Geospace Technologies Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing also reports fourth-quarter results. Geospace designs and manufactures seismic equipment, primarily for oil and gas markets, and sells industrial, imaging, offshore cable, and border-security products.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $75.7 million | $73.7 million |
| Gross profit (loss) | $11.0 million | $(20.7) million |
| Gross margin | 14.5% | (28.1)% |
| Operating loss | $(20.7) million | $(54.3) million |
| Net loss | $(19.2) million | $(56.8) million |
| Diluted loss per share | $(1.45) | $(4.32) |
| Operating cash flow | $(10.4) million | $10.1 million |
- Revenue rose 2.7%. Product revenue declined to $53.9 million from $60.1 million, while rental revenue increased to $21.9 million from $13.7 million.
- FY2018 loss improvement primarily reflected higher rental revenue, lower rental-equipment depreciation, $17.1 million less inventory obsolescence expense, and reduced manufacturing costs. Gross margin remained weak amid underused manufacturing capacity.
- Fourth-quarter revenue was $20.6 million; gross profit was $5.3 million; operating loss was $0.8 million; and net loss was $0.2 million.
- Cash and cash equivalents were $11.9 million and short-term investments were $25.5 million at year-end, totaling $37.4 million. Total assets were $199.1 million and stockholders’ equity was $176.6 million.
- No long-term debt was outstanding. The credit facility provided $21.5 million of borrowing availability at year-end, subject to a borrowing base and covenants. Its maturity was subsequently extended to April 2020.
- FY2018 investing cash flow was $7.8 million, including $9.9 million from rental-equipment sales. Capital expenditures were $8.2 million; this included $6.5 million of cash investment in rental equipment.
- Inventory was $50.5 million, including $31.7 million classified as non-current, and carried a $30.6 million obsolescence reserve. Net rental equipment increased to $39.5 million from $16.5 million.
Material changes and notable items
- On July 27, 2018, Geospace acquired Quantum Technology Sciences for approximately $4.4 million cash at closing, with potential revenue-based earn-outs of up to $23.5 million over four years. It recorded $4.3 million of goodwill, $8.2 million of intangible assets, and a $7.7 million initial earn-out liability. Quantum contributed $0.3 million in revenue and a $0.7 million operating loss after acquisition.
- The company transferred $29.2 million of inventory to rental equipment as a noncash investing activity. Management also cited increased OBX production and inventory as uses of operating cash.
- A December 2017 workforce-reduction program cut more than 60 Houston-area positions, incurred $0.7 million of termination costs, and was expected to generate approximately $6 million in annualized cash savings.
- FY2018 inventory obsolescence expense was $4.4 million, down from $21.5 million in FY2017. FY2017 also included $5.3 million of impairment charges related to PRM manufacturing equipment.
- After year-end, Geospace acquired OptoSeis fiber-optic sensing technology for $1.8 million cash plus potential earn-outs of up to $23.2 million over five and a half years.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the FY2018 financial statements and internal controls.
Outlook, risks, and contingencies
- Management expected challenging oil-and-gas market conditions to continue into FY2019. It anticipated substantially higher OBX rental revenue from contracted demand, land-based wireless revenue broadly matching FY2018, reservoir revenue similar to FY2018, and higher Adjacent and Emerging Markets revenue. These are expectations, not guarantees.
- Management expected FY2019 cash investment in the OBX rental fleet of $30 million or more and approximately $3 million in property, plant, and equipment. It believed available cash and investments would fund operating losses and planned capital spending for the next 12 months.
- Large-scale seabed PRM orders had not been received since November 2012, and management had no indication of an FY2019 order. A major order, if received, could materially affect revenue and profit.
- Key risks include oil-price and exploration-spending volatility, short order visibility and cancellations, inventory obsolescence, customer credit and collection exposure, rental-equipment recovery and utilization, and fixed costs. One customer represented 10.4% of FY2018 revenue; the company reported $9.0 million of combined trade and financing receivables due from that customer at year-end.
- Other risks include reliance on single-source components, international and Russian operations and sanctions, tariffs, foreign-exchange movements, competition and product obsolescence, and the uncertain success of Quantum’s government-market business. Litigation was described as ordinary-course; management did not expect pending matters to materially affect results or cash flows.
- The company did not expect to pay cash dividends in the foreseeable future. The filing also states that there were no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether OBX rental contracts convert into the expected FY2019 revenue and support returns on the planned fleet investment of at least $30 million.
- How quickly operating cash use, inventory levels, and obsolescence reserves change as demand and factory utilization evolve.
- Quantum’s revenue growth, cash generation, and earn-out exposure, as well as the commercial prospects and contingent costs associated with OptoSeis.
- Customer concentration and collectability of receivables, particularly the $9.0 million exposure to the customer identified in the filing.
- Borrowing-base availability and covenant compliance under the credit facility, alongside liquidity needs and the timing of planned capital spending.