Geospace Technologies Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Geospace designs and manufactures seismic equipment, including products for oil and gas exploration and rental, as well as products for industrial, imaging, and border-security markets. The filing was made amid the COVID-19 pandemic and a sharp decline in oil prices, both of which heightened uncertainty for customer demand and collections.
Key financial results
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Revenue | $25.9; down 0.8% year over year | $51.6; up 17.3% |
| Gross profit / margin | $7.9 / 30.5%, versus $10.4 / 39.6% | $18.4 / 35.6%, versus $13.4 / 30.5% |
| Operating income (loss) | $(11.5), versus $1.0 | $(11.3), versus $(5.0) |
| Net income (loss) | $(11.8), or $(0.87) per share, versus $0.7 | $(13.1), or $(0.97) per share, versus $(5.1) |
| Operating cash flow | Not presented for the quarter alone | $5.7 provided, versus $2.9 used |
Quarterly revenue was essentially flat as increased OBX wireless rental revenue was largely offset by reduced revenue recognition from a financially distressed marine customer. For the six-month period, higher OBX rentals drove revenue and gross profit growth. Quarterly gross margin fell due to OBX equipment upgrade costs, higher rental-equipment depreciation, and lower recognized rental revenue.
Operating expenses rose to $19.4 million for the quarter, principally reflecting $8.1 million of bad debt expense and a $1.0 million non-cash increase in contingent consideration fair value. For six months, operating expenses were $29.7 million, including $8.2 million of bad debt expense and higher contingent consideration, research and development, and personnel costs.
Balance sheet, liquidity and debt
- At March 31, 2020, cash and cash equivalents were $18.9 million, compared with $18.9 million at September 30, 2019. Cash included $6.5 million held by foreign subsidiaries and branches.
- Current assets were $58.0 million and current liabilities were $11.4 million. Total assets were $191.8 million; stockholders’ equity was $166.4 million.
- The company had no borrowings under its credit agreement; borrowing availability was $14.9 million. The agreement permits up to $30.0 million subject to a borrowing base, matures in April 2022, and covenants were satisfied at quarter-end.
- Investing cash outflow was $5.7 million, including $5.2 million invested in rental equipment and $2.8 million in property, plant and equipment. There were no financing cash flows.
Material changes, outlook and risks
- Customer credit exposure: The company recorded $8.0 million of bad debt expense in the quarter and reduced to zero the carrying value of a receivable from an international seismic marine customer. The customer contractually owed $14.0 million, including $6.0 million of unrecognized rental revenue and late-payment penalties; the recorded trade receivable was $8.0 million. The company ceased recognizing revenue from this customer after missed payments and was evaluating a possible debt-for-financial-instrument exchange, with no agreement reached.
- Separate product sale with doubtful collectability: A $12.5 million product sale, partially financed by a $10.0 million, three-year customer note, was not recognized as revenue or cost of revenue because collectability was uncertain. The customer had paid $3.0 million, recorded as non-current deferred revenue. Management said recognition would wait until collection became probable.
- Industry outlook: Management expects difficult oil and gas conditions and restrained demand for traditional and land-based seismic products to continue in fiscal 2020. It warned that further inventory obsolescence expense may be recorded if demand remains weak.
- Spending and liquidity outlook: Management does not expect significant additional OBX fleet investment in the rest of fiscal 2020, estimates full-year capital investment in property, plant and equipment could reach $5 million, and believes cash and available credit will cover operating losses and planned capital spending for the next 12 months.
- COVID-19 and oil prices: Operations had largely remained open, with limited reported effects on personnel and operations and no significant order cancellations or supply-chain interruptions as of the filing. The company could not estimate the pandemic’s duration or impact; prolonged low oil prices and disruptions could reduce demand, impair customer payments, and harm liquidity.
- Subsequent development: Quantum received a $10 million U.S. Border Patrol contract in April 2020. The company did not expect significant revenue from it until fiscal first quarter 2021 and expected Quantum to continue incurring operating losses until revenue recognition.
- Contingencies: Contingent consideration was $10.9 million at March 31, 2020, up from $9.9 million at September 30, 2019, with changes in estimated fair value recorded in operating expenses. Management said pending ordinary-course legal matters were not expected to have a material adverse effect.
No quantified consolidated earnings or revenue guidance was provided. The company also noted there were no open tenders for large-scale seabed permanent reservoir monitoring systems, though it believed a tender might emerge in fiscal 2020.
Most important facts for investors to verify
- Whether the distressed marine customer makes recoveries or reaches a debt exchange, and whether further revenue recognition remains suspended.
- Whether the $8.0 million receivable write-off fully reflects expected credit losses and whether any unrecognized customer amounts are ultimately recoverable.
- Whether the separate $12.5 million sale becomes collectible and qualifies for revenue recognition.
- How sustained oil-price weakness and COVID-19 affect OBX rental utilization, customer demand, collections, and inventory obsolescence.
- Whether the Quantum contract converts into recognized revenue on the anticipated schedule and supports the segment’s substantial operating costs.
- Whether liquidity, credit availability, and compliance with the amended credit-agreement covenants remain adequate as operating conditions evolve.