Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Board of Directors and StockholdersION Geophysical Corporation
OpinionOn November 14, 2016, the District Court ordered our sureties to pay principal and interest on internal control over financial reportingthe royalty damages previously awarded. On November 25, 2016, we paid WesternGeco the $20.8 million due pursuant to the order, and reduced our loss contingency accrual to zero.
WeOn March 14, 2017, the District Court held a hearing on whether impose additional damages for willfulness. The Judge found that our infringement was willful, and awarded enhanced damages of $5.0 million to WesternGeco (WesternGeco had sought $43.6 million in such damages.) The District Court also ordered the appeal bond to be released and discharged. The Court’s findings and ruling were memorialized in an order issued on May 16, 2017. On June 30, 2017, we and WesternGeco agreed that neither of us would appeal the District Court's award of $5.0 million in enhanced damages. Upon assessment of the enhanced damages, we accrued $5.0 million in the first quarter of 2017. As we have auditedpaid the internal control over financial reporting of ION Geophysical Corporation (a Delaware corporation)$5.0 million, the accrual has been adjusted, and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established2018, the loss contingency accrual was zero.
WesternGeco filed a second petition in the 2013 Internal Control-Integrated Framework issuedSupreme Court on February 17, 2017, appealing the lost profits issue again. On May 30, 2017, the Supreme Court called for the U.S. Solicitor General’s views on whether or not the Supreme Court ought to hear WesternGeco’s appeal. On December 6, 2017, the Solicitor General filed its brief, and took the position that the Supreme Court ought to hear the appeal and that foreign lost profits ought to be available. On January 12, 2018, the Supreme Court agreed to hear the appeal. The specific issue before the Supreme Court was whether lost profits arising from use of prohibited combinations occurring outside of the United States are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. § 271(f)(2) (the statute under which we were held to have infringed WesternGeco’s patents, and upon which the District Court and Court of Appeals relied in entering their rulings).
The Supreme Court heard oral arguments on April 16, 2018. We argued that the Court of Appeals’ decision that eliminated lost profits ought to be affirmed. WesternGeco and the Solicitor General argued that the Court of Appeals’ decision that eliminated lost profits ought to be reversed.
On June 22, 2018, the Supreme Court reversed the judgment of the Court of Appeals, held that the award of lost profits to WesternGeco by the CommitteeDistrict Court was a permissible application of Sponsoring OrganizationsSection 284 of the Treadway Commission (COSO). In our opinion,Patent Act, and remanded the Company maintained,case back to the Court of Appeals for further proceedings consistent with its (the Supreme Court’s) opinion. On July 24, 2018, the Supreme Court issued the judgment that returned the case to the Court of Appeals.
On July 27, 2018, the Court of Appeals vacated its September 21, 2016 judgment with respect to damages, and ordered WesternGeco and us to submit supplemental briefing on what relief is appropriate in all material respects, effective internal control over financial reporting aslight of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
Supreme Court’s decision. We also have audited,and WesternGeco each submitted briefing in accordance with the standardsCourt of Appeals’ order (the last brief was filed on September 7, 2018).
We argued in our brief to the Court of Appeals that lost profits were not available to WesternGeco because the jury instructions required them to find that we had been WesternGeco’s direct competitor in the survey markets where WesternGeco had lost profits, and that the jury could not have found so. Additionally, we argued that the award of lost profits and reasonable royalties ought to be vacated and retried on separate grounds due to the outcome of an Inter Partes Review (“IPR”) filed with the Patent Trial and Appeal Board (“PTAB”) of the Public Company Accounting Oversight Board (United States) (“PCAOB”)Patent and Trademark Office.
Until the Court of Appeals’ January 11, 2019 decision issued (which is described below), the consolidated financial statementsIPR was an administrative proceeding that was separate from the 2009 lawsuit. By means of the Company asIPR, we joined a challenge to the validity of andseveral of WesternGeco’s patent claims that another company had filed. While the 2009 lawsuit was pending on appeal, the PTAB invalidated four of the six patent claims that formed the basis for the year endedlawsuit judgment against us. WesternGeco appealed the PTAB’s invalidation of its patents to the Court of Appeals. On May 7, 2018, the Court of Appeals affirmed the PTAB’s invalidation of the patents, and on July 16, 2018, the Court of Appeals denied WesternGeco’s petition for a rehearing. On December 31, 2017,13, 2018, WesternGeco filed a petition with the Supreme Court, arguing that the Court of Appeals ought to have overturned the decision of the PTAB. (As of February 7, 2019, the Supreme Court has not indicated whether it will, or will not, hear WesternGeco’s appeal.)
In the same brief to the Court of Appeals in which we made our “direct competitor” argument, we argued that the Court of Appeals’ affirmation of the PTAB’s decision precluded WesternGeco’s damages claims, and that the Court of Appeals should order a new trial as to the royalty damages already paid by us. We also argued that if the Court of Appeals did not find our report dated February 8,“direct competitor” argument persuasive, the Court should nonetheless vacate the District Court’s award of royalty damages and lost profits damages and order a new trial as to both royalty damages and lost profits.
In its briefs to the Court of Appeals, WesternGeco argued that the only remaining issue was whether lost profits were unavailable to WesternGeco due to our “direct competitor” argument, and argued that the invalidation of four of its six patent claims by the PTAB (which was affirmed by the Court of Appeals) should have no effect on lost profits or on the royalty award already paid by us. WesternGeco also argued that lost profits should be available notwithstanding our “direct competitor” argument.
Oral arguments took place on November 16, 2018, expressedand on January 11, 2019, the Court of Appeals issued its ruling. In its ruling, the Court of Appeals refused to disturb the award of reasonable royalties to WesternGeco (which we paid in 2016), and rejected our “direct competitor” argument, but vacated the District Court’s award of lost profits damages and remanded the case back to the District Court to determine whether to hold a new trial as to lost profits. The Court of Appeals also ruled that its affirmance of the PTAB’s decision eliminated four of the five patent claims that could have supported the award of lost profits, leaving only one remaining patent claim that could support an unqualified opinion on those financial statements.
Basis for opinionaward of lost profits.
The Company’s management is responsibleCourt of Appeals further held that the lost profits award can be reinstated by the District Court if the existing trial record establishes that the jury must have found that the technology covered by the one remaining patent claim was essential for maintaining effective internal control over financial reporting and for its assessmentperforming the surveys upon which lost profits were based. To make such a finding, the District Court must conclude that the present trial record establishes that there was no dispute that the technology covered by the one remaining patent claim, independent of the effectivenesstechnology of internal control over financial reporting, includedthe now-invalid claims, was required to perform the surveys. The Court of Appeals ruling further provides that if, but only if, the District Court concludes that WesternGeco established at trial, with undisputed evidence, that the remaining claim covers technology that was necessary to perform the surveys, then the District Court may deny a new trial and reinstate lost profits.
We may not ultimately prevail in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOBlitigation and arewe could be required to be independent with respectpay some or all of the lost profits that were awarded by the District Court, plus interest, if the District Court denies a new trial on lost profits, or if a new trial is granted and a new judgment issues. Our assessment that we do not have a loss contingency may change in the future due to developments at the Supreme Court, Court of Appeals, or District Court, and other events, such as changes in applicable law, and such reassessment could lead to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the riskdetermination that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reportingsignificant loss contingency is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets thatprobable, which could have a material effect on the Company’s business, financial statements.condition and results of operations.
BecauseOur business depends on the level of its inherent limitations, internal control overexploration and production activities by the oil and natural gas industry. If capital expenditures by E&P companies decline,typically because of lower price realizations for oil and natural gas, the demand for our services and products would decline and our results of operations would be materially adversely affected.
Demand for our services and products depends upon the level of spending by E&P companies and seismic contractors for exploration and production activities, and those activities depend in large part on oil and gas prices. Spending by our customers on services and products that we provide is highly discretionary in nature, and subject to rapid and material change. Any decline in oil and gas related spending on behalf of our customers could cause alterations in our capital spending plans, project modifications, delays or cancellations, general business disruptions or delays in payment, or non-payment of amounts that are owed to us, any one of which could have a material adverse effect on our financial reportingcondition. Additionally, the recent increases in oil and gas prices may not preventincrease demand for our services and products or detect misstatements.otherwise have a positive effect on our financial condition or results of operations. E&P companies’ willingness to explore, develop and produce depends largely upon prevailing industry conditions that are influenced by numerous factors over which our management has no control, such as:
the supply of and demand for oil and gas;
the level of prices, and expectations about future prices, of oil and gas;
the cost of exploring for, developing, producing and delivering oil and gas;
the expected rates of decline for current production;
the discovery rates of new oil and gas reserves;
weather conditions, including hurricanes, that can affect oil and gas operations over a wide area, as well as less severe inclement weather that can preclude or delay seismic data acquisition;
domestic and worldwide economic conditions;
changes in government leadership, such as the change in presidency in Mexico and its impact on the Mexican economy and offshore exploration programs;
political instability in oil and gas producing countries;
technical advances affecting energy consumption;
government policies regarding the exploration, production and development of oil and gas reserves;
the ability of oil and gas producers to raise equity capital and debt financing;
merger and divestiture activity among oil and gas companies and seismic contractors; and
compliance by members of the OPEC and non-OPEC members such as Russia, with agreements to cut oil production.
The level of oil and gas exploration and production activity has been volatile in recent years. Trends in oil and gas exploration and development activities have declined, together with demand for our services and products. Any prolonged substantial reduction in oil and gas prices would likely further affect oil and gas production levels and therefore adversely affect demand for the services we provide and products we sell.
Our operating results often fluctuate from period to period, and we are subject to cyclicality and seasonality factors.
Our industry and the oil and gas industry in general are subject to cyclical fluctuations. Demand for our services and products depends upon spending levels by E&P companies for exploration and production of oil and natural gas and, in the case of new seismic data acquisition, the willingness of those companies to forgo ownership of the seismic data. Capital expenditures by E&P companies for these activities depend upon several factors, including actual and forecasted prices of oil and natural gas and those companies’ short-term and strategic plans.
Since 2015, E&P companies shifted their focus more to production activities and less on exploration due to declining oil and gas prices resulted in decreasing revenues and prompted cost reduction initiatives across the industry. The price of Brent crude oil increased to an average of $71 per barrel in 2018 due to the combination of robust global demand and sustained OPEC production cuts after a long period of unrestrained output relative to past periods. Before the end of 2018, Brent crude oil prices fell to nearly $50 per barrel and the U.S. Energy Information Administration (“EIA”) forecasts the Brent crude oil spot price will average $61 per barrel in 2019 and $65 per barrel in 2020. The price decrease resulted from concerns of oversupply and slower than expected pace of oil demand growth. Energy prices, which include oil, natural gas and coal, are projected to stabilize overall in the near-term as demand and supply comes into equilibrium. As of December 31, 2018, our E&P Technology & Services segment backlog, consisting of commitments for data processing work and for underwritten multi-client New Venture and proprietary projects decreased by 44% compared to our existing backlog as of December 31, 2017. The decrease in our backlog is attributable to the timing of finalizing contracts.
Our operating results are subject to fluctuations from period to period as a result of introducing new services and products, the timing of significant expenses in connection with customer orders, unrealized sales, levels of research and development activities in different periods, the product and service mix of our revenues and the seasonality of our business. Because some of our products are technologically complex and tend to be relatively large investments, we generally experience long sales cycles for these types of products with a series of technical and commercial reviews by our customers and historically incur significant expense at the beginning of these cycles. In addition, the revenues can vary widely from period to period due to changes in customer requirements and demand. These factors can create fluctuations in our net revenues and results of operations from period to period. Variability in our overall gross margins for any period, which depend on the percentages of higher-margin and lower-margin services and products sold in that period, compounds these uncertainties. As a result, if net revenues or gross margins fall below expectations, our results of operations and financial condition will likely be materially adversely affected.
Additionally, our business can be seasonal in nature, with strongest demand typically in the second half of each year. Customer budgeting cycles at times result in higher spending activity levels by our customers at different points of the year.
Due to the high value of many of our products and seismic data libraries as they tend to be relatively large investments, our quarterly operating results have historically fluctuated from period to period due to the timing of orders and shipments and the mix of services and products sold. This uneven pattern makes financial predictions for any given period difficult, increases the risk of unanticipated variations in our quarterly results and financial condition, and places challenges on our inventory management. Delays caused by factors beyond our control can affect our E&P Technology & Services segment’s revenues from its imaging and multi-client services from period to period. Also, projectionsdelays in ordering products or in shipping or delivering products in a given period could significantly affect our results of operations for that period. Fluctuations in our quarterly operating results may cause greater volatility in the market price of our common stock.
Our indebtedness could adversely affect our liquidity, financial condition and our ability to fulfill our obligations and operate our business.
As of December 31, 2018, our total outstanding indebtedness (including capital lease obligations) was approximately $121.7 million, consisting primarily of approximately $120.6 million outstanding Second Lien Notes and $2.9 million of capital leases, partially offset by $2.9 million of debt issuance costs. As of December 31, 2018, there was no outstanding indebtedness under our Credit Facility. Under our Credit Facility, as amended, the lender has committed $50.0 million of revolving credit, subject to a borrowing base. As of December 31, 2018, we have $41.9 million of borrowing base availability under the Credit Facility. The amount available will increase or decrease monthly as our borrowing base changes. We may also incur additional indebtedness in the future. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In October 2016, S&P Global Ratings (“S&P”) raised our corporate credit rating to CCC+ from SD and maintains a negative outlook. S&P continues to hold a negative outlook on our Company reflecting the high debt leverage, expected negative free cash flow and the potential for liquidity to weaken, if market conditions do not significantly improve. Following
the redemption of our Third Lien Notes in March 2018, Moody’s Investors Service has withdrawn all assigned public credit ratings on our Company, including the Caa2 Corporate Family Rating.
Our high level of indebtedness could have negative consequences to us, including:
we may have difficulty satisfying our obligations with respect to our outstanding debt;
we may have difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes;
we may need to use all, or a substantial portion, of our available cash flow to pay interest and principal on our debt, which will reduce the amount of money available to finance our operations and other business activities;
our vulnerability to general economic downturns and adverse industry conditions could increase;
our flexibility in planning for, or reacting to, changes in our business and in our industry in general could be limited;
our amount of debt and the amount we must pay to service our debt obligations could place us at a competitive disadvantage compared to our competitors that have less debt;
our customers may react adversely to our significant debt level and seek or develop alternative licensors or suppliers;
we may have insufficient funds, and our debt level may also restrict us from raising the funds necessary to repurchase all of the Notes, as defined below, tendered to us upon the occurrence of a change of control, which would constitute an event of default under the Notes; and
our failure to comply with the restrictive covenants in our debt instruments which, among other things, limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or prospects.
Our level of indebtedness will require that we use a substantial portion of our cash flow from operations to pay principal of, and interest on, our indebtedness, which will reduce the availability of cash to fund working capital requirements, capital expenditures, research and development and other general corporate or business activities.
We are subject to intense competition, which could limit our ability to maintain or increase our market share or to maintain our prices at profitable levels.
Many of our sales are obtained through a competitive bidding process, which is standard for our industry. Competitive factors in recent years have included price, technological expertise, and a reputation for quality, safety and dependability. While no single company competes with us in all of our segments, we are subject to intense competition in each of our segments. New entrants in many of the markets in which certain of our services and products are currently strong should be expected. See Item 1. “Business – Competition.” We compete with companies that are larger than we are in terms of revenues, technical personnel, number of processing locations and sales and marketing resources. A few of our competitors have a competitive advantage in being part of a large affiliated seismic contractor company. In addition, we compete with major service providers and government-sponsored enterprises and affiliates. Some of our competitors conduct seismic data acquisition operations as part of their regular business, which we have traditionally not conducted, and have greater financial and other resources than we do. These and other competitors may be better positioned to withstand and adjust more quickly to volatile market conditions, such as fluctuations in oil and natural gas prices, as well as changes in government regulations. In addition, any evaluationexcess supply of effectivenessservices and products in the seismic services market could apply downward pressure on prices for our services and products. The negative effects of the competitive environment in which we operate could have a material adverse effect on our results of operations. In particular, the consolidation in recent years of many of our competitors in the seismic services and products markets has negatively impacted our results of operations.
There are a number of geophysical companies that create, market and license seismic data and maintain seismic libraries. Competition for acquisition of new seismic data among geophysical service providers historically has been intense and we expect this competition will continue to future periodsbe intense. Larger and better-financed operators could enjoy an advantage over us in a competitive environment for new data.
Our OBS operations involve numerous risks.
Through our Ocean Bottom Integrated Technologies segment, we operate as a seismic acquisition contractor concentrating on OBS data acquisition. There can be no assurance that we will achieve the expected benefits from our acquisition projects and these projects may result in unexpected costs, expenses and liabilities, which may have a material adverse effect on our business, financial condition or results of operations. Our OBS operations exposed us to operating risks:
Seismic data acquisition activities in marine ocean bottom areas are subject to the risk of downtime or reduced productivity, as well as to the risks of loss to property and injury to personnel, mechanical failures and natural disasters. In addition to losses caused by human errors and accidents, we may also become subject to losses resulting from, among other things, political instability, business interruption, strikes and weather events; and
Our OBS acquisition equipment and services may expose us to litigation and legal proceedings, including those related to product liability, personal injury and contract liability. We have in place insurance coverage against operating hazards, including product liability claims and personal injury claims, damage, destruction or business interruption and whenever possible, will obtain agreements from customers that limit our liability. However, we cannot provide assurance that the nature and amount of insurance will be sufficient to fully indemnify us against liabilities arising from pending and future claims or that its insurance coverage will be adequate in all circumstances or against all hazards, and that we will be able to maintain adequate insurance coverage in the future at commercially reasonable rates or on acceptable terms.
increased costs associated with the operation of an OBS acquisition project and the management of geographically dispersed operations;
Cash flows from OBS acquisition projects may be inadequate to realize the value of manufactured equipment for use in its OBS surveys;
risks associated with our OBS acquisition technologies, including risks that the new technology may not perform as well as we anticipate;
difficulties in retaining and integrating key technical, sales and marketing personnel and the possible loss of such employees and costs associated with their loss;
the diversion of management’s attention and other resources from other business operations and related concerns;
the requirement to maintain uniform standards, controls and procedures;
our inability to realize operating efficiencies, cost savings or other benefits that we expect from OBS operations; and
difficulties and delays in securing new business and customer projects.
The indentures governing the 9.125% Senior Secured Second-Priority Notes due 2021 (the “ Second Lien Notes”) contain a number of restrictive covenants that limit our ability to finance future operations or capital needs or engage in other business activities that may become inadequate becausebe in our interest.
The indenture governing the Second Lien Notes imposes, and the terms of changesany future indebtedness may impose, operating and other restrictions on us and our subsidiaries. Such restrictions affect, or will affect, and in many respects limit or prohibit, among other things, our ability and the ability of certain of our subsidiaries to:
incur additional indebtedness;
create liens;
pay dividends and make other distributions in respect of our capital stock;
redeem our capital stock;
make investments or certain other restricted payments;
sell certain kinds of assets;
enter into transactions with affiliates; and
effect mergers or consolidations.
The restrictions contained in the indenture governing the Second Lien Notes could:
limit our ability to plan for or react to market or economic conditions or meet capital needs or otherwise restrict our activities or business plans; and
adversely affect our ability to finance our operations, acquisitions, investments or strategic alliances or other capital needs or to engage in other business activities that the degree of compliance with the policies or procedures may deteriorate.would be in our interest.
/s/ GRANT THORNTON LLP
Houston, Texas
February 8, 2018
Item 8.A breach of any of these covenants could result in a default under the indenture governing the Second Lien Notes. If an event of default occurs, the trustee and holders of the Second Lien Notes could elect to declare all borrowings outstanding, together with accrued and unpaid interest, to be immediately due and payable. An event of default under the indenture governing the Second Lien Notes would also constitute an event of default under our Credit Facility. In addition, if we are unable to repay or extend the maturity of our Second Lien Notes prior to their scheduled maturity in 2021, the maturity of our Credit Facility, which currently matures in 2023, will accelerate to mature in 2021 which may cause us to face substantial liquidity problems and may force us to reduce or delay investments, dispose of material assets or operations, or issue additional debt or equity. See Footnote 5 “Long-term Debt and Lease Obligations” of the Footnotes to Consolidated Financial Statements appearing below in this Form 10-K.
As a technology-focused company, we are continually exposed to risks related to complex, highly technical services and Supplementary Dataproducts that are sometimes operated in dangerous marine environments.
We have made, and we will continue to make, strategic decisions from time to time as to the technologies in which we invest. If we choose the wrong technology, our financial results could be adversely impacted. Our operating results are dependent upon our ability to improve and refine our seismic imaging and data processing services and to successfully develop, manufacture and market our products and other services and products. New technologies generally require a substantial investment before any assurance is available as to their commercial viability. If we choose the wrong technology, or if our competitors develop or select a superior technology, we could lose our existing customers and be unable to attract new customers, which would harm our business and operations.
New data acquisition or processing technologies may be developed. New and enhanced services and products introduced by one of our competitors may gain market acceptance and, if not available to us, may adversely affect us.
The markets for our services and products are characterized by changing technology and new product introductions. We must invest substantial capital to develop and maintain a leading edge in technology, with no assurance that we will receive an adequate rate of return on those investments. If we are unable to develop and produce successfully and timely new or enhanced services and products, we will be unable to compete in the future and our business, our results of operations and our financial statementscondition will be materially and adversely affected. Our business could suffer from unexpected developments in technology, or from our failure to adapt to these changes. In addition, the preferences and requirements of customers can change rapidly.
The businesses of our E&P Technology & Services segment and Optimization Software & Services group within our Operations Optimization segment, being more concentrated in software, processing services and proprietary technologies, have also exposed us to various risks that these technologies typically encounter, including the following:
future competition from more established companies entering the market;
technology obsolescence;
dependence upon continued growth of the market for seismic data processing;
the rate of change in the markets for these segments’ technology and services;
further consolidation of the participants within this market;
research and development efforts not proving sufficient to keep up with changing market demands;
dependence on third-party software for inclusion in these segments’ services and products;
misappropriation of these segments’ technology by other companies;
alleged or actual infringement of intellectual property rights that could result in substantial additional costs;
difficulties inherent in forecasting sales for newly developed technologies or advancements in technologies;
recruiting, training and retaining technically skilled, experienced personnel that could increase the costs for these segments, or limit their growth; and
the ability to maintain traditional margins for certain of their technology or services.
Seismic data acquisition and data processing technologies historically have progressed rather rapidly and we expect this progression to continue. In order to remain competitive, we must continue to invest additional capital to maintain, upgrade and expand our seismic data acquisition and processing capabilities. However, due to potential advances in technology and the related notes thereto required bycosts associated with such technological advances, we may not be able to fulfill this item begin at page F-1 hereof.strategy, thus possibly affecting our ability to compete.
Item 15. ExhibitsOur customers often require demanding specifications for performance and Financial Statement Schedulesreliability of our services and products. Because many of our products are complex and often use unique advanced components, processes, technologies and techniques, undetected errors and design and manufacturing flaws may occur. Even though we attempt to assure that our systems are always reliable in the field, the many technical variables related to their operations can cause a combination of factors that can, and have from time to time, caused performance and service issues with certain of our products. Product defects result in higher product service, warranty and replacement costs and may affect our customer relationships and industry reputation, all of which may adversely impact our results of operations. Despite our testing and quality assurance programs, undetected errors may not be discovered until the product is purchased and used by a customer in a variety of field conditions. If our customers deploy our new products and they do not work correctly, our relationship with our customers may be materially and adversely affected.
(a) ListAs a result of Documents Filedour systems’ advanced and complex nature, we expect to experience occasional operational issues from time to time. Generally, until our products have been tested in the field under a wide variety of operational conditions, we cannot be certain that performance and service problems will not arise. In that case, market acceptance of our new products could be delayed and our results of operations and financial condition could be adversely affected.
(1) Financial StatementsWe also face exposure to product liability claims in the event that certain of our products, or certain components manufactured by others that are incorporated into our products, fail to perform to specification, which failure results, or is alleged to result, in property damage, bodily injury and/or death. Marine exploration in particular can present dangerous conditions to those conducting it. Any product liability claims decided adversely against us may have a material adverse effect on our results of operations and cash flows. While we maintain insurance coverage with respect to certain product liability claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against product liability claims. In addition, product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. Furthermore, even if we are successful in defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and us.
We have invested, and expect to continue to invest, significant sums of money in acquiring and processing seismic data for our E&P Technology & Services’ multi-client data library, without knowing precisely how much of this seismic data we will be able to license or when and at what price we will be able to license the data sets. Our business could be adversely affected by the failure of our customers to fulfill their obligations to reimburse us for the underwritten portion of our seismic data acquisition costs for our multi-client library.
We invest significant amounts in acquiring and processing new seismic data to add to our E&P Technology & Services’ multi-client data library. The costs of most of these investments are funded by our customers, with the remainder generally being recovered through future data licensing fees. In 2018, we invested approximately $28.3 million in our multi-client data library. Our customers generally commit to licensing the data prior to our initiating a new data library acquisition program. However, the aggregate amounts of future licensing fees for this data are uncertain and depend on a variety of factors, including the market prices of oil and gas, customer demand for seismic data in the library, and the availability of similar data from competitors.
By making these investments in acquiring and processing new seismic data for our E&P Technology & Services’ multi-client library, we are exposed to the following risks:
We may not fully recover our costs of acquiring and processing seismic data through future sales. The ultimate amounts involved in these data sales are uncertain and depend on a variety of factors, many of which are beyond our control.
The timing of these sales is unpredictable and can vary greatly from period to period. The costs of each survey are capitalized and then amortized as a percentage of sales and/or on a straight-line basis over the expected useful life of the data. This amortization will affect our earnings and, when combined with the sporadic nature of sales, will result in increased earnings volatility.
Regulatory changes that affect companies’ ability to drill, either generally or in a specific location where we have acquired seismic data, could materially adversely affect the value of the seismic data contained in our library. Technology changes could also make existing data sets obsolete. Additionally, each of our individual surveys has a limited book life based on its location and oil and gas companies’ interest in prospecting for reserves in such location, so a particular survey may be subject to a significant decline in value beyond our initial estimates.
The value of our multi-client data could be significantly adversely affected if any material adverse change occurs in the general prospects for oil and gas exploration, development and production activities.
The cost estimates upon which we base our pre-commitments of funding could be wrong. The result could be losses that have a material adverse effect on our financial statements filed ascondition and results of operations. These pre-commitments of funding are subject to the creditworthiness of our clients. In the event that a client refuses or is unable to pay its commitment, we could incur a substantial loss on that project.
As part of our asset-light strategy, we routinely charter vessels from third-party vendors to acquire seismic data for our multi-client business. As a result, our cost to acquire our multi-client data could significantly increase if vessel charter prices rise materially.
Reductions in demand for our seismic data, or lower revenues of or cash flows from our seismic data, may result in a requirement to increase amortization rates or record impairment charges in order to reduce the carrying value of our data library. These increases or charges, if required, could be material to our operating results for the periods in which they are recorded.
A substantial portion of our seismic acquisition project costs (including third-party project costs) are underwritten by our customers. In the event that underwriters for such projects fail to fulfill their obligations with respect to such underwriting commitments, we would continue to be obligated to satisfy our payment obligations to third-party contractors.
We derive a substantial amount of our revenues from foreign operations and sales, which pose additional risks.
The majority of our foreign sales are denominated in U.S. dollars. Sales to customer destinations outside of North America represented 75%, 76% and 78% of our consolidated net revenues for 2018, 2017 and 2016, respectively. We believe that export sales will remain a significant percentage of our revenue. U.S. export restrictions affect the types and specifications of products we can export. Additionally, in order to complete certain sales, U.S. laws may require us to obtain export licenses, and we cannot assure you that we will not experience difficulty in obtaining these licenses.
Like many energy services companies, we have operations in and sales into certain international areas, including parts of the Middle East, West Africa, Latin America, India, Asia Pacific and Russia, that are subject to risks of war, political disruption, civil disturbance, political corruption, possible economic and legal sanctions (such as possible restrictions against countries that the U.S. government may in the future consider to be state sponsors of terrorism) and changes in global trade policies. Our sales or operations may become restricted or prohibited in any country in which the foregoing risks occur. In particular, the occurrence of any of these risks could result in the following events, which in turn, could materially and adversely impact our results of operations:
disruption of E&P activities;
restriction on the movement and exchange of funds;
inhibition of our ability to collect advances and receivables;
enactment of additional or stricter U.S. government or international sanctions;
limitation of our access to markets for periods of time;
expropriation and nationalization of assets of our company or those of our customers;
political and economic instability, which may include armed conflict and civil disturbance;
currency fluctuations, devaluations and conversion restrictions;
confiscatory taxation or other adverse tax policies; and
governmental actions that may result in the deprivation of our contractual rights, including the potential for adverse decisions by judicial or administrative bodies in foreign countries with unpredictable or corrupt judicial systems.
Our international operations and sales increase our exposure to other countries’ restrictive tariff regulations, other import/export restrictions and customer credit risk.
In addition, we are subject to taxation in many jurisdictions and the final determination of our tax liabilities involves the interpretation of the statutes and requirements of taxing authorities worldwide. Our tax returns are subject to routine examination by taxing authorities, and these examinations may result in assessments of additional taxes, penalties and/or interest.
We may be unable to obtain broad intellectual property protection for our current and future products and we may become involved in intellectual property disputes; we rely on developing and acquiring proprietary data which we keep confidential.
We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technologies. We believe that the technological and creative skill of our employees, new product developments, frequent product enhancements, name recognition and reliable product maintenance are the foundations of our competitive advantage. Although we have a considerable portfolio of patents, copyrights and trademarks, these property rights offer us only limited protection. Our competitors may attempt to copy aspects of our products despite our efforts to protect our proprietary rights, or may design around the proprietary features of our products. Policing unauthorized use of our proprietary rights is difficult, and we are unable to determine the extent to which such use occurs. Our difficulties are compounded in certain foreign countries where the laws do not offer as much protection for proprietary rights as the laws of the United States.
Third parties inquire and claim from time to time that we have infringed upon their intellectual property rights. Many of our competitors own their own extensive global portfolio of patents, copyrights, trademarks, trade secrets and other intellectual property to protect their proprietary technologies. We believe that we have in place appropriate procedures and safeguards to help ensure that we do not violate a third party’s intellectual property rights. However, no set of procedures and safeguards is infallible. We may unknowingly and inadvertently take action that is inconsistent with a third party’s intellectual property rights, despite our efforts to do otherwise. Any such claims from third parties, with or without merit, could be time consuming, result in costly litigation, result in injunctions, require product modifications, cause product shipment delays or require us to enter into royalty or licensing arrangements. Such claims could have a material adverse effect on our results of operations and financial condition.
Much of our litigation in recent years have involved disputes over our and others’ rights to technology. See Item 3. “Legal Proceedings.”
To protect the confidentiality of our proprietary and trade secret information, we require employees, consultants, contractors, advisors and collaborators to enter into confidentiality agreements. Our customer data license and acquisition agreements also identify our proprietary, confidential information and require that such proprietary information be kept confidential. While these steps are taken to strictly maintain the confidentiality of our proprietary and trade secret information, it is difficult to ensure that unauthorized use, misappropriation or disclosure will not occur. If we are unable to maintain the secrecy of our proprietary, confidential information, we could be materially adversely affected.
If we do not effectively manage our transition into new services and products, our revenues may suffer.
Services and products for the geophysical industry are characterized by rapid technological advances in hardware performance, software functionality and features, frequent introduction of new services and products, and improvement in price characteristics relative to product and service performance. Among the risks associated with the introduction of new services and products are delays in development or manufacturing, variations in costs, delays in customer purchases or reductions in price of existing products in anticipation of new introductions, write-offs or write-downs of the carrying costs of inventory and raw materials associated with prior generation products, difficulty in predicting customer demand for new product and service offerings and effectively managing inventory levels so that they are in line with anticipated demand, risks associated with customer qualification, evaluation of new products, and the risk that new products may have quality or other defects or may not be supported adequately by application software. The introduction of new services and products by our competitors also may result in delays in customer purchases and difficulty in predicting customer demand. If we do not make an effective transition from existing services and products to future offerings, our revenues and margins may decline.
Furthermore, sales of our new services and products may replace sales, or result in discounting of some of our current product or service offerings, offsetting the benefits of a successful introduction. In addition, it may be difficult to ensure performance of new services and products in accordance with our revenue, margin and cost estimations and to achieve operational efficiencies embedded in our estimates. Given the competitive nature of the seismic industry, if any of these risks materializes, future demand for our services and products, and our future results of operations, may suffer.
Global economic conditions and credit market uncertainties could have an adverse effect on customer demand for certain of our services and products, which in turn would adversely affect our results of operations, our cash flows, our financial condition and our stock price.
Historically, demand for our services and products has been sensitive to the level of exploration spending by E&P companies and geophysical contractors. The demand for our services and products will be lessened if exploration expenditures by E&P companies are reduced. During periods of reduced levels of exploration for oil and natural gas, there have been oversupplies of seismic data and downward pricing pressures on our seismic services and products, which, in turn, have limited our ability to meet sales objectives and maintain profit margins for our services and products. In the past, these then-prevailing industry conditions have had the effect of reducing our revenues and operating margins. The markets for oil and gas historically have been volatile and may continue to be so in the future.
Turmoil or uncertainty in the credit markets and its potential impact on the liquidity of major financial institutions may have an adverse effect on our ability to fund our business strategy through borrowings under either existing or new debt facilities in the public or private markets and on terms we believe to be reasonable. Likewise, there can be no assurance that our customers will be able to borrow money for their working capital or capital expenditures on a timely basis or on reasonable terms, which could have a negative impact on their demand for our services and products and impair their ability to pay us for our services and products on a timely basis, or at all.
Our sales have historically been affected by interest rate fluctuations and the availability of liquidity, and we and our customers would be adversely affected by increases in interest rates or liquidity constraints. This could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The loss of any significant customer or the inability of our customers to meet their payment obligations to us could materially and adversely affect our results of operations and financial condition.
Our business is exposed to risks related to customer concentration. In 2018, we had two customers (ExxonMobil and Petrobras) with sales that each exceeded 10% of our consolidated net revenues. In 2017, we had one customer with sales that exceeded 10% of our consolidated net revenues and no single customer represented 10% or more of our consolidated net revenues for 2016. Our top five customers together accounted for approximately 39%, 34% and 50%, of our consolidated net revenues during 2018, 2017 and 2016. The loss of any of our significant customers or deterioration in our relations with any of them could materially and adversely affect our results of operations and financial condition.
During the last ten years, our traditional geophysical contractor customers have been rapidly consolidating, thereby consolidating the demand for our services and products. The loss of any of our significant customers to further consolidation could materially and adversely affect our results of operations and financial condition.
Our business is exposed to risks of loss resulting from nonpayment by our customers. Many of our customers finance their activities through cash flow from operations, the incurrence of debt or the issuance of equity. Declines in commodity prices, and the credit markets could cause the availability of credit to be constrained. The combination of lower cash flow due to commodity prices, a reduction in borrowing bases under reserve-based credit facilities and the lack of available debt or equity financing may result in a significant reduction in our customers’ liquidity and ability to pay their obligations to us. Furthermore, some of our customers may be highly leveraged and subject to their own operating and regulatory risks, which increases the risk that they may default on their obligations to us. The inability or failure of our significant customers to meet their obligations to us or their insolvency or liquidity may adversely affect our financial results.
Our stock price has been volatile, declining and increasing from time to time.
The securities markets in general and our common stock in particular have experienced significant price and volume volatility in recent years. The market price and trading volume of our common stock may continue to experience significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations or business prospects or those of companies in our industry. In addition to the other risk factors discussed in this section, the price and volume volatility of our common stock may be affected by:
operating results that vary from the expectations of securities analysts and investors;
factors influencing the levels of global oil and natural gas exploration and exploitation activities, such as the decline in crude oil prices and depressed prices for natural gas in North America or disasters such as the Deepwater Horizon incident in the Gulf of Mexico in 2010;
the operating and securities price performance of companies that investors or analysts consider comparable to us;
actions by rating agencies related to the Notes;
announcements of strategic developments, acquisitions and other material events by us or our competitors; and
changes in global financial markets and global economies and general market conditions, such as interest rates, commodity and equity prices and the value of financial assets.
To the extent that the price of our common stock declines, our ability to raise funds through the issuance of equity or otherwise use our common stock as consideration will be reduced. A low price for our equity may negatively impact our ability to access additional debt capital. These factors may limit our ability to implement our operating and growth plans. In addition, the volatility in the market price of our common stock affects the value of our stock appreciation rights (“SARs”). To the extent that the price of our common stock increases, the value of our SARs will increase and could have a negative impact on our earnings and cash flows.
Goodwill, intangible assets and other long-lived assets (multi-client data library and property, plant and equipment and seismic rental equipment) that we have recorded are subject to impairment evaluations. In addition, our product inventory may become obsolete or excessive due to future changes in technology, changes in market demand, or changes in market expectations. Write-downs of these assets may adversely affect our financial condition and results of operations.
Reductions in or an impairment of the value of our goodwill, intangible assets and other long-lived assets will result in additional charges against our earnings, which could have a material adverse effect on our reported results of operations and financial position in future periods. At December 31, 2018, our remaining goodwill, intangible assets, multi-client data library and property, plant and equipment and seismic rental equipment balances were $22.9 million, $0.5 million, $73.5 million and $13.0 million, respectively. For 2018, we recognized an impairment of $36.6 million in property, plant and equipment for our cable-based ocean bottom acquisition technologies.
Our services and products’ technologies often change relatively quickly. Phasing out of old products involves estimating the amounts of inventories we need to hold to satisfy demand for those products and satisfy future repair part needs. Based on changing technologies and customer demand, we may find that we have either obsolete or excess inventory on hand. Because of unforeseen future changes in technology, market demand or competition, we might have to write off unusable inventory, which would adversely affect our results of operations.
Due to the international scope of our business activities, our results of operations may be significantly affected by currency fluctuations.
We derived approximately 75% of our 2018 consolidated net revenues from international sales, subjecting us to risks relating to fluctuations in currency exchange rates. Currency variations can adversely affect margins on sales of our products in countries outside of the United States and margins on sales of products that include components obtained from suppliers located outside of the United States. We operate in a wide variety of jurisdictions, including the United Kingdom, Brazil, Mexico, China, Canada, Russia, the United Arab Emirates, Egypt and other countries. Certain of these countries have experienced geopolitical instability, economic problems and other 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 collectability of receivables, our future results of operations, liquidity and financial condition may be adversely affected.
We currently require customers in certain higher risk countries to provide their own financing. We do not currently extend long-term credit through notes to companies in countries where we perceive excessive credit risk.
Our foreign subsidiaries receive their income and pay their expenses primarily in their local currencies. To the extent that transactions of these subsidiaries are settled in their local currencies, a devaluation of those currencies versus the U.S. dollar could reduce the contribution from these subsidiaries to our consolidated results of operations as reported in U.S. dollars. For financial reporting purposes, such depreciation will negatively affect our reported results of operations since earnings denominated in foreign currencies would be converted to U.S. dollars at a decreased value. In addition, since we participate in competitive bids for sales of certain of our services and products that are denominated in U.S. dollars, a depreciation of the U.S. dollar against other currencies could harm our competitive position relative to other companies. While we periodically employ economic cash flow and fair value hedges to minimize the risks associated with these exchange rate fluctuations, the hedging activities may be ineffective or may not offset more than a portion of the adverse financial impact resulting from currency variations. Accordingly, we cannot provide assurance that fluctuations in the values of the currencies of countries in which we operate will not materially adversely affect our future results of operations.
We rely on highly skilled personnel in our businesses, and if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to effectively operate our business.
Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain skilled personnel for all areas of our organization. We require highly skilled personnel to operate and provide technical services and support for our businesses. Competition for qualified personnel required for our data processing operations and our other businesses has intensified recently. Our growth has presented challenges to us to recruit, train and retain our employees while managing the impact of potential wage inflation and the lack of available qualified labor in some markets where we operate. A well-trained, motivated and adequately-staffed work force has a positive impact on our ability to attract and retain business. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
Certain of our facilities could be damaged by hurricanes and other natural disasters, which could have an adverse effect on our results of operations and financial condition.
Certain of our facilities are located in regions of the United States that are susceptible to damage from hurricanes and other weather events, and, during 2005, were impacted by hurricanes or other weather events. Our Devices group leases 144,000 square feet of facilities located in Harahan, Louisiana, in the greater New Orleans metropolitan area. In late August 2005, we suspended operations at these facilities and evacuated and locked down the facilities in preparation for Hurricane Katrina. These facilities did not experience flooding or significant damage during or after the hurricane. However, because of employee evacuations, power failures and lack of related support services, utilities and infrastructure in the New Orleans area, we were unable to resume full operations at the facilities until late September 2005. In August 2017, we lost use of our offices located in the Houston metropolitan area for several days, as a result of Hurricane Harvey.
Future hurricanes or similar natural disasters that impact our facilities may negatively affect our financial position and operating results for those periods. These negative effects may include reduced production, product sales and data processing revenues; costs associated with resuming production; reduced orders for our services and products from customers that were similarly affected by these events; lost market share; late deliveries; additional costs to purchase materials and supplies from outside suppliers; uninsured property losses; inadequate business interruption insurance and an inability to retain necessary staff. To the extent that climate change increases the severity of hurricanes and other weather events, as some have suggested, it could worsen the severity of these negative effects on our financial position and operating results.
Our operations, and the operations of our customers, are subject to numerous government regulations, which could adversely limit our operating flexibility. Regulatory initiatives undertaken from time to time, such as restrictions, sanctions and embargoes, can adversely affect, and have adversely affected, our customers and our business.
In addition to the specific regulatory risks discussed elsewhere in this Item 1A. “Risk Factors” section, our operations are subject to other laws, regulations, government policies and product certification requirements worldwide. Changes in such laws, regulations, policies or requirements could affect the demand for our products or services or result in the need to modify our services and products, which may involve substantial costs or delays in sales and could have an adverse effect on our future operating results. Our export activities in particular are subject to extensive and evolving trade regulations. Certain countries (including Russia) are subject to restrictions, sanctions and embargoes imposed by the United States government. These restrictions, sanctions and embargoes also prohibit or limit us from participating in certain business activities in those countries. In addition, our operations are subject to numerous local, state and federal laws and regulations in the United States and in foreign jurisdictions concerning the containment and disposal of hazardous materials, the remediation of contaminated properties, and the protection of the environment. These laws have been changed frequently in the past, and there can be no assurance that future changes will not have a material adverse effect on us. In addition, our customers’ operations are also significantly impacted by laws and regulations concerning the protection of the environment and endangered species. Consequently, changes in governmental regulations applicable to our customers may reduce demand for our services and products. To the extent that our customers’ operations are disrupted by future laws and regulations, our business and results of operations may be materially and adversely affected.
Offshore oil and gas exploration and development recently has been a regulatory focus. Future changes in laws or regulations regarding such activities, and decisions by customers, governmental agencies or other industry participants in response, could reduce demand for our services and products, which could have a negative impact on our financial position, results of operations or cash flows. We cannot reasonably or reliably estimate that such changes will occur, when they will occur, or whether they will impact us. Such changes can occur quickly within a region, which may impact both the affected region and global exploration and production, and we may not be able to respond quickly, or at all, to mitigate these changes. In addition, these future laws and regulations could result in increased compliance costs or additional operating restrictions that may adversely affect the financial health of our customers and decrease the demand for our services and products.
Existing or future laws and regulations related to greenhouse gases and climate change could have a material adverse effect on our business, results of operations, and financial condition.
Changes in environmental requirements related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements. Local, state, and federal agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas.
We have outsourcing arrangements with third parties to manufacture some of our products. If these third party suppliers fail to deliver quality products or components at reasonable prices on a timely basis, we may alienate some of our customers and our revenues, profitability and cash flow may decline. Additionally, current global economic conditions could have a negative impact on our suppliers, causing a disruption in our vendor supplies. A disruption in vendor supplies may adversely affect our results of operations.
Our manufacturing processes require us to purchase quality components. In addition, we use contract manufacturers as an alternative to our own manufacturing of products. We have outsourced the manufacturing of our products, including our towed marine streamers, geophone manufacturing. Certain components used in our towed marine manufacturing operations are currently provided by a single supplier. Without these sole suppliers, we would be required to find other suppliers who could build these components for us, or set up to make these parts internally. If, in implementing any outsource initiative, we are unable to identify contract manufacturers willing to contract with us on competitive terms and to devote adequate resources to fulfill their obligations to us or if we do not properly manage these relationships, our existing customer relationships may suffer. In addition, by undertaking these activities, we run the risk that the reputation and competitiveness of our services and products may deteriorate as a result of the reduction of our control over quality and delivery schedules. We also may experience supply interruptions, cost escalations and competitive disadvantages if our contract manufacturers fail to develop, implement, or maintain manufacturing methods appropriate for our products and customers.
Reliance on certain suppliers, as well as industry supply conditions, generally involves several risks, including the possibility of a shortage or a lack of availability of key components, increases in component costs and reduced control over delivery schedules. If any of these risks are realized, our revenues, profitability and cash flows may decline. In addition, the more we come to rely on contract manufacturers, we may have fewer personnel resources with expertise to manage problems that may arise from these third-party arrangements.
Additionally, our suppliers could be negatively impacted by current global economic conditions. If certain of our suppliers were to experience significant cash flow issues or become insolvent as a result of such conditions, it could result in a reduction or interruption in supplies to us or a significant increase in the price of such supplies and adversely impact our results of operations and cash flows.
Our business is subject to cybersecurity risks and threats.
Threats to our information technology systems associated with cybersecurity risk and cyber incidents or attacks continue to grow. It is also possible that breaches to our systems could go unnoticed for some period of time. Risks associated with these threats include, among other things, loss of intellectual property, disseminating of highly confidential information, impairment of our ability to conduct our operations, disruption of our customers’ operations, loss or damage to our customer data delivery systems, and increased costs to prevent, respond to or mitigate cybersecurity events.
Our certificate of incorporation and bylaws, Delaware law and certain contractual obligations under our agreement with BGP contain provisions that could discourage another company from acquiring us.
Provisions of our certificate of incorporation and bylaws, Delaware law and the terms of our investor rights agreement with BGP may have the effect of discouraging, delaying or preventing a merger or acquisition that our stockholders may consider favorable, including transactions in which you might otherwise receive a premium for shares of our common stock. These provisions include:
authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;
providing for a classified board of directors with staggered terms;
requiring supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws;
eliminating the ability of stockholders to call special meetings of stockholders;
prohibiting stockholder action by written consent; and
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
In addition, the terms of our INOVA Geophysical joint venture with BGP and BGP’s investment in our company contain a number of provisions, such as certain pre-emptive rights granted to BGP with respect to certain future issuances of our stock, that could have the effect of discouraging, delaying or preventing a merger or acquisition of our company that our stockholders may otherwise consider to be favorable.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our stock price.
If, in the future, we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could have a material adverse effect on the price of our common stock.
Note: The foregoing factors pursuant to the Private Securities Litigation Reform Act of 1995 should not be construed as exhaustive. In addition to the foregoing, we wish to refer readers to other factors discussed elsewhere in this report are listedas well as other filings and reports with the SEC for a further discussion of risks and uncertainties that could cause actual results to differ materially from those contained in forward-looking statements. We undertake no obligation to publicly release the “Indexresult of any revisions to Consolidated Financial Statements” on page F-1 hereof.any such forward-looking statements, which may be made to reflect the events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
(2)Item 1B. Financial Statement SchedulesUnresolved Staff Comments
The following financial statement schedule is listed in the “Index to Consolidated Financial Statements” on page F-1 hereof, and is includedNone.
Item 2. Properties
Our principal operating facilities at December 31, 2018 were as part of this Annual Report on Form 10-K:
Schedule II — Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the requested information is shown in the financial statements or noted therein.
(3)follows: Exhibits
|
| | | | |
| Operating Facilities | 3.1Square
Footage |
| — |
Segment |
| Houston, Texas | 3.2 |
| — | |
| 4.1 |
| — | Indenture, dated May 13, 2013, among ION Geophysical Corporation, the subsidiary guarantors named therein, Wilmington Trust, National Association, as trustee, and U.S. Bank National Association, as collateral agent, filed on May 13, 2013 as Exhibit 4.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference. |
| 4.2210,000 |
| | First Supplemental Indenture, dated as of April 28, 2016, to the Indenture, dated May 13, 2013, among ION Geophysical Corporation, the subsidiary guarantors named therein, Wilmington Savings Fund Society, FSB, as trustee,Global Headquarters, E&P Technology & Services and U.S. Bank National Association, as collateral agent, filed on April 28, 2016 as Exhibit 4.3 to the Company’s Current Report on Form 8-K and incorporated by reference. |
| Harahan, Louisiana | 4.3144,000 |
| | Devices group within Operations Optimization |
| Chertsey, England | 4.418,000 |
| | Intercreditor Agreement, dated as of April 28, 2016, by and among PNC Bank, National Association, as first lien representative and first lien collateral agent for the first lien secured parties, and Wilmington Savings Fund Society, FSB, as second lien representative and second lien collateral agent for the second lien secured parties and as third lien representative for the third lien secured parties, and U.S. Bank National Association as third lien collateral agent for the third lien secured parties and acknowledged and agreed to by ION Geophysical Corporation and the other grantors named therein, filed on April 28, 2016 as Exhibit 10.1 to the Company’s Current Report on Form 8-K and incorporated by reference. |
| Edinburgh, Scotland | 16,000 |
| | Optimization Software & Services group within Operations Optimization |
| | **10.1388,000 |
| — | |
Each of these operating facilities is leased by us under long-term lease agreements. These lease agreements have terms that expire ranging from 2018 to 2030. See Footnote 14 “Operating Leases” of Footnotes to Consolidated Financial Statements.
In addition, we lease offices in Dubai, UAE; Beijing, China; Rio de Janeiro, Brazil; and Moscow, Russia to support our global sales force. We lease offices for our seismic data processing centers in Port Harcourt, Nigeria; Luanda, Angola; Cairo, Egypt; Villahermosa, Mexico; and Rio de Janeiro, Brazil. Our executive headquarters is located at 2105 CityWest Boulevard, Suite 100, Houston, Texas. The machinery, equipment, buildings and other facilities owned and leased by us are considered by our management to be sufficiently maintained and adequate for our current operations.
Item 3. Legal Proceedings
WesternGeco
A more thorough treatment of history of this litigation is set forth above in Item 1.A, “Risk Factors”. As noted in that section, in 2014, because a jury found that we infringed four WesternGeco patents, the United States District Court for the Southern District of Texas (the “District Court”) entered a Final Judgment against us in the amount of $123.8 million ($12.5 million in reasonable royalties, $93.4 million in lost profits, $10.9 million in pre-judgment interest on lost profits, and $9.4 million in supplemental damages).
In 2015, the United States Court of Appeals for the Federal Circuit in Washington, D.C. (the “Court of Appeals”) reversed, in part, the District Court, holding that the lost profits, which were attributable to foreign seismic surveys, were not available to WesternGeco under the Patent Act. We had recorded a loss contingency accrual of $123.8 million because of the District Court’s ruling. As a result of the reversal by the Court of Appeals, we reduced the loss contingency accrual to $22.0 million.
On February 26, 2016, WesternGeco appealed the Court of Appeals’ decision to the Supreme Court, as to both lost profits and “enhanced” damages (damages which are available for willful infringement, and which neither the District Court nor the Trial Court awarded). On June 20, 2016, the Supreme Court vacated the Court of Appeals’ ruling, although it did not address lost profits at that time. Rather, in light of changes in case law regarding the standard of proof for willfulness in patent infringement, the Supreme Court remanded the case to the Court of Appeals for a determination of whether enhanced damages were appropriate.
On November 14, 2016, the District Court ordered our sureties to pay principal and interest on the royalty damages previously awarded. On November 25, 2016, we paid WesternGeco the $20.8 million due pursuant to the order, and reduced our loss contingency accrual to zero.
On March 14, 2017, the District Court held a hearing on whether impose additional damages for willfulness. The Judge found that our infringement was willful, and awarded enhanced damages of $5.0 million to WesternGeco (WesternGeco had sought $43.6 million in such damages.) The District Court also ordered the appeal bond to be released and discharged. The Court’s findings and ruling were memorialized in an order issued on May 16, 2017. On June 30, 2017, we and WesternGeco agreed that neither of us would appeal the District Court's award of $5.0 million in enhanced damages. Upon assessment of the enhanced damages, we accrued $5.0 million in the first quarter of 2017. As we have paid the $5.0 million, the accrual has been adjusted, and as of December 31, 2018, the loss contingency accrual was zero.
WesternGeco filed a second petition in the Supreme Court on February 17, 2017, appealing the lost profits issue again. On May 30, 2017, the Supreme Court called for the U.S. Solicitor General’s views on whether or not the Supreme Court ought to hear WesternGeco’s appeal. On December 6, 2017, the Solicitor General filed its brief, and took the position that the Supreme Court ought to hear the appeal and that foreign lost profits ought to be available. On January 12, 2018, the Supreme Court agreed to hear the appeal. The specific issue before the Supreme Court was whether lost profits arising from use of prohibited combinations occurring outside of the United States are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. § 271(f)(2) (the statute under which we were held to have infringed WesternGeco’s patents, and upon which the District Court and Court of Appeals relied in entering their rulings).
The Supreme Court heard oral arguments on April 16, 2018. We argued that the Court of Appeals’ decision that eliminated lost profits ought to be affirmed. WesternGeco and the Solicitor General argued that the Court of Appeals’ decision that eliminated lost profits ought to be reversed.
On June 22, 2018, the Supreme Court reversed the judgment of the Court of Appeals, held that the award of lost profits to WesternGeco by the District Court was a permissible application of Section 284 of the Patent Act, and remanded the case back to the Court of Appeals for further proceedings consistent with its (the Supreme Court’s) opinion. On July 24, 2018, the Supreme Court issued the judgment that returned the case to the Court of Appeals.
On July 27, 2018, the Court of Appeals vacated its September 21, 2016 judgment with respect to damages, and ordered WesternGeco and us to submit supplemental briefing on what relief is appropriate in light of the Supreme Court’s decision. We and WesternGeco each submitted briefing in accordance with the Court of Appeals’ order (the last brief was filed on September 7, 2018).
We argued in our brief to the Court of Appeals that lost profits were not available to WesternGeco because the jury instructions required them to find that we had been WesternGeco’s direct competitor in the survey markets where WesternGeco had lost profits, and that the jury could not have found so. Additionally, we argued that the award of lost profits and reasonable royalties ought to be vacated and retried on separate grounds due to the outcome of an Inter Partes Review (“IPR”) filed with the Patent Trial and Appeal Board (“PTAB”) of the Patent and Trademark Office.
Until the Court of Appeals’ January 11, 2019 decision issued (which is described below), the IPR was an administrative proceeding that was separate from the 2009 lawsuit. By means of the IPR, we joined a challenge to the validity of several of WesternGeco’s patent claims that another company had filed. While the 2009 lawsuit was pending on appeal, the PTAB invalidated four of the six patent claims that formed the basis for the lawsuit judgment against us. WesternGeco appealed the PTAB’s invalidation of its patents to the Court of Appeals. On May 7, 2018, the Court of Appeals affirmed the PTAB’s invalidation of the patents, and on July 16, 2018, the Court of Appeals denied WesternGeco’s petition for a rehearing. On December 13, 2018, WesternGeco filed a petition with the Supreme Court, arguing that the Court of Appeals ought to have overturned the decision of the PTAB. (As of February 7, 2019, the Supreme Court has not indicated whether it will, or will not, hear WesternGeco’s appeal.)
In the same brief to the Court of Appeals in which we made our “direct competitor” argument, we argued that the Court of Appeals’ affirmation of the PTAB’s decision precluded WesternGeco’s damages claims, and that the Court of Appeals should order a new trial as to the royalty damages already paid by us. We also argued that if the Court of Appeals did not find our “direct competitor” argument persuasive, the Court should nonetheless vacate the District Court’s award of royalty damages and lost profits damages and order a new trial as to both royalty damages and lost profits.
In its briefs to the Court of Appeals, WesternGeco argued that the only remaining issue was whether lost profits were unavailable to WesternGeco due to our “direct competitor” argument, and argued that the invalidation of four of its six patent claims by the PTAB (which was affirmed by the Court of Appeals) should have no effect on lost profits or on the royalty award already paid by us. WesternGeco also argued that lost profits should be available notwithstanding our “direct competitor” argument.
Oral arguments took place on November 16, 2018, and on January 11, 2019, the Court of Appeals issued its ruling. In its ruling, the Court of Appeals refused to disturb the award of reasonable royalties to WesternGeco (which we paid in 2016), and rejected our “direct competitor” argument, but vacated the District Court’s award of lost profits damages and remanded the case back to the District Court to determine whether to hold a new trial as to lost profits. The Court of Appeals also ruled that its affirmance of the PTAB’s decision eliminated four of the five patent claims that could have supported the award of lost profits, leaving only one remaining patent claim that could support an award of lost profits.
The Court of Appeals further held that the lost profits award can be reinstated by the District Court if the existing trial record establishes that the jury must have found that the technology covered by the one remaining patent claim was essential for performing the surveys upon which lost profits were based. To make such a finding, the District Court must conclude that the present trial record establishes that there was no dispute that the technology covered by the one remaining patent claim, independent of the technology of the now-invalid claims, was required to perform the surveys. The Court of Appeals ruling further provides that if, but only if, the District Court concludes that WesternGeco established at trial, with undisputed evidence, that the remaining claim covers technology that was necessary to perform the surveys, then the District Court may deny a new trial and reinstate lost profits.
We may not ultimately prevail in the litigation and we could be required to pay some or all of the lost profits that were awarded by the District Court, plus interest, if the District Court denies a new trial on lost profits, or if a new trial is granted and a new judgment issues. Our assessment that we do not have a loss contingency may change in the future due to developments at the Supreme Court, Court of Appeals, or District Court, and other events, such as changes in applicable law, and such reassessment could lead to the determination that a significant loss contingency is probable, which could have a material effect on the Company’s business, financial condition and results of operations. The Company’s assessments disclosed in this Annual Report on Form 10-K or elsewhere are based on currently available information and involve elements of judgment and significant uncertainties.
Other Litigation
We have been named in various other lawsuits or threatened actions that are incidental to our ordinary business. 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 effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “IO.”
We have not historically paid, and do not intend to pay in the foreseeable future, cash dividends on our common stock. We presently intend to retain cash from operations for use in our business, with any future decision to pay cash dividends on our common stock dependent upon our growth, profitability, financial condition and other factors our board of directors consider relevant.
The terms of our Credit Facility contain covenants that restrict us from paying cash dividends on our common stock, or repurchasing or acquiring shares of our common stock, unless (i) there is no event of default under the Credit Facility, (ii) there is excess availability under the Credit Facility greater than $20.0 million (or, at the time that the borrowing base formula amount is less than $20.0 million, the borrowers’ level of liquidity (as defined in the Credit Facility) is greater than $20.0 million) and (iii) the agent receives satisfactory projections showing that excess availability under the Credit Facility for the immediately following period of ninety (90) consecutive days will not be less than $20.0 million (or, at the time that the borrowing base formula amount is less than $20.0 million, the borrowers’ level of liquidity is greater than $20.0 million). The aggregate amount of permitted cash dividends and stock repurchases may not exceed $10.0 million in any fiscal year or $40.0 million in the aggregate from and after the closing date of the Credit Facility.
The indenture governing the Second Lien Notes contains certain covenants that, among other things, limit our ability to pay certain dividends or distributions on our common stock or purchase, redeem or retire shares of our common stock, unless (i) no default under the indenture has occurred or would occur as a result of that payment, (ii) we would have, after giving pro forma effect to the payment, been permitted to incur at least $1.00 of additional indebtedness under a fixed charge coverage ratio test under the indenture, and (iii) the total cumulative amount of all such payments would not exceed a sum calculated by reference to, among other items, our consolidated net income, proceeds from certain sales of equity or assets, certain conversions or exchanges of debt for equity and certain other reductions in our indebtedness and in aggregate not to exceed at any one time $25.0 million.
On December 31, 2018, there were 567 holders of record of our common stock.
On November 30, 2018, the Company’s stockholders approved certain amendments to the Company’s Second Amended and Restated 2013 Long-term Incentive Plan (the “2013 LTIP”) including increasing the total number of shares of common stock available for issuance under the 2013 LTIP by 1.2 million shares, for a total of approximately 1.7 million shares, eliminating the restriction on the number of shares in the 2013 LTIP that can be issued as full value awards and certain other technical updates and clarifications related to Section 162(m) of the internal revenue code, as amended.
On February 21, 2018, in connection with the Public Equity Offering (as described in Footnote 12 “Stockholders' Equity and Stock-based Compensation” of Footnotes to the Consolidated Financial Statements), we issued and sold 1,820,000 shares of common stock at a public offering price of $27.50 per share, and warrants to purchase an additional 1,820,000 shares of the Company’s common stock. The net proceeds from this offering were $47.0 million, including transaction expenses. A portion of the net proceeds were used to retire the Company’s $28.5 million Third Lien Notes in March 2018 (several weeks before their maturity date). The warrants have an exercise price of $33.60 per share, are immediately exercisable and currently expire on March 21, 2019.
On December 14, 2017, in connection with the Equity Investment Program (as described in Footnote 12 “Stockholders' Equity and Stock-based Compensation” of Footnotes to the Consolidated Financial Statements), we sold, in a private placement under Section 4(a)(2) of the Securities Act of 1933, as amended, 120,567 shares of our common stock at $13.05 per share (the closing price of the our common stock on the NYSE on such date).
Item 6. Selected Financial Data
Special Items Affecting Comparability
The selected consolidated financial data set forth below under “Historical Selected Financial Data” with respect to our consolidated statements of operations for 2018, 2017, 2016, 2015 and 2014, and with respect to our consolidated balance sheets at December 31, 2018, 2017, 2016, 2015 and 2014, have been derived from our audited consolidated financial statements.
Our results of operations and financial condition have been affected by restructuring activities, legal contingencies, dispositions, debt refinancing and impairments and write-downs of assets during the periods presented, which affect the comparability of the financial information shown. In particular, our results of operations for the fiscal years ended December 31, 2014 – 2018 time period were impacted by the following items (before tax):
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In thousands) |
| Cost of sales: | | | | | | | | | |
| Write-down of multi-client data library | $ | — |
| | $ | (2,304 | ) | | $ | — |
| | $ | (399 | ) | | $ | (100,100 | ) |
| Write-down of excess and obsolete inventory | $ | (665 | ) | | $ | (398 | ) | | $ | (429 | ) | | $ | (151 | ) | | $ | (6,952 | ) |
| Operating expenses: | | | | | | | | | |
| Impairment of long-lived assets | $ | (36,553 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (23,284 | ) |
| Write-down of receivables | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (8,214 | ) |
| Accelerated vesting and cash exercise of stock appreciation right awards | $ | (2,105 | ) | | $ | (6,141 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Other income (expense): | | | | | | | | | |
| Reversal of (accrual for) loss contingency related to legal proceedings | $ | — |
| | $ | (5,000 | ) | | $ | 1,168 |
| | $ | 101,978 |
| | $ | 69,557 |
|
| Gain on sale of Source product line | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,522 |
|
| Gain on sale of cost method investments | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5,463 |
|
| Recovery of INOVA bad debts | $ | — |
| | $ | 844 |
| | $ | 3,983 |
| | $ | — |
| | $ | — |
|
| Loss on bond exchange | $ | — |
| | $ | — |
| | $ | (2,182 | ) | | $ | — |
| | $ | — |
|
| Equity in losses of INOVA investments | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (49,485 | ) |
The historical selected financial data shown below should not be considered as being indicative of future operations, and should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this Form 10-K.
Historical Selected Financial Data
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | (In thousands, except for per share data) |
| Statement of Operations Data: | | | | | | | | | | |
| Net revenues | | $ | 180,045 |
| | $ | 197,554 |
| | $ | 172,808 |
| | $ | 221,513 |
| | $ | 509,558 |
|
| Gross profit | | 59,620 |
| | 75,639 |
| | 36,032 |
| | 8,003 |
| | 62,223 |
|
| Loss from operations | | (54,272 | ) | | (8,699 | ) | | (43,171 | ) | | (100,632 | ) | | (117,929 | ) |
| Net loss applicable to common shares | | (71,171 | ) | | (30,242 | ) | | (65,148 | ) | | (25,122 | ) | | (128,252 | ) |
| Net loss per basic share | | $ | (5.20 | ) | | $ | (2.55 | ) | | $ | (5.71 | ) | | $ | (2.29 | ) | | $ | (11.72 | ) |
| Net loss per diluted share | | $ | (5.20 | ) | | $ | (2.55 | ) | | $ | (5.71 | ) | | $ | (2.29 | ) | | $ | (11.72 | ) |
| Weighted average number of common shares outstanding | | 13,692 |
| | 11,876 |
| | 11,400 |
| | 10,957 |
| | 10,939 |
|
| Weighted average number of diluted shares outstanding | | 13,692 |
| | 11,876 |
| | 11,400 |
| | 10,957 |
| | 10,939 |
|
| Balance Sheet Data (end of year): | | | | | | | | |
| Working capital | | $ | 20,105 |
| | $ | (8,628 | ) | (a) | $ | 16,555 |
| | $ | 93,160 |
| | $ | 222,099 |
|
| Total assets | | 244,749 |
| | 301,069 |
| | 313,216 |
| | 435,088 |
| | 617,257 |
|
Long-term debt (b) | | 121,741 |
| | 156,744 |
| | 158,790 |
| | 182,992 |
| | 190,594 |
|
| Total equity | | 7,824 |
| | 30,806 |
| | 53,398 |
| | 112,040 |
| | 135,712 |
|
| Other Data: | | | | | | | | | | |
| Investment in multi-client data library | | $ | 28,276 |
| | $ | 23,710 |
| | $ | 14,884 |
| | $ | 45,558 |
| | $ | 67,785 |
|
| Capital expenditures | | 1,514 |
| | 1,063 |
| | 1,488 |
| | 19,241 |
| | 8,264 |
|
| Depreciation and amortization (other than multi-client data library) | | 8,763 |
| | 16,592 |
| | 21,975 |
| | 26,527 |
| | 27,656 |
|
| Amortization of multi-client data library | | 48,988 |
| | 47,102 |
| | 33,335 |
| | 35,784 |
| | 64,374 |
|
| |
| (a) | **10.2Working capital at December 31, 2017 is negative due to $28.5 million of Third Lien Notes (redeemed March 26, 2018) being reclassified from long-term to current. |
|
| — | |
| (b) | **10.3 |
| — | |
| **10.4 |
| — | |
| **10.5 |
| — | |
| 10.6 |
| — | long-term debt. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Note: The following should be read in conjunction with our Consolidated Financial Statements and related Footnotes to Consolidated Financial Statements that appear elsewhere in this Annual Report on Form 10-K. References to “Footnotes” in the discussion below refer to the numbered Footnotes to Consolidated Financial Statements.
Executive Summary
Our Business
The terms “we,” “us” and similar or derivative terms refer to ION Geophysical Corporation and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicated.
We have been a technology leader for 50 years with a strong history of innovation. While the traditional focus of our cutting-edge technology has been on the E&P industry, we are now broadening and diversifying our business into relevant adjacent markets such as offshore logistics, military and marine robotics.
Leveraging innovative technologies, we create value through data capture, analysis and optimization to enhance companies’ critical decision-making abilities and returns. Our E&P offerings are focused on improving decision-making, enhancing reservoir management and optimizing offshore operations. We provide our services and products through three business segments – E&P Technology & Services, Operations Optimization and Ocean Bottom Integrated Technologies.
For a full discussion of our business, see Part I, Item 1. “Business.”
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. Third-party reports now indicate that global exploration and production spending is expected to increase by 8% in 2019, consistent with 8% in 2018 and up from the 4% growth of 2017. This is an improvement from the double-digit declines sustained from 2014 to 2016. In addition, this is the second consecutive year that international spending is expected to increase, where our offerings are more relevant.
Shale production has dominated activity during the downturn due to its competitive break-even prices and short payback period compared to conventional exploration. However, we believe that investment in conventional resources during the next decade will be required to meet longer-term demand. We’re starting to see increasing pressure for a resumption in offshore investment and exploration activity to replace reserves.
The following is a summary of recent oil and gas pricing 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 |
| 12/31/2018 | $ | 86.07 |
| | $ | 50.57 |
| | $ | 76.40 |
| | $ | 44.48 |
| | $ | 4.70 |
| | $ | 3.10 |
|
| 9/30/2018 | $ | 82.72 |
| | $ | 68.38 |
| | $ | 74.19 |
| | $ | 65.07 |
| | $ | 3.12 |
| | $ | 2.73 |
|
| 6/30/2018 | $ | 80.42 |
| | $ | 66.04 |
| | $ | 77.41 |
| | $ | 62.03 |
| | $ | 3.08 |
| | $ | 2.74 |
|
| 3/31/2018 | $ | 71.08 |
| | $ | 61.94 |
| | $ | 66.27 |
| | $ | 59.20 |
| | $ | 6.24 |
| | $ | 2.49 |
|
| 12/31/2017 | $ | 66.80 |
| | $ | 55.29 |
| | $ | 60.46 |
| | $ | 49.34 |
| | $ | 3.69 |
| | $ | 2.60 |
|
| 9/30/2017 | $ | 59.77 |
| | $ | 46.47 |
| | $ | 52.14 |
| | $ | 44.25 |
| | $ | 3.18 |
| | $ | 2.76 |
|
| 6/30/2017 | $ | 55.05 |
| | $ | 43.98 |
| | $ | 53.38 |
| | $ | 42.48 |
| | $ | 3.27 |
| | $ | 2.85 |
|
| 3/31/2017 | $ | 56.34 |
| | $ | 49.56 |
| | $ | 54.48 |
| | $ | 47.00 |
| | $ | 3.71 |
| | $ | 2.44 |
|
| | | | | | | | | | | | |
| Source: EIA. | | | | | | | | |
Crude oil prices can be volatile due to a number of factors. Significant downward price volatility in Brent crude oil began late in 2014 and reached a low average of $33 per barrel in early 2016 before improving to approximately $55 per barrel by the end of 2016. The prices for Brent crude oil increased to an average of $71 per barrel for the full year 2018. This represents an $18 per barrel improvement over the average crude oil prices for the full year 2017 of $53. This price increase was due to robust global demand and sustained OPEC production cuts, the combination of which resulted in net inventory crude draws that reduced the overall crude surplus. Daily Brent crude oil spot prices reached a peak of $86 per barrel in October 2018, which was the highest level since October 2014, before falling to nearly $50 per barrel before the end of 2018. The price decrease in the latter part of 2018 reflected global oil inventory builds and record levels of production from the world’s three largest
producers - United States, Saudi Arabia and Russia. The EIA forecasts the Brent crude oil spot price will average $61 per barrel in 2019, $11 per barrel lower than 2018, resulting from concerns of oversupply and slower than expected pace of oil demand growth. In December 2018, OPEC and other non-OPEC participants such as Russia reached an agreement to cut their oil production for six months beginning January 2019 in response to increasing evidence that the global crude oil market could become oversupplied in 2019. This production cut is expected to keep global crude oil supply and demand in equilibrium, stabilizing prices. E&P spending is expected to increase over the near-term as crude oil prices are forecasted to remain more stable. In 2018, Mexico’s new President has announced that the Mexican government will not offer any new license rounds for the next three years while assuring that existing contracts will not be cancelled. In the medium-term, global crude oil demand is expected to continue growing while the oil & gas industry is predicted to face a supply crunch due to unsustainably low levels of exploration investments. As a result, E&P companies are expected to increase their focus on offshore oil exploration to replenish reserves.
Given the historical volatility of crude prices, there is a continued risk that if prices do not continue to improve, or if they start to decline again due to high levels of crude oil production, there is a potential for slowing growth rates in various global regions and/or for ongoing supply/demand imbalances. If commodity prices do not continue to improve, or if they start to deteriorate again, demand for our services and products could decline.
Impact to Our Business
While our 2018 revenues were down compared to 2017, we are seeing signs of increasing activity in our business, primarily due to the strategic shift we made to move our offerings closer to the reservoir and the associated continued success of our 3-D multi-client programs as well as clients starting to renew interest in conventional reserve replacement and offshore exploration. Historically, our revenue and EBITDA generation is lower in the first part of the year as customers tend to set budgets in the first quarter, firm up plans through the year, and spend excess budget in the fourth quarter. Investments in our multi-client data library are dependent upon the timing of our New Venture projects and the availability of underwriting by our customers. We continue to maintain high standards for underwriting new projects. Our asset light strategy enables us to scale our business to market conditions avoiding significant fixed costs and maintaining flexibility to manage the timing and amount of our capital expenditures.
In our E&P Technology & Services segment, our New Venture revenues experienced significant declines compared to 2017. In the current disciplined spending environment, many clients wait to purchase data associated with a license round until a formal public announcement has been made by the government. Delays in license round announcements can materially impact the timing of sales in areas where our New Venture programs are underway. Our under performance was driven by the continued delay of the Panama license round announcement, the three-year moratorium on new upstream licensing in Mexico and the continued focus on cash preservation within E&P companies restricting exploration spending. Imaging Services revenues increased as a result of an increase in proprietary ocean bottom nodal imaging projects. Our data library sales increased in 2018 compared to 2017 due to sales of the recently completed phase of the Mexico and Brazil reimaging programs, along with sales of 2-D data libraries in Libya. We invested $28.3 million in our multi-client data library during 2018, approximately $4.6 million and $13.4 million more compared to 2017 and 2016, respectively.
At December 31, 2018, our E&P Technology & Services segment backlog, which consists of commitments for (i) data processing work, (ii) New Venture projects (both multi-client and proprietary) by our Ventures group underwritten by our customers and (iii) E&P Advisors projects, decreased 44% to $21.9 million, compared with $39.2 million at December 31, 2017. The majority of our backlog relates to our 3-D multi-client reimaging programs offshore Brazil and our proprietary Imaging Services and E&P Advisors work. We anticipate that the majority of our backlog will be recognized as revenue over the first half of 2019.
Within the Operations Optimization segment, the increase in Optimization Software & Services revenues was due to continued increase in sales of our Gator ocean bottom command and control system. Devices revenues continue to be impacted by reduced towed streamer seismic contractor activity and cash preservation focus.
We have continued to evolve our strategy for our Ocean Bottom Integrated Technologies segment consistent with our asset light business model. The remaining elements of our next generation ocean bottom nodal system, 4Sea, will be commercialized in 2019. We are offering 4Sea components more broadly to the growing number of OBS service providers under recurring revenue commercial strategies that will enable us to share in the value our technology delivers. We may also license the right to manufacture and use the fully integrated system to a service provider on a value-based pricing model, such as a royalty stream. Such licensing would be recognized through the relevant segment, either E&P Technology & Services or Operations Optimization. While not our primary route to market, we continue to evaluate acquisition projects on a case-by-case basis that meet our long-term risk and return thresholds. In 2018, we recognized a write down of $36.6 million for our cable-based ocean bottom acquisition technologies. We continue to see significant long-term potential for our technologies to improve OBS safety, efficiency and data quality, and we expect demand for OBS surveys to continue increasing.
It is our view that technologies that add a competitive advantage through improved imaging, lower costs, higher productivity, or enhanced safety will continue to be valued in our marketplace. We believe that our newest technologies, such as Marlin and 4Sea, will continue to attract customer interest, because these technologies are designed to deliver those desirable attributes.
Key Financial Metrics
The tables below provide (i) a summary of our net revenues for our company as a whole, and by segment, for 2018, 2017 and 2016, and (ii) an overview of other certain key financial metrics for our company as a whole and our three business segments on a comparative basis for 2018, 2017 and 2016, as reported and as adjusted in all three years for the special items recorded for those years.
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In thousands) |
| Net revenues: | | | | | |
| E&P Technology & Services: | | | | | |
| New Venture | $ | 69,685 |
| | $ | 100,824 |
| | $ | 27,362 |
|
| Data Library | 47,095 |
| | 40,016 |
| | 39,989 |
|
| Total multi-client revenues | 116,780 |
| | 140,840 |
| | 67,351 |
|
| Imaging Services | 19,740 |
| | 16,409 |
| | 25,538 |
|
| Total | $ | 136,520 |
| | $ | 157,249 |
| | $ | 92,889 |
|
| Operations Optimization: | | | | | |
| Devices | $ | 22,396 |
| | $ | 23,610 |
| | $ | 26,746 |
|
| Optimization Software & Services | 21,129 |
| | 16,695 |
| | 16,756 |
|
| Total | $ | 43,525 |
| | $ | 40,305 |
| | $ | 43,502 |
|
| Ocean Bottom Integrated Technologies | $ | — |
| | $ | — |
| | $ | 36,417 |
|
| Total | $ | 180,045 |
| | $ | 197,554 |
| | $ | 172,808 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
| | As Reported | | Special Items | | As Adjusted | | As Reported | | Special Items | | As Adjusted | | As Reported | | Special Items | | As Adjusted |
| | (In thousands, except per share data) |
| Gross profit: | | | | | | | | | | | | | | | | | |
| E&P Technology & Services | $ | 43,369 |
| | $ | — |
| | $ | 43,369 |
| | $ | 65,196 |
| | $ | — |
| | $ | 65,196 |
| | $ | 4,708 |
| | $ | 766 |
| | $ | 5,474 |
|
| Operations Optimization | 22,293 |
| | — |
| | 22,293 |
| | 20,076 |
| | — |
| | 20,076 |
| | 21,745 |
| | 188 |
| | 21,933 |
|
| Ocean Bottom Integrated Technologies | (6,042 | ) | | — |
| | (6,042 | ) | | (9,633 | ) | | — |
| | (9,633 | ) | | 9,579 |
| | 123 |
| | 9,702 |
|
| Total | $ | 59,620 |
| | $ | — |
| | $ | 59,620 |
| | $ | 75,639 |
| | $ | — |
| | $ | 75,639 |
| | $ | 36,032 |
|
| $ | 1,077 |
| (d) | $ | 37,109 |
|
| Gross margin: | | | | | | | | | | | | | | | | | |
| E&P Technology & Services | 32 | % | | — | % | | 32 | % | | 41 | % | | — | % | | 41 | % | | 5 | % | | 1 | % | | 6 | % |
| Operations Optimization | 51 | % | | — | % | | 51 | % | | 50 | % | | — | % | | 50 | % | | 50 | % | | — | % | | 50 | % |
| Ocean Bottom Integrated Technologies | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 27 | % | | — | % | | 27 | % |
| Total | 33 | % | | — | % | | 33 | % | | 38 | % | | — | % | | 38 | % | | 21 | % | | — | % | | 21 | % |
| Income (loss) from operations: | | | | | | | | | | | | | | | | | |
| E&P Technology & Services | $ | 21,758 |
| | $ | — |
| | $ | 21,758 |
| | $ | 42,505 |
| | $ | — |
| | $ | 42,505 |
| | $ | (16,446 | ) | | $ | 1,128 |
| | $ | (15,318 | ) |
| Operations Optimization | 7,295 |
| | — |
| | 7,295 |
| | 8,022 |
| | — |
| | 8,022 |
| | 9,652 |
| | 197 |
| | 9,849 |
|
| Ocean Bottom Integrated Technologies | (47,644 | ) | | 36,553 |
| (a)
| (11,091 | ) | | (16,259 | ) | | — |
| | (16,259 | ) | | (1,756 | ) | | 504 |
| | (1,252 | ) |
| Support and other | (35,681 | ) | | 2,105 |
| (b) | (33,576 | ) | | (42,967 | ) | | 6,141 |
| (b) | (36,826 | ) | | (34,621 | ) | | 180 |
| | (34,441 | ) |
| Total | $ | (54,272 | ) | | $ | 38,658 |
| | $ | (15,614 | ) | | $ | (8,699 | ) | | $ | 6,141 |
| | $ | (2,558 | ) | | $ | (43,171 | ) | | $ | 2,009 |
| (d) | $ | (41,162 | ) |
| Operating margin: | | | | | | | | | | | | | | | | | |
| E&P Technology & Services | 16 | % | | — | % | | 16 | % | | 27 | % | | — | % | | 27 | % | | (18 | )% | | 2 | % | | (16 | )% |
| Operations Optimization | 17 | % | | — | % | | 17 | % | | 20 | % | | — | % | | 20 | % | | 22 | % | | 1 | % | | 23 | % |
| Ocean Bottom Integrated Technologies | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | (5 | )% | | 2 | % | | (3 | )% |
| Support and other | (20 | )% | | 1 | % | | (19 | )% | | (22 | )% | | 3 | % | | (19 | )% | | (20 | )% | | — | % | | (20 | )% |
| Total | (30 | )% | | 21 | % | | (9 | )% | | (4 | )% | | 3 | % | | (1 | )% | | (25 | )% | | 1 | % | | (24 | )% |
| Net income (loss) applicable to common shares | $ | (71,171 | ) | | $ | 38,658 |
| | $ | (32,513 | ) | | $ | (30,242 | ) | | $ | 11,141 |
| (c) | $ | (19,101 | ) | | $ | (65,148 | ) | | $ | (960 | ) | (e) | $ | (66,108 | ) |
| Diluted net income (loss) per common share | $ | (5.20 | ) | | $ | 2.83 |
| | $ | (2.37 | ) | | $ | (2.55 | ) | | $ | 0.94 |
| | $ | (1.61 | ) | | $ | (5.71 | ) | | $ | (0.09 | ) | | $ | (5.80 | ) |
|
| | | | |
| (a) | 10.7 |
| — | |
| 10.8 |
| — | |
| 10.9 |
| — | |
| **10.10 |
| — | |
| **10.11 |
| — | |
| **10.12 |
| — | |
| **10.13 |
| — | |
| 10.14 |
| — | Revolving Credit and Security Agreement dated as of August 22, 2014 among PNC Bank, National Association, as agent for lenders, the lenders from time to time party thereto, as lenders, and PNC Capital Markets LLC, as lead arranger and bookrunner, with ION Geophysical Corporation, ION Exploration Products (U.S.A.), Inc., I/O Marine Systems, Inc. and GX Technology Corporation, as borrowers, filed on November 6, 2014 as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, and incorporated herein by reference. |
| 10.15 |
| — | First Amendment to Revolving Credit and Security Agreement dated as of August 4, 2015 among PNC Bank, National Association, as lender and agent, the lenders from time to time party thereto, as lenders, with ION Geophysical Corporation, ION Exploration Products (U.S.A.), Inc., I/O Marine Systems, Inc. and GX Technology Corporation, as borrowers, filed on August 6, 2015 as Exhibit 10.1 to the Company’s Current Report on Form 8-K, and incorporated herein by reference. |
| 10.16 |
| — | Second Amendment to the Revolving Credit and Security Agreement, dated as of April 28, 2016, among ION Geophysical Corporation and the subsidiary co-borrowers named therein, as borrowers, the financial institutions party thereto, as lenders, and PNC Bank, National Association, as agent for the lenders, filed on April 28, 2016 as Exhibit 10.2 to the Company’s Current Report on Form 8-K and incorporated by reference. |
| **10.17 |
| — | |
| **10.18 |
| — | |
| **10.19 |
| — | |
| **10.20 |
| — | |
| **10.21 |
| — | |
| 21.1 |
| — | |
| *23.1 |
| — | |
| *31.1 |
| — | |
| *31.2 |
| — | |
| *32.1 |
| — | |
| *32.2 |
| — | |
|
| | | | |
| 101 |
| — | The following materials are formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31, 2017 and 2016, (ii) Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015, (iii) Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015, (v) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015, (vi) Footnotes to Consolidated Financial Statements and (vii) Schedule II – Valuation and Qualifying Accounts.cable-based ocean bottom acquisition technologies. |
| | | | |
* | Filed herewith. |
** | Management contract or compensatory plan or arrangement. |
|
| |
| (b) | Exhibits required by Item 601Represents accelerated vesting and cash exercise of Regulation S-K. |
| Reference is made to subparagraph (a) (3) of this Item 15, which is incorporated herein by reference. |
| |
(c) | Not applicable. |
| |
stock appreciation right awards.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Houston, State of Texas, on February 9, 2018.
|
| | | |
| ION GEOPHYSICAL CORPORATION |
| | |
| By | | /s/ R. Brian Hanson |
| | | | R. Brian Hanson | |
| (c) | In addition to item (b), also impacting net loss applicable to common shares was a loss contingency accrual of $5.0 million related to legal proceedings. |
| | | | President | |
| (d) | Represents severance and Chief Executive Officerfacility charges related to the Company’s 2016 restructuring. |
| | | | |
| (e) | Represents a $3.9 million recovery of INOVA bad debts, partially offset by item (d). |
| | | | |
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIESWe 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 year to year, and the primary factors that accounted for those changes.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSFor a discussion of factors that could impact our future operating results and financial condition, see Item 1A. “Risk Factors” above.
Results of Operations
Year Ended December 31, 2018 (As Adjusted) Compared to Year Ended December 31, 2017 (As Adjusted)
Our total net revenues of $180.0 million for 2018 decreased $17.6 million, or 9%, compared to total net revenues of $197.6 million for 2017. Our overall gross profit percentage for 2018 was 33%, compared to a gross profit percentage of 38% for 2017. Total operating expenses as a percentage of total net revenues for 2018 and 2017 were 42% and 40%, as adjusted, respectively. During 2018, our loss from operations was $15.6 million, as adjusted, compared to a loss of $2.6 million, as adjusted, for 2017.
Our net loss for 2018 was $32.5 million, as adjusted, or $(2.37) per share, compared to net loss of $19.1 million, as adjusted, or $(1.61) per share for 2017. As noted above, our net loss for 2018 and 2017 included other special items totaling $38.7 million and $11.1 million, respectively, impacting our loss per share by $2.83 and $0.94, respectively.
Net Revenues, Gross Profits and Gross Margins
E&P Technology & Services — Net revenues for 2018 decreased by $20.7 million, or 13%, to $136.5 million, compared to $157.2 million for 2017. Within the E&P Technology & Services segment, total multi-client revenues were $116.8 million, a decrease of 17%, with New Venture revenues experiencing significant declines during 2018. Partially offsetting the overall decline in New Venture revenues was an increase in Data Library revenues, attributable to sales of the recently completed phases of the Brazil and Mexico reimaging programs, along with sales of 2-D data libraries in Libya. The decrease in multi-client revenues was driven by the continued delay of the Panama license round announcement, the deferment of new E&P investments in Mexico and the continued focus on cash preservation within E&P companies restricting exploration spending. Imaging Services revenues were $19.7 million, a 20%increase, due to an increase in proprietary ocean bottom nodal imaging projects.
Gross profit decreased by $21.8 million to $43.4 million, representing a 32% gross margin, compared to $65.2 million, or 41% gross margin, for 2017. The decline in gross profit and margin were due to the decrease in New Venture revenues partly offset by the increases in Data Library and Imaging Services revenues, as noted above.
Operations Optimization — Net revenues for 2018 increased by $3.2 million, or 8%, to $43.5 million, compared to $40.3 million for 2017. Optimization Software & Services net revenues increased by $4.4 million, or 26%, to $21.1 million, compared to $16.7 million for 2017 due to increase in sales of our Gator ocean bottom command and control system. Devices revenues for 2018 decreased by $1.2 million, or 5%, to $22.4 million, compared to $23.6 million for 2017. This decrease was due to a decline in our repairs business due to seismic contractors focus on cash preservation and decrease in sales of our various product offerings. Operations Optimization gross profit for 2018 increased by $2.2 million to $22.3 million, in 2018, compared to $20.1 million, for 2017. Gross margin increased to 51% in 2018 from 50% in 2017.
Ocean Bottom Integrated Technologies — Net revenues for both 2018 and 2017 were zero. In line with our component strategy, revenues for the elements of fully integrated 4Sea system will be recognized in the relevant segment, either E&P Technology & Services or Operations Optimization. Gross loss was $6.0 million for 2018 compared to gross loss of $9.6 million for 2017. This decline was due to reduced depreciation expense as some assets were fully depreciated in late 2017 and early 2018.
Operating Expenses (As Adjusted)
The following table presents the “As Adjusted” in both 2018 and 2017, excluding other special items (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 | | Year Ended December 31, 2017 |
| | As Reported | | Special Items | | As Adjusted | | As Reported | | Special Items | | As Adjusted |
| Operating expenses: | | | | | | | | | | | |
| Research, development and engineering | $ | 18,182 |
| | $ | — |
| | $ | 18,182 |
| | $ | 16,431 |
| | $ | — |
| | $ | 16,431 |
|
| Marketing and sales | 21,793 |
| | — |
| | 21,793 |
| | 20,778 |
| | — |
| | 20,778 |
|
| General, administrative and other operating expenses | 37,364 |
| | (2,105 | ) | (a)
| 35,259 |
| | 47,129 |
| | (6,141 | ) | (a)
| 40,988 |
|
| Impairment of long-lived assets | 36,553 |
| | (36,553 | ) | (b)
| — |
| | — |
| | — |
| | — |
|
| Total operating expenses | $ | 113,892 |
| | $ | (38,658 | ) | | $ | 75,234 |
| | $ | 84,338 |
| | $ | (6,141 | ) | | $ | 78,197 |
|
|
| | |
(a) | Represents accelerated vesting and cash exercise of stock appreciation rights awards. |
| |
(b) | | Page |
ION Geophysical Corporation and Subsidiaries: | | |
ReportsRepresents a write-down of Independent Registered Public Accounting Firms | | F-2 |
Consolidated Balance Sheets — December 31, 2017 and 2016 | | F-3 |
Consolidated Statements of Operations — Years ended December 31, 2017, 2016 and 2015 | | F-4 |
Consolidated Statements of Comprehensive Income (Loss) — Years ended December 31, 2017, 2016 and 2015 | | F-5 |
Consolidated Statements of Cash Flows — Years ended December 31, 2017, 2016 and 2015 | | F-6 |
Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2017, 2016 and 2015 | | F-7 |
Footnotes to Consolidated Financial Statements | | F-8 |
Schedule II — Valuation and Qualifying Accounts | | S-1the cable-based ocean bottom acquisition technologies. |
Research, Development and Engineering — Research, development and engineering expense increased $1.8 million, or 11%, to $18.2 million, for 2018, compared to $16.4 million, for 2017. Increase is primarily driven by increased employment costs as we continue to invest in imaging algorithms and infrastructure, devices and software. We see significant long-term potential for investing in technologies that improve image quality, safety and productivity.
Marketing and Sales — Marketing and sales expense increased $1.0 million, or 5%, to $21.8 million, for 2018, compared to $20.8 million, for 2017. This increase was primarily due to increased marketing expenses to broaden and diversify our offerings into adjacent markets including consulting fees, partly offset by decrease in commission expense.
ReportGeneral, Administrative and Other Operating Expenses — General, administrative and other operating expenses decreased $5.7 million, or 14%, to $35.3 million, as adjusted, for 2018 compared to $41.0 million, as adjusted, for 2017. The decrease was driven by reductions in bonus expense due to current operating results.
Other Items
Interest Expense, net — Interest expense, net, of Independent Registered Public Accounting Firm$13.0 million for 2018 compared to $16.7 million for 2017. The decrease in interest expense was a result of lower outstanding debt during 2018. For additional information, please refer to “— Liquidity and Capital Resources — Sources of Capital” below.
Other Expense — Other expense for 2018 was $0.4 million compared to other expense of $3.9 million for 2017. The difference primarily relates to changes in our accrual for loss contingency related to the WesternGeco legal proceedings. See further discussion at Footnote 8 “Legal Matters” and in Part 1, Item 3, “Legal Proceedings.”
BoardThe following table reflects the significant items of Directorsother income (in thousands):
|
| | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 |
| Accrual for contingency related to legal proceedings (Footnote 8) | $ | — |
| | $ | (5,000 | ) |
| Recovery of INOVA bad debts | — |
| | 844 |
|
| Other income (expense) | (436 | ) | | 211 |
|
| Total other income (expense) | $ | (436 | ) | | $ | (3,945 | ) |
Income Tax Expense — Income tax expense for 2018 was $2.7 million compared to less than $0.1 million for 2017. Our effective tax rates for 2018 and Stockholders
ION Geophysical Corporation
Opinion on2017 were 4.0% and 0.1%, respectively. The income tax expense for 2018 and 2017 primarily relates to profits generated by our non-U.S. businesses. Tax expense for 2018 and 2017 includes a $0.3 million and $1.3 million, respectively tax benefit for the financial statements
We have audited the accompanying consolidated balance sheets of ION Geophysical Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for eachrelease of the three yearsvaluation allowance against refundable U.S. alternative minimum tax (“AMT”) credits. Tax expense has not been offset by the tax benefits on losses within the U.S. and other jurisdictions, from which we cannot currently benefit. Our effective tax rate for 2018 was negatively impacted by the change in the period ended December 31, 2017, and thevaluation allowance related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial positionU.S. operating losses for which we cannot currently recognize a tax benefit. See further discussion of establishment of the Company as deferred tax valuation allowance at Footnote 7 “Income Taxes”of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013Footnotes to Internal Control-Integrated FrameworkConsolidated Financial Statements. issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 8, 2018 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2014
Houston, Texas
February 8, 2018
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIESResults of Operations
CONSOLIDATED BALANCE SHEETSYear Ended December 31, 2017 (As Adjusted) Compared to Year Ended December 31, 2016 (As Adjusted)
Our total net revenues of $197.6 million for 2017 increased $24.8 million, or 14%, compared to total net revenues of $172.8 million for 2016. Our overall gross profit percentage for 2017 was 38%, compared to a gross profit percentage of 21%, as adjusted, for 2016. Total operating expenses as a percentage of net revenues for 2017 and 2016 were 40% and 45%, as adjusted, respectively. During 2017, our loss from operations was $2.6 million, as adjusted, compared to a loss of $41.2 million, as adjusted, for 2016.
Our net loss for 2017 was $19.1 million, as adjusted, or $(1.61) per share, compared to net loss of $66.1 million, as adjusted, or $(5.80) per share for 2016. As noted above, our net loss for 2017 and 2016 included restructuring charges and other special items totaling $11.1 million and $(1.0) million, respectively, impacting our earnings per share by $0.94 and $(0.09), respectively.
Net Revenues, Gross Profits and Gross Margins (As Adjusted for 2016)
E&P Technology & Services — Net revenues for 2017 increased by $64.4 million, or 69%, to $157.2 million, compared to $92.9 million for 2016. Within the E&P Technology & Services, total multi-client revenues were $140.8 million, an increase of 109%, driven by New Venture revenues from our 3-D multi-client reimaging programs offshore Mexico and Brazil, as well as revenues from a new 2-D multi-client program in Panama and other programs that have recently been launched. Imaging Services revenues were $16.4 million, a decrease of 36%, as result of the shift towards higher return multi-client programs during 2017. Revenues from Data Library sales were consistent year over year.
Gross profit increased by $59.7 million to $65.2 million, representing a 41% gross margin, compared to $5.5 million, as adjusted, or 6% gross margin, for 2016. These improvements in gross profit and margin were due to the increase in revenues and the mix of higher margin 3-D reimaging programs as noted above, as well as the full benefit of our cost control initiatives implemented in prior years. These increases were partially offset by higher sales-based amortization of our multi-client data library.
Operations Optimization — Net revenues for 2017 decreased by $3.2 million or 7% to $40.3 million compared to $43.5 million for 2016. Devices net revenues for 2017 decreased by $3.1 million, or 12%, to $23.6 million, compared to $26.7 million for 2016. This decrease was due to a decline in our repairs business, partially offset by sales of new product offerings during 2017. Optimization Software & Services net revenues remained flat at $16.7 million. Excluding the effect of foreign currencies, Optimization Software & Services revenues were up 4% in terms of local GBP currency. Operations Optimization gross profit for 2017 decreased by $1.9 million to $20.0 million, in 2017, compared to $21.9 million, as adjusted, for 2016. Gross margin remained flat at 50%.
Ocean Bottom Integrated Technologies — Net revenues for 2017 were zero compared to $36.4 million for 2016. The crew was idle throughout 2017 as we pursued additional OBS work. Gross loss was $9.6 million for 2017 compared to gross income of $9.7 million, as adjusted, for 2016. This decline was due to the decrease in revenues, partially offset by several cost control initiatives implemented in 2017, including the renegotiation of our vessel leases, which reduced our vessel lease costs.
Operating Expenses (As Adjusted)
The following table presents the “As Adjusted” in both 2017 and 2016, excluding other special items (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands, except share data) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 52,056 |
| | $ | 52,652 |
|
| Accounts receivable, net | 19,478 |
| | 20,770 |
|
| Unbilled receivables | 37,304 |
| | 13,415 |
|
| Inventories | 14,508 |
| | 15,241 |
|
| Prepaid expenses and other current assets | 7,643 |
| | 9,559 |
|
| Total current assets | 130,989 |
| | 111,637 |
|
| Deferred income tax asset | 1,753 |
| | — |
|
| Property, plant, equipment and seismic rental equipment, net | 52,153 |
| | 67,488 |
|
| Multi-client data library, net | 89,300 |
| | 105,935 |
|
| Goodwill | 24,089 |
| | 22,208 |
|
| Intangible assets, net | 1,666 |
| | 3,103 |
|
| Other assets | 1,119 |
| | 2,845 |
|
| Total assets | $ | 301,069 |
| | $ | 313,216 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Current maturities of long-term debt | $ | 40,024 |
| | $ | 14,581 |
|
| Accounts payable | 24,951 |
| | 26,889 |
|
| Accrued expenses | 38,697 |
| | 26,240 |
|
| Accrued multi-client data library royalties | 27,035 |
| | 23,663 |
|
| Deferred revenue | 8,910 |
| | 3,709 |
|
| Total current liabilities | 139,617 |
| | 95,082 |
|
| Long-term debt, net of current maturities | 116,720 |
| | 144,209 |
|
| Other long-term liabilities | 13,926 |
| | 20,527 |
|
| Total liabilities | 270,263 |
| | 259,818 |
|
| Equity: | | | |
| Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 12,019,701 and 11,792,447 shares at December 31, 2017 and 2016, respectively. | 120 |
| | 118 |
|
| Additional paid-in capital | 903,247 |
| | 899,198 |
|
| Accumulated deficit | (854,921 | ) | | (824,679 | ) |
| Accumulated other comprehensive loss | (18,879 | ) | | (21,748 | ) |
| Total stockholders’ equity | 29,567 |
| | 52,889 |
|
| Noncontrolling interests | 1,239 |
| | 509 |
|
| Total equity | 30,806 |
| | 53,398 |
|
| Total liabilities and equity | $ | 301,069 |
| | $ | 313,216 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
| | As Reported | | Special Items(b) | | As Adjusted | | As Reported | | Special Items(a) | | As Adjusted |
| Operating expenses: | | | | | | | | | | | |
| Research, development and engineering | $ | 16,431 |
| | $ | — |
| | $ | 16,431 |
| | $ | 17,833 |
| | $ | (397 | ) | | $ | 17,436 |
|
| Marketing and sales | 20,778 |
| | — |
| | 20,778 |
| | 17,371 |
| | (262 | ) | | 17,109 |
|
| General, administrative and other operating expenses | 47,129 |
| | (6,141 | ) | | 40,988 |
| | 43,999 |
| | (273 | ) | | 43,726 |
|
| Total operating expenses | $ | 84,338 |
| | $ | (6,141 | ) | | $ | 78,197 |
| | $ | 79,203 |
| | $ | (932 | ) | | $ | 78,271 |
|
| Income (loss) from operations | $ | (8,699 | ) | | $ | 6,141 |
| | $ | (2,558 | ) | | $ | (43,171 | ) | | $ | 2,009 |
| | $ | (41,162 | ) |
| |
(a) | Includes severance affecting operating expenses. |
| |
(b) | Represents accelerated vesting and cash exercise of stock appreciation rights awards. |
Research, Development and Engineering — Research, development and engineering expense decreased $1.0 million, or 6%, to $16.4 million, for 2017, compared to $17.4 million, as adjusted, for 2016. During the current down-cycle in E&P exploration spending, we have been selective in spending on research and development (“R&D”) projects in order to reduce expenses without sacrificing our ability to develop our technologies. As discussed above, despite the extended market downturn and uncertainty, we see significant long-term potential for our technologies to improve OBS productivity. We continue to invest in our 4Sea system and we expect long-term demand for OBS production surveys (4-D) to increase.
Marketing and Sales —Marketing and sales expense increased $3.7 million, or 22%, to $20.8 million, for 2017, compared to $17.1 million, as adjusted, for 2016. This increase was primarily due to higher commissions driven by increased sales in the E&P Technology & Services segment.
General, Administrative and Other Operating Expenses — General, administrative and other operating expenses decreased $2.7 million, as adjusted, or 6%, to $41.0 million, as adjusted for 2017 compared to $43.7 million, as adjusted, for 2016. This decrease for 2017 was primarily due to the full benefit of our cost control initiatives implemented in prior years.
Other Items
Interest Expense, net — Interest expense, net, of $16.7 million for 2017 compared to $18.5 million for 2016. This improvement was primarily due to reduced debt caused by the bond exchange during 2016. For additional information, please refer to “— Liquidity and Capital Resources — Sources of Capital” below.
Other Income (Expense) — Other income (expense) for 2017 was $(3.9) million compared to other income of $1.4 million for 2016. The difference primarily relates to changes in our accrual for loss contingency related to a legal matter. See accompanyingfurther discussion at Footnote 8 “Legal Matters” and in Part 1, Item 3, “Legal Proceedings.”
The following table reflects the significant items of other income (in thousands):
|
| | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 |
| Reduction of (accrual for) loss contingency related to legal proceedings (Footnote 8) | $ | (5,000 | ) | | $ | 1,168 |
|
| Recovery of INOVA bad debts | 844 |
| | 3,983 |
|
| Loss on bond exchange | — |
| | (2,182 | ) |
| Other expense | 211 |
| | (1,619 | ) |
| Total other income | $ | (3,945 | ) | | $ | 1,350 |
|
Income Tax Expense — Income tax expense for 2017 was less than $0.1 million compared to $4.4 million for 2016. Our effective tax rates for 2017 and 2016 were (0.1)% and (7.3)%, respectively. The income tax expense for 2017 and 2016 primarily relates to results generated by our non-U.S. businesses. Tax expense for 2017 includes a $1.3 million tax benefit for the release of the valuation allowance against refundable U.S. alternative minimum tax (“AMT”) credits. Tax expense has not been offset by the tax benefits on losses within the U.S. and other jurisdictions, from which we cannot currently benefit. Our effective tax rate for 2017 was negatively impacted by the change in valuation allowance related to U.S. operating losses for which we cannot currently recognize a tax benefit. See further discussion of establishment of the deferred tax valuation allowance at Footnote 7 “Income Taxes”of Footnotes to Consolidated Financial Statements.
Liquidity and Capital Resources
Sources of Capital
As of December 31, 2018, we had total liquidity of $75.5 million, consisting of $33.6 million in cash on hand and $41.9 million of available borrowing capacity under the Credit Facility. Our cash requirements include working capital requirements and cash required for our debt service payments, multi-client seismic data acquisition activities and capital expenditures. As of December 31, 2018, we had working capital of $20.1 million. Working capital requirements are primarily driven by our investment in our (i) multi-client data library ($28.3 million in 2018) and royalty payments for multi-client sales. Also, our headcount has traditionally been a significant driver of our working capital needs. As a significant portion of our business is involved in the planning, processing and interpretation of seismic data, one of our largest investments is in our employees, which involves cash expenditures for their salaries, bonuses, payroll taxes and related compensation expenses, typically in advance of related revenue billings and collections.
Our working capital requirements may change from time to time depending upon many factors, including our operating results and adjustments in our operating plan in response to industry conditions, competition and unexpected events. In recent years, our primary sources of funds have been cash flows generated from operations, existing cash balances, debt and equity issuances and borrowings under our revolving credit facility.
Public Equity Offering and Retirement of Debt
On February 21, 2018, we announced our successful completion of a public equity offering to begin de-levering our balance sheet. We issued and sold 1,820,000 shares of common stock at a public offering price of $27.50 per share, and warrants to purchase an additional 1,820,000 shares of our common stock. The net proceeds from this offering were $47.0 million, including transaction expenses. A portion of the net proceeds were used to retire our $28.5 million Third Lien Notes in March 2018 (several weeks before their maturity date). The warrants have an exercise price of $33.60 per share, are immediately exercisable and expire on March 21, 2019.
Equity Investment Program
To encourage our executive officers and other key employees to purchase our common stock and further align their interests with those of our stockholders, the Board authorized and approved an equity investment program pursuant to which certain of our executive officers and other key employees are permitted, but not obligated, to purchase unregistered shares of our common stock directly from the Company at market prices. In connection with any such purchases, the Committee authorized and approved, on December 13, 2017, a grant by us to such purchasing executive officers and key employees of a certain number of shares of restricted stock. On December 13, 2017, the Committee also authorized and approved to grant to certain executive officers and key employees a certain number of shares of restricted stock in connection with certain purchases of shares of our common stock in the open market.
On December 14, 2017, we sold, in a private placement under Section 4(a)(2) of the Securities Act of 1933, as amended, 120,567 shares of our common stock at $13.05 per share (the closing price of the our common stock on the NYSE on such date) and executive officers and other key employees purchased 219,346 shares in the open market.
Revolving Credit Facility
On August 16, 2018, we and our material U.S. subsidiaries; GX Technology Corporation, ION Exploration Products (U.S.A) and I/O Marine Systems, Inc. (the “Material U.S. Subsidiaries”), along with GX Geoscience Corporation, S. de R.L. de C.V., a limited liability company (Sociedad de Responsibilidad Limitada de Capital Variable) organized under the laws of Mexico, and a subsidiary of the Company (the “Mexican Subsidiary,”) (the Material U.S. Subsidiaries and the Mexican Subsidiary are collectively, the “Subsidiary Borrowers”, together with ION Geophysical Corporation are the “Borrowers”), the financial institutions party thereto, as lenders, and PNC Bank, National Association (“PNC”), as agent for the lenders, entered into that certain Third Amendment and Joinder to Revolving Credit and Security Agreement (the “Third Amendment”), amending the Revolving Credit and Security Agreement, dated as of August 22, 2014 (as previously amended by the First Amendment to Revolving Credit and Security Agreement, dated as of August 4, 2015 and the Second Amendment to Revolving Credit and Security Agreement, dated as of April 28, 2016, the “Credit Agreement”). The Credit Agreement, as amended by the First Amendment, the Second Amendment and the Third Amendment is herein called, the “Credit Facility”).
The Third Amendment amends the Credit Agreement to, among other things:
extend the maturity date of the Credit Facility by approximately four years (from August 22, 2019 to August 16, 2023), subject to the retirement or extension of the maturity date of the Second Lien Notes, as defined below, which mature on December 15, 2021;
increase the maximum revolver amount by $10 million (from $40 million to $50 million);
increase the borrowing base percentage of the net orderly liquidation value as it relates to the multi-client data library (not to exceed $28.5 million, up from the previous maximum of $15 million for the multi-client data library component);
include the eligible billed receivables of the Mexican Subsidiary up to a maximum of $5 million in the borrowing base calculation and joins the Mexican Subsidiary as a borrower thereunder (with a maximum exposure of $5 million) and require the equity and assets of the Mexican Subsidiary to be pledged to secure obligations under the Credit Facility;
modify the interest rate such that the maximum interest rate remains consistent with the fixed interest rate prior to the Third Amendment (that is, 3.00% per annum for domestic rate loans and 4.00% per annum for LIBOR rate loans), but now lowers the range down to a minimum interest rate of 2.00% for domestic rate loans and 3.00% for LIBOR rate loans based on a leverage ratio for the preceding four-quarter period;
decrease the minimum excess borrowing availability threshold which (if the Borrowers have minimum excess borrowing availability below any such threshold) triggers the agent’s right to exercise dominion over cash and deposit accounts; and
modify the trigger required to test for compliance with the fixed charge coverage ratio.
The borrowing base under the Credit Facility will increase or decrease monthly using a formula based on certain eligible receivables, eligible inventory and other amounts, including a percentage of the net orderly liquidation value of our multi-client
data library. As of December 31, 2018, the borrowing base under the Credit Facility was $41.9 million, and there was no outstanding indebtedness under the Credit Facility.
The Credit Facility requires us to maintain compliance with various covenants. At December 31, 2018, we were in compliance with all of the covenants under the Credit Facility. For further information regarding our Credit Facility see Footnote 5 “Long-term Debt and Lease Obligations” of Footnotes to Consolidated Financial Statements.
Senior Secured Notes
As of December 31, 2018, ION Geophysical Corporation’s 9.125% Senior Secured Second Priority Notes due December 2021 (the “Second Lien Notes”) had an outstanding principal amount of $120.6 million. Prior to its early redemption, ION Geophysical Corporation’s 8.125% Senior Secured Second-Priority Notes due May 2018 (the “Third Lien Notes”) had an aggregate principal amount of $28.5 million. In March 2018, ION Geophysical Corporation obtained consent from a majority of the Second Lien Notes holders and from PNC to redeem, in full, the Third Lien Notes prior to their stated maturity. On March 26, 2018, ION Geophysical Corporation redeemed the Third Lien Notes by paying the then outstanding principal amount, plus all accrued and unpaid interest through the redemption date.
The Second Lien Notes remain outstanding and are senior secured second-priority obligations guaranteed by the Material U.S. Subsidiaries and the Mexican Subsidiary. Interest on the Second Lien Notes accrues at the rate of 9.125% per annum and is payable semiannually in arrears on June 15 and December 15 of each year during their term, except that the interest payment otherwise payable on June 15, 2021 will be payable on December 15, 2021.
The April 2016 indenture governing the Second Lien Notes contains certain covenants that, among other things, limits or prohibits our ability and the ability of our restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Second Lien Notes, including among other things, incurring additional indebtedness in excess of permitted indebtedness, creating liens, paying dividends and making other distributions in respect of our capital stock, redeeming our 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 Second Lien Notes Indenture are subject to certain exceptions and qualifications. All of our subsidiaries are currently restricted subsidiaries.
As of December 31, 2018, we are in compliance with the covenants with respect to the Second Lien Notes.
On or after December 15, 2019, we may on one or more occasions redeem all or a part of the Second Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Second Lien Notes redeemed during the twelve-month period beginning on December 15th of the years indicated below:
|
| | |
| Date | | Percentage |
| 2019 | | 105.500% |
| 2020 | | 103.500% |
| 2021 and thereafter | | 100.000% |
Meeting our Liquidity Requirements
As of December 31, 2018, our total outstanding indebtedness (including capital lease obligations) was approximately $121.7 million, consisting primarily of approximately $120.6 million outstanding Second Lien Notes (maturing in December 2021) and $2.9 million of capital leases, partially offset by $2.9 million of debt issuance costs. As of December 31, 2018, there was no outstanding indebtedness under our Credit Facility.
For 2018, total capital expenditures, including investments in our multi-client data library, were $29.8 million. We currently expect that our capital expenditures, including investments in our multi-client data library, will be a range of $40.0 million to $60.0 million in 2019. Investments in our multi-client data library are dependent upon the timing of our New Venture projects and the availability of underwriting by our customers.
We believe that our existing cash balance, cash from operations and undrawn availability under our Credit Facility will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, as described at Part I, Item 3. “Legal Proceedings,” there are possible scenarios involving an outcome in the WesternGeco lawsuit that could materially and adversely affect our liquidity.
Cash Flow from Operations
Net cash provided by operating activities was $7.1 million for 2018, compared to $27.6 million for 2017. The decrease was driven by lower revenue activity compared to 2017, payment of $3.75 million damages payment for the WesternGeco lawsuit, reductions in accounts payable and accrued expenses and increase in our combined accounts and unbilled receivable balance.
Net cash provided by operating activities was $27.6 million for 2017, compared to $1.0 million for 2016. The increase in net cash provided by operations was due to a significant increase in New Venture revenues in 2017, compared to 2016 and due to $20.8 million damages payment in 2016 for the WesternGeco lawsuit, which was partially offset by increases in unbilled receivables as of December 31, 2017.
Cash Flow Used In Investing Activities
Net cash flow used in investing activities was $29.8 million for 2018, compared to $24.8 million for 2017. The principal uses of cash in our investing activities during 2018 were $28.3 million of investments in our multi-client data library and $1.5 million of investments in property, plant and equipment.
Net cash flow used in investing activities was $24.8 million for 2017, compared to $13.6 million for 2016. The principal uses of cash in our investing activities during 2017 were $23.7 million of investments in our multi-client data library and $1.1 million of investments in property, plant and equipment.
Cash Flow Used in Financing Activities
Net cash flow provided by financing activities was $3.8 million for 2018, compared to $3.6 million of net cash flow used in financing activities for 2017. The net cash flow provided by financing activities during 2018 was primarily related to $47.0 million of net cash received from our public equity offering, partially offset by $30.8 million of payments on long-term debt including equipment capital leases and a $10.0 million repayment of our Credit Facility.
Net cash flow used in financing activities was $3.6 million for 2017, compared to $21.6 million of net cash flow used in financing activities for 2016. The net cash flow used in financing activities during 2017 was primarily related to $4.8 million of payments on long-term debt related to equipment capital leases, partially offset by $1.6 million of proceeds from employee stock purchases.
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 typically in the second half of our fiscal year.
Future Contractual Obligations
The following table sets forth estimates of future payments of our consolidated contractual obligations, as of December 31, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Contractual Obligations | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| Long-term and short-term debt | $ | 121,728 |
| | $ | 1,159 |
| | $ | 120,569 |
| | $ | — |
| | $ | — |
|
| Interest on long-term debt obligations | 34,901 |
| | 11,344 |
| | 23,236 |
| | 321 |
| | — |
|
| Equipment capital lease obligations | 2,938 |
| | 1,069 |
| | 1,869 |
| | — |
| | — |
|
| Operating leases | 68,938 |
| | 13,248 |
| | 34,753 |
| | 13,914 |
| | 7,023 |
|
| Purchase obligations | 2,908 |
| | 2,908 |
| | — |
| | — |
| | — |
|
| Total | $ | 231,413 |
| | $ | 29,728 |
| | $ | 180,427 |
| | $ | 14,235 |
| | $ | 7,023 |
|
The long-term and short-term debt at December 31, 2018 included $120.6 million of principal indebtedness outstanding under our Second Lien Notes that mature in December 2021. The $2.9 million of equipment capital lease obligations relates to Imaging Services’ financing of computer and other equipment purchases.
The operating lease commitments at December 31, 2018 relate to our leases for certain equipment, offices, processing centers, and warehouse space. Our purchase obligations primarily relate to our committed inventory purchase orders under which deliveries of inventory are scheduled to be made in 2019.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands, except per share data) |
| Service revenues | $ | 159,410 |
| | $ | 130,640 |
| | $ | 160,480 |
|
| Product revenues | 38,144 |
| | 42,168 |
| | 61,033 |
|
| Total net revenues | 197,554 |
| | 172,808 |
| | 221,513 |
|
| Cost of services | 103,124 |
| | 115,763 |
| | 180,215 |
|
| Cost of products | 18,791 |
| | 21,013 |
| | 33,295 |
|
| Gross profit | 75,639 |
| | 36,032 |
| | 8,003 |
|
| Operating expenses: | | | | | |
| Research, development and engineering | 16,431 |
| | 17,833 |
| | 26,445 |
|
| Marketing and sales | 20,778 |
| | 17,371 |
| | 30,493 |
|
| General, administrative and other operating expenses | 47,129 |
| | 43,999 |
| | 51,697 |
|
| Total operating expenses | 84,338 |
| | 79,203 |
| | 108,635 |
|
| Loss from operations | (8,699 | ) | | (43,171 | ) | | (100,632 | ) |
| Interest expense, net | (16,709 | ) | | (18,485 | ) | | (18,753 | ) |
| Other income (expense) | (3,945 | ) | | 1,350 |
| | 98,275 |
|
| Loss before income taxes | (29,353 | ) | | (60,306 | ) | | (21,110 | ) |
| Income tax expense | 24 |
| | 4,421 |
| | 4,044 |
|
| Net loss | (29,377 | ) | | (64,727 | ) | | (25,154 | ) |
| Net (income) loss attributable to noncontrolling interests | (865 | ) | | (421 | ) | | 32 |
|
| Net loss attributable to ION | $ | (30,242 | ) | | $ | (65,148 | ) | | $ | (25,122 | ) |
| Net loss per share: | | | | | |
| Basic | $ | (2.55 | ) | | $ | (5.71 | ) | | $ | (2.29 | ) |
| Diluted | $ | (2.55 | ) | | $ | (5.71 | ) | | $ | (2.29 | ) |
| Weighted average number of common shares outstanding: | | | | | |
| Basic | 11,876 |
| | 11,400 |
| | 10,957 |
|
| Diluted | 11,876 |
| | 11,400 |
| | 10,957 |
|
See accompanying Footnotes to Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Net loss | $ | (29,377 | ) | | $ | (64,727 | ) | | $ | (25,154 | ) |
| Other comprehensive income (loss), net of taxes, as appropriate: | | | | | |
| Foreign currency translation adjustments | 2,869 |
| | (6,967 | ) | | (1,974 | ) |
| Total other comprehensive income (loss), net of taxes | 2,869 |
| | (6,967 | ) | | (1,974 | ) |
| Comprehensive net loss | (26,508 | ) | | (71,694 | ) | | (27,128 | ) |
| Comprehensive (income) loss attributable to noncontrolling interests | (865 | ) | | (421 | ) | | 32 |
|
| Comprehensive net loss attributable to ION | $ | (27,373 | ) | | $ | (72,115 | ) | | $ | (27,096 | ) |
See accompanying Footnotes to Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (29,377 | ) | | $ | (64,727 | ) | | $ | (25,154 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
| Depreciation and amortization (other than multi-client library) | 16,592 |
| | 21,975 |
| | 26,527 |
|
| Amortization of multi-client data library | 47,102 |
| | 33,335 |
| | 35,784 |
|
| Impairment of multi-client data library | 2,304 |
| | — |
| | 399 |
|
| Stock-based compensation expense | 2,552 |
| | 3,267 |
| | 5,486 |
|
| Accrual (reduction) of loss contingency related to legal proceedings | 5,000 |
| | (1,168 | ) | | (101,978 | ) |
| Loss on bond exchange | — |
| | 2,182 |
| | — |
|
| Write-down of excess and obsolete inventory | 398 |
| | 429 |
| | 151 |
|
| Deferred income taxes | (5,420 | ) | | (1,181 | ) | | 7,444 |
|
| Change in operating assets and liabilities: | | | | | |
| Accounts receivable | 1,692 |
| | 20,426 |
| | 69,491 |
|
| Unbilled receivables | (23,947 | ) | | 6,543 |
| | 1,630 |
|
| Inventories | 190 |
| | 2,312 |
| | 2,251 |
|
| Accounts payable, accrued expenses and accrued royalties | 1,443 |
| | (5,085 | ) | | (30,264 | ) |
| Deferred revenue | 5,131 |
| | (2,759 | ) | | (1,571 | ) |
| Other assets and liabilities | 4,370 |
| | (13,978 | ) | | (6,720 | ) |
| Net cash provided by (used in) operating activities | 28,030 |
| | 1,571 |
| | (16,524 | ) |
| Cash flows from investing activities: | | | | | |
| Investment in multi-client data library | (23,710 | ) | | (14,884 | ) | | (45,558 | ) |
| Purchase of property, plant, equipment and seismic rental equipment | (1,063 | ) | | (1,488 | ) | | (19,241 | ) |
| Proceeds from sale of cost method investments | — |
| | 2,698 |
| | — |
|
| Other investing activities | — |
| | 30 |
| | 1,263 |
|
| Net cash used in investing activities | (24,773 | ) | | (13,644 | ) | | (63,536 | ) |
| Cash flows from financing activities: | | | | | |
| Borrowings under revolving line of credit | — |
| | 15,000 |
| | — |
|
| Repayments under revolving line of credit | — |
| | (5,000 | ) | | — |
|
| Payments on notes payable and long-term debt | (4,816 | ) | | (8,634 | ) | | (7,452 | ) |
| Cost associated with issuance of debt | (53 | ) | | (6,744 | ) | | (145 | ) |
| Repurchase of common stock | — |
| | (964 | ) | | (1,989 | ) |
| Payments to repurchase bonds | — |
| | (15,000 | ) | | — |
|
| Proceeds from employee stock purchases and exercise of stock options | 1,619 |
| | — |
| | — |
|
| Dividend payment to non-controlling interest | (100 | ) | | — |
| | — |
|
| Other financing activities | (243 | ) | | (252 | ) | | 73 |
|
| Net cash used in financing activities | (3,593 | ) | | (21,594 | ) | | (9,513 | ) |
| Effect of change in foreign currency exchange rates on cash and cash equivalents | (260 | ) | | 1,386 |
| | 898 |
|
| Net decrease in cash and cash equivalents | (596 | ) | | (32,281 | ) | | (88,675 | ) |
| Cash and cash equivalents at beginning of period | 52,652 |
| | 84,933 |
| | 173,608 |
|
| Cash and cash equivalents at end of period | $ | 52,056 |
| | $ | 52,652 |
| | $ | 84,933 |
|
See accompanying Footnotes to Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIESCritical Accounting Policies and Estimates
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Noncontrolling Interests | | Total Equity |
| (In thousands, except shares) | Shares | | Amount | |
| Balance at January 1, 2015 | 10,965,606 |
| | $ | 110 |
| | $ | 889,284 |
| | $ | (734,409 | ) | | $ | (12,807 | ) | | $ | (6,565 | ) | | $ | 99 |
| | $ | 135,712 |
|
Net (loss) income (a) | — |
| | — |
| | — |
| | (25,122 | ) | | — |
| | — |
| | 4 |
| | (25,118 | ) |
| Translation adjustment | — |
| | — |
| | — |
| | — |
| | (1,974 | ) | | — |
| | (22 | ) | | (1,996 | ) |
| Stock-based compensation expense | — |
| | — |
| | 5,486 |
| | — |
| | — |
| | — |
| | — |
| | 5,486 |
|
| Vesting of restricted stock units/awards | 29,191 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Purchase of treasury shares | (296,488 | ) | | (3 | ) | | — |
| | — |
| | — |
| | (1,986 | ) | | — |
| | (1,989 | ) |
| Restricted stock cancelled for employee minimum income taxes | (6,208 | ) | | — |
| | (126 | ) | | — |
| | — |
| | — |
| | — |
| | (126 | ) |
| Issuance of stock for the ESPP | 10,588 |
| | — |
| | 215 |
| | — |
| | — |
| | — |
| | — |
| | 215 |
|
| Purchase of subsidiary shares from noncontrolling interest | — |
| | — |
| | (144 | ) | | — |
| | — |
| | — |
| | — |
| | (144 | ) |
Balance at December 31, 2015 (b) | 10,702,689 |
| | 107 |
| | 894,715 |
| | (759,531 | ) | | (14,781 | ) | | (8,551 | ) | | 81 |
| | 112,040 |
|
Net (loss) income (a) | — |
| | — |
| | — |
| | (65,148 | ) | | — |
| | — |
| | 421 |
| | (64,727 | ) |
| Translation adjustment | — |
| | — |
| | — |
| | — |
| | (6,967 | ) | | — |
| | 7 |
| | (6,960 | ) |
| Stock-based compensation expense | — |
| | — |
| | 3,267 |
| | — |
| | — |
| | — |
| | — |
| | 3,267 |
|
| Vesting of restricted stock units/awards | 40,495 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Purchase of treasury shares | (155,304 | ) | | (1 | ) | | — |
| | — |
| | — |
| | (963 | ) | | — |
| | (964 | ) |
| Restricted stock cancelled for employee minimum income taxes | (4,973 | ) | | — |
| | (22 | ) | | — |
| | — |
| | — |
| | — |
| | (22 | ) |
| Issuance of stock for the ESPP | 4,100 |
| | — |
| | 23 |
| | — |
| | — |
| | — |
| | — |
| | 23 |
|
| Issuance of stock in bond exchange | 1,205,440 |
| | 12 |
| | 1,215 |
| | — |
| | — |
| | 9,514 |
| | — |
| | 10,741 |
|
| Balance at December 31, 2016 | 11,792,447 |
| | 118 |
| | 899,198 |
| | (824,679 | ) | | (21,748 | ) | | — |
| | 509 |
| | 53,398 |
|
| Net (loss) income | — |
| | — |
| | — |
| | (30,242 | ) | | — |
| | — |
| | 865 |
| | (29,377 | ) |
| Translation adjustment | — |
| | — |
| | — |
| | — |
| | 2,869 |
| | — |
| | (35 | ) | | 2,834 |
|
| Dividend payment to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (100 | ) | | (100 | ) |
| Stock-based compensation expense | — |
| | — |
| | 2,552 |
| | — |
| | — |
| | — |
| | — |
| | 2,552 |
|
| Exercise of stock options | 15,000 |
| | — |
| | 46 |
| | — |
| | — |
| | — |
| | — |
| | 46 |
|
| Vesting of restricted stock units/awards | 115,576 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Employee purchases of unregistered shares of common stock | 120,567 |
| | 1 |
| | 1,572 |
| | — |
| | — |
| | — |
| | — |
| | 1,573 |
|
| Restricted stock cancelled for employee minimum income taxes | (23,889 | ) | | — |
| | (120 | ) | | — |
| | — |
| | — |
| | — |
| | (120 | ) |
| Balance at December 31, 2017 | 12,019,701 |
| | $ | 120 |
| | $ | 903,247 |
| | $ | (854,921 | ) | | $ | (18,879 | ) | | $ | — |
| | $ | 1,239 |
| | $ | 30,806 |
|
| |
(a) | Net income attributable to noncontrolling interests for 2015 excludes less than $(0.1) million related to the redeemable noncontrolling interests, which is reported in the mezzanine equity section of the Consolidated Balance Sheet. |
| |
(b) | The figures for 2015, set forth in the tables above have been retroactively adjusted to reflect the one-for-fifteen reverse stock split completed on February 4, 2016. |
See accompanying Footnotes to Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
General Description and Principles of Consolidation
ION Geophysical Corporation and its subsidiaries offer a full suite of services and products for seismic data acquisition and processing. The consolidated financial statements include the accounts of ION Geophysical Corporation and its majority-owned subsidiaries (collectively referred to as the “Company” or “ION”). Intercompany balances and transactions have been eliminated. Certain reclassifications were made to previously reported amounts in the consolidated financial statements and notes thereto to make them consistent with the current presentation format.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles generally accepted in the United States of America requires management to make choices between acceptable methods of accounting and to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, at the datedisclosure of the financial statementscontingent assets and liabilities, and the reported amounts of revenuesrevenue and expenses during the reporting period. Significantexpenses. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risk and uncertainties. Management’s estimates are made at discrete points in time based on the relevant market information. These estimates may be subjective in nature and involve uncertainties and mattersinformation available at the end of judgment and, therefore, cannot be determined with precision. Areas involving significant estimates include, but are not limited to, accounts and unbilled receivables, inventory valuation, sales forecasts related to multi-client data libraries, goodwill and intangible asset valuation and deferred taxes. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
The Company considerseach period. We believe that all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. At December 31, 2017judgments and 2016, there was $0.4 million and $0.8 million, respectively, of long-term and short-term restricted cashestimates used to secure standby and commercial letters of credit, which is included within Long-term and Other Current Assets.
Accounts and Unbilled Receivables
Accounts and unbilled receivables are recorded at cost, less the related allowance for doubtful accounts. The Company considers current information and events regarding the customers’ ability to repay their obligations, such as the length of time the receivable balance is outstanding, the customers’ credit worthiness and historical experience. Unbilled receivables relate to revenues recognized on multi-client surveys, imaging services and ocean bottom acquisition services on a proportionate basis, and on licensing of multi-client data libraries for which invoices have not yet been presented to the customer.
Inventories
Inventories are statedprepare our financial statements were reasonable at the lower of cost (primarily first-in, first-out method) or market. The Company provides reserves for estimated obsolescence or excess inventory equaltime we made them, but circumstances may change requiring us to the difference between cost of inventory and its estimated market value based upon assumptions about future demand for the Company’s products, market conditions and the risk of obsolescence driven by new product introductions.
Property, Plant, Equipment and Seismic Rental Equipment
Property, plant, equipment and seismic rental equipment are stated at cost. Depreciation expense is provided straight-line over the following estimated useful lives:
|
| |
| Years |
Machinery and equipment | 3-7 |
Buildings | 5-25 |
Seismic rental equipment | 3-5 |
Leased equipment and other | 3-10 |
Expenditures for renewals and betterments are capitalized; repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss is reflectedrevise our estimates in operating expenses.
The Company evaluates the recoverability of long-lived assets, including property, plant, equipment and seismic rental equipment, when indicators of impairment exist, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. Impairment in the carrying value of an asset held for use is recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value.
Multi-Client Data Library
The multi-client data library consists of seismic surveysways that are offered for licensing to customers on a non-exclusive basis. The capitalized costs include costs paid to third parties for the acquisition of data and related activities associated with the data creation activity and direct internal processing costs, such as salaries, benefits, computer-related expenses and other costs incurred for seismic data project design and management. For 2017, 2016 and 2015, the Company capitalized, as part of its multi-client data library, $12.7 million, $6.6 million and $6.1 million, respectively, of direct internal processing costs. At December 31, 2017 and 2016, multi-client data library costs and accumulated amortization consisted of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Gross costs of multi-client data creation | $ | 939,077 |
| | $ | 906,306 |
|
| Less accumulated amortization | (727,872 | ) | | (680,770 | ) |
| Less impairments to multi-client data library | (121,905 | ) | | (119,601 | ) |
| Total | $ | 89,300 |
| | $ | 105,935 |
|
The Company’s method of amortizing the costs of an in-process multi-client data library (the period during which the seismic data is being acquired and/or processed, referred to as the “New Venture” phase) consists of determining the percentage of actual revenue recognized to the total estimated revenues (which includes both revenues estimated to be realized during the New Venture phase and estimated revenues from the licensing of the resulting “on-the-shelf” data survey) and multiplying that percentage by the total cost of the project (the sales forecast method). The Company considers a multi-client data survey to be complete when all work on the creation of the seismic data is finished and that data survey is available for licensing. Once a multi-client data survey is complete, the data survey is considered “on-the-shelf” and the Company’s method of amortization is then the greater of (i) the sales forecast method or (ii) the straight-line basis over a four-year period. The greater amount of amortization resulting from the sales forecast method or the straight-line amortization policy is applied on a cumulative basis at the individual survey level. Under this policy, the Company first records amortization using the sales forecast method. The cumulative amortization recorded for each survey is then compared with the cumulative straight-line amortization. The four-year period utilized in this cumulative comparison commences when the data survey is determined to be complete. If the cumulative straight-line amortization is higher for any specific survey, additional amortization expense is recorded, resulting in accumulated amortization being equal to the cumulative straight-line amortization for such survey. The Company has determined the amortization period of four years based upon its historical experience that indicates that the majority of its revenues from multi-client surveys are derived during the acquisition and processing phases and during four years subsequent to survey completion.
The Company estimates the ultimate revenue expected to be derived from a particular seismic data survey over its estimated useful economic life to determine the costs to amortize, if greater than straight-line amortization. That estimate is made by the Company at the project’s initiation. For a completed multi-client survey, the Company reviews the estimate quarterly. If during any such review, the Company determines that the ultimate revenue for a survey is expected tocould be materially adverse to our results of operations and financial condition. We describe our significant accounting policies more or less than the original estimate of ultimate revenue for such survey, the Company decreases or increases (as the case may be) the amortization rate attributable to the future revenue from such survey. In addition,fully in connection with such reviews, the Company evaluates the recoverability of the multi-client data library, and, if required under Accounting Standards Codification (“ASC”) 360-10 “Impairment and Disposal of Long-Lived Assets,”Footnote 1 records an impairment charge with respect to such data.
Equity Method Investment
In accordance with ASC 810 “Consolidation,Summary of Significant Accounting Policies” the Company determined that INOVA Geophysical is a variable interest entity because the Company’s voting rights with respect to INOVA Geophysical are not proportionate to its ownership interest and substantially all of INOVA Geophysical’s activities are conducted on behalf of the Company and BGP, a related party to the Company. The Company is not the primary beneficiary of INOVA Geophysical because it does not have the power to direct the activities of INOVA Geophysical that most significantly impact its economic performance. Accordingly, the Company does not consolidate INOVA Geophysical, but instead accounts for INOVA Geophysical using the equity method of accounting. Under this method, an investment is carried at the acquisition cost, plus the Company’s equity in undistributed earnings or losses since acquisition, less distributions received.
At December 31, 2014, the Company fully impaired its investment in INOVA reducing its equity investment in INOVA and its share of INOVA’s accumulated other comprehensive loss, both to zero. As of December 31, 2017, the carrying value of this investment remains zero. The Company no longer records its equity in losses or earnings and has no obligation, implicit or explicit, to fund any expenses of INOVA Geophysical.
Noncontrolling Interests
The Company has non-redeemable noncontrolling interests. Non-redeemable noncontrolling interests in majority-owned affiliates are reported as a separate component of equity in “Noncontrolling interests” in the Consolidated Balance Sheets. Net loss in the Consolidated Statements of Operations is attributable to noncontrolling interests. The activity for this noncontrolling interest relates to proprietary processing projects in Brazil.
Goodwill and Other Intangible Assets
Goodwill is allocated to reporting units, which are either the operating segment or one reporting level below the operating segment. For purposes of performing the impairment test for goodwill as required by ASC 350 “Intangibles — Goodwill and Other,” (“ASC 350”) the Company established the following reporting units: E&P Technology & Services, Optimization Software & Services, Devices and Ocean Bottom Seismic Services.
In accordance with ASC 350, the Company is required to evaluate the carrying value of its goodwill at least annually for impairment, or more frequently if facts and circumstances indicate that it is more likely than not impairment has occurred. The Company formally evaluates the carrying value of its goodwill for impairment as of December 31 for each of its reporting units. The Company first performs a qualitative assessment by evaluating relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. If the Company is unable to conclude qualitatively that it is more likely than not that a reporting unit’s fair value exceeds its carrying value, then it will use a two-step quantitative assessment of the fair value of a reporting unit. To determine the fair value of these reporting units, the Company uses a discounted future returns valuation model, which includes a variety of level 3 inputs. The key inputs for the model include the operational three-year forecast for the Company and the then-current market discount factor. Additionally, the Company compares the sum of the estimated fair values of the individual reporting units less consolidated debt to the Company’s overall market capitalization as reflected by the Company’s stock price. If the carrying value of a reporting unit that includes goodwill is determined to be more than the fair value of the reporting unit, there exists the possibility of impairment of goodwill. An impairment loss of goodwill is measured in two steps by first allocating the fair value of the reporting unit to net assets and liabilities including recorded and unrecorded intangible assets to determine the implied carrying value of goodwill. The next step is to measure the difference between the carrying value of goodwill and the implied carrying value of goodwill, and, if the implied carrying value of goodwill is less than the carrying value of goodwill, an impairment loss is recorded equal to the difference. See further discussion below at Footnote 9 “Goodwill.”
The intangible assets, other than goodwill, relate to customer relationships. The Company amortizes its customer relationship intangible assets on an accelerated basis over a 10-Footnotes to 15-year period, using the undiscounted cash flows of the initial valuation models. The Company uses an accelerated basis as these intangible assets were initially valued using an income approach, with an attrition rate that resulted in a pattern of declining cash flows over a 10- to 15-year period.
Following the guidance of ASC 360 “Impairment and Disposal of Long-Lived Assets,” the Company reviews the carrying values of these intangible assets for impairment if events or changes in the facts and circumstances indicate that their carrying value may not be recoverable. Any impairment determined is recorded in the current period and is measured by comparing the fair value of the related asset to its carrying value. See further discussion below at Footnote 8 “Details of Selected Balance Sheet Accounts — Intangible AssetsConsolidated Financial Statements.”
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, short-term investments, accounts and unbilled receivables, accounts payable, accrued multi-client data library royalties and long-term debt. The carrying amounts of cash and cash equivalents, short-term investments, accounts and unbilled receivables, accounts payable and accrued multi-client data library royalties approximate fair value due to the highly liquid nature of these instruments. The fair value of the long-term debt is calculated using a market approach based upon Level 1 inputs, including an active market price.
Revenue RecognitionSenior Secured Notes
As of December 31, 2018, ION Geophysical Corporation’s 9.125% Senior Secured Second Priority Notes due December 2021 (the “Second Lien Notes”) had an outstanding principal amount of $120.6 million. Prior to its early redemption, ION Geophysical Corporation’s 8.125% Senior Secured Second-Priority Notes due May 2018 (the “Third Lien Notes”) had an aggregate principal amount of $28.5 million. In March 2018, ION Geophysical Corporation obtained consent from a majority of the Second Lien Notes holders and from PNC to redeem, in full, the Third Lien Notes prior to their stated maturity. On March 26, 2018, ION Geophysical Corporation redeemed the Third Lien Notes by paying the then outstanding principal amount, plus all accrued and unpaid interest through the redemption date.
The Company derives revenue fromSecond Lien Notes remain outstanding and are senior secured second-priority obligations guaranteed by the sale of (i) multi-client and proprietary surveys, licenses of “on-the-shelf” data libraries and imaging services within its E&P Technology & Services segment; (ii) seismic data acquisition systems and other seismic equipment; (iii) seismic command and control software systems and software solutions for operations management within its E&P Operations Optimization segment; and (iv) fully-integrated Ocean Bottom Seismic Services (“OBS”) solutions that include survey design and planning and data acquisition within its Ocean Bottom Seismic Services segment. All revenues of the E&P Technology & Services and Ocean Bottom Seismic Services segmentsMaterial U.S. Subsidiaries and the services component of revenues forMexican Subsidiary. Interest on the Optimization Software & Services group within the E&P Operations Optimization segment are classified as services revenues. All other revenues are classified as product revenues.
Multi-Client and Proprietary Surveys, and Imaging Services — As multi-client surveys are being designed, acquired and/or processed, the New Venture phase, the Company enters into non-exclusive licensing arrangements with its customers. License revenues from these New Venture survey projects are recognized during the New Venture phase as the seismic data is acquired and/or processed on a proportionate basis as work is performed. Under this method, the Company recognizes revenues based upon quantifiable measures of progress, such as kilometers acquired or days processed. Upon completion of a multi-client seismic survey, the seismic survey is considered “on-the-shelf,” and licenses to the survey data are granted to customers on a non-exclusive basis. Revenues on licenses of completed multi-client data surveys are recognized when (a) a signed final master geophysical data license agreement and accompanying supplemental license agreement are returned by the customer; (b) the purchase price for the license is fixed or determinable; (c) delivery or performance has occurred; (d) and no significant uncertainty exists as to the customer’s obligation, willingness or ability to pay. In limited situations, the Company has provided the customer with a right to exchange seismic data for another specific seismic data set. In these limited situations, the Company recognizes revenueSecond Lien Notes accrues at the earlierrate of 9.125% per annum and is payable semiannually in arrears on June 15 and December 15 of each year during their term, except that the customer exercising its exchange right or the expiration of the customer’s exchange right.interest payment otherwise payable on June 15, 2021 will be payable on December 15, 2021.
The Company also performs seismic surveys under contractsApril 2016 indenture governing the Second Lien Notes contains certain covenants that, among other things, limits or prohibits our ability and the ability of our restricted subsidiaries to specific customers, wherebytake certain actions or permit certain conditions to exist during the seismic data is owned by those customers. Revenue is recognized as the seismic data is acquired and/or processed on a proportionate basis as work is performed. The Company uses quantifiable measures of progress consistent with its multi-client surveys.
Revenues from all imaging and other services are recognized when (a) persuasive evidence of an arrangement exists, (b) the price is fixed or determinable, and (c) collectability is reasonably assured. Revenues from contract services performed on a dayrate basis are recognized as the service is performed.
Acquisition Systems and Other Seismic Equipment — For the sales of acquisition systems and other seismic equipment, the Company follows the requirements of ASC 605-10 “Revenue Recognition” and recognizes revenue when (a) evidence of an arrangement exists; (b) the price to the customer is fixed and determinable; (c) collectability is reasonably assured; and (d) the acquisition system or other seismic equipment is delivered to the customer and risk of ownership has passed to the customer, or, in the case in which a substantive customer-specified acceptance clause exists in the contract, the later of delivery or when the customer-specified acceptance is obtained.
Software — For the sales of navigation, survey and quality control software systems, the Company follows the requirements of ASC 985-605 “Software Revenue Recognition” (“ASC 985-605”). The Company recognizes revenue from sales of these software systems when (a) evidence of an arrangement exists; (b) the price to the customer is fixed and determinable; (c) collectability is reasonably assured; and (d) the software is delivered to the customer and risk of ownership has passed to the customer, or, in the limited case in which a substantive customer-specified acceptance clause exists, the later of delivery or when the customer-specified acceptance is obtained. These arrangements generally include the Company providing related services, such as training courses, engineering services and annual software maintenance. The Company allocates revenue to each element of the arrangement based upon vendor-specific objective evidence (“VSOE”) of fair value of the element or, if VSOE is not available for the delivered element, the residual method is used.
In addition to perpetual software licenses, the Company offers time-based software licenses. For time-based licenses, the Company recognizes revenue ratably over the contract term, which is generally two to five years.
Ocean Bottom Seismic Services — The Company recognizes revenues as they are realized and earned and can be reasonably measured, based on contractual day rates or on a fixed-price basis, and when collectability is reasonably assured. In connection with acquisition contracts, the Company may receive revenues for preparation and mobilization of equipment and personnel or for capital improvements to vessels. The Company defers the revenues earned and incremental costs incurred that are directly related to contract preparation and mobilization and recognizes such revenues and costs over the primary contract term of the acquisition project. The Company usesSecond Lien Notes, including among other things, incurring additional indebtedness in excess of permitted indebtedness, creating liens, paying dividends and making other distributions in respect of our capital stock, redeeming our 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 ratioSecond Lien Notes Indenture are subject to certain exceptions and qualifications. All of square kilometers acquired asour subsidiaries are currently restricted subsidiaries.
As of December 31, 2018, we are in compliance with the covenants with respect to the Second Lien Notes.
On or after December 15, 2019, we may on one or more occasions redeem all or a percentagepart of the total square kilometers expected to be acquired overSecond Lien Notes at the primary termredemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Second Lien Notes redeemed during the twelve-month period beginning on December 15th of the contractyears indicated below:
|
| | |
| Date | | Percentage |
| 2019 | | 105.500% |
| 2020 | | 103.500% |
| 2021 and thereafter | | 100.000% |
Meeting our Liquidity Requirements
As of December 31, 2018, our total outstanding indebtedness (including capital lease obligations) was approximately $121.7 million, consisting primarily of approximately $120.6 million outstanding Second Lien Notes (maturing in December 2021) and $2.9 million of capital leases, partially offset by $2.9 million of debt issuance costs. As of December 31, 2018, there was no outstanding indebtedness under our Credit Facility.
For 2018, total capital expenditures, including investments in our multi-client data library, were $29.8 million. We currently expect that our capital expenditures, including investments in our multi-client data library, will be a range of $40.0 million to recognize deferred revenues$60.0 million in 2019. Investments in our multi-client data library are dependent upon the timing of our New Venture projects and amortize,the availability of underwriting by our customers.
We believe that our existing cash balance, cash from operations and undrawn availability under our Credit Facility will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, as described at Part I, Item 3. “Legal Proceedings,” there are possible scenarios involving an outcome in cost of services, the costs related to contract preparationWesternGeco lawsuit that could materially and mobilization. The Company recognizes the costs of relocating vessels without contracts to more promising market sectors as such costs are incurred. Upon completion of acquisition contracts, the Company recognizes in earnings any demobilization fees received and expenses incurred.adversely affect our liquidity.
Cash Flow from Operations
Multiple-element ArrangementsNet cash provided by operating activities was $7.1 million — When separate elements (such as an acquisition system, other seismic equipment and/or imaging and acquisition services) are contained in a single sales arrangement, or in related arrangements with the same customer, the Company follows the requirements of ASC 605-25 “for Accounting for Multiple-Element Revenue Arrangement”2018 (“ASC 605-25”).
This guidance requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The Company allocates arrangement consideration to each deliverable qualifying as a separate unit of accounting in an arrangement based on its relative selling price. The Company determines its selling price using VSOE, if it exists, or otherwise third-party evidence (“TPE”). If neither VSOE nor TPE of selling price exists for a unit of accounting, the Company uses estimated selling price (“ESP”). The Company generally expects that it will not be able to establish TPE due to the nature of the markets in which the Company competes, and, as such, the Company typically will determine its selling price using VSOE or, if not available, ESP. VSOE is generally limited to the price charged when the same or similar product is sold on a standalone basis. If a product is seldom sold on a standalone basis, it is unlikely that the Company can determine VSOE for the product.
The objective of ESP is to determine the price at which the Company would transact if the product were sold by the Company on a standalone basis. The Company’s determination of ESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. Specifically, the Company considers the anticipated margin on the particular deliverable, the selling price and profit margin for similar products and the Company’s ongoing pricing strategy and policies.
Product Warranty — The Company generally warrants that its manufactured equipment will be free from defects in workmanship, materials and parts. Warranty periods generally range from 30 days, compared to three years from the date of original purchase, depending on the product. The Company provides for estimated warranty as a charge to costs of sales at the time of sale. 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). In limited cases, the Company has provided indemnification of customers for potential intellectual property infringement claims relating to products sold.
Research, Development and Engineering
Research, development and engineering costs primarily relate to activities that are designed to improve the quality of the subsurface image and overall acquisition economics of the Company’s customers. The costs associated with these activities are expensed as incurred. These costs include prototype material and field testing expenses, along with the related salaries and stock-based compensation, facility costs, consulting fees, tools and equipment usage and other miscellaneous expenses associated with these activities.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC 718, “Compensation – Stock Compensation” (“ASC 718”). The Company estimates the value of stock option awards on the date of grant using the Black-Scholes option pricing model. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. The Company recognizes stock-based compensation on the straight-line basis over the service period of each award (generally the award’s vesting period).
Income Taxes
Income taxes are accounted for under the liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, including operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized (see Footnote 5 “Income Taxes”). The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Debt Issuance Costs
In the first quarter of 2016, the Company adopted Accounting Standards Update (ASU) 2015-03, which requires entities to present debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability on the balance sheet as opposed to being presented as a deferred charge, and ASU 2015-15, which adds paragraphs to ASU 2015-03 indicating that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to
line of credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement.
For the years ended December 31, 2017 and 2016, unamortized debt issuance costs related to the Company’s long-term debt are reported on the Consolidated Balance Sheets as a reduction of the carrying value of the related debt, except for the unamortized debt issuance costs related to the Company’s Credit Facility which are reported in “Other Assets” on the Consolidated Balance Sheets ($0.2 million for 2017 and $1.2 million for 2016). Prior to adoption, the Company reported all unamortized debt issuance costs in “Other Assets” on the Consolidated Balance Sheets.
Comprehensive Net Loss
Comprehensive net loss as shown in the Consolidated Statements of Comprehensive Loss and the balance in Accumulated Other Comprehensive Loss as shown in the Consolidated Balance Sheets as of December 31, 2017 and 2016, consist of foreign currency translation adjustments.
Foreign Currency Gains and Losses
Assets and liabilities of the Company’s subsidiaries operating outside the United States that have a functional currency other than the U.S. dollar have been translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Results of foreign operations have been translated using the average exchange rate during the periods of operation. Resulting translation adjustments have been recorded as a component of Accumulated Other Comprehensive Loss. Foreign currency transaction gains and losses are included in the Consolidated Statements of Operations in Other income as they occur. Total foreign currency transaction losses were $1.6 million, $3.3 million and $2.127.6 million for 2017. The decrease was driven by lower revenue activity compared to 2017, payment of $3.75 million damages payment for the WesternGeco lawsuit, reductions in accounts payable and accrued expenses and increase in our combined accounts and unbilled receivable balance.
Net cash provided by operating activities was $27.6 million for 2017, compared to $1.0 million for 2016. The increase in net cash provided by operations was due to a significant increase in New Venture revenues in 2017, compared to 2016 and due to $20.8 million damages payment in 2016 for the WesternGeco lawsuit, which was partially offset by increases in unbilled receivables as of December 31, 2017.
Cash Flow Used In Investing Activities
Net cash flow used in investing activities was $29.8 million for 2018, compared to 2016$24.8 million for 2017. The principal uses of cash in our investing activities during 2018 were $28.3 million of investments in our multi-client data library and 2015$1.5 million of investments in property, plant and equipment.
Net cash flow used in investing activities was $24.8 million for 2017, compared to $13.6 million for 2016. The principal uses of cash in our investing activities during 2017 were $23.7 million of investments in our multi-client data library and $1.1 million of investments in property, plant and equipment.
Cash Flow Used in Financing Activities
Net cash flow provided by financing activities was $3.8 million for 2018, respectively.compared to $3.6 million of net cash flow used in financing activities for 2017. The net cash flow provided by financing activities during 2018 was primarily related to $47.0 million of net cash received from our public equity offering, partially offset by $30.8 million of payments on long-term debt including equipment capital leases and a $10.0 million repayment of our Credit Facility.
ConcentrationNet cash flow used in financing activities was $3.6 million for 2017, compared to $21.6 million of Foreign Sales Risk
net cash flow used in financing activities for 2016. The majoritynet cash flow used in financing activities during 2017 was primarily related to $4.8 million of the Company’s foreign sales are denominated in U.S. dollars. For 2017, 2016 and 2015, international sales comprised 76%, 78% and 66%, respectively,payments on long-term debt related to equipment capital leases, partially offset by $1.6 million of total net revenues. The significant decline in oil prices that began in the fourth quarter of 2014 have continued to impact the global market throughout 2015 and 2016. Since 2008, global economic problems and uncertainties have generally increased in scope and nature. To the extent that world events or economic conditions negatively affect the Company’s future sales to customers in many regions of the world, as well as the collectability of the Company’s existing receivables, the Company’s future results of operations, liquidity and financial condition would be adversely affected.proceeds from employee stock purchases.
(2) SegmentInflation and Geographic InformationSeasonality
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 typically in the second half of our fiscal year.
Future Contractual Obligations
The Company evaluates and reviews its results based on three business segments: E&P Technology & Services, E&P Operations Optimization, and Ocean Bottom Seismic Services. The Company measures segment operating results based on income (loss) from operations.
A summaryfollowing table sets forth estimates of segment information followsfuture payments of our consolidated contractual obligations, as of December 31, 2018 (in thousands):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net revenues: | | | | | |
| E&P Technology & Services: | | | | | |
| New Venture | $ | 100,824 |
| | $ | 27,362 |
| | $ | 48,294 |
|
| Data Library | 40,016 |
| | 39,989 |
| | 63,326 |
|
| Total multi-client revenues | 140,840 |
| | 67,351 |
| | 111,620 |
|
| Imaging Services | 16,409 |
| | 25,538 |
| | 45,630 |
|
| Total | $ | 157,249 |
| | $ | 92,889 |
| | $ | 157,250 |
|
| E&P Operations Optimization: | | | | | |
| Devices | $ | 23,610 |
| | $ | 26,746 |
| | $ | 36,269 |
|
| Optimization Software & Services | 16,695 |
| | 16,756 |
| | 27,994 |
|
| Total | $ | 40,305 |
| | $ | 43,502 |
| | $ | 64,263 |
|
| Ocean Bottom Seismic Services | $ | — |
| | $ | 36,417 |
| | $ | — |
|
| Total | $ | 197,554 |
| | $ | 172,808 |
| | $ | 221,513 |
|
| Gross profit (loss): | | | | | |
| E&P Technology & Services | $ | 65,196 |
| | $ | 4,708 |
| | $ | 13,508 |
|
| E&P Operations Optimization | 20,076 |
| | 21,745 |
| | 33,995 |
|
| Ocean Bottom Seismic Services | (9,633 | ) | | 9,579 |
| | (39,500 | ) |
| Total | $ | 75,639 |
| | $ | 36,032 |
| | $ | 8,003 |
|
| Gross margin: | | | | | |
| E&P Technology & Services | 41 | % | | 5 | % | | 9 | % |
| E&P Operations Optimization | 50 | % | | 50 | % | | 53 | % |
| Ocean Bottom Seismic Services | — | % | | 26 | % | | — | % |
| Total | 38 | % | | 21 | % | | 4 | % |
| Loss from operations: | | | | | |
| E&P Technology & Services | $ | 42,505 |
| | $ | (16,446 | ) | | $ | (24,941 | ) |
| E&P Operations Optimization | 8,022 |
| | 9,652 |
| | 20,131 |
|
| Ocean Bottom Seismic Services | (16,259 | ) | | (1,756 | ) | | (55,080 | ) |
| Support and other | (42,967 | ) | | (34,621 | ) | | (40,742 | ) |
| Loss from operations | (8,699 | ) | | (43,171 | ) | | (100,632 | ) |
| Interest expense, net | (16,709 | ) | | (18,485 | ) | | (18,753 | ) |
| Other income (expense) | (3,945 | ) | | 1,350 |
| | 98,275 |
|
| Loss before income taxes | $ | (29,353 | ) | | $ | (60,306 | ) | | $ | (21,110 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Contractual Obligations | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| Long-term and short-term debt | $ | 121,728 |
| | $ | 1,159 |
| | $ | 120,569 |
| | $ | — |
| | $ | — |
|
| Interest on long-term debt obligations | 34,901 |
| | 11,344 |
| | 23,236 |
| | 321 |
| | — |
|
| Equipment capital lease obligations | 2,938 |
| | 1,069 |
| | 1,869 |
| | — |
| | — |
|
| Operating leases | 68,938 |
| | 13,248 |
| | 34,753 |
| | 13,914 |
| | 7,023 |
|
| Purchase obligations | 2,908 |
| | 2,908 |
| | — |
| | — |
| | — |
|
| Total | $ | 231,413 |
| | $ | 29,728 |
| | $ | 180,427 |
| | $ | 14,235 |
| | $ | 7,023 |
|
The long-term and short-term debt at December 31, 2018 included $120.6 million of principal indebtedness outstanding under our Second Lien Notes that mature in December 2021. The $2.9 million of equipment capital lease obligations relates to Imaging Services’ financing of computer and other equipment purchases. |
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Depreciation and amortization (including multi-client data library): | | | | | |
| E&P Technology & Services | $ | 53,663 |
| | $ | 44,100 |
| | $ | 51,014 |
|
| E&P Operations Optimization | 1,349 |
| | 1,780 |
| | 2,869 |
|
| Ocean Bottom Seismic Services | 7,001 |
| | 7,511 |
| | 6,158 |
|
| Support and other | 1,681 |
| | 1,919 |
| | 2,270 |
|
| Total | $ | 63,694 |
| | $ | 55,310 |
| | $ | 62,311 |
|
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Total assets: | | | |
| E&P Technology & Services | $ | 156,555 |
| | $ | 159,965 |
|
| E&P Operations Optimization | 74,361 |
| | 76,992 |
|
| Ocean Bottom Seismic Services | 20,828 |
| | 29,908 |
|
| Support and other | 49,325 |
| | 46,351 |
|
| Total | $ | 301,069 |
| | $ | 313,216 |
|
A summaryThe preparation of totalconsolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make choices between acceptable methods of accounting and to use judgment in making estimates and assumptions that affect the reported amounts of assets by geographic area follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Total assets by geographic area: | | | |
| North America | $ | 116,598 |
| | $ | 145,013 |
|
| Europe | 51,876 |
| | 61,329 |
|
| Middle East | 70,308 |
| | 72,984 |
|
| Latin America | 55,661 |
| | 23,891 |
|
| Other | 6,626 |
| | 9,999 |
|
| Total | $ | 301,069 |
| | $ | 313,216 |
|
A summaryand liabilities, disclosure of fixedcontingent assets less accumulated depreciation by geographic area as follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Total fixed assets less accumulated deprecation by geographic area: | | | |
| North America | $ | 10,609 |
| | $ | 17,637 |
|
| Europe | 20,725 |
| | 27,714 |
|
| Middle East | 20,543 |
| | 21,370 |
|
| Latin America | 170 |
| | 202 |
|
| Other | 106 |
| | 565 |
|
| Total | $ | 52,153 |
| | $ | 67,488 |
|
Intersegment sales are insignificant for all periods presented. Support and other assets include all assets specifically related to support personnel and operation and a majority of cash and cash equivalents. Depreciation and amortization expense is allocated to segments based upon use of the underlying assets.
A summary of net revenues by geographic area follows (in thousands):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net revenues by geographic area: | | | | | |
| Latin America | $ | 68,241 |
| | $ | 24,090 |
| | $ | 16,406 |
|
| North America | 48,120 |
| | 38,005 |
| | 74,634 |
|
| Europe | 44,930 |
| | 41,674 |
| | 72,577 |
|
| Asia Pacific | 18,896 |
| | 16,226 |
| | 19,135 |
|
| Commonwealth of Independent States | 8,222 |
| | 1,929 |
| | 11,008 |
|
| Africa | 6,837 |
| | 41,417 |
| | 13,182 |
|
| Middle East | 2,308 |
| | 9,467 |
| | 14,571 |
|
| Total | $ | 197,554 |
| | $ | 172,808 |
| | $ | 221,513 |
|
Net revenues are attributed to geographic areas on the basis of the ultimate destination of the equipment or service, if known, or the geographic area imaging services are provided. If the ultimate destination of such equipment is not known, net revenues are attributed to the geographic area of initial shipment.
(3) Long-term Debt and Lease Obligations
|
| | | | | | | |
| | December 31, |
| Obligations (in thousands) | 2017 | | 2016 |
| Senior secured second-priority lien notes (maturing December 15, 2021) | $ | 120,569 |
| | $ | 120,569 |
|
| Senior secured third-priority lien notes (maturing May 15, 2018) | 28,497 |
| | 28,497 |
|
| Revolving credit facility (maturing August 22, 2019) | 10,000 |
| | 10,000 |
|
| Equipment capital leases | 279 |
| | 3,446 |
|
| Other debt | 1,382 |
| | 1,415 |
|
Costs associated with issuances of debt (1) | (3,983 | ) | | (5,137 | ) |
| Total | 156,744 |
| | 158,790 |
|
| Current portion of long-term debt and lease obligations | (40,024 | ) | | (14,581 | ) |
| Non-current portion of long-term debt and lease obligations | $ | 116,720 |
| | $ | 144,209 |
|
| |
(1)
| Represents debt issuance costs presented as a direct deduction from the carrying amount of the associated debt liability. |
Revolving Credit Facility
In August 2014, ION and its material U.S. subsidiaries, GX Technology Corporation, ION Exploration Products (U.S.A.), Inc. and I/O Marine Systems, Inc. (collectively, the “Subsidiary Borrowers”), and together with the Company, collectively, the “Borrowers”) entered into a Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), as agent (the “Original Credit Agreement”), which was amended by the First Amendment to Revolving Credit and Security Agreement in August 2015 (the “First Amendment”)liabilities, and the Second Amendment (as defined below) (the Original Credit Agreement, as amended by the First Amendment,reported amounts of revenue and the Second Amendment, the “Credit Facility”).
expenses. The Credit Facility is available to provide for the Borrowers’ general corporate needs, including working capital requirements, capital expenditures, surety deposits and acquisition financing. The maximum amount of the revolving line of credit under the Credit Facility is the lesser of $40.0 million or a monthly borrowing base.
On April 28, 2016, the Borrowers and PNC entered into a second amendment (the “Second Amendment”) to the Credit Facility. The Second Amendment, among other things:
increased the applicable margin for loans by 0.50% per annum (from 2.50% per annum to 3.00% per annum for alternate base rate loans and from 3.50% per annum to 4.00% per annum for LIBOR-based loans);
increased the minimum excess availability threshold to avoid triggering the agent’s rights to exercise dominion over cash and deposit accounts and increases certain of the thresholds upon which such dominion ceases;
increased the minimum liquidity threshold to avoid triggering the Company’s obligation to calculate and comply with the existing fixed charge coverage ratio and increased certain of the thresholds upon which such required calculation and compliance cease;
established a reserve that reduced the amount available to be borrowed by the aggregate amount owing under all Third Lien Notes that remain outstanding (if any) on or after February 14, 2018 (i.e., 90 days prior to the stated maturity of the Third Lien Notes);
increased the maximum amount of certain permitted junior indebtedness to $200.0 million (from $175.0 million);
incorporated technical and conforming changes to reflect that the Second Lien Notes and the remaining Third Lien Notes (and any permitted refinancing thereof or subsequently incurred replacement indebtedness meeting certain requirements) constitute permitted indebtedness;
clarified the circumstances and mechanics under which the Company may prepay, repurchase or redeem the Second Lien Notes, the remaining Third Lien Notes and certain other junior indebtedness;
modified the cross-default provisions to incorporated defaults under the Second Lien Notes, the remaining Third Lien Notes and certain other junior indebtedness; and
eliminated the potential early commitment termination date and early maturity date that would otherwise have occurred ninety (90) days prior the maturity date of the Third Lien Notes if any of the Third Lien Notes then remained outstanding.
The borrowing base under the Credit Facility will increase or decrease monthly using a formulafollowing accounting policies are based on, certain eligible receivables, eligible inventory and other amounts, including a percentage of the net orderly liquidation value of the Borrowers’ multi-client data library (not to exceed $15.0 million for the multi-client data library data component). As of December 31, 2017, the borrowing base under the Credit Facility was $25.5 million and there was $10.0 million of indebtedness resulting in $15.5 million of undrawn borrowing base availability under the Credit Facility. The Credit Facility is scheduled to mature on August 22, 2019.
The obligations of Borrowers under the Credit Facility are secured by a first-priority security interest in 100% of the stock of the Subsidiary Borrowers and 65% of the equity interest in ION International Holdings L.P. and by substantially all other assets of the Borrowers.
The Credit Facility contains covenants that, among other things, limit or prohibit the Borrowers, subject to certain exceptionsjudgments and qualifications, from incurring additional indebtedness (including capital lease obligations), repurchasing equity, paying dividends or distributions, granting or incurring additional liensassumptions made by management that include inherent risk and uncertainties. Management’s estimates are based on the Borrowers’ properties, pledging shares of the Borrowers’ subsidiaries, entering into certain merger transactions, entering into transactions with the Company’s affiliates, making certain sales or other dispositions of the Borrowers’ assets, making certain investments, acquiring other businesses and entering into sale-leaseback transactions with respect to the Borrowers’ property.
The Credit Facility, requires that ION and the Subsidiary Borrowers maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 as ofrelevant information available at the end of each fiscal quarter during the existence of a covenant testing trigger event. 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. A covenant testing trigger event occurs upon (a) the occurrence and continuance of an event of default under the Credit Facility or (b) the failure to maintain a measure of liquidity greater than (i) $7.5 million for five consecutive business days or (ii) $6.5 million on any given business day. Liquidity, as defined in the Credit Facility, is the Company’s excess availability to borrow ($15.5 million at December 31, 2017) plus the aggregate amount of unrestricted cash held by ION, the Subsidiary Borrowers and their domestic subsidiaries. At December 31, 2017, ION, the Subsidiary Borrowers and their domestic subsidiaries had unrestricted cash totaling $39.3 million and non-domestic subsidiaries had unrestricted cash totaling $12.7 million.
At December 31, 2017, the Company was in compliance withWe believe that all of the covenants underjudgments and estimates used to prepare our financial statements were reasonable at the Credit Facility.
The Credit Facility, as amended, contains customary eventtime we made them, but circumstances may change requiring us to revise our estimates in ways that could be materially adverse to our results of default provisions (including a “changeoperations and financial condition. We describe our significant accounting policies more fully in Footnote 1 “Summary of control” event affecting ION), the occurrenceSignificant Accounting Policies” of which could leadFootnotes to an acceleration of the Company’s obligations under the Credit Facility as amended.Consolidated Financial Statements.
Senior Secured Notes
In May 2013, the Company sold $175.0 million aggregate principal amountAs of 8.125% Senior Secured Second-Priority Notes dueDecember 31, 2018, (the “Third Lien Notes”) in a private offering pursuant to an Indenture dated as of May 13, 2013 (the Third Lien Notes Indenture”). Prior to the completion of the Exchange Offer (as defined below) and Consent Solicitation (as defined below) on April 28, 2016, the Third Lien Notes were senior secured second-priority obligations of the Company. After giving effect to the Exchange Offer and Consent Solicitation, the remaining aggregate principal amount of approximately $28.5 million of outstanding Third Lien Notes became senior secured third-priority obligations of the Company subordinated to the liens securing all senior and second priority indebtedness of the Company, including under the Credit Facility and Second-Priority Lien Notes (defined below).
Pursuant to the Exchange Offer and Consent Solicitation, the Company (i) issued approximately $120.6 million in aggregate principal amount of the Company’s newION Geophysical Corporation’s 9.125% Senior Secured Second Priority Notes due December 2021 (the “Second Lien Notes”) had an outstanding principal amount of $120.6 million. Prior to its early redemption, ION Geophysical Corporation’s 8.125% Senior Secured Second-Priority Notes” due May 2018 (the “Third Lien Notes”) had an aggregate principal amount of $28.5 million. In March 2018, ION Geophysical Corporation obtained consent from a majority of the Second Lien Notes holders and collectively withfrom PNC to redeem, in full, the Third Lien Notes prior to their stated maturity. On March 26, 2018, ION Geophysical Corporation redeemed the “Notes”) and 1,205,477 shares of the Company’s common stock in exchange for approximately $120.6 million in aggregate principal amount of Third Lien Notes and (ii) purchased approximately $25.9 million in aggregateby paying the then outstanding principal amount, of Third Lien Notes in exchange for aggregate cash consideration totaling approximately $15.0 million, plus all accrued and unpaid interest onthrough the Third Lien Notes from the applicable last interest payment date to, but not including, April 28, 2016.
After giving effect to the Exchange Offer and Consent Solicitation, the aggregate principal amount of the Third Lien Notes remaining outstanding was approximately $28.5 million and the aggregate principal amount of Second Lien Notes outstanding was approximately $120.6 million.
The Third Lien Notes are guaranteed by the Company’s material U.S. subsidiaries, GX Technology Corporation, ION Exploration Products (U.S.A.), Inc. and I/O Marine Systems, Inc. (the “Guarantors”), and mature on May 15, 2018. Interest on the Third Lien 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.
Prior to the completion of the Exchange Offer and Consent Solicitation, the Third Lien Notes Indenture contained certain covenants that, among other things, limited or prohibited 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 Third Lien 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 Third Lien Notes Indenture are subject to certain exceptions and qualifications. After giving effect to the Exchange Offer and Consent Solicitation, the Third Lien Notes Indenture was amended to, among other things, provide for the release of the second priority security interest in the collateral securing the remaining Third Lien Notes and the grant of a third priority security interest in the collateral, subordinate to liens securing all senior and second priority indebtedness of the Company, including the Credit Facility and the Second Lien Notes, and eliminate substantially all of the restrictive covenants and certain events of default pertaining to the remaining Third Lien Notes.
As of December 31, 2017, the Company was in compliance with the covenants with respect to the Third Lien Notes.redemption date.
The Second Lien Notes remain outstanding and are senior secured second-priority obligations guaranteed by the Guarantors. The Second Lien Notes mature on December 15, 2021.Material U.S. Subsidiaries and the Mexican Subsidiary. Interest on the Second Lien Notes accrues at the rate of 9.125% per annum and is payable semiannually in arrears on June 15 and December 15 of each year during their term, beginning June 15, 2016, except that the interest payment otherwise payable on June 15, 2021 will be payable on December 15, 2021.
The indenture dated April 28, 2016 indenture governing the Second Lien Notes (the “Second Lien Notes Indenture”) contains certain covenants that, among other things, limitlimits or prohibit the Company’sprohibits our ability and the ability of itsour restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Second Lien Notes, including among other things, incurring additional indebtedness in excess of permitted indebtedness, creating liens, paying dividends and making other distributions in respect of the Company’sour capital stock, redeeming the Company’sour 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 Second Lien Notes Indenture are subject to certain exceptions and qualifications. All of the Company’sour subsidiaries are currently restricted subsidiaries.
As of December 31, 2018, we are in compliance with the covenants with respect to the Second Lien Notes.
On or after December 15, 2019, we may on one or more occasions redeem all or a part of the Second Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Second Lien Notes redeemed during the twelve-month period beginning on December 15th of the years indicated below:
|
| | |
| Date | | Percentage |
| 2019 | | 105.500% |
| 2020 | | 103.500% |
| 2021 and thereafter | | 100.000% |
Meeting our Liquidity Requirements
As of December 31, 2018, our total outstanding indebtedness (including capital lease obligations) was approximately $121.7 million, consisting primarily of approximately $120.6 million outstanding Second Lien Notes (maturing in December 2021) and $2.9 million of capital leases, partially offset by $2.9 million of debt issuance costs. As of December 31, 2018, there was no outstanding indebtedness under our Credit Facility.
For 2018, total capital expenditures, including investments in our multi-client data library, were $29.8 million. We currently expect that our capital expenditures, including investments in our multi-client data library, will be a range of $40.0 million to $60.0 million in 2019. Investments in our multi-client data library are dependent upon the timing of our New Venture projects and the availability of underwriting by our customers.
We believe that our existing cash balance, cash from operations and undrawn availability under our Credit Facility will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, as described at Part I, Item 3. “Legal Proceedings,” there are possible scenarios involving an outcome in the WesternGeco lawsuit that could materially and adversely affect our liquidity.
Cash Flow from Operations
Net cash provided by operating activities was $7.1 million for 2018, compared to $27.6 million for 2017. The decrease was driven by lower revenue activity compared to 2017, payment of $3.75 million damages payment for the WesternGeco lawsuit, reductions in accounts payable and accrued expenses and increase in our combined accounts and unbilled receivable balance.
Net cash provided by operating activities was $27.6 million for 2017, compared to $1.0 million for 2016. The increase in net cash provided by operations was due to a significant increase in New Venture revenues in 2017, compared to 2016 and due to $20.8 million damages payment in 2016 for the WesternGeco lawsuit, which was partially offset by increases in unbilled receivables as of December 31, 2017.
Cash Flow Used In Investing Activities
Net cash flow used in investing activities was $29.8 million for 2018, compared to $24.8 million for 2017. The principal uses of cash in our investing activities during 2018 were $28.3 million of investments in our multi-client data library and $1.5 million of investments in property, plant and equipment.
Net cash flow used in investing activities was $24.8 million for 2017, compared to $13.6 million for 2016. The principal uses of cash in our investing activities during 2017 were $23.7 million of investments in our multi-client data library and $1.1 million of investments in property, plant and equipment.
Cash Flow Used in Financing Activities
Net cash flow provided by financing activities was $3.8 million for 2018, compared to $3.6 million of net cash flow used in financing activities for 2017. The net cash flow provided by financing activities during 2018 was primarily related to $47.0 million of net cash received from our public equity offering, partially offset by $30.8 million of payments on long-term debt including equipment capital leases and a $10.0 million repayment of our Credit Facility.
Net cash flow used in financing activities was $3.6 million for 2017, compared to $21.6 million of net cash flow used in financing activities for 2016. The net cash flow used in financing activities during 2017 was primarily related to $4.8 million of payments on long-term debt related to equipment capital leases, partially offset by $1.6 million of proceeds from employee stock purchases.
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 typically in the second half of our fiscal year.
Future Contractual Obligations
The following table sets forth estimates of future payments of our consolidated contractual obligations, as of December 31, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Contractual Obligations | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| Long-term and short-term debt | $ | 121,728 |
| | $ | 1,159 |
| | $ | 120,569 |
| | $ | — |
| | $ | — |
|
| Interest on long-term debt obligations | 34,901 |
| | 11,344 |
| | 23,236 |
| | 321 |
| | — |
|
| Equipment capital lease obligations | 2,938 |
| | 1,069 |
| | 1,869 |
| | — |
| | — |
|
| Operating leases | 68,938 |
| | 13,248 |
| | 34,753 |
| | 13,914 |
| | 7,023 |
|
| Purchase obligations | 2,908 |
| | 2,908 |
| | — |
| | — |
| | — |
|
| Total | $ | 231,413 |
| | $ | 29,728 |
| | $ | 180,427 |
| | $ | 14,235 |
| | $ | 7,023 |
|
The long-term and short-term debt at December 31, 2018 included $120.6 million of principal indebtedness outstanding under our Second Lien Notes that mature in December 2021. The $2.9 million of equipment capital lease obligations relates to Imaging Services’ financing of computer and other equipment purchases.
The operating lease commitments at December 31, 2018 relate to our leases for certain equipment, offices, processing centers, and warehouse space. Our purchase obligations primarily relate to our committed inventory purchase orders under which deliveries of inventory are scheduled to be made in 2019.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make choices between acceptable methods of accounting and to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risk and uncertainties. Management’s estimates are based on the relevant information available at the end of each period. We believe that all of the judgments and estimates used to prepare our financial statements were reasonable at the time we made them, but circumstances may change requiring us to revise our estimates in ways that could be materially adverse to our results of operations and financial condition. We describe our significant accounting policies more fully in Footnote 1 “Summary of Significant Accounting Policies” of Footnotes to Consolidated Financial Statements.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Codification Topic 606 – Revenue from Contracts with Customers and all the related amendments, (“ASC 606”) using the modified retrospective method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaborative arrangements and financial instruments. The adoption of ASC 606 did not have a material impact on our consolidated balance sheets or consolidated statements of operations for any of our reporting segments.
We derive revenue from the sale or license of (i) multi-client and proprietary data, imaging services and E&P Advisors consulting services within our E&P Technology & Services segment; (ii) seismic data acquisition systems and other seismic equipment, (iii) seismic command and control software systems and software solutions for operations management within our Operations Optimization segment; and (iv) a full suite of technology and services within our Ocean Bottom Integrated Technologies segment. All revenues of the E&P Technology & Services and Ocean Bottom Integrated Technologies segments and the services component of revenues for the Optimization Software & Services group as part of the Operations Optimization segment are classified as services revenues. All other revenues are classified as product revenues.
We use a five-step model to determine proper revenue recognition from customer contracts. Revenue is recognized when (i) a contract is approved by all parties; (ii) the goods or services promised in the contract are identified; (iii) the consideration we expect to receive in exchange for the goods or services promised is determined; (iv) the consideration is allocated to the goods and services in the contract; and (v) control of the promised goods or services is transferred to the customer. We do not disclose the value of contractual future performance obligations such as backlog with an original expected length of one year or less.
Multi-client and Proprietary Surveys, Imaging Services and E&P Advisors Services - As multi-client seismic surveys are being designed, acquired or processed (the “New Venture” phase), we enter into non-exclusive licensing arrangements with our customers, who pre-fund or underwrite these programs in part. License revenues from these surveys are recognized during the New Venture phase as the seismic data is acquired and/or processed on a proportionate basis as work is performed and control is transferred to the customer. Under this method, we recognize revenue based upon quantifiable measures of progress, such as kilometers acquired or surveys of performance completed to date. Upon completion of a multi-client seismic survey, it is considered “on-the-shelf,” and licenses to the survey data are granted to customers on a non-exclusive basis.
We also perform seismic surveys, imaging and other services under contracts to specific customers, whereby the seismic data is owned by those customers. We recognize revenue as the seismic data is acquired and/or processed on a proportionate basis as work is performed. We use quantifiable measures of progress consistent with our multi-client seismic surveys.
Acquisition Systems and Other Seismic Equipment - For sales of seismic data acquisition systems and other seismic equipment, we recognize revenue when control of the goods has transferred to the customer. Transfer of control generally occurs when (i) we have a present right to payment; (ii) the customer has legal title to the asset; (iii) we have transferred physical possession of the asset; and (iv) the customer has significant rewards of ownership; or (v) the customer has accepted the asset.
Software - Licenses for our navigation, survey design and quality control software systems provide the customer with a right to use the software. We offer usage-based licenses under which we receive a monthly fee based on the number of vessels and licenses used. For these usage-based licenses, revenue is recognized as the performance obligations are performed over the contract term, which is generally two to five years. In addition to usage-based licenses, we offer perpetual software licenses as it exists when made available to the customer. Revenue from these licenses is recognized upfront at the point in time when the software is made available to the customer.
These arrangements generally include us providing related services, such as training courses, engineering services and annual software maintenance. We allocate consideration to each element of the arrangement based upon directly observable or estimated standalone selling prices. Revenue is recognized for these services as control transfers to the customer over time.
Ocean Bottom Integrated Technologies - We recognize revenue as the seismic data is acquired and control transfers to the customer. We use quantifiable measures of progress consistent with our multi-client surveys. In connection with acquisition contracts, we may receive revenues for preparation and mobilization of equipment and personnel, capital improvements to vessels, or demobilization activities. We defer the revenues earned and incremental costs incurred that are directly related to these activities and recognizes such revenues and costs over the primary contract term of the acquisition project as we transfer the goods and services to the customer. We recognize the costs of relocating vessels without contracts to more promising market sectors as such costs are incurred.
Multi-Client Data Library
Our multi-client data library consists of seismic surveys that are offered for licensing to customers on a non-exclusive basis. The capitalized costs include the costs paid to third parties for the acquisition of data and related activities associated with the data creation activity and direct internal processing costs, such as salaries, benefits, computer-related expenses and other costs incurred for seismic data project design and management. For 2018, 2017 and 2016, we capitalized, as part of our multi-client data library, $11.9 million, $12.7 million and $6.6 million, respectively, of direct internal processing costs.
Our method of amortizing the costs of an in-process multi-client survey (the period during which the seismic data is being acquired or processed, the New Venture phase) consists of determining the percentage of actual revenue recognized to the total estimated revenues (which includes both revenues estimated to be realized during the New Venture phase and estimated revenues from the licensing of the resulting “on-the-shelf” survey data) and multiplying that percentage by the total cost of the project (the sales forecast method). We consider a multi-client survey to be complete when all work on the creation of the seismic data is finished and that survey is available for licensing.
Once a multi-client data survey is completed, the data survey is considered “on-the-shelf” and our method of amortization is then the greater of (i) the sales forecast method or (ii) the straight-line basis over a four-year period. The greater amount of amortization resulting from the sales forecast method or the straight-line amortization policy is applied on a cumulative basis at the individual survey level. Under this policy, we first record amortization using the sales forecast method. The cumulative amortization recorded for each survey is then compared with the cumulative straight-line amortization. The four-year period utilized in this cumulative comparison commences when the data survey is determined to be complete. If the cumulative straight-line amortization is higher for any specific survey, additional amortization expense is recorded, resulting in the accumulated amortization being equal to the cumulative straight-line amortization for that survey. We have determined the amortization period to be four years based upon our historical experience that indicates that the majority of our revenues from multi-client surveys are derived during the acquisition and processing phases and during the four years subsequent to survey completion.
Estimated sales are determined based upon discussions with our customers, our experience and our knowledge of industry trends. Changes in sales estimates may have the effect of changing the percentage relationship of cost of services to revenue. In applying the sales forecast method, an increase in the projected sales of a survey will result in lower cost of services as a percentage of revenue and higher earnings when revenue associated with that particular survey is recognized, while a decrease in projected sales will have the opposite effect. Assuming that the overall volume of sales mix of surveys generating revenue in the period was held constant in 2018, an increase of 10% in the sales forecasts of all surveys would have increased our amortization expense by approximately $1.5 million.
We estimate the ultimate revenue expected to be derived from a particular seismic data survey over its estimated useful economic life to determine the costs to amortize, if greater than straight-line amortization. That estimate is made by us at the project’s initiation. For a completed multi-client survey, we review the estimate quarterly. If during any such review, we determine that the ultimate revenue for a survey is expected to be materially more or less than the original estimate of total revenue for such survey, we decrease or increase (as the case may be) the amortization rate attributable to the future revenue from such survey. In addition, in connection with such reviews, we evaluate the recoverability of the multi-client data library, and, if required, record an impairment charge with respect to such data.
Reserve for Excess and Obsolete Inventories
Our reserve for excess and obsolete inventories is based on historical sales trends and various other assumptions and judgments, including future demand for our inventory, the timing of market acceptance of our new products and the risk of obsolescence driven by new product introductions. When we record a charge for excess and obsolete inventories, the amount is applied as a reduction in the cost basis of the specific inventory item for which the charge was recorded. Should these assumptions and judgments not be realized for these or for other reasons, our reserve would be adjusted to reflect actual results. Our industry is subject to technological change and new product development that could result in obsolete inventory. Our reserve for inventory at December 31, 2018 and 2017 was $15.0 million.
Goodwill
Goodwill is allocated to our reporting units, which is either the operating segment or one reporting level below the operating segment. For purposes of performing the impairment test for goodwill, we established the following reporting units: E&P Technology & Services, Optimization Software & Services, Devices, and Ocean Bottom Integrated Technologies. To determine the fair value of our reporting units, we use a discounted future returns valuation method. If we had established different reporting units or utilized different valuation methodologies, our impairment test results could differ. Additionally, we compared the sum of the estimated fair values of the individual reporting units less consolidated debt to our overall market capitalization as reflected by our stock price.
We evaluate the carrying value of our goodwill at least annually for impairment, or more frequently if facts and circumstances indicate that it is more likely than not impairment has occurred. We formally evaluate the carrying value of our goodwill for impairment as of December 31 for each of our reporting units. We first perform a qualitative assessment by evaluating relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we are unable to conclude qualitatively that it is more likely than not that a reporting unit’s fair value exceeds its carrying value, then we will use a two-step quantitative assessment of the fair value of a reporting unit. If the carrying value of a reporting unit of an entity that includes goodwill is determined to be more than the fair value of the reporting unit, there exists the possibility of impairment of goodwill. An impairment loss of goodwill is measured in two steps by first allocating the fair value of the reporting unit to net assets and liabilities including recorded and unrecorded other intangible assets to determine the implied carrying value of goodwill. The next step is to measure the difference between the carrying value of goodwill and the implied carrying value of goodwill, and, if the implied carrying value of goodwill is less than the carrying value of goodwill, an impairment loss is recorded equal to the difference.
The goodwill balance as of December 31, 2018 was comprised of $20.0 million in our Optimization Software & Services and $2.9 million in our E&P Technology & Services reporting units. Based on our qualitative assessment performed as of December 31, 2018, we concluded it was more likely than not that the fair values of our E&P Technology & Services, and Optimization Software & Services reporting units exceeded their carrying values. Accordingly, no further testing was required and no impairment was recognized. However, if the market value of our shares declines for a prolonged period, and if management's judgments and assumptions regarding future industry conditions and operations diminish, it is reasonably possible that our expectations of future cash flows may decline and ultimately result in a goodwill impairment for our E&P Technology & Services and Optimization Software & Services reporting units.
Property, Plant, Equipment and Seismic Rental Equipment
Property, plant, equipment and seismic rental equipment are stated at cost. Depreciation expense is provided straight-line over their estimated useful lives.
Expenditures for renewals and betterments are capitalized; repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss is reflected in operating expenses.
We evaluate the recoverability of our property, plant, equipment and seismic rental equipment, when indicators of impairment exist, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. Impairment in the carrying value of an asset held for use is recognized whenever anticipated future undiscounted cash flows from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value. For 2018, we identified an indicator of impairment as it relates to our cable-based ocean bottom acquisition technologies. As a result, we recognized an impairment charge of $36.6 million.
Deferred Tax Assets
We established a valuation allowance on a substantial majority of our U.S. net deferred tax assets. A valuation allowance is established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. We will continue to record a valuation allowance for the substantial majority of all of our deferred tax assets until there is sufficient evidence to warrant reversal. In the event our expectations of future operating results change, an additional valuation allowance may be required to be established on our existing unreserved net U.S. deferred tax assets. As a result of passage of the Tax Cut and Jobs Act (the “Act”) on December 22, 2017, the Company’s U.S. deferred tax assets, liabilities, and associated valuation allowance as of December 31, 2018 and 2017 have been re-measured at the new U.S. federal tax rate of 21%.
Stock-Based Compensation
We estimate the value of stock-based payment awards on the date of grant using an option pricing model such as Black-Scholes or Monte Carlo simulation. The determination of the fair value of stock-based payment awards is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, actual and projected stock-based instrument exercise behaviors, risk-free interest rate and expected dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognize stock-based compensation expense on the straight-line basis over the requisite service period of each award that are ultimately expected to vest. As it relates to our SARs, in the event that the market price of our common stock increases, our expectation of participants’ expected exercise behavior and risk free interest rate change in the future, we may have to recognize additional SARs expense that could ultimately affect our operating results and cash flows.
Foreign Sales Risks
For 2018, we recognized $68.9 million of sales to customers in Latin America, $31.1 million of sales to customers in Europe, $17.8 million of sales to customers in Asia Pacific, $10.8 million of sales to customers in Africa, $5.5 million of sales to customers in the Middle East and $1.4 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 2018, 2017 and 2016, international sales comprised 75%, 76% and 78%, respectively, of total net revenues. The volatility in oil prices have continued to impact the global market through 2018. Our results of operations, liquidity and financial condition related to our operations in Russia are primarily denominated in U.S. dollars. To the extent that world events or economic conditions negatively affect our future sales to customers in many regions of the world, as well as the collectability of our existing receivables, our future results of operations, liquidity and financial condition would be adversely affected.
Off-Balance Sheet Arrangements
Variable interest entities. As of December 31, 2018, our investment in INOVA Geophysical constitutes an investment in a variable interest entity, as that term is defined in Accounting Standards Codification Topic 810-10 “Consolidation – Overall” and as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. See Footnote 1 “Summary of Significant Accounting Policies-Equity Method Investments” of Footnotes to Consolidated Financial Statements included elsewhere in this Form 10-K for additional information.
Indemnification
In the ordinary course of our business, we enter into contractual arrangements with our customers, suppliers and other parties under which we may agree to indemnify the other party to such arrangement from certain losses it incurs relating to our products or services or for losses arising from certain events as defined within the particular contract. Some of these indemnification obligations may not be subject to maximum loss limitations. Historically, payments we have made related to these indemnification obligations have been immaterial.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our primary market risks include risks related to interest rates and foreign currency exchange rates.
Interest Rate Risk
As of December 31, 2018, we had outstanding total indebtedness of approximately $121.7 million. As of December 31, 2018, all of this indebtedness, other than borrowings under our Credit Facility (described below) accrues interest at fixed interest rates.
As our borrowings under the Credit Facility are subject to variable interest rates, we are subject to interest rate risk to the extent we have outstanding balances under the Credit Facility. We are therefore impacted by changes in LIBOR and/or our bank's base rates. We may, from time to time, use derivative financial instruments to help mitigate rising interest rates under our Credit Facility. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors.
Foreign Currency Exchange Rate Risk
Our operations are conducted in various countries around the world, and we receive revenue from these operations in a number of different currencies with the most significant of our international operations using British Pounds Sterling. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in currencies other than the U.S. dollar, which is our functional currency, or the functional currency of many of our subsidiaries, which is not necessarily the U.S. dollar. To the extent that transactions of these subsidiaries are settled in currencies other than the U.S. dollar, a devaluation of these currencies versus the U.S. dollar could reduce the contribution from these subsidiaries to our consolidated results of operations as reported in U.S. dollars.
Through our subsidiaries, we operate in a wide variety of jurisdictions, including the United Kingdom, Brazil, Mexico, China, Canada, Russia, the United Arab Emirates, Egypt and other countries. Our financial results may be affected by changes in foreign currency exchange rates. Our consolidated balance sheets at December 31, 2018 reflected approximately $9.2 million of net working capital related to our foreign subsidiaries, a majority of which is within the United Kingdom and Brazil. Our foreign subsidiaries receive their income and pay their expenses primarily in their local currencies. To the extent that transactions of these subsidiaries are settled in the local currencies, a devaluation of these currencies versus the U.S. dollar could reduce the contribution from these subsidiaries to our consolidated results of operations as reported in U.S. dollars. For the year ended December 31, 2018, we recorded net foreign currency losses of approximately $0.4 million in other income, a majority of these losses are due to currency fluctuations related to our operations within Brazil and the United Kingdom.
Item 8. Financial Statements and Supplementary Data
The financial statements and related notes thereto required by this item begin at page F-1 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file with or submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms. Disclosure controls and procedures are defined in Rule 13a-15(e) under the Exchange Act, and they include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of December 31, 2018.
(b)Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
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| (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; |
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| (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and |
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| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2018 based upon criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
The independent registered public accounting firm that has also audited our consolidated financial statements included in this Annual Report on Form 10-K has issued an audit report on our internal control over financial reporting. This report appears below.
(c)Changes in Internal Control over Financial Reporting. There was not any change in our internal control over financial reporting that occurred during the three months ended December 31, 2018, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
ION Geophysical Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of ION Geophysical Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 7, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Houston, Texas
February 7, 2019
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Reference is made to the information appearing in the definitive proxy statement, under “Item 1 — Election of Directors,” for our annual meeting of stockholders to be held on May 15, 2019 (the “2019 Proxy Statement”) to be filed with the SEC with respect to Directors, Executive Officers and Corporate Governance, which is incorporated herein by reference and made a part hereof in response to the information required by Item 10.
Item 11. Executive Compensation
Reference is made to the information appearing in the 2019 Proxy Statement, under “Executive Compensation,” to be filed with the SEC with respect to Executive Compensation, which is incorporated herein by reference and made a part hereof in response to the information required by Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Reference is made to the information appearing in the 2019 Proxy Statement, under “Item 1 — Ownership of Equity Securities of ION” and “Equity Compensation Plan Information,” to be filed with the SEC with respect to Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, which is incorporated herein by reference and made a part hereof in response to the information required by Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Reference is made to the information appearing in the 2019 Proxy Statement, under “Item 1 — Certain Transactions and Relationships,” to be filed with the SEC with respect to Certain Relationships and Related Transactions and Director Independence, which is incorporated herein by reference and made a part hereof in response to the information required by Item 13.
Item 14. Principal Accounting Fees and Services
Reference is made to the information appearing in the 2019 Proxy Statement, under “Principal Auditor Fees and Services,” to be filed with the SEC with respect to Principal Accountant Fees and Services, which is incorporated herein by reference and made a part hereof in response to the information required by Item 14.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) List of Documents Filed
(1) Financial Statements
The financial statements filed as part of this report are listed in the “Index to Consolidated Financial Statements” on page F-1 hereof.
(2) Financial Statement Schedules
The following financial statement schedule is listed in the “Index to Consolidated Financial Statements” on page F-1 hereof, and is included as part of this Annual Report on Form 10-K:
Schedule II — Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the requested information is shown in the financial statements or noted therein.
(3) Exhibits
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| 3.1 |
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| 3.2 |
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| 4.1 |
| — | Indenture, dated May 13, 2013, among ION Geophysical Corporation, the subsidiary guarantors named therein, Wilmington Trust, National Association, as trustee, and U.S. Bank National Association, as collateral agent, filed on May 13, 2013 as Exhibit 4.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference. |
| 4.2 |
| | First Supplemental Indenture, dated as of April 28, 2016, to the Indenture, dated May 13, 2013, among ION Geophysical Corporation, the subsidiary guarantors named therein, Wilmington Savings Fund Society, FSB, as trustee, and U.S. Bank National Association, as collateral agent, filed on April 28, 2016 as Exhibit 4.3 to the Company’s Current Report on Form 8-K and incorporated by reference. |
| 4.3 |
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| 4.4 |
| | Intercreditor Agreement, dated as of April 28, 2016, by and among PNC Bank, National Association, as first lien representative and first lien collateral agent for the first lien secured parties, and Wilmington Savings Fund Society, FSB, as second lien representative and second lien collateral agent for the second lien secured parties and as third lien representative for the third lien secured parties, and U.S. Bank National Association as third lien collateral agent for the third lien secured parties and acknowledged and agreed to by ION Geophysical Corporation and the other grantors named therein, filed on April 28, 2016 as Exhibit 10.1 to the Company’s Current Report on Form 8-K and incorporated by reference. |
| **10.1 |
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| **10.2 |
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| **10.3 |
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| **10.4 |
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| **10.5 |
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| 10.6 |
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| 10.7 |
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| 10.8 |
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| 10.9 |
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| **10.10 |
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| 10.11 |
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| **10.12 |
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| 10.13 |
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| 10.14 |
| — | Revolving Credit and Security Agreement dated as of August 22, 2014 among PNC Bank, National Association, as agent for lenders, the lenders from time to time party thereto, as lenders, and PNC Capital Markets LLC, as lead arranger and bookrunner, with ION Geophysical Corporation, ION Exploration Products (U.S.A.), Inc., I/O Marine Systems, Inc. and GX Technology Corporation, as borrowers, filed on November 6, 2014 as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, and incorporated herein by reference. |
| 10.15 |
| — | First Amendment to Revolving Credit and Security Agreement dated as of August 4, 2015 among PNC Bank, National Association, as lender and agent, the lenders from time to time party thereto, as lenders, with ION Geophysical Corporation, ION Exploration Products (U.S.A.), Inc., I/O Marine Systems, Inc. and GX Technology Corporation, as borrowers, filed on August 6, 2015 as Exhibit 10.1 to the Company’s Current Report on Form 8-K, and incorporated herein by reference. |
| 10.16 |
| — | Second Amendment to the Revolving Credit and Security Agreement, dated as of April 28, 2016, among ION Geophysical Corporation and the subsidiary co-borrowers named therein, as borrowers, the financial institutions party thereto, as lenders, and PNC Bank, National Association, as agent for the lenders, filed on April 28, 2016 as Exhibit 10.2 to the Company’s Current Report on Form 8-K and incorporated by reference. |
| **10.17 |
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| **10.18 |
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| **10.19 |
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| **10.20 |
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| **10.21 |
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| 10.22 |
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| 10.23 |
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| * **10.24 |
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| * **10.25 |
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| * **10.26 |
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| *21.1 |
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| *23.1 |
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| *24.1 |
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| *31.1 |
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| *31.2 |
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| *32.1 |
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| *32.2 |
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| *101 |
| — | The following materials are formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31, 2018 and 2017, (ii) Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016, (iii) Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016, (v) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016, (vi) Footnotes to Consolidated Financial Statements and (vii) Schedule II – Valuation and Qualifying Accounts. |
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| * | Filed herewith. |
| ** | Management contract or compensatory plan or arrangement. |
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| (b) | Exhibits required by Item 601 of Regulation S-K. |
| Reference is made to subparagraph (a) (3) of this Item 15, which is incorporated herein by reference. |
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| (c) | Not applicable. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Houston, State of Texas, on February 7, 2019.
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| ION GEOPHYSICAL CORPORATION |
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| By | | /s/ R. Brian Hanson |
| | | R. Brian Hanson |
| | | President and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. Brian Hanson and Matthew Powers and each of them, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and re-substitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all documents relating to the Annual Report on Form 10-K for the year ended December 31, 2018, including any and all amendments and supplements thereto, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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| Name | | Capacities | | Date |
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| /s/ R. BRIAN HANSON | | President, Chief Executive Officer and Director
(Principal Executive Officer) | | February 7, 2019 |
| R. Brian Hanson | | | |
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| /s/ STEVEN A. BATE | | Executive Vice President and Chief
Financial Officer (Principal Financial Officer) | | February 7, 2019 |
| Steven A. Bate | | | |
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| /s/ SCOTT SCHWAUSCH | | Vice President and Corporate Controller
(Principal Accounting Officer) | | February 7, 2019 |
| Scott Schwausch | | | |
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| /s/ JAMES M. LAPEYRE, JR. | | Chairman of the Board of Directors and Director | | February 7, 2019 |
| James M. Lapeyre, Jr. | | | |
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| /s/ DAVID H. BARR | | Director | | February 7, 2019 |
| David H. Barr | | | |
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| | Director | | February 7, 2019 |
| Zheng HuaSheng | | | |
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| Name | | Capacities | | Date |
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| /s/ MICHAEL C. JENNINGS | | Director | | February 7, 2019 |
| Michael C. Jennings | | | |
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| /s/ FRANKLIN MYERS | | Director | | February 7, 2019 |
| Franklin Myers | | | |
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| /s/ S. JAMES NELSON, JR. | | Director | | February 7, 2019 |
| S. James Nelson, Jr. | | | |
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| /s/ JOHN N. SEITZ | | Director | | February 7, 2019 |
| John N. Seitz | | | |
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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| ION Geophysical Corporation and Subsidiaries: | | |
| Report of Independent Registered Public Accounting Firms | | F-2 |
| Consolidated Balance Sheets — December 31, 2018 and 2017 | | F-3 |
| Consolidated Statements of Operations — Years ended December 31, 2018, 2017 and 2016 | | F-4 |
| Consolidated Statements of Comprehensive Loss — Years ended December 31, 2018, 2017 and 2016 | | F-5 |
| Consolidated Statements of Cash Flows — Years ended December 31, 2018, 2017 and 2016 | | F-6 |
| Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2018, 2017 and 2016 | | F-8 |
| Footnotes to Consolidated Financial Statements | | F-9 |
| Schedule II — Valuation and Qualifying Accounts | | S-1 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
ION Geophysical Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of ION Geophysical Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 7, 2019 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2014.
Houston, Texas
February 7, 2019
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (In thousands, except share data) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 33,551 |
| | $ | 52,056 |
|
| Accounts receivable, net | 26,128 |
| | 19,478 |
|
| Unbilled receivables | 44,032 |
| | 37,304 |
|
| Inventories, net | 14,130 |
| | 14,508 |
|
| Prepaid expenses and other current assets | 7,782 |
| | 7,643 |
|
| Total current assets | 125,623 |
| | 130,989 |
|
| Deferred income tax asset, net | 7,191 |
| | 1,753 |
|
| Property, plant, equipment and seismic rental equipment, net | 13,041 |
| | 52,153 |
|
| Multi-client data library, net | 73,544 |
| | 89,300 |
|
| Goodwill | 22,915 |
| | 24,089 |
|
| Other assets | 2,435 |
| | 2,785 |
|
| Total assets | $ | 244,749 |
| | $ | 301,069 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Current maturities of long-term debt | $ | 2,228 |
| | $ | 40,024 |
|
| Accounts payable | 34,913 |
| | 24,951 |
|
| Accrued expenses | 31,411 |
| | 38,697 |
|
| Accrued multi-client data library royalties | 29,256 |
| | 27,035 |
|
| Deferred revenue | 7,710 |
| | 8,910 |
|
| Total current liabilities | 105,518 |
| | 139,617 |
|
| Long-term debt, net of current maturities | 119,513 |
| | 116,720 |
|
| Other long-term liabilities | 11,894 |
| | 13,926 |
|
| Total liabilities | 236,925 |
| | 270,263 |
|
| Equity: | | | |
| Common stock, $0.01 par value; authorized 26,666,667 shares; outstanding 14,015,615 and 12,019,701 shares at December 31, 2018 and 2017, respectively. | 140 |
| | 120 |
|
| Additional paid-in capital | 952,626 |
| | 903,247 |
|
| Accumulated deficit | (926,092 | ) | | (854,921 | ) |
| Accumulated other comprehensive loss | (20,442 | ) | | (18,879 | ) |
| Total stockholders’ equity | 6,232 |
| | 29,567 |
|
| Noncontrolling interests | 1,592 |
| | 1,239 |
|
| Total equity | 7,824 |
| | 30,806 |
|
| Total liabilities and equity | $ | 244,749 |
| | $ | 301,069 |
|
See accompanying Footnotes to Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In thousands, except per share data) |
| Service revenues | $ | 139,038 |
| | $ | 159,410 |
| | $ | 130,640 |
|
| Product revenues | 41,007 |
| | 38,144 |
| | 42,168 |
|
| Total net revenues | 180,045 |
| | 197,554 |
| | 172,808 |
|
| Cost of services | 100,557 |
| | 103,124 |
| | 115,763 |
|
| Cost of products | 19,868 |
| | 18,791 |
| | 21,013 |
|
| Gross profit | 59,620 |
| | 75,639 |
| | 36,032 |
|
| Operating expenses: | | | | | |
| Research, development and engineering | 18,182 |
| | 16,431 |
| | 17,833 |
|
| Marketing and sales | 21,793 |
| | 20,778 |
| | 17,371 |
|
| General, administrative and other operating expenses | 37,364 |
| | 47,129 |
| | 43,999 |
|
| Impairment of long-lived assets | 36,553 |
| | — |
| | — |
|
| Total operating expenses | 113,892 |
| | 84,338 |
| | 79,203 |
|
| Loss from operations | (54,272 | ) | | (8,699 | ) | | (43,171 | ) |
| Interest expense, net | (12,972 | ) | | (16,709 | ) | | (18,485 | ) |
| Other income (expense), net | (436 | ) | | (3,945 | ) | | 1,350 |
|
| Loss before income taxes | (67,680 | ) | | (29,353 | ) | | (60,306 | ) |
| Income tax expense | 2,718 |
| | 24 |
| | 4,421 |
|
| Net loss | (70,398 | ) | | (29,377 | ) | | (64,727 | ) |
| Net income attributable to noncontrolling interests | (773 | ) | | (865 | ) | | (421 | ) |
| Net loss attributable to ION | $ | (71,171 | ) | | $ | (30,242 | ) | | $ | (65,148 | ) |
| Net loss per share: | | | | | |
| Basic | $ | (5.20 | ) | | $ | (2.55 | ) | | $ | (5.71 | ) |
| Diluted | $ | (5.20 | ) | | $ | (2.55 | ) | | $ | (5.71 | ) |
| Weighted average number of common shares outstanding: | | | | | |
| Basic | 13,692 |
| | 11,876 |
| | 11,400 |
|
| Diluted | 13,692 |
| | 11,876 |
| | 11,400 |
|
See accompanying Footnotes to Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In thousands) |
| Net loss | $ | (70,398 | ) | | $ | (29,377 | ) | | $ | (64,727 | ) |
| Other comprehensive income (loss), net of taxes, as appropriate: | | | | | |
| Foreign currency translation adjustments | (1,563 | ) | | 2,869 |
| | (6,967 | ) |
| Comprehensive net loss | (71,961 | ) | | (26,508 | ) | | (71,694 | ) |
| Comprehensive income attributable to noncontrolling interests | (773 | ) | | (865 | ) | | (421 | ) |
| Comprehensive net loss attributable to ION | $ | (72,734 | ) | | $ | (27,373 | ) | | $ | (72,115 | ) |
See accompanying Footnotes to Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In thousands) |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (70,398 | ) | | $ | (29,377 | ) | | $ | (64,727 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Depreciation and amortization (other than multi-client library) | 8,763 |
| | 16,592 |
| | 21,975 |
|
| Amortization of multi-client data library | 48,988 |
| | 47,102 |
| | 33,335 |
|
| Impairment of long-lived assets | 36,553 |
| | — |
| | — |
|
| Impairment of multi-client data library | — |
| | 2,304 |
| | — |
|
| Stock-based compensation expense | 3,337 |
| | 2,552 |
| | 3,267 |
|
| Accrual (reduction) of loss contingency related to legal proceedings | — |
| | 5,000 |
| | (1,168 | ) |
| Loss on bond exchange | — |
| | — |
| | 2,182 |
|
| Write-down of excess and obsolete inventory | 665 |
| | 398 |
| | 429 |
|
| Deferred income taxes | (6,252 | ) | | (5,420 | ) | | (1,181 | ) |
| Change in operating assets and liabilities: | | | | | |
| Accounts receivable | (7,024 | ) | | 1,692 |
| | 20,426 |
|
| Unbilled receivables | (5,245 | ) | | (23,947 | ) | | 6,543 |
|
| Inventories | (353 | ) | | 190 |
| | 2,312 |
|
| Accounts payable, accrued expenses and accrued royalties | (7,600 | ) | | 1,443 |
| | (5,085 | ) |
| Deferred revenue | (1,112 | ) | | 5,131 |
| | (2,759 | ) |
| Other assets and liabilities | 6,776 |
| | 3,952 |
| | (14,556 | ) |
| Net cash provided by operating activities | 7,098 |
| | 27,612 |
| | 993 |
|
| Cash flows from investing activities: | | | | | |
| Investment in multi-client data library | (28,276 | ) | | (23,710 | ) | | (14,884 | ) |
| Purchase of property, plant, equipment and seismic rental equipment | (1,514 | ) | | (1,063 | ) | | (1,458 | ) |
| Proceeds from sale of cost method investments | — |
| | — |
| | 2,698 |
|
| Net cash used in investing activities | (29,790 | ) | | (24,773 | ) | | (13,644 | ) |
| Cash flows from financing activities: | | | | | |
| Borrowings under revolving line of credit | — |
| | — |
| | 15,000 |
|
| Repayments under revolving line of credit | (10,000 | ) | | — |
| | (5,000 | ) |
| Payments on notes payable and long-term debt | (30,807 | ) | | (4,816 | ) | | (23,634 | ) |
| Cost associated with issuance of debt | (1,247 | ) | | (53 | ) | | (6,744 | ) |
| Net proceeds from issuance of stocks | 46,999 |
| | — |
| | — |
|
| Repurchase of common stock | — |
| | — |
| | (964 | ) |
| Proceeds from employee stock purchases and exercise of stock options | 214 |
| | 1,619 |
| | — |
|
| Dividend payment to noncontrolling interest | (200 | ) | | (100 | ) | | — |
|
| Other financing activities | (1,151 | ) | | (243 | ) | | (252 | ) |
| Net cash provided by (used in) financing activities | 3,808 |
| | (3,593 | ) | | (21,594 | ) |
| Effect of change in foreign currency exchange rates on cash, cash equivalents and restricted cash | 319 |
| | (260 | ) | | 1,386 |
|
| Net decrease in cash, cash equivalents and restricted cash | (18,565 | ) | | (1,014 | ) | | (32,859 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 52,419 |
| | 53,433 |
| | 86,292 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 33,854 |
| | $ | 52,419 |
| | $ | 53,433 |
|
The following table is a reconciliation of cash, cash equivalents and restricted cash:
|
| | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In thousands) |
| Cash and cash equivalents | $ | 33,551 |
| | $ | 52,056 |
| | $ | 52,652 |
|
| Restricted cash included in prepaid expenses and other current assets | — |
| | 60 |
| | 260 |
|
| Restricted cash included in other long-term assets | 303 |
| | 303 |
| | 521 |
|
| Total cash, cash equivalents, and restricted cash shown in consolidated statements of cash flows | $ | 33,854 |
| | $ | 52,419 |
| | $ | 53,433 |
|
See accompanying Footnotes to Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Noncontrolling Interests | | Total Equity |
| (In thousands, except shares) | Shares | | Amount | |
Balance at January 1, 2016 (a) | 10,702,689 |
| | $ | 107 |
| | $ | 894,715 |
| | $ | (759,531 | ) | | $ | (14,781 | ) | | $ | (8,551 | ) | | $ | 81 |
| | $ | 112,040 |
|
| Net (loss) income | — |
| | — |
| | — |
| | (65,148 | ) | | — |
| | — |
| | 421 |
| | (64,727 | ) |
| Translation adjustment | — |
| | — |
| | — |
| | — |
| | (6,967 | ) | | — |
| | 7 |
| | (6,960 | ) |
| Stock-based compensation expense | — |
| | — |
| | 3,267 |
| | — |
| | — |
| | — |
| | — |
| | 3,267 |
|
| Vesting of restricted stock units/awards | 40,495 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Purchase of treasury shares | (155,304 | ) | | (1 | ) | | — |
| | — |
| | — |
| | (963 | ) | | — |
| | (964 | ) |
| Restricted stock cancelled for employee minimum income taxes | (4,973 | ) | | — |
| | (22 | ) | | — |
| | — |
| | — |
| | — |
| | (22 | ) |
| Issuance of stock for the ESPP | 4,100 |
| | — |
| | 23 |
| | — |
| | — |
| | — |
| | — |
| | 23 |
|
| Issuance of stock in bond exchange | 1,205,440 |
| | 12 |
| | 1,215 |
| | — |
| | — |
| | 9,514 |
| | — |
| | 10,741 |
|
| Balance at December 31, 2016 | 11,792,447 |
| | 118 |
| | 899,198 |
| | (824,679 | ) | | (21,748 | ) | | — |
| | 509 |
| | 53,398 |
|
| Net (loss) income | — |
| | — |
| | — |
| | (30,242 | ) | | — |
| | — |
| | 865 |
| | (29,377 | ) |
| Translation adjustment | — |
| | — |
| | — |
| | — |
| | 2,869 |
| | — |
| | (35 | ) | | 2,834 |
|
| Dividend payment to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (100 | ) | | (100 | ) |
| Stock-based compensation expense | — |
| | — |
| | 2,552 |
| | — |
| | — |
| | — |
| | — |
| | 2,552 |
|
| Exercise of stock options | 15,000 |
| | — |
| | 46 |
| | — |
| | — |
| | — |
| | — |
| | 46 |
|
| Vesting of restricted stock units/awards | 115,576 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Employee purchases of unregistered shares of common stock | 120,567 |
| | 1 |
| | 1,572 |
| | — |
| | — |
| | — |
| | — |
| | 1,573 |
|
| Restricted stock cancelled for employee minimum income taxes | (23,889 | ) | | — |
| | (120 | ) | | — |
| | — |
| | — |
| | — |
| | (120 | ) |
| Balance at December 31, 2017 | 12,019,701 |
| | 120 |
| | 903,247 |
| | (854,921 | ) | | (18,879 | ) | | — |
| | 1,239 |
| | 30,806 |
|
| Net (loss) income | — |
| | — |
| | — |
| | (71,171 | ) | | — |
| | — |
| | 773 |
| | (70,398 | ) |
| Translation adjustment | — |
| | — |
| | — |
| | — |
| | (1,563 | ) | | — |
| | (220 | ) | | (1,783 | ) |
| Dividend payment to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (200 | ) | | (200 | ) |
| Stock-based compensation expense | — |
| | — |
| | 3,337 |
| | — |
| | — |
| | — |
| | — |
| | 3,337 |
|
| Exercise of stock options | 70,086 |
| | 1 |
| | 213 |
| | — |
| | — |
| | — |
| | — |
| | 214 |
|
| Vesting of restricted stock units/awards | 151,852 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Restricted stock cancelled for employee minimum income taxes | (46,024 | ) | | — |
| | (1,151 | ) | | — |
| | — |
| | — |
| | — |
| | (1,151 | ) |
| Public equity offering | 1,820,000 |
| | 18 |
| | 46,981 |
| | — |
| | — |
| | — |
| | — |
| | 46,999 |
|
| Balance at December 31, 2018 | 14,015,615 |
| | $ | 140 |
| | $ | 952,626 |
| | $ | (926,092 | ) | | $ | (20,442 | ) | | $ | — |
| | $ | 1,592 |
| | $ | 7,824 |
|
| |
| (a) | The figures for January 1, 2016, set forth in the tables above have been retroactively adjusted to reflect the one-for-fifteen reverse stock split completed on February 4, 2016. |
See accompanying Footnotes to Consolidated Financial Statements.
ION GEOPHYSICAL CORPORATION AND SUBSIDIARIES
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
General Description and Principles of Consolidation
ION Geophysical Corporation and its subsidiaries offer a full suite of services and products for seismic data acquisition and processing. The consolidated financial statements include the accounts of ION Geophysical Corporation and its majority-owned subsidiaries (collectively referred to as the “Company” or “ION”). Intercompany balances and transactions have been eliminated. Certain reclassifications were made to previously reported amounts in the consolidated financial statements and notes thereto to make them consistent with the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are made at discrete points in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Areas involving significant estimates include, but are not limited to, accounts and unbilled receivables, inventory valuation, sales forecasts related to multi-client data libraries, goodwill and intangible asset valuation and deferred taxes. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. At December 31, 2018 and 2017, there was $0.3 million and $0.4 million, respectively, of long-term and short-term restricted cash used to secure standby and commercial letters of credit, which is included within “Other long-term assets” and “Prepaid expenses and other current assets” in the Consolidated Balance Sheets.
Accounts and Unbilled Receivables
Accounts and unbilled receivables are recorded at cost, less the related allowance for doubtful accounts. The Company considers current information and events regarding the customers’ ability to repay their obligations, such as the length of time the receivable balance is outstanding, the customers’ credit worthiness and historical experience. Unbilled receivables relate to revenues recognized on multi-client surveys, imaging services and devices equipment repairs on a proportionate basis, and on licensing of multi-client data libraries for which invoices have not yet been presented to the customer.
Inventories
Inventories are stated at the lower of cost (primarily first-in, first-out method) or net realizable value. The Company provides reserves for estimated obsolescence or excess inventory equal to the difference between cost of inventory and its estimated net realizable value based upon assumptions about future demand for the Company’s products, market conditions and the risk of obsolescence driven by new product introductions.
Property, Plant, Equipment and Seismic Rental Equipment
Property, plant, equipment and seismic rental equipment are stated at cost. Depreciation expense is provided straight-line over the following estimated useful lives:
|
| |
| Years |
| Machinery and equipment | 3-7 |
| Buildings | 5-25 |
| Seismic rental equipment | 3-5 |
| Leased equipment and other | 3-10 |
Expenditures for renewals and betterments are capitalized; repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss is reflected in operating expenses.
The Company evaluates the recoverability of long-lived assets, including property, plant, equipment and seismic rental equipment, when indicators of impairment exist, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. Impairment in the carrying value of an asset held for use is recognized whenever anticipated future undiscounted cash flows from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value. For 2018, the Company identified an indicator of impairment as it relates to its cable-based ocean bottom acquisition technologies. As a result, the Company recognized an impairment charge of $36.6 million.
Multi-Client Data Library
The multi-client data library consists of seismic surveys that are offered for licensing to customers on a non-exclusive basis. The capitalized costs include costs paid to third parties for the acquisition of data and related activities associated with the data creation activity and direct internal processing costs, such as salaries, benefits, computer-related expenses and other costs incurred for seismic data project design and management. For 2018, 2017 and 2016, the Company capitalized, as part of its multi-client data library, $11.9 million, $12.7 million and $6.6 million, respectively, of direct internal processing costs. At December 31, 2018 and 2017, multi-client data library costs and accumulated amortization consisted of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Gross costs of multi-client data creation | $ | 972,309 |
| | $ | 939,077 |
|
| Less accumulated amortization | (776,860 | ) | | (727,872 | ) |
| Less impairments to multi-client data library | (121,905 | ) | | (121,905 | ) |
| Multi-client data library, net | $ | 73,544 |
| | $ | 89,300 |
|
The Company’s method of amortizing the costs of an in-process multi-client data library (the period during which the seismic data is being acquired and/or processed, referred to as the “New Venture” phase) consists of determining the percentage of actual revenue recognized to the total estimated revenues (which includes both revenues estimated to be realized during the New Venture phase and estimated revenues from the licensing of the resulting “on-the-shelf” data survey) and multiplying that percentage by the total cost of the project (the sales forecast method). The Company considers a multi-client data survey to be complete when all work on the creation of the seismic data is finished and that data survey is available for licensing. Once a multi-client data survey is complete, the data survey is considered “on-the-shelf” and the Company’s method of amortization is then the greater of (i) the sales forecast method or (ii) the straight-line basis over a four-year period. The greater amount of amortization resulting from the sales forecast method or the straight-line amortization policy is applied on a cumulative basis at the individual survey level. Under this policy, the Company first records amortization using the sales forecast method. The cumulative amortization recorded for each survey is then compared with the cumulative straight-line amortization. The four-year period utilized in this cumulative comparison commences when the data survey is determined to be complete. If the cumulative straight-line amortization is higher for any specific survey, additional amortization expense is recorded, resulting in accumulated amortization being equal to the cumulative straight-line amortization for such survey. The Company has determined the amortization period of four years based upon its historical experience that indicates that the majority of its revenues from multi-client surveys are derived during the acquisition and processing phases and during four years subsequent to survey completion.
The Company estimates the ultimate revenue expected to be derived from a particular seismic data survey over its estimated useful economic life to determine the costs to amortize, if greater than straight-line amortization. That estimate is made by the Company at the project’s initiation. For a completed multi-client survey, the Company reviews the estimate quarterly. If during any such review, the Company determines that the ultimate revenue for a survey is expected to be materially more or less than the original estimate of ultimate revenue for such survey, the Company decreases or increases (as the case may be) the amortization rate attributable to the future revenue from such survey. In addition, in connection with such reviews, the Company evaluates the recoverability of the multi-client data library, and, if required, records an impairment charge with respect to such data.
Equity Method Investment
The Company determined that INOVA Geophysical is a variable interest entity because the Company’s voting rights with respect to INOVA Geophysical are not proportionate to its ownership interest and substantially all of INOVA Geophysical’s activities are conducted on behalf of the Company and BGP, a related party to the Company. The Company is not the primary beneficiary of INOVA Geophysical because it does not have the power to direct the activities of INOVA Geophysical that most significantly impact its economic performance. Accordingly, the Company does not consolidate INOVA Geophysical, but instead accounts for INOVA Geophysical using the equity method of accounting. Under this method, an investment is carried at the acquisition cost, plus the Company’s equity in undistributed earnings or losses since acquisition, less distributions received.
At December 31, 2014, the Company fully impaired its investment in INOVA reducing its equity investment in INOVA and its share of INOVA’s accumulated other comprehensive loss, both to zero. As of December 31, 2018, the carrying value of this investment remains zero. The Company no longer records its equity in losses or earnings and has no obligation, implicit or explicit, to fund any expenses of INOVA Geophysical.
Noncontrolling Interests
The Company has non-redeemable noncontrolling interests. Non-redeemable noncontrolling interests in majority-owned affiliates are reported as a separate component of equity in “Noncontrolling interests” in the Consolidated Balance Sheets. Net income attributable to noncontrolling interests is stated separately in the Consolidated Statements of Operations. The activity for this noncontrolling interest relates to proprietary processing projects in Brazil.
Goodwill
Goodwill is allocated to reporting units, which are either the operating segment or one reporting level below the operating segment. For purposes of performing the impairment test for goodwill, the Company established the following reporting units: E&P Technology & Services, Optimization Software & Services, Devices and Ocean Bottom Integrated Technologies.
The Company is required to evaluate the carrying value of its goodwill at least annually for impairment, or more frequently if facts and circumstances indicate that it is more likely than not impairment has occurred. The Company formally evaluates the carrying value of its goodwill for impairment as of December 31 for each of its reporting units. The Company first performs a qualitative assessment by evaluating relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. If the Company is unable to conclude qualitatively that it is more likely than not that a reporting unit’s fair value exceeds its carrying value, then it will use a two-step quantitative assessment of the fair value of a reporting unit. To determine the fair value of these reporting units, the Company uses a discounted future returns valuation model, which includes a variety of level 3 inputs. The key inputs for the model include the operational three-year forecast for the Company and the then-current market discount factor. Additionally, the Company compares the sum of the estimated fair values of the individual reporting units less consolidated debt to the Company’s overall market capitalization as reflected by the Company’s stock price. If the carrying value of a reporting unit that includes goodwill is determined to be more than the fair value of the reporting unit, there exists the possibility of impairment of goodwill. An impairment loss of goodwill is measured in two steps by first allocating the fair value of the reporting unit to net assets and liabilities including recorded and unrecorded intangible assets to determine the implied carrying value of goodwill. The next step is to measure the difference between the carrying value of goodwill and the implied carrying value of goodwill, and, if the implied carrying value of goodwill is less than the carrying value of goodwill, an impairment loss is recorded equal to the difference. See further discussion below at Footnote 11 “Goodwill.”
Revenue From Contracts With Customers
On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606 - “Revenue from Contracts with Customers” and all the related amendments (“ASC 606”), using the modified retrospective method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaborative arrangements and financial instruments. The adoption of ASC 606 did not have a material impact on the Consolidated Balance Sheets or Consolidated Statements of Operations for any of our reporting segments. See further discussion below at Footnote 3 “Revenue from Contracts with Customers.”
Research, Development and Engineering
Research, development and engineering costs primarily relate to activities that are designed to improve the quality of the subsurface image and overall acquisition economics of the Company’s customers. The costs associated with these activities are expensed as incurred. These costs include prototype material and field testing expenses, along with the related salaries and stock-based compensation, facility costs, consulting fees, tools and equipment usage and other miscellaneous expenses associated with these activities.
Stock-Based Compensation
The Company accounts for all stock-based payment awards issued to employees and directors, including employee stock options, restricted stocks units, restricted stocks and stock appreciation rights under the provisions of ASC 718 “Compensation – Stock Compensation” (“ASC 718”). The Company estimates the value of stock-based payment awards on the date of grant using an option pricing model such as Black-Scholes or Monte Carlo simulation. The determination of the fair value of stock-based payment awards is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, actual and projected stock-based instrument exercise behaviors, risk-free interest rate and expected dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recognizes stock-based compensation expense on the straight-line basis over the requisite service period of each award that are ultimately expected to vest.
Income Taxes
Income taxes are accounted for under the liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, including operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized (see Footnote 7 “Income Taxes”). The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Debt Issuance Costs
The Company presents debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability on the Consolidated Balance Sheets and amortizes such costs using the effective interest method whereas debt issuance costs related to line of credit arrangement is presented within “Other assets” on the Consolidated Balance Sheets and amortized ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement.
Foreign Currency Gains and Losses
Assets and liabilities of the Company’s subsidiaries operating outside the United States that have a functional currency other than the U.S. dollar have been translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Results of foreign operations have been translated using the average exchange rate during the periods of operation. Resulting translation adjustments have been recorded as a component of Accumulated Other Comprehensive Loss. Foreign currency transaction gains and losses, as they occur, are included in “Other income (expense), net” on the Consolidated Statements of Operations. Total foreign currency transaction losses were $0.4 million, $1.6 million and $3.3 million for 2018, 2017 and 2016, respectively.
Concentration of Foreign Sales Risk
The majority of the Company’s foreign sales are denominated in U.S. dollars. For 2018, 2017 and 2016, international sales comprised 75%, 76% and 78%, respectively, of total net revenues. Since 2008, global economic problems and uncertainties have generally increased in scope and nature. The volatility in oil prices have continued to impact the global market throughout 2018. To the extent that world events or economic conditions negatively affect the Company’s future sales to customers in many regions of the world, as well as the collectability of the Company’s existing receivables, the Company’s future results of operations, liquidity and financial condition would be adversely affected.
(2) Segment and Geographic Information
The Company evaluates and reviews its results based on three business segments: E&P Technology & Services, Operations Optimization, and Ocean Bottom Integrated Technologies. The Company measures segment operating results based on income (loss) from operations.
A summary of segment information follows (in thousands):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net revenues: | | | | | |
| E&P Technology & Services: | | | | | |
| New Venture | $ | 69,685 |
| | $ | 100,824 |
| | $ | 27,362 |
|
| Data Library | 47,095 |
| | 40,016 |
| | 39,989 |
|
| Total multi-client revenues | 116,780 |
| | 140,840 |
| | 67,351 |
|
| Imaging Services | 19,740 |
| | 16,409 |
| | 25,538 |
|
| Total | $ | 136,520 |
| | $ | 157,249 |
| | $ | 92,889 |
|
| Operations Optimization: | | | | | |
| Devices | $ | 22,396 |
| | $ | 23,610 |
| | $ | 26,746 |
|
| Optimization Software & Services | 21,129 |
| | 16,695 |
| | 16,756 |
|
| Total | $ | 43,525 |
| | $ | 40,305 |
| | $ | 43,502 |
|
| Ocean Bottom Integrated Technologies | $ | — |
| | $ | — |
| | $ | 36,417 |
|
| Total | $ | 180,045 |
| | $ | 197,554 |
| | $ | 172,808 |
|
| Gross profit (loss): | | | | | |
| E&P Technology & Services | $ | 43,369 |
| | $ | 65,196 |
| | $ | 4,708 |
|
| Operations Optimization | 22,293 |
| | 20,076 |
| | 21,745 |
|
| Ocean Bottom Integrated Technologies | (6,042 | ) | | (9,633 | ) | | 9,579 |
|
| Total | $ | 59,620 |
| | $ | 75,639 |
| | $ | 36,032 |
|
| Gross margin: | | | | | |
| E&P Technology & Services | 32 | % | | 41 | % | | 5 | % |
| Operations Optimization | 51 | % | | 50 | % | | 50 | % |
| Ocean Bottom Integrated Technologies | — | % | | — | % | | 26 | % |
| Total | 33 | % | | 38 | % | | 21 | % |
| Income (loss) from operations: | | | | | |
| E&P Technology & Services | $ | 21,758 |
| | $ | 42,505 |
| | $ | (16,446 | ) |
| Operations Optimization | 7,295 |
| | 8,022 |
| | 9,652 |
|
| Ocean Bottom Integrated Technologies | (47,644 | ) | (a) | (16,259 | ) | | (1,756 | ) |
| Support and other | (35,681 | ) | | (42,967 | ) | | (34,621 | ) |
| Loss from operations | (54,272 | ) | | (8,699 | ) | | (43,171 | ) |
| Interest expense, net | (12,972 | ) | | (16,709 | ) | | (18,485 | ) |
| Other income (expense), net | (436 | ) | | (3,945 | ) | | 1,350 |
|
| Loss before income taxes | $ | (67,680 | ) | | $ | (29,353 | ) | | $ | (60,306 | ) |
(a) Includes a charge of $36.6 million to write-down the cable-based ocean bottom acquisition technologies associated with the Ocean Bottom Integrated Technologies segment. This impairment relates to property, plant, equipment and seismic rental equipment of $21.3 million within the Operations Optimization segment and $15.3 million within the Ocean Bottom Integrated Technologies segment.
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Depreciation and amortization (including multi-client data library): | | | | | |
| E&P Technology & Services | $ | 51,673 |
| | $ | 53,663 |
| | $ | 44,100 |
|
| Operations Optimization | 995 |
| | 1,349 |
| | 1,780 |
|
| Ocean Bottom Integrated Technologies | 4,231 |
| | 7,001 |
| | 7,511 |
|
| Support and other | 852 |
| | 1,681 |
| | 1,919 |
|
| Total | $ | 57,751 |
| | $ | 63,694 |
| | $ | 55,310 |
|
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Total assets: | | | |
| E&P Technology & Services | $ | 165,132 |
| | $ | 156,555 |
|
| Operations Optimization | 51,783 |
| | 74,361 |
|
| Ocean Bottom Integrated Technologies | 1,177 |
| | 20,828 |
|
| Support and other | 26,657 |
| | 49,325 |
|
| Total | $ | 244,749 |
| (a) | $ | 301,069 |
|
(a) Balance is net of impairment charge of $36.6 million related to the cable-based ocean bottom acquisition technologies.
A summary of total assets by geographic area follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| North America | $ | 86,614 |
| | $ | 116,598 |
|
| Latin America | 69,418 |
| | 55,661 |
|
| Middle East | 52,037 |
| | 70,308 |
|
| Europe | 31,566 |
| | 51,876 |
|
| Other | 5,114 |
| | 6,626 |
|
| Total | $ | 244,749 |
| | $ | 301,069 |
|
A summary of property, plant, equipment and seismic equipment less accumulated depreciation and impairment by geographic area follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| North America | $ | 11,663 |
| | $ | 10,609 |
|
| Europe | 1,140 |
| | 20,725 |
|
| Latin America | 143 |
| | 170 |
|
| Middle East | 36 |
| | 20,543 |
|
| Other | 59 |
| | 106 |
|
| Total | $ | 13,041 |
| (a) | $ | 52,153 |
|
(a) Balance is net of impairment charge of $36.6 million related to the cable-based ocean bottom acquisition technologies.
Intersegment sales are insignificant for all periods presented. Support and other assets include all assets specifically related to support personnel and operation and a majority of cash and cash equivalents. Depreciation and amortization expense is allocated to segments based upon use of the underlying assets.
A summary of net revenues by geographic area follows (in thousands):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Latin America | $ | 68,871 |
| | $ | 68,241 |
| | $ | 24,090 |
|
| North America | 44,474 |
| | 48,120 |
| | 38,005 |
|
| Europe | 31,077 |
| | 44,930 |
| | 41,674 |
|
| Asia Pacific | 17,817 |
| | 18,896 |
| | 16,226 |
|
| Africa | 10,837 |
| | 6,837 |
| | 41,417 |
|
| Middle East | 5,526 |
| | 2,308 |
| | 9,467 |
|
| Commonwealth of Independent States | 1,443 |
| | 8,222 |
| | 1,929 |
|
| Total | $ | 180,045 |
| | $ | 197,554 |
| | $ | 172,808 |
|
Net revenues are attributed to geographic areas on the basis of the ultimate destination of the equipment or service, if known, or the geographic area imaging services are provided. If the ultimate destination of such equipment is not known, net revenues are attributed to the geographic area of initial shipment.
(3) Revenue from Contracts with Customers
The Company derives revenue from the sale or license of (i) multi-client and proprietary data, imaging services and E&P Advisors consulting services within its E&P Technology & Services segment; (ii) seismic data acquisition systems and other seismic equipment, (iii) seismic command and control software systems and software solutions for operations management within its Operations Optimization segment; and (iv) a full suite of technology and services within its Ocean Bottom Integrated Technologies segment. All revenues of the E&P Technology & Services and Ocean Bottom Integrated Technologies segments and the services component of revenues for the Optimization Software & Services group as part of the Operations Optimization segment are classified as services revenues. All other revenues are classified as product revenues.
The Company uses a five-step model to determine proper revenue recognition from customer contracts. Revenue is recognized when (i) a contract is approved by all parties; (ii) the goods or services promised in the contract are identified; (iii) the consideration the Company expects to receive in exchange for the goods or services promised is determined; (iv) the consideration is allocated to the goods and services in the contract; and (v) control of the promised goods or services is transferred to the customer. The Company does not disclose the value of contractual future performance obligations such as backlog with an original expected length of one year or less within the footnotes.
Multi-client and Proprietary Surveys, Imaging Services and E&P Advisors Services - As multi-client seismic surveys are being designed, acquired or processed (the “New Venture” phase), the Company enters into non-exclusive licensing arrangements with its customers, who pre-fund or underwrite these programs in part. License revenues from these surveys are recognized during the New Venture phase as the seismic data is acquired and/or processed on a proportionate basis as work is performed and control is transferred to the customer. Under this method, the Company recognizes revenue based upon quantifiable measures of progress, such as kilometers acquired or surveys of performance completed to date. Upon completion of a multi-client seismic survey, it is considered “on-the-shelf,” and licenses to the survey data are granted to customers on a non-exclusive basis.
The Company also performs seismic surveys, imaging and other services under contracts with specific customers, whereby the seismic data is owned by those customers. The Company recognizes revenue as the seismic data is acquired and/or processed on a proportionate basis as work is performed. The Company uses quantifiable measures of progress consistent with its multi-client seismic surveys.
Acquisition Systems and Other Seismic Equipment - For sales of seismic data acquisition systems and other seismic equipment, the Company recognizes revenue when control of the goods has transferred to the customer. Transfer of control generally occurs when (i) the Company has a present right to payment; (ii) the customer has legal title to the asset; (iii) the Company has transferred physical possession of the asset; and (iv) the customer has significant rewards of ownership; or (v) the customer has accepted the asset.
Software - Licenses for the Company’s navigation, survey design and quality control software systems provide the customer with a right to use the software. The Company offers usage-based licenses under which it receives a monthly fee based on the number of vessels and licenses used. For these usage-based licenses, revenue is recognized as the performance obligations are performed over the contract term, which is generally two to five years. In addition to usage-based licenses, the Company offers perpetual software licenses as it exists when made available to the customer. Revenue from these licenses is recognized upfront at the point in time when the software is made available to the customer.
These arrangements generally include the Company providing related services, such as training courses, engineering services and annual software maintenance. The Company allocates consideration to each element of the arrangement based upon directly observable or estimated standalone selling prices. Revenue is recognized for these services as control transfers to the customer over time.
Ocean Bottom Integrated Technologies - The Company recognizes revenue as the seismic data is acquired and control transfers to the customer. The Company uses quantifiable measures of progress consistent with its multi-client surveys. In connection with acquisition contracts, the Company may receive revenues for preparation and mobilization of equipment and personnel, capital improvements to vessels, or demobilization activities. The Company defers the revenues earned and incremental costs incurred that are directly related to these activities and recognizes such revenues and costs over the primary contract term of the acquisition project as it transfers the goods and services to the customer. The Company recognizes the costs of relocating vessels without contracts to more promising market sectors as such costs are incurred.
Revenue by Segment and Geographic Area
See Footnote 2 “Segment Information” of Footnotes to Consolidated Financial Statements for revenue by segment and revenue by geographic area for the years ended December 31, 2018, 2017 and 2016. In 2018, the Company had two customers with sales that each exceeded 10% of the consolidated net revenues. Revenues related to these customers are included within the E&P Technology & Services segment. In 2017, the Company had one customer with sales that exceeded 10% of the consolidated net revenues and revenues related to this customer are included within the E&P Technology & Services segment. No single customer represented 10% or more of the consolidated net revenues for 2016.
Unbilled Receivables
Unbilled receivables relate to revenues recognized on multi-client surveys, imaging services and Devices equipment repairs on a proportionate basis, and on licensing of multi-client data libraries for which invoices have not yet been presented to the customer. The following table is a summary of unbilled receivables (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| New Venture | $ | 38,430 |
| | $ | 33,183 |
|
| Imaging Services | 5,075 |
| | 4,121 |
|
| Devices | 527 |
| | — |
|
| Total | $ | 44,032 |
| | $ | 37,304 |
|
The changes in unbilled receivables were as follows (in thousands):
|
| | | |
| | |
| Unbilled receivables at December 31, 2017 | $ | 37,304 |
|
| Recognition of unbilled receivables | 153,611 |
|
| Revenues billed to customers | (146,883 | ) |
| Unbilled receivables at December 31, 2018 | $ | 44,032 |
|
Deferred Revenue
Billing practices are governed by the terms of each contract based upon achievement of milestones or pre-agreed schedules. Billing does not necessarily correlate with revenue recognized on a proportionate basis as work is performed and control is transferred to the customer. Deferred revenue represents cash received in excess of revenue not yet recognized as of the reporting period, but will be recognized in future periods. The following table is a summary of deferred revenues (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| New Venture | $ | 5,797 |
| | $ | 6,548 |
|
| Imaging Services | 307 |
| | 676 |
|
| Devices | 626 |
| | 633 |
|
| Optimization Software & Services | 980 |
| | 1,053 |
|
| Total | $ | 7,710 |
| | $ | 8,910 |
|
The changes in deferred revenues were as follows (in thousands):
|
| | | |
| | |
| Deferred revenue at December 31, 2017 | $ | 8,910 |
|
| Cash collected in excess of revenue recognized | 25,234 |
|
Recognition of deferred revenue (a) | (26,434 | ) |
| Deferred revenue at December 31, 2018 | $ | 7,710 |
|
(a) The majority of deferred revenue recognized relates to Company’s Ventures group.
The Company expects to recognize all deferred revenue within the next 12 months.
(4) Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-2, “Leases (Topic 842)” which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The Company will adopt ASU 2016-2 on January 1, 2019 using the modified retrospective method. The Company has completed its evaluation of operating leases related to offices, processing centers, warehouse spaces and, to a lesser extent, certain equipment. The Company expects the adoption of the standard will result in approximately $50 million to $60 million in right-of-use assets and lease obligations on the Consolidated Balance Sheets. The Company expects the Income Statement recognition to appear similar to its current methodology. The Company will elect the practical expedients upon transition which will retain the lease classification for leases and any unamortized initial direct costs that existed prior to the adoption of the standard.
On January 1, 2018, the Company adopted ASC 606 and all the related amendments using the modified retrospective method. The adoption did not have a material impact to the Company’s revenue recognition policy under the previous standard and adoption of the new standard did not result in an adjustment to the Company’s beginning retained earnings balance.
On January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows “Restricted Cash (a consensus of the FASB Emerging Issues Task Force)”, using a retrospective transition method to each period presented. The new standard no longer requires the Company to present transfers between cash and cash equivalents and restricted cash in the statements of cash flows. Adoption of the new standard resulted in a decrease of $0.4 million and $0.6 million in net cash provided by operating activities as previously reported for the years ended December 31, 2017 and 2016, respectively. See the Consolidated Statements of Cash Flows above which includes a reconciliation of cash and cash equivalents to total cash, cash equivalents, and restricted cash.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losseson Financial Instruments.” Theguidance will replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates The guidance is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. The Company is in the initial stages of evaluating the impact of this standard on the Consolidated Financial Statements.
(5) Long-term Debt and Lease Obligations
The following is a summary of long-term debt and lease obligation (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2018 | | 2017 |
Senior secured second-priority lien notes (maturing December 15, 2021) | | $ | 120,569 |
| | $ | 120,569 |
|
Senior secured third-priority lien notes (redeemed March 26, 2018) | | — |
| | 28,497 |
|
Revolving credit facility (amended August 16, 2018, maturing August 16, 2023) (a) | | — |
| | 10,000 |
|
| Equipment capital leases | | 2,938 |
| | 279 |
|
| Other debt | | 1,159 |
| | 1,382 |
|
| Costs associated with issuances of debt | | (2,925 | ) | | (3,983 | ) |
| Total | | 121,741 |
| | 156,744 |
|
| Current portion of long-term debt and lease obligations | | (2,228 | ) | | (40,024 | ) |
| Non-current portion of long-term debt and lease obligations | | $ | 119,513 |
| | $ | 116,720 |
|
(a)The maturity of the revolving credit facility will accelerate to December 15, 2021 if the Company is unable to repay or extend the maturity of the Second Lien Notes.
Revolving Credit Facility
On August 16, 2018, ION and its material U.S. subsidiaries; GX Technology Corporation, ION Exploration Products (U.S.A) Inc. and I/O Marine Systems Inc. (the “Material U.S. Subsidiaries”), along with GX Geoscience Corporation, S. de R.L. de C.V., a limited liability company (Sociedad de Responsibilidad Limitada de Capital Variable) organized under the laws of Mexico, and a subsidiary of the Company (the “Mexican Subsidiary”), (the Material U.S. Subsidiaries and the Mexican Subsidiary are collectively, the “Subsidiary Borrowers”, together with ION Geophysical Corporation are the “Borrowers”), the financial institutions party thereto, as lenders, and PNC Bank, National Association (“PNC”), as agent for the lenders, entered into that certain Third Amendment and Joinder to Revolving Credit and Security Agreement (the “Third Amendment”), amending the Revolving Credit and Security Agreement, dated as of August 22, 2014 (as previously amended by the First
Amendment to Revolving Credit and Security Agreement, dated as of August 4, 2015 and the Second Amendment to Revolving Credit and Security Agreement, dated as of April 28, 2016, the “Credit Agreement”). The Credit Agreement, as amended by the First Amendment, the Second Amendment and the Third Amendment is herein called, the “Credit Facility”).
The Credit Facility is available to provide for the Borrowers’ general corporate needs, including working capital requirements, capital expenditures, surety deposits and acquisition financing.
The Third Amendment amends the Credit Agreement to, among other things:
extend the maturity date of the Credit Facility by approximately four years (from August 22, 2019 to August 16, 2023), subject to the retirement or extension of the maturity date of the Second Lien Notes, as defined below, which mature on December 15, 2021;
increase the maximum revolver amount by $10 million (from $40 million to $50 million);
increase the borrowing base percentage of the net orderly liquidation value as it relates to the multi-client data library (not to exceed $28.5 million, up from the previous maximum of $15 million for the multi-client data library component);
include the eligible billed receivables of the Mexican Subsidiary up to a maximum of $5 million in the borrowing base calculation and joins the Mexican Subsidiary as a borrower thereunder (with a maximum exposure of $5 million) and require the equity and assets of the Mexican Subsidiary to be pledged to secure obligations under the Credit Facility;
modify the interest rate such that the maximum interest rate remains consistent with the fixed interest rate prior to the Third Amendment (that is, 3.00% per annum for domestic rate loans and 4.00% per annum for LIBOR rate loans), but now lowers the range down to a minimum interest rate of 2.00% for domestic rate loans and 3.00% for LIBOR rate loans based on a leverage ratio for the preceding four-quarter period;
decrease the minimum excess borrowing availability threshold which (if the Borrowers have minimum excess borrowing availability below any such threshold) triggers the agent’s right to exercise dominion over cash and deposit accounts; and
modify the trigger required to test for compliance with the fixed charge coverage ratio, which is further described below.
The maximum amount under the Credit Facility is the lesser of $50.0 million or a monthly borrowing base. The borrowing base under the Credit Facility will increase or decrease monthly using a formula based on certain eligible receivables, eligible inventory and other amounts, including a percentage of the net orderly liquidation value of the Borrowers’ multi-client data library. As of December 31, 2018, the borrowing base under the Credit Facility was $41.9 million and there was no outstanding indebtedness under the Credit Facility.
The obligations of Borrowers under the Credit Facility are secured by a first-priority security interest in 100% of the stock of the Subsidiary Borrowers and 65% of the equity interest in ION International Holdings L.P. and by substantially all other assets of the Borrowers. However, the first-priority security interest in the other assets of the Mexican Subsidiary is limited to a maximum exposure of $5.0 million.
The Credit Facility contains covenants that, among other things, limit or prohibit the Borrowers, subject to certain exceptions and qualifications, from incurring additional indebtedness in excess of permitted indebtedness (including capital lease obligations), repurchasing equity, paying dividends or distributions, granting or incurring additional liens on the Borrowers’ properties, pledging shares of the Borrowers’ subsidiaries, entering into certain merger transactions, entering into transactions with the Company’s affiliates, making certain sales or other dispositions of the Borrowers’ assets, making certain investments, acquiring other businesses and entering into sale-leaseback transactions with respect to the Borrowers’ property.
The Credit Facility, requires that ION and the Subsidiary Borrowers maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 as of the end of each fiscal quarter during the existence of a covenant testing trigger event. 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. A covenant testing trigger event occurs upon (a) the occurrence and continuance of an event of default under the Credit Facility or (b) by a two-step process based on (i) a minimum excess borrowing availability threshold (excess borrowing availability less than $6.25 million for five consecutive business days or $5.0 million on any given business day, and (ii) the Borrowers’ unencumbered cash maintained in a PNC deposit account is less that the Borrowers’ then outstanding obligations. Prior to the Third Amendment, the test covenant compliance was tied to a total liquidity measure (liquidity less than $7.5 million for five consecutive days or $6.5 million on any given day).
As of December 31, 2018, the Company was in compliance with all of the covenants under the Credit Facility.
The Credit Facility, as amended, 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 Credit Facility.
Senior Secured Notes
As of December 31, 2018, ION Geophysical Corporation’s 9.125% Senior Secured Second Priority Notes due December 2021 (the “Second Lien Notes”) had an outstanding principal amount of $120.6 million. Prior to its early redemption, ION Geophysical Corporation’s 8.125% Senior Secured Second-Priority Notes due May 2018 (the “Third Lien Notes”) had an aggregate principal amount of $28.5 million. In March 2018, ION Geophysical Corporation obtained consent from a majority of the Second Lien Notes holders and from PNC to redeem, in full, the Third Lien Notes prior to their stated maturity. On March 26, 2018, ION Geophysical Corporation redeemed the Third Lien Notes by paying the then outstanding principal amount, plus all accrued and unpaid interest through the redemption date.
The Second Lien Notes remain outstanding and are senior secured second-priority obligations guaranteed by the Material U.S. Subsidiaries and the Mexican Subsidiary (each as defined above and herein below, with the reference to the Second Lien Notes, the “Guarantors”). Interest on the Second Lien Notes accrues at the rate of 9.125% per annum and is payable semiannually in arrears on June 15 and December 15 of each year during their term, except that the interest payment otherwise payable on June 15, 2021 will be payable on December 15, 2021.
The April 2016 indenture governing the Second Lien Notes contains certain covenants that, among other things, limits or prohibits ION Geophysical Corporation’s ability and the ability of its restricted subsidiaries to take certain actions or permit certain conditions to exist during the term of the Second Lien Notes, including among other things, incurring additional indebtedness, creating liens, paying dividends and making other distributions in respect of ION Geophysical Corporation’s capital stock, redeeming ION Geophysical Corporation’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 Second Lien Notes Indenture are subject to certain exceptions and qualifications. All of ION Geophysical Corporation’s subsidiaries are currently restricted subsidiaries.
As of December 31, 2018, the Company was in compliance with the covenants with respect to the Second Lien Notes.
On or after December 15, 2019, the Company may on one or more occasions redeem all or a part of the Second Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest and special interest, if any, on the Second Lien Notes redeemed during the twelve-month period beginning on December 15th of the years indicated below:
|
| | |
| Date | | Percentage |
| 2019 | | 105.500% |
| 2020 | | 103.500% |
| 2021 and thereafter | | 100.000% |
Equipment Capital Leases
The Company has entered into capital leases that are due in installments for the purpose of financing the purchase of computer equipment through 2019.2021. Interest accrues under these leases at rates of upfrom 4.3% to 4.3%8.7% per annum, and the leases are collateralized by liens on the computer equipment. The assets are amortized over the lesser of their related lease terms or their estimated productive lives and such charges are reflected within depreciation expense.
A summary of future principal obligations under long-term debt and equipment capital lease obligations follows (in thousands):
| | | Years Ended December 31, | | Short-Term and Long-Term Debt | | Capital Lease Obligations | | Other Financing | | Total | |
| 2018 | | $ | 38,497 |
| | $ | 250 |
| | $ | 1,382 |
| | $ | 40,129 |
| |
| Years Ending December 31, | | | Short-Term and Long-Term Debt | | Capital Lease Obligations | | Other Financing | | Total |
| 2019 | | — |
| | 29 |
| | — |
| | 29 |
| | $ | — |
| | $ | 1,069 |
| | 1,159 |
| | $ | 2,228 |
|
| 2020 | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,135 |
| | — |
| | 1,135 |
|
| 2021 | | — |
| | — |
| | — |
| | — |
| | 120,569 |
| | 734 |
| | — |
| | 121,303 |
|
| 2022 | | 120,569 |
| | — |
| | — |
| | 120,569 |
| |
| Total | | $ | 159,066 |
| | $ | 279 |
| | $ | 1,382 |
| | $ | 160,727 |
| | $ | 120,569 |
| | $ | 2,938 |
| | $ | 1,159 |
| | $ | 124,666 |
|
The Company’s U.S. federal tax returns for 20142015 and subsequent years remain subject to examination by tax authorities. The Company is no longer subject to Internal Revenue Service (“IRS”) examination for periods prior to 2015, although carryforward attributes that were generated prior to 2015 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 20132012 and subsequent years generally remain open to examination.
A summary of property, plant, equipment and seismic rental equipment follows (in thousands):
The Company has adopted stock option plans for eligible employees, directors and consultants, which provide for the granting of options to purchase shares of common stock. The options under these plans generally vest in equal annual installments over a four-year period and have a term of ten years. These options are typically granted at pre-established quarterly grant dates with an exercise price per share equal to or greater than the current market price and, upon exercise, are issued from the Company’s unissued common shares. In August 2006, the Compensation Committee (“Committee”) of the Board of Directors (“Board”) of the Company approved fixed pre-established quarterly grant dates for all future grants of options.
The Company has issued restricted stock and restricted stock units under the Company’s 2013 Long-Term Incentive PlanLTIP, as amended and other applicable plans. Restricted stock units are awards that obligate the Company to issue a specific number of shares of common stock in the future if continued service vesting requirements are met. Non-forfeitable ownership of the common stock will vest over a period as determined by the Company in its sole discretion, generally in equal annual installments over a three-year period. Shares of restricted stock awarded may not be sold, assigned, transferred, pledged or otherwise encumbered by the grantee during the vesting period.
To encourage the Company’s executive officers and other key employees to purchase common stock of the Company and further align their interests with those of the Company’s stockholders, the Board authorized and approved an equity investment program (the “Program”) pursuant to which certain of the executive officers and other key employees of the Company are permitted, but not obligated, to purchase unregistered shares of common stock of the Company directly from the Company at market prices. In connection with any such purchases, the Committee authorized and approved, on December 13, 2017, a grant by the Company to such purchasing executive officers and key employees of a certain number of shares of restricted stock. On December 13, 2017, the Committee also authorized and approved to grant to certain executive officers and key employees a certain number of shares of restricted stock in connection with certain purchases of shares of the Company’s common stock in the open market.
A summary of future rental commitments over the next five years under non-cancelable operating leases follows (in thousands):
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.
Due to their highly liquid nature, the amount of the Company’s other financial instruments, including cash and cash equivalents, restricted cash, accounts and unbilled receivables, short term investments, accounts payable and accrued multi-client data library royalties, represent their approximate fair value.
A summary of selected quarterly information follows (in thousands, except per share amounts):
The Company acquired DigiCourse, Inc., the Company’s marine positioning products business, from Laitram in 1998. In connection with that acquisition, the Company entered into a Continued Services Agreement with Laitram under which Laitram agreed to provide the Company certain bookkeeping, software, manufacturing and maintenance services. Manufacturing services consist primarily of machining of parts for the Company’s marine positioning systems. The term of this agreement expired in September 2001 but the Company continues to operate under its terms. In addition, from time to time, when the Company has requested, the legal staff of Laitram has advised the Company on certain intellectual property matters with regard to the Company’s marine positioning systems. During 2018 and 2017, the Company paid Laitram and its affiliates $0.4 million and $0.2 million, respectively, which consisted of manufacturing services and reimbursement of costs. During 2016, and 2015 the Company paid less than $0.1 million in each year for reimbursement for costs related to providing administrative and other back-office support services in connection with the Company’s Louisiana marine operations. In addition, the Company is currently subleasing approximately 4,100 square feet of office space to Laitram. In the opinion of the Company’s management, the terms of these services are fair and reasonable and as favorable to the Company as those that could have been obtained from unrelated third parties at the time of their performance.
The consolidating adjustments necessary to present ION Geophysical Corporation’s results on a consolidated basis.