Business context and reporting period
Geospace Technologies Corporation designs and manufactures seismic equipment for oil and gas exploration, along with non-seismic industrial and imaging products. This unaudited Form 10-Q covers the fiscal quarter and nine months ended June 30, 2018; comparisons are with the periods ended June 30, 2017. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Revenue | $21.27 million | $55.16 million |
| Gross profit (loss) | $4.68 million | $5.71 million |
| Gross margin | 22.0% | 10.3% |
| Operating loss | $5.14 million | $19.96 million |
| Net loss | $4.80 million | $19.01 million |
| Loss per diluted share | $0.36 | $1.43 |
| Cash from (used in) operating activities | Not separately presented | $(12.07) million |
Quarterly revenue increased 49.8% year over year; nine-month revenue increased 10.2%. Non-seismic revenue was $8.78 million for the quarter and $23.06 million for nine months, with operating income of $1.43 million and $3.84 million, respectively. Seismic revenue was $12.35 million and $31.67 million, while the segment recorded operating losses of $4.12 million and $15.55 million.
At June 30, cash and cash equivalents were $12.55 million and short-term investments were $27.01 million, totaling $39.56 million in cash and short-term investments. Current assets were $77.73 million and current liabilities $10.38 million. Total liabilities were $10.43 million; the company reported no long-term debt or credit-facility borrowings. The $30 million revolving facility had $21.9 million available after letters of credit, and matures in April 2019.
Total assets were $187.67 million, down from $205.70 million at September 30, 2017. Stockholders’ equity was $177.24 million. The company used $12.07 million in operating cash, generated $9.80 million from investing activities, and ended the period with $12.55 million cash.
Material changes versus prior comparable periods
- Quarterly gross profit improved from a $5.11 million loss to $4.68 million profit; nine-month gross loss of $11.00 million turned into $5.71 million gross profit. Management attributed the improvement to higher revenue, particularly rental revenue, lower rental-equipment depreciation, reduced inventory obsolescence expense, and lower fixed manufacturing costs.
- Quarterly seismic revenue rose 68.9%, mainly from increased OBX wireless rentals; nine-month seismic revenue rose 3.3%. Non-seismic revenue rose 30.2% for the quarter and 21.7% for nine months, led by industrial products, including water-meter products.
- Operating expenses increased 13.3% for the quarter and 2.1% for nine months, primarily due to a $2.7 million bad-debt charge related to a customer bankruptcy. Excluding bad debt expense or recovery, expenses declined $1.6 million and $3.3 million, respectively.
- Nine-month operating cash flow shifted to a $12.07 million use from $12.01 million provided in the prior-year period. Management cited working-capital needs, including receivables and inventory, among the uses of cash.
Outlook, risks and notable items
- Management expects challenging seismic-industry conditions to continue through the remainder of fiscal 2018 and into fiscal 2019. Although oil prices and seismic activity showed some improvement, customer capital constraints and excess unused equipment continue to limit demand. Management expects seismic revenue to remain low until exploration activity increases.
- Seismic inventory remained above levels appropriate to current demand. Management said continued weak conditions could require further inventory-obsolescence charges. The nine-month period included $4.00 million of inventory-obsolescence expense.
- A customer bankruptcy prompted a $2.7 million quarterly bad-debt expense; the company reserved all pre-petition claims and said any future recovery could reverse some expense. Net trade receivables were $11.15 million after a $3.57 million doubtful-account allowance.
- A cost-reduction program, including more than 60 Houston-area employee reductions, is expected to generate approximately $6 million in annualized cash savings. The company recorded $0.7 million of termination costs in the first fiscal quarter; no further costs or program liabilities were expected at June 30.
- Management estimated fiscal 2018 cash investment of approximately $4 million in rental equipment and $2 million in property, plant and equipment. It believed cash and short-term investments would fund operating losses and planned capital expenditures for the next 12 months, while noting other liquidity sources could be needed if losses continue.
- Foreign-exchange exposure includes Canadian-dollar intercompany balances; the company had a $30 million Canadian-dollar hedge and an approximately $8.9 million Canadian-dollar under-hedged position. It also disclosed exposure to Russian and Colombian currencies.
- On July 27, 2018, after the reporting period, the company acquired Quantum Technology Sciences for approximately $4.4 million cash at closing, plus contingent earn-outs of up to $23.5 million over four years, payable in cash or company stock based on eligible revenue.
- The Tax Cuts and Jobs Act reduced the U.S. federal corporate tax rate to 21%; management recorded related tax adjustments and said a valuation allowance largely offset deferred-tax effects. The filing reports valuation allowances against most U.S. and Canadian deferred tax assets.
- Management said disclosure controls were effective as of June 30, 2018. A previously reported inventory-classification control weakness was addressed with a quarterly review control; the prior restatement affected classification, but not total assets, liabilities, revenue, net loss, loss per share or cash flows.
Important facts for investors to verify
- Whether seismic demand and equipment utilization improve as management expects, and whether further inventory-obsolescence charges are required.
- The bankruptcy customer’s recovery outcome and any resulting changes to the bad-debt allowance.
- Cash burn, planned capital spending, and borrowing availability and renewal of the credit facility before its April 2019 maturity.
- Quantum’s operating contribution and the terms, performance conditions and potential dilution or cash impact of its earn-out payments.
- Foreign-currency exposure, repatriation-related taxes, and the realization of deferred tax assets and tax benefits.