Geospace Technologies Corporation — Form 10-Q Summary
Business context and reporting period. The company designs and manufactures seismic equipment used primarily by the oil and gas industry, and also sells imaging and industrial products. This filing covers the first quarter of fiscal 2017, the three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015. Dollar amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $15.285 | $13.137 |
| Gross profit (loss) | $(3.327) | $(6.402) |
| Operating loss | $(11.311) | $(14.692) |
| Net loss | $(11.705) | $(11.042) |
| Loss per diluted share | $(0.89) | $(0.85) |
| Operating cash flow | $(1.900) | $(2.360) |
- Revenue rose 16.4%. Gross margin improved to approximately negative 21.8% from negative 48.7%; operating margin improved to approximately negative 74.0% from negative 111.8%.
- Seismic revenue was $9.406 million, up from $7.574 million, principally because of rentals under a large OBX contract. Non-Seismic revenue increased to $5.736 million from $5.433 million.
- Cash and cash equivalents were $12.794 million and short-term investments were $24.739 million at quarter-end, totaling $37.533 million. Operating activities used $1.9 million of cash; investing activities provided $4.483 million, including $1.915 million from sales of used rental equipment and $2.674 million from short-term investments.
- Current assets were $169.940 million and current liabilities $10.271 million. Total liabilities were $10.304 million; the company had no debt outstanding. Its credit facility had $29.6 million of borrowing availability after letters of credit.
- Inventory was $101.765 million, including a $13.367 million obsolescence reserve. The quarter included $4.147 million of inventory obsolescence expense.
Material changes and management commentary
- The $2.148 million revenue increase was driven mainly by wireless exploration rentals. OBX Contract rental revenue was $4.3 million for the quarter; management expected lower rental income in the quarter ending March 31, 2017 as the contract concluded.
- Traditional seismic product revenue declined 48.5%, while wireless exploration revenue increased 234.6%. No permanent reservoir monitoring systems were delivered or ordered during fiscal 2016 or the reported quarter.
- Gross loss narrowed primarily due to higher rental revenue and lower manufacturing costs following workforce reductions, partly offset by higher inventory obsolescence expense. Management said seismic inventories remained excessive and anticipated further obsolescence charges if weak demand persisted.
- Net loss increased despite the improved operating result, in part because income tax expense was $0.434 million versus a $3.577 million tax benefit in the prior-year quarter. Management attributed the current tax rate to inability to recognize tax benefits on U.S. and Canadian losses amid uncertainty about future use.
- Management expected depressed seismic conditions to continue through fiscal 2017 and seismic revenue and gross margins to remain weak until oil prices and exploration activity improve. It estimated fiscal 2017 property, plant and equipment cash investment of approximately $3.5 million and expected minimal rental-fleet investment absent significant OBX orders.
- The company expected an approximately $13 million U.S. tax refund in the quarter ending March 31, 2017, relating to carryback of fiscal 2016 tax losses. Management believed cash, investments, executed rental contracts, the expected refund, and available credit would fund operating losses and planned capital spending for the next 12 months; it did not anticipate borrowing during fiscal 2017.
Risks, contingencies, and other items
- Demand is exposed to oil and gas industry conditions and exploration budgets. Continued weak seismic demand could prolong losses, reduce cash, and require additional inventory write-downs.
- Foreign currency exposure includes operations in Russia and Colombia and Canadian-dollar intercompany balances. The company had a $3.0 million, 90-day Canadian-dollar forward contract; foreign-exchange losses were $0.065 million in the quarter.
- There was no debt outstanding; the revolving credit agreement expires May 4, 2018 and contains financial and other covenants. The company reported compliance at December 31, 2016.
- The company reported ordinary-course legal matters but said management was unaware of any material pending or contemplated legal or government proceedings.
- Management reported disclosure controls and procedures were effective as of December 31, 2016, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the OBX rental contract ended as expected and how replacement rentals or sales affected subsequent revenue and cash flow.
- Subsequent seismic demand, inventory levels, and additional obsolescence charges against the substantial inventory balance.
- Receipt and amount of the anticipated approximately $13 million tax refund, and the usability of deferred tax assets.
- Cash consumption, planned capital spending, credit-facility availability, and covenant compliance as operating losses continue.
- Whether non-seismic growth and profitability can offset persistent weakness in seismic markets.