GEOSPACE TECHNOLOGIES CORPORATION — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017; fourth-quarter results are also noted. The company designs and manufactures seismic equipment for oil and gas customers and non-seismic industrial and imaging products. Unless otherwise stated, figures below are in U.S. dollars.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $73.7 million | $62.1 million |
| Gross profit (loss) | ($20.7 million); margin approximately (28.1%) | ($19.4 million) |
| Operating loss | ($54.3 million); margin approximately (73.7%) | ($55.5 million) |
| Net loss | ($56.8 million); $4.32 per diluted share | ($46.0 million); $3.52 per diluted share |
| Cash from (used in) operations | $10.1 million | ($1.7 million) |
| Cash and cash equivalents | $15.1 million | $10.3 million |
| Short-term investments | $36.1 million | $27.5 million |
| Long-term debt | None | None |
FY2017 investing cash flow was a use of $5.5 million; financing cash flow provided $0.05 million. Cash, cash equivalents and short-term investments totaled $51.2 million at year-end. Total assets were $205.7 million and stockholders’ equity was $195.2 million. The company reported no outstanding borrowings and $23.8 million of borrowing availability under its credit facility after letters of credit.
FY2017 fourth-quarter revenue was $23.7 million, gross loss $9.7 million, operating loss $18.2 million and net loss $19.2 million ($1.46 per share).
Changes versus prior period
- Revenue rose 18.8% year over year, primarily as seismic revenue increased 39.4% to $47.1 million. Wireless exploration sales rose 61.4% to $29.7 million, including a fourth-quarter sale of 45,000 GSX channels from the rental fleet.
- Non-seismic revenue declined 6.1% to $26.0 million: industrial revenue fell 11.1%, while imaging revenue was approximately flat. Non-seismic operating income increased slightly to $4.2 million.
- Despite higher revenue and lower operating expenses, gross loss widened to $20.7 million from $19.4 million. Inventory obsolescence expense increased to $21.5 million from $11.2 million, and the company recorded $5.3 million of equipment impairment.
- Net loss increased by $10.8 million. The prior-year result included a $9.4 million income tax benefit; FY2017 recorded $2.7 million of tax expense.
- At September 30, 2017, $55.9 million of inventory was classified as non-current, in addition to $20.8 million of current inventory. Total inventory, net of reserves, was $76.7 million.
Outlook, risks and unusual items
- Management expected depressed seismic conditions to continue through FY2018 and did not expect demand for most seismic products to exceed FY2017 levels. Excess customer-owned equipment, volatile oil prices and constrained customer capital budgets were cited as headwinds.
- Management expected FY2018 non-seismic revenue to increase, principally from industrial products. It saw potential for higher GSX and OBX rental revenue but noted there were no firm rental contracts guaranteeing an increase.
- No large-scale seabed PRM orders had been received since November 2012. Management reported no current indication of a FY2018 order; a large order could materially affect results, but absent one, reservoir product revenue and profit were expected to remain near FY2017 levels.
- Following notice that a prior PRM customer was seeking quotes for systems requiring fiber-optic sensors, Geospace recorded $5.1 million of additional PRM inventory obsolescence reserves and $5.3 million of impairment on manufacturing equipment in Q4. The company’s PRM designs use electrical sensors.
- Management anticipated approximately $6 million of FY2018 cash investment in rental equipment, plus up to $15 million of non-cash inventory transfers to the rental fleet depending on demand, and approximately $3 million of property, plant and equipment spending. It believed available cash and investments would fund operating losses and planned capital expenditures through December 2018.
- The company restated prior balance sheets after finding that inventory not expected to be realized in the next operating cycle had been classified as current. The non-cash reclassification did not change total assets, liabilities, revenue, net loss, loss per share or cash flows. Management identified a material weakness in inventory classification controls; management and the auditor concluded internal control over financial reporting was ineffective, and the auditor issued adverse opinions on those controls for FY2017 and FY2016.
- Key risks include prolonged oil and gas weakness, inventory write-downs and asset impairment, customer credit and concentration (one customer represented 17.8% of FY2017 revenue), foreign exchange and Russia-related exposure, and reliance on single suppliers for certain components. Pending ordinary-course litigation was not expected by management to materially affect the company.
Most important facts for investors to verify
- Whether FY2018 cash use, operating losses and capital spending remain consistent with management’s estimate that liquidity would last through December 2018.
- Subsequent inventory aging, obsolescence charges and the recoverability of the remaining PRM inventory and related manufacturing assets.
- Progress and independent validation of remediation for the material weakness, and whether future filings report effective internal controls.
- Actual demand, signed rental contracts and any PRM orders, given management’s cautious outlook and the absence of PRM orders since 2012.
- Customer collection and financing-receivable performance, including the $8.1 million financing receivable from the customer representing 17.8% of revenue.