Geospace Technologies Corporation (GEOS) Q1 2016 Earnings Report, Transcript and Summary

Good day and welcome to the Geospace Technologies' First Quarter 2016 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 open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Rick Wheeler. Sir, you may begin.

Good morning and welcome to Geospace Technologies' conference call for the first quarter and year end of fiscal year 2016 and thank you for listening today. I'm 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'll start 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, we will make a replay of this conference call available in the Investor Relations section of our website at www.geospace.com. Let me 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. 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 first quarter of fiscal year 2016, which ended December 31, 2015. As reported, the market conditions that existed at the year-end of fiscal year 2015 for seismic equipment saw further depression in the first quarter of fiscal year 2016. Revenue in the first quarter was down by 38% compared to last year, and was made up mostly of lower margin products. This reduced revenue compounded with higher unabsorbed fixed factory overhead cost as well as ongoing depreciation expense from underutilized seismic rental equipment, was the basis of the $11 million net loss in the first quarter. But in addition, the net loss includes the recognition of a $1.9 million valuation allowance against our Canadian subsidiaries differed tax assets which we consider to be impaired in the declining business environment. Total revenue from our traditional seismic products in the first quarter was $5 million, which represents a drop of 35% from last year's first quarter. As a parameter, a seismic industry activity the decrease in traditional seismic revenue directly reflects the reduction that is occurred in the number of seismic expiration programs over the course of time. As reduced activity has also negatively affected wireless product revenue, which in the first quarter was $1.9 million, a decline of $3.8 million or 67% from the previous year. And examining today's environment of greatly curtailed expiration activity, our customers currently have more than enough existing seismic equipment to carry out the limited number of project opportunities available to them. Because of this, demand for new equipment including our high technology GSX and OBX cable assistance has been reduced to minimum levels. Despite these unfavorable conditions, the scheduled rental contract for 5,000 stations of our OBX marine nodal system announced October in 2015 is progressing as planned. This contract is expected to run for approximately nine months, and if so, we generate revenue of up to $17.1 million. Our reservoir seismic products have also seen a decrease in demand over the preceding year. Total revenue for these products was just $0.7 million in the first quarter, down 68% from a year ago. The decrease from last year is primarily attributable to fewer sales of our [indiscernible] seismic tools, which are used for frac monitoring and other micro seismic well bore and cross well seismic imaging. We fully expect revenue from this segment to remain low so long as there are no meaningful permanent reservoir monitoring or PRMs projects underway. As we recently reported, a potential PRM project that was under tender and expected to be awarded and delivered in fiscal year 2016 was indefinitely postponed. Although periodic discussions regarding other possible PRM systems continue in preliminary form, they are similarly surrounded by the uncertainties evidenced in this recent tinder withdrawal. In the wake of low and especially volatile oil prices, the capital spending restraints currently implemented by offshore field operators, increased the risks of cancellation and delays of formal tenders and awards for PRM systems. First quarter revenue from our non-seismic business segment was $5.4 million, remaining essentially flat with respect to the same period last year. Revenue within the segment often fluctuates, however, we continue to see incremental increases in the demand for some of our non-seismic products. We are very much encouraged by the opportunities used for growth that exist in this segment and our plant is to continue taking advantages of these opportunities to broadening our customer base and boosting our capacities for these particular products. At this time, I'll turn the call over to Tom McEntire, to provide you with more detailed commentary and insight on our company's first quarter financial performance.

Thanks, Rick and good morning everyone. Before I begin, I would like to remind everyone that while our discussions today may include estimates of future cash flows and other events, we will not provide any specific revenue or earnings guidance during this call. In yesterday's press release for our first quarter ended December 31, 2015, we reported revenue of $13.1 million compared to last year's revenue of $21.2 million. Our net loss for the quarter was $11 million or loss of $0.85 per diluted share compared to last year's net loss of $5.4 million or a loss of $0.41 per diluted share. This quarter's loss includes a tax charge of $1.9 million or $0.15 per diluted share for evaluation allowance against our Canadian subsidiaries differed tax assets which we considered to be impaired due to the declining business environment there. A breakdown of revenue for each of our product segments for the first quarter is as follows. Revenue from our traditional seismic products was $5 million, a decrease of 35% compared to revenue of $7.7 million last year. The decrease primarily reflects lower demand for our geophone in marine products. Our wireless seismic product revenue was $1.9 million, a decrease of 67% compared to last year's revenue of $7.7 million. Both sales in rentals of our wireless equipment decreased due to the reduced need for seismic equipment by our customers. Revenue from our reservoir seismic products was $697,000, a decrease of 68% compared to revenue of $2.2 million last year. A majority of this quarter's revenues represent sales and rentals of our bore hole seismic tools, these demand is down considerably from last year due to the decline in hydraulic fractured activities in North America. Revenue from our non-seismic products was $5.4 million, a slight increase over last year. While we did see revenue increases from our industrial products, these increases were mostly offset by lower revenue from our offshore cable and thermal imaging products. Our seismic segments gross profit margins continue to be unfavorably impacted by a number of factors including significantly lower seismic product revenue, unabsorbed fixed manufacturing cost due to lower factory utilization, fixed depreciation expenses from a rental fleet, a revenue mix containing the concentration of significantly lower margin products, an increase inventory obsolescence expenses due to higher levels of slow-moving inventories. We expect our seismic product gross profit margins to be under significant stress through the remainder of fiscal year 2016. In light of current market conditions, we believe the level of our inventories par exceed those considered appropriate for the current product demand we were seeing. Our policy has been and will continue to be to record higher inventory obsolescence expenses when we experienced reduced levels of inventory turnover. And as our inventories continue to age. In this regard, we expect significantly higher levels of inventory obsolescence expenses during fiscal year 2016 when compared to recent fiscal years. Our operating expenses were $8.3 million, a decrease of 16% compared to operating expenses of $9.9 million last year. A decrease in operating expenses was primarily due to the collection of the past through receivable from a seismic customer which resulted in a bad debt reversal. Capital investments into our rental fleet and property plant and equipment for the first quarter were $800,000. We want to remind everyone that we continue to remain cautious with respect to funding future capital projects as we seek to preserve cash and reduce our asset base. We currently expect our total fiscal year 2016 cash, capital investments to be approximately $5 million. Last month, we announced a program to reduce our cash cost. This program is expected to produce approximately $7 million of annualized cash savings over and above measures already implemented. We expect to substantially complete this initiative by the end of our second quarter. In connection with reductions made to our workforce, we expect to incur approximately $900,000 of termination cost in our second quarter. At the end of our first quarter, our balance sheet reflected $37 million of cash and short-term investments. We continue to have no long-term debt outstanding, at almost $30 million of borrowing availability under our credit agreement. With the recently announced cost reductions, a $19.4 million federal income tax refund and expected cash collections from the upcoming OBX rental contract, we are still optimistic for a net positive cash flow during fiscal year 2016, although it goes without saying that achieving this goal becomes increasingly more difficult if our quarterly revenues and our core seismic business continues to decline as it did in the first quarter. That concludes my prepared remarks and I'll turn the call back over to Rick.

Thanks, Tom. With capital budgets being continually revised downward by oil and gas companies, plant seismic expiration activity has been reduced significantly. In conjunction available funding to enhance existing fields and to develop new product has also dropped to meet these capital spending curves. As can be seen, these conditions undermine demand for our seismic products, both for expiration and reservoir monitoring. Furthermore, we anticipate that this present trend and current capital spending will continue in the near and foreseeable future. But despite the consequences reflected in our financial results, we reiterate our strong persistent believe that the current circumstances cannot be sustained indefinitely. And as a requirement to explore for new resources and enhance the production of existing reservoirs through seismic monitoring is absolute and inescapable in the long-term. We recognized the cyclical nature of the oil and gas industry we serve and we believe that improved seismic technology will remain a core component and inevitably corrected market. With no debt, $37 million of cash in short-term investments and $30 million of untapped credit with our bank, a strength of our balance sheet demonstrates our commitment to manage the business with withstand these cycles. Additionally, our recently implemented cost reduction program is expected to provide approximately $7 million of annualized cash savings. This further enhances our continued strength and liquidity as does the $19.4 million tax refund that should be received in the coming months. Meanwhile through our ongoing research and development efforts, we continue advancing the product technologies that will secure our leadership in a recovered seismic industry and meet us new challenges. And this concludes our prepared remarks. So I'll now turn the call back over to Keith for questions.

[Operator Instructions] We'll take the first question from Ken Sill with Seaport Global. Please go ahead.

Thank you. Yeah, I appreciate the comments and the color and really liked the cash on the balance sheet and the cash flow positive for this year. I guess one question on the inventory obsolesce, just because you're right at off or right at down I'm assuming that inventory can still be put to work if demand ticked up again or does it really kind of waste away sitting the shelf?

No, this is – for the most part its inventory that’s sitting on our shelf, it's just slow moving and yeah, we're not throwing it away just because we're putting up a reserve against it.

So that implication is that when the market turns which no one has an visibility to do, got stuff and come back and your margins will be probably be a little bit better since there is not going to be an DD&A?

Yeah, I mean that’s not a guaranteed event but if that happens we often see that. And Ken, there is also – we do have some inventory that we will obsolete if we come out with a new chip or something that obsoletes on all part, we will throw that away. But for the most part, this is just providing reserves as the stuff gets older and we're just trying to be conservative with respect of accounting politicizes.

At the end of the day I think as you're I think understating, the inventory that we have is still viable product but there are certain risks attached to it in this current business environment. And I think a Tom suggesting, we're identifying those risks through this obsolescence as reserves.

Yeah, and that makes sense. I mean it's a tough market out there and there is not a lot of visibility. So getting back to kind of the long-term view, you have an opinion of where oil prices need to be to see an uptick particularly offshore in seismic for both expiration and perhaps maybe a lower price for permanent reservoir mining or production monitoring?

No, not really. I mean there was many articles and opinions out there as you cared to look for. So you could throw a dart and picked your poison, I don’t think that we can identify a particular price point. We've seen occasions where the price was low and that’s when we first introduced our first permanent reservoir monitoring system and prices were about $30 a barrel. So there is other driving forces, but fundamentally as you say in the long-term, you've got to find new reserves. I mean many of these oil companies have not made up a new reserves what they've been product. So it's not a sustainable condition that has to turnaround.

And then just final question, what is the opportunity for your equipments in shale place?

It really makes no difference, our seismic recording equipment can be used in any of the geological structures that one might be hunting for oil.

Yeah, but does it make sense to do reservoir monitoring the shelves or is to through the retail?

The science on that is still being developed because shell place are – they are the newest mannerism of reserves that exists out there and there is quite a bit of research on what how one would manage those. So I think it's not real clear yet what the best techniques for monitoring shale reserves will be.

Okay, thank you.

[Operator Instructions] We'll go next to Bill Dezellem with Tieton Capital.

Thank you. A group of questions, first of all, Tom, where did the $1.9 million valuation allowance fall into the P&L, was that the tax line or somewhere else?

Yes it was at the tax line, it's the tax charge. So it reduced our benefit for the quarter.

Great, thank you. And then, relative to the inventory the reference to higher obsolescence charges in the future, why not take one much larger charge now and get it over with rather than drive it out over quarters. Tell us just kind of either the through process or the mechanical process behind that please.

Well, our policy is to look at the aging of our inventory and as it ages we provide larger reserves for the older inventory. And so we have a lot of inventory right now that is still current within our formula and we don’t believe that needs a reserve or requires a reserve. So, I'm not sure how you would – we could come up with some big lump sum but I don’t think we believe that right now and we believe our policy is a good way of providing reserves when risk increases.

So, I want to tie with the prior questionnaires discussion on this and what you just said to make sure that we're completely clear. So, the inventory itself, you're not looking at it today and feeling as though it is functionally obsolete. However, you're referencing your opening remarks about a higher level of obsolescence going forward. That’s a function of the formula and the longer that the sales are low that will push more and more product – more and more inventory from a formulae perspective into the obsolete arena and therefore from the accounting perspective you'll take the right off and follow the formula.

That’s right.

Great, thank you. And then, Rick, would you please discuss the canceled PRM tender, just tell us about the history behind it and just whatever you can about the project?

Sure. Well, we were under a non-disclosure on this arrangement, so we're not going to reveal too much but we have been working on the tender for quite a period of time there, I mean these things as everybody knows, they do take quite a bit of time throughout the analysis phase and the feasibility phase and the design and all that. And we were anticipating that an award would be right near the tail end of the first quarter. But instead when it was withdrawn, I mean that just changed the character of things and [indiscernible] with that, that’s what ended us to introduce to this – our cost reduction program primarily involving the reduction of our workforce. Things were going well, I mean clearly there was pressure throughout the entire event with respect to how oil prices were moving up and down. And decisions were made often outside of the circles that we're in discussion with which are more technical in nature, but fundamentally that’s about all I can tell you on it.

Okay, I'm going to try for a little bit more technically. You said you've been working on it for some time, are you talking several quarters or several years?

No, not several years but throughout the prior year.

Great, thank you. And then relative to the operator themselves, is that someone that you have previously worked with on the PRM front or a new PRM customer?

Well I can't really reveal the customer because of our non-disclosure but there are more than one operator generally on all these fields, so it's generally a linty of participants.

And was it a single field that they were looking at cabling or multiple fields?

This was a single field that we were examining at this time.

Great. Thank you.

[Operator Instructions] And it does appear we have no further questions at this time. I'll will turn the floor back to Rick Wheeler for any additional or closing remarks.

All right, well I want to thank Keith, our moderator and certainty we want to thank everybody for listening to our call and posting these questions. And we look forward to speaking with you during our fiscal year 2016 second quarter conference call which should come up in May. So thanks again and good bye.

Ladies and gentlemen, this does concludes today's conference call. Please disconnect your lines at this time. And have a wonderful day.