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CORE LABORATORIES N V - Quarter Report: 2009 June (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 June 30, 2009

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes [   ]  No [   ]

 

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ X ]                        Accelerated filer [   ]                        Non-accelerated filer [   ] 9;                       Smaller reporting company [   ]

                                                                                                                                       (Do not check if a 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 July 22, 2009 was 22,964,559.


 


 

CORE LABORATORIES N.V.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009

 

INDEX

 
 

Page

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 
     
 

Consolidated Balance Sheets (Unaudited) at June 30, 2009 and December 31, 2008

1

     
 

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

 

June 30, 2009 and 2008

2

     

 

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

3

 

June 30, 2009 and 2008

 
     
 

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

 
 

June 30, 2009 and 2008

4

     
 

Notes to the Unaudited Consolidated Interim Financial Statements

5

     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

     

Item 4.

Controls and Procedures

27

     
     

PART II - OTHER INFORMATION

     

Item 1.

Legal Proceedings

28

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

     

Item 4.

Submission of Matters to a Vote of Security Holders

28

     

Item 6.

Exhibits

30

     
 

Signature

31

     


 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CORE LABORATORIES N.V.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

     

June 30,

 

December 31,

     

2009

 

2008

   

ASSETS

(Unaudited)

CURRENT ASSETS:

     
 

Cash and cash equivalents

$       103,246 

 

$        36,138 

 

Accounts receivable, net of allowance for doubtful accounts of $3,450 and

     
 

  $3,535 at 2009 and 2008, respectively

123,946 

 

144,293 

 

Inventories, net

36,858 

 

34,838 

 

Prepaid expenses and other current assets

24,490 

 

20,376 

   

TOTAL CURRENT ASSETS

288,540 

 

235,645 

           

PROPERTY, PLANT AND EQUIPMENT, net

100,289 

 

103,463 

INTANGIBLES, net

6,780 

 

6,992 

GOODWILL

148,600 

 

148,600 

DEFERRED TAX ASSET

21,015 

17,708 

OTHER ASSETS

10,650 

9,127 

   

TOTAL ASSETS

$       575,874 

 

$      521,535 

           
   

LIABILITIES AND EQUITY

     

CURRENT LIABILITIES:

     
 

Accounts payable

$         26,840 

 

$       41,588 

 

Accrued payroll and related costs

21,957 

 

28,637 

 

Taxes other than payroll and income

7,440 

 

7,949 

 

Unearned revenues

7,573 

 

7,932 

Income tax payable

9,004 

Other accrued expenses

12,042 

9,584 

   

TOTAL CURRENT LIABILITIES

84,856 

 

95,690 

       

LONG-TERM DEBT

201,709 

 

194,568 

DEFERRED COMPENSATION

14,467 

 

12,815 

OTHER LONG-TERM LIABILITIES

37,916 

 

30,177 

COMMITMENTS AND CONTINGENCIES

     
       

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, 25,519,956 issued and 22,964,559 outstanding at 2009

     

and 25,519,956 issued and 23,020,033 outstanding at 2008

1,430 

 

1,430 

 

Additional paid-in capital

49,873 

 

53,019 

 

Retained earnings

436,668 

 

382,266 

 

Accumulated other comprehensive (loss)

(4,810)

 

(4,927)

 

Treasury shares (at cost), 2,555,397 at 2009 and 2,499,923 at 2008

(248,351)

 

(245,661)

 

      Total Core Laboratories N.V. shareholders' equity

234,810 

 

186,127 

 

Non-controlling interest

2,116 

 

2,158 

TOTAL EQUITY

236,926 

188,285 

   

TOTAL LIABILITIES AND EQUITY

$       575,874 

 

$      521,535 

 

 

 

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

1

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CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

   

Three Months Ended June 30,

 

2009

 

2008

   

(Unaudited)

REVENUES:

     
 

Services

$     134,671 

 

$     153,994 

 

Product sales

32,591 

 

43,694 

   

167,262 

 

197,688

OPERATING EXPENSES:

     
 

Cost of services, exclusive of depreciation expense shown below

84,401 

 

99,892 

 

Cost of sales, exclusive of depreciation expense shown below

24,596 

 

31,018 

 

General and administrative expenses

6,684 

 

7,159 

 

Depreciation

5,724 

 

5,117 

 

Amortization

182 

 

159 

 

Other income, net

(6,013)

 

(753)

OPERATING INCOME

51,688 

 

55,096 

Interest expense

3,840 

 

8,000 

Income before income tax expense

47,848 

 

47,096 

Income tax expense

17,884 

 

14,652 

Net income

29,964 

 

32,444 

    Net income attributable to non-controlling interest

157 

 

77 

Net income attributable to Core Laboratories N.V.

$      29,807 

 

$      32,367 

       

EARNINGS PER SHARE INFORMATION:

     

Basic earnings per share attributable to Core Laboratories N.V.

$          1.30 

$          1.41 

       

Diluted earnings per share attributable to Core Laboratories N.V.

$          1.29 

 

$          1.32 

       

Cash dividends per share

$          0.10 

 

$                - 

       

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

     

Basic

22,955 

 

22,995 

       

Diluted

23,179 

 

24,452 

       
       

 

 

 

 

 

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

2

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CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

   

Six Months Ended June 30,

 

2009

 

2008

   

(Unaudited)

REVENUES:

     
 

Services

$     276,363 

 

$     292,403 

 

Product sales

69,775 

 

84,722 

   

346,138 

 

377,125 

OPERATING EXPENSES:

     
 

Cost of services

172,697 

 

191,051 

 

Cost of sales

52,332 

 

59,332 

 

General and administrative expenses

15,958 

 

15,448 

 

Depreciation

11,251 

 

10,214 

 

Amortization

363 

 

301 

 

Other expense (income), net

(4,770)

 

1,312 

OPERATING INCOME

98,307 

 

99,467 

Interest expense

7,640 

 

12,782 

Income before income tax expense

90,667 

 

86,685 

Income tax expense

31,464 

 

27,391 

Net income

59,203 

 

59,294 

    Net income attributable to non-controlling interest

204 

 

180 

Net income attributable to Core Laboratories N.V.

$      58,999 

 

$      59,114 

       

EARNINGS PER SHARE INFORMATION:

     

Basic earnings per share

$          2.57 

$         2.57 

       

Diluted earnings per share

$          2.54 

 

$         2.44 

       

Cash dividends per share

$          0.20 

 

$              - 

       

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

     

Basic

22,963 

 

22,989 

       

Diluted

23,192 

 

24,206 

       
       

 

 

 

 

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

3

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CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

     

Six Months Ended June 30,

   

2009

 

2008

 

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net income

$        59,203 

 

$     59,294 

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

     
 

Net provision for doubtful accounts

319 

 

75 

 

Provisions for inventory obsolescence

103 

 

178 

 

Equity in earnings of affiliates

(78)

 

(114)

 

Stock-based compensation

2,624 

 

2,135 

 

Depreciation and amortization

11,614 

 

10,515 

 

Non-cash interest expense

7,213 

 

12,251 

Gain on sale of assets

(345)

(1,594)

Realization of pension obligation

117 

39 

 

(Increase) decrease in value of life insurance policies

(421)

 

300 

 

Deferred income taxes

(8,145)

 

1,449 

 

Changes in assets and liabilities:

     

Accounts receivable

20,028 

(11,986)

   

Inventories

(2,123)

 

(2,463)

   

Prepaid expenses and other current assets

724 

 

(425)

   

Other assets

(252)

 

15 

   

Accounts payable

(14,748)

 

(1,178)

   

Accrued expenses

1,948 

 

(4,308)

   

Other long-term liabilities

8,486 

 

9,220 

 

Net cash provided by operating activities

86,267 

 

73,403 

CASH FLOWS FROM INVESTING ACTIVITIES:

     
   

Capital expenditures

(5,320)

 

(13,657)

   

Patents and other intangibles

(151)

 

(152)

   

Acquisitions, net of cash acquired

 

(13,000)

   

Non-controlling interest - contributions

 

370 

   

Proceeds from sale of assets

459 

 

3,090 

   

Premiums on life insurance

(844)

 

(704)

 

Net cash used in investing activities

(5,856)

 

(24,053)

CASH FLOWS FROM FINANCING ACTIVITIES:

     
   

Repayment of debt borrowings

 

(7,257)

   

Proceeds from debt borrowings

 

5,000 

   

Capital lease obligations

 

(3)

   

Stock options exercised

302 

 

690 

   

Excess tax benefits from stock-based compensation

127 

 

11,011 

   

Non-controlling interest - dividends

(246)

 

   

Dividends paid

(4,597)

 

   

Repurchase of common shares

(8,889)

 

(29,780)

 

Net cash used in financing activities

(13,303)

 

(20,339)

NET CHANGE IN CASH AND CASH EQUIVALENTS

67,108 

 

29,011 

CASH AND CASH EQUIVALENTS, beginning of period

36,138 

 

25,617 

CASH AND CASH EQUIVALENTS, end of period

$      103,246 

 

$     54,628 

Non-cash investing and financing activities:

Financed capital expenditures

$         2,871 

$               - 

 

 

 

 

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

4

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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 U.S. GAAP and 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, 2008.

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. Non-controlling 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 and six months ended June 30, 2009 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2009. We have performed an evaluation of subsequent events through July 23, 2009, which is the date the financial statements were issued.

Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2008 was derived from the 2008 audited consolidated financial statements as revised for the recently adopted accounting principles, 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.

 

2. INVENTORIES

Inventories consist of the following (in thousands):

   

June 30,

 

December 31,

   

2009

 

2008

   

(Unaudited)

   

Finished goods

 

$      21,619

 

$       26,785

Parts and materials

 

13,337

 

7,190

Work in progress

 

1,902

 

863

  Total inventories, net

 

$      36,858

 

$       34,838

We include freight costs incurred for shipping inventory to customers in the Cost of Sales line of the Consolidated Statements 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, we did not identify a triggering event; therefore, we have determined that goodwill is not impaired. We amortize intangible assets with a defined term on a straight-line basis over their respective useful lives.

There were no other significant changes relating to our intangible assets for the six months ended June 30, 2009. The remaining composition of goodwill by business segment at June 30, 2009 is consistent with the amounts disclosed in our Annual Report on Form 10-K as of December 31, 2008.
 

5


 

4. DEBT AND CAPITAL LEASE OBLIGATIONS

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

   

June 30,

 

December 31,

   

2009

 

2008

   

(Unaudited)

Senior exchangeable notes

 

$       238,658

 

$     238,658

Discount on senior exchangeable notes

 

36,949

 

44,090

      Net senior exchangeable notes

$       201,709

$     194,568


 

On January 1, 2009, we adopted FASB Staff Position ("FSP") No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("APB 14-1"). APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The adoption of APB 14-1 on January 1, 2009 impacted the historical accounting for our Senior Exchangeable Notes ("Notes") and resulted in an increase to Additional Paid in Capital of $51.9 million and Deferred Tax Liabilities of $16.1 million with an offset to Retained Earnings of $23.9 million and a discount on the Notes of $44.1 million. The impact to net income and to diluted earnings per share was a decrease of $1.3 million and $3.9 million and $0.06 and $0.16 for the three and six months ended June 30, 2008, respectively.  The discount will be amortized into interest expense through November 2011.

In 2006, Core Laboratories LP, a wholly owned subsidiary of Core Laboratories N.V., issued $300 million aggregate principal amount of the Notes due 2011. The Notes bear interest at a rate of 0.25% per year paid on a semi-annual basis and are fully and unconditionally guaranteed by Core Laboratories N.V. resulting in interest expense of $0.1 million and $0.2 million for the three months ended June 30, 2009 and 2008, respectively, and $0.3 million and $0.4 million for the six months ended June 30, 2009 and 2008, respectively. With the additional amortization of the discount on the Notes, the effective interest rate is 7.48% for the period ended June 30, 2009, which resulted in additional non-cash interest expense of $3.6 million and $4.2 million for the three months ended June 30, 2009 and 2008, respectively, and $7.1 million and $8.4 million for the six months ended June 30, 2009 and 2008, respectively. The Notes are exchangeable into shares of Core Laboratories N.V. under certain circumstances at a conversion rate of $93.61 or 10.6825 per $1,000 principal amount of the 238,658 Notes outstanding at June 30, 2009. 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. The carrying value of the equity component of the Notes was $84.4 million at June 30, 2009 and December 31, 2008. At June 30, 2009, the Notes were trading at 103.0% of their face value.

As part of the issuance of the Notes, we entered into an exchangeable senior note hedge transaction in October 2006 (the "Call Option") through one of our subsidiaries with Lehman Brothers OTC Derivatives Inc. ("Lehman OTC") whereby Lehman OTC is obligated to deliver to us an amount of shares required to cover the shares issuable upon conversion of the Notes. On October 3, 2008, Lehman OTC filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Although we may not retain the benefit of the Call Option if Lehman OTC fails to perform under the contract, we believe the impact will not be material and would not affect our income statement presentation. In addition, we do not expect Lehman OTC's default to result in a direct impact on our balance sheet as the Call Option was initially recorded as an equity transaction. We are currently unable to ascertain whether any value would be established for our unsecured position or how this will ultimately be resolved through their bankruptcy proceedings.

Separate from the Call Option, we also sold Lehman OTC warrants, for which we received consideration, to purchase up to 3.2 million common shares at an exercise price of $126.02. The warrants become exercisable beginning in late December 2011 and expire in January 2012. The warrants have been purchased from Lehman OTC by a third party.

The derivative transactions described above do not affect the terms of the outstanding Notes.

We maintain a revolving credit facility (the "Credit Facility") that allows for an aggregate borrowing capacity of $100.0 million. The Credit 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 $9.8 million at June 30, 2009 relating to certain projects in progress. Our available borrowing capacity under the Credit Facility at June 30, 2009 was $90.2 million.
 

6


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 and six months ended June 30, 2009 and 2008 (in thousands):

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2009

 

2008

 

2009

 

2008

 

(Unaudited)

 

(Unaudited)

Service cost

$     265 

 

$     302 

 

$     518 

 

$     588 

Interest cost

339 

 

357 

 

663 

 

695 

Expected return on plan assets

(186)

 

(322)

 

(364)

 

(628)

Amortization of transition asset

(22)

 

(26)

 

(44)

 

(51)

Amortization of prior service cost

40 

 

45 

 

80 

 

90 

Amortization of net loss

61 

122 

   Net periodic pension cost

$     497 

 

$     356 

 

$     975 

 

$     694 


 

During the six months ended June 30, 2009, we contributed approximately $2.4 million, as determined by the insurance company, to fund the estimated 2009 premiums on investment contracts held by the plan.

On a recurring basis, we use the market approach to value certain assets and 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 Statements of Operations. The following table summarizes the fair value balances (in thousands):

(Unaudited)

   

Fair Value Measurement at June 30, 2009

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets:

             

Money market and other investment fund assets

$         4,549

 

$                -

 

$       4,549

 

$              -

               

Liabilities:

             

Deferred compensation plan

$         7,018

 

$            950

 

$       6,068

 

$              -

     

Fair Value Measurement at December 31, 2008

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets:

             

Money market and other investment fund assets

$       14,576

 

$       10,954

 

$        3,622

 

$              -

               

Liabilities:

             

Deferred compensation plan

$         5,746

 

$            478

 

$        5,268

 

$              -


 

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 of the last day of the month following the termination of services except that the payment of benefits for select executives generally commences on the first working day following a six month waiting period following the date of termination.
 

7


 

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 us or any of our subsidiaries should not have a material adverse effect on our 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 we or any of our subsidiaries is a party will not have a material adverse effect on our consolidated results of operations or liquidity for the period in which that resolution occurs.

During the first quarter of 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 Statements of Operations to Other Expense (Income), net. The contingent liability is included in Other Long-term Liabilities in the Consolidated Balance Sheet. As a result of finalizing a settlement agreement, we released $2.5 million of the contingent liability, to Other Expense (Income), net in the Consolidated Statements of Operations during the second quarter of 2009.

 

7. EQUITY

During the three months ended June 30, 2009, we repurchased 12,719 of our common shares for $1.0 million pursuant to the terms of a stock-based compensation plan, in consideration of the participants' tax burdens that may result from the issuance of common shares under this plan. During the six months ended June 30, 2009, we repurchased 134,324 of our common shares for $8.9 million. Included in this total were rights to 16,324 shares valued at $1.3 million that were surrendered to the Company pursuant to the terms of a stock-based compensation plan, in consideration of the participants' 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 future acquisitions, settlement of employee stock awards, or possible conversion of the Notes.

During the three and six months ended June 30, 2009, we recognized tax benefits of $0.1 million and $0.1 million, respectively, 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.

On April 16, 2009, we declared a quarterly $0.10 per share of common stock dividend that was paid on May 27, 2009. In addition on July 13, 2009, we declared a quarterly dividend of $0.10 per share of common stock and a special non-recurring cash dividend of $0.75 per share of common stock for shareholders of record on July 24, 2009 and payable on August 24, 2009.
 

8


The following table summarizes our changes in equity for the six months ended June 30, 2009 (in thousands):

             

Accumulated

           
     

Additional

     

Other

     

Non-

   
 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Controlling

 

Total

(Unaudited)

Shares

 

Capital

 

Earnings

 

Income (Loss)

 

Stock

 

Interest

 

Equity

December 31, 2008

$    1,430 

$    53,019 

$    382,266 

$    (4,927)

$    (245,661)

$       2,158 

$    188,285 

Stock options exercised

(1,439)

1,741 

302 

Stock based-awards

(1,834)

4,458 

2,624 

Tax benefit of stock-based
    awards issued

127 

127 

Repurchase of common shares

(8,889)

(8,889)

Dividends paid

(4,597)

(4,597)

Non-controlling interest dividend

(246)

(246)

Comprehensive income:

Amortization of pension,
    net of tax

117 

117 

Net income

58,999 

204 

59,203 

Total comprehensive income

59,320 

June 30, 2009

$    1,430 

$     49,873 

$    436,668 

$       (4,810)

$    (248,351)

$       2,116 

$    236,926 


 

Comprehensive Income

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

 

   

Three months ended June 30,

 

Six months ended June 30,

   

2009

 

2008

 

2009

 

2008

   

(Unaudited)

 

(Unaudited)

Net income

 

$      29,964

 

$      32,444

 

$     59,203

 

$     59,294

Realization of pension obligation

 

59

 

19

 

117

 

39

  Total comprehensive income

 

$      30,023

 

$      32,463

 

$     59,320

 

$     59,333

 

Accumulated other comprehensive income (loss) consisted of the following (in thousands):

 

June 30,

 

December 31,

 

2009

 

2008

 

(Unaudited)

   

Prior service cost

$          (1,030)

 

$       (1,089)

Transition asset

422 

 

454 

Unrecognized net actuarial loss

(4,202)

 

(4,292)

     Total accumulated other comprehensive loss

$         (4,810)

 

$      (4,927)

Non-controlling Interests

On January 1, 2009, we adopted Statement of Financial Accounting Standards No. 160, "Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 requires companies with non-controlling 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 non-controlling interests must also be clearly presented on the Consolidated Statements of Operations. In addition, when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary will be initially measured at fair value and recorded as a gain or loss. Upon adopting SFAS 160, we revised our historical presentation of non-controlling interests to be included as part of the total equity and presented the net income relating to non-controlling interests as a separate component of total net income.
 

9


 

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 June 30,

 

Six Months Ended June 30,

 

2009

 

2008

 

2009

 

2008

 

(Unaudited)

 

(Unaudited)

Weighted average basic common shares outstanding

22,955

 

22,995

 

22,963

 

22,989

Effect of dilutive securities:

             

Stock options

48

152

71

152

Contingent shares

16

 

12

 

15

 

38

Restricted stock and other

160

 

189

 

143

 

165

Senior exchangeable notes and warrants

-

 

1,104

 

-

 

862

Weighted average diluted common and potential
    common shares outstanding

23,179

 

24,452

 

23,192

 

24,206


 

In 2006, we sold warrants that give the holder the right to acquire approximately 3.2 million of our common shares at an exercise price of $126.02 per share.  Included in the Senior exchangeable notes and warrants line in the table above, these warrants had no dilutive impact on our earnings per share for the three and six months ended June 30, 2009, as the average share price did not exceed the strike price of the warrants for the periods. On October 3, 2008, the dealer of the warrants filed for bankruptcy protection and subsequently sold the warrants to a third-party dealer.

 

9. OTHER EXPENSE (INCOME), NET

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

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2009

 

2008

 

2009

 

2008

 

(Unaudited)

 

(Unaudited)

Gain on sale of assets

$          (268)

 

$       (310)

 

$       (345)

 

$    (1,594)

Foreign exchange loss (gain)

(2,897)

267 

(1,009)

(479)

Interest income

(59)

 

(185)

 

(98)

 

(293)

Non-income tax accrual

(2,500)

 

 

(2,500)

 

5,030 

Other, net

(289)

 

(525)

 

(818)

 

(1,352)

  Total other expense (income), net

$        (6,013)

 

$       (753)

 

$     (4,770)

 

$     1,312 

During the first quarter of 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. During the second quarter of 2009 we released $2.5 million of the contingent liability as a result of finalizing a settlement agreement. Additionally in 2008, we recorded a gain of $1.1 million in connection with the sale of a small office building.
 

10


 

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

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2009

 

2008

 

2009

 

2008

 

(Unaudited)

 

(Unaudited)

Australian Dollar

$        (300)

 

$         (10)

 

$       (278)

 

$        (32)

Canadian Dollar

(1,115)

 

61 

 

(767)

 

276 

Euro

(376)

 

192 

 

(213)

 

(394)

Mexican Peso

(130)

 

(46)

 

 

(92)

Russian Ruble

(372)

 

(104)

 

224 

 

(261)

British Pound

(304)

57 

(232)

13 

Other currencies, net

(300)

117 

255 

11 

  Total loss (gain)

$     (2,897)

 

$         267 

 

$    (1,009)

 

$       (479)

 

10. INCOME TAX EXPENSE

The effective tax rates for the second quarter of 2009 and 2008 were 37.4% and 31.1%, respectively. The effective tax rates for year to date 2009 and 2008 were 34.7% and 31.6%, respectively. The increase in the effective tax rate for the second quarter and year to date of 2009 is primarily a result in a change in activity levels between jurisdictions with different tax rates and establishment of valuation allowances against deferred tax assets in tax jurisdictions where we no longer anticipate having sufficient taxable income to fully utilize these deferred tax assets.

 

11. SEGMENT REPORTING

We operate our business in three reportable segments: (1) Reservoir Description, (2) Production Enhancement and (3) Reservoir Management. These business segments provide different services and utilize different technologies.

*

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.


11


Results for these business segments are presented below. We use the same accounting policies to prepare our business segment results as are used to prepare our Consolidated Financial Statements. We evaluate performance based on income or loss before income tax, interest and other non-operating income (expense). Summarized financial information concerning our segments is shown in the following table (in thousands):

 

(Unaudited)

 

Reservoir Description

 

Production Enhancement

 

Reservoir Management

 

Corporate & Other 1

 

Consolidated

Three Months Ended June 30, 2009

                 

Revenues from unaffiliated customers

 

$    103,479

 

$      52,014

 

$      11,769

 

$             - 

 

$     167,262

Inter-segment revenues

 

351

 

447

 

355

 

(1,153)

 

-

Segment operating income

 

31,462

 

14,419

 

3,484

 

2,323 

 

51,688

Total assets

 

255,448

 

172,095

 

17,929

 

130,402 

 

575,874

Capital expenditures

 

2,120

 

401

 

52

 

92 

 

2,665

Depreciation and amortization

 

3,593

 

1,462

 

178

 

673 

 

5,906

                     

Three Months Ended June 30, 2008

                 

Revenues from unaffiliated customers

 

$    114,157

 

$      71,706

 

$      11,825

 

$             - 

 

$     197,688

Inter-segment revenues

 

296

 

363

 

351

 

(1,010)

 

-

Segment operating income (loss)

 

29,059

 

23,169

 

2,962

 

(94)

 

55,096

Total assets

 

267,216

 

176,086

 

16,077

 

71,433 

 

530,812

Capital expenditures

 

4,292

 

2,082

 

92

 

1,573 

 

8,039

Depreciation and amortization

 

3,041

 

1,372

 

146

 

717 

 

5,276

                     

Six Months Ended June 30, 2009

                   

Revenues from unaffiliated customers

 

$    206,002

 

$    115,114

 

$      25,022

 

$             - 

 

$     346,138

Inter-segment revenues

 

474

 

808

 

736

 

(2,018)

 

-

Segment operating income

 

56,214

 

32,743

 

6,962

 

2,388 

 

98,307

Total assets

 

255,448

 

172,095

 

17,929

 

130,402 

 

575,874

Capital expenditures

 

4,183

 

988

 

52

 

97 

 

5,320

Depreciation and amortization

 

6,950

 

2,924

 

355

 

1,385 

 

11,614

                     

Six Months Ended June 30, 2008

                   

Revenues from unaffiliated customers

 

$    214,658

 

$    138,730

 

$      23,737

 

$             - 

 

$     377,125

Inter-segment revenues

 

529

 

556

 

666

 

(1,751)

 

-

Segment operating income (loss)

 

52,077

 

45,109

 

7,189

 

(4,908)

 

99,467

Total assets

 

267,216

 

176,086

 

16,077

 

71,433 

 

530,812

Capital expenditures

 

7,607

 

4,254

 

189

 

1,607 

 

13,657

Depreciation and amortization

 

5,970

 

2,758

 

299

 

1,488 

 

10,515

                     

(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 in 2006. Core Laboratories LP is a wholly 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: balance sheets as of June 30, 2009 and December 31, 2008, statements of operations for each of three and six months ended June 30, 2009 and 2008 and the statements of cash flows for each of the six months ended June 30, 2009 and 2008 of (a) Core Laboratories N.V., parent/guarantor, (b) Core Laboratories LP, issuer of public debt securities guaranteed by Core Laboratories N.V., (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.
 

12


 

Condensed Consolidating Balance Sheets (Unaudited)

               
                       
   

(In thousands)

June 30, 2009

     

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

$        39,785 

 

$        48,499 

 

$       14,962 

 

$                   - 

 

$       103,246

 

Accounts receivable, net

 

29,219 

 

94,726 

 

 

123,946

 

Inventories, net

 

3,774 

 

33,084 

 

 

36,858

 

Prepaid expenses and other current assets

6,252 

 

8,654 

 

9,584 

 

 

24,490

     

46,038 

 

90,146 

 

152,356 

 

 

288,540

                       

PROPERTY, PLANT AND EQUIPMENT, net

 

22,504 

 

77,785 

 

 

100,289

GOODWILL AND INTANGIBLES, net

46,986 

 

8,124 

 

100,270 

 

 

155,380

INTERCOMPANY RECEIVABLES

63,155 

 

215,531 

 

478,681 

 

(757,367)

 

-

INVESTMENT IN AFFILIATES

490,690 

 

 

1,333,250 

 

(1,823,519)

 

421

DEFERRED TAX ASSET

2,649 

 

11,382 

 

6,984 

 

 

21,015

OTHER ASSETS

2,394 

 

6,343 

 

1,492 

 

 

10,229

   

TOTAL ASSETS

$      651,912 

 

$      354,030 

 

$  2,150,818 

 

$   (2,580,886)

 

$       575,874

                       
   

LIABILITIES AND EQUITY

               

CURRENT LIABILITIES:

                 
 

Accounts payable

$             343 

 

$          1,898 

 

$       24,599 

 

$                   - 

 

$         26,840

 

Other accrued expenses

3,122 

 

27,710 

 

27,184 

 

 

58,016

     

3,465 

 

29,608 

 

51,783 

 

 

84,856

                       

LONG-TERM DEBT

 

201,709 

 

 

 

201,709

DEFERRED COMPENSATION

6,249 

 

7,565 

 

653 

 

 

14,467

INTERCOMPANY PAYABLES

392,149 

 

 

365,218 

 

(757,367)

 

-

OTHER LONG-TERM LIABILITIES

15,239 

 

13,403 

 

9,274 

 

 

37,916

                       

SHAREHOLDERS' EQUITY

234,810 

 

101,745 

 

1,721,774 

 

(1,823,519)

 

234,810

   

NON-CONTROLLING INTEREST

 

 

2,116 

 

 

2,116

TOTAL EQUITY

234,810 

 

101,745 

 

1,723,890 

 

(1,823,519)

 

236,926

                       
   

TOTAL LIABILITIES AND EQUITY

$      651,912 

 

$      354,030 

 

$  2,150,818

 

$   (2,580,886)

 

$      575,874


 

13


 

 

Condensed Consolidating Balance Sheets (Unaudited)

               
                       
   

(In thousands)

December 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

$          13,347

 

$       11,027 

 

$       11,764 

 

$                 - 

 

$       36,138

 

Accounts receivable, net

232

 

34,346 

 

109,715 

 

 

144,293

 

Inventories, net

-

 

3,683 

 

31,155 

 

 

34,838

 

Prepaid expenses and other current assets

4,989

 

6,630 

 

8,757 

 

 

20,376

     

18,568

 

55,686 

 

161,391 

 

 

235,645

                       

PROPERTY, PLANT AND EQUIPMENT, net

-

 

24,072 

 

79,391 

 

 

103,463

GOODWILL AND INTANGIBLES, net

46,986

 

8,303 

 

100,303 

 

 

155,592

INTERCOMPANY RECEIVABLES

108,491

 

318,780 

 

456,421 

 

(883,692)

 

-

INVESTMENT IN AFFILIATES

389,500

 

 

1,147,137 

 

(1,536,296)

 

341

DEFERRED TAX ASSET

3,283

 

10,179 

 

4,246 

 

 

17,708

OTHER ASSETS

2,319

 

5,215 

 

1,252 

 

 

8,786

   

TOTAL ASSETS

$      569,147

 

$      422,235 

 

$   1,950,141 

 

$   (2,419,988)

 

$       521,535

                       
   

LIABILITIES AND EQUITY

               

CURRENT LIABILITIES:

                 
 

Accounts payable

$              626

 

$ 8,364 

 

$        32,598 

 

$                  - 

 

$         41,588

 

Other accrued expenses

4,221

 

20,940 

 

28,941 

 

 

54,102

     

4,847

 

29,304 

 

61,539 

 

 

95,690

                       

LONG-TERM DEBT

-

 

194,568 

 

 

 

194,568

DEFERRED COMPENSATION

6,118

 

6,138 

 

559 

 

 

12,815

INTERCOMPANY PAYABLES

356,963

 

96,351 

 

430,378 

 

(883,692)

 

-

OTHER LONG-TERM LIABILITIES

15,092

 

7,276 

 

7,809 

 

 

30,177

                       

SHAREHOLDERS' EQUITY

186,127

 

88,598 

 

1,447,698 

 

(1,536,296)

 

186,127

   

NON-CONTROLLING INTEREST

-

 

 

2,158 

 

 

2,158

TOTAL EQUITY

186,127

 

88,598 

 

1,449,856 

 

(1,536,296)

 

188,285

                       
   

TOTAL LIABILITIES AND EQUITY

$      569,147

 

$      422,235 

 

$   1,950,141 

 

$   (2,419,988)

 

$      521,535


 

14


 

 

Condensed Consolidating Statements of Operations (Unaudited)

             
                       
   

(In thousands)

Three Months Ended June 30, 2009

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

REVENUES

                 
 

Operating revenues

$                   - 

 

$      40,675 

 

$       126,587 

 

$                  - 

 

$     167,262 

 

Intercompany revenues

355 

 

6,758 

 

19,745 

 

(26,858)

 

 

Earnings from consolidated affiliates

33,141 

 

 

93,831 

 

(126,972)

 

   

Total revenues

33,496 

 

47,433 

 

240,163 

 

(153,830)

 

167,262 

                       

OPERATING EXPENSES

                 
 

Operating costs

308 

 

21,426 

 

87,263 

 

 

108,997 

 

General and administrative expenses

1,992 

 

4,689 

 

 

 

6,684 

 

Depreciation and amortization

 

1,379 

 

4,527 

 

 

5,906 

 

Other expense (income), net

(3,282)

 

3,499 

 

24,454 

 

(30,684)

 

(6,013)

                     

Operating income

34,478 

 

16,440 

 

123,916 

 

(123,146)

 

51,688 

Interest expense

418 

 

3,411 

 

11 

 

 

3,840 

                   

Income before income tax expense

34,060 

 

13,029 

 

123,905 

 

(123,146)

 

47,848 

Income tax expense (benefit)

4,253 

 

6,652 

 

6,979 

 

 

17,884 

                   

Net income

29,807 

 

6,377 

 

116,926 

 

(123,146)

 

29,964 

Net income attributable to
    non-controlling interest

 

 

157 

 

 

157 

                   

Net income attributable to
    Core Laboratories

$           29,807 

 

$        6,377 

 

$       116,769 

 

$    (123,146)

 

$       29,807 

 

Condensed Consolidating Statements of Operations (Unaudited)

             
                       
   

(In thousands)

Six Months Ended June 30, 2009

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

REVENUES

                 
 

Operating revenues

$                   - 

 

$      85,809 

 

$      260,329 

 

$                   - 

 

$     346,138 

 

Intercompany revenues

698 

 

13,357 

 

49,745 

 

(63,800)

 

 

Earnings from consolidated affiliates

63,428 

 

 

186,484 

 

(249,912)

 

   

Total revenues

64,126 

 

99,166 

 

496,558 

 

(313,712)

 

346,138 

                       

OPERATING EXPENSES

                 
 

Operating costs

620 

 

45,031 

 

179,378 

 

 

225,029 

 

General and administrative expenses

5,452 

 

10,499 

 

 

 

15,958 

 

Depreciation and amortization

 

2,748 

 

8,866 

 

 

11,614 

 

Other expense (income), net

(3,293)

 

7,634 

 

52,022 

 

(61,133)

 

(4,770)

                     

Operating income

61,347 

 

33,254 

 

256,285 

 

(252,579)

 

98,307 

Interest expense

893 

 

6,716 

 

31 

 

 

7,640 

                   

Income before income tax expense

60,454 

 

26,538 

 

256,254 

 

(252,579)

 

90,667 

Income tax expense (benefit)

1,455 

 

11,438 

 

18,571 

 

 

31,464 

                   

Net income

58,999 

 

15,100 

 

237,683 

 

(252,579)

 

59,203 

Net income attributable to
    non-controlling interest

 

 

204 

 

 

204 

 

 

 

 

 

 

     

 

Net income attributable to
    Core Laboratories

$         58,999 

 

$        15,100 

 

$     237,479 

 

$       (252,579

 

$       58,999 


 

15


 

 

Condensed Consolidating Statements of Cash Flows (Unaudited)

             
                       
   

(In thousands)

Six Months Ended June 30, 2009

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

                   

Net cash provided by operating activities

$        39,495 

 

$       39,163 

 

$         7,609 

 

$                - 

 

$       86,267 

                 

 

   

CASH FLOWS FROM INVESTING ACTIVITIES:

               
 

Capital expenditures

 

(1,022)

 

(4,298)

 

 

(5,320)

 

Patents and other intangibles

 

 

(151)

 

 

(151)

 

Proceeds from sale of assets

 

175 

 

284 

 

 

459 

 

Premiums on life insurance

 

(844)

 

 

 

(844)

Net cash used in investing activities

 

(1,691)

 

(4,165)

 

 

(5,856)

                   

CASH FLOWS FROM FINANCING ACTIVITIES:

               
 

Stock options exercised

302 

 

 

 

 

302 

 

Excess tax benefit from stock-based payments

127 

 

 

 

 

127 

Non-controlling interest - dividends

(246)

(246)

 

Dividends paid

(4,597)

 

 

 

 

(4,597)

 

Repurchase of common shares

(8,889)

 

 

 

 

(8,889)

Net cash used in financing activities

(13,057)

 

 

(246)

 

 

(13,303)

                   

NET CHANGE IN CASH AND CASH|
   EQUIVALENTS

26,438 

 

37,472 

 

3,198 

 

 

67,108 

CASH AND CASH EQUIVALENTS,
   beginning of period

13,347 

 

11,027 

 

11,764 

 

 

36,138 

CASH AND CASH EQUIVALENTS,
   end of period

$        39,785 

 

$        48,499 

 

$       14,962 

 

$                - 

 

$      103,246 



 

16


 

 

Condensed Consolidating Statements of Operations (Unaudited)

             
                       
   

(In thousands)

Three Months Ended June 30, 2008

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

REVENUES

                 
 

Operating revenues

$                   - 

 

$      44,920 

 

$       152,768 

 

$                    - 

 

$      197,688 

 

Intercompany revenues

344 

 

5,057 

 

34,768 

 

(40,169)

 

 

Earnings from consolidated affiliates

34,609 

 

 

63,947 

 

(98,556)

 

   

Total revenues

34,953 

 

49,977 

 

251,483 

 

(138,725)

 

197,688 

                       

OPERATING EXPENSES

                 
 

Operating costs

334 

 

25,512 

 

105,064 

 

 

130,910 

 

General and administrative expenses

2,974 

 

4,140 

 

45 

 

 

7,159 

 

Depreciation and amortization

 

1,328 

 

3,948 

 

 

5,276 

 

Other expense (income), net

(1,303)

 

2,153 

 

27,362 

 

(28,965)

 

(753)

                     

Operating income

32,948 

 

16,844 

 

115,064 

 

(109,760)

 

55,096 

Interest expense

21 

 

7,979 

 

 

 

8,000 

                   

Income before income tax expense

32,927 

 

8,865 

 

115,064 

 

(109,760)

 

47,096 

Income tax expense (benefit)

560 

 

2,736 

 

11,356 

 

 

14,652 

                   

Net income

32,367 

 

6,129 

 

103,708 

 

(109,760)

 

32,444 

Net income attributable to
    non-controlling interest

 

 

77 

 

 

77 

                   

Net income attributable to
    Core Laboratories

$           32,367 

 

$        6,129 

 

$       103,631 

 

$       (109,760)

 

$        32,367 

 

 

Condensed Consolidating Statements of Operations (Unaudited)

             
                       
   

(In thousands)

Six Months Ended June 30, 2008

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

REVENUES

                 
 

Operating revenues

$                   - 

 

$      84,585 

 

$      292,540 

 

$                    - 

 

$      377,125 

 

Intercompany revenues

611 

 

8,909 

 

67,437 

 

(76,957)

 

 

Earnings from consolidated affiliates

70,160 

 

 

159,229 

 

(229,389)

 

   

Total revenues

70,771 

 

93,494 

 

519,206 

 

(306,346)

 

377,125 

                       

OPERATING EXPENSES

                 
 

Operating costs

631 

 

46,673 

 

203,079 

 

 

250,383 

 

General and administrative expenses

6,494 

 

8,906 

 

48 

 

 

15,448 

 

Depreciation and amortization

 

2,700 

 

7,815 

 

 

10,515 

 

Other expense (income), net

3,234 

 

2,976 

 

49,195 

 

(54,093)

 

1,312 

                     

Operating income

60,412 

 

32,239 

 

259,069 

 

(252,253)

 

99,467 

Interest expense

57 

 

12,725 

 

 

 

12,782 

                   

Income before income tax expense

60,355 

 

19,514 

 

259,069 

 

(252,253)

 

86,685 

Income tax expense (benefit)

1,241 

 

4,099 

 

22,051 

 

 

27,391 

                   

Net income

         59,114 

 

       15,415 

 

     237,018 

 

      (252,253)

 

       59,294 

Net income attributable to
    non-controlling interest

 

 

180 

 

 

180 

                   

Net income attributable to
    Core Laboratories

$          59,114 

 

$      15,415 

 

$      236,838 

 

$       (252,253)

 

$      59,114 


 

17


 

 

Condensed Consolidating Statements of Cash Flows (Unaudited)

             
                       
   

(In thousands)

Six Months Ended June 30, 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

$      25,271 

 

$      26,150 

 

$      21,982 

 

$                - 

 

$     73,403 

                 

   

CASH FLOWS FROM INVESTING ACTIVITIES:

               
 

Capital expenditures

 

(6,212)

 

(7,445)

 

 

(13,657)

 

Patents and other intangibles

 

(25)

 

(127)

 

 

(152)

 

Cash in escrow

 

 

(13,000)

 

 

(13,000)

 

Non-controlling interest - contribution

 

 

370 

 

 

370 

 

Proceeds from sale of assets

 

2,235 

 

855 

 

 

3,090 

 

Premiums on life insurance

 

(704)

 

 

 

(704)

Net cash used in investing activities

 

(4,706)

 

(19,347)

 

 

(24,053)

                   

CASH FLOWS FROM FINANCING ACTIVITIES:

               
 

Repayment of debt

(2,257)

 

(5,000)

 

 

 

(7,257)

 

Proceeds from debt borrowings

 

5,000 

 

 

 

5,000 

 

Capital lease obligations

 

 

(3)

 

 

(3)

 

Stock options exercised

690 

 

 

 

 

690 

 

Repurchase of common shares

(29,780)

 

 

 

 

(29,780)

 

Excess tax benefit from stock-based payments

11,011 

 

 

 

 

11,011 

Net cash used in financing activities

(20,336)

 

 

(3)

 

 

(20,339)

                   

NET CHANGE IN CASH AND CASH
   EQUIVALENTS

4,935 

 

21,444 

 

2,632 

 

 

29,011 

CASH AND CASH EQUIVALENTS,
   beginning of period

6,712 

 

7,818 

 

11,087 

 

 

25,617 

CASH AND CASH EQUIVALENTS,
   end of period

$       11,647 

 

$      29,262 

 

$      13,719 

 

$                - 

 

$       54,628 


 

 

13. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2008, the FASB issued FSP No. FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). FSP 132(R)-1 provides guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009 with early adoption permitted. We are currently evaluating the impact of FSP 132(R)-1 but do not expect the pronouncement to have an impact on our financial position or results of operations.


 

18

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 June 30, 2009 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, 2008.

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 4,800 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 on Form 10-Q 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 Form 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 based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, 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

   

-

the financial condition of our client base and their ability to fund capital expenditures.


 

19


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, 2008, as well as the other reports 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 for 2009 that are based primarily on market conditions existing at the time our targets are established. Based on discussions late in 2008 with our clients and our view of the oil and gas industry, we anticipated that in 2009, spending by our international clients would soften and we expected North American spending to decrease significantly. Given the sharp declines in commodity prices over the last 12 months and announced reductions in capital expenditure programs by certain of our clients, oilfield activity levels may not grow at the same rate as earlier expected, and in all likelihood will decrease further on a year over year basis. For example, the North American rig count was down 27% year over year in the first quarter of 2009 and for the second quarter was down 50% year over year.

Results of Operations

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

(Unaudited)

Three Months Ended June 30,

 

% Change

 

2009

 

2008

 

2009/2008

REVENUES:

     

Services

$  134,671 

 

81% 

 

$ 153,994 

 

78% 

 

(13%)

Product sales

32,591 

 

19% 

 

43,694 

 

22% 

 

(25%)

  Total revenues

167,262 

 

100% 

 

197,688 

 

100% 

 

(15%)

OPERATING EXPENSES:

                 

Cost of services*

84,401 

 

63% 

 

99,892 

 

65% 

 

(16%)

Cost of sales*

24,596 

 

75% 

 

31,018 

 

71% 

 

(21%)

  Total cost of services and sales

108,997 

 

65% 

 

130,910 

 

66% 

 

(17%)

General and administrative expenses

6,684 

 

4% 

 

7,159 

 

3% 

 

(7%)

Depreciation and amortization

5,906 

 

4% 

 

5,276 

 

3% 

 

12% 

Other expense, net

(6,013)

 

(4%)

 

(753)

 

 

699%

Operating income

51,688 

 

31% 

 

55,096 

 

28% 

 

(6%)

Interest expense

3,840 

 

2% 

 

8,000 

 

4% 

 

(52%)

Income before income tax expense

47,848 

 

29% 

 

47,096 

 

24% 

 

2% 

Income tax expense

17,884 

 

11% 

 

14,652 

 

8% 

 

22% 

Net income

29,964 

 

18% 

 

32,444 

 

16% 

 

(8%)

Net income attributable to
    non-controlling interest

157 

 

-    

 

77 

 

-    

 

104%

Net income attributable to
    Core Laboratories N.V.

$   29,807 

 

18% 

 

$   32,367 

 

16% 

 

(8%)

                   

*Percentage based on applicable revenue rather than total revenue

       


 

20


 

(Unaudited)

Six Months Ended June 30,

 

% Change

 

2009

 

2008

 

2009/2008

REVENUES:

     

Services

$  276,363 

 

80% 

 

$ 292,403 

 

78% 

 

(5%)

Product sales

69,775 

 

20% 

 

84,722 

 

22% 

 

(18%)

  Total revenues

346,138 

 

100% 

 

377,125 

 

100% 

 

(8%)

OPERATING EXPENSES:

                 

Cost of services*

172,697 

 

62% 

 

191,051 

 

65% 

 

(10%)

Cost of sales*

52,332 

 

75% 

 

59,332 

 

70% 

 

(12%)

  Total cost of services and sales

225,029 

 

65% 

 

250,383 

 

66% 

 

(10%)

General and administrative expenses

15,958 

 

5% 

 

15,448 

 

4% 

 

3% 

Depreciation and amortization

11,614 

 

3% 

 

10,515 

 

3% 

 

10% 

Other expense, net

(4,770)

 

(1%)

 

1,312 

 

1% 

 

(464%)

Operating income

98,307 

 

28% 

 

99,467 

 

26% 

 

(1%)

Interest expense

7,640 

 

2% 

 

12,782 

 

3% 

 

(40%)

Income before income tax expense

90,667 

 

26% 

 

86,685 

 

23% 

 

5% 

Income tax expense

31,464 

 

9% 

 

27,391 

 

7% 

 

15% 

Net income

59,203 

 

17% 

 

59,294 

 

16% 

 

-    

Net income attributable to
    non-controlling interest

204 

 

-    

 

180 

 

-    

 

13% 

Net income attributable to
    Core Laboratories N.V.

$    58,999 

 

17% 

 

$   59,114 

 

16% 

 

-   

                   

*Percentage based on applicable revenue rather than total revenue

       

 

Operating Results for the Three and Six Months Ended June 30, 2009 Compared to the Three and Six Months Ended June 30, 2008 (unaudited)

Service Revenues

Service revenues decreased to $134.7 million for the second quarter of 2009, down 13% when compared to $154.0 million for the second quarter of 2008. For the six months ended June 30, 2009, service revenues decreased 5% to $276.4 million compared to $292.4 million for the respective period in 2008. Our service revenues declined slightly over the prior three and six months ended June 30, 2008 when oil prices had reached all time highs and natural gas prices were at record highs. We have experienced less downward pressures due to our significant international operations and projects. Some of our projects that continue to provide meaningful revenue streams are in the Middle East, Asia-Pacific, offshore deepwater regions of the Gulf of Mexico and the southern-Atlantic margins off the coast of West Africa and Brazil.

Product Sale Revenues

Revenues associated with product sales decreased to $32.6 million for the second quarter of 2009, down 25% from $43.7 million for the second quarter of 2008. For the six months ended June 30, 2009, product sale revenues decreased 18% to $69.8 million compared to $84.7 million for the same period in 2008. Our product sales revenues were impacted by the significant decline in the North American drilling activity; however, our revenues declined at a much lower rate compared to the 50% and 38% decrease in the average North American rig count year over year second quarter and year to date, respectively. This was due primarily from the continued market penetration and acceptance of our specialized optimizing technologies introduced in 2007 and 2008, which are focused on high-end well completion and stimulation programs mainly in the Haynesville, Marcellus and Eagle Ford shale plays.

Cost of Services

Cost of services expressed as a percentage of service revenue was 63% for the quarter ended June 30, 2009, which was down from 65% for the same period in 2008. For the six months ending June 30, 2009, cost of services expressed as a percentage of service revenue was 62% as compared to 65% for the same period for 2008. The decline in the cost of services relative to service revenue was primarily a result of proactive expense control actions put in place to protect against potential market declines.
 

 

21


 

Cost of Sales

Cost of sales as a percentage of product sales revenues was 75% for the quarter ended June 30, 2009, up from 71% for the same period in 2008. For the six months ending June 30, 2009, cost of product sales expressed as a percentage of sales revenue was 75% up from 70% for the same period in 2008. The reduction in margins came primarily from a decline in manufacturing efficiencies, which was caused by a reduction in manufacturing due to the significant decline in North American drilling activity.

General and Administrative Expenses

General and administrative expenses totaled $6.7 million for the second quarter of 2009, down 7% from the $7.2 million incurred in the second quarter of 2008, due to an emphasis on managing costs. For the six months ended June 30, 2009 and 2008, general and administrative expenses were $0.6 million higher, at $16.0 million from $15.4 million.

Depreciation and Amortization Expense

Depreciation and amortization expense increased to $5.9 million for the second quarter of 2009, up 12% when compared to $5.3 million for the second quarter of 2008. For the six months ended June 30, 2009, depreciation and amortization expense was $11.6 million, an increase of $1.1 million from the six months ended June 30, 2008. This increase in depreciation and amortization expense was due to the expansion of our capital expenditure program throughout 2008 which funded our operational growth.

Other Expense (Income), Net

Other expense (income), net consisted of the following at June 30, 2009 and 2008 (in thousands):

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2009

 

2008

 

2009

 

2008

 

(Unaudited)

 

(Unaudited)

Gain on sale of assets

$           (268)

 

$       (310)

 

$         (345)

 

$      (1,594)

Foreign exchange loss (gain)

(2,897)

267 

(1,009)

(479)

Interest income

(59)

 

(185)

 

(98)

 

(293)

Non-income tax accrual

(2,500)

 

 

(2,500)

 

5,030 

Other, net

(289)

 

(525)

 

(818)

 

(1,352)

  Total other expense (income), net

$        (6,013)

 

$       (753)

 

$      (4,770)

 

$        1,312 


 

During the first quarter of 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. During the second quarter of 2009 we released $2.5 million of the contingent liability as a result of finalizing a settlement agreement. Additionally in 2008, we recorded a gain of $1.1 million in connection with the sale of a small office building.

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

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2009

 

2008

 

2009

 

2008

 

(Unaudited)

 

(Unaudited)

Australian Dollar

$           (300)

 

$         (10)

 

$       (278)

 

$         (32)

Canadian Dollar

(1,115)

 

61 

 

(767)

 

276 

Euro

(376)

 

192 

 

(213)

 

(394)

Mexican Peso

(130)

 

(46)

 

 

(92)

Russian Ruble

(372)

 

(104)

 

224 

 

(261)

British Pound

(304)

57 

(232)

13 

Other currencies, net

(300)

117 

255 

11 

  Total loss (gain)

$        (2,897)

 

$         267 

 

$    (1,009)

 

$       (479)


 

22


 

Income Tax Expense

The effective tax rates for the second quarter of 2009 and 2008 were 37.4% and 31.1%, respectively. The increase in the effective tax rate for the second quarter of 2009 is primarily a result in a change in activity levels between jurisdictions with different tax rates and establishment of valuation allowances against deferred tax assets in tax jurisdictions where we no longer anticipate having sufficient taxable income to fully utilize these deferred tax assets.

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 three and six months ended June 30, 2009 and 2008 (in thousands):

 

Three Months Ended
June 30,

 

% Change

 

2009

 

2008

 

2009/2008

Revenues:

(Unaudited)

   

Reservoir Description

$    103,479

 

$    114,157

 

(9%)

Production Enhancement

52,014

 

71,706

 

(27%)

Reservoir Management

11,769

 

11,825

 

   Consolidated

$    167,262

 

$    197,688

 

(15%)

Operating income:

Reservoir Description

$     31,462 

 

$     29,059 

 

8% 

Production Enhancement

14,419 

 

23,169 

 

(38%)

Reservoir Management

3,484 

 

2,962 

 

18% 

Corporate and Other1

2,323 

 

(94)

 

NM 

   Consolidated

$     51,688 

 

$     55,096 

 

(6%)

           

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

"NM"  means not meaningful

 

Six Months Ended
June 30,

 

% Change

 

2009

 

2008

 

2009/2008

Revenues:

(Unaudited)

   

Reservoir Description

$    206,002

 

$    214,658

 

(4%)

Production Enhancement

115,114

 

138,730

 

(17%)

Reservoir Management

25,022

 

23,737

 

5% 

   Consolidated

$    346,138

 

$    377,125

 

(8%)

Operating income:

Reservoir Description

$     56,214 

 

$     52,077 

 

8% 

Production Enhancement

32,743 

 

45,109 

 

(27%)

Reservoir Management

6,962 

 

7,189 

 

(3%)

Corporate and Other1

2,388 

 

(4,908)

 

NM

   Consolidated

$     98,307 

 

$     99,467 

 

(1%)

           

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

"NM"  means not meaningful


 

23


Reservoir Description

Revenues from the Reservoir Description segment decreased 9%, or $10.7 million, to $103.5 million in the second quarter of 2009, compared to $114.2 million in the second quarter of 2008. For the six months ended June 30, 2009 revenues decreased 4%, or $8.7 million, to $206.0 million from $214.7 million for the six months ended June 30, 2008. The revenue decrease is the result of a significant decline in oil and gas prices from record highs reached in 2008. Due to our significant international operations and projects such as our reservoir rock and reservoir fluids characterization projects, we have not experienced as significant of a decline. We have experienced increased demand in the Middle East and Asia-Pacific and for our continued large scale core analyses studies as well as crude oil and derived petroleum products characterization studies on a global basis. Other areas that continue to provide revenue growth are the continued expansion of worldwide deepwater projects in West Africa, Brazil, Gulf of Mexico and North American gas shale plays in the Eagle Ford, Haynesville, Muskwa and other active fields.

Operating income in the second quarter of 2009 increased by 8%, or $2.4 million, to $31.5 million compared to $29.1 million for the second quarter of 2008. Operating income for the six months ended June 30, 2009 increased by 8%, or $4.1 million, to $56.2 million. The increase in operating income for the quarter was primarily due to continued emphasis on higher value and thus higher margin services on development and production related projects in addition to the de-emphasis of the more cyclical exploration regions coupled with an emphasis on controlling costs. Operating margins for the quarter and six months ended June 30, 2009 were 30% and 27%, respectively, compared to 25% and 24% for the same periods in 2008, respectively.

Production Enhancement

Revenues from the Production Enhancement segment decreased by 27%, or $19.7 million, to $52.0 million in the second quarter of 2009 as compared to $71.7 million in the second quarter in 2008. Revenues decreased by 17%, or $23.6 million, to $115.1 million for the six months ended June 30, 2009 as compared to $138.7 million for the same period in 2008. The decrease in revenues is due to the significant decline in North American drilling activity; however, our decline in revenues is less than the reduction in the average rig count for North America year over year for both the quarter and year to date periods ended June 30, 2009. The downward trend in the North America rig count has continued since the latter half of 2008 and the industry outlook for the rig count remains unclear. The primary reason for the slower decline in our revenues was our focus on high-end well completion and stimulation programs and the market penetration and client acceptance of our well perforating and completion products and our fracture diagnostic services.

Operating income in the second quarter of 2009 decreased by 38%, or $8.8 million, to $14.4 million from $23.2 million for the second quarter of 2008. Operating margins decreased to 28% in the second quarter of 2009 compared to 32% for the same period in 2008. For the six months ended June 30, 2009, operating income decreased to $32.7 million, a decrease of 27% over the same period in 2008. The decrease in margins were primarily due to a decline in manufacturing efficiencies from the reduction in manufacturing due to the significant decline in North American drilling activities, but has been offset somewhat by our ongoing market penetration of higher-margin services including our proprietary and patented fracture diagnostic technologies, such as our SpectraScan™ and recently introduced SpectraChem Plus™ tracer service coupled with an emphasis on controlling costs.

Reservoir Management

Revenues from the Reservoir Management segment remained flat in the second quarter of 2009 as compared to the second quarter of 2008. Revenues for the six months ended June 30, 2009 were $25.0 million, an increase of 5% from $23.7 million from the same period in 2008. The increase in revenue was due to continued interest in several of our existing multi-client reservoir studies including such studies in the south Atlantic off the coasts of West Africa and Brazil. The recent introduction of a joint industry project evaluating the petrophysical, geochemical and production characteristics of the Eagle Ford Shale in south Texas and the introduction of a Global Gas Shale Study that examines the gas shale potential in central and southern Europe, north Africa, India, China and Australia, among other regions are expected to expand revenues in the segment along with the continued participation in our North American Gas Shale Study.

Operating income in the second quarter of 2009 increased 18% to $3.5 million from $3.0 million for the second quarter of 2008. The increase in operating income was primarily related to the mix of activity in our consortium projects and timing of analysis work on these projects. For the six months ended June 30, 2009, operating income was $7.0 million, as compared to operating income of $7.2 million from the same period in 2008.
 

 

24


 

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 regarding the cash that was available in the period that was in excess of our needs to fund our capital expenditures and operating activities. 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. Free cash flow does not represent residual cash available for distribution because we may have other non-discretionary expenditures that are not deducted from the measure. 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 GAAP for the six months ended June 30, 2009 and 2008 (in thousands):

   

Six Months Ended June 30,

 

% Change

   

2009

 

2008

 

2009/2008

Free cash flow calculation:

(Unaudited)

Net cash provided by operating activities

$     86,267

$   73,403

18% 

Less: capital expenditures

 

5,320

 

13,657

 

(61%)

    Free cash flow

 

$     80,947

 

$   59,746

 

35% 

The increase in free cash flow in 2009 compared to 2008 was due to a decrease in working capital excluding cash, primarily from the greater collection of receivables over the payments made to vendors and a decrease in capital expenditures.

At June 30, 2009 and December 31, 2008, we had working capital of $203.7 million and $140.0 million, respectively. The increase in working capital is driven primarily from an increase in cash and a decrease in trade accounts payable and accrued payroll offset by a decrease in accounts receivable.

Cash Flows

The following table summarizes cash flows for the six months ended June 30, 2009 and 2008 (in thousands):

   

Six Months Ended June 30,

 

% Change

   

2009

 

2008

 

2009/2008

Cash provided by/(used in):

(Unaudited)

    Operating activities

$    86,267 

$    73,403 

18% 

    Investing activities

(5,856)

(24,053)

(76%)

    Financing activities

 

(13,303)

 

(20,339)

 

(35%)

Net change in cash and cash equivalents

 

$    67,108 

 

$     29,011 

 

131% 

The increase in cash flows provided by operating activities was primarily attributable to a reduction in receivables partially offset by a reduction in liabilities.

Cash flows used in investing activities declined slightly due to a decrease in capital expenditures for the period of $8.3 million and an acquisition in 2008 for $13.0 million offset by a reduction in the cash proceeds from the sale of assets.

The decrease in cash flows used in financing activities related primarily to a decrease in the number of shares repurchased under our common share repurchase program. In the first six months of 2009, we repurchased 134,324 shares for an aggregate price of $8.9 million compared to 260,541 shares for an aggregate price of $29.8 million during the same period in 2008. The decrease in cash flows used in financing activities was also attributable to a reduction in the excess tax benefits from stock-based compensation that was recognized in 2009 offset by dividends of $4.6 million paid in 2009 and the net reduction in debt of $2.3 million.

We maintain a revolving credit facility (the "Credit Facility") that allows for an aggregate borrowing capacity of $100.0 million. The Credit 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 $9.8 million at June 30, 2009 relating to certain projects in progress. Our available borrowing capacity under the Credit Facility at June 30, 2009 was $90.2 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 June 30, 2009. 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, dividend payments and future acquisitions.
 

25


 

Recent Accounting Pronouncements

In December 2008, the FASB issued FSP No. FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). FSP 132(R)-1 provides guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009 with early adoption permitted. We are currently evaluating the impact of FSP 132(R)-1 but do not expect the pronouncement to have an impact on our financial position or results of operations.

 

 

 

 

 

 

 


 

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Item 3. Quantitative and Qualitative Disclosures About 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 for the fiscal year ended December 31, 2008.

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, 2008.

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 our 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 June 30, 2009 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 been no changes in our system of 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 June 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

27

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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.

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 June 30, 2009:

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

April 1-30, 2009 (1)

 

5,996

 

$ 74.01

 

5,996

 

3,960,285

May 1-31, 2009 (2)

 

6,723

 

$ 83.33

 

6,723

 

3,976,712

June 1-30, 2009

 

-

 

-

 

-

 

3,977,712

Total

 

12,719

 

$ 78.94

 

12,719

   

(1) Contains 5,996 shares valued at $0.4 million, or $74.01 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 April 2009.

(2) Contains 6,723 shares valued at $0.6 million, or $83.33 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 May 2009.

Under Dutch law, and subject to certain Dutch statutory provisions, and with shareholder approval we will be permitted to repurchase up to 50% of our issued share capital in open market purchases. In connection with our initial public offering in September 1995 and Dutch law in effect at the time, our shareholders authorized our Management Board to repurchase up to 10% of our issued share capital for a period of 18 months. On January 29, 2009, our shareholders authorized the extension through July 29, 2010 to purchase up to 10% of our issued shares and an additional 15.6% of our issued shares to fulfill obligations relating to the Notes or warrants. The repurchase of shares in the open market is at the discretion of management pursuant to this shareholder authorization.

Item 4. Submission of Matters to a Vote of Security Holders

At our annual meeting of shareholders on May 14, 2009, our shareholders voted on all matters presented to them with the results of the vote below.

Shareholders elected two Class III Supervisory Directors consisting of Richard L. Bergmark and Alexander Vriesendorp, to serve until our annual meeting in 2012 or until their successors have been duly elected and qualified.

The vote tabulation for the individual Supervisory Directors was as follows:

Director

 

Votes for

 

Votes withheld

Richard L. Bergmark

 

18,948,718

 

1,575,642

Alexander Vriesendorp

 

20,472,272

 

52,088

The following Directors' terms continue beyond 2009:

Director

 

Year Term Expires

D. John Ogren

 

2010

Joseph R. Perna

 

2010

Jacobus Schouten

 

2010

David M. Demshur

 

2011

Rene R. Joyce

 

2011

Michael C. Kearney

 

2011


 

28


Shareholders confirmed the Dutch Statutory Annual Accounts for the year ended December 31, 2008. The proposal was approved by 19,425,637 votes in favor, 35,323 votes against, with 1,063,399 abstentions.

Shareholders approved the extension of the authority of the Supervisory Board to issue and/or to grant rights (including options to purchase) of the Company's common and/or preferred shares up to a maximum of 20% of the outstanding shares per annum until May 14, 2014. The proposal was approved by 17,377,222 votes in favor, 1,077,147 votes against, with 20,344 abstentions and 2,049,647 broker non-votes.

Shareholders approved the extension of the authority of the Supervisory Board to limit or exclude the pre-emptive rights of the holders of our common shares and/or preference shares up to a maximum of 20% of outstanding shares per annum until May 14, 2014. The proposal was approved by 17,528,385 votes in favor, 921,721 votes against, with 24,607 abstentions and 2,049,647 broker non-votes.

Shareholders ratified the appointment of PricewaterhouseCoopers LLP as our registered independent accountants for the year ending December 31, 2009. The proposal was approved by 20,489,652 votes in favor, 16,354 votes against, with 18,353 abstentions.

 

 

 


 

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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.

DEF 14A filed on
May 17, 2006 for Annual Meeting of Shareholders (File No. 001-14273)

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:

July 23, 2009

By:

/s/ Richard L. Bergmark                    

   

Richard L. Bergmark

   

Chief Financial Officer

   

(Duly Authorized Officer and

   

Principal Financial Officer)

 

 


 

 

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