Geospace Technologies Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; filed August 5, 2016. Financial statements are unaudited. The company designs and manufactures seismic equipment and also sells thermal-imaging and industrial products.
Financial performance
| Metric | Three months ended June 30, 2016 | Year-over-year | Nine months ended June 30, 2016 | Year-over-year |
|---|---|---|---|---|
| Revenue | $17.7 million | Down 10.5% | $45.7 million | Down 33.6% |
| Gross profit (loss) | $(2.9) million | Compared with $(3.3) million | $(13.9) million | Compared with $(1.9) million |
| Operating loss | $(12.0) million | Compared with $(12.5) million | $(40.7) million | Compared with $(30.9) million |
| Net loss | $(11.7) million; $(0.89) per share | Compared with $(8.6) million; $(0.66) per share | $(33.7) million; $(2.58) per share | Compared with $(19.2) million; $(1.48) per share |
Third-quarter gross margin was approximately negative 16%; nine-month gross margin was approximately negative 30%. The filing attributes losses to weak seismic demand, low factory utilization, fixed rental-equipment depreciation, and elevated inventory obsolescence.
- Segments: Third-quarter Seismic revenue was $9.6 million, down from $13.5 million; Non-Seismic revenue was $8.0 million, up from $6.1 million. For nine months, Seismic revenue fell to $25.6 million from $51.9 million, while Non-Seismic revenue rose to $19.7 million from $16.5 million. Seismic generated a $34.2 million nine-month operating loss; Non-Seismic reported $2.6 million of operating income.
- Cash flow: Operating activities used $1.1 million in the nine months, versus $6.8 million used in the prior-year period. Investing activities used $9.6 million, including net purchases of short-term investments. Cash and cash equivalents declined $10.8 million to $11.5 million; no financing cash flows were reported.
- Liquidity and debt: Cash plus short-term investments totaled $38.8 million. Current assets were $179.3 million and current liabilities $9.8 million. There was no debt outstanding; the company reported $29.5 million of revolver availability after letters of credit and compliance with covenants. Total liabilities were $9.9 million.
- Balance sheet: Total assets were $266.9 million, down from $303.6 million at September 30, 2015. Inventory was $110.1 million, including a $10.9 million obsolescence reserve; stockholders’ equity was $257.1 million.
Material changes, outlook, and risks
- Management cited prolonged weakness in oil and gas exploration spending following the oil-price decline. It expected depressed seismic conditions through fiscal 2016 and beyond, and did not expect seismic sales to recover until oil prices stabilize at higher levels and exploration activity improves.
- In January 2016, the company began further cost reductions, including more than 150 Houston-area employee reductions and facility consolidation. It expected approximately $7 million of annualized cash savings from this program, in addition to prior savings; $1.0 million of termination costs were incurred.
- Management said seismic inventories remained well above levels appropriate for current demand and expected elevated inventory obsolescence expense to continue. The company recorded $6.4 million of inventory obsolescence expense and a $1.0 million rental-asset impairment in the nine-month period.
- An OBX rental contract contributed $4.1 million of revenue in the quarter and $7.4 million in the nine months. Management expected another approximately $6 million to $9 million of revenue from the contract. It estimated fiscal 2016 property, plant, and equipment spending at about $2.0 million and, absent additional OBX orders, rental-fleet cash investment at about $0.5 million.
- Management believed cash, investments, expected rental proceeds, potential tax refunds, and available credit would fund operating losses and planned capital expenditures for the next 12 months. It noted that further losses could qualify for a U.S. tax refund of up to approximately $13 million upon filing the fiscal 2016 return.
- Income-tax benefits were affected by valuation allowances of $3.4 million against U.S. and Canadian deferred tax assets in the quarter and $2.5 million against Canadian deferred tax assets in the prior quarter, as well as a $1.0 million prior-year tax-benefit correction.
- Foreign-currency exposure includes Russian and Colombian operations and Canadian-dollar intercompany balances; the company entered into a $3.0 million, 90-day Canadian-dollar hedge. Management reported no material pending or known contemplated legal or government proceedings.
- Management said disclosure controls were effective as of June 30, 2016. It stated that engaging an outside tax firm to review tax positions remediated a previously reported material weakness in income-tax controls.
Key facts for investors to verify
- Whether seismic demand and inventory turnover recover, and the amount of further obsolescence charges.
- Timing and realization of the anticipated $6 million to $9 million of remaining OBX contract revenue and related cash collections.
- Cash burn, potential tax refunds, and the adequacy of liquidity if operating losses persist.
- Effectiveness of the tax-control remediation and the assumptions supporting deferred tax asset valuation allowances.
- Foreign-exchange exposure, including the Canadian-dollar hedge and unhedged operating exposures.