Business Context and Reporting Period
This Form 10-Q is for Mitcham Industries, Inc. (the request metadata identifies MIND TECHNOLOGY, INC.; investors should verify the issuer). The report covers the quarter and nine months ended October 31, 2013, with comparisons to October 31, 2012 and January 31, 2013. The company operates equipment leasing and Seamap equipment manufacturing businesses serving seismic, offshore, hydrographic and related industries worldwide.
Financial Performance and Position
| Metric | Three Months Ended October 31, 2013 | Three Months Ended October 31, 2012 | Nine Months Ended October 31, 2013 | Nine Months Ended October 31, 2012 |
|---|---|---|---|---|
| Revenue | $20.3 million | $18.6 million | $68.5 million | $76.3 million |
| Gross profit | $5.0 million | $4.4 million | $23.9 million | $28.6 million |
| Gross margin | 24.4% | 23.5% | 34.8% | 37.5% |
| Operating income (loss) | $(2.6) million | $(1.9) million | $3.5 million | $11.1 million |
| Net income (loss) | $(2.6) million | $(1.2) million | $3.0 million | $13.6 million |
| Adjusted EBITDA | $4.8 million | $6.7 million | $27.8 million | $37.8 million |
| Operating cash flow | Not separately provided | Not separately provided | $18.7 million | $36.1 million |
Third-quarter revenue increased approximately 9%, driven by higher lease-pool equipment sales, Seamap sales and other equipment sales, partially offset by a 29% decline in equipment leasing revenue. Nine-month revenue declined approximately 10% because of lower leasing and Seamap sales.
Third-quarter operating results remained negative as lower leasing revenue, higher general and administrative costs and a $1.0 million doubtful-account provision exceeded gross profit. The nine-month operating decline also reflected lower leasing revenue and higher overhead. The third-quarter tax benefit was $0.5 million; the nine-month tax provision was $0.9 million, compared with a $3.5 million tax benefit in the prior-year period that included a significant tax settlement benefit.
Cash and cash equivalents were $24.2 million at October 31, 2013, compared with $15.2 million at January 31, 2013. Including restricted cash, working capital was approximately $56.2 million versus $48.4 million. Total debt was $3.25 million, including $3.0 million drawn under the revolving facility, compared with $4.38 million at January 31, 2013. The company reported compliance with all debt covenants.
Cash flow from operations was $18.7 million. Investing cash outflows were $7.6 million, including $13.3 million of lease-pool equipment purchases and $6.2 million of proceeds from used equipment sales. Financing cash outflows were $3.0 million, including $1.0 million of debt repayment and $2.2 million of treasury-stock purchases.
Material Changes Versus the Prior Comparable Period
- Equipment leasing revenue fell 20% for the nine-month period, with weakness in the United States, Latin America and marine leasing.
- Seamap revenue declined to $16.6 million from $23.1 million for the nine months, although third-quarter Seamap revenue increased year over year.
- SAP equipment sales increased materially, generating approximately $2.5 million of nine-month gross profit versus $0.7 million in the prior-year period.
- Lease-pool equipment additions decreased to approximately $14.3 million from $26.5 million during the first nine months.
- General and administrative expense increased to $18.2 million from $16.9 million for the nine months.
- The company recorded a $1.0 million doubtful-account provision, primarily related to accounts in Latin America and Southeast Asia, versus a $0.4 million recovery in the prior-year period.
- The company entered into a new $50 million, three-year secured revolving credit facility on August 2, 2013, replacing its predecessor facility.
- The company repurchased 147,900 shares for approximately $2.2 million during the nine months; 852,100 shares remained available under the authorization at October 31, 2013.
Guidance, Outlook, Risks and Unusual Items
Management reported marginal improvement in the third quarter and expected seasonal improvement in the fourth quarter, but emphasized uncertainty regarding the magnitude and durability of any recovery. Latin American activity was expected to improve as delayed projects commence, although permitting, labor, security and logistical issues remained risks. U.S. leasing was expected to benefit from a particular fourth-quarter project, but management stated that this was not necessarily a trend. European activity had improved but was expected to decline seasonally late in the fourth quarter. Canadian winter activity was expected to be weaker than the prior year, while Russian activity could improve during the winter season.
After October 31, 2013, the company purchased approximately $29.0 million of wireless recording equipment in response to specific customer demand and expected full-year fiscal 2014 lease-pool additions of approximately $45.0 million. Management expected to fund these purchases through cash, operating cash flow and the credit facility.
The company entered into a manufacturing arrangement with PGS for customized marine energy-source controllers. Deliveries were expected over several years, but the arrangement was not material to reported results through October 31, 2013 or expected to be material in the fourth quarter.
Key risks include cyclical oil and gas exploration spending, oil and natural-gas price changes, customer defaults, seasonal and project delays, competition and pricing pressure, excess used marine equipment, foreign-exchange exposure, foreign operations, supplier commitments, technological obsolescence and possible impairment of long-lived assets. The company had approximately $26.8 million of equipment purchase commitments with Sercel and was discussing potential amendments because it did not expect to complete all purchases scheduled before December 31, 2013.
Foreign customers represented approximately 83% of third-quarter revenue. A 10% strengthening of the U.S. dollar against relevant foreign currencies would have reduced the value of foreign-currency cash deposits by approximately $1.8 million. The IRS had begun an examination of the fiscal 2013 federal return but had proposed no adjustments as of December 10, 2013.
Important Facts for Investors to Verify
- Confirm the issuer and ticker discrepancy: the filing is for Mitcham Industries, Inc., not clearly MIND TECHNOLOGY, INC.
- Assess whether the reported leasing recovery and anticipated fourth-quarter seasonal improvement materialized.
- Evaluate the effect of the $29.0 million post-quarter lease-pool purchase on depreciation, utilization, liquidity and debt.
- Review collectability of receivables, particularly the accounts underlying the $1.0 million doubtful-account provision.
- Monitor compliance with the secured credit facility’s leverage and fixed-charge covenants and the availability of borrowing capacity.
- Evaluate customer, supplier and project concentration risks, including the Sercel commitments and PGS arrangement.
- Separate recurring operating performance from used-equipment sales, foreign-exchange effects and the prior-year tax settlement benefit.