ION Geophysical Corporation
Q2 2009 Earnings Call Transcript

Published: 7 Aug 2009

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the ION Geophysical second quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) This conference is being recorded today Thursday, August 6th, 2009. I will now like to turn the conference over to Jack Lascar. Please go ahead sir.

[Jack Lascar:]

Thank you and good morning everyone. We appreciate your joining us today. With me are Bob Peebler, Chief Executive Officer, and Brian Hanson, Executive Vice President and Chief Financial Officer. Before I turn the call over to management, I have a few items to cover. If you would like to be on an email distribution list, to receive future news releases, or experience a technical problem and didn't receive your news release today, please call DRG&E and provide us with that information. That number is 713-529-6600. If you would like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the Company website at www.iongeo.com or via a recorded instant replay until August 20. The information was provided in yesterday's earnings release. Information reported on this call speaks only as of today, August 6, 2009 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay, Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control that may cause the Company's actual results or performance to differ materially from any future results or performance, expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time-to-time in its filings with the SEC, including in its Annual Report on Form 10-K for the year ended December 31, 2008 and in its quarterly reports on Form 10-Q. Furthermore, as we start this call, please refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements. I will now turn the call over to Bob Peebler.

[Bob Peebler:]

Thanks, Jack, and good morning. Welcome to our second quarter earnings release call. As we discussed last quarter, we have suffered a significant slow down in most of our business lines. The most severely impacted business is our land equipment, which has been breathtaking in the magnitude of the collapse in both North America and the former Soviet Union. To illustrate the severity of the turn down, we have seen the land-cable assistance business drop by more than 80% from an annualized run rate a year ago. Our strategy to handle, what we believe is a short-term problem has been to rapidly consolidate all of our land-cable business into ARAM, with significant headcount reductions, while preserving our key R&D programs. This has been a significant challenge that is continuing into the third quarter, with the goal of having a majority of the related actions completed this month. We're also continuing to focus on cost reductions and other impacted parts of our organization, but as stated last quarter, we think the majority of headcount reductions are behind us. The significant falloff in our library sales compared to our expectations going into the quarter was concerning. We have still have – we had and still have a significant pipeline to cover our revised plans that were completed last February, but we only closed about half of the business we were forecasting going into Q2. The reasons were many, but a significant amount of business slipped into Q3, due to additional spending checks and balances that the larger oil companies have implemented in reaction to this volatile commodity pricing environment. Not too surprisingly, the final sign-off level has gone further up in many of our customer’s organizations as they also are focusing on cost reductions in cash management. We saw several million dollars in sales that got bowed down in just getting the final paperwork that we expect to pick up in this quarter. What is unique about our data libraries is their focus on the hard exploration areas around the world, including the Arctic, Brazil, and India were activity levels are still high. We are still forecasting a stronger second half of the year in our data sales, as improving oil prices and falling development and operating costs, should free-up capital for greater back-end spending a year ago, when oil and gas prices where collapsing. Our Marine systems business has also seen some slowdown as Marine contractors are feeling pressure on both activity levels, and pricing for the services. We're starting to see some vessels being stacked and new vessels being canceled or delayed as illustrated by the recent CGG announcement. In the case of the vessels being taken out of service, all are the older part of the fleet and at the lower end of the technology food chain and are not prime targets for our intelligent acquisition offerings. We have a significant backlog of business and sufficient backlog of business in Marine with equipment deliveries scheduled in Q3 and Q4 that we still believe, we have a solid year. One very bright spot in our Marine business line is concept systems, which will likely have a record year, due to the ongoing commercialization Orca and a business model, which is a subscription business model to which it has been sold. The subscription model doesn't generate the higher front-end revenue boost for product sales, but it delivers a much more predictable revenue stream that continues to build over time as more, more vessels are outfitted with our new technology. The other bright spot is DigiFIN sales, which are exceeding our own internal projections. DigiFIN has been recognized by oil companies, as significantly improving streamer performance both from an image quality perspective, and also productivity where in-built shooting is being reduced by as much as 30%. Any change in productivity is very important as pressure on cost for both oil companies and seismic contractors have gone up significantly, due to the lower oil and gas prices. We are also making progress of DigiSTREAMER with a recent sale during the current quarter. Our GXT proprietary data processing business is also heading for a record year with the projects becoming even larger in scope and more technically challenging. A wave of reprocessing is going on as oil companies take a breather in acquiring data and are focused more on getting the full value out of the data they have been acquiring over the last few, very high activity years. Our leading state of art reverse time migration continues to expand among prior customers and also into new geographies and new customers. We are also experiencing an increase in interest in our fall way processing driven in part by the need for improvement improved proxy detection in the shale resource plays that have become the mainstay of much of the E&P activity in the onshore U.S. Six years ago, GXT was mainly a North American centric business with majority of their work coming out of the Gulf of Mexico. They have successfully expanding their coverage to where they are recognized around the world as a leading processing chart. Even tough our traditional land business is in the tank, we are making significant progress of FireFly. For example, we have successfully finished the first of three projects in Mexico and are mobilizing for the second project as we speak. We also finished the baby blocker project for BP in Haynesville Shale with Dawson [ph] as a contractor and are gearing up for the big blocker shoot that will soon start. Our BDP FireFly project in China was completed during the quarter that resulted in our commercial system sale revenues being recognized in the quarter. BDP will soon this system on another high-density suite in the same Mongolia region. We are seeing an excellent trace recovery in all of the recent jobs and we are getting significant productivity that in some instances are off shouting nearby cable based crews buy 2 to 3x. We expect productivity and continued increase as crews become more familiar with FireFly operations and we make continuous improvements, due to customer feed back. Firefly is the only cable assistant that is routinely shooting 5000 plus full way stations, which is equivalent to 15,000 channels of analog and we are also the only commercial cable assistant that can recall in the full way. We estimate since we started with the original FireFly job of BP that we have recorded eight surveys, of which two are in progress, currently totaling over 650 million seismic traces representing in an area of 1,250 square kilometers of data on three continents. In summary, I would characterize ION’s business as a portfolio of business lines for our concept software and our GXT data processing businesses are helping offset the dramatic drop in our land systems business. Our marine business has slowed down, but is bucking the trend with new integrated technology, which we call intelligent acquisition that combines Orca, DigiBIRD, DigiFIN, and most recently DigiSTREAMER that brings both improved image quality and productivity gains to the operations. In our multi-client businesses, we have a robust portfolio of over 25 Blackberry’s that continues to grow and we still have many more ideas to continue growth. My expectation for that business is to still have timing uncertainty for library sales, and we have a down year compared to 2008, but with more strength in the second half than we have experienced in the last two quarters. On a regional basis, we do not expect to see much improvement in North America, due to the lingering gas over hang until mid-2010 at the earliest. Russia is more complex, as so much depends at oil prices and the stability of the Russian industry. We still believe we can continue to grow in Asia, some places in the former Soviet Union, and North Africa and the Middle East as our still very large projects progressing. So much of our short and medium-term business depends on how the world economies in demand for energy unfolds, and your guess is as good as ours on that regard, but I do feel certain about is the long-term trend of the industry needing better technology to meet future energy demand. ION is well-positioned as a major player with a portfolio of technology that we are now bringing into the market and our continued R&D spend that is still at a $40 million run rate, even after all of the cutbacks we have made to the Company. With that I will turn it over to Brian.

[Brian Henson:]

Thank you, Bob; good morning everyone. Similar to last quarter's call, I would first like to go to our latest quarter’s results and then moved into a broader discussion providing updates on our liquidity and other current business initiatives. Moving into the financials for the quarter, as we expected, our second quarter was soft due to continued market weakness, especially in North American and Russian land markets. Overall, we generated revenues of $101 million, compared to $181 million during the second quarter of 2008, a decrease of approximately 44%. All of our segments experienced the lower level of revenues compared to last year second quarter. Sequentially, however our data management solutions and our marine imaging systems segments had an improved quarter, compared to the first quarter of 2009. Year-to-date, we generated revenues of $207 million, compared to $321 million in 2008. We saw a slight increase in our gross margin in the second quarter to 33%, compared to 32% in 2008. In our marine imaging systems division, we experienced an 18% point increase in gross margin, mainly related to the product sales mix for the quarter. Our data management solutions segment gross margin showed a five percentage point improvement over the last year, as a result of more software versus hardware sales. Margins in our ION solutions segment remained fairly consistent with a decrease of 3% when compared to the second quarter of 2008. Our land imaging systems segments showed the largest deterioration in margins, mainly due to the increased amortization charges related to the ARAM acquisition. The first half of 2009, contained two special charges that directly impacted our results. The first special charge relates to the previously discussed in first quarter, additional impairment of acquired intangible assets of ARAM of $38 million. The second special charge relates to the impact on foreign currency exchange losses on our United Kingdom and Canadian operations, due to the significant fluctuations, and weakening of the US dollar against the sterling pound and Canadian dollar, we recognized foreign currency exchange losses of approximately $7 million for the second quarter of 2009. In total, the first half of 2009 contains approximately $45 million of special charges before taxes. Moving to revenues, our land imaging systems business second-quarter revenues decreased to $30 million compared to $46 million in 2008. Year-to-date revenues of $65 million represent a decrease of 31 million from the same period last year. The quarter and six-month decrease, were mainly attributed to the continued softness in the North American and Russian markets. As Bob mentioned during the second quarter, we recognize the revenue related to the sale of our fully commercialized FireFly system for the world's largest land contractors. While we announced earlier this system in the first quarter, we did not recognize revenue until this quarter. Gross margins in our land business decreased during the second to 11%compared to 23% in 2008. Year-to-date gross margins decreased to 14% from 23%. Lower land revenues for the quarter and year-to-date contributed to this decrease in margins as our mainland markets remained oppressed. Margins were further diluted due to the inclusion of the amortization of ARAM’s acquired intangibles. For the marine imaging systems business, revenues for the second quarter were $24 million compared to $50 million for the second quarter of 2008. Year-to-date revenues of 43 million for 2009 decreased from 85 million in 2008. Revenues for the first half of 2009 were impacted by the timing of new vessels and lower VectorSeis Ocean revenues. In 2008, we delivered the final portion of VSO system-four and the beginning of system-five, which was not duplicated in 2009. Market acceptance and demand has continued for our DigiFIN steering technology, which resulted in several more system sales in the second quarter. Second quarter gross margin in the brine group increased 18 percentage points to 50% compared to 32% in the second quarter of 2008, primary a result of product sales mix. Year-to-date gross margins increased ten percentage points to 48% from 38%, again due to product sales mix. Quarterly revenues from our data management solutions division concept systems, increased by $0.4 million compared to 2008. First-half revenues of the division decreased by $3 million to $16 million compared to 19 million in 2008. The decrease in revenues for both the quarter and year-to-date were entirely the result of changes in foreign currency exchange rates, but this division does business primarily in pounds sterling. Excluding the impact of exchange rates the division has generated a record year thus far and grew quarter-over-quarter by 21% and year-over-year by 15%. Our second quarter ION solutions revenues were also down compared to prior year at approximately $37 million in revenue. Year-to-date revenues decreased to 84 million, compared to $121 million in 2008. The decrease in the ION solutions division was due to lower multiple multi-client data library and new venture program sales, which relates partially to the timing of the sales and partially to our customers budgets and spending cuts as a result of low commodity prices. However, on the data processing side of our business, we have continued to experience both sales growth and an increase in our backlog. Second quarter gross margin in the solutions division decreased to 31% from 34% in the second quarter of 2008. Year-to-date gross margins decreased slightly to 31% in 2009 compared to 33% in 2008. As a result of lower revenues this year, second quarter consolidated operating expenses as a percent of percentage of revenue increased significantly to 33% compared to 21% for the second quarter of 2008. However, total operating expenses actually decreased by $5 million quarter-over-quarter. This decrease reflects the initial results of our cost reduction initiatives, partially offset by the inclusion in the second quarter of the ARAM business. Based upon the recent cost reduction measures initiating the fourth quarter of 2008, we expect to continue to incur lower operating expenses for the remainder of 2009 that were incurred last year and generate savings of approximately $43 million on an annualized basis. We incurred an income tax benefit of approximately $17 million in the first half of 2009. Excluding the non-cash foreign exchange losses in the second quarter, we generated a net loss of $6 million or $0.05 per diluted share compared to net income of $15 million for the second quarter of 2008. Including the foreign currency exchange losses diluted EPS in the second quarter was a loss of $0.11 compared to income of $0.16 in 2008. The total impact of the special charges was approximately 5 million after-tax or $0.06 per diluted share. Year-to-date, excluding the first quarter intangible impairment loss and the foreign currency exchange losses, we generated a loss of 17 million or $0.17 per share compared to net income of $23 million for 2008. Including these items, diluted year-to-date EPS was a loss of $0.49 compared to an income of $0.24 in 2008. The total impact of the special charges was approximately 32 million after-tax or $0.32 per diluted share. Excluding these items our year-to-date loss was $0.17 per diluted share. Turning to the balance sheet, inventories are adjusted for 33 million of equipment capitalized to our rental pool decreased by $12 million for the quarter. Adjusting back the effects of currency, as we converted Canadian inventories in the U.S. dollars, we actually monetized about 16 million to cash through sales of inventory during the quarter. A large portion of our current inventory is held in our land division, which will take time to monetize given the continued softness of that business. Accounts receivable decreased by 14 million from the first quarter as we continued to focus on collections. Excluding the investment in our multi-client data library, CapEx for the quarter was 400,000. The investment in our multi-client data library data library was 27 million in the quarter. Overall, our working capital improved 45 million or 17% to 222 million as of June 30, 2009 from 267 million at the end of the 2008. Cash remained flat compared to year-end, primarily as a result of reducing trade payables increasing focus on receivables collections and the additional secured financing transaction in June. At the end of July, our unrestricted cash balance was approximately 35 million. Our adjusted EBITDA was 31 million for the first half of 2009 and 13 million for the second quarter. However, as I mentioned previously the second quarter of 2009 year-to-date results included significant foreign currency exchange losses. Adding back those losses, our first half adjusted EBITDA was 37 million and our second quarter 2009 adjusted EBITDA was 20 million respectively. We now anticipate 2009 consolidated revenues to range between 450 and 500 million, mainly as a result of the ARAM acquisition and as adjusted for the write-down of intangible assets in the first quarter, we now expect to book between 16 and 18 million of non-cash amortization in 2009, which was an increase from the 14 million, we incurred in 2008. We are anticipating interest and preferred dividend expense to be between 29 million and 31 million. Consolidated gross margin percentage is expected to be down slightly from 2008, ranging from 30% to 33% due to the increase in amortization of intangibles, partially offset by higher margin products. At the same time, we recognized that our consolidated gross margin is highly sensitive to the overall sales mix of our portfolio of products and services. Operating expenses as a percentage of revenues are expected to range between 28% and 30% in 2009, excluding the special charges incurred in the first quarter. We now anticipate generating approximately 90 million to 115 million of adjusted EBITDA in 2009. Based upon these assumptions and excluding the special charges in the first quarter we anticipate a loss this year to be between $0.19 and $0.09 for diluted share with effective tax rate of 20% to 22%, including these special charges, we expect that 2009 loss range to be between $0.50 and $0.39 per diluted share, with an effective tax rate of 25% to 27%. Moving to liquidity, in June of 2009, we issued under private placement 18.5 million shares of common stock for gross proceeds of $40.7 million. We then used the net proceeds of $38.2 million, plus 2.6 million of operating cash to repay our outstanding principal balance of $48.8 million on our bridge loan with Jefferies. The bridge loan was originally scheduled to mature in January 2010; the extinguishment of the bridge loan was a very important step under our cash management strategy since it was our highest unit of loan with an effective interest rate of approximately 25%. Additionally, during the second quarter, we entered into the Fifth Amendment of a roving credit facility. The primary purpose of the Fifth Amendment was to further relax our debt covenants as well as obtain approval to enter into a secured equipment financing transaction with ICON Capital for 20 million, secured by our rental pool of assets. They received 12.5 million of funds prior to June 30 and received the remaining 7.5 million in July. The loan has an interest rate of 15% that matures on July 31, 2014. We are using the funds in the normal course of business operations. And with that we will up the call for questions.

[Operator:]

(Operator instructions) And our first question comes from the line of James West with Barclays Capital. Please go ahead.

[James West:]

Hi good morning guys.

[Bob Peebler:]

Hi.

[James West:]

Bob, when you talk to your contractor customers and your oil company customers and get a sense for their thinking on exploration budgets, do you think – is it fair to say at this point that the exploration budgets may have hit a bottom, I mean it looks like it from kind of your numbers and from what we hear is more a seismic companies, but I'm curious as to your thoughts on that and clearly places like North America are a little bit different, but maybe on a more global basis?

[Bob Peebler:]

I think on a global basis and aggregate, I think what you're suggesting is, is what we are also picking up on, I think there is a growing feeling of confidence that the oil prices are not going to go to 30, they are in fact only about 50, we know that some of our larger oil company customers are using towards the $50 as their, I don't think it is a price tax, but is sort of how they are adjusting organizations. So, I think, we have also seen the bottom. My own belief is that they entered into 2009 with tremendous amount of uncertainty, it has taken them almost to this point to even get themselves organized and release budgets and I would guess as the year unfolds we will see some strengthening just in spending going forward that is what we are sort of assuming like in the data library sales and then going into 2010, obviously the oil prices hold up, I think we will see things even further strengthening.

[James West:]

Okay and then on the FireFly, business obviously you have had a lot of success with the systems that are in the field now, I believe, you know two of these projects are more rental type agreements, when are you comfortable, I guess first on putting more FireFly equipment out in the field into new customers hands? And then two, do you think any of these rental agreements turn into sales at some point?

[Bob Peebler:]

First is from an activity point of view, we are seeing a growing interest in FireFly as you would expect, we are getting enough activity in multiple places and we are having enough operational success and I think people are getting more and more confidence in the system. So because of that and sort of the flow of interest, we see a lot be driven by oil companies, as we look forward into next year, we can really imagine, we are going to have to expand that fleet one way or the other. From the point of view of a sale, I think it is inevitable, obviously if you look at the economics of the system, as the utilization goes up the rental model actually for us is quite good from a margin point of view, but if you are renting that system and you are doing it routinely overtime, then the economics of purchase becomes more attractive. So, I think it is really going to be sort of a balance as this utilization continues to grow, people see the interest in FireFly growing that some point people are going to convert and also buy systems.

[James West:]

Okay. And then, one question for Brian, if I may. For the data library business, I know you guys have talked about strength in that business, in the second half there has been a lot of capital, kind of year-to-date, particularly in the second quarter, how should we think about capital outlays for data libraries or for SPAN programs, I guess in the second half of the year.

[Brian Hanson:]

Well, we continue to manage that program with the same level that we have historically, so we look at the portfolio of our current projects that are ongoing and we make sure that the total levels of underwriting for those projects match our direct expenses of executing. So, there has been no change in our operating method.

[James West:]

Okay, thanks, guys.

[Operator:]

Thank you and our next question comes from the line of Mark Thomas – Simmons & Co., please go ahead.

[Mark Thomas:]

Good morning, guys. I think most people understand that the current market is extremely challenging, but at the same time I think there is some frustration given another downward revision in guidance, can you just help us understand I guess why the change in the revenue guidance and specifically where there are certain project that you plan to book that come in, I mean you talked about slippage in the Q3 with some sales, but if it is just slippage, I guess it will help us bridge that the revision and the guidance please?

[Bob Peebler:]

Sure, Mark. If you look at what we expected to occur in the second quarter, primarily if you looked at it, there are two areas of our business that showed surprising weakness. The first was on the land side of the house, and just about every deal that we were actively pursuing, which was a qualified target in our sales pipeline on the land business did not come to fruition, we had a very anemic quarter with low revenues there. And every thing that we saw on the upside of the portfolio that we had discounted, none of those came to the house too, so many times in a quarter, if the qualified deal falls out, you typically have a deal in the upside that will slide in and I think for the first time in our experience, we saw both them slide out and nothing slid-in. So, what we have done is, we have taken a very conservative look at that land business for the back half of the year and materially down – sort of downsized our expectations from a revenue perspective. Second area in the business that we saw softness that was surprising to us, was on the data library sales, as we mentioned it was softer than we had expected. There was certainly two things that went on there, one was the slippage of certain projects into the third and fourth quarter, because of a more conservative approach to purchasing patterns and the second is that I think we have identified in the second quarter that there is being more of a reduction in CapEx budgets and that certain spending that we anticipate to occur, simply probably will not occur this year, so we have taken more of a conservative swing at that business too for our new guidance.

[Mark Thomas:]

Okay. And then, if you are able to achieve the new guidance, will you remain in compliance with your covenant this year?

[Bob Peebler:]

Yes, we will.

[Mark Thomas:]

Okay. And then just a final question, with respect to the FireFly system this quarter, can you quantify what was booked this quarter?

[Brian Hanson:]

No, we don't – obviously just for competitive reasons we don't give out specific deal information.

[Mark Thomas:]

Okay, thank you very much guys.

[Operator:]

Thank you. Our next question comes from the line of Terese Fabian with Sidoti & Co. Please go ahead.

[Terese Fabian:]

Thank you and good morning, I have a follow-up on the FireFly question, how large a system sale was it, what you had shipped in the first quarter and are you going to keep advising on the surveys in terms of a design and also processing the data that comes out?

[Brian Hanson:]

The sale is for 4,000 stations.

[Terese Fabian:]

Okay.

[Bob Peebler:]

Terese, what was the second part of that question?

[Terese Fabian:]

Well, I think that you said that you were assisting a new design of the projects and also doing the data processing afterwards, is that going to be ongoing?

[Brian Hanson:]

Yes that is in reference to the PEMEX, not – that is not the case from a commercial point of view with China job, we were very much involved with it, but the PEMEX job, we will consider that more of a full solution where we in fact did do the design in collaboration with PEMEX. And then we will be doing the processing of the data and are starting the process into the data of the first project and so that one is the full solution.

[Terese Fabian:]

And in China, you are not processing the data?

[Brian Hanson:]

No, we are also processing the data, but in this particular case, it was more of a prototype where we were processing and the customer is also processing.

[Terese Fabian:]

Okay. Thank you, and did I hear you say that in the first quarter you conducted further consolidation of the land system into the ARAM division?

[Brian Hanson:]

That is correct.

[Terese Fabian:]

And what was involved there; is it going to give you additional savings?

[Brian Hanson:]

Yes, if your think about one of the – I have said one of the silver linings in this whole thing is that because we had overlapping product lines, overlapping manufacturing, we really had the opportunity to consolidate those two businesses, I will have to say that we have done it in a much more rapid way than we would have done in the normal course of business if the market would have stayed strong, but this was fortunate, we just got a lot faster than you would normally do. So, we are going to end up mainly with the ARAM group running our land cable systems business out of Calgary, so there is substantial savings overtime. The consolidated group will be much more profitable when the business turns and either one when they would standalone.

[Terese Fabian:]

I understand that it is hard to predict when the business will turn in fact, but do you see any saturation of markets with conventional systems that are going to inhibit sales going forward?

[Brian Hanson:]

Well I think the – sort of our base business, cable system business, most of the growth opportunities, the highest growth opportunities I believe are outside of the U.S. The U.S. has such a collapse and it is going to take a while to work our way through all the systems that are out there that being said, even in the US, there is a trend and that is going to much higher staging count. So, the play in the U.S. will be selling back into our install base versus having a new, a lot of new systems in demand. So, I think the U.S. is going to be a slower one to turn around. We will see some sales back into it for a higher channel count, but the big play for us is international, which we think we have significant growth opportunities.

[Terese Fabian:]

Okay and one last question on the multi-client data library service, do you give a number on the clients CapEx for that? I mean as for guidance number for the year?

[Bob Peebler:]

The clients CapEx, do you mean our projected – our anticipated CapEx spend for multi-client?

[Terese Fabian:]

Yes total, yes.

[Bob Peebler:]

Well, we have that and we do give it, and we put it in our K.

[Terese Fabian:]

Okay, the guidance number for that.

[Bob Peebler:]

I think the latest was I believe it is 80 million to 85 million on the CapEx side, although I don't have the Q in front me Terese, but it will be in there.

[Terese Fabian:]

Okay thank you very much that is it, thanks.

[Operator:]

Thank you our next question comes from line of Andrew Heilman with MH & Associates. Please go ahead.

[Andrew Heilman:]

Good morning guys. I just want to ask a question on the law suit, or I guess the crossed law suit between ION and WesternGeco, I just wonder if I can get an update on that as far as what the cost is expected to be, any settlement possibility, the length and you know any other details that you guys could provide? Thanks.

[Brian Hanson:]

Mainly on the law suit, I think the information we have put out in the press release is pretty much the information that we are putting out, we are not going to really speculate on the length of time or any of those things, as I think as many of you have been involved with these kinds of activities, it is normally the terms of years not in the terms of months and you know it is hard to estimate the expenses or whatever, so this will be quite a long period of time for this thing to play out.

[Andrew Heilman:]

Do you expect it to effect sales in those product areas at all?

[Brian Hanson:]

No, we haven't really – we haven't most recently seen really that kind of an impact?

[Andrew Heilman:]

Thank you.

[Operator:]

Our next question comes from the line of Mark Gaskell with MKG Financial Group, please go ahead.

[Mark Gaskell:]

Thank you, congratulations on working through a tough difficult time in this market, actually my question has been answered, I appreciate it thank you.

[Operator:]

Our next question comes from the line of Lars Toslap [ph] with AAM [ph]. Please go ahead.

[Lars Toslap:]

Good morning. I have a question regarding your cash flow, if you look at your cash during the first half, you had EBITDA of 30 million and you made a share issue of 40 million, and as far as I can see, you had positive contribution from reduced working capital of some 55 million. So that adds up to 115 million roughly, and still your net debt is down by only 20 million, could you just specify where your cash flow has been used in that period.

[Bob Peebler:]

Actually, Lars, I think it is probably more appropriate for you to when we file our Q today; can you just go to the cash flow segment?

[Lars Toslap:]

Okay. So, kind of looking more specific on how you have divided that CapEx for instance?

[Bob Peebler:]

I am sure. Could you repeat that question on the CapEx?

[Lars Toslap:]

Just to give any indication, I think it is quite – it is nearly 100 million differences there and I guess much of those have gone into CapEx and in multi-client library and other types of CapEx, could you just give me an indication on the size of those figures.

[Brian Hanson:]

Again, you can break out the investment of multi-client CapEx on the cash flow statement and in addition you can break-out the rest. Our typical CapEx, I think the first half CapEx was a couple of million dollars. The second quarter investment in multi-client was 27 million – the first half multi-client CapEx, 45 million in total. So, first half of the year we invested in between multi-client and just CapEx about 47, 48 million, and when you jump into that cash flow statement of your specific questions, feel free to call me.

[Lars Toslap:]

Okay.

[Operator:]

Thank you. (Operator instructions) And our next question comes from the line of Mark Thomas with Simmons & Co., please go ahead.

[Mark Thomas:]

Hi, Brian, just a couple of quick clarifications, on the full-year EPS guidance, does that include the Q2 foreign exchange loss of $0.06.

[Brian Hanson:]

Yes, it does.

[Mark Thomas:]

Okay. And then, your multi-client CapEx of $27 million this quarter. Is that money you spend and you get reimbursed by your clients or is that money that –

[Brian Hanson:]

There is a little bit of a disconnect – I mean the way the underwriting works typically, it comes from the form of a commitment and then they would tend to pay that commitment at various stages in the projects, so much exciting, so much at certain milestones then a balance when the data is delivered. The actual timing of the expenses can be disconnected from the timing of the cash flows coming in. So at any point in time, we could be ahead in cash flow or behind in cash flow, depending on how we spend money against the projects. Obviously, the majority of the expense is done in the shooting stage – and we are shooting seismic and that tends to be the shortest period of time for the project itself. So it takes you know matter of weeks to shoot the surveys, but 80% of the expenditure goes into that and then it is a matter of months to process the data and deliver the product, we are only 20% of the expenditures on the data processing side. So, there tends to on any given project the time when we have actually invested our cash to bridge the timing of the inflows and the second quarter would be reflective of that.

[Mark Thomas:]

Okay, thank you, that is helpful. And then, last question for me, Bob, GX Technology announced they enhance their emerging tool kit this quarter, as well as received a new contract. Can you give us some color that has opened up other bidding opportunities to process more complex geometries?

[Bob Peebler:]

I can give you, I am not going to talk field specific, but I can certainly give you the trend, one is that we are seeing the projects growing in size, part of that is because things like wide-azimuth surveys, which was a lot of shooting in the Gulf of Mexico and other places. The original turn of the crank was done, typically by contract by the seismic contractor that acquired the data, we are now seeing that data coming back for reprocessing and a lot of that is acknowledgment that the first round is what as good as they had hoped, or they are just looking for more and our leading technology is really getting us a lot of work. So, we are seeing that whole area just continue to expand. In addition, our business is expanding globally. So, are – you know, as we become more and more global with that business, there seems to be just almost an unlimited demand for we do. Our biggest challenge there is just, how do you continue to expand requires really strong technical people run at business and we are really protective of the quality of what we deliver, so we are somewhat throttled just by the rate of which we can expand to cover the business.

[Mark Thomas:]

All right, thank you very much.

[Operator:]

(Operator instructions) And at this time, there are no further questions. I would like to turn the call back over to management for any closing remarks.

[Bob Peebler:]

Okay. Well, thank you for taking the time to attend the conference call and we look forward to talking to you during our third quarter call.

[Operator:]

Ladies and gentlemen, this concludes ION Geophysical second quarter earnings conference call. You may now disconnect. Thank you for using ACT Teleconferencing.