Business Context and Reporting Period
Dawson Geophysical Company provides North American onshore seismic data acquisition services to major and independent oil and gas companies and multi-client data-library providers. This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparative amounts for the three months ended March 31, 2017, as adjusted for the adoption of ASC Topic 606 and a 5% stock dividend.
The company began the quarter with six U.S. crews and four Canadian crews and ended with eight U.S. crews and four Canadian crews. It was operating six U.S. crews at the filing date and expected to operate up to seven U.S. crews through the third quarter of 2018.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $49.9 million | $42.4 million | 17.7% increase |
| Operating expenses | $38.8 million | $40.0 million | 3.0% decrease |
| General and administrative expense | $4.1 million | $4.4 million | 6.2% decrease |
| Depreciation and amortization | $8.7 million | $10.2 million | 14.7% decrease |
| Loss from operations | $(1.6) million | $(12.1) million | Improved by $10.5 million |
| Net loss | $(1.7) million | $(9.2) million | Improved by $7.4 million |
| Loss per share | $(0.07) | $(0.40) | Improved |
| EBITDA, non-GAAP | $7.0 million | $(1.9) million | Improved by $8.8 million |
| Net cash from operating activities | $0.8 million | $(6.7) million | Improved by $7.5 million |
Revenue growth was attributed primarily to increased crew count and utilization. Operating expenses declined mainly because of lower reimbursable third-party charges. G&A expense declined following continued cost-cutting measures. Total operating costs decreased 5.5% to $51.5 million.
Operating margin improved to approximately negative 3.3% from negative 28.7% in the prior-year quarter. G&A expense represented 8.2% of revenue versus 10.3% in the prior-year period. The filing does not present a GAAP gross margin.
At March 31, 2018, cash and cash equivalents were $17.6 million, short-term investments were $17.6 million, and total current assets were $85.9 million. Current liabilities were $25.2 million, producing a current ratio of approximately 3.4:1. Total assets were $170.1 million and stockholders’ equity was $139.5 million.
Net cash used in investing activities was $4.4 million, including $4.1 million of capital expenditures and net purchases of short-term investments. Net cash used in financing activities was $0.7 million. Cash declined by $4.4 million during the quarter to $17.6 million.
The company had $277,000 of insurance-related notes payable and $7.2 million of capital lease obligations. It had no borrowings under its $20.0 million Veritex Bank credit facility, although availability is subject to borrowing-base limitations. Three letters of credit totaled $2.425 million. The company was in compliance with its credit covenants at March 31, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue increased 17.7%, reflecting higher crew count and utilization.
- Operating loss and net loss narrowed substantially, although the company remained unprofitable on a GAAP basis.
- EBITDA became positive at $7.0 million, compared with negative EBITDA of $1.9 million in Q1 2017.
- Operating cash flow improved from an outflow of $6.7 million to an inflow of $0.8 million.
- Cash declined in Q1 2018 because the prior-year period benefited from a substantially larger net liquidation of short-term investments.
- Depreciation and amortization declined due to several years of reduced capital expenditures.
- The company adopted ASC Topic 606 using the full retrospective method. The adoption materially affected balance-sheet presentation and adjusted prior-period results, but had limited effect on Q1 2017 operating loss and net loss.
- The company adopted ASU 2018-02 and ASU 2017-09 in Q1 2018; neither had a material financial statement impact.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management reported stronger-than-anticipated Canadian winter activity and improved project visibility, but stated that market conditions remained challenging and that project visibility was constrained by uncertainty over the sustainability of higher oil prices and seismic budgets. Management continued a conservative operating approach, cost reductions, in-house service downsizing, and internal restructuring to improve efficiency.
Management cited a moderate increase in demand from 2017 through Q1 2018, improved crew utilization and productivity, and increased proposal activity driven by higher oil prices and customer focus on profitability and production growth. Activity remained below 2015 levels, and early projects outside the Permian and Delaware basins were highly competitive and had not yet been awarded.
Approximately three-quarters of Q1 2018 revenue was generated from turnkey contracts. These contracts can enhance returns from improved productivity but expose the company to weather, downtime, permit, access, and crew-performance risks. The company expects turnkey contracts to remain a high proportion of its business.
The board approved an initial 2018 capital budget of $10.0 million for maintenance capital and recording-channel replacement or expansion. Management reported $4.4 million spent to date, while the cash flow statement reported $4.1 million of capital expenditures for the quarter.
Management believes available cash, short-term investments, operating cash flow, and unused credit capacity will be adequate for current operations and planned 2018 capital expenditures. However, liquidity depends on future operating performance, customer payments, commodity prices, demand, and access to financing.
- Principal business risks include dependence on oil and gas industry spending, commodity-price volatility, contract delays or cancellations, customer concentration and credit risk, reduced utilization, high fixed costs and capital requirements, weather and land-access disruptions, competition, and operational interruptions.
- The allowance for doubtful accounts was $250,000; management noted that this may not cover a default by one large or several smaller customers.
- Pending ordinary-course legal proceedings were not expected to have a material adverse effect, and the company stated it was adequately indemnified and insured.
- The company maintains valuation allowances against significantly all federal, state, and foreign deferred tax assets, so future losses may generate reduced or no tax benefits.
- Foreign-exchange translation produced a $329,000 other comprehensive loss in Q1 2018.
- The company is evaluating lease accounting under ASC Topic 842, which management expects will increase reported assets and liabilities for operating leases.
- A 5% stock dividend was approved May 1, 2018, payable May 29, 2018. Historical share and per-share amounts in the filing were adjusted for the dividend.
Investor Verification Items
- Verify whether higher crew utilization, oil prices, and proposal activity translate into sustained contract awards and revenue growth.
- Assess the company’s ability to achieve GAAP profitability rather than relying solely on positive EBITDA.
- Monitor accounts receivable growth, customer collections, deferred revenue, and the adequacy of the $250,000 doubtful-account allowance.
- Confirm capital spending against the $10.0 million 2018 budget and evaluate related effects on cash and equipment capacity.
- Review the June 30, 2018 expiration and borrowing-base limitations of the unused credit facility, including the impact of receivable or equipment-value declines.
- Evaluate the effect of capital lease payments and future operating-lease recognition on liquidity and leverage.
- Track exposure to oil and natural gas prices, customer concentration, contract cancellations, weather, permits, land access, and turnkey-contract execution.
- Confirm the retrospective effects of ASC Topic 606 and the per-share adjustments associated with the 5% stock dividend.