Dawson Geophysical Company — Form 10-Q Summary
Business context and reporting period
Dawson provides North American onshore seismic data acquisition and processing services to major and independent oil and gas companies and multi-client data-library providers. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, with comparisons to the adjusted prior-year periods. Prior periods were retrospectively adjusted for adoption of ASC Topic 606 and a 5% stock dividend paid in May 2018.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Operating revenue | $36.2 million | $86.0 million |
| Year-over-year revenue change | 14.3% increase | 16.3% increase |
| Loss from operations | $(6.3) million | $(7.9) million |
| Operating margin | (17.4%) | (9.2%) |
| Net loss | $(5.7) million | $(7.4) million |
| Loss per share | $(0.25) | $(0.32) |
| EBITDA, non-GAAP | $1.6 million | $8.6 million |
| EBITDA margin | 4.3% | 9.9% |
| Cash flow from operations | Not separately presented in the statement of cash flows | $12.8 million |
| Capital expenditures | Not separately presented | $6.2 million |
At June 30, 2018, cash and cash equivalents were $26.8 million and short-term investments were $17.6 million. Total current assets were $84.1 million versus current liabilities of $23.3 million, implying a current ratio of approximately 3.6x. Accounts receivable were $27.9 million and deferred revenue was $7.1 million.
Total notes payable and capital lease obligations were approximately $9.5 million, consisting of $3.0 million current and $3.7 million long-term amounts reported on the balance sheet, plus capital lease obligations disclosed at $6.5 million; the disclosure presentation should be reconciled carefully because the capital lease amount includes current and long-term portions. The Company had no borrowings under its $20.0 million revolving credit facility, which expires June 30, 2019, and was in compliance with all financial covenants. Three letters of credit totaled $2.425 million.
Material changes versus the prior comparable period
- Revenue increased $4.5 million, or 14.3%, in the second quarter and $12.0 million, or 16.3%, for the first six months, primarily due to increased crew count and utilization.
- Operating expenses decreased 4.8% in the quarter and 3.8% year to date, primarily because of lower contract fulfillment costs.
- General and administrative expense declined 14.5% in the quarter and 10.5% year to date as a result of cost-cutting initiatives. G&A declined to 10.6% of quarterly revenue and 9.2% of year-to-date revenue.
- Depreciation and amortization decreased to $7.4 million in the quarter and $16.1 million year to date, reflecting multiple years of reduced capital expenditures.
- Net loss improved substantially from $14.9 million to $5.7 million in the quarter and from $24.1 million to $7.4 million year to date. EBITDA improved from negative $5.5 million to positive $1.6 million in the quarter and from negative $7.4 million to positive $8.6 million year to date.
- Operating cash flow improved by $14.7 million year over year, from an outflow of $1.9 million to an inflow of $12.8 million.
- Cash increased $4.7 million from December 31, 2017, while short-term investments increased $1.0 million and property and equipment declined from $86.6 million to $75.5 million.
Guidance, outlook, commentary, risks and unusual items
Management operated four to seven U.S. crews during the second quarter and the equivalent of one Canadian crew for approximately half the quarter. At the time of filing, five U.S. crews were operating and none in Canada. Management anticipated up to five U.S. crews during the third quarter and up to five combined U.S. and Canadian crews during the fourth quarter. Early indications suggested an improved Canadian winter season, but project visibility remained constrained by uncertainty regarding oil prices and activity, particularly in the Permian and Delaware basins.
Management reported that bid activity and crew utilization slowed significantly during the second quarter, followed by gradual improvement early in the third quarter, primarily outside the Permian and Delaware basins. The outlook for the remainder of 2018 was described as guarded, although management was encouraged by increased bid activity for 2019.
The 2018 capital budget was initially set at $10.0 million for maintenance capital and recording-channel replacement or increases. Approximately $5.6 million had been spent through the filing date. Management expected depreciation to remain broadly flat during 2018 and believed available cash, short-term investments, operating cash flow, and credit availability would fund current needs and planned capital expenditures.
- The business is highly dependent on oil and natural gas exploration and production spending, commodity prices, customer concentration, contract delays or cancellations, crew utilization, weather, land access, productivity, competition and access to capital.
- Most contracts are turnkey, which can benefit from productivity improvements but exposes the Company to weather and crew-downtime risks.
- The Company maintains a $250,000 allowance for doubtful accounts and warns that customer credit deterioration could exceed historical experience.
- Significantly all federal, state and foreign deferred tax assets remain subject to valuation allowances; future losses may produce reduced or no tax benefits.
- Adoption of Topic 606 materially affected the balance sheet and required retrospective adjustment of prior periods. Deferred contract fulfillment costs were $7.4 million at June 30, 2018.
- The Company is evaluating the lease standard expected to place primarily office and shop operating leases on the balance sheet.
- Routine legal proceedings and client contractual disputes exist, but management does not expect pending matters to have a material adverse effect. No subsequent events were reported.
Important facts for investors to verify
- Whether the improving bid activity and anticipated 2019 demand convert into sustained crew utilization and revenue growth.
- The effect of Permian and Delaware project completions, Canadian activity, commodity prices and customer capital-spending plans on future revenue.
- The sustainability of positive EBITDA and operating cash flow despite continued GAAP operating and net losses.
- The reconciliation of disclosed capital lease obligations to current and long-term debt balances and the timing of approximately $6.5 million of lease obligations.
- Compliance with the credit facility’s borrowing-base limitations and financial covenants, particularly if receivables or equipment values decline.
- The realizability of deferred tax assets and the potential impact of future valuation-allowance changes.
- The balance-sheet impact and implementation effects of the pending lease accounting standard.