Business Context and Reporting Period
Mitcham Industries, Inc. (NASDAQ: MIND) filed its Form 10-K for the fiscal year ended January 31, 2017. The company provides equipment manufacturing, sales and short-term leasing services to the seismic, hydrographic, oceanographic and defense industries through two segments: Equipment Manufacturing and Sales and Equipment Leasing.
Fiscal 2017 included a full year of operations from Klein Marine Systems, acquired on December 31, 2015. The company operated internationally, with approximately 85% of revenue attributable to foreign operations.
Financial Performance and Position
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Total revenue | $41.0 million | $51.8 million | Down 20.9% |
| Gross profit (loss) | $(7.4) million | $2.7 million | Declined $10.1 million |
| Gross margin | (18.1%) | 5.2% | Down 23.3 percentage points |
| Operating loss | $(31.3) million | $(26.8) million | Loss increased $4.5 million |
| Net loss | $(33.2) million | $(38.7) million | Loss improved $5.6 million |
| Net loss attributable to common shareholders | $(33.6) million | $(38.7) million | Loss per share $(2.79) versus $(3.22) |
| Adjusted EBITDA | $3.6 million | $13.7 million | Down 73.6% |
| Operating cash flow | $3.2 million | $15.0 million | Down 79.0% |
- Segment performance: Equipment Manufacturing and Sales revenue was $25.1 million, with a 46% gross margin and a $0.5 million operating loss. Equipment Leasing revenue was $15.9 million, including $10.2 million of leasing revenue and $5.3 million of lease-pool equipment sales; the segment reported an $18.9 million gross loss and a $27.8 million operating loss.
- Liquidity: Cash and short-term investments, including restricted cash, were $3.5 million at January 31, 2017; unrestricted cash and cash equivalents were $2.9 million and restricted cash was $0.6 million. Working capital was approximately $21.6 million.
- Debt: Debt outstanding was $6.4 million at January 31, 2017, all classified as current. The company repaid and terminated its revolving Credit Agreement in March 2017 and repaid and cancelled the Seamap Credit Facility on April 5, 2017.
- Capital assets: Net seismic lease-pool and property, plant and equipment declined to $43.8 million from $73.5 million. Lease-pool additions were only $0.4 million, compared with $2.4 million in fiscal 2016 and $11.8 million in fiscal 2015.
- Receivables: Customer accounts and contracts receivable totaled approximately $24.5 million before allowances, including $11.7 million more than 90 days past due. The allowance for doubtful accounts was approximately $5.9 million.
- Preferred stock: The company issued 343,000 shares of 9% Series A preferred stock, generating approximately $7.3 million of proceeds. Preferred dividends were approximately $0.5 million for the year.
- Fourth quarter: Revenue was $12.5 million and net loss was $9.9 million, compared with revenue of $11.4 million and net loss of $26.8 million in the fourth quarter of fiscal 2016. The prior-year quarter included substantially higher tax expense.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of a continuing collapse in seismic equipment leasing demand, caused by reduced oil and gas exploration spending, excess industry equipment and pricing pressure. Equipment leasing revenue fell approximately 57%.
- Equipment Leasing gross margin deteriorated to negative 119% from negative 35%, reflecting low utilization, fixed lease-pool depreciation of $25.8 million and a loss on lease-pool equipment sales of approximately $0.3 million.
- Manufacturing and sales revenue was broadly stable, but the mix changed materially: Seamap revenue declined to $14.1 million from $22.3 million, while Klein contributed $8.2 million during its first full fiscal year.
- General and administrative expense increased to $20.7 million from $19.0 million, principally because fiscal 2017 included a full year of Klein operations, although cost-reduction initiatives lowered expenses excluding Klein.
- Fiscal 2017 did not include the $3.6 million intangible-asset impairment recorded in fiscal 2016 or the $2.1 million contract settlement charge recorded in fiscal 2016. Fiscal 2016 also included approximately $11.0 million of income tax expense, largely from valuation allowances on deferred tax assets.
- The company reduced its net book value of equipment through depreciation and asset sales and continued to limit new lease-pool investment.
Guidance, Outlook, Risks and Unusual Items
- Management expects only marginal improvement in fiscal 2018 and does not expect Equipment Leasing results to return to fiscal 2015 levels in the foreseeable future.
- Management expects Equipment Manufacturing and Sales revenue to improve in fiscal 2018, supported by the $12.5 million backlog at January 31, 2017, expected substantially to be fulfilled during fiscal 2018. Management also expects higher Klein and Seamap sales, although backlog is not necessarily indicative of future results.
- Lease-pool additions are expected to remain near fiscal 2017 levels, focused on maintenance and ancillary equipment. Additional lease-pool asset sales are expected.
- Key risks include oil and natural gas price volatility, weak seismic activity, excess equipment supply, low lease utilization, technology obsolescence, customer payment defaults, customer concentration, supplier concentration, foreign currency and geopolitical exposure, Russia-related sanctions, and limited access to working-capital financing.
- The company stated that it was discussing replacement revolving credit facilities but did not plan to rely on such facilities for liquidity. There is no assurance that replacement financing will be obtained.
- Deferred tax assets of approximately $26.4 million were fully offset by valuation allowances, reflecting uncertainty regarding future taxable income. The lease-pool impairment test did not result in an impairment charge for fiscal 2017, but further deterioration could result in future impairment.
- Two customers represented approximately 24% of consolidated revenue in fiscal 2017, and the five largest customers represented approximately 39%. Approximately 45% of revenue was generated from rentals of equipment acquired from Sercel.
- The company reported no material legal proceedings and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Reconcile liquidity after the March and April 2017 debt repayments, including available unrestricted cash, restricted cash and any replacement credit facilities.
- Assess whether leasing utilization, lease rates and equipment sales can improve sufficiently to absorb the lease pool’s substantial fixed depreciation.
- Review the aging, collateral and collectability of the approximately $24.5 million of customer and contract receivables, including $11.7 million over 90 days past due.
- Evaluate the quality and timing of the $12.5 million manufacturing backlog and the execution of Klein and Seamap product deliveries.
- Monitor the $26.4 million deferred-tax-asset valuation allowance and potential future tax benefits only if taxable income is generated.
- Consider the 9% preferred-stock dividend burden, senior liquidation preference and potential future preferred-stock issuance under the ATM program.