Business Context and Reporting Period
The submitted Form 10-Q is for TGC Industries, Inc., not Dawson Geophysical Co. It covers the quarter and nine months ended September 30, 2012, with unaudited interim financial statements. TGC provides 3-D seismic data acquisition services to oil and gas companies in the continental United States and Canada. The company operated nine U.S. crews and an average of one and one-half Canadian crews during the third quarter.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $41.8 million, up 34.9% | $139.3 million, up 24.9% |
| Income from operations | $2.1 million | $19.7 million |
| Net income | $1.1 million | $11.5 million |
| Diluted EPS | $0.05 | $0.55 |
| EBITDA | $8.8 million, up 28.1% | $38.3 million, up 45.5% |
- Nine-month operating margin was approximately 14.2%, compared with 10.9% in the prior-year period; net margin was approximately 8.3%, compared with 6.6%.
- Third-quarter operating margin was approximately 5.0% and net margin approximately 2.7%. Cost of services increased to 73.9% of revenue from 70.0%, reflecting additional crews and Canadian ramp-up costs.
- Nine-month cash flow from operations was $36.6 million, compared with $30.0 million. Investing cash outflow was $22.0 million, including $23.7 million of cash capital expenditures. Financing cash outflow was $9.0 million.
- Cash and cash equivalents were $21.5 million at September 30, 2012, versus $15.7 million at December 31, 2011. Working capital was $16.2 million, down from $19.9 million.
- Total notes payable were approximately $21.3 million, including $9.4 million current and $12.0 million long term. Capital lease obligations totaled approximately $3.7 million. The $5.0 million revolving credit facility had no borrowings outstanding and expires September 16, 2013.
- Total assets increased to $135.6 million from $99.9 million, primarily reflecting equipment investment. Shareholders’ equity was $77.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased $27.8 million for the first nine months, driven by improved North American land seismic activity, greater wireless-technology efficiency, a strong first quarter, and additional crews.
- Cost of services rose 21.2%, below the 24.9% revenue increase, improving the nine-month cost ratio to 67.8% from 69.9%.
- SG&A declined 10.1% because the prior-year period included $1.7 million of costs related to a terminated merger transaction. SG&A as a percentage of revenue improved to 4.7% from 6.5%.
- Depreciation and amortization increased 30.8% to $18.6 million, reflecting significant equipment additions. Nine-month capital expenditures were approximately $41.0 million, versus $20.9 million of cash capital expenditures reported in the cash flow statement because a substantial portion was financed.
- Interest expense increased 51.8% for the nine months and 82.0% for the quarter due to equipment-financing notes.
- Other comprehensive income included a $1.5 million foreign-currency translation gain for the nine months, compared with a $1.2 million loss in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected Canadian seismic activity to increase during the fourth quarter of 2012 and the following quarter after seasonally weak second- and third-quarter activity.
- Management stated that current cash and borrowing capacity were expected to fund working-capital needs for the next 12 months, but future liquidity depends on operating performance, customer payments, and access to financing.
- On October 15, 2012, the company agreed to purchase 8,000 three-channel GSX wireless seismic recording stations and related equipment. Substantially all equipment was delivered in October and financed with a new $7.0 million, 36-month note and approximately $7.2 million of existing cash.
- Key risks include dependence on energy-industry spending, oil and natural-gas price volatility, weather, contract delays or cancellations, customer credit and payment risk, capital availability, competition, and the weak economic recovery.
- The company reported no off-balance-sheet arrangements, no material changes to previously disclosed risk factors, and no significant expected loss from pending legal proceedings. Results are seasonal and interim results are not necessarily indicative of full-year performance.
- A 5% stock dividend was paid in May 2012; per-share amounts were adjusted accordingly. No cash dividend was declared other than $1,150 paid in lieu of fractional shares.
Investor Verification Items
- Verify the issuer identity: the provided filing identifies TGC Industries, Inc., while the request identifies Dawson Geophysical Co.
- Reconcile the approximately $41.0 million of equipment acquired with the $23.7 million of cash capital expenditures and related notes and lease obligations.
- Assess the effect of the October 2012 $14.2 million GSX equipment purchase on leverage, cash, depreciation, and future Canadian capacity.
- Monitor third-quarter margin compression, Canadian ramp-up costs, crew utilization, and the sustainability of increased U.S. seismic activity.
- Review receivables, contract billings, customer concentration, and collection timing because accounts receivable increased to $27.8 million from $19.4 million at year-end.
- Confirm debt maturities, equipment collateral, interest rates, and compliance with the revolving credit agreement and other financing terms.