Geospace Technologies Corporation — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015; comparative period is the three months ended December 31, 2014. The company designs and manufactures seismic equipment for the oil and gas industry and also sells thermal imaging and industrial products.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $13.1 million | $21.2 million |
| Gross profit (loss) | ($6.4) million | ($0.02) million |
| Operating loss | ($14.7) million | ($9.9) million |
| Net loss | ($11.0) million | ($5.4) million |
| Basic and diluted loss per share | ($0.85) | ($0.41) |
| Cash used in operating activities | $2.4 million | $2.5 million |
- Revenue fell 37.9% year over year. Seismic revenue declined 51.4% to $7.6 million; Non-Seismic revenue was essentially unchanged at $5.4 million.
- Gross loss worsened as lower demand reduced factory utilization, fixed manufacturing costs were under-absorbed, rental equipment utilization fell, product mix shifted toward lower-margin products, and inventory obsolescence expense increased.
- At December 31, 2015, cash and cash equivalents were $17.4 million and short-term investments were $19.6 million, for total available cash and investments of approximately $37.0 million. About $8.1 million was held by foreign subsidiaries.
- Current assets were $192.9 million and current liabilities were $11.9 million. Inventories were $120.3 million; income tax receivable was $25.3 million.
- No long-term debt or credit-facility borrowings were outstanding. The company reported $29.9 million of borrowing availability under its credit agreement and compliance with its covenants.
- Income tax benefit was $3.6 million. The company recorded a valuation allowance against its Canadian subsidiary’s deferred tax assets, including a $9.9 million tax-loss carryforward it judged unlikely to use.
Material changes and management commentary
- Seismic demand was at historic lows amid sharply lower oil prices and reduced exploration spending. Management expected depressed conditions and low seismic sales to continue through fiscal 2016; large, irregular customer orders make quarterly sales difficult to predict.
- Wireless exploration revenue fell 66.8%, traditional exploration revenue fell 35.4%, and reservoir product revenue fell 68.0%. The company said it had neither delivered nor received orders for permanent reservoir monitoring systems in fiscal 2015 or the first quarter of fiscal 2016.
- In January 2016, the company began a cost-reduction program expected to generate about $7 million in annualized cash savings, in addition to earlier savings. It planned to reduce its Houston-area workforce by more than 150 employees and consolidate facilities; approximately $0.9 million of termination costs were expected in Q2 FY2016.
- Inventory obsolescence expense was $2.3 million in the quarter. Management said inventory exceeded levels appropriate for expected demand and anticipated significantly higher obsolescence expense in fiscal 2016.
- Management expected approximately $2.0 million of fiscal 2016 cash investment in rental equipment, plus up to $14.0 million of non-cash inventory transfers for OBX rental equipment depending on demand. Estimated fiscal 2016 property, plant and equipment spending was approximately $3.0 million.
- The company expected a $19.4 million U.S. tax refund in March or April 2016 and said existing liquidity, that refund, rental-contract proceeds and available borrowing were expected to fund losses and planned capital spending for the next 12 months. It did not anticipate borrowing in fiscal 2016, but gave no assurance.
Risks, contingencies, and other notable items
- Demand remains exposed to oil and gas prices, exploration budgets, and the timing of large, unpredictable seismic-system orders. Excess inventory and reduced production utilization pressure margins and may drive further write-downs.
- Foreign currency exposures include operations in Russia and Colombia and Canadian-dollar intercompany balances. The company had a $2.0 million, 90-day Canadian-dollar hedge; the filing describes remaining currency risk.
- The company reported no material pending or known contemplated legal or government proceedings, while noting ordinary-course legal matters with uncertain outcomes.
- A material weakness in deferred-tax controls had previously been reported. Management described remediation steps, including external tax review, and concluded disclosure controls were effective as of December 31, 2015.
- There were no long-lived asset impairments identified at quarter end. The company early adopted the standard requiring deferred taxes to be classified as non-current; the reclassification did not affect earnings, equity, or cash flows.
Key facts for investors to verify
- Whether the anticipated $19.4 million tax refund was received on the expected schedule and whether the reported liquidity outlook remains adequate.
- Progress and actual costs and savings from the workforce reduction and facility consolidation.
- Seismic order trends, OBX rental demand and utilization, and any new permanent reservoir-monitoring orders.
- Inventory aging, obsolescence charges, and the pace of inventory reduction.
- Whether the deferred-tax control remediation is sustained and the Canadian valuation allowance or foreign-currency exposures change materially.