DAWSON GEOPHYSICAL CO - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

 

 

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, 2012.

 

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 submit and post such files).  Yes x  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.

 

Reference is made to the succeeding pages for the following financial information:

 

	Page
Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	3
Consolidated Statements of Earnings for the three months and nine months ended September 30, 2012 and 2011 (unaudited)	5
Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2012 and 2011 (unaudited)	6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)	7
Notes to Consolidated Financial Statements	8

 

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TGC INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2012

 

		September 30,			December 31,
		2012			2011
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	21,481,441		$	15,745,559
Trade accounts receivable		27,778,928			19,351,023
Cost and estimated earnings in excess of billings on uncompleted contracts		2,133,882			5,101,478
Prepaid expenses and other		2,956,917			1,606,936
Total current assets		54,351,168			41,804,996
PROPERTY AND EQUIPMENT - at cost
Machinery and equipment		176,893,034			139,017,290
Automobiles and trucks		14,236,510			12,616,608
Furniture and fixtures		489,520			434,146
Leasehold improvements		14,994			14,994
		191,634,058			152,083,038
Less accumulated depreciation and amortization		(110,712,036		)	(94,286,207		)
		80,922,022			57,796,831
Goodwill		201,530			201,530
Other assets		89,585			77,870
		291,115			279,400
Total assets		$	135,564,305		$	99,881,227

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS - CONTINUED

September 30, 2012

 

		September 30,			December 31,
		2012			2011
		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Trade accounts payable		$	12,437,945		$	9,256,392
Accrued liabilities		4,306,002			2,598,126
Billings in excess of costs and estimated earnings on uncompleted contracts		5,248,177			937,755
Federal and state income taxes payable		4,867,629			2,017,644
Current maturities of notes payable		9,390,449			5,802,513
Current portion of capital lease obligations		1,933,121			1,336,037
Total current liabilities		38,183,323			21,948,467
NOTES PAYABLE, less current maturities		11,952,489			5,328,892
CAPITAL LEASE OBLIGATIONS, less current portion		1,739,744			1,626,612
LONG-TERM DEFERRED TAX LIABILITY		6,144,477			7,257,576
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; 20,732,500 and 19,348,436 in each period		207,325			193,484
Additional paid-in capital		29,353,883			28,176,922
Retained earnings		47,021,322			35,499,541
Treasury stock, at cost, 80,076 and 37,820 shares in each period		(691,009		)	(257,394		)
Accumulated other comprehensive income		1,652,751			107,127
		77,544,272			63,719,680
Total liabilities and shareholders’ equity		$	135,564,305		$	99,881,227

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

September 30, 2012

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Revenue		$	41,834,680		$	31,013,392		$	139,264,045		$	111,476,221
Cost and expenses
Cost of services		30,918,343			21,718,157			94,477,345			77,938,081
Selling, general and administrative		2,134,408			2,437,866			6,484,735			7,211,319
Depreciation and amortization expense		6,685,698			4,968,140			18,591,209			14,209,566
		39,738,449			29,124,163			119,553,289			99,358,966
Income from operations		2,096,231			1,889,229			19,710,756			12,117,255
Interest expense		350,366			192,495			873,004			575,191
Income before income taxes		1,745,865			1,696,734			18,837,752			11,542,064
Income tax expense		634,223			650,156			7,315,971			4,144,977
NET INCOME		$	1,111,642		$	1,046,578		$	11,521,781		$	7,397,087
Earnings per common share:
Basic		$	0.05		$	0.05		$	0.56		$	0.37
Diluted		$	0.05		$	0.05		$	0.55		$	0.36
Weighted average number of common shares outstanding:
Basic		20,566,096			20,211,848			20,433,905			20,194,276
Diluted		20,878,977			20,512,761			20,815,181			20,512,061

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

September 30, 2012

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Net Income		$	1,111,642		$	1,046,578		$	11,521,781		$	7,397,087
Other comprehensive income (loss):
Foreign currency translation adjustments		1,852,637			(1,988,785		)	1,545,624			(1,198,154		)
Total other comprehensive income (loss), net of tax		$	2,964,279		$	(942,207	)	$	13,067,405		$	6,198,933

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

Consolidated Statement of Cash Flows (Unaudited)

September 30, 2012

 

		Nine Months Ended
		September 30,
		2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	11,521,781		$	7,397,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		18,591,209			14,209,566
(Gain) loss on disposal of property and equipment		(1,060,986		)	(126,522		)
Non-cash compensation		380,955			168,652
Cash paid in lieu of stock options		—			—
Deferred income taxes		(1,113,099		)	1,011,034
Changes in operating assets and liabilities
Trade accounts receivable		(8,119,120		)	(701,599		)
Cost and estimated earnings in excess of billings on uncompleted contracts		3,005,148			2,586,403
Prepaid expenses and other		1,544,548			1,942,411
Prepaid federal and state income tax		78,268			1,042,770
Other assets		(10,246		)	(13,707		)
Trade accounts payable		3,062,383			(1,406,656		)
Accrued liabilities		1,669,776			2,015,569
Billings in excess of cost and estimated earnings on uncompleted contracts		4,310,422			298,292
Income taxes payable		2,704,357			1,544,449
NET CASH PROVIDED BY OPERATING ACTIVITIES		36,565,396			29,967,749
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(23,673,444		)	(14,144,555		)
Proceeds from sale of property and equipment		1,695,986			233,012
NET CASH USED IN INVESTING ACTIVITIES		(21,977,458		)	(13,911,543		)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable		(7,875,848		)	(6,488,083		)
Principal payments on capital lease obligations		(1,458,415		)	(979,982		)
Proceeds from exercise of stock options		377,382			164,356
Payment of dividends		(1,150		)	—
NET CASH USED IN FINANCING ACTIVITIES		(8,958,031		)	(7,303,709		)
NET INCREASE IN CASH AND CASH EQUIVALENTS		5,629,907			8,752,497
EFFECT OF EXCHANGE RATES ON CASH		105,975			(86,429		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		15,745,559			13,072,503
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	21,481,441		$	21,738,571
Supplemental cash flow information
Interest paid		$	873,004		$	575,191
Income taxes paid		$	5,646,445		$	545,432
Noncash investing and financing activities
Capital lease obligations incurred		$	2,129,880		$	1,419,412
Financed equipment purchase		$	15,201,800		$	6,765,619
Financed insurance premiums		$	2,882,751		$	2,162,868
Restricted stock awards to employees		$	1,334,014		$	—
Treasury shares issued for stock options exercised		$	433,615		$	—

 

See Notes to Consolidated Financial Statements

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

 

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 connection with the preparation of these consolidated financial statements, the Company evaluated subsequent events after the balance sheet date of September 30, 2012, through November 9, 2012, 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.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“ASU 2011-04”), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 changes certain fair value measurement principles and enhances disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 became effective in our first quarter of 2012 and will be applied prospectively.  The adoption of this standard did not have a significant impact on our financial statements or disclosures.

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2012

 

NOTE A - continued

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (“ASU 2011-05”), which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity.  This update does not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income. ASU 2011-05 became effective in our first quarter of 2012.  The adoption changed the order in which we presented certain financial statements, but did not have any other impact on our financial statements.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other-Topic 350: Testing for Impairment (“ASU 2011-08”).  ASU 2011-08 amends the guidance in FASB Accounting Standards Codification Topic (“ASC”) 350-20, Intangibles-Goodwill and Other-Goodwill.  The intent of this ASU is to simplify how entities test goodwill for impairment by allowing an entity to use a qualitative approach to test goodwill for impairment. The amendments in the ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350-20.  The amendments do not change the current guidance for testing other indefinite-lived assets for impairment.  ASU 2011-08 is effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early application is permitted.  The Company elected to adopt this standard early and effective as of December 31, 2011, in its year-end goodwill impairment analysis.  The adoption of this standard did not have a significant effect on the Company’s consolidated financial statements and related disclosures.

 

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). This update requires the following new disclosures related to recognized financial instruments (and derivatives) subject to master netting arrangements or similar agreements: (i) the gross amounts of recognized financial assets and liabilities; (ii) the amounts offset under current GAAP; (iii) the net amounts presented in the balance sheet; (iv) the amounts subject to an enforceable master netting arrangement or similar agreement that were not included in (ii); and (v) the net amount representing the difference between (iii) and (iv). The update also requires qualitative disclosures related to counterparties, setoff rights, and terms of enforceable master netting arrangements and related agreements depending on their effect or potential effect on the entity’s financial position. The new disclosures will enable financial statement users to compare balance sheets prepared under U.S. GAAP and IFRS, which are subject to different offsetting models. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not currently expect that the adoption of this update in the first quarter of 2013 will have a significant effect on its consolidated financial statements and related disclosures.

 

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350) — Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). This ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under U.S. GAAP.  The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  The Company does not currently expect that the adoption of this update in the first quarter of 2013 will have a significant effect on its consolidated financial statements and related disclosures.

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

September 30, 2012

 

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, 2011, 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, 2012, and 2011, have been adjusted for the 5% stock dividend paid on May 14, 2012, to shareholders of record as of April 30, 2012.

 

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

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		(Unaudited)						(Unaudited)
		2012			2011			2012			2011
Basic:
Numerator:
Net income		$	1,111,642		$	1,046,578		$	11,521,781		$	7,397,087
Denominator:
Basic - weighted average common shares outstanding		20,566,096			20,211,848			20,433,905			20,194,276
Basic EPS		$	0.05		$	0.05		$	0.56		$	0.37
Diluted:
Numerator:
Net income		$	1,111,642		$	1,046,578		$	11,521,781		$	7,397,087
Denominator:
Weighted average common shares outstanding		20,566,096			20,211,848			20,433,905			20,194,276
Effect of Dilutive Securities:
Stock options		312,881			300,913			381,276			317,785
		20,878,977			20,512,761			20,815,181			20,512,061
Diluted EPS		$	0.05		$	0.05		$	0.55		$	0.36

 

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TGC INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED

September 30, 2012

 

NOTE D — DIVIDENDS

 

On April 20, 2012, the Company declared a five percent (5%) stock dividend on its outstanding common shares.  The 5% stock dividend was paid on May 14, 2012, to shareholders of record as of April 30, 2012.  Cash in lieu of fractional shares in the total amount of $1,150 was paid to shareholders based on the last sales price of the common shares on the record date.  No dividends were declared or paid in 2011.

 

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 2012, federal and various state estimated income taxes for tax year 2012, as well as various state income taxes for tax year 2011.

 

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 $194,000 and $107,000, or approximately $0.01 per share, for the three months ended September 30, 2012, and 2011, respectively, and approximately $381,000 and $334,000, or approximately $0.02 per share, for the nine months ended September 30, 2012, and 2011, respectively.

 

As of September 30, 2012, there was approximately $1,309,000 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 — ENTRY INTO A DEFINITIVE AGREEMENT

 

On October 15, 2012, we disclosed that the Company entered into an agreement with Geospace Technologies to purchase 8,000 stations of 3-channel GSX wireless seismic recording equipment, along with all peripheral equipment, to be deployed in Canada.  The Company took delivery of substantially all of this equipment during October 2012.  This purchase was financed with a $7,000,000 36-month note payable to a commercial bank and approximately $7,200,000 in existing cash.

 

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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 natural gas prices, the availability of capital resources, and the current weak economic recovery 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-dimensional (“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 nine seismic crews in the U.S. during the third quarter of 2012.  We operated an average of one and one-half crews in Canada during the third quarter.  Due to the seasonality of the Canadian market, the second and third quarters are usually weak quarters 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 2012.

 

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.  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 other factors 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 nine months ended September 30, 2012, are not necessarily indicative of a full year’s results.

 

Nine Months Ended September 30, 2012, Compared to Nine Months Ended September 30, 2011 (Unaudited)

 

Revenues.  Our revenues were $139,264,045 for the nine months ended September 30, 2012, compared to $111,476,221 for the same period of 2011, an increase of 24.9%.  This increase in revenues was attributable to continued improvement in the North American land seismic acquisition market, increased efficiencies of new wireless recording technology, and our record first quarter in 2012 in which we operated additional seismic crews in the U.S. and Canada.  We operated eight seismic crews in the U.S. during the first and second quarters, and added a ninth crew in the third quarter of 2012, as compared to seven seismic crews in the U.S. during the first quarter and eight crews in the second and third quarters of 2011.

 

Cost of services.  Our cost of services was $94,477,345 for the nine months ended September 30, 2012, compared to $77,938,081 for the same period of 2011, an increase of 21.2%.  This increase was primarily attributable to strong revenue growth during the first three quarters of 2012 and our fielding of two additional crews in the first quarter of 2012.  As a percentage of revenues, cost of services was 67.8% for the nine months ended September 30, 2012, compared to 69.9% for the same period of 2011.

 

Selling, general, and administrative expenses.  Selling, general, and administrative (“SG&A”) expenses were $6,484,735 for the nine months ended September 30, 2012, compared to $7,211,319 for the same period of 2011, a decrease of 10.1%.  This decrease was primarily attributable to $1,683,074 of transaction costs in 2011 related to a terminated merger transaction, partially offset by increased compensation costs for recent staff additions.  SG&A expense as a percentage of revenues was 4.7% for the nine months ended September 30, 2012, compared with 6.5% for the same period of 2011.

 

Depreciation and amortization expense.  Depreciation and amortization expense was $18,591,209 for the nine months ended September 30, 2012, compared to $14,209,566 for the same period of 2011, an increase of 30.8%.  This increase was primarily attributable to capital expenditures of approximately $41,000,000 for the nine months ended September 30, 2012.  Depreciation and amortization expense as a percentage of revenues was 13.3% for the nine months ended September 30, 2012, compared to 12.7% for the same period of 2011.

 

Income from operations.  Income from operations was $19,710,756 for the nine months ended September 30, 2012, compared to $12,117,255 for the same period of 2011.  The increase was attributable to an increase in revenues, partially offset by increases in cost of services and depreciation expenses discussed above. EBITDA increased $11,975,144 to $38,301,965 for the nine months ended September 30, 2012, from $26,326,821 for the same period of 2011, an increase of 45.5%.  This increase 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 $873,004 for the nine months ended September 30, 2012, compared to $575,191 for the same period of 2011, an increase of 51.8%.  This increase was primarily attributable to a five-year $7,701,800 note payable and a three-year $7,500,000 note payable from commercial banks to finance, in part, our recent purchases of seismic acquisition equipment.

 

Income tax expense.  Income tax expense was $7,315,971 for the nine months ended September 30, 2012, compared to $4,144,977 for the same period of 2011.  The effective tax rate was 38.8% for the nine months ended September 30, 2012, compared to an effective tax rate of 35.9% for the nine months ended September 30, 2011, See Note E of Notes to Financial Statements in Item 1.

 

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Three Months Ended September 30, 2012, Compared to Three Months Ended September 30, 2011 (Unaudited)

 

Revenues.  Our revenues were $41,834,680 for the three months ended September 30, 2012, compared to $31,013,392 for the same period of 2011, an increase of 34.9% reflecting the continuing strength in the U.S. land seismic market.  We operated nine crews in the U.S. during the third quarter of 2012 compared with eight crews in the U.S. during the third quarter of 2011.  The Company’s Canadian operations did not contribute significantly to the overall results of this year’s or last year’s third quarter.

 

Cost of services.  Our cost of services was $30,918,343 for the three months ended September 30, 2012, compared to $21,718,157 for the same period of 2011, an increase of 42.4%. This increase was primarily attributable to increased revenues, our operation of additional seismic acquisition crews as discussed above, and increased costs associated with ramp-up costs for the Company’s Canadian operations.  As a percentage of revenues, cost of services was 73.9% for the three months ended September 30, 2012, compared to 70.0% for the same period of 2011.

 

Selling, general, and administrative expenses.  SG&A expenses were $2,134,408 for the three months ended September 30, 2012, compared to $2,437,866 for the same period of 2011, a decrease of 12.4%.  This decrease was primarily due to costs in 2011 associated with a terminated merger transaction.  SG&A expense as a percentage of revenues was 5.1% for the three months ended September 30, 2012, compared with 7.9% for the same period of 2011.

 

Depreciation and amortization expense.  Depreciation and amortization expense was $6,685,698 for the three months ended September 30, 2012, compared to $4,968,140 for the same period of 2011, an increase of 34.6%.  This increase was primarily attributable to additions of seismic recording equipment, vibration vehicles, and other equipment and vehicles.  Depreciation and amortization expense as a percentage of revenues was 16.0% for the three months ended September 30, 2012, and also for the same period of 2011.

 

Income from operations.  Income from operations was $2,096,231 for the three months ended September 30, 2012, compared to $1,889,229 for the same period of 2011.  This increase was primarily attributable to the significant increase in revenues, partially offset by increases in cost of services, and depreciation and amortization expenses discussed above.  EBITDA increased $1,924,560 to $8,781,929 for the three months ended September 30, 2012, from $6,857,369 for the same period of 2011, an increase of 28.1%.  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 $350,366 for the three months ended September 30, 2012, compared to $192,495 for the same period of 2011, an increase of 82.0%.  This increase was primarily attributable to a five-year $7,701,800 note payable and a three-year $7,500,000 note payable from commercial banks to finance, in part, our recent purchases of seismic acquisition equipment.

 

Income tax expense.  Income tax expense was $634,223 for the three months ended September 30, 2012, compared to $650,156 for the same period of 2011.  The effective tax rate was 36.3% for the three months ended September 30, 2012, compared to 38.3% for the same period of 2011.  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						Nine Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
		(unaudited)						(unaudited)
Net income		$	1,111,642		$	1,046,578		$	11,521,781		$	7,397,087
Depreciation and amortization		6,685,698			4,968,140			18,591,209			14,209,566
Interest expense		350,366			192,495			873,004			575,191
Income tax expense		634,223			650,156			7,315,971			4,144,977
EBITDA		8,781,929			$	6,857,369		$	38,301,965		$	26,326,821

 

Liquidity and Capital Resources

 

Cash Flows

 

Cash flows from operating activities.

 

Net cash provided by operating activities was $36,565,396 for the nine months ended September 30, 2012, compared to $29,967,749 for the same period of 2011.  The $6,597,647 increase during the first nine months of 2012 from the same period of 2011 was primarily attributable to net income of $11,521,781 during the nine months ended September 30, 2012 compared to $7,397,087 for the same period of 2011, 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, depreciation and amortization, and the mix of contracts.

 

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Working capital decreased $3,688,684 to $16,167,845 as of September 30, 2012, from the December 31, 2011 working capital of $19,856,529.  This decrease was primarily due to a decrease in cost and estimated earnings in excess of billings on uncompleted contracts of $2,967,596, an increase in trade accounts payable of $3,181,553, an increase in accrued liabilities of $1,707,876, an increase in billings in excess of costs and estimated earnings on uncompleted contracts of $4,310,422, an increase in federal and state income taxes payable of $2,849,985, and an increase in current maturities of notes payable of $3,587,936, partially offset by an increase in cash of $5,735,882, and an increase in trade accounts receivable of $8,427,905.

 

Cash flows used in investing activities.

 

Net cash used in investing activities was $21,977,458 for the nine months ended September 30, 2012, and $13,911,543 for the nine months ended September 30, 2011.  This increase was due to an increase in capital expenditures of $9,528,889 and an increase in proceeds from the sale of property and equipment of $1,462,974.

 

Cash flows used in financing activities.

 

Net cash used in financing activities was $8,958,031 for the nine months ended September 30, 2012, and $7,303,709 for the nine months ended September 30, 2011.  The increase was due primarily to principal payments on notes payable and capital lease obligations.

 

Capital expenditures.

 

During the nine months ended September 30, 2012, the Company acquired $41,005,124 of vehicles and equipment, primarily to add to and replace similar vehicles and equipment, purchased new wireless GSR and GSX seismic recording equipment, and seven new vibration vehicles.  Cash of $23,673,444, a five-year $7,701,800 note payable, a three-year $7,500,000 note payable from commercial banks, and capital lease obligations from a vehicle leasing company of $2,129,880 were used to finance these acquisitions.  In addition, on October 15, 2012, we entered into an agreement with Geospace Technologies to purchase 8,000 stations of 3-channel GSX wireless seismic recording equipment, along with all peripheral equipment.  The Company took delivery of substantially all of this equipment during October 2012.  This purchase was financed with a $7,000,000 36-month note payable to a commercial bank and approximately $7,200,000 in existing cash, and is discussed in Note G of Notes to Financial Statements in Item 1.  Although we do not budget for our capital expenditures, we may purchase additional equipment during 2012 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

 

We have relied on cash generated from operations and short-term borrowings from commercial banks and equipment lenders to fund our working capital requirements and capital expenditures.

 

The Company has a revolving credit agreement with a commercial bank.  The borrowing limit under the revolving line of credit agreement is $5,000,000 and was renewed on September 16, 2011, and again on September 16, 2012.  The revolving line of credit agreement will expire on September 16, 2013.  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, 2012, we had no borrowings outstanding under the revolving credit agreement.

 

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At September 30, 2012, the Company had six outstanding notes payable to commercial banks for equipment purchases.  The notes have interest rates between 4.50% and 6.35%, are due in monthly installments between $50,170 and $223,437 including interest, have a total outstanding balance of $20,050,694, and are collateralized by equipment.

 

During the nine-month period ending September 30, 2012, the Company paid off three notes payable to an equipment finance company with interest between 5.33% and 6.00% and monthly payments between $23,740 and $61,667.  These notes were collateralized by equipment.

 

The Company had, at September 30, 2012, three outstanding notes payable to finance companies for corporate insurance.  The notes have interest rates between 4.95% and 5.56%, and are due in monthly installments between $17,414 and $302,892 including interest, and have a total outstanding balance of $1,292,244.

 

Contractual Obligations

 

We believe that our capital resources, including cash generated from operations and short-term borrowings from commercial banks and equipment lenders, will be adequate to meet our current operational needs.  We believe that we will be able to finance our 2012 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 weak economic recovery 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, 2012, 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, 2011.  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 2012.

 

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, 2011, and in Note A to this Form 10-Q.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

There has been no material change from the information provided in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” contained in our Annual Report on Form 10-K for the year ended December 31, 2011, which is incorporated herein by reference.

 

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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 September 30, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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, 2011, 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. MINE SAFETY DISCLOSURES — None.

 

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.
*10.1		Fourth Amendment to Amended and Restated Loan and Security Agreement with Sovereign Bank by and between TGC Industries, Inc. and Sovereign Bank, dated January 26, 2012.
*10.2		Fifth Amendment to Amended and Restated Loan and Security Agreement with Sovereign Bank by and between TGC Industries, Inc. and Sovereign Bank, dated September 16, 2012.
*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.
*101.INS		XBRL Instance Document
*101.SCH		XBRL Taxonomy Extension Schema Document
*101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
*101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
*101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

*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: November 9, 2012		/s/ Wayne A. Whitener
		Wayne A. Whitener
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: November 9, 2012		/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.
*10.1		Fourth Amendment to Amended and Restated Loan and Security Agreement with Sovereign Bank by and between TGC Industries, Inc. and Sovereign Bank, dated January 26, 2012.
*10.2		Fifth Amendment to Amended and Restated Loan and Security Agreement with Sovereign Bank by and between TGC Industries, Inc. and Sovereign Bank, dated September 16, 2012.
*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.
*101.INS		XBRL Instance Document
*101.SCH		XBRL Taxonomy Extension Schema Document
*101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
*101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
*101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

 

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