Geospace Technologies Corporation — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2013. The unaudited results cover the company’s fiscal second quarter; the six-month comparison is against the same period of FY2012. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Sales | $76.4m | $56.2m | $154.2m | $99.5m |
| Gross profit; gross margin | $35.6m; 46.5% | $25.1m; 44.6% | $76.1m; 49.4% | $45.7m; 45.9% |
| Operating income; operating margin | $25.6m; 33.4% | $16.5m; 29.3% | $57.1m; 37.0% | $29.1m; 29.2% |
| Net income | $16.9m | $11.4m | $38.9m | $20.1m |
| Diluted EPS | $1.30 | $0.89 | $3.01 | $1.57 |
- Sales rose 35.9% in the quarter and 54.9% over six months. Management attributed the gains mainly to stronger seismic demand and favorable product mix; operating expenses rose 16.5% and 14.1%, respectively.
- Seismic sales were $69.8m for the quarter and $141.8m for six months; non-seismic sales declined to $6.4m and $11.9m, respectively. Six-month seismic growth included reservoir products and wireless products, while traditional product sales fell.
- Q2 other expense was $0.5m, including $0.7m of foreign-exchange losses. Six-month other expense was $0.4m. Effective tax rates were 32.6% for Q2 and 31.5% for six months.
Cash flow, liquidity and debt
- Operating cash flow was negative $42.6m for the six months, compared with positive $23.2m a year earlier. Major uses included increases in inventory ($31.4m), receivables ($21.2m), and costs and estimated earnings in excess of billings ($11.3m); the company cited production and working-capital needs related in part to the Statoil order.
- Investing cash flow was positive $0.2m, reflecting $17.7m of rental-equipment investment, $17.1m in proceeds from used rental-equipment sales, and $9.1m net proceeds from short-term investment sales. Financing cash flow was positive $3.9m.
- At March 31, cash and cash equivalents were $12.3m and short-term investments were $10.6m, down from $50.8m and $20.0m at September 30, 2012. Current assets were $204.1m and current liabilities $31.4m. Total liabilities were $34.8m.
- No credit-facility borrowings or standby letters of credit were outstanding; the full $25.0m facility was available. The company reported compliance with covenants. The facility expires March 2, 2015.
Material changes, outlook and risks
- Reservoir-product revenue increased sharply: Q2 included about $17.0m from delivery of a system to Shell Brasil and about $21.0m recognized under the percentage-of-completion method for the Statoil order; six-month Statoil revenue recognized was about $29.7m. Contract estimates and customer change orders can affect reported revenue and profit.
- Management described seismic orders and shipment timing as irregular and sales as “lumpy,” with quarterly fluctuations potentially affecting operating income. Wireless-product sales fell year over year in Q2, despite six-month growth; traditional seismic sales also declined in the quarter.
- Non-seismic sales and operating income declined, partly due to lower European sales of industrial sensors and thermal imaging products. Management expected the European market to remain challenging for the rest of FY2013.
- Management estimated FY2013 gross investment in rental equipment could exceed $30m depending on demand, and property and equipment investment could be approximately $15m–$20m. Planned funding sources include cash, internal cash flow, rental-equipment proceeds and/or facility borrowings; these are estimates, not earnings guidance.
- Foreign-currency exposure affected results. A $20.0m forward contract hedged part of $34.4m of Canadian-dollar exposure; the company reported an accrued unrealized loss of about $0.2m on the contract at quarter-end. Risks also include currency and operating exposure in Russia and Colombia, floating-rate borrowing exposure, and dependence on oil-and-gas industry demand.
- The company adopted a revised segment presentation effective October 1, 2012 (Seismic and Non-Seismic); prior-period amounts were reclassified without effect on net income, equity or cash flows. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor verification points
- Track collection of receivables and conversion of the large inventory and unbilled-contract balances into cash, particularly as Statoil production and customer billings progress.
- Verify timing, remaining costs, margins, billings, change orders and customer acceptance or delivery milestones for major reservoir contracts.
- Assess whether rental-fleet and property investment estimates remain aligned with demand, utilization, equipment resale proceeds and available liquidity.
- Monitor seismic order volatility, used wireless-equipment sales, and continued weakness in non-seismic/European markets.
- Review foreign-exchange movements, hedge coverage and credit-facility covenant headroom. The filing does not provide a specific full-year revenue or earnings forecast.