TGC Industries, Inc. (proposed post-merger name: Dawson Geophysical Company) — Q3 2014 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2014. TGC provides 3-D seismic data acquisition services to oil and natural gas exploration and development companies in the continental United States and Canada. The company operated five U.S. crews during the third quarter and one Canadian crew intermittently; Canadian activity is seasonal.
The filing is by TGC Industries, Inc., although the request metadata identifies Dawson Geophysical Company. On October 8, 2014, after the quarter ended, TGC entered into a merger agreement with Dawson. Closing was expected in the first quarter of 2015, subject to shareholder, regulatory and other conditions.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $26.1 million | $21.1 million | $93.1 million | $115.8 million |
| Loss from operations | $(6.0) million | $(5.8) million | $(5.2) million | $(0.5) million |
| Net loss | $(4.0) million | $(4.0) million | $(3.8) million | $(1.6) million |
| Loss per diluted share | $(0.18) | $(0.18) | $(0.17) | $(0.07) |
| EBITDA | $(1.3) million | $0.2 million | $9.4 million | $18.6 million |
| Cash flow from operations | Not separately provided | Not separately provided | $19.7 million | $23.9 million |
Q3 revenue increased 23.6% year over year, but cost of services rose to 96.1% of revenue from 87.6%, resulting in a negative operating margin of approximately 22.9% versus approximately 27.6% in the prior-year quarter. For the first nine months, revenue declined 19.6%; cost of services increased to 82.3% of revenue from 77.7%, and the operating margin was approximately negative 5.6% versus negative 0.5%.
SG&A declined 2.3% for the nine-month period, but increased as a percentage of revenue to 7.6% from 6.2%. Depreciation and amortization declined 23.4% to $14.6 million for the nine months because of reduced equipment and vehicle spending. Interest expense declined 44.0% to $0.5 million as equipment notes were repaid. The nine-month income tax benefit was $2.0 million, compared with $0.2 million of tax expense in 2013.
Cash flow, liquidity and debt
- Cash and cash equivalents were $25.1 million at September 30, 2014, compared with $16.1 million at December 31, 2013.
- Operating cash flow was $19.7 million for the first nine months, down from $23.9 million in the comparable period.
- Investing cash flow was negative $0.9 million, including $1.3 million of cash capital expenditures and $0.3 million of proceeds from equipment sales.
- Financing cash flow was negative $9.7 million, primarily reflecting $8.5 million of note repayments and $1.2 million of capital lease payments.
- At September 30, 2014, equipment notes payable totaled $14.2 million, insurance financing notes totaled $1.3 million, and capital lease obligations totaled approximately $1.3 million.
- The company had a $5.0 million revolving credit facility, with no borrowings outstanding at quarter-end. The facility was renewed through September 16, 2015 and is secured by accounts receivable.
- Working capital was $17.2 million at September 30, 2014, slightly below $17.7 million at December 31, 2013. Management believed available cash, borrowing capacity and operating cash flow were sufficient for the next 12 months.
Material changes versus the prior comparable period
- Nine-month revenue fell $22.7 million, primarily because of a soft seismic market, fewer operating crews and adverse winter weather.
- Q3 revenue improved because five U.S. crews operated throughout the quarter, compared with three U.S. crews at the beginning of Q3 2013.
- Profitability deteriorated materially: nine-month net loss increased to $3.8 million from $1.6 million, while EBITDA declined 49.2% to $9.4 million.
- Shot-hole work, which carries higher costs and lower margins than vibroseis work, increased during Q3 and contributed to the higher cost-of-services ratio.
- Cash increased despite lower operating cash flow because operating cash generation exceeded investing and financing cash uses.
- Capital expenditures included a $6.1 million financed purchase of a 10,500-channel INOVA Hawk seismic acquisition system; total vehicles and equipment acquired during the nine months were $7.5 million.
Outlook, strategic transaction and risks
The filing provides no formal revenue or earnings guidance. Management expected to finance 2014 capital expenditures through operating cash flow, lender borrowings and the revolving facility, but noted that future liquidity depends on operating performance and customers’ ability to pay.
The proposed Dawson merger contemplated issuing approximately 14.2 million TGC shares after a 1-for-3 reverse stock split. Former Dawson shareholders were expected to own approximately 66% of the combined company and legacy TGC shareholders approximately 34%. Management cited potential benefits including greater geographic diversity, higher crew utilization and logistical efficiencies, but warned that integration, employee retention, customer retention and cost synergies were uncertain.
Key risks include dependence on energy-industry spending, oil and natural gas prices, weather, contract delays or cancellations, competition, availability of capital and foreign-currency movements. The merger required approvals from both shareholder groups, antitrust clearance and other closing conditions. If terminated in certain circumstances, TGC could owe Dawson a $2.0 million termination fee and up to $1.5 million of expense reimbursement. The filing states that there were no material changes to previously disclosed legal proceedings or market-risk disclosures and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the Dawson merger closed, on what terms, and the final exchange ratio, share issuance and ownership percentages.
- Whether the proposed reverse stock split and related name change were completed.
- Subsequent crew counts, utilization, backlog and pricing, particularly given the sharp nine-month revenue decline and weak margins.
- Remaining equipment debt, lease obligations, maturity schedules and availability under the revolving credit facility.
- The sustainability of operating cash flow, including the effects of contract billings, receivables and income-tax payments.
- Any merger-related costs, integration expenses, termination fees or goodwill and intangible-asset impairment charges.
- The impact of adopting the new revenue-recognition standard scheduled for January 1, 2017; the company had not yet determined the transition method or quantified the impact.