Mitcham Industries, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2015, for fiscal 2016. The filing identifies the registrant as Mitcham Industries, Inc., although the request metadata references MIND TECHNOLOGY, INC. The statements are unaudited and should be read with the fiscal 2015 Form 10-K.
Business Context
The company operates two segments: Equipment Leasing, which provides seismic, hydrographic, oceanographic and related equipment leasing, sales and services worldwide; and Seamap, which designs, manufactures and sells seismic and offshore telemetry products. Results are highly sensitive to oil and gas exploration spending, seismic contractor activity, equipment utilization, customer project timing and foreign exchange rates.
Key Financial Metrics
| Metric | Three months ended July 31, 2015 | Three months ended July 31, 2014 | Six months ended July 31, 2015 | Six months ended July 31, 2014 |
|---|---|---|---|---|
| Revenue | $7.6 million | $19.5 million | $24.7 million | $45.3 million |
| Gross profit (loss) | $(2.6) million | $3.2 million | $2.0 million | $14.5 million |
| Gross margin | (34.5)% | 16.6% | 8.0% | 32.0% |
| Operating income (loss) | $(8.8) million | $(4.0) million | $(9.8) million | $0.8 million |
| Net income (loss) | $(5.8) million | $(3.3) million | $(6.1) million | $0.4 million |
| Adjusted EBITDA | $0.7 million | $5.8 million | $8.3 million | $20.2 million |
| Operating cash flow | Not separately provided | Not separately provided | $11.7 million | $19.2 million |
Revenue declined approximately 61% in the quarter and 45% year to date. Basic and diluted loss per share was $0.49 for the quarter and $0.51 for the six-month period, compared with prior-year earnings per share of $0.26 and $0.03, respectively.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $2.8 million at July 31, 2015, down from $5.2 million at January 31, 2015. Restricted cash was $0.1 million.
- Working capital was approximately $36.2 million, compared with $44.1 million at January 31, 2015.
- Total debt was $14.3 million, consisting primarily of $6.5 million under the revolving credit facility and $7.6 million under the Seamap term facility. Total debt was $26.4 million at January 31, 2015.
- Net cash provided by operating activities was $11.7 million. Investing activities used $1.6 million and financing activities used $11.9 million, producing a $2.4 million decrease in cash.
- Accounts receivable, net, declined to $18.1 million from $23.7 million, while inventories increased to $14.5 million from $11.5 million. The allowance for doubtful accounts increased to $6.9 million.
- The company reported compliance with all applicable debt covenants. The revolving facility leverage ratio was 0.78 to 1.00 versus a maximum of 2.00 to 1.00, and fixed-charge coverage was 4.46 to 1.00 versus a minimum of 1.25 to 1.00.
- As of July 31, 2015, management estimated approximately $23.2 million of borrowing capacity under the revolving facility after considering covenant limitations and Seamap debt.
Material Changes Versus the Prior Comparable Period
- Equipment Leasing revenue fell 55% in the quarter and 36% for the six-month period. The segment generated a gross loss of $3.9 million for the quarter and $1.5 million for the six months, compared with prior-year gross losses of $0.4 million and gross profit of $7.3 million.
- Seamap revenue declined 72% in the quarter and 48% year to date. Seamap gross margin improved to 55% in the quarter but fell to 46% for the six months, partly because of product mix and a lower-margin order.
- Approximately $6.0 million of Seamap orders expected in the second quarter were delayed by production, supplier and customer scheduling issues and were expected to ship in the quarter ending October 31, 2015.
- General and administrative expense decreased to $5.0 million for the quarter and $9.9 million for the six months, primarily due to lower incentive compensation, reduced headcount and cost-control measures.
- Lease-pool additions were approximately $2.0 million in the first six months, compared with $9.4 million in the prior-year period. The company expects approximately $4.0 million of additions for fiscal 2016.
- Debt repayments reduced financing cash flows by approximately $12.0 million, compared with $1.0 million of financing cash inflows in the prior-year period.
- Foreign currency translation reduced comprehensive income by $1.6 million year to date, and the quarter included a $0.7 million non-cash foreign exchange loss used in the company’s Adjusted EBITDA reconciliation.
Outlook, Commentary and Risks
Management expects depressed oil prices and the slowdown in seismic exploration to continue through at least the balance of fiscal 2016 and likely beyond. The company expects lower leasing revenue in fiscal 2016 than in fiscal 2015, but cannot quantify the expected reduction. North American and Latin American activity was particularly weak; Russian activity remained relatively robust but faced oil-price, currency and contract-pricing pressures.
Management expects excess land and marine equipment capacity, customer budget reductions, project cancellations or postponements, pricing concessions, vessel retirements and industry consolidation to continue affecting demand. Marine leasing demand remains constrained, although inquiries for certain equipment improved late in fiscal 2015. Management believes expansion of Seamap’s product offerings, aftermarket services and new customer opportunities may partially offset the downturn.
- Major risks include oil and natural gas price volatility, reduced seismic demand, customer defaults, loss of significant customers, competition, seasonal and project-timing fluctuations, technological obsolescence, foreign currency exposure and inability to obtain financing.
- Operations and assets are exposed to Russia-related economic and trade sanctions, ruble depreciation, and other geopolitical and foreign-operating risks.
- Approximately 93% of second-quarter revenue came from international customers. Approximately 64% of net assets were affected by foreign currency movements.
- Accounts receivable included approximately $3.2 million of contracts and notes receivable from three customers; approximately $0.8 million was past its stated term but was collateralized by equipment and considered collectible by management.
- The company recorded a $0.6 million provision for doubtful accounts and a $2.8 million income-tax benefit in the quarter. Certain United Kingdom deferred tax assets were subject to a valuation allowance.
- No material legal proceedings were reported, and management stated that disclosure controls were effective as of July 31, 2015.
Important Facts to Verify
- Whether the approximately $6.0 million of delayed Seamap orders shipped in the quarter ended October 31, 2015, and the related effect on revenue and cash flow.
- Actual fiscal 2016 leasing demand, utilization and pricing, particularly in North America, Latin America, Russia and marine markets.
- Whether Adjusted EBITDA and debt-covenant headroom remain adequate as operating results weaken.
- Collectibility of accounts receivable and the approximately $0.8 million of past-due contracts receivable.
- Whether the planned approximately $4.0 million of fiscal 2016 lease-pool additions is reduced further or produces adequate utilization.
- Potential impairment of lease-pool equipment, goodwill or other long-lived assets if depressed industry conditions persist.
- Foreign exchange effects, particularly from the Russian ruble, and the company’s lack of derivative hedging arrangements.