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

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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 June 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.

 

 

 

Table of Contents

 

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 June 30, 2010 (unaudited) and December 31, 2009	3
Consolidated Statements of Earnings for the three months and six months ended June 30, 2010 and 2009 (unaudited)	5
Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)	6
Notes to Consolidated Financial Statements	7

 

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TGC INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

 

		June 30,			December 31,
		2010			2009
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	21,733,209		$	25,504,149
Trade accounts receivable, net of allowance for doubtful accounts of $623,109 in each period		10,680,928			9,455,224
Cost and estimated earnings in excess of billings on uncompleted contracts		1,824,010			474,059
Prepaid expenses and other		2,383,901			648,872
Prepaid federal and state income tax		121,162			943,600
Total current assets		36,743,210			37,025,904
PROPERTY AND EQUIPMENT - at cost
Machinery and equipment		104,860,491			100,687,976
Automobiles and trucks		9,843,120			8,914,434
Furniture and fixtures		406,264			397,879
Leasehold improvements		14,994			14,994
		115,124,869			110,015,283
Less accumulated depreciation and amortization		(69,756,464		)	(62,431,950		)
		45,368,405			47,583,333
Goodwill		1,392,178			1,408,089
Other assets		51,160			32,399
		1,443,338			1,440,488
Total assets		$	83,554,953		$	86,049,725

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS — CONTINUED

 

		June 30,			December 31,
		2010			2009
		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable		$	6,110,218		$	4,126,474
Accrued liabilities		1,230,915			1,337,437
Billings in excess of costs and estimated earnings on uncompleted contracts		5,929,448			7,077,941
Current maturities of notes payable		7,205,679			6,407,892
Current portion of capital lease obligations		872,839			780,526
Total current liabilities		21,349,099			19,730,270
NOTES PAYABLE, less current maturities		3,374,660			5,875,390
CAPITAL LEASE OBLIGATIONS, less current portion		934,898			631,757
LONG-TERM DEFERRED TAX LIABILITY		5,769,420			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		192,422			183,231
Additional paid-in capital		27,278,451			27,014,078
Retained earnings		25,228,908			25,889,008
Treasury stock, at cost, 37,803 shares		(257,323		)	(257,323		)
Accumulated other comprehensive loss		(315,582		)	(133,716		)
		52,126,876			52,695,278
Total liabilities and shareholders’ equity		$	83,554,953		$	86,049,725

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2010			2009			2010			2009
Revenue		$	22,480,784		$	22,591,134		$	52,774,625		$	58,602,011
Cost and expenses
Cost of services		18,335,659			15,565,041			41,921,690			37,810,163
Selling, general and administrative		1,744,273			968,333			3,429,310			2,141,866
Depreciation and amortization expense		3,789,217			3,633,316			7,656,931			7,432,753
		23,869,149			20,166,690			53,007,931			47,384,782
Income (loss) from operations		(1,388,365		)	2,424,444			(233,306		)	11,217,229
Interest expense		214,202			268,313			429,814			536,960
Income (loss) before income taxes		(1,602,567		)	2,156,131			(663,120		)	10,680,269
Income tax expense (benefit)		(391,961		)	913,862			(3,021		)	4,403,338
NET INCOME (LOSS)		$	(1,210,606	)	$	1,242,269		$	(660,099	)	$	6,276,931
Earnings per common share:
Basic		$	(0.06	)	$	0.06		$	(0.03	)	$	0.33
Diluted		$	(0.06	)	$	0.06		$	(0.03	)	$	0.33
Weighted average number of common shares outstanding:
Basic		19,202,800			19,194,360			19,201,133			19,189,029
Diluted		19,202,800			19,291,499			19,201,133			19,193,051

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		Six Months Ended
		June 30,
		2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(660,099	)	$	6,276,931
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,656,931			7,432,753
(Gain) loss on disposal of property and equipment		18,333			(130,322		)
Share-based compensation		273,996			297,849
Deferred income taxes		(1,325,874		)	(665,517		)
Changes in operating assets and liabilities
Trade accounts receivable		(1,210,786		)	1,849,610
Cost and estimated earnings in excess of billings on uncompleted contracts		(1,349,206		)	(3,763,402		)
Prepaid expenses and other		328,942			836,417
Prepaid federal and state income tax		831,899			—
Trade accounts payable		(1,510,936		)	(1,516,103		)
Accrued liabilities		(103,420		)	1,077,909
Billings in excess of cost and estimated earnings on uncompleted contracts		(1,149,829		)	(5,754,963		)
Income taxes payable		—			4,732,100
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,799,951			10,673,262
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(1,185,821		)	(707,080		)
Proceeds from sale of property and equipment		45,617			242,170
NET CASH USED IN INVESTING ACTIVITIES		(1,140,204		)	(464,910		)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable		(3,788,707		)	(3,133,877		)
Principal payments on capital lease obligations		(552,988		)	(575,505		)
Proceeds from exercise of stock options		—			9,600
Payment of dividends		(431		)	(385		)
NET CASH USED IN FINANCING ACTIVITIES		(4,342,126		)	(3,700,167		)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(3,682,379		)	6,508,185
EFFECT OF EXCHANGE RATES ON CASH		(88,561		)	—
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		25,504,149			24,114,351
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	21,733,209		$	30,622,536
Supplemental cash flow information
Interest paid		$	429,814		$	536,960
Income taxes paid		$	609,561		$	1,660,864
Noncash investing and financing activities
Capital lease obligations incurred		$	954,534		$	407,598
Financed equipment purchases		$	3,597,813		$	—
Financed insurance premiums		$	2,088,161		$	2,000,955
Restricted stock awards to employees		$	20,750		$	24,350

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 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 2009, the Company acquired the stock of Eagle Canada, Inc.  The consolidated financial statements for the three and six months ended June 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 June 30, 2010, through August 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.

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

June 30, 2010

 

NOTE A - continued

 

Gravity Data

 

The Company owns a data bank which contains gravity data, and to a lesser extent magnetic data, from many of the major oil and natural gas producing areas located within the United States.  When an order for gravity data is received, the portion of gravity data requested by the customer is prepared in digital format for licensing and shipment to the customer.  This process is performed by an employee in the Company’s headquarters office and is normally completed within a few days.  The licensing of gravity data is not a material part of the Company’s revenue.  Gravity data revenue during the six-month period ended June 30, 2010, was approximately $1,700.  Gravity revenue for the year ended December 31, 2009, was approximately $20,300.

 

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 six-month periods ended June 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.

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

June 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						Six Months Ended
		June 30,						June 30,
		(Unaudited)						(Unaudited)
		2010			2009			2010			2009
Basic:
Numerator:
Net income (loss)		$	(1,210,606	)	$	1,242,269		$	(660,099	)	$	6,276,931
Denominator:
Basic – weighted average common shares outstanding		19,202,800			19,194,360			19,201,133			19,189,029
Basic EPS		$	(0.06	)	$	0.06		$	(0.03	)	$	0.33
Diluted:
Numerator:
Net income (loss)		$	(1,210,606	)	$	1,242,269		$	(660,099	)	$	6,276,931
Denominator:
Weighted average common shares outstanding		19,202,800			19,194,360			19,201,133			19,189,029
Effect of Dilutive Securities:
Stock options		—			97,139			—			4,022
		19,202,800			19,291,499			19,201,133			19,193,051
Diluted EPS		$	(0.06	)	$	0.06		$	(0.03	)	$	0.33

 

Outstanding and exercisable options to purchase 75,885 and 99,706 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 six months ended June 30, 2010 due to the net losses.

 

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.   Cash in lieu of fractional shares in the total amount of $431 was paid to shareholders based on the last sales price of the Company’s common shares on the record date.

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

June 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 six 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

 

Effective January 1, 2006, the Company accounted for share-based compensation awards granted after that date and for unvested awards outstanding at that date 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.  Such implementation is expected to have minimal impact on our results of operations, financial position, and liquidity.  We have recognized compensation expense, relative to share-based awards, in wages in the Consolidated Statements of Earnings of approximately $149,000 and $116,000, less than $0.01 per share, for the three months ended June 30, 2010, and 2009, and approximately $274,000 and $298,000, or approximately $0.01 per share, for the six months ended June 30, 2010, and 2009, respectively.

 

As of June 30, 2010, there was approximately $486,000 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. (“Eagle Canada”), a Delaware corporation.  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.

 

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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 Securities and Exchange Commission 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 Securities and Exchange Commission.

 

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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 second quarter of 2010.  We did not operate any crews in Canada for the entire second quarter.  Due to the seasonality of the Canadian market, the second quarter is usually the weakest quarter for activity in Canada, and we expect increasing levels of seismic activity in that region for the next three quarters, beginning with the third 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 56 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.

 

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Results of Operations

 

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

 

Six Months Ended June 30, 2010, Compared to Six Months Ended June 30, 2009 (Unaudited)

 

Revenues.  Our revenues were $52,774,625 for the six months ended June 30, 2010, compared to $58,602,011 for the same period of 2009, a decrease of 9.9%.  This decrease in revenues was attributable to lower overall demand, a competitive pricing environment for seismic services, uncertainty regarding the future energy policy in the United States, and our operation of six seismic crews in the U.S. during the six months ended June 30, 2010, compared to nine crews during the first quarter and six crews during most of the second quarter of 2009.  The decrease was partially offset by revenues from Eagle Canada.

 

Cost of services.  Our cost of services was $41,921,690 for the six months ended June 30, 2010, compared to $37,810,163 for the same period of 2009, an increase of 10.9%.  This increase was primarily attributable to continuing pricing pressures as a result of the industry wide slow-down, the inclusion of Canadian operations and additional costs incurred for equipment and helicopter rentals during the first quarter of 2010.  As a percentage of revenue, cost of services was 79.4% for the six months ended June 30, 2010 compared to 64.5% for the same period of 2009.

 

Selling, general, and administrative expenses.  SG&A expenses were $3,429,310 for the six months ended June 30, 2010, compared to $2,141,866 for the same period of 2009, an increase of 60.1%.  This increase was primarily attributable to additional expenses associated with management and integration costs of the Eagle Canada acquisition.  SG&A expense as a percentage of revenues was 6.5% for the six months ended June 30, 2010, compared with 3.7% for the same period of 2009.

 

Depreciation and amortization expense.  Depreciation and amortization expense was $7,656,931 for the six months ended June 30, 2010, compared to $7,432,753 for the same period of 2009, an increase of 3.0%.  Depreciation and amortization expense as a percentage of revenues was 14.5% for the six months ended June 30, 2010, compared to 12.7% for the same period of 2009.

 

Income and loss from operations.  Loss from operations was $233,306 for the six months ended June 30, 2010, compared to income from operations of $11,217,229 for the same period of 2009.  The decrease was attributable to several factors, including the fact that income from operations for the six months ended June 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, uncertainty regarding the future energy policy in the United States, and our operation of six seismic crews in the U.S. during the six months ended June 30, 2010, compared to nine crews during the first quarter and six crews during most of the second quarter of 2009.  EBITDA decreased $11,226,357 to $7,423,625 for the six months ended June 30, 2010, from $18,649,982 for the same period of 2009, a decrease of 60.2%.  This decrease was a result of 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 $429,814 for the six months ended June 30, 2010, compared to $536,960 for the same period of 2009, a decrease of 20.0%.  This decrease was primarily attributable to our continuing principal payments on notes payable and capital lease obligations.

 

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Income tax expense.  The income tax benefit was $3,021 for the six months ended June 30, 2010, compared to income tax expense of $4,403,338 for the same period of 2009.  The effective tax benefit for the six months ended June 30, 2010, was minimal due to state margin taxes and permanent tax differences compared to an effective tax rate of 41.2% for the same period of 2009.  See Note E of Notes to Financial Statements in Item 1.

 

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

 

Revenues.  Our revenues were $22,480,784 for the three months ended June 30, 2010, compared to $22,591,134 for the same period of 2009, a decrease of 0.5%.  We operated six crews in the U.S. during the second quarter of 2010, and six crews in the U.S. for most of the second quarter of 2009.  The Company’s Canadian operations did not contribute materially to the overall results of this year’s second quarter.

 

Cost of services.  Our cost of services was $18,335,659 for the three months ended June 30, 2010, compared to $15,565,041 for the same period of 2009, an increase of 17.8%.  This increase was primarily attributable to depressed demand and a more competitive pricing environment.  As a percentage of revenues, cost of services was 81.6% for the three months ended June 30, 2010, compared to 68.9% for the same period of 2009.

 

Selling, general, and administrative expenses.  SG&A expenses were $1,744,273 for the three months ended June 30, 2010, compared to $968,333 for the same period of 2009, an increase of 80.1%.  This increase was primarily due to the inclusion of Eagle Canada in this year’s second quarter.  SG&A expense as a percentage of revenues was 7.8% for the three months ended June 30, 2010, compared with 4.3% for the same period of 2009.

 

Depreciation and amortization expense.  Depreciation and amortization expense was $3,789,217 for the three months ended June 30, 2010, compared to $3,633,316 for the same period of 2009, an increase of 4.3%.  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.  Depreciation and amortization expense as a percentage of revenues was 16.9% for the three months ended June 30, 2010, compared to 16.1% for the same period of 2009.

 

Income and loss from operations.  Loss from operations was $1,388,365 for the three months ended June 30, 2010, compared to income from operations of $2,424,444 for the same period of 2009.  This decrease was primarily attributable to a slight decrease in revenues and an increase in SG&A expenses, cost of services, and depreciation and amortization expenses discussed above.  EBITDA decreased $3,656,908 to $2,400,852 for the three months ended June 30, 2010, from $6,057,760 for the same period of 2009, a decrease of 60.4%.  This decrease 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 $214,202 for the three months ended June 30, 2010, compared to $268,313 for the same period of 2009, a decrease of 20.2%.  This decrease was primarily attributable to our continuing payments on notes payable and capital lease obligations.

 

Income tax expense.  Income tax benefit was $391,961 for the three months ended June 30, 2010, compared to income tax expense of $913,862 for the same period of 2009.  The effective tax benefit rate was 24.5% for the three months ended June 30, 2010, compared to an effective tax expense rate of 42.4% for the same period of 2009.  See Note E of Notes to Financial Statements in Item 1.

 

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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						Six Months Ended
		June 30,						June 30,
		2010			2009			2010			2009
		(unaudited)						(unaudited)
Net income (loss)		$	(1,210,606	)	$	1,242,269		$	(660,099	)	$	6,276,931
Depreciation and amortization		3,789,217			3,633,316			7,656,931			7,432,753
Interest expense		214,202			268,313			429,814			536,960
Income tax expense (benefit)		(391,961		)	913,862			(3,021		)	4,403,338
EBITDA		$	2,400,852		$	6,057,760		$	7,423,625		$	18,649,982

 

Liquidity and Capital Resources

 

Cash Flows

 

Cash flows from operating activities.

 

Net cash provided by operating activities was $1,799,951 for the six months ended June 30, 2010, compared to $10,673,262 for the same period of 2009.  The $8,873,311 decrease during the first six months of 2010 from the same period of 2009 was principally 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.

 

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Working capital decreased $1,901,523 to $15,394,111 as of June 30, 2010, from the December 31, 2009 working capital of $17,295,634.  This decrease was primarily due to a $3,770,940 decrease in cash and cash equivalents, a decrease in prepaid federal income taxes of $822,438, an increase in trade accounts payable of $1,983,744, and an increase in the current portion of debt obligations of $797,787, partially offset by an increase in trade accounts receivable of $1,225,704, an increase in costs and estimated earnings in excess of billings on uncompleted contracts of $1,349,951, an increase in prepaid expenses and other of $1,735,029, and a decrease in billings in excess of costs and estimated earnings on uncompleted contracts of $1,148,493.

 

Cash flows used in investing activities.

 

Net cash used in investing activities was $1,140,204 for the six months ended June 30, 2010, and $464,910  for the six months ended June 30, 2009.  This increase was due primarily to an increase in capital expenditures of $478,741 and a decrease in proceeds from the sale of property and equipment of $196,553.

 

Cash flows used in financing activities.

 

Net cash used in financing activities was $4,342,126 for the six months ended June 30, 2010, and $3,700,167  for the six months ended June 30, 2009.  The increase was due primarily to principal payments on notes payable attributable to Eagle Canada.

 

Capital expenditures.

 

During the six months ended June 30, 2010, the Company acquired $5,738,168 of vehicles and equipment, primarily to replace similar vehicles and equipment, and purchased a new 3,000 channel seismic recording system.  Cash of $1,185,821, $3,597,813 in obligations included in accounts payable at June 30, 2010, and capital lease obligations from a vehicle leasing company of $954,534 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.

 

Capital Resources

 

Since 2005, 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.

 

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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 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, and again on September 16, 2009.  The revolving line of credit agreement does not expire until September 16, 2010.  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. The credit loan agreement provides for non-financial and financial covenants including a minimum debt service coverage ratio in excess of 2.0 to 1.0 and a ratio of debt to worth not in excess of 1.25 to 1.0.  As of June 30, 2010, we had no borrowings outstanding under the revolving credit agreement.

 

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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 June 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 six 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 Securities and Exchange Commission.  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 June 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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. — None.

 

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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.
*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.

 

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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: August 9, 2010	/s/ Wayne A. Whitener
	Wayne A. Whitener
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: August 9, 2010	/s/ James K. Brata
	James K. Brata
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

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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.
*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.

 

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