Mitcham Industries, Inc. — Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2019. The filing is an annual report, although the requested period is identified as 2018 Q4. Mitcham provides marine technology products and seismic equipment leasing services through two segments: Marine Technology Products and Equipment Leasing.
Business Context and Strategic Direction
- Marine Technology Products includes Seamap marine seismic products, Klein side-scan sonar and waterside security systems, and SAP distribution activities.
- Equipment Leasing provides short-term seismic equipment rentals and sells used lease-pool equipment.
- Management is shifting capital and strategic emphasis toward marine technology products because of persistent weakness in oil and gas exploration, excess seismic equipment capacity, lower pricing, and industry competition.
- The Company acquired marine sensor and streamer intellectual property and related assets from Hydroscience for total consideration of approximately $4.5 million, including $3.0 million in cash, during February 2018.
Financial Performance and Key Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|
| Total revenue | $42.9 million | $48.3 million | Down 11% |
| Gross profit | $11.7 million | $6.1 million | Improved |
| Gross margin | 27% | 13% | Improved |
| Operating loss | $13.0 million | $19.7 million | Loss narrowed |
| Net loss | $19.8 million | $21.1 million | Loss narrowed |
| Net loss attributable to common shareholders | $21.5 million | $22.0 million | Loss narrowed |
| Basic and diluted loss per common share | $1.78 loss | $1.82 loss | Improved |
| Adjusted EBITDA | $0.9 million | $7.2 million | Down materially |
| Cash flow from operations | $5.5 million used | $0.7 million provided | Declined |
- Marine Technology Products revenue was $25.8 million versus $27.6 million; gross profit was $10.7 million versus $10.7 million, and segment gross margin increased to 42% from 39%.
- Equipment Leasing revenue was $17.4 million versus $20.9 million; segment gross profit was $1.0 million versus a $4.6 million gross loss. Leasing revenue increased, but lease-pool equipment sales declined substantially from the prior year.
- Klein revenue increased 62% year over year, although delays in government project awards, component availability, competitive pressure, and lower sonar industry demand continued to affect results.
- Lease-pool depreciation declined to $9.2 million from $14.4 million, reflecting asset sales and reduced additions. Approximately $105.4 million of equipment cost was fully depreciated but remained in service at year-end.
- Foreign revenue represented approximately 85% of consolidated revenue, compared with 76% in fiscal 2018.
Cash Flow, Liquidity, Debt and Capital Structure
| Balance-sheet or cash-flow item | January 31, 2019 | January 31, 2018 |
|---|
| Cash, short-term investments and restricted cash | $9.5 million | $10.1 million |
| Working capital | $28.8 million | $25.3 million |
| Total assets | $65.3 million | $73.7 million |
| Net lease pool and property and equipment | $14.2 million | $22.9 million |
| Total liabilities | $8.6 million | $7.8 million |
| Long-term bank debt | None | None |
| Shareholders’ equity | $56.7 million | $65.8 million |
- Operating cash flow was negative $5.5 million, primarily reflecting the net loss and working-capital uses.
- Investing cash flow was approximately negative $15,000 after $5.7 million of used lease-pool equipment proceeds, $3.0 million for the Hydroscience asset acquisition, and capital expenditures.
- Financing cash flow was $5.1 million provided, principally from $6.9 million of Series A preferred stock proceeds, partly offset by $1.7 million of preferred dividends.
- The Company had no interest-bearing bank debt at January 31, 2019. It terminated or repaid its revolving and term credit facilities in prior periods.
- Series A preferred stock outstanding was approximately 830,000 shares with a 9% cumulative dividend and a $25 liquidation preference per share. Quarterly preferred dividends were approximately $467,000.
- Gross customer receivables were approximately $14.9 million, including $4.3 million more than 180 days past due; the allowance for doubtful accounts was $2.1 million.
Material Changes Versus Fiscal 2018
- Total revenue declined primarily because of lower marine technology sales and significantly lower lease-pool equipment sales.
- Gross profit improved substantially as Equipment Leasing returned to a small gross profit and lease-pool depreciation and equipment-sale costs declined.
- The net loss remained substantial due partly to approximately $5.4 million of other expense related to the sale of the Russian subsidiary and a $1.2 million reserve against non-current prepaid income taxes.
- The Company sold its Russian subsidiary, MSE, in August 2018 for contractual proceeds of approximately $1.2 million and recorded a loss of approximately $4.9 million, including $5.4 million of cumulative translation losses.
- SAP, the Australian subsidiary, was classified as held for sale in the fourth quarter. The expected sale price was approximately $660,000, and the Company recorded an estimated loss of approximately $500,000.
- Marine Technology Products backlog increased to approximately $8.7 million from $2.7 million, with substantially all orders expected to be fulfilled in fiscal 2020.
- The Company adopted the new revenue recognition standard using the modified retrospective method; management reported no material impact.
Outlook, Commentary, Risks and Unusual Items
- Management expects fiscal 2020 leasing activity to remain well below historical levels, although it anticipates demand in Europe, Australia and North America and possible improvement in South America.
- Management expects low lease-pool additions and continuing declines in depreciation as assets are sold or become fully depreciated.
- SeaLink streamer products had limited fiscal 2019 contribution because facility expansion and start-up costs exceeded related revenue. Management expected improvement as production and repair operations ramped up.
- Approximately $1.0 million of Seamap revenue was delayed into the first quarter of fiscal 2020, and approximately $1.0 million of Klein orders were delayed because of component shortages.
- Key risks include dependence on oil and gas exploration activity, cyclical demand, customer credit quality, foreign operations and currency fluctuations, export controls and sanctions, supplier concentration, product reliability, technology obsolescence, environmental regulation, cybersecurity, and potential impairment of long-lived assets.
- The Company expects to meet its next-12-month liquidity needs through cash on hand, operating cash flow, lease-pool equipment sales, and possible additional preferred stock issuance. This outlook is exposed to negative operating cash flow and dependence on capital-market access.
- The Company has no common-stock dividend policy and does not anticipate paying common dividends in the foreseeable future.
- Contractual obligations totaled approximately $7.1 million, including $2.7 million of operating leases, $1.4 million of other obligations, and $3.0 million of purchase obligations.
Important Facts for Investors to Verify
- Whether the $8.7 million marine backlog converts to revenue and cash flow as expected during fiscal 2020.
- The timing and final economics of the SAP sale, including cash proceeds, the note receivable, working-capital adjustments, and contingent consideration.
- Whether Marine Technology Products can achieve sustained profitability after SeaLink start-up costs and whether Klein’s improved sales trend continues.
- Customer collection risk, particularly the $4.3 million of receivables more than 180 days past due and the adequacy of the $2.1 million allowance.
- The Company’s ability to generate positive operating cash flow without relying on additional preferred stock issuance or equipment sales.
- The ongoing economic value and serviceability of fully depreciated lease-pool equipment and the risk of future impairment.
- The dilution, senior liquidation preference, and recurring 9% dividend burden associated with the Series A preferred stock.
- Future effects of foreign operations, currency movements, export controls, geopolitical conditions, and supplier or component shortages.
