GEOSPACE TECHNOLOGIES CORPORATION — Form 10-Q Summary
Business context and period: The quarter ended December 31, 2017 (the first quarter of fiscal 2018). Geospace designs and manufactures seismic equipment for the oil and gas industry and non-seismic industrial and imaging products. Results are unaudited and compare with the three months ended December 31, 2016. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change / context |
|---|---|---|---|
| Revenue | $14.6 million | $15.3 million | Down 4.2% |
| Gross profit (loss) | ($1.0) million | ($3.3) million | Gross margin approximately (6.6)% vs. (21.8)% |
| Operating loss | ($9.6) million | ($11.3) million | Operating margin approximately (65.6)% vs. (74.0)% |
| Net loss | ($9.5) million | ($11.7) million | Loss per diluted share: ($0.72) vs. ($0.89) |
| Cash used in operating activities | $5.8 million | $1.9 million | Operating cash outflow increased |
- Non-seismic revenue grew 12.5% to $6.5 million; seismic revenue fell 14.5% to $8.0 million. Seismic operating loss improved to $7.7 million, while non-seismic operating income was $1.0 million.
- At December 31, cash and cash equivalents were $13.9 million and short-term investments were $32.1 million, totaling approximately $46.0 million. Current assets were $81.0 million versus current liabilities of $11.3 million.
- No long-term debt or credit-facility borrowings were outstanding. Borrowing availability was $26.3 million after letters of credit, and the company reported covenant compliance. The facility matures April 30, 2019.
- Cash declined $1.2 million during the quarter. Investing activities provided $4.8 million, primarily from investment maturities and rental-equipment sales; financing activities provided no cash.
Material changes, outlook and risks
- Seismic results remain pressured by weak exploration spending. Wireless exploration revenue declined 42.6%, mainly because a large OBX rental contract was active in the prior-year quarter. Traditional seismic revenue increased 47.5%, while non-seismic growth reflected stronger industrial and imaging product demand.
- Management expects depressed seismic market conditions to persist through fiscal 2018 and expects low gross margins until demand improves. Seismic inventory remains well above levels considered appropriate for current demand; further obsolescence charges may be recorded as inventory ages. The company reported $1.4 million of inventory obsolescence expense in the quarter.
- In December, the company initiated cost reductions, including eliminating more than 60 Houston-area positions. It expects approximately $6 million in annualized cash savings; $0.7 million of termination costs were incurred in the quarter, with no further costs expected.
- Management estimated fiscal 2018 investments of approximately $3 million in property, plant and equipment and $2 million in rental equipment. It believes existing cash and short-term investments can fund operating losses and planned capital expenditures through December 2018; this is an estimate, not a guarantee.
- The company has received no permanent reservoir-monitoring system orders since November 2012 and none in fiscal 2017 or the first quarter of fiscal 2018. It recorded substantial PRM inventory reserves and manufacturing-equipment impairment in the prior-year fourth quarter: $5.1 million and $5.3 million, respectively.
- The Tax Cuts and Jobs Act lowered the U.S. federal corporate rate to 21% beginning January 1, 2018. The company was still evaluating parts of the law’s impact; it expected the transition tax on certain foreign earnings to have minimal cash impact, partly because of tax loss carryforwards. Deferred tax assets remain subject to a valuation allowance.
- Foreign-currency movements are a risk. The company entered into a 90-day Canadian-dollar forward contract for CAN$32.0 million, leaving approximately CAN$1.6 million unhedged; the contract was not designated as an accounting hedge.
- The filing describes ordinary-course legal matters but says management was unaware of any material pending or contemplated legal or government proceeding. Management reported disclosure controls effective and said remediation measures addressed a previously reported inventory-classification weakness.
Important facts for investors to verify
- Whether seismic exploration demand, rental utilization and revenue recover, and whether further inventory write-downs or asset impairments are required.
- Whether the forecast $6 million of annualized savings is achieved and whether cash burn remains consistent with management’s liquidity estimate through December 2018.
- The collectability and timing of financing receivables, including customer promissory notes, and the adequacy of related credit-loss allowances.
- The final accounting and cash effects of tax-law changes, foreign earnings repatriation and foreign-exchange exposure.