Business Context and Reporting Period
This Form 10-Q covers TGC Industries, Inc. and its wholly owned subsidiary for the quarter and six months ended June 30, 2014. The company provides 3-D seismic data acquisition services to oil and natural gas companies in the continental United States and Canada. The request metadata identifies Dawson Geophysical Co., but the filing text identifies the registrant as TGC Industries, Inc.; this discrepancy should be verified.
TGC operated four U.S. crews throughout the second quarter. Canadian operations declined from four crews at the beginning of the quarter to two by mid-April and none thereafter because of seasonal thawing conditions.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $18.2 million | $31.5 million | $67.0 million | $94.7 million |
| Income (loss) from operations | $(6.4) million | $(5.6) million | $0.8 million | $5.3 million |
| Net income (loss) | $(4.0) million | $(4.0) million | $0.2 million | $2.3 million |
| Basic and diluted EPS | $(0.18) | $(0.18) | $0.01 | $0.11 |
| EBITDA | $(1.6) million | $0.7 million | $10.7 million | $18.3 million |
| Cash flow from operations | Not separately presented | Not separately presented | $21.3 million | $23.1 million |
- Six-month revenue decreased 29.2%; second-quarter revenue decreased approximately 42% based on reported amounts.
- Six-month cost of services was 76.9% of revenue versus 75.5% in the prior-year period. Second-quarter cost of services was 96.8% versus 89.8%.
- Six-month operating margin declined to approximately 1.1% from 5.6%. Second-quarter operating margin was approximately negative 35.3% versus negative 17.8%.
- Depreciation and amortization was $9.9 million for the six months, down 23.9%, reflecting the maintenance capital expenditure program.
- Interest expense declined 43.1% for the six months to $0.4 million, primarily because three equipment notes were repaid in 2013.
- Cash and cash equivalents were $30.5 million at June 30, 2014, versus $16.1 million at December 31, 2013. Working capital was $22.3 million.
- At June 30, 2014, notes payable totaled approximately $12.5 million, including $9.3 million classified as current. Capital lease obligations totaled approximately $1.6 million, including $1.1 million current.
- The company had no borrowings under its $5.0 million revolving credit facility, which was scheduled to expire on September 16, 2014; management intended to renew it.
Cash Flow, Capital Spending, and Balance Sheet Changes
- Operating cash flow was $21.3 million, supported in part by increased accounts payable and billings in excess of costs and estimated earnings on uncompleted contracts.
- Investing cash flow was $(0.8) million, including $1.1 million of capital expenditures and $0.3 million of proceeds from equipment sales.
- Financing cash flow was $(6.3) million, primarily reflecting $5.5 million of principal payments on notes payable and $0.8 million of capital lease payments.
- Accounts receivable increased to $22.2 million from $10.7 million at year-end 2013. Trade accounts payable increased to $15.4 million from $4.1 million.
- Billings in excess of costs and estimated earnings on uncompleted contracts increased to $7.7 million from $0.7 million at December 31, 2013.
- The company acquired $1.1 million of vehicles and equipment during the first six months. It stated that additional equipment could be purchased if demand increased.
Material Changes, Outlook, Risks, and Unusual Items
- Management attributed the revenue decline to a softening seismic market, fewer operating crews, and adverse winter weather in parts of the United States and Canada.
- The company continued its maintenance capital expenditure policy, reducing equipment purchases and related depreciation while limiting operating capacity.
- No formal financial guidance was provided. Management stated that current forecasts indicated sufficient cash and borrowing capacity to fund working capital needs for the next 12 months.
- Management cautioned that interim results are not necessarily indicative of full-year results because Canadian operations are seasonal.
- Key risks include dependence on energy-industry spending, oil and natural gas price fluctuations, economic conditions, weather, contract delays or cancellations, customer payment performance, competition, and availability of capital resources.
- In August 2014, after the reporting date, the company agreed to purchase certain wireless recording equipment; the filing does not provide a purchase price.
- The company adopted ASU 2013-11 without a significant effect and plans to adopt the new revenue standard, ASU 2014-09, on January 1, 2017. The adoption method and financial impact had not been determined.
- No material changes to critical accounting policies, market-risk disclosures, or previously reported risk factors were identified. The company reported no off-balance-sheet arrangements and stated that pending legal actions were not expected to result in significant loss.
Investor Verification Items
- Verify the registrant identity, since the filing is for TGC Industries, Inc., while the request metadata names Dawson Geophysical Co.
- Assess whether the sharp decline in crew count and revenue reflects temporary seasonal conditions or a sustained weakening in seismic demand.
- Review receivable growth, contract billings, and payable increases to determine the sustainability and quality of operating cash flow.
- Confirm renewal terms and availability under the $5.0 million revolving credit facility before its September 16, 2014 expiration.
- Evaluate debt maturities, equipment replacement needs, and the potential cost of the post-period wireless recording equipment purchase.
- Consider the sensitivity of future results to oil and gas capital spending, commodity prices, weather, and contract cancellations.