Geospace Technologies Corporation — Form 10-Q Summary
Business context and reporting period. Geospace designs and manufactures seismic equipment for oil and gas exploration and reservoir monitoring, as well as products for adjacent industrial, imaging and emerging security markets. This unaudited report covers the three and six months ended March 31, 2019 (fiscal second quarter and first half), compared with the same periods in 2018. The company reports Oil and Gas Markets, Adjacent Markets and Emerging Markets segments.
Key financial results
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Revenue | $26.1 million, up 35.7% | $44.0 million, up 29.8% |
| Gross profit / gross margin | $10.4 million / 39.6% | $13.4 million / 30.5% |
| Operating income (loss) | $1.0 million | $(5.0) million |
| Net income (loss) | $0.7 million; $0.05 per diluted share | $(5.1) million; $(0.38) per diluted share |
| Cash from (used in) operations | Not presented separately for the quarter | $(2.9) million |
Balance sheet and liquidity at March 31, 2019: Cash and cash equivalents were $12.8 million and short-term investments were $0.7 million, totaling $13.5 million in available cash and investments. Current assets were $55.6 million and current liabilities $14.6 million. The company had no borrowings outstanding; borrowing availability under its credit facility was $25.5 million. Total liabilities were $26.7 million, including $12.1 million in contingent earn-out liabilities. Stockholders’ equity was $173.0 million.
First-half investing cash flow was positive $3.9 million, including $24.9 million in proceeds from short-term investment sales, offset in part by $20.4 million invested in rental equipment. The company reported no long-term debt and no borrowings under its credit agreement.
Material changes versus prior comparable periods
- Second-quarter revenue rose $6.9 million year over year, driven primarily by higher OBX marine seismic rental revenue. First-half revenue increased $10.1 million.
- Second-quarter gross profit improved from $2.0 million to $10.4 million; first-half gross profit increased from $1.0 million to $13.4 million. Management attributed the improvement mainly to high OBX fleet utilization and lower unutilized factory costs.
- Oil and Gas Markets second-quarter revenue increased 65.4% to $18.7 million, and segment operating results improved to income of $3.3 million from a loss of $3.8 million. The increase was primarily from OBX rentals; sales of GSX wireless products remained weaker.
- Adjacent Markets revenue declined 7.2% in the quarter to $7.3 million, although segment operating income rose to $1.7 million. Emerging Markets, which includes Quantum, recorded $46,000 of quarterly revenue and a $1.2 million operating loss.
- Operating expenses increased 29.2% in the quarter, mainly from personnel and other costs associated with the Quantum and OptoSeis acquisitions.
- The company acquired the OptoSeis fiber optic sensing technology business in November 2018 for approximately $1.8 million cash, plus potential earn-outs of up to $23.2 million. Quantum, acquired in July 2018, has potential earn-outs of up to $23.5 million.
Outlook, commentary, risks and unusual items
- Management expects challenging oil and gas market conditions to continue through fiscal 2019. It expects legacy land-based traditional and wireless product sales to remain low, while reporting stronger demand for marine OBX rentals. Management also expects product-sale gross margins to remain below historic norms until demand improves.
- Management expects fiscal 2019 cash investment in the rental fleet could reach $30 million or more, primarily for OBX equipment, and property, plant and equipment investment could be up to $3 million. Funding is expected from cash, operating and rental-contract cash flows, or credit-facility borrowings if needed.
- Management believes cash, short-term investments and available credit will be sufficient to fund operating losses and planned capital expenditures for the next 12 months. This is management’s assessment, not formal earnings guidance.
- Oil and gas product inventories remain higher than management considers appropriate for current demand. The company may record further inventory obsolescence expense if weak conditions and low turnover persist.
- Second-quarter revenue included $1.3 million from recognition of a non-refundable customer deposit after cancellation of a rental contract. The filing says the first-half period also included this amount.
- The credit agreement was extended to April 2020. A March 2019 amendment lowered the minimum unencumbered liquid-assets covenant to $5 million, allowed qualifying assets held outside the U.S. to count, added a $140 million tangible-net-worth covenant, and pledged the company’s Houston headquarters property as collateral. The company reported compliance with covenants at quarter-end.
- Risks cited include volatile oil prices and customer exploration budgets, delayed or canceled orders, underutilized equipment, product acceptance and obsolescence, customer credit risk, and uncertainty about adoption of Quantum and OptoSeis products. A single customer owed $8.2 million at quarter-end; $6.2 million was collected in April 2019.
- Potential contingent acquisition payments are tied to future eligible revenue. Management said pending ordinary-course legal proceedings are not expected to have a material adverse effect, but their outcomes are uncertain.
Important facts for investors to verify
- Whether OBX rental utilization and revenue remain strong, and whether the planned fleet investment generates adequate returns and cash flow.
- Progress in reducing excess and aging inventory, and the level of any additional obsolescence charges.
- Collection of the remaining balance of the $8.2 million receivable from the single customer and any subsequent changes in credit exposure.
- Commercial traction and operating losses for Quantum and OptoSeis, including the effect of acquisition costs and contingent earn-outs.
- Compliance with amended credit covenants, liquidity needs through the April 2020 facility maturity, and the impact of pledging the headquarters property.
- Potential effects of foreign exchange exposure, including the Canadian-dollar intercompany balance and the partial currency hedge.