Geospace Technologies Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019; comparisons are with the year ended September 30, 2018. The filing was signed November 22, 2019. Dollar amounts are in U.S. millions unless stated otherwise.
Business context
Geospace designs and manufactures seismic equipment, principally for oil and gas exploration and production, and also sells industrial, imaging, and border/perimeter security products. Its three segments are Oil and Gas Markets, Adjacent Markets, and Emerging Markets. Fiscal 2019 growth was driven mainly by rental demand for ocean-bottom OBX wireless seismic equipment; demand for traditional and land-based seismic products remained weak.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $95.8 | $75.7 |
| Gross profit / gross margin | $31.4 / 32.8% | $11.0 / 14.5% |
| Operating income (loss) | $1.0 | $(20.7) |
| Net loss | $(0.1) | $(19.2) |
| Operating cash flow | $5.6 | $(10.4) |
| Cash and cash equivalents at year-end | $18.9 | $11.9 |
- Rental revenue increased to $50.0 million from $22.4 million; product revenue declined to $45.8 million from $53.3 million.
- At year-end, current assets were $71.2 million and current liabilities $13.2 million. Short-term investments were zero, versus $25.5 million in FY2018.
- No long-term debt was outstanding. The revolving credit facility permitted up to $30 million, subject to a borrowing base; $27.0 million was available and the company was covenant-compliant at September 30, 2019.
- Investing cash flow was $1.6 million, including $34.1 million invested in rental equipment, largely to expand the OBX fleet. The company expects about $6 million of FY2020 rental-fleet investment and up to $5 million in property, plant and equipment.
- Inventory totaled $45.4 million, including a $32.1 million obsolescence reserve; $21.5 million was classified as non-current. FY2019 inventory obsolescence expense was $4.6 million.
Material changes and unusual items
- Oil and Gas Markets revenue rose 44.5% to $65.0 million, and the segment moved to $3.1 million operating income from a $14.1 million loss. Wireless exploration revenue increased 93.6%, primarily from OBX rentals.
- Adjacent Markets revenue was broadly flat at $30.2 million, while operating income rose to $6.2 million from $5.3 million. Emerging Markets revenue fell to $0.2 million; its operating loss widened to $2.3 million.
- FY2019 operating income included a $7.0 million gain on sale of Houston real estate for $8.3 million. The company reported a net loss despite positive pretax income of $2.3 million, largely reflecting $2.4 million of income tax expense, primarily foreign withholding taxes on rental income.
- Operating expenses increased 18.1% to $37.4 million, including acquisition-related costs and amortization. The reported expense line also included a $2.1 million net reduction in estimated acquisition earn-out fair value.
- The company acquired OptoSeis fiber-optic sensing assets for $1.8 million cash plus contingent payments of up to $23.2 million. Quantum, acquired in FY2018, has potential earn-outs of up to $23.5 million. No earn-out payments were made in FY2019; the combined contingent consideration liability was $9.9 million at year-end.
Outlook, commentary and key risks
- Management expected FY2020 OBX rental revenue to increase further, supported by existing contracts and additional demand. It expected land-based wireless revenue to exceed FY2019 levels, including a recently received 30,000-station GCL order; management cautioned that broader demand and the revenue impact remained uncertain.
- Management expected a slight increase in traditional land-based seismic demand, reservoir product revenue broadly similar to FY2019, and higher Adjacent and Emerging Markets revenue. Quantum was expected to continue operating at a loss until it secures contracts sufficient to support its cost base.
- No large-scale seabed permanent reservoir monitoring (PRM) order had been received since November 2012, and management had no indication of one for FY2020. Such an order, if received, could materially affect revenue and profits.
- A major credit exposure is $8.5 million due from an international marine seismic customer with payment difficulties. The company accepted a payment plan in November 2019 targeting completion by March 31, 2020; management disclosed significant collection concerns and had not recorded a significant reserve.
- Key risks include volatile oil and gas spending, short order visibility and cancellations, customer concentration and credit risk, inventory obsolescence, rental-equipment recovery and utilization, product competition and technology change, reliance on single-source components, foreign operations and sanctions, and the uncertain commercial prospects of Quantum and OptoSeis.
- In November 2019, after fiscal year-end, the credit facility maturity was extended to April 2022, with covenant thresholds scheduled to tighten in FY2021. The company said available cash and facility capacity should fund operating needs and planned investment for the next 12 months. It does not anticipate cash dividends in the foreseeable future.
Most important facts for investors to verify
- Collection progress on the $8.5 million customer receivable and whether the payment plan is being met; assess potential reserve or cash-flow consequences.
- OBX rental utilization, contract duration, fleet investment returns, and the sustainability of the strong rental-driven margin improvement.
- Delivery, timing, and collectability of the 30,000-station GCL order, alongside actual demand for land-based seismic equipment.
- Inventory aging and future obsolescence charges, plus the adequacy of reserves against legacy oil-and-gas inventory.
- Quantum contract wins and operating losses, OptoSeis revenue, and changes to the $9.9 million contingent consideration liability and related maximum earn-outs.
- Compliance with the amended credit covenants and availability of borrowing capacity, particularly as thresholds tighten in FY2021.