Geospace Technologies Corporation — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2022. Dollar figures below are in millions unless noted.
Business context and results
Geospace designs and manufactures seismic equipment for oil and gas exploration and reservoir monitoring, and products for adjacent industrial and imaging markets and emerging security markets. The filing compares the three- and six-month periods ended March 31, 2022 with the corresponding 2021 periods.
| Metric | Three months 2022 | Three months 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $24.7 | $23.9 | $42.7 | $52.4 |
| Gross profit | $6.8 | $0.8 | $8.5 | $7.6 |
| Gross margin | 27.6% | 3.5% | 19.9% | 14.5% |
| Operating loss | $(1.6) | $(8.2) | $(8.5) | $(9.6) |
| Net loss | $(1.5) | $(7.2) | $(8.2) | $(8.2) |
| Loss per share, diluted | $(0.11) | $(0.53) | $(0.64) | $(0.61) |
Financial position, cash flow and liquidity
- At March 31, cash and cash equivalents were $8.2 million and short-term investments were $3.7 million, totaling $11.9 million, down from $23.6 million at September 30, 2021. Current assets were $56.6 million and current liabilities $11.5 million.
- Operating cash outflow was $10.3 million for the six months, compared with $3.9 million in the prior-year period. Investing activities provided $5.8 million and financing activities used $1.5 million. The cash balance fell by $5.9 million over the period.
- The balance sheet reported no borrowings. Lease liabilities totaled $1.1 million. Financing receivables were $16.1 million, including $14.9 million current, principally promissory notes related to equipment sales.
- On May 6, 2022, the company entered into a two-year asset-based credit agreement with maximum availability of $10 million, subject to a borrowing base. Borrowings carry interest at prime plus 4% (minimum prime rate of 3.25%), are secured by specified domestic assets, and require a minimum consolidated tangible net worth of $100 million. The company said it did not then anticipate needing to borrow.
Material changes versus the prior comparable period
- Second-quarter revenue rose 3.3%, while six-month revenue declined 18.5%. The six-month decrease largely reflected lower Emerging Markets revenue after substantial prior-year revenue from a U.S. Customs and Border Protection contract, which was completed in the current quarter.
- Adjacent Markets revenue grew 21.2% for the quarter and 19.9% for the six months, with stronger industrial and imaging product sales. Oil and Gas Markets revenue fell 6.1% and 14.2%, respectively, as wireless product sales remained weak.
- Gross profit improved substantially in the quarter, which management attributed primarily to better margins on wireless product sales. Six-month gross profit increased 13.8%, supported by improved OBX rental utilization and product margins.
- Operating loss narrowed in both comparison periods. Results benefited from non-cash reductions in estimated contingent consideration liabilities: $2.2 million in the quarter and $4.7 million for the six months. These fair-value credits reflect revised estimates and do not represent operating cash receipts.
- Research and development expense increased to $4.7 million for the quarter and $9.9 million for the six months. Six-month product revenue also faced a difficult comparison because the prior year included a $12.5 million land-based wireless system sale and CBP contract revenue.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified revenue or earnings guidance. Management expects weak demand for Oil and Gas Markets products to persist until exploration companies direct more cash toward exploration; it also cited increased demand for marine nodal rentals after quarter-end. Management expected about $2 million of fiscal 2022 investment in property, plant and equipment and no significant further rental-fleet investment.
- Management stated that current cash, cash equivalents and short-term investments were expected to fund operating losses and planned capital expenditures for the next 12 months. It also warned that absent future profitable results, additional liquidity sources could be needed.
- Russia and Ukraine: The company’s Russian subsidiary had a $4.3 million net carrying value, including $1.0 million of cash, at March 31. Sanctions, export restrictions, supply-chain disruption, currency movements, or difficulty accessing or repatriating funds could affect operations and asset values. The company noted that repatriating Russian cash could incur taxes.
- Oil and gas markets and COVID-19: Demand remains sensitive to commodity prices and exploration budgets. Management described supply-chain constraints, higher input costs and longer lead times, and continuing uncertainty from COVID-19 and its effects on customers and suppliers.
- Inventory and contingencies: The company reported a $36.7 million inventory obsolescence reserve; $25.9 million of finished goods and raw materials were fully reserved. It recorded large downward fair-value adjustments to Quantum and OptoSeis earn-out liabilities amid lower expected eligible revenue and contract prospects. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect.
- The company used $0.7 million to repurchase treasury stock during the six months; its $7.5 million repurchase authorization was completed in November 2021. Foreign currency translation reduced comprehensive income by $1.7 million for the six months.
Important facts for investors to verify
- Whether operating cash use continues and whether the stated 12-month liquidity expectation remains supportable, particularly given the $11.7 million decline in cash and short-term investments.
- Collection and timing of the $16.1 million of financing receivables, including recent equipment-sale notes, and the related customer-credit concentrations.
- Whether oil and gas exploration spending and OBX rental utilization recover enough to improve segment performance, and whether Adjacent Markets growth can continue amid supply constraints.
- Potential effects of Russia-related sanctions and restrictions on the subsidiary, manufacturing, supply chain, cash access and asset recoverability.
- Whether inventory reserves adequately reflect slow-moving and fully reserved stock, and whether changes in contingent consideration estimates continue to materially affect reported operating results.
- Availability and borrowing-base terms of the new credit facility, and the company’s ability to maintain its $100 million minimum tangible net worth covenant if it borrows.