Business Context and Reporting Period
This unaudited Form 10-Q is for Mitcham Industries, Inc. for the quarter and six months ended July 31, 2016, with comparative periods ended July 31, 2015. The filing describes two segments: Equipment Leasing and Equipment Manufacturing and Sales. The company provides seismic, hydrographic, oceanographic and related equipment leasing, manufacturing, sales and support worldwide. The provided filing identifies Mitcham Industries, Inc., not MIND Technology, Inc.
Financial Metrics
| Metric | Three Months 2016 | Three Months 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Revenue | $8.7 million | $7.6 million | $20.4 million | $24.7 million |
| Gross profit (loss) | $(2.2) million | $(2.6) million | $(2.6) million | $2.0 million |
| Operating loss | $(8.3) million | $(8.8) million | $(14.6) million | $(9.8) million |
| Net loss | $(9.5) million | $(5.8) million | $(16.0) million | $(6.1) million |
| Net loss per common share | $(0.80) | $(0.49) | $(1.33) | $(0.51) |
| Adjusted EBITDA | $(0.6) million | $0.8 million | $1.6 million | $8.5 million |
| Operating cash flow | Not separately provided | Not separately provided | $3.1 million | $11.7 million |
Approximate consolidated margins were negative 25.9% gross, negative 96.0% operating and negative 110.0% net in the second quarter. For the six-month period, gross margin was negative 12.8%, operating margin negative 71.8% and net margin negative 78.3%.
- Cash and cash equivalents were $3.5 million at July 31, 2016, compared with $3.8 million at January 31, 2016.
- Working capital was approximately $24.0 million at July 31, 2016, compared with $28.2 million at January 31, 2016.
- Total debt was $9.5 million, consisting primarily of $5.0 million under the revolving credit facility and $4.4 million under the Seamap term facility. Total debt was $20.5 million at January 31, 2016.
- Total assets were $113.9 million and shareholders’ equity was $98.9 million at July 31, 2016.
- Accounts and contracts receivable, net, were $13.1 million, supported by a $5.8 million allowance for doubtful accounts. Total receivables before the allowance were $23.9 million, including $5.0 million classified as long-term.
- The company issued 320,000 shares of 9.00% Series A cumulative preferred stock in June 2016, generating approximately $7.1 million of net proceeds. Annual preferred dividends are approximately $720,000.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 14.7%, primarily because Klein, acquired December 31, 2015, contributed $2.3 million of revenue. Six-month revenue declined 17.4% because of a sharp reduction in Equipment Leasing revenue.
- Equipment Leasing revenue declined 39.5% in the quarter and 54.4% for the six months. The segment reported gross losses of $4.9 million and $8.4 million, respectively.
- Equipment Manufacturing and Sales revenue increased 106.6% in the quarter and 53.4% for the six months, reflecting the Klein acquisition and higher SAP revenue. Segment gross margin was 46% in the quarter and 45% for the six months.
- The six-month gross result deteriorated from $2.0 million of profit to a $2.6 million loss. Lower leasing revenue was only partly offset by lower lease-pool depreciation and increased equipment sales.
- Six-month operating loss increased by approximately $4.9 million, while net loss increased by approximately $9.9 million. The prior-year period benefited from a $3.0 million income-tax benefit; the current period recorded a $0.7 million tax provision despite the pretax loss.
- Operating cash flow declined approximately 73.5% to $3.1 million. Investing activities provided $1.5 million, primarily due to $2.2 million of used lease-pool equipment sales, while financing activities used $4.0 million.
- Lease-pool purchases were $0.6 million in the first six months versus $1.9 million in the prior year, reflecting reduced demand and curtailed capital spending.
Guidance, Outlook, Risks and Unusual Items
- Management expects lower leasing revenue in fiscal 2017 than in fiscal 2016 and expects depressed seismic exploration activity to continue at least through the balance of fiscal 2017. The magnitude of the decline was not quantified.
- Management expects fiscal 2017 lease-pool additions to be below $1.0 million, compared with approximately $2.4 million in fiscal 2016.
- Management expects Klein to contribute more than $12.0 million of annual fiscal 2017 revenue. This is a management expectation, not a formal earnings forecast.
- Management expects Seamap revenue in the second half of fiscal 2017 to exceed first-half revenue, based on scheduled deliveries, but noted continued softness in aftermarket services.
- Liquidity is expected to be funded by cash on hand, operating cash flow, preferred-stock proceeds and the credit facilities. The company stated that it expects to remain compliant with debt covenants.
- At July 31, 2016, the revolving credit facility had a $20.0 million commitment, subject to borrowing-base and covenant limitations, and matured August 31, 2017. The company was in compliance with its leverage, fixed-charge coverage and capital-expenditure covenants.
- Key risks include oil and gas price volatility, weak seismic demand, excess industry equipment capacity, customer payment delays and defaults, foreign-exchange exposure, Russian sanctions and import restrictions, competition, seasonal demand, further asset impairments and access to financing.
- The company had approximately $5.8 million of allowances for doubtful accounts and had negotiated extended or restructured payment arrangements with certain customers.
- Management recorded no additional long-lived-asset impairment as of July 31, 2016, but a $3.6 million intangible-asset impairment had been recorded at January 31, 2016.
- The company closed its Peru branch because of reduced activity and expects no material effect from the closure. No material legal proceedings were disclosed.
- Disclosure controls and procedures were concluded to be effective as of July 31, 2016, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the issuer identity and ticker because the supplied metadata names MIND Technology, while the filing is for Mitcham Industries, Inc.
- Assess whether seismic leasing demand and oil-and-gas exploration activity recover, particularly in North America, Russia and marine markets.
- Monitor cash generation, receivable collections, customer restructurings and the $5.8 million doubtful-account allowance.
- Review debt maturities, borrowing-base availability, floating-rate exposure and compliance with the credit-facility covenants.
- Evaluate whether Klein can achieve the expected more than $12.0 million of fiscal 2017 revenue and whether its integration produces expected benefits.
- Consider the recurring cash burden of the 9.00% preferred stock, including approximately $720,000 of annual dividends.
- Track potential impairment of the lease pool, goodwill and intangible assets, as well as the realization of approximately $20.2 million of deferred tax assets subject to valuation allowances.