Mitcham Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2016, compared with April 30, 2015. The filing identifies the registrant as Mitcham Industries, Inc.; the request metadata references MIND TECHNOLOGY, INC.
Business context
The company operates through two segments: Equipment Leasing, which provides seismic equipment leasing and sales worldwide, and Equipment Manufacturing and Sales, which includes Seamap and the recently acquired Klein Marine Systems. Results are heavily affected by oil and gas exploration activity, seismic contractor budgets, equipment utilization, foreign exchange rates and seasonal demand.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $11.7 million | $17.1 million |
| Gross profit/(loss) | $(0.4) million | $4.6 million |
| Gross margin | (3.1%) | 26.7% |
| Operating loss | $(6.3) million | $(1.0) million |
| Net loss | $(6.4) million | $(0.2) million |
| Net loss per diluted share | $(0.53) | $(0.02) |
| Adjusted EBITDA | $2.2 million | $7.9 million |
| Operating cash flow | $1.8 million | $6.4 million |
- Equipment Leasing revenue declined 61% to $4.5 million, including $3.6 million of leasing revenue and $0.9 million of lease-pool equipment sales. The segment generated a $3.5 million gross loss and a $6.5 million operating loss.
- Equipment Manufacturing and Sales revenue increased 27% to $7.2 million, with a 44% gross margin and $0.2 million of operating income. The period included $2.1 million of Klein revenue; Klein was acquired in December 2015.
- Cash and cash equivalents declined to $2.4 million from $3.8 million at January 31, 2016. Working capital was approximately $26.3 million.
- Total debt was $17.7 million at April 30, 2016, consisting primarily of $12.5 million under the revolving credit facility and $5.2 million under the Seamap term facility.
- Net cash used in financing activities was $2.8 million, principally reflecting $2.0 million of revolving-credit repayments and $0.8 million of term-loan repayments.
- Capital expenditures included $0.5 million of seismic equipment held for lease and $0.1 million of other property and equipment. Lease-pool additions for fiscal 2017 were expected to be below $2.0 million.
Material changes versus the prior comparable period
- Revenue decreased approximately 32%, driven primarily by a 68% decline in equipment-leasing revenue. Weak activity in Canada, Russia, the United States and other regions materially reduced utilization.
- Gross margin deteriorated from 26.7% to negative 3.1% because leasing revenue fell below the segment’s largely fixed direct costs and lease-pool depreciation.
- General and administrative expense increased to $5.3 million from $4.9 million, including approximately $0.7 million of incremental Klein costs. Excluding Klein, management stated that these expenses declined approximately 6%.
- Operating cash flow fell by approximately $4.7 million, while cash declined by $1.4 million during the quarter.
- Foreign-currency translation adjustments improved accumulated other comprehensive loss by $2.7 million, but comprehensive loss was still $3.8 million.
Outlook, liquidity, risks and unusual items
- Management expected depressed oil prices and reduced seismic exploration activity to continue through at least the balance of fiscal 2017, with leasing revenue expected to be lower than in fiscal 2016. The filing does not quantify the expected decline.
- Management expected Seamap fiscal 2017 revenue to be generally in line with fiscal 2016, SAP revenue to be significantly higher, and Klein to contribute approximately $12.0 million of annual revenue.
- The company expected lower marine leasing demand because of excess industry equipment, vessel retirements and vessel “cold stacking.” Customer payment delays and financial distress remained a cash-flow risk.
- The company breached its revolving credit agreement leverage covenant at April 30, 2016: actual leverage was 2.29-to-1.00 versus a maximum of 2.00-to-1.00. The banks waived the breach, and subsequent debt reductions restored compliance. The fixed-charge coverage ratio was 1.58-to-1.00 versus a minimum of 1.25-to-1.00.
- The revolving credit commitment was reduced from $30.0 million to $20.0 million in June 2016. The company stated that liquidity for the next 12 months was expected to come from cash, operating cash flow, borrowings and the subsequent preferred-stock issuance.
- In June 2016, the company issued 320,000 shares of 9.00% Series A cumulative preferred stock, generating approximately $7.0 million of net proceeds used to repay revolving debt. Annual preferred dividends are approximately $0.7 million. Underwriters also received a 30-day option for an additional 48,000 shares.
- The company had approximately $18.4 million of valuation allowance against deferred tax assets at April 30, 2016 and recorded a $0.3 million tax provision despite the pretax loss, primarily due to valuation allowances and foreign withholding taxes.
- The company identified oil and gas demand, customer concentration and defaults, competition, foreign operations and currency movements, Russia-related sanctions, technological obsolescence, possible asset impairments, financing availability, manufacturing risks and seasonal variability as material risks.
- No material legal proceedings were reported. Management stated that the risk factors in the prior Form 10-K had not materially changed.
Investor verification items
- Verify the company identity because the supplied metadata says MIND TECHNOLOGY, INC., while the filing is for Mitcham Industries, Inc.
- Assess whether the subsequent preferred-stock proceeds and debt repayments sufficiently improved covenant compliance and liquidity.
- Monitor leasing utilization, customer payment collections, allowance adequacy and the carrying value of the seismic lease pool.
- Evaluate whether Klein and other manufacturing operations can offset continued weakness in seismic leasing.
- Review exposure to Russia, sanctions, foreign exchange movements and the approximately 43% of net assets affected by foreign currencies.
- Reconcile non-GAAP Adjusted EBITDA with GAAP operating cash flow and net income when assessing debt-service capacity.