Dawson Geophysical Company — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2015. Dawson Geophysical provides onshore 2-D, 3-D and multi-component seismic data acquisition and processing services to oil and gas companies and multi-client data-library providers.
Comparability: The February 11, 2015 merger with Legacy TGC was accounted for as a reverse acquisition, with Legacy Dawson as the accounting acquirer. The 2015 nine-month results include Legacy Dawson through February 11 and the merged company thereafter; therefore, 2015 and 2014 results are not directly comparable. The merger also changed the fiscal year-end from September 30 to December 31.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Operating revenues | $62.5 million | $62.6 million | $179.6 million | $193.5 million |
| Loss from operations | $(4.7) million | $(6.5) million | $(32.5) million | $(12.9) million |
| Net loss | $(2.9) million | $(3.9) million | $(21.3) million | $(9.7) million |
| Loss per diluted share | $(0.13) | $(0.28) | $(1.05) | $(0.70) |
| Net cash from operating activities | Not separately provided | Not separately provided | $17.9 million | $32.2 million |
| EBITDA | $7.8 million | $3.7 million | $3.5 million | $17.9 million |
Margins: Q3 2015 operating margin was approximately negative 7.5% and net margin was approximately negative 4.6%. For the first nine months, operating margin was approximately negative 18.1% and net margin was approximately negative 11.9%. EBITDA margin was approximately 12.5% in Q3 and 2.0% for the first nine months.
- Q3 operating expenses declined 8.0% to $50.2 million, primarily because of lower reimbursed third-party charges. General and administrative expense increased 6.1% to $5.0 million, while depreciation and amortization increased 21.3% to $12.0 million.
- Nine-month general and administrative expense increased to $18.1 million from $11.9 million, including approximately $2.9 million of merger-related costs and $1.2 million of severance and compensation costs.
- Cash and cash equivalents were $39.0 million at September 30, 2015, compared with $14.6 million at December 31, 2014. Short-term investments were $19.3 million, compared with $28.8 million at year-end.
- Total current assets were $103.6 million versus current liabilities of $31.0 million, implying a current ratio of approximately 3.3x.
- Net property, plant and equipment was $154.1 million. Total assets were $260.3 million and stockholders’ equity was $214.8 million.
- Commercial bank notes had aggregate principal of $10.6 million, and capital lease obligations were $1.6 million. Total notes payable and capital lease obligations reported on the balance sheet were $12.2 million, excluding the separate presentation of current and long-term portions.
Material Changes Versus the Prior Comparable Period
- Q3 revenue was essentially flat year over year, but nine-month revenue declined 7.2%, primarily due to reduced crew utilization, lower client spending and weaker commodity prices.
- Nine-month net loss more than doubled to $21.3 million from $9.7 million, and EBITDA declined to $3.5 million from $17.9 million.
- Operating cash flow fell $14.3 million, or approximately 44%, to $17.9 million, reflecting lower revenue and limited reduction in overall operating expenses.
- Depreciation and amortization increased because of additional assets acquired in the merger.
- The Company completed a workforce reduction of approximately 30% after the merger and expects related savings primarily in operating expenses.
- Capital expenditures were $5.1 million through September 30, and management expects full-year 2015 capital expenditures to be below the approved $10.0 million budget.
- On June 30, 2015, the Company terminated the Legacy Dawson credit facilities and entered into an amended Existing Credit Agreement. The agreement provides a revolving line of credit of up to the lesser of $20.0 million or 80% of eligible accounts receivable, less the New Term Loan balance. The facility was undrawn at September 30, 2015.
- No dividend was declared in 2015. Management stated that dividends would not be paid for the foreseeable future, subject to future Board discretion.
Outlook, Commentary, Risks and Unusual Items
- Management expects to operate approximately eight to ten U.S. data acquisition crews during the fourth quarter of 2015 and through the latter part of the first quarter of 2016, with limited Canadian activity.
- Demand was described as reduced and expected to remain depressed through 2015 and into 2016 because of uncertain commodity prices and lower exploration and production spending.
- Client-directed delays, severe weather, flooding, weaker Canadian activity and reduced utilization negatively affected results. Improved weather and operational discipline partially offset these effects in other operating areas.
- Approximately three-quarters of revenue was generated from turnkey contracts. These contracts may benefit productivity but expose the Company to weather, downtime and utilization risk.
- On May 25, 2015, flooding destroyed equipment with a net book value of approximately $593,000. The Company believes insurance coverage is adequate.
- The Company recorded a preliminary $750,000 accrual for contingencies related to certain tax matters in connection with the merger. The merger purchase price allocation remained preliminary and could be materially adjusted.
- Management does not currently anticipate impairment of long-lived assets, but sustained or further declines in oil and gas prices could result in material impairment charges and possible tax valuation allowances.
- Merger-related shareholder demands and litigation were reviewed by a Special Litigation Committee, which rejected the claims in July 2015. The related lawsuit had been dismissed without prejudice. Management does not expect pending legal matters to materially affect financial condition, results or liquidity.
- Key risks include dependence on energy-industry spending, oil and gas price volatility, high fixed operating costs, customer concentration and credit risk, contract cancellations or delays, weather and operational disruptions, competition, foreign exchange exposure and access to capital.
- Management believes cash, short-term investments, operating cash flow and available borrowing capacity are adequate for current operational needs and planned 2015 capital expenditures, but future liquidity depends materially on operating performance and customer payment behavior.
Investor Verification Items
- Reconcile reported 2015 results with pro forma merger results because the reported periods contain different legacy-company populations.
- Monitor crew utilization, active crew counts, turnkey contract pricing and customer-directed delays as leading indicators of revenue and margin recovery.
- Verify compliance with the Existing Credit Agreement’s financial covenants and the availability of the revolving credit facility.
- Assess whether cash balances and operating cash flow can support scheduled debt, capital lease and operating lease payments amid continued losses.
- Review the final merger purchase price allocation, including fair values, deferred taxes and any potential measurement-period adjustments.
- Evaluate potential impairment charges, tax valuation allowances and insurance recoveries related to equipment losses.
- Track the reinstatement or continued suspension of dividends and the effect of merger-related and workforce-reduction costs on future expenses.