Business Context and Reporting Period
Mitcham Industries, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended October 31, 2017. The company operates through Equipment Manufacturing and Sales and Equipment Leasing segments, serving seismic, hydrographic, oceanographic, offshore, defense and related markets worldwide. The filing identifies the registrant as Mitcham Industries, Inc.
Key Financial Metrics
| Metric | Three Months Ended October 31, 2017 | Nine Months Ended October 31, 2017 |
|---|---|---|
| Revenue | $8.6 million | $37.9 million |
| Gross profit | $0.9 million | $4.7 million |
| Operating loss | $4.8 million | $12.1 million |
| Net loss | $5.3 million | $13.3 million |
| Net loss available to common shareholders | $5.5 million | $13.9 million |
| Loss per diluted common share | $0.46 | $1.15 |
| Adjusted EBITDA | $(0.4) million | $8.3 million |
| Net cash provided by operating activities | Not separately provided for the quarter | $2.2 million |
Gross margin was approximately 10% for the quarter and 12% for the nine-month period. Adjusted EBITDA is a non-GAAP measure and was substantially aided by gains from lease pool equipment sales.
- Cash and cash equivalents were $6.5 million at October 31, 2017; cash, cash equivalents and restricted cash totaled $6.8 million.
- Working capital was approximately $26.7 million, compared with $21.6 million at January 31, 2017.
- Total assets were $76.8 million, compared with $94.7 million at January 31, 2017.
- Accounts and contracts receivable, net, totaled $16.2 million, including $4.1 million of long-term receivables.
- Inventory was $11.9 million.
- The company reported no outstanding debt at October 31, 2017 after repaying and terminating its credit facilities.
- Net cash provided by investing activities was $6.1 million, including $6.7 million of proceeds from used lease pool equipment sales.
- Net cash used in financing activities was $5.1 million, including $3.5 million of revolving credit repayments, $2.8 million of term-loan repayments, $0.6 million of preferred dividends and $1.9 million of net preferred-stock proceeds.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased approximately 7% from $8.1 million to $8.6 million; nine-month revenue increased approximately 33% from $28.5 million to $37.9 million.
- The nine-month revenue increase was driven primarily by a large lease pool equipment sale and higher manufactured equipment sales.
- Third-quarter operating loss improved from $7.7 million to $4.8 million; the nine-month operating loss improved from $22.4 million to $12.1 million.
- Equipment Manufacturing and Sales revenue increased 14% for the quarter and 24% for the nine-month period. Seamap revenue increased materially, while Klein revenue declined.
- Equipment Leasing revenue declined 3% for the quarter and increased 52% for the nine-month period, with the nine-month increase primarily reflecting lease pool equipment sales. Core equipment leasing revenue declined 20% and 26%, respectively.
- Equipment Leasing reported gross losses of $1.9 million for the quarter and $4.7 million for the nine-month period, although lease pool equipment sales generated approximately $0.2 million and $3.1 million of gross profit, respectively.
- Lease pool depreciation declined 44% for the quarter and 42% for the nine-month period due to equipment sales, reduced purchases and equipment becoming fully depreciated.
- Net interest expense changed to net interest income as average borrowings fell to approximately $1.1 million from $13.9 million in the prior-year nine-month period.
- Net cash provided by operating activities declined to $2.2 million from $3.7 million, while total cash and restricted cash increased by $3.3 million.
- Preferred stock outstanding increased through the ATM program; the filing states annual preferred dividend requirements of approximately $1.0 million based on shares outstanding at October 31, 2017.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expects the seismic market to remain challenging, with any meaningful recovery gradual and only marginal improvement anticipated in the final quarter of fiscal 2018.
- Management does not expect Equipment Leasing financial results to return to fiscal 2015 levels in the foreseeable future.
- Leasing demand remains affected by weak oil and gas exploration activity, excess seismic equipment supply, pricing pressure and intense competition. Russia is expected to remain restrained because of economic issues and trade restrictions.
- Management expects lease pool additions for fiscal 2018 to remain below $0.5 million and intends to sell selected equipment and redeploy capital when opportunities arise.
- The Equipment Manufacturing and Sales segment is a strategic emphasis, including expansion into products less dependent on oil and gas activity. Management cited increased Klein bookings and inquiries and expects SAP revenue to exceed fiscal 2017 levels based on pending orders.
- The company currently has no bank credit facility and is negotiating potential facilities that may be significantly smaller than its terminated facilities. There is no assurance that financing will be obtained.
- Management believes cash on hand, operating cash flow, preferred-stock proceeds and potential lease pool equipment sales will satisfy liquidity needs for the next 12 months.
- Preferred stock carries a 9% annual dividend and a $25 liquidation preference per share. The company issued approximately $1.9 million of gross preferred-stock proceeds during the nine months.
- Cash collateral of approximately $229,000 supported import and performance bonds. The filing reports no material legal proceedings and no off-balance-sheet arrangements.
- Foreign operations create currency exposure; a 10% strengthening of the U.S. dollar against specified currencies would reduce the U.S.-dollar value of foreign-currency deposits by approximately $140,000. The company does not hedge this exposure with derivatives.
- Risks include cyclical energy markets, customer defaults, loss of significant customers or suppliers, foreign political and currency risks, Russian sanctions, seasonality, competition, intellectual-property claims and possible impairment of long-lived assets.
- The company adopted certain accounting standards during fiscal 2018 and expected the forthcoming revenue standard to potentially accelerate recognition for certain equipment contracts, although management did not expect a material overall difference.
Important Facts for Investors to Verify
- Whether the reported improvement is sustainable without recurring or opportunistic lease pool equipment sales.
- The extent to which core equipment leasing revenue, utilization and pricing recover from depressed market conditions.
- Progress in obtaining replacement credit facilities and the effect of limited leverage on working capital and growth investments.
- Future preferred-stock issuance, dividend obligations and the resulting impact on common shareholders.
- Seamap and Klein order bookings, delivery timing and segment margins.
- Accounts and contracts receivable concentration, collectability and the adequacy of the reported allowances.
- Potential impairment of lease pool assets, goodwill and intangible assets if seismic demand or expected cash flows weaken.
- Foreign-exchange, sanctions and geopolitical exposure, particularly in Russia and other international markets.