Geospace Technologies Corporation — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended June 30, 2020. This fiscal third-quarter filing was submitted August 7, 2020. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and results
Geospace designs and manufactures seismic equipment for oil and gas exploration and sells products for adjacent industrial, imaging and emerging security markets. Its three reportable segments are Oil and Gas Markets, Adjacent Markets and Emerging Markets.
| Metric | Three months ended June 30, 2020 | Prior-year quarter | Nine months ended June 30, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $22.7 | $22.9 | $66.3 | $66.9 |
| Gross profit | $8.1 | $7.6 | $18.5 | $21.0 |
| Gross margin | 35.5% | 33.2% | 27.8% | 31.4% |
| Operating loss | $(2.6) | $(3.3) | $(13.9) | $(8.4) |
| Net loss | $(2.3) | $(3.7) | $(15.4) | $(8.8) |
| Loss per diluted share | $(0.17) | $(0.27) | $(1.14) | $(0.66) |
Quarterly revenue was nearly flat year over year: higher OBX marine equipment rental revenue offset weaker adjacent-market and traditional exploration product sales. Nine-month revenue was down 0.8%, while gross profit fell 12.2%. Nine-month operating expenses rose 10.0%, including $1.6 million of noncash increases in estimated acquisition earn-out liabilities. Income tax expense was $2.6 million for the nine months despite the net loss; the company said it could not recognize tax benefits for losses in the U.S., Canada and Russia.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $26.7 million at June 30, 2020, up from $18.9 million at September 30, 2019. Cash included $6.0 million held by foreign subsidiaries and branches.
- Nine-month operating cash flow was $12.4 million; investing cash flow used $4.5 million, including $5.4 million invested in rental equipment and $2.6 million in property and equipment. Financing cash flow was zero.
- Total assets were $189.4 million and stockholders’ equity was $164.5 million. Current assets were $64.8 million versus current liabilities of $9.6 million.
- The company had no borrowings under its credit agreement, with $17.9 million of borrowing availability from a facility of up to $30.0 million. It reported compliance with covenants. The agreement matures in April 2022; specified covenant thresholds increase beginning with the quarter ending December 31, 2020.
- Management said cash, cash equivalents and credit-facility availability should fund operating losses and planned capital expenditures for the next 12 months. It did not expect significant further OBX fleet or property and equipment investment in the remainder of FY2020.
Material changes, outlook and risks
- Segment mix: Q3 Oil and Gas Markets revenue increased 21.1% to $17.5 million, driven by OBX rentals; segment operating income was $1.5 million. Adjacent Markets revenue declined 38.0% to $5.1 million, with operating income down to $0.6 million. Emerging Markets revenue was $0.1 million and operating loss was $1.2 million. For the nine months, Oil and Gas Markets had a $1.1 million operating loss, Adjacent Markets earned $2.7 million, and Emerging Markets lost $5.0 million.
- COVID-19 and energy markets: Management reported reduced demand, rental cancellations and travel constraints, with lower-than-expected adjacent-market sales. It warned that pandemic disruption and sustained low oil prices could further weaken exploration demand, customer creditworthiness, supply chains and liquidity. Traditional and legacy land-based seismic product sales were expected to remain below historical levels; the duration and severity of the effects were not estimable.
- Cost reductions: After quarter-end, the company initiated reductions affecting more than 100 employees, primarily in Houston. It expected approximately $0.8 million of termination costs in Q4 FY2020.
- Customer credit exposure: An international marine seismic customer had a distressed financial position. The company reversed $8.0 million of operating lease receivable and rental revenue during FY2020 and stopped recognizing further revenue until payment capacity improves. The filing reports $8.3 million of trade receivables from this customer, plus $5.7 million of unrecognized rental revenue and late fees. A $13 million debt security was issued after quarter-end, due July 2022, secured by a third-priority lien; its marketability was uncertain.
- Unrecognized product sale: The company did not recognize revenue or cost on a $12.5 million sale partly financed by a $10.0 million, three-year customer note, citing collectability concerns. It had received $3.8 million in payments, recorded as deferred revenue.
- Contract and earn-outs: Quantum received a $10 million U.S. Border Patrol contract in April 2020; management expected no significant related revenue until Q1 FY2021. Contingent consideration liabilities totaled $11.6 million at June 30, 2020 and depend on future revenue and estimates.
- Accounting revision and controls: The company revised its previously issued first- and second-quarter FY2020 statements for errors in applying lease accounting and accounting for a customer lease receivable. It said the revision did not change nine-month net loss or operating cash flow. Management identified a material weakness relating to ASC 842 controls, concluded disclosure controls and internal control over financial reporting were ineffective as of June 30, and said it was designing quarterly controls and would use outside technical assistance as needed.
- Management expected no material adverse effect from ordinary-course legal proceedings, but said outcomes were inherently uncertain. The filing gave no formal numerical earnings or revenue guidance.
Most important facts for investors to verify
- Customer collections and recoverability of the $8.3 million recorded receivable, the $13 million debt security, and other unrecognized or deferred customer balances; reconcile the filing’s different descriptions of the distressed marine customer exposure.
- Whether the ASC 842 material weakness is remediated and whether subsequent filings indicate additional accounting revisions.
- Actual pace of cost reductions, severance costs, and the effect of COVID-19 and oil-market conditions on revenue, margins and liquidity.
- Timing and collectability of revenue from the Border Patrol contract, and the eventual cash or stock cost of acquisition earn-outs.
- Compliance with the amended credit-facility covenants as thresholds increase, and whether available borrowing capacity remains adequate.