capital expenditures 3,820 6,369 2,310 12,499
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Three Months Ended
September 30, 2009
Revenue 11,709 13,748 2,965 28,422
Operating costs 4,202 10,570 501 15,273
Depreciation and
amortization 5,532 5,843 317 11,692
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Segment operating profit
(loss) 1,975 (2,665) 2,147 1,457
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Research and development 2,990
Stock-based compensation 3,188
Corporate services 1,518
Manufacturing and distribution 188
Other expenses 192
Income taxes (2,419)
-----------
Loss (4,200)
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Capital expenditures 2,360 811 708 3,879
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United Inter-
Canada States national Total
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($) ($) ($) ($)
Nine Months Ended
September 30, 2010
Revenue 58,502 102,367 15,199 176,068
Operating costs 19,408 46,871 9,480 75,759
Depreciation and
amortization 16,288 15,048 6,004 37,340
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Segment operating profit
(loss) 22,806 40,448 (285) 62,969
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Research and development 12,911
Stock-based compensation 5,490
Corporate services 6,364
Manufacturing and distribution 916
Other income (1,390)
Income taxes 11,379
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Earnings 27,299
-----------
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Total assets 159,962 176,341 56,279 392,582
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Capital expenditures 6,170 11,686 6,094 23,950
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Nine Months Ended
September 30, 2009
Revenue 39,749 57,225 7,874 104,848
Operating costs 16,176 37,422 2,838 56,436
Depreciation and
amortization 17,393 22,343 2,393 42,129
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Segment operating profit
(loss) 6,180 (2,540) 2,643 6,283
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Research and development 9,404
Stock-based compensation 5,190
Corporate services 4,532
Manufacturing and distribution 372
Other expenses 1,074
Income taxes (6,299)
-----------
Loss (7,990)
-----------
Total assets 175,678 169,090 22,379 367,147
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Capital expenditures 3,772 3,837 4,736 12,345
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For further information: Pason Systems Inc., Jim Hill, Chairman, President and CEO, Phone: (403) 301-3401, Fax: (403) 301-3499, E-mail: [email protected]; Jim Glasspoole, Chief Financial Officer, Phone: (403) 692-3840, Fax: (403) 301-3411, E-mail: [email protected]
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