Business Context and Reporting Period
This summary is based on TGC Industries, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed March 15, 2013. The request metadata identifies Dawson Geophysical Company, but the filing itself identifies TGC Industries, Inc. (NASDAQ: TGE). TGC provides land-based 3-D seismic data acquisition services to oil and gas companies in the United States and Canada through its wholly owned subsidiary, Eagle Canada.
The company operated 14 seismic crews at year-end 2012, including nine in the United States and five in Canada. Unaudited fourth-quarter 2012 revenue was $57.1 million and net income was $4.2 million.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $196.3 million | $151.0 million | +30.0% |
| Income from operations | $26.8 million | $18.2 million | +47.4% |
| Net income | $15.7 million | $10.8 million | +44.7% |
| Diluted EPS | $0.75 | $0.53 | +41.5% |
| EBITDA | $52.3 million | $37.4 million | +39.9% |
| Cash flow from operations | $39.3 million | $34.2 million | +14.9% |
| Capital expenditures | $57.1 million | $30.7 million | +85.9% |
| Cash and cash equivalents | $8.6 million | $15.7 million | -45.3% |
| Total debt and capital lease obligations | $28.9 million | $13.1 million | Increase |
| Shareholders’ equity | $78.0 million | $63.7 million | +22.4% |
Approximate 2012 margins were 31.1% for income before depreciation, amortization, SG&A and other operating costs based on revenue less cost of services; 13.6% operating margin; 8.0% net margin; and 26.6% EBITDA margin. Cost of services remained 68.9% of revenue, while SG&A declined to 4.5% of revenue from 6.4%.
Working capital was $12.2 million at December 31, 2012, down from $19.9 million. The company had an unused $5.0 million revolving credit facility, and total contractual obligations were approximately $30.8 million, including $25.0 million of debt, $3.8 million of capital leases, and $2.0 million of operating leases.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger North American land-seismic demand, improved efficiency from wireless recording technology, and additional crews. Management attributed approximately 74% of the increase to market improvement and technology efficiencies and 26% to additional crews.
- Seismic crews increased from 12 at December 31, 2011 to 14 at December 31, 2012; management reported 15 crews after year-end.
- Capital expenditures rose substantially to $57.1 million, primarily for new GSR and GSX recording systems, additional channels and stations, and seven vibration vehicles.
- Interest expense increased 55.8% because of equipment-financing debt, despite $11.3 million of principal payments.
- SG&A decreased 9.0%, mainly because 2011 included $2.1 million of costs related to terminated merger discussions.
- Backlog declined to approximately $81 million from $118 million at year-end 2011, although management expected the backlog to be completed during 2013.
- The company paid its first cash dividend, $0.15 per common share, in December 2012, totaling approximately $3.1 million, and also paid a 5% stock dividend in May 2012.
Guidance, Outlook, Risks and Unusual Items
Management stated that the 2012 equipment investments should permit the company to enter a “cash building mode” in 2013. It expected 2013 capital expenditures to be financed through operating cash flow, commercial borrowings and available capacity under the revolving credit facility, but noted that additional equipment purchases could occur if demand warranted.
- Demand is highly dependent on oil and natural gas prices, drilling activity and customer exploration budgets.
- The business has high fixed costs and is exposed to weather delays, permit and right-of-way delays, project cancellations, crew productivity, equipment failures and seasonal Canadian operating restrictions.
- Equipment-financing obligations require monthly payments ranging from approximately $50,000 to $223,000, with maturities extending from 2013 through 2017. Core seismic equipment is pledged as collateral.
- Customer concentration and credit risk remain relevant: the largest customer represented approximately 16% of 2012 revenue, and two customers represented 29% and 23% of year-end accounts receivable.
- The company conducts business in Canada and is exposed to foreign-currency fluctuations.
- Operations involve dangerous machinery, remote environments and explosives. The company does not insure certain risks, including business interruption from equipment maintenance or weather delays.
- Various ordinary-course legal claims were outstanding, but management considered material loss remote. No impairment charge or off-balance-sheet arrangement was reported.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor Verification Points
- Verify the issuer identity: the supplied filing is for TGC Industries, Inc., not Dawson Geophysical Company.
- Reconcile the sharp increase in capital spending and debt with expected 2013 utilization, cash generation and backlog conversion.
- Review the timing and funding of approximately $13.3 million of debt and capital-lease payments due within one year.
- Assess whether the $81 million backlog is firm, cancellable, appropriately priced and sufficient to support 15 crews.
- Monitor oil and gas prices, customer exploration budgets, Canadian activity levels and foreign-exchange effects.
- Evaluate receivables growth, customer concentration and collection performance, particularly because the company generally requires no collateral.
- Confirm future dividend policy, since the filing states that future cash dividends are discretionary and may not continue.