Dawson Geophysical Company — Q1 2015 Form 10-Q Summary
Business context and reporting period
Dawson Geophysical provides onshore 2-D, 3-D and multi-component seismic data acquisition and processing services to oil and gas companies and multi-client data providers in the United States and Canada. The filing covers the three months ended March 31, 2015.
On February 11, 2015, the company completed its strategic combination with Legacy TGC Industries. The transaction was accounted for as a reverse acquisition, with Legacy Dawson treated as the accounting acquirer. Accordingly, 2015 results include Legacy Dawson for the full quarter and Legacy TGC from February 12 through March 31, while the 2014 comparison reflects Legacy Dawson only. The periods are therefore not fully comparable.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenues | $73.7 million | $76.8 million | Down 4.0% |
| Operating loss | $(9.8) million | $2.8 million income | Unfavorable change |
| Net loss | $(6.6) million | $1.7 million income | Unfavorable change |
| Basic and diluted EPS | $(0.37) | $0.12 | Unfavorable change |
| EBITDA | $1.4 million | $12.7 million | Down 88.6% |
| Net cash from operating activities | $(3.3) million | $23.4 million | Unfavorable change |
Operating costs rose 13% to $83.5 million. Operating expenses were $64.8 million, general and administrative expense was $7.5 million, and depreciation and amortization was $11.2 million. The operating margin declined to approximately negative 13.3% from positive 3.7%; EBITDA margin declined to approximately 2.0% from 16.5%.
The income tax benefit was $3.3 million, compared with $0.7 million of tax expense in the prior-year quarter, producing an effective tax benefit rate of 33.4%. The filing does not provide a clear adjusted or normalized profit measure excluding merger-related items.
Cash flow, liquidity, debt and capital resources
- Cash and cash equivalents were $20.6 million at March 31, 2015, up from $14.6 million at December 31, 2014. Short-term investments were $27.5 million.
- Total current assets were $117.0 million versus $89.0 million at year-end 2014. Accounts receivable increased to $57.8 million from $37.1 million, and the allowance for doubtful accounts increased to $0.8 million from $0.3 million.
- Operating activities used $3.3 million, reflecting the quarterly loss and a $4.97 million working-capital cash outflow, primarily associated with receivables and timing of payments.
- Investing activities provided $13.0 million, including $12.4 million of cash acquired in the merger, partly offset by $1.2 million of capital expenditures.
- Financing activities used $3.7 million, including $2.8 million of note repayments and $0.4 million of capital lease payments. No dividend was paid in the quarter.
- Debt obligations totaled approximately $16.8 million of notes payable and $2.4 million of capital lease obligations at March 31, 2015. Approximately $9.9 million of notes payable and $1.4 million of capital lease obligations were due within one year.
- Legacy Dawson had an unused revolving facility of up to $20.0 million, subject to borrowing-base limits, and Legacy TGC had an unused facility of up to $5.0 million, also subject to borrowing-base limits.
- The company approved a 2015 capital budget of $10.0 million and had spent $1.3 million for maintenance capital through the filing date. Management expected actual maintenance capital spending to be below the approved budget.
Material changes versus the prior comparable period
- Revenue declined 4%, primarily due to lower crew utilization, reduced client demand, uncertain commodity prices, reduced customer spending, severe weather, project delays and a weaker Canadian season.
- Operating expenses increased despite lower revenue, principally because of the addition of Legacy TGC crews and the combined-company cost structure.
- General and administrative expense more than doubled as a result of approximately $2.6 million of merger costs and approximately $0.5 million of severance expenses associated with an approximately 20% workforce reduction after the merger.
- Depreciation and amortization increased by approximately $1.0 million due to assets acquired in the merger.
- Shares outstanding increased substantially as a result of the merger; 21.6 million shares were issued and outstanding at March 31, 2015, compared with 14.2 million at December 31, 2014.
- The board suspended quarterly dividends for the quarters ended December 31, 2014 and March 31, 2015 and stated that dividends would not be paid for the foreseeable future.
Guidance, outlook, risks and unusual items
Management reported that demand was expected to remain reduced through 2015 because of declining and uncertain oil and gas prices and lower client expenditures. The company was operating eight to ten U.S. acquisition crews and expected that range to continue through the third quarter, with limited Canadian activity during the summer. Severe wet weather, reduced demand and client-directed delays continued into April and mid-May and materially affected crew utilization.
Approximately three-quarters of first-quarter revenue came from turnkey contracts. These contracts can improve productivity economics but expose the company to greater weather and downtime risk. Management expects depreciation to remain generally flat in 2015 because of limited capital expenditures.
The Legacy Dawson credit facility was scheduled to mature or require renewal on June 2, 2015, and management anticipated renewal during the second quarter. The company was in compliance with Legacy Dawson debt covenants. It was not in compliance with Legacy TGC's debt-service-coverage covenant at March 31, 2015, but obtained a lender waiver covering related defaults through March 31, 2016. A $0.7 million equipment note matured on June 5, 2015.
The merger purchase-price allocation remained preliminary and could be materially adjusted. The company recorded approximately $0.75 million for tax-related contingencies and reported no goodwill from the transaction. A shareholder demand and related fiduciary-duty allegations remained under review by a Special Litigation Committee; the related lawsuit was dismissed without prejudice. Management did not expect pending litigation to have a material adverse effect, but outcomes were uncertain.
Principal business risks include dependence on oil and gas industry spending, commodity-price volatility, high fixed operating costs, weather and operational disruptions, contract delays or cancellations, customer concentration and credit risk, competition, foreign-exchange exposure, and the need for adequate liquidity and credit-facility renewals.
Important facts for investors to verify
- Reconcile reported Q1 2015 results with pro forma combined-company results because the reported periods are not fully comparable.
- Monitor crew utilization, pricing, backlog, turnkey contract exposure and the effect of weather and customer-directed delays.
- Confirm renewal or replacement of the Legacy Dawson revolving credit facility and compliance with all debt covenants after the waiver period.
- Assess near-term debt maturities, capital lease payments and the company’s ability to generate positive operating cash flow.
- Review the final merger purchase-price allocation and any resulting changes to asset values, depreciation, amortization, taxes or contingencies.
- Track accounts receivable collections, allowance adequacy and customer concentration in the weaker energy-market environment.
- Verify the status and potential financial impact of the shareholder demands and Special Litigation Committee review.