Business context and reporting period
Geospace Technologies Corporation designs and manufactures seismic data acquisition and reservoir-monitoring equipment, with additional thermal-imaging and industrial products. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2014 (fiscal Q2 and first half), compared with the same periods of 2013. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Quarter ended Mar. 31, 2014 | Quarter ended Mar. 31, 2013 | Six months ended Mar. 31, 2014 | Six months ended Mar. 31, 2013 |
|---|---|---|---|---|
| Sales | $68.6 | $76.4 | $169.9 | $154.2 |
| Gross profit | $27.9 | $35.6 | $75.0 | $76.1 |
| Gross margin | 40.7% | 46.5% | 44.1% | 49.4% |
| Operating income | $16.0 | $25.6 | $51.6 | $57.1 |
| Net income | $10.8 | $16.9 | $35.0 | $38.9 |
| Diluted EPS | $0.82 | $1.30 | $2.66 | $3.01 |
| Operating cash flow | Not separately stated | Not separately stated | $55.8 | $(42.6) |
Second-quarter sales fell 10.3% year over year, while first-half sales rose 10.2%, mainly on higher Statoil contract revenue. First-half gross profit was slightly lower despite higher sales; operating expenses rose 23.0% to $23.4 million, including higher personnel, legal, R&D, stock-based and incentive compensation costs. The filing attributes quarterly gross-profit pressure to production cost overruns, manufacturing inefficiencies, unfavorable wireless mix, increased inventory obsolescence and lower sales; first-half results also reflected discounting on large wireless orders.
At March 31, cash and equivalents were $44.3 million, compared with $2.7 million at September 30, 2013. Current assets were $255.9 million and current liabilities $40.5 million (working capital of approximately $215.4 million). Total assets were $368.2 million. The company had no borrowings outstanding and had $50.0 million available under its credit agreement; it reported compliance with covenants. First-half investing cash use was $14.1 million, including $18.3 million invested in rental equipment and $4.4 million in property and equipment, partially offset by $8.6 million in used-rental-equipment proceeds. The six-month cash increase was $41.6 million.
First-half sales by segment: Seismic $158.9 million, up 12.0%; Non-Seismic $10.7 million, down 10.1%. Seismic operating income fell 6.1% to $58.0 million; Non-Seismic operating income declined 23.6% to $1.0 million.
Changes, outlook and risks
- Quarterly Seismic sales declined 8.7%; the six-month increase reflected reservoir-product activity, particularly $55.0 million recognized on the Statoil order versus $29.7 million in the comparable prior period. Management expected to recognize the remaining $5.2 million of that order in the remainder of fiscal 2014 and expected reservoir-product revenue to decline significantly over that period.
- Wireless product sales were weaker amid industry softness and increased competition, partly offset by higher GSX rental revenue. Management expects wireless adoption to grow but says order flow will remain erratic. It expects traditional lower-margin product sales to be flat or decline.
- Management estimated fiscal-2014 rental-equipment capital expenditures could be approximately $30 million or more if demand supports them, plus approximately $30 million for other property and equipment, including about $13 million for Houston facility expansion. Funding was expected from cash, operating cash flow, rental sales and/or credit-agreement borrowings.
- Inventory obsolescence expense was $1.7 million for the first six months; the obsolescence reserve was $7.8 million at March 31. The company also recognized $1.9 million of stock-based compensation in the first half and had $15.4 million of unrecognized restricted-stock compensation cost.
- Risks include irregular, potentially delayed or cancelled large orders; foreign-exchange exposure and international political, regulatory and export-control risks; Russian operations and sourcing; rental-equipment recovery, renewal, obsolescence and impairment; and cybersecurity disruption. A U.S. export license for a $1.1 million Russian customer order was being delayed. The IRS was auditing the fiscal-2012 federal tax return; management did not expect a material effect.
Important facts for investors to verify
- Whether margins recover from the reported manufacturing inefficiencies, cost overruns, product mix and inventory-obsolescence pressures.
- Timing and completion of the remaining Statoil revenue, and the extent of the expected second-half reservoir-revenue decline.
- Wireless orders and rental utilization, including whether planned rental-fleet and facility capital spending is supported by demand and cash generation.
- Exposure to foreign-market, export-license, currency and rental-equipment risks, and any material developments in the tax audit or other contingencies.