Mitcham Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Filed December 5, 2019, for the quarter and nine months ended October 31, 2019, fiscal 2020. Mitcham operates through Marine Technology Products and Equipment Leasing, serving seismic, hydrographic, oceanographic, defense, security and offshore markets. The filing identifies the registrant as Mitcham Industries, Inc.; trading symbols are MIND and MINDP.
Key Financial Metrics
| Metric | Three Months Ended October 31 | Nine Months Ended October 31 |
|---|---|---|
| Revenue | $10.7 million, versus $14.7 million | $29.4 million, versus $30.6 million |
| Gross profit | $4.1 million; 38.0% margin | $10.7 million; 36.3% margin |
| Operating loss | $1.9 million, versus $0.3 million | $7.4 million, versus $10.5 million |
| Net loss | $2.0 million, versus $5.2 million | $7.6 million, versus $15.7 million |
| Net loss attributable to common shareholders | $2.6 million; $0.21 per share | $9.1 million; $0.75 per share |
| Adjusted EBITDA | $0.2 million, versus $3.4 million | $(0.7) million, versus $0.8 million |
Marine Technology Products generated $8.1 million of revenue in the quarter and $20.8 million year-to-date, with gross margins of 41% in both periods. Equipment Leasing generated $2.6 million and $8.7 million, respectively; its nine-month gross profit improved to $2.1 million from a $0.2 million loss.
Net cash used in operating activities was $4.2 million for the nine months, compared with $8.0 million in the prior-year period. Investing cash use was $1.2 million, including $1.9 million for seismic lease equipment and $0.9 million for property and equipment. Financing provided $0.7 million, primarily from $2.2 million of preferred-stock sales, offset by $1.5 million of preferred dividends.
At October 31, 2019, cash and cash equivalents were $4.7 million and restricted cash was $0.1 million. Working capital was approximately $23.5 million, compared with $28.8 million at January 31, 2019. The company reported no interest-bearing bank debt or credit facilities. Operating lease liabilities totaled $2.5 million, including $0.4 million current and $2.1 million non-current. Annual preferred-stock dividend requirements were approximately $2.1 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 27%, primarily from lower Equipment Leasing activity, lower lease-pool and other equipment sales, and the sale of SAP.
- Nine-month revenue declined 4%; Marine Technology Products revenue increased 9%, but Equipment Leasing revenue declined 27%.
- Nine-month operating loss improved by $3.1 million, mainly due to higher Marine Technology Products revenue, lower lease-pool depreciation and reduced general and administrative costs.
- Third-quarter operating loss widened because of lower revenue and segment contribution and higher research and development spending.
- The company completed the sale of its Australian subsidiary, SAP, in February 2019. The Russian subsidiary sale from August 2018 generated a $4.9 million loss in the prior-year period, including $5.4 million of cumulative translation losses.
- The company adopted ASC 842 on February 1, 2019, recognizing approximately $3.0 million of operating lease right-of-use assets and liabilities at transition. The adoption did not materially affect earnings or cash flows.
- Preferred stock outstanding increased to 928,000 shares from 830,000 at January 31, 2019. The company sold approximately $2.4 million of preferred stock through its ATM program during the nine months.
Guidance, Outlook, Risks and Unusual Items
Management is shifting toward Marine Technology Products while retaining Equipment Leasing as an important business. Marine Technology Products backlog was approximately $12.4 million at October 31, 2019, up from $8.7 million at January 31, 2019; management expected most backlog to be completed in fiscal 2020. The Malaysia facility was expected to operate near capacity for the balance of fiscal 2020, and the company was evaluating capacity expansion.
Management expects increasing revenue from the SeaLink product line and views Klein’s MA-X sonar technology as a potential source of new opportunities, including a U.S. Navy-related unmanned underwater vehicle program. These opportunities remain subject to long sales cycles, competition, government budgets and uncertain delivery timing. No formal quantitative revenue or earnings guidance was provided.
Equipment Leasing demand remained sporadic by geography. During the quarter, the company invested approximately $3.1 million in new land nodal equipment, with approximately $2.3 million paid in cash, and immediately deployed the equipment on a European project.
- Liquidity risk remains relevant because the company generated negative operating cash flow, has no bank credit facility and expects continuing preferred dividend obligations.
- Demand is sensitive to oil and gas exploration spending, seismic activity, customer financing, seasonality and project timing.
- International operations represented approximately 81% of nine-month revenue. The company does not hedge foreign currency exposure with derivatives.
- Customer defaults, including delayed payments from the buyer of the former Russian subsidiary, could affect collections. Through October 31, 2019, that buyer had paid approximately $0.6 million of approximately $1.2 million of contractual proceeds.
- Management reported no material legal proceedings, no off-balance-sheet arrangements and no material change in previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether backlog converts to revenue and cash within fiscal 2020 as anticipated.
- The sustainability of Marine Technology Products growth and the commercial adoption of SeaLink and MA-X.
- Utilization, pricing and resale values of the expanded lease-pool equipment base.
- Cash burn, preferred-stock issuance capacity, approximately $2.1 million of annual preferred dividends and access to future financing.
- Collection of remaining proceeds and interest from the former Russian subsidiary sale.
- Potential impairment of goodwill, intangible assets and seismic equipment if market demand or expected cash flows weaken.