Mitcham Industries, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2013. The supplied filing identifies the registrant as Mitcham Industries, Inc., not MIND TECHNOLOGY, INC. Results are unaudited and should be read with the fiscal-year Form 10-K for the year ended January 31, 2013.
Business Context
The company operates through two segments: Equipment Leasing, which leases and sells seismic, hydrographic, oceanographic and related equipment worldwide, and Seamap, which designs, manufactures and sells marine seismic and offshore telemetry products. Approximately 89% of second-quarter revenue came from international customers.
Financial Performance
| Metric | Three months ended July 31, 2013 | Three months ended July 31, 2012 | Six months ended July 31, 2013 | Six months ended July 31, 2012 |
|---|---|---|---|---|
| Revenue | $20.9 million | $23.1 million | $48.2 million | $57.7 million |
| Gross profit | $4.3 million | $7.4 million | $18.9 million | $24.3 million |
| Gross margin | 20.6% | 32.1% | 39.2% | 42.1% |
| Operating income (loss) | $(2.1) million | $1.3 million | $6.1 million | $13.0 million |
| Net income (loss) | $(0.7) million | $6.4 million | $5.6 million | $14.9 million |
| Diluted EPS | $(0.05) | $0.48 | $0.43 | $1.12 |
| Adjusted EBITDA | $7.0 million | $11.1 million | $23.0 million | $31.1 million |
Second-quarter Equipment Leasing revenue declined 12% to $13.9 million, while Seamap revenue declined 6% to $7.0 million. For the six-month period, Equipment Leasing revenue declined 7% to $37.3 million and Seamap revenue declined 40% to $11.0 million.
The second-quarter Equipment Leasing gross margin fell to 6% from 19%, primarily because leasing revenue declined while depreciation and other costs were relatively fixed. Six-month Equipment Leasing gross margin remained 35%. Seamap gross margin declined to 49% from 58% in the quarter and to 52% from 56% for the six-month period.
Second-quarter results included approximately $1.0 million of net foreign-exchange gains. The prior-year quarter included an approximately $5.3 million tax benefit related to a Canadian and U.S. tax settlement, making the year-over-year net income comparison unusually unfavorable.
Cash Flow, Liquidity and Debt
| Metric | Six months ended July 31, 2013 | Six months ended July 31, 2012 |
|---|---|---|
| Operating cash flow | $16.0 million | $29.3 million |
| Investing cash flow | $(5.2) million | $(22.3) million |
| Financing cash flow | $(5.3) million | $(1.2) million |
| Ending cash and equivalents | $20.3 million | $21.5 million |
Working capital was approximately $56.9 million at July 31, 2013, including cash and restricted cash of approximately $21.0 million, compared with $48.4 million at January 31, 2013. Total debt was $269,000 at July 31, 2013, including $130,000 of current maturities, versus $4.4 million at January 31, 2013. The company had approximately $622,000 of outstanding standby letters of credit.
The company repaid $4.0 million on its revolving credit facility and repurchased 102,900 shares for approximately $1.5 million during the six months. On August 2, 2013, it replaced the prior facility with a secured, three-year, $50.0 million syndicated revolving credit agreement. Approximately $1.0 million was outstanding under the new facility as of August 30, 2013. Management stated that liquidity needs for the next 12 months are expected to be met through cash, operating cash flow and the revolving facility.
Material Changes and Outlook
- Demand remained weak in U.S. land leasing, Latin America and marine leasing. Latin American projects were delayed by permitting, labor and logistical issues.
- Management cited potential improvement in the third quarter and seasonal improvement in the fourth quarter, but emphasized uncertainty regarding the magnitude and timing.
- Recent inquiries and activity in Europe, Russia and Canada were viewed as encouraging, although management stated that the effects remained uncertain.
- Seamap expects additional GunLink 4000 and BuoyLink shipments during the remainder of fiscal 2014. A new PGS SourceLink manufacturing arrangement is expected to have an immaterial impact on fiscal 2014 results but may be deployed across most of PGS’s fleet over several years.
- Lease-pool additions were approximately $4.8 million during the first six months. Full-year fiscal 2014 additions were expected to be $18 million to $23 million, contingent on improved demand; approximately $2.0 million of equipment purchases were committed as of July 30, 2013.
- The company had equipment purchase agreements with Sercel involving estimated total purchases of approximately $26.8 million, of which approximately $9.0 million had been purchased through July 31, 2013.
Risks, Contingencies and Unusual Items
- Results depend heavily on oil and natural gas exploration activity, energy prices, seismic contractor profitability and customer financing.
- Seasonality, project delays, customer defaults, competition, technological obsolescence, foreign operations and foreign-currency movements may materially affect results.
- Approximately 71% of net assets were exposed to foreign-currency translation. A 10% strengthening of the U.S. dollar against relevant currencies would have reduced the U.S.-dollar value of foreign-currency cash deposits by approximately $1.2 million.
- The company does not use foreign-exchange or interest-rate derivatives to hedge these exposures.
- Restricted cash of approximately $719,000 supported Russian customs bonds and contractual performance obligations.
- No material legal proceedings were reported, and management stated that previously disclosed risk factors had not materially changed.
- Disclosure controls and procedures were assessed as effective as of July 31, 2013.
Investor Verification Items
- Confirm the registrant identity, because the provided metadata names MIND TECHNOLOGY, INC., while the filing names Mitcham Industries, Inc.
- Reconcile the effect of the prior-year $5.3 million tax benefit when assessing year-over-year earnings trends.
- Monitor Equipment Leasing utilization, regional project starts and the effect of fixed lease-pool depreciation on margins.
- Verify the timing and profitability of Seamap deliveries, including GunLink, BuoyLink and PGS SourceLink programs.
- Track lease-pool capital expenditures against the $18 million to $23 million fiscal-year outlook and committed Sercel purchases.
- Review borrowing-base availability, covenant compliance and floating-rate exposure under the new credit agreement.