Business Context and Reporting Period
Dawson Geophysical Company provides North American onshore seismic data acquisition and processing services to major and independent oil and gas companies and multi-client data-library providers. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Operating revenue | $37.0 million | $40.4 million | $112.2 million | $126.5 million |
| Income (loss) from operations | $1.9 million | $(5.2) million | $(10.0) million | $(13.2) million |
| Net income (loss) | $2.0 million | $(5.2) million | $(9.4) million | $(12.6) million |
| EPS, basic and diluted | $0.09 | $(0.23) | $(0.41) | $(0.55) |
| Net cash from operating activities | Not separately provided for the quarter | $1.2 million | $12.8 million |
Q3 operating margin was approximately 5.2%, compared with negative 12.9% in Q3 2018. The nine-month operating margin was approximately negative 8.9%, compared with negative 10.4% in the prior-year period. Q3 EBITDA, a non-GAAP measure, was $7.2 million versus $1.7 million; nine-month EBITDA was $7.0 million versus $10.2 million.
At September 30, 2019, cash and cash equivalents were $14.7 million, restricted cash was $5.0 million, and short-term investments were $7.4 million. Cash, cash equivalents and restricted cash totaled $19.7 million, compared with $28.7 million at December 31, 2018. Cash and short-term investments totaled $27.1 million.
Total assets were $140.2 million and stockholders’ equity was $108.6 million. Accounts receivable increased to $36.0 million from $25.3 million at year-end, while deferred revenue declined to $8.0 million from $10.5 million.
Commercial-bank debt was eliminated during the period. Remaining notes payable totaled $0.1 million, and finance lease liabilities totaled $3.1 million. Operating lease liabilities totaled $7.4 million following adoption of the new lease standard. The company had no borrowings under its new revolving credit facility at September 30, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue declined 8.6% in Q3 and 11.3% for the first nine months, primarily because of lower reimbursable revenue and lower crew and equipment utilization during the first half of 2019.
- Operating expenses declined 24.4% in Q3 and 11.7% for the first nine months, reflecting lower reimbursable expenses and improved operating efficiencies.
- Q3 results improved substantially, with a return to operating and net profitability, aided by cost reductions, higher recording-channel and energy-source utilization, larger crews, and favorable weather.
- Nine-month general and administrative expense increased 11.0% to $13.4 million, primarily because of severance and retirement costs related to headcount reductions and executive retirements. Q3 general and administrative expense declined 8.2%.
- Depreciation and amortization declined to $5.2 million in Q3 and $16.6 million for the first nine months, reflecting several years of reduced capital expenditures.
- Operating cash flow fell to $1.2 million from $12.8 million, principally because accounts receivable increased by $10.5 million.
- Capital expenditures were $3.6 million on the cash flow statement; management reported $2.8 million of 2019 capital budget usage, primarily for maintenance, equipment additions, replacement and refurbishment.
- Financing activities used $10.2 million, including $7.9 million of principal payments on notes payable and $2.1 million of finance-lease payments.
Guidance, Outlook, Risks and Unusual Items
- Management anticipated operating up to five U.S. crews in Q4 2019, with limited Canadian activity, and expected activity levels could be sustained into Q2 2020 in the U.S. Management was operating five U.S. crews and one small Canadian crew at the time of filing.
- Management described 2020 visibility as improved, with expected high channel and energy-source utilization in the U.S. during Q1 and Q2 2020 and up to four Canadian crews during the Canadian season, while noting that expected utilization would be below Q3 levels.
- The seismic market and oil and gas sector remained challenging. Key risks include oil and natural gas price volatility, energy-company spending, project delays or cancellations, customer concentration and credit risk, crew utilization, weather, permitting and land access, competition, high fixed costs, capital requirements and equipment availability.
- On September 30, 2019, the company entered into a Dominion Bank revolving facility of up to $15.0 million, subject to borrowing-base limitations. The facility bears interest at the lesser of 6.0% and the greater of prime or 3.5%, matures September 30, 2020, and requires compliance with financial covenants, including $75.0 million of tangible net worth. A $5.0 million restricted deposit supports the facility.
- The company paid $4.4 million to retire the Veritex term loan. Three Veritex letters of credit totaling $2.4 million remained outstanding and were secured by certificates of deposit.
- The company is defending a Weatherford groundwater-contamination lawsuit seeking recovery and contribution for past and future remediation costs. Management believes the matter will not have a material adverse effect, but the outcome cannot be predicted with certainty.
- The company adopted ASC 842 lease accounting prospectively on January 1, 2019, recognizing a $6.9 million operating lease right-of-use asset and $7.4 million of operating lease liabilities at September 30, 2019. The adoption did not materially affect results of operations or cash flows.
- Substantially all federal, state and foreign deferred tax assets remain subject to valuation allowances. The filing reports no material subsequent events and no material changes to the risk factors in the 2018 Form 10-K.
Investor Verification Priorities
- Verify whether the anticipated U.S. and Canadian crew activity and utilization levels were achieved after September 30, 2019.
- Monitor collections of the increased accounts receivable balance and the effect on operating cash flow and liquidity.
- Review compliance with the Dominion facility’s tangible-net-worth, liquidity and leverage covenants through its September 30, 2020 maturity.
- Assess customer concentration, project cancellations, pricing, reimbursable activity and exposure to oil and gas capital-spending trends.
- Evaluate the financial impact and developments in the Weatherford environmental litigation and other client contractual disputes.
- Confirm the company’s ability to fund maintenance capital expenditures, finance-lease maturities and operating-lease obligations from operations and available liquidity.
- Reconcile the filing’s statement that disclosure controls were effective “as of June 30, 2019” with the September 30, 2019 reporting period.