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ION GEOPHYSICAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Executive Summary Our Business We are a global, technology-focused seismic solutions company. Our services and products include data processing and reservoir imaging services; planning services for survey design and optimization; navigation, command and control, and data management software products; and marine and land seismic data acquisition equipment. In addition, we maintain a multi-client data library with seismic data acquired and processed from surveys of offshore and onshore regions around the world. We serve customers in all major energy producing regions of the world from strategically located offices in 20 cities on five continents. For over 45 years we have been engaged in providing industry leading seismic data acquisition technology, such as full-wave imaging capability with VectorSeis® products, the ability to record seismic data from basins that underlie ice fields in polar regions and cableless seismic techniques. The advanced technologies we currently offer include DigiSTREAMER™, Orca®, our WiBand™ data processing technology, and INOVA Geophysical's lower-cost cableless Hawk™ land system, improved FireFly® system (FireFly DR31) and a new cabled system (G3i™), each of which is designed to deliver improvements in both image quality and productivity. We have more than 550 patents and pending patent applications in various countries around the world, approximately 55% of our employees are involved in technical roles and approximately 20% of our employees have advanced degrees. Seismic imaging plays a fundamental role in hydrocarbon exploration and reservoir development by delineating structures, rock types and fluid locations in the subsurface. Our services, technologies and products are used by oil and gas exploration and production ("E&P") companies and seismic acquisition contractors to generate high-resolution images of the Earth's subsurface in order to identify new sources of hydrocarbons and pinpoint drilling locations for wells, which can be costly and involve high risk. We provide our services and products through three business segments - Solutions, Systems and Software - as well as through our INOVA Geophysical joint venture. Solutions. Our Solutions business provides advanced seismic data processing services for marine and land environments, reservoir solutions, onboard processing and quality control, seismic data libraries, and services by our GeoVentures® group. We maintain approximately 10.5 petabytes of seismic data storage in 12 global data centers, including our largest data center in Houston, which will soon be moving into a new facility. Our GeoVentures services are designed to manage the entire seismic process, from survey planning and design to data acquisition and management, through pre-processing and final subsurface imaging. The GeoVentures group focuses on the technologically intensive components of the image development process, such as survey planning and design and data processing and interpretation and outsources the logistics components (such as field acquisition) to experienced seismic and other geophysical contractors. Our GXT Imaging Solutions group offers processing and imaging services designed to help our E&P customers reduce exploration and production risk, evaluate and develop reservoirs and increase production. GXT develops a series of subsurface images by applying its processing technology to data owned or licensed by its customers and also provides its customers with support services (including onboard seismic vessel services), such as data pre-conditioning for imaging and outsourced management (including quality control) of seismic data acquisition and image processing services. Our Solutions business focuses on providing services and products for challenging environments, such as the Arctic frontier; complex and hard-to-image geologies, such as deepwater subsurface salt formations in the Gulf of Mexico and offshore West Africa and Brazil; unconventional reservoirs, such as those found in shale, tight gas and oil sands formations; and offshore basin-wide seismic data and imaging programs. Since 2002, our basin exploration seismic data programs have resulted in a substantial data library that covers significant portions of many of the frontier basins in the world, including offshore East and West Africa, India and Brazil, the Arctic and the deepwater Gulf of Mexico. Software. Our Software business provides command and control software systems and related services for navigation and data management involving towed marine streamer and seabed operations. Our proprietary software, with over 13 million lines of code, is installed on towed streamer marine vessels worldwide and is a component of many re-deployable and permanent seabed monitoring systems. Through our Software business, we provide marine imagining, seabed imaging and survey design, planning and optimization. Systems. Our Systems business is engaged in the manufacture of (i) towed streamer and re-deployable ocean-bottom cable seismic data acquisition systems and shipboard recorders; (ii) marine streamer positioning and control systems and energy sources; and (iii) analog geophone sensors. 15 -------------------------------------------------------------------------------- Table of Contents INOVA Geophysical. We conduct our land seismic equipment business through INOVA Geophysical Equipment Limited ("INOVA Geophysical" or "INOVA"), a joint venture with BGP Inc. ("BGP"). BGP is a subsidiary of China National Petroleum Corporation, and is generally regarded as the world's largest land geophysical service contractor. BGP owns a 51% equity interest in INOVA Geophysical, and we own the remaining 49% interest. INOVA manufactures cable-based, cableless and radio-controlled seismic data acquisition systems, digital sensors, vibroseis vehicles (i.e., vibrator trucks) and source controllers for detonator and energy sources business lines. INOVA's research and development centers are located primarily in the U.S. and Canada, although the joint venture intends to evaluate lower-cost manufacturing opportunities in China. In addition, we and BGP often field-test, and we expect to field-test further, INOVA's new technologies and related equipment for operational feedback and quality improvements. Economic Conditions Demand for our seismic data acquisition services and products has traditionally been cyclical and substantially dependent upon activity levels in the oil and gas industry, particularly our customers' willingness and ability to expend their capital for oil and natural gas exploration and development projects. This demand is sensitive to current and expected future crude oil and natural gas prices. During the first quarter of 2013, West Texas Intermediate ("WTI") spot crude oil prices began the quarter near a low of $89 per barrel rising to approximately $98 per barrel before trading in a smaller range and finishing the quarter near $95 per barrel. Brent crude oil prices did not follow a similar pattern to WTI this quarter. Brent crude oil prices started the quarter near $109 per barrel initially trading in a small range, then rising to approximately $119 per barrel before falling to a low of $107 per barrel, finishing the quarter near that low. Energy price forecasts are by their nature highly uncertain, but external reports indicate that WTI crude oil prices and Brent crude oil prices are expected to remain in price ranges of $80 to $110 and $100 to $130 per barrel, respectively, for 2013 as demand outpaces supply. U.S. natural gas prices continued to slowly trend upward from the low prices experienced in 2012. U.S. Henry Hub natural gas prices started the quarter near $3.35 per MMBtu, trading in a narrow range the first two months of the quarter before steadily moving up to $4.00 per MMBtu near the end of the quarter closing just below that high. We believe demand for natural gas will continue to grow as it is being used to supplant coal in the production of U.S. electricity and that industry investment in shale-based gas production will increase and be facilitated by new investment in technologies to locate and extract the reserves. For the first quarter of 2013, our Solutions segment revenues grew compared to the first quarter of 2012 due to a significant increase in new ventures revenue mostly due to a large 3D marine program that commenced acquisition in the fourth quarter of 2012 and continued acquisition into the first quarter of 2013. Additionally, we experienced growth in other new venture programs offshore Australia, Africa, and in the Arctic, and grew our data processing revenues with further international penetration. However, our data library sales fell short of our expectations due to delays in licensing rounds for offshore Tanzania, Brazil and Greenland. Our gross margins decreased during the first quarter of 2013 due to severe weather delays on our 3D marine program, which hindered our acquisition of seismic data and at the same time caused us to incur incremental standby costs. However, we continue to expect this program to be profitable as a whole. At March 31, 2013, our Solutions segment backlog, which consists of commitments for (i) data processing work and (ii) both multi-client new venture projects and proprietary projects by our GeoVentures group underwritten by our customers, was $129.1 million compared with backlog of $151.3 million at December 31, 2012 and $128.5 million at March 31, 2012. The decline in backlog during the quarter was due to a portion of the backlog outstanding at December 31, 2012 being filled by the recognition of revenue related to the partial completion of a large 3D marine program. We anticipate that the majority of our backlog will be recognized as revenue over the remainder of 2013. Revenues for our Systems segment decreased in the first quarter of 2013 compared to the first quarter of 2012. Sales of our positioning products decreased primarily due to the lack of new marine vessels being introduced during the last six months and a decline in our land sensors revenue, partially offset by growth in DigiStreamer sales and ocean-bottom cable sales. Our Software segment revenues decreased slightly for the first quarter of 2013 compared to the same period of 2012, impacted mainly by unfavorable foreign currency exchange rates compared to the 2012 period. Expressed in terms of the segment's local currency (British Pounds Sterling), Software segment revenues for the first quarter of 2013 were consistent with those for the first quarter of 2012. INOVA Geophysical reported a slight increase in revenues and a decrease in gross profits for the quarter ended December 31, 2012, compared to the quarter ended December 31, 2011. The slight increase in revenues was principally due to sales of INOVA Geophysical's new products introduced during 2012, G3i channels (cable-based recording system) and UniVib™ units (peak force small vibrators), as well as other vibrator trucks; however, INOVA Geophysical's equipment rental business declined during the quarter, which had the overall effect of decreasing gross profits. 16 -------------------------------------------------------------------------------- Table of Contents It is our view that technologies that add a competitive advantage through improved imaging, cost reductions or improvements in well productivity will continue to be valued in our marketplace. We believe that our newest technologies, such as Calypso™, our WiBand data processing technology, DigiSTREAMER, Orca and INOVA Geophysical's newest technologies, will continue to attract customer interest, because those technologies are designed to deliver improvements in image quality within more productive delivery systems. We expect the growth in demand for seismic services to continue to remain positive for the remainder of 2013. However, in stating this expectation, we are assuming that (i) the global and U.S. economies will not slip back into a recession, (ii) the prices of WTI and Brent crude oil will remain predominantly above $80 and $100 per barrel, respectively, (iii) there will be increasing demand for seismic services in the Middle East and North Africa resulting from improved geopolitical stability in those areas, and (iv) the level of exploration and development activities in the U.S. Gulf of Mexico will continue to increase. Beginning in the third quarter of 2011 U.S. Gulf of Mexico drilling activity has shown signs of a slow but steady recovery as permitting levels have improved and the number of drilling rigs working in U.S. offshore waters has increased from an average of 43 in the first quarter of 2012 to 52 in the first quarter of 2013. Investment in GeoRXT In February 2013, we purchased from Reservoir Exploration Technology, ASA a 30% interest in a joint venture entity, GeoRXT B.V. ("GeoRXT") for $1.5 million. GeoRXT is headquartered in Rio de Janeiro, Brazil, and specializes in seismic acquisition operations using ocean-bottom cables deployed from vessels leased by GeoRXT. We have an option, exercisable at any time on or prior to May 15, 2013, to increase our ownership percentage to 50% by making additional capital contributions into GeoRXT of $40.0 million. Additionally, we provided GeoRXT with an $8.0 million working capital loan, the repayment of which is guaranteed by GeoRXT's majority joint venture partner, Georadar Levantamentos Geofisicos S/A ("Georadar"). GeoRXT is obligated to repay this loan to us on or before May 25, 2013. However, we currently expect to exercise our option to increase our ownership interest in GeoRXT to 50%, of which part of the required capital contribution will be funded through the conversion of this loan into additional equity. GeoRXT has one marine seismic crew currently operating offshore Brazil that utilizes one of our legacy VSO (VectorSeis Ocean) ocean-bottom cable seismic data acquisition systems. We anticipate that during 2013, GeoRXT will add another crew, which will employ for its data acquisition operations our Calypso next-generation VSO ocean-bottom system. WesternGeco Legal Proceedings A verdict was returned by the jury in this lawsuit on August 16, 2012, finding that we willfully infringed the claims contained in four patents and awarded WesternGeco the sum of $105.9 million in damages, consisting of $12.5 million in reasonable royalty and $93.4 million in lost profits. We believe that the verdict is not consistent with applicable law or the facts or evidence in the case and, in September 2012, filed motions with the trial court to overturn all or portions of the verdict. See further discussion at Part II, Item 1A. - "Risk Factors - An unfavorable judgment in our pending litigation matter with WesternGeco could have a material adverse effect on our financial results and liquidity. In addition, there can be no assurance that any losses suffered by us as a result of any such judgment will not exceed the associated loss contingency reserve we have established" and Part II, Item 1. - "Legal Proceedings." The ultimate outcome of the case in the trial court, and the content of the final judgment as a whole, presently rests with the presiding trial court judge. The next step in the case is for the trial court judge to decide post-verdict motions filed by the parties and enter a final judgment. The final judgment will determine the result of the trial prior to appeal. When he enters a final judgment in the case, the judge can choose to follow the jury verdict or to take other actions, such as changing to a different result or ordering an entirely new trial. As of the filing date of this Quarterly Report on Form 10-Q, the Court had not yet entered a final judgment in the case. If the Court enters a final judgment that is adverse to us, we intend to appeal the judgment to the United States Court of Appeals for the Federal Circuit. WesternGeco would also have the right to elect to appeal any final judgment. Key Financial Metrics The table below provides an overview of key financial metrics for our company as a whole and our three business segments during the three months ended March 31, 2013, compared to those for the same period of 2012. For certain tabular information on the operating results of our INOVA Geophysical joint venture, as well as textual information about our GeoRXT joint venture, see "- Results of Operations - Other Items - Equity in Earnings of Investments." 17 -------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, 2013 2012 (in thousands, except per share amounts) Net revenues: Solutions: New Venture $ 48,436 $ 28,994 Data Library 9,448 10,268 Total multi-client revenues 57,884 39,262 Data Processing 31,286 26,865 Total $ 89,170 $ 66,127 Systems: Towed Streamer $ 13,549 $ 15,804 Ocean Bottom 6,765 3,519 Other 11,533 17,383 Total $ 31,847 $ 36,706 Software: Software Systems $ 7,941 $ 8,370 Services 779 507 Total $ 8,720 $ 8,877 Total $ 129,737 $ 111,710 Gross profit: Solutions $ 20,197 $ 18,985 Systems 8,380 15,812 Software 6,380 6,359 Total $ 34,957 $ 41,156 Gross margin: Solutions 23 % 29 % Systems 26 % 43 % Software 73 % 72 % Total 27 % 37 % Income from operations: Solutions $ 7,357 $ 9,606 Systems 934 8,740 Software 5,161 5,482 Corporate and other (11,529 ) (12,185 ) Total $ 1,923 $ 11,643 Operating margin: Solutions 8 % 15 % Systems 3 % 24 % Software 59 % 62 % Corporate and other (9 )% (11 )% Total 1 % 10 % Net income applicable to common shares $ 1,537 $ 8,237 Basic and diluted net income per common share $ 0.01 $ 0.05 We intend that the following discussion of our financial condition and results of operations will provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, and the primary factors that accounted for those changes. On April 17, 2013, we filed on Form 10-K/A, an Amendment No. 1 to our Annual Report on Form 10-K in order to file separate consolidated financial statements for INOVA Geophysical for the fiscal year ended December 31, 2012, as required under SEC Regulation S-X. 18 -------------------------------------------------------------------------------- Table of Contents For a discussion of factors that could impact our future operating results and financial condition, see Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, and Item 1A. "Risk Factors" in Part II of this Form 10-Q. The information contained in this Quarterly Report on Form 10-Q contains references to trademarks, service marks and registered marks of ION and our subsidiaries, as indicated. Except where stated otherwise or unless the context otherwise requires, the terms "GeoVentures," "DigiFIN," "VectorSeis," "FireFly," "ARIES II," "Orca," "GATOR," and "Scorpion" refer to GeoVentures®, DigiFIN®, VECTORSEIS®, FIREFLY®, ARIES® II, GATOR®, ORCA® and SCORPION® registered marks owned by ION or INOVA Geophysical, and the terms "DigiSTREAMER," "Hawk," "UniVib," "G3i," "Calypso," and "WiBand" refer to DigiSTREAMER™, Hawk™, UniVib™, G3i™, Calypso™ and WiBand™ trademarks and service marks owned by ION or INOVA Geophysical. Results of Operations Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012 Our overall total net revenues of $129.7 million for the three months ended March 31, 2013 (the "Current Quarter") increased $18.0 million, or 16%, compared to total net revenues for the three months ended March 31, 2012 (the "Comparable Quarter"). Our overall gross profit percentage for the Current Quarter was 27%, compared to 37% for the Comparable Quarter. Total operating expenses as a percentage of net revenues for the Current Quarter was 25% compared to 26% in the Comparable Quarter. For the Current Quarter, our income from operations was $1.9 million, compared to $11.6 million for the Comparable Quarter. Net Revenues, Gross Profits and Gross Margins Solutions - Net revenues for the Current Quarter increased by $23.1 million, or 35%, to $89.2 million, compared to $66.1 million for the Comparable Quarter. This increase was predominantly driven by (i) growth in new ventures, mostly due to a large multi-quarter 3D marine program and growth in other new venture programs offshore Australia, Africa, and in the Arctic, and (ii) growth in our data processing business primarily driven by further international diversification and improved demand for Gulf of Mexico seismic data. Gross profit increased by $1.2 million to $20.2 million, representing a 23% gross margin, compared to $19.0 million, representing a 29% gross margin, in the Comparable Quarter. The decrease in gross margin was related to severe weather delays on our 3D marine program, decreasing our production in the acquisition of seismic data for this program while incurring incremental standby costs during the Current Quarter; however, we continue to expect this project to be profitable as a whole. This decrease in gross margin was partially offset by higher revenues recognized from our data processing activities with only a slight increase in costs due to us leveraging the semi fixed-cost nature of our processing infrastructure. Systems - Net revenues for the Current Quarter decreased by $4.9 million, or 13%, to $31.8 million, compared to $36.7 million for the Comparable Quarter. Gross profit decreased by $7.4 million to $8.4 million, representing a 26% gross margin, for the Current Quarter compared to $15.8 million, representing a 43% gross margin, for the Comparable Quarter. This decrease in revenues and gross profits was principally due to lower demand for positioning and other towed streamer equipment and systems due to a slowdown of new vessel construction and a large sensor geophone sale in the Comparable Quarter that did not recur in the Current Quarter. This decrease in revenues was partially offset by an increase in revenue from towed streamer acquisition products, as well as delivery of two ocean-bottom cable arrays. The decrease in gross margin is due to decreased sales of our higher margin positioning products and increased sales of lower margin towed streamer acquisition products and ocean-bottom cable arrays. Software - Net revenues for the Current Quarter were $8.7 million, compared to $8.9 million for the Comparable Quarter. Gross profit for the Current Quarter was $6.4 million, representing a 73% gross margin, which was consistent with the Comparable Quarter. Operating Expenses Research, Development and Engineering - Research, development and engineering expense was $9.3 million, or 7% of net revenues, for the Current Quarter, an increase of $1.6 million compared to $7.7 million, or 7% of net revenues, for the Comparable Quarter. During the Current Quarter, we continued to invest in our next generation of seismic acquisition products and services, which includes Calypso, our next generation re-deployable seabed seismic data acquisition system. 19 -------------------------------------------------------------------------------- Table of Contents Marketing and Sales - Marketing and sales expense was $8.0 million, or 6% of net revenues, for the Current Quarter, which is comparable to $7.4 million, or 7% of net revenues, for the Comparable Quarter. The increase of $0.6 million was primarily due to investment in our Solutions sales teams to support the continued growth in this segment. General, Administrative and Other Operating Expenses - General, administrative and other operating expenses of $15.8 million, or 12% of net revenues, for the Current Quarter, represented an increase of $1.4 million compared to $14.4 million, or 13% of net revenues, for the Comparable Quarter. The increase was principally due to significant bad debt expense of $2.9 million, primarily related to the bankruptcy filing of one of our underwriting clients in our Solutions segment. This was partially offset by lower legal fees, which were high in the Comparable Quarter due to then-outstanding litigation. Other Items Interest Expense, net - Interest expense, net, was $1.1 million for the Current Quarter compared to $1.5 million for the Comparable Quarter, which is consistent with the rate decrease related to our amended Credit Facility (see "- Liquidity and Capital Resources - Capital Requirements and Sources of Capital" below). Equity in Earnings of Investments - We account for our equity investments in both INOVA Geophysical and GeoRXT as equity method investments. We record our share of earnings and losses of our 49% interest in INOVA Geophysical on a one fiscal quarter lag basis. Thus, our share of INOVA Geophysical's earnings for the three months ended December 31, 2012 is included in our financial results for the Current Quarter. For the Current Quarter, we recorded approximately $1.9 million of equity in earnings of INOVA Geophysical compared to $2.5 million for the Comparable Quarter. The following table reflects the summarized financial information for INOVA Geophysical for the three-month periods ended December 31, 2012 and 2011 (in thousands): Three Months Ended December 31, 2012 2011 Net revenues $ 59,611 $ 58,998 Gross profit $ 12,327 $ 13,964 Income (loss) from operations $ (250 ) $ 6,509 Net income $ 3,742 $ 5,717 In late February 2013, we purchased a 30% interest GeoRXT. We record our share of earnings related to our interest in GeoRXT on a current quarter basis, unlike our recording of earnings in INOVA Geophysical, which are on a one fiscal quarter lag basis. Thus, our share of GeoRXT's losses during the Current Quarter was approximately $(0.7) million. Other Income (Expense) - Other income for the Current Quarter was $1.0 million compared to other expense of $(0.7) million for the Comparable Quarter. This difference was primarily related to changes in foreign currency exchange rates associated with our operations in the United Kingdom. Income Tax Expense - Income tax expense for the Current Quarter was $1.2 million compared to $3.4 million for the Comparable Quarter. Our effective tax rates for the Current Quarter and Comparable Quarter were 40.0% and 28.9%, respectively. The change in our effective tax rate for the Current Quarter was primarily due to a $1.2 million adjustment that related to prior periods, which was partially offset by discrete tax (benefits) totaling $(0.9) million. The adjustment primarily relates to differences in prior periods between our financial statements and our tax returns, which had not been appropriately reflected in those periods. Because this adjustment was not material to either of the prior periods nor to the results or trend of earnings for 2013, it was recorded in the Current Quarter. The discrete tax benefits recorded in the Current Quarter were mainly comprised of U.S. tax benefits and credits that were extended in the American Taxpayer Relief Act of 2012, signed into law in January 2013. Excluding these amounts, our effective tax rate for the Current Quarter would have been 28.9%. Preferred Stock Dividends - The preferred stock dividend relates to our Series D Preferred Stock. Quarterly dividends must be paid in cash. Dividends are paid at a rate equal to the greater of (i) 5.0% per annum or (ii) the three month LIBOR rate on the last day of the immediately preceding calendar quarter plus 2.5% per annum. The Series D Preferred Stock dividend rate was 5.0% at March 31, 2013. Liquidity and Capital Resources Sources of Capital Our cash requirements include our working capital requirements, and cash required for our debt service payments, seismic data acquisition projects and capital expenditures. As of March 31, 2013, we had working capital of $156.1 million, which included $66.6 million of cash on hand. Capital requirements are primarily driven by our continued investment in our 20 -------------------------------------------------------------------------------- Table of Contents multi-client seismic data library (totaling $13.3 million for the Current Quarter) and, to a lesser extent, our inventory purchase obligations. Also, our headcount is a significant driver of our working capital needs. Because a significant portion of our business is involved in the planning, processing and interpretation of seismic data services, one of our largest investments is in our employees, which involves cash expenditures for their salaries, bonuses, payroll taxes and related compensation expenses. In addition, we currently expect to exercise the option to increase our ownership percentage in GeoRXT to 50%. In order to do so would require a $40 million capital contribution into GeoRXT, of which $8 million would be through the conversion of the working capital loan we provided them in January 2013. For further discussion on our investment in GeoRXT, see "- Executive Summary - Investment in GeoRXT." Our working capital requirements may change from time to time depending upon many factors, including our operating results and adjustments in our operating plan required in response to industry conditions, competition, acquisition opportunities and unexpected events, such as an adverse judgment on our WesternGeco litigation, which is further discussed at Part II, Item 1A. - "Risk Factors - An unfavorable judgment in our pending litigation matter with WesternGeco could have a material adverse effect on our financial results and liquidity. In addition, there can be no assurance that any losses suffered by us as a result of any such judgment will not exceed the associated loss contingency reserve we have established" and Part II, Item 1. "Legal Proceedings." In recent years, our primary sources of funds have been cash flows generated from our operations, our existing cash balances, debt and equity issuances and borrowings under our revolving credit facilities. At March 31, 2013, our principal outstanding credit facility consisted of a revolving line of credit providing borrowings of up to $175.0 million, of which $97.3 million was outstanding at that date, leaving $77.7 million of unused available capacity. Revolving Line of Credit - On May 29, 2012, we amended the terms of our senior secured credit facility (the "Credit Facility") with China Merchants Bank Co., Ltd., New York Branch, as administrative agent and lender ("CMB"). The First Amendment to Credit Agreement and Loan Documents (the "First Amendment") modified certain provisions of our senior credit agreement with CMB that we had entered into on March 25, 2010. As amended by the First Amendment, our Credit Facility now provides that we may make revolving credit borrowings in U.S. Dollars, Euros, British Pounds Sterling or Canadian Dollars up to an amount not to exceed the U.S. Dollar equivalent of $175.0 million. In addition, all then-outstanding term loan indebtedness under our Credit Facility was converted to revolving credit indebtedness, such that as of May 29, 2012, there was $98.3 million in total revolving credit indebtedness outstanding under our Credit Facility. For further information on our Credit Facility, see Note 6 "Long-term Debt" at Notes to Unaudited Condensed Consolidated Financial Statements. Meeting our Liquidity Requirements For the Current Quarter, total capital expenditures, including investments in our multi-client data library, were $17.3 million, and we are projecting additional capital expenditures for the remaining nine months of 2013 to be between $145 million and $175 million. Of the total projected capital expenditures for the remaining nine months of 2013, we are estimating that approximately $125 million to $145 million will be spent on investments in our multi-client data library. We currently believe that our existing cash, cash generated from operations and our sources of working capital will be sufficient for us to meet our anticipated cash needs for at least the next 12 months. However, as described at Part II, Item 1A. - "Risk Factors - An unfavorable judgment in our pending litigation matter with WesternGeco could have a material adverse effect on our financial results and liquidity. In addition, there can be no assurance that any losses suffered by us as a result of any such judgment will not exceed the associated loss contingency reserve we have established" and Part II, Item 1. - "Legal Proceedings," there are possible scenarios involving a future judgment to be rendered in the WesternGeco lawsuit that could adversely affect our liquidity. In order to appeal such a judgment, we may be required to collateralize an appeal bond for the full amount of damages entered in the judgment. If we become subject to a significant adverse judgment in the WesternGeco lawsuit, we might utilize a combination of cash on hand, undrawn balances available under our revolving line of credit under our senior debt facility and incur additional debt and/or equity financing. In addition, we may be required to reduce the amounts we spend on capital expenditures, which could adversely affect our results of operations in future periods. Cash Flow from Operations Net cash provided by operating activities was $34.3 million for the Current Quarter, compared to $51.8 million for the Comparable Quarter. This decrease in our net cash flows from operating activities was primarily due in part to the decrease in our income from operations for the Current Quarter compared to the Comparable Quarter. Our net cash flows provided by operating activities during the Current Quarter were impacted positively by a significant decrease in accounts receivable and unbilled receivables, offset by a negative impact due to a decrease in accounts payable, accrued expenses, accrued liabilities and deferred revenue. 21 -------------------------------------------------------------------------------- Table of Contents Cash Flow from Investing Activities Net cash used in investing activities was $27.7 million for the Current Quarter, compared to $6.3 million for the Comparable Quarter. The principal use of cash in our investing activities during the Current Quarter was $13.3 million for continued investment in our multi-client data library, $4.0 million for capital expenditures related to property, plant and equipment, and a total $9.5 million investment in GeoRXT, consisting of $1.5 million for the purchase of our 30% equity interest in GeoRXT, and $8.0 million loaned to GeoRXT for short-term working capital. The principal uses of cash in our investing activities during the Comparable Quarter were $24.5 million for investment in our multi-client data library, and $1.8 million of capital expenditures related to property, plant and equipment, offset by proceeds from the maturity of $20.0 million of short-term investments. Cash Flow from Financing Activities Net cash flow used in financing activities was a net $0.1 million for the Current Quarter, compared to $1.1 million for the Comparable Quarter. The net cash flow used in financing activities during the Current Quarter was primarily related to payments of long-term debt of $0.8 million compared to $1.4 million during the Comparable Quarter. Inflation and Seasonality Inflation in recent years has not had a material effect on our costs of goods or labor, or the prices for our products or services. Traditionally, our business has been seasonal, with strongest demand in the fourth quarter of our fiscal year. Critical Accounting Policies and Estimates Refer to our Annual Report on Form 10-K for the year ended December 31, 2012 for a complete discussion of our significant accounting policies and estimates. There have been no material changes in the Current Quarter regarding our critical accounting policies and estimates. Foreign Sales Risks The majority of our foreign sales are denominated in United States dollars. Product revenues are allocated to geographical locations on the basis of the ultimate destination of the equipment, if known. If the ultimate destination of such equipment is not known, product revenues are allocated to the geographical location of initial shipment. Service revenues, which primarily relate to our GeoVentures division, are allocated based upon the billing location of the customer. For the Current Quarter and Comparable Quarter, international sales comprised 79% and 67%, respectively, of total net revenues. The percentage of total sales from foreign countries increased primarily due to a decrease in sales from the U.S., as well as increased sales to customers in Europe, Latin America and the Middle East. A summary of net revenues by geographic area follows (in thousands): Three Months Ended March 31, 2013 2012 Europe $ 66,807 $ 43,658 North America 27,379 36,606 Latin America 15,388 7,728 Middle East 13,379 7,349 Asia Pacific 3,490 12,721 Africa 2,501 2,352 Commonwealth of Independent States (CIS) 793 1,296 Total $ 129,737 $ 111,710 |