Business Context and Reporting Period
This unaudited Form 10-Q was filed by TGC Industries, Inc., not Dawson Geophysical Company, for the quarter and six months ended June 30, 2013. TGC provides 3-D seismic data acquisition services to oil and natural gas exploration and production companies in the United States and Canada through its Eagle Canada subsidiary.
The business is seasonal, with the second quarter typically weaker because of the Canadian spring-thaw shutdown. TGC began the quarter with nine U.S. crews and six Canadian crews and ended with two crews in each country.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $31.5 million | $30.4 million | $94.7 million | $97.4 million |
| Income from operations | $(5.6) million | $(2.9) million | $5.3 million | $17.6 million |
| Net income (loss) | $(4.0) million | $(2.0) million | $2.3 million | $10.4 million |
| Diluted EPS | $(0.18) | $(0.09) | $0.11 | $0.48 |
| EBITDA | $0.7 million | $3.3 million | $18.3 million | $29.5 million |
- Six-month revenue declined 2.8%; second-quarter revenue increased 3.6% year over year.
- Six-month cost of services increased 12.5% to $71.5 million, or 75.5% of revenue versus 65.2% in the prior-year period. Second-quarter cost of services was 89.8% of revenue versus 82.3%.
- Six-month operating margin was approximately 5.6%, down from 18.1%; second-quarter operating margin was approximately negative 17.8%, down from negative 9.4%.
- Six-month EBITDA declined 37.9% to $18.3 million; second-quarter EBITDA declined 77.5% to $0.7 million.
- Six-month operating cash flow was $23.1 million, compared with $34.4 million in 2012.
- Capital expenditures were $0.5 million, compared with $22.4 million in the prior-year period. Investing activities provided $0.2 million, compared with $20.8 million used in 2012.
- Cash used in financing activities was $7.0 million, primarily reflecting principal payments on notes payable and capital leases.
- Cash and cash equivalents were $24.8 million at June 30, 2013, versus $8.6 million at December 31, 2012. Working capital was $21.2 million, up from $12.2 million.
- At June 30, total notes payable were approximately $21.8 million, and capital lease obligations were approximately $3.1 million. No borrowings were outstanding under the $5.0 million revolving credit facility.
Material Changes Versus the Prior Comparable Period
- The revenue mix shifted toward shot-hole work, which produces higher revenue but lower margins than vibroseis work.
- Several U.S. crews were idled because of a softening seismic market, while the Canadian business was affected by seasonal conditions. Idle-crew costs pressured margins.
- Depreciation and amortization increased 9.6% for the first six months because of equipment and vehicle purchases made in the second half of 2012.
- SG&A increased 11.1% for the first six months, primarily because of higher share-based compensation.
- Interest expense increased 20.2% for the first six months, primarily because of equipment purchases financed in the prior year.
- The effective tax rate increased to 49.6% from 39.1% for the first six months, primarily because of permanent tax differences.
- Foreign currency translation losses were $2.8 million for the first six months, reducing accumulated other comprehensive income to a $2.0 million loss at June 30, 2013.
- TGC paid a 5% stock dividend in May 2013 and stated that it may not pay cash dividends in the foreseeable future.
Outlook, Risks, Contingencies, and Unusual Items
Management expects to activate additional crews as conditions allow and believes available cash, operating cash flow, and borrowing capacity are sufficient to fund working capital needs for the next 12 months. The company expects to renew its $5.0 million revolving credit agreement before its September 16, 2013 expiration. No specific revenue, earnings, or margin guidance was provided.
- Key risks include dependence on energy-industry exploration spending, oil and natural gas prices, weather, contract delays or cancellations, customer payment capacity, availability of capital, and general economic conditions.
- Future operating performance and customer collections will affect the company’s ability to meet debt repayments and fund capital requirements.
- The company had various ordinary-course legal proceedings but did not expect any significant loss. No off-balance-sheet arrangements were reported.
- Management reported no material changes to previously disclosed market risks or risk factors and concluded that disclosure controls and procedures were effective.
- The company adopted ASU 2012-02 without a significant effect and expects ASU 2013-11, to be adopted January 1, 2014, to have no significant effect.
Investor Verification Points
- Verify the issuer identity: the supplied filing is for TGC Industries, Inc., while the request identifies Dawson Geophysical Co.
- Assess whether the shift toward shot-hole work and continued crew idling represents a temporary mix and seasonal issue or a sustained deterioration in utilization and margins.
- Review the renewal and terms of the revolving credit facility before its September 2013 expiration.
- Reconcile debt maturities and capital lease obligations with projected operating cash flow and expected capital expenditures.
- Evaluate customer concentration, contract cancellation exposure, receivable collections, and the effect of oil and natural gas prices on seismic spending.
- Confirm the impact of the 5% stock dividend when comparing historical share counts and per-share results.