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MIND > SEC Filings for MIND > Form 10-Q on 5-Jun-2013All Recent SEC Filings

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Form 10-Q for MITCHAM INDUSTRIES INC


5-Jun-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We operate in two segments, equipment leasing ("Equipment Leasing") and equipment manufacturing. Our equipment leasing operations are conducted from our Huntsville, Texas headquarters and from our locations in Calgary, Canada; Brisbane, Australia; Ufa, Bashkortostan, Russia; Budapest, Hungary; Singapore; Bogota, Colombia; and Lima, Peru. Our Equipment Leasing segment includes the operations of our Mitcham Canada, ULC. ("MCL"), Seismic Asia Pacific Pty. Ltd. ("SAP"), Mitcham Europe Ltd ("MEL"), Mitcham Marine Leasing Pte Ltd. ("MML") and Mitcham Seismic Eurasia LLC ("MSE") subsidiaries and our branch operations in Peru and Colombia. Our equipment manufacturing segment is conducted by our Seamap subsidiaries and, therefore, is referred to as our "Seamap" segment. 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.

The following table presents certain operating information by operating segment.

                                                            For the Three Months Ended
                                                                    April 30,
                                                             2013                 2012
                                                                  (in thousands)
Revenues:
Equipment Leasing                                        $      23,364          $  24,087
Seamap                                                           3,934             10,841
Inter-segment sales                                                 (7 )             (297 )

Total revenues                                                  27,291             34,631

Cost of sales:
Equipment Leasing                                               11,043             13,228
Seamap                                                           1,709              4,892
Inter-segment costs                                                (58 )             (375 )

Total cost of sales                                             12,694             17,745

Gross profit                                                    14,597             16,886
Operating expenses:
General and administrative                                       6,039              5,319
Recovery of doubtful accounts                                       -                (428 )
Depreciation and amortization                                      375                329

Total operating expenses                                         6,414              5,220

Operating income                                         $       8,183          $  11,666

EBITDA (1)                                               $      15,748          $  19,825
Adjusted EBITDA (1)                                      $      16,014          $  20,019
Reconciliation of Net income to EBITDA and Adjusted
EBITDA
Net income                                               $       6,307          $   8,456
Interest expense, net                                                3                  5
Depreciation and amortization                                    7,826              8,757
Provision for income taxes                                       1,612              2,607

EBITDA (1)                                                      15,748             19,825
Stock-based compensation                                           266                194

Adjusted EBITDA (1)                                      $      16,014          $  20,019

Reconciliation of Net cash provided by operating
activities to EBITDA
Net cash provided by operating activities                $       8,390          $  17,864
Stock-based compensation                                          (266 )             (194 )
Changes in trade accounts, contracts and notes
receivable                                                       4,977             (3,725 )
Interest paid                                                       66                167
Taxes paid , net of refunds                                      1,379              3,821
Gross profit from sale of lease pool equipment                     498                928
Changes in inventory                                             1,345               (165 )
Changes in prepaid expenses and other current assets             1,578                422
Changes in accounts payable, accrued expenses and
other current liabilities and deferred revenue                  (2,174 )              832
Other                                                              (45 )             (125 )

EBITDA (1)                                               $      15,748          $  19,825


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(1) EBITDA is defined as net income before (a) interest expense, net of interest income, (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 calculated in accordance with accounting principles generally accepted in the United States ("U.S. 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 facility 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 and liquidity of our core cash operations. EBITDA and Adjusted EBITDA are not measures of financial performance or liquidity under U.S. 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 U.S. 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, EBITDA 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 April 30, 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 reflected in the accompanying condensed consolidated financial statements at the cost to our Seamap segment, net of 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 and if the proceeds from the sale exceed the estimated present value of future lease income from that equipment. We also occasionally sell new seismic equipment that we acquire from other companies and sometimes provide financing on those sales. We also produce, sell, and lease equipment used to deploy and retrieve seismic equipment with helicopters. In addition to conducting seismic equipment leasing operations, SAP sells equipment, consumables, systems integration, engineering hardware and software maintenance support services to the seismic, hydrographic, oceanographic, environmental, and defense industries throughout Southeast Asia and Australia.

Seismic equipment leasing is normally susceptible to weather patterns in certain geographic regions. In Canada and Russia, a significant percentage of the seismic survey activity occurs in winter months, from December or January 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 unstable terrain. In other areas of the world, such as South America, Southeast Asia and the Pacific Rim, periods of heavy rain can impair seismic


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operations. These periods of heavy rain often occur during the months of February through May in parts of South America. We are able, in some cases, to transfer our equipment from one region to another in order to deal with seasonal demand and to increase our equipment utilization.

Historically, our first fiscal quarter has produced the highest leasing revenues, due in large part to the effect of the Canadian and Russian winter seasons discussed above. With the expansion of our land leasing operations into other geographic areas, such as South America and Europe, and the recent strength of our marine leasing operations, we have recently seen a lessening of the seasonal variation in our leasing business. We do expect to continue to experience seasonal fluctuations, but such fluctuations may not be as great or as predictable as in the past.

Our leasing segment can also experience periodic fluctuations in activity levels due to matters unrelated to seasonal or weather factors. These factors include the periodic shift of seismic exploration activity from one geographic area to another and difficulties encountered by our customers due to permitting and other logistical challenges.

Our Seamap segment designs, manufactures and sells a variety of products used primarily in marine seismic applications. Seamap's primary products include
(1) the GunLink seismic source acquisition and control systems, which provide marine operators more precise control of their exploration systems, and (2) the BuoyLink RGPS tracking system used to provide precise positioning of seismic sources and streamers (marine recording channels that are towed behind a vessel). Seamap's business is generally not impacted by seasonal conditions, as is the case with our land leasing operations. However, Seamap can experience significant fluctuations in its business. The timing of deliveries and sales is often dependent upon the availability of the customer's vessel for delivery and installation of the equipment. Given the relatively large size of some orders, this can result in significant variations from period to period.

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 2013, we experienced an unexpected softening of demand for land seismic equipment in certain markets, specifically Latin America and Europe, and we saw sporadic land leasing demand in the United States, each as more fully discussed below. We think these issues are temporary in nature and have recently seen indications that demand for our products and services in these markets will improve over the balance of fiscal 2014.

In Latin America, specifically in Colombia, we have experienced a series of delays in anticipated projects due to permitting and logistical difficulties encountered by our customers. While these issues have not been completely resolved, there are indications that many of these delayed projects will commence in the second or third quarters of fiscal 2014. Based on our discussions with customers and others in the industry, we believe there is considerable future demand for seismic services and equipment in Latin America. We have seen indications of renewed activity in Latin America, where we are delivering equipment for two new contracts, scheduled to commence in the second and third quarters of fiscal 2014. Activity in Europe was considerable lower in fiscal 2013 as compared to fiscal 2012. Political changes, fiscal issues and environmental concerns have, we believe, caused delays in many energy projects in Europe, particularly non-conventional natural gas projects. The effect of these matters has continued into the first quarter of fiscal 2014. However, we have recently seen a significant increase in bidding activity within this region, which leads us to believe demand in that region will increase over the balance of fiscal 2014. Leasing revenues in the United States declined over the course of fiscal 2013 and into fiscal 2014. We believe this decline, and the sporadic activity we have experienced in this region, has been due to an overall slow-down in exploration activity in the United States, and as exploration budgets have been diverted to drilling programs rather than seismic exploration. This slow-down in the United States has also contributed to lower leasing revenues from our downhole seismic tools.

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


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years. We believe the decline in Seamap's revenues in the first quarter of fiscal 2014, as compared to the first quarter of fiscal 2013, is not indicative of a trend but reflects period to period variability that is inherent in the business. 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 that demand in our marine markets will remain strong into the future; however, subject to fluctuations from period to period, such as that between the first quarters of fiscal 2013 and fiscal 2014.

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.

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 expanse of our leasing operations and have expanded the types of equipment that we have in our lease pool. We expect that additions to our lease pool in fiscal 2014 will amount to between $23 million and $28 million. However, many of those expenditures are contingent upon anticipated improvements in demand for seismic equipment materializing. During the first quarter of fiscal 2014, we added approximately $1.7 million of equipment to our lease pool.

We also have expanded the geographic breadth of our operations over the past few years by acquiring or establishing operating facilities in new locations. We may seek to expand our operations into 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.

A significant portion of our revenues are generated from foreign sources. For the three months ended April 30, 2013 and 2012, revenues from international customers totaled approximately $24.6 million and $28.3 million, respectively. These amounts represent 90% and 82% of consolidated revenues in those periods, respectively. The majority of our transactions with foreign customers are denominated in United States, Australian, and Canadian 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 may be described above.

Results of Operations

Revenues for the three months ended April 30, 2013 and 2012 were approximately $27.3 million and $34.6 million, respectively. The decrease between the two periods was due primarily to decreased Seamap sales and, to a lesser extent, lower leasing revenues. For the three months ended April 30, 2013, we generated operating income of approximately $8.2 million, compared to approximately $11.7 million for the three months ended April 30, 2012. The decrease in operating profit in the three months ended April 30, 2013 as compared to the same period a year ago was due primarily to lower gross profit from Seamap sales. A more detailed explanation of these variations follows.

Revenues and Cost of Sales

Equipment Leasing

Revenue and cost of sales from our Equipment Leasing segment were as follows:



                                                    Three Months Ended
                                                         April 30,
                                                    2013           2012
                                                     ($ in thousands)
            Revenue:
            Equipment leasing                     $  20,093      $ 21,008
            Lease pool equipment sales                  900         2,332
            New seismic equipment sales                 117           268
            SAP equipment sales                       2,254           479

                                                     23,364        24,087
            Cost of sales:
            Direct costs-equipment leasing            1,273         2,870
            Lease pool depreciation                   7,470         8,434
            Cost of lease pool equipment sales          402         1,404
            Cost of new seismic equipment sales          79           140
            Cost of SAP equipment sales               1,819           380

                                                     11,043        13,228

            Gross profit                          $  12,321      $ 10,859

            Gross profit %                               53 %          45 %


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Equipment leasing revenues decreased approximately 4% in the first quarter of fiscal 2014 from the first quarter of fiscal 2013 due primarily to declines in land leasing in the United States, Europe and Latin America, and a decline in marine leasing. These declines were largely offset by higher land leasing revenues in Canada, Russia and the Pacific Rim. Land leasing activity in the United States in the first quarter of fiscal 2014 continued the downward trend that began in fiscal 2013 which we believe was caused by a shift in exploration spending towards drilling activity and away from seismic programs. Latin America land leasing activity continued to encounter project delays in the first quarter of fiscal 2014, as discussed above. The decline in marine leasing activity in the first quarter of fiscal 2014 was the result of certain projects being completed in the fourth quarter of fiscal 2013 and temporary delays in the start of various new projects. Leasing revenues in Canada and Russia in the first quarter of fiscal 2014 benefited from more equipment being deployed in those areas than in the first quarter of fiscal 2013. The year over year improvement in these areas was despite a generally softer winter season in Canada and the cancellation of a project in Russia. Leasing activity in the Pacific Rim has increased as we have deployed additional equipment into that region.

From time to time, we sell equipment from our lease pool based on specific customer demand and as opportunities present themselves in order to redeploy our capital in other lease pool assets. Accordingly, these transactions tend to occur sporadically and are difficult to predict. Often, the equipment that is sold from our lease pool has been in service, 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 margin from the transaction. The amount of the margin on a particular transaction varies greatly based primarily upon the age of the equipment. The gross profit from sales of lease pool equipment for the three months ended April 30, 2013 and 2012 was approximately $498,000 and $928,000, respectively. We expect to continue to sell lease pool equipment from time to time.

We regularly sell new seismic equipment, including heli-picker equipment that we produce. Heli-picker equipment sales are generally concentrated in the third and fourth quarter of our fiscal year. The gross profit from sales of new seismic equipment for the three months ended April 30, 2013 and 2012 was approximately $38,000 and $128,000, respectively.

SAP regularly sells new hydrographic and oceanographic equipment and provides system integration services to customers in Australia and throughout the Pacific Rim. For the fiscal quarter ended April 30, 2013, SAP generated gross profit of approximately $435,000 from these transactions as compared to approximately $99,000 in the fiscal quarter ended April 30, 2012. Sales of equipment by SAP can vary significantly from period to period based upon the delivery requirements of customers, which are often times governmental agencies in the Pacific Rim; however, we recently have experienced increased inquiries and demand for these products and services.

Direct costs related to equipment leasing were approximately 6% and 14% of leasing revenues in the three months ended April 30, 2013 and 2012, respectively. The decrease in the percentage in the fiscal 2014 period reflects a decline in the sub-lease of certain equipment.

For the three months ended April 30, 2013, lease pool depreciation decreased approximately 11% from the three months ended April 30, 2012. The decrease in depreciation expense results from certain assets becoming fully depreciated, yet still producing leasing revenue and the decline in the rate of lease pool additions in the first quarter of fiscal 2014.

Overall, our Equipment Leasing segment generated gross profit of approximately $12.3 million, 53% of segment revenues, in the first quarter of fiscal 2014, as compared to $10.9 million, 45% of segment revenues, in the first quarter of fiscal 2013. The increase in gross profit in the fiscal 2014 period resulted primarily from lower direct costs and depreciation expense, offset by decreased leasing revenue.


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Seamap

Revenues and cost of sales from our Seamap segment were as follows:



                                              Three Months Ended
                                                   April 30,
                                              2013           2012
                                               ($ in thousands)
                  Equipment sales           $   3,934      $ 10,841
                  Cost of equipment sales       1,709         4,892

                  Gross profit              $   2,225      $  5,949

                  Gross profit %                   57 %          55 %

The sale of Seamap products, while not generally impacted by seasonal factors, can vary significantly from quarter to quarter due to customer delivery requirements. In the three months ended April 30, 2013, Seamap did not ship any major GunLink or BuoyLink systems, and all revenues for this segment were related to the sale of other products and spare parts as well as support, training and repair services. In the three months ended April 30, 2012, Seamap shipped two GunLink 4000 systems and three BuoyLink systems. Revenue in both periods also includes the sale of certain other equipment, such as streamer weight collars, and providing on-going support and repair services, as well as spare parts sales. Changes in product prices did not contribute materially to the difference in sales between the periods. We expect to make shipments of GunLink 4000 and BuoyLink systems during the balance of fiscal 2014, including one of each during the three months ending July 31, 2013.

The gross profit margin from the sale of Seamap equipment for the three months ended April 30, 2013 was comparable to that for the three months ended April 30, 2012.

Operating Expenses

General and administrative expenses for the three months ended April 30, 2013 were approximately $6.0 million, compared to approximately $5.3 million for the three months ended April 30, 2012. The increase in the fiscal 2014 period reflects lower overhead absorption from Seamap and increased personnel related costs. Included in general and administrative expenses for the three months ended April 30, 2013 and 2012 is stock-based compensation expense of approximately $266,000 and $194,000, respectively.

In the three months ended April 30, 2012, we recorded a recovery of doubtful accounts receivable of approximately $428,000 related to accounts receivable previously determined to be uncollectable.

Other Income (Expense)

Net interest expense for the three months ended April 30, 2013 declined to approximately $3,000, as compared to approximately $5,000 for the three months ended April 30, 2012. The decline is due primarily to lower average borrowings under our revolving credit agreement.

Other income and other expense relate primarily to foreign exchange losses and . . .

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