Business Context and Reporting Period
The filing is a Form 10-Q for the quarter ended July 31, 2011, covering the three and six months ended July 31, 2011, compared with the corresponding 2010 periods. The filing identifies the registrant as Mitcham Industries, Inc., not MIND Technology, Inc.; this company-name discrepancy should be verified.
The company operates through Equipment Leasing, which provides seismic equipment leasing, sales and service, and Seamap, which manufactures and sells seismic, hydrographic and offshore equipment. Operations are worldwide, with approximately 81% of consolidated revenue generated from international customers during both the quarter and six-month period.
Financial Metrics
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Revenue | $21.3 million, versus $15.2 million | $47.8 million, versus $31.7 million |
| Gross profit | $8.2 million, versus $4.7 million | $22.1 million, versus $11.6 million |
| Gross margin | 38.6%, versus 30.7% | 46.3%, versus 36.6% |
| Operating income | $2.6 million, versus operating loss of $0.6 million | $11.6 million, versus $1.9 million |
| Net income | $1.3 million, versus net loss of $0.1 million | $7.4 million, versus $2.2 million |
| Diluted EPS | $0.11, versus $(0.01) | $0.67, versus $0.22 |
| EBITDA | $9.3 million, versus $5.5 million | $24.4 million, versus $12.8 million |
| Adjusted EBITDA | $10.0 million, versus $6.0 million | $25.3 million, versus $13.6 million |
Equipment Leasing revenue increased 85% in the quarter and 76% for the six months, driven primarily by higher leasing activity. Seamap revenue decreased 6% in the quarter but increased 17% for the six months. Equipment Leasing gross margin improved to 31% for the quarter and 41% for the six months, compared with 10% and 27%, respectively, in the prior-year periods. Seamap gross margin was 57% for both the quarter and six months, compared with 53% and 49%.
Net cash provided by operating activities was $19.6 million for the six months, compared with $18.1 million. Investing cash use was $30.2 million, including $30.5 million of seismic equipment purchases. Financing cash flow was positive $9.2 million, reflecting approximately $31.0 million of net public-offering proceeds and $20.9 million of revolving-credit repayments. Cash and cash equivalents were $13.9 million at July 31, 2011, compared with $14.6 million at January 31, 2011; restricted cash was $0.1 million.
Total assets increased to $164.3 million from $138.0 million, largely reflecting lease-pool additions. Net seismic equipment lease pool and property and equipment increased to $101.6 million from $79.1 million. Total debt was $3.7 million at July 31, 2011, compared with $26.5 million at January 31, 2011, including $0.75 million outstanding on the revolving facility and $2.7 million of current maturities. Working capital was approximately $29.3 million, and shareholders’ equity was $138.2 million.
Material Changes Versus the Prior Comparable Period
- Revenue, gross profit, operating income and net income improved substantially, primarily because of stronger Equipment Leasing activity.
- The company recovered $0.5 million of previously reserved accounts receivable in the quarter, compared with a $0.8 million doubtful-account provision in the prior-year quarter.
- General and administrative expense increased to $5.8 million for the quarter and $10.4 million for the six months, reflecting higher activity, personnel costs, professional fees, travel, stock compensation and foreign-currency translation effects.
- The June 2011 offering issued 2.3 million common shares and generated approximately $31.0 million of net proceeds. The proceeds were used primarily to repay revolving debt and fund lease-pool purchases.
- Lease-pool additions totaled approximately $34.8 million during the first six months, compared with $12.1 million in the prior-year period.
- The prior-year six-month results included a nonrecurring $1.3 million bargain-purchase gain from the AES acquisition; no comparable gain was recorded in 2011.
- Foreign-currency translation produced a $2.8 million comprehensive-income gain for the six months, compared with a $1.0 million gain in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
Management reported increased seismic exploration activity in South America, North America, Russia, Canada, marine markets and parts of Eastern Europe. The company deployed significant new equipment to Colombia and was establishing a facility in Hungary to serve European, North African and Middle Eastern markets.
Management expected to add more than $30 million of lease-pool equipment during the balance of fiscal 2012 and estimated total fiscal-year additions of $65 million to $70 million. The company had approximately $5.4 million of purchase commitments at July 31 and entered into approximately $23.0 million of additional commitments afterward. It expected to fund these needs through operating cash flow, cash on hand and the revolving facility.
The $35 million revolving credit facility was extended to May 31, 2013. At September 2, 2011, approximately $2.9 million was outstanding, $1.0 million was reserved for letters of credit and approximately $31.1 million remained available. The company complied with its debt covenants at July 31, including a debt-to-equity ratio of 0.03:1, current ratio of 2.43:1 and quarterly EBITDA of $9.3 million against a $2.0 million minimum.
- Key risks include cyclicality in oil and gas exploration, oil and natural-gas price fluctuations, customer financing constraints, customer defaults, loss of significant customers, seasonality and possible impairment of long-lived assets.
- International operations expose the company to foreign-currency risk. A 10% strengthening of the U.S. dollar against relevant currencies was estimated to reduce the value of foreign-currency cash deposits by approximately $0.4 million.
- The Canadian Revenue Agency had proposed approximately $8.6 million of additional tax, including interest and penalties, for prior years. The company had made approximately $3.4 million of prepayments and was pursuing competent-authority and appeal procedures.
- The company was required to purchase approximately $10.0 million of additional equipment through December 31, 2011 under its Sercel agreement; failure to meet the requirement could permit termination of the agreement and exclusive referral arrangement.
- Deepwater Horizon-related cancellations and delays affected Gulf of Mexico activity but had not materially affected reported results or financial condition.
- The filing states that interim results are not necessarily indicative of full-year results. No formal earnings guidance is provided.
Investor Verification Points
- Verify whether the filing belongs to Mitcham Industries, Inc. or the requested MIND Technology, Inc.
- Assess whether the substantial lease-pool expansion and planned $65 million to $70 million of fiscal 2012 additions can generate adequate utilization and returns.
- Monitor cash conversion, accounts receivable growth, equipment purchase commitments and future revolver borrowings.
- Evaluate exposure to the approximately $8.6 million Canadian tax assessment and the adequacy of recorded tax liabilities.
- Consider seasonality, foreign-currency exposure and the sustainability of the sharp year-over-year margin improvement.
- Review the terms and covenant capacity of the amended revolving credit facility and the company’s ability to finance continued expansion.