Geospace Technologies Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022; comparisons are with the periods ended June 30, 2021. The company designs and manufactures seismic equipment and other products, with businesses in Oil and Gas Markets, Adjacent Markets, and Emerging Markets. Unless stated otherwise, amounts below are in millions.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $20.7, down 10.4% year over year | $63.4, down 16.0% |
| Gross profit / gross margin | $3.7 / 17.6%, versus $5.6 / 24.4% | $12.2 / 19.2%, versus $13.2 / 17.5% |
| Operating loss | $6.5, versus $2.4 | $15.1, versus $12.1 |
| Net loss | $6.6, or $0.51 per diluted share | $14.8, or $1.14 per diluted share |
| Cash from operating activities | Not presented for the quarter | Used $13.3, versus $7.5 used |
Quarterly revenue fell mainly because of lower wireless seismic product sales; higher OBX equipment rental revenue and stronger Adjacent Markets sales partly offset the decline. Nine-month revenue also reflected the completion of the U.S. Customs and Border Protection (CBP) contract and lower wireless sales. Operating expenses rose year over year in both periods, including higher personnel, research and development, and Aquana-related costs. The nine-month operating loss included a favorable $5.0 million noncash reduction in estimated contingent consideration; this credit reduced reported operating expenses.
At June 30, cash and cash equivalents were $7.5 million and short-term investments were $1.6 million, or approximately $9.1 million combined. These balances were down from $23.6 million at September 30, 2021. Total assets were $142.4 million and stockholders’ equity was $129.2 million. The company had no debt outstanding. It reported $8.5 million of borrowing availability under a new credit agreement, subject to a $10 million maximum facility and borrowing-base limits. The company said it believed available cash and investments would cover operating losses and planned capital spending for the next 12 months.
Changes by business and other notable items
- Oil and Gas Markets: Third-quarter revenue was $9.5 million, down 24.8%; nine-month revenue was $34.3 million, down 17.4%. The company cited weak exploration spending despite higher oil prices. Its nine-month segment operating loss improved to $6.2 million from $13.3 million, while the quarterly loss widened to $3.7 million from $1.8 million.
- Adjacent Markets: Revenue rose 16.7% in the quarter to $10.9 million and 18.6% for nine months to $28.3 million, driven by industrial and imaging products. Segment operating income declined modestly in both periods as expenses increased.
- Emerging Markets: Revenue fell to $0.1 million in the quarter and $0.6 million for nine months, largely because the CBP contract was completed in the second quarter of fiscal 2022. Nine-month segment results shifted from $5.3 million operating income to a $3.6 million operating loss.
- Cash flow and investment: Investing activities provided $8.7 million, including proceeds from short-term investment sales and used rental equipment. The company invested $4.1 million in rental equipment and received $5.9 million from used-equipment sales. It also issued $11.7 million of notes receivable in connection with equipment sales.
- Inventory: Inventory was $32.9 million, including a $38.3 million obsolescence reserve against gross inventory. Management said Oil and Gas inventory remained above levels appropriate for current demand and expected further obsolescence expense if demand or turnover did not improve.
Outlook, risks, and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management expected weak demand for Oil and Gas products to persist until exploration companies direct more cash toward exploration; it noted increased rental demand for marine OBX equipment. It also highlighted ongoing supply-chain constraints, higher input costs, and longer supplier lead times. The company said it did not anticipate significant remaining fiscal-2022 investment in rental equipment or property, plant and equipment.
- Russia and Ukraine: A portion of oil and gas product manufacturing is conducted through the company’s Russian subsidiary. Sanctions, export restrictions, shipping delays, or other disruptions could affect operations and costs. The subsidiary’s net carrying value was $6.7 million, including $1.4 million in cash; the company reported $1.2 million of subsidiary domestic sales in the first nine months of fiscal 2022.
- Industry and market risks: Results remain sensitive to oil and gas prices, exploration budgets, customer order timing, COVID-19-related supply-chain effects, and changes in government policy affecting border-security demand and climate regulation.
- Receivables and customer concentration: Three customers represented combined trade and financing receivables of $11.4 million, $3.8 million, and $3.1 million, respectively. A previously financed product sale had $3.8 million remaining on its promissory note at June 30, 2022.
- Acquisition-related payments: Contingent consideration was reduced to $0.2 million at June 30, 2022 from $6.0 million at September 30, 2021, following fair-value adjustments and payments. Aquana earn-outs, if achieved, are recorded as compensation expense; no liability was recorded because of a continued-employment condition.
- Legal matters: The company reported ordinary-course legal proceedings and said their expected resolution was not believed to have a material adverse effect.
Important facts for investors to verify
- Whether the expected recovery in OBX rental demand and Adjacent Markets growth can offset continued weakness in seismic product sales.
- Cash burn, working-capital needs, and the company’s ability to maintain liquidity if operating losses continue; borrowing availability depends on the credit agreement’s borrowing base and covenants.
- Inventory aging and the potential for further obsolescence charges.
- Exposure to Russia-related sanctions and disruption, including the accessibility of Russian subsidiary cash and continuity of manufacturing.
- Collection and repayment of customer financing receivables, particularly the $3.8 million outstanding note, and the effect of customer concentration.
- Whether future operating results depend on nonrecurring items, including contingent-consideration fair-value credits and used rental-equipment sales.