Geospace Technologies Corporation — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014; financial statement amounts are unaudited and in U.S. dollars. Unless otherwise stated, amounts below are in millions.
Business context and results
Geospace designs and manufactures seismic equipment and reservoir-monitoring products for the oil and gas industry, as well as non-seismic products. Results were sharply affected by weaker seismic-equipment demand amid deteriorating oil-market conditions and the completion of a large reservoir-monitoring contract.
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $21.2 | $101.3 |
| Gross profit (loss) | $(0.02); approximately -0.1% margin | $47.1; approximately 46.5% margin |
| Operating income (loss) | $(9.9); approximately -46.7% margin | $35.7; approximately 35.2% margin |
| Net income (loss) | $(5.4) | $24.2 |
| Diluted EPS | $(0.41) | $1.85 |
| Operating cash flow | $(1.4) | $52.7 |
Financial position and liquidity
- At December 31, cash and cash equivalents were $30.3, short-term investments $19.7, and total assets $343.1. Current assets were $232.1 against current liabilities of $20.1.
- Inventory was $147.3, up from $145.9 at September 30, 2014. Net trade receivables fell to $13.4 from $24.6.
- Stockholders’ equity was $321.3; total liabilities were $21.8. No borrowings were outstanding under the credit agreement. Approximately $50.0 of borrowing availability remained; the agreement expires April 27, 2016. The company reported covenant compliance.
- Investing cash outflow was $0.8; financing cash outflow was $1.1. Cash declined $3.1 during the quarter to $30.3.
Material changes and management commentary
- Revenue fell 79.1% year over year. Seismic revenue declined to $15.6 from $95.2, and the seismic segment recorded an operating loss of $7.4 versus income of $38.5. Non-seismic revenue was $5.4 versus $5.9, with operating income of $0.9 versus $0.8.
- Seismic declines reflected lower demand across traditional, wireless, and reservoir products. Wireless revenue fell 87.5%; fewer than 100 GSX channels were sold, compared with 77,000 in the prior-year quarter. Reservoir revenue fell 92.6%, principally because the Statoil order was completed in April 2014.
- Gross profit approached break-even as lower seismic sales, fixed manufacturing costs from low factory utilization, and a lower-margin sales mix weighed on results. Operating expenses decreased 13.6%, partly offset by higher bad-debt and stock-based compensation expenses.
- Other income included $1.6 of foreign-exchange gains. The company also reported a $0.925 gain on foreign-currency forward contracts for the quarter. The forward contract had a $0.641 fair value at December 31 and covered Canadian-dollar exposure.
Outlook, risks, and unusual items
- Management expected challenging industry conditions to continue to pressure seismic exploration demand and gross margins throughout FY2015. It did not expect substantial permanent reservoir-monitoring contracts during FY2015. Wireless-system orders were described as likely to remain irregular and difficult to predict.
- Planned FY2015 cash investment included approximately $7 for the OBX rental fleet, $5–$7 for machinery and equipment, and $1–$5 for Houston facility expansion. Potential inventory transfers to rental equipment of up to $20 or more were described as non-cash. Management expected to fund spending with cash, operating cash flow, rental-equipment proceeds, and/or credit-facility borrowings.
- Management believed available cash, operating cash flow, and borrowing capacity would fund planned FY2015 operations, while cautioning that longer-term capital needs could require additional debt or equity and that financing might not be available on acceptable terms.
- The company performed an interim goodwill impairment test because business conditions had deteriorated and its stock price had declined; management found no impairment at December 31. It also found no impairment of rental equipment or property, plant, and equipment.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, but outcomes were uncertain. Foreign-currency movements, lower oil-industry spending, customer order timing, credit losses, inventory valuation, and restrictive credit covenants are relevant risks.
Important facts for investors to verify
- Whether seismic demand and factory utilization recover, and the resulting effect on margins, cash flow, and inventory.
- Inventory composition, obsolescence reserves, and the recoverability of receivables; the quarter included $0.7 of bad-debt expense and a higher doubtful-account allowance.
- Actual OBX rental-fleet and other capital spending versus management’s FY2015 estimates, and the utilization and returns of those investments.
- Credit-agreement covenant headroom and liquidity if operating conditions worsen; current borrowing availability was approximately $50.0, with no borrowings outstanding.
- Foreign-exchange exposures and hedge performance, including the Canadian-dollar forward contract and Russian and Colombian operations.