Geospace Technologies Corporation — Q3 FY2017 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; compared with the periods ended June 30, 2016. Financial amounts below are in U.S. dollars. The company designs and manufactures seismic and non-seismic equipment, with seismic products primarily serving the oil and gas industry.
Financial performance
| Metric | Three months ended June 30, 2017 | Prior-year quarter | Nine months ended June 30, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $14.2 million | $17.7 million | $50.0 million | $45.7 million |
| Gross profit (loss) | ($5.1) million | ($2.9) million | ($11.0) million | ($13.9) million |
| Operating loss | ($13.8) million | ($12.0) million | ($36.1) million | ($40.7) million |
| Net loss | ($14.4) million | ($11.7) million | ($37.6) million | ($33.7) million |
| Loss per diluted share | ($1.09) | ($0.89) | ($2.86) | ($2.58) |
| Operating cash flow | Not provided for the quarter | $12.0 million | ($1.1) million |
- Gross margin was approximately negative 36% for the quarter and negative 22% for the nine-month period. The nine-month comparison improved from approximately negative 30% in 2016.
- Nine-month operating cash flow included a $12.8 million U.S. tax refund. Net loss was substantially offset in the cash flow reconciliation by non-cash charges, including $12.1 million of inventory obsolescence expense.
- At June 30, cash and cash equivalents were $17.1 million and short-term investments were $36.5 million, totaling $53.5 million. Current assets were $154.8 million and current liabilities $9.1 million.
- The company had no borrowings. Its credit facility had $25.8 million available after letters of credit; it expires May 4, 2018. Stockholders’ equity was $212.6 million.
Material changes versus prior comparable periods
- Quarterly revenue fell 19.7%, mainly because wireless exploration rental revenue declined, including the absence of a large OBX rental contract active in the prior-year quarter. Nine-month revenue rose 9.4%, primarily on higher wireless product sales and rental revenue.
- Quarterly gross loss widened, reflecting weaker wireless rental revenue and higher inventory obsolescence. Nine-month gross loss narrowed on higher wireless revenue and lower manufacturing costs, partly offset by increased obsolescence charges.
- Quarterly net loss increased to $14.4 million; the nine-month net loss also increased despite improved operating loss, in part because the prior-year period included a larger income tax benefit.
- Non-seismic revenue declined 15.4% for the quarter and 3.8% for the nine months. Non-seismic operating income remained positive, at $1.0 million and $3.1 million, respectively. Seismic operations recorded a $12.0 million quarterly operating loss and a $30.6 million nine-month operating loss.
Outlook, risks and unusual items
- Management expected depressed seismic market conditions to continue through FY2017 and seismic revenue, particularly traditional and wireless products, to remain weak until oil prices and exploration activity improve. Management also expected gross margins to remain low and warned of additional inventory obsolescence expense in FY2017 and beyond.
- Seismic inventory was considered excessive relative to current demand. The obsolescence reserve was $20.4 million at June 30, compared with $9.7 million at September 30, 2016. No permanent reservoir monitoring systems were delivered or ordered in FY2016 or the first nine months of FY2017.
- Management believed available cash and short-term investments would fund operating losses and planned capital spending for the next 12 months. However, tax refunds that had supported liquidity were not expected to recur from current tax losses, and management said renewal of the credit facility was uncertain and could involve reduced availability and stricter covenants.
- FY2017 capital spending was estimated at approximately $1.0 million for property, plant and equipment; rental-fleet investment was expected to be minimal absent significant OBX orders. No formal revenue or earnings guidance was provided.
- The company recorded $1.4 million of income tax expense for the nine months, despite losses, amid valuation allowances on U.S. and Canadian deferred tax assets. Management cited uncertainty about their future utilization.
- Foreign exchange exposure includes Russian and Colombian operations and Canadian-dollar intercompany balances. A Canadian-dollar hedge added in July 2017 left the company over-hedged by approximately C$4.3 million; management estimated a 10% weakening of the U.S. dollar against the Canadian dollar could result in a $0.3 million loss while that position remained.
- Management reported no material pending or known contemplated legal or government proceedings. Disclosure controls were assessed as effective at June 30, 2017; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether seismic orders, utilization and rental demand recover, particularly for wireless systems, and whether revenue improves after the prior-year OBX rental comparison.
- Further inventory write-downs, inventory turnover and the adequacy of the $20.4 million obsolescence reserve.
- Cash burn excluding tax refunds, the timing and amount of any additional refund, and whether liquidity remains adequate if losses persist.
- Renewal or replacement of the credit facility before its May 2018 expiry, including availability, covenants and borrowing costs.
- Progress in non-seismic businesses and any orders for permanent reservoir monitoring systems, alongside the effect of tax valuation allowances and foreign-exchange exposure.