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What Investors Need to Know about Pason Systems Inc.’s Q2 Results

There were many things to like about Pason Systems Inc.’s (TSX:PSI) second quarter of 2014 results, one of which was the performance of the stock on the day of the release, which went up 10.8%. The quarter was better than expected due to stronger-than-expected Canadian drilling activity, foreign exchange, and an increase in U.S. market share.

Strong revenue growth

Revenue for the quarter increased just over 26% to $103.8 million, as strong revenue growth was seen in all categories. Drilling activity in Canada increased 35% due to a longer drilling season and a drier-than-usual spring break-up, and drilling days in the U.S. increased 5%. In the U.S., market share increased four percentage points to 61%.

Revenue for the Electronic Driller Recorder, or EDR, representing 45% of the company’s revenue, increased 27% in the quarter as EDR rental days increased 39% in Canada and 11% in the U.S. The communications and software segments were other notable performers, achieving a 55% and 33% increase in revenue respectively. The international segment, which posted mixed results last quarter, also posted a strong 19% increase in revenue.

New product acceptance

Pason’s growth was above industry levels, attesting to market share gains and greater penetration of the company’s products. There has been strong acceptance of the new Pason rig display, which is Wi-Fi- and internet-enabled and runs on Microsoft Windows. It is the newest technology coming from the company and gives access to services and applications at the rig site. Both these new products and greater penetration of existing products have all led to increases in the daily revenue per rig that the company is able to generate. In fact, in the U.S., average daily revenue per rig increased 7% to U.S.$643 from U.S.$603 in the same period last year.

Going forward, Pason has a multitude of new products that are currently in the works and will be rolled out in the next 18 months. EDR will continue to evolve, and there is good potential for new products on the software and analytics side.

Dividend hike

The company continued its tradition of consistent dividend increases this quarter and instituted a 13% dividend hike. The annual dividend now stands at $0.68 per share for a dividend yield of 2.1%.

Strong balance sheet

A strong balance sheet provides the company with flexibility and options. As at the end of the second quarter, Pason’s cash balance is $157 million, and there is no debt on its balance sheet. This, along with the company’s strong cash flow generation, positions it to continue to increase both research and development and capital expenditures in order to continue to grow and innovate. Free cash flow this quarter totaled $27 million. Capital expenditures planned for the next 12 months have been increased to $125 million.

Pason is armed with a healthy balance sheet, almost no debt, very strong cash flow generation, and access to credit markets. The company could make a game-changing acquisition or just continue to make smaller acquisitions. It will continue to spend on R&D in order to expand its markets, and it has a fantastic core business generating piles of cash. These things are what give me confidence that growth at Pason will be picking up. I can’t say when, but in the meantime, the company continues to pile on the cash.

The bottom line

Pason will continue to focus on innovation, increasing product penetration and increasing market share in order to drive revenue growth. This quarter has once again shown that the company continues to make progress on all fronts. Due to Pason’s continued emphasis on innovation, capital expenditure is expected to increase again in the next 12 months to $125 million. With a healthy balance sheet and strong cash flow generation, Pason is more than able to continue with investing in new and improved products, as well as to continue to reward shareholders with increasing dividend payments.

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Fool contributor Karen Thomas has no position in any stocks mentioned. Pason Systems is a recommendation of Stock Advisor Canada.

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