10-Q 1 geos-10q_20150331.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 2015 OR

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from              to             

Commission file number 001-13601

 

GEOSPACE TECHNOLOGIES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Texas

 

76-0447780

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

7007 Pinemont Drive

Houston, Texas  77040-6601

(Address of Principal Executive Offices) (Zip Code)

(713) 986-4444

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer

x

 

Accelerated filer

o

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

There were 13,147,916 shares of the Registrant’s Common Stock outstanding as of the close of business on April 30, 2015.

 

 

 

 


 

Table of Contents

 

 

2

 


 

PART I - FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

March 31, 2015

 

 

September 30, 2014

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,513

 

 

$

33,357

 

Short-term investments

 

 

19,958

 

 

 

19,861

 

Trade accounts receivable, net

 

 

16,783

 

 

 

24,602

 

Current portion of notes receivable

 

 

4,404

 

 

 

3,786

 

Income tax receivable

 

 

8,857

 

 

 

2,570

 

Inventories, net

 

 

138,365

 

 

 

145,890

 

Deferred income tax assets

 

 

7,319

 

 

 

7,244

 

Prepaid expenses and other current assets

 

 

1,872

 

 

 

6,698

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

221,072

 

 

 

244,008

 

 

 

 

 

 

 

 

 

 

Rental equipment, net

 

 

45,262

 

 

 

53,873

 

Property, plant and equipment, net

 

 

50,989

 

 

 

49,205

 

Goodwill

 

 

1,843

 

 

 

1,843

 

Non-current deferred income tax assets

 

 

626

 

 

 

75

 

Non-current notes receivable

 

 

1,524

 

 

 

28

 

Prepaid income taxes

 

 

4,947

 

 

 

5,848

 

Other assets

 

 

106

 

 

 

106

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

326,369

 

 

$

354,986

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable trade

 

$

2,865

 

 

$

4,964

 

Accrued expenses and other current liabilities

 

 

6,762

 

 

 

14,590

 

Deferred revenue

 

 

529

 

 

 

3,752

 

Deferred income tax liabilities

 

 

23

 

 

 

23

 

Income taxes payable

 

 

230

 

 

 

22

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

10,409

 

 

 

23,351

 

 

 

 

 

 

 

 

 

 

Non-current deferred income tax liabilities

 

 

664

 

 

 

2,377

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

11,073

 

 

 

25,728

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

 

131

 

 

 

131

 

Additional paid-in capital

 

 

71,966

 

 

 

70,704

 

Retained earnings

 

 

250,292

 

 

 

260,919

 

Accumulated other comprehensive loss

 

 

(7,093

)

 

 

(2,496

)

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

315,296

 

 

 

329,258

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

326,369

 

 

$

354,986

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3

 


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31, 2015

 

 

March 31, 2014

 

 

March 31, 2015

 

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

24,833

 

 

$

58,909

 

 

$

43,296

 

 

$

156,729

 

Rental equipment

 

 

3,109

 

 

 

9,642

 

 

 

5,812

 

 

 

13,170

 

Total revenues

 

 

27,942

 

 

 

68,551

 

 

 

49,108

 

 

 

169,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

21,402

 

 

 

35,474

 

 

 

40,015

 

 

 

86,712

 

Rental equipment

 

 

5,124

 

 

 

5,174

 

 

 

7,698

 

 

 

8,192

 

Total cost of revenues

 

 

26,526

 

 

 

40,648

 

 

 

47,713

 

 

 

94,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

1,416

 

 

 

27,903

 

 

 

1,395

 

 

 

74,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,953

 

 

 

6,554

 

 

 

11,822

 

 

 

13,256

 

Research and development

 

 

3,691

 

 

 

5,097

 

 

 

6,992

 

 

 

9,472

 

Bad debt expense

 

 

321

 

 

 

296

 

 

 

1,018

 

 

 

644

 

Total operating expenses

 

 

9,965

 

 

 

11,947

 

 

 

19,832

 

 

 

23,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

(8,549

)

 

 

15,956

 

 

 

(18,437

)

 

 

51,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(107

)

 

 

(103

)

 

 

(219

)

 

 

(235

)

Interest income

 

 

115

 

 

 

25

 

 

 

174

 

 

 

56

 

Foreign exchange gains, net

 

 

599

 

 

 

101

 

 

 

2,188

 

 

 

80

 

Other, net

 

 

(23

)

 

 

(12

)

 

 

(113

)

 

 

(38

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense), net

 

 

584

 

 

 

11

 

 

 

2,030

 

 

 

(137

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(7,965

)

 

 

15,967

 

 

 

(16,407

)

 

 

51,486

 

Income tax expense (benefit)

 

 

(2,783

)

 

 

5,151

 

 

 

(5,780

)

 

 

16,494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(5,182

)

 

$

10,816

 

 

$

(10,627

)

 

$

34,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.40

)

 

$

0.83

 

 

$

(0.82

)

 

$

2.68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(0.40

)

 

$

0.82

 

 

$

(0.82

)

 

$

2.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – Basic

 

 

13,002,616

 

 

 

12,950,416

 

 

 

12,990,129

 

 

 

12,948,788

 

Weighted average shares outstanding – Diluted

 

 

13,002,616

 

 

 

13,002,383

 

 

 

12,990,129

 

 

 

13,001,075

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

4

 


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31, 2015

 

 

March 31, 2014

 

 

March 31, 2015

 

 

March 31, 2014

 

Net income (loss)

 

$

(5,182

)

 

$

10,816

 

 

$

(10,627

)

 

$

34,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains on available-for-sale securities (net of tax)

 

 

23

 

 

 

 

 

 

21

 

 

 

 

Foreign currency translations adjustments

 

 

(1,966

)

 

 

(942

)

 

 

(4,618

)

 

 

(1,039

)

Other comprehensive income (loss)

 

 

(1,943

)

 

 

(942

)

 

 

(4,597

)

 

 

(1,039

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

(7,125

)

 

$

9,874

 

 

$

(15,224

)

 

$

33,953

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

5

 


 

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months

 

 

Six Months

 

 

 

Ended

 

 

Ended

 

 

 

March 31, 2015

 

 

March 31, 2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(10,627

)

 

$

34,992

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Deferred income tax benefit

 

 

(2,338

)

 

 

(676

)

Depreciation

 

 

10,096

 

 

 

8,662

 

Accretion of discounts on short-term-investments

 

 

114

 

 

 

 

Stock-based compensation

 

 

2,327

 

 

 

1,935

 

Bad debt expense

 

 

1,018

 

 

 

644

 

Inventory obsolescence expense

 

 

1,662

 

 

 

1,717

 

Gross profit from the sale of used rental equipment

 

 

(1,349

)

 

 

(5,466

)

Gain on disposal of property, plant and equipment

 

 

(2

)

 

 

(58

)

Excess tax expense from stock-based compensation

 

 

(1,065

)

 

 

 

Effects of changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts and notes receivable

 

 

3,559

 

 

 

337

 

Income tax receivable

 

 

(6,287

)

 

 

 

Inventories

 

 

3,303

 

 

 

(3,987

)

Costs and estimated earnings in excess of billings

 

 

 

 

 

12,400

 

Prepaid expenses and other current assets

 

 

4,645

 

 

 

306

 

Prepaid income taxes

 

 

900

 

 

 

(950

)

Accounts payable

 

 

(2,064

)

 

 

(2,496

)

Accrued expenses and other

 

 

(11,503

)

 

 

(1,346

)

Deferred revenue

 

 

(3,197

)

 

 

5,672

 

Income taxes payable

 

 

255

 

 

 

4,117

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

(10,553

)

 

 

55,803

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(1,418

)

 

 

(4,379

)

Investment in rental equipment

 

 

(1,799

)

 

 

(18,309

)

Proceeds from sale of used rental equipment

 

 

3,570

 

 

 

8,551

 

Purchases of short-term investments

 

 

(1,875

)

 

 

 

Proceeds from the sale of short-term investments

 

 

1,715

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

 

193

 

 

 

(14,137

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal payments on debt arrangements

 

 

 

 

 

(931

)

Excess tax benefit from stock-based compensation

 

 

 

 

 

661

 

Proceeds from exercise of stock options

 

 

 

 

 

212

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

 

 

 

(58

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

516

 

 

 

6

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

(9,844

)

 

 

41,614

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

33,357

 

 

 

2,726

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

23,513

 

 

$

44,340

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

6

 


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1. Significant Accounting Policies

Basis of Presentation

The consolidated balance sheet of Geospace Technologies Corporation and its subsidiaries (the “Company”) at September 30, 2014 was derived from the Company’s audited consolidated financial statements at that date. The consolidated balance sheet at March 31, 2015 and the consolidated statements of operations and statements of comprehensive income (loss) for the three and six months ended March 31, 2015 and 2014, and the consolidated statements of cash flows for the six months ended March 31, 2015 and 2014 were prepared by the Company without audit. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows were made. The results of operations for the three and six months ended March 31, 2015 are not necessarily indicative of the operating results for a full year or of future operations.

Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America were omitted pursuant to the rules of the Securities and Exchange Commission. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2014.

Reclassifications

Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation. During the six months ended March 31, 2015, the Company reclassified $4.2 million in deposits made for equipment purchases in the prior fiscal year from prepaid and other current assets to property, plant and equipment on its consolidated balance sheet. Such reclassification had no effect on net income (loss), stockholders’ equity or cash flows.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. The Company continually evaluates its estimates, including those related to bad debt reserves, inventory obsolescence reserves, percentage-of-completion revenue recognition, self-insurance reserves, product warranty reserves, long-lived assets, intangible assets and deferred income tax assets. The Company bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original or remaining maturity at the time of purchase of three months or less to be cash equivalents.

Short-term Investments

The Company classifies its short-term investments consisting of corporate bonds, government bonds and other such similar investments as available-for-sale securities. Available-for-sale securities are carried at fair market value with net unrealized holding gains and losses reported each period as a component of accumulated other comprehensive income (loss) in stockholders’ equity. See note 2 for additional information.

Inventories

The Company records a write-down of its inventories when the cost basis of any manufactured product, including any estimated future costs to complete the manufacturing process, exceeds its net realizable value. Inventories are stated at the lower of cost or market value. Cost is determined on the first-in, first-out method, except that certain of the Company’s foreign subsidiaries use an average cost method to value their inventories.

7

 


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Impairment Review of Goodwill and Long-lived Assets

At March 31, 2015, the Company had $1.8 million of goodwill reflected in its consolidated balance sheet. In accordance with FASB ASC 350, “Intangibles – Goodwill and Other,” we perform goodwill impairment testing at least annually, unless indicators of impairment exist in interim periods. In recent months, business conditions in the oil and gas industry have significantly deteriorated and the market value of the Company’s stock has declined. In light of the foregoing, we concluded that it was appropriate for us to perform an interim goodwill impairment test as of December 31, 2014 and March 31, 2015. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit (including any unrecognized intangibles) as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. Based on the results of our step one test as of December 31, 2014 and March 31, 2015, management concluded that goodwill was not impaired; however, given overall market conditions, management will continue to monitor this situation. In connection with our goodwill impairment test, management also reviewed the recoverability of the carrying value of the Company’s rental equipment and property, plant and equipment based on future undiscounted cash flows and determined that no such impairment of these assets was necessary at December 31, 2014 and March 31, 2015.

Revenue Recognition – Products and Services

The Company primarily derives revenue from the sale of its manufactured products, including revenues derived from the sale of its manufactured rental equipment. In addition, the Company generates revenue from the short-term rental under operating leases of its manufactured products. Except for revenues recognized using the percentage-of-completion method discussed below, the Company recognizes revenue from product sales, including the sale of used rental equipment, when (i) title passes to the customer, (ii) the customer assumes the risks and rewards of ownership, (iii) the product sales price has been determined, (iv) collectability of the sales price is reasonably assured, and (v) product delivery occurs as directed by the customer. Except for certain of the Company’s reservoir characterization products, the Company’s products are generally sold without any customer acceptance provisions and the Company’s standard terms of sale do not allow customers to return products for credit. The Company recognizes rental revenues as earned over the rental period. Rentals of the Company’s equipment generally range from daily rentals to rental periods of up to six months or longer. Revenues from engineering services are recognized as services are rendered over the duration of a project, or as billed on a per hour basis. Field service revenues are recognized when services are rendered and are generally priced on a per day rate.

Revenue Recognition – Percentage of Completion

The Company utilizes the percentage-of-completion method (the “POC Method”) to recognize revenues and costs on contracts having the following characteristics:

·

the order/contract requires significant custom designs for customer specific applications;

·

the product design requires significant engineering efforts;

·

the order/contract requires the customer to make progress payments during the contract term; and

·

the order/contract requires at least 90 days of engineering and manufacturing effort.

The POC Method requires the Company’s senior management to make estimates, at least quarterly, of the (i) total expected costs of the contract, (ii) manufacturing progress against the contract and (iii) the estimated cost to complete the contract. These estimates impact the amount of revenue and gross profit the Company recognizes for each reporting period. Significant estimates that may affect the future cost to complete a contract include the cost and availability of raw materials and component parts, engineering services, manufacturing equipment, labor, manufacturing capacity, factory productivity, contract penalties and disputes, product warranties and other contingent factors. Change orders are included in the total estimated contract revenue when it is probable that the change order will result in additional value that can be reliably estimated and realized. The Company defers recognition of the entire amount of revenue or portion thereof associated with unapproved change orders if there is substantial uncertainty as to amounts involved or ultimate realization. The cumulative impact of periodic revisions to the future cost to complete a contract will be reflected in the period in which these changes become known, including, to the extent required, the recognition of losses at the time such losses are known and estimable. Due to the various estimates inherent in the POC Method, actual final results at the conclusion of a contract could differ from management’s previous estimates.

8

 


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The Company analyzes a variety of indicators to determine manufacturing progress, including actual costs incurred to date compared to total estimated costs and actual quantities produced to date compared to total contract quantities.

Cost of sales includes direct contract costs, such as materials and labor, and indirect costs that are attributable to a contract’s production activity. The timing of when the Company invoices its customer is dependent upon the completion of certain production milestones as defined in the contract. Cumulative contract costs and estimated earnings to date in excess of cumulative billings are reported as a current asset on the consolidated balance sheet as “costs and estimated earnings in excess of billings.” Cumulative billings in excess of cumulative costs and estimated earnings are reported as a current liability on the consolidated balance sheet as “billings in excess of costs and estimated earnings.” Any uncollected billed revenue, including contract retentions, is included in “trade accounts receivable, net.”

The Company currently has no contracts accounted for under the POC Method.

Research and Development Costs

The Company expenses research and development costs as incurred. Research and development costs include salaries, employee benefit costs, department supplies, direct project costs and other related costs.

Product Warranties

Most of the Company’s products do not require installation assistance or sophisticated instructions. The Company offers a standard product warranty obligating it to repair or replace equipment with manufacturing defects. The Company maintains a reserve for future warranty costs based on historical experience or, in the absence of historical product experience, management’s estimates. Reserves for future warranty costs are included within accrued expenses and other current liabilities on the consolidated balance sheets. Changes in the warranty reserve are reflected in the following table (in thousands):

 

Balance at October 1, 2014

 

$

951

 

Accruals for warranties issued during the period

 

 

395

 

Settlements made (in cash or in kind) during the period

 

 

(702

)

Balance at March 31, 2015

 

$

644

 

 

Recent Accounting Pronouncements

In August 2014, the FASB issued ASU 2014-15 which provides guidance on management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and to provide related footnote disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customer (Topic 606).” The amendment applies a new five-step revenue recognition model to be used in recognizing revenues associated with customer contracts. The amendment requires disclosure sufficient to enable readers of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill the contract. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

 

9

 


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

2. Short-term Investments

 

 

 

As of March 31, 2015 (in thousands)

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

15,122

 

 

$

 

 

$

(5

)

 

$

15,117

 

Government

 

 

4,843

 

 

 

 

 

 

(2

)

 

 

4,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

19,965

 

 

$

 

 

$

(7

)

 

$

19,958

 

 

 

 

As of September 30, 2014 (in thousands)

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

14,262

 

 

$

 

 

$

(27

)

 

$

14,235

 

Government

 

 

5,638

 

 

 

 

 

 

(12

)

 

 

5,626

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

19,900

 

 

$

 

 

$

(39

)

 

$

19,861

 

 

Accumulated other comprehensive loss on the consolidated balance sheets at March 31, 2015 and September 30, 2014 included unrealized losses (net of tax) of $5,000 and $26,000, respectively.

 

 

3. Derivative Financial Instruments

At March 31, 2015 and September 30, 2014, the Company’s Canadian subsidiary had $28.6 million and $29.8 million, respectively, of Canadian dollar denominated intercompany accounts payable owed to one of the Company’s U.S. subsidiaries.  In order to mitigate its exposure to movements in foreign currency rates between the U.S. dollar and Canadian dollar, the Company routinely enters into foreign currency forward contracts to hedge a portion of its exposure to changes in the value of the Canadian dollar.  At March 31, 2015, the Company was a party to a $28.0 million Canadian dollar forward contract.  This contract reduces the impact on cash flows from movements in the Canadian dollar/U.S. dollar currency exchange rate, but has not been designated as a hedge for accounting purposes.

At March 31, 2015, the Company had an accrued unrealized foreign exchange gain of $0.3 million under this contract.

The following table summarizes the gross fair value of all derivative instruments, which are not designated as hedging instruments and their location in the consolidated balance sheets (in thousands):

 

Derivative Instrument

 

Location

 

March 31, 2015

 

 

September 30, 2014

 

Foreign Currency Exchange Contracts

 

Prepaid Expenses and Other Current Assets

 

$

294

 

 

$

795

 

 

The following table summarizes the impact of the Company’s derivatives on the consolidated statements of operations for the three and six month periods ended March 31, 2015 and 2014 (in thousands):

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

 

March 31

 

 

March 31

 

Derivative Instrument

 

Location of Gain (Loss)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Foreign Currency Exchange Contracts

 

Other Income (Expense)

 

$

2,023

 

 

$

(58

)

 

$

2,948

 

 

$

155

 

 

Amounts in the above table include realized and unrealized derivative gains and losses.

 

 

10

 


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

4. Fair Value of Financial Instruments

At March 31, 2015, the Company’s financial instruments included cash and cash equivalents, short-term investments, foreign currency forward contract, trade and notes receivables and accounts payable.  Due to the short-term maturities of cash and cash equivalents, trade and other receivables and accounts payable, the carrying amounts approximate fair value on the respective balance sheet dates.

The Company measures its short-term investments and derivative instruments at fair value on a recurring basis.  The fair value measurement of the Company’s short-term investments and derivative instruments was determined using the following inputs (in thousands):

 

 

 

As of March 31, 2015

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Identical Assets

 

 

Observable

 

 

Unobservable

 

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

15,117

 

 

$

15,117

 

 

$

 

 

$

 

Government bonds

 

 

4,841

 

 

 

4,841

 

 

 

 

 

 

 

Foreign currency forward contract

 

 

294

 

 

 

 

 

 

294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

20,252

 

 

$

19,958

 

 

$

294

 

 

$

 

 

 

 

As of September 30, 2014

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Identical Assets

 

 

Observable

 

 

Unobservable

 

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

14,235

 

 

$

14,235

 

 

$

 

 

$

 

Government bonds

 

 

5,626

 

 

 

5,626

 

 

 

 

 

 

 

Foreign currency forward contract

 

 

795

 

 

 

 

 

 

795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

20,656

 

 

$

19,861

 

 

$

795

 

 

$

 

 

The Company applies fair value techniques on a non-recurring basis in evaluating potential impairment losses related to goodwill and long-lived assets.

 

 

5. Accounts and Notes Receivable

Current trade accounts are reflected in the following table (in thousands):

 

 

 

March 31, 2015

 

 

September 30, 2014

 

Trade accounts receivable

 

$

18,637

 

 

$

25,727

 

Allowance for doubtful accounts

 

 

(1,854

)

 

 

(1,125

)

 

 

$

16,783

 

 

$

24,602

 

 

The allowance for doubtful accounts represents the Company’s best estimate of probable credit losses.  The Company determines the allowance based upon historical experience and a review of its balances.  Accounts receivable balances are charged off against the allowance whenever it is probable that the receivable will not be recoverable.  The Company does not have any off-balance-sheet credit exposure related to its customers.

11

 


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Notes receivable, net are reflected in the following table (in thousands):

 

 

 

March 31, 2015

 

 

September 30, 2014

 

Notes receivable

 

$

5,928

 

 

$

3,814

 

Allowance for doubtful notes

 

 

 

 

 

 

 

 

 

5,928

 

 

 

3,814

 

Less current portion

 

 

4,404

 

 

 

3,786

 

Non-current notes receivable

 

$

1,524

 

 

$

28

 

 

During the three months ended March 31, 2015, notes receivable were reduced $0.7 million in connection with the return of rental equipment from a customer in a non-cash transaction.

 

 

6. Inventories

Inventories consist of the following (in thousands):

 

 

 

March 31, 2015

 

 

September 30, 2014

 

Finished goods

 

$

49,203

 

 

$

42,473

 

Work-in-process

 

 

20,856

 

 

 

28,582

 

Raw materials

 

 

77,150

 

 

 

82,599

 

Obsolescence reserve

 

 

(8,844

)

 

 

(7,764

)

 

 

$

138,365

 

 

$

145,890

 

 

During the six months ended March 31, 2015 and 2014, the Company made non-cash inventory transfers of $0.1 million and $6.9 million, respectively, to its rental equipment fleet. Raw materials include semi-finished goods and component parts totaling $41.9 million and $43.6 million at March 31, 2015 and September 30, 2014, respectively.

 

 

7. Long-Term Debt

The Company had no long-term debt outstanding at March 31, 2015 and September 30, 2014.

On March 2, 2011, the Company entered into a credit agreement with Frost Bank.  On September 27, 2013, the Company amended the credit agreement and increased its borrowing availability to $50.0 million (as amended, the “Credit Agreement”).  The Company’s borrowings under the Credit Agreement were principally secured by its accounts receivable, inventories and equipment.  In addition, certain domestic subsidiaries of the Company guaranteed the obligations of the Company under the Credit Agreement and such subsidiaries secured the obligations by the pledge of certain of the assets of such subsidiaries.  The Company was required to make quarterly interest payments on borrowed funds.  The Credit Agreement limited the incurrence of additional indebtedness, required the maintenance of certain financial ratios, restricted the Company and its subsidiaries’ ability to pay cash dividends and contained other covenants customary in agreements of this type.  The interest rate for borrowings under the Credit Agreement was a LIBOR based rate with a margin spread of 250 to 325 basis points depending upon the maintenance of certain ratios.  At March 31, 2015, the Company was in compliance with all covenants under the Credit Agreement; however, a covenant requiring the Company to maintain a minimum ratio of Funded Debt to EBITDA restricted the Company’s potentially available borrowings under the Credit Agreement to $19.7 million at March 31, 2015.  At March 31, 2015 and September 30, 2014, the Company had standby letters of credit outstanding in the amount of $59,000 and $51,000, respectively.

On May 4, 2015, the Company again amended the Credit Agreement which reduced its borrowing availability to $30.0 million with amounts available for borrowing determined by a borrowing base.  Under the amendments to the Credit Agreement, the borrowing base is determined based upon certain of the Company’s and its U.S. subsidiaries’ assets which include (i) 80% of certain accounts receivable plus (ii) 50% of certain notes receivable (such result not to exceed $10 million) plus (iii) 25% of certain inventories (excluding work-in-process inventories).  On a pro forma basis as of March 31, 2015, the Company’s borrowing base was $37.9 million resulting in borrowing availability of $30.0 million less any outstanding letters of credit.  Borrowings under the Credit Agreement as amended are secured by substantially all of the Company’s assets.  In addition, the Company’s domestic subsidiaries have guaranteed the obligations of the Company under the Credit Agreement and such subsidiaries have secured the obligations by the pledge of substantially all of the assets of such subsidiaries.  The Credit Agreement as amended expires on May 4, 2018 and all borrowed funds are due and payable at that time.  The Company is required to make monthly interest payments on borrowed funds.  

12

 


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The Credit Agreement as amended limits the incurrence of additional indebtedness, requires the maintenance of a single financial ratio that compares certain of the Company’s assets to certain of its liabilities, restricts the Company and its subsidiaries’ ability to pay cash dividends and contains other covenants customary in agreements of this type.  The interest rate for borrowings under the Credit Agreement as amended is based on the Wall Street Journal prime rate, which was 3.25% at March 31, 2015.

 

 

8. Accumulated Other Comprehensive Loss:

Accumulated other comprehensive loss consisted of the following (in thousands):

 

 

 

Unrealized

 

 

Foreign

 

 

 

 

 

 

Losses on

 

 

Currency

 

 

 

 

 

 

Available-for-

 

 

Translation

 

 

 

 

 

 

Sale Securities

 

 

Adjustments

 

 

Total

 

Balance at September 30, 2014

 

$

(26

)

 

$

(2,470

)

 

$

(2,496

)

Change in unrealized losses on available-for-sale securities (net of tax)

 

 

21

 

 

 

 

 

 

21

 

Foreign currency translation adjustments

 

 

 

 

 

(4,618

)

 

 

(4,618

)

Balance at March 31, 2015

 

$

(5

)

 

$

(7,088

)

 

$

(7,093

)

 

 

9. Stock-Based Compensation:

On November 21, 2013, the Company issued 184,000 shares of restricted stock under the 1997 Key Employee Stock Option Plan, as amended.  The fair value of the Company’s common stock on the date of grant was $98.68 per share, and the unrecognized compensation cost on the date of grant related to these awards, net of estimated forfeitures, was $17.3 million and will be charged to expense over four years as the restrictions lapse.  During fiscal year 2014, the Company issued a total of 13,000 shares of restricted stock under the 2014 Long Term Incentive Plan, as amended (“the Plan”) at a weighted average grant date fair value of $45.68 per share.  During the first six months of fiscal year 2015, the Company issued a total of 3,000 shares of restricted stock under the Plan at a weighted average grant date fair value of $19.13 per share. Recipients of restricted stock awards are entitled to vote such shares and are entitled to dividends if paid.

Compensation expense for restricted stock awards is determined based on the closing market price of the Company’s stock on the date of grant applied to the total number of shares that are anticipated to fully vest.  As of March 31, 2015, we had unrecognized compensation expense of approximately $11.5 million, all of which was related to restricted stock awards.  The weighted average period over which this expense is expected to be recognized is 2.7 years.

 

 

13

 


GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

10. Earnings (Loss) Per Common Share

The Company applies the two-class method in calculating per share data.  The following table summarizes the calculation of net earnings (loss) and weighted average common shares and common equivalent shares outstanding for purposes of the computation of earnings (loss) per share (in thousands, except share and per share data):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31, 2015

 

 

March 31, 2014

 

 

March 31, 2015

 

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(5,182

)

 

$

10,816

 

 

$

(10,627

)

 

$

34,992

 

Less: Income allocable to unvested restricted stock

                                                                  

 

 

 

 

109

 

 

 

 

 

 

353

 

Income (loss) available to common shareholders