Geospace Technologies Corporation
Q2 2015 Earnings Call Transcript

Published: 7 Aug 2015

[Operator:]

Good morning and welcome to the Geospace Technologies Third Quarter 2015 Earnings Conference Call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Tom McEntire, the Company's Vice President and Chief Financial Officer. Today's call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call. At this time, all participants have been placed in a listen-only mode and the floor will be opened to your question following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Rick Wheeler. You may begin, sir.

[Rick Wheeler:]

Thanks. Good morning, and welcome to Geospace Technologies conference call for the third quarter of fiscal year 2015 and thanks for listening today. I am Rick Wheeler, the Company's President and Chief Executive Officer, and I'm here with Tom McEntire, the company's Vice President and Chief Financial Officer. I will start off with the prepared portion of the call with an overview of the quarter, and Tom will follow that with an in-depth review and commentary of our financial performance. I'll then close out the prepared portion of the call with some final remarks, and we will open the line for questions. Also, as a matter of convenience and previously mentioned, we will make a replay of this conference call available in the Investor Relations section of our website at www.geospace.com. Let me first caution that the information we will discuss this morning is time-sensitive, and therefore may not be accurate on the date one listens to the replay. Secondly, many of the statements that we will make today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. By example, this includes statements about the market for our products, revenue recognition, planned operations and capital expenditures. These statements are based on our current perceptions, expectations and knowledge, but actual outcomes are influenced by uncertainties and other factors that we are unable to control or predict. These and other risks, both known and unknown, can lead to undesirable results or cause our performance to materially differ from what we may express or imply. These risks and uncertainties include those discussed in our SEC Form 10-K and Form 10-Q filings. Yesterday after the market closed, the company released its financial results for the third quarter of fiscal year 2015. The depressed market conditions that began in 2014 have continued without relief through the third quarter, where revenues totaled $19.8 million with the [Indiscernible] of $21 million over the last year’s third quarter. For the nine months ended June 30, 2015 the company reported revenues of $68.9 million compared to $210.6 million for the same period last year. The decline in revenue for both periods is directly attributed to the pronounced decrease and demand for our products in today’s seismic market coupled with having no large contracts currently underway for the manufacture of Permanent Reservoir Monitoring or PRM systems. With these lower revenues losses were incurred for both the quarter and the nine month period of $8.6 million and $19.2 million respectively. Revenues for traditional seismic product revenues in the third fiscal quarter were $6.3 million, a decrease of $3.6 million from last year. For the nine months ended June 30, this segment had revenues of $23.6 million, a reduction of $19.7 million over the same period last year. In both periods, the reduced revenues are a direct reflection of the very broad inactivity that exists in the current seismic exploration market. The difference in revenue year-over-year for the nine months period is also accentuated by a commonly large geophone orders seen in last year's first quarter. Our wireless product revenues in the third quarter were $6 million, a decrease of $6.2 million from last year’s third quarter. For the nine months ended June 30, 2015 wireless product revenues totaled $23.8 million compared to $70.3 million for the same period last year, a decrease of $46.5 million. These declines are again a direct result of reduced demand for seismic equipment in today’s market. We note however that in contrast to the declining overall seismic market utilization of our OBX marine noble systems continue to increase in the third quarter. Various customers deployed over 3700 OBX stations from our rental fleet on a variety of projects throughout the quarter. Rental revenues had sequentially increased in every quarter of this fiscal year mostly from increasing rentals of OBX marine novel systems. The number of successful high data quality surveys achieved by our OBX customers is steadily growing. From this remain encouraged about the future of our OBX product line; however project delays and cancellations of some jobs as reported by our customers demonstrate that this specialised ocean bottom seismic market still shows risk and volatility. Revenues from our reservoir product in the third quarter totaled $1.2 million, a decrease of $12.1 million compared to last year’s third quarter. For the nine months ended June 30, reservoir product revenues were $4.5 million, this compares with a $80.7 million in the same nine month period of last previous year, a reduction of $76.2 million. While lower demand for our borehole and other general reservoir products was a contributor to these reductions in these periods, the largest component of these decreases was the absence of any PRM system contracts during the current fiscal year. In contrast, last year, the three months and nine months ended June 30th of 2014 saw revenue contributions from the Statoil PRM order of $6.7 million and $61.7 million respectively. Despite having no contracts currently in hand, we continue discussing future PRM systems with potential customers and we believe that our vast leadership, experienced and past successes in PRM technology for well over a decade keep us well positioned to secure future PRM contracts. In the third quarter, our non seismic businesses continued down the path of improved performance. Third quarter revenues for this segment were $6.1 million a 21% sequential increase over the second quarter and an increase of $0.9 million over last year. For the nine months ended June 30, 2015, revenues and operating income for our non-seismic businesses were $16.5 million and $2.3 million, respectively, each reflecting an increase ove the same period last year. These modest improvements are largely a result of broader acceptance and adoption of some of our industrial product lines. At this time, I’ll turn the call over to Tom to provide you with more detailed commentary and insight on the company’s third quarter financial performance.

[Tom McEntire:]

Thanks Rick and good morning everyone. Before I begin, I would like to remind everyone that we will not provide any specific revenue or earnings guidance during the call. In yesterday's press release for our third quarter ended June 30, 2015, we reported revenues of $19.8 million, compared to revenues of $41 million last year. Our net loss for the quarter was $8.6 million or a loss of $0.66 per diluted share compared to last year's net income of $3.8 million or $0.29 per diluted share. For the six months ended June 30, 2015, we reported revenues of $68.9 million compared to revenues of $211 million last year. Our net loss for the nine month period was $19.2 million or a loss of $1.48 per diluted share compared to last year's net income of $39 million or $3.95 per diluted share. A breakdown of the revenues from each of our product segments is as follows; our traditional seismic products revenues for the third quarter were $6.3 million, a decrease of 36% compared to revenues of $10 million last year. Revenues for the nine month period were $23.6 million, a decrease of 45% compared to revenues of $43 million last year. The decrease for both periods reflects lower demand for our geophones and marine products due to soft industry conditions. In addition, as Rick just indicated last year’s first quarter included large orders for geophones. Third quarter revenues from our GSX and OBX wireless seismic products were $6 million a decrease of 51% compare to revenues of $12 million last year. Wireless revenues for the nine month period were $23.8 million, a decrease of 66% compared to revenues of $70 million last year. These results reflect declines in both products and rental revenues and are a direct result of reduced demand precipitated by soft industry conditions. Although wireless rental revenues declined, we are pleased to note that rental revenues from our OBX marine noble systems increased in both the quarter and year-to-date periods of 2015. Reservoir seismic products for the third quarter were $1.2 million, a decrease of 91% compared to revenues of $30 million last year. Reservoir product revenues for the nine month period were $4.1 million, a decrease of 94% compared to revenues of $81 million last year. The decrease in revenues for each of the periods ended June 30, 2015 was primarily due to the absence of any PRM contracts in the current year compared to PRM system deliveries to Statoil and other customers totaling $7 million and $71 million for the three month and nine month periods of last year respectively. For the third quarter, non-seismic product revenues were $6.1 million, an increase of 17% compared to revenues of $5.2 million last year. Revenues for the nine month period were $16.5 million, an increase of 4% compared to revenues of $15.9 million last year. The revenue increase for each period resulted from increased demand for our industrial products. Our seismic segment gross profit margins continue to be unfavourably impacted by a number of factors including significantly lower product and rental revenues, unabsorbed fixed manufacturing cost due to low factory utilization, fixed depreciation expenses from our rental equipment during periods of low utilization, a sales mix containing a concentration of significantly lower margin products primarily caused by a substantial reduction in revenues from our wireless and reservoir products, increased warranty costs due to manufacturing flaws and increased inventory obsolescence expenses, due to high levels of slow-moving inventories. Should current industry conditions persist, we expect our seismic product profit margins to be under significant stress for the remainder of the fiscal year and into the future due to the factors that we just sighted. In addition, continued negative industry conditions could lead to asset impairments in the future. Operating expenses for the third quarter were $9.1 million, a decrease of 8% compared to operating expenses of $10 million last year. Our operating expenses for the nine month period were $29 million; a decrease of 13% compared to last year's operating expenses of $33 million. The decrease in each period was primarily due to the elimination of incentive compensation expenses, and was partially offset by increased bad debt expense. Total capital investments in our rental fleet in property, plant and equipment for the nine months ended June 30, 2015, were $5.8 million. These difficult times have required us to cautiously evaluate any new capital projects as we seek to preserve cash and reduce our asset base. In that regard, we expect our total fiscal year 2015 capital investments to be approximately $7 million. Our inventory balance now stands at a $141 million, representing a decline of $15 million since the beginning of the fiscal year. Although demand is weak, we are working diligently to bring about further reductions in our inventory levels. Purchase order for raw materials remain at extremely low levels and our production activities continue to be focused on essential task. At June 30, 2015 our balance sheet reflected $45 million of cash and short term investments an increase of almost $2 million since the March quarter. Looking forward, we currently expect to utilize about $3 million to $5 million of cash in the fourth quarter. That concludes my prepared remarks and I'll turn the call back over to Rick.

[Rick Wheeler:]

Thanks Tom. Around the globe we had seen demand for seismic exploration services reach historic low levels and there is no simplistic forecast for when increased levels of demand might return. To the extent the current market conditions in the seismic industry persist, demand for our seismic equipment products is expected to remain at corresponding low levels. Until seismic exploration activity returns to more conventional norms and/or manufacturing for new PRM contracts begins, our profits will continue to be hard hit by depreciation of unutilized rental equipment and fixed factory overhead cost left unabsorbed by our manufacturing operations. Given that seismic exploration and reservoir management are necessary components for a stable and sustainable energy market, endurance through this down cycle and a strong emergence thereafter are our focussed objectives. We believe that our strong balance sheet and continued development of industry technology are the key elements that will allow us to achieve these objectives. This concludes our prepared remarks, so I will now turn the call back to Aaron to issue some question.

[Operator:]

[Operator Instructions]. Our first question is from Joe Maxa with Dougherty & Company. Your line is open.

[Joe Maxa:]

Thank you, good morning.

[Rick Wheeler:]

Hi, Joe.

[Tom McEntire:]

Hi, Joe.

[Joe Maxa:]

I was wondering on the OBX side if you are seeing that demand for the rental continue here in the fourth quarter as you had a pretty strong rental quarter, of things given last quarter. And then also, if you’re getting any interest, any type of activity where there are maybe some purchases on any of your wireless stuff?

[Rick Wheeler:]

Well, certainly the indications are both from what you’ve seen in the last quarters and the floating that we’ve got outstanding certainly indicates higher interest in OBX and then ongoing continuation of that increase, but as we mentioned that still very volatile situation there. It’s always the case very easy to withdraw some of these contracts when they are offered. But yes, we’re definitely seeing an increased interest currently projecting into the fourth quarter, but no guarantees.

[Joe Maxa:]

Okay. That’s primarily with the OBX?

[Rick Wheeler:]

Yes. That’s the OBX and I’m there is always the potential with sales for our wireless equipment. But things are tough right now with respect to people’s capital budgets and what they’re willing to spend. And as we say, that’s why demand for our products is somewhat low at this point.

[Joe Maxa:]

Right, of course. Okay. That’s all I had it.

[Operator:]

And we will take our next question from Bill Dezellem with Tieton Capital. Your line is open.

[Bill Dezellem:]

Thank you. I actually have a group of questions. First of all, I just wanted to clarify what I think we just heard you say, relative to your rental revenue in the September quarter you are – from what you see now thinking that it will be up versus the June quarter. Is that correct?

[Rick Wheeler:]

I can’t predict that. I’m just saying that indications are that particularly in the OBX interest has increased and we have gross outstanding now but all of that is extremely volatile, Bill and so no, we couldn’t predict that per say.

[Bill Dezellem:]

Understood. And then you did reference in the release that you saw some OBX project cancellations. Were any of those some of the big ones that you had been hoping for and can you characterize those cancellation please?

[Rick Wheeler:]

Well, some of those cancellations are ones that are going to be retendered as we understand. Some are larger than others. In fact we mentioned that 3700 or so of the VOX were out this quarter and sort of being an ongoing increased. And many of the jobs that were floating are actually much larger than that.

[Bill Dezellem:]

And those that you are quoting that are larger, what’s the estimated timeframe and the estimated timeframe even relevant because things are so fluid right now?

[Rick Wheeler:]

Things are so fluid that it almost isn’t relevant and actually many of these quotes do extend in the next fiscal year.

[Bill Dezellem:]

That’s helpful. And let’s talk about the cash. Tom you mentioned that you thought you would burn $3 million to $5 million of cash in the fourth quarter, what will that cash be used on?

[Tom McEntire:]

Bill, it will be used probably to most likely payroll and supplies and perhaps involve materials to the extent that we might need some, but mostly for operating expenses.

[Bill Dezellem:]

And so I guess what I’m trying to get my arms around is you mentioned in your remarks that you’re working to bring inventory down, which should generate some cash and here in the most recent quarter you were able to generate a little bit of cash. And so I’m trying to grasp, does the inventory reduction is going t be less than what it was in the June quarter or what the other swing factors might be that would change from a cash generation to a little cash burn? f

[Tom McEntire:]

Yes. I can’t really predict the exact type of inventory that we’re going to buy and how much we would be able to bring the inventory down. But most of it’s for operating expenses, Bill, we got cash operating expenses every day.

[Bill Dezellem:]

Great. Thank you both.

[Operator:]

[Operator Instructions] I believe, we have a follow-up from Bill Dezellem with Tieton Capital Management.

[Bill Dezellem:]

I just to want ask questions, I’ve come in with the couple of more. The PRM conversations which you have been having, would you say that the likelihood of an order in the next 12 months it has increased or decreased from how you would have characterize those conservations six months ago?

[Rick Wheeler:]

Well, the likelihood of an order is really contingent on among other things, things that we don’t control, without or not CapEx budgets or redefined by some of the oil companies. I mean, we’ve seen if you look, you’re seeing many of the E&P companies actually reflect changes in their budgets almost on a monthly basis sometimes. But we still think that there is very good changes, one of the PRM contracts coming through.

[Bill Dezellem:]

And would you like to handicap it whether it’s higher or lower likelihood than you saw maybe six months ago?

[Rick Wheeler:]

No. That would be too speculative on my part. I think the risks are still there, but the opportunities are also still there.

[Bill Dezellem:]

Great. And then I actually like to ask the exact same question for OBX, not rental but outright order. Relative to the conversations that you’ve been having, likelihood higher or lower with order in the next 12 months?

[Rick Wheeler:]

I think right now the focal element on the OBX still remains mostly in interest of rental. The contractors while there is activity out there and it’s continuing to increased in terms of opportunities for surveys on ocean bottom, it’s really an issue for the contractors of growing those up into consecutive jobs, and that’s difficult to do, and that’s the primary stimulus for looking more towards purchases. It’s always possible because many of these contractors are doing well about securing some of these jobs, but I can’t really give a number of probabilities on that.

[Bill Dezellem:]

Great. Thanks. And I’m going to circle back to PRM for a moment. Given it has been a while since you’ve had an order and the size of these orders can be quite large, are you sensing at all that there is a logjam taking place. And is there any chance that you have strange scenario or you may end up not being able to expect multiple orders?

[Rick Wheeler:]

Well, of course that could happen. I can tell you now there’s not a logjam as part of that goes, but timing on these are such that each of the oil companies that we might be discussing this with sort of have their own timeframes and there is – if there is the chance that happen. But if you’ll recall in the Statoil job we actually pulled that in from the original timeframes that they had recently looked at simply just through the use of overtime and that’s sort of thing. I don’t see a logjam at this point.

[Bill Dezellem:]

That’s helpful. Thank you again.

[Operator:]

Our next question comes from Ken Sill with Seaport Global. Your line is open.

[Ken Sill:]

[Indiscernible]

[Operator:]

Pardon the interruption, Ken your line is cutting out.

[Ken Sill:]

Hello. I’m sorry. I’ll take it offline. It doesn’t seem to be working.

[Operator:]

You were sounding little better toward the end, Ken, if you want to start one time.

[Ken Sill:]

I’ll try it one more time. Hasn’t been any change in oil company decision making with the recent decline in crude, I’m assuming it just put more uncertainty in the market. But I was wondering if you’d noticed any change in the tone?

[Rick Wheeler:]

There’s a lot of change in the oil industry. As I mentioned you see them revise your capital budgets sometimes third and fourth time. So I think there’s still a lot of examination by the oil companies as to their best approach. Everyone is trying to guess what sort of duration some of this might extend through. So certainly there are changes, but again they got to business and so to some extend there is coming back to realities of what needs to be done to protect their assets.

[Ken Sill:]

Okay. Thank you. It’s a tough time, but we’re all aware of that. Thanks.

[Operator:]

And we will take our next question from Jon Burke with Amica Mutual Insurance. Your line is open.

[Jon Burke:]

Hi, guys.

[Rick Wheeler:]

Hi.

[Jon Burke:]

I have a question on the cash burn element. If we look – if we just assume there’s no change in current macro conditions and if we look forward to the upcoming year. Outside the first quarter payment that was paid for bonuses for the prior year is there anything -- would there be any material change in the kind of a cash burn going forward?

[Rick Wheeler:]

John, that’s a good question. We think we can sustain at this level of averaging about a $1 million a month or less. Going into next year we expect that we’ll see a big income tax refund, we’re going to carry back a loss in our U.S. tax return and get it refund that will supply lot of cash in the third quarter of next year. So overall next year we’re think we’re fine.

[Jon Burke:]

Okay. All right. Yes, $1 million of month, there’s no problem. A couple more on, Tom you mentioned factors that are hurting the gross margin one of them being want to expense. Was that just one of many or is that material? Was there kind of higher than expected return of equipment?

[Rick Wheeler:]

It wasn’t really a return of equipment. Its equipment that has some flows that were in the process of repairing right now, and so yeah, it higher than normal, I think we had about $1.9 million charge to warranty expense in the quarter which is an usually high for us.

[Jon Burke:]

But it’s a singular event. It’s not an ongoing event?

[Rick Wheeler:]

Yes.

[Jon Burke:]

Okay. And that’s whatever the issue was even mechanical, technological that’s you guys have surrounded it and fixing it and fine going forward. Okay.

[Rick Wheeler:]

Yes.

[Jon Burke:]

And then last one Tom, again, on your comments, you mentioned possibility of assets impairments in the future, is that more of an accounting whereas the assets are utilized for so long that they have to be written down or I don’t remember in the past you’ve made that statement on calls?

[Rick Wheeler:]

Well, it is certainly is an accounting exercise that we do go through an impairment analysis orderly and we look at it. And as we continue in this type of market and the longer we’re in this market the longer we expect to be in this market higher the risk that impairments of a much larger magnitude and what we take every quarter we always booking inventory reserves and receivable issues and things like that. But it could be greater than that if this is going to be long lasted in our rental equipment and inventories and things or not going to have any demand, so yes, we look at it quarterly and we’re just throwing that out there that its possible reality.

[Jon Burke:]

Okay. Is there a definition around it, as far as like a look back, or is it a look forward, I guess…?

[Rick Wheeler:]

Yes. There is a cash flow analysis that you have to put together and make assumptions about the utilization of your assets and how much cash you drive and from a goodwill standpoints you would discount that back to the present value and look at those things. But yes, it’s a fairly in-depth exercise.

[Jon Burke:]

Okay. All right. Thanks guys. It’s helpful.

[Operator:]

[Operator Instructions] We’ll pause briefly for additional questions. At this time there are no additional phone questions. I’d like to turn the program back over to Mr. Rick Wheeler for any additional remarks.

[Rick Wheeler:]

Thank you, Erin. And we would like to thank everyone for joined our call today. We look forward to speaking with everyone during our fourth quarter conference call in November. Thanks again and goodbye.

[Operator:]

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.