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

September 09, 2009 | About:

10qk

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Mitcham Industries Inc. (MIND) filed Quarterly Report for the period ended 2009-07-31.

MITCHAM INDUSTRIES INC. specializes in the leasing and sale of seismic equipment to the oil and gas industry. Co. provides short-term leasing of peripheral seismic equipement to meet a customer's requirements as well as offering maintenance and support during the lease term. Co. leases its seismic equipment primarily to land-based seismic data acquisition companies and major oil and gas exploration companies conducting seismic data acquisition surveys in North and South America. Co. also sells and services new and used seismic data acquisition systems and peripheral equipment to companies. Mitcham Industries Inc. has a market cap of $52.3 million; its shares were traded at around $5.33 with a P/E ratio of 9.2 and P/S ratio of 0.8. Mitcham Industries Inc. had an annual average earning growth of 2.1% over the past 10 years.

Highlight of Business Operations:

We have responded to the decline in demand for our services and products by reducing our additions to our lease pool of equipment. During the six months ended July 31, 2009, we added approximately $7.8 million of equipment to our lease pool, as compared to $19.8 million during the six months ended July 31, 2008. During the fiscal years ended January 31, 2009, 2008 and 2007, we added approximately $34.9 million, $26.0 million and $25.5 million, respectively, of equipment to our lease pool in response to the strong demand for our equipment and services during those periods. Despite the recent decline in demand, we have added, and expect to add, certain types of equipment to our lease pool, such as additional equipment for vertical seismic profiling (VSP) and three component digital sensors, during fiscal 2010. We expect that the cost of these additions will be approximately $15 million for all of fiscal 2010; however, if demand warrants, we could acquire additional equipment during the balance of this fiscal year.

Revenues for the three months ended July 31, 2009 were approximately $12.7 million, compared to approximately $17.5 million for the three months ended July 31, 2008. For the six months ended July 31, 2009, revenues were approximately $23.3 million, compared to approximately $36.0 million for the six months ended July 31, 2008. The decline is attributable primarily to a decrease in equipment leasing revenues and lower sales of lease pool equipment and new seismic equipment. For the three months ended July 31, 2009, we generated an operating loss of approximately $1.5 million as compared to an operating profit of approximately $2.3 million for the three months ended July 31, 2008. Our operating loss for the six months ended July 31, 2009 was

approximately $1.5 million as compared to an operating profit of approximately $8.7 million for the six months ended July 31, 2008. The decline in operating profit was due primarily to the decline in leasing revenues and an increase in lease pool depreciation. A more detailed explanation of these variations follows.

SAP regularly sells new hydrographic and oceanographic equipment and provides system integration services to customers in Australia and throughout the Pacific Rim. For the fiscal quarter ended July 31, 2009, SAP incurred a gross loss of approximately $80,000 from these transactions as compared to a gross profit of approximately $425,000 in the fiscal quarter ended July 31, 2008. For the six months ended July 31, 2009, SAP produced a gross profit of approximately $304,000 versus approximately $460,000 in the six months ended July 31, 2008.

In May 2008, SAP entered into a contract with the Royal Australian Navy to provide certain equipment to the Republic of the Philippines. We account for this contract using the percentage of completion method. In the three months ended July 31, 2009, we recognized approximately $60,000 in revenues related to this contract, yet recognized costs of approximately $400,000, which resulted in a loss from this contract during the period of approximately $340,000. We have incurred approximately $200,000 in unexpected costs in the fulfillment of this contract and have submitted claims reimbursement for these costs. However, until our claims are approved and accepted, we have not included the benefit from these claims in our calculation of expected profits from the contract. We expect to recognize contract revenues of approximately $340,000 in the third quarter of fiscal 2010, excluding the effect of the pending claims, and gross profit of approximately $46,000. These amounts will reflect the completion of the contract. In the six months ended July 31, 2008, we did not recognize any 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.

Overall, our Equipment Leasing segment generated a gross loss of approximately $649,000 in the second quarter of fiscal 2010 as compared to a gross profit of approximately $5.7 million in the second quarter of fiscal 2009. For the first six months of fiscal 2010, our Equipment Leasing segment generated a gross profit of approximately $1.5 million, as compared to approximately $14.5 million in the first six months of fiscal 2009. The gross profit for this period declined due primarily to lower leasing revenues and higher depreciation expense related to our lease pool equipment. During fiscal 2009, we added significant amounts of new equipment to our lease pool. Once new equipment is initially placed in service, we begin depreciating the equipment on a straight-line basis for the balance of its estimated useful life. Therefore, in periods of lower equipment utilization, such as in the three and six months ended July 31, 2009, we experience depreciation expense that is disproportionate to our equipment leasing revenues.

Read the The complete ReportMIND is in the portfolios of John Rogers of ARIEL CAPITAL MANAGEMENT LLC.

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