Geospace Technologies Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017; comparisons are to the corresponding periods ended March 31, 2016. The filing is unaudited. The company designs and manufactures seismic equipment for oil and gas exploration and reservoir monitoring, as well as non-seismic imaging and industrial products.
Financial performance
| Metric | Three months ended Mar. 31, 2017 | Three months ended Mar. 31, 2016 | Six months ended Mar. 31, 2017 | Six months ended Mar. 31, 2016 |
|---|---|---|---|---|
| Revenue | $20.6 million | $14.9 million | $35.8 million | $28.1 million |
| Gross profit (loss) | $(2.6) million | $(4.6) million | $(5.9) million | $(11.0) million |
| Gross margin | (12.4)% | (30.8)% | (16.4)% | (39.2)% |
| Operating loss | $(11.1) million | $(14.0) million | $(22.4) million | $(28.7) million |
| Net loss | $(11.5) million | $(11.0) million | $(23.2) million | $(22.0) million |
| Loss per diluted share | $(0.88) | $(0.84) | $(1.77) | $(1.69) |
All figures are in U.S. dollars. Operating losses narrowed, but net losses increased year over year, largely because the prior-year periods included income tax benefits while 2017 had tax expense.
Balance sheet, liquidity and cash flow
- At March 31, 2017, cash and cash equivalents were $19.3 million and short-term investments were $28.9 million, totaling $48.2 million in available cash and investments. The total included $7.1 million held by foreign subsidiaries and branch offices; management intends to permanently reinvest foreign earnings.
- Six-month operating cash flow was positive $8.3 million, versus $4.4 million in the prior-year period. Cash generation included a $12.8 million U.S. income tax refund and noncash adjustments, including $8.4 million of inventory obsolescence expense.
- Six-month investing cash flow was positive $0.5 million, including $2.4 million of proceeds from used rental equipment sales. Capital spending was $0.3 million on property and equipment and $0.1 million on rental equipment.
- Total assets were $232.7 million and stockholders’ equity was $225.1 million. Current liabilities were $7.6 million. Inventories were $92.1 million, down from $104.5 million at September 30, 2016; the inventory obsolescence reserve rose to $17.4 million from $9.7 million.
- No long-term debt or credit-facility borrowings were outstanding. The company had $29.6 million of borrowing availability after $0.4 million of letters of credit and was in covenant compliance. The facility expires May 4, 2018.
Material changes and business trends
- Revenue increased 37.7% in the quarter and 27.7% year to date. Seismic revenue rose 64.0% for the quarter and 45.3% for six months, principally from higher GSX sales and OBX rental revenue. Non-seismic revenue rose 2.9% and 4.1%, respectively.
- Seismic operations remained loss-making: segment operating loss was $9.2 million for the quarter and $18.6 million year to date. Non-seismic operations generated operating income of $1.1 million and $2.1 million, respectively.
- Gross losses narrowed year over year as sales and rentals improved and prior cost reductions lowered manufacturing costs. Higher inventory obsolescence expense partly offset those gains. Operating expenses declined 9.5% for the quarter and 6.8% for six months, mainly reflecting the 2016 cost-reduction program.
- The company’s 2016 workforce and facility cost-reduction program was designed to deliver approximately $7 million in annualized cash savings; more than 150 Houston-area employees were affected.
Outlook, risks and contingencies
- Management expected depressed seismic-market conditions to continue through fiscal 2017, citing oil and gas exploration spending and crude-price uncertainty. It expects seismic revenue and gross margins to remain under pressure until demand improves.
- Management said seismic inventories remained excessive and expected them to decline slowly. If weak conditions persist, additional obsolescence expense may be recorded in fiscal 2017 and beyond.
- Two OBX rental contracts concluded during the quarter; management expected lower rental income in the quarter ending June 30, 2017. It did not expect further OBX rental-fleet investment in fiscal 2017 without significant customer orders. No permanent reservoir monitoring systems had been delivered or ordered in fiscal 2016 or the first half of fiscal 2017.
- Management estimated fiscal 2017 property, plant and equipment investment of approximately $3.5 million and said cash and short-term investments should cover operating losses and planned capital expenditures for the next 12 months. It noted that continued losses could require use of investments, rental or other assets, or credit-facility borrowings.
- Key risks include oil and gas industry weakness, delayed or cancelled orders, product obsolescence, customer bad debts, and foreign-currency movements. The company reported foreign-exchange losses related in part to U.S. dollar deposits held by its Russian subsidiary and uses a limited Canadian-dollar forward contract to hedge short-term exposure.
- The company reported ordinary-course legal actions but no material pending or known contemplated legal or government proceedings. Management said there were no events indicating impairment of long-lived assets at March 31, 2017.
Important facts for investors to verify
- Whether improved seismic sales and rental revenue persist, especially after the two OBX contracts ended, and whether new permanent reservoir-monitoring orders emerge.
- Whether inventory levels and the $17.4 million obsolescence reserve adequately reflect demand; further write-downs could weigh on margins.
- How much operating cash flow depends on nonrecurring tax refunds and working-capital movements. The $12.8 million refund received in March 2017 related to carrying back fiscal 2016 losses; the company said it was in a U.S. tax-loss carryforward position and could not receive further federal refunds in future years.
- Whether cash and investments remain sufficient if operating losses continue, and whether the company needs to draw on its credit facility before its May 2018 expiration.
- Potential tax and reporting effects of accounting-standard changes, particularly income taxes on intercompany asset transfers and revenue recognition for percentage-of-completion contracts.