Geospace Technologies Corporation (GEOS) Q2 2016 Earnings Report, Transcript and Summary

Please standby, your program is about to begin. Welcome to the Geospace Technologies Second Quarter 2016 Earnings Conference Call. Hosting this 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 Rick Wheeler. Sir, you may begin.

Thanks. Good morning, everyone and welcome to Geospace Technologies conference call for the second quarter of fiscal year 2016 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 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. As a matter of convenience, we will make the replay of the conference call available in the Investor Relations section of our website at www.geospace.com. First, 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 risks and others, 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 second quarter of fiscal year 2016, which ended March 31, 2016. As we mentioned, the second quarter was very much an extension of similar market conditions experienced in the first quarter, characterized by the continued decline in demand for purchases of our seismic equipment. Assisted by an OBX rental contract, our revenue in the second quarter sequentially increased 14% over the first quarter. However, in comparison to last year's second quarter, total revenue declined by $13 million or 47%. This decline in revenue is further evidenced in the six months ended March 31, 2016, where revenue dropped by $21 million or 43% compared to last year’s similar six months period. Our seismic product revenue in fiscal year 2016 continues to be primarily comprised of lower margin products. In addition, depreciation expenses for our mostly idle rental fleet along with increased levels of unabsorbed fixed factory overhead costs are negatively impacting our profit margins. As a consequence, our operating results yielded net losses of $11 million and $22 million, respectively for the three month and the six month periods ended March 31, 2016. Contributing to the loss for both periods is a reduced tax benefit resulting from a valuation allowance placed against the operating losses of our Canadian subsidiary and from adjustments to correct our fiscal year 2015 tax provision. Our traditional seismic products generated revenue of $3.2 million in the second quarter. This is one-third of the amount generated in the second quarter of last fiscal year. For the six months ended March 31, 2016, traditional seismic products totaled $8.2 million in revenue, or just under half of the amount generated in the same six month period a year ago. These declines distinctly highlight the level of inactivity presently occurring in both the marine and land seismic exploration markets, where demand for these products correlates directly with the amount of program activity. Revenue from our wireless seismic products totaled $4.7 million in the second fiscal quarter. This is an improvement sequentially of $2.8 million, or 149% over the first quarter and is directly tied to the commencement of a large OBX rental contract, which added $3.3 million of revenue during the first for the -- during the quarter. However, when compared to last year's second quarter, revenue from this segment fell by $7.4 million or 61%. For the six months ended March 31, 2016, wireless product revenue was $6.6 million, a drop of $11.2 million, or 63% from the same period a year ago. It should be noted that last year's second quarter and year-to-date periods included revenue of $3 million from a non-refundable deposit received from a customer in connection with a canceled OBX purchase order. However, the reduction in revenue for both periods, primarily demonstrates that demand for our wireless seismic products, particularly our GSX land system, remains at extremely low levels. With oil and gas companies executing significantly fewer land seismic exploration programs, our customers have adequate stores of equipment to accomplish these surveys without the need for new equipment. In slight contrast and as mentioned above, there exists a stronger demand and utilization of our OBX marine wireless systems. At present, multiple rented OBX systems are operating in the field, including the large 5,000 station system that was announced in October of 2015. Reservoir seismic product revenue in the second quarter was $0.6 million. This represents a slight decrease of $0.1 million sequentially over the first quarter and a decrease of $0.5 million or 48% compared to last year’s second quarter. Reservoir seismic product revenue for the six months ended March 31, 2016 totaled $1.3 million, a reduction of $2 million or 61% from the same six month period last year. In both periods, revenue from this product segment was primarily derived from the sale, repair, and rental of borehole seismic tools, sensors, and instruments. We expect revenue from our reservoir seismic products to remain at these low levels so long as no permanent reservoir monitoring or PRM projects are underway. We further note that with no active tenders or quotations underway at this time, we do not anticipate any significant revenue contributions from PRM systems in fiscal year 2016. Our non-seismic products posted revenues of $6.3 million in the second quarter, up 16% over the first quarter and an increase of $1.3 million or 25% over last year’s second quarter. The improved performance for our non-seismic businesses is further exemplified in the six months ended March 31, 2016, where revenues totaled $11.7 million compared with $10.5 million for the same period last year. As mentioned in the past, demand for many of these unique products has risen, and we expect this trend to continue based on increased customer interest in these products and their broader adoption by the industries they serve. I will now turn the call over to Tom McEntire to provide with you more detail commentary and insight on the company’s [first] quarter financial performance.

Thanks, Rick, and good morning everyone. Before beginning, we 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 the call. In yesterday’s press release for our second quarter ended March 31, 2016, we reported revenue of $14.9 million compared to $28 million last year. Our net loss for the quarter was $11 million, or a loss of $0.84 per share compared to last year's net loss of $5 million, or a loss of $0.40 per share. For the six months ended March 31, 2016, we reported revenue of $28.1 million compared to revenue of $49 million last year. Our net loss for the six month period was $22 million, or a loss of a $1.69 per share, compared to last year's net loss of $11 million, or a loss of $0.82 per share. On operating results for the quarter and six month period include tax charges of $500,000 and $2.5 million, respectively, for the provision of a valuation allowance against our Canadian subsidiary’s deferred tax assets and a net adjustment of $1.2 million and $1 million respectively for corrections made to our fiscal year 2015 income tax provision. A breakdown of revenue for each of our product segments is as follows. For the second quarter, revenue from our traditional seismic products was $3.2 million, a decrease of 67% compared to revenue of $10 million last year. Revenue for the six months was $8.2 million, a decrease of 53% compared to $70 million last year. The decrease for both periods reflects lower demand for land and marine exploration products due to a continuing decline in seismic exploration program activities. Our wireless seismic product revenue for the second quarter was $4.7 million, a decrease of 61% compared to revenues of $12 million last year. Wireless product revenue for the six month period was $6.6 million, a decrease of 63% compared to $80 million last year. The reduction in revenue for both periods reflects weak demand due to reduced seismic exploration projects and an overabundance of unutilized customer owned equipment in the marketplace. However, rental revenue increased during each of the current year periods due to the commencement of a large OBX rental contract, which resulted in rental revenue of $3.3 million in the second quarter. It is also worthy to note that both prior year periods contained $3 million of revenue resulted from a non-refundable deposit received from a customer in connection with a canceled OBX purchase order. Revenue from our reservoir seismic products for second quarter was $582,000, a decrease of 48% compared to revenue of over $1 million last year. Revenue for the six month period was $1.3 million, a decrease of 61% compared to $3 million of revenue last year. The decrease in revenue for both periods resulted from lower borehole product sales and repairs, again driven by decrease seismic activities. For second quarter, revenue from our non-seismic products was $6.3 million, an increase of 25% compared to $5 million last year. Revenues for the six month period was $11.7 million, an increase of 12% compared to $10.5 million last year. The increase in revenue for both periods was attributable to higher demand for our industrial products and during the six month period was partially offset by lower sales of our offshore cable products. Our gross profit margins continued to be under significant pressure due to several factors, including an unfavorable product mix, the fixed cost of depreciation for our mostly idled rental fleet, reduced factory productivity due to declining seismic product sales and increasing levels of inventory obsolescence expenses due to higher levels of slower moving inventories. As a result, we expect our seismic product gross profit margin will continue to be under significant stress throughout fiscal year 2016. In light of current market conditions, we continue to believe that the level of inventories or exceed, those considered appropriate for the current product demand we are now seeing. Our policy has been and will continue to be to record higher levels of inventory obsolescence expenses when we experience reduced levels of inventory turnover and as our inventories continued to age. In this regard, we expect significantly higher levels of inventory obsolescence expenses during fiscal year 2016 when compared to recent fiscal years. Operating expenses for the second quarter were $9.4 million, a decrease of 6% compared to operating expenses of $10 million last year. Our operating expenses for the six months were $17.7 million, a decrease of 11% compared to last year’s operating expenses of $20 million. The decrease in operating expenses for both periods is attributable to cost-cutting reduction program that we initiated back in January and the decrease is partially offset by $500,000 of termination costs charged to operating expenses in association with a cost reduction program. For the six month period, the decrease in operating expenses also reflects a collection of a past due receivable from the seismic customer resulting in a net bad debt recovery. Cash investments into our rental fleet and property, plant and equipment were $1.3 million through the first six months. We expect our fiscal year 2016 cash investments into our rental fleet and property, plant and equipment to be approximately $3 million. In January 2016, we announced the program to reduce our cash costs. This program is expected to produce approximately $7 million of annualized cash savings and the above measures -- I’m sorry, cash savings over and above the measures we previously implemented. The initiatives carried out into this program are now substantially complete and resulted in charge of $1 million for termination costs in our second quarter, which was split evenly between cost of goods sold and operating expenses. At the end of our second quarter, our balance sheet reflected $43 million of cash and short-term investments. Last quarter, we predicted the receipt of an IRS refund of $19.4 million. As a result of certain revisions and corrections made to our fiscal year 2015 tax provision, we ultimately received a refund in March 2016 of $18.3 million. As noted in our cash flow statement during the first six months of fiscal year 2016, we utilized $7 million of cash to reduce our accounts payable and accrued expenses to rock-bottom levels including a $3.5 million annual payment for property taxes in the second quarter. We do not expect further substantial reductions in these liability accounts in future quarters. While positive cash flow for the fiscal this year is still possible, we are less optimistic about the prospects of achieving this goal due to the continuing decline we are seeing in the demand for purchases of our seismic products. At the end of the second quarter, we continue to have no long-term debt outstanding and $30 million of borrowing availability under our credit agreement. That concludes my prepared remarks and I'll turn the call back over to Rick.

Thanks, Tom. Reflecting over the first six months of fiscal year 2016, now behind us, seismic exploration activity and resulting demand for our products has dropped to unprecedented and enduring low industry levels. Moreover, because most oil and gas companies are focusing their limited capital spending on production related project commitments, we maintain our belief that seismic exploration will remain relatively unfunded through 2016 and perhaps longer. In this anticipated environment, demand for our seismic exploration reservoir monitoring products is expected to remain at these record low levels and as such, lower revenues and inevitable operating losses are expected to persist. We want to make note that throughout this period in the absence of ongoing seismic exploration activities, new potential oil and gas resources are not being found and existing reserves depleted through extraction and exhibiting decline are not being replaced. We stand by our view that this condition is innately unsustainable and any long-term rationale for energy stability unequivocally necessitates meaningful seismic exploration to find new reserves in seismic reservoir characterization to optimally recover existing reserves. Our proven leadership in the products and technologies that best performed these tasks along with the strength of our balance sheet place us in a uniquely superior position within the industry for an inevitable recovery. Our balance sheet reflects no long-term debt and over $43 million of cash and short-term investments. In addition, we have an untapped credit line of about $30 million. This total liquidity of over $73 million combined with an approximate $7 million of annualized cash savings, expected from cost reductions implemented in January, underscores our wherewithal to manage and endure the current cycle while continuing develop and advance the technologies that will drive the seismic industry. This includes our prepared remarks. So, I will now turn the call back over to Zack for questions.

[Operator Instructions] Our first question comes from Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. First of all, the tax refund, $18.3 million you said was received in March. Where does that flow through the P&L and cash flow statement?

Bill, it would not flow through the P&L. It would flow through the balance sheet. We had a receivable booked for that. So it flows through the P&L last year, when we booked a tax benefit and we just now received that benefit this year. So, no P&L activity in this fiscal year would have happened last year. In the cash flow statement, it’s going to flow through the income tax receivable line as a positive source. There is a $9.9 million positive cash flow input, offset by an accrual of about $7 million for next year’s tax refund until this current year tax refund will get next year.

Great. Thank you. And then also continuing down number questions here. Inventory obsolescence charge, what was that in the quarter?

Well, for the six month period it’s $4.2 million. I don't recall what it was at the end of the first quarter but I think it was larger in the second quarter than it was in the first.

And that’s the essence of that. Looking forward. Thank you. And then, Rick, what are you seeing in terms of trends and conversations relative to OBX? Are the conversations increasing, decreasing, no real change?

I don’t know if there is any real change. I mean there is projects out there that are being tendered that would utilize the OBX. Some of them are for later dates. Some of them fall into next fiscal year in fact. But the activity has been about the same in the last few months.

And how about for reservoir with continuing lower oil prices, are those conversations trending downwards or they somewhat holding at the levels they had been?

Those conversations are always very sporadic and sparse in between time, flurries of activity. The things to note is there aren’t any active tenders right now out there and so to that extend there is no formalities in those discussions. We still have the discussions with those technical components within the oil company so.

And then finally, we don’t often ask about the non-seismic businesses perhaps curious. The strength that you saw here this quarter, do you consider that the beginning of some sort of a trend or is that just a normal variability in that segment?

Well, there clearly is variability. You’ve seen that before.

Right.

But we do believe that there is some backbone behind the additional interests that’s being developed in these products and to that extent, we are doing what we can to continue that and exploit that.

Thank you, both.

[Operator Instructions] Our next question comes from Ken Sill with Seaport Global. Please go ahead.

Good morning, guys.

Hi, Ken.

Hi, Ken.

Yes. I just wanted to follow-up on the non-seismic. What kind of products, if you could refresh us on what's actually in there, and is there a seasonal component to the revenues there?

The components in the non-seismic are kind of a -- it's really a motley crew as it were. But we’ve got sensors that are used in other non-seismic industries for vibration monitoring, security monitoring and that sort of thing. We also have our thermal products, which in essence are operating devices that are used in the textile industry, in the flexographic industry and other places. We have other industrial product used in the water meter industry for cables and connectors that find use in non-seismic applications. So it kind of hits a lot of basis.

And is there a -- I know that like in the product business in the oil patch, generally there is a fourth quarter spike in revenues and I know a downtick in Q1 on a calendar basis. Do you guys have any sense -- that couldn’t really parse out any different seasonality in the historic data?

There is not really very much seasonality, I wouldn’t say. Do you Tom?

No. No.

Yes. It does have lumps here and there but it doesn’t seem to exhibit much in the way of seasonality.

So, I guess the tough thing is there could be a lot of variation from quarter-to-quarter but you think the underlying trend is still positive, more so than it’s been.

Yes. I think that’s an accurate statement.

Okay. Thank you.

And there is no further questions. I’d like to hand the call over to Mr. Rick Wheeler for any additional or closing remarks.

All right. Well, thank you, Zack. We would like to thank everyone for joining our call today and we look forward to speaking with you during our fiscal year 2016 third quarter conference call sometime in August. Thanks and goodbye.

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