Filing Summary
Period: Quarterly report on Form 10-Q for the three and nine months ended September 30, 2013, filed November 8, 2013. Entity discrepancy: the supplied filing identifies the registrant as TGC Industries, Inc., not Dawson Geophysical Co.; this should be verified.
Business Context and Reporting Period
TGC Industries and its subsidiary Eagle Canada provide 3-D seismic data acquisition services to oil and natural gas exploration and development companies in the United States and Canada. The business is seasonal and depends heavily on energy-company drilling and exploration budgets, commodity prices, weather, crew availability, and contract timing.
The company began the third quarter with three U.S. crews and ended with five, compared with nine U.S. crews in the third quarter of 2012. Canadian operations began the quarter with three short-term crews and ended with none. Management expected Canadian demand to improve during the fourth quarter of 2013 and the following quarter.
Financial Results and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $21.1 million | $41.8 million | $115.8 million | $139.3 million |
| Income (loss) from operations | $(5.8) million | $2.1 million | $(0.5) million | $19.7 million |
| Net income (loss) | $(4.0) million | $1.1 million | $(1.6) million | $11.5 million |
| Basic EPS | $(0.18) | $0.05 | $(0.07) | $0.54 |
| EBITDA | $0.2 million | $8.8 million | $18.6 million | $38.3 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $23.9 million | $36.6 million |
Revenue declined 49.5% in the quarter and 16.8% for the nine-month period. Nine-month cost of services fell 4.7%, but increased to 77.7% of revenue from 67.8%; third-quarter cost of services increased to 87.6% of revenue from 73.9%. SG&A increased 11.4% for the nine months and represented 6.2% of revenue versus 4.7% previously. Depreciation and amortization represented 16.5% of nine-month revenue versus 13.3% in the prior period.
Q3 2013 operating margin was approximately negative 27.6%, compared with approximately 5.0% in Q3 2012. Nine-month operating margin was approximately negative 0.5%, compared with approximately 14.2% in the prior-year period. EBITDA margin was approximately 1.1% for Q3 and 16.7% for the nine-month period; corresponding prior-year margins were approximately 21.0% and 27.5%.
Liquidity, Balance Sheet, and Debt
- Cash and cash equivalents were $21.3 million at September 30, 2013, up from $8.6 million at December 31, 2012.
- Working capital was $19.7 million, compared with $12.2 million at year-end 2012.
- Total debt consisted of $18.2 million of notes payable and $2.6 million of capital lease obligations, including current and long-term portions.
- The company had no borrowings under its $5.0 million revolving credit facility, which was renewed through September 16, 2014 and secured by accounts receivable.
- Capital expenditures were $1.3 million in the first nine months, while total vehicle and equipment acquisitions were $1.6 million; the company incurred $0.4 million of capital lease obligations.
- Total assets declined to $109.6 million from $142.0 million at December 31, 2012, largely reflecting lower receivables and net property and equipment.
Material Changes Versus Prior Comparable Period
- Softening seismic-market demand led to fewer operating crews, lower revenue, idling costs, and a shift toward shot-hole work, which management described as higher-revenue but lower-margin than vibroseis work.
- The company moved from operating profitability to an operating loss and net loss in both the quarter and nine-month period.
- Nine-month EBITDA decreased 51.5%, from $38.3 million to $18.6 million; third-quarter EBITDA decreased 97.4%, from $8.8 million to $0.2 million.
- Operating cash flow remained positive but decreased 34.6% year over year, primarily because of lower earnings and changes in payables, accrued liabilities, contract billings, and taxes, partly offset by improved collections of accounts receivable.
- Capital spending declined substantially from the prior year as the company followed a maintenance-capital-expenditure policy implemented in late 2012.
- The company paid down approximately $9.9 million of notes payable and $1.6 million of capital lease obligations during the nine months. Two equipment notes were repaid in February and September 2013.
- A five percent stock dividend was paid in May 2013. Management stated that cash dividends may not be paid in the foreseeable future.
Outlook, Risks, Contingencies, and Unusual Items
Management believed available cash, operating cash flow, and borrowing capacity were sufficient to fund working-capital needs for the next 12 months. Additional equipment purchases during 2013 were possible if demand improved. No formal revenue or earnings guidance was provided.
- Key risks include dependence on oil and natural gas industry spending, commodity-price fluctuations, weather, contract delays or cancellations, competition, customer payment delays, and access to capital.
- Seasonality is significant, particularly in Canada; management expected Canadian demand to increase beginning in the fourth quarter of 2013.
- Legal proceedings arose in the ordinary course of business, but management did not expect any significant loss.
- The company reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors or critical accounting policies.
- Foreign-currency translation produced a $2.1 million loss for the nine months, reducing accumulated other comprehensive income to a $1.3 million loss at September 30, 2013.
- Income tax benefit in the third quarter was $2.2 million, while the nine-month period included $0.2 million of tax expense; the nine-month tax expense was attributed primarily to permanent tax differences.
Investor Verification Checklist
- Confirm whether this filing belongs to TGC Industries or Dawson Geophysical Co.; the filing text names TGC Industries, Inc. throughout.
- Verify the sharp decline in crew count, revenue, operating margin, and EBITDA and determine whether demand recovered after September 30, 2013.
- Assess the sustainability of positive operating cash flow given the period’s large working-capital contribution from accounts receivable collections.
- Review debt maturities, equipment collateral, the revolving-credit renewal, and available borrowing capacity.
- Evaluate exposure to shot-hole work, idle-crew costs, Canadian seasonality, commodity prices, weather, and contract cancellations.
- Reconcile the reported EBITDA measure with GAAP operating income, net income, and operating cash flow; EBITDA is non-GAAP and may not be comparable with other companies.