Business Context and Reporting Period
TGC Industries, Inc. (the filing entity identified in the source text) provides 3-D seismic data acquisition services to oil and gas companies in the continental United States and Canada. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. TGC operated seven U.S. seismic crews and added an eighth during the second quarter. Canadian operations were seasonally reduced by the spring thaw, but two crews were reactivated late in the quarter.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $30.2 million, up 34.4% | $80.5 million, up 52.5% |
| Income from operations | $1.2 million; prior-year loss of $1.4 million | $10.2 million; prior-year loss of $0.2 million |
| Net income | $0.6 million; prior-year loss of $1.2 million | $6.4 million; prior-year loss of $0.7 million |
| Diluted EPS | $0.03; prior-year loss of $0.06 | $0.33; prior-year loss of $0.03 |
| EBITDA | $6.0 million, up 149.6% | $19.5 million, up 162.3% |
| Net cash from operating activities | Not separately reported | $24.4 million, versus $1.8 million |
Six-month cost of services was 69.9% of revenue versus 79.4% in the prior-year period; second-quarter cost of services was 72.6% versus 81.6%. Six-month SG&A was 5.9% of revenue versus 6.5%, while depreciation and amortization was 11.5% versus 14.5%. The reported effective tax rate was 35.5% for the six months and 42.6% for the quarter.
Cash and cash equivalents increased to $21.9 million at June 30, 2011, from $13.1 million at December 31, 2010. Working capital was $19.3 million, up from $13.7 million. Capital expenditures used $11.1 million of cash during the first six months, primarily for seismic recording systems, vehicles, and vibration equipment.
Total notes payable were $9.1 million, including $6.1 million of current maturities and $2.9 million long term. Capital lease obligations totaled $2.8 million. No borrowings were outstanding under the $5.0 million revolving credit facility at June 30, 2011; the facility was scheduled to expire September 16, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger North American land seismic demand, improved contract terms, increased operational efficiencies from wireless recording systems, and the addition of U.S. crews.
- Operating results improved substantially, with the Company moving from operating losses in both comparable periods to operating income.
- Cost of services grew more slowly than revenue, producing significant margin improvement.
- SG&A increased 39.2% for the six months, primarily because of $1.1 million in transaction costs related to the proposed Dawson Geophysical merger. Second-quarter transaction costs were approximately $528,000.
- Depreciation and amortization increased 20.7% for the six months because of additional wireless recording systems, vibration vehicles, and other equipment.
- Operating cash flow increased by $22.6 million year over year, while capital expenditures increased substantially from $1.2 million to $11.1 million.
- Principal payments reduced notes payable and lease obligations; interest expense declined 11.0% for the six months.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that Canadian seismic activity was expected to increase over the next three quarters beginning in the third quarter of 2011. Based on current forecasts, management believed available cash and borrowing capacity were sufficient to fund working capital needs for the following 12 months, although additional equipment could be purchased if demand increased. No formal revenue or earnings guidance was provided.
On March 20, 2011, TGC entered into a merger agreement with Dawson Geophysical Company. Subject to specified Dawson share-price conditions, TGC shareholders would generally receive 0.188 shares of Dawson common stock for each TGC share. The merger required shareholder approvals and remained subject to termination rights and exchange-ratio provisions. Voting agreements covered approximately 28.73% of TGC's outstanding shares held by directors and executive officers. The transaction was expected to qualify as a generally tax-free reorganization.
On July 25, 2011, TGC agreed to purchase a new 5,000-channel GSR wireless seismic recording system and related equipment for approximately $6.3 million, financed with a 5% commercial-bank note; substantially all equipment was delivered in July.
Principal risks include dependence on oil and gas industry spending, oil and natural gas price volatility, weather-related delays, contract cancellations, customer credit and payment risk, access to capital, seasonality, and competition. The largest customer represented approximately 15% of 2010 revenue. Management reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and no significant loss expected from ongoing ordinary-course legal proceedings.
Important Facts for Investors to Verify
- Confirm the legal entity: the supplied filing is for TGC Industries, Inc., although the request metadata identifies Dawson Geophysical Co.
- Track the status, approvals, exchange ratio, conditions, and termination provisions of the proposed Dawson merger.
- Assess whether the expected Canadian activity recovery and expanded U.S. crew count translate into sustained utilization and margins.
- Reconcile strong operating cash flow with the increased capital-expenditure program and the additional $6.3 million equipment purchase announced after quarter-end.
- Review the September 16, 2011 expiration and any renewal or replacement of the $5.0 million revolving credit facility.
- Monitor customer concentration, oil and gas capital spending, commodity prices, weather, contract cancellations, and customer payment capacity.
- Consider that interim and seasonal results are not necessarily indicative of full-year performance and that EBITDA is a non-GAAP measure.