ION Geophysical Corporation Q4 2009 Earnings Call Transcript

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 |  About: Ion Geophysical Corporation (IO)
by: SA Transcripts

ION Geophysical Corporation (NYSE:IO)

Q4 2009 Earnings Call Transcript

February 18, 2010 10:00 am ET

Executives

Jack Lascar – IR, DRG&E

Bob Peebler – CEO

Brian Hanson – EVP and CFO

Analysts

James West – Barclays Capital

Stephen Gengaro – Jefferies & Company

Terese Fabian – Sidoti & Company

David Griffiths – Copia Capital

Nathaniel Pulsifer – Pulsifer & Associates

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the ION Geophysical’s fourth quarter earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator instructions) This conference is being recorded today, February 18, 2010. I would now like to turn the conference over to Jack Lascar. Please go ahead, sir.

Jack Lascar

Thank you, Branney, and good morning, everyone. Welcome to the ION Geophysical Corporation’s fourth quarter earnings conference call. We appreciate your joining us today. Your hosts 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 like to be on the e-mail distribution list to receive future news releases or experience a technical problem and didn’t receive yours yesterday, please call us at 713-529-6600 and let us know. 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’s website at web www.iongeo.com or via a recorded instant replay until March 4. The information was provided in yesterday’s earnings release. Information reported on this call speaks only as of today, February 18, 2010 and therefore you are advised that time sensitive information may no longer be accurate as of the time of 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 Reform Act of 1995. These forward-looking statements are based on management’s current expectation 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 defer materially from any future results or performance expressed or implied by those statements. This risk 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, 2009 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 those statements.

I will now turn the call over to Bob Peebler.

Bob Peebler

Thanks, Jack and good morning. I will discuss three main topics this morning, the market, the BGP joint venture and of our business outlook moving into 2010.

First the market. Fourth quarter was mainly repeated the pattern we had experienced all year. The land equipment business was mainly in the tank because of an equipment overhang resulting from stack crews around the world due to lower seismic activity. The only real bright spot has been the growing oil company interest in FireFly and a significant increase in jobs during 2009 with year-over-year gains in total traces recorded of 280%.

Our marine business was slower compared to year ago, but still turned in solid results due to the strength of our new technology such as DigiFIN and our marine software product ORCA. Our data processing business continues to be another bright spot ending a record year with solid growth as oil companies accelerate the reprocessing of recently acquired high-end data such as wide azimuth.

We also continued to experience strong interest in our multi-client new venture programs such as the ArcticSPAN™, the data library sales were significantly off compared to a year ago mainly due to tightness in oil company budgets during all of 2009 and a delay in planned spending.

Looking forward, we believe that the equipment market will likely continue to be relatively slow for most of 2010. Our contractor customers are seeing some improvements in the business, more in marine than land. However, our equipments business will not rebound until filled equipment inventories reduced and stack crews are back at work. This should begin to happen during the second half of 2010. BGP, for example, expects stack crew activity to pick up during the latter part of the year driven by contracts in our international markets such as Iraq.

As already stated, we also have significant interests in activity with FireFly mainly from the rental side and anticipate some of these rentals will lead to sales during the second half of the year. In marine, our DigiFIN product is expected to have solid sales similar to last year and ORCA is still in a growth phase being driven by more complex surveys such as wide azimuth, which seems to be experiencing increasing survey activity.

Next, I want to discuss the BGP joint venture. We are on track to close on the joint venture by the end of March. We expect to receive all needed U.S. approval this month with antitrust [ph] already cleared and Cyprus approval expected very soon. We have also finalized the term sheet for the permanent financing for both our term-year long and revolver.

I will let Brian provide more detail on the financing a little later. The remaining work before closing includes completing the legal structure for the joint venture entity and moving through the various steps to execute the closing. We are also in the process of working on the operational aspects of the joint ventures, including developing a plan for integrating China and North American R&D and manufacturing. We already have an agreement on the joint venture CEO who will be our current ION executive.

We expect 2010 driven mainly by getting the joint venture booted up and functional with improvements in land sales as the year progresses. The main increase in earnings related to the joint venture will likely start in 2011 when the joint venture is fully functional and BGP’s business has improved to the point that the capital spending is back to a more normal run rate.

Finally, I would like to discuss our current business outlook. We do not have the visibility including the potential results of the joint venture to provide specific detail guidance for 2010. I can say we expect a slow beginning due to normal oil company and contracted budget and planning cycles combined with the fact that increases in our equipment sales will lag improvements in overall seismic activity. We also don’t expect any BGP equipment sales in quarter one since it would naturally wait until the joint venture is operating when we get the financial benefit of purchasing through the JV. We do expect business improving as the year unfolds with the year being significantly weighted towards the second half of the year.

Our goal is to get ION back to profitability in 2010, less any one-time expanses related to the formation of the joint venture. Overall, we were entering the year with much lower costs than both 2008 and 2009, and we are projecting growth in both our data processing and our multi-client businesses. We expect flat-to-slight improvements in our equipment businesses. We also get the benefit of a significant reduction in interest payments due to our planned de-leveraging which Brian will further discuss.

With that I will turn it over to Brian.

Brian Hanson

Thank you, Bob. Good morning, everyone. First I want to provide more detail around the one-time charges included in the earnings release for the fourth quarter. The first relates to the fair value adjustment of our embedded derivatives. Part of the proposed joint venture transactions with BGP includes bridge financing involving a stock warrant and the issuance of convertible notes. This warrant would eventually be converted into equity and credited against the approximately 24 million ION shares that BGP will purchase at the JV closing. However, until then the warrant must be adjusted to fair value quarterly.

Additionally the 40 million in convertible notes were issued at a discount, which is being accreted until the joint venture closes in March 2010. Combined, the fair value adjustment of the conversion features and the debt discount accretion caused the non-cash loss of $36 million for the fourth quarter. Once the joint venture closes, the warrant will be eliminated and the debt discount will have been fully accreted. Second relates to an impairment of our cost method investment based on the review the investment was determined that the fair value was lower than the book value and we subsequently took a write-off of $4.5 million.

For the full year, the additional one-time charges relate to the intangible asset impairment of $38 million in the first quarter, the out of period stock based compensation expense true up of $3.3 million in the second quarter of 2009, and the 2009 restructuring charges of $3 million. All of these items have been discussed in prior quarters. In total, we booked approximately $85 million before tax of special charges in 2009.

Next, I would like to point out a few items on the balance sheet. The first relates to our continued monetization of our inventory, which showed a decrease of $19 million of a prior period. The decrease excludes the non-cash transfer of $49 million from inventory into our rental pool in 2009. As the majority of our inventory relates to our land business, our inventory levels will drop significantly upon the closing of the joint venture.

Our current maturities contain $253 million in long term indebtedness, and has a contractual maturity of more than one year. Similar to last quarter, because we have not yet closed the joint venture, the accounting rules consider the one-time -- the time limit to be a limiting factor which forces the reclassifications from long term to short term. When you remove the impact of the $253 million debt reclassification, and adjust for the impact of the fair value of the warrant, working capital is $239 million compared to $267 million in 2008.

Moving into 2010, we are moving forward on our refinancing arrangements related to the joint venture. While the deals have not yet closed, I wanted to give you some direction on the anticipated changes into our debt structure. As part of the closing of the joint venture, we will replace our Term a loan currently of a $102 million with a new term loan facility of $106 million and a new undrawn revolver of $100 million borrowing capacity. With the moneys from the closing of the joint venture, we will pay off both our existing revolver and the subordinated seller note of $35 million. The secured equipment financing of $19 million will move into the joint ventures’ financials.

From a cash perspective, our cash position continues to improve from that at year end. We have additional capacity in our revolver of approximately $20 million at a cash balance of approximately $41 million. As we announced previously in October 2009, we obtained a jury verdict against Wilson Greatbatch related to our marine batteries and battery packs, and in January of 2010 we obtained the jury verdict against Sercel for infringement of VectorSeis patent. The amount of the Greatbatch judgment is approximately $33 million and the verdict is currently on appeal.

The amount of the Sercel verdict was $25 million and we expect Sercel to appeal -- at verdict. Although we expect both judgments to be upheld on appeal, neither of these amounts will be reflected in our financial statements until we actually collect the final amounts after the appeal process is completed.

Our overall goal this year is to return to profitability again in 2010. We believe that the seismic markets bottomed out in late 2009 and our contracted customers are starting to see an increase in activity in their business. Although we do expect some related pickup in our equipment business, we expect that it will be towards the latter part of 2010 positioning us for 2011 as we see this activity level ultimately translate into orders for ION. We anticipate growth and increased profitability in 2010 in both our data processing business and our new venture multi-client business.

We will also see the full year benefits of the cost savings from our restructuring activities implemented in late 2008 and into 2009 in addition to lower interest expense associated with the de-leveraging and re-financings concurrent with closing of the joint venture. The market volatility that began in 2008 has greatly impacted our ability to accurately forecast our business, and as a result we continue to suspend guidance. We will, however, be coming out with improved metrics after we close the joint venture both around the joint venture itself and the ION business. Our goal is to provide better visibility to ION for our shareholders as we navigate through a difficult to predict environment.

While we are not providing earnings guidance, we are providing some guidelines on major expenses that will change with the closing of the joint venture. The first relates to interest expense. We are anticipating interest expense during 2010 of between $18 million and $22 million for the year compared to $36 million in 2009. The 2010 anticipated expense includes approximately $7 million from the current financing arrangements that will exist until the closing of the joint venture projected in March 2010.

Secondly, related to amortization of intangibles, ARAM was the largest driver of our intangible asset amortization. When the proposed joint venture closes in 2010, in March 2010, we anticipate that our intangible asset amortization will likewise decrease by approximately 1.5 million per quarter to approximately 2 million per quarter, excluding investments into our multi-client library. Our effective tax rate is anticipated to be between 24% and 28% for 2010, and with the closing of the proposed joint venture our shares will increase from approximately 119 million shares at December 31, 2009 to a 143 million shares by the end of the first quarter of 2010.

Finally, I wanted to give background on how we will be accounting for the new joint venture. When the joint venture closes we will remove the effective land businesses from our financial statements because we have a minority interest and one accounts for it under the equity method of accounting. Under this method, we will record the joint ventures proportionate earnings or losses in our income statement under our minority interest as part of other income and expenses. We will also have our investment of 49% in the joint venture on our balance sheet as an asset. Additionally, we will provide in our quarterly reports, the financial results of the joint venture to again provide better transparency into our operations.

With that, we will open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will begin the question-and-answer session. (Operator instructions) and our first question comes from the line of James West with Barclays Capital. Please go ahead.

James West – Barclays Capital

Good morning, guys.

Bob Peebler

Good morning, James.

James West – Barclays Capital

Bob, if we have seen the pickup, I think, in tender and activity for your customers that’s starting to translate into contracts here for certainly for the land business and the marine business, I think, were mostly sold out for the first half of this year. So, in that context what’s the normal or what would you expect to be the normal lag time between your customers seeing much better activity levels and you seeing a pickup in equipment sales?

Bob Peebler

That’s a good question. James, on this, I can only speculate just using sort of the historical experiences looking back, and I would say that it’s going to vary a little bit from market to market. So, in areas that such as North America and Russia, I think Russia will take longer just because the business itself is -- you have a lot of small players that are under capitalized and even though their activity is picking up, it’s picking up at much lower prices for them. And so I think it’s going to take a while for that one to work through and get tightened up. Now I think the good news in Russia, there is a trend that -- more consolidation and we actually welcome that. We feel like this consolidation will bring people with probably stronger balance sheets. But I think Russia -- that one will be a while. I would, just to speculate, I would probably say that’s sort of 2011 gain. We will see some activity, we have already seen some, but it’s not going to be great.

North America is a little more -- North America is a little more confused and I think everybody is pondering what the gas market are going to do. We do know that our customers are seeing increase in projects being left and those kinds of things. So that one I think we could see probably start seeing benefits in the second half of -- second half of this year. I know our land guys are at least seeing some increase in discussions with customers.

And then you go into the rest of the world. I don’t have real good visibility right now into India, for example with a pretty big installed base. You do have China, which interestingly enough, I was surprised that China, in fact, had quite a few stack crews. But again, we have been told that both CMPC and Center Pack [ph] are increasing their budgets substantially. And if that happens that sort of flows probably again into sort of the second half of this year to see some -- we aren’t not expecting any kind of gang buster land pick up in the year, but we do expect to see some improvement year-over-year and it’s going to be just sort of as the year unfolds.

The joint venture puts a little bit of anomaly in our business because this is probably the first year that we haven’t had some purchases from BGP in the first quarter in some form or another. But number one, BGP probably is one of their slower, and it is a fact that this is one of the slowest years in capital spend this period this year. But they are also seeing their activities pick up international with a lot of projects being bid. As you know they could be big in Iraq. So, again, I think once we get the venture closed they could buy from the venture plus their business getting better. So that’s a long question. I would guess, it’s any place from a year from when it all starts to longer, but this thing started well into last year. So --

James West – Barclays Capital

Okay. Bob, but then what about in the marine side on the Digi products given that -- lot of the higher end vessels are going to be well utilized and they may not be well utilized at good pricing but they are going to be working. What’s the normal, kind of, cycle time for those products in the aftermarket business there?

Bob Peebler

Actually, marine is a whole different story than land in the sense that our new technology in marine is like DigiFIN is basically selling in this installed base that exists, and then going into the higher market, and we anticipate, we had a good strong year last year with DigiFIN sales, and we believe we are going to have a good strong year this year. If you notice, while a lot of the activity is increasing, we are hearing a lot about white azimuth surveys coming back and some big surveys going on there. 4-D is coming back in the North Sea and some other areas and that requires more and more people specking in, steerable streamers. So I think that market is going to be more or less driven by our ability to have the new technology go in and there is a demand for it.

ORCA is going to have a -- should have a good solid year of growth. And there is still a few new vessels coming into the market. Most of that is -- we are pretty much done with new vessels, even last year was pretty small. So that’s – we’ve already sort of taken that line [ph] down. But there are a few out there that’s still coming in and we will have some probably the positioning technology sales to.

James West – Barclays Capital

Okay. And then just the last question from me, with the joint venture, if I heard you correctly, you guys have along with BGP mostly set strategic goals for the joint venture and so I am assuming there is an R&D budget being discussed and perhaps in place. What’s going to be the focus of the R&D effort of the JV? Will it still be on FireFly? Will it be different technologies? Could you give us some color there?

Bob Peebler

There is two focuses. One of the main attractions of the ION by BGP was our new technology. They believe, like we believe that we are at the beginning than even in the middle of a new technology cycle on land and they were most impressed with our FireFly and the thing we are going to source technology et cetera. So, they have a strong interest there in R&D and that will continue. And if anything, because we are picking up some engineering resources in China, if anything we can even strengthen some of those programs just with the resources that are coming into the venture.

Secondly, now we have a very large customer, they have some very important features they want in our cable systems, and they are working closely with us on sort of our, you might call it next generation cable that we had already been working on at ARAM. It’s a sort of the evolution of the ARAM product line, and they are very interested in helping us accelerate that with very targeted feedback from them. So that will -- as those feature functions are added that will continue to open up their ability to purchase more and more from the venture.

James West – Barclays Capital

Okay. Thanks, Bob.

Operator

Thank you. Our next question comes from the line of Stephen Gengaro with Jefferies. Please go ahead.

Stephen Gengaro – Jefferies & Company

Thank you. Good morning, gentlemen.

Bob Peebler

Good morning.

Stephen Gengaro – Jefferies & Company

Can you -- I am not sure how much you can tell us, but can you give us a sense for what portion of BGP’s business you are currently doing, and sort of how that shifts -- we are trying to get a, sort of, frame some upside or realistic views of the JV’s profitability?

Bob Peebler

I will just say historically if we look at our market share with BGP, we have been rocking around 20% and that includes vibes. And so, I will say that our sales to them was very -- in the last two or three years, a lot of the dollars was more in the vibe side than the system side. The, sort of, the stated objective of that JV is to increase that market share significantly. We sort of look at over a planning or sort of a five-year plan, we don’t see any reason over the time it can't flip. And so we will get it closer to 70%, 80% over time. And that will be obviously dependent on having all the feature functions they need. And so it will evolve, and also they have a large install base that they will have to continue to maintain at some level. But they certainly are going to have a preference. I think the other thing that we told all the investors how to think about this is that, in addition to BGP, BGP is owned by CNPC, which is the large state-owned oil and gas company of China. And they also loan – CNPC also owns seismic crews that are in the oilfields, China oilfields that are not part of BGP.

So this will also help open up those markets that we’ve historically had a difficult time penetrating, just because now basically they will be buying from their joint venture, they are owned by CNPC. And then even further down the path, we think it will just by being in China, associated with the Chinese industry that we also should have some leverage into Sinopec. So I think the future is bright in that sense, and then we also will have access to markets that's been difficult for us to get into. So for example as Iraq opens up, CNPC is a big player. They will be bringing BGP in and that helps pull us in.

Stephen Gengaro – Jefferies & Company

That's very helpful. And then as a sort of follow-up question. I know you are shying away from giving guidance, and I can understand that, but when we look at the sort of the progression as we go through the year, it sounds like its more back half weighted. You mentioned return to profitability, do you mean for the year return to profitability or for a quarter or two in the back half of the year?

Bob Peebler

We are saying for the year.

Stephen Gengaro – Jefferies & Company

Okay. Good. That's helpful. Thank you.

Bob Peebler

Okay.

Operator

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

Terese Fabian – Sidoti & Company

Hi, thank you. I have a question on other seismic data acquisition companies that are your customers. You had setup [ph] the last conference call there was a positive reaction to the JV. Now a couple of months into the process have – do you have an update on discussions with your clients?

Bob Peebler

Yes, we have conversations with them off and on, continuously I guess, and it's really not a whole lot has changed from the initial reaction. I would say net-net we’ve gotten positive response. I think number one people want to make sure that they see a viable alternative in the market. The idea of having a sort of a competitor owned the equipment company you are buying from, I think the market already got over that a long time ago. If you look at our main competitor they are owned by a very large seismic service contractor who they compete against everyday. And so that issue I don’t think has really grown any – we really haven't seen that swell to any real great concern on our part.

Terese Fabian – Sidoti & Company

But as I understand you to say that you would expect BGP to be up to 80% of the JV business?

Bob Peebler

No. No, what I said was we would expect to get 80% of BGP's spend not right out of the gate. We were saying over time we should go from maybe approximately 20% spend to over time we’d hope to get to an 80% spend.

Terese Fabian – Sidoti & Company

So a substantial amount of sales from the JV to them.

Bob Peebler

Correct.

Terese Fabian – Sidoti & Company

Okay. One other question. On the ION Solutions business, can you give a breakdown between the seismic data processing and the SPAN sales for the fourth quarter?

Brian Hanson

Well, we haven't historically done that, but we are actually going to be producing those metrics like that, Terese, probably it's after the JV closes, it will probably be on the next call.

Terese Fabian – Sidoti & Company

Okay. I think that would be helpful. But you also said that the SPAN sales were down. What are you seeing –?

Brian Hanson

What we said was if you got into the actual multi-client business in 2009, what happened in that business, although it was down off of prior year, it wasn't down like our land business, and what we saw as we drove into that multi-client business. When you broke it down into two parts the actual new venture activity, where we are actually sanctioning projects and floating the boat and shooting data versus finished projects and the data was in the data library. What we noticed was the majority of spend that was coming in from your companies was directed to all of the new venture activity.

So we had a – our actual data library sales was considerably softer in 2009 versus 2008. And as you know those data library sales typically enjoy the benefit of the yearend spend from oil companies as they have extra capital available. We just didn't see that occur in the fourth quarter. So, if you went back to prior years as you know '06, '07, '08, we typically enjoyed sort of nice discretionary spend in Q4 to that finished data library's data set, and that just didn't happen in Q4 of '09.

Bob Peebler

I think one of the things that was encouraging to me if you consider that our new ventures are underwritten pretty much so the portfolio is pretty much 100% underwritten. So that tells you that the oil companies were still willing to spend on underwriting, which also says something about their view of what's going to happen over the next two, three, four years, whereas the beta library purchase is more of a discretionary spend. They can move that out a month or quarter or half a year, and it doesn't really effect them that much because most of those projects are very long-term projects, whereas a new venture they may want new data in the Arctic soon, and they know they wouldn’t get that because their new venture is going. So I think they were prioritizing their spend more toward in our case, our customers more towards the collecting new data that will be available in library form soon versus buying the older spend data.

Brian Hanson

And just to give you a perspective of, as Bob said, that program is an underwritten program. In 2008, we did some more of over 100 million of investment in that program to those new venture projects. And in 2009 we actually spent close to 85 million, so it wasn't down dramatically.

Terese Fabian – Sidoti & Company

I think looking at the numbers the fourth quarter ION Solutions division number really is within expectations reflecting the market. But it seems then that you must have had a pick-up of some of your data processing work. Can you talk a little bit about what reprocessing that data provides for your customers?

Bob Peebler

If you look at the kind of processing we do, we mainly in percent of work, mainly due – our proprietary mainly is reprocessing. And there has been a tremendous amount of data shot over the last several years. If you just think about all of the wide-azimuth surveys that's been shot in very complex areas, as an example, and so now the oil companies are going back and really wanting to reprocess, part of it is because we have state-of-the-art reverse time migration and no one is nearly close to saying that we completely solved sub surface salt imaging. And so companies are going back and any time anything really new comes out likely with reverse time migration, go back and reprocess. We have a lot of reprocessing going on. It's very high end, being driven by very complex problems. And in fact that business grew all through the year, and we entered this year with really a strong pipeline of business that we expect it to grow, continue to grow this year.

Terese Fabian Sidoti & Company

And just one last quick question on the interest expense, you gave 2010 guidance. What do you expect the first quarter will be?

Bob Peebler

Seven

Terese Fabian – Sidoti & Company

Thank you.

Operator

(Operator instructions). And our next question comes from the line of David Griffiths with Copia Capital. Please go ahead.

David Griffiths Copia Capital

Good morning guys.

Bob Peebler

Good morning.

David Griffiths Copia Capital

Just a quick question on the multi-client spend. You spent almost $85 million in 2009. And I know you aren't really giving guidance for this year but what should we expect for multi-client interest level for your clients this year and what – like round numbers what do you think you will spend this year in multi-client?

Bob Peebler

That's good question. Not that it's guidance but sort of an approximate range is probably, it will be up off 2009 and we'll probably going to spend in the 90 to 100 range. That's a little difficult to predict. Every year we were typically wrong, so it can be more, it can be less. That represents sort of a normal and healthy business for us.

David Griffiths Copia Capital

Okay. And then how do you explain, it is interesting that you had, I think other seismic companies had pretty decent yearend multi-client sales, and then your multi-client sales didn't seem to show up in the fourth quarter. I'm just wondering, is that just because of project timing or specific areas that you had your library in or?

Bob Peebler

I think it's where our libraries are. There is a – for example, there’s a lease sale coming up in the gulf, a big lease sale that’s in March, then just talking, and we don't have any 3-D data libraries to speak of. And most of those lease sales really drive the 3-D data library sales. So, I think there is quite a bit of yearend activity where people, they knew they – if you think about you are preparing for lease sales, you get data as soon as you can get it. And so I think that's where some of the discretionary money likely went to cover them.

I think there is also some stuff going on in the North Sea but I’m not as certain on that on lease sales, but I do know that talking to some of the other companies in the multi-client business, that's what they saw, was mainly where our spans are mainly located in basins sort of new basins where the oil companies are looking out, 10 years, 15 years. So for example, we have been big up in the Arctic and still big up in the Arctic. But if you think about the planning horizons for the guys working up there, they can easily slide data library sale three to six months and it doesn't impact a whole lot.

David Griffiths Copia Capital

Right. Would you expect a similar, you basically said that you’re – you're basically 100% pre-funded last year. Do you expect a similar level of pre-funding for 2010?

Bob Peebler

Yes.

David Griffiths Copia Capital

Yes?

Bob Peebler

That is the way that we run our business. So it's a discipline more than an expectation.

David Griffiths Copia Capital

Great. That's all have I for you. Thanks very much.

Operator

Thank you. Our next question is a follow-up question from the line of Stephen Gengaro with Jefferies. Please go ahead.

Stephen Gengaro – Jefferies & Company

Thank you. I was wondering if we look at the – well, the items like G&A and your marketing and sales expense, how should we think about the change in those numbers as the JV gets formed?

Bob Peebler

That's a good question, Stephen. What I try to do in this call was give you general direction around things like amortization interest, the big buckets that have grey clouds around them. The actual – from there I would say that the SG&A is going to be more or less a kind of a relative split. So what we have 100% of today, a portion of that would go into the joint venture and the remaining amount will stay at ION. A lot of the SG&A activities will either be directly – the expense will be directly incurred by the joint venture or the joint venture will pay a shared service expense to ION to perform a service.

Stephen Gengaro – Jefferies & Company

Okay. That's helpful. I guess the only other follow-up I had was when the effective tax rate for the quarter excluding all the charges that you used to kind of get to the $0.11 loss.

Brian Hanson

Are you asking that?

Stephen Gengaro – Jefferies & Company

Yes, yes. I'm asking what that number is?

Brian Hanson

If you back up the effective tax rate after taking into consideration all that noise. I don't have that number in front of me but I can get it for you.

Stephen Gengaro – Jefferies & Company

Okay. Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Nathaniel Pulsifer with Pulsifer & Associates. Please go ahead.

Nathaniel Pulsifer – Pulsifer & Associates

Good morning and thank you for taking my call. I have a question about the current asset current liability information on the balance sheet. There has been a substantial change in notes due, and I wanted to get some comfort as to how the company was going to be proceeding on that in the balance of this year and I have a follow on.

Brian Hanson

Could you be more specific to the line items on the balance sheet?

Nathaniel Pulsifer – Pulsifer & Associates

Sure. The total current assets decreased by 130 million, but the – let’s see – current portion –

Brian Hanson

I think I know where you are going. Let me help you with that. There is a couple of things that are going on in current assets. The first thing is, I called it in my part of the script was you have the effect of our debt being reclassified in the current.

Nathaniel Pulsifer – Pulsifer & Associates

Right.

Brian Hanson

Really get an apples-to-apples, you got to pull it out of current because that's more accounting magic than it is reality. And then the other thing you have to do is, you have to adjust those current assets for the impact of the derivative feature of the warrants. So that shrinks the current assets by another $36 million. So if you take both of those out and do a comparison year-over-year, we were sitting at somewhere around 237 million of current assets versus 260-ish prior year’s so, the delta is about $25 million delta year-over-year and that delta is really driven by the decrease of inventory levels over 2009.

Nathaniel Pulsifer – Pulsifer & Associates

Okay. And then a follow on, the notes payable increased by a substantial amount. You spoke about that in your opening remarks, could you remind me of the plans to bring that number back down to or perhaps maybe a more manageable level?

Brian Hanson

Notes in general as in total debt, the total debt balance of the company we're going to be delevering as we close the joint venture in March. So the proceeds that we'll receive from that joint venture will be entirely used to delever the company. And so we will be dropping from effectively close to 300-ish million in debt down to more in the 125 range.

Nathaniel Pulsifer – Pulsifer & Associates

Satisfying. And then finally if I may, the text refers to five items, which were to be illuminated in the table at the end of the notes, but I only count four, what was the fifth item that went into this set of adjustments? Impairment stock-based compensation restructuring adjustment, what was the fifth one?

Brian Hanson

Yes, two of those charges are under the impairment column, the first was the 38 million that we incurred intangible assets in the first quarter, and the second was a write-down of the cost method investment of 4.5 million.

Nathaniel Pulsifer – Pulsifer & Associates

And what was that investment?

Brian Hanson

It was an investment made many, many years ago into a – it was actually a result of the contribution of assets into another business that we did many years ago, made back in 2004 I believe.

Nathaniel Pulsifer – Pulsifer & Associates

Okay. Thank you.

Operator

Thank you. At this time, we have no further questions. I like to turn the call back to management for any closing remarks.

Jack Lascar

Well, thanks for taking the time to attend the call and we look forward to talking to you during our first quarter call. Thanks.

Operator

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

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