Geospace Technologies Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context
Geospace designs and manufactures seismic data acquisition and reservoir-monitoring equipment, and also sells thermal-imaging and industrial products. Its Seismic segment generates most revenue. The company also earns revenue by renting equipment, including GSX and OBX wireless systems.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2014 | $40.7 | $210.6 |
| Revenue, 2013 | $78.1 | $232.3 |
| Gross profit, 2014 | $15.4 | $90.4 |
| Operating income, 2014 | $5.5 | $57.1 |
| Net income, 2014 | $3.8 | $38.7 |
| Diluted EPS, 2014 | $0.29 | $2.95 |
- Quarterly revenue fell 47.9% year over year; nine-month revenue fell 9.3%. Gross margins were approximately 37.8% for the quarter and 42.9% for the nine months, versus 43.3% and 47.3% in 2013, respectively.
- Quarterly operating income declined 78.2% and net income declined 77.9% year over year. Nine-month operating income declined 30.5% and net income declined 30.7%.
- For the nine months, operating cash flow was $71.1, versus cash used of $51.4 in 2013. Investing activities used $21.2; financing activities provided approximately $0.01. Cash and cash equivalents increased to $52.6 from $2.7 at September 30, 2013; the company also held $5.9 of short-term investments.
- At June 30, total assets were $361.7 and stockholders’ equity was $331.3. Current assets were $248.3 and current liabilities $28.3. The company had no long-term debt, with $49.9 of additional borrowing availability under its $50 million credit facility; it was in covenant compliance.
- Capital spending for the nine months included $25.7 for rental equipment and $5.7 for property and equipment. The current ratio was approximately 8.8.
Material changes and management commentary
- The largest revenue decline was in reservoir products: third-quarter revenue fell 70.2%, chiefly because manufacturing on the $171.2 million Statoil order was completed in April 2014. Statoil revenue was $6.7 in the quarter versus $41.7 a year earlier; nine-month revenue was $61.7 versus $71.5.
- Wireless product revenue fell 23.7% for the quarter and 10.5% for the nine months, reflecting soft industry demand and greater competition. Higher GSX and OBX rentals partly offset lower sales. The company sold about 8,000 GSX channels in the quarter, compared with 14,000 a year earlier, and 200 OBX stations.
- Non-Seismic revenue declined 22.1% for the quarter and 14.4% for the nine months. Management cited lower thermal-imaging and offshore-cable sales; capacity constraints from the Statoil order affected offshore-cable sales.
- Operating expenses rose 11.6% for the quarter and 19.4% for the nine months, reflecting higher stock-based and incentive compensation, staffing, and research and development costs. Nine-month research and development expense was $13.1, versus $10.5.
- Management said traditional-product sales could be flat or decline slightly amid reduced seismic activity. Wireless-system sales are expected to remain challenging in the near term, with order flow likely to remain erratic. If no new contracts are obtained, management expects reservoir-product revenue to decline in fiscal 2015 versus fiscal 2014.
Outlook, risks and unusual items
- Subject to customer demand, management estimated fiscal 2014 rental-equipment capital expenditures of approximately $30 million or more and other property and equipment spending of approximately $8 million. Houston facility expansion spending was estimated at $20 million to $25 million, with most expected in fiscal 2015.
- Management emphasized that large seismic and reservoir orders are irregular, customers control shipping dates, and orders may be delayed or canceled; quarterly results and cash flows may therefore fluctuate materially.
- International exposure includes foreign-currency, geopolitical, export-control and sanctions risks. The filing cites current political instability involving Russia and Ukraine, $8.8 million of imports from the Russian subsidiary during the nine months, and a $1.1 million Russian order lost after an export license was indefinitely deferred.
- The company hedged $30.0 million of Canadian-dollar intercompany exposure against $34.8 million outstanding; the filing reports a $0.5 million accrued unrealized loss on the forward contract at June 30. Unhedged Russian and Colombian operations also expose working capital to currency movements.
- Other stated risks include rental-equipment recovery, lease renewal, obsolescence and impairment; fixed rental-fleet costs; cybersecurity and system disruptions; and dependence on foreign markets. The company said it did not anticipate paying cash dividends in the foreseeable future.
- Notable items include $2.2 million of inventory-obsolescence expense and $0.7 million of bad-debt expense for the nine months. Derivative results included a $1.0 million loss for the quarter but a $1.1 million gain for the nine-month period. Approximately $14.0 million of restricted-stock compensation remained unrecognized at June 30.
- The company was evaluating the impact of the new revenue-recognition standard, effective for its fiscal years beginning after December 15, 2016. Management concluded disclosure controls were effective at June 30, 2014 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new reservoir-monitoring contracts replace the completed Statoil manufacturing work, and how quickly associated revenue and margins recover.
- Whether wireless-system demand, sales from the rental fleet, and rental utilization support management’s expectations amid competition and soft seismic markets.
- Whether planned rental-fleet, property, and Houston-facility investments proceed as estimated and generate adequate returns.
- Developments in Russian operations, import availability, export licensing, sanctions, and foreign-currency exposure.
- Changes in inventory obsolescence reserves, receivable allowances, derivative values, and the company’s substantial remaining restricted-stock compensation expense.