ION GEOPHYSICAL CORP - FORM 10-Q

Attached files

file	filename
EX-31.1 - CEO 302 CERTIFICATION - ION GEOPHYSICAL CORP	ex311ceosec302cert09302014.htm
EXCEL - IDEA: XBRL DOCUMENT - ION GEOPHYSICAL CORP	Financial_Report.xls
EX-31.2 - CFO 302 CERTIFICATION - ION GEOPHYSICAL CORP	ex312cfosec302cert09302014.htm
EX-32.1 - CEO 906 CERTIFICATION - ION GEOPHYSICAL CORP	ex321ceosec906cert09302014.htm
EX-10.1 - REVOLVING CREDIT AND SECURITY AGREEMENT - ION GEOPHYSICAL CORP	ex101revolvingcreditandsec.htm
EX-32.2 - CFO 906 CERTIFICATION - ION GEOPHYSICAL CORP	ex322cfosec906cert09302014.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 1-12691

ION GEOPHYSICAL CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



DELAWARE		22-2286646
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)



2105 CityWest Blvd.
Suite 400
Houston, Texas		77042-2839
(Address of principal executive offices)		(Zip Code)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 933-3339

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

At October 24, 2014, there were 164,203,639 shares of common stock, par value $0.01 per share, outstanding.

Table of Contents

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS FOR FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2014



	PAGE
PART I. Financial Information
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	3
Condensed Consolidated Statements of Operations for the three- and nine-months ended September 30, 2014 and 2013	4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three- and nine-months ended September 30, 2014 and 2013	5
Condensed Consolidated Statements of Cash Flows for the nine-months ended September 30, 2014 and 2013	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures about Market Risk	37
Item 4. Controls and Procedures	37

PART II. Other Information
Item 1. Legal Proceedings	38
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 5. Other Information	41
Item 6. Exhibits	42

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



	September 30, 2014			December 31, 2013
	( In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	129,847		$	148,056
Accounts receivable, net	86,738			149,448
Unbilled receivables	57,477			49,468
Inventories	55,376			57,173
Prepaid expenses and other current assets	26,453			24,772
Total current assets	355,891			428,917
Deferred income tax asset	14,340			14,650
Property, plant, equipment and seismic rental equipment, net	60,365			46,684
Multi-client data library, net	243,917			238,784
Equity method investments	40,174			53,865
Goodwill	50,385			55,876
Intangible assets, net	9,191			11,247
Other assets	19,482			14,648
Total assets	$	793,745		$	864,671
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	5,901		$	5,906
Accounts payable	30,666			22,654
Accrued expenses	75,608			84,358
Accrued multi-client data library royalties	24,416			46,460
Deferred revenue	16,495			20,682
Total current liabilities	153,086			180,060
Long-term debt, net of current maturities	179,583			214,246
Other long-term liabilities	142,776			210,602
Total liabilities	475,445			604,908
Redeemable noncontrolling interests	2,086			1,878
Equity:
Common stock, $0.01 par value; authorized 200,000,000 shares; outstanding 164,203,639 and 163,737,757 shares at September 30, 2014 and December 31, 2013, respectively, net of treasury stock	1,642			1,637
Additional paid-in capital	886,170			879,969
Accumulated deficit	(553,531		)	(606,157		)
Accumulated other comprehensive loss	(11,720		)	(11,138		)
Treasury stock, at cost, 849,539 shares at both September 30, 2014 and December 31, 2013	(6,565		)	(6,565		)
Total stockholders’ equity	315,996			257,746
Noncontrolling interests	218			139
Total equity	316,214			257,885
Total liabilities and equity	$	793,745		$	864,671

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(In thousands, except per share data)
Service revenues	$	71,923		$	44,679		$	272,386		$	224,231
Product revenues	34,617			35,159			100,332			106,259
Total net revenues	106,540			79,838			372,718			330,490
Cost of services	60,285			52,256			200,697			188,494
Cost of products	17,032			42,686			47,716			85,525
Gross profit (loss)	29,223			(15,104		)	124,305			56,471
Operating expenses:
Research, development and engineering	10,910			10,288			30,254			28,665
Marketing and sales	8,480			8,416			27,610			25,364
General, administrative and other operating expenses	15,182			22,720			48,334			50,277
Total operating expenses	34,572			41,424			106,198			104,306
Income (loss) from operations	(5,349		)	(56,528		)	18,107			(47,835		)
Interest expense, net	(5,048		)	(4,281		)	(14,779		)	(8,103		)
Equity in losses of investments	(5,558		)	(5,192		)	(9,027		)	(10,414		)
Other income (expense), net	(622		)	(74,301		)	73,970			(180,392		)
Income (loss) before income taxes	(16,577		)	(140,302		)	68,271			(246,744		)
Income tax expense	8,345			56,954			14,261			19,450
Net income (loss)	(24,922		)	(197,256		)	54,010			(266,194		)
Net (income) loss attributable to noncontrolling interests	381			498			(1,384		)	515
Net income (loss) attributable to ION	(24,541		)	(196,758		)	52,626			(265,679		)
Preferred stock dividends	—			338			—			1,014
Conversion payment of preferred stock	—			5,000			—			5,000
Net income (loss) applicable to common shares	$	(24,541	)	$	(202,096	)	$	52,626		$	(271,693	)
Net income (loss) per share:
Basic	$	(0.15	)	$	(1.29	)	$	0.32		$	(1.73	)
Diluted	$	(0.15	)	$	(1.29	)	$	0.32		$	(1.73	)
Weighted average number of common shares outstanding:
Basic	164,149			157,143			164,021			156,842
Diluted	164,149			157,143			164,326			156,842

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(In thousands)
Net income (loss)	$	(24,922	)	$	(197,256	)	$	54,010		$	(266,194	)
Other comprehensive income (loss), net of taxes, as appropriate:
Foreign currency translation adjustments	(2,632		)	2,513			489			(530		)
Equity interest in investees' other comprehensive income (loss)	738			(716		)	(1,125		)	(1,265		)
Other changes in other comprehensive income	28			27			54			381
Total other comprehensive income (loss), net of taxes	(1,866		)	1,824			(582		)	(1,414		)
Comprehensive net income (loss)	(26,788		)	(195,432		)	53,428			(267,608		)
Comprehensive (income) loss attributable to noncontrolling interest	381			498			(1,384		)	515
Comprehensive net income (loss) attributable to ION	$	(26,407	)	$	(194,934	)	$	52,044		$	(267,093	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Nine Months Ended September 30,
	2014			2013
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	54,010		$	(266,194	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization (other than multi-client data library)	20,989			13,146
Amortization of multi-client data library	46,014			50,892
Stock-based compensation expense	7,058			5,707
Equity in losses of investments	9,027			10,414
Accrual for (reduction of) loss contingency related to legal proceedings	(69,557		)	181,776
Gain on sale of Source product line	(6,522		)	—
Gain on sale of cost-method investment	—			(3,591		)
Write-down of multi-client data library	—			5,461
Write-down of receivables from OceanGeo	—			9,157
Write-down of excess and obsolete inventory	—			21,197
Deferred income taxes	(1,536		)	7,768
Change in operating assets and liabilities:
Accounts receivable	71,540			57,481
Unbilled receivables	(8,036		)	6,890
Inventories	(4,272		)	(13,157		)
Accounts payable, accrued expenses and accrued royalties	(31,324		)	(6,179		)
Deferred revenue	(4,153		)	(6,527		)
Other assets and liabilities	3,738			4,274
Net cash provided by operating activities	86,976			78,515
Cash flows from investing activities:
Cash invested in multi-client data library	(57,340		)	(86,346		)
Purchase of property, plant, equipment and seismic rental assets	(6,842		)	(13,539		)
Repayment of (advances to) INOVA Geophysical	1,000			(8,000		)
Investment in and advances to OceanGeo B.V.	(3,683		)	(9,500		)
Cash of OceanGeo B.V. upon acquiring a controlling interest	609			—
Net proceeds from sale of Source product line	14,394			—
Proceeds from sale of a cost-method investment	—			4,150
Investment in convertible note	—			(2,000		)
Other investing activities	928			76
Net cash used in investing activities	(50,934		)	(115,159		)
Cash flows from financing activities:
Proceeds from issuance of notes	—			175,000
Borrowings under revolving line of credit	15,000			—
Payments under revolving line of credit	(50,000		)	(97,250		)
Payments on notes payable and long-term debt	(11,737		)	(3,296		)
Costs associated with issuance of debt	(2,126		)	(6,731		)
Acquisition of non-controlling interest	(6,000		)	—
Payment of preferred dividends	—			(1,014		)
Conversion payment of preferred stock	—			(5,000		)
Proceeds from employee stock purchases and exercise of stock options	577			2,367
Other financing activities	(154		)	790
Net cash (used in) provided by financing activities	(54,440		)	64,866
Effect of change in foreign currency exchange rates on cash and cash equivalents	189			(608		)
Net (decrease) increase in cash and cash equivalents	(18,209		)	27,614
Cash and cash equivalents at beginning of period	148,056			60,971
Cash and cash equivalents at end of period	$	129,847		$	88,585

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The condensed consolidated balance sheet of ION Geophysical Corporation and its subsidiaries (collectively referred to as the “Company” or “ION,” unless the context otherwise requires) at December 31, 2013 has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at September 30, 2014, and the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013, are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the operating results for a full year or of future operations.

These condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with accounting principles generally accepted in the United States have been omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and Amendment No. 1 thereto on Form 10-K/A, which was filed on March 28, 2014 and contains the separate consolidated financial statements of INOVA Geophysical Equipment Limited (“INOVA Geophysical”) for its fiscal year ended December 31, 2013.

(2) Acquisition of OceanGeo

In February 2013, the Company acquired 30% of OceanGeo B.V. (“OceanGeo”). OceanGeo specializes in seismic acquisition operations using ocean bottom cables deployed from vessels leased by OceanGeo. In October 2013, the Company reached agreement with its joint venture partner in OceanGeo, Georadar Levantamentos Geofisicos S/A (“Georadar”), for the Company to have the option to increase its ownership percentage in OceanGeo from 30% to 70%, subject to certain conditions.

To further assist OceanGeo in acquiring backlog, in October 2013, the Company also agreed to loan OceanGeo additional funds for working capital, as necessary, up to a maximum of $25.0 million. Prior to obtaining a controlling interest in OceanGeo, the Company advanced a total of $18.9 million to OceanGeo.

In January 2014, the Company acquired an additional 40% interest in OceanGeo, through the conversion of certain outstanding amounts loaned to OceanGeo by the Company into additional equity interests of OceanGeo, bringing the Company’s total equity interest in OceanGeo to 70% and giving the Company control over OceanGeo. The Company has included in its results of operations, the results of OceanGeo from the date of the Company’s acquisition of a controlling interest.

In July 2014, the Company paid $6.0 million to Georadar for the remaining 30% of OceanGeo, increasing its equity interest in OceanGeo to 100%. In addition to the $6.0 million cash purchase price, the Company agreed to pay Georadar up to an additional $5.0 million, contingent upon the occurrence of certain future events, including the award of a future material project in 2014 and a minimal amount of vessel downtime. The Company does not believe that it will have to pay the contingent amount and, therefore, has not accrued this amount as of September 30, 2014. Since the initial investment in early 2013, the Company has invested or contributed assets totaling approximately $46.5 million to OceanGeo.

The Company acquired OceanGeo as part of its strategy to expand the range of service offerings it can provide to oil and gas exploration and production customers and to put its Calypso^® seabed acquisition technology to work in a service model to meet the growing demand for seabed seismic services.

Table of Contents

The acquisition of OceanGeo was accounted for by the acquisition method, whereby the assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date based on an income approach. The estimated fair value of the assets acquired and liabilities assumed approximated the purchase price and therefore no goodwill or bargain purchase was recognized. During the three months ended September 30, 2014, management adjusted its purchase accounting valuation estimates and, as a result, retrospectively adjusted the valuations of assets with a corresponding increase to property, plant, and equipment as of the acquisition date. The retrospective adjustments amounted to approximately $3.9 million and primarily related to revisions of estimates of recoverability of the multi-client data library. In connection with the acquisition, the Company incurred $1.3 million in acquisition-related transaction costs related to professional services and fees. These costs were expensed as incurred and were included in other income (expense), net in the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2014. As a result of consolidating OceanGeo’s results into the Company’s consolidated results of operations for the period from the acquisition date at the end of January 2014 to September 30, 2014, the Company’s results of operations include $25.0 million of OceanGeo revenues and $1.7 million of income from OceanGeo’s operations for the three months ended September 30, 2014, and $71.5 million of OceanGeo revenues and $12.3 million of income from OceanGeo’s operations for the nine months ended September 30, 2014. The following table summarizes the fair value assigned to the assets acquired and liabilities assumed, as well as the noncontrolling interest, at the acquisition date (in thousands):



Estimated Fair Value of Assets Acquired and Liabilities Assumed:
Cash and cash equivalents	$	609
Accounts receivable	9,247
Prepaid expenses and other current assets	1,433
Property, plant, equipment and seismic rental equipment, net	18,474
Other assets	2,227
Total identifiable assets	31,990
Accounts payable and accrued liabilities	(13,464		)
Bank loans	(6,135		)
Other liabilities	(1,026		)
Net assets	11,365
Noncontrolling interest	(3,410		)
Total consideration	$	7,955

The following summarized unaudited pro forma consolidated income statement information for the nine months ended September 30, 2014 and 2013 and for the three months ended September 30, 2013, assumes that the OceanGeo acquisition had occurred as of the beginning of the periods presented. The Company has prepared these unaudited pro forma financial results for comparative purposes only. These unaudited pro forma financial results may not be indicative of the results that would have occurred if ION had completed the acquisition as of the beginning of the periods presented or the results that may be attained in the future. Amounts presented below are in thousands, except for the per share amounts:



Pro forma Consolidated ION Income Statement Information	Three Months Ended September 30, 2013			Nine Months Ended September 30,
Pro forma Consolidated ION Income Statement Information	Three Months Ended September 30, 2013			2014		2013
Net revenues	$	79,838		$	381,902	$	362,157
Income (loss) from operations	$	(72,757	)	$	22,492	$	(66,997	)
Net income (loss)	$	(214,305	)	$	55,838	$	(277,612	)
Net income (loss) attributable to ION	$	(213,807	)	$	53,684	$	(277,097	)
Basic net income (loss) per common share	$	(1.40	)	$	0.33	$	(1.81	)
Diluted net income (loss) per common share	$	(1.40	)	$	0.33	$	(1.81	)

(3) Segment Information

The Company operates through four business segments – Solutions, Systems, Software and Ocean Bottom Services (the segment name for OceanGeo) – as well as through its INOVA Geophysical joint venture. See Note 4 “Equity Method Investments” for the summarized financial information for INOVA Geophysical. The Company measures segment operating results based on income from operations.

Table of Contents

A summary of segment information is as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net revenues:
Solutions:
New Venture	$	18,446		$	11,945		$	76,499		$	93,630
Data Library	3,262			5,184			30,104			36,153
Total multi-client revenues	21,708			17,129			106,603			129,783
Data Processing	24,151			26,318			91,131			91,453
Total	$	45,859		$	43,447		$	197,734		$	221,236
Systems:
Towed Streamer	$	13,666		$	15,342		$	35,782		$	41,461
Ocean Bottom Equipment	—			159			—			7,307
Other	11,029			10,766			36,166			33,194
Total	$	24,695		$	26,267		$	71,948		$	81,962
Software:
Software Systems	$	9,922		$	8,892		$	28,384		$	24,297
Services	1,088			1,232			3,198			2,995
Total	$	11,010		$	10,124		$	31,582		$	27,292
Ocean Bottom Services	$	24,976		$	—		$	71,454		$	—
Total	$	106,540		$	79,838		$	372,718		$	330,490
Gross profit (loss):
Solutions	$	5,927		$	(8,487	)	$	51,207		$	33,600
Systems	10,123			(13,987		)	31,288			3,195
Software	8,326			7,370			23,388			19,676
Ocean Bottom Services	4,847			—			18,422			—
Total	$	29,223		$	(15,104	)	$	124,305		$	56,471
Gross margin:
Solutions	13		%	(20		)%	26		%	15		%
Systems	41		%	(53		)%	43		%	4		%
Software	76		%	73		%	74		%	72		%
Ocean Bottom Services	19		%	—		%	26		%	—		%
Total	27		%	(19		)%	33		%	17		%
Income (loss) from operations:
Solutions	$	(5,960	)	$	(18,163	)	$	11,733		$	215
Systems	2,917			(23,610		)	9,835			(21,172		)
Software	6,227			6,280			16,985			16,396
Ocean Bottom Services	1,677			—			12,333			—
Corporate and other	(10,210		)	(21,035		)	(32,779		)	(43,274		)
Income (loss) from operations	(5,349		)	(56,528		)	18,107			(47,835		)
Interest expense, net	(5,048		)	(4,281		)	(14,779		)	(8,103		)
Equity in losses of investments	(5,558		)	(5,192		)	(9,027		)	(10,414		)
Other income (expense), net	(622		)	(74,301		)	73,970			(180,392		)
Income (loss) before income taxes	$	(16,577	)	$	(140,302	)	$	68,271		$	(246,744	)

Table of Contents

(4) Equity Method Investments

The following table reflects the change in the Company’s equity method investments during the nine months ended September 30, 2014 (in thousands):



	INOVA Geophysical			OceanGeo			Total
Investments at December 31, 2013	$	51,065		$	2,800		$	53,865
Equity in earnings (losses) of investments	(9,765		)	738			(9,027		)
Advances to OceanGeo (prior to consolidation)	—			3,683			3,683
Acquisition of controlling interest (consolidation) of OceanGeo	—			(7,221		)	(7,221		)
Equity interest in investees' other comprehensive loss	(1,126		)	—			(1,126		)
Investments at September 30, 2014	$	40,174		$	—		$	40,174

INOVA Geophysical — The Company accounts for its 49% interest in INOVA Geophysical as an equity method investment and records its share of earnings and losses of INOVA Geophysical on a one fiscal quarter lag basis. For the three and nine months ended September 30, 2014, the Company recorded its share of losses from INOVA Geophysical of $5.6 million and $9.8 million, respectively, compared to its share of losses for the corresponding periods in 2013, of $0.2 million and $3.0 million, respectively. The following table reflects the summarized financial information for INOVA Geophysical for the three months ended June 30, 2014 and 2013 and the nine-month periods from October 1, 2013 and 2012 to June 30, 2014 and 2013, respectively (in thousands):



	Three Months Ended June 30,						Nine-Month Periods from October 1 through June 30,
	2014			2013			2014			2013
Net revenues	$	11,092		$	61,241		$	77,774		$	142,947
Gross profit (loss)	$	(2,164	)	$	12,243		$	8,020		$	26,378
Income (loss) from operations	$	(9,851	)	$	1,658		$	(16,094	)	$	(7,103	)
Net loss	$	(11,425	)	$	(488	)	$	(20,010	)	$	(6,518	)

Related Party Transactions

For information regarding transactions between the Company and its equity method investees, see Note 14 “Related Party Transactions.”

(5) Long-term Debt



Obligations (in thousands)	September 30, 2014			December 31, 2013
Senior secured second-priority notes	$	175,000		$	175,000
Revolving line of credit	—			35,000
Equipment capital leases	9,693			8,651
Facility capital lease obligation	791			1,501
Total	185,484			220,152
Current portion of long-term debt and lease obligations	(5,901		)	(5,906		)
Non-current portion of long-term debt and lease obligations	$	179,583		$	214,246

New Credit Facility, including Revolving Line of Credit

In August 2014, ION and its subsidiaries, ION Exploration Products (U.S.A.), Inc., I/O Marine Systems, Inc. and GX Technology Corporation (collectively, the “Subsidiary Borrowers” and together with ION, the “Borrowers”), entered into a new credit facility (the “New Credit Facility”).

The terms of the New Credit Facility are set forth in a revolving credit and security agreement dated as of August 22, 2014, among the Borrowers, the lenders party thereto and PNC Bank, National Association (“PNC”), as agent for the lenders.

The New Credit Facility replaced the Company’s prior syndicated credit facility under a credit agreement dated as of March 25, 2010, as amended, by and among ION, the subsidiary guarantors that were parties thereto and China Merchants Bank Co., Ltd., New York Branch (“CMB”), as administrative agent and lender (the “Prior Credit Facility”).

Table of Contents

The revolving credit and security agreement contemplates maximum credit facilities of up to $175.0 million in the aggregate, consisting of (i) a revolving facility of up to $125.0 million, to which the lenders have committed $80.0 million and up to an additional $45.0 million of which is subject to the implementation of certain accordion provisions (with availability under such revolving facility subject at all times to a borrowing base and other conditions to borrowing) and (ii) an uncommitted term facility in an aggregate amount of up to $50.0 million on terms to be mutually agreed at a later date and subject to receiving commitments of lenders to such term facility.

The borrowing base for revolving credit borrowings under the New Credit Facility is calculated using a formula based on certain eligible receivables, eligible inventory and other amounts. In addition, the New Credit Facility includes a $15.0 million sublimit for the issuance of documentary and standby letters of credit. As of September 30, 2014, no amounts were drawn under the New Credit Facility. The Company expects that any amounts drawn under the New Credit Facility sooner than one year prior to the maturity of the New Credit Facility (as described below) will be classified as long-term debt.

The New Credit Facility is available for revolving credit borrowings to be used to pay fees and expenses related to the entry into the New Credit Facility and to provide for the Company’s general corporate needs, including the Company’s working capital requirements, capital expenditures, surety deposits and acquisition financing.

The interest rate on revolving credit borrowings under the New Credit Facility will be, at the Company’s option, (i) an alternate base rate equal to the highest of (a) the prime rate of PNC, (b) a federal funds effective rate plus 0.50% or (c) a LIBOR-based rate plus 1.0%, plus an applicable interest margin, or (ii) a LIBOR-based rate, plus an applicable interest margin. The revolving credit indebtedness under the New Credit Facility is scheduled to mature on the earlier of (x) August 22, 2019 or (y) the date which is 90 days prior to the maturity date of the Notes (as defined below) (or such later due date if the Notes have been refinanced).

The obligations of the Borrowers under the New Credit Facility are secured by a first-priority security interest in 100% of the stock of the Subsidiary Borrowers and 65% of the equity interests in ION International Holdings L.P. and by substantially all other assets of the Borrowers.

The revolving credit and security agreement contains covenants that, among other things, restrict the Company, subject to certain exceptions, from incurring additional indebtedness (including capital lease obligations), repurchasing equity, paying dividends or distributions, granting or incurring additional liens on the Company’s properties, pledging shares of the Company’s subsidiaries, entering into certain merger or other change-in-control transactions, entering into transactions with the Company’s affiliates, making certain sales or other dispositions of the Company’s assets, making certain investments, acquiring other businesses and entering into sale-leaseback transactions with respect to the Company’s property.

The revolving credit and security agreement requires compliance with certain financial covenants, including requirements related to ION and the Subsidiary Borrowers, measured on a rolling four quarter basis, (i) maintaining a minimum fixed charge coverage ratio of 1.1 to 1 as of the end of each fiscal quarter during the existence of a covenant testing trigger event, and (ii) not exceeding a maximum senior secured leverage ratio of 3.0 to 1 as of the end of each fiscal quarter.

The fixed charge coverage ratio is defined as the ratio of (i) ION’s EBITDA, minus unfunded capital expenditures made during the relevant period, minus distributions (including tax distributions) and dividends made during the relevant period, minus cash taxes paid during the relevant period, to (ii) certain debt payments made during the relevant period. The senior secured leverage ratio is defined as the ratio of (x) total senior funded debt to (y) ION’s EBITDA (excluding expenditures related directly to the Company’s multi-client data library). As of September 30, 2014, the Company was in compliance with these financial covenants.

The revolving credit and security agreement contains customary event of default provisions (including a “change of control” event affecting ION), the occurrence of which could lead to an acceleration of the Company’s obligations under the revolving credit and security agreement.

In connection with entering into the New Credit Facility, PNC replaced CMB as administrative agent, first lien representative for the first lien secured parties and collateral agent for the first lien secured parties under the Intercreditor Agreement (as defined below). The Company incurred $1.9 million of costs related to entering into the New Credit Facility, which are being amortized over 3.5 years. As a part of the cancellation of the Prior Credit Facility, the Company wrote-off to interest expense $0.3 million of unamortized debt issuance costs.

Senior Secured Second-Priority Notes

In May 2013, the Company sold $175.0 million aggregate principal amount of 8.125% Senior Secured Second-Priority Notes due 2018 (“Notes”) in a private offering pursuant to an Indenture dated as of May 13, 2013. The Notes are senior secured second-priority obligations of the Company, are guaranteed by certain of the Company’s U.S. subsidiaries, and mature on May 15, 2018. Interest on the Notes accrues at the rate of 8.125% per annum and will be payable semiannually in arrears on May 15 and November 15 of each year during their term. In May 2014, the holders of the Notes exchanged their Notes for a like principal amount of registered Notes with the same terms.

Table of Contents

On or after May 15, 2015, the Company may on one or more occasions redeem all or a part of the Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Notes redeemed during the 12-month period beginning on May 15th of the years indicated below:



Date		Percentage
2015		104.063%
2016		102.031%
2017 and thereafter		100.000%

The Notes are initially jointly and severally guaranteed on a senior secured basis by each of the Company’s current material U.S. subsidiaries: GX Technology Corporation, ION Exploration Products (U.S.A.), Inc. and I/O Marine Systems, Inc. (the “Notes Guarantors”). The Notes and the guarantees are secured, subject to certain exceptions and permitted liens, by second-priority liens on substantially all of the assets that secure the indebtedness under the New Credit Facility (see “— New Credit Facility, including Revolving Line of Credit” above). The indebtedness under the Notes is effectively junior to the Company’s obligations under the New Credit Facility to the extent of the value of the collateral securing the New Credit Facility, and to any other indebtedness secured on a first-priority basis to the extent of the value of the Company’s assets subject to those first-priority security interests.

The Notes contain certain covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Notes. These limits apply to making certain investments, incurring additional indebtedness, selling assets, paying dividends, issuing preferred stock, carrying out mergers or consolidations, and certain other transactions. These and other restrictive covenants contained in the Indenture are subject to important exceptions and qualifications. All of the Company’s subsidiaries are currently restricted subsidiaries. As of September 30, 2014, the Company was in compliance with these covenants.

In connection with the issuance of the Notes, the Company and the Notes Guarantors entered into a second lien intercreditor agreement dated as of May 13, 2013 (the “Intercreditor Agreement”) with, among others, CMB, as administrative agent, first lien representative for the first lien secured parties and collateral agent for the first lien secured parties, the trustee under the Indenture and the collateral agent for the second lien secured parties.

OceanGeo Brazil Bank Debt

In connection with the Company’s acquisition of a controlling interest in OceanGeo in the first quarter of 2014, OceanGeo’s existing debt was consolidated into the Company’s accounts. During the three months ended September 30, 2014, OceanGeo repaid this debt in full.

(6) Net Income (Loss) per Share

Basic net income (loss) per common share is computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per common share is determined based on the assumption that dilutive restricted stock and restricted stock unit awards have vested and outstanding dilutive stock options have been exercised and the aggregate proceeds were used to reacquire common stock using the average price of such common stock for the period. The total number of shares issued or reserved for future issuance under outstanding stock options at September 30, 2014 and 2013 was 9,111,725 and 7,081,950, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at September 30, 2014 and 2013 was 1,144,432 and 763,559, respectively. All outstanding stock awards for the three months ended September 30, 2014 and the three and nine months ended September 30, 2013 were anti-dilutive.

Prior to September 30, 2013, there were 27,000 shares outstanding of the Company’s Series D Cumulative Convertible Preferred Stock (“Series D Preferred Stock”). In September 2013, the holder converted all of the outstanding shares of Series D Preferred Stock into 6,065,075 shares of common stock. The then-outstanding shares of Series D Preferred Stock were anti-dilutive for the three and nine months ended September 30, 2013.

Table of Contents

The following table summarizes the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014		2013
Net income (loss) applicable to common shares	$	(24,541	)	$	(202,096	)	$	52,626	$	(271,693	)
Weighted average number of common shares outstanding	164,149			157,143			164,021		156,842
Effect of dilutive stock awards	—			—			305		—
Weighted average number of diluted common shares outstanding	164,149			157,143			164,326		156,842
Basic net income (loss) per share	$	(0.15	)	$	(1.29	)	$	0.32	$	(1.73	)
Diluted net income (loss) per share	$	(0.15	)	$	(1.29	)	$	0.32	$	(1.73	)

(7) Income Taxes

The Company maintains a valuation allowance for substantially all of its deferred tax assets. The valuation allowance is calculated in accordance with the provisions of the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification Topic 740 “Income Taxes,” which requires that a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. In the event the Company’s expectations of future operating results change, the valuation allowance may need to be adjusted upward or downward. As of September 30, 2014, the Company’s unreserved net U.S. deferred tax assets totaled $3.9 million. These existing unreserved deferred tax assets are currently considered to be “more likely than not” realized.

The Company’s effective tax rates for the three months ended September 30, 2014 and 2013 were (50.3)% and (40.6)%, respectively, and for the nine months ended September 30, 2014 and 2013 were 20.9% and (7.9)%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2014 was positively impacted by the change in valuation allowance related to the reduction of the legal contingency reserve. The Company’s income tax expense for the three and nine months ended September 30, 2014 relates to income from the Company’s non-U.S. businesses, including OceanGeo. This foreign tax expense has not been offset by the tax benefits on losses within the U.S. and other jurisdictions, from which the Company cannot currently benefit.

The Company has approximately $2.2 million of unrecognized tax benefits and does not expect to recognize significant increases in unrecognized tax benefits during the next 12-month period. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.

As of September 30, 2014, the Company’s U.S. federal tax returns for 2007 and subsequent years remain subject to examination by tax authorities. The Company is no longer subject to U.S. Internal Revenue Service (“IRS”) examination for periods prior to 2007, although carryforward attributes that were generated prior to 2007 may still be adjusted upon examination by the IRS if they either have been or will be used in an open year. In the Company’s foreign tax jurisdictions, tax returns for 2010 and subsequent years generally remain open to examination.

(8) Litigation

WesternGeco

In June 2009, WesternGeco L.L.C. (“WesternGeco”) filed a lawsuit against the Company in the United States District Court for the Southern District of Texas, Houston Division. In the lawsuit, styled WesternGeco L.L.C. v. ION Geophysical Corporation, WesternGeco alleged that the Company had infringed several method and apparatus claims contained in four of its United States patents regarding marine seismic streamer steering devices.

The trial began in July 2012. A verdict was returned by the jury in August 2012, finding that the Company infringed the claims contained in the four patents by supplying its DigiFIN^® lateral streamer control units and the related software from the United States and awarded WesternGeco the sum of $105.9 million in damages, consisting of $12.5 million in reasonable royalty and $93.4 million in lost profits.

In June 2013, the presiding judge entered a Memorandum and Order, ruling that WesternGeco is entitled to be awarded supplemental damages for the additional DigiFIN units that were supplied from the United States before and after trial that were not included in the jury verdict due to the timing of the trial. In October 2013, the judge entered another Memorandum and Order, ruling on the number of DigiFIN units that are subject to supplemental damages and also ruling that the supplemental damages applicable to the additional units should be calculated by adding together the jury’s previous reasonable royalty and lost profits damages awards per unit, resulting in supplemental damages of $73.1 million.

In April 2014, the judge entered another Order, ruling that lost profits should not have been included in the calculation of supplemental damages in the October 2013 Memorandum and Order and reducing the supplemental damages award in the case from $73.1 million to $9.4 million. In the Order, the judge also further reduced the damages award in the case by $3.0 million to reflect a settlement and license that WesternGeco entered into with a customer of the Company that had purchased and used DigiFIN units that were also included in the damages amounts awarded against the Company.

In May 2014, the judge signed and entered a Final Judgment in the amount of $123.8 million. Also, the Final Judgment included an injunction that enjoins the Company, its servants, agents and anyone acting in concert with it, from supplying in or from the United States the DigiFIN product or any parts unique to the DigiFIN product, or any instrumentality no more than colorably different from any of these products or parts, for combination outside of the United States. The Company has conducted its business in compliance with the Court’s orders in the case, and the Company has reorganized its operations such that it no longer supplies the DigiFIN product or any parts unique to the DigiFIN product in or from the United States.

Table of Contents

As previously disclosed, the Company has taken a loss contingency accrual of $123.8 million related to this case. Post-judgment interest will continue to accrue until this legal matter is fully resolved. The Company’s assessment of its potential loss contingency may change in the future due to developments in the case and other events, such as changes in applicable law, and such reassessment could lead to the determination that no loss contingency is probable or that a greater or lesser loss contingency is probable. Any such reassessment could have a material effect on the Company’s financial condition or results of operations.

The Company and WesternGeco have each appealed the Final Judgment to the United States Court of Appeals for the Federal Circuit. The Company filed its appeal brief on September 4, 2014. WesternGeco’s appeal brief was filed on October 21, 2014. Oral arguments have not been scheduled as of the date of this Quarterly Report on Form 10-Q.

In order to stay the judgment during the appeal, the Company arranged with sureties to post an appeal bond with the trial court on the Company’s behalf in the amount of $120.0 million. The terms of the appeal bond arrangements provide the sureties the contractual right for as long as the bond is outstanding to require the Company to post cash collateral for up to the full amount of the bond; however, the sureties did not require cash collateral upon the posting of the appeal bond. If the sureties exercise their right to require collateral while the appeal bond is outstanding, the Company would intend to utilize a combination of cash on hand and undrawn balances available under the Company’s New Credit Facility. If the Company is required to collateralize the full amount of the bond, the Company might also seek additional debt and/or equity financing. The collateralization of the full amount of the bond could have an adverse effect on the Company’s liquidity. Any requirements that the Company collateralize the appeal bond will reduce its liquidity and may reduce the amount otherwise available to be borrowed under its New Credit Facility. No assurances can be made whether the Company’s efforts to raise additional cash would be successful and, if so, on what terms and conditions, and at what cost the Company might be able to secure any such financing. The Company will incur fees of approximately $2.0 million per year to maintain the appeal bond until such time as the appeal bond is no longer required.

Other

The Company has been named in various other lawsuits or threatened actions that are incidental to its ordinary business. Litigation is inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time-consuming, cause the Company to incur costs and expenses, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits and actions cannot be predicted with certainty. Management currently believes that the ultimate resolution of these matters will not have a material adverse impact on the financial condition, results of operations or liquidity of the Company.

(9) Other Income (Expense), Net

A summary of other income (expense), net is as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Reduction of (accrual for) loss contingency related to legal proceedings (Note 8)	$	—		$	(71,776	)	$	69,557		$	(181,776	)
Gain on sale of product line⁽¹⁾	—			—			6,522			—
Gain on sale of a cost-method investment	—			—			—			3,591
Other expense, net	(622		)	(2,525		)	(2,109		)	(2,207		)
Total other income (expense), net	$	(622	)	$	(74,301	)	$	73,970		$	(180,392	)


⁽¹⁾	In May 2014, the Company sold its Source product line for approximately $14.4 million, net of transaction fees, recording a gain of approximately $6.5 million before taxes. As a part of this transaction, the Company reduced Goodwill on the Marine reporting unit by $5.1 million. The historical results of this product line have not been material to the Company’s results of operations.

(10) Details of Selected Balance Sheet Accounts

Inventories



A summary of inventories is as follows (in thousands):	September 30, 2014			December 31, 2013
Raw materials and subassemblies	$	40,970		$	54,168
Work-in-process	11,879			2,297
Finished goods	26,977			33,263
Reserve for excess and obsolete inventories	(24,450		)	(32,555		)
Total	$	55,376		$	57,173

Table of Contents

Other Long-term Liabilities



A summary of other long-term liabilities is as follows (in thousands):	September 30, 2014		December 31, 2013
Accrual for loss contingency related to legal proceedings (Note 8)	$	123,770	$	193,327
Deferred rents	12,277		8,822
Facility abandonment restructuring accrual	4,211		4,837
Other long-term liabilities	2,518		3,616
Total	$	142,776	$	210,602

(11) Accumulated Other Comprehensive Income (Loss)

A summary of changes in accumulated other comprehensive loss by component is as follows (in thousands):



	Foreign currency translation adjustments			Equity interest in investees’ other comprehensive income (loss)			Other changes in other comprehensive income (loss)			Total
Accumulated other comprehensive loss at December 31, 2013	$	(11,923	)	$	841		$	(56	)	$	(11,138	)
Net current-period other comprehensive income (loss)	489			(1,125		)	54			(582		)
Accumulated other comprehensive loss at September 30, 2014	$	(11,434	)	$	(284	)	$	(2	)	$	(11,720	)

(12) Supplemental Cash Flow Information and Non-cash Activity

A summary of non-cash items from investing and financing activities is as follows (in thousands):



	Nine Months Ended September 30,
	2014		2013
Cash paid during the period for:
Interest	$	9,087	$	2,042
Income taxes	$	12,008	$	13,778
Non-cash items from investing and financing activities:
Purchases of computer equipment financed through capital leases	$	5,768	$	5,962
Leasehold improvement paid by landlord	$	—	$	5,000
Conversion of investment in a convertible note to equity	$	3,151	$	6,765
Transfer of inventory to property, plant, equipment and seismic rental equipment	$	3,039	$	1,471
Investment in multi-client data library financed through trade payables	$	1,298	$	—
Purchases of property, plant, and equipment and seismic rental equipment financed through accounts payable	$	—	$	835

(13) Fair Value of Financial Instruments

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value.

Investment in Convertible Note. In March 2012, the Company and a privately owned U.S.-based technology company entered into an agreement for the Company to make available to the technology company a credit facility in an amount of up to $4.0 million. The credit facility has since been amended such that the current maturity date is March 2015, the annual interest rate is 0.25%, and the conversion provision allows for conversion of any or all of the outstanding balance of the promissory note under the credit facility into an amount of common shares of the technology company up to 19.5% of the total outstanding shares of the company.

Table of Contents

In September 2014, the Company converted $3.2 million of the balance of the note into 688,000 common shares of the investee, which resulted in a post-conversion equity ownership percentage interest in the investee of 19.5%. This investment continues to be accounted for as a cost method investment and is included in Other assets. Prior to conversion, the note and accrued interest had a fair value that approximated its book value resulting in no realized gain or loss on this conversion. The Company performed a fair value analysis with respect to its investment in the convertible note and interest using Level 3 inputs. These inputs included a market approach, including terms and likelihood of an investment event.

As of September 30, 2014, $1.1 million of principal and accrued interest remains outstanding under this credit arrangement and the fair value of this investment approximated its book value, including the accrued interest.

Fair Value of Other Financial Instruments. Due to their highly liquid nature, the amount of the Company’s other financial instruments, including cash and cash equivalents, accounts and unbilled receivables, notes receivable, accounts payable, and accrued multi-client data library royalties, represent their approximate fair value.

The carrying amounts of the Company’s long-term debt as of September 30, 2014 and December 31, 2013 were $185.5 million and $220.2 million, respectively, compared to its fair values of $176.7 million and $190.4 million as of September 30, 2014 and December 31, 2013, respectively. The fair value of the long-term debt was calculated using Level 1 inputs, including an active market price.

The Company’s cost method investment for which quoted market prices are not available are recorded at cost and reviewed periodically if there are events or changes in circumstances that may have a significant adverse effect on the fair value of the investments.

(14) Related Party Transactions

BGP Inc. (“BGP”) owned approximately 14.5% of the Company’s outstanding common stock as of September 30, 2014. For the nine months ended September 30, 2014 and 2013, the Company recorded revenues from BGP of $5.1 million and $5.3 million, respectively. Total receivables due from BGP were $1.0 million at September 30, 2014.

In July 2013, the Company agreed to lend up to $10.0 million to INOVA Geophysical, and received a promissory note issued by INOVA Geophysical to the order of the Company, which was originally scheduled to mature on September 30, 2013. The maturity date of the promissory note has since been extended to December 31, 2014. The loan was made by the Company to support certain short-term working capital needs of INOVA Geophysical. The indebtedness under the note accrues interest at an annual rate equal to the London Interbank Offered Rate plus 650 basis points. In 2013, the Company advanced the full principal amount of $10.0 million to INOVA Geophysical under the promissory note. INOVA Geophysical has repaid a total of $6.0 million, of which $4.0 million remains outstanding at September 30, 2014. This balance is included in Prepaid expenses and other current assets.

With the Prior Credit Facility being replaced by the New Credit Facility in August 2014, INOVA no longer provides a bank stand-by letter of credit as credit support for the Company’s obligations under the New Credit Facility. For further information regarding our New Credit Facility, see Note 5 “Long-term Debt.”

(15) Polarcus Alliance

In June 2013, the Company entered into an alliance (the “Polarcus Alliance”) with Polarcus MC Ltd., a Cayman Islands limited liability company, (“Polarcus”) in order to collaborate on 3D multi-client data library projects. The premise of the Polarcus Alliance is for towed-streamer seismic services and other related services to be provided by Polarcus and data processing and reservoir services to be provided by the Company. Under the Polarcus Alliance, each party can identify and propose potential project opportunities to the other party, which the other party then has the option to propose amendments to the potential project and accept or reject participation in the proposed project.

Under the Polarcus Alliance, the Company is currently participating in one project, offshore Ireland, that was proposed by Polarcus and accepted by the Company. Acquisition started and completed in the third quarter of 2014. This project is currently in the data processing phase. The transactions related to this project are included within the Company’s consolidated results of operations, financial position and cash flows and are immaterial.

The activities of each project under the Polarcus Alliance are accounted for consistent with our accounting policies related to the Company’s multi-client data library, except that the Company only records revenue at the Company’s agreed sharing ratio of each project and capitalizes its agreed share of the direct project costs. When the current project is complete, the Company will have increased its multi-client data library by its share of the total direct project costs.

The Company periodically settles any differences between actual payments for direct project costs made by each company and the agreed sharing ratio on a specific project through cash payments between the companies. As a result, the Company may build up a payable and/or receivable balance with Polarcus to be settled at a later date.

(16) Recent Accounting Pronouncements

Revenue Recognition — In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued new accounting guidance for recognition of revenue. This new guidance replaces virtually all existing U.S. GAAP and IFRS guidance on revenue recognition. The new guidance is effective for fiscal years beginning after December 15, 2016. This new guidance applies to all periods presented. Therefore, when the Company issues its financial statements on Forms 10-Q and 10-K for periods included in its year ended December 31, 2017, its comparative periods that are presented from the years ended December 31, 2015 and 2016, must be retrospectively presented in compliance with this new guidance. Early adoption is not allowed for U.S. GAAP. The new guidance requires companies to make more estimates and use more judgment than under current accounting guidance. The Company is currently evaluating (i) the two allowed adoption methods to determine which method it plans to use for retrospective presentation of comparative periods and (ii) whether the implementation of this new guidance will have a material impact on the Company’s consolidated financial position or results of operations for the periods presented.

Reporting Discontinued Operations — In April 2014, the FASB issued amendments to guidance for reporting discontinued operations and disposals of components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The implementation of the amended guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

(17) Condensed Consolidating Financial Information

In 2013, the Company sold $175.0 million aggregate principal amount of its 8.125% Senior Secured Second-Priority Notes due 2018. The Notes were issued by ION Geophysical Corporation and are guaranteed by the Company’s current material U.S. subsidiaries: GX Technology Corporation, ION Exploration Products (U.S.A.), Inc. and I/O Marine Systems, Inc. (“the Guarantors”), which are 100-percent-owned subsidiaries. The Guarantors have fully and unconditionally guaranteed the payment obligations of ION Geophysical Corporation with respect to these debt securities. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:


•	ION Geophysical Corporation and the Guarantors (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).


•	All other subsidiaries of ION Geophysical Corporation that are not Guarantors.


•	The consolidating adjustments necessary to present ION Geophysical Corporation’s results on a consolidated basis.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.

Table of Contents



	September 30, 2014
Balance Sheet	ION Geophysical Corporation			The Guarantors			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	84,294		$	—		$	45,553		$	—		$	129,847
Accounts receivable, net	1,529			36,502			48,707			—			86,738
Unbilled receivables	—			42,059			15,418			—			57,477
Inventories	—			3,151			52,225			—			55,376
Prepaid expenses and other current assets	11,585			3,500			13,138			(1,770		)	26,453
Total current assets	97,408			85,212			175,041			(1,770		)	355,891
Deferred income tax asset	6,499			6,675			760			406			14,340
Property, plant, equipment and seismic rental equipment, net	6,547			28,832			24,986			—			60,365
Multi-client data library, net	—			219,251			24,666			—			243,917
Equity method investments	40,174			—			—			—			40,174
Investment in subsidiaries	796,608			280,302			—			(1,076,910		)	—
Goodwill	—			21,884			28,501			—			50,385
Intangible assets, net	—			6,752			2,439			—			9,191
Intercompany receivables	35,192			—			—			(35,192		)	—
Other assets	17,624			197			1,661			—			19,482
Total assets	$	1,000,052		$	649,105		$	258,054		$	(1,113,466	)	$	793,745
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	—		$	4,901		$	1,000		$	—		$	5,901
Accounts payable	1,886			12,443			16,337			—			30,666
Accrued expenses	14,214			42,489			19,988			(1,083		)	75,608
Accrued multi-client data library royalties	—			23,800			616			—			24,416
Deferred revenue	—			13,707			2,788			—			16,495
Total current liabilities	16,100			97,340			40,729			(1,083		)	153,086
Long-term debt, net of current maturities	175,000			4,444			139			—			179,583
Intercompany payables	490,127			34,963			229			(525,319		)	—
Other long-term liabilities	2,829			130,775			9,455			(283		)	142,776
Total liabilities	684,056			267,522			50,552			(526,685		)	475,445
Redeemable noncontrolling interests	—			—			2,086			—			2,086
Equity:
Common stock	1,642			290,460			5,787			(296,247		)	1,642
Additional paid-in capital	886,170			175,005			247,585			(422,590		)	886,170
Accumulated earnings (deficit)	(553,531		)	334,625			28,126			(362,751		)	(553,531		)
Accumulated other comprehensive income (loss)	(11,720		)	6,736			(11,416		)	4,680			(11,720		)
Due from ION Geophysical Corporation	—			(425,243		)	(64,884		)	490,127			—
Treasury stock	(6,565		)	—			—			—			(6,565		)
Total stockholders’ equity	315,996			381,583			205,198			(586,781		)	315,996
Noncontrolling interests	—			—			218			—			218
Total equity	315,996			381,583			205,416			(586,781		)	316,214
Total liabilities and equity	$	1,000,052		$	649,105		$	258,054		$	(1,113,466	)	$	793,745

Table of Contents



	December 31, 2013
Balance Sheet	ION Geophysical Corporation			The Guarantors			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	124,701		$	—		$	23,355		$	—		$	148,056
Accounts receivable, net	1,874			99,547			48,027			—			149,448
Unbilled receivables	—			33,490			15,978			—			49,468
Inventories	—			6,595			50,578			—			57,173
Prepaid expenses and other current assets	12,888			5,030			7,438			(584		)	24,772
Total current assets	139,463			144,662			145,376			(584		)	428,917
Deferred income tax asset	6,513			6,960			489			688			14,650
Property, plant, equipment and seismic rental equipment, net	6,440			29,845			10,399			—			46,684
Multi-client data library, net	—			212,572			26,212			—			238,784
Equity method investments	51,065			—			2,800			—			53,865
Investment in subsidiaries	699,695			248,482			—			(948,177		)	—
Goodwill	—			26,984			28,892			—			55,876
Intangible assets, net	—			8,246			3,001			—			11,247
Intercompany receivables	8,313			13,419			—			(21,732		)	—
Other assets	14,315			56			24,262			(23,985		)	14,648
Total assets	$	925,804		$	691,226		$	241,431		$	(993,790	)	$	864,671
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	—		$	4,716		$	1,190		$	—		$	5,906
Accounts payable	3,515			11,741			7,364			34			22,654
Accrued expenses	16,652			54,250			13,392			64			84,358
Accrued multi-client data library royalties	—			45,921			539			—			46,460
Deferred revenue	—			16,387			4,295			—			20,682
Total current liabilities	20,167			133,015			26,780			98			180,060
Long-term debt, net of current maturities	210,000			3,655			591			—			214,246
Intercompany payables	426,134			—			21,732			(447,866		)	—
Other long-term liabilities	11,757			214,211			8,637			(24,003		)	210,602
Total liabilities	668,058			350,881			57,740			(471,771		)	604,908
Redeemable noncontrolling interests	—			—			1,878			—			1,878
Equity:
Common stock	1,637			290,460			19,138			(309,598		)	1,637
Additional paid-in capital	879,969			180,700			235,381			(416,081		)	879,969
Accumulated earnings (deficit)	(606,157		)	232,186			(4,010		)	(228,176		)	(606,157		)
Accumulated other comprehensive income (loss)	(11,138		)	6,218			(11,920		)	5,702			(11,138		)
Due from ION Geophysical Corporation	—			(369,219		)	(56,915		)	426,134			—
Treasury stock	(6,565		)	—			—			—			(6,565		)
Total stockholders’ equity	257,746			340,345			181,674			(522,019		)	257,746
Noncontrolling interests	—			—			139			—			139
Total equity	257,746			340,345			181,813			(522,019		)	257,885
Total liabilities and equity	$	925,804		$	691,226		$	241,431		$	(993,790	)	$	864,671

Table of Contents



	Three Months Ended September 30, 2014
Income Statement	ION Geophysical Corporation			The Guarantors			All Other Subsidiaries			Consolidating Adjustments			Total Consolidated
	(In thousands)
Net revenues	$	—		$	33,344		$	73,947		$	(751	)	$	106,540
Cost of sales	—			32,447			45,621			(751		)	77,317
Gross profit	—			897			28,326			—			29,223
Total operating expenses	7,599			15,357			11,616			—			34,572
Income (loss) from operations	(7,599		)	(14,460		)	16,710			—			(5,349		)
Interest expense, net	(4,931		)	(58		)	(59		)	—			(5,048		)
Intercompany interest, net	(90		)	566			(476		)	—			—
Equity in earnings (losses) of investments	(12,131		)	8,500			—			(1,927		)	(5,558		)
Other income (expense)	(17		)	21			(626		)	—			(622		)
Net income (loss) before income taxes	(24,768		)	(5,431		)	15,549			(1,927		)	(16,577		)
Income tax expense (benefit)	(227		)	800			7,772			—			8,345
Net income (loss)	(24,541		)	(6,231		)	7,777			(1,927		)	(24,922		)
Net loss attributable to noncontrolling interests	—			—			381			—			381
Net income (loss) applicable to common shares	$

ION GEOPHYSICAL CORP - FORM 10-Q - November 6, 2014

Attached files