Geospace Technologies Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2015; year-over-year comparisons are with the periods ended June 30, 2014. Amounts are in U.S. dollars. The filing describes a manufacturer of seismic equipment for the oil and gas industry, with additional non-seismic thermal imaging and industrial products.
Financial performance
| Metric | Three months 2015 | Three months 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $19.8 million | $40.7 million | $68.9 million | $210.6 million |
| Gross profit (loss) | ($3.3 million) | $15.4 million | ($1.9 million) | $90.4 million |
| Operating income (loss) | ($12.5 million) | $5.5 million | ($30.9 million) | $57.1 million |
| Net income (loss) | ($8.6 million) | $3.8 million | ($19.2 million) | $38.7 million |
| Diluted EPS | ($0.66) | $0.29 | ($1.48) | $2.95 |
Gross margin was approximately negative 16.7% for the quarter and negative 2.8% for the nine months, versus positive 37.8% and 42.9% in the comparable 2014 periods. Operating margin was approximately negative 63.0% and negative 44.9%, respectively, versus positive 13.4% and 27.1%.
- Cash flow: Operating activities used $6.8 million in the first nine months, compared with $71.1 million provided in 2014. Investing activities used $1.1 million; financing activities had no net cash flow. Cash declined $7.8 million from September 30, 2014.
- Liquidity and balance sheet: At June 30, cash and cash equivalents were $25.6 million and short-term investments were $19.6 million. Current assets were $215.2 million and current liabilities $13.0 million. Total assets were $323.2 million; stockholders’ equity was $309.0 million.
- Debt and credit: No long-term debt or revolver borrowings were outstanding. The amended credit facility provides up to $30.0 million of availability, subject to a borrowing base; availability at quarter-end was $30.0 million before $0.13 million of letters of credit. The facility is secured, expires in May 2018, and the company reported covenant compliance.
- Working capital items: Inventory was $131.4 million, down from $145.9 million at September 2014. The doubtful-account allowance rose to $1.9 million from $1.1 million. The inventory obsolescence reserve was $9.5 million, up from $7.8 million.
Material changes and operating drivers
- Revenue declined 51.6% for the quarter and 67.3% for the nine months. The nine-month decline was concentrated in Seismic, whose revenue fell 73.3% to $51.9 million; Seismic recorded a $23.4 million operating loss, compared with $66.2 million of operating income a year earlier.
- Seismic weakness reflected lower demand for traditional and wireless exploration products and the absence of large reservoir-monitoring deliveries. The Statoil order was completed in April 2014; no permanent reservoir-monitoring systems were delivered in fiscal 2015 through the reporting date.
- Non-Seismic revenue increased 4.0% for the nine months to $16.5 million, with operating income of $2.3 million. Management attributed improvement to industrial-product demand and offshore-cable margin gains.
- Management cited low factory utilization, fixed rental-equipment depreciation, lower-margin sales mix, higher warranty costs from product defects, and increased inventory obsolescence as factors depressing gross profit. Operating expenses fell 13.0% for the nine months, mainly due to eliminated incentive compensation, partly offset by higher bad-debt expense.
- Foreign exchange was volatile: the company recorded a $0.6 million net foreign-exchange loss in the quarter but a $1.6 million net gain for the nine months. Nine-month other comprehensive loss included $3.4 million of foreign-currency translation losses.
Outlook, risks, and unusual items
- Management said seismic demand is expected to remain challenged through fiscal 2015 and beyond unless oil prices stabilize and industry conditions improve. It did not expect substantial permanent reservoir-monitoring contracts in fiscal 2015. Wireless and large reservoir-system orders are irregular, making quarterly revenue difficult to predict.
- Management expected fiscal 2015 cash investment of approximately $4.5 million in rental equipment, plus at least $5.5 million of non-cash inventory transfers to the rental fleet. Estimated property, plant and equipment spending was approximately $2.5 million, including $0.5 million for Houston facility expansion. Expansion could accelerate if industry conditions improve substantially or significant reservoir-system orders are received.
- Management believed cash, operating cash flow, and available credit should fund planned operations through fiscal 2015 and beyond, while cautioning that long-term capital needs may require additional debt or equity and that acceptable financing may not be available.
- An interim goodwill test at June 30 found no impairment of the $1.8 million goodwill balance; management also found no impairment of rental equipment or property and equipment. Management warned continued adverse conditions could lead to future impairments.
- The company recorded a $4.4 million income tax benefit for the quarter and $10.2 million for the nine months. It also reported $10.4 million of unrecognized restricted-stock compensation expected to be recognized over an average 2.5 years.
- Management said pending or potential ordinary-course legal matters were not expected to have a material adverse effect, while noting litigation outcomes are inherently uncertain. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether seismic exploration demand, particularly for wireless products, stabilizes and how order timing affects revenue and factory utilization.
- Whether the company can improve gross margins, manage inventory and warranty costs, and convert its substantial inventory and rental fleet into cash or profitable sales.
- Actual cash generation, remaining credit availability under the borrowing-base facility, and compliance with its covenants.
- Whether further deterioration in oil and gas markets triggers goodwill, rental-equipment, or property-asset impairment tests and charges.
- Exposure to foreign-currency movements, customer credit losses, and the uncertainty of future reservoir-monitoring contracts.