Geospace Technologies Corporation — FY2018 Second-Quarter 10-Q
Reporting period: Three and six months ended March 31, 2018; balance sheet compared with September 30, 2017. The company designs and manufactures seismic equipment for the oil and gas industry and non-seismic industrial and imaging products. Amounts below are in millions except per-share data.
Financial performance
| Metric | Three months ended Mar. 31, 2018 | Prior-year quarter | Six months ended Mar. 31, 2018 | Prior-year period |
|---|---|---|---|---|
| Revenue | $19.25 | $20.56 | $33.89 | $35.84 |
| Gross profit (loss) | $2.00 | $(2.56) | $1.03 | $(5.89) |
| Gross margin | 10.4% | (12.4)% | 3.0% | (16.4)% |
| Operating loss | $(5.22) | $(11.06) | $(14.83) | $(22.37) |
| Net loss | $(4.73) | $(11.50) | $(14.21) | $(23.21) |
| Loss per share, basic and diluted | $(0.36) | $(0.88) | $(1.07) | $(1.77) |
- Quarterly revenue declined 6.4%; six-month revenue declined 5.4%. Seismic revenue fell 19.1% for the quarter and 17.2% for six months, led by weaker wireless product sales and rentals. Non-seismic revenue rose 21.0% and 17.0%, respectively, chiefly from industrial products.
- Gross results improved substantially, primarily because inventory-obsolescence expense fell and workforce reductions lowered fixed manufacturing costs. Six-month inventory-obsolescence expense was $3.3 million, versus $8.4 million a year earlier. Management cautioned that margins are expected to remain low and further inventory write-downs may be required.
- Seismic segment operating loss narrowed to $3.8 million for the quarter and $11.4 million for six months. Non-seismic segment operating income was $1.4 million and $2.4 million, respectively.
- Six-month operating cash flow was negative $12.4 million, versus positive $8.3 million in the prior-year period. Investing activities provided $11.5 million, including net proceeds from short-term investments and sales of used rental equipment. Cash and equivalents declined by $0.9 million to $14.2 million.
- At March 31, cash and equivalents were $14.2 million and short-term investments were $26.5 million, totaling $40.6 million in available cash and investments. Current assets were $82.5 million and current liabilities $10.8 million. There was no long-term debt or credit-facility borrowing; $27.6 million was available under the facility after letters of credit. The company reported covenant compliance.
Changes, outlook and risks
- Despite lower total sales, losses improved year over year as cost of revenue and operating expenses declined. Seismic demand remains depressed; the company reported increased inquiries but no firm new-product orders or commitments at the filing date.
- Management expects challenging seismic market conditions to continue through FY2018. It expects approximately $4 million of FY2018 cash investment in rental equipment and $3 million in property, plant and equipment. Management believes cash and short-term investments can fund operating losses and planned capital expenditures for the next 12 months, while acknowledging ongoing losses and declining cash balances.
- A cost-reduction program initiated in December 2017 reduced the Houston-area workforce by more than 60 employees and is expected to yield about $6 million in annualized cash savings. The company incurred $0.7 million in termination costs; no further costs or related liabilities were expected at March 31.
- Seismic inventory remains high relative to demand. The company had previously recorded $5.1 million of PRM inventory obsolescence reserves and $5.3 million of manufacturing-equipment impairment reserves in September 2017. It has received no permanent reservoir monitoring system orders since November 2012; a prospective Statoil contract was awarded to another supplier.
- Other risks include oil and gas exploration spending and commodity prices, customer order delays or cancellations, product obsolescence, customer credit losses, and foreign-exchange exposure. The company hedged part of its Canadian-dollar intercompany exposure, but remained under-hedged by approximately CAN$11.1 million. Litigation was described as ordinary-course; management was unaware of material pending or contemplated proceedings.
- The Tax Cuts and Jobs Act reduced the U.S. federal corporate tax rate to 21%. The six-month income tax benefit was $0.7 million, including a claimed $0.7 million prior-year refund. Valuation allowances against U.S. and Canadian deferred tax assets constrained recognition of tax benefits. The company said repatriation of foreign cash could trigger taxes.
- The filing describes a prior material weakness related to inventory classification and a restatement of earlier balance sheets. Management said a quarterly inventory-classification control was implemented and the weakness remediated; disclosure controls were assessed as effective as of March 31, 2018.
Important facts for investors to verify
- Whether seismic demand, especially wireless equipment sales and rentals, recovers and converts inquiries into firm orders.
- Inventory aging, utilization and additional obsolescence charges, given elevated seismic inventories and the company’s stated risk of further write-downs.
- Operating cash burn and the adequacy of the $40.6 million cash-and-investment balance, considering ongoing losses and planned capital spending.
- Progress toward the expected $6 million annualized cost savings and the effect of workforce reductions on manufacturing capacity.
- Credit-facility availability and renewal: the facility matures April 30, 2019 and includes a minimum liquid-assets covenant and restrictions on distributions.
- Tax consequences of foreign cash repatriation, deferred-tax valuation allowances, and remaining foreign-currency exposure.