MIND Technology, Inc. (MIND) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. Welcome to the Mitcham Industries Fiscal 2013 First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, June 6, 2012. I would now like to turn the call over to Karen Roan of DRG&L. Please go ahead, Karen.

Thank you, Carrie. Good morning, and welcome to the Mitcham Industries' fiscal 2013 first quarter conference call. We appreciate all of you joining us today. Your hosts are Bill Mitcham, President and Chief Executive Officer; and Rob Capps, Executive Vice President and Chief Financial Officer. 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 via webcast by going to the Investor Relations' section of the company's website at www.mitchamindustries.com or by a recorded instant replay until June 13. 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, June 6, 2012, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of the new 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 Reform Act of 1995. These forward-looking statements are based on management's current expectations and included 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 filings with the SEC, including in its annual report on Form 10-K for the year ended January 31, 2012. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated into our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements. Now I'd like to turn over the call to Mitcham's President and CEO, Bill Mitcham.

Thanks, Karen, and good morning, everyone. And we'd like to thank all of you for joining us today for our fiscal 2013 first quarter conference call. Our logistics for this call are a little bit different than normal as I'm currently in Copenhagen, Denmark while Rob and Karen are back in Huntsville. I'm attending the annual convention of the European Association of Geoscientists and Engineers, or EAGE, which is one of our most important marketing activities for the year. So please forgive us if we seem a little disjointed or experience technical difficulties. I'll begin as usual by making a few general comments about the quarter. Rob will then discuss our financial performance and debt before I conclude with a discussion of our market outlook. We'll then turn the call -- open the call for your questions. So turning to the first quarter. It was another record performance for Mitcham as we posted the second-best quarter overall and the best first quarter performance in the history of this company. Our total revenues, leasing revenues, EBITDA, net income and earnings per share were the highest they've been for any first quarter in our history. And Seamap revenues reached a new record for any quarter. Both our leasing and Seamap revenues were in excess of -- were up in excess of 25%. EBITDA was up more than 30% from the first quarter a year ago. And up until fiscal 2012, our first quarter's always produced our highest leasing revenues. But that has been changing and recently it may not necessarily be the case going forward. We usually see very strong activity in Canada and Russia during the cold weather months. And this year's first quarter was no exception. However, due to our geographic expansion and a generally healthy market for seismic services globally, the seasonal fluctuations seem to be diminishing somewhat. As good as the first quarter results were, they could've been even better if not for just a couple of factors. Certain of our Seamap deliveries that have been scheduled for the first quarter were delayed until the second quarter due to our customers' requirements. In addition, we had expected certain leasing contracts in Colombia to kick off in the first quarter. And due to the extended heavy rains in Colombia, the underlying seismic programs have been delayed until later in the year. Together, we estimate those events represented about a little more than $4.5 million in postponed revenues and negatively impacted our first quarter earnings by about $0.18 per share. Occurrences such as these don't, in our opinion, indicate any change in the strong fundamentals that remain in our industry and in our company. They're just part of the seismic business, also known as lumpy. Our total revenues of $34.6 million in the quarter rose nearly 31% from a year ago due to the improvements in our core leasing business and the Seamap sales. Our core leasing revenues of $21 million were up more than 25% from a year ago driven by a strong winter season in Canada and improvement in our marine leasing business. In fact, we saw improvement over last year's first quarter in most of our leasing business. Seamap, our marine manufacturing segment, posted its best quarter ever in spite of the delayed shipments with revenues up more than 26% from last year's first quarter to $10.5 million. We sold 2 GunLink 4000s and 3 BuoyLink RGPS systems during the quarter along with weight collars and other related marine equipment. We also continued to see a steady revenue stream coming from ongoing support and service work on our installed base of products. With that, now I'll turn the call over to Rob, who'll give you a detailed review of our financial remarks. And after, as I said, after Rob's discussion, I'll return with some final remarks.

Okay. Thanks, Bill, and good morning, everybody. As usual, I'll begin by discussing the top line of each of our 2 segments, which is equipment leasing and Seamap. Then I'll follow up with the discussion of the profitability of each of the segments and then conclude with a discussion of our consolidated results and our financial position. First, let me review our equipment leasing segment, which includes not only our core leasing business, but also non-Seamap equipment sales such as occasional sales of our lease pool equipment, new seismic equipment that we acquire from third parties, sales of heli-transport equipment and sales of new Hydrographic and Oceanographic equipment from our Australian subsidiary, SAP. In our core leasing business, revenues in the first quarter were up 25% year-over-year to $21 million. We saw year-over-year improvement in most areas of the leasing business with Canada and marine leasing being the most significant. However, we also saw improvement in the U.S., Russia, Europe and South America. We had expected even more improvement in South America. However, due to the weather issues in Colombia that Bill mentioned, we have seen certain projects delayed until later in the year. Now in Latin America, the rainy season typically occurs during the late winter/early spring time period. So while there's nothing unusual about the seasonal time of the rain there, it has been unusually heavy this year. We estimate that the delayed leasing revenues related to this amount to about $2 million. As expected, and I think as we mentioned in the last quarter's call, we did see some softness in leasing revenues in certain areas as compared to the fourth quarter of fiscal 2012. Coming off a very strong fourth quarter, we had to test, repair and reposition a great deal of equipment during the first quarter. Due to that and the seasonal factors, we did experience lower leasing revenue sequentially primarily in the U.S., South America and in Europe. As Bill also mentioned, we do seem to be experiencing less seasonal fluctuation in our leasing business than in the past. That being said, seasonal fluctuations will continue. We do expect our second quarter leasing revenues to be sequentially lower from the first quarter as has been the case historically. Contracting to bid and acquiring activity in the leasing business continue to be good and to meet our overall expectations. Our sales of lease pool[ph] equipment increased to $2.3 million in this quarter compared to $335,000 in the same quarter last year. Other equipment sales, which include sales from SAP and heli-picker equipment were $747,000 in the first quarter compared to $1 million for the same quarter a year ago. We'll now turn to our Seamap segment, which again designs, manufactures and sells a variety of products and systems used in marine seismic applications. Seamap had it's best quarter ever with revenues up 26% to $10.5 million from $8.3 million at the same quarter a year ago and up 44% from the fourth quarter of 2012. During the quarter, we shipped 2 GunLink 4000 systems and 3 BuoyLink RGPS systems. Sales of streamer weight collars, spare parts and support and service work also continued to show solid results. As Bill told you earlier, additional deliveries had been scheduled but had to be delayed to our customers' requirements. These some odds and ends amounted to more than $2.5 million of delayed revenues, all of which has now been delivered. Now let me discuss the profitability of each of the segments. Gross profit for equipment leasing segment was $10.9 million in the first quarter compared to a gross profit of $9 million in the same quarter a year ago. The first quarter rev gross profit margin in the leasing segment was 45% compared to 50% of last year's first quarter. Now this change was due to higher depreciation costs arising from our investment of new equipment, as well as increased support costs attributable to the higher, leasing activity. Gross profit for our Seamap manufacturing business was $6 million for the first quarter compared to $4.8 million for the same quarter a year ago. This represents a gross profit margin of 55% and 57%, respectively. Now, this nominal difference was the result of changes in product mix. Our overall gross profit for the first quarter rose 21% to $16.9 million from $14 million in the same quarter a year ago. And the overall gross profit margin in the quarter was 49% compared to 53% in last year's -- in the same quarter a year ago. Now let me touch on just a few items in our other items in our P&L. Our general and administrative expenses for the first quarter were $5.3 million as compared to $4.6 million in the first quarter of last year. As a percentage of revenues, G&A expenses declined to 15.4% in this year's first quarter from 17.5% in last year's quarter. Our tax provision for the quarter was $2.6 million, which is an effective run -- tax rate of just under 24% compared to $2.4 million or about a 28% effective rate in the same quarter a year ago. Our effective tax rate is lower than the U.S. tax quarter rate primarily due to the effective lower tax rates in foreign jurisdictions. Our first quarter EBITDA was $19.8 million compared to $15 million in last year's first quarter or 57% of revenues in both periods. Our adjusted EBITDA, which excludes stock-based compensation expense, was $20 million this quarter as compared to $15.3 million in the same period last year. Now keep in mind that EBITDA and adjusted EBITDA are non-GAAP measures and are reconciled to reported income and cash provided by operating activities in the financial tables in yesterday's press release. Overall, we recorded net income of $8.5 million or $0.63 per diluted share in the first quarter of this year compared to $6.1 million or $0.58 per diluted share for last year's first quarter. Now we estimate that the approximately $4.5 million in delayed revenues that we've discussed resulted in lower net income in the first quarter of about $2.4 million or about $0.18 per diluted share. In addition, this year's first quarter did include the impact of the 2.3 million additional shares of common stock that were issued in our June 2011 public offering. Let me just make a few comments about our financial position and then I'll turn the call back over to Bill. During the first quarter, fiscal quarter, we added just under $16 million in new lease equipment. About $14 million of this relates to a purchase of used equipment we made late in the quarter. This equipment consists of approximately 15,000 stations or 45,000 channels of 3D component recording equipment and about 3,000 channels of single component equipment. But most of this equipment has not yet been deployed, excuse me. However, we were able to obtain the equipment at a very favorable price. This purchase gives us a very strong position of 3D component equipment, and we'd expect strong demand for it the later in the year, including for the Canadian winter season. For the balance of 2013, we expect to continue to selectively edge our lease pool base on industry trends, customer demand and opportunities that may arise. We currently expect our lease pool additions for all of fiscal 2013 to total between $35 million and $40 million. Mitcham's overall financial and liquidity position remains very strong. We continue to generate good cash flow from operations, which amounted to just about $17.9 million in the first quarter of fiscal 2013. At the end of the quarter, we had $50.1 million of working capital, and cash and cash equivalents of $17.5 million. As of April 30, 2012, we had about $19.2 million outstanding under our $35 million revolving credit facility. And with that, I'll turn things back over to Bill.

Thanks, Rob. As I said earlier, we are certainly pleased with our first quarter performance. The fundamentals of our industry remain very strong, and we're seeing healthy levels of exploration activity both in the U.S. and internationally. Speaking of internationally, as I said earlier in the call, I am in Copenhagen at our European show, the EAGE. And this is -- in 25 years of attending the show in Europe, this is absolutely one of the best shows I've ever been to in terms of the right people being here, in terms of the optimism here and people wanting to get jobs done. I tell you, we have been overrun at our booth talking to our customers. So our favorable outlook for fiscal 2013 is driven by the growing demand for oil in both developed and emerging economies, increased CapEx programs by the majors, independents, IOCs and NOCs, as well as the impact on oil prices have continued political instability in several oil-producing areas. In addition, the market for natural gas outside of North America certainly continues to create attractive opportunities. We continue to see steady activity in the oil- and liquid-rich plays in the North American land market. Also seeing indications for a strong winter season in Canada and Russia in the coming year, as several customers, as Rob said are already seeking to obtain commitments or bookings for equipment for the winter. Our marine leasing business continues to deliver good results, and we're likely to see that trend continue driven by healthy E&P spending and renewed activity in the Gulf of Mexico. Internationally, demand for land seismic acquisition continues to increase in Latin America, Europe, Pacific Rim and North Africa. As a result, we continue to expand the geographic breadth of our operations by establishing operating facilities in new locations. Our most recent expansion in Colombia, Hungary and Singapore are contributing to our fiscal 2013 performance. Activity in Latin America remains one of our best growth markets and should continue to be an active area of exploration to the next several years. We currently have over 35,000 channels deployed there and expect to pool more into that region during the year and add some new products, including Sercel UNITE cable-free system and DSU3 digital sensors. As the end of the first quarter revenues, from our international customers represented 82% of our consolidated results, excuse me, so we're well diversified geographically. We're extremely pleased with Seamap's record results and expect it to continue to be a strong performer going forward. Revenues from Seamap have increased over the last 3 fiscal years as we benefited both from equipping new-build vessels and from re-equipping older vessels with newer more efficient technology. We view the relative shortage of seismic vessels available as a positive sign because they should drive additional new-builds, which obviously means marine contractors are looking to upgrade technology in their existing fleet and add into their new fleets. These factors should combine to provide us the opportunity to install our GunLink and BuoyLink systems in more vessels, which in turn will help to add incremental sales and replacement parts, service and support work. Overall, we remain ideally positioned to capitalize on the growing demand for higher resolution imaging requiring greater density and a need for substantially larger channel counts on each crew. We have the world's largest total lease pool of seismic equipment strategically positioned across geographic areas that are projected to have high levels of seismic exploration activity on an ongoing basis. Based on our current outlook and our pipeline of business, we currently believe that fiscal 2013 will be another record year for Mitcham Industries. So that concludes my formal remarks. Carrie, we'll be happy to take any questions.

[Operator Instructions] And this is from Veny Alexandrov from Pritchard.

My first question, I guess, it's about the $4.5 million of revenues, which are postponed. We heard that $2.5 million of these are Seamap, and the other $2 million are in Colombia. Now so it's 2 parts question. Tell us about Colombia. You said that the project is going to start later in the year or the projects -- have they already started? And can we expect these revenues to be -- to hit Q2? And then in terms of Seamap, you said that it's already delivered, but should we consider these on top of the run rate for Seamap or just part of the Q2 run rate?

Bill, I'll grab those and you can jump in.

Yes, yes.

Veny, the Colombian question, the projects have not started yet. They still could start in the second quarter. It's kind of the fluid situation right now and, pardon the pun, with the rains. So we could see some impact from the second quarter that -- we don't know that for sure yet so -- because they haven't started yet. So we're just saying is there being -- what we're saying is because of the activity there, there's -- a lot of the contracts or a lot of the projects just have not started yet, so that's kind of a continuing situation. As far as Seamap, it is -- those things we mentioned have been delivered, as we mentioned. As far as adding to the run rate, they are incremental to what we had expected earlier. But I would emphasize that Seamap can be -- have very large fluctuations in this business based on how the deliveries happen. So I would caution you not to ignore that situation.

Well, based on the backlog that you have right now, do you think that $10 million is the new run rate? $10 million per quarter? Or we shouldn't go that far?

No, I don't think that's right, Veny. I think that's -- no.

Okay. And the second thing that I found very interesting is the comment about early indications in terms of strength in Canada. It's very early to talk about the next season in Canada. Can you give us more information? What makes you think that winter is going to be very strong there?

Well, as Rob said earlier in the call, Veny, we were able to purchase 15,000 -- a little over 15,000 stations of DSU3 at a very reasonable price. And although we've not put those into the work yet, we certainly know -- and part of the influence of us purchasing those was work for the winter season coming up in the Canadian market. Last year, we had -- Rob, you have to help me with this, total 25,000, is that right, 22,000?

That's about right.

We have -- yes, we own about 22,000 DSU3. And we could have probably put out another 8,000 to 10,000, maybe even 15,000 stations. We'll take care of that -- we've taken care of that situation. And because it's a small industry and people know what we do, we've had people already call and wanting to make commitments for the winter.

So it's based on your performance in previous years. You guys did so well that people are already talking to you about next year?

Absolutely.

Okay. If I may ask one last question, Europe, you were ramping up operations there. Is Europe performing up to your expectations? Are you still in the process of ramping up? What's happening over there?

Well, we're still renting equipment over here. Certainly, there's a little bit of financial turmoil as you know going on so there's a little bit of uncertainty. We don't have all the channels out that we have here. But we expect -- we've got several jobs bid. And we think that certainly after this show, we've -- there's a lot of positive outlook in European here -- in Europe here.

And I have Brian Uhlmer of Global Hunter.

Yes, I just have a couple of questions here. First off, I wanted to dig into the Seamap side and you're talking about visibility for builds. Do you feel that there's new-builds in the Q that you're already starting discussions with the operators yet that we'll start to see some new vessel awards that will -- they'll filter through to you? Or is it just kind of your outlook in the market? How close are we to seeing some new awards?

Well, I think it's a combination of that. Certainly, there's some -- there are some new vessels coming online that we already have forecast. And there's been quite a bit of traffic on the stand, talking about new-builds, talking about things. But understand from -- above -- those vessels don't go overnight. So it's not anything that would come out -- that would affect this year for sure. But looking out into 2013, we know there's some new vessels -- there's a number of new vessels coming out. So I say a number, but I'm not talking about a double handful, but there's certainly some new ones coming out.

Okay, good deal. Switching topics, can you update us on the Sercel agreement? And where you stand with that?

Yes, I think so. It's -- we are waiting for some final remarks to come back from them. We actually have a meeting, I think, scheduled, is it next week, Rob?

Yes, right.

Or the following week, over -- in the next couple of weeks.

Okay. And we have talked before that you were trying to potentially extend that into a -- it's -- the new synergy has been a little bit delayed. Are we looking at a multiyear agreement, you think, or just another one year lockup?

Well, I think, Brian, these things are typically being in a 2- to 3-year deals. And just kind of look at it historically, these things have typically expired. It has taken us a few months after expiration to get the new agreement in place. So this really is continuing on pretty much in their normal course. And in the meantime, we're continuing business as normal with them.

Okay, sounds good. And finally, when you talk about CapEx, it's a little bit -- you were kind opportunistic this quarter. Is that an accurate way of putting kind of a out-of-the-ordinary CapEx spend for this quarter? Or is there enough opportunity out there that you can -- that you'll be up this run rate? And I apologize if I missed your guidance, Rob, a few minutes ago if you already said it -- said that.

Yes, I think for the year, we're looking to be 35 to 40 as we sit here today. So certainly, there's -- it was a bit opportunistic in that we had a chance to get the DSU3s. But having said that, we did that because we saw a real demand out there and thought we can really put in the work. So it's a little bit of both, I'd say.

Okay. And you're renting the DSUs back to the same customer you bought them from? Or no?

No, no, no. And they've not yet been deployed.

Next, I do have a question from Georg Venturatos from Johnson Rice.

Just wanted to touch first on the Seamap side. Obviously, really impressive results out of that business. Obviously, you're seeing more demand and more visibility in the pipeline. But are you also seeing some benefit from that expanded space in the Singapore's facility? Or is it really just demand that's driving the better results recently?

Clearly, Georg, I think the demand is what's driving the results. But in order for us to really deliver on those -- that demand in a timely manner, that facility has been very critical for us. So without the demand solely it wouldn't do us much good, that we -- but on the other side of demand, it wouldn't do much good without the expanded facility.

Certainly. On the CapEx side -- and I know you ran through some of the purchases, if you could just give us a little more detail there. And then just update us on the total channel count you have right now.

Well, again we -- the purchase we made was about 15,000 stations of DSU3, which is 45,000 channels and about 3,000 channels of single channel 428 (sic) [428XL] equipment, those -- around $14 million for those combined. And our channel count is around 220, 225 right now, 220,000, 225,000 right now. So not different than we disclosed in the last call, I think.

And now I have Tyson Bauer from KC Capital on the line. [Operator Instructions]

A couple of quick questions. Your lease pool sales have been elevated now for 3 straight quarters at levels that typically you would do in an entire year. Anything unique or unusual that you may be running through that line item as opposed to just straight sales out of your lease pool?

Those are sales out of lease pool, so there's nothing unusual about that. We just happened to have opportunity to sell some older equipment. That's what we've been doing.

And the equipment that you are selling are fully depreciated?

Sometimes, yes. Sometimes, no. I mean it's generally highly depreciated, but not always fully. Some of them we sold this past quarter was not fully depreciated.

Okay. Rob, can you give us an update on where you stand and what the timeline is with the Canadian tax authority and the IRS?

We -- just to background -- we've had an ongoing tax audit with the Canadian tax people, which gets into a U.S. issue, which has been disclosed in the 10-Ks going back, couple of 3 years. We expect to have that resolved, that's the word I was looking for, any time now. And actually been expecting to have it resolved any time for a few weeks now or few months now. So it can happen tomorrow, it can happen next month.

And that would be -- once resolved the possibility of $8.5 million coming back into the fold?

No, that's not quite right. I think, again, as we've disclosed in the 10-K, that we have about $4.5 million to $5 million -- about $5 million of tax reserve, if you will, on the balance sheet. And a significant portion of that would be relieved or come back into income, should this be resolved as we think it will. And there's about $3.5 million of cash payments we've made to the Canadian tax authorities. And the majority of that would either be refunded or to be applied to current tax liabilities.

Got you. And final question, when you look at Q1 and you look at what you have projected going into the year for fiscal '13, is there any change to your annual budgeting or outlook as you've made those Seamap deliveries and you're expecting the $2 million in Latin America to be kind of added in to the end of their seismic year? So overall, is there any changes in your outlook?

No. I think overall, we remain very optimistic and feel pretty good about things. As Bill said, we expect this to be another record year.

[Operator Instructions] I do have David Starkey on the line from Morgan Stanley.

Could you give us an idea what you're planning to use this shelf offering for that you had filed here a few months back?

Rob?

Okay. We have no specific plans at this point. We thought it a prudent step as we did last year to put one in place. And just it was a good time to do it, and the audit was finished. We had sufficient time to do it. And so we decided, it's a prudent thing to do, but we have no specific plans.

Okay. That would be for potential acquisitions and just basically something that would drive or improve the long-term prospects for the company?

[indiscernible]

Sure, exactly right. I think it's pretty common now for many companies to have this little thing. It's just a prudent thing to have available. So you can act quickly if some opportunity does come up.

And again just to clarify, you do think over the next few quarter you should be able to get that $0.18 back over the rest of this year through the business? No change in the outlook for Colombian operations or anything like that?

Yes. As we said earlier, for the total year, we have no change in our overall outlook.

At this time, there are no further questions, so I will turn it back to management at this time.

Carrie, thank you very much. And we'd like to thank you, all, once again for joining us on the call and for your interest in Mitcham Industries. We look forward to talking to you again after the conclusion of the second quarter, and that wraps it up from here.

And thank you, all, for joining the Mitcham Industries' fiscal 2013 first quarter conference call. If you wish to listen to a playback of this conference, please dial 1 (866) 949-7821. You may now disconnect. Have a great day.