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

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Form 10-Q for MITCHAM INDUSTRIES INC


5-Sep-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           For the Six Months Ended
                                                     July 31,                            July 31,
                                              2013                2012             2013              2012
                                                  (in thousands)                      (in thousands)
Revenues:
Equipment Leasing                         $      13,937         $  15,818      $     37,301        $  39,905
Seamap                                            7,042             7,454            10,976           18,295
Inter-segment sales                                 (84 )            (192 )             (91 )           (489 )

Total revenues                                   20,895            23,080            48,186           57,711

Cost of sales:
Equipment Leasing                                13,119            12,788            24,162           26,016
Seamap                                            3,602             3,121             5,311            8,013
Inter-segment costs                                (126 )            (229 )            (184 )           (604 )

Total cost of sales                              16,595            15,680            29,289           33,425

Gross profit                                      4,300             7,400            18,897           24,286
Operating expenses:
General and administrative                        6,048             5,719            12,087           11,038
Recovery of doubtful accounts                        -                 -                 -              (428 )
Depreciation and amortization                       378               340               753              669

Total operating expenses                          6,426             6,059            12,840           11,279

Operating (loss) income                   $      (2,126 )       $   1,341      $      6,057        $  13,007

EBITDA (1)                                $       6,672         $  10,180      $     22,420        $  30,005
Adjusted EBITDA (1)                       $       6,959         $  11,050      $     22,973        $  31,069
Reconciliation of Net income to EBITDA
and Adjusted EBITDA
Net (loss) income                         $        (693 )       $   6,402      $      5,614        $  14,858
Interest (income) expense, net                     (160 )              96              (157 )            101
Depreciation and amortization                     7,798             8,810            15,624           17,567
(Benefit) provision for income taxes               (273 )          (5,128 )           1,339           (2,521 )

EBITDA (1)                                        6,672            10,180            22,420           30,005
Stock-based compensation                            287               870               553            1,064

Adjusted EBITDA (1)                       $       6,959         $  11,050      $     22,973        $  31,069


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Reconciliation of Net cash provided by
operating activities to EBITDA
Net cash provided by operating activities    $  7,571       $ 11,416       $ 15,961       $  29,280
Stock-based compensation                         (287 )         (870 )         (553 )        (1,064 )
Changes in trade accounts and contracts
receivable                                     (3,738 )       (7,147 )        1,239         (10,872 )
Interest paid                                      16            158             82             325
Taxes paid , net of refunds                     2,246          3,214          3,625           7,035
Gross profit from sale of lease pool
equipment                                       1,560          2,197          2,058           3,125
Changes in inventory                             (317 )          535          1,028             370
Changes in accounts payable, accrued
expenses and other current liabilities
and deferred revenue                              (50 )        1,210         (2,224 )         2,042
Changes in prepaid expenses and other
current assets                                   (196 )           -           1,382              -
Other                                            (133 )         (533 )         (178 )          (236 )

EBITDA (1)                                   $  6,672       $ 10,180       $ 22,420       $  30,005

(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 contain financial covenants that are based upon Adjusted 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 July 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 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


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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 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 accomodate 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 marine leasing, we have seen a lessening of the seasonal variation in our leasing business in some years. We expect to continue to experience seasonal fluctuations, but such fluctuations may not be as great or as predictable as in the past.

Our Equipment 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. This situation has continued into fiscal 2014 to a large degree, as discussed more fully below. While we expect marginal improvement in the third quarter of fiscal 2014 and seasonal improvement in the fourth quarter of fiscal 2014, there remains much uncertainty as to the magnitude of this improvement, if any.

In Latin America, specifically in Colombia, we have experienced a series of delays in anticipated projects due to permitting, labor and logistical difficulties encountered by our existing and potential customers. A significant number of projects have been recently awarded to seismic contractors in Colombia, which we believe could indicate improving activity in that region. We have seen indications of renewed activity in Latin America, where we have delivered equipment for two new contracts and are staging equipment for other contracts. Many projects in Colombia have not started when anticipated and it now appears that some work scheduled to be completed in calendar 2013 will not take place until calendar 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, including Colombia, Bolivia, Brazil and other areas. Therefore, we remain optimistic about the future of our land leasing operations in Latin America. However, given our experience in recent periods and reports of on-going permitting, labor and security issues in parts of Colombia, the timing of many projects in Latin America continues to be uncertain.

Leasing revenues in the United States declined over the course of fiscal 2013 and through the second quarter of 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.


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Activity in Europe was considerably lower in fiscal 2013 as compared to fiscal 2012. Political changes, fiscal issues and environmental concerns we believe, caused delays in many energy projects in Europe, particularly non-conventional natural gas projects. The effect of these matters continued into the first six months of fiscal 2014. However, we have recently shipped equipment to new projects and have 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 and into fiscal 2015.

Very recently we have experienced an increase in inquiries for the Russian market. As the seismic industry in Russia is generally seasonal, much of this work is scheduled for the winter season, which would encompass the fourth quarter of fiscal 2014 and the first quarter of fiscal 2015. Should this business develop as preliminarily indicated, we would expect an improvement in our land leasing business in this area and would likely deploy additional equipment to that region. We also have recently received preliminary inquiries in Canada regarding equipment for the upcoming winter season there. While these early inquiries are encouraging, we believe it is too early to determine what impact this will have on our business in Canada for the balance of this fiscal year and the first quarter of fiscal 2015.

We have recently seen a decline in demand in our marine rental business. Due to industry consolidation and restructuring we believe there to be an oversupply of used marine equipment available on the market, which has had a negative impact on the demand for our products and services. We believe this situation to be temporary as the overall marine seismic market continues to be robust.

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 existing 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.

In June 2013 we entered into a manufacturing arrangement with Petroleum Geo-Services ASA ("PGS"), one of the largest marine seismic contractors in the world. Under this arrangement we will manufacture and sell to PGS a customized and proprietary marine energy source controller that is based on our GunLink 4000 product (the "PGS SourceLink"). We have previously collaborated with PGS to develop PGS SourceLink. We expect PGS SourceLink will be deployed on the majority of PGS' fleet of seismic vessels. This fleet currently consists of 13 vessels, with three additional vessels under development. The deployment will take place over a period of several years. At this time, we expect this arrangement to have an immaterial impact on our results of operations for the balance of 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 and our income from operations.

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. From time to time we will seek to sell certain types of equipment from our lease pool, such as older technology or equipment for which demand is declining, and redeploy that capital into other types of equipment. Due to the recent softening in demand in our leasing business, we have reduced the level of additions to our lease pool. During the first six months of fiscal 2014 we have added approximately $4.8 million of equipment to our lease pool. We expect that additions to our lease pool for all of fiscal 2014 will amount to between $18 million and $23 million. However, many of those expenditures are contingent upon anticipated improvements in demand for seismic equipment materializing. We expect the majority of these additions to be for land recording equipment, including traditional cabled systems for certain geographic regions and wireless recording systems.

Historically, there have been two or three primary manufacturers of land seismic equipment. Recently, the industry has seen the emergence of additional entities seeking to introduce new equipment, particularly wireless recording equipment. Accordingly, there has developed significant competition among these new and existing


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manufacturers. This competition has, we believe, in turn led to pricing pressure for the manufacturers of equipment. While we benefit from lower prices for new equipment, this situation has also begun to have a negative impact on the pricing for our products and services. We have not been able to determine the magnitude of this impact on our results to date.

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 July 31, 2013 and 2012, revenues from international customers totaled approximately $18.6 million and $15.6 million, respectively. These amounts represent 89% and 68% 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 July 31, 2013 and 2012 were approximately $20.9 million and $23.1 million, respectively. The decrease between the two periods was due primarily to lower leasing revenues. Revenues for the six months ended July 31, 2013 and 2012 were approximately $48.2 million and $57.7 million, respectively. The decline between the six month periods is due primarily to lower leasing revenues and lower Seamap equipment sales. For the three months ended July 31, 2013, we incurred an operating loss of approximately $2.1 million, compared to operating income of approximately $1.3 million for the three months ended July 31, 2012. For the six months ended July 31, 2013, we generated an operating profit of approximately $6.1 million, compared to $13.0 million in the six months ended July 31, 2012. The decrease in operating profit in the three and six months ended July 2013 as compared to the same periods a year ago was due primarily to lower leasing revenues and 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            Six Months Ended
                                               July 31,                     July 31,
                                          2013           2012          2013          2012
                                           ($ in thousands)             ($ in thousands)
  Revenue:
  Equipment leasing                     $   6,442      $ 10,882      $ 26,535      $ 31,890
  Lease pool equipment sales                2,119         3,204         3,019         5,536
  New seismic equipment sales                 158           170           275           438
  SAP equipment sales                       5,218         1,562         7,472         2,041

                                           13,937        15,818        37,301        39,905
  Cost of sales:
  Direct costs-equipment leasing            1,119         2,012         2,392         4,882
  Lease pool depreciation                   7,438         8,528        14,908        16,962
  Cost of lease pool equipment sales          559         1,007           961         2,411
  Cost of new seismic equipment sales         121           107           200           247
  Cost of SAP equipment sales               3,882         1,134         5,701         1,514

                                           13,119        12,788        24,162        26,016

  Gross profit                          $     818      $  3,030      $ 13,139      $ 13,889

  Gross profit %                                6 %          19 %          35 %          35 %


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Equipment leasing revenues decreased approximately 41% in the second quarter of fiscal 2014 from the second quarter of fiscal 2013 due primarily to declines in land leasing in the United States and Latin America, and a decline in marine leasing. These declines were partially offset by higher land leasing revenues in Europe, the Pacific Rim, Asia and Africa. For the first six months of fiscal 2014, equipment leasing revenues declined approximately 17% from the first six months of fiscal 2013 primarily due to declines in land leasing in the United States, Latin America and in marine leasing. Partially offsetting the decline in the six month periods were improved land leasing revenue in Canada, Russia, the Pacific Rim, Asia and Africa. Land leasing activity in the United States in fiscal 2014 has 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 has continued to encounter project delays in fiscal 2014, as discussed above. The decline in marine leasing activity in fiscal 2014 is, we believe, the result of certain projects being completed in the fourth quarter of fiscal 2013, temporary delays in the start of various new projects and an excess of used equipment becoming available in the market as discussed above. Leasing revenues in Canada and Russia in the first six months of fiscal 2014 benefited from more equipment being deployed in those areas than in the first six months 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, Asia and Africa has increased as we have deployed additional equipment into those regions. The increased activity in Asia and Africa relates to specific projects and may not necessarily be indicative of a trend in those regions.

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 . . .

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