DAWSON GEOPHYSICAL CO - Quarter Report: 2010 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2010.

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                   .

 

Commission File Number 001-32472

 

TGC INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:  (972) 881-1099

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to be submit and post such files).  Yes  o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Title of Each Class		Outstanding at October 29, 2010
Common Stock ($.01 Par Value)		19,204,448

 

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

		Page
Reference is made to the succeeding pages for the following financial information:
Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		3
Consolidated Statements of Earnings for the three months and nine months ended September 30, 2010 and 2009 (unaudited)		5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)		6
Notes to Consolidated Financial Statements		7

 

2

 

TGC INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2010

 

		September 30,			December 31,
		2010			2009
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	19,578,600		$	25,504,149
Trade accounts receivable, net of allowance for doubtful accounts of $-0- in 2010 and $623,109 in 2009		10,089,143			9,455,224
Cost and estimated earnings in excess of billings on uncompleted contracts		1,188,185			474,059
Prepaid expenses and other		1,770,083			648,872
Prepaid federal and state income tax		741,559			943,600
Total current assets		33,367,570			37,025,904
PROPERTY AND EQUIPMENT - at cost
Machinery and equipment		107,436,455			100,687,976
Automobiles and trucks		9,734,974			8,914,434
Furniture and fixtures		407,607			397,879
Leasehold improvements		14,994			14,994
		117,594,030			110,015,283
Less accumulated depreciation and amortization		(73,257,217		)	(62,431,950		)
		44,336,813			47,583,333
Goodwill		1,427,787			1,408,089
Other assets		56,284			32,399
		1,484,071			1,440,488
Total assets		$	79,188,454		$	86,049,725

 

See Notes to Consolidated Financial Statements

 

3

 

TGC INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS - CONTINUED

September 30, 2010

 

		September 30,			December 31,
		2010			2009
		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable		$	4,253,840		$	4,126,474
Accrued liabilities		1,804,050			1,337,437
Billings in excess of costs and estimated earnings on uncompleted contracts		4,022,854			7,077,941
Current maturities of notes payable		6,608,176			6,407,892
Current portion of capital lease obligations		877,365			780,526
Total current liabilities		17,566,285			19,730,270
NOTES PAYABLE, less current maturities		3,711,801			5,875,390
CAPITAL LEASE OBLIGATIONS, less current portion		886,356			631,757
LONG-TERM DEFERRED TAX LIABILITY		5,723,149			7,117,030
COMMITMENTS AND CONTINGENCIES		—			—
SHAREHOLDERS’ EQUITY
Preferred stock, $1.00 par value; 4,000,000 shares authorized; issued - none		—			—
Common stock, $.01 par value; 25,000,000 shares authorized; 19,242,251 and 18,323,091 issued in each period, respectively		192,423			183,231
Additional paid-in capital		27,398,685			27,014,078
Retained earnings		23,958,103			25,889,008
Treasury stock, at cost, 37,803 shares		(257,323		)	(257,323		)
Accumulated other comprehensive income (loss)		8,975			(133,716		)
		51,300,863			52,695,278
Total liabilities and shareholders’ equity		$	79,188,454		$	86,049,725

 

See Notes to Consolidated Financial Statements

 

4

 

TGC INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

September 30, 2010

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2010			2009			2010			2009
Revenue		$	22,843,724		$	16,083,161		$	75,618,349		$	74,685,172
Cost and expenses
Cost of services		18,932,507			14,120,847			60,854,197			51,931,010
Selling, general and administrative		1,579,159			994,643			5,008,469			3,136,509
Depreciation and amortization expense		3,863,486			3,449,011			11,520,417			10,881,764
		24,375,152			18,564,501			77,383,083			65,949,283
Income (loss) from operations		(1,531,428		)	(2,481,340		)	(1,764,734		)	8,735,889
Interest expense		187,328			245,751			617,142			782,711
Income (loss) before income taxes		(1,718,756		)	(2,727,091		)	(2,381,876		)	7,953,178
Income tax expense (benefit)		(447,949		)	(992,726		)	(450,970		)	3,410,612
NET INCOME (LOSS)		$	(1,270,807	)	$	(1,734,365	)	$	(1,930,906	)	$	4,542,566
Earnings (loss) per common share:
Basic		$	(0.07	)	$	(0.09	)	$	(0.10	)	$	0.24
Diluted		$	(0.07	)	$	(0.09	)	$	(0.10	)	$	0.24
Weighted average number of common shares outstanding:
Basic		19,204,448			19,199,552			19,202,250			19,192,575
Diluted		19,204,448			19,199,552			19,202,250			19,240,516

 

See Notes to Consolidated Financial Statements

 

5

 

 

TGC INDUSTRIES, INC.

Consolidated Statement of Cash Flows (Unaudited)

September 30, 2010

 

		Nine Months Ended
		September 30,
		2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(1,930,906	)	$	4,542,566
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,520,417			10,881,764
(Gain) loss on disposal of property and equipment		(25,183		)	(167,665		)
Non-cash compensation		394,230			398,445
Deferred income taxes		(1,419,648		)	(455,977		)
Changes in operating assets and liabilities
Trade accounts receivable		(575,271		)	327,166
Cost and estimated earnings in excess of billings on uncompleted contracts		(712,943		)	2,039,489
Prepaid expenses and other		970,187			1,405,067
Prepaid federal and state income tax		211,412			—
Other assets		(23,772		)	16,330
Trade accounts payable		104,219			(2,339,588		)
Accrued liabilities		461,359			627,808
Billings in excess of cost and estimated earnings on uncompleted contracts		(3,056,224		)	(4,395,478		)
Income taxes payable		—			3,546,418
NET CASH PROVIDED BY OPERATING ACTIVITIES		5,917,877			16,426,345
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(5,085,358		)	(857,536		)
Proceeds from sale of property and equipment		111,702			301,791
NET CASH USED IN INVESTING ACTIVITIES		(4,973,656		)	(555,745		)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable		(6,053,353		)	(5,034,522		)
Principal payments on capital lease obligations		(814,472		)	(814,690		)
Proceeds from exercise of stock options		—			9,600
Payment of dividends		(431		)	(385		)
NET CASH USED IN FINANCING ACTIVITIES		(6,868,256		)	(5,839,997		)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(5,924,035		)	10,030,603
EFFECT OF EXCHANGE RATES ON CASH		(1,154		)	—
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		25,504,149			24,114,351
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	19,578,600		$	34,144,954
Supplemental cash flow information
Interest paid		$	617,142		$	782,711
Income taxes paid		$	1,072,831		$	1,660,864
Noncash investing and financing activities
Capital lease obligations incurred		$	1,155,286		$	433,645
Financed equipment purchase		$	1,988,910		$	—
Financed insurance premiums		$	2,088,161		$	2,000,955
Restricted stock awards to employees		$	20,750		$	24,350

 

See Notes to Consolidated Financial Statements

 

6

 

TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

 

NOTE A

 

BASIS OF PRESENTATION

 

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and the instructions to Form 10-Q.  Accordingly, they do not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements.  References to “we,” “us,” “our,” “its,” or the “Company” refer to TGC Industries, Inc. and our subsidiaries.

 

In October of 2009, the Company acquired the stock of Eagle Canada, Inc.  The consolidated financial statements for the three and nine months ended September 30, 2010, include Eagle Canada since the date of acquisition.

 

In connection with the preparation of these consolidated financial statements, the Company evaluated subsequent events after the balance sheet date of September 30, 2010, through November 9, 2010, the date these consolidated financial statements were issued.

 

REVENUE RECOGNITION

 

Seismic Surveys

 

The Company provides seismic data acquisition survey services to its customers under general service agreements which define certain obligations for the Company and for its customers.  A supplemental agreement setting forth the terms of a specific project, which may be cancelled by either party upon 30 days’ advance written notice, is entered into for every project.  These supplemental agreements are either “turnkey” agreements providing for a fixed fee to be paid for each unit of seismic data acquired or “term” agreements providing for a fixed hourly, daily, or monthly fee during the term of the project.  The duration of these projects will vary from a few days to several months.  The Company recognizes revenue when services are performed under both types of agreements.  Services are defined as the commencement of data acquisition.  Under turnkey agreements, the total number of units of seismic data to be gathered is set forth in the agreement, and revenue is recognized as services are performed on a per unit of seismic data acquired rate.  Under term agreements, revenue is recognized as services are performed based on the time worked rate provided in the term agreement.  Under both turnkey and term agreements, cost of earned revenue is recognized by multiplying total estimated agreement cost by the percentage-of-completion of the agreement.  The excess of that amount over the cost of earned revenue reported in prior periods is recognized as cost of earned revenue for the period.  Agreements are not segmented or combined for purposes of calculating percentage of completion.  The asset “Cost and estimated earnings in excess of billings on uncompleted contracts” represents cost incurred on turnkey agreements in excess of billings on those agreements.  The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings on turnkey agreements in excess of cost on those agreements.

 

7

 

TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2010

 

NOTE A - continued

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued the FASB Accounting Standards Codification (the “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretative releases of the Securities and Exchange Commission (the “SEC”) are also sources of authoritative U.S. GAAP for SEC registrants. The ASC became effective for financial statements issued for interim and annual periods ending after September 15, 2009, and superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative.  The Company adopted the ASC effective September 30, 2009, and, other than the manner in which new accounting guidance is referenced, the adoption of the ASC had no impact on the Company’s results of operations, financial position, or notes to the financial statements.

 

NOTE B — MANAGEMENT PRESENTATION

 

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and changes in financial position have been included.  The results of the interim periods are not necessarily indicative of results to be expected for the entire year.  For further information, refer to the financial statements and the footnotes thereto included in the Company’s Annual Report for the year ended December 31, 2009, filed on Form 10-K.

 

NOTE C — EARNINGS PER SHARE

 

Basic earnings per common share are based upon the weighted average number of shares of common stock (“common shares”) outstanding.  Diluted earnings per share are based upon the weighted average number of common shares outstanding and, when dilutive, common shares issuable for stock options, warrants, and convertible securities.  All earnings per common share for the three-month and nine-month periods ended September 30, 2010, and 2009, have been adjusted for the 5% stock dividend paid on May 14, 2010, to shareholders of record as of April 30, 2010.

 

8

 

TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2010

 

NOTE C - continued

 

The following is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted net income (loss) per share:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		(Unaudited)						(Unaudited)
		2010			2009			2010			2009
Basic:
Numerator:
Net income		$	(1,270,807	)	$	(1,734,365	)	$	(1,930,906	)	$	4,542,566
Denominator:
Basic - weighted average common shares outstanding		19,204,448			19,199,552			19,202,250			19,192,575
Basic EPS		$	(0.07	)	$	(0.09	)	$	(0.10	)	$	0.24
Diluted:
Numerator:
Net income		$	(1,270,807	)	$	(1,734,365	)	$	(1,930,906	)	$	4,542,566
Denominator:
Weighted average common shares outstanding		19,204,448			19,199,552			19,202,250			19,192,575
Effect of Dilutive Securities:
Stock options		—			—			—			47,941
		19,204,448			19,199,552			19,202,250			19,240,516
Diluted EPS		$	(0.07	)	$	(0.09	)	$	(0.10	)	$	0.24

 

Outstanding and exercisable options to purchase 64,867 and 88,249 shares of the Company’s common stock were not included in the computation of diluted earnings per share as the effect would have been anti-dilutive for the three and nine months ended September 30, 2010 due to net losses in those periods.

 

NOTE D — DIVIDENDS

 

On April 20, 2010, the Company declared a five percent (5%) stock dividend on its outstanding common shares.  The 5% stock dividend was paid on May 14, 2010, to shareholders of record as of April 30, 2010.

 

9

 

TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2010

 

NOTE E — INCOME TAXES

 

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes.  In addition, the Company paid, during the first nine months of 2010, federal and various state estimated income taxes for tax year 2010, as well as various state income taxes for tax year 2009.

 

NOTE F — SHARE-BASED COMPENSATION

 

The Company accounts for share-based compensation awards and for unvested awards outstanding using the modified prospective application method.  Accordingly, we recognized the fair value of the share-based compensation awards as wages in the Consolidated Statements of Earnings on a straight-line basis over the vesting period.  We have recognized compensation expense, relative to share-based awards, in wages in the Consolidated Statements of Earnings of approximately $120,000 and $101,000, less than $0.01 per share, for the three months ended September 30, 2010, and 2009, and approximately $394,000 and $398,000, or approximately $0.02 per share, for the nine months ended September 30, 2010, and 2009, respectively.

 

As of September 30, 2010, there was approximately $407,000 of unrecognized compensation expense related to our two share-based compensation plans which the Company expects to recognize over a period of three years.

 

NOTE G — ACQUISITION OF EAGLE CANADA SUPPLEMENTARY DATA

 

On October 19, 2009, we disclosed our entry into a material definitive agreement regarding the acquisition of the stock of Eagle Canada, Inc., a Delaware corporation (“Eagle Canada”).  Eagle Canada was a wholly-owned subsidiary of Eagle Geophysical, Inc. and Eagle Geophysical Onshore, Inc. (the “Debtors”), which were debtors in a Chapter 11 bankruptcy proceeding in Houston, Texas.  Eagle Canada is in the business of providing seismic data and surveying services to the Canadian energy industry and has its principal place of business located in Calgary, Alberta, Canada.  By Order dated October 14, 2009, the Bankruptcy Court approved the sale of the Eagle Canada stock by the Debtors to TGC and authorized the Debtors to enter into a stock purchase agreement with TGC.  In accordance with the terms of the stock purchase agreement, the sale transaction closed on October 16, 2009, with TGC acquiring the Eagle Canada stock for a total purchase price of approximately $10.3 million paid from existing cash.  The acquisition provides the Company with a new geographic region in which to operate.  The seismic recording equipment used by Eagle Canada is interchangeable with that of TGC.

 

10

 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Form 10-Q. Portions of this document that are not statements of historical or current fact are forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. The cautionary statements made in this Form 10-Q should be read as applying to all related forward-looking statements wherever they appear in this Form 10-Q. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause our actual results to differ materially from anticipated results include those discussed in Part II, Item 1A. “RISK FACTORS.”

 

Forward Looking Statements

 

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  All statements other than statements of historical fact included in this report regarding the Company’s strategies and plans for growth are forward-looking statements.  These forward-looking statements are often characterized by the terms “may,” “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” and other words and terms of similar meanings and do not reflect historical facts.  Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.  Important factors that could cause actual results to differ materially from such expectations are disclosed in the Company’s SEC filings, and include, but are not limited to, the dependence upon energy industry spending for seismic services, the unpredictable nature of forecasting weather, the potential for contract delay or cancellation, the potential for fluctuations in oil and gas prices, the availability of capital resources, and the current economic downturn which could adversely affect our revenues and cash flow if our customers, and/or potential customers, become unable to pay, or must delay payment of, amounts owing to the Company because such customers are not successful in generating revenues or are precluded from securing necessary financing.  The forward-looking statements contained herein reflect the current views of the Company’s management, and the Company assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those contemplated by such forward-looking statements.

 

Executive Overview

 

TGC Industries, Inc. is a Texas corporation, and with its wholly-owned subsidiary, Eagle Canada, Inc., a Delaware corporation, (collectively “TGC” or the “Company”), is primarily engaged in the geophysical service business of conducting Three-D (“3-D”) surveys for clients in the oil and gas business.  TGC’s principal business office is located at 101 E. Park Blvd., Suite 955, Plano, Texas 75074 (Telephone: 972-881-1099).  TGC’s internet address is www.tgcseismic.com.  TGC makes available free of charge on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K as soon as reasonably practicable after filing with, or furnishing such information to, the SEC.

 

11

 

The Company is a leading provider of seismic data acquisition services throughout the continental United States and Canada.  We supply seismic data to companies engaged in the domestic exploration and development of oil and natural gas on land and in land-to-water transition areas. Our customers rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of existing hydrocarbons, to optimize the development and production of hydrocarbon reservoirs, to better delineate existing oil and natural gas fields, and to augment reservoir management techniques.  We operated six seismic crews in the lower 48 states during the third quarter of 2010.  We operated one crew in Canada during the third quarter.  Due to the seasonality of the Canadian market, the third quarter is usually a weak quarter for activity in Canada, and we expect increasing levels of seismic activity in that region for the next two quarters starting with the fourth quarter of 2010.

 

We acquire geophysical data using the latest in 3-D survey techniques. We introduce acoustic energy into the ground by using vibration equipment or dynamite detonation, depending on the surface terrain and subsurface requirements. The reflected energy, or echoes, is received through geophones, converted into a digital signal at a multi-channel recording unit, and then transmitted to a central recording vehicle. Subsurface requirements dictate the number of channels necessary to perform our services. With our state-of-the-art seismic equipment, including computer technology and multiple channels, we acquire, on a cost effective basis, immense volumes of seismic data that when processed and interpreted produce more precise images of the earth’s subsurface. Our customers then use our seismic data to generate 3-D geologic models that help reduce finding costs and improve recovery rates from existing wells.

 

We provide our seismic data acquisition services primarily to major and independent domestic onshore oil and natural gas exploration and development companies for use in the onshore drilling and production of oil and natural gas in the continental United States and Canada. The main factors influencing demand for seismic data acquisition services in our industry are the level of drilling activity by oil and natural gas companies and the sizes of such companies’ exploration and development budgets, which, in turn, depend largely on current and anticipated future crude oil and natural gas prices and depletion rates.

 

The services we provide to our customers vary according to the size and needs of each customer. Our services are marketed by supervisory and executive personnel who contact customers to determine their needs and respond to customer inquiries regarding the availability of crews. Contacts are based principally upon professional relationships developed over a number of years. There are a number of consultants in the oil and natural gas industry who process and interpret seismic data for oil and natural gas companies. These consultants can have an influence in determining which company their customers use to acquire seismic data.

 

The acquisition of seismic data for the oil and natural gas industry is a highly competitive business.  There are approximately 57 seismic crews currently operating in the continental United States and Canada. Contracts for such services generally are awarded on the basis of price quotations, crew experience, and the availability of crews to perform in a timely manner, although factors other than price, such as crew safety performance history, and technological and operational expertise, are often determinative. Our competitors include companies with financial resources that are significantly greater than our own as well as companies of comparable and smaller size. Our primary competitors are Dawson Geophysical Company, Geo Kinetics, Inc., and CGG-Veritas.  These competitors are publicly-traded companies with long operating histories which field numerous crews and work in a number of different regions and terrain.  In addition to the previously named companies, we also compete for projects from time to time with smaller seismic companies which operate in local markets with only one or two crews and often specialize in specific regions or type of operations.  We believe that our long-term industry expertise, the customer relationships developed over our history, and our financial stability give us an advantage over most of our competitors in the industry.

 

12

 

Results of Operations

 

The Company’s business is subject to seasonal variations; thus the results of operations for the three and nine months ended September 30, 2010, are not necessarily indicative of a full year’s results.  The results of operations for the three and nine months ended September 30, 2010, include Eagle Canada which was acquired by the Company in October of 2009.

 

Nine Months Ended September 30, 2010, Compared to Nine Months Ended September 30, 2009 (Unaudited)

 

Revenues.  Our revenues were $75,618,349 for the nine months ended September 30, 2010, compared to $74,685,172 for the same period of 2009, an increase of 1.2%.  We operated six seismic crews in the U.S. during each of the three quarters in the nine months ended September 30, 2010, compared to nine crews during the first quarter, six crews during most of the second quarter, and four crews during the third quarter of 2009.  Revenues from Eagle Canada also contributed to the increase.

 

Cost of services.  Our cost of services was $60,854,197 for the nine months ended September 30, 2010, compared to $51,931,010 for the same period of 2009, an increase of 17.2%.  This increase was primarily attributable to the inclusion of Canadian operations, continuing pricing pressures as a result of the current recession and industry wide slow-down, and additional costs incurred for equipment and helicopter rentals during the first quarter of 2010.  As a percentage of revenue, cost of services was 80.5% for the nine months ended September 30, 2010, compared to 69.5% for the same period of 2009.

 

Selling, general, and administrative expenses.  SG&A expenses were $5,008,469 for the nine months ended September 30, 2010, compared to $3,136,509 for the same period of 2009, an increase of 59.7%.  This increase was primarily attributable to additional expenses associated with management and the integration costs of the Eagle Canada acquisition.  SG&A expense as a percentage of revenues was 6.6% for the nine months ended September 30, 2010, compared with 4.2% for the same period of 2009.

 

Depreciation and amortization expense.  Depreciation and amortization expense was $11,520,417 for the nine months ended September 30, 2010, compared to $10,881,764 for the same period of 2009, an increase of 5.9%.  Depreciation and amortization expense as a percentage of revenues was 15.2% for the nine months ended September 30, 2010, compared to 14.6% for the same period of 2009.

 

Income and loss from operations.  Loss from operations was $1,764,734 for the nine months ended September 30, 2010, compared to income from operations of $8,735,889 for the same period of 2009.  The decrease was attributable to several factors, including the fact that income from operations for the nine months ended September 30, 2009 was among the highest in Company history.  Other factors contributing to the decrease include lower overall demand, a competitive pricing environment for seismic services, continuing uncertainty regarding the future energy policy in the United States, and our operation of six seismic crews in the U.S. during each of the three quarters in the nine months ended September 30, 2010, compared to nine crews during the first quarter, six crews during most of the second quarter, and four crews during the third quarter of 2009.  EBITDA decreased $9,861,970 to $9,755,683 for the nine months ended September 30, 2010, from $19,617,653 for the same period of 2009, a decrease of 50.3%.  This decrease resulted from those factors discussed above.  For a definition of EBITDA, a reconciliation of EBITDA to net income, and discussion of EBITDA, refer to the section entitled “EBITDA” found below.

 

Interest expense.  Interest expense was $617,142 for the nine months ended September 30, 2010, compared to $782,711 for the same period of 2009, a decrease of 21.1%.  This decrease was primarily attributable to our continuing principal payments on notes payable and capital lease obligations.

 

13

 

Income tax expense.  The income tax benefit was $450,970 for the nine months ended September 30, 2010, compared to income tax expense of $3,410,612 for the same period of 2009.  The effective tax benefit rate for the nine months ended September 30, 2010, was 18.9% primarily due to state margin taxes and permanent tax differences compared to an effective tax rate of 42.9% for the same period of 2009.  See Note E of Notes to Financial Statements in Item 1.

 

Three Months Ended September 30, 2010, Compared to Three Months Ended September 30, 2009 (Unaudited)

 

Revenues.  Our revenues were $22,843,724 for the three months ended September 30, 2010, compared to $16,083,161 for the same period of 2009, an increase of 42.0%.  This increase was primarily due to our operation of six crews in the U.S. during the third quarter of 2010 compared with four crews in the U.S. during the third quarter of 2009.

 

Cost of services.  Our cost of services was $18,932,507 for the three months ended September 30, 2010, compared to $14,120,847 for the same period of 2009, an increase of 34.1%.  This increase was primarily attributable to increased revenue.  As a percentage of revenues, cost of services was 82.9% for the three months ended September 30, 2010, compared to 87.8% for the same period of 2009.

 

Selling, general, and administrative expenses.  SG&A expenses were $1,579,159 for the three months ended September 30, 2010, compared to $994,643 for the same period of 2009, an increase of 58.8%.  This increase was primarily due to the inclusion of Eagle Canada in this year’s third quarter.  SG&A expense as a percentage of revenues was 6.9% for the three months ended September 30, 2010, compared with 6.2% for the same period of 2009.

 

Depreciation and amortization expense.  Depreciation and amortization expense was $3,863,486 for the three months ended September 30, 2010, compared to $3,449,011 for the same period of 2009, an increase of 12.0%.  This increase was primarily attributable to additions of seismic recording equipment, vibration vehicles, and other equipment and vehicles resulting from the acquisition of Eagle Canada, and the recent purchase of a new 5,000 channel GSR (Geospace Seismic Recorder) wireless recording system.  Depreciation and amortization expense as a percentage of revenues was 16.9% for the three months ended September 30, 2010, compared to 21.4% for the same period of 2009.

 

Loss from operations.  Loss from operations was $1,531,428 for the three months ended September 30, 2010, compared to $2,481,340 for the same period of 2009.  This decrease was primarily attributable to an increase in revenues partially offset by increases in SG&A expenses, cost of services, and depreciation and amortization expenses discussed above.  EBITDA increased $1,364,387 to $2,332,058 for the three months ended September 30, 2010, from $967,671 for the same period of 2009, an increase of 141.0%.  This increase was a result of those factors mentioned above.  For a definition of EBITDA, a reconciliation of EBITDA to net income, and discussion of EBITDA, please refer to the section entitled “EBITDA” found below.

 

Interest expense.  Interest expense was $187,328 for the three months ended September 30, 2010, compared to $245,751 for the same period of 2009, a decrease of 23.8%.  This decrease was primarily attributable to our continuing payments on notes payable and capital lease obligations.

 

14

 

Income tax benefit.  Income tax benefit was $447,949 for the three months ended September 30, 2010, compared to $992,726 for the same period of 2009.  The effective tax benefit rate was 26.1% for the three months ended September 30, 2010, compared to 36.4% for the same period of 2009.  See Note E of Notes to Financial Statements in Item 1.

 

EBITDA

 

We define EBITDA as net income plus interest expense, income taxes, and depreciation and amortization expense. We use EBITDA as a supplemental financial measure to assess:

 

·                  the financial performance of our assets without regard to financing methods, capital structures, taxes, or historical cost basis;

 

·                  our liquidity and operating performance over time and in relation to other companies that own similar assets and that we believe calculate EBITDA in a manner similar to us; and

 

·                  the ability of our assets to generate cash sufficient for us to pay potential interest costs.

 

We also understand that such data is used by investors to assess our performance. However, EBITDA is not a measure of operating income, operating performance, or liquidity presented in accordance with generally accepted accounting principles. When assessing our operating performance or our liquidity, you should not consider this data in isolation or as a substitute for our net income, cash flow from operating activities, or other cash flow data calculated in accordance with generally accepted accounting principles.  EBITDA excludes some, but not all, items that affect net income and operating income, and these measures may vary among other companies.  Therefore, EBITDA as presented below may not be comparable to similarly titled measures of other companies.  Further, the results presented by EBITDA cannot be achieved without incurring the costs that the measure excludes: interest expense, income taxes, and depreciation and amortization.

 

The following table reconciles our EBITDA to our net income:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2010			2009			2010			2009
		(unaudited)						(unaudited)
Net income (loss)		$	(1,270,807	)	$	(1,734,365	)	$	(1,930,906	)	$	4,542,566
Depreciation and amortization		3,863,486			3,449,011			11,520,417			10,881,764
Interest expense		187,328			245,751			617,142			782,711
Income tax expense (benefit)		(447,949		)	(992,726		)	(450,970		)	3,410,612
EBITDA		$	2,332,058		$	967,671		$	9,755,683		$	19,617,653

 

15

 

 

Liquidity and Capital Resources

 

Cash Flows

 

Cash flows from operating activities.

 

Net cash provided by operating activities was $5,917,877 for the nine months ended September 30, 2010, compared to $16,426,345 for the same period of 2009.  The $10,508,468 decrease during the first nine months of 2010 from the same period of 2009 was primarily attributable to the decrease in net income, the timing of billings and revenue recognition, the collections of accounts receivable, the timing of receipt and payment of invoices, federal and state income taxes payable, and the mix of contracts.

 

Working capital decreased $1,494,349 to $15,801,285 as of September 30, 2010, from the December 31, 2009 working capital of $17,295,634.  This decrease was primarily due to a $5,925,549 decrease in cash and cash equivalents, partially offset by an increase in costs and estimated earnings in excess of billings on uncompleted contracts of $714,126, an increase in prepaid expenses and other of $1,121,211, and a decrease in billings in excess of costs and estimated earnings on uncompleted contracts of $3,055,087.

 

Cash flows used in investing activities.

 

Net cash used in investing activities was $4,973,656 for the nine months ended September 30, 2010, and $555,745 for the nine months ended September 30, 2009.  This increase was due to an increase in capital expenditures of $4,227,822 and a decrease in proceeds from the sale of property and equipment of $190,089.

 

Cash flows used in financing activities.

 

Net cash used in financing activities was $6,868,256 for the nine months ended September 30, 2010, and $5,893,997 for the nine months ended September 30, 2009.  The increase was due primarily to principal payments on notes payable attributable to Eagle Canada.

 

Capital expenditures.

 

During the nine months ended September 30, 2010, the Company acquired $8,229,554 of vehicles and equipment, primarily to replace similar vehicles and equipment, and purchased a new 5,000 channel seismic recording system.  Cash of $5,085,358, notes payable of $1,988,910 from a commercial bank, and capital lease obligations from a vehicle leasing company of $1,155,286 were used to finance these acquisitions.  Although we do not budget for our capital expenditures, we may purchase additional equipment during 2010 should the demand for our services increase.

 

Liquidity

 

Our primary source of liquidity is cash generated from operations and short-term borrowings from commercial banks and equipment lenders.  Based on current forecasts, we believe that we have sufficient available cash and borrowing capacity to fund our working capital needs over the next 12 months.

 

16

 

Capital Resources

 

We have relied on cash generated from operations, short-term borrowings from commercial banks and equipment lenders, and proceeds from a public offering of our common stock to fund our working capital requirements and capital expenditures.

 

In December of 2007, we completed a $4,120,254 loan transaction with a commercial lender for the purpose of providing funds for the purchase of our seventh new ARAM ARIES recording system. This loan is repayable over a period of 48 months at a fixed per annum interest rate of 6.38%. This loan is collateralized by the new recording system equipment and the recording vehicles and two semi-trailers that transport the newly purchased equipment between jobs.  In January of 2008, the Company entered into a $2,463,101 loan agreement with a bank to provide financing for the purchase of new vibration vehicles.  The loan is repayable over a period of 57 months at a fixed per annum interest rate of 6.35% and is collateralized by the vibration vehicles.  In February of 2008, the Company exercised its purchase option for seismic recording equipment it had been renting.  In March of 2008, the Company entered into a $2,975,844 loan agreement with a commercial lender to provide financing for the purchase of this rented equipment and to replace an existing loan the Company had with the lender.  This loan is repayable over a period of 48 months at a fixed per annum interest rate of 5.75% and is collateralized by the equipment.  In July of 2008, the Company entered into a $3,200,000 loan agreement with a bank to provide financing for the purchase of seismic recording equipment.  This loan is repayable over 36 months at a fixed per annum interest rate of 6.00% and is collateralized by the equipment.  In August of 2008, the Company entered into a $2,003,700 loan agreement with a bank to provide financing for the purchase of new vibration vehicles.  This loan is repayable over 36 months at a fixed per annum interest rate of 6.00% and is collateralized by the vibration vehicles.  In September of 2008, the Company entered into a $2,690,402 loan agreement with a commercial lender to provide financing for our eighth new ARAM ARIES recording system. This loan is repayable over a period of 48 months at a fixed per annum interest rate of 6.00% and is collateralized by the recording system.  Also in September of 2008, the Company entered into a $1,092,053 loan agreement with the same commercial lender to provide financing for recording equipment that goes with the eighth ARAM ARIES recording system.  This loan is co-terminus with the loan for the recording system, carries a fixed per annum interest rate of 6.00%, and is collateralized by the recording equipment.  In January of 2008, Eagle Canada entered into a $4,660,070 loan agreement with a bank to provide financing for the purchase of a new ARAM ARIES recording system. This loan is repayable over a period of 36 months at a fixed per annum interest rate of 6.14% and is collateralized by the recording system.  In June of 2010, we purchased a 3,000 channel Geosource seismic recording system for approximately $3,598,000.  This system was paid for in July of 2010 with existing cash.  In September of 2010, the Company entered into a $1,988,910 loan agreement with a commercial lender to purchase 2,000 additional recording channels that was added to the 3,000 channel Geosource seismic recording system purchased in July 2010.  This loan carries a fixed per annum interest rate of 5.00%, and is collateralized by the 2,000 channels of recording equipment.

 

In April of 2005, we entered into a revolving credit agreement with a commercial bank.  Effective September 16, 2006, we renewed our revolving credit agreement and increased the borrowing limit from $3,500,000 to $5,000,000.  The borrowing limit under that revolving line of credit agreement remains at $5,000,000 and was renewed on September 16, 2007, September 16, 2008, September 16, 2009, and again on September 16, 2010.  The revolving line of credit agreement does not expire until September 16, 2011.  Our obligations under this agreement are secured by a security interest in our accounts receivable.  Interest on the outstanding amount under the revolving credit agreement is payable monthly at the greater of the prime rate of interest or five percent.  As of September 30, 2010, we had no borrowings outstanding under the revolving credit agreement.

 

17

 

Contractual Obligations

 

We believe that our capital resources, including our short-term investments, funds available under our revolving credit agreement, and cash flow from operations, will be adequate to meet our current operational needs. We believe that we will be able to finance our 2010 capital expenditures through cash flow from operations, borrowings from commercial lenders, and the funds available under our line of credit loan agreement.  However, our ability to satisfy working capital requirements, meet debt repayment obligations, and fund future capital requirements will depend principally upon our future operating performance which is subject to the risks inherent in our business, and will also depend on the extent to which the current recession adversely affects the ability of our customers, and/or potential customers, to pay promptly amounts owing to the Company under their service contracts with us.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2010, we had no off-balance sheet arrangements.

 

Critical Accounting Policies

 

A discussion of our critical accounting policies can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.  There have been no material changes to these policies (including critical accounting estimates and assumptions or judgments affecting the application of those estimates and assumptions) during the first nine months of 2010.

 

Recently Issued Accounting Pronouncements

 

A discussion of recently issued accounting pronouncements can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We have not entered into any hedging agreements or swap agreements.  Our principal market risks include fluctuations in commodity prices which affect demand for and pricing of our services and the risk related to the concentration of our customers in the oil and natural gas industry.  Since all of our customers are involved in the oil and natural gas industry, there may be a positive or negative effect on our exposure to credit risk because our customers may be similarly affected by changes in economic and industry conditions.  For the year ended December 31, 2009, our largest customer accounted for approximately 31% of our revenues.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

The Company maintains controls and procedures to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission and to process, summarize, and disclose this information within the time periods specified in the rules of the SEC.  Based on an evaluation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report conducted by the Company’s management, with the participation of the Chief Executive and Chief Financial Officers, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that the Company is able to record, process, summarize, and report information required to be included in reports filed or submitted under the Exchange Act within the required time period.  There were no changes in the Company’s internal controls over financial reporting or in other factors during the quarter ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

18

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

The Company is a defendant in various legal actions that arose or may arise out of the normal course of business.  In our opinion, none of these actions has resulted, or will result, in any significant loss to us.

 

ITEM 1A. RISK FACTORS.

 

For a discussion of those “Risk Factors” affecting the Company, you should carefully consider the “Risk Factors” discussed in Part I, under “Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2009, which is herein incorporated by reference.  There have been no material changes from those risk factors previously disclosed in such Annual Report.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. - None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. — None.

 

ITEM 4. RESERVED.

 

ITEM 5. OTHER INFORMATION.

 

On September 16, 2010, the Company entered into an Amendment to the Amended and Restated Loan and Security Agreement and Amended and Restated Promissory Note (the “Amended Loan Agreement and Note”) for the purpose of renewing and extending the Company’s line of credit with its lender, Sovereign Bank, a Texas state bank.  The Amended Loan Agreement and Note allow TGC to borrow, repay, and re-borrow from time to time until September 16, 2011, up to the lesser of $5,000,000 or 80% of the Company’s eligible accounts receivable and provides for an interest rate of the greater of the prime rate as quoted in the Wall Street Journal or five percent (5%).  As collateral for such indebtedness, the Company has granted Sovereign Bank a security interest covering all of the Company’s accounts receivable and the newly purchased GSR (Geospace Seismic Recorder) wireless recording system equipment.  As of this date, the Company has not drawn down any amounts under this line of credit.

 

The foregoing description is a summary of the Amended Loan Agreement and Note and is qualified in its entirety by reference to the Amended Loan Agreement and Note, a copy of which is included as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

 

19

 

ITEM 6. EXHIBITS.

 

The following exhibits are included herein:

 

EXHIBITS INDEX

 

EXHIBIT NO.		DESCRIPTION
3.1		Restated Articles of Incorporation (with amendment) as filed with the Secretary of State of Texas on June 20, 2003, filed as Exhibit 3.4 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003, and incorporated herein by reference.
3.2		Bylaws, as amended and restated March 25, 2009, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 31, 2009, and incorporated herein by reference.
*10.1		Amendment to Amended and Restated Loan and Security Agreement and Amended and Restated Promissory Note by and between TGC Industries, Inc. and Sovereign Bank, dated September 16, 2010.
*31.1		Certification of Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2		Certification of Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1		Certification of Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2		Certification of Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*Filed herewith.

 

20

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	TGC INDUSTRIES, INC.
Date: November 8, 2010	/s/ Wayne A. Whitener
	Wayne A. Whitener
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: November 8, 2010	/s/ James K. Brata
	James K. Brata
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

21

 

EXHIBITS INDEX

 

EXHIBIT NO.		DESCRIPTION
3.1		Restated Articles of Incorporation (with amendment) as filed with the Secretary of State of Texas on June 20, 2003, filed as Exhibit 3.4 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003, and incorporated herein by reference.
3.2		Bylaws, as amended and restated March 25, 2009, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 31, 2009, and incorporated herein by reference.
*10.1		Amendment to Amended and Restated Loan and Security Agreement and Amended and Restated Promissory Note by and between TGC Industries, Inc. and Sovereign Bank, dated September 16, 2010.
*31.1		Certification of Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2		Certification of Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1		Certification of Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2		Certification of Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*Filed herewith.