Dawson Geophysical Company — FY2015 Form 10-K Summary
Business context and reporting period
Dawson provides onshore 2-D, 3-D and multi-component seismic data acquisition and processing services in the United States and Canada, primarily for oil and natural gas exploration and development companies. The filing covers the fiscal year ended December 31, 2015. The company completed its merger with Legacy Dawson on February 11, 2015 and is treated as the accounting successor to Legacy Dawson.
Comparability is limited: 2015 includes Legacy Dawson operations through February 11 and the combined company thereafter, while the principal prior-year comparison is an unaudited calendar 2014 period. The company also presents quarterly data for the fourth quarter of 2015.
Financial performance and liquidity
| Metric | FY2015 | Prior comparable period |
|---|---|---|
| Revenue | $234.7 million | $244.3 million, calendar 2014 |
| Operating loss | $40.7 million | $19.9 million |
| Net loss | $26.3 million | $14.7 million |
| Basic loss per share | $1.27 | $0.90 |
| EBITDA | $7.5 million | $20.8 million |
| Cash flow from operations | $20.6 million | $30.5 million |
- Revenue declined approximately 3.9%. Operating margin was approximately negative 17.3%, net margin was approximately negative 11.2%, EBITDA margin was approximately 3.2%, and operating cash flow margin was approximately 8.8%.
- Fourth-quarter 2015 revenue was $73.7 million, operating loss was $9.8 million, and net loss was $6.6 million, or $0.37 per share. Fourth-quarter 2014 revenue was $50.8 million and net loss was $5.0 million, but the periods are not fully comparable because of the merger and fiscal-year change.
- Cash and cash equivalents were $37.0 million and short-term investments were $21.0 million at December 31, 2015. Accounts receivable were $35.7 million.
- Total assets were $247.8 million and stockholders’ equity was $209.7 million. Current assets were $99.9 million versus current liabilities of $28.8 million.
- Debt obligations totaled approximately $9.5 million, excluding the revolving facility; capital lease obligations were $1.2 million. The company had a $20.0 million revolving facility, subject to borrowing-base limitations, and had not drawn on it during 2015. A $1.767 million letter of credit reduced available borrowing capacity.
- The company was in compliance with its credit covenants at year-end. Debt and capital lease payments due within one year totaled approximately $8.6 million.
- Capital expenditures were approximately $6.9 million, limited largely to maintenance. The initial 2016 capital expenditure budget was $10.0 million.
- No cash dividends were declared in 2015, and management stated that dividends are not expected for the foreseeable future.
Material changes versus the prior period
- Demand weakened as oil and natural gas prices declined, reducing client exploration and development spending, crew utilization, pricing and project activity.
- Weather disruptions, flooding, client-directed delays, land-access delays and a weaker Canadian operating season negatively affected 2015 results.
- Operating expenses declined modestly to $205.6 million, but operating costs increased as a percentage of revenue because revenue fell and the company retained substantial fixed costs.
- General and administrative expense increased to $22.7 million from $17.0 million, driven by post-merger staffing, Canadian administrative costs, merger-related costs, consulting and accounting-system implementation.
- Depreciation and amortization increased to $47.1 million from $40.0 million, primarily because of assets acquired in the merger.
- Merger-related costs were approximately $3.3 million before tax. The company issued approximately 7.4 million shares as merger consideration, increasing the share count and contributing to comparability issues.
- Operating cash flow decreased by approximately $9.9 million, while capital spending fell substantially from the prior calendar-period level. Cash increased by $22.4 million, aided by merger cash acquired, short-term investment maturities and limited capital spending.
- No impairment charges were recorded in 2015, although management identified continued exposure to future impairment if commodity prices and projected cash flows deteriorate.
Guidance, outlook, risks and unusual items
- At year-end, the company operated ten crews: eight in the United States and two in Canada. Early 2016 activity was reduced to approximately four to six U.S. crews with limited Canadian activity; visibility beyond the second quarter was limited.
- Management expected reduced North American demand into 2016 because of low and uncertain oil prices. It expected depreciation to remain broadly flat and planned to fund maintenance capital expenditures through operating cash flow, borrowings and available credit.
- Most contracts were turnkey arrangements, representing approximately three-quarters of 2015 revenue. These contracts offer greater profit potential but expose the company to weather, access, productivity and downtime risks.
- Two customers represented approximately 36% of 2015 revenue; the company extends unsecured credit and is exposed to customer defaults, cancellations and delayed payments.
- The company operates in a capital-intensive, high-fixed-cost industry. Prolonged low utilization could produce further operating losses and constrain borrowing capacity because the revolving facility is tied to eligible accounts receivable.
- Other material risks include commodity-price volatility, competition and pricing pressure, weather, land-access permits, operational safety, equipment obsolescence, foreign-currency exposure in Canada, cybersecurity, environmental and hydraulic-fracturing regulation, and possible asset impairments.
- Legal proceedings arise in the ordinary course of business, but management believed pending matters would not materially affect financial condition, results or liquidity. The filing states that there were no off-balance-sheet arrangements at year-end.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2015.
Most important facts for investors to verify
- Whether oil and natural gas prices recover sufficiently to increase customer exploration spending, crew utilization and pricing.
- The company’s active crew count, backlog quality and cancellation or delay trends after the first quarter of 2016.
- Cash generation relative to approximately $8.6 million of near-term debt and capital lease payments and the $10.0 million 2016 capital budget.
- Availability of the revolving facility after applying eligible-receivable borrowing limits and the $1.767 million insurance letter of credit.
- Potential impairment of seismic equipment and intangible assets if projected cash flows decline or the industry downturn persists.
- Customer concentration, receivables collectability and any material contractual disputes.
- The effect of the merger, stock issuance and fiscal-year change when comparing 2015 results with prior periods.