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MIND > SEC Filings for MIND > Form 10-Q on 11-Dec-2013All Recent SEC Filings

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Form 10-Q for MITCHAM INDUSTRIES INC


11-Dec-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 Nine Months Ended
                                                   October 31,                         October 31,
                                             2013                2012             2013               2012
                                                 (in thousands)                       (in thousands)
Revenues:
Equipment Leasing                        $      14,738         $  14,078      $     52,039        $   53,983
Seamap                                           5,608             4,839            16,584            23,134
Inter-segment sales                                (71 )            (344 )            (162 )            (833 )

Total revenues                                  20,275            18,573            68,461            76,284

Cost of sales:
Equipment Leasing                               12,784            12,177            36,946            38,193
Seamap                                           2,651             2,052             7,962            10,065
Inter-segment costs                               (113 )             (10 )            (297 )            (614 )

Total cost of sales                             15,322            14,219            44,611            47,644

Gross profit                                     4,953             4,354            23,850            28,640
Operating expenses:
General and administrative                       6,086             5,854            18,173            16,907
Provision for (recovery of) doubtful
accounts                                         1,048                -              1,048              (443 )
Depreciation and amortization                      371               362             1,124             1,031

Total operating expenses                         7,505             6,216            20,345            17,495

Operating (loss) income                  $      (2,552 )       $  (1,862 )    $      3,505        $   11,145

EBITDA (1)                               $       4,549         $   6,446      $     26,969        $   36,451
Adjusted EBITDA (1)                      $       4,836         $   6,705      $     27,808        $   37,774
Reconciliation of Net income to EBITDA
and Adjusted EBITDA
Net (loss) income                        $      (2,628 )       $  (1,222 )    $      2,986        $   13,636
Interest (income) expense, net                      37               (79 )            (120 )              22
Depreciation and amortization                    7,618             8,703            23,242            26,270
(Benefit) provision for income taxes              (478 )            (956 )             861            (3,477 )

EBITDA (1)                                       4,549             6,446            26,969            36,451
Stock-based compensation                           287               259               839             1,323

Adjusted EBITDA (1)                      $       4,836         $   6,705      $     27,808        $   37,774

Reconciliation of Net cash provided by
operating activities to EBITDA
Net cash provided by operating
activities                               $       2,729         $   6,849      $     18,690        $   36,129
Stock-based compensation                          (287 )            (259 )            (839 )          (1,323 )
Provision for doubtful accounts                 (1,048 )             619            (1,048 )             636
Changes in trade accounts, contracts
and notes receivable                             2,053            (6,029 )           3,292           (16,901 )
Interest paid                                      124               122               206               447
Taxes paid , net of refunds                     (3,699 )           1,187               (74 )           8,222
Gross profit from sale of lease pool
equipment                                        2,050               532             4,108             3,657
Changes in inventory                             1,799               253             2,827               623
Changes in accounts payable, accrued
expenses and other current liabilities
and deferred revenue                               886               758            (1,338 )           2,801
Changes in prepaid expenses and other
current assets                                      67                -              1,449                -
Other                                             (125 )           2,414              (304 )           2,160

EBITDA (1)                               $       4,549         $   6,446      $     26,969        $   36,451


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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 the predecessor revolving credit facility and the Credit Agreement each contain financial covenants that are based upon EBITDA or 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 October 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 accommodate 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 may experience significant fluctuations in its business in the future. 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 in revenues 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 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. We experienced marginal improvement in the third quarter of fiscal 2014 and expect seasonal improvement in the fourth quarter of fiscal 2014; however, there remains much uncertainty as to the magnitude of the future 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. Land leasing activity in the area remained subdued in the third quarter of fiscal 2014. We have seen indications of renewed activity in Latin America, where we have delivered equipment for new contracts and are staging equipment for other contracts. Therefore, we expect increased leasing activity in the fourth quarter of fiscal 2014. Certain projects in Colombia did not commence as anticipated, and it now appears that many projects 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. We have recently experienced an increase in demand for specific types of wireless recording equipment in this region. Accordingly, we have recently purchased additional amounts of this equipment and have initially deployed it into Latin America for use on a particular project scheduled to begin in the first quarter of fiscal 2015.


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Leasing revenues in the United States declined over the course of fiscal 2013 and through the third 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 the diversion of exploration budgets to drilling programs rather than seismic exploration. We do expect increased leasing revenues from this region in the fourth quarter of fiscal 2014 due to a particular project. This improvement is not necessarily indicative of a trend and this project is not expected to extend beyond the fourth quarter. However, there are indications from some customers that they expect improved activity in the United States during calendar 2014. The effect of any such improvement on our business cannot be determined at this time.

Activity in Europe has been 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 experienced a significant increase in rental activity in the market in the third quarter of fiscal 2014, which is expected to continue into a portion of the fourth quarter. Leasing activity in Europe is expected to decline late in the fourth quarter and into the first quarter of fiscal 2015 due to seasonal issues. However, based on discussions with our customers there are indications of continued improved leasing activity in Europe over the balance of fiscal 2015.

As the seismic industry in Russia is generally seasonal, most seismic projects are 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 expect an improvement in our land leasing business in this area over the comparable periods one year ago. In response, we expect to deploy additional equipment to that region, including equipment from Europe as projects there are completed.

Based on firm orders received to date and discussions with our customers, we expect the winter season in Canada this year to be generally weaker than last year, as it appears that some oil and gas companies are delaying or canceling seismic projects. We have, however, recently deployed newly purchased wireless equipment to Canada to support a particular project. We expect this project to at least partially offset any decline in our rental business in Canada in the fourth quarter of fiscal 2014 and the first quarter of fiscal 2015 over the comparable periods one year ago.

We have recently experienced an improvement in demand for our down hole seismic tools; and based on outstanding orders and inquiries, we expect this improvement to continue into the fourth quarter of fiscal 2014 and the first quarter of fiscal 2015. However, demand for down hole seismic tools tends to be sporadic and projects utilizing this equipment are often subject to delays or cancellation.

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.

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. 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. Recently, some marine seismic contractors have reported softening of demand and therefore pressure on the pricing to their customers. We do not believe this has had a material impact on our business to date. However, should this situation persist, we could experience a decline in demand for our Seamap products and for marine leasing products. This could also cause customers to delay expansion or upgrade plans.

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. This arrangement did not have a material impact on our results of operations in the three or nine months ended October 31, 2013. While we do expect to deliver some equipment pursuant to this arrangement in the fourth quarter of fiscal 2014, we do not expect it to have a material effect on our results of operations for that period.

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.


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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 reduced the level of additions to our lease pool during the first nine months of fiscal 2014. During this period we added approximately $14.3 million of equipment to our lease pool, as compared to approximately $26.5 million in the first nine months of fiscal 2013. However, subsequent to October 31, 2013, we added approximately $29.0 million of new wireless recording equipment to our lease pool in response to specific demand from certain customers. We had not previously anticipated these additions. These purchases expand the availability of certain types of land recording equipment within our lease pool. We believe that, in addition to meeting the current specific demand from customers, this will allow us to expand our relationship with existing and new customers in various geographic regions in the future.

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, significant competition among these new and existing manufacturers has developed. This competition has, we believe, 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 October 31, 2013 and 2012, revenues from international customers totaled approximately $16.8 million and $15.0 million, respectively. These amounts represent 83% and 81% 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 October 31, 2013 and 2012 were approximately $20.3 million and $18.6 million, respectively. The increase between the two periods was due to higher lease pool, Seamap and other equipment sales, offset by lower leasing revenues. Revenues for the nine months ended October 31, 2013 and 2012 were approximately $68.5 million and $76.3 million, respectively. The decline between the nine-month periods was due primarily to lower leasing revenues and lower Seamap equipment sales, offset by higher other equipment sales. For the three months ended October 31, 2013, we incurred an operating loss of approximately $2.6 million, compared to an operating loss of approximately $1.9 million for the three months ended October 31, 2012. For the nine months ended October 31, 2013, we generated an operating profit of approximately $3.5 million, compared to $11.1 million in the nine months ended October 31, 2012. The decrease in operating profit in the three and nine months ended October 2013 as compared to the same periods a year ago was due primarily to lower leasing revenues. A more detailed explanation of these variations follows.


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Revenues and Cost of Sales

Equipment Leasing

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



                                          Three Months Ended           Nine Months Ended
                                              October 31,                 October 31,
                                          2013           2012          2013          2012
                                           ($ in thousands)             ($ in thousands)
  Revenue:
  Equipment leasing                     $   7,900      $ 11,062      $ 34,435      $ 42,952
  Lease pool equipment sales                3,169         1,873         6,188         7,409
  New seismic equipment sales                 294           181           569           619
  SAP equipment sales                       3,375           962        10,847         3,003

                                           14,738        14,078        52,039        53,983
  Cost of sales:
  Direct costs-equipment leasing            1,466         1,664         3,857         6,546
  Lease pool depreciation                   7,279         8,314        22,188        25,276
. . .
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