Geospace Technologies Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended June 30, 2013; balance sheet compared with September 30, 2012. Dollar amounts are in millions unless otherwise noted. The company designs and manufactures seismic and non-seismic equipment, primarily for the oil and gas industry. Its fiscal third quarter is the three months ended June 30.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $78.1 | $55.2 | $232.3 | $154.7 |
| Gross profit | $33.9 | $23.0 | $110.0 | $68.7 |
| Gross margin | 43.3% | 41.6% | 47.3% | 44.4% |
| Operating income | $25.0 | $15.6 | $82.1 | $44.7 |
| Net income | $17.0 | $10.7 | $55.9 | $30.9 |
| Diluted EPS | $1.31 | $0.83 | $4.32 | $2.40 |
- Q3 sales increased 41.6%; nine-month sales increased 50.2%. Management attributed growth primarily to higher demand for seismic permanent reservoir-monitoring products.
- Seismic sales were $71.3 million in Q3 and $213.1 million for nine months. Non-seismic sales were $6.7 million and $18.6 million, respectively.
- Q3 reservoir-product revenue was $44.5 million, including approximately $41.7 million recognized under the percentage-of-completion method on the Statoil order. Nine-month reservoir revenue was $95.8 million, including $71.5 million recognized on Statoil and $17.0 million for delivery of the Shell Brasil system.
- Operating expenses rose 20.7% in Q3 and 16.2% year to date, reflecting higher personnel costs and expenses associated with increased sales and asset expansion. Nine-month foreign-exchange losses contributed to other expense of $0.4 million, versus other income of $0.7 million a year earlier.
Cash, liquidity and debt
- Cash and cash equivalents were $10.0 million at June 30, down from $50.8 million at September 30; the company held no short-term investments at quarter end. Current assets were $226.8 million and current liabilities $38.1 million.
- Operating cash flow was negative $51.4 million for nine months, compared with positive $40.0 million in the prior-year period. Significant working-capital uses included increases of $58.4 million in inventories, $28.4 million in costs and estimated earnings in excess of billings, and $19.4 million in trade and notes receivable.
- Investing cash flow was positive $6.7 million and financing cash flow positive $3.9 million for nine months. Investing included $17.0 million of property and equipment purchases, $19.6 million of rental-equipment investment, and $23.8 million of proceeds from used rental-equipment sales.
- No credit-agreement borrowings were outstanding. The company had a $25.0 million revolving facility, with $15,000 of standby letters of credit outstanding; it reported covenant compliance. The facility expires March 2, 2015.
Outlook, risks and notable items
- The company reported a $160 million Statoil seabed reservoir-monitoring order, scheduled for delivery over three years through fiscal 2015. Management expects reservoir-product revenue to increase significantly relative to historical levels, but noted that order timing and customer-directed shipping dates make quarterly sales difficult to predict.
- Management estimated fiscal 2013 investment in rental equipment could exceed $30 million, depending on demand, and property-and-equipment investment could be approximately $20 million. Funding was expected from cash, internal cash flow, rental-equipment sales and/or credit-facility borrowings.
- Traditional seismic sales declined, which management linked to lower North American seismic activity. Q3 wireless revenue also fell year over year; management described wireless demand as irregular. Non-seismic sales and operating income declined, with management citing weaker European sensor sales and lower thermal-imaging volume and margins; it expected the European market to remain challenging through fiscal 2013.
- Foreign-exchange exposure includes Canadian-dollar intercompany balances: a $20.0 million forward contract hedged part of the $28.1 million exposure, leaving approximately $8.1 million net exposure. The company also identified unhedged currency risks in Russia and Colombia. It reported $0.6 million of unrealized gain on the forward contract at quarter end.
- Percentage-of-completion revenue depends on estimates of contract costs and progress; actual results may differ. The filing reports commitments and contingencies but provides no specific material contingency amount in the supplied text. Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Statoil contract production, remaining delivery schedule, billings and collection of amounts recognized under percentage-of-completion accounting.
- Whether inventory, unbilled contract costs and receivables convert to cash as expected, given the sharp working-capital increase and negative operating cash flow.
- Expected rental-fleet and property-and-equipment spending, demand for wireless systems, and the effect of irregular orders on cash and quarterly results.
- Ongoing performance of traditional and non-seismic products, including North American seismic activity and European demand.
- Foreign-currency exposure, forward-contract coverage, credit-facility covenants and any subsequent changes in liquidity.