##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2006
 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 No. 0-10144
 DAWSON GEOPHYSICAL COMPANY
 Texas
    
    75-0970548(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 508 West Wall, Suite 800, Midland, Texas 79701
 (Principal Executive Office)
 Telephone Number: 432-684-3000
 þ o
  o þ o
 o þ
  Title of Each Class
    
    Outstanding at August 4,2006Common Stock, $.33 1/3 par value
    
    7,549,244 shares




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##### 



DAWSON GEOPHYSICAL COMPANY
  PageNumberPart I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Statements of Operations for the Three Months and the Nine Months Ended June 30, 2006 and 2005 (unaudited)
    
    
    1Balance Sheets at June 30, 2006 (unaudited) and September 30, 2005
    
    
    2Statements of Cash Flows for the Nine Months Ended June 30, 2006 and 2005 (unaudited)
    
    
    3Notes to Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    15Part II. OTHER INFORMATION
    
    
    15Item 1. Legal Proceedings
    
    
    15Item 1A. Risk Factors
    
    
    15Item 6. Exhibits
    
    
    15Signatures
    
    
    16Index to Exhibits
    
    
    17Second Restated Articles of IncorporationCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Rule 13a-14(b)Certification of CFO Pursuant to Rule 13a-14(b)




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 DAWSON GEOPHYSICAL COMPANY
 
 STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    41,524,000
    
    
    $
    31,500,000
    
    
    $
    117,059,000
    
    
    $
    79,574,000Operating costs:Operating expenses
    
    
    30,378,000
    
    
    
    22,878,000
    
    
    
    87,625,000
    
    
    
    61,100,000General and administrative
    
    
    1,117,000
    
    
    
    1,409,000
    
    
    
    3,558,000
    
    
    
    3,192,000Depreciation
    
    
    3,393,000
    
    
    
    2,387,000
    
    
    
    9,557,000
    
    
    
    5,519,00034,888,000
    
    
    
    26,674,000
    
    
    
    100,740,000
    
    
    
    69,811,000Income from operations
    
    
    6,636,000
    
    
    
    4,826,000
    
    
    
    16,319,000
    
    
    
    9,763,000Other income:Interest income
    
    
    147,000
    
    
    
    212,000
    
    
    
    475,000
    
    
    
    335,000Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,000
    )Gain (loss) on disposal of assets
    
    
    (92,000
    )
    
    
    149,000
    
    
    
    44,000
    
    
    
    149,000Loss on sale of short term investments
    
    
    
    
    
    
    (4,000
    )
    
    
    (17,000
    )
    
    
    (4,000
    )Other
    
    
    11,000
    
    
    
    
    
    
    
    28,000
    
    
    
    239,000Income before income tax
    
    
    6,702,000
    
    
    
    5,183,000
    
    
    
    16,849,000
    
    
    
    10,417,000Income tax expense:Current
    
    
    (1,543,000
    )
    
    
    (783,000
    )
    
    
    (3,385,000
    )
    
    
    (1,516,000
    )Deferred
    
    
    (918,000
    )
    
    
    (1,043,000
    )
    
    
    (2,572,000
    )
    
    
    (1,617,000
    )(2,461,000
    )
    
    
    (1,826,000
    )
    
    
    (5,957,000
    )
    
    
    (3,133,000
    )Net income
    
    $
    4,241,000
    
    
    $
    3,357,000
    
    
    $
    10,892,000
    
    
    $
    7,284,000Net income per common share
    
    $
    0.56
    
    
    $
    0.45
    
    
    $
    1.45
    
    
    $
    1.13Net income per common share-assuming
dilution
    
    $
    0.56
    
    
    $
    0.45
    
    
    $
    1.44
    
    
    $
    1.11Weighted average equivalent common shares
outstanding
    
    
    7,535,615
    
    
    
    7,445,525
    
    
    
    7,508,871
    
    
    
    6,446,607Weighted average equivalent common shares
outstanding-assuming dilution
    
    
    7,614,507
    
    
    
    7,540,963
    
    
    
    7,586,117
    
    
    
    6,542,479
 See accompanying notes to the financial statements.
 1




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DAWSON GEOPHYSICAL COMPANY
 
 BALANCE SHEETS
 June 30,
    
    
    September 30,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    787,000
    
    
    $
    2,803,000Short-term investments
    
    
    11,364,000
    
    
    
    20,326,000Accounts receivable, net of allowance for doubtful accounts of $124,000 in June 2006
and $331,000 in September 2005
    
    
    35,514,000
    
    
    
    28,696,000Prepaid expenses and other assets
    
    
    749,000
    
    
    
    1,127,000Current deferred tax asset
    
    
    43,000
    
    
    
    1,229,000Total current assets
    
    
    48,457,000
    
    
    
    54,181,000Property, plant and equipment
    
    
    154,524,000
    
    
    
    124,478,000Less accumulated depreciation
    
    
    (71,847,000
    )
    
    
    (64,532,000
    )Net property, plant and equipment
    
    
    82,677,000
    
    
    
    59,946,000$
    131,134,000
    
    
    $
    114,127,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,329,000
    
    
    $
    6,601,000Accrued liabilities:Payroll costs and other taxes
    
    
    650,000
    
    
    
    1,198,000Other
    
    
    3,730,000
    
    
    
    2,182,000Deferred revenue
    
    
    68,000
    
    
    
    190,000Total current liabilities
    
    
    13,777,000
    
    
    
    10,171,000Deferred tax liability
    
    
    3,438,000
    
    
    
    2,052,000Stockholders equity:Preferred stock-par value $1.00 per share; 5,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock-par value $.33 1/3 per share; 50,000,000 and 10,000,000 shares authorized
in each period; 7,541,994 and 7,484,044 shares issued and outstanding in each period
    
    
    2,514,000
    
    
    
    2,495,000Additional paid-in capital
    
    
    82,107,000
    
    
    
    80,987,000Other comprehensive income, net of tax
    
    
    (93,000
    )
    
    
    (77,000
    )Retained earnings
    
    
    29,391,000
    
    
    
    18,499,000Total stockholders equity
    
    
    113,919,000
    
    
    
    101,904,000$
    131,134,000
    
    
    $
    114,127,000
 See accompanying notes to the financial statements.
 2




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DAWSON GEOPHYSICAL COMPANY
 
 STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine Months Ended June 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    10,892,000
    
    
    $
    7,284,000Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    9,557,000
    
    
    
    5,519,000Gain on disposal of assets
    
    
    (44,000
    )
    
    
    (149,000
    )Realized loss on sale of short-term investments
    
    
    17,000
    
    
    
    4,000Deferred income tax expense
    
    
    2,572,000
    
    
    
    1,617,000Non-cash compensation
    
    
    590,000
    
    
    
    45,000Excess tax benefit from share based payment arrangement
    
    
    (180,000
    )
    
    
    Other
    
    
    119,000
    
    
    
    (1,000
    )Change in current assets and liabilities:Increase in accounts receivable
    
    
    (6,818,000
    )
    
    
    (11,207,000
    )Decrease (increase) in prepaid expenses
    
    
    378,000
    
    
    
    (325,000
    )Increase in accounts payable
    
    
    2,728,000
    
    
    
    5,355,000Increase (decrease) in deferred revenue
    
    
    (122,000
    )
    
    
    1,278,000Increase in accrued liabilities
    
    
    1,000,000
    
    
    
    1,922,000Net cash provided by operating activities
    
    
    20,689,000
    
    
    
    11,342,000CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (32,606,000
    )
    
    
    (34,433,000
    )Proceeds from sale of short-term investments
    
    
    6,510,000
    
    
    
    4,965,000Proceeds from maturity of short-term investments
    
    
    2,500,000
    
    
    
    Proceeds from disposal of assets
    
    
    342,000
    
    
    
    183,000Acquisition of short-term investments
    
    
    
    
    
    
    (21,309,000
    )Net cash used in investing activities
    
    
    (23,254,000
    )
    
    
    (50,594,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    369,000
    
    
    
    188,000Proceeds from line of credit
    
    
    
    
    
    
    10,000,000Repayment on line of credit
    
    
    
    
    
    
    (10,000,000
    )Proceeds from stock offering
    
    
    
    
    
    
    41,004,000Excess tax benefit from share based payment arrangement
    
    
    180,000
    
    
    
    Net cash provided by financing activities
    
    
    549,000
    
    
    
    41,192,000Net (decrease) increase in cash and cash equivalents
    
    
    (2,016,000
    )
    
    
    1,940,000CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    2,803,000
    
    
    
    3,587,000CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    787,000
    
    
    $
    5,527,000SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid during the period for income taxes
    
    $
    2,340,000
    
    
    $
    476,000NON CASH INVESTING ACTIVITIES:Unrealized loss on investments
    
    $
    (27,000
    )
    
    $
    (82,000
    )
 See accompanying notes to the financial statements.
 3




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DAWSON GEOPHYSICAL COMPANY
 
 NOTES TO FINANCIAL STATEMENTS
 1. ORGANIZATION AND NATURE OF OPERATIONS
  2. OPINION OF MANAGEMENT
   Critical Accounting Policies
  Revenue Recognition.
  Allowance for Doubtful Accounts.
 Impairment of Long-lived Assets.
 Depreciable Lives of Property, Plant and Equipment.
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Tax Accounting.
 Stock Based Compensation.
   Three Months Ended
    
    
    Nine Months EndedJune 30, 2005
    
    
    June 30, 2005Net income, as reported
    
    $
    3,357,000
    
    
    $
    7,284,000Add: Stock-based employee compensation expense included in net income, net of tax
    
    
    
    
    
    
    45,000Deduct: Stock-based employee compensation expense determined under fair value
based method (SFAS 123), net of tax
    
    
    (107,000
    )
    
    
    (359,000
    )Net income, pro forma
    
    $
    3,250,000
    
    
    $
    6,970,000Basic:Net income per common share, as reported
    
    $
    0.45
    
    
    $
    1.13Net income per common share, pro forma
    
    $
    0.44
    
    
    $
    1.08Diluted:Net income per common share, as reported
    
    $
    0.45
    
    
    $
    1.11Net income per common share, pro forma
    
    $
    0.43
    
    
    $
    1.07
   5




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WeightedAverageNumber of
    
    
    RemainingWeighted
    
    
    Optioned
    
    
    Contractual
    
    
    Aggregate IntrinsicAverage Price
    
    
    Shares
    
    
    Term
    
    
    Value ($000)Balance as of March 31, 2006
    
    $
    8.98
    
    
    
    196,250Expired
    
    $
    9.27
    
    
    
    (6,500
    )Exercised
    
    $
    7.58
    
    
    
    (18,500
    )Balance as of June 30, 2006
    
    $
    9.12
    
    
    
    171,250Balance as of September 30, 2005
    
    $
    8.87
    
    
    
    224,500Expired
    
    $
    9.27
    
    
    
    (6,500
    )Exercised
    
    $
    7.90
    
    
    
    (46,750
    )Balance as of June 30, 2006
    
    $
    9.12
    
    
    
    171,250
    
    
    
    2.35
    
    
    $
    3,654Exercisable as of June 30, 2006
    
    $
    7.50
    
    
    
    99,250
    
    
    
    2.35
    
    
    $
    2,279
  Recently Issued Accounting Pronouncements
  6




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3. NET INCOME PER COMMON SHARE
   Three Months Ended
    
    
    Nine Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005NUMERATOR:Net income and numerator for basic and diluted net
income per common share-income available to common
shareholders
    
    $
    4,241,000
    
    
    $
    3,357,000
    
    
    $
    10,892,000
    
    
    $
    7,284,000DENOMINATOR:Denominator for basic net income per common
share-weighted average common shares
    
    
    7,535,615
    
    
    
    7,445,525
    
    
    
    7,508,871
    
    
    
    6,446,607Effect of dilutive securities-employee stock options
    
    
    78,892
    
    
    
    95,438
    
    
    
    77,246
    
    
    
    95,872Denominator for diluted net income per common
share-adjusted weighted average common shares and
assumed conversions
    
    
    7,614,507
    
    
    
    7,540,963
    
    
    
    7,586,117
    
    
    
    6,542,479Net income per common share
    
    $
    0.56
    
    
    $
    0.45
    
    
    $
    1.45
    
    
    $
    1.13Net income per common share-assuming dilution
    
    $
    0.56
    
    
    $
    0.45
    
    
    $
    1.44
    
    
    $
    1.11
 4. DEBT
   7




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5. CONTINGENCY
  8




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward Looking Statements
  Overview
     9




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Highlights of the Quarter Ended June 30, 2006
  
    
    We operated eleven acquisition crews during most of the third fiscal quarter of 2006, as
compared to ten crews for most of the third fiscal quarter of 2005.
    
    We experienced price improvements and more favorable contract terms in our agreements
with clients. These factors helped improve our revenues during the third quarter of fiscal
2006 compared to the same quarter in fiscal 2005.
    
    Weather conditions in the quarter ended June 30, 2006
had minor affects on operating results while crew downtime associated
with delays in securing land access permits had more of an impact
than in recent quarters.
    
    We continued to grow by placing into service an additional data acquisition crew, our
twelfth, in June of 2006.
 Results of Operations
 Operating Revenues
 Operating Costs
 10




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Taxes
 Liquidity and Capital Resources
 Introduction.
 Cash Flows.
   11




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Capital Expenditures.
   Capital Resources.
    Payments Due by PeriodWithin
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 Years(In thousands)Operating lease obligations
    
    $
    301
    
    
    $
    151
    
    
    $
    150
    
    
    
    0
    
    
    
    0
  Off-Balance Sheet Arrangements
  Critical Accounting Policies
  12




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Revenue Recognition.
  Allowance for Doubtful Accounts.
 Impairment of Long-lived Assets.
 Depreciable Lives of Property, Plant and Equipment.
 Tax Accounting.
 Stock Based Compensation.
  13




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
    
    Expected volatility of our stock price based on historical volatility over the expected
term of the option.
    
    Expected term of the option based on historical employee stock option exercise behavior,
the vesting term of the respective option and the contractual term.
    
    Risk-free interest rate for periods within the expected term of the option.
    
    Dividend yield.
   Recently Issued Accounting Pronouncements
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  14




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ITEM 4. CONTROLS AND PROCEDURES
 Internal Control  Integrated Framework
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
  15




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SIGNATURES
  DAWSON GEOPHYSICAL COMPANYDATE: August 7, 2006
    By:
    /s/ Stephen C. JumperStephen C. JumperPresident and Chief Executive OfficerDATE: August 7, 2006
    By:
    /s/ Christina W. HaganChristina W. HaganExecutive Vice President, Treasurer,
Secretary and Chief Financial Officer 16




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INDEX TO EXHIBITS
 Number
    
    Exhibit3.1*
    
    Second Restated Articles of Incorporation of the Company, as amended.3.2
    
    Bylaws of the Company, as amended (filed on December 11, 2003 as Exhibit 3 to the
Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2003
(File No. 000-10144) and incorporated herein by reference).4.1
    
    Rights Agreement by and between the Company and Mellon Investor Services, LLC
(f/k/a Chasemellon Shareholder Services, L.L.C.), as Rights Agent, dated July 13,
1999 (filed on December 11, 2003 as Exhibit 4 to the Companys Annual Report on
Form 10-K for the fiscal year ended September 30, 2003 (File No. 000-10144) and
incorporated herein by reference).31.1*
    
    Certification of Chief Executive Officer of Dawson Geophysical Company pursuant to
Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.31.2*
    
    Certification of Chief Financial Officer of Dawson Geophysical Company pursuant to
Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer of Dawson Geophysical Company pursuant to
Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended,
and Section 1350 of Chapter 63 of Title 18 of the United States Code. Pursuant to
SEC Release 34-47551, this Exhibit is furnished to the SEC and shall not be deemed
to be filed.32.2*
    
    Certification of Chief Financial Officer of Dawson Geophysical Company pursuant to
Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended,
and Section 1350 of Chapter 63 of Title 18 of the United States Code. Pursuant to
SEC Release 34-47551, this Exhibit is furnished to the SEC and shall not be deemed
to be filed.
 
 *
    
    Filed herewith. 17