Geospace Technologies Corporation — Fiscal 2020 Q1 (Form 10-Q)
Reporting period: Three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018, unless otherwise noted. The company designs and manufactures seismic equipment and related products, with businesses in Oil and Gas, Adjacent, and Emerging Markets.
Financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $25.7 million | $17.9 million |
| Gross profit | $10.5 million | $3.1 million |
| Gross margin | 40.8% | 17.3% |
| Operating income (loss) | $0.2 million | $(6.1) million |
| Net loss | $(1.3) million | $(5.9) million |
| Loss per diluted share | $(0.10) | $(0.44) |
| Cash from (used in) operating activities | $(3.4) million | $1.3 million |
- Revenue rose 44%, principally from higher rental revenue for OBX marine wireless seismic equipment. Rental revenue was $16.6 million, up from $7.4 million; product revenue was $9.1 million, down from $10.5 million.
- Gross profit improved with higher OBX utilization, while operating expenses increased 12.8% to $10.3 million, including higher research and development spending. The company reported operating income but remained loss-making after $1.4 million of income tax expense, primarily foreign withholding taxes on rental income in Nigeria and Brunei.
- Oil and Gas segment revenue increased to $19.5 million from $11.0 million, and segment operating results improved to $4.1 million of income from a $2.6 million loss. Adjacent Markets revenue declined to $6.1 million from $6.6 million; Emerging Markets revenue was $0.1 million and its operating loss widened to $1.4 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $10.1 million at December 31, 2019, down from $18.9 million at September 30, 2019. The quarter’s cash decrease was $8.8 million. Management states $6.9 million of cash was held by foreign subsidiaries and branch offices.
- Cash used in investing activities was $5.6 million, mainly $5.2 million invested in rental equipment and $1.7 million in property and equipment, partly offset by rental-equipment sale proceeds. There were no financing cash flows.
- The company had no borrowings under its credit agreement; reported borrowing availability was $24.7 million under a facility of up to $30 million, subject to a borrowing base. It reported covenant compliance. The facility maturity was extended to April 2022.
- Total liabilities were $26.5 million and stockholders’ equity was $178.7 million. Current assets were $71.9 million versus current liabilities of $16.4 million.
- Operating cash use reflected, among other items, increased receivables and inventory. Inventory obsolescence expense was $1.4 million.
Material changes, outlook and risks
- Management expects fiscal 2020 cash investment in the wireless rental fleet to be $8 million or more, depending on OBX demand, and estimates property and equipment investment could reach $5 million. It expects to fund spending with cash, operating and rental-contract cash flows, or credit-facility borrowings if needed.
- Management expects challenging conditions for traditional and legacy land-based seismic products to continue in fiscal 2020, with sales remaining below historical norms. It anticipates additional inventory obsolescence charges if weak demand and excess inventory persist. Management believes a PRM tender may emerge during fiscal 2020, but reported no open tenders at the filing date.
- A significant international seismic marine customer had $8.7 million of recorded receivables at quarter-end; total contractual amounts owed were $10.2 million, including $1.5 million of invoiced revenue not recognized. The customer missed scheduled payments under a payment plan. Geospace stopped recognizing revenue from it in late November and was negotiating a restructuring involving near-term payments, current rental payments, and a secured debt instrument. No additional reserve had been recorded; a significant bad-debt reserve could be required as early as Q2 FY2020 if negotiations, collateral, or payments prove inadequate.
- Oil and gas demand remains exposed to commodity prices, exploration budgets, customer order delays or cancellations, and underutilized customer equipment. Quantum’s Emerging Markets business had not obtained significant security contracts and management expects operating losses until sufficient contracts support its cost structure.
- The filing added a risk concerning coronavirus: disruption to Chinese suppliers or reduced oil and gas demand could affect supply chains, product demand, results, and liquidity.
- Other notable items include $9.9 million of contingent consideration liabilities tied to the Quantum and OptoSeis acquisitions, with potential future payments subject to earn-outs. Management reported no quarter-on-quarter fair-value adjustment. The Colombia property, carried at $0.7 million, was classified as held for sale.
- Management stated that cash, cash equivalents, and available credit were expected to fund operating losses and planned capital spending for the next 12 months. This outlook depends on liquidity, customer collections, rental demand, and access to borrowing capacity.
Important facts for investors to verify
- Progress and terms of the marine customer’s proposed repayment and collateral agreement, subsequent collections, and any resulting bad-debt reserve.
- OBX fleet utilization, rental revenue sustainability, planned fleet investment, and customer payment performance.
- Inventory levels and any further obsolescence charges, alongside recovery in traditional and land-based seismic product demand.
- Actual capital spending, operating cash flow, borrowing availability, and continued compliance with credit-facility covenants.
- Whether Quantum secures revenue-generating contracts and whether the company incurs any contingent earn-out payments.