Geospace Technologies Corporation — Q1 FY2013 10-Q
Business context and period: The unaudited quarter ended December 31, 2012. Geospace designs and manufactures seismic data acquisition and reservoir-monitoring equipment, along with thermal imaging and industrial products. Seismic products drove most sales. Effective October 1, 2012, the company recategorized its segments as Seismic and Non-Seismic; prior-period figures were reclassified. Per-share and share-count comparisons reflect the October 2012 two-for-one stock split.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $77.8 million | $43.3 million |
| Gross profit / margin | $40.6 million / 52.2% | $20.7 million / 47.7% |
| Operating income / margin | $31.5 million / 40.6% | $12.6 million / 29.1% |
| Net income | $22.0 million | $8.7 million |
| Diluted EPS | $1.70 | $0.68 |
| Operating cash flow | $(2.1) million | $20.1 million |
Revenue increased 79.6%; gross profit rose 96.4%, and net income increased approximately 153%. The effective tax rate was 30.6%, including $0.3 million of research-credit benefits relating to the prior fiscal year; excluding those credits, management reported a 31.6% rate.
Seismic sales rose 93.3% to $72.1 million, while Non-Seismic sales fell 5.6% to $5.5 million. Wireless revenue increased $29.0 million; the quarter included sales of about 28,000 new and 19,000 used wireless channels. Reservoir revenue increased $5.7 million, including about $8.7 million recognized on the Statoil order. Traditional seismic product sales were broadly unchanged.
Liquidity, cash flow and debt
- At December 31, 2012, cash and cash equivalents were $44.9 million and short-term investments were $19.7 million. Current assets were $210.6 million against current liabilities of $51.7 million (about 4.1x current ratio).
- Operating cash flow was negative despite $22.0 million net income, principally reflecting higher inventory ($13.7 million), costs and estimated earnings ahead of billings ($6.3 million), receivables ($6.0 million), and other current assets. An $8.5 million increase in income taxes payable and $2.1 million in deferred revenue partly offset these uses.
- Investing cash use was $5.3 million. Capital expenditures totaled $17.9 million, including $11.4 million for rental equipment and $6.5 million for property and equipment; $12.4 million of used rental-equipment sale proceeds partly offset spending.
- No borrowings or letters of credit were outstanding under the $25 million credit facility; the full amount was available. The facility expires March 2, 2014. The company reported covenant compliance. Total liabilities were $55.0 million; the filing reports no funded debt outstanding.
Material changes, outlook and risks
- Management estimated FY2013 capital expenditures could be approximately $54 million or more, driven by demand for wireless rental equipment. Funding was expected from cash, operating cash flow, rental-equipment sales and/or facility borrowings.
- Management cautioned that large seismic orders and customer-directed shipping schedules make quarterly sales and production “lumpy” and difficult to predict. The quarter’s results are not necessarily indicative of full-year or future results.
- Non-Seismic sales and operating income weakened; management attributed the sales decline partly to lower European demand and expected that market to remain challenging through FY2013.
- Key execution risks include percentage-of-completion estimates on long-term contracts, especially the Statoil order; cost, timing, change-order and contract-estimate revisions could affect reported revenue and profit. Inventory was $97.3 million, up from $83.9 million at September 30, partly for the Statoil and Shell Brasil orders and anticipated demand.
- Foreign-exchange exposure includes Canadian-dollar intercompany balances; an $18 million forward contract hedged part of the exposure. The company also disclosed unhedged Russian operating exposure. A $0.2 million unrealized loss was accrued on the forward contract at quarter-end.
- The FY2013 incentive plan provides for an aggregate maximum bonus of $6.5 million, subject to a pretax return threshold and other terms. The filing states $1.9 million of incentive compensation was accrued, but its comparative-period wording is unclear.
- The IRS was auditing the company’s fiscal 2009 federal tax return; management did not expect a material effect. Management concluded disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Timing, remaining performance obligations, costs and cash collection for the Statoil and Shell Brasil orders, including contract-estimate changes.
- Whether projected FY2013 capital spending of $54 million or more is realized and how much is funded by rental-equipment sales versus cash or borrowing.
- Wireless rental-fleet utilization, new and used equipment sales, and the sustainability of the quarter’s unusually high seismic growth.
- Inventory recoverability, receivable collections and the drivers of negative operating cash flow despite strong reported earnings.
- Exact incentive-compensation accrual and any subsequent developments in the IRS audit or foreign-currency exposure.