Pason Systems, Inc. :PSI-CA: Earnings Analysis: Q1, 2016 By the Numbers : June 1, 2016

Pason Systems, Inc. reports financial results for the quarter ended March 31, 2016.

We analyze the earnings along side the following peers of Pason Systems, Inc. – Canadian Energy Services & Technology Corp., Hyduke Energy Services Inc. and Trinidad Drilling Ltd. (CEU-CA, HYD-CA and TDG-CA) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of CAD 45.81 million, Net Earnings of CAD -10.86 million.
  • Gross margins narrowed from 40.43% to 12.40% compared to the same period last year, operating (EBITDA) margins now 17.03% from 44.52%.
  • Year-on-year change in operating cash flow of -84.16% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-03-31 2015-06-30 2015-09-30 2015-12-31 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 99.4 57.44 68.47 59.84 45.81
Revenue Growth (%YOY) -19.3 -44.69 -48.92 -56.7 -53.91
Earnings (mil) 14.19 -9.4 -18.56 -0.84 -10.86
Earnings Growth (%YOY) -31.84 -153.41 -170.12 -101.78 -176.53
Net Margin (%) 14.28 -16.37 -27.1 -1.41 -23.71
EPS 0.17 -0.11 -0.22 -0.01 -0.13
Return on Equity (%) 11.33 -7.38 -14.87 -0.68 -9.34
Return on Assets (%) 9.77 -6.59 -13.61 -0.63 -8.58

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Market Share Versus Profits

Revenues History
Earnings History

PSI-CA‘s change in revenue this period compared to the same period last year of -53.91% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that PSI-CA is holding onto its market share. Also, for comparison purposes, revenues changed by -23.44% and earnings by -1,191.32% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 40.43% to 12.40%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went from 44.52% to 17.03% in this time frame. For comparison, gross margins were 26.45% and EBITDA margins were 30.08% in the previous period.

Gross Margin Versus EBITDA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

PSI-CA‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 456.37 days, compared to last year’s level of 202.79 days.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

PSI-CA‘s change in operating cash flow of -84.16% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 22.66% to -18.69% and (2) one-time items that contributed to a decrease in pretax margins from 26.63% to -38.59%

EBIT Margin Versus PreTax Margin
EBIT Margin History
PreTax Margin History

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Company Profile

Pason Systems, Inc. provides instrumentation systems to land-based and offshore rigs. The company also engages in the designing, manufacturing and rental of specialized drilling instrumentation systems for use on land-based drilling rigs. It offers data management systems, rental solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, enable collaboration between the rig and the office. Pason Systems was founded by Wayne Parks and Ron Mason in February 3, 1978 and is headquartered in Calgary, Canada.

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