Geospace Technologies Corporation — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018; comparisons are with the three months ended December 31, 2017 unless otherwise noted. Balance-sheet comparisons are with September 30, 2018. Amounts below are in U.S. dollars.
Business context and results
Geospace designs and manufactures seismic equipment for oil and gas exploration and reservoir monitoring, as well as products for industrial, imaging, and border-security markets. It reports Oil and Gas Markets, Adjacent Markets, and Emerging Markets segments. The quarter’s revenue growth was driven mainly by rental demand for OBX marine wireless seismic equipment; management said difficult conditions for land-based seismic products are expected to persist.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Total revenue | $17.9 million | $14.6 million |
| Product revenue | $10.5 million | $13.3 million |
| Rental revenue | $7.4 million | $1.4 million |
| Gross profit (loss) | $3.1 million | $(1.0) million |
| Gross margin | 17.3% | (6.6)% |
| Operating loss | $(6.1) million | $(9.6) million |
| Net loss | $(5.9) million | $(9.5) million |
| Basic and diluted loss per share | $(0.44) | $(0.72) |
Financial position, cash flow, and liquidity
- Operating cash flow was $1.3 million, versus cash used of $5.8 million a year earlier. Investing activities provided $4.1 million, including $16.1 million of short-term investment sale proceeds; the company invested $10.2 million in rental equipment and paid $1.8 million for OptoSeis assets. Financing activities provided $0.2 million from stock-option exercises.
- Cash and cash equivalents were $17.1 million and short-term investments were $9.5 million at December 31, 2018, totaling $26.6 million. Cash increased from $11.9 million at September 30, while short-term investments declined from $25.5 million.
- Total current assets were $63.7 million and current liabilities were $19.4 million. The company reported no long-term debt or credit-facility borrowings. Its $30 million credit agreement, extended to April 2020, had $20.9 million of borrowing availability after letters of credit; the company was in covenant compliance.
- Inventory was $48.6 million, including a $30.6 million obsolescence reserve. Management said oil and gas inventories remained excessive for current demand and warned further obsolescence charges may be recorded.
- Trade receivables included $6.8 million due from one customer, a concentration investors may wish to monitor.
Changes, outlook, and risks
- Revenue increased year over year, while product revenue fell and rental revenue rose sharply. Oil and Gas Markets revenue increased to $11.0 million, primarily on OBX rentals; its operating loss narrowed to $2.6 million from $7.7 million. Adjacent Markets revenue was $6.6 million and operating income was $1.0 million. Emerging Markets, which includes Quantum, recorded $0.1 million revenue and a $1.2 million operating loss.
- Gross profit improved from a loss to a profit, reflecting increased wireless rental revenue and improved factory utilization. Operating expenses rose 6% to $9.2 million, partly due to acquired-business personnel costs, amortization, and acquisition legal fees.
- For FY2019, management expected cash investment in the OBX rental fleet could reach $30 million or more and estimated approximately $3 million of property, plant, and equipment investment. It expected challenging conditions for land-based traditional and legacy wireless products to continue through FY2019 and product gross margins to remain below historical norms until demand improves. No specific revenue or earnings guidance was provided.
- In November 2018, the company acquired OptoSeis fiber-optic sensing assets for approximately $1.8 million cash plus contingent payments of up to $23.2 million over five and a half years. The fair value assessment was preliminary. Quantum, acquired in July 2018, carries contingent payments of up to $23.5 million over four years. Total contingent earn-out liabilities were $12.1 million at quarter-end.
- Key risks cited include oil-price volatility and constrained customer exploration budgets, excess or aging inventory, delayed or canceled orders, product acceptance and obsolescence, customer credit exposure, and the uncertain commercial outcomes of Quantum and OptoSeis. Management believed cash and short-term investments would fund operating losses and planned expenditures for the next 12 months, but noted other liquidity sources might be needed if profitability does not return.
- The company adopted the new revenue-recognition standard on October 1, 2018; management said adoption had no material financial-statement impact. Pending legal matters were not expected by management to have a material adverse effect, though outcomes were uncertain.
Important facts for investors to verify
- The MD&A says revenue rose 18.7%; the reported revenue figures of $17.875 million and $14.644 million imply growth of approximately 22.1%. Verify the discrepancy.
- Confirm the timing, utilization, and expected returns of the planned OBX fleet investment, and how it will be funded.
- Track inventory levels, turnover, and potential additional obsolescence charges, as well as collection of the $6.8 million single-customer receivable.
- Monitor the preliminary OptoSeis valuation, contingent earn-out exposure, and revenue contribution from both acquisitions.
- Assess whether cash generation and credit availability remain adequate if oil and gas demand stays weak; $7.6 million of cash was held by foreign subsidiaries and branches.