OYO Geospace Corporation — Q2 FY2012 Form 10-Q
Business context and period. The filing covers the fiscal quarter and six months ended March 31, 2012; the quarter is compared with the three months ended March 31, 2011. OYO Geospace designs and manufactures seismic acquisition and reservoir-monitoring equipment, and thermal imaging products. Seismic is its primary business. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Sales | $56.2m, up 10.9% | $99.5m, up 6.1% |
| Gross profit / gross margin | $25.1m / approximately 44.6% | $45.7m / approximately 45.9% |
| Operating income / operating margin | $16.5m / approximately 29.3% | $29.1m / approximately 29.2% |
| Net income | $11.4m, versus $8.7m | $20.1m, versus $16.9m |
| Diluted earnings per share | $1.78, versus $1.38 | $3.13, versus $2.70 |
| Cash from operating activities | $23.2m for the six-month period, versus $5.4m |
At March 31, 2012, cash and cash equivalents were $44.2m and short-term investments were $5.0m. Current assets were $163.2m versus current liabilities of $31.9m (approximately 5.1 times current-liability coverage). Total liabilities were $34.4m and stockholders’ equity was $198.8m. The balance sheet reports no outstanding credit-facility borrowings. The $25m facility had $2.0m of standby letters of credit and $23.0m of additional borrowing availability.
Six-month investing cash outflow was $11.5m, including $22.2m invested in rental equipment and $1.7m in property and equipment, partly offset by $12.5m of used-rental-equipment sale proceeds. Financing provided $1.0m. The company reported no debt borrowings during the period.
Material changes and operating trends
- Quarterly growth was led by seismic products. Seismic sales rose 11.7% to $52.7m; Thermal Solutions sales were nearly flat at $3.4m. For six months, seismic sales rose 7.2% to $92.9m while Thermal Solutions sales fell 7.9% to $6.2m.
- Wireless product sales and rentals increased 32.8% for the quarter and 16.3% for six months, reflecting stronger customer demand. Industrial product sales rose 67.6% and 57.9%, respectively. Six-month traditional seismic sales declined 4.9%; quarterly reservoir-product revenue declined 27.2%, although six-month revenue was nearly unchanged.
- Management attributed improved gross profit to higher sales and improved factory productivity, including production of rental equipment. Six-month operating expenses rose 4.4%, primarily because of higher bad-debt and incentive-compensation expense.
- Receivables increased to $34.3m from $19.8m at September 30, 2011; the doubtful-account allowance rose to $1.0m from $0.4m. Inventory declined to $69.2m from $72.4m, while the obsolescence reserve increased to $10.6m from $9.6m.
Outlook, risks and unusual items
- Management estimated fiscal 2012 capital expenditures could be approximately $32m or more, primarily reflecting demand for wireless rental equipment. Expected funding sources include cash, operating cash flow, rental-equipment sale proceeds and potential credit-facility borrowings.
- The filing provides no specific revenue or earnings guidance. Management cautioned that large, irregular customer orders and customer-determined shipping dates make seismic sales and production levels difficult to predict and likely to remain “lumpy.”
- Management identified lower North American natural-gas prices and reduced exploration and hydraulic-fracturing activity as potential headwinds, particularly for borehole tools. Demand is also exposed to oil-and-gas industry and broader economic downturns.
- Operating cash flow benefited from higher payables and customer advance payments, but was partly offset by a $13.4m increase in trade and notes receivable. Management cited aging customer accounts as a driver of higher bad-debt expense.
- The company entered a $14m foreign-currency forward contract to hedge part of its Canadian subsidiary’s U.S.-dollar intercompany exposure; it reported a $0.1m unrealized loss on the contract. The filing also describes unhedged ruble exposure. Other income included foreign-exchange gains, partly offset by the forward-contract loss.
- The credit agreement was amended on April 24, 2012, effective March 31, to exclude rental-equipment investments from capital expenditures used in the cash-flow-coverage covenant calculation. The company reported covenant compliance at March 31.
- The effective tax rate was 32.1% for the quarter and 32.4% for six months. Management said the research and experimentation tax credit was not extended beyond calendar 2011. The IRS was auditing fiscal 2007–2009 federal returns; management did not expect a material effect.
- Management stated that risk-factor disclosures had not materially changed from the September 30, 2011 Form 10-K. Results for the interim periods were not necessarily indicative of full-year or future performance.
Important facts for investors to verify
- Whether wireless-equipment demand and rental utilization support the planned capital spending and its expected returns.
- Receivable aging, collections and the adequacy of the increased doubtful-account allowance, alongside inventory obsolescence exposure.
- Whether seismic order timing, natural-gas market weakness or other customer-industry changes affect subsequent sales and margins.
- The extent of future foreign-exchange exposure and the cost and effectiveness of the Canadian-dollar hedge.
- Compliance with credit-facility covenants, available liquidity after planned investment, and the outcome of the IRS audit.