Geospace Technologies Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019. The financial statements are unaudited. Geospace designs and manufactures seismic equipment and other products, reporting in Oil and Gas Markets, Adjacent Markets, and Emerging Markets.
Financial performance
| Metric | Three months ended June 30, 2019 | Nine months ended June 30, 2019 |
|---|---|---|
| Revenue | $22.9 million, up 7.5% year over year | $66.9 million, up 21.2% |
| Gross profit / margin | $7.6 million / 33.2% | $21.0 million / 31.4% |
| Operating loss | $3.3 million | $8.4 million |
| Net loss | $3.7 million; $0.27 per share | $8.8 million; $0.66 per share |
| Operating cash flow | Not separately provided for the quarter | $6.1 million provided, versus $12.1 million used in the prior-year period |
- Rental revenue rose to $10.7 million for the quarter and $32.4 million year to date, from $8.0 million and $14.7 million, respectively. Product revenue declined year over year in both periods.
- At June 30, cash and cash equivalents were $15.6 million; short-term investments were zero, versus $25.5 million at September 30, 2018. Current assets were $53.4 million and current liabilities $13.6 million. The company reported no borrowings under its credit agreement and $23.4 million of borrowing availability.
- No long-term debt was outstanding. The credit facility permits up to $30.0 million subject to a borrowing base and matures in April 2020. Total liabilities included $12.1 million of contingent earn-out liabilities.
- Cash used in investing activities was $2.3 million for the nine months, including $28.7 million invested in rental equipment; proceeds from sales of short-term investments and used rental equipment partly offset those outlays. Cash increased $3.7 million from the start of the fiscal year.
Changes and operating drivers
- Revenue growth was principally driven by higher OBX marine wireless equipment rentals. Oil and Gas Markets revenue increased 17.0% in the quarter and 39.3% year to date; the segment moved from a prior-year operating loss to a small year-to-date operating profit.
- Adjacent Markets revenue declined 6.2% for the quarter and 4.0% year to date, although segment operating income improved. Emerging Markets, comprising Quantum, reported only $11,000 of quarterly revenue and a $1.4 million operating loss.
- Gross profit improved substantially from the prior year, which management attributed mainly to OBX rental utilization and improved factory productivity. The company nevertheless remained loss-making, with operating expenses up 11.3% for the quarter and 14.6% year to date. Higher acquisition-related costs were a key factor; the prior-year quarter also included a $2.6 million bad-debt charge.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expected fiscal 2019 cash investment in the wireless rental fleet of about $35 million and property, plant and equipment spending of up to $2 million.
- Management expected challenging conditions for land-based traditional and legacy wireless seismic products to continue through fiscal 2020, citing constrained customer budgets and underutilized industry equipment. It expected OBX rental demand to remain a source of activity.
- Management warned that Oil and Gas Markets inventory remained excessive relative to current demand and that further obsolescence expense could be recorded. Inventory obsolescence expense was $3.0 million for the nine-month period.
- Customer concentration is material: one customer generated $14.6 million, more than 10% of nine-month revenue, and owed $5.4 million at June 30; $1.1 million was collected in July.
- On August 1, 2019, after quarter-end, the company sold non-strategic Houston real estate for $8.6 million. Its $1.4 million carrying value was classified as held for sale at June 30.
- Acquisition earn-outs could reach $23.5 million for Quantum and $23.2 million for OptoSeis, subject to eligible revenue over their respective earn-out periods. The company identified oil-and-gas market weakness, customer order delays or cancellations, product acceptance, inventory obsolescence, customer credit losses, and foreign-currency movements as risks.
- Management stated that cash, cash equivalents, short-term investments, and available credit were expected to fund operating losses and planned capital spending for the next 12 months. However, it noted that absent future profitability it may need other liquidity sources. The company held $7.5 million of cash abroad.
Important facts for investors to verify
- Whether OBX rental utilization and demand can sustain revenue and margins as the fleet expands.
- Inventory aging, future obsolescence charges, and the pace of recovery in land-based seismic product demand.
- Collection and ongoing exposure to the customer representing more than 10% of nine-month revenue.
- Actual rental-fleet capital spending, borrowing-base availability, and compliance with credit-facility covenants through the April 2020 maturity.
- Earn-out valuations and potential payments related to Quantum and OptoSeis, alongside the acquired businesses’ revenue and operating performance.
- Use of the $8.6 million proceeds from the post-quarter real-estate sale and any related effects on liquidity or operations.