Mitcham Industries Inc. (NASDAQ:MIND)
Q4 2016 Earnings Conference Call
April 6, 2016 9:00 am ET
Robert Capps - Co-Chief Executive Officer, Chief Financial Officer
Guy Malden - Co-Chief Executive Officer, Executive Vice President, Marine Systems
Jack Lascar - Dennard Lascar Associates
Garrett Williams - Seaport Global
Tyson Bauer - KC Capital
Ross DeMont - Midwood Capital
Greetings and welcome to the Mitcham Industries fourth quarter conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Jack Lascar. Please go ahead, sir.
Thank you, Kevin. Good morning and welcome to the Mitcham Industries fiscal 2016 fourth quarter and year-end conference call. We appreciate all of you joining us today. Your hosts are Rob Capps, co-Chief Executive Officer and Chief Financial Officer, and Guy Malden, co-Chief Executive Officer and Executive Vice President of Marine Systems.
Before I turn over the call to management, I have a few items to cover. If you would like to listen to a replay of today’s call, it will be available for 90 days via webcast by going to the Investor Relations section of the company’s website at mitchamindustries.com or via recorded instant replay until April 20. Information on how to access the replay was provided in yesterday’s earnings release.
Information reported on this call speaks only as of today, Wednesday, April 6, 2016 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay.
Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company’s actual future results or performance to materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its findings with the SEC, including in its annual report on Form 10-K for the year ended January 31, 2016. Furthermore, as we start this call, please also refer to the statements regarding forward-looking statements incorporated in our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements.
I would like now to turn the call over to Guy Malden.
Thanks Jack, and good morning everyone. We would like to thank you for joining us today for our fiscal 2016 fourth quarter and year-end conference call. I’ll begin by making some general comments about the quarter. Rob will then discuss our financial results in more detail and address our market outlook. We will then open the call for questions.
Turning now to our fourth quarter results, our leasing business continues to operate in a highly challenging environment as low oil and gas prices still weigh on seismic exploration activity and competition amongst seismic equipment providers is intense. Our leasing revenues were down both year-over-year and sequentially due to the cancellation or postponement of many seismic exploration projects in the face of low commodity prices.
All geographic markets were affected, although to differing degrees. In the U.S., there is still very little exploration activity as oil prices remain depressed, making E&P companies highly cautious. Until corrective market forces have kicked in and fundamentals meaningfully improve, there is little motivation for them to seek out new prospects.
We experienced little benefit this year from the normal fourth quarter seasonal uptick in revenues from Canada and Russia as both of those markets were and remain extremely depressed. In fact, industry sources estimate that roughly five land seismic crews were operating in Canada this winter season compared to approximately 15 crews a year earlier and as many as 40 a few years ago. Given what we’re seeing so far in the first quarter, we expect the weakness in the Canadian market to continue.
The weakness in the Canadian market was no surprise to us. Russia and CIS, however, did disappoint us in the fourth quarter. At the time of our last quarterly call, customer inquiries and orders caused us to believe that the Russian winter season would be comparable to the prior year, if not better. As it turned out, the lack of capital, unstable oil prices, and the devaluation of the ruble have all contributed to numerous project cancellations. This resulted in a severely curbed season relative to our expectations.
While our European leasing business was down from last year, activity in this region has been more stable for us than in other parts of the world. Given the better relative performance of Europe, it has actually become the largest revenue contributor to our leasing results this quarter.
The Latin American region is still seeing reduced exploration activity due to unfavorable macroeconomic conditions. Though the region was sequentially up from the third quarter, this was coming off of severely depressed levels and is not indicative of a meaningful improvement in activity. That said, we have been actively bidding new projects in that region that could result in increased activity later this year or next year.
In Asia-Pacific, revenue was down from last year but up sequentially. Like most of the other regions, this is a consequence of the extremely low revenue levels we saw in the third quarter as things have been relatively quiet in Asia and activity has been well below levels we have seen in the past.
In the marine leasing market, the industry is still plagued with an excess supply of seismic equipment and opportunities to rent marine equipment are difficult to come by; however, we do in fact see some sporadic opportunities within this market, which we will continue to pursue. Overall, while we have seen some pockets of activity in our leasing business, specifically Alaska and Europe, the overall level of activity is severely depressed from historical levels.
Our manufacturing business has fared a bit better thus far in this downturn, however. While activity is no doubt down from previous years, we have benefited from the desire of many marine operators to upgrade to newer and more efficient technology. We also have seen some demand from geotechnical and hydrographic survey companies for our Seamap products. Results in this segment were up year-over-year in the fourth quarter due to a large system delivery but down sequentially as we had three large deliveries in the third quarter this year. Of course, the timing of deliveries can cause significant fluctuations in quarter to quarter results.
We are very excited about our recently acquisition of Klein Associates, which we have renamed Klein Marine Systems. Klein is a well-recognized name within the sonar industry and is a designer, manufacturer and worldwide distributor of sonar and waterside security systems to the military and commercial markets. We are quite familiar with the technology underlying Klein’s products, and our Australian subsidiary, SAP, has been one of Klein’s largest distributors in recent years. The engineering disciplines and challenges, as well as the manufacturing processes of Klein in our Seamap operation are very similar. We also see overlap among customers, particularly geotechnical and hydrographic survey companies.
We believe this acquisition provides us a number of opportunities for collaboration between Klein and Seamap, including shared engineering resources, manufacturing synergies, joint customer proposals, and new product development. Furthermore, Klein’s business provides us with a degree of diversification from the cyclical oil and gas service industry.
With that, let me turn the call over to Rob.
Okay, thanks Guy. Good morning everyone. I’ll give you a more detailed review of our financial results, then I’ll make some comments about our view of the market, current market, and our market outlook.
With the acquisition of Klein, we have re-evaluated and redefined our operating segments. We think these changes will help present a clearer picture of our financial results. Klein, our Seamap operations, and the product sales of SAP, our Australian subsidiary, now form our manufacturing and equipment sales segment. All of our leasing business, including lease pool equipment sales and some miscellaneous equipment sales, will constitute our leasing segment. The difference is product sales from SAP have previously been a part of our equipment leasing segment. Segment results for all periods presented in the earnings release yesterday and our 10-K to be filed either later today or tomorrow have been restated to reflect this new structure. We think you’ll find this new presentation provides improved transparency of our financial results.
As far as the specifics of the quarter, our leasing revenues in the fourth quarter were $3.8 million, down 61% from last year’s fourth quarter and down 12% sequentially. As Guy mentioned, we have seen reduced activity in most areas of our leasing business. Lack of meaningful business developing in Russia during the winter season was a particular disappointment and was unexpected, given the inquiries that we’d received from our customers there. Visibility in the leasing business remains limited and competition for available business is fierce. There are possibilities, however, for [indiscernible] business but do remain uncertain given the difficult market environment.
Our lease pool equipment sales revenues were $673,000 in the quarter compared to $296,000 in the same quarter last year. New seismic equipment sales, which includes miscellaneous [indiscernible] equipment but no longer includes SAP oceanographic and hydrographic equipment, were $181,000 compared to $242,000 in the same quarter a year ago.
Let me turn to the new manufacturing equipment sales segment, which again includes Seamap, Klein, and the product sales from SAP. Revenues for this segment as a whole totaled $6.8 million in the quarter compared to $4.8 million in the fourth quarter a year ago. Seamap revenues were $4.9 million in the quarter compared to $3.8 million in the fourth quarter last year. There was one large system delivery during this quarter as well as the usual sales of replacement parts, engineering services, and ongoing support and repair services. SAP product sales were $1.3 million this quarter compared to $1.1 million in the same period a year ago, while Klein contributed roughly half a million dollars, although I would note that the Klein acquisition was effective December 31, so January, or one month, was all that was included in this year-end results.
Let me talk a bit about the profitability of each of the segments. Gross profit in the equipment leasing segment was again strongly impacted by the high fixed costs of depreciation, which magnifies the negative impact of lower sales on our operating profit; thus, we reported a gross loss of $4.3 million compared to a loss of $303,000 in the fourth quarter of fiscal 2015 for this particular segment. We did have lower lease pool depreciation costs of $7 million this quarter versus $8.2 million a year ago due to reduced lease pool additions over the last two years. Our ongoing cost reduction and business rationalization efforts have nearly halved our direct leasing costs, which totaled about $1.1 million this quarter versus $2 million a year ago.
Fourth quarter gross profit for the manufacturing and equipment sales segment was $3.1 million compared to $2 million a year ago. This represents a gross profit margin of 46% and 42% respectively. The difference between the two periods in gross margin is primarily due to differences in product mix.
Our general and administrative expenses were approximately $4.7 million for the fourth quarter of this year, down from $6 million in last year’s fourth quarter. This represents a 21% decrease and is a result of our continuing efforts to bring our cost structure in line with reduced levels of activity. I’d point out, however, that the $4.7 million figure does include roughly $360,000 of transaction costs related to the Klein acquisition and about $250,000 in incremental Klein G&A cost.
Overall, our operating loss in the fourth quarter this year was $11 million compared to an operating loss of $7.7 million in the fourth quarter of fiscal 2015. During the fourth quarter, we had roughly $941,000 in foreign exchange losses incurred by subsidiaries overseas, which resulted from the strength of the U.S. dollar compared to local currencies.
During the fourth quarter, we also had a few unusual items I’d like to highlight. There are three unusual items I’d like to mention to you. The first, we had a $3.6 million impairment of intangible assets which relates primarily to Heli-Picker assets and goodwill related to our Seamap segment. We had a pre-tax charge of $1 million related to a provision for doubtful accounts receivable, which is based on our view of more challenging conditions in the industry in general as well as customer-specific factors. Finally, we had an approximately $18.1 million income tax-related charge--or charges totaling $18.1 million for income taxes. Specifically in that regard, we established a valuation allowance for the majority of our deferred tax assets which relate primarily to net operating loss carryovers in the United States and some other jurisdictions. The charge related to this valuation allowance was approximately $15.4 million. We also looked to deduct certain [indiscernible] tax credits rather than take them as a credit against future taxes, which resulted in an additional $2.6 million in deferred income tax expense. The impact of all this was an offset of what would normally have an income tax benefit, resulting in an approximately $14.7 million income tax expense in the quarter. I would point out that these tax benefits are not lost, we merely have established a valuation allowance for accounting purposes.
Our fourth quarter adjusted EBITDA was $566,000 compared to $747,000 in last year’s fourth quarter. We reported a net loss in the fourth quarter of $26.8 million or $2.23 a share. This compares to a net loss of $9.2 million or $0.76 per share in the fourth quarter a year ago.
Let me briefly just highlight a few of our full year results. For all of fiscal 2016, revenues were $51.8 million compared to $83.1 million in the fiscal 2015 year. Total gross profit for fiscal 2016 was $2.7 million compared to $23.3 million in fiscal 2015. General and administrative expenses were $19 million in fiscal 2016 compared to $25 million a year ago, reflecting cost reduction initiatives that were implemented during 2016 such as headcount and working hour reductions, some voluntary salary reductions, lower incentive compensation and lower travel cost. May I remind you that fiscal 2016 also includes the $360,000 of transaction costs related to the Klein acquisition. We reported a net loss of $38.7 million or $3.23 per share in fiscal 2016 compared to a net loss of $9.2 million or $0.74 a share in fiscal 2015.
Next, let me make just a few comments about our liquidity and balance sheet. Despite all this, Mitcham’s overall financial position remains strong. At the end of the fourth quarter, we had over $28 million of working capital that included cash and cash equivalents of about $3.8 million. We generated almost $15 million in cash flow from operating activities during fiscal 2016, and our full-year adjusted EBITDA for this year was $13.7 million, which results in free cash flow of about $11 million exclusive of the Klein acquisition, of course.
Throughout fiscal 2016, we were able to reduce our outstanding debt by $5.8 million despite adding $10 million in debt for the Klein acquisition, and we continued to reduce our borrowings subsequent to year-end. This brings our net debt, which is debt less cash balances, to about $15.7 million as of today. We’ve also recently reduced the commitment under our revolving credit facility from $40 million to $30 million in order to avoid commitment fees on amounts that we feel are unlikely to be utilized.
During fiscal 2016, we have purchased roughly $2.4 million in new lease pool equipment. Due to the ongoing difficulties in the seismic industry, we expect our lease pool additions for fiscal 2017 to be roughly $2 million, which will probably be limited to maintenance of our existing equipment and possibly some ancillary items that will enhance our ability to lease existing equipment.
Let me conclude my remarks with a discussion of the current market outlook. As we’ve said earlier, this overall seismic market remains very soft and we believe that low oil prices and a lack of seismic exploration projects will likely continue through fiscal 2017. The full-year leasing revenues are currently expected to be below fiscal 2016. Although the winter season is normally a strong benefit to our first quarter results, the low level of activity we’re seeing this year gives us little reason to anticipate any material upside coming from Russia or Canada. There has been some steadier activity in Alaska; however, this will not offset the shortfall from other areas. We also expect Europe to show ongoing activity, so although there is the prospect for a sequential improvement in the leasing quarter, we expect Q1 to be very similar to the fourth quarter.
North America seems to be the most negatively impacted by the decline in activity. With very few crews working in Canada for the winter season and our expectations of weak activity in the U.S., the region will likely not fare well in the near term. In Latin America, while activity has been subdued, we are seeing and we have recently bid on a number of projects in that region for later in the year in areas such as Colombia, Bolivia and Brazil; however as you will recall, there continue to be logistical, regulatory and security hurdles in that region that do add some uncertainty to the picture.
Russia has become more uncertain due to the many project cancellations brought on by low oil prices and a weak ruble. The European market should continue to present some opportunities for us despite being impacted by the same factors weighing on other oil markets. As we said earlier, land activity in Europe has shown greater stability than other markets and we are hopeful that this will continue to be the case for fiscal 2017.
Although the timing of revenues is dependent upon customer delivery schedules, the combined backlog for Seamap, Klein and SAP product sales amounts to about $8.7 million versus about $7.7 million a year ago. We’re also pursuing additional opportunities in Asia for equipping of hydrographic survey vessels. Some of this may include products from both Seamap and Klein.
We are continuing to work on getting Klein and Seamap more closely aligned in pursuing new projects. We are very encouraged by our early efforts to have both engineering organizations work together. In the meantime, we continue to rationalize our leasing business while pursuing opportunities wherever they present themselves.
We are continuing to explore ways to align our cost structure with the current environment. As a result, we have decided to close our branch in Peru. We think all opportunities within Latin America can be served more effectively from our branch in Colombia, therefore this does not compromise our ability to pursue any projects that may arise.
We have seen a number of potential opportunities arise in the eastern hemisphere. There is uncertainty surrounding many of these projects and timing is uncertain; nonetheless, we are focused on vetting the opportunities and pursuing this business as appropriate.
Now in conclusion, although we do not expect leasing conditions to improve meaningfully in fiscal 2017, we do remain confident in our ability to handle this prolonged downturn. While this particular downturn has proven to be exceptionally lengthy, our capital structure, balance sheet, cash flow focus, and adaptability have enabled us to not only weather these difficult times but also to diversify and strengthen our business. In this environment, we think there are opportunities to reshape and expand our manufacturing and equipment sales business as well as our leasing business. We will continue to pursue such opportunities and intend to emerge from this downturn better positioned with greater capabilities.
That concludes our formal comments. Kevin, we’d be happy to open the call up for questions now.
Our first question today is coming from Ken Sill from Seaport Global. Please proceed with your question.
Hi guys, this is Garrett William on behalf of Ken Sill. Just a couple quick questions. I see there is an other expense of around $900,000. What exactly is included in that?
That is primarily foreign exchange losses in the quarter in foreign subsidiaries.
Okay, great. Thank you. Then just a quick follow-up, do you guys have any guidance on SG&A moving forward near term?
Not specifically. I think you have to kind of normalize the fourth quarter numbers for the unusual items we’ve talked about, so you’ll see that if you kind of apples to apples to the third quarter, we’re actually down slightly. But you do need to factor in the fact of Klein, so there will be ongoing G&A from Klein, so you kind of need to--I think you can kind of back into the numbers if you annualize the Klein one-month numbers.
Okay, great. Thank you guys. I’ll turn it back.
Thank you. As a reminder, it’s star, one to be placed in the question queue. Our next question is coming from Tyson Bauer from KC Capital. Please proceed with your question.
Good morning, gentlemen.
A quick question on kind of your cash flow outlook overall for ’17, and also a big component of that is your lease pool depreciation, how much that tails off as we go through the year. So if you want to touch on those two subjects?
Well, we are confident that we’ll continue to be cash flow positive this year. We’ve produced positive adjusted EBITDA, and as we said, our capital expenditures will be minimal, so we would expect to continue to generate free cash flow and to pay down debt. As far as lease pool depreciation, it will continue to tail off. I think if you kind of look at the comparison from fiscal ’15 to fiscal ’16, that gives you a sense of the tail-off, and I think that will continue through ’17.
Okay. Your doubtful accounts now the last three quarters, $2.2 million, roughly 18% of what your lease revenues have been for the last three quarters. I’m guessing most of those are in that leasing segment where you’re taking those account write-offs. Are we basically to the point where now you’re confident in what you have left in those accounts receivable, or is this the climate we’re in now where we’re going to see a higher percentage of doubtful accounts going forward?
We feel like we have it where it needs to be now. I’d point out that a lot of what we’ve provided for are not necessarily revenues coming from the last few quarters. We have a handful of customers in which we have agreed to extend the payment terms for various reasons and under various scenarios, and a great deal of our provision relates to those situations which, just given the nature of the industry right now, we think is prudent. We think we’re where we need to be.
Okay, thank you.
Thank you. As a reminder, please press star, one if you’d like to ask a question today. Our next question is coming from Ross DeMont from Midwood Capital. Please proceed with your question.
Good morning, guys. How are you?
A quick question. Now that we’ve sort of re-configured how we’re presenting equipment manufacturing and sales, can you talk about--I guess we’re adding Klein in there effectively. Are we now talking about sort of $35 million-ish of revs, and I guess, what type of margins should we expect out of that division or that segment now that we’ve got Klein in there?
Yes, that’s roughly right from a revenue standpoint. From a margin standpoint, Klein and Seamap have very similar gross margins. The SAP piece does have lower margin - that’s kind of a 20, 25% margin business, so I think if you blend that all together, it’s going to be pretty comparable, maybe down a couple or three points from what we’ve seen historically.
Okay, that’s great. Then on seasonality and equipment leasing, obviously historically the winter season has been strong for us with Canada and Russia. Now that those are particularly weak, should we expect that seasonality will look different? Is it possible it would even reverse itself?
I think it’s not likely to reverse itself, given the environment, but I think it will look different. I think the seasonality just doesn’t exist this year, so I think it’s more steady.
Okay, that’s--well, maybe one more, which is obviously we made a pretty nice acquisition here. Are we still on the lookout for more, or do you think Klein satisfies what we’ve been sort of looking for and hoping for?
Well, I think we’re always looking for something, but we’re going to be pretty cautious about what we do. I mean, capital is precious these days, but we’re always on the lookout and we think there are things we can do to further expand that business.
Okay, thanks so much.
Thank you. Once again, that’s star, one to be placed in the question queue.
We have reached the end of our question and answer session. I’d like to turn the floor back over to management for any further or closing comments.
We’d just like to thank everyone for joining us on the call today and for your interest in Mitcham, and we look forward to talking to you again at the conclusion of our first quarter. Thanks very much.
Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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