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 June 30, 2016
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 Incorporation or Organization) |
(I.R.S. Employer 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 |
o |
|
Accelerated filer |
x |
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 13,328,066 shares of the Registrant’s Common Stock outstanding as of the close of business on July 31, 2016.
|
|
|
Page Number |
|
|||
|
|
|
|
|
3 |
||
|
|
|
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
|
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
22 |
|
|
|
|
|
|
22 |
||
|
|
||
|
|||
|
|
|
|
|
24 |
2
PART I - FINANCIAL INFORMATION
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
|
|
June 30, 2016 |
|
|
September 30, 2015 |
|
||
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11,526 |
|
|
$ |
22,314 |
|
Short-term investments |
|
|
27,254 |
|
|
|
18,112 |
|
Trade accounts receivable, net |
|
|
12,010 |
|
|
|
12,693 |
|
Current portion of notes receivable |
|
|
2,179 |
|
|
|
2,004 |
|
Income tax receivable |
|
|
10,511 |
|
|
|
17,369 |
|
Inventories, net |
|
|
110,122 |
|
|
|
124,800 |
|
Prepaid expenses and other current assets |
|
|
5,736 |
|
|
|
1,295 |
|
Total current assets |
|
|
179,338 |
|
|
|
198,587 |
|
Rental equipment, net |
|
|
36,875 |
|
|
|
46,036 |
|
Property, plant and equipment, net |
|
|
45,567 |
|
|
|
48,709 |
|
Deferred income tax assets, net |
|
|
201 |
|
|
|
4,554 |
|
Non-current notes receivable |
|
|
1,915 |
|
|
|
1,516 |
|
Prepaid income taxes |
|
|
2,998 |
|
|
|
4,095 |
|
Other assets |
|
|
15 |
|
|
|
95 |
|
Total assets |
|
$ |
266,909 |
|
|
$ |
303,592 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable trade |
|
$ |
2,221 |
|
|
$ |
4,077 |
|
Accrued expenses and other current liabilities |
|
|
7,392 |
|
|
|
9,679 |
|
Deferred revenue |
|
|
89 |
|
|
|
165 |
|
Income tax payable |
|
|
112 |
|
|
|
3 |
|
Total current liabilities |
|
|
9,814 |
|
|
|
13,924 |
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
|
40 |
|
|
|
44 |
|
Total liabilities |
|
|
9,854 |
|
|
|
13,968 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
— |
|
|
|
— |
|
Common stock |
|
|
133 |
|
|
|
131 |
|
Additional paid-in capital |
|
|
76,702 |
|
|
|
74,160 |
|
Retained earnings |
|
|
194,617 |
|
|
|
228,278 |
|
Accumulated other comprehensive loss |
|
|
(14,397 |
) |
|
|
(12,945 |
) |
Total stockholders’ equity |
|
|
257,055 |
|
|
|
289,624 |
|
Total liabilities and stockholders’ equity |
|
$ |
266,909 |
|
|
$ |
303,592 |
|
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 |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
12,594 |
|
|
$ |
15,467 |
|
|
$ |
34,452 |
|
|
$ |
58,763 |
|
Rental equipment |
|
|
5,084 |
|
|
|
4,284 |
|
|
|
11,294 |
|
|
|
10,096 |
|
Total revenue |
|
|
17,678 |
|
|
|
19,751 |
|
|
|
45,746 |
|
|
|
68,859 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
15,894 |
|
|
|
19,233 |
|
|
|
46,252 |
|
|
|
59,248 |
|
Rental equipment |
|
|
4,684 |
|
|
|
3,824 |
|
|
|
13,390 |
|
|
|
11,522 |
|
Total cost of revenue |
|
|
20,578 |
|
|
|
23,057 |
|
|
|
59,642 |
|
|
|
70,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(2,900 |
) |
|
|
(3,306 |
) |
|
|
(13,896 |
) |
|
|
(1,911 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
5,125 |
|
|
|
5,469 |
|
|
|
16,316 |
|
|
|
17,291 |
|
Research and development expenses |
|
|
3,441 |
|
|
|
3,564 |
|
|
|
10,556 |
|
|
|
10,556 |
|
Bad debt expense (recovery) |
|
|
549 |
|
|
|
112 |
|
|
|
(74 |
) |
|
|
1,130 |
|
Total operating expenses |
|
|
9,115 |
|
|
|
9,145 |
|
|
|
26,798 |
|
|
|
28,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(12,015 |
) |
|
|
(12,451 |
) |
|
|
(40,694 |
) |
|
|
(30,888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(7 |
) |
|
|
(36 |
) |
|
|
(18 |
) |
|
|
(255 |
) |
Interest income |
|
|
84 |
|
|
|
138 |
|
|
|
252 |
|
|
|
312 |
|
Foreign exchange gains (losses), net |
|
|
(678 |
) |
|
|
(567 |
) |
|
|
(9 |
) |
|
|
1,621 |
|
Other, net |
|
|
(16 |
) |
|
|
(24 |
) |
|
|
(50 |
) |
|
|
(137 |
) |
Total other income (expense), net |
|
|
(617 |
) |
|
|
(489 |
) |
|
|
175 |
|
|
|
1,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(12,632 |
) |
|
|
(12,940 |
) |
|
|
(40,519 |
) |
|
|
(29,347 |
) |
Income tax benefit |
|
|
(978 |
) |
|
|
(4,376 |
) |
|
|
(6,858 |
) |
|
|
(10,156 |
) |
Net loss |
|
$ |
(11,654 |
) |
|
$ |
(8,564 |
) |
|
$ |
(33,661 |
) |
|
$ |
(19,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.89 |
) |
|
$ |
(0.66 |
) |
|
$ |
(2.58 |
) |
|
$ |
(1.48 |
) |
Diluted |
|
$ |
(0.89 |
) |
|
$ |
(0.66 |
) |
|
$ |
(2.58 |
) |
|
$ |
(1.48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
13,051,916 |
|
|
|
13,002,916 |
|
|
|
13,042,000 |
|
|
|
12,994,391 |
|
Diluted |
|
|
13,051,916 |
|
|
|
13,002,916 |
|
|
|
13,042,000 |
|
|
|
12,994,391 |
|
The accompanying notes are an integral part of the consolidated financial statements.
4
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
||||
Net loss |
|
$ |
(11,654 |
) |
|
$ |
(8,564 |
) |
|
$ |
(33,661 |
) |
|
$ |
(19,191 |
) |
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on available-for-sale securities, net of tax |
|
|
16 |
|
|
|
(8 |
) |
|
|
21 |
|
|
|
13 |
|
Foreign currency translation adjustments |
|
|
115 |
|
|
|
1,192 |
|
|
|
(1,473 |
) |
|
|
(3,426 |
) |
Total other comprehensive income (loss) |
|
|
131 |
|
|
|
1,184 |
|
|
|
(1,452 |
) |
|
|
(3,413 |
) |
Total comprehensive loss |
|
$ |
(11,523 |
) |
|
$ |
(7,380 |
) |
|
$ |
(35,113 |
) |
|
$ |
(22,604 |
) |
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)
|
|
Nine Months Ended |
|
|||||
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(33,661 |
) |
|
$ |
(19,191 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit) |
|
|
4,403 |
|
|
|
(3,458 |
) |
Depreciation expense |
|
|
15,206 |
|
|
|
14,777 |
|
Impairment of rental assets |
|
|
998 |
|
|
|
— |
|
Accretion of discounts on short-term-investments |
|
|
89 |
|
|
|
174 |
|
Stock-based compensation expense |
|
|
3,934 |
|
|
|
3,434 |
|
Bad debt expense (recovery) |
|
|
(74 |
) |
|
|
1,130 |
|
Inventory obsolescence expense |
|
|
6,414 |
|
|
|
2,566 |
|
Write-down of inventories |
|
|
617 |
|
|
|
— |
|
Gross profit from sale of used rental equipment |
|
|
(229 |
) |
|
|
(1,658 |
) |
Gain on disposal of property, plant and equipment |
|
|
— |
|
|
|
(2 |
) |
Realized loss on short-term investments |
|
|
4 |
|
|
|
— |
|
Excess tax expense from stock-based compensation |
|
|
(1,390 |
) |
|
|
(1,065 |
) |
Effects of changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts and notes receivable |
|
|
72 |
|
|
|
7,314 |
|
Income tax receivable |
|
|
6,858 |
|
|
|
(6,829 |
) |
Inventories |
|
|
3,066 |
|
|
|
5,274 |
|
Prepaid expenses and other current assets |
|
|
(4,435 |
) |
|
|
2,832 |
|
Prepaid income taxes |
|
|
1,097 |
|
|
|
1,333 |
|
Accounts payable trade |
|
|
(1,844 |
) |
|
|
(1,827 |
) |
Accrued expenses and other |
|
|
(2,254 |
) |
|
|
(8,127 |
) |
Deferred revenue |
|
|
(74 |
) |
|
|
(3,412 |
) |
Income tax payable |
|
|
109 |
|
|
|
(19 |
) |
Net cash used in operating activities |
|
|
(1,094 |
) |
|
|
(6,754 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(1,206 |
) |
|
|
(2,046 |
) |
Investment in rental equipment |
|
|
(504 |
) |
|
|
(3,784 |
) |
Proceeds from the sale of used rental equipment |
|
|
1,280 |
|
|
|
4,547 |
|
Purchases of short-term investments |
|
|
(20,800 |
) |
|
|
(4,281 |
) |
Proceeds from the sale of short-term investments |
|
|
11,679 |
|
|
|
4,415 |
|
Net cash used in investing activities |
|
|
(9,551 |
) |
|
|
(1,149 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(143 |
) |
|
|
152 |
|
Decrease in cash and cash equivalents |
|
|
(10,788 |
) |
|
|
(7,751 |
) |
Cash and cash equivalents, beginning of fiscal year |
|
|
22,314 |
|
|
|
33,357 |
|
Cash and cash equivalents, end of fiscal period |
|
$ |
11,526 |
|
|
$ |
25,606 |
|
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, 2015 was derived from the Company’s audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 2016 and the consolidated statements of operations and comprehensive loss for the three and nine months ended June 30, 2016 and 2015, and the consolidated statements of cash flows for the nine months ended June 30, 2016 and 2015 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 nine months ended June 30, 2016 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, 2015.
Reclassifications
Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation. During the three months ended December 31, 2015, the Company elected to early adopt Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-17-Income Taxes (Topic 740) requiring all deferred tax assets and liabilities to be classified as non-current on the balance sheet. The purpose of this adoption was to simplify the presentation of deferred income taxes. The accompanying balance sheet as of September 30, 2015 has been retrospectively adjusted to reflect the adoption of this standard. The effect of the adjustment at September 30, 2015 was a $6.4 million decrease in current assets, a $10,000 decrease in current liabilities, a $3.0 million increase in non-current deferred tax assets and a $3.4 million decrease in non-current deferred tax liabilities. Such reclassification had no effect on our previously reported net 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 management to make estimates and assumptions that affect the amount of assets, liabilities, revenue and expenses 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, self-insurance reserves, product warranty reserves, impairment of long-lived 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, the results of which form the basis for making judgments about the carrying values of assets and liabilities which are not readily available from other sources. 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 loss in stockholders’ equity. See note 2 for additional information.
7
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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.
Impairment of Long-lived Assets
The Company’s long-lived assets are reviewed for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable. The impairment review, if necessary, includes a comparison of expected future cash flows (undiscounted and without interest charges) to be generated by an asset group with the associated carrying value of the related assets. If the carrying value of the asset group exceeds the expected future cash flows, an impairment loss is recognized to the extent that the carrying value of the asset group exceeds its fair value. At June 30, 2016, management reviewed the recoverability of the carrying value of the Company’s long-lived assets based on future undiscounted cash flows and determined that the carrying value of certain rental assets exceeded the expected future cash flows. As a result, the Company recorded an impairment charge of $1.0 million in the accompanying consolidated statements of operations for the three and nine months ended June 30, 2016. No such impairment of remaining long-lived assets was necessary as the expected future cash flows exceeded the carrying value of the assets.
Revenue Recognition – Products and Services
The Company primarily derives revenue from the sale of its manufactured products, including revenue 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. 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 revenue 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. Revenue from engineering services is recognized as services are rendered over the duration of a project, or as billed on a per hour basis. Field service revenue is recognized when services are rendered and is generally priced on a per day rate.
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, 2015 |
|
$ |
2,326 |
|
Accruals for warranties issued during the period |
|
|
411 |
|
Settlements made (in cash or in kind) during the period |
|
|
(2,106 |
) |
Balance at June 30, 2016 |
|
$ |
631 |
|
Recent Accounting Pronouncements
In June 2016, the FASB issued guidance surrounding credit losses for financial instruments that replaces the incurred loss impairment methodology in current U.S. generally accepted accounting principles (“GAAP”). The new impairment model requires
8
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption for fiscal year beginning after December 15, 2018 is permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company does not expect the adoption of this standard to have a material effect upon its consolidated financial statements.
In March 2016, the FASB issued guidance to simplify key components of employee share-based payment accounting. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company does not expect the adoption of this guidance to have a material effect upon its consolidated financial statements.
In February 2016, the FASB issued guidance requiring a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expense and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, this new guidance will require both types of leases to be recognized on the balance sheet. The guidance also requires disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2018 and is to be applied using the modified retrospective approach. The Company does not expect the adoption of this guidance to have a material effect upon its consolidated financial statements.
In July 2015, the FASB issued guidance requiring management to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The pronouncement is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period and should be applied retrospectively, with early application permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
In August 2014, the FASB issued guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern and to provide disclosures in certain circumstances. The new guidance was issued to reduce diversity in the timing and content of footnote disclosures. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2016. The Company does not expect the adoption of this guidance to have a material effect upon its consolidated financial statements.
In May 2014, the FASB issued guidance requiring entities to recognize revenue from contracts with customers by applying a five-step model in accordance with the core principle to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this guidance specifies the accounting for some costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. In August 2015, the FASB issued guidance deferring the effective date of this guidance to annual periods beginning after December 15, 2017, including interim reporting periods therein. Entities have the option to adopt this guidance either retrospectively or through a modified retrospective transition method. This new standard will supersede existing revenue guidance and affect the Company's revenue recognition process and the presentations or disclosures of the Company's consolidated financial statements and footnotes. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
9
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. Short-term Investments
|
|
As of June 30, 2016 (in thousands) |
|
|||||||||||||
|
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Estimated Fair Value |
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
17,655 |
|
|
$ |
17 |
|
|
$ |
— |
|
|
$ |
17,672 |
|
Government bonds |
|
|
9,568 |
|
|
|
14 |
|
|
|
— |
|
|
|
9,582 |
|
Total |
|
$ |
27,223 |
|
|
$ |
31 |
|
|
$ |
— |
|
|
$ |
27,254 |
|
|
|
As of September 30, 2015 (in thousands) |
|
|||||||||||||
|
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Estimated Fair Value |
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
15,166 |
|
|
$ |
— |
|
|
$ |
(5 |
) |
|
$ |
15,161 |
|
Government bonds |
|
|
2,948 |
|
|
|
3 |
|
|
|
— |
|
|
|
2,951 |
|
Total |
|
$ |
18,114 |
|
|
$ |
3 |
|
|
$ |
(5 |
) |
|
$ |
18,112 |
|
3. Derivative Financial Instruments
At June 30, 2016 and September 30, 2015, the Company’s Canadian subsidiary had $27.5 million and $28.1 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. Approximately $3.3 million of these Canadian dollar denominated intercompany accounts payable are considered by management to be of a short-term nature whereby the appreciation or devaluation of the Canadian dollar against the U.S. dollar will result in a gain or loss, respectively, to the consolidated statement of operations. The Company considers the remaining $24.2 million Canadian dollar denominated intercompany accounts payable to be of a long-term nature and whereby settlement is not planned or anticipated in the foreseeable future; therefore, any resulting foreign exchange gains and losses are reported in the consolidated balance sheets as a component of other comprehensive income in accordance with ASC 830 “Foreign Currency Matters”. In June 2016, the Company entered into a $3.0 million 90-day hedge contract with a United States bank to hedge a portion of its short-term Canadian dollar foreign exchange rate exposure. 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 June 30, 2016, the fair value of this contract was a liability of $11,000.
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 |
|
June 30, 2016 |
|
|
September 30, 2015 |
|
||
Foreign Currency Forward Contracts |
|
Accrued Expenses and Other Current Liabilities |
|
$ |
11 |
|
|
$ |
18 |
|
The following table summarizes the Company’s gains on derivative instruments in the consolidated statements of operations for the three and nine month periods ended June 30, 2016 and 2015 (in thousands):
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
Derivative Instrument |
|
Location of Gain (Loss) on Derivative Instrument |
|
June 30, 2016 |
|
|
June 30, 2015 |
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
||||
Foreign Currency Forward Contracts |
|
Other Income (Expense) |
|
$ |
(14 |
) |
|
$ |
(393 |
) |
|
$ |
14 |
|
|
$ |
2,555 |
|
Amounts in the above table include realized and unrealized derivative gains and losses.
4. Fair Value of Financial Instruments
At June 30, 2016, 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
10
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 June 30, 2016 |
|
|||||||||||||
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable (Level 2) |
|
|
Significant Unobservable (Level 3) |
|
|
Totals |
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
17,672 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
17,672 |
|
Government bonds |
|
|
9,582 |
|
|
|
— |
|
|
|
— |
|
|
|
9,582 |
|
Foreign currency forward contract |
|
|
— |
|
|
|
(11 |
) |
|
|
— |
|
|
|
(11 |
) |
Total |
|
$ |
27,254 |
|
|
$ |
(11 |
) |
|
$ |
— |
|
|
$ |
27,243 |
|
|
|
As of September 30, 2015 |
|
|||||||||||||
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable (Level 2) |
|
|
Significant Unobservable (Level 3) |
|
|
Totals |
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
15,161 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
15,161 |
|
Government bonds |
|
|
2,951 |
|
|
|
— |
|
|
|
— |
|
|
|
2,951 |
|
Foreign currency forward contract |
|
|
— |
|
|
|
(18 |
) |
|
|
— |
|
|
|
(18 |
) |
Total |
|
$ |
18,112 |
|
|
$ |
(18 |
) |
|
$ |
— |
|
|
$ |
18,094 |
|
The Company applies fair value techniques on a non-recurring basis in evaluating potential impairment losses related to long-lived assets.
5. Accounts and Notes Receivable
Current trade accounts are reflected in the following table (in thousands):
|
|
June 30, 2016 |
|
|
September 30, 2015 |
|
||
Trade accounts receivable |
|
$ |
14,180 |
|
|
$ |
15,209 |
|
Allowance for doubtful accounts |
|
|
(2,170 |
) |
|
|
(2,516 |
) |
|
|
$ |
12,010 |
|
|
$ |
12,693 |
|
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.
Notes receivable, net are reflected in the following table (in thousands):
|
|
June 30, 2016 |
|
|
September 30, 2015 |
|
||
Notes receivable |
|
$ |
4,094 |
|
|
$ |
3,520 |
|
Allowance for doubtful notes |
|
|
— |
|
|
|
— |
|
|
|
|
4,094 |
|
|
|
3,520 |
|
Less current portion |
|
|
2,179 |
|
|
|
2,004 |
|
Non-current notes receivable |
|
$ |
1,915 |
|
|
$ |
1,516 |
|
11
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. Inventories
Inventories consist of the following (in thousands):
|
|
June 30, 2016 |
|
|
September 30, 2015 |
|
||
Finished goods |
|
$ |
44,366 |
|
|
$ |
55,074 |
|
Work in process |
|
|
2,019 |
|
|
|
5,632 |
|
Raw material |
|
|
74,685 |
|
|
|
70,769 |
|
Obsolescence reserve |
|
|
(10,948 |
) |
|
|
(6,675 |
) |
|
|
$ |
110,122 |
|
|
$ |
124,800 |
|
During the nine months ended June 30, 2016 and 2015, the Company made non-cash inventory transfers of $3.0 million and $4.8 million, respectively, to its rental equipment fleet. Raw materials include semi-finished goods and component parts totaling $52.5 million and $48.4 million, respectively, at June 30, 2016 and September 30, 2015.
7. Long-Term Debt
The Company had no long-term debt outstanding at June 30, 2016 and September 30, 2015.
On March 2, 2011, the Company entered into a credit agreement with Frost Bank with borrowing availability of $50.0 million (the “Credit Agreement”). On May 4, 2015, the Company 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). As of June 30, 2016, the Company’s borrowing base was $35.3 million resulting in borrowing availability of $30.0 million less $0.5 million of outstanding letters of credit. The Company’s domestic subsidiaries have guaranteed the obligations of the Company under the Credit Agreement and such subsidiaries have secured their obligations under such guarantees by the pledge of substantially all of the assets of such subsidiaries, except real property assets. The Credit Agreement 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. 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 3.50% at June 30, 2016. At June 30, 2016, the Company was in compliance with all covenants under the Credit Agreement.
8. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following (in thousands):
|
|
Unrealized Gains (Losses) on Available-for-Sale Securities |
|
|
Foreign Currency Translation Adjustments |
|
|
Totals |
|
|||
Balance at October 1, 2015 |
|
$ |
(3 |
) |
|
$ |
(12,942 |
) |
|
$ |
(12,945 |
) |
Changes in unrealized gains on available-for-sale securities, net of tax |
|
|
21 |
|
|
|
— |
|
|
|
21 |
|
Foreign currency translation adjustments |
|
|
— |
|
|
|
(1,473 |
) |
|
|
(1,473 |
) |
Balance at June 30, 2016 |
|
$ |
18 |
|
|
$ |
(14,415 |
) |
|
$ |
(14,397 |
) |
12
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. Stock-Based Compensation
During the nine months ended June 30, 2016, the Company issued 182,400 shares of restricted stock under its 2014 Long Term Incentive Plan, as amended (the “Plan”). The weighted average grant date fair value of the restricted stock was $14.84 per share. The grant date fair value of these awards was $2.7 million, which will be charged to expense over the next four years as the restrictions lapse. Compensation expense for restricted stock awards was 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. Recipients of restricted stock awards are entitled to vote such shares and are entitled to dividends, if paid.
During the nine months ended June 30, 2016, the Company also issued 69,300 nonqualified stock options under the Plan. The options issued are based upon three tiers, each with separate market and service based vesting conditions. Market based vesting conditions are based on achieving a specified market return on the Company’s stock price. Compensation expense for the nonqualified stock option awards was determined based on a Monte Carlo simulation, which incorporates the possibility that the market conditions may not be satisfied. The weighted average grant date fair value of the options issued was determined to be $5.96 per option resulting in unrecognized compensation costs of $0.4 million, which will be charged to expense over the requisite service period of the options, ranging from 18 to 36 months.
As of June 30, 2016, the Company had unrecognized compensation expense of $8.1 million relating to restricted stock awards. This unrecognized compensation expense is expected to be recognized over a weighted average period of 2.8 years. In addition, the Company had $0.3 million of unrecognized compensation expense related to nonqualified stock option awards which is expected to be recognized over a weighted average period of 1.7 years.
As of June 30, 2016, a total of 276,150 shares of restricted stock and 159,000 nonqualified stock options shares were outstanding.
10. Loss Per Common Share
The Company applies the two-class method in calculating per share data. The following table summarizes the calculation of net loss and weighted average common shares and common equivalent shares outstanding for purposes of the computation of loss per share (in thousands, except share and per share data):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
||||
Net loss |
|
$ |
(11,654 |
) |
|
$ |
(8,564 |
) |
|
$ |
(33,661 |
) |
|
$ |
(19,191 |
) |
Less: Income allocable to unvested restricted stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Loss available to common shareholders |
|
|
(11,654 |
) |
|
|
(8,564 |
) |
|
|
(33,661 |
) |
|
|
(19,191 |
) |
Reallocation of participating earnings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Loss attributable to common shareholders for diluted earnings per share |
|
$ |
(11,654 |
) |
|
$ |
(8,564 |
) |
|
$ |
(33,661 |
) |
|
$ |
(19,191 |
) |
Weighted average number of common share equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares used in basic loss per share |
|
|
13,051,916 |
|
|
|
13,002,916 |
|
|
|
13,042,000 |
|
|
|
12,994,391 |
|
Common share equivalents outstanding related to stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total weighted average common shares and common share equivalents used in diluted loss per share |
|
|
13,051,916 |
|
|
|
13,002,916 |
|
|
|
13,042,000 |
|
|
|
12,994,391 |
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.89 |
) |
|
$ |
(0.66 |
) |
|
$ |
(2.58 |
) |
|
$ |
(1.48 |
) |
Diluted |
|
$ |
(0.89 |
) |
|
$ |
(0.66 |
) |
|
$ |
(2.58 |
) |
|
$ |
(1.48 |
) |
For the calculation of diluted loss per share for the three and nine months ended June 30, 2016 and 2015, 159,000 stock options and 89,700 stock options, respectively, were excluded in the calculation of weighted average shares outstanding as a result of their impact being antidilutive.
13
GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. Commitments and Contingencies
The Company is involved in various pending or potential legal actions in the ordinary course of our business. Management is unable to predict the ultimate outcome of these actions, because of the inherent uncertainty of litigation. Management is not aware of any material pending or known to be contemplated legal or government proceedings against the Company.
12. Segment Information
The Company reports and evaluates financial information for two segments: Seismic and Non-Seismic. Seismic product lines include: land and marine wireless data acquisition systems, permanent land and seabed reservoir monitoring products and services, geophones and geophone strings, hydrophones, leader wire, connectors, telemetry cables, marine streamer retrieval and steering devices and various other products. The Non-Seismic product lines include: thermal imaging products and industrial products.
The following table summarizes the Company’s segment information (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
|
June 30, 2016 |
|
|
June 30, 2015 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seismic |
|
$ |