Geospace Technologies Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. The filing also reports fourth-quarter results. Geospace designs and manufactures seismic equipment used in oil and gas exploration and reservoir monitoring, plus industrial and imaging products. Seismic activity weakened amid lower oil prices and reduced customer capital spending.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $62.1 million | $84.9 million |
| Gross profit (loss) | ($19.4) million | ($11.2) million |
| Gross margin | (31.2)% | (13.2)% |
| Operating loss | ($55.5) million | ($52.6) million |
| Net loss | ($46.0) million | ($32.6) million |
| Basic and diluted loss per share | ($3.52) | ($2.51) |
| Cash used in operating activities | $1.7 million | $11.4 million |
- Revenue declined 26.9%. Seismic revenue fell 44.2% to $33.8 million; non-seismic revenue rose 16.6% to $27.7 million. Industrial products grew, led by water-meter products.
- Rental revenue increased to $15.5 million from $11.2 million, including $11.3 million from an OBX rental contract. Product-sales revenue declined to $46.5 million from $73.7 million.
- Negative gross margin reflected lower sales, underabsorbed factory costs, inventory obsolescence and write-downs, and impairment of rental assets. Operating expenses fell 12.6% to $36.1 million.
- FY2016 fourth-quarter revenue was $16.3 million; gross loss was $5.5 million, operating loss $14.8 million, and net loss $12.3 million, or $0.94 per share.
Liquidity, debt and cash flow
- At September 30, 2016, cash and cash equivalents were $10.3 million and short-term investments were $27.5 million, totaling $37.8 million. Working capital was $164.1 million; current assets were $174.3 million and current liabilities $10.3 million.
- Inventory was $104.5 million, down from $124.8 million, but management said it remained excessive for current demand. The inventory obsolescence reserve was $9.7 million.
- The company had no outstanding debt and reported $29.6 million of borrowing availability under its $30 million asset-based credit facility, after letters of credit. It was in covenant compliance; the facility expires May 4, 2018.
- Investing activities used $10.2 million, including net purchases of short-term investments. Cash and cash equivalents declined by $12.1 million during the year.
Material changes, outlook and risks
- Seismic-market weakness drove revenue down from $236.9 million in FY2014 to $84.9 million in FY2015 and $62.1 million in FY2016. The company had no permanent reservoir-monitoring system orders or deliveries in FY2015 or FY2016; the large Statoil project had been completed in 2014.
- Management expected FY2017 demand for most seismic products to remain depressed and not exceed FY2016 levels. GSX rentals were expected to remain weak. OBX rental revenue could increase, but there were no executed firm contracts supporting that expectation. A large reservoir-monitoring order could materially affect results, but management had no indication one would be received in FY2017.
- Management expected non-seismic revenue to increase in FY2017, principally from industrial products. It also forecast approximately $3.5 million of FY2017 capital expenditures and no cash investment in the rental fleet absent additional OBX orders.
- Management expected an approximately $13 million U.S. tax refund in the second fiscal quarter of FY2017 from carrying back the FY2016 pretax loss. It stated cash, investments, rental contracts, the anticipated refund and available credit were sufficient for operating losses and planned capital expenditures over the next 12 months.
- A January 2016 cost-reduction program targeted about $7 million in annualized cash savings and included a workforce reduction of more than 150 Houston-area employees. FY2016 termination costs were $1.0 million; the company reported no remaining program liabilities.
- Unusual charges included $10.6 million of inventory obsolescence expense, a further $0.6 million inventory write-down, and $1.8 million of rental-asset impairment. A $7.7 million valuation allowance against U.S. and Canadian deferred tax assets contributed to the tax result; the income tax benefit was $9.4 million.
- Key risks include continued low oil and gas exploration spending, excess and potentially obsolete inventory, customer credit and concentration risk, high fixed costs, foreign currency and geopolitical exposure (including Russia), reliance on single-source components, and possible difficulty recovering rental equipment abroad. One customer accounted for 18.5% of FY2016 revenue and owed $9.1 million at year-end.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls. Pending ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether seismic customer spending recovers and whether the company can reduce inventory without further substantial obsolescence charges.
- Collection of the $9.1 million receivable from the largest customer and the collectability of other receivables and notes.
- Receipt, timing and amount of the expected approximately $13 million tax refund, and the company’s cash burn if the downturn persists.
- Whether OBX rentals convert to firm contracts, and whether large reservoir-monitoring orders materialize.
- Credit-facility borrowing-base availability and covenant compliance as losses continue; the filing reports no debt outstanding at year-end.