DAWSON GEOPHYSICAL CO quarterly report, Q2 FY2020

Business Context and Reporting Period

Dawson Geophysical Company provides North American onshore seismic data acquisition and processing services to major and independent oil and gas companies and multi-client data-library providers. The unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.

Results were materially affected by lower oil and gas industry spending, COVID-19, reduced customer capital budgets, crew-count changes and workforce reductions. The company operated primarily in the United States during the quarter.

Financial Performance and Liquidity

Metric	Q2 2020	Q2 2019	Six Months 2020	Six Months 2019
Operating revenue	$29.5 million	$24.1 million	$68.5 million	$75.2 million
Income (loss) from operations	$1.1 million	$(11.6) million	$2.5 million	$(11.9) million
Net income (loss)	$1.5 million	$(11.2) million	$2.5 million	$(11.4) million
Basic EPS	$0.06	$(0.49)	$0.11	$(0.49)
EBITDA	$5.8 million	$(6.1) million	$11.6 million	$(0.1) million
Cash flow from operations	Not separately provided in the statement	Not separately provided in the statement	$9.0 million	$12.1 million

Q2 operating margin was approximately 3.8%, compared with negative 48.3% in Q2 2019. Six-month operating margin was approximately 3.7%, compared with negative 15.9% in the prior-year period. EBITDA margin was approximately 19.7% for Q2 and 17.0% for the six-month period.

Q2 revenue increased 22.5%, primarily from higher crew productivity and equipment utilization. Six-month revenue declined 9.0% because of a lower crew count and reduced utilization in the first quarter.
Operating expenses declined 22.1% in Q2 and 26.3% for the six-month period, primarily due to lower crew counts and workforce-related cost reductions.
General and administrative expense declined 15.6% in Q2 and 17.3% for the six-month period, reflecting workforce reductions, salary reductions and other cost controls.
At June 30, 2020, cash and cash equivalents were $29.5 million, restricted cash was $5.0 million and short-term investments were $2.4 million. Total cash, restricted cash and short-term investments were $36.8 million.
Total assets were $122.3 million and stockholders’ equity was $105.5 million at June 30, 2020.
Six-month capital expenditures were approximately $2.7 million, against an initial 2020 capital budget of $5.0 million.

Debt, Liquidity and Cash Flow

Operating cash flow was $9.0 million for the six months ended June 30, 2020, down from $12.1 million in the comparable 2019 period.
Investing activities used $2.5 million, primarily for capital expenditures.
Financing activities used $3.0 million, including $7.8 million of note principal payments and $1.5 million of finance-lease payments, partially offset by $6.4 million of Paycheck Protection Program loan proceeds. The PPP loan was subsequently repaid during the second quarter.
The Dominion revolving credit facility provides borrowing capacity of up to $15.0 million, subject to borrowing-base limitations and covenants. No amounts were outstanding at June 30, 2020, and the facility matured on September 30, 2020.
Other notes payable totaled $0.7 million, with interest rates of 4.05% to 4.99%. Finance-lease liabilities totaled $0.9 million. Operating-lease liabilities totaled $6.5 million.
The company stated that cash, short-term investments, operating cash flow and available revolver capacity were expected to meet current operating and 2020 capital needs, but future liquidity depends on operating performance and customers’ ability to pay.

Material Changes Versus the Prior Comparable Period

The company returned to profitability in Q2 and for the first six months, compared with substantial losses in the 2019 periods.
Revenue improved in Q2 but remained below the prior-year level on a year-to-date basis.
Cost reductions, including workforce reductions announced in April, materially improved operating results. The company incurred approximately $1.4 million of Q2 severance costs and expects annual savings of approximately $4.3 million.
United States revenue increased to $29.5 million in Q2 from $22.0 million, while Canadian revenue fell to approximately $0.02 million from $2.0 million. For the six-month period, U.S. revenue declined to $56.7 million from $59.7 million and Canadian revenue declined to $11.8 million from $15.6 million.
Property and equipment declined to $46.4 million from $53.5 million at December 31, 2019, consistent with limited capital spending and depreciation.
Notes payable and finance-lease obligations declined substantially from year-end as a result of principal payments.

Guidance, Outlook, Risks and Unusual Items

Management anticipated continued operation of one moderate-sized U.S. crew through the end of 2020, with possible periods of low utilization and limited Canadian activity.
Several late-2020 project opportunities could require a second crew in the fourth quarter, and the company had received requests for potential 2021 projects; however, visibility beyond the fourth quarter was limited and requests for proposals remained slow.
Management identified COVID-19, oil and gas price volatility, excess oil supply, OPEC+ production decisions and customer capital-budget reductions of approximately 30% to 50% as principal risks to demand.
Additional risks include contract delays or cancellations, customer credit risk, concentration among oil and gas customers, reduced utilization, high fixed costs, equipment and permitting issues, weather, competition and foreign-currency exposure.
The company maintained valuation allowances against substantially all federal, state and foreign deferred tax assets. Accordingly, future losses may generate reduced or no tax benefits.
The company is defending a Weatherford groundwater-contamination lawsuit. Management believes the matter will not have a material adverse effect, but the outcome cannot be predicted with certainty.
The filing reports no material impairment losses, no off-balance-sheet arrangements and no subsequent events through the filing date.
Management stated that disclosure controls were effective as of June 30, 2020 and that no material changes occurred in internal control over financial reporting.

Important Facts for Investors to Verify

Whether the anticipated U.S. crew activity and potential fourth-quarter projects materialized after June 30, 2020.
The status and renewal or replacement of the Dominion credit facility after its September 30, 2020 maturity date.
The sustainability of revenue and margin improvements after workforce reductions and the approximately $1.4 million Q2 severance charge.
Customer concentration, accounts-receivable collections and the adequacy of the $250,000 allowance for doubtful accounts amid energy-sector stress.
The ultimate outcome and potential financial exposure from the Weatherford litigation and other customer disputes.
The effect of COVID-19, oil prices, OPEC+ actions and customer capital-budget reductions on crew utilization and contract awards.
The extent to which deferred tax assets and net operating losses will ultimately be realizable.