Business Context and Reporting Period
This Form 10-Q covers the quarter ended March 31, 2012, and was filed May 10, 2012. The filing identifies the registrant as TGC Industries, Inc.; the request metadata identifies Dawson Geophysical Co., so the registrant name should be verified. TGC provides 3-D seismic data acquisition services to oil and gas exploration and production companies in the United States and Canada. It operated eight U.S. crews and seven Canadian crews during the quarter.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $67.0 million | $50.2 million | Up 33.4% |
| Income from operations | $20.5 million | $9.0 million | Up 127.2% |
| Net income | $12.4 million | $5.8 million | Up 114.9% |
| Basic diluted EPS | $0.61 | $0.29 | Up $0.32 |
| EBITDA | $26.2 million | $13.5 million | Up 94.4% |
| Net cash from operating activities | $(0.4) million | $9.1 million | Declined $9.5 million |
Revenue increased primarily from improved North American land seismic demand, increased wireless recording technology efficiency, seasonal Canadian strength, and two additional operating crews. Cost of services was $38.5 million, or 57.5% of revenue, versus 68.2% previously. SG&A was $2.3 million, or 3.4% of revenue, versus 5.0%. Income from operations margin was approximately 30.5%, compared with 17.9%; net margin was approximately 18.5%, compared with 11.5%; and EBITDA margin was approximately 39.1%, compared with 26.8%.
Cash and cash equivalents were $10.7 million at March 31, 2012, down from $15.7 million at December 31, 2011. Working capital was $24.9 million, up from $19.9 million. Trade receivables increased to $54.4 million from $19.4 million, contributing to negative operating cash flow. Capital expenditures were $2.8 million in cash, while total vehicles and equipment purchased were $11.4 million, financed with cash, a $7.7 million bank note, and $0.9 million of capital lease obligations.
Outstanding commercial bank equipment notes totaled $16.2 million, equipment-finance notes $0.5 million, and insurance-financing notes $0.3 million. Capital lease obligations totaled approximately $3.5 million. The company had no borrowings under its $5.0 million secured revolving credit facility, which expires September 16, 2012. Management stated that available cash and borrowing capacity should fund working capital needs for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue rose 33.4%, supported by additional crews, market improvement, technology efficiencies, and Canadian seasonality.
- Cost of services grew 12.5%, substantially slower than revenue, producing a significant margin improvement.
- SG&A declined 8.0%, partly because 2011 included merger-related costs.
- Depreciation and amortization increased 28.2% because of additions to seismic recording equipment, vibration vehicles, and other equipment.
- Interest expense increased 27.0% due primarily to equipment purchases.
- The effective tax rate increased to approximately 39% from approximately 35%.
- Operating cash flow shifted from $9.1 million provided to $0.4 million used, primarily because of the increase in trade accounts receivable and timing of billings and collections.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
No specific revenue or earnings guidance was provided. Management expects sufficient liquidity for the next 12 months and stated that 2012 capital expenditures may increase if demand rises. The company expects limited Canadian activity for the two quarters beginning in the second quarter because of the seasonal thaw.
On April 9, 2012, the company announced an agreement to purchase 13,000 additional GSR single-channel data acquisition units and related equipment for $14 million, expected to be delivered by the end of May 2012 and financed with cash and debt. On April 24, 2012, it entered into a $2.7 million insurance-financing note at 4.95%.
Principal risks include dependence on energy-company exploration spending, oil and natural gas price fluctuations, weather and seasonality, contract delays or cancellations, customer payment risk, access to capital, and intense competition. The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and no legal proceedings expected to result in a significant loss. The Dawson merger agreement disclosed in 2011 was terminated on October 27, 2011 after the parties failed to agree on a revised exchange ratio and the required shareholder approval was not obtained.
A five-percent stock dividend was declared April 20, 2012, payable May 14, 2012, to shareholders of record April 30, 2012. The financial statements are unaudited and interim results are not necessarily indicative of full-year results.
Important Facts for Investors to Verify
- Confirm the issuer identity, because the filing is for TGC Industries, Inc., while the request identifies Dawson Geophysical Co.
- Assess whether the sharp increase in receivables and negative operating cash flow reflects timing or emerging collection risk.
- Review financing terms and liquidity after the planned $14 million equipment purchase and the subsequent $2.7 million insurance note.
- Evaluate the sustainability of unusually strong operating margins and EBITDA growth amid seasonal Canadian weakness.
- Confirm the effect of the five-percent stock dividend on reported share counts and per-share metrics.
- Review exposure to oil and gas spending, commodity prices, weather, contract cancellations, customer credit, and competitive pressures.