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MIND > SEC Filings for MIND > Form 10-K on 4-Apr-2013All Recent SEC Filings

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Form 10-K for MITCHAM INDUSTRIES INC


4-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We operate in two segments, Equipment Leasing and Seamap. Our equipment leasing operations are conducted from our Huntsville, Texas headquarters and from our locations in Calgary, Canada; Brisbane, Australia; Lima, Peru; Bogota, Colombia; Budapest, Hungary; Singapore and Ufa, Russia. This includes the operations of our MCL, SAP, MEL, MML and MSE subsidiaries and our branches in Peru and Colombia. MEL and MML were formed in late fiscal 2012. Accordingly, the first full year of operations for these subsidiaries was fiscal 2013 and they did not contribute materially to our revenues prior to January 1, 2012. Seamap operates from its locations near Bristol, United Kingdom and in Singapore.

Management believes that the performance of our Equipment Leasing segment is indicated by revenues from equipment leasing and by the level of our investment in lease pool equipment. Management further believes that the performance of our Seamap segment is indicated by revenues from equipment sales and by gross profit from those sales. Management monitors EBITDA and Adjusted EBITDA, both as defined in the following table, as key indicators of our overall performance and liquidity.


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The following table presents certain operating information by operating segment:

                                                               Years Ended January 31,
                                                         2013            2012            2011
                                                                    (in thousands)
Revenues:
Equipment Leasing                                      $  73,516       $  84,428       $ 50,018
Seamap                                                    32,210          28,703         22,462
Less inter-segment sales                                  (1,041 )          (297 )       (1,117 )

Total revenues                                           104,685         112,834         71,363

Cost of sales:
Equipment Leasing                                         53,320          42,615         34,494
Seamap                                                    14,817          12,818         11,209
Less inter-segment costs                                    (865 )          (351 )         (982 )

Total direct costs                                        67,272          55,082         44,721

Gross profit
Equipment Leasing                                         20,196          41,813         15,524
Seamap                                                    17,393          15,885         11,253
Less inter-segment amounts                                  (176 )            54           (135 )

Total gross profit                                        37,413          57,752         26,642

Operating expenses:
General and administrative                                22,539          21,354         16,755
(Recovery of) provision for doubtful accounts               (428 )           615          1,795
Depreciation and amortization                              1,400           1,239          1,171

Total operating expenses                                  23,511          23,208         19,721

Operating income                                       $  13,902       $  34,544       $  6,921

EBITDA (1)                                             $  48,452       $  63,500       $ 28,680
Adjusted EBITDA (1)                                    $  50,038       $  64,831       $ 29,779
Reconciliation of Net Income to EBITDA and Adjusted
EBITDA
Net income                                             $  17,051       $  24,321       $  4,729
Interest expense , net                                       (11 )           396            473
Depreciation, amortization and impairment                 34,939          28,774         22,717
(Benefit) provision for income taxes                      (3,527 )        10,009          2,065
Gain from bargain purchase                                    -               -          (1,304 )

EBITDA (1)                                                48,452          63,500         28,680
Stock-based compensation                                   1,586           1,331          1,099

Adjusted EBITDA (1)                                    $  50,038       $  64,831       $ 29,779

Reconciliation of Net Cash Provided by Operating
Activities to EBITDA
Net cash provided by operating activities              $  44,257       $  35,958       $ 30,137
Stock-based compensation                                  (1,586 )        (1,331 )       (1,099 )
Provision for doubtful accounts                              636          (1,709 )       (1,795 )
Changes in trade accounts and contracts receivable       (13,331 )        16,687          2,019
Interest paid                                                533             704            728
Taxes paid, net of refunds                                 9,177           7,536            508
Gross profit from sale of lease pool equipment             5,369           4,923          1,340
Changes in contract revenues in excess of billings            -               -            (573 )
Changes in inventory                                         718           2,614           (727 )
Changes in accounts payable, accrued expenses and
other current liabilities                                  4,091          (2,683 )       (1,964 )
Other                                                     (1,412 )           801            106

EBITDA (1)                                             $  48,452       $  63,500       $ 28,680


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(1) EBITDA is defined as net income before (a) interest income and interest expense, (b) provision for (or benefit from) income taxes and
(c) depreciation, amortization and impairment. Adjusted EBITDA excludes stock-based compensation. We consider EBITDA and Adjusted EBITDA to be important indicators for the performance of our business, but not measures of performance or liquidity calculated in accordance with accounting principles generally accepted in the United States of America ("GAAP"). We have included these non-GAAP financial measures because management utilizes this information for assessing our performance and liquidity, and as indicators of our ability to make capital expenditures, service debt and finance working capital requirements. The covenants of our revolving credit agreement require us to maintain a minimum level of EBITDA. Management believes that EBITDA and Adjusted EBITDA are measurements that are commonly used by analysts and some investors in evaluating the performance and liquidity of companies such as us. In particular, we believe that it is useful to our analysts and investors to understand this relationship because it excludes transactions not related to our core cash operating activities. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance of our core cash operations. EBITDA and Adjusted EBITDA are not measures of financial performance or liquidity under GAAP and should not be considered in isolation or as alternatives to cash flow from operating activities or as alternatives to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP. In evaluating our performance as measured by EBITDA, management recognizes and considers the limitations of this measurement. EBITDA and Adjusted EBITDA do not reflect our obligations for the payment of income taxes, interest expense or other obligations such as capital expenditures. Accordingly, EDITDA and Adjusted EBITDA are only two of the measurements that management utilizes. Other companies in our industry may calculate EBITDA or Adjusted EBITDA differently than we do and EBITDA and Adjusted EBITDA may not be comparable with similarly titled measures reported by other companies.

In our Equipment Leasing segment, we lease seismic data acquisition equipment primarily to seismic data acquisition companies conducting land, transition zone and marine seismic surveys worldwide. We provide short-term leasing of seismic equipment to meet a customer's requirements. All active leases at January 31, 2013 were for a term of less than one year. Seismic equipment held for lease is carried at cost, net of accumulated depreciation. We acquire some marine lease pool equipment from our Seamap segment. These amounts are carried in our lease pool at the cost to our Seamap segment, less accumulated depreciation. From time to time, we sell lease pool equipment to our customers. These sales are usually transacted when we have equipment for which we do not have near term needs in our leasing business. Additionally, when equipment that has been leased to a customer is lost or destroyed, the customer is charged for such equipment at amounts specified in the underlying lease agreement. These charges are included in "Lease pool equipment sales" in the accompanying financial statements. We occasionally sell new seismic equipment that we acquire from other manufacturers. We produce and sell, as well as lease, equipment used to deploy and retrieve seismic equipment with helicopters. In addition to leasing seismic equipment, SAP sells equipment, consumable supplies, systems integration, engineering hardware and software maintenance support services to the seismic, hydrographic, oceanographic, environmental and defense industries throughout Southeast Asia and Australia.

Our Seamap segment designs, manufactures and sells a variety of products used primarily in marine seismic applications. Seamap's primary products include the
(i) GunLink seismic source acquisition and control systems, which provide marine operators more precise control of exploration tools; and (ii) the BuoyLink RGPS tracking system used to provide precise positioning of seismic sources and streamers (marine recording channels that are towed behind a vessel).

Seismic equipment leasing is susceptible to weather patterns in certain geographic regions. In Canada and Russia, a significant percentage of the seismic survey activity normally occurs in the winter months, from December through March or April. During the months in which the weather is warmer, certain areas are not accessible to trucks, earth vibrators and other heavy equipment because of the unstable terrain. Accordingly, our first and fourth quarters have historically produced higher leasing revenues than the second and third quarters. In other areas of the world, periods of heavy rain can impair seismic operations. These periods of inclement weather can impact our results of operations; however, there is no historical trend as to the timing of such impact. We are able, in many cases, to transfer our equipment from one region to another in order to deal with seasonal demand and to increase our equipment utilization, see Item 1A - "Risk Factors."


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Business Outlook

Our revenues are directly related to the level of worldwide oil and gas exploration activities and the profitability and cash flows of oil and gas companies and seismic contractors, which, in turn, are affected by expectations regarding the supply and demand for oil and natural gas, energy prices and finding and development costs. Land seismic data acquisition activity levels are measured in terms of the number of active recording crews, known as the "crew count," and the number of recording channels deployed by those crews, known as "channel count." Because an accurate and reliable census of active crews does not exist, it is not possible to make definitive statements regarding the absolute levels of seismic data acquisition activity. Furthermore, a significant number of seismic data acquisition contractors are either private or state-owned enterprises and information about their activities is not available in the public domain.

During fiscal 2012, we experienced a significant increase in our equipment leasing business. We believe the factors contributing to this increase included the following:

Increased exploration activity driven by higher worldwide oil prices;

Increased exploration activity for natural gas, driven in part by non-conventional sources, such as shale reservoirs;

Our geographic expansion;

An increase in the channel count on seismic surveys; and

The additions we made to our lease pool of equipment.

Particular areas of improved leasing revenues included our Latin American, North American and European land operations and our marine leasing business. We expected these trends to generally continue into fiscal 2013. However, they did not and our equipment leasing business declined in fiscal 2013 from fiscal 2012 levels, but the levels remained above those of fiscal 2011.The decline in fiscal 2013 from fiscal 2012 related primarily to declines in land leasing activity in the United States, Latin America and Europe.

We do not believe that the decline in our fiscal 2013 land leasing activity is indicative of a trend. As more fully discussed below, we believe that certain specific factors contributed to the fiscal 2013 decline and that those factors will not necessarily continue into the future. However, there can be no assurance of this.

We believe overall demand for seismic services, and for our services, continues to remain strong. This demand is driven by the world-wide demand for oil and gas and the demand for more precise seismic data on the part of oil and gas companies. Also contributing to this demand is the use of seismic data in the development and management of oil and gas properties beyond the exploration phase.

Over the past several years, we have made significant additions to our lease pool of equipment, amounting to over $190 million in equipment purchases during the five years ended January 31, 2013. By adding this equipment, we have not only expanded the amount of equipment that we have, but have also increased the geographic prescence of our leasing operations and have expanded the types of equipment that we have in our lease pool. Additions to our lease pool during fiscal 2013, 2012 and 2011 amounted to approximately $39.1 million, $68.8 million and $31.1 million, respectively.

Historically, there have been continued improvements and enhancements in seismic equipment, generally driven by competition among two or three major equipment suppliers. Recently, a number of companies have developed, or are developing, seismic recording equipment based on wireless, or cable-free technology. We believe that there are approximately eight companies currently offering or developing such equipment. We think it is unlikely that all of these products will ultimately prove to be commercially successful. However, in the meantime, the existence of these products has created a great deal of competition that has had the effect of depressing prices for seismic recording equipment, and specifically recording channels. While we are the

beneficiary of lower prices for equipment we purchase, the current equipment pricing environment also exerts


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pressure on our rental rates. We cannot at this time determine the effect of this pressure, if any, on our results of operations. We currently have within our lease pool of equipment wireless recording channels from two different manufacturers. Depending upon the demand from our customers, we may add additional wireless equipment to our lease pool in the future.

The market for products sold by Seamap and the demand for the leasing of marine seismic equipment is dependent upon activity within the offshore, or marine, seismic industry, including the re-fitting of existing seismic vessels and the equipping of new vessels. Seamap has enjoyed increases in revenues over the past three fiscal years. Our Seamap business has benefited from equipping new-build vessels and from re-equipping older vessels with newer, more efficient technology. In addition, as Seamap has expanded its installed base of products, our business for replacements, spare parts, repair and support services has expanded. Certain existing and potential customers continue to express interest in our GunLink and BuoyLink products. Some of this interest involves the upgrade of exiting GunLink and BuoyLink products to newer versions or systems with greater functionality. We believe the marine seismic market continues to be strong, as indicated by the expansion of various marine seismic contractors, including the addition of new vessels to their fleets.

We also have expanded the geographic breadth of our operations by acquiring or establishing operating facilities in new locations. In fiscal 2012, we established new leasing subsidiaries in Hungary and in Singapore and significantly expanded the operations of our branch in Colombia. We may seek to expand our operations in to additional locations in the future either through establishing "green field" operations or by acquiring other businesses. However, we do not currently have specific plans to establish any such operations.

The oil and gas industry, in general, and the seismic industry, in particular, have historically been cyclical businesses. If worldwide oil and gas prices should decline from current levels, or if the expectations for future prices should change, we could see a material change in the level of our business.

A significant portion of our revenues are generated from foreign sources. For fiscal 2013, 2012 and 2011, revenues from international customers totaled approximately $81.2 million, $86.7 million and $59.7 million, respectively. These amounts represent 78%, 77% and 84% of consolidated revenues in those fiscal years, respectively. The majority of our transactions with foreign customers are denominated in United States, Australian, Canadian and Singapore dollars and Russian rubles. We have not entered, nor do we intend to enter, into derivative financial instruments for hedging or speculative purposes.

Our revenues and results of operations have not been materially impacted by inflation or changing prices in the past three fiscal years, except as described above.

Results of Operations

For fiscal 2013, we recorded operating income of approximately $13.9 million, compared to approximately $34.5 million for fiscal 2012 and approximately $6.9 million for fiscal 2011. The decrease in fiscal 2013 relates primarily to decreased leasing revenues and increased lease pool depreciation. The increase in fiscal 2012 over fiscal 2011 reflects increased leasing revenue associated with the improved demand for seismic equipment.

The gross profit for our Equipment Leasing segment was approximately $20.2 million in fiscal 2013, compared to approximately $41.8 million in fiscal 2012 and approximately $15.5 million in fiscal 2011. The decrease between fiscal 2012 and fiscal 2013 resulted from lower leasing revenues and higher lease pool depreciation expense. The increase between fiscal 2011 and fiscal 2012 resulted from higher leasing revenues and increased sales of lease pool equipment. The increase was despite increased direct operating costs and depreciation expense related to our lease pool of equipment. Our Seamap segment recorded gross profit of approximately $17.4 million, $15.9 million and $11.3 million in fiscal 2013, 2012 and 2011, respectively. The increases in gross profit were due primarily to increased revenues. Seamap revenues increased in each of these years as customers continued to buy new equipment in order to enhance efficiency by upgrading technology. The improvement in revenues is also due in part to on-going support activities from our installed base of these products.


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Revenues and Cost of Sales

Equipment Leasing

Revenues and cost of sales from our Equipment Leasing segment were comprised of
the following:



                                                    Years Ended January 31,
                                                 2013         2012         2011
                                                         (in thousands)
         Revenues:
         Equipment leasing                     $ 54,592     $ 70,137     $ 36,825
         Lease pool equipment sales              11,412        6,503        2,470
         New seismic equipment sales              1,282        1,810        6,056
         SAP equipment sales                      6,230        5,978        4,667

                                                 73,516       84,428       50,018
         Cost of sales:
         Lease pool depreciation                 33,594       27,668       21,512
         Direct costs - equipment leasing         8,200        8,059        3,739
         Cost of lease pool equipment sales       6,043        1,580        1,130
         Cost of new seismic equipment sales        655          924        4,362
         Cost of SAP equipment sales              4,828        4,384        3,751

                                                 53,320       42,615       34,494

         Gross profit                          $ 20,196     $ 41,813     $ 15,524

         Gross profit margin                      27%          50%          31%

In fiscal 2013, equipment leasing revenues declined approximately 22% from fiscal 2012 levels, due primarily to reduced activity in the United States, Latin American and Europe (as discussed in more detail below) and, to a lesser extent, a decline in our down hole leasing revenue (as discussed in more detail below). During fiscal 2012, we benefited from a very large project in the United States that contributed approximately $4.5 million in leasing revenues. We had anticipated a follow-on project in fiscal 2013, but this did not occur. Very large contracts such as this can occur from time to time, but they cannot be predicted with any degree of accuracy.

Fiscal 2013 equipment leasing revenues in Latin America were less than anticipated and less than in fiscal 2012. A number of anticipated projects, primarily in Colombia, experienced a series of delays due to weather, permitting, regulatory and other logistical issues. Based on discussions with our customers and other industry participants, we believe there is a substantial amount of seismic survey activity pending in Latin America and we expect this to be an area of continued strong activity for our leasing business. However, factors such as those encountered in fiscal 2013 could continue to impact our business.

We also experienced a decline in equipment leasing activity in Europe in fiscal 2013 as compared to fiscal 2012. We believe that this decline was caused, in large degree, by economic, political and environmental issues in much of Eastern Europe. Political unrest in North Africa also contributed to this decline, as certain of our customers in Eastern Europe have operated in North Africa in the past. We have recently seen indications of improved activity among our customers in Eastern Europe and expect increased activity among these customers in the future. There can be no assurance, however, as to the effect of this on our equipment leasing business.

During fiscal 2013, revenues from our down hole leasing business declined from that in fiscal 2012. The majority of our down hole business has been in North America and relates to microseismic and fracture monitoring programs. We believe that decreased activity in such programs in North America contributed to this decline.

Revenues from our marine leasing business increased in fiscal 2013 over fiscal 2012, reflecting, we believe, overall strong fundamentals in the marine seismic market. However, this increase did not offset the decreases discussed above.


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Equipment leasing revenues in fiscal 2012 increased by more than 90% over fiscal 2011. Contributing to the increase was significantly improved demand for land equipment in Latin America, North America and Europe, as well as increased demand for marine equipment. We also experienced improved demand during this period for our down hole seismic equipment. In order to respond to this increased demand, we made significant additions to our lease pool during fiscal 2012 and we significantly increased our operations in Latin America. The improved demand was seen across most categories of land equipment, including traditional cabled systems, three component recording systems and cable free recording systems.

From time to time, we sell equipment from our lease pool based on specific customer demand or in order to redeploy our capital in other lease pool assets. These transactions tend to occur as opportunities arise and, accordingly, are difficult to predict. Also included in sales of lease pool equipment are charges to leasing customers for lost or destroyed equipment. Lease pool equipment sales increased in fiscal 2013 period due to the sale of certain older equipment in a series of transactions. The gross profit and related gross profit margin from the lease pool equipment sales amounted to approximately $5.4 million in fiscal 2013, $4.9 million in fiscal 2012, and $1.3 million in fiscal 2011. Often, the equipment that is sold from our lease pool has been held by us, and therefore depreciated, for some period of time. Accordingly, the equipment sold may have a relatively low net book value at the time of the sale, resulting in a relatively high gross profit from the transaction. The amount of the gross profit on a particular transaction varies greatly based primarily upon the age of the equipment.

Occasionally, we sell new seismic equipment that we acquire from other manufacturers, and we regularly sell equipment that we produce for use in deploying and retrieving seismic equipment by helicopter. Often, the sales of new seismic equipment are structured with a significant down payment, with the balance financed over a period of time at a market rate of interest. In fiscal 2013 and 2012, essentially all sales of new seismic equipment relate to sales of heli-transport equipment. In fiscal 2011, in addition to sales of heli-transport equipment, we sold a new recording system to a new customer in Europe. The gross profit from new seismic equipment sales amounted to approximately $627,000 in fiscal 2013, $886,000 in fiscal 2012, and $1.7 million in fiscal 2011. The gross profit in fiscal 2011, as a percent of sales, was less than that in fiscal 2013 and 2012 due to the lower gross profit from the sale of the new recording system in that year. SAP regularly sells new hydrographic and oceanographic equipment to customers in Australia and throughout the Pacific Rim. Contributing to the increase in SAP equipment sales during the three-year period ended January 31, 2013 was increased demand from various entities throughout Southeast Asia. The gross profit from the sale of new seismic, hydrographic and oceanographic equipment by SAP amounted to approximately $1.4 million in fiscal 2013, $1.6 million in fiscal 2012, and $916,000 in fiscal 2011.

Lease pool depreciation expense for fiscal 2013 amounted to approximately $33.6 million, as compared to approximately $27.7 million in fiscal 2012 and approximately $21.5 million in fiscal 2011. The increase in depreciation expense in each of the periods resulted from the significant additions to our lease pool of equipment that we have made in recent periods, including approximately $39.1 million in fiscal 2013 and approximately $68.8 million in fiscal 2012. We begin to depreciate new equipment when that equipment is first deployed on a rental contract. The equipment is then depreciated on a straight-line basis over its estimated useful life. The useful lives of our assets range from three to seven years. In April 2012, we purchased approximately $13.8 million of used . . .

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