Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
|
|
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
|
|
|
|
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 Identification No.)
|
incorporation
or organization)
|
|
|
|
2105
CityWest Blvd.
|
|
Suite
400
|
|
Houston,
Texas
|
77042-2839
|
(Address
of principal executive offices)
|
(Zip
Code)
|
INPUT/OUTPUT,
INC.
2101
CityWest Blvd.
Building
III, Suite 400
Houston,
TX 77042
(Former
name, former address and former fiscal year if changed since last
report)
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: x
No:
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
one):
Large
accelerated filer £
|
Accelerated
filer x
|
Non-accelerated
filer £
|
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes: £
No:
x
At
October 31, 2007, there were 81,296,495 shares of common stock, par value $0.01
per share, outstanding.
ION
GEOPHYSICAL CORPORATION AND
SUBSIDIARIES
TABLE
OF
CONTENTS FOR FORM 10-Q
FOR
THE
QUARTER ENDED SEPTEMBER 30, 2007
|
PAGE
|
PART
I. Financial Information
|
|
Item
1. Unaudited Financial Statements
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2007 and December
31,
2006
|
3
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended
September 30, 2007 and 2006
|
4
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2007 and 2006
|
5
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
6
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
11
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
19
|
Item
4. Controls and Procedures
|
19
|
PART
II. Other Information
|
|
Item
1. Legal Proceedings
|
20
|
Item
1A. Risk Factors
|
20
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
21
|
|
|
Item
6. Exhibits
|
22
|
PART
I. FINANCIAL INFORMATION
Item
1. Unaudited
Financial Statements
ION
GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
26,035
|
|
$
|
17,056
|
|
Restricted
cash
|
|
|
3,635
|
|
|
1,044
|
|
Accounts
receivable, net
|
|
|
115,282
|
|
|
167,747
|
|
Current
portion of notes receivable, net
|
|
|
9,761
|
|
|
6,299
|
|
Unbilled
receivables
|
|
|
48,914
|
|
|
28,599
|
|
Inventories
|
|
|
141,675
|
|
|
115,520
|
|
Prepaid
expenses and other current assets
|
|
|
16,784
|
|
|
9,854
|
|
Total
current assets
|
|
|
362,086
|
|
|
346,119
|
|
Notes
receivable
|
|
|
453
|
|
|
4,968
|
|
Non-current
deferred income tax asset
|
|
|
6,314
|
|
|
6,197
|
|
Property,
plant and equipment, net
|
|
|
37,550
|
|
|
38,129
|
|
Multi-client
data library, net
|
|
|
53,353
|
|
|
33,072
|
|
Investments
at cost
|
|
|
4,436
|
|
|
4,254
|
|
Goodwill
|
|
|
157,120
|
|
|
156,091
|
|
Intangible
and other assets, net
|
|
|
58,249
|
|
|
66,306
|
|
Total
assets
|
|
$
|
679,561
|
|
$
|
655,136
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Notes
payable and current maturities of long-term debt
|
|
$
|
7,730
|
|
$
|
6,566
|
|
Accounts
payable
|
|
|
49,455
|
|
|
47,844
|
|
Accrued
expenses
|
|
|
59,000
|
|
|
50,819
|
|
Accrued
multi-client data library royalties
|
|
|
26,435
|
|
|
27,197
|
|
Deferred
revenue
|
|
|
18,124
|
|
|
37,442
|
|
Deferred
income tax liability
|
|
|
5,909
|
|
|
5,909
|
|
Total
current liabilities
|
|
|
166,653
|
|
|
175,777
|
|
Long-term
debt, net of current maturities
|
|
|
71,528
|
|
|
70,974
|
|
Non-current
deferred income tax liability
|
|
|
3,881
|
|
|
4,142
|
|
Other
long-term liabilities
|
|
|
4,249
|
|
|
4,588
|
|
Total
liabilities
|
|
|
246,311
|
|
|
255,481
|
|
|
|
|
|
|
|
|
|
Cumulative
convertible preferred stock
|
|
|
30,000
|
|
|
29,987
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value; authorized 200,000,000 shares; outstanding
81,293,999 and 80,123,486 shares at September 30, 2007 and December
31,
2006, respectively, net of treasury stock
|
|
|
822
|
|
|
810
|
|
Additional
paid-in capital
|
|
|
502,917
|
|
|
493,605
|
|
Accumulated
deficit
|
|
|
(100,307
|
)
|
|
(123,095
|
)
|
Accumulated
other comprehensive income
|
|
|
6,402
|
|
|
4,859
|
|
Treasury
stock, at cost, 853,402 and 850,428 shares at September 30, 2007
and
December 31, 2006, respectively
|
|
|
(6,584
|
)
|
|
(6,511
|
)
|
Total
stockholders’ equity
|
|
|
403,250
|
|
|
369,668
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
679,561
|
|
$
|
655,136
|
|
See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
ION
GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(In
thousands, except per share amounts)
|
|
Product
revenues
|
|
$
|
126,246
|
|
$
|
76,824
|
|
$
|
385,587
|
|
$
|
235,302
|
|
Service
revenues
|
|
|
47,306
|
|
|
33,149
|
|
|
118,166
|
|
|
102,011
|
|
Total
net revenues
|
|
|
173,552
|
|
|
109,973
|
|
|
503,753
|
|
|
337,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products
|
|
|
90,302
|
|
|
55,829
|
|
|
281,739
|
|
|
169,397
|
|
Cost
of services
|
|
|
31,498
|
|
|
21,131
|
|
|
86,810
|
|
|
64,183
|
|
Gross
profit
|
|
|
51,752
|
|
|
33,013
|
|
|
135,204
|
|
|
103,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
11,554
|
|
|
7,762
|
|
|
34,715
|
|
|
23,032
|
|
Marketing
and sales
|
|
|
10,906
|
|
|
9,813
|
|
|
31,151
|
|
|
28,458
|
|
General
and administrative
|
|
|
12,428
|
|
|
8,985
|
|
|
35,024
|
|
|
29,524
|
|
Total
operating expenses
|
|
|
34,888
|
|
|
26,560
|
|
|
100,890
|
|
|
81,014
|
|
Income
from operations
|
|
|
16,864
|
|
|
6,453
|
|
|
34,314
|
|
|
22,719
|
|
Interest
expense
|
|
|
(1,764
|
)
|
|
(1,484
|
)
|
|
(5,017
|
)
|
|
(4,309
|
)
|
Interest
income
|
|
|
273
|
|
|
630
|
|
|
1,412
|
|
|
1,517
|
|
Other
expense
|
|
|
(823
|
)
|
|
(687
|
)
|
|
(1,470
|
)
|
|
(1,309
|
)
|
Income
before income taxes and change in accounting principle
|
|
|
14,550
|
|
|
4,912
|
|
|
29,239
|
|
|
18,618
|
|
Income
tax expense
|
|
|
1,322
|
|
|
1,419
|
|
|
4,671
|
|
|
3,332
|
|
Net
income before change in accounting principle
|
|
|
13,228
|
|
|
3,493
|
|
|
24,568
|
|
|
15,286
|
|
Cumulative
effect of change in accounting principle
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
398
|
|
Net
income
|
|
|
13,228
|
|
|
3,493
|
|
|
24,568
|
|
|
15,684
|
|
Preferred
stock dividends and accretion
|
|
|
589
|
|
|
636
|
|
|
1,780
|
|
|
1,801
|
|
Net
income applicable to common shares
|
|
$
|
12,639
|
|
$
|
2,857
|
|
$
|
22,788
|
|
$
|
13,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per basic share before change in accounting
principle
|
|
$
|
0.16
|
|
$
|
0.04
|
|
$
|
0.28
|
|
$
|
0.17
|
|
Cumulative
effect of change in accounting principle
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income per basic share
|
|
$
|
0.16
|
|
$
|
0.04
|
|
$
|
0.28
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share before change in accounting
principle
|
|
$
|
0.14
|
|
$
|
0.04
|
|
$
|
0.26
|
|
$
|
0.17
|
|
Cumulative
effect of change in accounting principle
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income per diluted share
|
|
$
|
0.14
|
|
$
|
0.04
|
|
$
|
0.26
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
81,047
|
|
|
79,575
|
|
|
80,607
|
|
|
79,344
|
|
Diluted
|
|
|
97,780
|
|
|
81,354
|
|
|
97,426
|
|
|
80,976
|
|
See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
ION
GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
24,568
|
|
$
|
15,684
|
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
—
|
|
|
(398
|
)
|
Depreciation
and amortization (other than multi-client library)
|
|
|
19,876
|
|
|
16,243
|
|
Amortization
of multi-client library
|
|
|
24,959
|
|
|
16,573
|
|
Stock-based
compensation expense related to stock options, nonvested stock and
employee stock purchases
|
|
|
4,586
|
|
|
4,220
|
|
Deferred
income tax
|
|
|
(688
|
)
|
|
(542
|
)
|
Bad
debt expense
|
|
|
306
|
|
|
298
|
|
Gain
on sale of fixed assets
|
|
|
(195
|
)
|
|
(33
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
53,660
|
|
|
8,037
|
|
Unbilled
receivables
|
|
|
(20,315
|
)
|
|
(8,598
|
)
|
Inventories
|
|
|
(24,258
|
)
|
|
(21,717
|
)
|
Accounts
payable, accrued expenses and accrued royalties
|
|
|
7,006
|
|
|
21,375
|
|
Deferred
revenue
|
|
|
(19,377
|
)
|
|
16,993
|
|
Other
assets and liabilities
|
|
|
(5,409
|
)
|
|
(847
|
)
|
Net
cash provided by operating activities
|
|
|
64,719
|
|
|
67,288
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(7,167
|
)
|
|
(5,837
|
)
|
Investment
in multi-client data library
|
|
|
(45,240
|
)
|
|
(29,439
|
)
|
Proceeds
from the sale of fixed assets
|
|
|
268
|
|
|
241
|
|
Increase
in cost method investment
|
|
|
(182
|
)
|
|
(254
|
)
|
Proceeds
from collection of note receivable associated with the sale of a
facility
|
|
|
—
|
|
|
2,000
|
|
Net
cash used in investing activities
|
|
|
(52,321
|
)
|
|
(33,289
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
under revolving line of credit
|
|
|
142,000
|
|
|
17,000
|
|
Repayments
under revolving line of credit
|
|
|
(142,000
|
)
|
|
(19,977
|
)
|
Payments
on notes payable and long-term debt
|
|
|
(6,512
|
)
|
|
(4,932
|
)
|
Payment
of preferred dividends
|
|
|
(1,767
|
)
|
|
(1,689
|
)
|
Proceeds
from employee stock purchases and exercise of stock
options
|
|
|
5,934
|
|
|
2,609
|
|
Restricted
stock cancelled for employee minimum income taxes
|
|
|
(1,231
|
)
|
|
—
|
|
Purchases
of treasury stock
|
|
|
(117
|
)
|
|
(607
|
)
|
Net
cash used in financing activities
|
|
|
(3,693
|
)
|
|
(7,596
|
)
|
|
|
|
|
|
|
|
|
Effect
of change in foreign currency exchange rates on cash and cash
equivalents
|
|
|
274
|
|
|
874
|
|
Net
increase in cash and cash equivalents
|
|
|
8,979
|
|
|
27,277
|
|
Cash
and cash equivalents at beginning of period
|
|
|
17,056
|
|
|
15,853
|
|
Cash
and cash equivalents at end of period
|
|
$
|
26,035
|
|
$
|
43,130
|
|
See
accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
ION
GEOPHYSICAL CORPORATION AND
SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
Basis of Presentation
In
September 2007, the Company changed its corporate name from Input/Output, Inc.
to ION Geophysical Corporation. This change was made to reflect the
evolution of the company from being primarily known as an equipment manufacturer
to the broad, current product/service portfolio of land and marine
acquisition hardware, survey design and command & control software,
advanced imaging services, and seismic data libraries. No
subsidiary names have been changed.
The
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, 2006 has been derived from the Company’s
audited consolidated financial statements at that date. The consolidated balance
sheet at September 30, 2007, the consolidated statements of operations for
the
three and nine months ended September 30, 2007 and 2006, and the consolidated
statements of cash flows for the nine months ended September 30, 2007 and 2006
have been prepared by the Company without audit. 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, 2007 are not necessarily indicative
of
the operating results for a full year or of future operations.
These
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. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
accounting principles generally accepted in the United States have been omitted.
The accompanying consolidated financial statements should be read in conjunction
with the Company’s Annual Report on Form 10-K for the year ended December 31,
2006.
During
the fourth quarter of 2006, the Company determined that a portion of service
revenues had been previously reported as product revenues during the first
three
quarters of 2006. The Company has reclassified these into service revenues,
with
no impact on total revenues for any reported period.
(2)
Summary of Significant Accounting Policies and Estimates
Refer
to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2006,
for a complete discussion of the Company’s significant accounting policies and
estimates, except for the addition of the following significant accounting
policy.
Income
Taxes –Accounting
for Uncertainty in Income Taxes. In
September 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement
No. 109” (FIN
48),
which clarifies the accounting for uncertainty in income taxes recognized in
accordance with Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (FAS
109). FIN 48 clarifies the application of FAS 109 by defining criteria that
an
individual tax position must satisfy in order for any part of the benefit of
that position to be recognized in the financial statements. Additionally, FIN
48
provides guidance on the measurement, derecognition, classification and
disclosure of tax positions, along with accounting for the related interest
and
penalties. The provisions of FIN 48 were effective for fiscal years beginning
after December 15, 2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to beginning retained earnings. The Company
adopted FIN 48 on January 1, 2007. The adoption resulted in no adjustment to
beginning retained earnings. See Note 7 for additional information.
(3)
Segment and Product Information
The
Company measures segment operating results based on income from operations.
The
Company evaluates and reviews results based on four segments - Land Imaging
Systems, Marine Imaging Systems, Data Management Solutions (which collectively
form the ION Systems Division) and the ION Solutions Division (formerly referred
to as Seismic Imaging Solutions) - to allow for increased visibility and
accountability of costs and more focused customer service and product
development. Intersegment sales are insignificant for all periods
presented.
A
summary
of segment information for the three and nine months ended September 30, 2007
and 2006, is as follows (in thousands):
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ION
Systems Division:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
Imaging Systems
|
|
$
|
79,055
|
|
$
|
46,082
|
|
$
|
242,804
|
|
$
|
130,837
|
|
Marine
Imaging Systems
|
|
|
37,099
|
|
|
24,864
|
|
|
116,925
|
|
|
89,990
|
|
Data
Management Solutions
|
|
|
10,917
|
|
|
6,662
|
|
|
28,097
|
|
|
16,793
|
|
Total
ION Systems Division
|
|
|
127,071
|
|
|
77,608
|
|
|
387,826
|
|
|
237,620
|
|
ION
Solutions Division (Seismic Imaging Solutions)
|
|
|
46,481
|
|
|
32,365
|
|
|
115,927
|
|
|
99,693
|
|
Total
|
|
$
|
173,552
|
|
$
|
109,973
|
|
$
|
503,753
|
|
$
|
337,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ION
Systems Division:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
Imaging Systems
|
|
$
|
5,663
|
|
$
|
1,874
|
|
$
|
16,681
|
|
$
|
6,467
|
|
Marine
Imaging Systems
|
|
|
9,912
|
|
|
5,792
|
|
|
32,077
|
|
|
22,310
|
|
Data
Management Solutions
|
|
|
5,948
|
|
|
2,423
|
|
|
12,686
|
|
|
5,389
|
|
Total
ION Systems Division
|
|
|
21,523
|
|
|
10,089
|
|
|
61,444
|
|
|
34,166
|
|
ION
Solutions Division (Seismic Imaging Solutions)
|
|
|
7,443
|
|
|
5,123
|
|
|
7,432
|
|
|
17,176
|
|
Corporate
|
|
|
(12,102
|
)
|
|
(8,759
|
)
|
|
(34,562
|
)
|
|
(28,623
|
)
|
Total
|
|
$
|
16,864
|
|
$
|
6,453
|
|
$
|
34,314
|
|
$
|
22,719
|
|
(4)
Inventories
A
summary
of inventories is as follows (in thousands):
|
|
September 30,
2007
|
|
December 31,
2006
|
|
Raw
materials and subassemblies
|
|
$
|
65,965
|
|
$
|
52,628
|
|
Work-in-process
|
|
|
16,138
|
|
|
13,324
|
|
Finished
goods
|
|
|
70,435
|
|
|
59,448
|
|
Reserve
for excess and obsolete inventories
|
|
|
(10,863
|
)
|
|
(9,880
|
)
|
Inventories,
net
|
|
$
|
141,675
|
|
$
|
115,520
|
|
(5)
Net Income per Common Share
Basic
net
income per common share is computed by dividing net income 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
committed for issuance under outstanding stock options at September 30, 2007
and
2006 were 5,983,142 and 7,120,519, respectively, and the total number of shares
of restricted stock and restricted stock units at September 30, 2007 and 2006
were 787,969 and 1,006,701, respectively. The number of shares issued under
stock option exercises during the nine months ended September 30, 2007 and
2006
were 724,368 and 477,101 shares, respectively.
The
Company has outstanding $60.0 million of convertible senior notes, for which
13,888,890 common stock may currently be acquired upon their full conversion,
and 30,000 outstanding shares of Series D-1 Cumulative Convertible Preferred
Stock (Series D-1 Preferred Stock), which may presently be converted, at the
holder’s election, into up to 3,812,428 shares of common stock. As highlighted
in the table below, the convertible senior notes are dilutive for certain of
the
periods presented and therefore have been included in the computation of diluted
net income per share in those periods. The Series D-1 Preferred Stock is
antidilutive for all periods presented.
The
following table summarizes the computation of basic and diluted net income
per
common share (in thousands, except per share amounts):
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income before change in accounting principle
|
|
$
|
12,639
|
|
$
|
2,857
|
|
$
|
22,788
|
|
$
|
13,485
|
|
Cumulative
effect of change in accounting principle
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
398
|
|
Net
income applicable to common shares
|
|
|
12,639
|
|
|
2,857
|
|
|
22,788
|
|
|
13,883
|
|
Income
impact of assumed convertible debt conversion
|
|
|
1,007
|
|
|
—
|
|
|
3,020
|
|
|
—
|
|
Net
income after impact of assumed convertible debt conversion
|
|
$
|
13,646
|
|
$
|
2,857
|
|
$
|
25,808
|
|
$
|
13,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
81,047
|
|
|
79,575
|
|
|
80,607
|
|
|
79,344
|
|
Effect
of dilutive stock awards
|
|
|
2,844
|
|
|
1,779
|
|
|
2,930
|
|
|
1,632
|
|
Effect
of convertible debt conversion
|
|
|
13,889
|
|
|
—
|
|
|
13,889
|
|
|
—
|
|
Weighted
average number of diluted common shares outstanding
|
|
|
97,780
|
|
|
81,354
|
|
|
97,426
|
|
|
80,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
0.16
|
|
$
|
0.04
|
|
$
|
0.28
|
|
$
|
0.17
|
|
Diluted
net income per common share
|
|
$
|
0.14
|
|
$
|
0.04
|
|
$
|
0.26
|
|
$
|
0.17
|
|
(6)
Notes Payable, Long-term
Debt and Lease
Obligations
Obligations
|
|
September 30,
2007
|
|
December 31,
2006
|
|
$75.0
million revolving line of credit
|
|
$
|
—
|
|
$
|
—
|
|
Convertible
senior notes
|
|
|
60,000
|
|
|
60,000
|
|
Facility
lease obligation
|
|
|
5,056
|
|
|
5,276
|
|
Equipment
capital leases and other notes payable
|
|
|
14,202
|
|
|
12,264
|
|
Total
|
|
$
|
79,258
|
|
$
|
77,540
|
|
Revolving
Line of Credit. In
March
2007, the Company obtained a $75.0 million revolving line of credit (the
“Facility”) with a scheduled maturity in March 2011. The Facility replaced the
Company’s $25.0 million revolving line of credit facility, which was scheduled
to mature in May 2008. There was no outstanding balance of indebtedness under
the Facility at September 30, 2007. The Facility is available for revolving
credit borrowings to be used for the Company’s working capital needs and general
corporate purposes, subject to a borrowing base. In addition, the Facility
includes a $25.0 million sub-limit for the issuance of documentary and standby
letters of credit of which $1.0 million had been issued at September 30, 2007.
The Facility may also be used to fund the repayment of the Company’s 5.50%
convertible senior notes indebtedness that is due on December 15, 2008, so
long
as after funds are advanced for that purpose, there remains at least $30.0
million under the borrowing base that is available for borrowings under the
Facility. The Facility includes an accordion feature under which the total
commitments under the Facility may be increased to $100.0 million, subject
to
the satisfaction of certain conditions.
The
Facility borrowing base is calculated based on the sum of (i) 85% of eligible
accounts receivable, eligible foreign accounts receivable and insured foreign
accounts receivable, plus (ii) the lesser of (x) thirty percent (30%) of
eligible inventory or (y) $20.0 million. For purposes of this calculation,
eligible foreign accounts receivable cannot exceed $23.5 million. As of
September 30, 2007, the borrowing base calculation permitted total borrowings
of
$67.0 million, of which $66.0 million remained available.
The
interest rate on borrowings under the Facility will be, at the Company’s option,
(i) an “alternate base rate” (as defined in the Facility credit agreement) or
(ii) for Eurodollar borrowings, a LIBOR rate plus an applicable margin. The
amount of the applicable margin will be based on the Company’s then-current
leverage ratio as defined in the credit agreement. The applicable margin will
be
increased by 0.50% with respect to any borrowings that are applied to repay
the
convertible senior notes.
The
Company is obligated to pay a commitment fee of 0.25% per annum on the unused
portion of the Facility. A significant portion of the Company’s assets are
pledged as collateral for outstanding borrowings under the Facility. The
Facility credit agreement restricts the Company’s ability to pay common stock
dividends, incur additional debt, sell significant assets, acquire other
businesses, merge with other entities and take certain other actions without
the
consent of the lenders. The credit agreement requires compliance with certain
financial and non-financial covenants, including requirements related to (i)
maintaining a minimum fixed charge coverage ratio of 1.25 to 1.0, and (ii)
not
exceeding a maximum leverage ratio of 2.75 to 1.0 (provided that, upon the
Company’s repaying the outstanding indebtedness under the convertible senior
notes, the maximum leverage ratio shall fall to 2.50 to 1.0 for 12 months and
then 2.0 to 1.0 thereafter). At September 30, 2007, the Company was in
compliance with all of the covenants under the credit agreement.
Convertible
Senior Notes. In
December 2003, the Company issued $60.0 million of convertible senior notes,
which mature on December 15, 2008. The notes bear interest at an annual rate
of
5.5%, payable semi-annually. The notes, which are not redeemable prior to their
maturity, are convertible into the Company’s common stock at an initial
conversion rate of 231.4815 shares per $1,000 principal amount of notes (a
conversion price of $4.32 per share), which represents 13,888,890 total common
shares.
Facility
Lease Obligation. In
2001,
the Company sold its facilities, located in Stafford, Texas, for $21.0 million.
Simultaneously with the sale, the Company entered into a non-cancelable
twelve-year lease with the purchaser of the property. Because the Company
retained a continuing involvement in the property that precluded sale-leaseback
treatment for financial accounting purposes, the sale-leaseback transaction
was
accounted for as a financing transaction.
In
September 2005, the owner sold the facilities to two parties, which were
unrelated to each other as well as unrelated to the seller. In conjunction
with
the sale of the facilities, the Company entered into two separate lease
arrangements for each of the facilities with the new owners. One lease, which
was classified as an operating lease, has a twelve-year lease term. The second
lease continues to be accounted for as a financing transaction due to the
Company’s continuing involvement in the property as a lessee, and has a ten-year
lease term, which the Company does not expect to renew. The Company recorded
the
commitment under the second lease as a $5.5 million lease obligation at an
implicit rate of 11.7% per annum. Both leases have renewal options allowing
the
Company to extend the leases for up to an additional twenty-year term. The
outstanding facility lease obligation was $5.1 million at September 30, 2007.
Equipment
Capital Leases. The
Company has entered into a series of equipment loans in the form of capital
leases that are due in installments for the purpose of financing the purchase
of
computer equipment. The leases expire in various years through 2010. Interest
charged under these loans ranges from 5.9% to 9.4% and the leases are
collateralized by liens on the computer equipment. During the nine months ended
September 30, 2007 and 2006, the Company entered into various capital leases
for
computer equipment totaling $5.9 million and $9.3 million,
respectively.
(7)
Income Taxes
In
2002,
the Company established a valuation allowance for substantially all of its
deferred tax assets. Since that time, the Company has continued to record a
valuation allowance. The valuation allowance was calculated in accordance with
the provisions of FAS 109, “Accounting
for Income Taxes,” which
require 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. The Company will continue to reserve for substantially all net
deferred tax assets until there is sufficient evidence to warrant reversal.
The
Company’s effective tax rate for the three months ended September 30, 2007 and
2006 was 9.1% and 28.9%, respectively and is primarily related to the Company’s
earnings in its foreign jurisdictions as well as the return to accrual
adjustment of U.S. state income taxes recorded in the current period. The
Company’s effective tax rate for the nine months ended September 30, 2007 and
2006 was 16.0% and 17.9%, respectively.
As
a
result of implementation of FIN 48, the Company recorded no adjustment to
beginning retained earnings because there were no unrecognized tax benefits.
The
Company does not expect to recognize significant increases in unrecognized
tax
benefits during the next twelve month period.
Interest
and penalties, if any, related to unrecognized tax benefits are recorded in
income tax expense.
The
Company’s U.S. federal tax returns for 2003 and subsequent years remain subject
to examination by tax authorities. The Company is no longer subject to IRS
examination for periods prior to 2003, although carryforward attributes that
were generated prior to 2003 may still be adjusted upon examination by the
IRS
if they either have been or will be used in a future period. In the Company’s
foreign tax jurisdictions, tax returns for 2000 and subsequent years generally
remain open to examination.
(8)
Comprehensive Net Income
The
components of comprehensive net income are as follows (in thousands):
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income applicable to common shares
|
|
$
|
12,639
|
|
$
|
2,857
|
|
$
|
22,788
|
|
$
|
13,883
|
|
Foreign
currency translation adjustment
|
|
|
865
|
|
|
2,129
|
|
|
1,543
|
|
|
2,785
|
|
Comprehensive
net income
|
|
$
|
13,504
|
|
$
|
4,986
|
|
$
|
24,331
|
|
$
|
16,668
|
|
(9)
Stock-Based Compensation - Valuation Assumptions
The
Company calculated the fair value of each option award on the date of grant
using the Black-Scholes option pricing model. The following assumptions were
used for each respective period:
|
Nine
Months Ended September 30,
|
|
2007
|
|
2006
|
Risk-free
interest rates
|
4.2%
- 4.9%
|
|
4.4%
- 5.2%
|
Expected
lives (in years)
|
4.5
|
|
4.5
|
Expected
dividend yield
|
0%
|
|
0%
|
Expected
volatility
|
45.0%
- 48.8%
|
|
47.5%
- 53.8%
|
The
computation of expected volatility during the nine months ended September 30,
2007 and 2006 was based on an equally weighted combination of historical
volatility and market-based implied volatility. Historical volatility was
calculated from historical data for a period of time approximately equal to
the
expected term of the option award, starting from the date of grant. Market-based
implied volatility was derived from traded options on the Company’s common stock
having a term of six months. The risk-free interest rate assumption is based
upon the U.S. Treasury yield curve in effect at the time of grant for periods
corresponding with the expected life of the option.
(10)
Commitments and Contingencies
Legal
Matters: In
September 2003, a former employee of the Company filed a lawsuit against the
Company in the 127th Judicial District Court, Harris County, Texas, alleging
that the Company terminated the employee’s employment as the result of age
discrimination. The case was transferred to the 268th District Court for Fort
Bend County, Texas, and, in November 2005, the case was removed to the United
States District Court for the Southern District of Texas (Gaines
Watkins v. Input/Output, Inc., Civil Action No. H-05-03940).
In June
2007, the case was tried to a jury, and the jury returned a verdict in favor
of
the plaintiff and found that the plaintiff was entitled to a total of $500,000
in pay. The jury also found that the Company acted willfully in discharging
the
plaintiff. Under the Age Discrimination in Employment Act of 1967, the plaintiff
may be awarded an additional amount of liquidated damages equal to the
plaintiff’s lost back wages if the jury determined that the age discrimination
was willful. On August 17, 2007, the presiding judge awarded a total of
$1,270,486 to the plaintiff. On September 28, 2007, the Company and the
plaintiff entered into a Settlement Agreement and Release, whereby the parties
agreed that the Company would pay $1,150,000 in full settlement of the case
and
the judgment. An estimated loss of $1.0 million was recorded during the second
quarter of this year. The remainder of the settlement amount was expensed in
the
third quarter of this year.
The
Company has been named in various other lawsuits or threatened actions that
are
incidental to its ordinary business. Such lawsuits and actions could increase
in
number as the Company’s business expands and the Company grows larger.
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.
Warranties:
The
Company generally warrants that all of its manufactured equipment will be free
from defects in workmanship, materials and parts. Warranty periods generally
range from 30 days to three years from the date of original purchase, depending
on the product. The Company provides for estimated warranty as a charge to
cost
of sales at time of sale, which is when estimated future expenditures associated
with such contingencies become probable and reasonably estimated. However,
new
information may become available, or circumstances (such as applicable laws
and
regulations) may change, thereby resulting in an increase or decrease in the
amount required to be accrued for such matters (and therefore a decrease or
increase in reported net income in the period of such change). A summary of
warranty activity is as follows (in thousands):
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Balance
at beginning of period
|
|
$
|
8,575
|
|
$
|
4,877
|
|
$
|
6,255
|
|
$
|
3,896
|
|
Accruals
for warranties issued during the period
|
|
|
3,722
|
|
|
1,501
|
|
|
9,207
|
|
|
5,030
|
|
Settlements
made (in cash or in kind) during the period
|
|
|
(901
|
)
|
|
(992
|
)
|
|
(4,066
|
)
|
|
(3,540
|
)
|
Balance
at end of period
|
|
$
|
11,396
|
|
$
|
5,386
|
|
$
|
11,396
|
|
$
|
5,386
|
|
(11)
Concentration of Credit and Foreign Sales Risks
For
the
nine months ended September 30, 2007, the Company recognized $119.4 million
of
sales to customers in Europe, $98.8 million of sales to customers in the
Asia-Pacific region, $26.3 million of sales to customers in Africa, $21.9
million of sales to customers in the Middle East, $11.6 million of sales to
customers in Latin American countries, and $39.1 million of sales to customers
in the Commonwealth of Independent States, or former Soviet Union (CIS). The
majority of the Company’s foreign sales are denominated in U.S. dollars. For the
nine months ended September 30, 2007 and 2006, international sales comprised
63%
and 74%, respectively, of total net revenues. Certain of these countries have
experienced economic problems and uncertainties from time to time. To the extent
that world events or economic conditions negatively affect the Company’s future
sales to customers in these and other regions of the world or the collectibility
of the Company’s existing receivables, the Company’s future results of
operations, liquidity and financial condition may be adversely
affected.
For
the
nine months ended September 30, 2007, $61.5 million, or 12.2%, of consolidated
net revenues, were primarily attributable to land system sales to Oil &
Natural Gas Corporation, Ltd. (ONGC), the national oil company of India. For
the
nine months ended September 30, 2007 and 2006, $29.3 million, or 5.8%, and
$25.5
million, or 7.6%, respectively, of consolidated net revenues were attributable
to marine equipment sales to Reservoir Exploration Technology (RXT). The loss
of
these customers or deterioration in the Company’s relationship with either of
these customers could have a material adverse effect on the Company’s results of
operations and financial condition.
(12) Recent
Accounting Pronouncements
In
September 2006, the FASB issued FAS No. 157, “Fair
Value Measurements”
(FAS
157). FAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact, if any, of this statement.
In
February 2007, the FASB issued FAS No. 159, “The
Fair Value Option for Financial
Assets and Financial Liabilities”
(FAS
159). FAS 159 allows companies the option to report certain financial assets
and
liabilities at fair value, establishes presentation and disclosure requirements
and requires additional disclosure surrounding the valuation of the financial
assets and liabilities presented at fair value on the balance sheet. The
provisions of FAS 159 are effective for fiscal years beginning after November
15, 2007. The Company is currently evaluating the impact, if any, of this
statement.
Effective
July, 1, 2007, the Company adopted the Emerging Issues Task Force, or EITF,
Topic D-109, “Determining
the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued
in
the Form of a Share under FASB Statement No.133” (Topic D-109).
Topic
D-109 conveys the SEC staff’s views on determining whether the
characteristics of a host contract in a hybrid financial instruments issued
in
the form of a share is more like debt or equity. The SEC staff believes that
in
evaluating an embedded derivative feature for separation under FASB Statement
133, the consideration of the economic characteristics and risks of the host
contract should not ignore the stated or implied substantive terms and features
of the hybrid financial instrument. The adoption of Topic D-109 did not have
an
impact on the Company’s financial position, results of operations, or cash
flows. However, if the holders of the Series D-1 Preferred Stock exercised
their
right to purchase additional shares of
Series D
Preferred Stock, the Company would account for the transaction under this new
guidance. These rights expire in February 2008.
Item
2. Management’s
Discussion and Analysis of Financial Condition and
Results of
Operations
Executive
Summary
We
are a
leading seismic solutions company, providing the global oil and natural gas
industry with a variety of seismic products and services, including seismic
data
acquisition equipment, survey design planning services, software products,
seismic data libraries, and seismic data processing services. In recent years,
we have transformed our business from being solely a seismic equipment
manufacturer to being a provider of a full range of seismic imaging products
and
services - including designing and planning a seismic survey, overseeing the
acquisition of seismic data by seismic contractors, and processing the acquired
seismic data using advanced algorithms and mode workflows. During 2004, we
completed two acquisitions as part of our strategy to expand the range of
products and services we provide. This expanded offering, which includes seismic
data management software and advanced imaging services, has enabled us to
broaden our customer base beyond seismic acquisition contractors to also include
oil and natural gas exploration and production companies.
In
January 2007, we created a new division, the ION Solutions Division, which
combined our established Seismic Imaging Solutions data processing services
and
Integrated Seismic Solutions service businesses of GX Technology Corporation
(GXT) with two new business units - FireFly®
Solutions and Seabed Solutions. This division was created to deliver integrated
hardware and service solutions for full-wave imaging in both the land and marine
environments. This division will focus on addressing the customer’s entire
seismic transaction - from the data acquisition phase to the data processing
phase - and will apply our latest developments in systems and processing
technology. The FireFly Solutions unit will focus on the integration of data
processing services with our new FireFly cableless full-wave land acquisition
system, while the Seabed Solutions unit will center on integrating our data
processing services with our latest generation of marine products. Revenue
associated with the sale of FireFly equipment will continue to be reported
under
the Land Imaging Systems segment. The creation of this new division did not
have
an impact on our previously reported business segment
classification.
In
September 2007, we changed our corporate name from Input/Output, Inc. to ION
Geophysical Corporation. This change was made to reflect the evolution of
our company from being primarily known as an equipment manufacturer to our
broad, current product and service portfolio of land and marine acquisition
hardware, survey design and command & control software, advanced
imaging services, and seismic data libraries.
Our
current growth strategy is focused on the following key areas:
|
·
|
Expanding
our ION Solutions business in new regions with new customers and
with new
service offerings, including proprietary services for owners and
operators
of oil and gas properties;
|
|
·
|
Globalizing
our ION Solutions data processing business by opening advanced imaging
centers in new locations, and expanding our presence in the land
seismic
processing segment;
|
|
·
|
Successfully
developing and introducing our next generation of marine towed streamer
products;
|
|
·
|
Expanding
our seabed imaging solutions business using our VectorSeis®
Ocean (VSO) acquisition platform and derivative
products;
|
|
·
|
Increasing
our market share in cable-based land acquisition systems through
our new
Scorpion®
acquisition system; and
|
|
·
|
Ongoing
development and further commercialization of FireFly, our cableless
full-wave land acquisition system.
|
Each
of
our four operating business segments experienced strong percentage increases
in
their revenues compared to their revenues for the comparable three and nine
months in 2006. Overall income from operations for the nine months ended
September 30, 2007 was approximately 51% higher compared to income from
operations for the comparable period in 2006.
During
the nine months ended September 30, 2007, we continued to see interest in our
new technologies. For example:
|
·
|
In
the fourth quarter of 2006, we delivered our new FireFly cableless
full-wave land acquisition system to BP America Production Company,
a
subsidiary of London-based BP p.l.c. for the first field application
in a
project in the Wamsutter gas fields in Wyoming. In March 2007, Apache
Corporation began their deployment of this system at a project located
in
northeast Texas; the survey was completed in June 2007 and results
are
currently being assessed. In the first quarter of 2007, we recognized
revenues of $20.8 million associated with this system sale, which
was used
on both the surveys in Wamsutter and northeast
Texas.
|
|
·
|
During
February 2007, we announced the receipt of an order for approximately
$29
million from Reservoir Exploration Technology (RXT), a marine seismic
contractor headquartered in Oslo, Norway, for a fourth VSO redeployable
ocean-bottom cable system. This system is scheduled to begin delivery
in
the fourth quarter of 2007. In addition, in May 2007, we entered
into a
multi-year agreement with RXT under which RXT has agreed to purchase
a
minimum of $160 million in VSO systems and related equipment over
the next
four years. This agreement entitles us to receive a royalty of 2.1%
of
revenues generated by RXT through the use of all VSO equipment from
January 2008 through the term of the agreement. In turn, this agreement
allows RXT to have exclusive rights to this product line through
2011.
|
|
·
|
During
the third quarter of 2007, we delivered the remaining five of 14
land
acquisition systems to ONGC, the national oil company of India, resulting
in $22.8 million of revenues during the quarter. The other systems
were
delivered during the second quarter 2007, and we recognized $35.5
million
in revenues in that quarter related to the sale.
|
|
·
|
In
the third quarter of 2007, we completed open water testing of our
DigiFIN™
advanced streamer command and control system with our launch partner
Petroleum Geo-Services’ (PGS). DigiFIN is designed to maintain tighter,
more uniform marine streamer separation along the entire length of
the
streamer cable, which allows for finer sampling of seismic data and
improved subsurface images. We believe that DigiFIN also enables
faster
line changes and minimizes the requirements for in-fill seismic work,
which together improve the productivity of towed streamer operations.
Also, PGS placed an order to outfit a vessel with DigiFIN, which
we
delivered during the quarter.
|
|
·
|
On
June 12, 2007, we entered into a series of agreements with Hydro
Technology Ventures and Reservoir Innovation AS for the formation
of a
joint venture company named OCTIO Geophysical AS for the purpose
of
developing, pilot testing and commercializing a full-wave seismic
system
for permanent monitoring of offshore reservoirs. Hydro Technology
is a
subsidiary of StatoilHydro ASA. Reservoir Innovation is a privately
held
company based in Bergen, Norway, that develops and commercializes
technologies for the exploration, development, and production of
offshore
hydrocarbon reservoirs. Each party to the joint venture has equal
operational control over the joint venture company. Under the terms
of the
agreement, we contributed (licensed) certain of our technology to
the
joint venture and agreed to sell certain products and to provide
temporary
employee support to the joint
venture.
|
In
March
2007, we obtained a $75.0 million revolving line of credit replacing our
previously available $25.0 million revolving line of credit. There were no
borrowings outstanding at September 30, 2007. See further discussion below
of
the terms of this new credit facility at “
—
Liquidity and Capital Resources.”
We
operate our company through four business segments: three of these segments
—
Land
Imaging Systems, Marine Imaging Systems and Data Management Solutions - make
up
our ION Systems division, and the fourth segment is our ION Solutions division
(formerly referred to as Seismic Imaging Solutions). The following table
provides an overview of key financial metrics for our company as a whole and
our
four business segments during the three and nine months ended September 30,
2007
compared to those periods one year ago (in thousands, except per share
amounts):
|
|
Three
Months Ended
September
30,
|
|
Comparable
Quarter
Increase
(Decrease)
|
|
Nine
Months Ended
September
30,
|
|
Comparable
Year-to-Date
Increase
(Decrease)
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
|
|
Net
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ION
Systems Division:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
Imaging Systems
|
|
$
|
79,055
|
|
$
|
46,082
|
|
|
71.6
|
%
|
$
|
242,804
|
|
$
|
130,837
|
|
|
85.6
|
%
|
Marine
Imaging Systems
|
|
|
37,099
|
|
|
24,864
|
|
|
49.2
|
%
|
|
116,925
|
|
|
89,990
|
|
|
29.9
|
%
|
Data
Management Solutions
|
|
|
10,917
|
|
|
6,662
|
|
|
63.9
|
%
|
|
28,097
|
|
|
16,793
|
|
|
67.3
|
%
|
Total
ION Systems Division
|
|
|
127,071
|
|
|
77,608
|
|
|
63.7
|
%
|
|
387,826
|
|
|
237,620
|
|
|
63.2
|
%
|
ION
Solutions Division (Seismic Imaging Solutions)
|
|
|
46,481
|
|
|
32,365
|
|
|
43.6
|
%
|
|
115,927
|
|
|
99,693
|
|
|
16.3
|
%
|
Total
|
|
$
|
173,552
|
|
$
|
109,973
|
|
|
57.8
|
%
|
$
|
503,753
|
|
$
|
337,313
|
|
|
49.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ION
Systems Division:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
Imaging Systems
|
|
$
|
5,663
|
|
$
|
1,874
|
|
|
202.2
|
%
|
$
|
16,681
|
|
$
|
6,467
|
|
|
157.9
|
%
|
Marine
Imaging Systems
|
|
|
9,912
|
|
|
5,792
|
|
|
71.1
|
%
|
|
32,077
|
|
|
22,310
|
|
|
43.8
|
%
|
Data
Management Solutions
|
|
|
5,948
|
|
|
2,423
|
|
|
145.5
|
%
|
|
12,686
|
|
|
5,389
|
|
|
135.4
|
%
|
Total
ION Systems Division
|
|
|
21,523
|
|
|
10,089
|
|
|
113.3
|
%
|
|
61,444
|
|
|
34,166
|
|
|
79.8
|
%
|
ION
Solutions Division (Seismic Imaging Solutions)
|
|
|
7,443
|
|
|
5,123
|
|
|
45.3
|
%
|
|
7,432
|
|
|
17,176
|
|
|
(56.7
|
%)
|
Corporate
|
|
|
(12,102
|
)
|
|
(8,759
|
)
|
|
(38.2
|
%)
|
|
(34,562
|
)
|
|
(28,623
|
)
|
|
(20.7
|
%)
|
Total
|
|
$
|
16,864
|
|
$
|
6,453
|
|
|
161.3
|
%
|
$
|
34,314
|
|
$
|
22,719
|
|
|
51.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income applicable to common shares
|
|
$
|
12,639
|
|
$
|
2,857
|
|
|
|
|
$
|
22,788
|
|
$
|
13,883
|
|
|
|
|
Basic
net income per common share
|
|
$
|
0.16
|
|
$
|
0.04
|
|
|
|
|
$
|
0.28
|
|
$
|
0.17
|
|
|
|
|
Diluted
net income per common share
|
|
$
|
0.14
|
|
$
|
0.04
|
|
|
|
|
$
|
0.26
|
|
$
|
0.17
|
|
|
|
|
We
intend
that the following discussion of our financial condition and results of
operations will provide information that will assist in understanding our
consolidated financial statements, the changes in certain key items in those
financial statements from quarter to quarter, and the primary factors that
accounted for those changes.
There
are
a number of factors that could impact our future operating results and financial
condition, and may if realized, cause our expectations set forth in this Form
10-Q and elsewhere to vary materially from what we anticipate. See Part II,
Item
1A. “Risk
Factors”
below.
The
information contained in this Quarterly Report on Form 10-Q contains references
to our trademarks, service marks and registered marks, as indicated. Except
where stated otherwise or unless the context otherwise requires, the terms
“VectorSeis,” “GATOR,” “Scorpion,” “Orca,” “DigiCOURSE” and “FireFly” refer to
our VectorSeis®, GATOR®, Scorpion®, Orca®, DigiCOURSE® and FireFly® registered
marks, and the terms “DigiFIN” and “DigiSHOT” refer to our DigiFIN™ and
DigiSHOT™ trademarks and service marks.
Results
of Operations
Three
Months Ended September 30, 2007 Compared to Three Months Ended September
30, 2006
Net
Revenues:
Net
revenues of $173.6 million for the three months ended September 30, 2007
increased $63.6 million, or 57.8%, compared to the corresponding period last
year. Land Imaging Systems’ net revenues increased by $33.0 million, to $79.1
million compared to $46.1 million in the corresponding period of last year.
This
increase included revenues related to the delivery of the remaining five land
acquisition systems of our 14 system order from India’s ONGC we received in
December 2006, and an increase in our vibrator truck sales during the third
quarter of 2007. Marine Imaging Systems’ net revenues for the three months ended
September 30, 2007 increased by $12.2 million to $37.1 million compared to
$24.9
million in the corresponding period of last year, principally due to stronger
sales of our marine positioning products, including the first sale of our
DigiFIN advanced streamer command and control system, and an increase in
VectorSeis Ocean (VSO) and source product sales. We expect to begin delivering
the next VSO system ordered by RXT in the fourth quarter of 2007. Our Data
Management Solutions segment (Concept Systems) contributed $10.9 million to
our
net revenues for the third quarter, compared to $6.7 million in the
corresponding period of last year. This increase primarily reflects increased
energy industry demand for marine seismic work and sales from our GATOR® and
newly launched Orca® towed streamer navigation and data management applications
product line.
Our
ION
Solutions division’s net revenues increased by $14.1 million, to $46.5 million
for the three months ended September 30, 2007, compared to $32.4 million in
the
corresponding period of last year. The results for the third quarter of 2007
included multi-client seismic data library sales related to our ultra-deep
seismic data program and geologic study off the east and west coasts of India
that was completed in the third quarter of 2007. These sales accounted for
the
majority of our data library sales during the third quarter of 2007 and were
supplemented by an increase in new venture revenues in the Arctic region.
Gross
Profit and Gross Profit Percentage:
Gross
profit of $51.8 million for the three months ended September 30, 2007 increased
$18.8 million, compared to the corresponding period last year. Gross profit
percentages for the three months ended September 30, 2007 and 2006 were 29.8%
and 30.0%, respectively. While the overall margins were flat, we experienced
stronger margins in our Marine Imaging Systems due to increased sales of our
source and Seabed product lines. We also had an increase in higher margin sales
at Concept Systems. These were offset by the growth of lower margin vibroseis
trucks in the Land Imaging Systems division.
Research
and Development:
Research and development expense was $11.6 million, or 6.7% of net revenues,
for
the three months ended September 30, 2007, an increase of $3.8 million compared
to $7.8 million, or 7.1% of net revenues, for the corresponding period last
year. The increase is due primarily to increased personnel costs related to
additional hirings and professional fees as well as increased costs related
to
the development of our FireFly version 2.0 system, DigiFIN™ advanced streamer
command and control system and our integrated marine acquisition system
products. We expect to continue to incur significant research and development
expenses as we continue to invest heavily in the next generation of our seismic
acquisition products and services, such as our next generation of marine
products.
Marketing
and Sales:
Marketing and sales expense of $10.9 million, or 6.3% of net revenues, for
the
three months ended September 30, 2007 increased $1.1 million compared to $9.8
million, or 8.9% of net revenues, for the corresponding period last year. The
reduction in marketing and sales expense as a percentage of net revenues
reflects our focus on leveraging our marketing and sales costs with our sales
growth. The increase in our sales and marketing expenditures reflects the hiring
of additional sales personnel and the creation of our two new business units,
FireFly Solutions and Seabed Solutions, within the ION Solutions division.
Expenses increased overall due to our continued business growth, which caused
additional spending associated with increased sales volumes, personnel hirings
and sales commissions. We intend to continue investing significant sums in
our
marketing efforts as we further penetrate markets with our new
products.
General
and Administrative:
General
and administrative expenses of $12.4 million for the three months ended
September 30, 2007 increased $3.4 million compared to $9.0 million for the
third
quarter of 2006. General and administrative expenses as a percentage of net
revenues for the three months ended September 30, 2007 and 2006 were 7.2% and
8.2%, respectively. The reduction in general and administrative expense as
a
percentage of net revenues reflects our focus on leveraging our administrative
costs with our sales growth. The increase in expenditures is primarily due
to
higher payroll costs, an increase in bonuses for 2007 related to our improved
results of operations and increased travel associated with our global solutions
corporate strategy.
Income
Tax Expense:
Income
tax expense for the three months ended September 30, 2007 was $1.3 million
compared to $1.4 million for the three months ended September 30, 2006. Income
tax expense consists mainly of non-U.S. taxes since we continue to maintain
a
valuation allowance for substantially all of our U.S. federal net deferred
tax
assets. Our effective tax rate for the three months ended September 30, 2007
and
2006 was 9.1% and 28.9%, respectively. The decrease in our effective tax rate
relates primarily to improved profitability of our U.S. operations and to a
positive return to accrual adjustment of U.S. state income taxes recorded in
the
current period.
Preferred
Dividend:
The
preferred dividend relates to our Series D-1 Preferred Stock we issued in
February 2005. Quarterly dividends may be paid, at our option, either in cash
or
by the issuance of our common stock. Dividends are paid at a rate equal to
the
greater of (i) five percent per annum or (ii) the three month LIBOR rate on
the
last day of the immediately preceding calendar quarter plus two and one-half
percent per annum. All dividends paid on the Series D-1 Preferred Stock have
been paid in cash. The Preferred Stock dividend rate was 7.86% at September
30,
2007.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
Net
Revenues:
Net
revenues of $503.8 million for the nine months ended September 30, 2007
increased $166.5 million, or 49.3%, compared to the corresponding period last
year. Land Imaging Systems’ net revenues increased by $112.0 million, to $242.8
million compared to $130.8 million in the corresponding period of last year.
The
increase is due to increased systems sales related to our ONGC order, the
recognition of our FireFly sale in the first quarter of 2007 and an increase
in
vibrator truck sales compared to the corresponding period in 2006. Marine
Imaging Systems’ net revenues increased $26.9 million to $116.9 million compared
to $90.0 million in the corresponding period of last year due to increased
sales
of positioning and source product lines resulting from greater demand for our
DigiCOURSE® positioning and source product system sales and moderately increased
VSO system sales. This increase was partially offset by a decrease in our marine
data acquisition systems sales. Concept Systems contributed $28.1 million to
our
net revenues for the first nine months of 2007, compared to $16.8 million in
the
corresponding period of last year. This increase primarily reflects increased
energy industry demand for marine seismic work and Concept Systems’ newly
launched Orca product line.
ION
Solutions division’s net revenues increased $16.2 million to $115.9 million for
the nine months ended September 30, 2007, compared to $99.7 million in the
corresponding period last year. For 2007, increased demand for proprietary
processing and pre-funded multi-client surveys exceeded the prior year’s
results, but were partially offset by lower sales of off-the-shelf seismic
data.
The first nine months of 2006 included a large, non-recurring multi-client
seismic library sale that was not duplicated during the corresponding period
in
2007.
Gross
Profit and Gross Profit Percentage: Gross
profit of $135.2 million for the nine months ended September 30, 2007 increased
$31.5 million, compared to the corresponding period last year. Gross profit
percentage for the nine months ended September 30, 2007 was 26.8% compared
to
30.8% in the prior year. The reduction in our gross margin percentage was
primarily due to the recognition of the sale of our first FireFly system (which,
as a newly-developed system, had relatively high built-in costs of sale) and
the
mix of business, including an increase in lower margin vibroseis trucks by
Land
Imaging Systems and the inclusion of a low-margin pre-funded multi-client survey
by ION Solutions.
Research
and Development: Research
and development expense was $34.7 million, or 6.9% of net revenues for the
nine
months ended September 30, 2007, an increase of $11.7 million compared to $23.0
million, or 6.8% of net revenues, for the corresponding period last year. The
increase was due primarily to increased personnel costs related to additional
hirings, contract labor and professional fees as well as increased costs related
to the development of our FireFly version 2.0 system, our DigiFIN advanced
streamer command and control system and our integrated marine acquisition system
products. We incurred significant research and development expenses during
the
nine months ended September 30, 2007 and expect to continue to incur significant
research and development expenses as we continue to invest heavily in the next
generation of our seismic acquisition products and services.
Marketing
and sales: Marketing
and sales expense of $31.2 million, or 6.2% of net revenues, for the nine months
ended September 30, 2007 increased $2.7 million compared to $28.5 million,
or
8.4% of net revenues, for the corresponding period last year. The reduction
in
marketing and sales expense as a percentage of net revenues reflects our focus
on leveraging our marketing and sales costs with our sales growth. Expenses
increased overall due to our continued business growth, which caused additional
spending associated with increased sales volumes, personnel hirings and sales
commissions. We intend to continue investing significant sums in our marketing
efforts as we penetrate markets with our new products.
General
and Administrative:
General
and administrative expenses of $35.0 million for the nine months ended September
30, 2007 increased $5.5 million compared to $29.5 million for the corresponding
period last year. General and administrative expenses as a percentage of net
revenues for the nine months ended September 30, 2007 were 7.0% compared to
8.7%
for the same period in 2006. The reduction in general and administrative
expenses as a percentage of net revenues reflects our focus on leveraging our
administrative costs with our sales growth. The increase in expenditures was
primarily due to higher payroll costs associated with an increase in management
and corporate personnel, an increase in travel associated with our global
solutions corporate strategy and the $1.2 million related to the Watkins
settlement (refer to Item
1. Legal
Proceedings
for more
information). This increase was partially offset by a decrease in professional
accounting, consulting and legal fees.
Income
Tax Expense: Income
tax expense for the nine months ended September 30, 2007 was $4.7 million
compared to $3.3 million for the nine months ended September 30, 2006. Income
tax expense consists mainly of non-U.S. taxes since we continue to maintain
a
valuation allowance for substantially all of our U.S. federal net deferred
tax
assets. Our effective tax rate for the nine months ended September 30, 2007
and
2006 was 16.0% and 17.9%, respectively.
Liquidity
and Capital Resources
Sources
of Capital
In
March
2007, we obtained a $75.0 million revolving line of credit (the “Facility”) with
a maturity date of March 2011. The Facility replaced our $25.0 million revolving
line of credit facility, which was scheduled to mature in May 2008. There was
no
outstanding balance of indebtedness under the Facility at September 30, 2007.
The Facility is available for revolving credit borrowings to be used for our
working capital needs and general corporate purposes, subject to a borrowing
base. In addition, the Facility includes a $25.0 million sub-limit for the
issuance of documentary and standby letters of credit, of which $1.0 million
had
been issued at September 30, 2007. The Facility may also be used to fund the
repayment of our 5.50% convertible senior notes indebtedness that is due on
December 15, 2008, so long as after funds are advanced for that purpose, there
remains at least $30.0 million under the borrowing base that is available for
borrowings under the Facility. See below for further discussion of our
outstanding convertible senior notes. The Facility includes an accordion feature
under which the total commitments under the Facility may be increased to $100.0
million, subject to the satisfaction of certain conditions.
The
Facility borrowing base is calculated based on the sum of (i) 85% of our total
eligible accounts receivable, eligible foreign accounts receivable and insured
foreign accounts receivable, plus (ii) the lesser of (x) thirty percent (30%)
of
eligible inventory or (y) $20.0 million. For purposes of this calculation,
eligible foreign accounts receivable cannot exceed $23.5 million. As of
September 30, 2007, the borrowing base calculation permitted total borrowings
of
$67.0 million, of which $66.0 million remained available.
The
interest rate on borrowings under the Facility will be, at our option, (i)
an
“alternate base rate” (as defined in the credit agreement) or (ii) for
Eurodollar borrowings, a LIBOR rate plus an applicable margin. The amount of
the
margin will be based on our then-current leverage ratio as defined in the
Facility credit agreement. The applicable margin will be increased by 0.50%
with
respect to any borrowings that are applied to repay the convertible senior
notes.
We
are
obligated to pay a commitment fee of 0.25% per annum on the unused portion
of
the Facility. A significant portion of our assets are pledged as collateral
for
outstanding borrowings under the Facility. The Facility credit agreement
restricts our ability to pay common stock dividends, incur additional debt,
sell
significant assets, acquire other businesses, merge with other entities and
take
certain other actions without the consent of the lenders. The credit agreement
requires compliance with certain financial and non-financial covenants,
including requirements to (i) maintain a minimum fixed charge coverage ratio
of
1.25 to 1.0, and (ii) not exceed a maximum leverage ratio of 2.75 to 1.0 (upon
retirement of the Convertible Notes debt, the maximum leverage ratio will be
reduced to 2.50 to 1.0 for 12 months, and then to 2.0 to 1.0 thereafter). At
September 30, 2007, we were in compliance with all of the covenants under the
credit agreement.
In
2005,
we issued 30,000 shares of a newly-designated Series D-1 Cumulative Convertible
Preferred Stock (Series D-1 Preferred Stock) in a privately-negotiated
transaction, and received $29.8 million in net proceeds. We also granted to
the
Series D-1 Preferred Stock purchaser an option, which expires on February 16,
2008, to purchase up to an additional 40,000 shares of one or more additional
series of Series D Preferred Stock. This option is currently exercisable. The
additional series of Series D Preferred Stock that may be issued would have
similar terms and conditions as the Series D-1 Preferred Stock, but would have
a
conversion price equal to 122% of the prevailing market price of our common
stock at the time of issuance, and would not be less than $6.31 per share
(subject to adjustment in certain events). On July 13, 2007, the holder of
the
Series D-1 Preferred Stock notified us of its election to exercise its option
to
purchase 15,000 shares of a new series of Series D Preferred Stock for a
purchase price of $15 million, but the holder withdrew its notice prior to
the
completion of the purchase of the additional shares of Series D Preferred
Stock.
The
holders of the Series D-1 Preferred Stock currently have the right to cause
us
to redeem all or a portion of their shares of Series D-1 Preferred Stock for
shares of registered common stock or, at our election, for cash. The number
of
shares of common stock to be issued by us upon redemption will be determined
by
dividing the stated value of the share of Series D-1 Preferred Stock being
redeemed by the prevailing market price of our common stock at the time of
such
redemption. If we elect to redeem the shares of Series D-1 Preferred Stock
for
cash, then we will pay the holders a redemption cash amount, which will also
be
based on the market price of the shares of common stock otherwise issuable
to
such holders.
Our
outstanding convertible senior notes mature on December 15, 2008. The
convertible senior notes are not redeemable prior to their maturity, and are
convertible into common stock at an initial conversion rate of 231.4815 shares
per $1,000 principal amount of notes (a conversion price of $4.32 per share),
which represents 13,888,890 total shares of common stock. We are considering
various alternatives with regard to the repayment or refinancing of the
indebtedness under these notes, which may include the use of our Facility.
It is
possible that any replacement of the debt capital represented by these notes
in
new debt capital may have the effect of increasing our overall borrowing
costs.
The
conversion price per share of common stock under the Series D-1 Preferred Stock
and the convertible senior notes is substantially below the currently prevailing
market prices for our common stock. Converting all of the Series D-1 Preferred
Stock and convertible senior notes at one time would result in significant
dilution to our stockholders that could limit our ability to raise additional
capital.
Based
on
our forecasts and our liquidity requirements for the near term future, we
believe that the combination of our projected internally generated cash, the
borrowing availability under our revolving line of credit and our working
capital (including our cash and cash equivalents on hand), will be sufficient
to
fund our operational needs and liquidity requirements for at least the next
twelve months.
Cash
Flow from Operations
We
have
historically financed operations from internally generated cash and funds from
equity and debt financings. Cash and cash equivalents were $26.0 million at
September 30, 2007, an increase of $9.0 million from December 31, 2006. Net
cash
provided by operating activities was approximately $64.7 million for the nine
months ended September 30, 2007 and 2006. Despite higher net income, our net
cash provided by our operating activities was flat, primarily due to increased
investment in our inventories and an increase in our unbilled receivables
associated with our multi-client new venture activities, partially offset by
a
reduction in our accounts receivable due to increased collections.
Cash
Flow from Investing Activities
Net
cash
flow used in investing activities was $52.3 million for the nine months ended
September 30, 2007, compared to $33.3 million for the nine months ended
September 30, 2006. The principal uses of cash in our investing activities
during the nine months ended September 30, 2007 were $45.2 million for
investments in our multi-client data library and $7.2 million for equipment
purchases. We expect to spend an additional $15 million to $30 million for
investments in our multi-client data library and on equipment purchases during
the remainder of 2007. The range of expenditures for the remainder of the year
could vary depending on the level of multi-client seismic data acquisition
projects that are initiated during the remainder of 2007. In general, a majority
or all of direct expenses associated with completing a multi-client survey
are
typically pre-funded by our customers.
Cash
Flow from Financing Activities
Net
cash
flow used in financing activities was $3.7 million for the nine months ended
September 30, 2007, compared to $7.6 million for the nine months ended September
30, 2006. The net cash flow used in financing activities during the nine months
ended September 30, 2007 was primarily related to scheduled principal payments
of $6.5 million on our notes payable and capital lease obligations, $1.8 million
in cash dividends paid on our outstanding Series D-1 Preferred Stock and $1.2
million of cancelled restricted stock for payment of employee minimum income
taxes. This use of net cash flow was partially offset by $5.9 million in
proceeds related to the exercise of stock options and stock purchases by our
employees during the nine months ended September 30, 2007
Inflation
and Seasonality
Inflation
in recent years has not had a material effect on our costs of goods or labor,
or
the prices for our products or services. Traditionally, our business has been
seasonal, with strongest demand in the fourth quarter of our fiscal
year.
Critical
Accounting Policies and Estimates
General.
Please
refer to our Annual Report on Form 10-K for the year ended December 31, 2006,
for a complete discussion of our other significant accounting policies and
estimates. There have been no material changes in the current period regarding
our critical accounting policies and estimates, except for the following
significant accounting policy:
In
September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes - an Interpretation
of FASB Statement No. 109” (FIN
48),
which clarifies the accounting for uncertainty in income taxes recognized in
accordance with Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (FAS
109). FIN 48 clarifies the application of FAS 109 by defining criteria that
an
individual tax position must meet for any part of the benefit of that position
to be recognized in the financial statements. Additionally, FIN 48 provides
guidance on the measurement, derecognition, classification and disclosure of
tax
positions, along with accounting for the related interest and penalties. The
provisions of FIN 48 are effective for fiscal years beginning after December
15,
2006, with the cumulative effect of the change in accounting principle recorded
as an adjustment to beginning retained earnings. We adopted FIN 48 on January
1,
2007. The adoption resulted in no adjustment to beginning retained earnings.
See
Note 7 of Condensed
Notes to Unaudited Consolidated Financial
Statements for
additional information.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued FAS No. 157, “Fair
Value Measurements”
(FAS
157). FAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective for fiscal years beginning after November 15, 2007. We are currently
evaluating the impact, if any, of this statement.
In
February 2007, the FASB issued FAS No. 159, “The
Fair Value Option for Financial
Assets and Financial Liabilities” (FAS
159). FAS 159 allows companies the option to report certain financial assets
and
liabilities at fair value, establishes presentation and disclosure requirements
and requires additional disclosure surrounding the valuation of the financial
assets and liabilities presented at fair value on the balance sheet. The
provisions of FAS 159 are effective for fiscal years beginning after November
15, 2007. We are currently evaluating the impact, if any, of this
statement.
Effective
July, 1, 2007, we adopted the Emerging Issues Task Force, or EITF, Topic D-109,
"Determining
the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued
in
the Form of a Share under FASB Statement No.133" (Topic D-109).
Topic
D-109 conveys the SEC staff’s views on determining whether the
characteristics of a host contract in a hybrid financial instruments issued
in
the form of a share is more like debt or equity. The SEC staff believes that
in
evaluating an embedded derivative feature for separation under FASB Statement
133, the consideration of the economic characteristics and risks of the host
contract should not ignore the stated or implied substantive terms and features
of the hybrid financial instrument. The adoption of Topic D-109 did not have
an
impact on our financial position, results of operations, or cash flows. However,
if the holders of our Series D-1 Preferred Stock exercised their right to
purchase additional shares of
Series D
Preferred Stock, we would account for the transaction under this new guidance.
These rights expire in February 2008.
Credit
and Foreign Sales Risks
Historically,
our principal customers have been seismic contractors that operate seismic
data
acquisition systems and related equipment to collect data in accordance with
their customers’ specifications or for their own seismic data libraries.
However, through the acquisition of GXT, we have diversified our customer base
to include major integrated and independent oil and gas companies.
For
the
nine months ended September 30, 2007, we recognized $119.4 million of sales
to
customers in Europe, $98.8 million of sales to customers in Asia Pacific, $26.3
million of sales to customers in Africa, $21.9 million of sales to customers
in
the Middle East, $11.6 million of sales to customers in Latin American
countries, and $39.1 million of sales to customers in the Commonwealth of
Independent States, or former Soviet Union (CIS). The majority of our foreign
sales are denominated in U.S. dollars. For the nine months ended September
30,
2007 and 2006, international sales comprised 63% and 74%, respectively of total
net revenues. Certain of these countries have experienced economic problems
and
uncertainties from time to time. To the extent that world events or economic
conditions negatively affect our future sales to customers in these and other
regions of the world or the collectibility of our existing receivables, our
future results of operations, liquidity and financial condition may be adversely
affected. We currently require customers in these higher risk countries to
provide their own financing and in some cases have assisted the customer in
organizing international financing and Export-Import credit guarantees provided
by the United States government. We do not currently extend long-term credit
through notes to companies in countries we consider to be inappropriate for
credit risk purposes.
For
the
nine months ended September 30, 2007, $61.5 million, or 12.2%, of consolidated
net revenues, were attributable to land system sales to ONGC. For the nine
months ended September 30, 2007 and 2006, $29.3 million, or 5.8%, and $25.5
million, or 7.6%, respectively, of consolidated net revenues, were attributable
to marine equipment sales to Reservoir Exploration Technology (RXT). The loss
of
these customers or deterioration in our relationship with either of these
customers could have a material adverse effect on our results of operations
and
financial condition.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
Please
refer to Item 7A of our Annual Report on Form 10-K for the year ended December
31, 2006, for a discussion regarding the Company’s quantitative and qualitative
disclosures about market risk. There have been no material changes to those
disclosures during the three months ended September 30, 2007.
Item
4. Controls
and Procedures
Disclosure
Controls and Procedures.
Under
the supervision and with the participation of management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a - 15(e) and 15d - 15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act), as of
September 30, 2007. Based on this evaluation, our principal executive officer
and principal financial officer concluded that as of September 30, 2007, our
disclosure controls and procedures were effective such that the information
relating to our company, including our consolidated subsidiaries, required
to be
disclosed in our SEC reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms and (ii) is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes
in Internal Control over Financial Reporting. There
were no changes in our internal control over financial reporting identified
in
connection with the evaluation required by Rule 13a-15(f) under the Exchange
Act
that was conducted during the prior fiscal quarter, which have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
II — OTHER INFORMATION
Item
1. Legal
Proceedings.
In
September 2003, a former employee of the Company filed a lawsuit against us
in
the 127th Judicial District Court, Harris County, Texas, alleging that we
terminated the employee’s employment as the result of age discrimination. The
case was transferred to the 268th District Court for Fort Bend County, Texas,
and, in November 2005, the case was removed to the United States District Court
for the Southern District of Texas (Gaines
Watkins v. Input/Output,
Inc., Civil Action No. H-05-03940).
In June
2007, the case was tried to a jury, and the jury returned a verdict in favor
of
the plaintiff and found that the plaintiff was entitled to a total of $500,000
in pay. The jury also found that we acted willfully in discharging the
plaintiff. Under the Age Discrimination in Employment Act of 1967, the plaintiff
may be awarded an additional amount of liquidated damages equal to the
plaintiff’s lost back wages if the jury determined that the age discrimination
was willful. On August 17, 2007, the presiding judge awarded a total of
$1,270,486 to the plaintiff. On September 28, 2007, we and the plaintiff entered
into a Settlement Agreement and Release, whereby the parties agreed that we
would pay $1,150,000 in full settlement of the case and the judgment. An
estimated loss of $1.0 million was recorded during the second quarter of this
year. The remainder of the settlement amount was expensed in the third quarter
of this year.
We
have
been named in various other lawsuits or threatened actions that are incidental
to our ordinary business. Such lawsuits and actions could increase in number
as
our business expands and we grow larger. Litigation is inherently unpredictable.
Any claims against us, whether meritorious or not, could be time consuming,
cause us 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. We
currently believe that the ultimate resolution of these matters will not have
a
material adverse impact on our financial condition, results of operations or
liquidity.
Item
1A. Risk
Factors.
This
report (as well as certain oral statements made from time to time by authorized
representatives on behalf of our company) contain statements concerning our
future results and performance and other matters that are “forward-looking”
statements within the meaning of Section 27A of the Securities Act of 1933,
as
amended (the Securities Act), and Section 21E of the Exchange Act. These
statements involve known and unknown risks, uncertainties, and other factors
that may cause our or our industry’s results, levels of activity, performance,
or achievements to be materially different from any future results, levels
of
activity, performance, or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “intend,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or
“continue” or the negative of such terms or other comparable terminology.
Examples of other forward-looking statements contained in this report (or in
such oral statements) include statements regarding:
|
• |
expected
net revenues, operating profit and net income;
|
|
• |
expected
gross margins for our products and services;
|
|
• |
future
benefits to our customers to be derived from new products and services,
such as Scorpion and FireFly;
|
|
• |
future
growth rates for certain of our products and services;
|
|
• |
future
sales to our significant customers;
|
|
• |
expectations
of oil and natural gas exploration and production companies and contractor
end-users purchasing our more expensive, more technologically advanced
products and services;
|
|
• |
the
degree and rate of future market acceptance of our new products and
services;
|
|
• |
expectations
regarding future mix of business and future asset
recoveries;
|
|
• |
the
timing of anticipated sales;
|
|
• |
anticipated
timing and success of commercialization and capabilities of products
and
services under development, and start- up costs associated with their
development;
|
|
• |
expected
improved operational efficiencies from our full-wave digital products
and
services;
|
|
• |
potential
future acquisitions;
|
|
• |
future
levels of capital expenditures;
|
|
• |
future
cash needs and future sources of cash, including availability under
our
new revolving line of credit facility and the retirement of our
outstanding convertible senior notes that mature in December
2008;
|
|
• |
the
outcome of pending or threatened disputes and other contingencies;
|
|
• |
future
demand for seismic equipment and services;
|
|
• |
future
seismic industry fundamentals;
|
|
• |
the
adequacy of our future liquidity and capital resources;
|
|
• |
future
oil and gas commodity prices;
|
|
• |
future
opportunities for new products and projected research and development
expenses;
|
|
• |
future
worldwide economic conditions;
|
|
• |
success
in integrating our acquired
businesses;
|
|
• |
expectations
regarding realization of deferred tax assets; and
|
|
• |
anticipated
results regarding accounting estimates we make.
|
These
forward-looking statements reflect our best judgment about future events and
trends based on the information currently available to us. Our results of
operations can be affected by inaccurate assumptions we make or by risks and
uncertainties known or unknown to us. Therefore, we cannot guarantee the
accuracy of the forward-looking statements. Actual events and results of
operations may vary materially from our current expectations and
assumptions.
Information
regarding factors that may cause actual results to vary from our expectations,
called “risk factors,” appears in our Annual Report on Form 10-K for the year
ended December 31, 2006 in Part I, Item 1A. “Risk Factors” and in our Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2007 in Part II,
Item 1A. “Risk Factors.” There have been no material changes from the risk
factors previously disclosed in that Form 10-K and Form 10-Q.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
(c)
During the three months ended September 30, 2007, the Company withheld and
subsequently cancelled shares of our common stock to satisfy the minimum
statutory income tax withholding obligation on the vesting of restricted stock
for related employees. The date of cancellation, number of shares and average
effective acquisition price per share, were as follows:
Period
|
|
(a)
Total Number of
Shares
Acquired
|
|
(b)
Average Price
Paid Per Share
|
|
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Program
|
|
(d) Maximum Number
(or Approximate
Dollar
Value) of Shares
That
May Yet Be Purchased
Under the Plans or
Program
|
|
July
1, 2007 to July 31, 2007
|
|
|
177
|
|
$
|
16.46
|
|
|
Not
applicable
|
|
|
Not
applicable
|
|
August
1, 2007 to August 31, 2007
|
|
|
29,226
|
|
$
|
14.45
|
|
|
Not
applicable
|
|
|
Not
applicable
|
|
September
1, 2007 to September 30, 2007
|
|
|
57,034
|
|
$
|
14.14
|
|
|
Not
applicable
|
|
|
Not
applicable
|
|
Total
|
|
|
86,437
|
|
$
|
14.24
|
|
|
|
|
|
|
|
Item
6. Exhibits
31.1
|
Certification
of President and Chief Executive Officer Pursuant to Rule
13a-14(a).
|
31.2
|
Certification
of Executive Vice President and Chief Financial Officer Pursuant
to Rule
13a-14(a).
|
32.1
|
Certification
of President and Chief Executive Officer Pursuant to 18 U.S.C.
§1350.
|
32.2
|
Certification
of Executive Vice President and Chief Financial Officer Pursuant
to 18
U.S.C. §1350.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ION
GEOPHYSICAL CORPORATION |
|
|
|
|
|
By |
/s/
R. Brian Hanson |
|
|
|
R.
Brian Hanson |
|
|
|
Executive Vice President and Chief Financial Officer |
|
Date:
November 8, 2007
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
31.1
|
|
Certification
of President and Chief Executive Officer Pursuant to Rule
13a-14(a).
|
31.2
|
|
Certification
of Executive Vice President and Chief Financial Officer Pursuant
to Rule
13a-14(a).
|
32.1
|
|
Certification
of President and Chief Executive Officer Pursuant to 18 U.S.C.
§1350.
|
32.2
|
|
Certification
of Executive Vice President and Chief Financial Officer Pursuant
to 18
U.S.C. §1350.
|