Geospace Technologies Corporation — Q2 FY2015 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2015; comparisons are with the same periods ended March 31, 2014. Amounts below are in U.S. dollars, generally millions. The company designs and manufactures seismic equipment and also sells thermal-imaging and industrial products.
Financial performance
| Metric | Three months ended Mar. 31, 2015 | Six months ended Mar. 31, 2015 |
|---|---|---|
| Revenue | $27.9 million, down 59.2% | $49.1 million, down 71.1% |
| Gross profit and margin | $1.4 million; 5.1% | $1.4 million; 2.8% |
| Operating income (loss) | $(8.5) million | $(18.4) million |
| Net income (loss) | $(5.2) million; $(0.40) per diluted share | $(10.6) million; $(0.82) per diluted share |
| Operating cash flow | Not provided for quarter alone | $(10.6) million |
For comparison, revenue was $68.6 million and $169.9 million, and net income was $10.8 million and $35.0 million, respectively, in the prior-year quarter and six-month periods. Prior-year gross margins were approximately 40.7% and 44.1%.
The seismic segment drove the deterioration: six-month revenue fell 75.9% to $38.4 million, and the segment recorded a $13.1 million operating loss. Non-seismic revenue was $10.5 million for six months, with $1.4 million of operating income. Foreign-exchange gains supported other income, which was $2.0 million for the six months.
Liquidity, balance sheet and cash flow
- At March 31, cash and cash equivalents were $23.5 million and short-term investments were $20.0 million. Current assets were $221.1 million versus current liabilities of $10.4 million.
- There was no long-term debt outstanding. The company reported $138.4 million of inventory, including an $8.8 million obsolescence reserve, and $16.8 million of net trade receivables, after a $1.9 million doubtful-account allowance.
- Six-month operating cash use was $10.6 million. Investing activities provided $0.2 million, including $3.6 million of proceeds from used rental-equipment sales; there were no financing cash flows. Cash declined $9.8 million from September 30, 2014.
- At March 31, the prior credit facility showed $19.7 million of potential borrowing availability, constrained by a funded-debt-to-EBITDA covenant; the company was in compliance. On May 4, 2015, after quarter-end, the facility was amended to a $30.0 million maximum subject to an asset-based borrowing base, with a May 2018 maturity. No borrowings were outstanding at March 31.
Material changes, outlook and risks
- Management attributed weaker results to reduced oil-and-gas exploration spending amid falling oil prices, sharply lower seismic-equipment demand, low factory utilization and a less favorable product mix. It expected challenging conditions and stressed seismic gross margins to continue through fiscal 2015 and beyond.
- There were no permanent reservoir-monitoring system deliveries in the first six months of FY2015. Management did not expect substantial permanent monitoring contracts during FY2015. The prior-year period included substantial Statoil and other system deliveries.
- Wireless-system orders were described as difficult to predict and likely to remain uneven. Management expected future demand to improve as customers shift to wireless equipment, but noted that timing depends on stabilization in oil prices and industry conditions.
- Management expected approximately $4 million of cash investment in the OBX rental fleet and at least $6 million of non-cash inventory transfers to the fleet during the remainder of FY2015. It estimated FY2015 property-and-equipment spending of about $4 million. Management said existing cash, operating cash flow and available borrowing should fund planned operations, while cautioning that long-term capital needs may require additional financing.
- Unusual items included recognition of a $3.0 million non-refundable OBX customer deposit as revenue after the intended purchase did not materialize; this also contributed to lower deferred revenue. A $2.0 million six-month foreign-exchange gain was reported, primarily associated with U.S.-dollar deposits at the Russian subsidiary. Goodwill and long-lived assets were tested for impairment; management found no impairment but said it would continue monitoring goodwill.
- Risks include continued oil-and-gas sector weakness, volatile and lumpy orders, fixed-cost under-absorption, inventory obsolescence and customer credit risk, foreign-currency movements, and credit-facility covenants. The filing reported pending or potential ordinary-course legal matters but said management did not expect their resolution to materially adversely affect the company.
Important facts for investors to verify
- Whether seismic demand, order timing and manufacturing utilization stabilize, and the resulting effect on margins and cash flow.
- Inventory quality and the adequacy of the obsolescence reserve, along with the collection of receivables and notes.
- Actual borrowing availability under the May 4 asset-based facility and ongoing compliance with its covenants.
- Whether anticipated OBX rental demand and capital spending plans materialize, and whether permanent reservoir-monitoring orders return.
- The persistence and cash-flow effects of foreign-exchange gains and the company’s exposure to the Russian, Canadian and other currencies.