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, 2010 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
OYO GEOSPACE 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 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 6,123,508 shares of the Registrant’s Common Stock outstanding as of the close of business on January 31, 2011.
Table of Contents
PART I. FINANCIAL INFORMATION | Page Number | |
| 3 | ||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | |
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 22 | |
| 23 | ||
PART II. OTHER INFORMATION | ||
| 24 | ||
| 24 | ||
| 24 | ||
2
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
| ASSETS | December 31, 2010 | September 30, 2010 | ||||||
| (unaudited) | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ 31,963 | $ 33,453 | ||||||
Trade accounts receivable, net | 26,313 | 19,107 | ||||||
Current portion of notes receivable, net | 2,238 | 2,400 | ||||||
Inventories, net | 50,203 | 47,395 | ||||||
Deferred income tax asset | 4,962 | 4,542 | ||||||
Prepaid expenses and other current assets | 3,421 | 3,089 | ||||||
Total current assets | 119,100 | 109,986 | ||||||
Rental equipment, net | 9,033 | 8,003 | ||||||
Property, plant and equipment, net | 33,610 | 33,988 | ||||||
Patents, net | 498 | 558 | ||||||
Goodwill | 1,843 | 1,843 | ||||||
Non-current deferred income tax asset | 670 | 754 | ||||||
Non-current notes receivable, net | 5,554 | 6,131 | ||||||
Other assets | 2,126 | 2,233 | ||||||
Total assets | $ 172,434 | $ 163,496 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable and current maturities of long-term debt | $ -- | $ 440 | ||||||
Accounts payable trade | 10,269 | 3,809 | ||||||
Accrued expenses and other current liabilities | 8,990 | 10,793 | ||||||
Deferred revenue | 3,064 | 1,311 | ||||||
Income tax payable | 3,748 | 2,056 | ||||||
Total current liabilities | 26,071 | 18,409 | ||||||
Long-term debt, net of current maturities | -- | 7,260 | ||||||
Non-current deferred income tax liabilities | 1,191 | 1,241 | ||||||
Total liabilities | 27,262 | 26,910 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock | -- | -- | ||||||
Common stock | 61 | 61 | ||||||
Additional paid-in capital | 47,468 | 47,059 | ||||||
Retained earnings | 97,835 | 89,622 | ||||||
Accumulated other comprehensive loss | (192 | ) | (156 | ) | ||||
Total stockholders’ equity | 145,172 | 136,586 | ||||||
Total liabilities and stockholders’ equity | $ 172,434 | $ 163,496 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
3
Table of Contents
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
| Three Months Ended December 31, 2010 | Three Months Ended December 31, 2009 | |||||||
Net sales | $ 43,101 | $ 26,316 | ||||||
Cost of sales | 24,008 | 19,155 | ||||||
Gross profit | 19,093 | 7,161 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 4,442 | 3,739 | ||||||
Research and development | 2,940 | 1,728 | ||||||
Bad debt recovery | (70 | ) | (42 | ) | ||||
Total operating expenses | 7,312 | 5,425 | ||||||
Gain on sale of assets | 16 | -- | ||||||
Income from operations | 11,797 | 1,736 | ||||||
Other income (expense): | ||||||||
Interest expense | (43 | ) | (84 | ) | ||||
Interest income | 62 | 51 | ||||||
Foreign exchange gains | 140 | 50 | ||||||
Other, net | (20 | ) | (174 | ) | ||||
Total other income (expense), net | 139 | (157 | ) | |||||
Income before income taxes | 11,936 | 1,579 | ||||||
Income tax expense | 3,723 | 478 | ||||||
Net income | $ 8,213 | $ 1,101 | ||||||
Basic earnings per share | $ 1.34 | $ 0.18 | ||||||
Diluted earnings per share | $ 1.30 | $ 0.18 | ||||||
Weighted average shares outstanding – Basic | 6,118,666 | 6,013,146 | ||||||
Weighted average shares outstanding – Diluted | 6,306,718 | 6,177,460 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
4
Table of Contents
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three Months Ended December 31, 2010 | Three Months Ended December 31, 2009 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ 8,213 | $ 1,101 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Deferred income tax benefit | (278 | ) | (229 | ) | ||||
Depreciation | 1,399 | 1,123 | ||||||
Amortization | 98 | 82 | ||||||
Stock-based compensation expense | 186 | 84 | ||||||
Bad debt recovery | (70 | ) | (42 | ) | ||||
Inventory obsolescence reserve | 1,524 | 258 | ||||||
Excess tax benefit from share-based compensation | (146 | ) | (150 | ) | ||||
Loss on early extinguishment of debt | -- | 142 | ||||||
Gain on disposal of property, plant and equipment | (16 | ) | -- | |||||
Effects of changes in operating assets and liabilities: | ||||||||
Trade accounts and notes receivable | (6,390 | ) | (873 | ) | ||||
Inventories | (4,541 | ) | 2,327 | |||||
Prepaid expenses and other assets | (340 | ) | 267 | |||||
Accounts payable | 6,462 | 304 | ||||||
Accrued expenses and other | (1,833 | ) | 904 | |||||
Deferred revenue | 1,761 | (29 | ) | |||||
Income tax payable | 1,690 | 49 | ||||||
Net cash provided by operating activities | 7,719 | 5,318 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from the sale of property, plant and equipment | 1 | -- | ||||||
Capital expenditures | (1,787 | ) | (102 | ) | ||||
Net cash used in investing activities | (1,786 | ) | (102 | ) | ||||
Cash flows from financing activities: | ||||||||
Principal payments on mortgage loans | (7,700 | ) | (1,518 | ) | ||||
Penalty for early extinguishment of debt | -- | (142 | ) | |||||
Excess tax benefit from share-based compensation | 146 | 150 | ||||||
Proceeds from exercise of stock options | 92 | 481 | ||||||
Net cash used in financing activities | (7,462 | ) | (1,029 | ) | ||||
Effect of exchange rate changes on cash | 39 | (256 | ) | |||||
Increase (decrease) in cash and cash equivalents | (1,490 | ) | 3,931 | |||||
Cash and cash equivalents, beginning of period | 33,453 | 8,571 | ||||||
Cash and cash equivalents, end of period | $ 31,963 | $ 12,502 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
5
Table of Contents
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| 1. | Significant Accounting Policies |
Basis of Presentation
The consolidated balance sheet of OYO Geospace Corporation and its subsidiaries (the “Company”) at September 30, 2010 was derived from the Company’s audited consolidated financial statements at that date. The consolidated balance sheet at December 31, 2010 and the consolidated statements of operations for the three months ended December 31, 2010 and 2009, and the consolidated statements of cash flows for the three months ended December 31, 2010 and 2009 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, 2010 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, 2010.
Reclassifications
Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation. 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, 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 debt investments purchased with an original or remaining maturity at the time of purchase of three months or less to be cash equivalents.
Inventories
The Company records a write-down of its inventory 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 (as determined by the first-in, first-out method) or market value. The Company’s subsidiary in the Russian Federation uses an average cost method to value its inventories.
6
Table of Contents
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Revenue Recognition
The Company primarily derives revenue from the sale, and short-term rental under operating leases, of seismic instruments and equipment and thermal solutions products. The Company generally recognizes sales revenues when its products are shipped and title and risk of loss have passed to the customer. 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 nine months or longer. Except for certain of the Company’s reservoir characterization products, its products are generally sold without any customer acceptance provisions and its standard terms of sale do not allow customers to return products for credit. In instances where the customer requires a significant performance test for the Company’s new and unproven products, the Company does not recognize the revenue attributable to the product as to which the performance test applies until the performance test is satisfied. Collection of revenue from the sale of large-scale reservoir characterization products may occur at various stages of production or after delivery of the product, and the collected funds are not refundable to the customer. Most of the Company’s products do not require installation assistance or sophisticated instruction.
The Company recognizes revenue when all of the following criteria are met:
| • | Persuasive evidence of an arrangement exists. The Company operates under a purchase order/contract system for goods sold to customers, and under rental/lease agreements for equipment rentals. These documents evidence that an arrangement exists. |
| • | Delivery has occurred or services have been rendered. For product sales, the Company does not recognize revenues until delivery has occurred or performance measures are met. For rental revenue, the Company recognizes revenue when earned. |
| • | The seller’s price to the buyer is fixed or determinable. Sales prices are defined in writing in a customer’s purchase order, purchase contract or equipment rental agreement. |
| • | Collectibility is reasonably assured. The Company evaluates customer credit to ensure that collectibility of revenue is reasonably assured. |
Occasionally seismic customers are not able to take immediate delivery of products which were specifically manufactured to the customer’s specifications. These occasions generally occur when customers face logistical issues such as project delays or delays with their seismic crew deployment. In these instances, customers have asked the Company to hold the equipment for a short period of time until they can take physical delivery of the product (referred to as “bill and hold” arrangements). The Company considers the following criteria for recognizing revenue when delivery has not occurred:
| • | Whether the risks of ownership have passed to the customer, |
| • | Whether we have obtained a fixed commitment to purchase the goods in written documentation from the customer, |
| • | Whether the customer requested that the transaction be on a bill and hold basis and the Company received that request in writing, |
| • | Whether the customer has a substantial business purpose for ordering the goods on a bill and hold basis, |
| • | Whether there is a fixed schedule for delivery of the product, |
| • | Whether the Company has any specific performance obligations such that the earning process is not complete, |
7
Table of Contents
| • | Whether the equipment is segregated from its other inventory and not subject to being used to fill other orders, and |
| • | Whether the equipment is complete and ready for shipment. |
8
Table of Contents
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The Company does not modify its normal billing and credit terms for these types of sales. As of December 31, 2010 and 2009, there were no sales under bill and hold arrangements.
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
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 the beginning of the period (October 1, 2010) | $ | 1,378 | ||
Accruals for warranties issued during the period | 630 | |||
Accruals related to pre-existing warranties (including changes in estimates) | -- | |||
Settlements made (in cash or in kind) during the period | (508 | ) | ||
Balance at the end of the period (December 31, 2010) | $ | 1,500 | ||
Financial Instruments
Fair value estimates are made at discrete points in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, accounts and notes receivable and accounts payable, approximate the fair values of such items as a result of the relative short term nature of such items.
Subsequent Events
The Company evaluates events and transactions that occur after the balance sheet date but before the financial statements are issued. The Company evaluated such events and transactions through the date the financial statements were filed electronically with the Securities and Exchange Commission.
9
Table of Contents
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| 2. | Earnings Per Common Share |
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, 2010 | Three Months Ended December 31, 2009 | |||||||
Net earnings available to common stockholders | $ 8,213 | $ 1,101 | ||||||
Weighted average common shares and common share equivalents: | ||||||||
Common shares used in basic earnings per share | 6,118,666 | 6,013,146 | ||||||
Common share equivalents outstanding related to stock options | 188,052 | 164,314 | ||||||
Total weighted average common shares and common share equivalents used in diluted earnings per share | 6,306,718 | 6,177,460 | ||||||
Basic earnings per common share | $1.34 | $0.18 | ||||||
Diluted earnings per common share | $ 1.30 | $ 0.18 | ||||||
Options totaling 43,000 and 9,450 shares of common stock for the three months ended December 31, 2010 and 2009, respectively, were excluded from the computation of weighted average shares because the impact of considering these options was antidilutive.
| 3. | Comprehensive Income |
Comprehensive income includes all changes in a company’s equity, except those resulting from investments by and distributions to stockholders. The following table summarizes the components of comprehensive income (in thousands):
| Three Months Ended December 31, 2010 | Three Months Ended December 31, 2009 | |||||||
Net income | $ 8,213 | $ 1,101 | ||||||
Foreign currency translation adjustments | (36 | ) | 109 | |||||
Total comprehensive income | $ 8,177 | $ 1,210 | ||||||
10
Table of Contents
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| 4. | Trade Accounts and Notes Receivable |
Current trade accounts and notes receivable are reflected in the following table (in thousands):
| December 31, 2010 | September 30, 2010 | |||||||||||
Trade accounts receivable | $ 26,621 | $ 19,441 | ||||||||||
Allowance for doubtful accounts | (308 | ) | (334 | ) | ||||||||
| $ 26,313 | $ 19,107 | |||||||||||
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.
At December 31, 2010 and September 30, 2010, the Company’s current notes receivable was $2.2 million and $2.4 million, respectively. The Company also had notes receivable of $5.6 million and $6.1 million classified as long-term at December 31, 2010 and September 30, 2010, respectively. The Company had a reserve for doubtful notes of zero at December 31, 2010 and September 30, 2010. Notes receivable are generally collateralized by the products sold and bear interest at rates ranging up to 11.3% per year.
| 5. | Inventories |
Inventories consist of the following (in thousands):
| December 31, 2010 | September 30, 2010 | |||||||
Finished goods | $ 11,034 | $ 11,211 | ||||||
Work-in-process | 9,242 | 7,166 | ||||||
Raw materials | 38,059 | 35,663 | ||||||
Obsolescence reserve | (8,132 | ) | (6,645 | ) | ||||
| $ 50,203 | $ 47,395 | |||||||
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, 2010 and 2009, the Company transferred $0.1 million and $0.3 million, respectively, of inventories to its rental equipment fleet.
11
Table of Contents
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. Segment and Geographic Information
The Company evaluates financial performance based on two business segments: Seismic and Thermal Solutions. The Seismic product lines currently consist of geophones and hydrophones, including multi-component geophones and hydrophones, seismic leader wire, geophone string connectors, seismic telemetry cable, high definition reservoir characterization products and services, marine seismic cable retrieval devices, data acquisition systems, offshore cables and industrial products. Thermal Solutions products include thermal printers, thermal printheads and dry thermal film and other media. The Company sells these products to a variety of markets, including the screen print, point of sale, signage and textile market sectors. The Company also sells Thermal Solutions products to its seismic customers.
The following table summarizes the Company’s segment information (in thousands):
| Three Months Ended December 31, 2010 | Three Months Ended December 31, 2009 | |||||||
Net sales: | ||||||||
Seismic | $ 39,475 | $ 22,827 | ||||||
Thermal Solutions | 3,423 | 3,294 | ||||||
Corporate | 203 | 195 | ||||||
Total | $ 43,101 | $ 26,316 | ||||||
Income (loss) from operations: | ||||||||
Seismic | $ 13,895 | $ 3,320 | ||||||
Thermal Solutions | 156 | 390 | ||||||
Corporate | (2,254 | ) | (1,974 | ) | ||||
Total | $ 11,797 | $ 1,736 | ||||||
7. Credit Agreement
On November 22, 2004, several of the Company’s subsidiaries entered into a credit agreement (the “Original Credit Agreement”) with a bank. The Original Credit Agreement has been amended periodically since 2004, and most recently on April 30, 2009 (as so amended, the “Credit Agreement”). Under the Credit Agreement, the Company’s borrower subsidiaries can borrow up to $25.0 million principally secured by their accounts receivable, inventories and equipment. The Credit Agreement expires on April 30, 2011. 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. At December 31, 2010, the Company was in compliance with all covenants. The interest rate for borrowings under the Credit Agreement is a LIBOR based rate with a margin spread of 300-400 basis points depending upon the maintenance of certain ratios. At December 31, 2010, the interest rate was 3.3%. At December 31, 2010, there were no borrowings outstanding under the Credit Agreement, standby letters of credit outstanding in the amount of $0.3 million and additional borrowings available of $24.7 million.
12
Table of Contents
OYO GEOSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. Income Taxes
The United States statutory tax rate for the three months ended December 31, 2010 and 2009 was 35% and 34%, respectively. The Company’s effective tax rates for the three months ended December 31, 2010 and 2009 were 31.2% and 30.3%, respectively. The Company’s effective tax rate for the three months ended December 31, 2010 benefited from a manufacturers’/producers’ deduction available to U.S. manufacturers. In addition, as a result of the recent extension of the research and experimentation tax credit by the United States Congress, the Company recognized a tax benefit of $155,000 for the three months ended December 31, 2010, which related to the fiscal year ended September 30, 2010. The Company’s effective tax rate for the three months ended December 31, 2009 benefited from the revaluation of a tax loss carryback for the Company’s Canadian subsidiary.
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 years 2009, 2008 and 2007. 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.
9. Legal Proceedings
On July 8, 2009, the Company received a complaint filed in the United States District Court in Nevada alleging that the Geospace Seismic Recorder (“GSR”), the Company’s newly developed wireless data acquisition system, infringes a patent held by Ascend Geo, LLC (“Ascend”). The Company requested and was granted a change in venue to the United States District Court for the Southern District of Texas in Houston (the “Court”). In addition to monetary damages, Ascend requested a preliminary injunction against future sales by the Company of the GSR nodal system. The Company filed its response with the Court requesting that it deny Ascend’s request for a preliminary injunction and, on November 4, 2009, the Court denied Ascend’s request for a preliminary injunction. The Company strongly believes that the GSR nodal system does not infringe Ascend’s patent. The Company also strongly believes that Ascend’s patent is not valid and petitioned the United States Patent and Trademark Office (“PTO”) to re-examine its validity. On May 20, 2010, the PTO examiner found all claims to be invalid. On September 17, 2010, Ascend filed a notice of appeal to the Board of Patent Appeals and Interferences, but failed to file an appeal brief. Accordingly, on January 4, 2011, the PTO issued a notice that all claims of Ascend’s patent are to be cancelled. Also on January 4, 2011, the Court dismissed Ascend’s case with prejudice and is now considering the Company’s request to have Ascend reimburse the Company’s attorney’s fees and expenses. According to Ascend’s website, it ceased business operations on July 15, 2010.
10. Early Extinguishment of Debt
On December 15, 2010 the Company paid off a long-term mortgage note with a principal balance outstanding of $7.7 million. The Company was not required to pay any additional fees as a result of the early extinguishment of the mortgage note.
13
Table of Contents
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, 2010, 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.
Industry Overview
OYO Geospace Corporation is a Delaware corporation incorporated on September 13, 1997. Unless otherwise specified, the discussion in this Quarterly Report on Form 10-Q refers to OYO Geospace 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. During most of fiscal year 2010, oil and natural gas prices remained at fairly consistent levels, but during fiscal years 2009 and 2008 there was substantial volatility in oil and natural gas prices. 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, 2010 for more information.
We have been 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 thermal imaging equipment and thermal media products targeted at the screen print, point of sale, signage and textile market sectors. We have been manufacturing thermal imaging products since 1995. We report and evaluate financial information for each of these two segments: Seismic and Thermal Solutions.
Seismic Products
The seismic segment of our business 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.
Seismic Exploration 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 data acquisition systems, geophones, hydrophones, multi-component sensors, seismic leader wire, geophone strings, connectors, seismic telemetry cables and other seismic related products. On land, our customers use our data acquisition systems, geophones, leader
14
Table of Contents
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.
During fiscal year 2008, we announced the development of a land-based wireless (or nodal) data acquisition system. Each nodal 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 nodal station operates as an independent data collection system. As a result, our nodal 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 nodal system is designed into configurations ranging from one to four channels per station. Since its introduction, we have sold and delivered over 50,000 channels of our land-based nodal acquisition system. We also have over 9,000 additional channels available for rent by our customers and we intend to increase our rental fleet up to 30,000 total channels in fiscal year 2011.
In October 2009, we introduced a marine-based nodal data acquisition system. Similar to our land nodal system, the marine nodal system can be deployed in virtually unlimited channel configurations and does not require interconnecting cables between each station. Our deepwater versions of this nodal system can be deployed in depths of up to 3,000 meters.
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 our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
Seismic 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.
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.
Emerging Technology Products
Our products continue to develop and expand beyond seismic applications through the utilization of our existing engineering experience and manufacturing capabilities. We design and manufacture power and communication transmission cable products for offshore applications and market these products to the offshore oil and gas and offshore construction industries. These products include a variety of specialized cables, primarily used
15
Table of Contents
in deepwater applications, such as remotely operated vehicle (“ROV”) tethers, umbilicals and electrical control cables. These products also include specially designed and manufactured cables, including armored cables, engineered to withstand harsh offshore operating environments.
In addition, we design and manufacture industrial sensors for the vibration monitoring and earthquake detection markets. We also design and manufacture other specialty cable and connector products, such as those used in connection with global positioning products and water meter applications.
Thermal Solutions Products
Our thermal solutions product technologies were originally developed for seismic data processing applications. In 1995, we modified this technology for application in other markets. Our thermal printers include both thermal imagesetters for graphics applications and thermal plotters for seismic applications. In addition, our thermal solutions products include direct-to-screen systems, thermal printheads, dry thermal film, thermal transfer ribbons and other thermal media. Our thermal imaging solutions produce images ranging in size from 12 to 54 inches wide and in resolution from 400 to 1,200 dots per inch. We market our thermal imaging solutions to a variety of industries, including the screen printing, point-of-sale, signage, flexographic and textile markets. We also continue to sell these products to our seismic customers.
The quality of thermal imaging is determined primarily by the interrelationship between a thermal printhead and the thermal media, be it film, ribbon, or any other media. We manufacture thermal printheads and thermal film, which we believe will enable us to more effectively match the characteristics of our thermal printers to thermal film, thereby improving print quality, and make us more competitive in markets for these products.
We also distribute private label high-quality dry thermal media for use in our thermal printers and direct-to-screen systems. In addition, we are continuously engaged in efforts to develop new lines of dry thermal film and ribbon in order to improve the image quality of our media for use with our printheads. In order to achieve more than marginal growth in our thermal solutions product business in future periods, we believe that it is important to continue our concentration of efforts on both our printhead and media improvements.
We believe that our current cash balances, cash flow from operations and cash borrowings available under our credit facility will provide sufficient resources to meet our working capital liquidity needs for the next twelve months.
Incentive Compensation Program
We adopted an incentive compensation program for fiscal year 2011 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, 2010. 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 2011 will be paid out to eligible employees after the end of the fiscal year.
Upon reaching the five percent threshold under this proposed program, an incentive compensation accrual will be established equal to 14.5 percent of the amount of any consolidated pretax profits above the five percent pretax return threshold. The maximum aggregate bonus available under the program for fiscal year 2011 is $3.5 million. Under this program, for the three months ended December 31, 2010 and 2009, we had accrued $1.7 million and $19,000, respectively, of incentive compensation expense.
16
Table of Contents
Consolidated Results of Operations
We report and evaluate financial information for two segments: Seismic and Thermal Solutions. Summary financial data by business segment follows (in thousands):
| Three Months Ended December 31, 2010 | Three Months Ended December 31, 2009 | |||||||
Seismic | ||||||||
Seismic exploration product sales | $ 34,064 | $ 19,046 | ||||||
Reservoir product sales and services | 3,425 | 2,098 | ||||||
Industrial product sales | 1,986 | 1,683 | ||||||
Total seismic sales | 39,475 | 22,827 | ||||||
Operating income | 13,895 | 3,320 | ||||||
Thermal Solutions | ||||||||
Net sales | 3,423 | 3,294 | ||||||
Operating income | 156 | 390 | ||||||
Corporate | ||||||||
Net sales | 203 | 195 | ||||||
Operating loss | (2,254 | ) | (1,974 | ) | ||||
Consolidated Totals | ||||||||
Net sales | 43,101 | 26,316 | ||||||
Operating income | 11,797 | 1,736 | ||||||
Overview
Three months ended December 31, 2010 compared to three months ended December 31, 2009
Consolidated sales for the three months ended December 31, 2010 increased by $16.8 million, or 63.8%, from the corresponding period of the prior fiscal year. This increase reflects a substantial increase in sales and rentals of our seismic products.
Consolidated gross profits for the three months ended December 31, 2010 increased by $11.9 million, or 166.6%, from the corresponding period of the prior fiscal year. This increase resulted from increased sales and rentals, and an improved product mix when compared to the three months ended December 31, 2009.
Consolidated operating expenses for the three months ended December 31, 2010 increased by $1.9 million, or 34.5%, from the corresponding period of the prior fiscal year. Incentive compensation expenses increased by $1.2 million during the three months ended December 31, 2010 due to the improvement in our pretax earnings. In addition, we increased our product development expenditures by $0.5 million from the corresponding period of the prior year.
Other income (expense) for the three months ended December 31, 2010 increased by $0.3 million from the corresponding period of the prior fiscal year. The increase in other income primarily resulted from (i) lower levels of interest expense resulting from lower levels of long-term debt, (ii) higher interest income from increasing levels of cash investments, (iii) higher foreign exchange gains on intercompany transactions, and (iv) a fee of $142,000 incurred during the three months ended December 31, 2009 from the early extinguishment of debt.
The United States statutory tax rate for the three months ended December 31, 2010 and 2009 was 35% and 34%, respectively. The effective tax rates for the three months ended December 31, 2010 and 2009 were 31.2% and 30.3%, respectively. The effective tax rate for the three months ended December 31, 2010 benefited
17
Table of Contents
from a manufacturers’/producers’ deduction available to U.S. manufacturers. In addition, as a result of the recent extension of the research and experimentation tax credit by the United States Congress, we recognized a tax benefit of $155,000 for the three months ended December 31, 2010, which related to the fiscal year ended September 30, 2010. Our effective tax rate for the three months ended December 31, 2009 benefited from the revaluation of a tax loss carryback for our Canadian subsidiary.
Seismic Products
Net Sales
Sales of our seismic products for the three months ended December 31, 2010 increased by $16.6 million, or 72.9%, from the corresponding period of the prior fiscal year. The sales increase reflects (i) a strong demand for our wireless data acquisition system, our marine products and our seismic reservoir products and (ii) improving conditions in our Canadian and Russian operations.
Operating Income
Our operating income associated with sales of our seismic products for the three months ended December 31, 2010 increased by $10.6 million, or 318.5%, from the corresponding period of the prior fiscal year. The higher income resulted primarily from the increased product sales and rentals combined with a more favorable product mix. Such income was partially offset by (i) $1.3 million of additional incentive compensation expense and (ii) $1.1 million of additional inventory obsolescence expense due to the aging of certain inventories.
Thermal Solutions Products
Net Sales
Sales of our thermal solutions products for the three months ended December 31, 2010 increased by $0.1 million, or 3.9%, from the corresponding period of the prior fiscal year. This increase was primarily due to increased sales of thermal imaging equipment. We consider this small increase to be normal due to recurring fluctuations in product sales volume and not associated with any long-term trend.
Operating Income
Our operating income associated with sales of our thermal solutions products for the three months ended December 31, 2010 decreased $0.2 million, or 60.0%, from the corresponding period of the prior fiscal year. The decrease in operating income resulted from (i) increased incentive compensation expenses relative to the improvement in our consolidated results, and (ii) increased charges for inventory obsolescence expense due to the aging of certain inventories.
Liquidity and Capital Resources
At December 31, 2010, we had $32.0 million in cash and cash equivalents. For the three months ended December 31, 2010, we generated approximately $7.7 million of cash in operating activities. Sources of cash generated in our operating activities resulted from net income of $8.2 million. Additional sources of cash included net non-cash charges of $2.9 million for deferred income tax benefit, depreciation, amortization, stock-based compensation, inventory obsolescence and bad debts. Other sources of cash included (i) a $6.5 million increase in accounts payable due to increased purchases of raw materials, (ii) a $1.8 million increase in deferred revenue due to the collection of advanced payments from our customers, and (iii) a $1.7 million increase in income tax payable resulting from income taxes owed on increased pretax profits. These sources of cash were offset by (i) a $6.4 million increase in trade accounts and notes receivable primarily resulting from increased sales, (ii) a $4.5 million increase in inventories resulting from increased product orders and demand for rental equipment, and (iii) a $1.8 million decrease in accrued expenses and other primarily resulting from the payment of fiscal year 2010 incentive compensation.
18
Table of Contents
Throughout fiscal years 2009 and 2010, we made substantial efforts to reduce our inventory levels in order to meet declining levels of product demand for our traditional seismic products and to generate cash flows to reduce our outstanding indebtedness. Due to significant demand for new products like our wireless data acquisition system, and our intention to increase our rental fleet of wireless equipment, we are strategically increasing certain product inventories to meet this demand. However, we continue to be subject to high levels of inventory obsolescence expense for our older and slower moving traditional products. We are giving substantial attention to the management of our inventories in this area.
For the three months ended December 31, 2010, we used approximately $1.8 million of cash in investing activities for capital expenditures. In addition, we transferred $0.1 million of inventories to our rental equipment during fiscal year 2011 which had a non-cash impact. Due to high demand for our wireless rental equipment, we estimate that our total capital expenditures in fiscal year 2011 could be approximately $20.0 million, including non-cash additions to our rental fleet. We expect these capital expenditures will be financed from our cash on hand, internal cash flow and/or from borrowings under our Credit Agreement.
For the three months ended December 31, 2010, we used approximately $7.5 million of cash in financing activities. These uses of cash included a $7.7 million principal payment for the early pay-off of a mortgage. These uses of cash were offset by $0.1 million of cash proceeds received from the exercise of stock options and a $0.1 million tax benefit related to such exercised stock options.
On November 22, 2004, several of our subsidiaries entered into a credit agreement (the “Original Credit Agreement”) with a bank. The Original Credit Agreement has been amended periodically since 2004, and most recently on April 30, 2009 (as so amended, the “Credit Agreement”). Under the Credit Agreement, our borrower subsidiaries can borrow up to $25.0 million principally secured by their accounts receivable, inventories and equipment. The Credit Agreement expires on April 30, 2011. The Credit Agreement limits the incurrence of additional indebtedness, requires the maintenance of certain financial ratios, restricts our and our subsidiaries’ ability to pay dividends and contains other covenants customary in agreements of this type. We believe the most restrictive covenants in the Credit Agreement are (i) the fixed charge coverage ratio of EBITDA to certain charges, and (ii) the cash flow leverage ratio of total borrowings (excluding real estate borrowings) to adjusted EBITDA. We believe these covenants are more restrictive than covenants contained in the Credit Agreement as in effect prior to the April 30, 2009 amendment, and future borrowings available under the Credit Agreement could be limited or completely restricted if future operating results deteriorate. The interest rate for borrowings under the Credit Agreement is a LIBOR based rate with a margin spread of 300-400 basis points depending upon the maintenance of certain ratios. At December 31, 2010, there were no borrowings outstanding under the Credit Agreement, standby letters of credit outstanding in the amount of $0.3 million and additional borrowings available of $24.7 million.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider 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. We continually evaluate our estimates, including those related to bad debt reserves, inventory obsolescence reserves, self-insurance reserves for medical expenses, product warranty reserves, intangible assets, stock-based compensation and deferred income tax assets. We base our estimates on historical experience and various other factors, including the impact from the current economic conditions, that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.
Our normal credit terms for trade receivables are 30 days. In certain situations, credit terms for trade receivables may be extended to 60 days or longer and such receivables generally do not require collateral. Additionally, we provide long-term financing in the form of promissory notes when competitive conditions require such financing and, in such cases, we may require collateral. We perform ongoing credit evaluations of our customers’ accounts and notes receivable and allowances are recognized for potential credit losses.
19
Table of Contents
Our 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.
Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and causes changes to previous estimates of tax liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions as well as by the Internal Revenue Service. In management’s opinion, adequate provisions for income taxes have been made for all open tax years. The potential outcomes of examinations are regularly assessed in determining the adequacy of the provision for income taxes and income tax liabilities. Management believes that adequate provisions have been made for reasonable and foreseeable outcomes related to uncertain tax matters.
We record a write-down of our 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 (as determined by the first-in, first-out method) or market value. Our subsidiary in the Russian Federation uses an average cost method to value its inventories.
We periodically review the composition of our inventories to determine if market demand, product modifications, technology changes, excessive quantities on-hand and other factors hinder our ability to recover its investment in such inventories. Management’s assessment is based upon historical product demand, estimated future product demand and various other judgments and estimates. Inventory obsolescence reserves are recorded when such assessments reveal that portions or components of our inventory investment will not be realized in our operating activities.
We primarily derive revenue from the sale, and short-term rental under operating leases, of seismic instruments and equipment and thermal solutions products. We generally recognize sales revenues when our products are shipped and title and risk of loss have passed to the customer. We recognize rental revenues as earned over the rental period. Rentals of our equipment generally range from daily rentals to rental periods of up to nine months or longer. Except for certain of our reservoir characterization products, our products are generally sold without any customer acceptance provisions and our standard terms of sale do not allow customers to return products for credit. In instances where the customer requires a significant performance test for our new and unproven products, we do not recognize the revenue attributable to the product as to which the performance test applies until the performance test is satisfied. Collection of revenue from the sale of large-scale reservoir characterization products may occur at various stages of production or after delivery of the product, and the collected funds are not refundable to the customer.
Most of our products do not require installation assistance or sophisticated instruction. We offer a standard product warranty, which obligates us to repair or replace equipment with manufacturing defects. We maintain a reserve for future warranty costs based on historical experience or, in the absence of historical experience, management estimates. We record a write-down of inventory when the cost basis of any item (including any estimated future costs to complete the manufacturing process) exceeds its net realizable value.
We recognize revenue when all of the following criteria are met:
| • | Persuasive evidence of an arrangement exists. We operate under a purchase order/contract system for goods sold to customers, and under rental/lease agreements for equipment rentals. These documents evidence that an arrangement exists. |
| • | Delivery has occurred or services have been rendered. For product sales, we do not recognize revenues until delivery has occurred or performance tests are met. For rental revenue, we recognize revenue when earned. |
20
Table of Contents
| • | The seller’s price to the buyer is fixed or determinable. Sales prices are defined in writing in a customer’s purchase order, purchase contract or equipment rental agreement. |
| • | Collectibility is reasonably assured. We evaluate customer credit to ensure collectibility is reasonably assured. |
Occasionally, our seismic customers are not able to take immediate delivery of products which were specifically manufactured to the customer’s specifications. These occasions generally occur when customers face logistical issues such as project delays or with their seismic crew deployment. In these instances, our customers have asked us to hold the equipment for a short period of time until they can take physical delivery of the product (referred to as “bill and hold” arrangements). We consider the following criteria for recognizing revenue when delivery has not occurred:
| • | Whether the risks of ownership have passed to the customer, |
| • | Whether we have obtained a fixed commitment to purchase the goods in written documentation from the customer, |
| • | Whether the customer requested that the transaction be on a bill and hold basis and we received that request in writing, |
| • | Whether the customer has a substantial business purpose for ordering the goods on a bill and hold basis, |
| • | Whether there is a fixed schedule for delivery of the product, |
| • | Whether we have any specific performance obligations such that the earning process is not complete, |
| • | Whether the equipment is segregated from our other inventory and not subject to being used to fill other orders, and |
| • | Whether the equipment is complete and ready for shipment. |
We do not modify our normal billing and credit terms for these types of sales. As of December 31, 2010 and 2009, we had no sales under bill and hold arrangements.
21
Table of Contents
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We do not have any market risk as to market risk sensitive instruments entered into for trading purposes and have only very limited risk as to arrangements entered into other than for trading purposes. Further, we do not engage in commodity or commodity derivative instrument purchasing or selling transactions. Because of the inherently unpredictability of foreign currency rates and interest rates, as well as other factors, actual results could differ materially from those projected in this Item.
Foreign Currency and Operations Risk
One of our wholly-owned subsidiaries, OYO-GEO Impulse, 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, 2010 reflected approximately $4.9 million of net working capital related to OYO-GEO Impulse. For third-party transactions, OYO-GEO Impulse both receives its income and pays its expenses primarily in rubles. To the extent that transactions of OYO-GEO Impulse are settled in rubles, a devaluation of the ruble versus the U.S. dollar could reduce any contribution from OYO-GEO Impulse 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 OYO-GEO Impulse’s net working capital or future contributions to our consolidated results of operations. At December 31, 2010, the foreign exchange rate of the U.S. dollar to the ruble was 1:30.5. If the U.S. dollar versus ruble exchange rate were to decline by ten percent, our working capital could decline by $0.5 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 these 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, 2010, we had outstanding accounts receivable of $7.8 million and $0.2 million from our subsidiaries in Canada and the Russian Federation, respectively. At December 31, 2010, the foreign exchange rate of the U.S. dollar to the Canadian Dollar was 1:1.0 and the foreign exchange rate of the U.S. dollar to ruble was 1:30.5. If the U.S. dollar exchange rate were to strengthen by ten percent against these foreign currencies, we would recognize foreign exchange losses of $0.8 million in Canada and $16,000 in the Russian Federation.
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 as most recently amended, our borrowing interest rate is a LIBOR based rate plus 250-350 basis points. As of December 31, 2010, we had no borrowings under the Credit Agreement.
22
Table of Contents
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, 2010 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, 2010.
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
23
Table of Contents
PART II - OTHER INFORMATION
The information required by this Item is contained in Financial Note 9, “Legal Proceedings,” in the Financial Notes in Item 1 of Part I of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
There have been no material changes to the Risk Factors disclosure included in our Annual Report on Form 10-K for the year ended September 30, 2010 filed with the SEC on December 12, 2010.
The following exhibits are filed with this Report on Form 10-Q.
| 10.1 | OYO Geospace Corporation Fiscal Year 2011 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. | |
24
Table of Contents
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.
OYO GEOSPACE CORPORATION | ||||
Date: February 4, 2011 | By: /s/ Gary D. Owens | |||
Gary D. Owens, Chairman of the Board | ||||
President and Chief Executive Officer | ||||
(duly authorized officer) | ||||
Date: February 4, 2011 | By: /s/ Thomas T. McEntire | |||
Thomas T. McEntire | ||||
Chief Financial Officer and Secretary | ||||
(principal financial officer) | ||||
25