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CORE LABORATORIES N V - Quarter Report: 2007 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

     

FORM 10-Q

 

(Mark One)

 

X

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2007

 

OR

 
 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ______________

 

Commission File Number: 001-14273

 

CORE LABORATORIES N.V.

(Exact name of registrant as specified in its charter)

 

The Netherlands

Not Applicable

(State of other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 
   

Herengracht 424

 

1017 BZ Amsterdam

 

The Netherlands

Not Applicable

(Address of principal executive offices)

(Zip Code)

   

(31-20) 420-3191

(Registrant's telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

 

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ X ] Accelerated filer [ ] Non-accelerated filer [ ]

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

    The number of common shares of the Registrant, par value EUR 0.04 per share, outstanding at April 25, 2007 was 23,908,863.


 

CORE LABORATORIES N.V.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007

 

INDEX

 
 

Page

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 
     
 

Consolidated Balance Sheets at March 31, 2007 (Unaudited) and December 31, 2006

1

     
 

Consolidated Statements of Operations (Unaudited) for the Three Months Ended

 

      March 31, 2007 and 2006

2

     

 

Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended

 
 

      March 31, 2007 and 2006

4

     
 

Notes to Unaudited Consolidated Interim Financial Statements

5

     

Item 2.

Management's Discussion and Analysis of Financial Condition and

 
 

      Results of Operations

15

     

Item 3.

Quantitative and Qualitative Disclosures of Market Risk

22

     

Item 4.

Controls and Procedures

22

     
     

PART II - OTHER INFORMATION

     

Item 1.

Legal Proceedings

23

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

     

Item 4.

Submissions of Matters to a Vote of Shareholders

23

     

Item 6.

Exhibits

24

     
 

Signature

25

     


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CORE LABORATORIES N.V.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

     

March 31,

 

December 31,

     

2007

 

2006

   

ASSETS

(Unaudited)

   

CURRENT ASSETS:

     
 

Cash and cash equivalents

$       28,989 

 

$       54,223 

 

Accounts receivable, net of allowance for doubtful accounts of $4,546 and

     
 

  $4,340 at 2007 and 2006, respectively

122,838 

 

112,055 

 

Inventories, net

32,482 

 

30,199 

 

Prepaid expenses and other current assets

28,738 

 

29,075 

   

TOTAL CURRENT ASSETS

213,047 

 

225,552 

           

PROPERTY, PLANT AND EQUIPMENT, net

86,603 

 

87,734 

INTANGIBLES, net

6,555 

 

6,602 

GOODWILL

132,618 

 

132,618 

DEFERRED TAX ASSET

33,133 

33,032 

OTHER ASSETS

16,254 

15,677 

   

TOTAL ASSETS

$     488,210 

 

$     501,215 

           
   

LIABILITIES AND SHAREHOLDERS' EQUITY

     

CURRENT LIABILITIES:

     
 

Current maturities of long-term debt and capital lease obligations

$         1,779 

 

$         2,762 

 

Accounts payable

33,514 

 

37,460 

 

Accrued payroll and related costs

21,384 

 

24,707 

 

Taxes other than payroll and income

7,253 

 

8,714 

 

Unearned revenues

8,996 

 

6,853 

 

Other accrued expenses

10,457 

 

8,424 

   

TOTAL CURRENT LIABILITIES

83,383 

 

88,920 

       

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

300,002 

 

300,002 

DEFERRED COMPENSATION

11,189 

 

10,413 

OTHER LONG-TERM LIABILITIES

36,440 

 

28,598 

COMMITMENTS AND CONTINGENCIES

     

MINORITY INTEREST

1,370 

 

1,446 

       

SHAREHOLDERS' EQUITY:

     
 

Preference shares, EUR 0.04 par value;

     
   

3,000,000 shares authorized, none issued or outstanding

 

 

Common shares, EUR 0.04 par value;

     
   

100,000,000 shares authorized, 27,033,903 issued and 23,906,863 outstanding at 2007

     
   

and 25,608,511 issued and 23,225,121 outstanding at 2006

1,525 

 

1,450 

 

Additional paid-in capital

43,782 

 

23,182 

 

Retained earnings

246,031 

 

224,110

 

Accumulated other comprehensive income (loss)

(2,054)

 

(2,072)

 

Treasury shares (at cost), 3,127,040 at 2007 and 2,383,390 at 2006

(233,458)

 

(174,834)

TOTAL SHAREHOLDERS' EQUITY

55,826 

71,836 

   

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$     488,210 

 

$     501,215 

The accompanying notes are an integral part of these consolidated financial statements.

Return to Index


 

CORE LABORATORIES N.V.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

   

Three Months Ended

March 31,

 

2007

 

2006

   

(Unaudited)

REVENUES:

     
 

Services

$     116,965 

 

$     99,135 

 

Product Sales

38,758 

 

38,200 

   

155,723 

 

137,335 

OPERATING EXPENSES:

     
 

Cost of services

79,854 

 

72,183 

 

Cost of sales

27,395 

 

27,965 

 

General and administrative expenses

8,039 

 

10,545 

 

Depreciation

4,486 

 

4,064 

 

Amortization

92 

 

60 

 

Other (income), net

(863)

 

(1,870)

OPERATING INCOME

36,720 

 

24,388 

Interest expense

632 

 

1,324 

Income before income tax expense

36,088 

 

23,064 

Income tax expense

10,826 

 

6,919 

NET INCOME

$      25,262 

 

$      16,145 

       

EARNINGS PER SHARE INFORMATION:

     

Basic earnings per share

$        1.08 

$        0.63 

       

Diluted earnings per share

$        1.04 

 

$        0.58 

       

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

     

Basic

23,430 

 

25,794 

       

Diluted

24,322 

 

27,767 

       
       

The accompanying notes are an integral part of these consolidated financial statements.

Return to Index


 

CORE LABORATORIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

     

Three Months Ended

March 31,

   

2007

 

2006

 

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net income

$     25,262 

 

$     16,145 

Adjustments to reconcile income to net cash provided by operating activities:

     
 

Net provision for doubtful accounts

361 

 

 

Inventory obsolescence

51 

 

1,513 

 

Equity in loss (income) of affiliates

 

(15)

 

Minority interest

(76)

 

 

Stock-based compensation

1,148 

 

1,399 

 

Depreciation and amortization

4,578 

 

4,124 

 

Debt issuance costs amortization

623 

 

29 

Gain on sale of assets

(48)

(564)

Realization of pension obligation

18 

 

Gain on insurance recovery

 

(492)

 

Increase in value of life insurance policies

(106)

 

(282)

 

Deferred income taxes

177 

 

138 

 

Changes in assets and liabilities, net of effect of dispositions:

     

Accounts receivable

(11,144)

(11,013)

   

Inventories

(2,334)

 

(1,283)

   

Prepaid expenses and other current assets

59 

 

(1,453)

   

Other assets

(134)

 

75 

   

Accounts payable

(3,946)

 

(1,857)

   

Accrued expenses

(608)

 

8,976 

   

Other long-term liabilities

5,277 

 

9,366 

 

Net cash provided by operating activities

19,158 

 

24,821 

CASH FLOWS FROM INVESTING ACTIVITIES:

     
   

Capital expenditures

(3,427)

 

(4,285)

   

Patents and other intangibles

(45)

 

   

Proceeds from sale of assets

76 

 

2,010 

   

Premiums on life insurance

(764)

 

(409)

 

Net cash used in investing activities

(4,160)

 

(2,684)

CASH FLOWS FROM FINANCING ACTIVITIES:

     
   

Repayment of debt

(982)

 

(5,869)

   

Proceeds from debt borrowings

 

10,000 

   

Capital lease obligations

(1)

 

(15)

   

Stock options exercised

16,918 

 

3,077 

   

Excess tax benefits from stock-based compensation

2,609 

 

246 

   

Debt issuance costs

(152)

 

   

Repurchase of common shares

(58,624)

 

(27,289)

 

Net cash used in financing activities

(40,232)

 

(19,850)

NET CHANGE IN CASH AND CASH EQUIVALENTS

(25,234)

 

2,287 

CASH AND CASH EQUIVALENTS, beginning of period

54,223 

 

13,743 

CASH AND CASH EQUIVALENTS, end of period

$    28,989 

 

$    16,030 

The accompanying notes are an integral part of these consolidated financial statements.

Return to Index


CORE LABORATORIES N.V.

NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Core Laboratories N.V. and its subsidiaries and have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America ("U.S.") for interim financial information using the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements.

Core Laboratories N.V. uses the equity method of accounting for all investments in which it has less than a majority interest and over which it does not exercise control. Minority interest has been recorded to reflect outside ownership attributable to consolidated subsidiaries that are less than 100% owned. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in these financial statements. Furthermore, the operating results presented for the three months ended March 31, 2007 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2007.

Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2006 was derived from the 2006 audited consolidated financial statements but does not include all disclosures in accordance with GAAP.

References to "Core Lab", "we", "our", and similar phrases are used throughout this Quarterly Report on Form 10-Q and relate collectively to Core Laboratories N.V. and its consolidated affiliates.

These financial statements should be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006.

 

2. INVENTORIES

Inventories consist of the following (in thousands):

   

March 31,

 

December 31,

   

2007

 

2006

   

(Unaudited)

   

Finished goods

 

$   26,392

 

$     24,747

Parts and materials

 

7,271

 

6,749

Work in progress

 

1,299

 

1,238

  Total inventories

 

34,962

 

32,734

Less - valuation reserves

 

2,480

 

2,535

  Inventories, net

 

$   32,482

 

$     30,199

We include freight costs incurred for shipping inventory to customers in the Cost of Sales line of the Consolidated Statement of Operations.

 

3. GOODWILL AND INTANGIBLES

We account for intangible assets with indefinite lives, including goodwill, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which requires us to evaluate these assets for impairment annually, or more frequently if an indication of impairment has occurred. Based upon our most recent evaluation, management determined that goodwill was not impaired. We amortize intangible assets with a defined term on a straight-line basis over their respective useful lives. There were no significant changes related to our intangible assets for the three months ended March 31, 2007. The composition of goodwill by business segment at March 31, 2007 is consistent with the amounts disclosed in our Annual Report on Form 10-K as of December 31, 2006.

 


 

4. DEBT AND CAPITAL LEASE OBLIGATIONS

Debt is summarized in the following table (in thousands):

   

March 31,

 

December 31,

   

2007

 

2006

   

(Unaudited)

   

Senior Exchangeable Notes

 

$     300,000

 

$   300,000 

Capital lease obligations

 

9

 

10

Other indebtedness

 

1,772

 

2,754

  Total debt and capital leases obligations

 

301,781

 

302,764

Less - short-term debt included in other indebtedness

 

1,672

 

2,654

Less - current maturities of long-term debt and capital lease obligations

 

107

 

108

   Long-term debt and capital lease obligations

 

$     300,002

 

$    300,002

In November 2006, Core Laboratories LP, a wholly owned subsidiary, issued $300 million aggregate principal amount of Senior Exchangeable Notes due 2011 (the "Notes") to qualified institutional buyers. The Notes bear interest at a rate of 0.25% per year and are guaranteed by Core Laboratories N.V. These notes are exchangeable into shares of Core Laboratories N.V. under certain circumstances at an initial conversion rate of 10.5533 per $1,000 principal amount of notes. Upon exchange, holders will receive cash up to the principal amount, and any excess exchange value will be delivered in Core Laboratories N.V. common shares. We sold the Notes to the initial purchasers and subsequently filed a registration statement on Form S-3, which became effective pursuant to the Securities Act of 1933, as amended with respect to resale of the notes and shares received in exchange for the notes on December 22, 2006.

We maintain a revolving credit facility (the "Credit Facility") that allows for an aggregate borrowing capacity of $100.0 million. As amended, this agreement provides an option to increase the commitment under the Credit Facility to $150.0 million, if certain conditions are met. The Credit Facility bears interest at variable rates from LIBOR plus 0.5% to a maximum of LIBOR plus 1.125%. The Credit Facility matures in December 2010 and requires interest payments only until maturity. These interest payments are based on the interest period selected. Our available capacity is reduced by outstanding unsecured letters of credit and performance guarantees and bonds totaling $7.5 million at March 31, 2007 related to certain projects in progress. Our available borrowing capacity under the Credit Facility at March 31, 2007 was $92.5 million.

 

5. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

We provide a noncontributory defined benefit pension plan covering substantially all of our Dutch employees based on years of service and final pay or career average pay, depending on when the employee began participating. Employees are immediately vested in the benefits earned. We fund the future obligations of this plan by purchasing investment contracts from a large national insurance company. We make annual premium payments, based upon each employee's age and current salary, to the insurance company.

The following table summarizes the components of net periodic pension cost under this plan for the three months ended March 31, 2007 and 2006 (in thousands):

 

Three Months Ended

March 31,

 
 

2007

 

2006

 
 

(Unaudited)

 

Service cost

$     291 

 

$     288 

 

Interest cost

266 

 

215 

 

Expected return on plan assets

(243)

 

(209)

 

Unrecognized pension obligation/(asset), net

18 

33 

   Net periodic pension cost

$     332 

 

$     327 

 

During the three months ended March 31, 2007, we contributed approximately $0.8 million, as determined by the insurance company, to fund the estimated 2007 premiums on investment contracts held by the plan.


6. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of business. We believe that the resolution of all litigation currently pending or threatened against it or any of its subsidiaries should not have a material adverse effect on its consolidated financial condition, results of operations or liquidity; however, because of the inherent uncertainty of litigation, we cannot provide assurance that the resolution of any particular claim or proceeding to which it or any of its subsidiaries is a party will not have a material adverse effect on its consolidated results of operations or liquidity for the period in which that resolution occurs.

 

7. SHAREHOLDERS' EQUITY

During the three months ended March 31, 2007, we repurchased 743,650 of our common shares for $58.6 million, at an average price of $78.83 per share. In January 2007, rights to 38,024 shares valued at $3.1 million, or $82.40 per share, were surrendered to the Company pursuant to the terms of a stock-based compensation plan, in settlement by the participants of personal tax burdens that may result from the issuance of common shares under this arrangement. In February 2007, 527,626 shares valued at $41.8 million, or $79.31 per share were surrendered to the Company pursuant to the terms of a stock-based compensation plan, in settlement by the participants of their exercise cost in the stock options and their personal tax burdens that may result from the issuance of common shares under this arrangement.

For the three months ended March 31, 2007, we issued 1,305,392 of our common shares associated with stock option exercises for which we received proceeds of approximately $16.9 million.

At our Annual Shareholders' Meeting on April 2, 2007 (the "Meeting"), our shareholders approved the cancellation of all of the 3,127,040 treasury shares we had repurchased or otherwise acquired up to the date of the Meeting. These 3,127,040 treasury shares were cancelled in April 2007 at historical cost, totaling $233.5 million, or $74.73 per share, resulting in a decrease in treasury shares at cost and a corresponding decrease in additional paid-in-capital, retained earnings and common stock. Our shareholders also approved the extension of the authority of our Management Board to repurchase up to 10% of the Company's outstanding share capital up through October 2, 2008.

Comprehensive Income

The components of other comprehensive income consisted of the following (in thousands):

   

March 31,

   

2007

   

(Unaudited)

Net income

 

$   25,262

Realization of pension obligation

 

18

  Total comprehensive income

 

$   25,280

Accumulated Other Comprehensive Income consisted of the following (in thousands):

 

March 31,

 

December 31,

 

2007

 

2006

 

(Unaudited)

   

Pension obligation - prior service cost

$     1,309

 

$   1,327

Pension obligation - unrecognized net actuarial loss

745

 

745

   Total accumulated other comprehensive income

$     2,054

 

$    2,072

 

8. EARNINGS PER SHARE

We compute basic earnings per common share by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common shares include additional shares in the weighted average share calculations associated with the incremental effect of dilutive employee stock options, restricted stock awards and contingently issuable shares, as determined using the treasury stock method. The following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted earnings per share (in thousands):

 

Three Months Ended

March 31,

 
 

2007

 

2006

 
 

(Unaudited)

 

Weighted average basic common shares outstanding

23,430

 

25,794

 

Effect of dilutive securities:

       

Stock options

664

1,675

Contingent shares

121

 

156

 

Restricted stock and other

107

 

142

 

Weighted average diluted common and potential common shares outstanding

24,322

 

27,767

 

In 2006, we sold warrants that give the holders the right to acquire approximately 3.2 million of our common shares at a strike price of $127.56 per share.  These warrants could have a dilutive impact on our earnings per share if the share price exceeds the strike price of the warrants. 

9. OTHER (INCOME)

The components of other (income), net, were as follows (in thousands):

 

Three Months Ended

March 31,

 
 

2007

 

2006

 
 

(Unaudited)

 

Minority interest

$    (76)

 

$       7 

 

Loss (gain) on sale of assets

(48)

 

(564)

 

Foreign exchange (gain) loss

18 

(360)

Interest income

(411)

 

(52)

 

Gain on insurance recovery

 

(492)

 

Other

(346)

 

(409)

 

  Total other (income), net

$  (863)

 

$  (1,870)

 

In 2005, a building at our manufacturing plant in Godley, Texas, was damaged by fire, resulting in the loss of the building, some inventory, as well as other business equipment and supplies. We filed a claim for business interruption costs and the final settlement was reached in the first quarter of 2006, which resulted in a gain of $0.5 million.

Foreign exchange (gains) losses by currency are summarized in the following table (in thousands):

 

Three Months Ended

March 31,

 
 

2007

 

2006

 
 

(Unaudited)

 

Canadian Dollar

$ 106 

 

$ 54 

 

Euro

(38)

 

(67)

 

Russian Ruble

(40)

 

(181)

 

Other currencies

(10)

 

(166)

 

  Total (gain) loss

$   18 

 

$    (360)

 

 

10. INCOME TAXES

We file an income tax return in the U.S. federal jurisdiction, various states and foreign jurisdictions. We are currently undergoing multiple examinations in various foreign jurisdictions, and the years 1998 through 2006 remain open for examination in various tax jurisdictions in which we operate.

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, Accounting for Income Taxes ("FIN 48"), on January 1, 2007. As a result of the implementation of FIN 48, we recognized approximately a $3.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

 

2007

 

(Unaudited)

Unrecognized tax benefits at January 1,

$   13,064

Tax positions, current period

-

Tax positions, prior period

705

Settlements with taxing authorities

-

Lapse of applicable statute of limitations

-

  Unrecognized tax benefits at March 31,

$   13,769

The total amount of unrecognized tax benefits at March 31, 2007, if recognized, would affect the effective tax rate.

Our policy is to record accrued interest and penalties on uncertain tax positions, net of any tax effect, as part of total tax expense for the period. The corresponding liability is carried along with the tax exposure as a non-current payable in "other long-term liabilities". For the period ending March 31, 2007 we accrued approximately $0.2 million of interest and penalties. We had approximately $3.2 million accrued for the payment of interest and penalties as of January 1, 2007. We expect the requirements of FIN 48 will add volatility to our effective tax rate, and therefore our expected income tax expense, in future periods.


 

11. SEGMENT REPORTING

Our business units have been aggregated into three complementary segments, which provide products and services for improving reservoir performance and increasing oil and gas recovery from new and existing fields.

*

Reservoir Description: Encompasses the characterization of petroleum reservoir rock, fluid and gas samples. We provide analytical and field services to characterize properties of crude oil and petroleum products to the oil and gas industry.

   

*

Production Enhancement: Includes products and services relating to reservoir well completions, perforations, stimulations and production. We provide integrated services to evaluate the effectiveness of well completions and to develop solutions aimed at increasing the effectiveness of enhanced oil recovery projects.

   

*

Reservoir Management: Combines and integrates information from reservoir description and production enhancement services to increase production and improve recovery of oil and gas from our clients' reservoirs.

Segment Analysis

We manage each of our business segments separately to reflect the different services and technologies provided and required by each segment. We use the same accounting policies to account for our business segments as those used to prepare our Consolidated Balance Sheets and Consolidated Statements of Operations. We evaluate the performance of our business segments on the basis of operating income.

Summarized financial information related to our business segments is shown in the following tables (in thousands):

 

(Unaudited)

 

Reservoir Description

 

Production Enhancement

 

Reservoir Management

 

Corporate & Other 1

 

Consolidated

Three Months Ended March 31, 2007

                 
 

Revenues from unaffiliated customers

 

$   83,163

 

$      58,807

 

$      13,753

 

$             - 

 

$     155,723

 

Inter-segment revenues

 

167

 

205

 

291

 

(663)

 

-

 

Segment operating income

 

16,773

 

16,052

 

3,697

 

198 

 

36,720

 

Total assets

 

219,681

 

166,627

 

19,358

 

82,544 

 

488,210

 

Capital expenditures

 

2,570

 

606

 

89

 

162 

 

3,427

 

Depreciation and amortization

 

2,372

 

1,284

 

127

 

795 

 

4,578

                       

Three Months Ended March 31, 2006

                 
 

Revenues from unaffiliated customers

 

$   71,204

 

$      56,080

 

$      10,051

 

$             - 

 

$     137,335

 

Inter-segment revenues

 

29

 

156

 

9

 

(194)

 

-

 

Segment operating income (loss)

 

9,191

 

12,920

 

2,940

 

(663)

 

24,388

 

Total assets

 

204,366

 

155,741

 

15,936

 

30,611 

 

406,654

 

Capital expenditures

 

2,916

 

1,136

 

140

 

93 

 

4,285

 

Depreciation and amortization

 

2,250

 

1,216

 

109

 

549 

 

4,124

                       
                       
 

(1) "Corporate & Other" represents those items that are not directly related to a particular segment and eliminations.

 


 

12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Core Laboratories N.V. has fully and unconditionally guaranteed all of the Notes issued by Core Laboratories LP on November 6, 2006.

The following condensed consolidating financial information is included so that separate financial statements of Core Laboratories LP are not required to be filed with the U.S. Securities and Exchange Commission. The condensed consolidating financial statements present investments in both consolidated and unconsolidated affiliates using the equity method of accounting.

The following condensed consolidating financial information presents: condensed consolidating balance sheets as of March 31, 2007 and December 31, 2006, statements of income and the consolidating statements of cash flows for each of the quarters ended March 31, 2007 and 2006 of (a) Core Laboratories N.V., parent/guarantor, (b) Core Laboratories LP, issuer of public debt securities guaranteed by Core Laboratories N.V. and (c) the non-guarantor subsidiaries, (d) consolidating adjustments necessary to consolidate Core Laboratories N.V. and its subsidiaries and (e) Core Laboratories N.V. on a consolidated basis.

Condensed Consolidating Balance Sheets

                 
                       
   

(In thousands)

March 31, 2007

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

   

ASSETS

                 

CURRENT ASSETS:

                 
 

Cash and cash equivalents

$          708 

 

$       15,301 

 

$      12,980 

 

$                - 

 

$      28,989

 

Accounts receivable, net

165 

 

22,466 

 

100,207 

 

 

122,838

 

Inventories, net

 

2,116 

 

30,366 

 

 

32,482

 

Prepaid expenses and other current assets

4,083 

 

8,538 

 

16,147 

 

(30)

 

28,738

     

4,956 

 

48,421 

 

159,700 

 

(30)

 

213,047

                       

PROPERTY, PLANT AND EQUIPMENT, net

 

21,343 

 

65,260 

 

 

86,603

GOODWILL AND INTANGIBLES, net

46,986 

 

1,983 

 

90,204 

 

 

139,173

INTERCOMPANY RECEIVABLES

20,969 

 

273,026 

 

272,794 

 

(566,789)

 

-

INVESTMENT IN AFFILIATES

270,174 

 

 

732,085 

 

(1,001,369)

 

890

DEFERRED TAX ASSET

6,392 

 

29,484 

 

14,247 

 

(16,990)

 

33,133

OTHER ASSETS

3,540 

 

10,638 

 

1,186 

 

 

15,364

   

TOTAL ASSETS

$      353,017 

 

$      384,895 

 

$  1,335,476 

 

$   (1,585,178)

 

$ 488,210

                       
   

LIABILITIES AND SHAREHOLDERS' EQUITY

               

CURRENT LIABILITIES:

                 
 

Current maturities of long-term debt and

   capital lease obligations

$          1,672 

 

$             100 

 

$                7 

 

$                - 

 

$         1,779

 

Accounts payable

198 

 

6,372 

 

26,944 

 

 

33,514

 

Other accrued expenses

7,702 

 

14,821 

 

25,597 

 

(30)

 

48,090

     

9,572 

 

21,293 

 

52,548 

 

(30)

 

83,383

                       

LONG-TERM DEBT AND CAPITAL LEASE

   OBLIGATIONS

 

300,000 

 

 

 

300,002

DEFERRED COMPENSATION

5,422 

 

5,437 

 

330 

 

 

11,189

DEFERRED TAX LIABILITY

12,776 

 

 

4,214 

 

(16,990)

 

-

INTERCOMPANY PAYABLES

254,651 

 

23,277 

 

288,861 

 

(566,789)

 

-

OTHER LONG-TERM LIABILITIES

14,770 

 

11,680 

 

9,990 

 

 

36,440

                       

MINORITY INTEREST

 

 

1,370 

 

 

1,370

                       

TOTAL SHAREHOLDERS' EQUITY

55,826 

 

23,208

 

978,161 

 

(1,001,369)

 

55,826

   

TOTAL LIABILITIES AND

   SHAREHOLDERS' EQUITY

$      353,017 

 

$      384,895 

 

$  1,335,476

 

$   (1,585,178)

 

$      488,210

 


 

Condensed Consolidating Balance Sheets

                 
                       
   

(In thousands)

December 31, 2006

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

   

ASSETS

                 

CURRENT ASSETS:

                 
 

Cash and cash equivalents

$          1,572

 

$       35,385 

 

$      17,266 

 

$                - 

 

$      54,223

 

Accounts receivable, net

125

 

19,717 

 

92,213 

 

 

112,055

 

Inventories, net

-

 

1,677 

 

28,522 

 

 

30,199

 

Prepaid expenses and other current assets

495

 

14,441 

 

14,139 

 

 

29,075

     

2,192

 

71,220 

 

152,140 

 

 

225,552

                       

PROPERTY, PLANT AND EQUIPMENT, net

-

 

21,654 

 

66,080 

 

 

87,734

GOODWILL AND INTANGIBLES, net

46,986

 

2,009 

 

90,225 

 

 

139,220

INTERCOMPANY RECEIVABLES

38,390

 

198,654 

 

351,316 

 

(588,360)

 

-

INVESTMENT IN AFFILIATES

150,090

 

 

788,555 

 

(937,755)

 

890

DEFERRED TAX ASSET

5,815

 

26,286 

 

13,707 

 

(12,776)

 

33,032

OTHER ASSETS

3,410

 

10,460 

 

917 

 

 

14,787

   

TOTAL ASSETS

$      246,883

 

$      330,283 

 

$  1,462,940 

 

$   (1,538,891)

 

$ 501,215

                       
   

LIABILITIES AND SHAREHOLDERS' EQUITY

               

CURRENT LIABILITIES:

                 
 

Current maturities of long-term debt and

   capital lease obligations

$          2,654

 

$             100 

 

$                8 

 

$                - 

 

$         2,762

 

Accounts payable

698

 

7,078 

 

29,684 

 

 

37,460

 

Other accrued expenses

2,785

 

18,915 

 

26,998 

 

 

48,698

     

6,137

 

26,093 

 

56,690 

 

 

88,920

                       

LONG-TERM DEBT AND CAPITAL LEASE

   OBLIGATIONS

-

 

300,000 

 

 

 

300,002

DEFERRED COMPENSATION

5,230

 

4,920 

 

263 

 

 

10,413

DEFERRED TAX LIABILITY

12,776

 

 

 

(12,776)

 

-

INTERCOMPANY PAYABLES

140,376

 

2,553 

 

445,431 

 

(588,360)

 

-

OTHER LONG-TERM LIABILITIES

10,528

 

7,645 

 

10,425 

 

 

28,598

                       

MINORITY INTEREST

-

 

 

1,446 

 

 

1,446

                       

TOTAL SHAREHOLDERS' EQUITY

71,836

 

(10,928)

 

948,683 

 

(937,755)

 

71,836

   

TOTAL LIABILITIES AND

   SHAREHOLDERS' EQUITY

$      246,883

 

$      330,283 

 

$  1,462,940 

 

$   (1,538,891)

 

$      501,215


 

Condensed Consolidating Statements of Operations

               
                       
   

(In thousands)

Quarter Ended March 31, 2007

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

REVENUES

                 
 

Operating revenues

$                   - 

 

$      29,987 

 

$ 125,736 

 

$                - 

 

$    155,723 

 

Intercompany revenues

260 

 

4,510 

 

18,380 

 

(23,150)

 

 

Earnings from consolidated affiliates

30,276 

 

 

 

(30,276)

 

   

Total revenues

30,536 

 

34,497 

 

144,116 

 

(53,426)

 

155,723 

                       

OPERATING EXPENSES

                 
 

Operating costs

314 

 

18,771 

 

88,164 

 

 

107,249 

 

General and administrative expenses

1,607 

 

6,432 

 

 

 

8,039 

 

Depreciation and amortization

 

1,301 

 

3,277 

 

 

4,578 

 

Other expense (income), net

45 

 

1,852 

 

20,380 

 

(23,140)

 

(863)

                     

Operating income

28,570 

 

6,141 

 

32,295 

 

(30,286)

 

36,720 

Interest expense

37 

 

594 

 

11 

 

(10)

 

632 

                   

Income before income tax expense

28,533 

 

5,547 

 

32,284 

 

(30,276)

 

36,088 

Income tax expense (benefit)

3,271 

 

3,325 

 

4,230 

 

 

10,826 

                   

NET INCOME

$         25,262 

 

$        2,222 

 

$     28,054 

 

$      (30,276)

 

$       25,262 

 

Condensed Consolidating Statements of Cash Flows

               
                       
   

(In thousands)

Quarter Ended March 31, 2007

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

                   

Net cash provided by operating activities

$ 39,215 

 

$ (18,249)

 

$ (1,808)

 

$                - 

 

$     19,158 

                 

   

CASH FLOWS FROM INVESTING ACTIVITIES:

               
 

Capital expenditures

 

(912)

 

(2,515)

 

 

(3,427)

 

Patents and other intangibles

 

(9)

 

(36)

 

 

(45)

 

Proceeds from sale of assets

 

 

74 

 

 

76 

 

Premiums on life insurance

 

(764)

 

 

 

(764)

Net cash used in investing activities

 

(1,683)

 

(2,477)

 

 

(4,160)

                   

CASH FLOWS FROM FINANCING ACTIVITIES:

               
 

Repayment of debt

(982)

 

 

 

 

(982)

 

Proceeds from debt borrowings

 

 

 

 

 

Capital lease obligations

 

 

(1)

 

 

(1)

 

Stock options exercised

16,918 

 

 

 

 

16,918 

 

Repurchase of common shares

(58,624)

 

 

 

 

(58,624)

 

Debt issuance costs

 

(152)

 

 

 

(152)

 

Excess tax benefit from stock-based payments

2,609 

 

 

 

 

2,609 

Net cash used in financing activities

(40,079)

 

(152)

 

(1)

 

 

(40,232)

                   

NET CHANGE IN CASH AND CASH

   EQUIVALENTS

(864)

 

(20,084)

 

(4,286)

 

 

(25,234)

CASH AND CASH EQUIVALENTS,

   beginning of period

1,572 

 

35,385 

 

17,266 

 

 

54,223 

CASH AND CASH EQUIVALENTS,

   end of period

$ 708 

 

$ 15,301 

 

$ 12,980 

 

$                - 

 

$       28,989 


 

Condensed Consolidating Statements of Operations

               
                       
   

(In thousands)

Quarter Ended March 31, 2006

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

REVENUES

                 
 

Operating revenues

$ - 

 

$ 24,006 

 

$ 113,329 

 

$                - 

 

$ 137,335 

 

Intercompany revenues

 

2,941 

 

23,747 

 

(26,688)

 

 

Earnings from consolidated affiliates

20,192 

 

 

13,912 

 

(34,104)

 

   

Total revenues

20,192 

 

26,947 

 

150,988 

 

(60,792)

 

137,335 

                       

OPERATING EXPENSES

                 
 

Operating costs

 

15,082 

 

94,171 

 

(9,105)

 

100,148 

 

General and administrative expenses

3,425 

 

7,118 

 

 

 

10,545 

 

Depreciation and amortization

33 

 

1,265 

 

2,826 

 

 

4,124 

 

Other expense (income), net

(196)

 

745 

 

15,155 

 

(17,574)

 

(1,870)

                     

Operating income

16,930 

 

2,737 

 

38,834 

 

(34,113)

 

24,388 

Interest expense

114 

 

1,210 

 

 

(9)

 

1,324 

                   

Income before income tax expense

16,816 

 

1,527 

 

38,825 

 

(34,104)

 

23,064 

Income tax expense (benefit)

671 

 

(4,078)

 

10,326 

 

 

6,919 

NET INCOME

$ 16,145 

 

$ 5,605 

 

$ 28,499 

 

$         (34,104)

 

$ 16,145 

 

Condensed Consolidating Statements of Cash Flows

               
                       
   

(In thousands)

Quarter Ended March 31, 2006

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

                   

Net cash provided by operating activities

$ 28,971 

 

$ (6,525)

 

$ 2,375 

 

$                - 

 

$ 24,821 

                 

   

CASH FLOWS FROM INVESTING ACTIVITIES:

               
 

Capital expenditures

 

(1,176)

 

(3,109)

 

 

(4,285)

 

Proceeds from sale of assets

 

288 

 

1,722 

 

 

2,010 

 

Premiums on life insurance

 

(409)

 

 

 

(409)

Net cash used in investing activities

 

(1,297)

 

(1,387)

 

 

(2,684)

                   

CASH FLOWS FROM FINANCING ACTIVITIES:

               
 

Repayment of debt

(5,869)

 

 

 

 

(5,869)

 

Proceeds from debt borrowings

 

10,000 

 

 

 

10,000 

 

Capital lease obligations

 

 

(15)

 

 

(15)

 

Stock options exercised

3,077 

 

 

 

 

3,077 

 

Repurchase of common shares

(27,289)

 

 

     

(27,289)

 

Excess tax benefits from stock-based payments

246 

 

 

 

 

246 

Net cash used in financing activities

(29,835)

 

10,000 

 

(15)

 

 

(19,850)

                   

NET CHANGE IN CASH AND CASH

   EQUIVALENTS

(864)

 

2,178 

 

973 

 

 

2,287 

CASH AND CASH EQUIVALENTS,

   beginning of period

1,352 

 

(243)

 

12,634 

 

 

13,743 

CASH AND CASH EQUIVALENTS,

   end of period

$ 488 

 

$ 1,935 

 

$ 13,607 

 

$                - 

 

$ 16,030 

Return to Index


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

The following discussion summarizes the financial position of Core Laboratories N.V. and its subsidiaries as of March 31, 2007 and should be read in conjunction with (i) the unaudited consolidated interim financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the consolidated financial statements and accompanying notes to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

General

Core Laboratories N.V. is a Netherlands limited liability company. It was established in 1936 and is one of the world's leading providers of proprietary and patented reservoir description, production enhancement and reservoir management products and services to the oil and gas industry. These products and services can enable our clients to improve reservoir performance and increase oil and gas recovery from their producing fields. Core Laboratories N.V. has over 70 offices in more than 50 countries and employs approximately 4,700 people worldwide.

References to "Core Lab", "we", "our", and similar phrases are used throughout this Quarterly Report on Form 10-Q and relate collectively to Core Laboratories N.V. and its consolidated affiliates.

Our business units have been aggregated into three complementary segments, which provide products and services for improving reservoir performance and increasing oil and gas recovery from new and existing fields.

*

Reservoir Description: Encompasses the characterization of petroleum reservoir rock, fluid and gas samples. We provide analytical and field services to characterize properties of crude oil and petroleum products to the oil and gas industry.

   

*

Production Enhancement: Includes products and services relating to reservoir well completions, perforations, stimulations and production. We provide integrated services to evaluate the effectiveness of well completions and to develop solutions aimed at increasing the effectiveness of enhanced oil recovery projects.

   

*

Reservoir Management: Combines and integrates information from reservoir description and production enhancement services to increase production and improve recovery of oil and gas from our clients' reservoirs.

Cautionary Statement Regarding Forward Looking Statements

This quarterly report contains 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. Certain of the statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations section, including those under the headings "Outlook" and "Liquidity and Capital Resources", and in other parts of this 10-Q, are forward looking. In addition, from time to time, we may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. Forward-looking statements can be identified by the use of forward-looking terminology such as "may", "will", "believe", "expect", "anticipate", "estimate", "continue", or other similar words, including statements as to the intent, belief, or current expectations of our directors, officers, and management with respect to our future operations, performance, or positions or which contain other forward-looking information. These forward-looking statements are predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. Our actual results may differ significantly from the results discussed in the forward-looking statements. While we believe that these statements are and will be accurate, a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our statements. Such factors include, but are not limited to, the risks and uncertainties summarized below:

-

general and economic business conditions;

   

-

prices of oil and natural gas and industry expectations about future prices;

   

-

foreign exchange controls and currency fluctuations;

   

-

political stability in the countries in which we operate;

   

-

the business opportunities (or lack thereof) that may be presented to and pursued by us;

   

-

changes in laws or regulations;

   

-

the validity of the assumptions used in the design of our disclosure controls and procedures; and

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise and forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risk and uncertainties, see "Item 1A - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as well as the other reports and registration statements filed by us with the SEC.

Recent Developments

On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, Accounting for Income Taxes ("FIN 48"), which was issued to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 became effective for fiscal years beginning after December 15, 2006. The cumulative effect of $3.3 million from adopting FIN 48 was recorded in retained earnings and other long term liabilities.

Outlook

We have established internal earnings targets that are based on current market conditions. Based on industry surveys, we anticipate North American activity levels of our clients during 2007 to remain somewhat higher than their activity levels in 2006. We also believe that the activity levels outside of North America for 2007 will continue to remain higher than activity levels for 2006.


Results of Operations

Unaudited results of operations as a percentage of applicable revenue were as follows (in thousands):

 

Three Months Ended March 31,

 

% Change

 

2007

 

2006

 

2007/2006

REVENUES:

     

Service

$116,965 

 

75% 

 

$ 99,135 

 

72% 

 

18% 

Product sale

38,758 

 

25% 

 

38,200 

 

28% 

 

1% 

  Total revenue

155,723 

 

100% 

 

137,335 

 

100% 

 

13% 

OPERATING EXPENSES:

                 

Cost of services*

79,854 

 

68% 

 

72,183 

 

73% 

 

11% 

Cost of sales*

27,395 

 

71% 

 

27,965 

 

73% 

 

(2%) 

  Total cost of services and sales

107,249 

 

69% 

 

100,148 

 

73% 

 

7% 

General and administrative expenses

8,039 

 

5% 

 

10,545 

 

8% 

 

(24%)

Depreciation and amortization

4,578 

 

3% 

 

4,124 

 

3% 

 

11% 

Other (income), net

(863)

 

(1%)

 

(1,870)

 

(1%)

 

(54%)

Operating income

36,720 

 

24% 

 

24,388 

 

18% 

 

51% 

Interest expense

632 

 

-  

 

1,324 

 

1% 

 

(52%)

Income before income tax expense

36,088 

 

23% 

 

23,064 

 

17% 

 

56% 

Income tax expense

10,826 

 

7% 

 

6,919 

 

5% 

 

56% 

  NET INCOME

$  25,262 

 

16% 

 

$ 16,145 

 

12% 

 

56% 

                   

*Percentage based on applicable revenue rather than total revenue

       

 

Operating Results for the Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006 (unaudited)

Service Revenues

Service revenues increased to $117.0 million for the first quarter of 2007, up 18% when compared to $99.1 million for the first quarter of 2006. This increase in revenue was primarily due to the continued strong commodity price of oil which is driving increased demand for oilfield activities globally. In addition, we have experienced an increase in market penetration and market acceptance of recently introduced services. This has benefited our business in the Middle East, especially Qatar and Saudi Arabia, where these services will be used to increase daily natural gas and crude oil production while maximizing the ultimate hydrocarbon recoveries from the Qatari and Saudi Arabian fields.

Product Sale Revenues

Revenues associated with product sales increased to $38.8 million for the first quarter of 2007, up 1% from $38.2 million for the first quarter of 2006. This increase was primarily the result of increased drilling activity on a global basis, but more specifically for natural gas in the North American markets which resulted in higher demand for our well completion products. During the first quarter we introduced new reservoir optimizing technologies which began to generate additional revenues that should produce higher operating margins which should also increase incremental margins.

Cost of Services

Cost of services expressed as a percentage of service revenue was 68% for the quarter ended March 31, 2007, down from 73% for the corresponding quarter in 2006. The decline in the cost of services relative to service revenue was primarily as a result of incremental margins earned on higher revenues over our relatively fixed cost structure. Incremental margins are calculated as the change in operating income divided by the change in revenues.

Cost of Sales

Cost of sales as a percentage of product sale revenues was 71% for the quarter ended March 31, 2007, which was an improvement from the 73% for the same period in 2006. The decrease in cost of sales as a percentage of product sale revenues for 2007 was primarily due to growing demand for new higher margin products and continuing efforts to improve our manufacturing efficiencies.

General and Administrative Expenses

General and administrative expenses were $8.0 million for the first quarter of 2007 compared to $10.5 million for the first quarter of 2006 due to recording $2.0 million higher expenses in the first quarter of 2006 relating to compensation benefits for certain members of management.

Depreciation and Amortization Expense

Depreciation and amortization expense of $4.6 million for the first quarter of 2007 increased $0.5 million, from $4.1 million for the first quarter of 2006.

Other (Income), Net

Other (income), net consisted of the following at March 31, 2007 and 2006 (in thousands):

 

Three Months Ended

March 31,

 
 

2007

 

2006

 
 

(Unaudited)

 

Minority interest

$    (76)

 

$      7 

 

Loss (gain) on sale of assets

(48)

 

(564)

 

Foreign exchange (gain) loss

18 

(360)

Interest income

(411)

 

(52)

 

Gain on insurance recovery

 

(492)

 

Other

(346)

 

(409)

 

  Total other (income), net

$  (863)

 

$  (1,870)

 

In 2005, a building at our manufacturing plant in Godley, Texas, was damaged by fire, resulting in the loss of the building, some inventory, as well as other business equipment and supplies. We filed a claim for business interruption costs and the final settlement was reached in the first quarter of 2006, which resulted in a gain of $0.5 million.

Foreign exchange (gains) losses by currency are summarized in the following table (in thousands):

 

 

Three Months Ended

March 31,

 
 

2007

 

2006

 
 

(Unaudited)

 

Canadian Dollar

$ 106 

 

$ 54 

 

Euro

(38)

 

(67)

 

Russian Ruble

(40)

 

(181)

 

Other currencies

(10)

 

(166)

 

  Total (gain) loss

$   18 

 

$    (360)

 

Income Tax Expense

The effective tax rate for the first quarter of 2007 and 2006 was 30.0%.


Segment Analysis

Our operations are managed primarily in three complementary segments - Reservoir Description, Production Enhancement and Reservoir Management. The following table summarizes our results by operating segment for the quarters ended March 31, 2007 and 2006 (in thousands):

 

Three Months Ended
March 31,

 

2007

 

2006

Revenues:

(Unaudited)

Reservoir Description

$    83,163

 

$    71,204

Production Enhancement

58,807

 

56,080

Reservoir Management

13,753

 

10,051

   Consolidated

$  155,723

 

$  137,335

Operating income:

Reservoir Description

$   16,773 

 

$     9,191 

Production Enhancement

16,052 

 

12,920 

Reservoir Management

3,697 

 

2,940 

Corporate and Other1

198 

 

(663)

   Consolidated

$   36,720 

 

$   24,388 

 

1) "Corporate and Other" represents those items that are not directly related to a particular segment.

Reservoir Description

Revenues from the Reservoir Description segment increased $12.0 million, to $83.2 million in the first quarter of 2007, compared to $71.2 million in the first quarter of 2006, as a result of continued expansion of oilfield activities world-wide and North American projects related to shale reservoirs. The revenue growth was driven, in part, by the increased demand for our recently introduced proprietary and patented reservoir optimization technologies and related services. These include our Pressurized Fluid Imaging Services (PFISTM) and technologies related to miscible gas field flood technologies. Revenues were also positively impacted by increased demand for our fluid characterization services in the U.S., Europe and Middle East. We are expanding our services, especially in the Middle East, which will be used to increase daily natural gas and crude oil production while maximizing the ultimate hydrocarbon recoveries.

Operating income in the first quarter of 2007 increased by 82% or $7.6 million to $16.8 million compared to $9.2 million for the first quarter of 2006. Increases in operating income were primarily due to incremental margins earned from higher sales over our relatively fixed cost structure and the introduction and acceptance of recently introduced reservoir optimization services. Operating margins for the quarter ended March 31, 2007 were 20% compared to 13% for the same period in 2006. This increase was driven by incremental margins of 63% for the three months ended March 31, 2007.

Production Enhancement

Revenues from the Production Enhancement segment increased $2.7 million to $58.8 million in the first quarter of 2007 as compared to $56.1 million in the first quarter in 2006. While North American natural gas drilling activity in 2007 relative to 2006 has increased somewhat in addition to the overall expansion in global drilling activities, the primary reason for the increase in our revenues in this segment has been the improvement in market penetration of our well perforating and completion products and diagnostic services. Another factor for the increase in revenues has been the continued improvements in the international expansion of our technologies.

Operating income in the first quarter of 2007 increased by 24% or $3.1 million to $16.1 million from $12.9 million for the first quarter of 2006. Operating margins increased to 27% in the first quarter of 2007 compared to 23% for the same period in 2006. These margin improvements were primarily due to increased sales of higher-margin services and products including new enhanced recovery technology, such as SpectraScan™, SpectraStim™, Completion Profiler™ and our SuperHERO™ perforating charges and gun systems, as well as improved manufacturing efficiencies. Additionally, the demand for our technology in fracture diagnostics continues to increase as drilling activity increases in unconventional reservoirs.

Reservoir Management

Revenues from the Reservoir Management segment increased $3.7 million, or 37%, in the first quarter of 2007 as compared to the first quarter of 2006. The improvement was a result of higher revenue for multi-client reservoir studies in the first three months of 2007, especially studies pertaining to unconventional gas reservoirs.

Operating income in the first quarter of 2007 increased 26% to $3.7 million from $2.9 million for the first quarter of 2006. The increase was primarily due to the continued expansion of the multi-client reservoir study sales in the U.S. and expansion of studies being performed in Libya, along with product sales to the heavy oil projects in Canada.


Liquidity and Capital Resources

General

We have historically financed our activities through cash on hand, cash flows from operations, bank credit facilities, or the issuance of debt and equity financing.

We utilize the non-GAAP financial measure of free cash flow to evaluate our cash flows and results of operations. Free cash flow is defined as net cash provided by operating activities (which is the most directly comparable GAAP measure) less capital expenditures. Management believes that free cash flow provides useful information to investors as it represents the cash, in excess of capital expenditures, available to operate the business and fund non-discretionary obligations. Free cash flow is not a measure of operating performance under GAAP, and should not be considered in isolation nor construed as an alternative to operating profit, net income (loss) or cash flows from operating, investing or financing activities, each as determined in accordance with GAAP. Moreover, since free cash flow is not a measure determined in accordance with GAAP and thus is susceptible to varying interpretations and calculations, free cash flow as presented, may not be comparable to similarly titled measures presented by other companies. The following table reconciles this non-GAAP financial measure to the most directly comparable measure calculated and presented in accordance with U.S. GAAP for the three month period ended March 31, 2007 and 2006 (in thousands):

   

Three Months Ended

March 31,

   

2007

 

2006

Free cash flow calculation:

 

(unaudited)

Net cash provided by operating activities

$   19,158

$   24,821

Less: capital expenditures

 

3,427

 

4,285

    Free cash flow

 

$   15,731

 

$   20,536

The decrease in free cash flow in 2007 compared to 2006 was due to a net increase in working capital, excluding cash, partially offset by higher net income and a decrease in capital expenditures. At March 31, 2007 and December 31, 2006, we had working capital of $129.7 million and $136.6 million, respectively.

Cash Flows

The following table summarizes cash flows for the three months ended March 31, 2007 and 2006 (in thousands):

   

Three Months Ended

March 31,

   

2007

 

2006

Cash provided by/(used in):

 

(unaudited)

    Operating activities

$    19,158 

$   24,821 

    Investing activities

 

(4,160)

 

(2,684)

    Financing activities

 

(40,232)

 

(19,850)

Net change in cash and cash equivalents

 

$   (25,234)

 

$     2,287 

The decrease in cash flows provided by operating activities was primarily attributable to a decrease in accrued liabilities and other long-term liabilities due to timing of payments.

The increase in cash flows used in financing activities related primarily to the number of shares repurchased under our common share repurchase program. In the first three months of 2007, we repurchased approximately 0.7 million shares for an aggregate price of $58.6 million compared to approximately 0.6 million shares for an aggregate price of $27.3 million during the three months ended March 31, 2006. The increase in cash flows used in financing activities was partially offset by an increase in stock options exercised of $13.8 million.

We maintain a revolving credit facility (the "Credit Facility") allowing for an aggregate borrowing capacity of $100.0 million. As amended, this agreement provides an option to increase the commitment under the Credit Facility to $150.0 million, if certain conditions are met. The Credit Facility bears interest at variable rates from LIBOR plus 0.5% to a maximum of LIBOR plus 1.125%. The Credit Facility matures in December 2010 and requires interest payments only until maturity. These interest payments are based on the interest period selected. Our available capacity is reduced by outstanding unsecured letters of credit and performance guarantees and bonds totaling $7.5 million at March 31, 2007 related to certain projects in progress. Our available borrowing capacity under the Credit Facility at March 31, 2007 was $92.5 million.

The terms of the Credit Facility require us to meet certain financial and operational covenants. We believe that we are in compliance with all such covenants at March 31, 2007. All of our material, wholly owned subsidiaries are guarantors or co-borrowers under the Credit Facility.

Our ability to maintain and grow our operating income and cash flow depends, to a large extent, on continued investing activities. We are a Netherlands holding company and substantially all of our operations are conducted through subsidiaries. Consequently, our cash flow depends upon the ability of our subsidiaries to pay cash dividends or otherwise distribute or advance funds to us. We believe our future cash flows from operations, supplemented by our borrowing capacity and issuances of additional equity should be sufficient to fund debt requirements, capital expenditures, working capital, and future acquisitions.

At our Annual Shareholders' Meeting on April 2, 2007 (the "Meeting"), our shareholders approved the cancellation of all of the 3,127,040 treasury shares we had repurchased or otherwise acquired up to the date of the Meeting. These 3,127,040 treasury shares were cancelled in April 2007 at historical cost, totaling $233.5 million, or $74.73 per share, resulting in a decrease in treasury shares at cost and a corresponding decrease in additional paid-in-capital, retained earnings, and common stock. Our shareholders also approved the extension of the authority of our Management Board to repurchase up to 10% of the Company's outstanding share capital up through October 2, 2008.

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Item 3. Quantitative and Qualitative Disclosures of Market Risk

There have been no material changes in market risk from the information provided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K as of December 31, 2006.

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Item 4. Controls and Procedures

A complete discussion of our controls and procedures is included in our Form 10-K for the year ended December 31, 2006.

Disclosure Controls and Procedures

Our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Core Laboratories N.V.'s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2007 at the reasonable assurance level. Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. Further, the design of disclosure controls and internal control over financial reporting must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our fiscal quarter ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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CORE LABORATORIES N.V.
PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Note 6 of Consolidated Interim Financial Statements in Part I, Item 1.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases of equity securities that are registered by us pursuant to Section 12 of the Exchange Act during the quarter ended March 31, 2007:

Period

 

Total Number of Shares Purchased

 

Average Price Paid Per Share

 

Total Number of Shares Purchased as Part of a Publicly Announced Program

 

Maximum Number of Shares That May Yet be Purchased Under the Program

January 1-31, 2007 (1)

 

216,024

 

$ 77.67

 

178,000

 

1,256

February 1-28, 2007 (2)

 

527,626

 

$79.31

 

-

 

1,256

March 1-31, 2007

 

-

 

-

 

-

 

1,256

Total

 

743,650

 

$78.83

 

178,000

   

(1) Contains 38,024 shares valued at $3.1 million, or $82.40 per share, acquired pursuant to the terms of a compensation plan, in settlement by the participants of personal tax burdens that may result from the issuance of common shares under this arrangement in January 2007.

(2) Contains 527,626 shares valued at $41.8 million, or $79.31 per share, acquired pursuant to the terms of a compensation plan, in settlement by the participants of their exercise cost in the stock options and their personal tax burdens that may result from the issuance of common shares under this arrangement in February 2007.

Under Dutch law and our articles of association, and subject to certain Dutch statutory provisions, we may repurchase up to 10% of our issued share capital in open market purchases. In connection with our initial public offering in March 1995, our shareholders authorized our Management Board to make such repurchases for a period of 18 months. At each annual shareholders' meeting subsequent to 1995, our shareholders have renewed that authorization. At our Annual Shareholders' Meeting on April 2, 2007, our shareholders approved the extension of the authority of our Management Board to repurchase up to 10% of the Company's outstanding share capital up through October 2, 2008.

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Item 4. Submissions of Matters to a Vote of Shareholders

With respect to proxy item 2, confirmation and adoption the Company's Dutch statutory annual accounts for the fiscal year ended December 31, 2006 (the "Dutch Annual Accounts"), and item 8, ratification of appointment of PricewaterhouseCoopers LLP as the Company's independent public accountants for the year ended December 31, 2006, the Company postponed voting on these matters and determined to adjourn the annual meeting with respect to these matters until a later date.  The Dutch Annual Accounts are the Company's audited consolidated financial statements, which have in the past been prepared in accordance with Dutch generally accepted accounting principles ("Dutch GAAP"), and are used for meeting local accounting and regulatory requirements in The Netherlands; they are not the same accounts which were distributed earlier this year to the shareholders in the Company's annual report filed on Form 10-K with the United States Securities and Exchange Commission ("SEC") which are prepared in accordance with United States generally accepted accounting principles ("US GAAP") or those financial statements otherwise made public from time to time in compliance with SEC requirements.  The Company is in the process of completing the 2006 Dutch Annual Accounts to comply with an international generally accepted accounting principles system known as the International Financial Reporting Standards ("IFRS").  Upon completion of the Dutch Annual Accounts in accordance with IFRS, the Company will re-convene the meeting to record the shareholder vote approving both the adoption of the Dutch Annual Accounts and the ratification of PricewaterhouseCoopers LLP.

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Item 6. Exhibits

Exhibit No.

Exhibit Title

 

Incorporated by reference from the following documents

3.1

-

Articles of Association of Core Laboratories N.V., as amended (including English translation)

 

Form F-1, September 20, 1995 (File No. 000-26710)

3.2

-

Amendments to the Articles of Association of Core Laboratories N.V.

 

Proxy Statement dated May 17, 2006 for Annual Meeting of Shareholders

31.1

-

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 


Filed herewith

31.2

-

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 


Filed herewith

32.1

-

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 


Furnished herewith

32.2

-

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 


Furnished herewith

         

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, Core Laboratories N.V., has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

CORE LABORATORIES N.V.

 

By:

Core Laboratories International B.V., its

   

Managing Director

     

Date:

April 26, 2007

By:

/s/ Richard L. Bergmark

   

Richard L. Bergmark

   

Chief Financial Officer

   

Duly Authorized Officer and

   

Principal Financial Officer


 

Certification

Exhibit 31.1

I, David M. Demshur, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Core Laboratories N.V. (the "Registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   
 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

   
 

(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   
 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and

5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

   
 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

 

 

Date: April 26, 2007

By:

/s/ David M. Demshur

   

David M. Demshur

   

Chief Executive Officer


 

Certification

Exhibit 31.2

I, Richard L. Bergmark, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Core Laboratories N.V. (the "Registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   
 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

   
 

(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   
 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and

5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

   
 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

 

 

Date: April 26, 2007

By:

/s/ Richard L. Bergmark

   

Richard L. Bergmark

   

Chief Financial Officer


 

Exhibit 32.1

Certification of

Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, David M. Demshur, Chief Executive Officer of Core Laboratories N.V. (the "Company"), hereby certify that the accompanying report on Form 10-Q for the quarter ended March 31, 2007, filed by the Company with the Securities and Exchange Commission on the date hereof fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, (the "Report").

I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 26, 2007

/s/ David M. Demshur

 

Name: David M. Demshur

 

Title: Chief Executive Officer

   

 

Exhibit 32.2

Certification of

Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Richard L. Bergmark, Chief Financial Officer of Core Laboratories N.V. (the "Company"), hereby certify that the accompanying report on Form 10-Q for the quarter ended March 31, 2007, filed by the Company with the Securities and Exchange Commission on the date hereof fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, (the "Report").

I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 26, 2007

/s/ Richard L. Bergmark

 

Name: Richard L. Bergmark

 

Title: Chief Financial Officer

   

 

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