Mitcham Industries, Inc. Form 10-Q Summary
Reporting period: Three months ended April 30, 2017, compared with the three months ended April 30, 2016. The filing identifies the registrant as Mitcham Industries, Inc.; the request metadata names MIND TECHNOLOGY, INC.
Business Context
The company operates through two segments: Equipment Manufacturing and Sales, which includes Seamap, Klein and SAP products, and Equipment Leasing, which provides seismic equipment leasing, equipment sales and related services worldwide. The business is highly exposed to oil and gas exploration activity, seismic industry conditions, commodity prices, foreign exchange and international operating risks.
Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Total revenue | $18.4 million | $11.7 million |
| Gross profit (loss) | $3.2 million | $(0.4) million |
| Gross margin | 17.3% | (3.1)% |
| Operating loss | $(2.3) million | $(6.3) million |
| Operating margin | (12.4)% | (54.0)% |
| Net loss | $(2.7) million | $(6.4) million |
| Net loss attributable to common shareholders | $(2.9) million | $(6.4) million |
| Loss per common share | $(0.24) | $(0.53) |
| EBITDA | $2.4 million | $1.7 million |
| Adjusted EBITDA | $9.0 million | $2.2 million |
| Cash flow from operations | $1.1 million | $1.8 million |
Revenue growth was driven primarily by lease pool equipment sales of $8.8 million versus $0.9 million in the prior-year quarter. Equipment leasing revenue declined 25% to $2.7 million, while Equipment Manufacturing and Sales revenue declined 4% to $6.9 million. The manufacturing segment generated a 42% gross margin; the leasing segment generated a 2% gross margin compared with a 78% gross loss in the prior-year period.
At April 30, 2017, cash and cash equivalents were $2.1 million and restricted cash was $0.4 million. Working capital was approximately $26.9 million. Total assets were $85.8 million and shareholders’ equity was $78.4 million. Accounts and contracts receivable, net of allowances, totaled $20.5 million, and inventories totaled $13.5 million.
The company had no outstanding long-term debt at April 30, 2017. It repaid and terminated its secured revolving credit facility in March 2017 and repaid and cancelled the Seamap Credit Facility in April 2017. The company had no current bank credit facilities and was discussing potential replacement facilities.
Material Changes Versus the Prior Comparable Period
- Total revenue increased $6.7 million, or approximately 57%, almost entirely because of higher lease pool equipment sales.
- Gross profit improved by $3.6 million, and the operating loss narrowed by $4.0 million.
- Lease pool equipment depreciation declined 39%, reflecting equipment sales, lower additions and fully depreciated assets.
- General and administrative expense declined 8% to $4.9 million.
- Interest expense declined to $46,000 from $264,000 due to substantially lower average borrowings.
- Operating cash flow declined to $1.1 million from $1.8 million, partly because of higher receivables and the period’s operating loss.
- Investing cash flow increased to $4.3 million, primarily from $4.5 million of cash proceeds from used lease pool equipment sales.
- Financing activities used $6.5 million, primarily for repayment of credit facilities and $194,000 of preferred stock dividends.
- The company issued 4,349 shares of Series A Preferred Stock under its ATM program, generating approximately $100,000 of net proceeds. The preferred stock carries a 9% annual dividend, with annual dividend requirements of approximately $782,000.
Outlook, Commentary, Risks and Unusual Items
Management expects seismic industry conditions to remain challenging through fiscal 2018, with only marginal improvement. Increased inquiries, bids and proposals suggest gradual market improvement, but leasing demand, pricing and utilization remain pressured by excess equipment supply, competition and weak oil and gas exploration activity.
Management expects leasing demand to be concentrated primarily in Europe, South America and North America. Russian activity is expected to remain restrained because of economic conditions and trade restrictions. Marine leasing is also expected to remain affected by excess used equipment. Klein revenue is expected to improve as in-process orders are delivered, and Seamap expects additional system deliveries during fiscal 2018.
The company plans to emphasize manufacturing and sales, selectively sell lease pool assets, limit new lease pool purchases and maintain limited leverage. Fiscal 2018 lease pool additions are expected to be less than $1.0 million, although actual additions may change based on market conditions or opportunities.
During the quarter, the company completed equipment sales totaling approximately $8.8 million, including approximately $4.5 million received in cash and the balance payable over 24 monthly installments secured by liens on the equipment. The transactions generated approximately $2.7 million of gross profit and provided a significant portion of reported earnings and cash flow.
Key risks include continued weakness in oil and gas exploration, customer defaults, loss of significant customers or suppliers, intense competition, foreign currency and geopolitical exposure, Russia-related sanctions, seasonality and weather, inability to obtain replacement credit facilities, and potential impairment of long-lived assets. Approximately 41% of net assets were exposed to foreign currency translation effects. A 10% strengthening of the U.S. dollar against relevant foreign currencies would reduce the value of foreign currency cash deposits by approximately $150,000.
Management stated that liquidity needs for the next 12 months are expected to be met through cash on hand, operating cash flow and preferred stock proceeds, but there is no assurance that replacement credit facilities will be obtained. No material legal proceedings or off-balance-sheet arrangements were reported. Disclosure controls were deemed effective.
Investor Verification Items
- Verify the registrant identity, because the filing text names Mitcham Industries, Inc., while the request metadata names MIND TECHNOLOGY, INC.
- Assess the sustainability of reported revenue and cash flow after excluding the sporadic lease pool equipment sales.
- Review the collectability and timing of the approximately $4.3 million of deferred equipment-sale receivables and the company’s allowance for doubtful accounts.
- Confirm the company’s ability to operate without bank credit facilities and whether replacement facilities were subsequently obtained.
- Monitor seismic leasing utilization, equipment pricing, oil and gas exploration activity and the impact of excess used equipment supply.
- Evaluate the ongoing 9% preferred dividend obligation and the potential effect of additional preferred or common equity issuance.
- Review foreign exchange, Russia-related sanctions, customer concentration and potential asset impairment risks.