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TGE > SEC Filings for TGE > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for TGC INDUSTRIES INC

Form 10-Q for TGC INDUSTRIES INC


9-Nov-2012

Quarterly Report


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.


Table of Contents

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.

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