Mitcham Industries, Inc. — Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended January 31, 2013, including the fourth quarter ended January 31, 2013. Mitcham leases and sells geophysical equipment used primarily in seismic data acquisition and operates through two segments: Equipment Leasing and Seamap, which designs and manufactures marine seismic equipment. Operations are conducted worldwide, with approximately 78% of fiscal 2013 revenue attributable to international customers.
Financial performance and position
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Revenue | $104.7 million | $112.8 million |
| Gross profit | $37.4 million | $57.8 million |
| Gross margin | 35.7% | 51.2% |
| Operating income | $13.9 million | $34.5 million |
| Net income | $17.1 million | $24.3 million |
| Diluted EPS | $1.29 | $2.02 |
| Adjusted EBITDA | $50.0 million | $64.8 million |
| Operating cash flow | $44.3 million | $36.0 million |
Equipment Leasing revenue was $73.5 million, down from $84.4 million, while Seamap revenue increased to $32.2 million from $28.7 million. Equipment Leasing gross profit fell to $20.2 million from $41.8 million, principally because of lower leasing revenue and higher lease-pool depreciation. Seamap gross profit increased to $17.4 million from $15.9 million, with a 54% gross margin.
Cash and cash equivalents were $15.2 million, plus $0.8 million of restricted cash, at January 31, 2013. Working capital was approximately $48.4 million. Total assets were $190.4 million, including $119.6 million of net seismic lease-pool and property and equipment. Total liabilities were $14.1 million and shareholders’ equity was $176.3 million.
Long-term debt was $4.2 million, including $4.0 million outstanding under the revolving credit facility. The amended facility provides borrowing capacity of up to $50 million through August 31, 2015, subject to a borrowing base. As of April 1, 2013, management estimated approximately $41.4 million remained available after outstanding borrowings and letters of credit.
Cash flow, capital spending and material changes
- Operating cash flow increased to $44.3 million from $36.0 million, despite a $13.3 million increase in trade accounts and contracts receivable.
- Investing cash outflow was $34.7 million, including $44.7 million of purchases of seismic equipment held for lease and $11.4 million of proceeds from used lease-pool equipment sales.
- Lease-pool additions were approximately $39.1 million, compared with $68.8 million in fiscal 2012. Management expected fiscal 2014 additions of approximately $23 million to $28 million.
- Financing activities used $9.9 million, primarily reflecting net repayments under the revolving credit facility.
- Equipment leasing revenue declined approximately 22%, primarily because of lower land-leasing activity in the United States, Latin America and Europe, the absence of a $4.5 million U.S. project that had benefited fiscal 2012, project delays in Colombia, and lower downhole activity.
- Lease-pool equipment sales increased to $11.4 million from $6.5 million and generated approximately $5.4 million of gross profit, an item that may vary substantially by period.
- The fiscal 2013 income tax benefit of $3.5 million was unusual. It included approximately $5.3 million related to a settlement with the Canadian Revenue Agency and the IRS concerning prior-year tax matters. Management estimated that the underlying tax provision would have been approximately $1.8 million without this benefit.
- Seamap backlog fell to approximately $2.2 million from $13.6 million, with the remaining orders expected to be fulfilled during fiscal 2014.
Fourth-quarter information
For the quarter ended January 31, 2013, revenue was $28.4 million, gross profit was $8.8 million, income before taxes was $3.4 million and net income was $3.4 million, or $0.26 diluted EPS. The comparable fourth quarter of fiscal 2012 produced revenue of $37.0 million, gross profit of $21.3 million and net income of $10.2 million, or $0.77 diluted EPS.
Outlook, commentary and risks
Management stated that overall demand for seismic services remained strong, supported by worldwide oil and gas demand and demand for higher-resolution seismic data. Management expected continued opportunities in Latin America, Eastern Europe and the marine seismic market, but did not provide formal revenue or earnings guidance. The company stated that the fiscal 2013 leasing decline was not necessarily indicative of a continuing trend, while acknowledging that project timing, weather, permitting, regulatory and political factors could continue to affect results.
- Results are highly dependent on oil and gas exploration spending, commodity prices, seismic crew activity and customer financial condition.
- Customer concentration is significant: CGV represented approximately 23% of fiscal 2013 revenue, and the five largest customers represented approximately 47%.
- Customer receivables totaled approximately $28.6 million, including $10.2 million more than 90 days past due; the allowance for doubtful accounts was $3.4 million.
- The company relies heavily on Sercel and other key suppliers. Products acquired from Sercel generated approximately 32% of fiscal 2013 revenue through rental activity.
- Wireless seismic technology could make portions of the existing lease pool obsolete. Approximately 27,000 of the company’s 231,000 land recording channels were wireless at January 31, 2013.
- Patent disputes involving Sercel, ION and WesternGeco could restrict the use, importation or demand for certain equipment.
- International operations expose the company to foreign exchange, political, regulatory, tax, security, export-control and anti-bribery risks. The company does not hedge foreign currency or interest-rate exposure with derivatives.
- Seismic leasing has substantial fixed depreciation costs and is seasonal, with historically stronger activity in the first and fourth fiscal quarters.
- The company had approximately $12.0 million of remaining minimum equipment purchases under Sercel agreements through December 2014, plus $3.15 million of outstanding purchase orders at January 31, 2013.
- No material legal proceedings were disclosed, no impairment charges were recorded, and management and the auditors concluded that internal controls over financial reporting were effective.
Important facts for investors to verify
- Whether equipment-leasing utilization and revenue recover after the fiscal 2013 decline, particularly in the United States, Latin America and Europe.
- Whether the unusually favorable tax benefit recurs; it should not be treated as a recurring earnings source.
- The collectability and aging of receivables, especially the $10.2 million more than 90 days past due.
- The pace and return on planned fiscal 2014 lease-pool spending of $23 million to $28 million.
- Seamap order intake and backlog conversion, given the decline to $2.2 million.
- Potential effects of wireless technology adoption and outstanding patent disputes on equipment values and rental demand.
- Customer and supplier concentration, including CGV and Sercel exposure, and compliance with the revolving credit facility’s covenants.
- The effect of foreign exchange movements, commodity prices, weather, permitting and geopolitical events on future results.