TGC Industries Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.29.13 | About: TGC Industries, (TGE)

TGC Industries (NASDAQ:TGE)

Q1 2013 Earnings Call

April 29, 2013 9:30 am ET

Executives

Karen Roan - Senior Vice President of Market Intelligence

Wayne A. Whitener - Chief Executive Officer, President and Director

James K. Brata - Chief Financial Officer, Principal Accounting Officer, Vice President, Secretary and Treasurer

Analysts

Veny Aleksandrov - FIG Partners, LLC, Research Division

Keith Maher - Singular Research

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the TGC Industries First Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, April 29, 2013.

I'd now like to turn the conference over to Karen Roan. Please go ahead, ma'am.

Karen Roan

Thank you, George. Good morning and welcome to the TGC Industries First Quarter 2013 Conference Call. We appreciate your joining us today. Your hosts are Wayne Whitener, President and Chief Executive Officer; and Jim Brata, Chief Financial Officer.

Before I turn over the call to management, I have few items to cover. If you would like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the company's website at tgcseismic.com or via a recorded instant replay until May 14. Information on how to access the replay was provided in this morning's earnings release. Information reported on this call speaks only as of today, Monday, April 29, 2013, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding the company's future performance are forward-looking statements. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control, that may cause the company's actual future results or performance to materially differ from any future results or performance expressed or implied by those statements.

These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including in its annual report on Form 10-K for the year ended December 31, 2012. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued this morning, and please note that the contents of our conference call this morning are covered by these statements.

Now let me turn over the call to Wayne Whitener.

Wayne A. Whitener

Thank you, Karen, and good morning, everyone. Thank you for joining us today for our first quarter 2013 earnings call. I will make some initial comments, and Jim Brata will provide you with the financial details. Then, I will conclude with some remarks about our marketing and business going forward.

The first quarter results were essentially in line with our forecast. As previously disclosed, we had expected first quarter 2013 results to be below last year's record first quarter due to a reserve expense of approximately $1.3 million associated with site cleanup costs related to the ending of the Canadian winter season that we took in the first quarter of 2013 that was not taken in the first quarter of 2012. We had additional depreciation expense of approximately $1 million. We also experienced land permit delays, mainly in the Northeast, and difficult winter weather conditions in parts of the U.S. during the first 2 months of this year.

In the first quarter, we operated 9 crews in the U.S. and 6 crews in Canada. Activity in Canada was solid in the first quarter. Since the beginning of April, we have shut down 4 crews in Canada due to the Canadian spring breakup. We are experiencing a softening in the U.S. seismic market as our clients are reevaluating reservoir plays and seismic funds are being diverted to drilling programs. As a result we have idled 2 U.S. crews but are keeping the key personnel to maintain the flexibility to get these crews back in the field as quickly as client demands warrant. We believe this softening is temporary but may last into the third quarter. However, we believe demand for our services will improve during the latter part of the year. Our backlog at the end of the first quarter was approximately $40 million consisting primarily of U.S. work.

I will now turn the call over to Jim Brata, who will give you a detailed review of our financial results, and then I will come back with some final remarks.

James K. Brata

Thank you, Wayne, and good morning. Revenues for the first quarter of 2013 were $63 million compared to $67 million in the record first quarter of 2012. We operated 9 crews in the U.S. during the quarter compared to 8 crews in last year's first quarter. In Canada, we operated 6 crews in this year's first quarter compared to 7 crews operating in Canada during the first quarter of 2012.

Cost of services in the first quarter of 2013 was $43 million compared to $39 million in the same quarter a year ago. The increase is primarily due to a reserve expense of approximately $1.3 million associated with site cleanup costs related to the ending of the Canadian winter season that we took in the first quarter of 2013 that was not taken in the first quarter of 2012; certain land permitting delays, mainly in the Northeast; and the adverse winter weather conditions in parts of the U.S. during the first 2 months of this year. Cost of services as a percentage of revenues in the first quarters of 2013 and 2012 was 68.4% and 57.5%, respectively.

Gross profit was $20 million in the first quarter of 2013 compared to $28 million in the first quarter a year ago. Gross profit margin was 31.6% compared to 42.5% in the first quarter a year ago, primarily due to the reserve associated with site cleanup in Canada, permitting issues and winter conditions mentioned earlier.

Our selling, general and administrative expenses were $2.4 million in the first quarter of 2013 compared to $2.3 million in the first quarter of 2012. As a percentage of revenues, SG&A expense was 3.8% in the first -- in this year's first quarter compared to 3.4% in the first quarter a year ago.

Depreciation and amortization expense rose 17% in the first quarter to $6.7 million from $5.7 million in the 2012 first quarter, reflecting depreciation on the new wireless equipment we purchased in 2012 to meet the requirements of our client base. As a percentage of revenues, depreciation and amortization expense was 10.6% in the first quarter of this year compared to 8.5% in the first quarter a year ago.

Interest expense rose 32% in the first quarter to $320,000 from $242,000 a year ago due to the large amount of new equipment that we purchased in the last 15 months, which amounted to approximately $58 million.

Net income was $6.4 million or $0.29 per diluted share compared to $12.4 million or $0.57 per diluted share in last year's first quarter. We recorded income tax expense of $4.2 million in the first quarter and effective tax rate of 40%. This compares to income tax expense of $7.8 million and effective tax rate of 39% a year ago.

EBITDA in the first quarter was $17.6 million, which is an EBITDA margin of 27.8%, compared to $26.2 million and EBITDA margin of 39% in the first quarter a year ago. An EBITDA reconciliation table was provided in our earnings release issued this morning.

And finally, I will highlight some balance sheet items. As of the end of the first quarter, we have long-term debt of $13.9 million; cash and cash equivalents of $10 million; our current ratio was roughly 1.6:1; working capital was approximately $21.3 million; and finally, we generated approximately $5.3 million in cash from operations in the quarter.

And with that, I'll turn the call back to Wayne for some closing comments.

Wayne A. Whitener

Thank you, Jim. Before we open the call up for questions, I would like to briefly summarize where we stand today. We are currently operating 7 crews in the U.S. and no crews in Canada. We believe the slow market conditions are temporary, and we are keeping our key personnel in order to maintain the flexibility to get crews back in the field as quickly as client demands warrant. However, it is possible that we will idle additional crews depending on demand for our services.

Looking at commodity prices. Natural gas remains a major variable. Current prices are hovering around $4, and if they remain firmly around that level or better yet inch higher, we believe that in 2014, we may see some real pickup in seismic spending in dry gas basins. As far as oil prices are concerned, as long as West Texas Intermediate remains close to $90 per barrel, we believe customers will continue their capital spending. If on the other hand, West Texas Intermediate falls below $80 a barrel and stays there, we might likely see a decline in activities and customer capital budgets.

We now own about 137,000 recording channels, which include 70,000 wireless channels, gives us the ability to field one of the largest fleets of geospace wireless data acquisition units in North America. We believe we are clearly ahead of the rest of the North American seismic industry in terms of latest technology and the age of our seismic equipment.

In closing, I'd like to state that our geographic diversification and low-cost structure, combined with our new wireless technology, position us well to take advantage of the opportunities ahead of us.

This concludes my formal remarks, and we'll now take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Veny Aleksandrov with FIG Partners.

Veny Aleksandrov - FIG Partners, LLC, Research Division

So my first question is about the 2 crews that you are idling and the market conditions right now, you are idling them but you are still keeping key personnel. What's happening from the bidding side and the contract side? Is there a still strong bidding activity and you're hoping that you're going to start signing contracts soon and that's why you're not letting key personnel go? I mean, can you just give us a little bit more information on that front?

Wayne A. Whitener

Sure. Yes, the bidding has been brisk. The bidding has been brisk since the first of the year. I think a lot of people are just looking at the economics to some of these reservoir plays. I also believe that the budgets came out late this year due to the fact of the election and some of the new tax consequences. So we feel like the second half of the year should pick up, and we are poised to put these crews back in the field as soon as the opportunity arises. And we're still very positive about what's going to happen between now and end of the year, even though as I said, we have idled 2 crews and we possibly may idle another crew. But we're still feel like the second half of the year will be strong.

Veny Aleksandrov - FIG Partners, LLC, Research Division

And my follow-up question is about Canada. You had 2 crews working until the end of April, now you're at 0. But if I remember, last year, we had some crews working in the summer over there. Is there any chance we might get some crews back working in Canada in the summer?

Wayne A. Whitener

Yes, we are expecting, we're waiting to get some work prepped in Canada. We're expecting to run 1, possibly 2, crews during the summer in Canada, and we're expecting the Canadian season coming up to be as good as it was this past year.

Veny Aleksandrov - FIG Partners, LLC, Research Division

You mean the winter season?

Wayne A. Whitener

The winter season, yes. We expect during the summer to run for sure 1 crew, possibly 2, and then, we're expecting the winter Canadian season starting in the end of the third quarter, beginning of the fourth quarter to be as good as it was last year.

Operator

[Operator Instructions] Our next question is from the line of Keith Maher with Singular Research.

Keith Maher - Singular Research

I was wondering if you could -- kind of following up on what Veny was asking. I'm just trying to reconcile, you're saying we got -- we have brisk bidding activity but there's this softening in the U.S. seismic market. So are you saying that the bidding is there but the companies just aren't acting on it, is that how I should read that?

Wayne A. Whitener

That is correct. They are working on their -- getting the bids and evaluating where they're going to spend their money, but basically, they've held off on signing any contracts. And that's why our backlog is down at the present time.

Keith Maher - Singular Research

Okay. And just a kind of question on the -- the land permit delays you experienced this year, in the, I believe you said the Northeast U.S., is that something new or is that just kind of, it happens from time to time and that's just part of just doing business in this industry?

Wayne A. Whitener

It happens from time to time, it's part of doing business. The Northeast seems very prone to that. We're working in areas of West Virginia, in Pennsylvania, which these -- state and also the local people are not used to seismic. And so it causes for more possibilities of land delays.

Operator

Our next question is from Rhys Williams with Columbia Partners.

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

Can you just remind us how much money you -- cost you in the second quarter of last year to take down the Canadian business that you put in the first quarter this year, so we can get an idea of the expense savings this quarter?

Wayne A. Whitener

Yes. Well, last year, we did not have any reserve for a site cleanup. This year is the first year that we've done that, and we put in a reserve of $1.3 million to cover those costs associated with the work that was done in the first quarter and the site cleanup costs that we'll incur in the second quarter.

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

And do you think at that point, at this point, $1.3 million looks about right, so basically all the expenses will go into the first quarter where the revenues were?

Wayne A. Whitener

Yes.

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

Okay. So we should get that benefit in earnings in the second quarter, year-over-year?

Wayne A. Whitener

Yes.

Operator

[Operator Instructions] Our next question is a follow-up from Veny Aleksandrov.

Veny Aleksandrov - FIG Partners, LLC, Research Division

Wayne, I want to talk about CapEx. Are you still going to spend only maintenance CapEx this year? Is this due to the plan of no more investment in new equipment at least for now?

Wayne A. Whitener

Yes, that is correct. We're in maintenance CapEx, and of course, maintenance CapEx will be down because we are idling some crews. Of course, we are taking the opportunity of these crews being idle to review and repair any of our instrumentation or trucking units that we use in our operations. But we do expect maintenance CapEx to be probably on the low end of this year, and we're in a cash-building mode.

Veny Aleksandrov - FIG Partners, LLC, Research Division

And you're still evaluating your choices in terms of what to do with that cash?

Wayne A. Whitener

I couldn't hear you on that, Veny.

Veny Aleksandrov - FIG Partners, LLC, Research Division

I'm sorry. You're still evaluating your options in terms of what to do with the cash that you're going to accumulate?

Wayne A. Whitener

Right, right. We have. I will point out, we did do a cash dividend to our shareholders at the end of last year. You probably just saw that we did a 5% stock dividend here. We just announced that. And we'll -- -- the board will review at the end of the year whether we'll do another cash dividend at that time or not.

Operator

And our next question is a follow-up from Keith Maher with Singular Research.

Keith Maher - Singular Research

I guess I was just wondering about -- level of depreciation. It was, I guess, about $6.7 million in the quarter. Is this kind of the level we should expect for the balance of the year on a quarterly basis?

James K. Brata

Yes. That's going to be about that level for the rest of the year. It's going to decrease very slightly, but that's a good level to use in your modeling.

Operator

And our next question is also a follow-up from Rhys Williams with Columbia Partners.

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

This is sort of a follow-up to Veny's question. Given you have a wonderful balance, with a lot of cash and you're generating cash, would a regular dividend make some sense as opposed to just a special? I just wanted to know what the management's thought is in the quarter.

Wayne A. Whitener

The board reviews that. So far, last year was our first year that we did a cash dividend. We have done the stock dividend, the 5% stock dividend for the last 5 years or so. So it's -- the board will review that and make a decision whether it will be a special dividend or just -- we review whether we might start regular dividends.

Operator

And I'm showing no further questions. I'll turn the call back to management for closing remarks.

Wayne A. Whitener

I would like to thank everyone to have been on our call today. And we look forward to talking to you again in the next quarterly call. Thank you.

Operator

Ladies and gentlemen, this concludes our conference for today. We thank you for your participation. You may now disconnect.

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