DAWSON GEOPHYSICAL CO annual report, FY2016

Dawson Geophysical Company — FY2016 Form 10-K Summary

Business Context and Reporting Period

Dawson Geophysical provides onshore seismic data acquisition and processing services in the continental United States and Canada. Its customers include major and independent oil and gas companies and multi-client data-library providers. The filing covers the fiscal year ended December 31, 2016, with quarterly information for the three months ended December 31, 2016. Comparisons with 2015 are affected by the 2015 merger and related changes in the fiscal year and reporting structure.

At December 31, 2016, the Company operated seven crews: three in the U.S. and four in Canada.
The Company owned equipment for 22 land-based crews, approximately 260,000 recording channels, 201 vibrator energy-source units and 22 central recording systems.
One customer represented approximately 13% of 2016 revenue.

Financial Performance and Key Metrics

Metric	FY2016	FY2015	Change
Operating revenue	$133.3 million	$234.7 million	Down 43.2%
Loss from operations	$(49.4) million	$(40.7) million	Worsened by $8.8 million
Net loss	$(39.8) million	$(26.3) million	Worsened by $13.5 million
Basic and diluted loss per share	$(1.84)	$(1.27)	Worsened by $0.57
EBITDA	$(2.0) million	$7.5 million	Declined by $9.5 million
Cash flow from operations	$8.7 million	$20.6 million	Down $11.9 million

Approximate operating margin was negative 37.1%, compared with negative 17.3% in 2015; net margin was negative 29.9%, compared with negative 11.2%.
U.S. revenue was $122.5 million and Canadian revenue was $10.8 million. U.S. revenue declined substantially from $222.2 million in 2015, while Canadian revenue declined from $12.5 million.
Operating expenses decreased to $121.7 million from $205.6 million, but the reduction did not offset the decline in revenue. General and administrative expense decreased to $16.8 million from $22.7 million, partly because 2015 included approximately $3.3 million of merger costs.
Depreciation and amortization was $44.3 million, compared with $47.1 million. Management expects depreciation to remain approximately flat during 2017.
The income tax benefit was $6.4 million, compared with $13.8 million in 2015. The effective tax benefit rate declined to approximately 13.9% from 34.4%, primarily because of increased valuation allowances against deferred tax assets.

Liquidity, Capital Resources and Debt

Cash and cash equivalents were $14.6 million, and short-term investments were $40.3 million at December 31, 2016. Total current assets were $75.7 million versus current liabilities of $15.0 million.
Net cash decreased by $22.4 million during 2016, primarily reflecting $22.7 million used in investing activities and $8.5 million used in financing activities.
Cash capital expenditures were $8.3 million; total capital expenditures were $9.8 million. The Company maintained a maintenance-focused capital spending program and approved an initial 2017 capital expenditure budget of $10.0 million.
Outstanding commercial-bank notes totaled $1.9 million, and capital lease obligations totaled $0.4 million. The Company had no outstanding borrowings under its revolving line of credit.
The revolving credit facility permits borrowings of up to $20.0 million, subject to borrowing-base limitations, and was scheduled to mature on June 30, 2017. The Company was in compliance with all credit-facility covenants at year-end.
Contractual obligations totaled approximately $11.9 million, including $9.6 million of operating lease obligations, $0.4 million of capital lease obligations and $1.9 million of debt obligations.

Material Changes Versus the Prior Comparable Period

Revenue fell sharply because of lower crew utilization, reduced client spending, uncertain commodity prices, lower pricing and project delays.
Severe weather delayed projects during the first and second quarters, while client-directed delays affected two to three crews during the third and fourth quarters.
Cash from operations declined, although collections from a $19.7 million reduction in accounts receivable provided significant operating cash flow. Management stated that a similar benefit is unlikely in 2017.
Debt and capital lease balances declined materially following principal repayments and the payoff of an insurance-premium financing note.
The Company recorded no impairment charges for equipment or intangible assets in 2016 or 2015, but continued to identify impairment as a material accounting risk given industry conditions.
The Company did not pay dividends in 2016 or 2015 and does not expect to pay dividends for the foreseeable future.

Outlook, Commentary, Risks and Unusual Items

Management expected demand to remain depressed into 2017. It anticipated operating four to six crews in the U.S. and Canada through the first quarter of 2017, but stated that visibility beyond that period was limited.
The principal business risks are continued dependence on oil and gas spending, commodity-price volatility, customer cancellations or delays, customer credit risk, high fixed operating costs, competition and limited crew utilization.
Most projects were performed under turnkey contracts, which represented approximately three-quarters of revenue. These contracts offer greater profit potential but expose the Company to weather, permitting, productivity and operational-delay risk.
The Company’s federal, state and foreign net operating loss and other deferred tax assets were subject to valuation allowances; future losses may generate reduced or no tax benefits.
The Company has unsecured customer receivables and maintained an allowance for doubtful accounts of $0.25 million. A significant customer default could materially affect results.
Legal proceedings arise in the ordinary course of business, but management stated that pending matters were not expected to have a material adverse effect. Contractual disputes with customers can affect revenue and results in individual periods.
The Company adopted cash-flow classification guidance during 2016 without material impact. It was evaluating the future impact of the new lease and revenue-recognition standards.
Management and RSM US LLP concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016. The financial statement and internal-control audits received unqualified opinions.

Important Facts for Investors to Verify

Whether oil and natural gas prices and customer exploration budgets support a sustained increase in crew utilization after the first quarter of 2017.
The renewal, terms and borrowing availability of the revolving credit facility after its June 30, 2017 maturity date.
Whether operating cash flow can fund the planned $10.0 million of 2017 capital expenditures while maintaining liquidity.
The recoverability of equipment and deferred tax assets, including the adequacy of valuation allowances.
Customer concentration, receivable collections and any changes in customer cancellations, delays or contract pricing.
The impact of turnkey contract exposure, weather, permitting delays, Canadian seasonality and foreign-currency fluctuations.
Whether the Company can return to positive EBITDA and profitability given its high depreciation burden and fixed operating costs.