Business Context and Reporting Period
Mitcham Industries, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended October 31, 2018, within fiscal 2019. The filing identifies the registrant as Mitcham Industries, Inc. and describes two segments: Marine Technology Products and Equipment Leasing. The company designs, manufactures, sells and leases seismic, hydrographic, oceanographic and offshore equipment. It sold its Russian subsidiary, Mitcham Seismic Eurasia LLC, in August 2018.
Key Financial Metrics
| Metric | Three Months Ended October 31 | Nine Months Ended October 31 |
|---|---|---|
| Total revenue | $14.7 million, versus $8.6 million | $30.6 million, versus $37.9 million |
| Gross profit | $5.2 million, versus $0.9 million | $8.3 million, versus $4.7 million |
| Gross margin | Approximately 35.7%, versus 10.4% | Approximately 27.2%, versus 12.4% |
| Operating loss | $0.3 million, versus $4.8 million | $10.5 million, versus $12.1 million |
| Net loss | $5.2 million, versus $5.3 million | $15.7 million, versus $13.3 million |
| Net loss attributable to common shareholders | $5.6 million, or $0.47 per share | $16.9 million, or $1.40 per share |
| Adjusted EBITDA | $3.4 million, versus a loss of $0.4 million | $0.8 million, versus $8.3 million |
| Operating cash flow | Not separately provided for the quarter | $(8.0) million, versus $2.2 million provided |
At October 31, 2018, cash and cash equivalents were $5.4 million, restricted cash was $0.2 million, and working capital was approximately $28.1 million. Total assets were $68.5 million and shareholders’ equity was $60.3 million. The company had no outstanding borrowings subject to interest-rate fluctuations and no current line of credit or other bank credit facility. Preferred stock outstanding generated annual dividend requirements of approximately $1.8 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased approximately 70% year over year, driven by higher Marine Technology Products revenue, increased equipment leasing revenue and higher other equipment sales.
- Nine-month revenue declined approximately 19%, primarily because the prior-year period included a large lease-pool equipment sale and Marine Technology Products revenue was lower.
- Marine Technology Products revenue rose to $9.3 million in the quarter from $6.0 million, while nine-month revenue declined to $19.0 million from $22.6 million. Klein revenue improved substantially, while Seamap and SAP were weaker on a nine-month basis.
- Equipment Leasing revenue increased to $5.4 million in the quarter from $2.7 million, but declined to $11.9 million for nine months from $15.5 million. Lease-pool equipment sales were substantially lower than in the prior-year nine-month period.
- Gross margin improved materially because of product mix, higher-margin Marine Technology Products sales and lower lease-pool depreciation. Lease-pool depreciation declined 39% in the quarter and 37% for nine months.
- The company recorded a $4.9 million loss on the sale of MSE, including $5.4 million of cumulative foreign-currency translation losses reclassified from accumulated other comprehensive loss.
- Operating cash flow deteriorated from $2.2 million provided in the prior-year nine-month period to $8.0 million used, reflecting the net loss and working-capital investment, including increases in receivables, unbilled revenue and inventory.
- The company raised approximately $6.1 million of net proceeds from preferred stock during the first nine months, including ATM sales and issuances to Mitsubishi Heavy Industries in connection with the Hydroscience asset acquisition.
Guidance, Outlook, Risks and Unusual Items
- Management expects liquidity needs for the next 12 months to be met through cash on hand, operating cash flow and additional preferred-stock proceeds, with possible cash generation from lease-pool equipment sales. There is no assurance that new credit facilities will be established.
- Fiscal 2019 lease-pool additions are expected to be less than $2.0 million. Lease-pool sales proceeds are unpredictable and may be reinvested, used elsewhere in the business or applied to general corporate purposes.
- Management expects the historically depressed Equipment Leasing business is unlikely to return to prior levels because of weak seismic demand, excess industry capacity, technological change and competition. Land leasing is expected to remain well below historical levels.
- The company is emphasizing Marine Technology Products, expanding offerings through internal development and acquisitions, and reducing capital deployed in the lease pool. Towed streamer products introduced in March 2018 had not made a significant contribution through nine months; management expects improvement in the fourth quarter and thereafter.
- Marine Technology Products backlog was approximately $6.1 million at October 31, 2018, with substantially all expected to be completed in fiscal 2019. Management cautioned that backlog and book-and-bill activity can vary significantly and may not predict future results.
- Management expects approximately $2.0 million of annual cost savings from reducing operations in Colombia and Canada and eliminating Russian operations as of August 31, 2018.
- Key risks include oil and gas and seismic-market weakness, customer defaults, loss of significant customers or suppliers, competition, foreign political and currency risk, Russian sanctions, seasonal fluctuations, potential asset impairment, funding constraints, intellectual-property claims and manufacturing risks.
- The company adopted the new revenue standard using the modified retrospective method; management reported no material adoption impact. No material legal proceedings, off-balance-sheet arrangements or changes in internal control were reported.
Important Facts for Investors to Verify
- Whether the company can sustain positive operating cash flow while continuing to report substantial net losses.
- The collectability and timing of approximately $17.4 million of net current accounts and contracts receivable, including $4.4 million owed by five customers.
- The scale and timing of expected revenue and margins from SeaLink and other newly acquired or developed products.
- Whether the approximately $6.1 million Marine Technology Products backlog converts to revenue as expected during fiscal 2019.
- The availability and terms of any replacement credit facilities, given the absence of current bank financing.
- The effect of preferred-stock issuance and the approximately $1.8 million annual preferred dividend requirement on common-shareholder returns and liquidity.
- Potential future impairment of lease-pool, goodwill or intangible assets if seismic demand and asset cash flows remain weak.
- Foreign-exchange exposure, including approximately $1.5 million of foreign-currency cash and the continuing impact of international operations.