Geospace Technologies Corporation — Fiscal 2021 Q3 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended June 30, 2021, for the fiscal year ending September 30. Geospace designs and manufactures seismic equipment and also serves industrial, imaging, water-monitoring, and security markets. Its reporting segments are Oil and Gas Markets, Adjacent Markets, and Emerging Markets. Unless stated otherwise, amounts below are in millions of dollars.
Key financial results
| Metric | Three months ended June 30, 2021 | Nine months ended June 30, 2021 |
|---|---|---|
| Revenue | $23.1; prior year $22.7 | $75.4; prior year $66.3 |
| Gross profit / margin | $5.6 / 24.4%; prior year $8.1 / 35.5% | $13.2 / 17.5%; prior year $18.5 / 27.8% |
| Operating loss | $2.4; prior year $2.6 | $12.1; prior year $13.9 |
| Net loss | $0.8; prior year $2.3 | $9.0; prior year $15.4 |
| Loss per share, basic and diluted | $0.06; prior year $0.17 | $0.67; prior year $1.14 |
| Cash from (used in) operations | Not presented for the quarter | $(7.5); prior year provided $12.4 |
Quarterly product revenue was $17.7 million and rental revenue was $5.4 million, compared with $7.0 million and $15.7 million, respectively, a year earlier. The nine-month figures were $66.0 million of product revenue and $9.4 million of rental revenue, versus $25.6 million and $40.7 million.
Financial position and liquidity
- At June 30, cash and cash equivalents were $20.1 million and short-term investments were $9.9 million, for combined liquid resources of approximately $30.0 million. Cash included $5.6 million held by foreign subsidiaries and branches.
- Total assets were $172.7 million and stockholders’ equity was $150.4 million. The company reported no borrowings under its credit agreement; borrowing availability was $17.7 million.
- The credit facility allows up to $20.0 million, subject to a borrowing base, and matures in April 2022. The company reported compliance with covenants at quarter-end. These include a $132 million minimum tangible net worth and a funded-debt-to-EBITDA ceiling of 1.50:1.
- Nine-month investing cash outflow was $1.7 million and financing cash outflow was $3.6 million, primarily for treasury-stock purchases. The company had $1.4 million remaining under its $5 million repurchase authorization.
Material changes and management commentary
- Quarterly revenue rose 1.7%, but gross profit fell from $8.1 million to $5.6 million, largely because rental revenue—particularly for OBX marine equipment—declined by $10.3 million. Operating expenses fell 24.0%, including lower contingent-consideration remeasurement expense and reduced costs.
- Nine-month revenue increased 13.8%, while gross profit declined. Revenue benefited from a $12.5 million wireless product sale recognized after management concluded the customer’s payment obligations were probably collectible, a $9.9 million sale of used OBX rental equipment, $9.9 million of U.S. Customs and Border Protection (CBP) contract revenue, and stronger Adjacent Markets sales. These gains were substantially offset by a $31.3 million decrease in rental revenue.
- Segment results were mixed. Nine-month Oil and Gas Markets revenue was $41.5 million, down from $47.5 million, with an operating loss of $13.3 million. Adjacent Markets revenue rose to $23.9 million from $18.3 million, with operating income of $4.8 million. Emerging Markets revenue reached $10.0 million, primarily from the CBP contract, and operating income was $5.3 million.
- Nine-month operating cash use reflected working-capital demands, including increased inventories and receivables, and lower deferred revenue. Cash declined from $32.7 million at September 30, 2020 to $20.1 million at June 30, 2021; the company also held $9.9 million in short-term investments.
Outlook, risks, and unusual items
- Management expected challenging Oil and Gas Markets conditions to continue through the rest of fiscal 2021 and possibly beyond, citing subdued exploration spending, customer-owned underutilized equipment, oil-price uncertainty, and reduced OBX rental utilization. It warned that excess legacy inventory could require further obsolescence charges.
- COVID-19 continued to affect rental demand and supply chains, with higher material costs and longer lead times. Management said Adjacent Markets demand had improved but could not determine whether that represented a lasting recovery.
- Management expected approximately $3 million of fiscal 2021 investment in property, plant, and equipment and approximately $2 million for the rental fleet, dependent on OBX demand. It believed available cash and credit would fund operating losses and planned capital expenditures for the next 12 months, while noting uncertainty about renewal or replacement of the credit facility after April 2022.
- The company planned an approximately $2.3 million Quantum earn-out payment in fiscal Q4. Contingent consideration liabilities totaled $9.2 million; fair-value changes depend on projected contract revenue and involve significant judgment.
- The $10 million promissory note associated with the previously delivered wireless system remained a credit and collection item; the customer had paid $7.0 million of principal by June 30 and was current on payments. The company also had concentrated receivables from three customers.
- On July 2, 2021, after quarter-end, the company acquired Aquana, a wireless water-monitoring and control provider, for approximately $1.4 million upfront, subject to adjustment, plus contingent payments over a six-year earn-out. The earn-out fair value had not yet been determined.
- Other notable transactions included a $1.7 million third-quarter gain from selling the remaining rights to a distressed customer’s debt security and $3.6 million of treasury-stock repurchases during the nine-month period. Management stated pending ordinary-course legal matters were not expected to materially affect the company.
Investor verification points
- Confirm the collectability and payment schedule of the $5.7 million in promissory notes and the $3.0 million sales-type lease receivable, as well as the status of the CBP unbilled receivable and remaining contract work.
- Track OBX rental utilization, used-equipment sales, and the effect of equipment disposals on recurring rental revenue and gross margins.
- Assess inventory quality and potential additional obsolescence charges; reported inventory included a $35.1 million obsolescence reserve.
- Review liquidity, covenant headroom, borrowing-base availability, and the April 2022 credit-facility maturity, particularly if operating cash use continues.
- Monitor Quantum and OptoSeis earn-out estimates and payments, and the costs, contingent obligations, and integration results of the Aquana acquisition.
- Evaluate whether Adjacent Markets growth and the CBP-related Emerging Markets contribution can continue as contract revenue is completed; also monitor oil-and-gas spending, COVID-19 supply-chain effects, and policy changes affecting energy and border-security markets.