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Mitcham Industries Inc. Reports Operating Results (10-Q)

December 08, 2010 | About:
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10qk

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Mitcham Industries Inc. (MIND) filed Quarterly Report for the period ended 2010-10-31.

Mitcham Industries Inc. has a market cap of $91.3 million; its shares were traded at around $9.18 with a P/E ratio of 35.3 and P/S ratio of 1.7. MIND is in the portfolios of John Rogers of ARIEL CAPITAL MANAGEMENT LLC, Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

During fiscal 2009 and 2008, we responded to the increased demand for our services and products by adding new equipment to our lease pool and by introducing new products from our Seamap segment. During fiscal 2009 and 2008, we added approximately $34.9 million and $26.0 million, respectively, of equipment to our lease pool. During fiscal 2010, we added approximately $19.6 million of new lease pool equipment, despite the decline in demand for equipment during this period. Although we experienced an overall decline in demand, there was an increase in demand for certain types of equipment, such as downhole seismic tools and three-component digital sensors. We responded to this demand by acquiring more of this equipment, as well as other equipment for which we had specific demand or anticipated demand in the near future. In the nine months ended October 31, 2010, we added approximately $20.7 million of new lease pool equipment. Due to recent indications of increased demand, particularly for certain types of equipment, we have increased our planned expenditures for new lease pool equipment for the current fiscal year. We now expect to add between $26 million and $28 million of new equipment to our lease pool in the fiscal year ending January 31, 2011.

A significant portion of our revenues are generated from foreign sources. For the three months ended October 31, 2010 and 2009, revenues from international customers totaled approximately $15.9 million and $9.2 million, respectively, representing 80% and 63% of consolidated revenues in those periods, respectively. For the nine months ended October 31, 2010 and 2009, revenues from international customers totaled approximately $43.8 million and $27.6 million, respectively, representing 85% and 73% of consolidated revenues in those periods, respectively. The majority of our transactions with foreign customers are denominated in United States, Australian, Canadian and Singapore dollars and Russian rubles. We have not entered, nor do we intend to enter, into derivative financial instruments for hedging or speculative purposes. We do not believe that entering into derivative instruments for hedging purposes would be cost effective.

Revenues for the three-month periods ended October 31, 2010 and 2009 were approximately $20.0 million and $14.5 million, respectively. The increase was due to an increase in other equipment sales. Revenues for the nine-month periods ended October 31, 2010 and 2009 were approximately $51.6 million and $37.8 million, respectively. The increase was due primarily to increased leasing revenues, higher other Seamap sales and higher other equipment sales. In the three months ended October 31, 2009, leasing revenues included the impact of an unusually large contract in the United States. As discussed more fully below, this single contract has a material impact on the comparison between the three months ended October 31, 2010 and 2009. During the nine months

ended October 31, 2010, leasing revenues began to recover from the lower levels experienced in the prior year as explained in more detail below. For the three months ended October 31, 2010, we generated operating income of approximately $1.7 million as compared to approximately $1.4 million for the three months ended October 31, 2009. For the nine months ended October 31, 2010, we generated operating income of approximately $3.6 million, as compared to an operating loss of approximately $80,000 in the nine months ended October 31, 2009. The increase in operating profit was due primarily to the increase in revenues. A more detailed explanation of these variations follows.

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. Sales of lease pool equipment in the third quarters and the first nine months of fiscal 2011 and 2010 are not considered necessarily indicative of a trend for such transactions. 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. For the three months ended October 31, 2010 and 2009 sales of lease pool equipment generated gross profit of approximately $591,000 and $335,000, respectively. For the nine months ended October 31, 2010 and 2009 sales of lease pool equipment generated gross profit of approximately $864,000 and $408,000, respectively.

SAP regularly sells new hydrographic and oceanographic equipment and provides system integration services to customers in Australia and throughout the Pacific Rim. For the third quarter ended October 31, 2010, SAP generated a gross profit of approximately $237,000 from these transactions as compared to approximately $92,000 in the fiscal quarter ended October 31, 2009. For the nine months ended October 31, 2010, the gross profit from SAP equipment sales amounted to approximately $689,000, as compared to approximately $396,000 in the nine months ended October 31, 2009. The increase in this business resulted from renewed demand from various governmental entities in the Pacific Rim. In May 2008, SAP entered into a contract with the Royal Australian Navy to provide certain equipment to the Republic of the Philippines. We accounted for this contract using the percentage of completion method. In October 2010, this contract was completed and in the three months ended October 31, 2010, we recognized revenues of approximately $520,000 and gross profit of approximately $60,000 related to this contract. In the three months ended October 31, 2009, we did not recognize any revenues or costs related to this contract. In the nine months ended October 31, 2009, we recognized approximately $1.0 million in revenues related to this contract. The sales of hydrographic and oceanographic equipment by SAP are generally not related to oil and gas exploration activities and are often made to governmental entities. Accordingly, these sales are not impacted by global economic and financial issues to the same degree as are other parts of our business.

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