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GGS > SEC Filings for GGS > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for GLOBAL GEOPHYSICAL SERVICES INC


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in combination with our Interim Financial Statements contained in this Form 10-Q and our Financial Statements for the year ended December 31, 2011 included in our form 10-K (Commission file number: 001-34709).

Forward Looking Statements

Statements other than statements of historical fact included in this Form 10-Q that relate to forecasts, estimates or other expectations regarding future events regarding technological advancements and our financial position, business strategy and plans and objectives of our management for future operations, may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions, as they relate to us or our management, identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about business outlook for the year, backlog and bid activity, business strategy, and related financial performance and statements with respect to future events. Such forward-looking statements are based on certain assumptions made by the Company based on management's experience and perception of historical trends, industry conditions, market position, future operations, profitability, liquidity, backlog, capital resources and other information currently available to management and believed to be appropriate. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to, the volatility of oil and natural gas prices, disruptions in the global economy, dependence upon energy industry spending, delays, reductions or cancellations of service contracts, high fixed costs of operations, weather interruptions, inability to obtain land access rights of way, industry competition, limited number of customers, credit risk related to our customers, asset impairments, the availability of capital resources, and operational disruptions. A discussion of these factors, including risks and uncertainties, is set forth under "Risk Factors" in our form 10-K (Commission file number: 001-34709) filed with the Securities and Exchange Commission. These forward-looking statements reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategies and liquidity. Although the Company believes that the expectations reflected in such statements are reasonable, the Company can give no assurance that such expectations will be correct. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements. We assume no obligation to update any such forward-looking statements.

Our backlog estimates represent those seismic data acquisition projects for which a client has executed a contract and has a scheduled start date for the project as well as unrecognized pre-committed funding from our Multi-client Services segment. Backlog estimates are based on a number of assumptions and estimates including assumptions related to foreign exchange rates and proportionate performance of contracts and our valuation of assets, such as seismic data, to be received by us as payment under certain agreements. The realization of our backlog estimates is further affected by our performance under term rate contracts, as the early or late completion of a project under term rate contracts will generally result in decreased or increased, as the case may be, revenues derived from these projects. Contracts for services are also occasionally modified by mutual consent. Because of potential changes in the scope or schedule of our clients' projects, we cannot predict with certainty when or if our backlog will be realized. Even where a project proceeds as scheduled, it is possible that the client may default and fail to pay amounts owed to us. In addition, the contracts in our backlog are cancelable by the client. Material delays, payment defaults or cancellations could reduce the amount of backlog currently reported, and consequently, could inhibit the conversion of that backlog into revenues.


Table of Contents

Overview

We provide an integrated suite of seismic data solutions to the global oil and gas industry, including our high resolution RG-3D Reservoir Grade® ("RG3D") seismic solutions. Our seismic data solutions consist primarily of seismic data acquisition, microseismic monitoring, processing and interpretation services. Through these services, we deliver data that enables the creation of high-resolution images of the earth's subsurface and that reveals complex structural and stratigraphic details. These images are used primarily by oil and gas companies to identify geologic structures favorable to the accumulation of hydrocarbons, to reduce risk associated with oil and gas exploration, to optimize well completion techniques and to monitor changes in hydrocarbon reservoirs. Companies participating in the mining, geothermal and carbon sequestration businesses may also use seismic services. We integrate seismic survey design, data acquisition utilizing our proprietary AUTOSEIS® recording technology, processing and interpretation to deliver enhanced services to our clients. In addition, we own and market a growing seismic data library and license this data to clients on a non-exclusive basis.

Our seismic solutions are used by many of the world's largest and most technically advanced oil and gas exploration and production companies, including national oil companies ("NOCs"), major integrated oil companies ("IOCs"), and large independent oil and gas companies. We provide seismic data acquisition on a worldwide basis for land, transition zone and shallow marine areas, including challenging environments such as marshes, forests, jungles, arctic climates, mountains and deserts. We also have significant operational experience in most of the major U.S. shale plays, where we believe our high resolution RG3D seismic solutions are particularly well-suited.

We generate revenues primarily by providing Proprietary Services and Multi-client Services to our clients. Our Proprietary Services generate revenues by conducting geophysical surveys for our clients on a contractual basis where our clients generally acquire all rights to the seismic data obtained through such survey. We also generate revenues by providing microseismic monitoring, data processing and interpretation services. Our Multi-client Services generate revenues by selling licenses, on a non-exclusive basis, to data we own as a part of our seismic data library.

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended September
30, 2011 (unaudited)

The following table sets forth our consolidated revenues for the period
indicated (amounts in millions):

                               Three Month Period Ended
                                    September 30,
Revenues by Service                  (unaudited)
                              2012                 2011
                         Amount      %        Amount       %
Proprietary Services    $ 30.2        33 %   $  60.1        55 %
Multi-client Services     60.0        67 %      50.0        45 %
Total                   $ 90.2       100 %   $ 110.1       100 %



                          Three Month Period Ended
                               September 30,
Revenues by Area                (unaudited)
                         2012                 2011
                    Amount      %        Amount       %
United States      $ 56.0        62 %   $  56.8        52 %
International        34.2        38 %      53.3        48 %
Total              $ 90.2       100 %   $ 110.1       100 %


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Revenues. We recorded revenues of $90.2 million for the three months ended September 30, 2012 compared to $110.1 million for the same period ended in 2011, a decrease of $19.9 million, or 18.1%.

We recorded revenues from Proprietary Services of $30.2 million for the three months ended September 30, 2012, compared to $60.1 million for the same period in 2011, a decrease of $29.9 million, or 49.8%. Of this amount, the decrease related to our international Proprietary operations was $28.3 million, primarily due to a decrease in our crew activities in Algeria, Colombia, and Brazil.

Multi-client Services generated revenues of $60.0 million for the three months ended September 30, 2012 compared to $50.0 million for the same period of 2011, an increase of $10.0 million, or 20.0%. The increase was primarily due to the increased Multi-client Services operations in Brazil. The $60.0 million in Multi-client Services revenues included $10.8 million of late sale revenues, $48.5 million of pre-commitment revenues, and $0.7 million in non-cash data swap transactions. This compared to $16.5 million in late sales revenues, $32.5 million of pre-commitment revenues, and $1.0 million in non-cash data swap transactions during the same period of 2011.

The following table sets forth our consolidated Multi-client Services revenues for the period indicated (amounts in millions):

                          Three Month Period Ended
                                September 30,
                           2012              2011
                                 (unaudited)
Multi-client revenues
Pre-commitments         $      48.5       $      32.5
Late sales                     10.8              16.5
Subtotal                       59.3              49.0
Non-cash data swaps             0.7               1.0
Total revenues          $      60.0       $      50.0

Operating expenses. Operating expenses, excluding depreciation and amortization decreased by $35.9 million, or 75%, to $11.7 million for the three months ended September 30, 2012. The decrease was primarily due to the reduced international active crews for the three months ended September 30, 2012 versus the same period in 2011.

Selling, General and Administrative Expenses. SG&A, excluding depreciation and amortization, decreased by $0.7 million, or 6%, to $9.9 million for the three months ended September 30, 2012. The SG&A cost decrease was primarily due to the reduced international crew activities for the three months ended September 30, 2012.

Depreciation and Amortization Expenses. Total depreciation (net) and amortization expense increased by $7.2 million, or 19.5%, to $44.1 million for the three months ended September 30, 2012. The Multi-client Services amortization expense was $37.4 million for the three months ended September 30, 2012, representing a 62% average amortization rate for the period. Gross depreciation expense for the period ended September 30, 2012 was $9.1 million, of which, $3.2 million was capitalized in connection with our Multi-client Services investments resulting in a net depreciation expense of $5.9 million. Approximately $1.9 million of library amortization expense was attributable to Multi-client projects for which there was no corresponding revenue during the period.


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The following table summarizes our depreciation and amortization for the three month period ended (amounts in millions):

                                                                     Three Month Period Ended
                                                                           September 30,
                                                                      2012              2011
                                                                            (unaudited)
Gross depreciation expense                                         $       9.1       $      11.2
Less: capitalized depreciation for Multi-client library                    3.2               4.2
Depreciation (net)                                                 $       5.9       $       7.0

Amortization expense of intangible assets                                  0.8               0.4
Multi-client amortization expense                                         37.4              29.5
Depreciation (net) and amortization expense                        $      44.1       $      36.9

Average Multi-client amortization rate for the period                       62 %              59 %

Interest Expense, Net. Interest expense, net, increased by $1.8 million, or 28.4%, to $8.3 million for the three months ended September 30, 2012, compared to $6.5 million for the same period of 2011. The increase of interest expense related to the increased borrowings outstanding under the revolving credit facility, the New Notes and various promissory notes.

Other Income (Expense), Net. Other income (expense), net, was a loss of $2.2 million for the three months ended September 30, 2012 compared to a loss of $1.2 million in the same period of 2011. The primary difference related to the write-off of investment in unconsolidated subsidiary of $1.8 million from other assets.

Income Tax Expense (Benefit). Our income tax expense for the three months ended September 30, 2012 was $4.9 million compared to $2.4 million in the same period of 2011. The effective income tax rate for the three months ended September 30, 2012 and 2011 was approximately 44.9% and 79.0%, respectively. The Company's effective income tax rate in 2012 and 2011 differs from the federal statutory rate primarily due to state income taxes, non-deductible expenses, tax rate differential from non-US operations, and valuation allowances in non-US jurisdictions.


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Nine months Ended September 30, 2012 Compared to Nine months Ended September 30, 2011 (unaudited)

The following table sets forth our consolidated revenues for the period indicated (amounts in millions):

                                Nine Month Period Ended
                                     September 30,
Revenues by Service                   (unaudited)
                              2012                  2011
                         Amount       %        Amount       %
Proprietary Services    $ 153.6        54 %   $ 145.7        54 %
Multi-client Services     130.1        46 %     126.6        46 %
Total                   $ 283.7       100 %   $ 272.3       100 %



                           Nine Month Period Ended
                                September 30,
Revenues by Area                 (unaudited)
                         2012                  2011
                    Amount       %        Amount       %
United States      $ 149.1        53 %   $ 140.9        52 %
International        134.6        47 %     131.4        48 %
Total              $ 283.7       100 %   $ 272.3       100 %

Revenues. We recorded revenues of $283.7 million for the nine months ended September 30, 2012 compared to $272.3 million for the same period ended in 2011, an increase of $11.4 million, or 4.2%.

We recorded revenues from Proprietary Services of $153.6 million for the nine months ended September 30, 2012, compared to $145.7 million for the same period in 2011, an increase of $7.9 million, or 5.4%. Of this amount, the increase related to our U.S. Proprietary operations was $14.0 million. The international Proprietary Services revenues for the nine months ended September 30, 2012 decreased by $6.1 million compared to the corresponding period in 2011. The decrease of $6.1 million was largely driven by a decrease in our crew activities in Algeria and Colombia.

Multi-client Services generated revenues of $130.1 million for the nine months ended September 30, 2012 compared to $126.6 million for the same period of 2011, an increase of $3.5 million, or 2.8%. The $130.1 million in Multi-client Services revenues included $36.1 million of late sale revenues, $88.8 million of pre-commitment revenues, and $5.2 million in non-cash data swap transactions. This compared to $34.1 million in late sales revenues, $90.5 million of pre-commitment revenues, and $2.0 million in non-cash data swap transactions during the same period of 2011.

The following table sets forth our consolidated Multi-client Services revenues for the period indicated (amounts in millions):

                            Nine Month Period Ended
                                 September 30,
                            2012               2011
                                  (unaudited)
Multi-client revenues
Pre-commitments         $       88.8       $       90.5
Late sales                      36.1               34.1
Subtotal                       124.9              124.6
Non-cash data swaps              5.2                2.0
Total revenues          $      130.1       $      126.6


Table of Contents

Operating expenses. Operating expenses, excluding depreciation and amortization decreased by $16.4 million, or 18%, to $77.0 million for the nine months ended September 30, 2012. The decrease was primarily due to the reduced international active crews for the nine months ended September 30, 2012 versus the same period in 2011.

Selling, General and Administrative Expenses. SG&A, excluding depreciation and amortization, increased by $4.3 million, or 14%, to $35.8 million for the nine months ended September 30, 2012. The SG&A cost increase was primarily due to the bad debt expense of $2.8 million recorded for the settlement of disputed receivable for the nine months ended September 30, 2012.

Depreciation and Amortization Expenses. Total depreciation (net) and amortization expense increased by $2.8 million, or 2.7%, to $107.2 million for the nine months ended September 30, 2012. The Multi-client Services amortization expense was $85.5 million for the nine months ended September 30, 2012, representing a 66% average amortization rate for the period. Gross depreciation expense for the nine months ended September 30, 2012 was $28.7 million, of which, $9.3 million was capitalized in connection with our Multi-client Services investments resulting in a net depreciation expense of $19.4 million. Approximately $6.4 million of library amortization expense was attributable to Multi-client projects for which there was no corresponding revenue during the period.

The following table summarizes our depreciation and amortization for the nine month period ended (amounts in millions):

                                                                       Nine Month Period Ended
                                                                            September 30,
                                                                       2012               2011
                                                                             (unaudited)
Gross depreciation expense                                         $       28.7       $       35.1
Less: capitalized depreciation for Multi-client library                     9.3               13.4
Depreciation (net)                                                 $       19.4       $       21.7

Amortization expense of intangible assets                                   2.3                1.4
Multi-client amortization expense                                          85.5               81.3
Depreciation (net) and amortization expense                        $      107.2       $      104.4

Average Multi-client amortization rate for the period                        66 %               64 %

Interest Expense, Net. Interest expense, net, increased by $4.8 million, or 25.9%, to $23.3 million for the nine months ended September 30, 2012, compared to $18.5 million for the same period of 2011. The increase of interest expense related to the increased borrowings outstanding under the revolving credit facility, the New Notes and various promissory notes.

Other Income (Expense), Net. Other income (expense), net, was a loss of $3.6 million for the nine months ended September 30, 2012 compared to a gain of $0.5 million in the same period of 2011. The primary difference related to the write-off of investment in unconsolidated subsidiary of $1.8 million from other assets.

Income Tax Expense (Benefit). Our income tax expense for the nine months ended September 30, 2012 was $12.3 million compared to $7.4 million in the same period of 2011. The effective income tax rate for the nine months ended September 30, 2012 and 2011 was approximately 44.8% and 64.1%, respectively. The Company's effective income tax rate in 2012 and 2011 differs from the federal statutory rate primarily due to state income taxes, non-deductible expenses, tax rate differential from non-US operations, and valuation allowances in non-US jurisdictions.


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EBITDA. We define EBITDA as net income before interest, taxes, depreciation and amortization and non-controlling interests. EBITDA is not a measure of financial performance derived in accordance with Generally Accepted Accounting Principles (GAAP) and should not be considered in isolation or as an alternative to net income as an indication of operating performance. The table below presents a reconciliation of EBITDA to net income (in thousands, except per share amounts):

                                                                                     Three Month Period Ended                                                  Nine Month Period Ended
                                                                                          September 30,                                                             September 30,
                                                                             2012                                  2011                                2012                                 2011
                                                                             (in thousands, except per share amounts)                                 (in thousands, except per share amounts)
UNAUDITED                                                        Amount           Per Share (3)         Amount       Per Share (3)         Amount           Per Share (3)        Amount        Per Share (3)

Net income, attributable to common shareholders                $     5,807       $          0.16       $    883     $          0.02     $     15,283       $          0.41      $   4,258     $          0.12

Net income (loss), attributable to non-controlling interests           151                                 (239 )                               (109 )                               (132 )
Income tax expense                                                   4,864                                2,424                               12,319                                7,379
Interest expense, net                                                8,295                                6,458                               23,344                               18,549
EBIT(1)                                                             19,117       $          0.51          9,526     $          0.26           50,837       $          1.36         30,054     $          0.82

Add: Multi-client amortization                                      37,413                               29,486                               85,540                               81,341
Add: Depreciation (net) and other amortization (2)                   4,414                                7,056                                9,563                               21,618
EBITDA(1)                                                      $    60,944       $          1.63       $ 46,068     $          1.25     $    145,940       $          3.92      $ 133,013     $          3.64

(1) EBIT, EBITDA, EBIT per share and EBITDA per share (as defined in the calculations above) are non GAAP measurements.
(2) Includes gain (loss) of sale of assets and includes amortization of intangibles.
(3) Calculated using diluted weighted average shares outstanding.

Our management believes EBITDA is useful to an investor in evaluating our operating performance because this measure is widely used by investors in the energy industry to measure a company's operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon, among other factors, accounting methods, book value of assets, capital structure and the method by which assets were acquired. We believe EBITDA helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure and asset base from our operating structure. EBITDA is also used as a supplemental financial measure by our management in presentations to our board of directors, as a basis for strategic planning and forecasting, and as a component for setting incentive compensation.


Table of Contents

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated by the Proprietary Services and Multi-client Services we provide to our clients, debt and equity offerings, our revolving credit facility, and equipment financings such as capital leases and proceeds from the sale of assets. Our primary uses of capital include the acquisition of seismic data recording equipment, seismic vehicles and vessels, other equipment needed to outfit new crews and to enhance the capabilities of and maintain existing crews' energy sources, and investments in Multi-client Services data for our library. We also use capital to fund the working capital required to launch new crews and operate existing crews. Our cash position, consistent with our revenues, depends to a large extent on the level of demand for our services. Historically, we have supplemented cash from operations with borrowings under our Revolving Credit Facility periodically as the need arises.

As of September 30, 2012, we had available liquidity as follows (amounts in millions):

                                                                  September 30,
                                                                      2012
                                                                   (unaudited)
Available cash                                                   $          23.6
Undrawn borrowing capacity under Revolving Credit Facility (1)              14.9
Total available liquidity                                        $          38.5

(1) Borrowings under the Revolving Credit Facility are subject to certain limitations under provisions of the Senior Notes Indenture. As of September 30, 2012, undrawn borrowing capacity would have been limited by $1.5 million resulting in net availability of $13.4 million.

. . .

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