Mitcham Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2012; filed December 5, 2012. The filing identifies the registrant as Mitcham Industries, Inc., although the request metadata lists MIND TECHNOLOGY, INC.
Business context
The company operates two segments: Equipment Leasing, which leases and sells seismic equipment worldwide, and Seamap, which manufactures and sells seismic, hydrographic and offshore telemetry systems. Results are affected by oil and gas exploration activity, energy prices, customer project timing, weather, permitting, seasonality and foreign exchange rates.
Key financial metrics
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Total revenue | $18.6 million, versus $28.0 million | $76.3 million, versus $75.8 million |
| Gross profit | $4.4 million, versus $14.3 million | $28.6 million, versus $36.5 million |
| Operating income (loss) | $(1.9) million, versus $8.4 million | $11.1 million, versus $20.0 million |
| Net income (loss) | $(1.2) million, or $(0.10) diluted per share | $13.6 million, or $1.03 diluted per share |
| Adjusted EBITDA | $6.7 million, versus $16.8 million | $37.8 million, versus $42.2 million |
| Net cash from operating activities | Not separately reported in the cash flow statement | $36.1 million, versus $28.4 million |
Margins: Consolidated gross margin was approximately 23% in the quarter and 38% year to date, compared with approximately 51% and 48%, respectively, in the prior-year periods. Equipment Leasing gross margin declined to 14% from 47% in the quarter and to 29% from 43% year to date. Seamap gross margin was 58% in the quarter and 56% year to date.
Revenue mix: Quarterly equipment leasing revenue declined 36% to $11.1 million. Year-to-date leasing revenue declined 8% to $43.0 million. Seamap revenue declined 28% in the quarter to $4.5 million but increased 6% year to date to $22.3 million. Lease pool equipment sales were $7.4 million year to date, compared with $3.1 million in the prior-year period.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $24.0 million at October 31, 2012, compared with $15.3 million at January 31, 2012; restricted cash was $96,000.
- Working capital was approximately $56.2 million, compared with $41.3 million at January 31, 2012.
- Total debt was $13.6 million, including $13.2 million outstanding under the revolving credit facility. The facility had a $50 million borrowing limit, subject to a borrowing base, and matured August 31, 2015. The applicable interest rate was 3.25%.
- As of December 4, 2012, approximately $33.5 million of the revolving facility was available after outstanding borrowings and letter-of-credit reserves.
- The company reported compliance with its debt covenants, including a debt-to-equity ratio of 0.08:1, current ratio of 8.22:1 and quarterly EBITDA of $6.4 million versus a $2.0 million minimum.
- Investing cash outflows included $35.5 million of seismic equipment purchases and were partly offset by $7.4 million of used lease pool equipment sales.
Material changes versus the prior comparable periods
- Quarterly revenue fell 34%, primarily because of lower land leasing activity in the United States and Europe, lower downhole leasing and lower Seamap shipments.
- Quarterly gross profit fell sharply because of lower leasing revenue and higher lease pool depreciation. Lease pool depreciation increased approximately 15% in the quarter and 25% year to date.
- Year-to-date revenue was broadly flat, but operating income declined 44% because of lower leasing profitability, higher depreciation and higher general and administrative expenses.
- General and administrative expense increased to $5.9 million in the quarter and $16.9 million year to date, reflecting expanded operations in Colombia, Singapore and Hungary.
- The company recorded a $3.5 million income tax benefit year to date, including approximately $5.3 million of benefit from a Canadian and U.S. tax settlement involving prior-year tax positions, penalties and interest. Excluding that effect, management estimated an approximately 18% effective tax expense rate for fiscal 2013.
- Cash from operations improved despite lower earnings, primarily because of collections of accounts receivable and higher non-cash depreciation.
Guidance, outlook, risks and unusual items
- Management expected sequential improvement in South America over the next two fiscal quarters as delayed projects commenced and bidding activity improved.
- Customer inquiries for Canadian and Russian winter-season equipment led management to expect strong leasing revenue in the fourth quarter of fiscal 2013 and first quarter of fiscal 2014.
- Management expected fiscal 2013 lease pool additions of $35 million to $40 million. At October 31, commitments for lease pool equipment were approximately $3.8 million; subsequent purchase orders totaled approximately $5.6 million.
- In November 2012, the company entered into Sercel equipment purchase agreements requiring minimum purchases through 2013 and 2014. Management estimated the total value of equipment under these arrangements at approximately $22.0 million, with $9.4 million of orders placed.
- Key risks include cyclical oil and gas exploration demand, energy-price declines, depressed North American natural gas prices, customer defaults, project delays, seasonality, competition, supplier dependence, technological obsolescence, foreign operations and currency exposure.
- Approximately 81% of quarterly revenue came from international customers. The company did not use derivative instruments to hedge foreign currency or interest-rate exposure.
- At October 31, 2012, approximately $8.8 million of cash was foreign-currency denominated; management estimated that a 10% strengthening of the U.S. dollar against those currencies would reduce the U.S.-dollar value by approximately $880,000.
- No material legal proceedings were reported, and the company stated that its previously disclosed risk factors had not materially changed.
Important facts for investors to verify
- Whether the expected Canadian and Russian winter demand and South American recovery materialized in subsequent quarters.
- Actual utilization and revenue contribution from newly purchased lease pool equipment, particularly the used equipment purchased in April 2012.
- Compliance with the revolving facility’s borrowing-base and EBITDA covenants as equipment purchases and debt levels increase.
- The cash-flow and margin impact of the Sercel minimum-purchase commitments.
- Whether the unusual $5.3 million tax benefit is nonrecurring and how future effective tax rates compare with management’s approximately 18% estimate.
- Exposure to further declines in U.S. and European exploration activity, foreign exchange losses and customer collection risk.