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EXCEL - IDEA: XBRL DOCUMENT - ION GEOPHYSICAL CORP | Financial_Report.xls |
EX-32.2 - EXHIBIT 32.2 CFO SECTION 906 CERTIFICATION - ION GEOPHYSICAL CORP | ex322cfosec906cert03312015.htm |
EX-32.1 - EXHIBIT 32.1 CEO SECTION 906 CERTIFICATION - ION GEOPHYSICAL CORP | ex321ceosec906cert03312015.htm |
EX-31.1 - EXHIBIT 31.1 CEO SECTION 302 CERTIFICATION - ION GEOPHYSICAL CORP | ex311ceosec302cert03312015.htm |
EX-10.1 - EXHIBIT 10.1 - ION GEOPHYSICAL CORP | ex101sargrantagreementvfin.htm |
EX-31.2 - EXHIBIT 31.2 CFO SECTION 302 CERTIFICATION - ION GEOPHYSICAL CORP | ex312cfosec302cert03312015.htm |
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 MARCH 31, 2015
OR
¨ | 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 April 23, 2015, there were 164,686,976 shares of common stock, par value $0.01 per share, outstanding.
1
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS FOR FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2015
PAGE | |
PART I. Financial Information | |
Item 1. Financial Statements | |
Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 | |
Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 | |
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2015 and 2014 | |
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 | |
Footnotes to Unaudited Condensed Consolidated Financial Statements | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. Quantitative and Qualitative Disclosures about Market Risk | |
Item 4. Controls and Procedures | |
PART II. Other Information | |
Item 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 5. Other Information | |
Item 6. Exhibits |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 2015 | December 31, 2014 | ||||||
( In thousands, except share data) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 144,438 | $ | 173,608 | |||
Accounts receivable, net | 39,369 | 114,325 | |||||
Unbilled receivables | 24,098 | 22,599 | |||||
Inventories | 42,976 | 51,162 | |||||
Prepaid expenses and other current assets | 13,007 | 13,662 | |||||
Total current assets | 263,888 | 375,356 | |||||
Deferred income tax asset | 8,605 | 8,604 | |||||
Property, plant, equipment and seismic rental equipment, net | 79,739 | 69,840 | |||||
Multi-client data library, net | 128,598 | 118,669 | |||||
Goodwill | 26,289 | 27,388 | |||||
Intangible assets, net | 6,276 | 6,788 | |||||
Other assets | 10,064 | 10,612 | |||||
Total assets | $ | 523,459 | $ | 617,257 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Current maturities of long-term debt | $ | 7,242 | $ | 7,649 | |||
Accounts payable | 29,150 | 36,863 | |||||
Accrued expenses | 50,849 | 65,264 | |||||
Accrued multi-client data library royalties | 15,604 | 35,219 | |||||
Deferred revenue | 11,327 | 8,262 | |||||
Total current liabilities | 114,172 | 153,257 | |||||
Long-term debt, net of current maturities | 182,421 | 182,945 | |||||
Other long-term liabilities | 144,979 | 143,804 | |||||
Total liabilities | 441,572 | 480,006 | |||||
Redeemable noncontrolling interest | 1,325 | 1,539 | |||||
Equity: | |||||||
Common stock, $0.01 par value; authorized 200,000,000 shares; outstanding 164,686,976 and 164,484,095 shares at March 31, 2015 and December 31, 2014, respectively, net of treasury stock | 1,647 | 1,645 | |||||
Additional paid-in capital | 889,255 | 887,749 | |||||
Accumulated deficit | (789,673 | ) | (734,409 | ) | |||
Accumulated other comprehensive loss | (14,152 | ) | (12,807 | ) | |||
Treasury stock, at cost, 849,539 shares at both March 31, 2015 and December 31, 2014 | (6,565 | ) | (6,565 | ) | |||
Total stockholders’ equity | 80,512 | 135,613 | |||||
Noncontrolling interest | 50 | 99 | |||||
Total equity | 80,562 | 135,712 | |||||
Total liabilities and equity | $ | 523,459 | $ | 617,257 |
See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.
3
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
(In thousands, except per share data) | |||||||
Service revenues | $ | 20,080 | $ | 110,696 | |||
Product revenues | 20,498 | 34,002 | |||||
Total net revenues | 40,578 | 144,698 | |||||
Cost of services | 45,534 | 72,071 | |||||
Cost of products | 10,832 | 15,773 | |||||
Gross profit (loss) | (15,788 | ) | 56,854 | ||||
Operating expenses: | |||||||
Research, development and engineering | 7,720 | 9,039 | |||||
Marketing and sales | 7,833 | 9,213 | |||||
General, administrative and other operating expenses | 15,348 | 18,931 | |||||
Total operating expenses | 30,901 | 37,183 | |||||
Income (loss) from operations | (46,689 | ) | 19,671 | ||||
Interest expense, net | (4,625 | ) | (4,797 | ) | |||
Equity in losses of investments | — | (1,688 | ) | ||||
Other income (expense), net | (3,219 | ) | 68,526 | ||||
Income (loss) before income taxes | (54,533 | ) | 81,712 | ||||
Income tax expense | 983 | 5,263 | |||||
Net income (loss) | (55,516 | ) | 76,449 | ||||
Net (income) loss attributable to noncontrolling interests | 252 | (470 | ) | ||||
Net income (loss) attributable to ION | $ | (55,264 | ) | $ | 75,979 | ||
Net income (loss) per share: | |||||||
Basic | $ | (0.34 | ) | $ | 0.46 | ||
Diluted | $ | (0.34 | ) | $ | 0.46 | ||
Weighted average number of common shares outstanding: | |||||||
Basic | 164,567 | 163,847 | |||||
Diluted | 164,567 | 164,061 |
See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.
4
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
Net income (loss) | $ | (55,516 | ) | $ | 76,449 | ||
Other comprehensive loss, net of taxes, as appropriate: | |||||||
Foreign currency translation adjustments | (1,345 | ) | 486 | ||||
Equity interest in investees' other comprehensive loss | — | (1,173 | ) | ||||
Other changes in other comprehensive income | — | 26 | |||||
Total other comprehensive loss, net of taxes | (1,345 | ) | (661 | ) | |||
Comprehensive net income (loss) | (56,861 | ) | 75,788 | ||||
Comprehensive (income) loss attributable to noncontrolling interest | 252 | (470 | ) | ||||
Comprehensive net income (loss) attributable to ION | $ | (56,609 | ) | $ | 75,318 |
See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.
5
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
(In thousands) | |||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | (55,516 | ) | $ | 76,449 | ||
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities: | |||||||
Depreciation and amortization (other than multi-client data library) | 6,525 | 7,904 | |||||
Amortization of multi-client data library | 5,289 | 16,326 | |||||
Stock-based compensation expense | 1,480 | 2,777 | |||||
Equity in losses of investments | — | 1,688 | |||||
Reduction of accrual for loss contingency related to legal proceedings | — | (69,557 | ) | ||||
Deferred income taxes | (12 | ) | (884 | ) | |||
Change in operating assets and liabilities: | |||||||
Accounts receivable | 74,388 | 60,646 | |||||
Unbilled receivables | (1,523 | ) | (18,945 | ) | |||
Inventories | (468 | ) | (144 | ) | |||
Accounts payable, accrued expenses and accrued royalties | (39,144 | ) | (5,359 | ) | |||
Deferred revenue | 3,137 | (4,678 | ) | ||||
Other assets and liabilities | (862 | ) | (3,541 | ) | |||
Net cash (used in) provided by operating activities | (6,706 | ) | 62,682 | ||||
Cash flows from investing activities: | |||||||
Cash invested in multi-client data library | (9,088 | ) | (22,353 | ) | |||
Purchase of property, plant, equipment and seismic rental assets | (11,994 | ) | (1,997 | ) | |||
Repayment of advance to INOVA Geophysical | — | 1,000 | |||||
Net investment in and advances to OceanGeo B.V. prior to its consolidation | — | (3,074 | ) | ||||
Other investing activities | 257 | 605 | |||||
Net cash used in investing activities | (20,825 | ) | (25,819 | ) | |||
Cash flows from financing activities: | |||||||
Borrowings under revolving line of credit | — | 15,000 | |||||
Payments on notes payable and long-term debt | (2,066 | ) | (2,755 | ) | |||
Other financing activities | 31 | 166 | |||||
Net cash (used in) provided by financing activities | (2,035 | ) | 12,411 | ||||
Effect of change in foreign currency exchange rates on cash and cash equivalents | 396 | (24 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (29,170 | ) | 49,250 | ||||
Cash and cash equivalents at beginning of period | 173,608 | 148,056 | |||||
Cash and cash equivalents at end of period | $ | 144,438 | $ | 197,306 |
See accompanying Footnotes to Unaudited Condensed Consolidated Financial Statements.
6
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
FOOTNOTES 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, 2014 has been derived from the Company’s audited consolidated financial statements at that date. The condensed consolidated balance sheet at March 31, 2015, and the condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2015 and 2014, 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 months ended March 31, 2015 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, 2014 and Amendment No. 1 thereto on Form 10-K/A, which was filed on April 24, 2015 and contains the separate consolidated financial statements of INOVA Geophysical Equipment Limited (“INOVA Geophysical”) for its fiscal year ended December 31, 2014.
(2) Restructurings and Other Charges
The recent decline in crude oil prices to five-year lows has negatively impacted the economic outlook of the Company’s E&P customers, which has also negatively impacted the outlook for the Company’s seismic contractor customers. In response to the decline in crude oil prices, E&P companies have reduced spending and re-prioritized their reduced capital spend to production-related activities and existing assets over exploration. Seismic spending is discretionary; therefore, E&P companies have disproportionately cut their spend on seismic-related services and products.
During the first quarter of 2015, the Company continued its restructuring program, focusing on centralizing the Company’s global data processing capabilities to core geographical hubs in the U.S. and the U.K. and reducing the Company’s marine repair infrastructure to two locations in the U.S. and U.A.E. Under this program, the Company made additional reductions to its headcount. Including December 2014, these restructurings have resulted in approximately a 20% reduction of full-time employees. During the three months ended March 31, 2015, the Company recognized the following pre-tax charges (in thousands):
Severance Charges(a) | Facility Charges(b) | Total | |||||||||
Cost of goods sold | $ | 1,813 | $ | — | $ | 1,813 | |||||
Operating expenses | 198 | — | 198 | ||||||||
Other expense | — | 1,913 | 1,913 | ||||||||
Net income attributable to noncontrolling interest | (172 | ) | — | (172 | ) | ||||||
Consolidated total | $ | 1,839 | $ | 1,913 | $ | 3,752 |
(a) | Represents severance charges related to first quarter 2015 restructuring, a portion of which relates to a noncontrolling interest. |
(b) | Represents facility charges related to first quarter 2015 restructuring. |
During the second quarter, the Company expects to incur additional restructuring charges related to vacating facilities and other items in the range of $2 million to $4 million.
(3) Segment Information
The Company operates through four business segments – Solutions, Systems, Software and Ocean Bottom Services. The Company measures segment operating results based on income (loss) from operations. In addition, the Company has an equity ownership interest in its INOVA Geophysical joint venture. As of December 31, 2014, the Company wrote its investment in INOVA Geophysical to zero and has suspended recording its share of losses in the joint venture. If at a future date, the Company’s cumulative share of earnings during the period of suspension becomes greater than its share of losses during the same period, the Company will begin to record its share of earnings in the joint venture as long as its net equity method investment remains greater than zero.
7
The following table is a summary of segment information (in thousands):
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Net revenues: | |||||||
Solutions: | |||||||
New Venture | $ | 5,029 | $ | 32,738 | |||
Data Library | 2,137 | 13,217 | |||||
Total multi-client revenues | 7,166 | 45,955 | |||||
Data Processing | 11,833 | 43,286 | |||||
Total | $ | 18,999 | $ | 89,241 | |||
Systems: | |||||||
Towed Streamer | $ | 5,165 | $ | 11,851 | |||
Other | 7,604 | 12,997 | |||||
Total | $ | 12,769 | $ | 24,848 | |||
Software: | |||||||
Software Systems | $ | 7,729 | $ | 9,154 | |||
Services | 1,081 | 885 | |||||
Total | $ | 8,810 | $ | 10,039 | |||
Ocean Bottom Services | $ | — | $ | 20,570 | |||
Total | $ | 40,578 | $ | 144,698 | |||
Gross profit (loss): | |||||||
Solutions | $ | (10,392 | ) | $ | 33,011 | ||
Systems | 4,559 | 11,417 | |||||
Software | 5,590 | 7,257 | |||||
Ocean Bottom Services | (15,545 | ) | 5,169 | ||||
Total | $ | (15,788 | ) | $ | 56,854 | ||
Gross margin: | |||||||
Solutions | (55 | )% | 37 | % | |||
Systems | 36 | % | 46 | % | |||
Software | 63 | % | 72 | % | |||
Ocean Bottom Services | — | % | 25 | % | |||
Total | (39 | )% | 39 | % | |||
Income (loss) from operations: | |||||||
Solutions | $ | (21,778 | ) | $ | 19,112 | ||
Systems | 1,014 | 3,371 | |||||
Software | 3,335 | 5,128 | |||||
Ocean Bottom Services | (17,559 | ) | 4,162 | ||||
Corporate and other | (11,701 | ) | (12,102 | ) | |||
Income (loss) from operations | (46,689 | ) | 19,671 | ||||
Interest expense, net | (4,625 | ) | (4,797 | ) | |||
Equity in losses of investments | — | (1,688 | ) | ||||
Other income (expense), net | (3,219 | ) | 68,526 | ||||
Income (loss) before income taxes | $ | (54,533 | ) | $ | 81,712 | ||
(4) Long-term Debt
Obligations (in thousands) | March 31, 2015 | December 31, 2014 | ||||||
Senior secured second-priority notes | $ | 175,000 | $ | 175,000 | ||||
Equipment capital leases | 14,391 | 15,059 | ||||||
Other debt | 272 | 535 | ||||||
Total | 189,663 | 190,594 | ||||||
Current portion of long-term debt and lease obligations | (7,242 | ) | (7,649 | ) | ||||
Non-current portion of long-term debt and lease obligations | $ | 182,421 | $ | 182,945 |
8
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”), entered into a new credit facility (the “Credit Facility”). For a complete discussion of the terms, available credit and security of this Credit Facility, see Footnote 6 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
As of March 31, 2015, there was no outstanding indebtedness under the Credit Facility. At March 31, 2015, the Company has a borrowing base of approximately $43 million under the Credit Facility. The borrowing base will increase or decrease monthly using a formula based on certain eligible receivables, eligible inventory and other amounts.
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 March 31, 2015, 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.
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. For a complete discussion of the terms and security of these Notes, see Footnote 6 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The Notes contain certain covenants that, among other things, limit or prohibit 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, including among other things:
•incurring additional indebtedness;
•creating liens;
•paying dividends and making other distributions in respect of the Company’s capital stock;
•redeeming the Company’s capital stock;
•making investments or certain other restricted payments;
•selling certain kinds of assets;
•entering into transactions with affiliates; and
•effecting mergers or consolidations.
These and other restrictive covenants contained in the Indenture are subject to certain exceptions and qualifications. All of the Company’s subsidiaries are currently restricted subsidiaries.
As of March 31, 2015, the Company was in compliance with the covenants on these Notes.
9
(5) 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 (loss) 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 March 31, 2015 and 2014 was 9,522,274 and 9,660,100, respectively, and the total number of shares of restricted stock and shares reserved for restricted stock units outstanding at March 31, 2015 and 2014 was 1,504,470 and 1,479,027, respectively. All outstanding stock awards for the three months ended March 31, 2015 were anti-dilutive.
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 March 31, | |||||||
2015 | 2014 | ||||||
Net income (loss) attributable to ION | $ | (55,264 | ) | $ | 75,979 | ||
Weighted average number of common shares outstanding | 164,567 | 163,847 | |||||
Effect of dilutive stock awards | — | 214 | |||||
Weighted average number of diluted common shares outstanding | 164,567 | 164,061 | |||||
Basic net income (loss) per share | $ | (0.34 | ) | $ | 0.46 | ||
Diluted net income (loss) per share | $ | (0.34 | ) | $ | 0.46 |
(6) 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 (“ASC”) 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 March 31, 2015, the Company’s unreserved net U.S. deferred tax assets totaled $2.7 million, which is unchanged from December 31, 2014. These existing unreserved deferred tax assets are currently considered to be “more likely than not” realizable through the expected reversal of existing temporary differences and the ability to offset the related deductions against taxable income in open carryback years.
The Company’s effective tax rates for the three months ended March 31, 2015 and 2014 were (1.8)% and 6.4%, respectively. The Company’s income tax expense for the three months ended March 31, 2015 of $1.0 million relates to income from the Company’s non-U.S. businesses. This foreign tax expense was not offset by tax benefits on losses within the U.S. and other jurisdictions, therefore producing a consolidated income tax expense on a pre-tax loss.
The Company has approximately $2.0 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 March 31, 2015, the Company’s U.S. federal tax returns for 2011 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 2011, although carryforward attributes that were generated prior to 2011 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 2009 and subsequent years generally remain open to examination.
(7) 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 the 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 damage 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 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.
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 in September 2014. WesternGeco’s appeal brief was filed in October 2014. Both parties presented their oral arguments in March 2015. The Company is currently awaiting a ruling from the United States Court of Appeals for the Federal Circuit. If the adverse ruling is affirmed, the Company intends to pursue all available opportunities to make further appeals.
10
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. 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 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 a material 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 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 $1.6 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.
(8) Other Income (Expense), Net
The following table is a summary of other income (expense), net (in thousands):
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Reduction of loss contingency related to legal proceedings (Footnote 7) | $ | — | $ | 69,557 | |||
Facility restructuring charge (Footnote 2) | (1,913 | ) | — | ||||
Other expense, net | (1,306 | ) | (1,031 | ) | |||
Total other income (expense), net | $ | (3,219 | ) | $ | 68,526 |
(9) Details of Selected Balance Sheet Accounts
Inventories
The following table is a summary of inventories (in thousands): | March 31, 2015 | December 31, 2014 | |||||
Raw materials and subassemblies | $ | 43,641 | $ | 41,461 | |||
Work-in-process | 9,074 | 18,221 | |||||
Finished goods | 15,148 | 21,284 | |||||
Reserve for excess and obsolete inventories | (24,887 | ) | (29,804 | ) | |||
Total | $ | 42,976 | $ | 51,162 |
The $4.9 million reduction in the reserve for excess and obsolete inventories was due to the scrapping of fully reserved inventory.
11
Other Long-term Liabilities
The following table is a summary of other long-term liabilities (in thousands): | March 31, 2015 | December 31, 2014 | |||||
Accrual for loss contingency related to legal proceedings (Footnote 7) | $ | 123,770 | $ | 123,770 | |||
Deferred rents | 13,896 | 13,416 | |||||
Facility restructuring accrual | 4,018 | 3,353 | |||||
Other long-term liabilities | 3,295 | 3,265 | |||||
Total | $ | 144,979 | $ | 143,804 |
(10) Accumulated Other Comprehensive Income (Loss)
The following table is a summary of changes in accumulated other comprehensive loss by component (in thousands):
Foreign currency translation adjustments | Total | |||||||
Accumulated other comprehensive loss at December 31, 2014 | $ | (12,807 | ) | $ | (12,807 | ) | ||
Net current-period other comprehensive income (loss) | (1,345 | ) | (1,345 | ) | ||||
Accumulated other comprehensive loss at March 31, 2015 | $ | (14,152 | ) | $ | (14,152 | ) | ||
(11) Supplemental Cash Flow Information and Non-cash Activity
The following table is a summary of non-cash items from investing and financing activities (in thousands):
Three Months Ended March 31, | |||||||
2015 | 2014 | ||||||
Cash paid during the period for: | |||||||
Interest | $ | 497 | $ | 912 | |||
Income taxes | $ | 5,041 | $ | 5,020 | |||
Non-cash items from investing and financing activities: | |||||||
Purchases of computer equipment financed through capital leases | $ | 1,178 | $ | 1,952 | |||
Investment in multi-client data library financed through accounts payable | $ | 7,018 | $ | — | |||
Transfer of inventory to property, plant, equipment and seismic rental equipment | $ | 8,485 | (a) | $ | 2,308 |
(a) | This transfer of inventory to property, plant, equipment and seismic rental equipment relates to ocean bottom seismic equipment manufactured by the Company to be deployed in the acquisition of ocean bottom seismic data. |
Additionally, during the three months ended March 31, 2015, the Company purchased approximately $12.0 million of property, plant, equipment and seismic rental equipment, including approximately $10.1 million related to the manufacture of ocean bottom seismic equipment that will be used by the Ocean Bottom Services segment.
(12) Acquisition of OceanGeo
In 2014, the Company completed the acquisition of OceanGeo B.V. (“OceanGeo”). OceanGeo specializes in seismic acquisition operations using ocean bottom cables deployed from vessels leased by OceanGeo. For a complete discussion of the acquisition of OceanGeo, see Footnote 3 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The following summarized unaudited pro forma consolidated income statement information for the three months ended March 31, 2014, assumes that the OceanGeo acquisition had occurred as of the beginning of the period prior to the period the acquisition occurred. 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 that prior period or the results that may be attained in the future. Amounts presented below are in thousands, except for the per share amounts:
12
Pro forma Consolidated ION Income Statement Information | Three Months Ended March 31, 2014 | ||||
Net revenues | $ | 153,882 | |||
Income from operations | $ | 22,788 | |||
Net income | $ | 77,009 | |||
Net income attributable to ION | $ | 76,539 | |||
Basic and diluted net income per common share | $ | 0.47 |
OceanGeo did not record any revenues during the three months ended March 31, 2015 due to its vessels being idle while it attempts to secure a backlog of future orders. OceanGeo has been verbally awarded and is working through the bid process towards a formal contract for a long-term project in Brazil. However, this program is projected to begin in the fourth quarter of 2015 or early 2016.
(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.
The carrying amounts of the Company’s long-term debt as of March 31, 2015 and December 31, 2014 were $189.7 million and $190.6 million, respectively, compared to its fair values of $151.2 million and $162.6 million as of March 31, 2015 and December 31, 2014, respectively. The fair value of the long-term debt was calculated using Level 1 inputs, including an active market price.
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.
(14) Stock-based Compensation
Stock Appreciation Rights (“SARs”). On March 1, 2015, the Company issued 3,108,107 SAR awards to 16 individuals with an exercise price of $2.28. The vesting of these SARs is achieved through both a market condition and a service condition. The market condition is achieved, in part or in full, in the event that during the four-year period beginning on the date of grant the 20-day trailing volume-weighted average price of a share of common stock is (i) greater than 120% of the exercise price for the first 1/3 of the awards, (ii) greater than 125% of the exercise price for the second 1/3 of the awards and (iii) greater than 130% of the exercise price for the final 1/3 of the awards. The exercise condition restricts the ability of the holders to exercise awards until certain service milestones have been reached such that (i) no more than 1/3 of the awards may be exercised, if vested, on and after the first anniversary of the date of grant, (ii) no more than 2/3 of the awards may be exercised, if vested, on and after the second anniversary of the date of grant and (iii) all of the awards may be exercised, if vested, on and after the third anniversary of the date of grant.
Pursuant to ASC 718, “Compensation – Stock Compensation,” the stock appreciation rights are considered liability awards and as such, these amounts are accrued in the liability section of the balance sheet. The Company calculated the fair value of each SAR award on the date of grant using a Monte Carlo simulation model. The following assumptions were used:
March 1, 2015 | |
Risk-free interest rates | 2.03% |
Expected lives (in years) | 2.7 |
Expected dividend yield | —% |
Expected volatility | 60.27% |
(15) Related Party Transactions
BGP Inc. (“BGP”) owned approximately 14.4% of the Company’s outstanding common stock as of March 31, 2015. For the three months ended March 31, 2015 and 2014, the Company recorded revenues from BGP of $2.9 million and $2.0 million, respectively. Total receivables due from BGP were $3.1 million at March 31, 2015.
(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.
On April 1, 2015, the FASB decided to propose a one-year deferral of the effective date for its new revenue standard for public and nonpublic entities reporting under U.S. GAAP. The proposal also would permit entities to adopt the standard as early as the original public entity effective date. Early adoption prior to that date would still not be permitted.
13
The FASB and IASB (collectively, the “Boards”) have discussed clarifying the guidance in their new revenue standards for: (1) licenses of intellectual property, (2) identifying performance obligations, (3) noncash consideration and (4) collectibility. The Boards have also discussed whether to add practical expedients for the accounting for contract modifications at transition and the presentation of sales taxes, and the FASB separately discussed several technical corrections. The FASB and the IASB did not agree on the nature and breadth of all of the changes to be proposed. The Boards are expected to issue separate exposure drafts later this year.
The Company continues to evaluate (i) the two allowed adoption methods to determine which method it plans to use for retrospective presentation of comparative periods, (ii) the impact of proposed clarifications to the guidance on timing of the recognition of revenue within the Company’s various revenue streams, (iii) the Company’s option to adopt the new guidance either as of the originally proposed effective date or the proposed deferred effective date and (iv) 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.
(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 footnotes.
14
March 31, 2015 | |||||||||||||||||||
Balance Sheet | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||
(In thousands) | |||||||||||||||||||
ASSETS | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 73,704 | $ | — | $ | 70,734 | $ | — | $ | 144,438 | |||||||||
Accounts receivable, net | — | 20,410 | 18,959 | — | 39,369 | ||||||||||||||
Unbilled receivables | — | 20,604 | 3,494 | — | 24,098 | ||||||||||||||
Inventories | — | 3,966 | 39,010 | — | 42,976 | ||||||||||||||
Prepaid expenses and other current assets | 5,827 | 3,273 | 8,404 | (4,497 | ) | 13,007 | |||||||||||||
Total current assets | 79,531 | 48,253 | 140,601 | (4,497 | ) | 263,888 | |||||||||||||
Deferred income tax asset | (7,852 | ) | 6,675 | 750 | 9,032 | 8,605 | |||||||||||||
Property, plant, equipment and seismic rental equipment, net | 5,972 | 30,748 | 43,019 | — | 79,739 | ||||||||||||||
Multi-client data library, net | — | 112,417 | 16,181 | — | 128,598 | ||||||||||||||
Investment in subsidiaries | 631,284 | 258,010 | — | (889,294 | ) | — | |||||||||||||
Goodwill | — | — | 26,289 | — | 26,289 | ||||||||||||||
Intangible assets, net | — | 5,822 | 454 | — | 6,276 | ||||||||||||||
Intercompany receivables | 43,490 | — | — | (43,490 | ) | — | |||||||||||||
Other assets | 8,935 | 167 | 962 | — | 10,064 | ||||||||||||||
Total assets | $ | 761,360 | $ | 462,092 | $ | 228,256 | $ | (928,249 | ) | $ | 523,459 | ||||||||
LIABILITIES AND EQUITY | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Current maturities of long-term debt | $ | — | $ | 6,880 | $ | 362 | $ | — | $ | 7,242 | |||||||||
Accounts payable | 2,260 | 16,246 | 10,644 | — | 29,150 | ||||||||||||||
Accrued expenses | 5,268 | 24,505 | 16,259 | 4,817 | 50,849 | ||||||||||||||
Accrued multi-client data library royalties | — | 15,040 | 564 | — | 15,604 | ||||||||||||||
Deferred revenue | — | 8,346 | 2,981 | — | 11,327 | ||||||||||||||
Total current liabilities | 7,528 | 71,017 | 30,810 | 4,817 | 114,172 | ||||||||||||||
Long-term debt, net of current maturities | 175,000 | 7,345 | 76 | — | 182,421 | ||||||||||||||
Intercompany payables | 495,667 | 25,268 | 18,218 | (539,153 | ) | — | |||||||||||||
Other long-term liabilities | 2,653 | 130,545 | 12,063 | (282 | ) | 144,979 | |||||||||||||
Total liabilities | 680,848 | 234,175 | 61,167 | (534,618 | ) | 441,572 | |||||||||||||
Redeemable noncontrolling interest | — | — | 1,325 | — | 1,325 | ||||||||||||||
Equity: | |||||||||||||||||||
Common stock | 1,647 | 290,460 | 19,138 | (309,598 | ) | 1,647 | |||||||||||||
Additional paid-in capital | 889,255 | 180,700 | 234,234 | (414,934 | ) | 889,255 | |||||||||||||
Accumulated earnings (deficit) | (789,673 | ) | 170,153 | 3,895 | (174,048 | ) | (789,673 | ) | |||||||||||
Accumulated other comprehensive income (loss) | (14,152 | ) | 4,869 | (14,155 | ) | 9,286 | (14,152 | ) | |||||||||||
Due from ION Geophysical Corporation | — | (418,265 | ) | (77,398 | ) | 495,663 | — | ||||||||||||
Treasury stock | (6,565 | ) | — | — | — | (6,565 | ) | ||||||||||||
Total stockholders’ equity | 80,512 | 227,917 | 165,714 | (393,631 | ) | 80,512 | |||||||||||||
Noncontrolling interests | — | — | 50 | — | 50 | ||||||||||||||
Total equity | 80,512 | 227,917 | 165,764 | (393,631 | ) | 80,562 | |||||||||||||
Total liabilities and equity | $ | 761,360 | $ | 462,092 | $ | 228,256 | $ | (928,249 | ) | $ | 523,459 |
15
December 31, 2014 | |||||||||||||||||||
Balance Sheet | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||
(In thousands) | |||||||||||||||||||
ASSETS | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 109,514 | $ | — | $ | 64,094 | $ | — | $ | 173,608 | |||||||||
Accounts receivable, net | 123 | 49,892 | 64,310 | — | 114,325 | ||||||||||||||
Unbilled receivables | — | 18,548 | 4,051 | — | 22,599 | ||||||||||||||
Inventories | — | 4,013 | 47,149 | — | 51,162 | ||||||||||||||
Prepaid expenses and other current assets | 6,692 | 2,697 | 8,769 | (4,496 | ) | 13,662 | |||||||||||||
Total current assets | 116,329 | 75,150 | 188,373 | (4,496 | ) | 375,356 | |||||||||||||
Deferred income tax asset | (7,852 | ) | 6,675 | 749 | 9,032 | 8,604 | |||||||||||||
Property, plant, equipment and seismic rental equipment, net | 6,412 | 33,065 | 30,363 | — | 69,840 | ||||||||||||||
Multi-client data library, net | — | 96,423 | 22,246 | — | 118,669 | ||||||||||||||
Investment in subsidiaries | 675,499 | 278,294 | — | (953,793 | ) | — | |||||||||||||
Goodwill | — | — | 27,388 | — | 27,388 | ||||||||||||||
Intangible assets, net | — | 6,254 | 534 | — | 6,788 | ||||||||||||||
Intercompany receivables | 29,979 | — | — | (29,979 | ) | — | |||||||||||||
Other assets | 10,191 | 147 | 274 | — | 10,612 | ||||||||||||||
Total assets | $ | 830,558 | $ | 496,008 | $ | 269,927 | $ | (979,236 | ) | $ | 617,257 | ||||||||
LIABILITIES AND EQUITY | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Current maturities of long-term debt | $ | — | $ | 6,965 | $ | 684 | $ | — | $ | 7,649 | |||||||||
Accounts payable | 4,308 | 12,028 | 20,527 | — | 36,863 | ||||||||||||||
Accrued expenses | 3,904 | 34,738 | 21,807 | 4,815 | 65,264 | ||||||||||||||
Accrued multi-client data library royalties | — | 34,624 | 595 | — | 35,219 | ||||||||||||||
Deferred revenue | — | 5,263 | 2,999 | — | 8,262 | ||||||||||||||
Total current liabilities | 8,212 | 93,618 | 46,612 | 4,815 | 153,257 | ||||||||||||||
Long-term debt, net of current maturities | 175,000 | 7,839 | 106 | — | 182,945 | ||||||||||||||
Intercompany payables | 509,124 | 8,892 | 21,087 | (539,103 | ) | — | |||||||||||||
Other long-term liabilities | 2,609 | 130,985 | 10,489 | (279 | ) | 143,804 | |||||||||||||
Total liabilities | 694,945 | 241,334 | 78,294 | (534,567 | ) | 480,006 | |||||||||||||
Redeemable noncontrolling interest | — | — | 1,539 | — | 1,539 | ||||||||||||||
Equity: | |||||||||||||||||||
Common stock | 1,645 | 290,460 | 19,138 | (309,598 | ) | 1,645 | |||||||||||||
Additional paid-in capital | 887,749 | 180,700 | 234,234 | (414,934 | ) | 887,749 | |||||||||||||
Accumulated earnings (deficit) | (734,409 | ) | 208,846 | 26,981 | (235,827 | ) | (734,409 | ) | |||||||||||
Accumulated other comprehensive income (loss) | (12,807 | ) | 6,229 | (12,795 | ) | 6,566 | (12,807 | ) | |||||||||||
Due from ION Geophysical Corporation | — | (431,561 | ) | (77,563 | ) | 509,124 | — | ||||||||||||
Treasury stock | (6,565 | ) | — | — | — | (6,565 | ) | ||||||||||||
Total stockholders’ equity | 135,613 | 254,674 | 189,995 | (444,669 | ) | 135,613 | |||||||||||||
Noncontrolling interests | — | — | 99 | — | 99 | ||||||||||||||
Total equity | 135,613 | 254,674 | 190,094 | (444,669 | ) | 135,712 | |||||||||||||
Total liabilities and equity | $ | 830,558 | $ | 496,008 | $ | 269,927 | $ | (979,236 | ) | $ | 617,257 |
16
Three Months Ended March 31, 2015 | |||||||||||||||||||
Income Statement | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||
(In thousands) | |||||||||||||||||||
Net revenues | $ | — | $ | 18,849 | $ | 22,135 | $ | (406 | ) | $ | 40,578 | ||||||||
Cost of sales | — | 24,775 | 31,997 | (406 | ) | 56,366 | |||||||||||||
Gross loss | — | (5,926 | ) | (9,862 | ) | — | (15,788 | ) | |||||||||||
Total operating expenses | 7,916 | 13,080 | 9,905 | — | 30,901 | ||||||||||||||
Loss from operations | (7,916 | ) | (19,006 | ) | (19,767 | ) | — | (46,689 | ) | ||||||||||
Interest expense, net | (4,551 | ) | (72 | ) | (2 | ) | — | (4,625 | ) | ||||||||||
Intercompany interest, net | 139 | (657 | ) | 518 | — | — | |||||||||||||
Equity in losses of investments | (42,857 | ) | (18,922 | ) | — | 61,779 | — | ||||||||||||
Other income (expense) | (29 | ) | 15 | (3,205 | ) | — | (3,219 | ) | |||||||||||
Net loss before income taxes | (55,214 | ) | (38,642 | ) | (22,456 | ) | 61,779 | (54,533 | ) | ||||||||||
Income tax expense | 50 | 51 | 882 | — | 983 | ||||||||||||||
Net loss | (55,264 | ) | (38,693 | ) | (23,338 | ) | 61,779 | (55,516 | ) | ||||||||||
Net loss attributable to noncontrolling interests | — | — | 252 | — | 252 | ||||||||||||||
Net loss attributable to ION | (55,264 | ) | (38,693 | ) | (23,086 | ) | 61,779 | (55,264 | ) | ||||||||||
Comprehensive net loss | $ | (56,609 | ) | $ | (40,053 | ) | $ | (24,698 | ) | $ | 64,499 | $ | (56,861 | ) | |||||
Comprehensive loss attributable to noncontrolling interest | — | — | 252 | — | 252 | ||||||||||||||
Comprehensive net loss attributable to ION | $ | (56,609 | ) | $ | (40,053 | ) | $ | (24,446 | ) | $ | 64,499 | $ | (56,609 | ) | |||||
Three Months Ended March 31, 2014 | |||||||||||||||||||
Income Statement | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||||
(In thousands) | |||||||||||||||||||
Net revenues | $ | — | $ | 78,122 | $ | 66,576 | $ | — | $ | 144,698 | |||||||||
Cost of sales | — | 43,996 | 43,848 | — | 87,844 | ||||||||||||||
Gross profit | — | 34,126 | 22,728 | — | 56,854 | ||||||||||||||
Total operating expenses | 9,021 | 15,255 | 12,907 | — | 37,183 | ||||||||||||||
Income (loss) from operations | (9,021 | ) | 18,871 | 9,821 | — | 19,671 | |||||||||||||
Interest expense, net | (4,573 | ) | (42 | ) | (182 | ) | — | (4,797 | ) | ||||||||||
Intercompany interest, net | 66 | (435 | ) | 369 | — | — | |||||||||||||
Equity in earnings (losses) of investments | 89,488 | 3,856 | 738 | (95,770 | ) | (1,688 | ) | ||||||||||||
Other income (expense) | 497 | 69,911 | (1,882 | ) | — | 68,526 | |||||||||||||
Net income before income taxes | 76,457 | 92,161 | 8,864 | (95,770 | ) | 81,712 | |||||||||||||
Income tax expense | 478 | 332 | 4,453 | — | 5,263 | ||||||||||||||
Net income | 75,979 | 91,829 | 4,411 | (95,770 | ) | 76,449 | |||||||||||||
Net income attributable to noncontrolling interests | — | — | (470 | ) | — | (470 | ) | ||||||||||||
Net income attributable to ION | 75,979 | 91,829 | 3,941 | (95,770 | ) | 75,979 | |||||||||||||
Comprehensive net income | $ | 75,318 | $ | 91,828 | $ | 4,901 | $ | (96,259 | ) | $ | 75,788 | ||||||||
Comprehensive income attributable to noncontrolling interest | — | — | (470 | ) | — | (470 | ) | ||||||||||||
Comprehensive net income attributable to ION | $ | 75,318 | $ | 91,828 | $ | 4,431 | $ | (96,259 | ) | $ | 75,318 | ||||||||
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Three Months Ended March 31, 2015 | |||||||||||||||
Statement of Cash Flows | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Total Consolidated | |||||||||||
(In thousands) | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||
Net cash provided by (used in) operating activities | $ | (62,480 | ) | $ | 41,328 | $ | 14,446 | $ | (6,706 | ) | |||||
Cash flows from investing activities: | |||||||||||||||
Cash invested in multi-client data library | — | (9,055 | ) | (33 | ) | (9,088 | ) | ||||||||
Purchase of property, plant, equipment and seismic rental equipment | (329 | ) | (1,133 | ) | (10,532 | ) | (11,994 | ) | |||||||
Other investing activities | — | 257 | — | 257 | |||||||||||
Net cash used in investing activities | (329 | ) | (9,931 | ) | (10,565 | ) | (20,825 | ) | |||||||
Cash flows from financing activities: | |||||||||||||||
Payments on notes payable and long-term debt | — | (1,725 | ) | (341 | ) | (2,066 | ) | ||||||||
Intercompany lending | 26,968 | (29,672 | ) | 2,704 | — | ||||||||||
Other financing activities | 31 | — | — | 31 | |||||||||||
Net cash provided by (used in) financing activities | 26,999 | (31,397 | ) | 2,363 | (2,035 | ) | |||||||||
Effect of change in foreign currency exchange rates on cash and cash equivalents | — | — | 396 | 396 | |||||||||||
Net increase (decrease) in cash and cash equivalents | (35,810 | ) | — | 6,640 | (29,170 | ) | |||||||||
Cash and cash equivalents at beginning of period | 109,514 | — | 64,094 | 173,608 | |||||||||||
Cash and cash equivalents at end of period | $ | 73,704 | $ | — | $ | 70,734 | $ | 144,438 |
Three Months Ended March 31, 2014 | |||||||||||||||
Statement of Cash Flows | ION Geophysical Corporation | The Guarantors | All Other Subsidiaries | Total Consolidated | |||||||||||
(In thousands) | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||
Net cash provided by operating activities | $ | 15,105 | $ | 19,989 | $ | 27,588 | $ | 62,682 | |||||||
Cash flows from investing activities: | |||||||||||||||
Investment in multi-client data library | — | (22,299 | ) | (54 | ) | (22,353 | ) | ||||||||
Purchase of property, plant, equipment and seismic rental equipment | (551 | ) | (1,230 | ) | (216 | ) | (1,997 | ) | |||||||
Repayment of advance to INOVA Geophysical | 1,000 | — | — | 1,000 | |||||||||||
Net investment in and advances to OceanGeo B.V. prior to its consolidation | — | — | (3,074 | ) | (3,074 | ) | |||||||||
Other investing activities | 579 | 26 | — | 605 | |||||||||||
Net cash provided by (used in) investing activities | 1,028 | (23,503 | ) | (3,344 | ) | (25,819 | ) | ||||||||
Cash flows from financing activities: | |||||||||||||||
Borrowings under revolving line of credit | 15,000 | — | — | 15,000 | |||||||||||
Payments on notes payable and long-term debt | — | (1,365 | ) | (1,390 | ) | (2,755 | ) | ||||||||
Intercompany lending | (1,155 | ) | 6,418 | (5,263 | ) | — | |||||||||
Other financing activities | 166 | — | — | 166 | |||||||||||
Net cash provided by (used in) financing activities | 14,011 | 5,053 | (6,653 | ) | 12,411 | ||||||||||
Effect of change in foreign currency exchange rates on cash and cash equivalents | — | — | (24 | ) | (24 | ) | |||||||||
Net increase in cash and cash equivalents | 30,144 | 1,539 | 17,567 | 49,250 | |||||||||||
Cash and cash equivalents at beginning of period | 124,701 | — | 23,355 | 148,056 | |||||||||||
Cash and cash equivalents at end of period | $ | 154,845 | $ | 1,539 | $ | 40,922 | $ | 197,306 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Our Business
In this Form 10-Q, “ION Geophysical,” “ION,” “the company” (or, “the Company”), “we,” “our,” “ours” and “us” refer to ION Geophysical Corporation and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicated.
The information contained in this Quarterly Report on Form 10-Q contains references to trademarks, service marks and registered marks of ION and our subsidiaries, as indicated. Except where stated otherwise or unless the context otherwise requires, the terms “GeoVentures,” “DigiFIN,” “VectorSeis,” “Orca,” “GATOR,” “Calypso,” “WiBand,” “G3i” and “Hawk” refer to GeoVentures®, DigiFIN®, VECTORSEIS®, ORCA®, GATOR®, Calypso®, WiBand®, G3i® and Hawk® registered marks owned by ION or INOVA Geophysical, and the terms “VSO,” “Narwhal” and “Marlin” refer to VSO™, Narwhal™ and Marlin™ trademarks and service marks owned by ION.
We are a global, technology-focused company that provides geoscience technology, services and solutions to the global oil and gas industry. Our offerings are designed to allow oil and gas exploration and production (“E&P”) companies to obtain higher resolution images of the Earth’s subsurface during exploration, exploitation and production operations to reduce their risk in exploration and reservoir development. We acquire and process seismic data from seismic surveys in regional data programs, which then become part of our multi-client data library. The seismic surveys for our data library business are pre-funded, or underwritten, in part by our customers, and, with the exception of our ocean bottom seismic (“OBS”) data acquisition company, OceanGeo B.V. (“OceanGeo”), we contract with third party seismic data acquisition companies to shoot and acquire the seismic data, all of which is intended to minimize our risk exposure. We serve customers in all major energy producing regions of the world from strategically located offices in 21 cities on six continents. Due to restructuring activities in 2015 (see “— Restructurings” below), we expect to vacate facilities in approximately 5 cities.
Seismic imaging plays a fundamental role in hydrocarbon exploration and reservoir development by delineating structures, rock types and fluid locations in the subsurface. Our technologies, services and solutions are used by E&P companies to generate high-resolution images of the Earth’s subsurface to identify sources of hydrocarbons and pinpoint drilling locations for wells, which can be costly and involve high risk.
We provide our services and products through four business segments – Solutions, Systems, Software and Ocean Bottom Services. Our Ocean Bottom Services segment is comprised of OceanGeo, in which we increased our ownership to 100% in 2014. In addition, we have a 49% ownership interest in our INOVA Geophysical Equipment Limited joint venture (“INOVA Geophysical,” or “INOVA”). As of December 31, 2014, we wrote our investment in INOVA Geophysical to zero, and therefore no longer record our share of losses in the joint venture. For details of our suspension of recording equity method losses, see Footnote 3 “Segment Information” of Footnotes to Consolidated Financial Statements.
For decades we have been engaged in providing innovative seismic data acquisition technology, such as full-wave imaging capability with VectorSeis products, the ability to record seismic data from basins that underlie ice fields in polar regions, and cableless seismic techniques. The advanced technologies we currently offer include our Orca and Gator command and control software systems, WiBand broadband data processing technology, Calypso OBS acquisition system, Narwhal (software system) for ice management, and other technologies, each of which is designed to deliver improvements in both image quality and productivity. In late 2014 and the first quarter of 2015, we have been field testing our new Marlin solution for optimizing simultaneous operations during marine seismic data acquisition. We have over 500 patents and pending patent applications in various countries around the world. Approximately 50% of our employees are involved in technical roles and over 25% of our employees have advanced degrees.
Solutions. Our Solutions business provides two distinct service activities that often work together.
Our GeoVentures services are designed to manage the entire seismic process, from survey planning and design to data acquisition and management, to final subsurface imaging and reservoir characterization. Our GeoVentures group focuses on the technologically intensive components of the image development process, such as survey planning and design, and data processing and interpretation, outsourcing the logistics components (such as field acquisition) to experienced seismic and other geophysical contractors.
Our GX Technology (“GXT”) group offers data processing and imaging services designed to help our E&P customers reduce exploration and production risk, evaluate and develop reservoirs, and increase production. GXT develops a series of subsurface images by applying its processing technology to data owned or licensed by its customers. After completing our restructuring activities started in the first quarter of 2015 (see “— Restructurings” below), we will maintain approximately 15 petabytes of digital seismic data information storage in 8 global data centers, including our largest data center in Houston.
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Our Solutions business focuses on providing services for challenging environments, such as the Arctic frontier; complex and hard-to-image geologies, such as deepwater subsurface salt formations in the Gulf of Mexico and offshore West Africa and Brazil; unconventional reservoirs, such as those found in shale, tight gas and oil sands formations; and offshore basin-wide seismic data and imaging programs. Since 2002, our basin exploration seismic data programs have resulted in a substantial data library that covers significant portions of many of the frontier basins in the world, including offshore East and West Africa, India, South America, the Arctic, the deepwater Gulf of Mexico and Australia.
Software. Our Software business provides command and control software systems, related software and services for towed marine streamer and seabed operations, as well as survey design. Our Orca software is installed on towed streamer marine vessels worldwide, and our Gator software is a component of many re-deployable and permanent seabed monitoring systems.
In 2013, we introduced our Narwhal for ice management system, and we continue to field test our new Marlin solution for optimizing simultaneous operations during marine seismic data acquisition. Both of these systems are part of our E&P software solutions for operations management.
Systems. Our Systems business is engaged in the manufacture of (i) re-deployable ocean bottom cable seismic data acquisition systems and shipboard recorders (for OceanGeo’s use in OBS data acquisition); (ii) marine towed streamer positioning and control systems; and (iii) analog geophone sensors.
Ocean Bottom Services. Through OceanGeo, we offer a fully integrated OBS solution that includes expert survey design, planning and optimization, to maximize seismic image quality, operational efficiency and safety; safe, efficient data acquisition by the experienced team at OceanGeo; superior imaging via OceanGeo’s exclusive use of our VSO systems; and data processing, interpretation and reservoir services, by our GXT group.
INOVA Geophysical. Historically, we have conducted our land seismic equipment business through INOVA Geophysical, which is a joint venture with BGP Inc. (“BGP”). BGP is a subsidiary of China National Petroleum Corporation, and is generally regarded as the world’s largest land geophysical service contractor. BGP owns a 51% equity interest in INOVA Geophysical, and we own the remaining 49% interest. INOVA manufactures cable-based and cableless seismic data acquisition systems, digital sensors, vibroseis vehicles (i.e., vibrator trucks) and source controllers for detonator and energy source business lines. As of December 31, 2014, we wrote our investment in INOVA Geophysical to zero.
Macroeconomic Conditions
Demand for our services and products is cyclical and dependent upon activity levels in the oil and gas industry, particularly our customers’ willingness to invest capital in the exploration for oil and natural gas. Our customers’ capital spending programs are generally based on their outlook for near-term and long-term commodity prices, economic growth, commodity demand and estimates of resource production.
In the first quarter of 2015, E&P companies continued to reduce their capital expenditure budgets in light of the recent steep oil price decreases that began in the fourth quarter of 2014. E&P companies are evaluating near-term oil prices, and how it will affect their return on new and existing projects before committing to spend substantial sums from their capital budgets. We believe E&P companies perceive projects with a longer time to payback, or profitability, as less attractive in the short-term. Therefore, E&P companies are increasingly likely to reduce capital expenditures for projects in the early stages, or exploration phase, of the E&P lifecycle compared to prior years. In low oil price environments, oil companies tend to prioritize production-related activities and existing assets over exploration, and disproportionately cut spending on seismic services and products, which has a negative impact on the entire seismic industry.
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The following table is a summary of recent oil and gas price trends:
Brent Crude (per bbl) | West Texas Intermediate Crude (per bbl) | Henry Hub Natural Gas (per mcf) | ||||||||||||||||||||||
Quarter ended | High | Low | High | Low | High | Low | ||||||||||||||||||
3/31/2015 | $ | 61.89 | $ | 45.13 | $ | 53.53 | $ | 43.46 | $ | 3.23 | $ | 2.58 | ||||||||||||
12/31/2014 | $ | 94.57 | $ | 55.27 | $ | 91.01 | $ | 53.27 | $ | 4.49 | $ | 2.89 | ||||||||||||
9/30/2014 | $ | 110.84 | $ | 94.53 | $ | 105.34 | $ | 91.16 | $ | 4.46 | $ | 3.75 | ||||||||||||
6/30/2014 | $ | 115.19 | $ | 103.37 | $ | 107.26 | $ | 99.42 | $ | 4.83 | $ | 4.28 | ||||||||||||
3/31/2014 | $ | 111.26 | $ | 105.73 | $ | 104.92 | $ | 91.66 | $ | 6.15 | $ | 4.01 | ||||||||||||
12/31/2013 | $ | 113.27 | $ | 103.08 | $ | 104.10 | $ | 92.30 | $ | 4.46 | $ | 3.45 | ||||||||||||
9/30/2013 | $ | 117.15 |