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GEOSPACE TECHNOLOGIES CORP - Quarter Report: 2012 December (Form 10-Q)

Form 10-Q
Table of Contents

 

 

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 December 31, 2012

OR

 

¨ 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)

 

 

 

Delaware   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  ¨

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  ¨

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   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

There were 12,858,216 shares of the Registrant’s Common Stock outstanding as of the close of business on January 31, 2013.

 

 

 


Table of Contents

Table of Contents

 

     Page
Number
 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

     3   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     23   

Item 4. Controls and Procedures

     24   

PART II. OTHER INFORMATION

  

Item 1A. Risk Factors

     25   

Item 6. Exhibits

     25   

 

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Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

      December 31, 2012      September 30, 2012  
     (unaudited)         
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 44,886       $ 50,752   

Short-term investments

     19,692         19,960   

Trade accounts receivable, net

     22,676         16,229   

Current portion of notes receivable, net

     3,534         3,806   

Inventories, net

     97,316         83,894   

Costs and estimated earnings in excess of billings

     6,325         —     

Deferred income tax assets

     6,437         6,689   

Other current assets

     9,764         5,898   
  

 

 

    

 

 

 

Total current assets

     210,630         187,228   

Rental equipment, net

     33,226         27,853   

Property, plant and equipment, net

     39,901         34,433   

Goodwill

     1,843         1,843   

Non-current deferred income tax assets

     431         307   

Non-current notes receivable, net

     1,236         1,687   

Prepaid income taxes

     6,710         5,479   

Other assets

     122         192   
  

 

 

    

 

 

 

Total assets

   $ 294,099       $ 259,022   
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable trade

   $ 17,347       $ 17,187   

Accrued expenses and other current liabilities

     13,722         13,978   

Deferred revenue

     10,800         8,641   

Deferred income tax liabilities

     142         111   

Income tax payable

     9,729         1,275   
  

 

 

    

 

 

 

Total current liabilities

     51,740         41,192   

Non-current deferred income tax liabilities

     3,285         2,843   
  

 

 

    

 

 

 

Total liabilities

     55,025         44,035   
  

 

 

    

 

 

 

Commitments and contingencies

     

Stockholders’ equity:

     

Preferred stock

     —           —     

Common stock

     129         128   

Additional paid-in capital

     62,408         60,633   

Retained earnings

     176,464         154,451   

Accumulated other comprehensive income (loss)

     73         (225
  

 

 

    

 

 

 

Total stockholders’ equity

     239,074         214,987   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 294,099       $ 259,022   
  

 

 

    

 

 

 

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

 

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Table of Contents

GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

 

     Three Months Ended  
     December 31, 2012     December 31, 2011  

Sales

   $ 77,751      $ 43,281   

Cost of sales

     37,187        22,623   
  

 

 

   

 

 

 

Gross profit

     40,564        20,658   

Operating expenses:

    

Selling, general and administrative

     5,363        4,735   

Research and development

     3,365        2,889   

Bad debt expense

     269        436   
  

 

 

   

 

 

 

Total operating expenses

     8,997        8,060   
  

 

 

   

 

 

 

Loss on disposal of equipment

     (19     —     
  

 

 

   

 

 

 

Income from operations

     31,548        12,598   
  

 

 

   

 

 

 

Other income (expense):

    

Interest expense

     (85     —     

Interest income

     229        267   

Foreign exchange gains

     46        122   

Other, net

     (16     (55
  

 

 

   

 

 

 

Total other income, net

     174        334   
  

 

 

   

 

 

 

Income before income taxes

     31,722        12,932   

Income tax expense

     9,709        4,247   
  

 

 

   

 

 

 

Net income

   $ 22,013      $ 8,685   
  

 

 

   

 

 

 

Basic earnings per share

   $ 1.72      $ 0.68   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 1.70      $ 0.68   
  

 

 

   

 

 

 

Weighted average shares outstanding—Basic

     12,827,918        12,704,538   
  

 

 

   

 

 

 

Weighted average shares outstanding—Diluted

     12,926,814        12,835,096   
  

 

 

   

 

 

 

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

 

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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three Months Ended  
     December 31, 2012     December 31, 2011  

Net income

   $ 22,013      $ 8,685   

Other comprehensive income (loss):

    

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

     (6     5   

Foreign currency translation adjustments

     304        (509
  

 

 

   

 

 

 

Other comprehensive income (loss)

     298        (504
  

 

 

   

 

 

 

Total comprehensive income

   $ 22,311      $ 8,181   
  

 

 

   

 

 

 

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

 

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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months     Three Months  
     Ended     Ended  
     December 31, 2012     December 31, 2011  

Cash flows from operating activities:

    

Net income

   $ 22,013      $ 8,685   

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

    

Deferred income tax expense

     458        339   

Depreciation

     1,994        1,771   

Amortization

     60        60   

Accretion of discounts on short-term-investments

     87        36   

Stock-based compensation

     250        187   

Bad debt expense

     269        436   

Inventory obsolescence recovery

     (550     (132

Gross profit from the sale of used rental equipment

     (6,519     (2,165

Loss on disposal of property, plant and equipment

     19        —     

Realized (gain) loss on short-term investments

     (1     1   

Effects of changes in operating assets and liabilities:

    

Trade accounts and notes receivable

     (5,981     (2,210

Inventories

     (13,704     7,734   

Costs and estimated earnings in excess of billings

     (6,325     —     

Other current assets

     (3,823     3,780   

Prepaid income taxes

     (1,231     (3,816

Accounts payable

     154        2,508   

Accrued expenses and other

     152        (660

Deferred revenue

     2,112        341   

Income taxes payable

     8,454        3,184   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (2,112     20,079   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property, plant and equipment

     (6,494     (792

Investment in rental equipment

     (11,419     (16,437

Proceeds from sale of used rental equipment

     12,408        3,577   

Purchases of short-term investments

     (702     (675

Proceeds from the sale of short-term investments

     900        625   
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,307     (13,702
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Excess tax benefit from stock-based compensation

     1,092        (3

Proceeds from exercise of stock options and other

     461        79   
  

 

 

   

 

 

 

Net cash provided by financing activities

     1,553        76   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     —          1   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (5,866     6,454   

Cash and cash equivalents, beginning of period

     50,752        31,388   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 44,886      $ 37,842   
  

 

 

   

 

 

 

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

 

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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, 2012 was derived from the Company’s audited consolidated financial statements at that date. The consolidated balance sheet at December 31, 2012 and the consolidated statements of operations and statements of comprehensive income for the three months ended December 31, 2012 and 2011, and the consolidated statements of cash flows for the three months ended December 31, 2012 and 2011 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 months ended December 31, 2012 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. 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 year ended September 30, 2012.

Reclassifications

Certain amounts previously presented in the consolidated financial statements may have been reclassified to conform to the current year presentation. Effective October 1, 2012, the Company reports and categorizes its sales and products into two segments: Seismic and Non-Seismic. Prior year amounts have been reclassified to conform to the new presentation of the Company’s business segments. Such reclassifications had no effect on net income, 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 comprehensive income in stockholders’ equity. The Company’s short-term investments have contractual maturities ranging from January 2013 to May 2015. See note 2 for additional information.

 

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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 the Company’s subsidiary in the Russian Federation uses an average cost method to value its inventories.

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 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.

The Company records bill and hold arrangements consistent with guidance around bill and hold arrangements. As of December 31, 2012 and 2011, the Company had no sales under bill and hold arrangements.

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 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. 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.

The Company analyzes a variety of indicators to determine manufacturing progress, including (i) actual costs incurred to date compared to total estimated costs, (ii) actual quantities produced to date compared to total contract quantities, and (iii) actual labor hours incurred to date compared to total estimated labor hours.

 

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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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.

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. Changes in the warranty reserve are reflected in the following table (in thousands):

 

Balance at October 1, 2012

   $  2,308   

Accruals for warranties issued during the period

     102   

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

     (171
  

 

 

 

Balance at December 31, 2012

   $ 2,239   
  

 

 

 

2. Short-term Investments

The Company’s short-term investments consisted of the following:

 

     As of December 31, 2012 (in thousands)  
     Amortized      Unrealized      Unrealized      Estimated  
     Cost      Gains      Losses      Fair Value  

Short-term investments:

           

Corporate

   $ 10,980       $ 10       $  —         $ 10,990   

Government

     8,676         26         —           8,702   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,656       $ 36       $ —         $ 19,692   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

     As of September 30, 2012 (in thousands)  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Estimated
Fair Value
 

Short-term investments:

           

Corporate

   $ 11,072       $ 37       $ —         $ 11,109   

Government

     8,842         9         —           8,851   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,914       $ 46       $ —         $ 19,960   
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated other comprehensive income (loss) on the consolidated balance sheets at December 31, 2012 and September 30, 2012 includes unrealized gains (net of tax) of $24,000 and $30,000, respectively.

3. Derivative Financial Instruments

Periodically the Company enters into foreign currency hedge arrangements. At December 31, 2012, the Company’s Canadian subsidiary had $34.4 million of U.S. dollar denominated intercompany accounts payable owed to 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, during its first quarter ended December 31, 2012, the Company entered into an $18.0 million foreign currency forward contract to hedge a portion of the Canadian subsidiary’s U.S. dollar denominated debt. This contract reduces the impact on cash flows from movements in the Canadian dollar/U.S. dollar currency exchange rate. At December 31, 2012, the Company had accrued unrealized foreign exchange losses of $0.2 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     December 31, 2012     September 30, 2012  

Foreign Currency Exchange Contracts

    Accrued Expenses        150        215   
   

 

 

   

 

 

 
    $ 150      $ 215   
   

 

 

   

 

 

 

The following table summarizes the impact of the Company’s derivatives on the consolidated statements of operations for the three month periods ended December 31, 2012 and 2011 (in thousands ):

 

    

Location of (Loss)

Gain on Derivative

  Three Months Ended  

Derivative Instrument

  Instrument   December 31, 2012     December 31, 2011  

Foreign Currency Exchange Contracts

  Other Income (Expense)     213          
   

 

 

   

 

 

 
    $ 213      $   
   

 

 

   

 

 

 

 

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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

4. Fair Value of Financial Instruments

At December 31, 2012, the Company’s financial instruments included cash and cash equivalents, short-term investments, foreign currency forward contract, trade and notes receivables, other current assets, accounts payable and other current liabilities. Due to the short-term maturities of cash and cash equivalents, trade and other receivables, other current assets, accounts payable and other current liabilities, 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:

 

     As of December 31, 2012 (in thousands)  
     Total     Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
(Level 2)
    Significant
Unobservable
(Level 3)
 

Short-term investments:

         

Corporate bonds

   $ 10,990      $ 10,990       $ —        $ —     

Government bonds

     8,702        8,702         —          —     

Foreign currency forward contract

     (101     —           (101     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 19,591      $ 19,692       $ (101   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     As of September 30, 2012 (in thousands)  
     Total     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
(Level 2)
    Significant
Unobservable
(Level 3)
 

Short-term investments:

         

Corporate bonds

   $ 11,109      $ 11,109       $ —        $ —     

Government bonds

     8,851        8,851         —          —     

Foreign currency forward contract

     (215     —           (215     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 19,745      $ 19,960       $ (215   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company’s foreign currency forward contract at December 31, 2012 and September 30, 2012 is recorded as a current liability on the consolidated balance sheets as a component of accrued expenses and other current liabilities.

 

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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

5. Accumulated Other Comprehensive Income (Loss):

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

 

     December 31, 2012      September 30, 2012  

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

   $ 24       $ 30   

Foreign currency translation adjustments

     49         (255
  

 

 

    

 

 

 
   $ 73       $ (225
  

 

 

    

 

 

 

6. Inventories

Inventories consist of the following (in thousands):

 

     December 31, 2012     September 30, 2012  

Finished goods

   $ 27,009      $ 32,845   

Work-in-process

     24,487        19,585   

Raw materials

     54,567        40,788   

Obsolescence reserve

     (8,747     (9,324
  

 

 

   

 

 

 
   $ 97,316      $ 83,894   
  

 

 

   

 

 

 

The Company’s reserve for slow moving and obsolete inventories is analyzed and adjusted periodically to reflect the Company’s best estimate of the net realizable value of such inventories.

During the three months ended December 31, 2012 and 2011, the Company made non-cash transfers of $1.0 million and $0.1 million, respectively, of inventories to its rental equipment fleet.

7. Accounts and Notes Receivable

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

 

     December 31, 2012     September 30, 2012  

Trade accounts receivable

   $ 23,261      $ 16,509   

Allowance for doubtful accounts

     (585     (280
  

 

 

   

 

 

 
   $ 22,676      $ 16,229   
  

 

 

   

 

 

 

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.

 

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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The Company provides long-term financing in the form of promissory notes when competitive conditions require such financing. Notes receivable bear interest and are generally collateralized by the products sold.

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

 

     December 31, 2012      September 30, 2012  

Notes receivable

   $ 4,770       $ 5,493   

Allowance for doubtful notes

     —           —     
  

 

 

    

 

 

 
     4,770         5,493   

Less current portion

     3,534         3,806   
  

 

 

    

 

 

 
   $ 1,236       $ 1,687   
  

 

 

    

 

 

 

8. Earnings Per Common Share

In October 2012, the Company implemented a 2-for-1 split of its common stock effected in the legal form of a stock dividend. All share and per-share disclosures for periods prior to October 2012 have been adjusted to give effect to the stock split.

The following table summarizes the calculation of net earnings and weighted average common shares and common equivalent shares outstanding for purposes of the computation of earnings per share (in thousands, except share and per share data):

 

     Three Months Ended  
     December 31, 2012      December 31, 2011  

Net earnings available to common stockholders

   $ 22,013       $ 8,685   
  

 

 

    

 

 

 

Weighted average number of common share equivalents:

     

Common shares used in basic earnings per share

     12,827,918         12,704,538   

Common share equivalents outstanding related to stock options

     98,896         130,558   
  

 

 

    

 

 

 

Total weighted average common shares and common share equivalents used in diluted earnings per share

     12,926,814         12,835,096   
  

 

 

    

 

 

 

Basic earnings per common share

   $ 1.72       $ 0.68   
  

 

 

    

 

 

 

Diluted earnings per common share

   $ 1.70       $ 0.68   
  

 

 

    

 

 

 

There were no stock options excluded from the computation of weighted average shares outstanding due to antidilution.

 

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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

9. Segment Information

Effective October 1, 2012, the Company reports and categorizes its sales and products into two business segments: Seismic and Non-Seismic. Prior to October 1, 2012, the Company reported its business segments as Seismic and Thermal Solutions. Effective October 1, 2012, the Seismic product lines include land and marine wireless data acquisition systems, seabed reservoir characterization products and services, geophones and hydrophones, leader wire, geophone string and acquisition system 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 Company frequently has a minor amount of Seismic product sales to its Non-Seismic customers.

The following table summarizes the Company’s segment information (in thousands):

 

     Three Months Ended  
     December 31, 2012     December 31, 2011  

Net sales:

    

Seismic

   $ 72,084      $ 37,292   

Non-Seismic

     5,467        5,788   

Corporate

     200        201   
  

 

 

   

 

 

 

Total

   $ 77,751      $ 43,281   
  

 

 

   

 

 

 

Income (loss) from operations:

    

Seismic

   $ 33,961      $ 13,961   

Non-Seismic

     465        993   

Corporate

     (2,878     (2,356
  

 

 

   

 

 

 

Total

   $ 31,548      $ 12,598   
  

 

 

   

 

 

 

10. Credit Agreement

On March 2, 2011, the Company entered into a new credit agreement (as amended, the “Credit Agreement”) with a bank. Under the Credit Agreement, the Company can borrow up to $25.0 million principally secured by its accounts receivable, inventories and equipment. In addition, certain domestic subsidiaries of the Company have guaranteed the obligations of the Company under the Credit Agreement and such subsidiaries have secured the obligations by the pledge of certain of the assets of such subsidiaries. The Credit Agreement expires on March 2, 2014. The Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial ratios, restricts the Company and its subsidiaries’ ability to pay dividends and contains other covenants customary in agreements of this type. The interest rate for borrowings under the Credit Agreement is a LIBOR based rate with a margin spread of 250 to 350 basis points depending upon the maintenance of certain ratios. At December 31, 2012, the Company was in compliance with all covenants. At December 31, 2012, there were no borrowings outstanding, there were no standby letters of credit outstanding, and available borrowings under the Credit Agreement were $25.0 million. On April 24, 2012, the Company amended the Credit Agreement, effective as of March 31, 2012, to remove investments in rental equipment from the calculation of capital expenditures as applied in determining the satisfaction of the Company’s cash flow coverage ratio covenant under the Credit Agreement.

 

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GEOSPACE TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

11. Income Taxes

The United States statutory tax rate for the three months ended December 31, 2012 and 2011 was 35%. The Company’s effective tax rates for the three months ended December 31, 2012 and 2011 were 30.6% and 32.8%, respectively. Compared to the United States statutory rate of 35%, the Company’s lower effective tax rates for each of the periods ended December 31, 2012 and 2011 primarily resulted from a manufacturers’/producers’ deduction available to U.S. manufacturers. In December 2012 the United States Congress announced that it extended the research and experimentation tax credit from January 1, 2012 through December 31, 2013. When the research and experimentation tax credit expired on December 31, 2011, the Company did not recognize any associated tax credits for the period January 1, 2012 through September 30, 2012. As a result of this recent announcement by the United States Congress, during the three months ended December 31, 2012, the Company recognized $0.3 million of additional research and experimentation tax credits which were earned by the Company in its fiscal year ended September 30, 2012. Excluding the impact of these prior period tax credits, the Company’s effective tax rate for the three months ended December 31, 2012 was 31.6%.

From time to time the Company is the subject of audits by various tax authorities that can result in claims and assessments and additional tax payments, penalties and interest. The United States Internal Revenue Service (“IRS”) is in the process of conducting an audit of the Company’s United States Federal income tax returns for fiscal year 2009. Management believes that the outcome of such audit will not have a material effect on the Company’s financial position, results of operations or cash flows.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the major elements of our consolidated financial statements. You should read this discussion and analysis together with our consolidated financial statements, including the accompanying notes, and other detailed information appearing elsewhere in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein, if any, contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “intend”, “expect”, “plan”, “budget”, “forecast”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue”, “evaluating” or similar words. Statements that contain these words should be read carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other forward-looking information. These forward-looking statements reflect our best judgment about future events and trends based on the information currently available to us. However, there will likely be events in the future that we are not able to predict or control. The factors listed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, as well as other cautionary language in such Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. The occurrence of the events described in these risk factors and elsewhere in this Quarterly Report on Form 10-Q could have a material adverse effect on our business, results of operations and financial position, and actual events and results of operations may vary materially from our current expectations. We assume no obligation to revise or update any forward-looking statement for any reason, except as required by law.

Business Overview

Geospace Technologies Corporation is a Delaware corporation incorporated on September 27, 1994. Unless otherwise specified, the discussion in this Quarterly Report on Form 10-Q refers to Geospace Technologies Corporation and its subsidiaries. We design and manufacture instruments and equipment used in the acquisition and processing of seismic data as well as in the characterization and monitoring of producing oil and gas reservoirs. Demand for our products has been, and will likely continue to be, vulnerable to downturns in the economy and the oil and gas industry in general. For more information, please refer to the risks discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

We have engaged in the seismic instrument and equipment business since 1980 and market our products primarily to the oil and gas industry. We also design, manufacture and distribute non-seismic equipment including thermal imaging equipment and industrial products. We report and categorize our customers and products into two different segments: Seismic and Non-Seismic.

Products and Product Development

Seismic Products

Our seismic business segment accounts for the majority of our sales. Geoscientists use seismic data primarily in connection with the exploration, development and production of oil and gas reserves to map potential and known hydrocarbon bearing formations and the geologic structures that surround them. Our seismic product lines currently consist of land and marine nodal data acquisition systems, seabed reservoir characterization products and services, geophones and hydrophones, leader wire, geophone string and acquisition system connectors, telemetry cables, marine streamer retrieval and steering devices and various other products. Many of our seismic products are compatible with most major competitive seismic data acquisition systems currently in use. We believe that our seismic products are among the most technologically advanced instruments and equipment available for seismic data acquisition.

 

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Traditional Products

A seismic energy source and a seismic data recording system are combined to acquire seismic data. We provide many of the components of seismic data recording systems, including geophones, hydrophones, multi-component sensors, seismic leader wire, geophone strings, connectors, seismic telemetry cables and other seismic related products. On land, our customers use geophones, leader wire, cables and connectors to receive and measure seismic reflections resulting from an energy source to data recording units, which store information for processing and analysis. In the marine environment, large ocean-going vessels tow long seismic cables known as “streamers” containing hydrophones which are used to detect pressure changes. Hydrophones transmit electrical impulses back to the vessel’s data recording unit where the seismic data is stored for subsequent processing and analysis. Our marine seismic products help steer streamers while being towed and help recover streamers if they become disconnected from the vessel.

Our seismic sensor, cable and connector products are compatible with most major competitive seismic data acquisition systems currently in use, and sales result primarily from seismic contractors purchasing our products as components of new seismic data acquisition systems or to repair and replace components of seismic data acquisition systems already in use.

Our products used in marine seismic data acquisition include our patented marine seismic streamer retrieval devices (“SRDs”). Occasionally, streamer cables are severed and become disconnected from the vessel as a result of obstacles, inclement weather, vessel traffic or human error. Our SRDs, which are attached to the streamer cables, contain air bags which are designed to inflate automatically at a given depth, bringing the severed streamer cables to the surface. These SRDs save the seismic contractors significant time and money compared to the alternative of losing the streamer cable. We also produce seismic streamer steering devices, or “birds,” which are finlike devices that attach to the streamer cable. These birds help maintain the streamer cable at a certain desired depth as it is being towed through the water.

Our wholly-owned subsidiary in the Russian Federation manufactures international standard geophones, sensors, seismic leader wire, seismic telemetry cables and related seismic products for customers in the Russian Federation and other international seismic marketplaces. Operating in foreign locations involves certain risks as discussed under the heading “Risk Factors – Our Foreign Subsidiaries and Foreign Marketing Efforts Face Additional Risks and Difficulties” in this Annual Report on Form 10-K.

Wireless Products

During fiscal year 2008, we announced the development of a land-based wireless (or nodal) seismic data acquisition system. Each wireless station operates independently and therefore can be deployed in virtually unlimited channel configurations. Rather than utilizing interconnecting cables as required by most traditional land data acquisition systems, each wireless station operates as an independent data collection system. As a result, our wireless system requires less maintenance, which we believe allows our customers to operate more effectively and efficiently because of its reduced environmental impact, lower weight and ease of operation. Our wireless system is designed into configurations ranging from one to four channels per station. Since its introduction and through September 30, 2012, we sold approximately 205,000 wireless channels and had approximately 65,000 wireless channels available for rent. With the recent opening of a branch office in Bogotá, Colombia and increasing demand for wireless rental equipment elsewhere in the world, we expect further increases in the size of our wireless product rental fleet during fiscal year 2013.

In October 2009, we introduced a marine-based wireless seismic data acquisition system. Similar to our land wireless system, the marine wireless system can be deployed in virtually unlimited channel configurations and does not require interconnecting cables between each station. Our deepwater versions of this marine wireless system can be deployed in depths of up to 3,000 meters.

 

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Reservoir Products

We have developed permanently installed high-definition reservoir characterization products for ocean-bottom applications in producing oil and gas fields. We also produce a retrievable version of this ocean-bottom system for use on fields where permanently installed systems are not appropriate or economical. Seismic surveys repeated over selected time intervals show dynamic changes within the reservoir and can be used to monitor the effects of production. Utilizing these tools, producers can enhance the recovery of oil and gas deposits over the life of a reservoir.

Our high-definition reservoir characterization products include the HDSeis™ product line and a suite of borehole and reservoir characterization products and services. Our HDSeis™ System is a high-definition seismic data acquisition system with flexible architecture that allows it to be configured as a borehole seismic system or as a subsurface system for both land and marine reservoir-monitoring projects. The scalable architecture of the HDSeis™ System enables custom designed system configuration for applications ranging from low-channel engineering and environmental-scale surveys requiring a minimum number of recording channels to high-channel surveys required to efficiently conduct permanent reservoir imaging and monitoring. Modular architecture allows virtually unlimited channel expansion. In addition, multi-system synchronization features make the HDSeis™ System well suited for multi-well or multi-site acquisition, simultaneous surface and downhole acquisition and continuous reservoir monitoring projects.

Reservoir characterization requires special purpose or custom designed systems in which portability becomes less critical and functional reliability assumes greater importance. This reliability factor helps assure successful operations in inaccessible locations over a considerable period of time. Additionally, reservoirs located in deepwater or harsh environments require special instrumentation and new techniques to maximize recovery. Reservoir characterization also requires high-bandwidth, high-resolution seismic data for engineering project planning and reservoir management. We believe our HDSeis™ System and tools, designed for cost-effective deployment and lifetime performance, will make borehole and seabed seismic acquisition a cost-effective and reliable process for the challenges of reservoir characterization and monitoring. Our multi-component seismic product developments include an omni-directional geophone for use in reservoir monitoring, a compact marine three-component or four-component gimbaled sensor and special-purpose connectors, connector arrays and cases.

In addition, we produce seismic borehole acquisition systems which employ a fiber optic augmented wireline capable of very high data transmission rates. These systems are used for several reservoir characterization applications, including an application pioneered by us allowing operators and service companies to monitor and measure the results of fracturing operations.

Non-Seismic Products

Our non-seismic businesses leverage upon our existing manufacturing facilities and engineering capabilities. We have found that many of our seismic products, with little or no modification, have direct application to industries beyond those involved in oil and gas exploration and development. For example, our customers utilize our borehole tools to monitor subsurface carbon dioxide injections and for mine safety applications.

Our non-seismic products include thermal imaging products targeted at the commercial graphics industry as well as various industrial products. Our industrial products include (i) sensors for vibration monitoring and earthquake detection, (ii) cables for power and communication for the offshore oil and gas and offshore construction industries, and (iii) water meter cables and other specialty cable and connector products.

 

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Consolidated Results of Operations

We report and evaluate financial information for two segments: Seismic and Non-Seismic. Certain items have been reclassified to conform to the new segment reporting. Summary financial data by business segment follows (in thousands):

 

     Three Months Ended  
     December 31, 2012     December 31, 2011  

Seismic

    

Traditional exploration product revenues

   $ 14,004      $ 14,002   

Wireless exploration product revenues

     46,918        17,875   

Reservoir product revenues

     11,162        5,415   
  

 

 

   

 

 

 

Total seismic sales

     72,084        37,292   

Operating income

     33,961        13,961   

Non-Seismic

    

Net sales

     5,467        5,788   

Operating income

     465        993   

Corporate

    

Net sales

     200        201   

Operating loss

     (2,878     (2,356

Consolidated Totals

    

Net sales

     77,751        43,281   

Operating income

     31,548        12,598   

Overview

Three months ended December 31, 2012 compared to three months ended December 31, 2011

Consolidated sales for the three months ended December 31, 2012 increased by $34.5 million, or 79.6%, from the corresponding period of the prior fiscal year. This increase reflects greater demand for sales of our seismic products.

Consolidated gross profit for the three months ended December 31, 2012 increased by $19.9 million, or 96.4%, from the corresponding period of the prior fiscal year. This increase in gross profit resulted from increased sales of our seismic products and a favorable product mix.

Consolidated operating expenses for the three months ended December 31, 2012 increased by $0.9 million, or 11.6%, from the corresponding period of the prior fiscal year. The increase in operating expenses reflects higher personnel costs and other general increases associated with increased sales and asset expansion.

Other income for the three months ended December 31, 2012 decreased $0.2 million from the corresponding period of the prior fiscal year. The decrease in other income primarily resulted from higher levels of interest expense and lower foreign exchange gains.

The United States statutory tax rate for the three months ended December 31, 2012 and 2011 was 35%. Our effective tax rates for the three months ended December 31, 2012 and 2011 were 30.6% and 32.8%, respectively. Compared to the United States statutory rate of 35%, our lower effective tax rates for each of the periods ended December 31, 2012 and 2011 primarily resulted from a manufacturers’/producers’ deduction available to U.S. manufacturers. In December 2012 the United States Congress announced that it extended the research and experimentation tax credit from January 1, 2012 through December 31, 2013. When the research and experimentation tax credit expired on December 31, 2011, we did not recognize any associated tax credits for the period January 1, 2012 through September 30, 2012. As a result of this recent announcement by the United States

 

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Congress, during the three months ended December 31, 2012, we recognized $0.3 million of additional research and experimentation tax credits which were earned by us in our fiscal year ended September 30, 2012. Excluding the impact of these prior period tax credits, our effective tax rate for the three months ended December 31, 2012 was 31.6%.

Seismic Products

Net Sales

Sales of our seismic products for the three months ended December 31, 2012 increased by $34.8 million, or 93.3%, from the corresponding period of the prior fiscal year. The components of this increase include the following:

 

   

Traditional Product Sales and Rentals – For the three months ended December 31, 2012, sales of our traditional products remained consistent with the corresponding period of the prior fiscal year.

 

   

Wireless Product Sales and Rentals – For the three months ended December 31, 2012, sales of our wireless products increased by $29.0 million, or 162.5%, from the corresponding period of the prior fiscal year. Wireless product revenues for the three months ended December 31, 2012 consisted of sales and rentals to both new and existing customers, and included the sale of (i) approximately 28,000 channels of new wireless products and (ii) approximately 19,000 channels of used wireless products from our rental fleet. The sale of used wireless products from our rental fleet resulted in sales proceeds of $12.4 million. This demand for wireless channel sales resulted from continued industry acceptance of our wireless systems in lieu of less efficient legacy cable-based systems.

 

   

Reservoir Product Sales, Rentals and Services – For the three months ended December 31, 2012, revenues from our reservoir products increased $5.7 million, or 106.1%, from the corresponding period of the prior year. Revenues increased primarily from the recognition of approximately $8.7 million of revenue from the Statoil order. Such increase was partially offset by a decline in sales and rentals of our borehole tools.

The rate of new customer orders for our seismic products, especially large orders for our wireless and subsea reservoir products, generally occur irregularly thereby making it difficult for us to predict our sales and production levels each quarter. Furthermore, product shipping dates are generally determined by our customers and are not at our discretion. As a result, these factors have caused past sales of our seismic products to be unpredictable, or “lumpy,” and we expect this trend to continue into the future.

Operating Income

Our operating income associated with sales of our seismic products for the three months ended December 31, 2012 increased by $20.0 million, or 143.3%, from the corresponding period of the prior fiscal year. The higher level of operating income resulted from increased wireless product sales and revenue recognition for the Statoil order.

Non-Seismic Products

Net Sales

Sales of our non-seismic products for the three months ended December 31, 2012 decreased by $0.3 million, or 5.6%, from the corresponding period of the prior fiscal year. This decrease is primarily due to lower sales of industrial sensors and thermal imaging products to our European customers which appear to have been impacted by the region’s economic crisis. We expect the European market for sales of our non-seismic products to remain challenging for the remainder of fiscal year 2013.

 

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Operating Income

Our operating income associated with sales of our non-seismic products for the three months ended December 31, 2012 decreased $0.5 million, or 53.2%, from the corresponding period of the prior fiscal year. The decrease in operating income resulted lower sales levels, and lower profit margins due to a less favorable sales mix.

Incentive Compensation Program

We adopted an incentive compensation program for fiscal year 2013 whereby most employees will be eligible to begin earning incentive compensation if the Company reaches a five percent pretax return on stockholders’ equity, determined as of September 30, 2012. To be eligible to participate in this incentive compensation program, employees must participate in our Core Values Program. Based on our experience in prior years, we expect one hundred percent of our eligible employees to participate in the Core Values Program. The incentive compensation program does not apply to the employees of our Russian subsidiary as such employees participate in a locally administered bonus program. Certain non-executive employees are required to achieve specific goals to earn a significant portion of their total incentive compensation award. Any bonus awards earned under this program in fiscal year 2013 will be paid out to eligible employees after the end of the fiscal year.

Upon reaching the five percent pretax return threshold, an incentive compensation accrual is established equal to 16.7 percent of the amount of any consolidated pretax profits above the five percent pretax return threshold. The initial maximum aggregate bonus available under the program for fiscal year 2013 will be $6.5 million. Under this program, for the three months ended December 31, 2012 and 2011, we had accrued $1.9 million of incentive compensation expense.

Liquidity and Capital Resources

At December 31, 2012, we had approximately $44.9 million in cash and cash equivalents. For the three months ended December 31, 2012, we used approximately $2.1 million of cash from operating activities. Sources of cash generated from our operating activities resulted from net income of $22.0 million. Additional sources of cash included net non-cash charges of $2.6 million from deferred income taxes, depreciation, amortization, accretion, stock-based compensation, inventory obsolescence and bad debts. Other sources of cash and changes in working capital included (i) an $8.5 million increase in income tax payable resulting from the timing of our income taxes, and (ii) a $2.1 million increase in deferred revenue primarily due to the collection of an advance payment from Statoil. These sources of cash were offset by (i) a $13.7 million increase in inventories due to production relating to the Shell Brasil Petróleo Ltda order, raw material purchases for the Statoil order, and other general inventory increases in anticipation of future product orders, (ii) a $6.3 million increase in costs and estimated earnings in excess of billings related to the Statoil order, (iii) a $6.5 million adjustment to transfer gross profits from rental equipment sales to investing activities since such transactions involve the sale of long-lived assets, (iv) a $6.0 million increase in trade accounts and notes receivable primarily resulting from increased sales and the timing of cash collections, (v) $3.8 million increase in income tax deposits and other current assets and (vi) $1.2 million increase in prepaid income taxes related to intercompany sales.

For the three months ended December 31, 2012, we used approximately $5.3 million of cash in investing activities. The primary use of cash was capital expenditures of $17.9, including $11.4 million to expand our rental equipment fleet and $6.5 million for property and equipment, including $4.1 million of real property acquisitions in Houston and Bogotá. Due to high customer demand for our wireless rental equipment, we estimate that our total capital expenditures in fiscal year 2013 could be approximately $54 million or more. We expect these capital expenditures will be financed from our cash on hand, internal cash flow, rental equipment sales proceeds and/or from borrowings under our Credit Agreement. These uses of cash were partially offset by $12.4 million of proceeds from the sale of used rental equipment.

For the three months ended December 31, 2012, we generated approximately $1.6 million of cash in financing activities resulting from cash proceeds received from the exercise of stock options and the associated tax benefit related to such exercised stock options.

 

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On March 2, 2011, we entered into a new credit agreement (as amended, the “Credit Agreement”) with a bank. Under the Credit Agreement, we can borrow up to $25.0 million principally secured by our accounts receivable, inventories and equipment. In addition, certain of our domestic subsidiaries have guaranteed our obligations under the Credit Agreement and such subsidiaries have secured the obligations by the pledge of certain of the assets of such subsidiaries. The Credit Agreement expires on March 2, 2014. The Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial ratios, restricts us and our 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 is a LIBOR based rate with a margin spread of 250-350 basis points depending upon the maintenance of certain ratios. At December 31, 2012, the interest rate was 2.7%. At December 31, 2012, there were no borrowings outstanding, no standby letters of credit outstanding, and available borrowings under the Credit Agreement were $25.0 million. Please see “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 for more information about the restrictive covenants imposed on us by the Credit Agreement.

Critical Accounting Policies

Critical Accounting Policies are included in Financial Note 1, “Significant Accounting Policies,” in the Financial Notes in Item 1 of Part I of this Quarterly Report on Form 10-Q.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We have some market risk relative to sensitive instruments entered into for trading purposes and have only very limited risk as to arrangements entered into other than for trading purposes. We do not engage in commodity or commodity derivative instrument purchase or sales transactions. Because of the inherent unpredictability of foreign currency rates and interest rates, as well as other factors, actual results could differ materially from those projected in this Item.

Short-Term Investment Risk

Our short-term investments consisting of corporate bonds, government bonds and other similar investments are classified for accounting purposes as available-for-sale. If these short-term investments are not held to maturity, the proceeds obtained when the instruments are sold will be impacted by the current interest rates at the time they are sold.

Foreign Currency and Operations Risk

One of our wholly-owned subsidiaries, Geospace Technologies Eurasia, is located in the Russian Federation. Therefore, our financial results may be affected by factors such as changes in foreign currency exchange rates, weak economic conditions in the Russian Federation or changes in its political climate. Our consolidated balance sheet at December 31, 2012 reflected approximately $6.0 million of net working capital related to Geospace Technologies Eurasia. For third-party transactions, Geospace Technologies Eurasia both receives its income and pays its expenses primarily in rubles. To the extent that transactions of Geospace Technologies Eurasia are settled in rubles, a devaluation of the ruble versus the U.S. dollar could reduce any contribution from Geospace Technologies Eurasia to our consolidated results of operations and total comprehensive income as reported in U.S. dollars. We do not hedge the market risk with respect to our operations in the Russian Federation; therefore, such risk is a general and unpredictable risk of future disruptions in the valuation of rubles versus U.S. dollars to the extent such disruptions result in any reduced valuation of Geospace Technologies Eurasia’s net working capital or future contributions to our consolidated results of operations. At December 31, 2012, the foreign exchange rate of the U.S. dollar to the ruble was 1:30.52. If the U.S. dollar versus ruble exchange rate were to decline by ten percent, our working capital could decline by $0.6 million.

Foreign Currency Intercompany Accounts

From time to time, we provide access to capital to our foreign subsidiaries through U.S. dollar denominated interest bearing promissory notes. Such funds are generally used by our foreign subsidiaries to purchase capital assets and for general working capital needs. In addition, we sell products to our foreign subsidiaries in U.S. dollars on trade credit terms. Because U.S. dollar denominated intercompany debts are accounted for in the local currency of our foreign subsidiaries, any appreciation or devaluation of such foreign currencies against the U.S. dollar will result in a gain or loss, respectively, to our consolidated statement of operations. At December 31, 2012, we had outstanding intercompany accounts receivable of $34.4 million from our Canadian subsidiary. We entered into an agreement with a Canadian bank to hedge $18.0 million of this foreign exchange exposure, resulting in a net U.S. dollar denominated intercompany accounts payable exposure to the Canadian dollar of $16.4 million. At December 31, 2012, the foreign exchange rate of the U.S. dollar to the Canadian dollar was 1:1.0. If the U.S. dollar exchange rate were to strengthen by ten percent against the Canadian dollar, we would recognize a foreign exchange loss of $1.6 million at our Canadian subsidiary. At December 31, 2012, we had outstanding accounts receivable of $1.9 million from our subsidiary in the Russian Federation, and the U.S. dollar to ruble exchange rate was 1:30.5. If the U.S. dollar exchange rate were to strengthen by ten percent against the Russian ruble, we would recognize a foreign exchange loss of $0.2 million at our Russian subsidiary.

Floating Interest Rate Risk

The Credit Agreement contains a floating interest rate, which subjects us to the risk of increased interest costs associated with any upward movements in bank market interest rates. Under the Credit Agreement our borrowing interest rate is a LIBOR based rate plus 250-350 basis points. As of December 31, 2012, we had no borrowings under the New Credit Agreement.

 

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Item 4. Controls and Procedures

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company’s reports.

In connection with the preparation of this Quarterly Report on Form 10-Q, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the CEO and CFO, as of December 31, 2012 of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2012.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1A. Risk Factors

Our Use of Percentage-of-Completion Method of Accounting Could Result in Volatility in our Results of Operations.

We recognize revenues and profits from our long-term contract using the percentage-of-completion method of accounting. Our current estimates of the contract costs and the profitability of our long-term contract, although reasonably reliable when made, could change as a result of uncertainties associated with this type of contract. Accordingly, we review the contract price and cost estimates periodically as our manufacturing efforts progress, and the cumulative impact of any periodic revisions to the contract price or cost estimates 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, and such losses could be material. In addition, change orders can increase (and sometimes substantially) the future scope and cost of a job. Therefore, change order awards (although frequently beneficial in the long-term) can have the short-term effect of reducing the contract’s percentage-of-completion and thus the revenues and profits that otherwise would be recognized to date.

Item 6. Exhibits

The following exhibits are filed with this Report on Form 10-Q.

 

10.1    Geospace Technologies Corporation Fiscal Year 2013 Bonus Plan.
31.1    Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of the Company’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of the Company’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    Interactive data file.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    GEOSPACE TECHNOLOGIES CORPORATION
Date: February 7, 2013     By:   /s/ Gary D. Owens
      Gary D. Owens, Chairman of the Board
     

President and Chief Executive Officer

(duly authorized officer)

 

Date: February 7, 2013     By:   /s/ Thomas T. McEntire
     

Thomas T. McEntire, Vice President,

     

Chief Financial Officer and Secretary

(principal financial officer)

 

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