Dawson Geophysical Company 2014 Form 10-K Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2014. Although filed under the Dawson Geophysical Company name after the February 11, 2015 merger, the historical financial statements and operating results principally represent former TGC Industries, Inc. and its subsidiaries, including Eagle Canada, and exclude historical Legacy Dawson results.
The company provides land-based 3-D seismic data acquisition services to oil and gas exploration and development companies in the United States and Canada. It operated eight crews at December 31, 2014, including three in the United States and five in Canada. Demand is closely tied to oil and natural gas prices, drilling activity and customer exploration budgets.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $118.8 million | $134.5 million | Down 11.7% |
| Operating loss | $13.5 million | $7.4 million | Loss increased |
| Net loss | $9.5 million | $6.3 million | Loss increased |
| Basic loss per share | $1.30 | $0.87 | More unfavorable |
| EBITDA | $5.6 million | $17.3 million | Down 67.5% |
| Cash flow from operations | $9.3 million | $23.0 million | Down 59.7% |
| Capital expenditures | $8.0 million | $2.5 million | Increased |
| Cash and equivalents | $11.4 million | $16.1 million | Down $4.8 million |
| Working capital | $12.5 million | $17.7 million | Down $5.2 million |
Revenue mix was approximately $68.4 million from the United States and $50.5 million from Canada. Cost of services was $101.6 million, or 85.5% of revenue, compared with 80.0% in 2013. Approximate 2014 margins were 14.5% gross, negative 11.4% operating, 4.7% EBITDA and negative 8.0% net.
Total assets were $85.1 million and shareholders’ equity was $57.1 million at year-end. Legacy TGC notes payable totaled $12.5 million, including $7.3 million of current maturities, and capital lease obligations totaled approximately $1.2 million. The $5.0 million revolving credit facility was unused and was scheduled to expire on September 16, 2015. The filing separately reports that Legacy Dawson had $8.6 million of bank notes and $10.2 million of capital lease obligations at December 31, 2014; these amounts were not included in Legacy TGC’s historical balance sheet.
Material Changes Versus Prior Comparable Period
- Revenue declined because of continued weakness in the seismic market, fewer operating crews and adverse winter weather in the United States and Canada.
- Cost of services declined in dollars but increased materially as a percentage of revenue, reflecting lower utilization, weather-related costs and a greater proportion of higher-cost shot-hole work.
- SG&A increased 21.5% to $11.7 million, including $1.8 million of merger-related transaction costs.
- Depreciation and amortization decreased 22.3% to $19.2 million following the maintenance capital expenditure policy adopted in 2013.
- EBITDA declined from $17.3 million to $5.6 million, while the company remained unprofitable for the second consecutive year.
- Operating cash flow decreased substantially, and cash declined despite reduced capital spending relative to 2012.
- Backlog declined to approximately $37 million at December 31, 2014, from $52 million one year earlier. Management anticipated completing the 2014 backlog during 2015.
- Capital expenditures were approximately $8.0 million, including a 10,500-channel INOVA Hawk system financed primarily with a $6.1 million equipment note.
Merger, Outlook, Risks and Unusual Items
On February 11, 2015, Legacy TGC completed its strategic business combination with Legacy Dawson. Legacy Dawson shareholders received approximately 66% of the combined company and Legacy TGC shareholders retained approximately 34%. Legacy Dawson was the accounting acquirer, so future historical financial statements will generally reflect Legacy Dawson’s results. The first post-merger quarterly report was expected to cover the quarter ended March 31, 2015.
Management stated that capital resources, cash flow and available borrowing capacity were expected to support current operations and anticipated 2015 capital expenditures, although future funding depends on operating performance and industry conditions. No formal revenue or earnings guidance was provided.
- Principal risks include dependence on oil and gas spending, volatile oil and gas prices, high fixed costs, crew underutilization, weather and permitting delays, contract cancellations, intense competition and customer credit risk.
- Two customers represented approximately 18% and 11% of 2014 revenue. Four customers represented 26%, 12%, 10% and 10% of year-end accounts receivable.
- Canadian operations expose the company to foreign currency risk and seasonal operating constraints. The company did not use currency hedges.
- Core equipment was pledged as collateral for debt requiring monthly payments of approximately $128,000 to $216,000, with maturities extending from June 2015 through September 2017.
- The company does not insure against certain business interruption risks, including equipment maintenance and weather delays. Uninsured losses or losses exceeding policy limits could be material.
- A purported Legacy Dawson shareholder filed a class and derivative action concerning the merger, alleging fiduciary-duty breaches and disclosure deficiencies. The company moved to dismiss the class claims and stated that it intended to defend the litigation vigorously.
- No impairment charge was recorded for 2014, although reduced demand, lower oil and gas prices or unsuccessful merger integration could trigger future equipment or intangible-asset impairments.
- No cash or stock dividend was declared or paid in 2014.
Most Important Facts for Investors to Verify
- Confirm that 2014 historical financial results represent Legacy TGC only and are not comparable to the post-merger combined company.
- Review the subsequent filings for the combined company’s purchase accounting, goodwill and intangible assets, merger costs and Legacy Dawson debt and lease obligations.
- Assess near-term debt maturities, collateralized equipment and renewal or replacement of the $5.0 million revolving credit facility.
- Evaluate backlog conversion, crew utilization, pricing and customer cancellations in light of the continued downturn in seismic demand.
- Monitor cash generation, working capital, accounts receivable concentration and the allowance for doubtful accounts, which was $557,867 at year-end.
- Follow the merger-related shareholder litigation and any resulting settlement, damages or disclosure obligations.
- Verify whether future capital spending can be funded from operations without materially increasing borrowings or diluting shareholders.