Presidential Remarks

Remarks by Rick Wheeler

Geospace Technologies Corporation

2016 Annual Meeting of Shareholders

February 4, 2016

Thank you Gary, and thanks to all of you for being here today.  As I begin, let me point out that my comments this morning may include forward-looking statements as described in the Private Securities Litigation Reform Act of 1995, and such statements are subject to known and unknown risks, as well as other factors described in our recent Annual Report and S.E.C. Form 10-K and Form 10-Q filings.

My comments will first cover a review of fiscal year 2015, which ended on September 30th, 2015, and following this, I will provide an update of the company through the first quarter of Fiscal Year 2016. I will then end my remarks with a discussion on our view of what lies ahead for Geospace Technologies.


On October 1st, 2014, our 2015 fiscal year began. Fiscal year 2014 had just concluded, having suffered the first significant effects of an energy industry entering turmoil. Fiscal year 2014 had set the company’s highest recorded numbers for revenue and net income in its first quarter, but by year’s end had seen those numbers drop to record lows as the overall seismic industry experienced significant decline. At the start of fiscal year 2015, the number of seismic exploration programs had fallen sharply, and as our customers adjusted to the limited amount of projects available, they were finding they had more than enough equipment to do the work. With those market conditions as a backdrop, we were destined out of the gate to face challenges in fiscal year 2015, but we did so with an arsenal of $103 million of liquidity, $146 million of usable inventory, $54 million of rental equipment, and zero debt on our balance sheet.

Knowing that the challenges ahead of us were real and likely to expand, in the first quarter we made strategic and meaningful reductions in our planned capital spending by throttling back earlier ambitions to construct a new building as well as by cutting budgets for property and equipment expenditures. During this time we also reduced factory hours, and in concert with other changes, directed our attention to lowering costs and preserving cash. As fiscal year 2015 continued to unfold, both land and marine seismic exploration activities progressively fell away, and as a consequence, so too did demand for our products. A slight exception to these circumstances was our OBX ocean bottom marine node, which saw increased interest within the seismic community and greater utilization and rental activity in fiscal year 2015 over prior years. However, the niche market surrounding the OBX was still impacted by the overall seismic industry downturn. This was evidenced when one of our customers, Seafloor Geophysical Solutions, was unable to secure the funding needed to take delivery of an ordered system, and thus forfeited a down payment. In recognition of the seismic business climate, which showed no near term prospects for real improvement, we took additional steps in the third quarter to further strengthen our financial position. Although we had no planned or immediate borrowing needs, we entered into a revised credit agreement with Frost Bank for a three year period, where the borrowing terms were much more amenable and adaptive to the existing market state than the more restricted covenants of our prior agreement. This new agreement provided greater stability of our available liquidity in a worsening market.

Compared with the depression seen in the seismic market, fiscal year 2015 presented a completely different set of dynamics for our non-seismic products. Revenue from our non-seismic businesses increased 11% over fiscal year 2014. Our water meter cable and connector products enjoyed widespread adoption in the automatic meter reading industry, and we expect this to continue. Even our custom offshore cable products which are used in the offshore energy industry saw improved revenue in 2015 over the previous year. However, in light of reduced capital spending that affects offshore oil and gas projects, demand for these cables will likely face pointed decreases in the future. This improved performance from our non-seismic business segment was highly cultivated and certainly welcomed, but it was not enough to overcome the losses in each quarter that culminated in a net loss for fiscal year 2015 of $32.6 million, or $2.51 per diluted share. Nonetheless, we managed to close out fiscal year 2015 with $70 million of liquidity, $125 million of usable inventory, $46 million of rental equipment, and zero debt on our balance sheet – a good place to start down our journey for fiscal year 2016.

  1. First Quarter of FY 2016:

The sparse seismic market that existed at the close of fiscal year 2015 continued to decline in the first quarter of fiscal year 2016. Combined revenues from all seismic segments totaled just $7.6 million, less than half of what they were in the first quarter of fiscal year 2015. As released yesterday, the company posted a net loss in the first quarter of $11.0 million, or $0.85 per share. Despite this, we closed the quarter with $67 million of total liquidity and a balance sheet that included $120 million of usable inventory, $43 million of rental equipment, and no debt. Up until the very end of the first quarter we had been discreetly finishing work and awaiting an answer on a tender for a permanent reservoir monitoring (PRM) system. A contract for the project was expected to be awarded about that same time. However, in lieu of an award, we instead received notice that the tender was being regretfully withdrawn. With the anticipated award ruled out and no other PRM system contract imminently on the horizon, we determined that the current business environment necessitated adjustments to our workforce. We implemented these reductions shortly after the first quarter ended, and we expect to see future annual savings of around $7.0 million, further enhancing our financial strength. So with the first quarter now behind us, let’s discuss what we see ahead for the remainder of fiscal year 2016?

  1. What Lies Ahead in FY 2016:

We are pleased that the commencement of a long term rental contract utilizing 5,000 stations of our OBX marine node is underway as scheduled. The contract is expected to run through the end of fiscal year 2016 and beyond, generating total revenues of up to $17.1 million. Notwithstanding this favorable circumstance, there are no indicators that overall market conditions for the seismic industry will turn around in the foreseeable future. At the present time, most oil and gas companies remain minimally engaged with seismic exploration, instead maintaining focus and shrinking capital budgets on production activities. Under a pervasive mantra of increasing individual market share, their one-minded goal seems to have been one of raising output rates in an energy market perceived as having insatiable demand. Production increases have certainly been wildly successful, but have also significantly outpaced growth in demand. As a result, a barrel of oil has seen price swings valuing it at less than a fourth of what it was less than two years ago. I know of no one that believes this is a sustainable condition. Production will inevitably have to come in balance with demand. Voluntary supply reductions are probably unlikely, as it seems that most producers want to be the “last man standing”, but involuntary reductions are almost certain, be it through business failures or the inability to reinvest capital. In many cases, current prices are hard pressed to support continued operations, let alone continued capital investment. And without maintenance investment, natural annual decline rates of 6% in traditional fields and 15% in shale fields are typically expected. It will take some time for the stabilization of supply and demand to take place, and with the number of variables involved, how much time is unknown. However, once market normalization begins to occur, seismic exploration will once again be a necessary and vital activity in the quest for new and replacement reserves. The need for finding replacement reserves is already present; just day before yesterday, BP revealed that its replacement reserve ratio was only 61% after excluding the impact of acquisitions and disposals. Alongside seismic exploration, seismic reservoir monitoring will remain undisplaced as the fundamental tool for characterizing reservoir dynamics in order to maximize recovery. Geospace has a long track record of providing the latest in reliable advanced technology to accomplish these endeavors, and doing so with a strong value proposition for our customers. We’ve also demonstrated the conservative wherewithal to successfully navigate and grow our business through the low cycles we find ourselves in today. We intend to continue developing and advancing the technology products that the seismic industry will need in its recovered state, and we believe our strong balance sheet and fiscal management provide the right elements to emerge in an optimal position for serving the rebounded industry. In this way, we believe we can continue providing the best value to both our customers and our shareholders. As I’ve said before, and it bears repeating, ‘we are only successful when our customers are successful’. And as our attained ISO 9001 quality certification suggests, our employees work hard to accomplish this through quality design and manufacturing processes aimed at customer satisfaction. We are very grateful and filled with regard for our customers. We are also very thankful for our employees and their dedication to high workmanship standards and our core value principles. Without either of them, there would be no Geospace. And finally, we are very appreciative of our shareholders who understand the lumps, bumps, and cycles inherent in our business and believe in the long term value that we can provide.

At this time, I’d like to open the floor to any questions you may have.

And now, I’ll turn the meeting back over to Gary.