Mitcham Industries, Inc. Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended January 31, 2016. Although the request references 2015 Q4, the filing is an annual report and separately provides unaudited fourth-quarter data for the quarter ended January 31, 2016.
Mitcham provides seismic equipment leasing and manufactures and sells marine seismic, hydrographic, oceanographic and sonar equipment through two segments: Equipment Leasing and Equipment Manufacturing and Sales. Klein Marine Systems was acquired for $10.0 million in cash effective December 31, 2015, contributing only one month of fiscal 2016 results.
Financial performance and key metrics
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Revenue | $51.8 million | $83.1 million |
| Gross profit | $2.7 million | $23.3 million |
| Gross margin | 5.2% | 28.0% |
| Operating income (loss) | $(26.8) million | $(6.7) million |
| Net income (loss) | $(38.7) million | $(9.2) million |
| Basic and diluted EPS | $(3.22) | $(0.74) |
| Adjusted EBITDA | $13.7 million | $31.7 million |
| Cash flow from operations | $15.0 million | $25.2 million |
- Equipment Leasing revenue declined to $26.7 million from $52.8 million, and the segment generated a gross loss of $9.2 million versus gross profit of $9.8 million.
- Equipment Manufacturing and Sales revenue declined to $25.4 million from $30.9 million, while gross margin improved to 46% from 44%.
- Lease pool depreciation was $29.5 million. Net seismic lease pool and property and equipment declined to $73.5 million from $100.1 million.
- Fiscal 2016 included a $3.6 million impairment charge, comprising approximately $3.0 million of Seamap goodwill and $0.6 million of leasing-related intangible assets.
- Income tax expense was $11.0 million despite the pretax loss, principally because the company established approximately $15.5 million of additional valuation allowances against deferred tax assets and recorded a $2.6 million tax effect from deducting prior-year foreign tax credits.
Liquidity, debt and cash flow
- Cash and cash equivalents were $3.8 million at January 31, 2016, compared with $5.2 million one year earlier. Working capital was approximately $28.2 million versus $44.1 million.
- Net cash used in investing activities was $10.3 million, including the $10.0 million Klein acquisition and $2.2 million of lease-pool equipment purchases, partly offset by $2.2 million from used-equipment sales.
- Net cash used in financing activities was $5.6 million, including $2.6 million of revolving-credit repayments and $3.2 million of term-loan repayments.
- Total debt was $20.5 million, consisting primarily of $14.4 million under the revolving line and $6.0 million under the Seamap term facility.
- The revolving credit commitment was reduced to $30.0 million in February 2016, with maturity extended to August 31, 2017. Management stated that the full commitment, less outstanding amounts, was available as of April 7, 2016, subject to the borrowing base.
- The company was in compliance with its debt covenants at January 31, 2016. The reported leverage ratio was 1.11 to 1.00 versus a maximum of 2.00 to 1.00, and fixed-charge coverage was 3.00 to 1.00 versus a minimum of 1.25 to 1.00.
Material changes versus the prior comparable period
- Revenue fell 38%, driven primarily by the oil-price downturn, reduced seismic exploration spending, excess industry equipment capacity and customer project cancellations or delays.
- Equipment leasing utilization declined sharply: approximately 6.5% of the lease pool was deployed on active contracts at January 31, 2016, compared with 14.3% in 2015 and 28.1% in 2014.
- Customer receivable risk remained significant. Customer accounts and contracts receivable totaled approximately $30.6 million, including $16.0 million more than 90 days past due; the allowance for doubtful accounts was $5.8 million.
- General and administrative expense decreased to $19.0 million from $25.0 million due to headcount reductions, reduced work hours, salary reductions, lower incentive compensation and lower travel spending.
- The company acquired Klein to expand into sonar and waterside security markets and reduce dependence on the cyclical energy industry. Klein had approximately $4.3 million of backlog at January 31, 2016.
- Manufacturing backlog increased to approximately $8.7 million from $7.7 million, with management expecting fulfillment during fiscal 2017. Seamap backlog was $4.4 million.
- Former President and CEO Billy F. Mitcham, Jr. died in September 2015. Robert Capps and Guy Malden assumed co-chief executive and operating responsibilities. Related employment obligations totaled approximately $2.1 million.
Outlook, risks and unusual items
- Management expected fiscal 2017 to remain challenging, with lower leasing revenue, continued pricing pressure and reduced operating margins. The company did not quantify the expected revenue decline.
- Management expected lease-pool additions of approximately $2.0 million in fiscal 2017, focused primarily on maintenance and ancillary equipment.
- Management expected Klein to contribute more than $12.0 million of annual revenue in fiscal 2017.
- Key risks include depressed oil and gas prices, reduced seismic crew and vessel activity, excess customer equipment, customer defaults, high fixed depreciation costs, technological obsolescence, foreign exchange volatility, Russia-related sanctions, political and regulatory uncertainty, supplier concentration and environmental requirements.
- The company had approximately $3.9 million of purchase orders outstanding at January 31, 2016, expected to be fulfilled within 180 days, and approximately $612,000 of customs and performance guarantees secured by letters of credit and bank guarantees.
- Approximately 86% of fiscal 2016 revenue came from international operations. One customer represented approximately 11% of consolidated revenue, and the five largest customers represented approximately 42%.
- The company had no material legal proceedings identified in the filing and reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the severe fiscal 2016 loss with operating cash flow, depreciation, impairment and the deferred-tax valuation allowance.
- Assess whether leasing utilization and customer receivable collections improve from the reported 6.5% utilization and $16.0 million of receivables over 90 days past due.
- Review debt availability, borrowing-base capacity and covenant compliance as the downturn affects EBITDA and asset values.
- Evaluate whether Klein achieves the expected contribution of more than $12.0 million of fiscal 2017 revenue and whether integration produces meaningful diversification.
- Monitor the value and impairment risk of the lease pool, goodwill and other intangible assets, particularly under continued weak oil and gas conditions.
- Confirm the timing and conversion of the $8.7 million manufacturing backlog into revenue and cash collections.