Geospace Technologies Corporation — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended March 31, 2016. The company designs and manufactures seismic equipment for the oil and gas industry and also sells thermal imaging and industrial products. Comparisons are with the corresponding periods ended March 31, 2015; balance-sheet comparisons are with September 30, 2015. Amounts below are in millions except per-share data.
Financial results
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $14.9 | $27.9 | $28.1 | $49.1 |
| Gross profit (loss) | $(4.6) | $1.4 | $(11.0) | $1.4 |
| Operating loss | $(14.0) | $(8.5) | $(28.7) | $(18.4) |
| Net loss | $(11.0) | $(5.2) | $(22.0) | $(10.6) |
| Loss per share, basic and diluted | $(0.84) | $(0.40) | $(1.69) | $(0.82) |
- Q2 revenue fell 46.6%; six-month revenue fell 42.8%. The principal driver was lower seismic-product demand amid reduced oil and gas exploration spending.
- Gross margins were negative: approximately (30.8)% in Q2 and (39.2)% for six months, versus positive margins in the prior-year periods. Management cited lower-margin sales mix, underutilized rental equipment and manufacturing capacity, and increased inventory obsolescence.
- Seismic revenue was $8.5 million in Q2, down from $22.8 million; the segment recorded an $11.8 million operating loss. Non-Seismic revenue increased to $6.3 million from $5.0 million, with $0.8 million operating income.
- Six-month operating cash flow was positive $4.4 million, compared with cash use of $10.6 million in the prior year. Investing activities provided $2.1 million; financing cash flow was zero. Operating cash generation included an $18.3 million tax refund and working-capital movements despite the net loss.
Balance sheet and liquidity at March 31, 2016
- Cash and cash equivalents were $28.4 million; short-term investments were $14.9 million, for combined liquidity of $43.3 million. Total current assets were $178.6 million, including $114.1 million of inventory.
- Total liabilities were $7.3 million and stockholders’ equity was $267.3 million. No long-term debt or credit-facility borrowings were outstanding. The $30 million revolving facility had $29.9 million available after letters of credit; the company was covenant-compliant.
- Cash increased from $22.3 million at September 30, 2015. Inventory declined from $124.8 million, but management said levels remained excessive relative to demand.
Material changes, outlook and risks
- Management attributed weak seismic demand to falling oil prices and reduced customer exploration budgets, and expected depressed conditions through fiscal 2016 and beyond. It expected seismic sales and margins to remain weak and inventory-obsolescence expense to remain significantly elevated until demand and turnover recover.
- A January cost-reduction program was expected to yield about $7 million in annualized cash savings, in addition to earlier measures. It included a reduction of more than 150 Houston-area employees and facility consolidation; the company recorded $1.0 million of termination costs in Q2.
- No permanent reservoir-monitoring system deliveries or orders were reported in FY2015 or the first six months of FY2016. The company did not expect to expand its GSX rental fleet in the foreseeable future. A large OBX rental contract contributed $3.3 million of rental revenue in Q2.
- Management estimated FY2016 capital spending of approximately $2.0 million for property and equipment and about $1.0 million of cash investment in rental equipment, with possible additional non-cash inventory transfers to the rental fleet of up to $3.0 million. It believed available liquidity, rental proceeds, potential tax refunds and borrowing capacity would fund losses and planned capital expenditures for the next 12 months.
- The company received an $18.3 million U.S. tax refund in March after carrying back FY2015 losses; it said continued significant FY2016 pretax losses could make it eligible for a further refund of up to approximately $13 million. The filing also records a tax adjustment correcting the prior-year tax benefit and a valuation allowance against Canadian deferred tax assets.
- Foreign exchange movements remain a risk; the company held Canadian-dollar intercompany balances and entered a $3.0 million, 90-day currency hedge. Other risks include oil-and-gas industry conditions and inventory recoverability. Management reported no material pending or known contemplated legal or government proceedings.
- Disclosure controls were concluded to be ineffective as of March 31, 2016. The filing cites a previously reported material weakness in income-tax monitoring and an identified tax error; RSM was engaged to review tax positions while remediation continued.
Important facts for investors to verify
- Whether seismic customer demand, product margins and inventory levels improve, and whether further obsolescence charges are recorded.
- Actual realization of the stated cost savings and the cash impact of continuing operating losses and planned capital expenditures.
- Eligibility and timing of any additional tax refund, and progress in remediating the income-tax control weakness.
- Utilization and economics of OBX rentals, and whether any permanent reservoir-monitoring orders or deliveries emerge.
- Available borrowing capacity, covenant compliance and foreign-exchange exposure as liquidity changes.