Geospace Technologies Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended December 31, 2013. The company designs and manufactures seismic equipment for oil and gas customers and also sells non-seismic thermal imaging and industrial products. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Sales | $101.3 million | $77.8 million | +30.3% |
| Gross profit | $47.1 million | $40.5 million | +16.1% |
| Gross margin | 46.5% | 52.1% | Down 5.7 percentage points |
| Operating income | $35.7 million | $31.5 million | +13.1% |
| Operating margin | 35.2% | 40.6% | Down 5.4 percentage points |
| Net income | $24.2 million | $22.0 million | +9.8% |
| Diluted EPS | $1.85 | $1.70 | +8.8% |
| Operating cash flow | $52.7 million | $(2.1) million | Improved |
- Seismic sales were $95.2 million, up 32.1%; non-seismic sales were $5.9 million, up 8.1%. Reservoir product revenue rose to $29.3 million from $11.2 million, primarily reflecting work on the Statoil contract. Wireless product revenue declined 3.0% to $45.5 million despite more GSX channels sold, as the sales mix included lower-priced multi-channel stations.
- Management attributed lower seismic operating margins to lower margins on larger wireless orders, higher depreciation on the expanded rental fleet, increased inventory-obsolescence expense, and higher factory overhead. Operating expenses rose 27.0%, including higher personnel and legal costs and business-expansion costs.
- Cash and cash equivalents were $44.4 million at December 31, versus $2.7 million at September 30. Total assets were $365.4 million; stockholders’ equity was $314.8 million. Inventories were $132.1 million, down from $149.5 million.
- No debt was outstanding at quarter-end; the company had $50.0 million available under its credit agreement, which expires April 27, 2016. It reported compliance with covenants. The agreement is secured, includes financial covenants and restricts cash dividends and additional indebtedness.
Cash flow, investment and balance-sheet developments
Operating cash flow was supported by net income and working-capital movements, including lower inventory, a decrease in costs and estimated earnings in excess of billings, increased deferred revenue from customer advances, and a $12.3 million increase in income taxes payable. These cash sources may not recur at the same levels. Investing activities used $11.0 million: $17.7 million was invested in rental equipment and $1.4 million in property and equipment, partly offset by $8.1 million of proceeds from used rental-equipment sales. The company repaid $0.9 million of credit-line borrowings. Income-tax payable increased to $12.5 million from $0.2 million at September 30.
Outlook, commentary and risks
- Management said seismic orders and customer-directed shipment timing are irregular, making quarterly sales “lumpy.” It expected GSX demand to continue growing as customers shift from cable-based systems, while cautioning that order flow would remain erratic.
- The company expected to recognize $58.4 million of revenue from the Statoil order during FY2014, including $28.0 million recognized in Q1; on that stated plan, about $30.4 million remained expected after Q1. The filing notes that contract estimates and timing can change.
- FY2014 capital spending was estimated at approximately $30 million or more for rental equipment, depending on customer demand, and approximately $30 million for other property and equipment, including about $13 million for Houston facility expansion. Management expected to fund spending with cash, operating cash flow, rental-equipment sale proceeds and/or credit-line borrowings.
- Key exposures include dependence on oil-and-gas and seismic-industry demand; volatility in large orders; execution and cost estimates under percentage-of-completion contracts; foreign currency exposure; and floating-rate borrowing risk. A $35 million forward contract hedged part of $50 million in Canadian-dollar intercompany exposure. The filing estimated a 10% U.S.-dollar strengthening against the Canadian dollar could produce a $1.5 million foreign-exchange loss on the net exposure.
- The IRS was auditing the company’s fiscal 2012 federal income-tax return; management did not expect a material effect. The filing also reported $347,000 of bad-debt expense and a $904,000 inventory-obsolescence recovery in operating cash-flow reconciliations.
- The company issued 184,000 restricted shares in November 2013. Unrecognized compensation cost was approximately $16.6 million at quarter-end, expected to be expensed as restrictions lapse over four years.
Important facts for investors to verify
- Whether Statoil project milestones, remaining revenue recognition and contract margins track management’s FY2014 expectations.
- Whether the Q1 cash-flow increase—particularly the tax-payable and working-capital movements—is sustained, and how much cash taxes are subsequently paid.
- Whether planned rental-fleet and Houston expansion spending proceeds as expected and produces adequate utilization and returns.
- Whether seismic demand, GSX order mix and gross margins improve or remain volatile.
- Future foreign-exchange impacts, including the Canadian-dollar exposure, and developments in the IRS audit.