Business Context and Reporting Period
This unaudited Form 10-Q covers TGC Industries, Inc. for the quarter and nine months ended September 30, 2011. The filing is for TGC Industries, not Dawson Geophysical Company; Dawson is discussed as the proposed merger partner. TGC provides 3-D seismic data acquisition services to oil and natural gas companies in the United States and Canada. It operated eight U.S. crews and two Canadian crews during the third quarter.
Financial Highlights
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $31.0 million, up 35.8% | $111.5 million, up 47.4% |
| Income from operations | $1.9 million; 6.1% operating margin | $12.1 million; 10.9% operating margin |
| Net income | $1.0 million, or $0.05 diluted EPS | $7.4 million, or $0.38 diluted EPS |
| Net margin | 3.4% | 6.6% |
| EBITDA | $6.9 million, up 194.0% | $26.3 million, up 169.9% |
| Cash flow from operations | Not separately reported | $30.0 million |
Cost of services was $21.7 million in the quarter and $77.9 million year to date, representing 70.0% and 69.9% of revenue, respectively, compared with 82.9% and 80.5% in the prior-year periods. SG&A was $2.4 million for the quarter and $7.2 million year to date, including $572,000 and $1.7 million, respectively, of merger-related transaction costs. Depreciation and amortization was $5.0 million for the quarter and $14.2 million year to date.
Cash and cash equivalents were $21.7 million at September 30, 2011, compared with $13.1 million at December 31, 2010. Working capital was $18.1 million, up from $13.7 million. Total notes payable were approximately $13.5 million, including $7.0 million current, and capital lease obligations totaled approximately $2.8 million, including $1.2 million current. The $5.0 million revolving credit facility had no borrowings outstanding and expires September 16, 2012.
Capital expenditures were $22.3 million during the first nine months, funded with $14.1 million of cash, a $6.8 million equipment loan, and $1.4 million of capital lease obligations. Net cash used in investing activities was $13.9 million, while net cash used in financing activities was $7.3 million. Management stated that available cash, borrowing capacity, and operating cash flow should fund working capital needs for the next 12 months.
Material Changes Versus Prior Comparable Period
- Revenue increased substantially because of improved North American land seismic demand, additional crews, better contract terms, and efficiencies from wireless recording technology.
- The company moved from operating losses to profitability: nine-month operating income was $12.1 million versus a $1.8 million operating loss, and net income was $7.4 million versus a $1.9 million net loss.
- Cost of services declined materially as a percentage of revenue, improving operating leverage.
- SG&A increased 44.0% year to date, primarily because of $1.7 million in merger transaction costs.
- Capital spending increased significantly to support additional recording systems, wireless channels, vibration vehicles, and other equipment.
- Interest expense declined 6.8% year to date because of continuing principal repayments.
Guidance, Outlook, Risks, and Unusual Items
No formal quantitative revenue or earnings guidance is provided. Management expects seismic activity in Canada to increase during the two quarters beginning with the fourth quarter of 2011, although Canadian operations were seasonally weak in the second and third quarters.
The proposed merger with Dawson Geophysical was terminated on October 27, 2011. Dawson’s average share price was below the merger agreement’s specified range, the parties could not negotiate a revised exchange ratio, and holders of the required 80% of TGC shares did not approve the transaction. Related transaction costs reduced SG&A.
Key risks include dependence on oil and gas industry spending, oil and natural gas price fluctuations, weather-related operating uncertainty, contract delays or cancellations, customer concentration and credit risk, competition, economic conditions, and the need for continued operating cash flow to fund debt service and capital expenditures. The filing states that the largest customer represented approximately 15% of 2010 revenue. Results are seasonal and interim results may not indicate full-year performance.
The company reported no off-balance-sheet arrangements, no material changes to previously disclosed risk factors, and no significant expected impact from recently issued accounting standards. Various ordinary-course legal proceedings were not expected to result in a significant loss.
Important Facts for Investors to Verify
- Confirm the filing entity and transaction status: the filing is TGC Industries’ 10-Q, and the Dawson merger was terminated after the reporting date.
- Assess whether improved margins and crew utilization are sustainable after excluding merger-related costs and considering seasonal Canadian weakness.
- Review capital spending, equipment financing, debt maturities, and the company’s ability to maintain liquidity as operations expand.
- Monitor oil and gas prices, customer exploration budgets, contract awards, cancellations, and customer payment performance.
- Reconcile management’s non-GAAP EBITDA presentation with GAAP operating income, net income, and operating cash flow.
- Verify subsequent developments after November 9, 2011, including any effects from the terminated merger or changes in demand.