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CORE LABORATORIES N V - Quarter Report: 2008 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, 2008

 

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 [ ] Smaller reporting company [ ]

    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 May 8, 2008 was 22,987,532.

 

 

 

CORE LABORATORIES N.V.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2008

 

INDEX

 
 

Page

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 
     
 

Consolidated Balance Sheets at March 31, 2008 (Unaudited) and December 31, 2007

1

     
 

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

 

      March 31, 2008 and 2007

2

     

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

 
 

      March 31, 2008 and 2007

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

21

     

Item 4.

Controls and Procedures

21

     
     

PART II - OTHER INFORMATION

     

Item 1.

Legal Proceedings

22

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

     

Item 6.

Exhibits

23

     
 

Signature

24

     

 

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,

     

2008

 

2007

   

ASSETS

(Unaudited)

   

CURRENT ASSETS:

     
 

Cash and cash equivalents

$       28,527 

 

$       25,617 

 

Accounts receivable, net of allowance for doubtful accounts of $4,463 and

     
 

  $4,199 at 2008 and 2007, respectively

146,736 

 

137,231 

 

Inventories, net

31,613 

 

29,363 

 

Prepaid expenses and other current assets

37,807 

 

28,488 

   

TOTAL CURRENT ASSETS

244,683 

 

220,699 

           

PROPERTY, PLANT AND EQUIPMENT, net

92,850 

 

93,038 

INTANGIBLES, net

6,984 

 

7,040 

GOODWILL

138,800 

 

138,800 

DEFERRED TAX ASSET

20,110 

26,024 

OTHER ASSETS

19,481 

19,189 

   

TOTAL ASSETS

$     522,908 

 

$     504,790 

           
   

LIABILITIES AND SHAREHOLDERS' EQUITY

     

CURRENT LIABILITIES:

     
 

Current maturities of long-term debt and capital lease obligations

$         1,906 

 

$         3,027 

 

Accounts payable

35,690 

 

39,861 

 

Accrued payroll and related costs

27,156 

 

25,689 

 

Taxes other than payroll and income

8,720 

 

8,820 

 

Unearned revenues

9,537 

 

9,130 

 

Other accrued expenses

10,468 

 

11,513 

   

TOTAL CURRENT LIABILITIES

93,477 

 

98,040 

       

LONG-TERM DEBT

300,000 

 

300,000 

DEFERRED COMPENSATION

14,080 

 

14,080 

OTHER LONG-TERM LIABILITIES

39,182 

 

29,041 

COMMITMENTS AND CONTINGENCIES

     

MINORITY INTEREST

1,588 

 

1,486 

       

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, 23,252,659 issued and 22,984,280 outstanding at 2008

     
   

and 23,080,949 issued and 23,065,949 outstanding at 2007

1,310 

 

1,300 

 

Additional paid-in capital

11,890 

 

 

Retained earnings

91,829 

 

62,496 

 

Accumulated other comprehensive income

246 

 

226 

 

Treasury shares (at cost), 268,379 at 2008 and 15,000 at 2007

(30,694)

 

(1,879)

TOTAL SHAREHOLDERS' EQUITY

74,581 

62,143 

   

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$     522,908 

 

$     504,790 

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

 

CORE LABORATORIES N.V.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

   

Three Months Ended

March 31,

 

2008

 

2007

   

(Unaudited)

REVENUES:

     
 

Services

$     138,409 

 

$     116,965 

 

Product Sales

41,028 

 

38,758 

   

179,437 

 

155,723 

OPERATING EXPENSES:

     
 

Cost of services

91,159 

 

79,854 

 

Cost of sales

28,314 

 

27,395 

 

General and administrative expenses

8,289 

 

8,039 

 

Depreciation

5,097 

 

4,486 

 

Amortization

142 

 

92 

 

Other expense (income), net

2,168 

 

(863)

OPERATING INCOME

44,268 

 

36,720 

Interest expense

644 

 

632 

Income before income tax expense

43,624 

 

36,088 

Income tax expense

14,291 

 

10,826 

NET INCOME

$      29,333 

 

$      25,262 

       

EARNINGS PER SHARE INFORMATION:

     

Basic earnings per share

$          1.28 

$         1.08 

       

Diluted earnings per share

$         1.22 

 

$         1.04 

       

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

     

Basic

22,982 

 

23,430 

       

Diluted

23,998 

 

24,322 

       
       

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,

   

2008

 

2007

 

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net income

$     29,333 

 

$     25,262 

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

     
 

Net provision for doubtful accounts

210 

 

361 

 

Inventory obsolescence

41 

 

51 

 

Equity in loss (income) of affiliates

(55)

 

 

Minority interest

103 

 

(76)

 

Stock-based compensation

827 

 

1,148 

 

Depreciation and amortization

5,239 

 

4,578 

 

Debt issuance costs amortization

370 

 

623 

Gain on sale of assets

(1,284)

(48)

Realization of pension obligation

20 

18 

 

Increase in value of life insurance policies

725 

 

(106)

 

Deferred income taxes

2,863 

 

177 

 

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

     

Accounts receivable

(9,714)

(11,144)

   

Inventories

(2,292)

 

(2,334)

   

Prepaid expenses and other current assets

(6,363)

 

59 

   

Other assets

(1,281)

 

(134)

   

Accounts payable

(4,171)

 

(3,946)

   

Accrued expenses

729 

 

(608)

   

Other long-term liabilities

10,140 

 

5,277 

 

Net cash provided by operating activities

25,440 

 

19,158 

CASH FLOWS FROM INVESTING ACTIVITIES:

     
   

Capital expenditures

(5,618)

 

(3,427)

   

Patents and other intangibles

(86)

 

(45)

   

Proceeds from sale of assets

2,467 

 

76 

   

Premiums on life insurance

(430)

 

(764)

 

Net cash used in investing activities

(3,667)

 

(4,160)

CASH FLOWS FROM FINANCING ACTIVITIES:

     
   

Repayment of debt

(6,120)

 

(982)

   

Proceeds from debt borrowings

5,000 

 

   

Capital lease obligations

(1)

 

(1)

   

Stock options exercised

633 

 

16,918 

   

Excess tax benefits from stock-based compensation

10,440 

 

2,609 

   

Debt issuance costs

 

(152)

   

Repurchase of common shares

(28,815)

 

(58,624)

 

Net cash used in financing activities

(18,863)

 

(40,232)

NET CHANGE IN CASH AND CASH EQUIVALENTS

2,910 

 

(25,234)

CASH AND CASH EQUIVALENTS, beginning of period

25,617 

 

54,223 

CASH AND CASH EQUIVALENTS, end of period

$    28,527 

 

$    28,989 

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 for which we have a controlling voting interest and/or a controlling financial interest. These financial statements have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") 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 for the periods presented have been included in these financial statements. Furthermore, the operating results presented for the three months ended March 31, 2008 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2008.

Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2007 was derived from the 2007 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 subsidiaries.

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, 2007.

 

2. INVENTORIES

Inventories consist of the following (in thousands):

   

March 31,

 

December 31,

   

2008

 

2007

   

(Unaudited)

   

Finished goods

 

$   22,381

 

$     21,795

Parts and materials

 

8,241

 

6,433

Work in progress

 

991

 

1,135

  Total inventories, net

 

$   31,613

 

$     29,363

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, 2008. The composition of goodwill by business segment at March 31, 2008 is consistent with the amounts disclosed in our Annual Report on Form 10-K as of December 31, 2007.

 

4. DEBT AND CAPITAL LEASE OBLIGATIONS

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

   

March 31,

 

December 31,

   

2008

 

2007

   

(Unaudited)

   

Senior exchangeable notes

 

$     300,000

 

$    300,000

Capital lease obligations

 

2

 

3

Other indebtedness

 

1,904

 

3,024

  Total debt and capital leases obligations

 

301,906

 

303,027

Less - short-term debt included in other indebtedness

 

1,904

 

3,024

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

 

2

 

3

    Long-term debt and capital lease obligations

 

$     300,000

 

$    300,000

In 2006, Core Laboratories LP, a wholly owned subsidiary of Core Laboratories N.V., issued $300 million aggregate principal amount of Senior Exchangeable Notes due 2011 (the "Notes"). The Notes bear interest at a rate of 0.25% per year paid on a bi-annual basis and are fully and unconditionally guaranteed by Core Laboratories N.V. The 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 maintain a revolving credit facility (the "Credit Facility") that allows for an aggregate borrowing capacity of $100.0 million. As amended, this facility 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%. %. Any outstanding balance under the Credit Facility is due in December 2010 when the Credit Facility matures. Interest payment terms are variable depending upon the specific type of borrowing under this facility. Our available capacity is reduced by outstanding unsecured letters of credit and performance guarantees and bonds totaling $11.6 million at March 31, 2008 relating to certain projects in progress. Our available borrowing capacity under the Credit Facility at March 31, 2008 was $88.4 million.

 

5. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

We provide a noncontributory defined benefit pension plan covering substantially all of our Dutch employees, payouts under which are determined 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 insurance company. We make annual premium payments, based on 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, 2008 and 2007 (in thousands):

 

Three Months Ended

March 31,

 

2008

 

2007

 

(Unaudited)

Service cost

$     286 

 

$     291 

Interest cost

338 

 

266 

Expected return on plan assets

(306)

 

(243)

Unrecognized pension obligation/(asset), net

(25)

(22)

Prior service cost

45 

 

40 

   Net periodic pension cost

$     338 

 

$     332 

During the three months ended March 31, 2008, we contributed approximately $1.1 million, as determined by the insurance company, to fund the estimated 2008 premiums on investment contracts held by the plan.

 

On January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157 ("SFAS 157") Fair Value Measurements for financial assets and liabilities. We have not adopted SFAS 157 for nonfinancial assets and nonfinancial liabilities for those measured on a nonrecurring basis as the adoption date has been deferred until January 1, 2009 pursuant to Financial Accounting Standards Board Staff Position No. 157-2. The application of FAS 157 to the Company's nonfinancial assets and liabilities will primarily be limited to asset impairments including Goodwill and this application is not expected to have a material impact to the Company. This new standard addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes. On a recurring basis, we use the market approach to value certain liabilities at fair value at quoted prices in an active market (Level 1) and certain assets and liabilities using significant other observable inputs (Level 2). We do not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). Gains and losses related to the fair value changes in the deferred compensation assets and liabilities are recorded in General and Administrative Expenses in the Consolidated Statement of Operations. The following table summarizes the fair value balances (in thousands):

 

     

Fair Value Measurement at March 31, 2008

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets:

             

Equity and other investment fund assets

$    4,562

 

$          -

 

$   4,562

 

$       -

               

Liabilities:

             

Deferred compensation plan

$    7,553

 

$  3,740

 

$   3,813

 

$      -

               

We have adopted a non-qualified deferred compensation plan that allows certain highly compensated employees to defer a portion of their salary, commission and bonus, as well as the amount of any reductions in their deferrals under the deferred compensation plan for employees in the United States (the "Deferred Compensation Plan"), due to certain limitations imposed by the U.S. Internal Revenue Code of 1986, as amended. The Deferred Compensation Plan also provides for employer contributions to be made on behalf of participants equal in amount to certain forfeitures of, and/or reductions in, employer contributions that participants could have received under the 401(k) Plan in the absence of certain limitations imposed by the Internal Revenue Code. Employer contributions to the deferred compensation plan vest ratably over a period of five years. Contributions to the plan are invested in equity and other investment fund assets, and carried on the balance sheet at fair value. The benefits under these contracts are fully vested and payment of benefits generally commences as soon as practicable after the last day of the calendar quarter during which the participant terminated employment.

 

6. COMMITMENTS AND CONTINGENCIES

 

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 Core Lab 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 Core Lab 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.

In 2008, we revised our estimate of a contingent liability associated with non-income related taxes, and as a result a charge to income of $5.0 million was recorded in the Consolidated Statement of Operations to Other Expense (Income), net. This adjustment requires judgment, assumptions and estimations to quantify the uncertainties related to this contingent liability. Management has concluded the adjustment relates to prior periods, however as the amounts are not material, no prior periods have been restated. The contingent liability is included in Other Long-term Liabilities in the Consolidated Balance Sheet. Management will continue to assess on a quarterly basis the probable outcome of the settlement of these taxes. The ultimate settlement amount and timing of this contingent liability is uncertain, and could possibly expose the Company to expenses of approximately $20.0 million in excess of our current estimate.

 

7. SHAREHOLDERS' EQUITY

During the three months ended March 31, 2008, we repurchased 253,379 of our common shares for $28.8 million, at an average price of $113.72 per share which included rights to 44,512 shares valued at $5.0 million, or $112.14 per share, were surrendered to the Company pursuant to the terms of a stock-based compensation plan, in consideration of their personal tax burdens that may result from the issuance of common shares under this plan. Such common shares, unless cancelled, may be reissued for a variety of purposes such as to use for future acquisitions, for settlement of employee stock awards as they vest, or possible conversion of the Notes.

For the three months ended March 31, 2008, we issued 42,160 of our common shares associated with stock option exercises for which we received proceeds of approximately $0.6 million.

During the three month period ended March 31, 2008, we recognized tax benefits of $10.4 million, relating to tax deductions in excess of book expense for stock-based compensation awards.  These tax benefits are recorded to additional paid-in capital to the extent deductions reduce current taxable income.

Comprehensive Income

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

   

March 31,

   

2008

 

2007

   

(Unaudited)

Net income

 

$   29,333

 

$   25,262

Realization of pension obligation

 

20

 

18

   Total comprehensive income

 

$   29,353

 

$   25,280

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

 

March 31,

 

December 31,

 

2008

 

2007

 

(Unaudited)

   

Prior service cost

$     (1,163)

 

$   (1,208)

Transition asset

494 

 

519 

Unrecognized net actuarial loss

915 

 

915 

   Total accumulated other comprehensive income

$         246 

 

$      226 

 

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,

 
 

2008

 

2007

 
 

(Unaudited)

 

Weighted average basic common shares outstanding

22,982

 

23,430

 

Effect of dilutive securities:

       

Stock options

153

664

Contingent shares

64

 

121

 

Restricted stock and other

137

 

107

 

Senior exchangeable notes

662

 

 

Weighted average diluted common and potential common shares outstanding

23,998

 

24,322

 

In 2006, we sold warrants that give the holders the right to acquire approximately 3.2 million of our common shares at an exercise 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 EXPENSE (INCOME), NET

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

 

Three Months Ended

March 31,

 
 

2008

 

2007

 
 

(Unaudited)

 

Minority interest

$      103 

 

$    (76)

 

Gain on sale of assets

(1,284)

 

(48)

 

Foreign exchange (gain) loss

(746)

18 

Interest income

(108)

 

(411)

 

Non-income tax accrual

5,030 

 

 

Other

(827)

 

(346)

 

  Total other expense (income), net

$  2,168 

 

$  (863)

 

In 2008, we revised our estimate of a contingent liability associated with non-income related taxes, and as a result a charge to income of $5.0 million was recorded. Additionally, we recorded a gain of $1.1 million in connection with the sale of a small office building.

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

 

Three Months Ended March 31,

 

2008

 

2007

 

(Unaudited)

Canadian Dollar

$     215 

 

$   106 

Euro

(586)

 

(38)

Russian Ruble

(157)

 

(40)

Other currencies

(218)

 

(10)

  Total (gain) loss

$   (746)

 

$    18 

 

10. 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 relating 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, 2008

                 
 

Revenues from unaffiliated customers

 

$   100,501

 

$      67,024

 

$      11,912

 

$             - 

 

$     179,437

 

Inter-segment revenues

 

233

 

193

 

315

 

(741)

 

-

 

Segment operating income (loss)

 

23,017

 

21,941

 

4,227

 

(4,917)

 

44,268

 

Total assets

 

248,200

 

172,796

 

22,385

 

79,527 

 

522,908

 

Capital expenditures

 

3,315

 

2,172

 

97

 

34 

 

5,618

 

Depreciation and amortization

 

2,929

 

1,386

 

153

 

771 

 

5,239

                       

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

                       
                       
 

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

 

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Core Laboratories N.V. has fully and unconditionally guaranteed all of the Notes issued by Core Laboratories LP in 2006. Core Laboratories LP is a 100% indirectly owned subsidiary of Core Laboratories N.V.

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, 2008 and December 31, 2007, statements of income and the consolidating statements of cash flows for each of the quarters ended March 31, 2008 and 2007 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, 2008

     

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

$          2,137 

 

$       12,195 

 

$      14,195 

 

$                - 

 

$      28,527

 

Accounts receivable, net

187 

 

32,761 

 

113,788 

 

 

146,736

 

Inventories, net

 

3,377 

 

28,236 

 

 

31,613

 

Prepaid expenses and other current assets

589 

 

12,979 

 

24,239 

 

 

37,807

     

2,913 

 

61,312 

 

180,458 

 

 

244,683

                       

PROPERTY, PLANT AND EQUIPMENT, net

 

21,362 

 

71,488 

 

 

92,850

GOODWILL AND INTANGIBLES, net

46,986 

 

8,573 

 

90,225 

 

 

145,784

INTERCOMPANY RECEIVABLES

58,905 

 

277,779 

 

351,410 

 

(688,094)

 

-

INVESTMENT IN AFFILIATES

299,104 

 

 

1,032,902 

 

(1,331,717)

 

289

DEFERRED TAX ASSET

2,982 

 

20,058 

 

 

(2,930)

 

20,110

OTHER ASSETS

3,276 

 

10,685 

 

5,231 

 

 

19,192

   

TOTAL ASSETS

$      414,166 

 

$      399,769 

 

$  1,731,714 

 

$   (2,022,741)

 

$     522,908

                       
   

LIABILITIES AND SHAREHOLDERS' EQUITY

               

CURRENT LIABILITIES:

                 
 

Current maturities of long-term debt and

   capital lease obligations

$          1,904 

 

$                - 

 

$                2 

 

$                  - 

 

$         1,906

 

Accounts payable

1,221 

 

4,525 

 

29,944 

 

 

35,690

 

Other accrued expenses

3,974 

 

10,213 

 

41,694 

 

 

55,881

     

7,099 

 

14,738 

 

71,640 

 

 

93,477

                       

LONG-TERM DEBT AND CAPITAL LEASE

   OBLIGATIONS

 

300,000 

 

 

 

300,000

DEFERRED COMPENSATION

5,879 

 

7,744 

 

457 

 

 

14,080

DEFERRED TAX LIABILITY

 

324 

 

2,606 

 

(2,930)

 

-

INTERCOMPANY PAYABLES

309,590 

 

10,189 

 

368,315 

 

(688,094)

 

-

OTHER LONG-TERM LIABILITIES

17,017 

 

12,490 

 

9,675 

 

 

39,182

                       

MINORITY INTEREST

 

 

1,588 

 

 

1,588

                       

TOTAL SHAREHOLDERS' EQUITY

74,581 

 

54,284 

 

1,277,433 

 

(1,331,717)

 

74,581

   

TOTAL LIABILITIES AND

   SHAREHOLDERS' EQUITY

$      414,166 

 

$      399,769 

 

$  1,731,714

 

$   (2,022,741)

 

$      522,908

 

 

 

Condensed Consolidating Balance Sheets

                 
                       
   

(In thousands)

December 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

$          6,712

 

$       7,818 

 

$      11,087 

 

$                - 

 

$      25,617

 

Accounts receivable, net

114

 

28,782 

 

108,335 

 

 

137,231

 

Inventories, net

 

2,681 

 

26,682 

 

 

29,363

 

Prepaid expenses and other current assets

887

 

9,901 

 

17,700 

 

 

28,488

     

7,713

 

49,182 

 

163,804 

 

 

220,699

                       

PROPERTY, PLANT AND EQUIPMENT, net

 

21,288 

 

71,750 

 

 

93,038

GOODWILL AND INTANGIBLES, net

46,986

 

8,652 

 

90,202 

 

 

145,840

INTERCOMPANY RECEIVABLES

25,828

 

334,793 

 

327,791 

 

(688,412)

 

-

INVESTMENT IN AFFILIATES

267,943

 

 

914,018 

 

(1,181,727)

 

234

DEFERRED TAX ASSET

2,507

 

25,925 

 

1,726 

 

(4,134)

 

26,024

OTHER ASSETS

3,634

 

11,456 

 

3,865 

 

 

18,955

   

TOTAL ASSETS

$      354,611

 

$      451,296 

 

$  1,573,156 

 

$   (1,874,273)

 

$    504,790

                       
   

LIABILITIES AND SHAREHOLDERS' EQUITY

               

CURRENT LIABILITIES:

                 
 

Current maturities of long-term debt and

   capital lease obligations

$          3,024

 

$                 - 

 

$                3 

 

$                - 

 

$         3,027

 

Accounts payable

2,417

 

4,581 

 

32,863 

 

 

39,861

 

Other accrued expenses

1,325

 

21,057 

 

32,770 

 

 

55,152

     

6,766

 

25,638 

 

65,636 

 

 

98,040

                       

LONG-TERM DEBT AND CAPITAL LEASE

   OBLIGATIONS

 

300,000 

 

 

 

300,000

DEFERRED COMPENSATION

5,688

 

7,980 

 

412 

 

 

14,080

DEFERRED TAX LIABILITY

4,134

 

 

 

(4,134)

 

-

INTERCOMPANY PAYABLES

264,976

 

66,550 

 

356,886 

 

(688,412)

 

-

OTHER LONG-TERM LIABILITIES

10,904

 

8,716 

 

9,421 

 

 

29,041

                       

MINORITY INTEREST

 

 

1,486 

 

 

1,486

                       

TOTAL SHAREHOLDERS' EQUITY

62,143

 

42,412 

 

1,139,315 

 

(1,181,727)

 

62,143

   

TOTAL LIABILITIES AND

   SHAREHOLDERS' EQUITY

$      354,611

 

$      451,296 

 

$  1,573,156 

 

$   (1,874,273)

 

$      504,790

 

 

 

Condensed Consolidating Statements of Operations

               
                       
   

(In thousands)

Quarter Ended March 31, 2008

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

REVENUES

                 
 

Operating revenues

$                   - 

 

$      39,665 

 

$ 139,772 

 

$                - 

 

$    179,437 

 

Intercompany revenues

267 

 

3,852 

 

32,669 

 

(36,788)

 

 

Earnings from consolidated affiliates

38,137 

 

 

95,282 

 

(133,419)

 

   

Total revenues

38,404 

 

43,517 

 

267,723 

 

(170,207)

 

179,437 

                       

OPERATING EXPENSES

                 
 

Operating costs

297 

 

21,161 

 

98,015 

 

 

119,473 

 

General and administrative expenses

3,520 

 

4,766 

 

 

 

8,289 

 

Depreciation and amortization

 

1,372 

 

3,867 

 

 

5,239 

 

Other expense (income), net

4,537 

 

823 

 

21,936 

 

(25,128)

 

2,168 

                     

Operating income

30,050 

 

15,395 

 

143,902 

 

(145,079)

 

44,268 

Interest expense

36 

 

608 

 

 

 

644 

                   

Income before income tax expense

30,014 

 

14,787 

 

143,902 

 

(145,079)

 

43,624 

Income tax expense (benefit)

681 

 

2,915 

 

10,695 

 

 

14,291 

                   

NET INCOME

$         29,333 

 

$        11,872 

 

$     133,207 

 

$      (145,079)

 

$       29,333 

 

Condensed Consolidating Statements of Cash Flows

               
                       
   

(In thousands)

Quarter Ended March 31, 2008

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

                   

Net cash provided by operating activities

$      14,287 

 

$      6,238 

 

$     4,915 

 

$                  - 

 

$     25,440 

                 

   

CASH FLOWS FROM INVESTING ACTIVITIES:

               
 

Capital expenditures

 

(3,636)

 

(1,982)

 

 

(5,618)

 

Patents and other intangibles

 

(22)

 

(64)

 

 

(86)

 

Proceeds from sale of assets

 

2,227 

 

240 

 

 

2,467 

 

Premiums on life insurance

 

(430)

 

 

 

(430)

Net cash used in investing activities

 

(1,861)

 

(1,806)

 

 

(3,667)

                   

CASH FLOWS FROM FINANCING ACTIVITIES:

               
 

Repayment of debt

(1,120)

 

(5,000)

 

 

 

(6,120)

 

Proceeds from debt borrowings

 

5,000 

 

 

 

5,000 

 

Capital lease obligations

 

 

(1)

 

 

(1)

 

Stock options exercised

633 

 

 

 

 

633 

 

Repurchase of common shares

(28,815)

 

 

 

 

(28,815)

 

Excess tax benefit from stock-based payments

10,440 

 

 

 

 

10,440 

Net cash used in financing activities

(18,862)

 

 

(1)

 

 

(18,863)

                   

NET CHANGE IN CASH AND CASH

   EQUIVALENTS

(4,575)

 

4,377 

 

3,108 

 

 

2,910 

CASH AND CASH EQUIVALENTS,

   beginning of period

6,712 

 

7,818 

 

11,087 

 

 

25,617 

CASH AND CASH EQUIVALENTS,

   end of period

$      2,137 

 

$     12,195 

 

$     14,195 

 

$                - 

 

$       28,527 

 

 

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)

 

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 benefits 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 

 

 

 

12. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations ("SFAS 141R") which replaces SFAS No.141, Business Combination. SFAS 141R retains the fundamental requirements of SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. In addition, SFAS 141R's scope is broader in that it applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008 and early adoption is not allowed. We are currently evaluating the effects that SFAS 141R may have on any future business combinations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 ("SFAS 160"). SFAS 160 requires companies with noncontrolling interests to disclose such interests clearly as a portion of equity separate from the parent's equity and the amount of consolidated net income attributable to these noncontrolling interests must also be clearly presented on the Consolidated Statement of Operations. In addition, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary will be initially measured at fair value and recorded as a gain or loss. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the effects that SFAS 160 may have on our financial position and results of operations.

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, 2008 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, 2007.

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 4,900 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; and

   

-

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

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 any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see "Item 1A - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as well as the other reports and registration statements filed by us with the SEC.

 

Outlook

We continue our efforts to expand our market presence by opening facilities in strategic areas and realizing synergies within our business lines. We believe our market presence provides us a unique opportunity to service customers who have global operations in addition to the national oil companies.

We have established internal earnings targets that are based on current market conditions. Based on discussions with our clients and our view of the industry, we anticipate that in 2008 spending by our international clients will increase approximately 20% while we expect North American spending to be relatively flat. Attaining our internal targets is dependent on, among other things, oilfield activity sustained at current levels.

Results of Operations

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

 

Three Months Ended March 31,

 

% Change

 

2008

 

2007

 

2008/2007

REVENUES:

     

Service

$138,409 

 

77% 

 

$116,965 

 

75% 

 

18% 

Product sale

41,028 

 

23% 

 

38,758 

 

25% 

 

6% 

  Total revenue

179,437 

 

100% 

 

155,723 

 

100% 

 

15% 

OPERATING EXPENSES:

                 

Cost of services*

91,159 

 

66% 

 

79,854 

 

68% 

 

14% 

Cost of sales*

28,314 

 

69% 

 

27,395 

 

71% 

 

3% 

  Total cost of services and sales

119,473 

 

67% 

 

107,249 

 

69% 

 

11% 

General and administrative expenses

8,289 

 

5% 

 

8,039 

 

5% 

 

3% 

Depreciation and amortization

5,239 

 

3% 

 

4,578 

 

3% 

 

14% 

Other expense (income), net

2,168 

 

1% 

 

(863)

 

(1%)

 

(351%)

Operating income

44,268 

 

25% 

 

36,720 

 

24% 

 

21% 

Interest expense

644 

 

-  

 

632 

 

-  

 

2% 

Income before income tax expense

43,624 

 

24% 

 

36,088 

 

23% 

 

21% 

Income tax expense

14,291 

 

8% 

 

10,826 

 

7% 

 

32% 

  NET INCOME

$  29,333 

 

16% 

 

$  25,262 

 

16% 

 

16% 

                   

*Percentage based on applicable revenue rather than total revenue

       

Operating Results for the Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007 (unaudited)

Service Revenues

Service revenues increased to $138.4 million for the first quarter of 2008, up 18% when compared to $117.0 million for the first quarter of 2007. This increase in revenue was largely attributable to an increase in worldwide oilfield activities, acceptance of recently introduced services by our customers and continued demand for our reservoir optimizing technologies in several North American projects related to oil sands, tight-gas sands, and shale reservoirs. The revenue growth was also driven, in part, by the continued expansion of our worldwide deepwater analysis projects.

Product Sale Revenues

Revenues associated with product sales increased to $41.0 million for the first quarter of 2008, up 6% from $38.8 million for the first quarter of 2007. This increase was primarily the result of continued market acceptance and penetration of new reservoir optimizing technologies introduced in 2007 coupled with the continued increase in 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.

 

Cost of Services

Cost of services expressed as a percentage of service revenue improved to 66% for the quarter ended March 31, 2008, down from 68% for the corresponding quarter in 2007. The decline in the cost of services relative to service revenue was primarily as a result of higher incremental margins earned on increased 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 69% for the quarter ended March 31, 2008, which was an improvement from the 71% for the same period in 2007. The decrease in cost of sales as a percentage of product sale revenues for 2008 was primarily due to the growing demand for our new technologies which are our higher margin products, from an overall increase in sales, continued efforts to enhance our manufacturing efficiencies and improved inventory management.

General and Administrative Expenses

General and administrative expenses were relatively flat at $8.3 million for the first quarter of 2008 compared to $8.0 million for the first quarter of 2007.

Depreciation and Amortization Expense

Depreciation and amortization expense of $5.2 million for the first quarter of 2008 increased $0.6 million, from $4.6 million for the first quarter of 2007. This increase in depreciation and amortization expense was primarily due to an increase in capital expenditures as we continue to grow the company.

Other Expense (Income), Net

Other expense (income), net consisted of the following at March 31, 2008 and 2007 (in thousands):

 

Three Months Ended

March 31,

 
 

2008

 

2007

 
 

(Unaudited)

 

Minority interest

$     103 

 

$    (76)

 

Gain on sale of assets

(1,284)

 

(48)

 

Foreign exchange (gain) loss

(746)

18 

Interest income

(108)

 

(411)

 

Non-income tax accrual

5,030 

 

 

Other

(827)

 

(346)

 

  Total other expense (income), net

$  2,168 

 

$  (863)

 

In 2008, we revised our estimate of a contingent liability associated with non-income related taxes, and as a result a charge to income of $5.0 million was recorded. Additionally, we recorded a gain of $1.1 million in connection with the sale of a small office building.

 

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

 

 

Three Months Ended

March 31,

 
 

2008

 

2007

 
 

(Unaudited)

 

Canadian Dollar

$ 215 

 

$ 106 

 

Euro

(586)

 

(38)

 

Russian Ruble

(157)

 

(40)

 

Other currencies

(218)

 

(10)

 

  Total (gain) loss

$   (746)

 

$   18 

 

Income Tax Expense

The effective tax rates for the first quarter of 2008 and 2007 were 32.8% and 30.0%, respectively.

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, 2008 and 2007 (in thousands):

 

Three Months Ended
March 31,

 

2008

 

2007

Revenues:

(Unaudited)

Reservoir Description

$  100,501

 

$    83,163

Production Enhancement

67,024

 

58,807

Reservoir Management

11,912

 

13,753

   Consolidated

$  179,437

 

$  155,723

Operating income (loss):

Reservoir Description

$   23,017 

 

$   16,773 

Production Enhancement

21,941 

 

16,052 

Reservoir Management

4,227 

 

3,697 

Corporate and Other1

(4,917)

 

198 

   Consolidated

$   44,268 

 

$   36,720 

 

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 $17.3 million, to $100.5 million in the first quarter of 2008, compared to $83.2 million in the first quarter of 2007. The revenue increase resulted from unprecedented demand for our reservoir rock and especially for our reservoir fluids characterization services in the Middle East, Asia and Europe and our reservoir optimizing technologies in several North American projects related to the Canadian oil sands, tight gas sands and multiple gas-shale reservoirs. The revenue growth was also driven, in part, by the continued expansion of worldwide deepwater projects.

Operating income in the first quarter of 2008 increased by 37% or $6.2 million to $23.0 million compared to $16.8 million for the first quarter of 2007. Increases in operating income were primarily due to higher incremental margins earned from increased sales over our relatively fixed cost structure. Operating margins for the quarter ended March 31, 2008 were 23% compared to 20% for the same period in 2007.

 

 

Production Enhancement

Revenues from the Production Enhancement segment increased $8.2 million to $67.0 million in the first quarter of 2008 as compared to $58.8 million in the first quarter in 2007. The primary reason for the increase in our revenues in this segment has been the further improvement in market penetration and client acceptance of our well perforating and completion products and fracture diagnostic services.

Operating income in the first quarter of 2008 increased by 37% or $5.9 million to $21.9 million from $16.1 million for the first quarter of 2007. Operating margins increased to 33% in the first quarter of 2008 compared to 27% for the same period in 2007. These margin improvements were primarily due to increased market penetration of higher-margin services and products including new enhanced recovery technology, such as our SpectraScan™ and SpectraChem™ tracer service and our new SuperHERO™ perforating charges and gun systems.

Reservoir Management

Revenues from the Reservoir Management segment decreased $1.8 million in the first quarter of 2008 as compared to the first quarter of 2007. The decrease in revenue was a result of the culmination of several large projects in the first quarter of 2007.

Operating income in the first quarter of 2008 increased 14% to $4.2 million from $3.7 million for the first quarter of 2007. The increase was primarily due to the continued expansion of the multi-client reservoir study sales in the U.S. and new studies being performed including a gas-shale study focused in the Appalachian region and a study on tight gas sands in the Middle East region.

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, 2008 and 2007 (in thousands):

   

Three Months Ended

March 31,

   

2008

 

2007

Free cash flow calculation:

 

(unaudited)

Net cash provided by operating activities

$   25,440

$   19,158

Less: capital expenditures

 

5,618

 

3,427

    Free cash flow

 

$   19,822

 

$   15,731

The increase in free cash flow in 2008 compared to 2007 was due to a higher net income partially offset by an increase in capital expenditures. Additionally, working capital, excluding cash, increased at a reduced rate in the first quarter of 2008 as compared to first quarter of 2007, and therefore had less of an impact on cash flow in the current year. At March 31, 2008 and December 31, 2007, we had working capital of $151.2 million and $122.7 million, respectively.

 

Cash Flows

The following table summarizes cash flows for the three months ended March 31, 2008 and 2007 (in thousands):

   

Three Months Ended

March 31,

   

2008

 

2007

Cash provided by/(used in):

 

(unaudited)

    Operating activities

$    25,440 

$    19,158 

    Investing activities

 

(3,667)

 

(4,160)

    Financing activities

 

(18,863)

 

(40,232)

Net change in cash and cash equivalents

 

$      2,910 

 

$   (25,234)

The increase in cash flows provided by operating activities was primarily attributable to an increase in net income along with a decrease in prepaid expenses and an increase in accrued liabilities and other long-term liabilities due to timing of payments.

The decrease 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 2008, we repurchased 253,379 shares for an aggregate price of $28.8 million compared to 743,650 shares for an aggregate price of $58.6 million during the three months ended March 31, 2007. The decrease in cash flows used in financing activities was also attributable to a decrease in stock options exercised in 2008 as compared to 2007 of $16.3 million.

We maintain a revolving credit facility (the "Credit Facility") that allows for an aggregate borrowing capacity of $100.0 million. As amended, this facility 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%. Any outstanding balance under the Credit Facility is due in December 2010 when the Credit Facility matures. Interest payment terms are variable depending upon the specific type of borrowing under this facility. Our available capacity is reduced by outstanding unsecured letters of credit and performance guarantees and bonds totaling $11.6 million at March 31, 2008 relating to certain projects in progress. Our available borrowing capacity under the Credit Facility at March 31, 2008 was $88.4 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, 2008. 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 our debt requirements, capital expenditures, working capital, and future acquisitions.

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations ("SFAS 141R") which replaces SFAS No.141, Business Combination. SFAS 141R retains the fundamental requirements of SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. In addition, SFAS 141R's scope is broader in that it applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008 and early adoption is not allowed. We are currently evaluating the effects that SFAS 141R may have on any future business combinations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 ("SFAS 160"). SFAS 160 requires companies with noncontrolling interests to disclose such interests clearly as a portion of equity separate from the parent's equity and the amount of consolidated net income attributable to these noncontrolling interests must also be clearly presented on the Consolidated Statement of Operations. In addition, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary will be initially measured at fair value and recorded as a gain or loss. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the effects that SFAS 160 may have on our financial position and results of operations.

Return to Index

 

 

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, 2007.

Return to Index

Item 4. Controls and Procedures

A complete discussion of our controls and procedures is included in our Annual Report on Form 10-K for the year ended December 31, 2007.

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, including our Chief Executive Officer and Chief Financial Officer, 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, 2008 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, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Return to Index

 

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.

Return to Index

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, 2008:

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, 2008

 

129,567

 

$ 113.86

 

129,567

 

1,189,812

February 1-29, 2008 (1)

 

120,036

 

$ 113.33

 

 79,300

 

1,110,512

March 1-31, 2008 (2)

 

   3,776

 

$ 121.60

 

          -

 

1,110,512

Total

 

253,379

 

$ 113.72

 

208,867

   

(1) Contains 40,736 shares valued at $4.5 million, or $111.26 per share, surrendered to us by participants in a stock-based compensation plan to settle any personal tax liabilities which may result from the award in February 2008.

(2) Contains 3,776 shares valued at $0.5 million, or $121.60 per share, surrendered to us by participants in a stock-based compensation plan to settle any personal tax liabilities which may result from the award in March 2008.

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 September 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.

Return to Index

 

 

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

10.1*

-

Form of Restated Employment Agreement between Core Laboratories N.V. and David Michael Demshur dated as of December 31, 2007

 


Filed herewith

10.2*

-

Form of Restated Employment Agreement between Core Laboratories N.V. and Richard Lucas Bergmark dated as of December 31, 2007

 


Filed herewith

10.3*

-

Form of Restated Employment Agreement between Core Laboratories N.V. and Monty Lee Davis dated as of December 31, 2007

 


Filed herewith

10.4*

-

Form of Restated Employment Agreement between Core Laboratories N.V. and John David Denson dated as of December 31, 2007

 


Filed herewith

10.5*

-

Amendment to Core Laboratories Supplement Executive Retirement Plan dated as of March 5, 2008

 


Filed herewith

10.6*

-

Amendment to Core Laboratories Supplemental Executive Retirement Plan for Monty L. Davis dated as of March 5, 2008

 


Filed herewith

10.7*

-

Amendment to Core Laboratories Supplemental Executive Retirement Plan for John D. Denson dated as of March 5, 2008

 


Filed herewith

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

         
 

*

Management contract or compensatory plan or arrangement

   

 

Return to Index

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:

May 8, 2008

By:

/s/ Richard L. Bergmark

   

Richard L. Bergmark

   

Chief Financial Officer

   

Duly Authorized Officer and

   

Principal Financial Officer

 

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