Dawson Geophysical Company 10-Q Summary
Business context and reporting period
Filed August 7, 2015, for the quarter and six months ended June 30, 2015. Dawson provides onshore 2-D, 3-D and multi-component seismic data acquisition and processing services to oil and gas companies and multi-client data-library providers in the United States and Canada.
The February 11, 2015 merger with Legacy TGC Industries was accounted for as a reverse acquisition, with Legacy Dawson treated as the accounting acquirer. The three-month 2015 results include the combined company for the full quarter; the six-month results include Legacy Dawson through February 11 and the combined company thereafter. Prior-period results are therefore not directly comparable.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Operating revenue | $43.335 million | $54.166 million | $117.057 million | $130.932 million |
| Loss from operations | $(18.065) million | $(9.228) million | $(27.879) million | $(6.406) million |
| Net loss | $(11.877) million | $(7.493) million | $(18.469) million | $(5.841) million |
| Loss per diluted share | $(0.55) | $(0.54) | $(0.93) | $(0.42) |
| Net cash from operating activities | Not separately provided in the financial statements | Not separately provided in the financial statements | $12.708 million | $32.602 million |
| EBITDA | $(5.704) million | $1.466 million | $(4.263) million | $14.122 million |
Second-quarter operating costs were $61.400 million, including $43.399 million of operating expenses, $5.621 million of general and administrative expense and $12.380 million of depreciation and amortization. Six-month operating costs were $144.936 million. General and administrative expense represented 13.0% of second-quarter revenue and 11.2% of first-half revenue, versus 6.5% and 5.5%, respectively, in the comparable periods.
At June 30, 2015, cash and cash equivalents were $37.275 million, short-term investments were $19.500 million and total current assets were $95.930 million. Total debt principal was approximately $12.966 million, excluding capital lease obligations; capital lease obligations totaled $1.965 million. Current maturities of notes and capital leases were $8.892 million. The company had full availability under its revolving line of credit, subject to borrowing-base limitations, and reported compliance with all debt covenants.
Total assets were $265.557 million and stockholders’ equity was $218.496 million at June 30, 2015. No dividend was declared or paid during 2015; management stated that dividends would not be paid for the foreseeable future.
Material changes versus the prior comparable period
- Revenue declined 20.0% in the second quarter and 10.6% in the first six months, primarily because of lower crew utilization, reduced customer spending and weaker commodity-price conditions.
- Second-quarter operating expenses declined 12.5%, but not sufficiently to offset the revenue decline. Six-month operating expenses declined 1.4%, while total six-month operating costs increased 5.5% because of higher general and administrative costs and depreciation.
- Operating losses and net losses worsened materially. Six-month EBITDA declined to a loss of $4.263 million from positive EBITDA of $14.122 million.
- General and administrative costs increased partly because of approximately $3.3 million of merger-related costs and $1.034 million of severance and compensation costs associated with an approximately 30% workforce reduction after the merger.
- Operating cash flow fell $19.894 million year over year to $12.708 million. Investing cash flow was positive $18.245 million, principally due to $12.382 million of cash acquired in the merger and net maturities of short-term investments. Capital expenditures were $4.083 million in the cash flow statement.
- Cash increased $22.631 million from December 31, 2014, while short-term investments decreased $9.250 million. The balance-sheet comparison is affected by the reverse-acquisition accounting.
Guidance, outlook, risks and unusual items
Management expected to operate eight to ten U.S. seismic acquisition crews, with limited Canadian activity, during the third quarter and through the balance of 2015. The company operated the equivalent of seven crews in the second quarter. Management also stated that demand was expected to remain reduced through 2015 because of uncertain commodity prices and lower client expenditures.
Severe weather, flooding, client-directed project delays, weaker-than-expected Canadian activity and lower utilization in the lower 48 states materially affected the quarter. Texas flooding destroyed some equipment; management believed insurance coverage was adequate but could not yet estimate the damage. The company’s 2015 capital budget was $10 million, and management expected maintenance capital spending to be below that amount.
Key risks include dependence on oil and gas industry spending, commodity-price volatility, high fixed operating costs, contract delays or cancellations, weather and operational disruptions, customer concentration and credit risk, competition, foreign-currency exposure and access to capital. Management noted that sustained or further declines in oil and gas prices could result in future impairment charges for seismic equipment and possible valuation allowances against tax assets.
A shareholder demand concerning alleged merger-related fiduciary and disclosure issues remained a contingency during the period. The related lawsuit was dismissed without prejudice in March 2015. The Special Litigation Committee completed its review on July 23, 2015, rejected the demands and reported its findings to the board on August 4, 2015. The filing also disclosed $750,000 accrued for tax-related contingencies at the merger date. No material adverse effect from ordinary-course legal proceedings was anticipated.
The company had $3.297 million of office operating lease obligations, $1.965 million of capital lease obligations and $12.966 million of debt obligations, for total disclosed contractual obligations of $18.228 million. It also had approximately $233,000 of unused letters of credit and no off-balance-sheet arrangements.
Investor verification priorities
- Verify the final purchase-price allocation for the February 2015 merger, which was preliminary and could be materially adjusted.
- Assess whether crew utilization, pricing and customer demand improved from the depressed second-quarter levels.
- Reconcile the company’s non-GAAP EBITDA presentation with GAAP net loss and operating cash flow.
- Monitor cash generation, debt maturities, borrowing-base availability and compliance with the 1.50:1 current-ratio and $150 million tangible-net-worth covenants.
- Evaluate the financial impact of flooding, insurance recoveries and any equipment impairment charges.
- Review customer concentration, receivable collectability and the adequacy of the $775,000 allowance for doubtful accounts.
- Confirm whether the suspension of dividends and the reduced capital budget remain in effect.