Mitcham Industries, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2016; comparative periods ended October 31, 2015. The supplied filing identifies the registrant as Mitcham Industries, Inc., although the request metadata names MIND TECHNOLOGY, INC. Financial statements are unaudited.
Business Context
The company operates in two segments: Equipment Leasing, which provides seismic equipment leasing and sales worldwide, and Equipment Manufacturing and Sales, which includes Seamap, Klein Marine Systems and SAP. Klein was acquired in December 2015 for approximately $10 million to expand hydrographic, oceanographic and defense-related offerings and reduce dependence on the cyclical energy industry.
Key Financial Metrics
| Metric | Three months ended October 31, 2016 | Three months ended October 31, 2015 | Nine months ended October 31, 2016 | Nine months ended October 31, 2015 |
|---|---|---|---|---|
| Total revenue | $8.1 million | $15.7 million | $28.5 million | $40.4 million |
| Gross profit (loss) | $(2.1) million | $1.7 million | $(4.7) million | $3.7 million |
| Operating loss | $(7.7) million | $(6.0) million | $(22.4) million | $(15.7) million |
| Net loss | $(7.3) million | $(5.8) million | $(23.3) million | $(11.9) million |
| Net loss available to common shareholders | $(7.5) million | $(5.8) million | $(23.6) million | $(11.9) million |
| Loss per common share | $(0.62) | $(0.48) | $(1.96) | $(0.99) |
| Adjusted EBITDA | $(0.5) million | $4.6 million | $1.1 million | $13.1 million |
Revenue declined approximately 49% in the quarter and 30% for the nine-month period. Gross margin was negative in both 2016 periods, compared with approximately 11% in the 2015 quarter and 9% for the 2015 nine-month period. Equipment Leasing generated revenue of $2.8 million in the quarter and $10.3 million year to date, down from $5.7 million and $22.1 million, respectively. Manufacturing and Sales generated $5.3 million in the quarter and $18.2 million year to date.
Cash and cash equivalents were $3.2 million at October 31, 2016, compared with $3.8 million at January 31, 2016. Working capital was approximately $16.8 million versus $28.2 million at January 31, 2016. Accounts and contracts receivable, net, were $11.3 million current and $5.0 million long term; the allowance for doubtful accounts was $5.2 million.
Net cash provided by operating activities was $3.7 million for the nine months, down from $13.9 million in the prior-year period. Investing activities provided $1.5 million, including $2.3 million from used lease-pool equipment sales. Financing activities used $5.1 million, including $9.4 million of revolving-credit payments and $2.4 million of term-loan payments.
Total debt was $8.7 million at October 31, 2016, consisting of $5.0 million under the revolving credit facility, $3.6 million under the Seamap term facility and $76,000 of other equipment notes. All debt was classified as current. The company had issued approximately $7.0 million of preferred stock proceeds during the period and paid $294,000 of preferred dividends.
Material Changes Versus Prior Comparable Period
- Equipment Leasing revenue fell approximately 40% in the quarter and 61% for the nine months, reflecting depressed seismic activity, especially in North America, Russia and the Pacific Rim.
- Seamap revenue declined to $2.5 million in the quarter and $9.7 million year to date, primarily because major system deliveries were delayed.
- Klein contributed $2.0 million of quarterly revenue and $6.5 million year to date; it was not included in the 2015 comparable periods.
- Manufacturing and Sales gross margin was 45% in both 2016 periods, compared with 49% in the 2015 quarter and 46% for the 2015 nine-month period. Klein’s margin was adversely affected by approximately $200,000 of additional costs on a foreign navy project.
- General and administrative expense increased to $5.0 million in the quarter and $15.8 million year to date, including $781,000 and $2.3 million, respectively, attributable to Klein. Excluding Klein, management reported approximately 5% lower general and administrative expense.
- The company issued 320,000 shares of 9% Series A cumulative preferred stock in June 2016 and 7,990 additional shares through an October ATM program. Net proceeds were applied primarily to debt reduction.
- Total assets declined to $104.3 million from $134.8 million at January 31, 2016, while net seismic equipment and property declined to $54.2 million from $73.5 million.
Outlook, Risks and Unusual Items
Management expects lower leasing revenue in fiscal 2017 than in fiscal 2016 and believes weak oil prices, reduced exploration budgets and excess seismic equipment may continue through fiscal 2017 and into fiscal 2018. The company expects fiscal 2017 lease-pool additions to remain below $1.0 million and anticipates further used-equipment sales, although timing is uncertain.
Management reported increased inquiries and potential projects in Canada, the United States, Latin America, Europe, Asia and the Pacific Rim, but stated that planned projects may not proceed. Klein shipments and a delayed Seamap PGS SourceLink delivery were expected to increase fourth-quarter revenue. The company also reported approximately $7.0 million of contracts awarded in the third quarter for two hydrographic vessels, with deliveries expected in fiscal 2018.
The revolving-credit facility required a leverage ratio no greater than 2.00 to 1.00 and fixed-charge coverage of at least 1.25 to 1.00. Actual four-quarter results were 4.76 to 1.00 and 0.09 to 1.00, respectively. The lender granted a one-time waiver for the quarter ended October 31, 2016. In November 2016, the facility commitment was reduced from $20.0 million to $10.0 million. Management expected compliance at January 31, 2017 based on higher expected Adjusted EBITDA and lower borrowings.
Management identified risks from continued weakness in oil and gas exploration, customer payment delays, foreign exchange exposure, Russia-related sanctions and import restrictions, customer concentration, competition, seasonal volatility, possible impairment of long-lived assets, and the need to maintain financing availability. Deferred tax assets were subject to valuation allowances of approximately $22.0 million at October 31, 2016. No material legal proceedings were reported.
Investor Verification Checklist
- Confirm the registrant identity because the filing text names Mitcham Industries, Inc., while the request metadata names MIND TECHNOLOGY, INC.
- Verify the lender waiver, amended $10.0 million credit commitment and covenant compliance after October 31, 2016.
- Assess whether expected fourth-quarter Klein and Seamap deliveries occurred and whether the approximately $7.0 million hydrographic contracts converted into revenue.
- Review customer receivable collections, extended payment arrangements and the adequacy of the $5.2 million doubtful-account allowance.
- Evaluate whether seismic activity, oil prices and used-equipment pricing improved sufficiently to support leasing revenue and asset carrying values.
- Consider the 9% preferred dividend obligation of approximately $740,000 annually and its effect on cash available to common shareholders.