We operate in two segments, equipment leasing ("
Equipment Leasing") and equipment manufacturing. Our equipment leasing operations are conducted from our Huntsville, Texasheadquarters and from our locations in Calgary, Canada; Brisbane, Australia; Ufa, Bashkortostan, Russia; Budapest, Hungary; Singapore; Bogota, Colombia; and Lima, Peru. Our Equipment Leasingsegment 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 Peruand Colombia. Our equipment manufacturing segment is conducted by our Seamapsubsidiaries and, therefore, is referred to as our "Seamap" segment. Seamapoperates from its locations near Bristol, United Kingdomand in Singapore. Management believes that the performance of our Equipment Leasingsegment 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 Seamapsegment 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, 2014 2013 2014 2013 (in thousands) (in thousands)
Revenues: Equipment Leasing
$ 11,836 $ 13,937 $ 31,508 $ 37,301Seamap 8,008 7,042 14,205 10,976 Inter-segment sales (299 ) (84 ) (436 ) (91 ) Total revenues 19,545 20,895 45,277 48,186 Cost of sales: Equipment Leasing 12,218 13,119 24,166 24,162 Seamap 4,230 3,602 6,902 5,311 Inter-segment costs (140 ) (126 ) (271 ) (184 ) Total cost of sales 16,308 16,595 30,797 29,289 Gross profit 3,237 4,300 14,480 18,897 Operating expenses: General and administrative 6,673 6,048 12,792 12,087 Depreciation and amortization 560 378 912 753 Total operating expenses 7,233 6,426 13,704 12,840 Operating (loss) income $ (3,996 ) $ (2,126 ) $ 776 $ 6,057EBITDA (1) $ 5,525 $ 6,672 $ 19,568 $ 22,420Adjusted EBITDA (1) $ 5,822 $ 6,959 $ 20,264 $ 22,973Reconciliation of Net income to EBITDA and Adjusted EBITDA Net (loss) income $ (3,347 ) $ (693 ) $ 390 $ 5,614Interest (income) expense, net 85 (160 ) 200 (157 ) Depreciation and amortization 9,463 7,798 18,545 15,624 (Benefit) provision for income taxes (676 ) (273 ) 433 1,339 EBITDA (1) 5,525 6,672 19,568 22,420 Stock-based compensation 297 287 696 553 Adjusted EBITDA (1) $ 5,822 $ 6,959 $ 20,264 $ 22,97312
-------------------------------------------------------------------------------- Table of Contents Reconciliation of Net cash provided by operating activities to EBITDA Net cash provided by operating activities
$ 5,092 $ 7,571 $ 19,150 $ 15,961Stock-based compensation (297 ) (287 ) (696 ) (553 ) Changes in trade accounts, contracts and notes receivable (291 ) (3,738 ) (759 ) 1,239 Interest paid 256 16 392 82 Taxes paid , net of refunds (179 ) 2,246 1,376 3,625 Gross profit from sale of lease pool equipment 856 1,560 1,563 2,058 Changes in inventory (241 ) (317 ) (416 ) 1,028 Changes in accounts payable, accrued expenses and other current liabilities and deferred revenue (3,420 ) (50 ) (3,384 ) (2,224 ) Changes in prepaid expenses and other current assets 3,582 (196 ) 2,239 1,382 Other 167 (133 ) 103 (178 ) EBITDA (1) $ 5,525 $ 6,672 $ 19,568 $ 22,420
(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
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.
Equipment Leasingsegment, 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, 2014were 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 Seamapsegment. These amounts are reflected in the accompanying condensed consolidated financial statements at the cost to our Seamapsegment, 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 Asiaand Australia.
Seismic equipment leasing is normally susceptible to weather patterns in certain geographic regions. In
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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 Asiaand 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 Americaand 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 Leasingsegment 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 Seamapsegment designs, manufactures and sells a variety of products used primarily in marine seismic applications. Seamap'sprimary 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). In May 2014, Seamappurchased two product lines from ION Geophysical Corporation ("ION"). These product lines consist of the Digishot™ energy source controller and the Sleeve Gun energy sources, (, collectively, the "ION Source Products"). Seamap'sbusiness is generally not impacted by seasonal conditions, as is the case with our land leasing operations. However, Seamapmay 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. The seismic industry is, in our opinion, experiencing a period of reduced demand and activity. This is evidenced by the publically announced financial results of some seismic contractors and seismic equipment suppliers. This industry has historically been cyclical and we believe we are currently experiencing a temporary decline in seismic exploration activity. The decline in activity is not uniform across all segments or geographic regions. In some areas, such as North American land and world-wide marine, activity is very subdued. However, in other areas, such as Europeand South America, we have seen an increase in activity over the past twelve months. Thus far in the fiscal year ending January 31, 2015("fiscal 2015") our land leasing activity in Latin Americahas been above that of the fiscal year ended January 31, 2014("fiscal 2014"). However, in the second quarter of fiscal 2015, we did experience a pause in activity in Colombiawhich we expect to continue through the third quarter of fiscal 2015. The seismic operators operating in Latin America, particularly Colombia, have been able to resolve some of the permitting and community relations issues that have plagued that region in recent years. However, this remains a difficult operating environment for our customers and we expect project delays and cancellations to occur from time to time because of this. Based on our discussions with customers and others in the industry, we believe there continues to be considerable demand for seismic services and equipment in Latin America, including Colombia, Bolivia, Braziland other areas. Therefore, we remain optimistic about the future of our land leasing operations in Latin America. Land leasing activity in the United Stateshas remained quite weak in fiscal 2015. 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 Statesand the diversion of exploration budgets to drilling programs rather than seismic exploration. We do expect to see periodic improvements in this area due to a limited number of significant projects that are planned. However, there are no clear indications of a general improvement in such seismic exploration activity in the United Statesin the near term. 14
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Europehas improved considerably in fiscal 2015 as compared to fiscal 2014. We are optimistic that this improved level of activity will continue; however, political instability, fiscal issues and environmental concerns remain a concern and could negatively impact this activity. As the seismic industry in Russiais generally seasonal, most seismic projects are scheduled for the winter season, which encompasses our fourth quarter and first quarter. Based on preliminary discussion with our customers we expect the overall level of activity in Russiathis winter to be comparable to last winter. However, the economic and trade sanctions imposed by the United Statesand the European Unionhave impacted our ability to move certain equipment into Russia. Based on our understanding of the sanctions as currently imposed, we believe that we will be able to export equipment to Russiaof a type, and in quantities, comparable to last winter. However, should additional sanctions be imposed or existing sanctions be interpreted differently from our understanding, our business in Russiain the coming winter season could be materially impacted. Land seismic activity in Canadalast winter was materially below that of prior years. Many of the factors impacting seismic exploration activity in the United Statesalso impact Canada. It is uncertain at this time if there will be any improvement in activity in Canadain the coming winter season. We have recently experienced an improvement in demand for our down hole seismic tools and have enjoyed a number of longer term projects. 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; however, we do expect it to continue throughout the balance of fiscal 2015. The economic and trade sanctions imposed by the United Statesagainst Russiahave negatively impacted our marine rental business. During the second quarter of fiscal 2015, we were unable to complete a long-term rental arrangement with a Russian marine contractor as the United States Department of Commercedid not issue an export permit for the equipment to be rented. In the past, export permits for this equipment had been issued as a matter of course. The market for products sold by Seamapand 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 Seamapbusiness has benefited from equipping new-build vessels and from re-equipping older vessels with newer, more efficient technology. In addition, as Seamaphas 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, this could cause a decline in demand for our Seamapproducts and cause customers to delay expansion or upgrade plans. We believe the acquisition of the ION Source Products will contribute to Seamap'sresults over the balance of fiscal 2015. In addition, we believe the customer relationships we acquired in this transaction will result in additional markets for Seamap'sother products, including GunLink and BuoyLink. 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. Due to the recent softening in demand in our leasing business, we have reduced the amount of additions we plan to make to our lease pool during fiscal 2015. During the first six months of fiscal 2015, we added approximately $9.4 millionof equipment to our lease pool. For all of fiscal 2015 we expect additions to our lease pool to total approximately $15.0 million, as compared to approximately $49.0 millionin fiscal 2014. We expect additions in the remainder of fiscal 2015 to consist primarily of used land recording equipment that we can acquire at attractive prices. 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. 15
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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, 2014and 2013, revenues from international customers totaled approximately $16.5 millionand $18.6 million, respectively. These amounts represent 84% and 89% of consolidated revenues in each of those respective periods. 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, 2014and 2013 were approximately $19.5 millionand $20.9 million, respectively. The decrease between the two periods was due to lower lease pool equipment sales, and other equipment sales, offset by higher leasing revenues and Seamapequipment sales. Revenues for the six months ended July 31, 2014and 2013 were approximately $45.3 millionand $48.2 million, respectively. The decrease between the two periods was due primarily to lower leasing revenues, lease pool equipment sales and other equipment sales, offset by higher Seamapequipment sales. For the three months ended July 31, 2014, we incurred an operating loss of approximately $4.0 million, compared to an operating loss of approximately $2.1 millionfor the three months ended July 31, 2013. For the six months ended July 31, 2014, we generated an operating profit of approximately $776,000, compared to $6.1 millionfor the six months ended July 31, 2013. The decrease in operating profit in the three and six months ended July 31, 2014as compared to the same periods a year ago was due primarily to lower revenues and higher lease pool depreciation. A more detailed explanation of these variations follows.
Revenues and Cost of Sales
Revenue and cost of sales from our
Equipment Leasingsegment were as follows: Three Months Ended Six Months Ended July 31, July 31, 2014 2013 2014 2013 ($ in thousands) ($ in thousands) Revenue: Equipment leasing $ 8,226 $ 6,442 $ 24,387 $ 26,535Lease pool equipment sales 1,285 2,119
New seismic equipment sales 347 158 944 275 SAP equipment sales 1,978 5,218 3,791 7,472 11,836 13,937 31,508 37,301 Cost of sales: Direct costs-equipment leasing 1,131 1,119
Lease pool depreciation 8,896 7,438
Cost of lease pool equipment sales 429 559 823 961 Cost of new seismic equipment sales 267 121 530 200 Cost of SAP equipment sales 1,495 3,882 2,868 5,701 12,218 13,119 24,166 24,162 Gross profit
$ (382 ) $ 818 $ 7,342 $ 13,139Gross profit % (3 )% 6 % 23 % 35 % 16
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Equipment leasing revenues increased approximately 28% in the second quarter of fiscal 2015 from the second quarter of fiscal 2014 due primarily to higher land leasing revenues in
Europe, the Pacific Rim, Asiaand Africaand higher down hole equipment leasing revenue. These increases were partially offset by lower marine and United Statesland leasing revenues. For the first six months of fiscal 2015, equipment leasing revenues declined approximately 8% from the first six months of fiscal 2014 primarily due to declines in land leasing in Canada, the United Statesand in marine leasing. Partially offsetting the decline in the six month periods was improved land leasing revenue in Russia, Europe, the Pacific Rim, Asiaand Africa, as well as higher down hole equipment leasing revenue. We had expected higher leasing revenues in the second quarter of fiscal 2015, but two projects in Latin Americadid not begin when anticipated. One of those projects commenced in August and the second is expected to begin in September. We expect improved leasing revenues in the third quarter of fiscal 2015 due to the impact of these projects and projects in Europeand the United Statesthat are expected to begin in the third quarter. We have seen an increase in demand in the Pacific Rimand have deployed additional land equipment to that region. We also have benefited from on-going projects in the Middle East. We believe the increase in down hole equipment leasing reflects the shift towards greater drilling and development expenditures. From time to time, we sell equipment from our lease pool based on specific customer demand and as opportunities present themselves in order to redeploy our capital in other lease pool assets. Accordingly, these transactions tend to occur sporadically and are difficult to predict. Often, the equipment that is sold from our lease pool has been in service, and therefore depreciated, for some period of time. Accordingly, the equipment sold may have a relatively low net book value at the time of the sale, resulting in a relatively high gross margin from the transaction. The amount of the margin on a particular transaction varies greatly based primarily upon the age of the equipment. The gross profit from sales of lease pool equipment for the three months ended July 31, 2014and 2013 was approximately $856,000and $1.6 million, respectively. For the first six months of fiscal 2015 and 2014, gross profit from sales of lease pool equipment was approximately $1.6 millionand $2.1 million, respectively. We expect to continue to sell lease pool equipment from time to time. We regularly sell new seismic equipment, including heli-picker equipment that we produce. Heli-picker equipment sales are generally concentrated in the fourth quarter of our fiscal year. The gross profit from sales of new seismic equipment for the three months ended July 31, 2014and 2013 was approximately $80,000and $37,000, respectively. The gross profit from sales of new seismic equipment for the six months ended July 31, 2014and 2013 was approximately $414,000and $75,000, respectively. SAP regularly sells new hydrographic and oceanographic equipment and provides system integration services to customers in Australiaand throughout the Pacific Rim. For the three months ended July 31, 2014, SAP generated gross profit of approximately $483,000from these transactions as compared to approximately $1.3 millionfor the three months ended July 31, 2013. For the six months ended July 31, 2014, SAP generated gross profit of approximately $923,000from these transactions as compared to approximately $1.8 millionfor the six months ended July 31, 2013. Sales of equipment by SAP can vary significantly from period to period based upon the delivery requirements of customers, which are often times governmental agencies in the Pacific Rim. Direct costs related to equipment leasing were approximately 14% and 17% of leasing revenues in the three months ended July 31, 2014and 2013, respectively. The higher percentages for fiscal 2014 periods reflect the effect of the sub-lease of certain equipment. For the six months ended July 31, 2014, direct costs were approximately 10% of leasing revenues, as compared to approximately 9% in the six months ended July 31, 2013. The relationship between direct costs and leasing revenues reflect certain costs that are generally fixed and do not fluctuate with the level of leasing revenues.
For the three and six months ended
Equipment Leasingsegment generated gross loss of approximately $382,000in the second quarter of fiscal 2015, as compared to a gross profit of approximately $818,000in the second quarter of fiscal 2014. For the six months ended July 31, 2014, the gross profit from our Equipment Leasingsegment was approximately $7.3 million, 23% of segment revenues, as compared to $13.1 million, 35% of segment revenues, in the six months ended July 31, 2013. 17
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Revenues and cost of sales from our
Three Months Ended Six Months Ended July 31, July 31, 2014 2013 2014 2013 ($ in thousands) ($ in thousands) Equipment sales
$ 8,008 $ 7,042 $ 14,205 $ 10,976
Cost of equipment sales 4,230 3,602 6,902
5,311 Gross profit
$ 3,778 $ 3,440 $ 7,303 $ 5,665Gross profit % 47 % 49 % 51 % 52 % The sale of Seamapproducts, while not generally impacted by seasonal factors, can vary significantly from quarter to quarter due to customer delivery requirements. In the three months ended July 31, 2014, we shipped one digital source controller system and two RGPS positioning systems. Also, during that same period, we generated approximately $900,000in revenue related to the ION Source Products. Other revenues for this segment were related to the sale of other products and spare parts as well as support, engineering, training and repair services. In the three months ended July 31, 2013, we shipped one source controller system and two RGPS positioning systems. In the six months ended July 31, 2014, we shipped two source controller systems and three RGPS positioning systems. In the six months ended July 31, 2013, we shipped one digital source controller system and one RGPS positioning systems. Changes in product prices did not contribute materially to the difference in sales between the periods. We expect to ship further source controller and RGPS positioning systems in the balance of fiscal 2015. However, due to the softness and uncertainty in the marine seismic market, our customers may seek to delay or postpone some deliveries. The gross profit margin from the sale of Seamapequipment varies between the fiscal 2015 and fiscal 2014 periods primarily due to slight changes in product mix and the impact of sales related to the ION Source Products. The majority of these sales during the second quarter of fiscal 2015 were fulfilled by ION pursuant to a transition services arrangement. We believe this arrangement, which was temporary, was relatively inefficient and resulted in higher costs than we expect to incur going forward. As of August 2014the transition and integration of the ION Source Products into Seamap'soperations was essentially complete. Operating Expenses General and administrative expenses for the three months ended July 31, 2014were approximately $6.7 million, compared to approximately $6.0 millionfor the three months ended July 31, 2013. Such expenses for the six months ended July 31, 2014were approximately $12.8 million, compared to approximately $12.1 millionfor the six months ended July 31, 2013. General and administrative expenses in the three months ended July 31, 2014included approximately $190,000of expenses related to the acquisition of the ION Source Products. Included in general and administrative expenses for the three months ended July 31, 2014and 2013 is stock-based compensation expense of approximately $297,000and $287,000, respectively. For the six months ended July 31, 2014and 2013, stock-based compensation expense amounted to approximately $696,000and $553,000, respectively. In addition, in the three and six months ended July 31, 2013, we recouped certain engineering and development costs pursuant to customer development arrangements, resulting in lower general and administrative expenses as compared to the same periods in fiscal 2015.
Other Income (Expense)
Net interest expense for the three months ended
July 31, 2014was approximately $85,000, as compared to net interest income of approximately $160,000for the three months ended July 31, 2013. For the six months ended July 31, 2014, net interest expense was approximately $200,000, as compared to net interest income of approximately $157,000for the six months ended July 31, 2013. This reflects higher average borrowings under our revolving credit agreement and increased costs associated with the facility, including commitment fees and costs. Other income and other expense relate primarily to foreign exchange losses and gains incurred by our foreign subsidiaries and branches. These entities have functional currencies other than the U.S. dollar but in many cases hold U.S. dollar cash balances and have accounts receivable and accounts payable denominated in U.S. dollars. As the U.S. dollar fluctuates in value against each subsidiary's functional currency, the subsidiary can incur a foreign exchange gain or loss, although the value of these amounts in our consolidated financial statements may not have changed materially. In the three months ended July 31, 2014, we had net foreign exchange gain of approximately $58,000, compared to approximately $1.0 millionin the three months ended July 31, 2013. In the six months ended July 31, 2014, we had net foreign exchange gain of approximately $247,000, compared to approximately $739,000in the six months ended July 31, 2013. These net losses and gains resulted primarily from fluctuations in the value of the Singaporedollar, Canadian dollar, Australian dollar, Colombian peso and Russian ruble versus the U.S. dollar. 18
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Provision for Income Taxes
Our tax provision for the three months ended
July 31, 2014was a benefit of approximately $676,000, which is an effective tax rate of approximately 17%. For the three months ended July 31, 2013, our tax provision was a benefit of approximately $273,000, which is an effective rate of approximately 28%. For the six months ended July 31, 2014, our tax provision was approximately $433,000, which is an effective rate of approximately 53%. For the six months ended July 31, 2013, our tax provision was a benefit of approximately $1.3 millionwhich is an effective rate of approximately 19%. Our annual effective tax rate differs from the United Statesstatutory rate primarily due to the effect of lower tax rates in foreign jurisdictions and the effect of foreign withholding taxes.
Liquidity and Capital Resources
Our principal source of liquidity and capital in recent periods has been cash flows provided by operating activities, our predecessor revolving credit facility and our Credit Agreement. The principal factor that has affected our cash flow from operating activities is the level of oil and gas exploration and development activities as discussed above. We believe that our liquidity needs for the next 12 months will be met from cash on hand, cash provided by operating activities and from proceeds of our Credit Agreement, taking into account the possible restrictions on funds from our foreign subsidiaries. However, should our needs for liquidity increase, such as for the purchase of additional lease pool equipment or to make an acquisition, we may seek to issue other debt or equity securities. We have on file with the
SECa shelf registration statement pursuant to which we may issue from time to time up to $150 millionin common stock, warrants, preferred stock, debt securities or any combination thereof. We currently have no plans to issue any such securities.
The following table sets forth selected historical information regarding cash flows from our Consolidated Statements of Cash Flows:
For the Six Months Ended July 31, 2014 2013 (in thousands) Net cash provided by operating activities
$ 19,150 $ 15,961Net cash used in investing activities (26,048 ) (5,215 ) Net cash provided by (used in) financing activities 991
(5,296 ) Effect of changes in foreign exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
July 31, 2014, we had working capital of approximately $48.0 million, including cash and cash equivalents of approximately $9.4 million, as compared to working capital of approximately $49.7 million, including cash and cash equivalents and restricted cash of approximately $15.2 million, at January 31, 2014. The decrease in working capital resulted primarily from investing activities during the first six months of fiscal 2014, partially offset by working capital generated from operations. Cash Flows from Operating Activities. Net cash provided by operating activities was approximately $19.2 millionin the first six months of fiscal 2015 as compared to approximately $16.0 millionin the first six months in fiscal 2014. This increase resulted primarily from higher collections of accounts receivable in the fiscal 2015 period. Cash Flows from Investing Activities. Net cash flows used in investing activities for the six months ended July 31, 2014included purchases of seismic equipment held for lease totaling approximately $13.7 million, as compared to approximately $7.8 millionin the six months ended July 31, 2013. There was approximately $3.4 millionin accounts payable at July 31, 2014related to lease pool purchases. At January 31, 2014, there was 19
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$7.7 millionin accounts payable related to lease pool purchases. Accordingly, additions to our lease pool amounted to approximately $9.4 millionin the first six months of fiscal 2015, as compared to approximately $4.8 millionin the first six months of fiscal 2014. We expect additions to our lease pool for all of fiscal 2015 to total approximately $15.0 million. We expect to fund these acquisitions with a combination of cash on hand, cash flow generated from operating activities and borrowings under our Credit Agreement.
In the first six months of fiscal 2015 we utilized
In the first six months of fiscal 2015, proceeds from the sale of lease pool equipment totaled approximately
$2.4 million, compared to approximately $3.0 millionin the first six months of fiscal 2014. We generally do not seek to sell our lease pool equipment on a regular basis, but may do so from time to time. In particular, we may sell lease pool equipment in response to specific demand from customers if the selling price exceeds the estimated present value of projected future leasing revenue from that equipment. Accordingly, cash flow from the sale of lease pool equipment is unpredictable. Cash Flows from Financing Activities. Net cash provided by financing activities was approximately $991,000in the first six months of fiscal 2015 compared to net cash used in financing activities of approximately $5.3 millionin the first six months of fiscal 2014. During the six months ended July 31, 2014, we had net borrowings of approximately $3.0 millionunder the Credit Agreement. This amount included borrowings of $10.0 millionused in connection with the acquisition of the ION Source Products. During the six months ended July 31, 2013, we had net repayments under our predecessor revolving credit facility of approximately $4.0 million. In April 2013, our Board of Directors authorized a share repurchase program for up to 1.0 million shares of our common stock. In the six months ended July 31, 2014, we purchased 158,400 shares of our common stock at a total cost of approximately $2.2 million, as compared to 102,900 shares at a cost of approximately $1.5 millionin the six months ended July 31, 2013. Since the inception of the repurchase program we have purchased a total of 306,300 shares pursuant to this program, leaving the purchase of a further 693,700 shares authorized under the existing program. We believe that the repurchase of our shares is an effective use of our capital and expect to make further purchases as market and operating conditions warrant. In connection with the temporary importation of our lease pool equipment into some countries we are required to post import bonds with the customs authorities of that country. These bonds are normally provided by local insurance, surety companies or local banks. In some cases, the party issuing the bond requires that we post collateral to secure our obligations under the bonds. As of July 31, 2014, we had provided stand-by letters of credit totaling approximately $4.0 millionunder the Credit Agreement related to such obligations. On August 2, 2013, we entered into a syndicated $50 million, secured, three-year revolving credit agreement (the "Credit Agreement") with HSBC Bank USA, N.A.("HSBC") as administrative agent. The Credit Agreement replaced our existing $50 millionrevolving credit agreement with First Victoria National Bank. Proceeds from the Credit Agreement may be used for working capital and general corporate needs. Up to $10.0 millionof the Credit Agreement may be used to secure letters of credit. The Credit Agreement provides for Eurodollar loans, which bear interest at the Eurodollar base rate, plus a margin of from 2.50% to 3.50% based on our leverage ratio and for ABR loans which bear interest at the applicable base rate plus a margin of from 1.50% to 2.50% based on our leverage ratio. As of July 312014, the margins for Eurodollar loans and ABR loans are 2.75% and 1.75%, respectively. We have agreed to pay a commitment fee on the unused portion of the Credit Agreement of from 0.375% to 0.50% based on our leverage ratio. As of July 31, 2014, the commitment fee rate is 0.375%. Amounts available under the Credit Agreement are subject to a borrowing base which is determined based primarily on the appraised value of our domestic lease pool equipment and certain accounts receivable. We believe that as of July 31, 2014, the full $50.0 million, less any amounts outstanding, is available to us. The Credit Agreement is secured by essentially all of our domestic assets and 65% of the capital stock of Mitcham Holdings Ltd., which is the holding company for all of our foreign subsidiaries. The Credit Agreement contains customary representations, warranties, conditions precedent to credit extensions, affirmative and negative covenants and events of default. The negative covenants include restrictions on liens, additional indebtedness in excess of $5.0 million, other than indebtedness to HSBC and its affiliates, acquisitions, fundamental changes, dispositions of property, restricted payments, transactions with affiliates and lines of business. The events of default include a change in control provision. 20
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The Credit Facility contains certain financial covenants that require us to maintain a maximum ratio of debt to adjusted EBITDA, a minimum ratio of fixed charges to adjusted EBITDA and, in certain circumstances, a maximum ratio of capital expenditures to adjusted EBITDA, all as defined in the Credit Agreement. As indicated by the following chart, we were in compliance with all financial covenants as of
July 31, 2014: Description of Financial Actual for the four quarters Covenant Required Amount ended July 31, 2014 Leverage Ratio Not more than 2.00 to 0.81 to 1.00 1.00 Fixed Charge Coverage Ratio Not less than 1.25 to 47.29 to 1.00 1.00 Capital Expenditures to Not more than 1.0 to not applicable, Adjusted Adjusted EBITDA Ratio 1.0, when Adjusted EBITDA - $35.8 millionEBITDA is less than $22.0 millionfor trailing four quarters In August 2014, our wholly-owned subsidiary, Seamap Pte Ltd.(" Seamap Singapore"), entered into a $15.0 millioncredit facility with HSBC - Singapore(the "Seamap Credit Facility"). The facility consists of a $10.0 millionterm loan, a $3.0 millionrevolving credit facility, and a $2.0 millionbanker's guarantee facility. The term facility provides for eleven quarterly principal payments of $800,000and a final payment of $1,200,000on or before August 22, 2017. Interest on the term facility is payable quarterly at LIBOR plus 2.75%. Under the revolving credit facility, Seamap Singapore may borrow up to $3.0 millionfrom time to time for working capital and other general corporate purposes. Borrowings under this facility bear interest at LIBOR plus 3.00%. Under the banker's guarantee facility HSBC - Singaporewill, from time to time as requested, issue banker's guarantees for performance, customs or bid bonds. The Seamap Credit Facility is secured by essentially all of the assets of Seamap Singaporeand by a corporate guarantee by Mitcham Industries, Inc.The agreement contains customary representations, warranties, affirmative and negative covenants and events of default. The negative covenants include restrictions on Seamap Singapore related to liens, additional indebtedness, acquisitions, fundamental changes, dispositions of property, restricted payments, transactions with affiliates and lines of business. The agreement contains financial covenants that require Seamap Singapore to maintain a minimum net worth and a minimum ration of debt to EBITDA, both as defined in the agreement. As of September 3, 2014, borrowings of approximately $15.0 millionand letters of credit totaling approximately $4.0 millionwere outstanding under the Credit Agreement and a $10.0 millionterm loan was outstanding under the Seamap Credit Facility. No amounts were outstanding under the revolving credit or banker's guarantee provisions of the Seamap Credit Facility. The proceeds from the term loan were used to repay certain inter-company indebtedness and in turn reduce amounts outstanding under the Credit Agreement. We have determined that the undistributed earnings of our foreign subsidiaries, other than branch operations in Colombiaand Peru, have been permanently reinvested outside of the United States. These permanent investments include the purchase of lease pool equipment by certain of those subsidiaries and the acquisition of the ION Source Products. Accordingly, while there is generally no legal restriction on the distribution of such earnings, we do not expect to have any such earnings available to satisfy obligations in the United States, such as the Credit Agreement. Should we in the future distribute these earnings to the United States, such distributions could be subject to foreign withholding taxes in certain cases and would likely result in additional federal income tax obligations in the United States. As of July 31, 2014, we had deposits in foreign banks consisting of both United Statesdollar and foreign currency deposits equal to approximately $7.7 million. Approximately $14 millionmay be distributed to the United Statesin repayment of inter-company obligations as of July 31, 2014and therefore do not result in any of the adverse tax consequences discussed above.