Remarks by Rick Wheeler
Geospace Technologies Corporation
2017 Annual Meeting of Shareholders
February 9, 2017
Thank you Gary, and thanks to each of you that have joined us today. Let me point out that my comments 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, many of which are discussed in our Annual Report as well as our S.E.C. Form 10-K and 10-Q filings.
First, I will cover a review of fiscal year 2016, which ended on September 30th, 2016. Following that, I will give an update of the company through its first quarter of Fiscal Year 2017. Lastly, I will close my remarks with a look at what lies ahead for Geospace Technologies.
- REVIEW OF FISCAL YEAR 2016:
The 2016 fiscal year began on October 1st of 2015. At the time, oil prices had fallen to half of what they had been only a year earlier and the threat of an unending oversupply left prices soft and extremely volatile. The end of fiscal year 2015 had just experienced the full effects of slashed capital spending by major oil companies on seismic exploration. Market demand for virtually all our seismic products had fallen to its lowest point in well over a decade. With a very limited number of seismic survey programs underway or available to them, our core customers had warehouses of idled equipment to draw on, and thus had plenty of equipment to operate the few crews they could keep busy. As the fiscal year progressed, oil prices fell even further, dropping to just over $26 per barrel in mid-February of 2016. This cemented the resolve of oil companies to further limit capital spending, to which seismic project investments were the most hardline casualties. As a poignant demonstration of this, we saw the withdrawal of a confidential tender for a permanent reservoir monitoring (PRM) system that we had been negotiating on for many months. With this tender cancelled, we found it necessary to implement significant cost reductions in the second quarter of the fiscal year, in a plan designed to yield an anticipated savings of about $7 million annually. Despite the unrelenting nature of the market’s depression, our OBX ocean bottom marine nodes continued to see an increase in industry acceptance and use during fiscal year 2016, following the same pattern first established the year before. Both long term and short term rental contracts for these products increased notably in the two consecutive years, and represented the largest part of our seismic segment revenue in 2016. Our OBX product line facilitates a complete transformation in the operation of ocean bottom seismic surveys compared to cabled systems. In an era of reduced budgets, our OBX equipment provides oil companies and contractors with new efficient tools to acquire high resolution seismic data from difficult areas of longtime interest. We see this as encouraging, but it must be remembered that ocean bottom projects are subject to just the same budget pressures, cancellations, and delays as seen in other land and marine seismic projects.
Our non-seismic product lines fared much better than our seismic segments in fiscal year 2016. Although revenue from our thermal imaging products remained essentially the same as the year before, our industrial products experienced a year-over-year growth in revenue of 36%. This was primarily a result of broader adoption and use by municipalities and manufacturers of our unique connectors and cables for the smart water meter industry. Even with the marked improvements in our non-seismic businesses and the significant cost reductions we implemented during the year, it was not nearly enough to compensate for the burden of fixed overhead and depreciation expenses associated with our partially idled factory and underutilized rental fleet equipment. Thus on September 30th, fiscal year 2016 closed out as the most challenging year in the company’s history, ending in a net loss of $(46) million, or $(3.52) per diluted share. However, we remained financially strong with no debt and over $67 million of liquidity. In addition, at fiscal year-end we had $104 million of usable inventory on the balance sheet, along with $31 million of rental assets and an unencumbered $45 million of property, plant, and equipment. This presented a sound financial position to start off the new fiscal year, which I’ll now discuss.
- First Quarter of FY 2017:
Without a doubt, the first quarter of fiscal year 2017 was plagued by the same seismic industry mire that pervaded all of fiscal year 2016. As we reported yesterday, total revenue in the first quarter was $15.3 million and resulted in a net loss of $(11.7) million, or $(0.89) per diluted share. Revenue in both our seismic and non-seismic business segments outpaced the previous year’s first quarter amounts. The largest revenue contributor in the quarter was a performing rental contract for 5,000 stations of our OBX marine system. This particular contract is coming to an end, and although there is no evidence at present to suggest a trending improvement in the overall seismic market, we do believe that our OBX marine products will continue to experience a more favorable business climate as evidenced in recent years. Let’s now discuss what lies ahead for the remainder of fiscal year 2017.
What Lies Ahead in FY 2017:
Overall, any horizon of robust improvement in current seismic industry conditions remains distant and largely unforeseeable in the coming year. Renewed demand for seismic equipment will likely be unpredictable and gradual, with commensurate ups and downs expected along the way. Oil companies continue to operate under capital spending budgets trimmed to the bone, with most funds earmarked for production and maintenance and not exploration. In aggregate, reserve replacement at an industry level has been at a deficit, and major oil and gas providers have admitted that such replacement of reserves is not as important for now as shoring up production and maintaining the value of existing reserves. Of course this cannot last and will have to change eventually. As unnerving as they are, we’ve seen similar cycles before. In these circumstances, our focus for fiscal year 2017 is multifaceted, yet simple –
- Leverage our leadership in technology and services to win as many competitive opportunities as possible.
- Provide unwavering support and reliability to our customers.
- Continue developing the next generation of products that will create value in our multiple industry segments.
- Enhance our operational efficiencies and factory modernization.
With these goals front-and-center in our minds, we will continue to prepare for the inevitable return of seismic industry activity that is sorely needed to sustain and grow a robust global energy market. We believe our strong balance sheet and conservative management give us exactly the right tools to succeed. Our dedicated employees provide the enabling force to get the job done, and we are so thankful for the extensive effort and principled spirit they exhibit every day. Satisfying our customers is our highest priority, and our employees embrace the ethics, tasks, and challenges to accomplish this. In addition to the grateful appreciation we have for our customers, we are equally grateful for the steadfastness, encouragement, and loyalty of our valuable shareholders. With our common vision, we believe the future is bright and that new heights are achievable.