OYO Geospace Corporation — Form 10-Q Summary
Business context and period: The company designs and manufactures seismic acquisition and reservoir-monitoring equipment, and thermal imaging products. This unaudited filing covers the fiscal third quarter and nine months ended June 30, 2012; balance-sheet comparisons are to September 30, 2011. Amounts are in millions of dollars unless noted.
Financial performance and position
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 |
|---|---|---|
| Sales | $55.2 (+19.0% year over year) | $154.7 (+10.4%) |
| Gross profit / margin | $23.0 / 41.6% (prior-year margin 44.3%) | $68.7 / 44.4% (prior-year margin 43.8%) |
| Operating income | $15.6 | $44.7 |
| Net income | $10.7 (prior year $9.2) | $30.9 (prior year $26.1) |
| Diluted EPS | $1.67 (prior year $1.44) | $4.80 (prior year $4.15) |
- For the quarter, seismic sales rose to $51.7 million from $42.8 million, led by wireless products; thermal solutions sales were $3.3 million versus $3.4 million. Nine-month seismic sales were $144.6 million, while thermal solutions sales were $9.5 million.
- Operating cash flow was $40.0 million for the nine months, versus $11.8 million a year earlier. Investing cash outflow was $23.8 million, including $24.6 million for rental equipment investment; financing cash inflow was $1.1 million.
- At June 30, cash and cash equivalents were $48.7 million and short-term investments were $18.9 million. Current assets were $173.0 million and current liabilities $29.1 million. Total liabilities were $31.3 million; no credit-agreement borrowings were outstanding.
- The $25 million revolving credit facility had $24.8 million available after standby letters of credit, and the company reported compliance with covenants. Total assets were $240.1 million, compared with $196.8 million at September 30, 2011.
Changes, outlook, and risks
- Management attributed sales growth primarily to demand for seismic products, particularly wireless systems. Wireless revenue increased 40.8% for the quarter and 25.6% for the nine-month period. Industrial product sales also grew; reservoir product revenue declined, and thermal solutions sales were lower.
- Quarterly gross margin fell year over year, which management attributed to lower reservoir-product sales and more sales of older rental-equipment components with lower margins. Nine-month gross margin improved modestly. Operating expenses increased 4.4% in both comparison periods.
- Management estimated fiscal 2012 capital expenditures could be approximately $32 million or more, largely to expand the rental fleet in response to wireless-equipment demand. It expected to fund spending with cash, operating cash flow, rental-equipment sale proceeds and/or facility borrowings. No earnings or revenue guidance was provided.
- Management described seismic orders and shipment timing as irregular and sales as “lumpy.” It noted that lower North American natural-gas prices and reduced exploration and hydraulic-fracturing activity could affect borehole-tool demand. Other exposures include oil-and-gas industry cyclicality, foreign currency and operations, floating interest rates, and inventory and customer-credit estimates.
- The fiscal 2012 incentive-compensation pool increased from $4.8 million to $5.7 million after the company achieved its stated pretax-income target; $4.8 million of incentive compensation expense had been accrued for the nine-month period. A $14.0 million foreign-currency forward contract hedged part of Canadian intercompany exposure; its June 30 fair value was a $0.137 million liability. The company also disclosed an IRS audit of fiscal 2007–2009 returns; management did not expect a material effect.
- Management said disclosure controls were effective as of June 30, 2012, with no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the prior annual report.
Important facts for investors to verify
- Whether strong wireless-product demand and rental utilization continue, and whether the planned rental-fleet investment generates adequate returns.
- How quarterly margin pressure, product mix, and lumpy customer orders affect future profitability and cash conversion.
- Whether the company’s cash-flow and funding assumptions support fiscal 2012 capital expenditures of approximately $32 million or more.
- Developments in North American gas-related activity, foreign-exchange exposures, the tax audit, and inventory-obsolescence and receivable reserves.