Geospace Technologies Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020; comparative period is fiscal 2019. This is an annual report, not a quarterly report. Unless noted, amounts below are in millions of U.S. dollars.
Business context
Geospace designs and manufactures seismic instruments and equipment, primarily for oil and gas exploration and reservoir monitoring. It also sells industrial and imaging products and provides contract manufacturing, while its Emerging Markets segment develops border and perimeter security products through Quantum. Oil and Gas Markets remains the largest segment. The company cited prolonged weakness in oil and gas markets and COVID-19-related disruption.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $87.8 | $95.8 |
| Gross profit | $23.4 | $31.4 |
| Gross margin | 26.7% | 32.8% |
| Operating income (loss) | $(18.0) | $1.0 |
| Net income (loss) | $(19.2) | $(0.1) |
| Loss per diluted share | $(1.42) | $(0.01) |
| Cash from operating activities | $18.1 | $5.6 |
Revenue fell 8.3%; gross profit declined 25.4%. The reported gross margin was approximately 26.7%, versus 32.8% in FY2019. The company attributed much of the revenue and gross-profit decline to an $8.0 million reduction in rental revenue from an impaired operating lease receivable. Operating expenses rose to $41.5 million from $37.4 million, including higher contingent-consideration fair-value charges, workforce termination costs and a $0.7 million goodwill impairment. FY2019 operating results included a $7.0 million gain from selling property.
- Oil and Gas Markets: Revenue was $61.7 million, down from $65.0 million; operating loss was $2.1 million versus $3.1 million of operating income. Wireless revenue increased 2.5% as reported, or 17.6% excluding the $8.0 million lease-receivable charge; traditional and reservoir product revenue declined.
- Adjacent Markets: Revenue was $25.4 million, down 15.6%; operating income declined to $4.0 million from $6.2 million, reflecting weaker industrial and imaging demand.
- Emerging Markets: Revenue was $0.7 million versus $0.2 million; operating loss widened to $6.1 million from $2.3 million.
Cash and cash equivalents were $32.7 million at year-end, compared with $18.9 million a year earlier. The company had no credit-agreement borrowings and reported $17.7 million of borrowing availability; it was in covenant compliance. Total assets were $186.8 million and stockholders’ equity was $161.0 million. Capital spending was $2.9 million on property, plant and equipment and $5.5 million on rental equipment. The filing does not provide a debt balance beyond reporting no long-term debt outstanding.
Material changes and unusual items
- An $8.0 million operating-lease receivable impairment reduced rental revenue to zero for the affected receivable. The customer’s financial distress also led Geospace to exchange $13.0 million of unpaid invoices and late fees for a third-lien secured bond. Management considered the bond’s fair value nominal and recorded no carrying amount.
- A separate $10.0 million customer promissory note related to a $12.5 million product sale raised collectability concerns. Geospace recognized neither revenue nor related cost of revenue; $4.6 million of payments received were recorded as non-current deferred revenue.
- Inventory obsolescence expense was $4.7 million, and the inventory obsolescence reserve was approximately $35.0 million. Management said inventory levels remained excessive and anticipated possible further obsolescence charges if weak demand continued.
- A July 2020 workforce-reduction program affected approximately 100 employees, incurred $0.9 million of termination costs and was expected to deliver approximately $2.0 million in annualized cash savings beginning in FY2021. There were no outstanding program liabilities at year-end.
- One customer accounted for 48.2% of FY2020 revenue and owed $7.3 million in trade receivables at year-end. Approximately 73% of revenue was attributed to customers outside the United States based on billing data.
Outlook, risks and contingencies
Management expected FY2021 land-based wireless revenue to moderately exceed FY2020 levels and traditional land seismic demand to improve slightly. It anticipated lower OBX marine rental revenue due to expiring contracts, a possible customer purchase of rented units and pandemic effects. Adjacent Markets and Emerging Markets revenue were expected to increase; most remaining revenue from Quantum’s $10.7 million U.S. Border Patrol contract was expected in the first half of FY2021. These are expectations, not guarantees.
Geospace was preparing a proposal for a large seabed permanent reservoir monitoring system and believed an award might occur in FY2021; any substantial revenue was expected mainly in FY2022 and later. The company had not received a large-scale seabed PRM order since 2012. FY2021 property, plant and equipment investment was estimated at approximately $5 million; rental-fleet investment depended on demand.
Key risks include the pandemic and oil-price volatility, customer concentration and creditworthiness, short order backlogs and possible order cancellations, inventory and rental-equipment impairment, competition, reliance on single-source components, foreign-market and export-control exposure, and the ability of Quantum and OptoSeis to generate returns. Contingent acquisition payments could reach $23.5 million for Quantum and $23.2 million for OptoSeis, subject to eligible revenue. The credit facility matures in April 2022 and includes liquidity and tangible-net-worth covenants. The company did not anticipate cash dividends in the foreseeable future and planned to begin a share-repurchase program authorized up to $5 million in FY2021.
Investor verification priorities
- Review the $8.0 million lease-receivable charge, the distressed customer’s bond, its lien priority and the absence of a recorded bond value.
- Assess collectability and revenue-recognition treatment for the separate $10.0 million promissory note and the $4.6 million deferred amount.
- Verify the largest customer’s ongoing credit condition, receivable exposure and share of revenue.
- Track inventory quality, additional obsolescence charges, rental-fleet utilization and the expected decline in OBX rental revenue.
- Monitor delivery and collectability under the Border Patrol contract, the seabed PRM tender and contingent earn-out liabilities.
- Review liquidity and covenant headroom against the credit facility’s FY2021 thresholds and April 2022 maturity.
- Management reported that disclosure controls and internal control over financial reporting were effective at September 30, 2020 after remediation of a previously reported lease-accounting material weakness. The external auditor audited the financial statements but was not engaged to opine on internal-control effectiveness.