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CORE LABORATORIES N V - Quarter Report: 2009 March (Form 10-Q)


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

     

FORM 10-Q

 

(Mark One)

 

X

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

 

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 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 (Sec. 232.405 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 ] 9;           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

April 23, 2009 was 22,947,132.

 

 

CORE LABORATORIES N.V.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2009

 

INDEX

 
 

Page

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 
     
 

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

1

     
 

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

 

March 31, 2009 and 2008

2

     

 

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

 
 

March 31, 2009 and 2008

3

     
 

Notes to the Unaudited Consolidated Interim Financial Statements

4

     

Item 2.

Management's Discussion and Analysis of Financial Condition and

 
 

     Results of Operations

16

     

Item 3.

Quantitative and Qualitative Disclosures of Market Risk

22

     

Item 4.

Controls and Procedures

22

     
     

PART II - OTHER INFORMATION

     

Item 1.

Legal Proceedings

23

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

     

Item 4.

Submission of Matters to a Vote of Security Holders

23

     

Item 6.

Exhibits

24

     
 

Signature

25

     

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CORE LABORATORIES N.V.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

     

March 31,

 

December 31,

     

2009

 

2008

   

ASSETS

(Unaudited)

CURRENT ASSETS:

     
 

Cash and cash equivalents

$       73,036 

 

$       36,138 

 

Accounts receivable, net of allowance for doubtful accounts of $3,644 and

     
 

  $3,535 at 2009 and 2008, respectively

131,557 

 

144,293 

 

Inventories, net

32,976 

 

34,838 

 

Prepaid expenses and other current assets

20,792 

 

20,376 

   

TOTAL CURRENT ASSETS

258,361 

 

235,645 

           

PROPERTY, PLANT AND EQUIPMENT, net

100,582 

 

103,463 

INTANGIBLES, net

6,907 

 

6,992 

GOODWILL

148,600 

 

148,600 

DEFERRED TAX ASSET

19,802 

17,708 

OTHER ASSETS

9,034 

9,127 

   

TOTAL ASSETS

$     543,286 

 

$     521,535 

           
   

LIABILITIES AND EQUITY

     

CURRENT LIABILITIES:

     
 

Accounts payable

$       27,218 

 

$       41,588 

 

Accrued payroll and related costs

25,443 

 

28,637 

 

Taxes other than payroll and income

6,445 

 

7,949 

 

Unearned revenues

8,025 

 

7,932 

Income tax payable

9,476 

Other accrued expenses

10,040 

9,584 

   

TOTAL CURRENT LIABILITIES

86,647 

 

95,690 

       

LONG-TERM DEBT

198,106 

 

194,568 

DEFERRED COMPENSATION

12,951 

 

12,815 

OTHER LONG-TERM LIABILITIES

36,651 

 

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 22,925,078 outstanding at 2009

     

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

1,430 

 

1,430 

 

Additional paid-in capital

52,460 

 

53,019 

 

Retained earnings

409,156 

 

382,266 

 

Accumulated other comprehensive (loss)

(4,869)

 

(4,927)

 

Treasury shares (at cost), 2,594,878 at 2009 and 2,499,923 at 2008

(251,451)

 

(245,661)

 

      Total Core Laboratories N.V. shareholders' equity

206,726 

 

186,127 

 

Non-controlling interest

2,205 

 

2,158 

TOTAL EQUITY

208,931 

188,285 

   

TOTAL LIABILITIES AND EQUITY

$      543,286 

 

$      521,535 

 

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

1

 

 

CORE LABORATORIES N.V.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

   

Three Months Ended

March 31,

 

2009

 

2008

   

(Unaudited)

REVENUES:

     
 

Services

$     141,692 

 

$     138,409 

 

Product sales

37,184 

 

41,028 

   

178,876 

 

179,437

OPERATING EXPENSES:

     
 

Cost of services, exclusive of depreciation expense shown below

88,296 

 

91,159 

 

Cost of sales, exclusive of depreciation expense shown below

27,736 

 

28,314 

 

General and administrative expenses

9,274 

 

8,289 

 

Depreciation

5,527 

 

5,097 

 

Amortization

181 

 

142 

 

Other expense, net

1,243 

 

2,065 

OPERATING INCOME

46,619 

 

44,371 

Interest expense

3,800 

 

4,782 

Income before income tax expense

42,819 

 

39,589 

Income tax expense

13,580 

 

12,739 

Net income

29,239 

 

26,850 

    Net income attributable to non-controlling interest

47 

 

103 

Net income attributable to Core Laboratories N.V.

$      29,192 

 

$      26,747 

       

EARNINGS PER SHARE INFORMATION:

     

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

$          1.27 

$          1.16 

       

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

$          1.26 

 

$          1.11 

       

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

     

Basic

22,970 

 

22,982 

       

Diluted

23,210 

 

23,998 

       
       

 

 

 

 

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

2

 

CORE LABORATORIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

     

Three Months Ended

March 31,

   

2009

 

2008

 

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net income

$        29,239 

 

$     26,850 

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

     
 

Net provision for doubtful accounts

424 

 

210 

 

Provisions for inventory obsolescence

22 

 

41 

 

Equity in earnings of affiliates

(48)

 

(55)

 

Stock-based compensation

1,322 

 

827 

 

Depreciation and amortization

5,708 

 

5,239 

 

Non-cash interest expense

3,574 

 

4,508 

Gain on sale of assets

(77)

(1,284)

Realization of pension obligation

58 

20 

 

Decrease in value of life insurance policies

603 

 

725 

 

Deferred income taxes

(3,638)

 

1,311 

 

Changes in assets and liabilities:

     

Accounts receivable

12,312 

(9,714)

   

Inventories

1,840 

 

(2,292)

   

Prepaid expenses and other current assets

1,127 

 

(6,363)

   

Other assets

85 

 

(1,281)

   

Accounts payable

(14,370)

 

(4,171)

   

Accrued expenses

5,327 

 

729 

   

Other long-term liabilities

6,610 

 

10,140 

 

Net cash provided by operating activities

50,118 

 

25,440 

CASH FLOWS FROM INVESTING ACTIVITIES:

     
   

Capital expenditures

(2,655)

 

(5,618)

   

Patents and other intangibles

(96)

 

(86)

   

Proceeds from sale of assets

86 

 

2,467 

   

Premiums on life insurance

(582)

 

(430)

 

Net cash used in investing activities

(3,247)

 

(3,667)

CASH FLOWS FROM FINANCING ACTIVITIES:

     
   

Repayment of debt borrowings

 

(6,120)

   

Proceeds from debt borrowings

 

5,000 

   

Capital lease obligations

 

(1)

   

Stock options exercised

169 

 

633 

   

Excess tax benefits from stock-based compensation

45 

 

10,440 

   

Dividends paid

(2,302)

 

   

Repurchase of common shares

(7,885)

 

(28,815)

 

Net cash used in financing activities

(9,973)

 

(18,863)

NET CHANGE IN CASH AND CASH EQUIVALENTS

36,898 

 

2,910 

CASH AND CASH EQUIVALENTS, beginning of period

36,138 

 

25,617 

CASH AND CASH EQUIVALENTS, end of period

$       73,036 

 

$     28,527 

 

 

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

Return to Index

3

 

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 for year-end reporting on Form 10-K.

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 month period ended March 31, 2009 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2009.

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.

These financial statements should be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

2. INVENTORIES

Inventories consist of the following (in thousands):

   

March 31,

 

December 31,

   

2009

 

2008

   

(Unaudited)

   

Finished goods

 

$        25,347

 

$        26,785

Parts and materials

 

6,387

 

7,190

Work in progress

 

1,242

 

863

  Total inventories, net

 

$        32,976

 

$        34,838

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

 

3. GOODWILL AND INTANGIBLES

We account for intangible assets with indefinite lives, including goodwill, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which requires us to evaluate these assets for impairment annually, or more frequently if an indication of impairment has occurred. Based upon our most recent evaluation, 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 three months ended March 31, 2009. The remaining composition of goodwill by business segment at March 31, 2009 is consistent with the amounts disclosed in our Annual Report on Form 10-K as of December 31, 2008.
 

4

 

4. DEBT AND CAPITAL LEASE OBLIGATIONS

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

   

March 31,

 

December 31,

   

2009

 

2008

   

(Unaudited)

Senior exchangeable notes

 

$     238,658

 

$     238,658

Discount on senior exchangeable notes

 

40,552

 

44,090

     Net senior exchangeable notes

$     198,106

$     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 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 diluted earnings per share was a decrease of $0.11 for the three months ended March 31, 2008.  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 March 31, 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 March 31, 2009, which resulted in additional non-cash interest expense of $3.5 million and $4.1 million for the three months ended March 31, 2009 and 2008, respectively. The Notes are exchangeable into shares of Core Laboratories N.V. under certain circumstances at a conversion rate of $93.73 or 10.6686 per $1,000 principal amount of the 238,658 Notes outstanding at March 31, 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 March 31, 2009 and December 31, 2008. At March 31, 2009, the Notes were trading at 97.7% 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 $126.37. The warrants become exercisable beginning in late December 2011 and expire in January 2012. The warrants have been purchased from Lehman OTC's 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 $10.3 million at March 31, 2009 relating to certain projects in progress. Our available borrowing capacity under the Credit Facility at March 31, 2009 was $89.7 million.
 

5

 

5. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

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

The following table summarizes the components of net periodic pension cost under this plan for the three months ended March 31, 2009 and 2008 (in thousands):

 

Three Months Ended

March 31,

 
 

2009

 

2008

 
 

(Unaudited)

 

Service cost

$        253 

 

$        286 

 

Interest cost

324 

 

338 

 

Expected return on plan assets

(178)

 

(306)

 

Amortization of transition asset

(22)

 

(25)

 

Amortization of prior service cost

40 

45 

Amortization of net loss

61 

   Net periodic pension cost

$        478 

 

$        338 

 

During the three month period ended March 31, 2009, we contributed approximately $2.3 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). We invest a significant portion of our cash on hand in an overnight money market account, which is carried at fair value. These balances are held as cash deposits during business hours and transferred in and out of the money market fund over night on a daily basis. Gains and losses related to the fair value changes in the deferred compensation assets and liabilities are recorded in General and Administrative Expenses in the Consolidated Statement of Operations. The following table summarizes the fair value balances (in thousands):

     

Fair Value Measurement at March 31, 2009

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets:

             

Money market and other investment fund assets

$    44,790

 

$     41,048

 

$       3,742

 

$               -

               

Liabilities:

             

Deferred compensation plan

$      5,776

 

$          771

 

$       5,005

 

$               -

 

     

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


 

6

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 Statement of Operations to Other Expense (Income), net. This adjustment required judgment, assumptions and estimations to quantify the uncertainties related to this contingent liability. Management has concluded the adjustment relates to prior periods, however as the amounts are not material, no prior periods have been restated. The contingent liability is included in Other Long-term Liabilities in the Consolidated Balance Sheet. Management will continue to assess on a quarterly basis the probable outcome of the settlement of these taxes. The ultimate settlement amount and timing of this contingent liability is uncertain, and could possibly expose us to expenses of approximately $20.0 million in excess of our current estimate. As of March 31, 2009, there has not been a change in management's view of the exposure or estimated settlement amount of this liability.

 

7. EQUITY

During the three months ended March 31, 2009, we repurchased 121,605 of our common shares for $7.9 million. Included in this total were rights to 3,605 shares valued at $0.3 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 month period ended March 31, 2009, we recognized tax benefits of $0.1 million relating to tax deductions in excess of book expense for stock-based compensation awards.  These tax benefits are recorded to additional paid-in capital to the extent deductions reduce current taxable income.

On January 22, 2009, we declared a quarterly $0.10 per share of common stock dividend that was paid on March 2, 2009. In addition on April 16, 2009, we declared a quarterly dividend of $0.10 per share of common stock payable May 27, 2009 to shareholders of record on April 27, 2009.

The following table summarizes our changes in equity for the three months ended March 31, 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

(865)

1,034 

169 

Stock based-awards

261 

1,061 

1,322 

Tax benefit of stock-based
    awards issued

45 

45 

Repurchase of common shares

(7,885)

(7,885)

Dividends paid

(2,302)

(2,302)

Comprehensive income:

Amortization of pension,
    net of tax

58 

58 

Net income

29,192 

47 

29,239 

Total comprehensive income

29,297 

March 31, 2009

$    1,430 

$     52,460 

$  409,156 

$       (4,869)

$  (251,451)

$       2,205 

$  208,931 


 

7

 

Comprehensive Income

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

   

Three months ended

   

March 31, 2009

 

March 31, 2008

   

(Unaudited)

Net income

 

$       29,239

 

$       26,850

Realization of pension obligation

 

58

 

20

  Total other comprehensive income

 

$       29,297

 

$       26,870

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

 

March 31,

 

December 31,

 

2009

 

2008

 

(Unaudited)

   

Prior service cost

$          (1,059)

 

$    (1,089)

Transition asset

438 

 

454 

Unrecognized net actuarial loss

(4,248)

 

(4,292)

      Total accumulated other comprehensive loss

$          (4,869)

 

$     (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 Statement 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.

 

8. EARNINGS PER SHARE

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

 

Three Months Ended

March 31,

 
 

2009

 

2008

 
 

(Unaudited)

 

Weighted average basic common shares outstanding

22,970

 

22,982

 

Effect of dilutive securities:

       

Stock options

100

153

Contingent shares

13

 

64

 

Restricted stock and other

127

 

137

 

Senior exchangeable notes and warrants

-

 

662

 

Weighted average diluted common and potential common shares outstanding

23,210

 

23,998

 

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 $126.18 per share.  Included in the Senior Exchangeable Notes line in the table above, these warrants had no dilutive impact on our earnings per share for the three month period ended March 31, 2009, as the average share price did not exceed the strike price of the warrants for the three month period. On October 3, 2008, the dealer of the warrants filed for bankruptcy protection and subsequently sold the warrants to a third-party dealer.
 

8

 

 

9. OTHER EXPENSE, NET

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

 

Three Months Ended

March 31,

 

2009

 

2008

 

(Unaudited)

Gain on sale of assets

$        (77)

 

$    (1,284)

Foreign exchange loss (gain)

1,888 

(746)

Interest income

(39)

 

(108)

Non-income tax accrual

 

5,030 

Other, net

(529)

 

(827)

  Total other expense, net

$    1,243 

 

$     2,065 

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. Additionally, 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

March 31,

 

2009

 

2008

 

(Unaudited)

Canadian Dollar

$        348 

 

$        215 

Euro

163 

 

(586)

Mexican Peso

132 

 

(47)

Malaysian Ringgit

136 

(55)

Russian Ruble

596 

 

(157)

Kazakhstan Tenge

167 

(3)

Other currencies, net

346 

(113)

  Total loss (gain)

$     1,888 

 

$      (746)

10. 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.

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):


 

9

 

(Unaudited)

 

Reservoir Description

 

Production Enhancement

 

Reservoir Management

 

Corporate & Other 1

 

Consolidated

Three Months Ended March 31, 2009

                 

Revenues from unaffiliated customers

 

$    102,523

 

$      63,100

 

$      13,253 

 

$             - 

 

$    178,876

Inter-segment revenues

 

123

 

361

 

381 

 

(865)

 

-

Segment operating income

 

24,752

 

18,324

 

3,478 

 

65 

 

46,619

Total assets

 

253,398

 

172,345

 

21,024 

 

96,519

 

543,286

Capital expenditures

 

2,063

 

587

 

 

 

2,655

Depreciation and amortization

 

3,357

 

1,462

 

177 

 

712 

 

5,708

                     

Three Months Ended March 31, 2008

                 

Revenues from unaffiliated customers

 

$   100,501

 

$      67,024

 

$      11,912

 

$             - 

 

$     179,437

Inter-segment revenues

 

233

 

193

 

315

 

(741)

 

-

Segment operating income (loss)

 

23,018

 

21,940

 

4,227

 

(4,814)

 

44,371

Total assets

 

248,200

 

172,796

 

22,385

 

53,043 

 

496,424

Capital expenditures

 

3,315

 

2,172

 

97

 

34 

 

5,618

Depreciation and amortization

 

2,929

 

1,386

 

153

 

771 

 

5,239

                     
                     

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

 

11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Core Laboratories N.V. has fully and unconditionally guaranteed all of the Notes issued by Core Laboratories LP in 2006. Core Laboratories LP is a 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 March 31, 2009 and December 31, 2008, statements of operations and the statements of cash flows for each of the three months ended March 31, 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.


 

10

 

Condensed Consolidating Balance Sheets (Unaudited)

               
                       
   

(In thousands)

March 31, 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

$        21,509 

 

$       40,246 

 

$        11,281 

 

$                  - 

 

$         73,036

 

Accounts receivable, net

279 

 

31,939 

 

99,339 

 

 

131,557

 

Inventories, net

 

3,643 

 

29,333 

 

 

32,976

 

Prepaid expenses and other current assets

5,655 

 

7,599 

 

7,538 

 

 

20,792

     

27,443 

 

83,427 

 

147,491 

 

 

258,361

                       

PROPERTY, PLANT AND EQUIPMENT, net

 

23,272 

 

77,310 

 

 

100,582

GOODWILL AND INTANGIBLES, net

46,986 

 

8,211 

 

100,310 

 

 

155,507

INTERCOMPANY RECEIVABLES

64,016 

 

234,850 

 

390,655 

 

(689,521)

 

-

INVESTMENT IN AFFILIATES

444,984 

 

 

1,221,135 

 

(1,665,729)

 

390

DEFERRED TAX ASSET

2,676 

 

11,491 

 

5,635 

 

 

19,802

OTHER ASSETS

2,101 

 

5,160 

 

1,383 

 

 

8,644

   

TOTAL ASSETS

$      588,206 

 

$      366,411 

 

$   1,943,919 

 

$   (2,355,250)

 

$        543,286

                       
   

LIABILITIES AND EQUITY

               

CURRENT LIABILITIES:

                 
 

Accounts payable

$             462 

 

$          4,923 

 

$        21,833 

 

$                   - 

 

$          27,218

 

Other accrued expenses

3,227 

 

19,343 

 

36,859 

 

 

59,429

     

3,689 

 

24,266 

 

58,692 

 

 

86,647

                       

LONG-TERM DEBT

 

198,106 

 

 

 

198,106

DEFERRED COMPENSATION

6,101 

 

6,237 

 

613 

 

 

12,951

DEFERRED TAX LIABILITY

 

 

 

 

-

INTERCOMPANY PAYABLES

354,494 

 

25,712 

 

309,315 

 

(689,521)

 

-

OTHER LONG-TERM LIABILITIES

17,196 

 

14,769 

 

4,686 

 

 

36,651

                       

SHAREHOLDERS' EQUITY

206,726 

 

97,321 

 

1,568,408 

 

(1,665,729)

 

206,726

   

NON-CONTROLLING INTEREST

 

 

2,205 

 

 

2,205

TOTAL EQUITY

206,726 

 

97,321 

 

1,570,613 

 

(1,665,729)

 

208,931

                       
   

TOTAL LIABILITIES AND EQUITY

$       588,206 

 

$      366,411 

 

$   1,943,919 

 

$    (2,355,250)

 

$       543,286 


 

11

 

 

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

DEFERRED TAX LIABILITY

-

 

 

 

 

-

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

 

 

12

 

 

Condensed Consolidating Statements of Operations (Unaudited)

             
                       
   

(In thousands)

Three Months Ended March 31, 2009

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

REVENUES

                 
 

Operating revenues

$                   - 

 

$      45,134 

 

$   133,742 

 

$                - 

 

$    178,876 

 

Intercompany revenues

343 

 

6,599 

 

30,000 

 

(36,942)

 

 

Earnings from consolidated affiliates

30,287 

 

 

92,653 

 

(122,940)

 

   

Total revenues

30,630 

 

51,733 

 

256,395 

 

(159,882)

 

178,876 

                       

OPERATING EXPENSES

                 
 

Operating costs

312 

 

23,605 

 

92,115 

 

 

116,032 

 

General and administrative expenses

3,460 

 

5,810 

 

 

 

9,274 

 

Depreciation and amortization

 

1,369 

 

4,339 

 

 

5,708 

 

Other expense (income), net

(11)

 

4,135 

 

27,568 

 

(30,449)

 

1,243 

                     

Operating income

26,869 

 

16,814 

 

132,369 

 

(129,433)

 

46,619 

Interest expense

475 

 

3,305 

 

20 

 

 

3,800 

                   

Income before income tax expense

26,394 

 

13,509 

 

132,349 

 

(129,433)

 

42,819 

Income tax expense (benefit)

(2,798)

 

4,786 

 

11,592 

 

 

13,580 

                   

Net income

29,192 

 

8,723 

 

120,757 

 

(129,433)

 

29,239 

     Net income attributable to
     non-controlling interest

 

 

47 

 

 

47 

NET INCOME ATTRIBUTABLE
     TO CORE LABORATORIES N.V.

$          29,192

 

$        8,723 

 

$    120,710 

 

$  (129,433)

 

$     29,192 

 

Condensed Consolidating Statements of Cash Flows (Unaudited)

             
                       
   

(In thousands)

Three Months Ended March 31, 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

$          18,135 

 

$        30,285 

 

$          1,698 

 

$                   - 

 

$       50,118 

                 

   

CASH FLOWS FROM INVESTING ACTIVITIES:

               
 

Capital expenditures

 

(486)

 

(2,169)

 

 

(2,655)

 

Patents and other intangibles

 

 

(96)

 

 

(96)

 

Proceeds from sale of assets

 

 

84 

 

 

86 

 

Premiums on life insurance

 

(582)

 

 

 

(582)

Net cash used in investing activities

 

(1,066)

 

(2,181)

 

 

(3,247)

                   

CASH FLOWS FROM FINANCING ACTIVITIES:

               
 

Stock options exercised

169 

 

 

 

 

169 

 

Excess tax benefit from stock-based payments

45 

 

 

 

 

45 

 

Dividends paid

(2,302)

 

 

 

 

(2,302)

 

Repurchase of common shares

(7,885)

 

 

 

 

(7,885)

Net cash used in financing activities

(9,973)

 

 

 

 

(9,973)

                   

NET CHANGE IN CASH AND CASH

   EQUIVALENTS

8,162 

 

29,219 

 

(483)

 

 

36,898 

CASH AND CASH EQUIVALENTS,

   beginning of period

13,347 

 

11,027 

 

11,764 

 

 

36,138 

CASH AND CASH EQUIVALENTS,

   end of period

$           21,509 

 

$         40,246 

 

$         11,281 

 

$                   - 

 

$        73,036 


 

13

 

Condensed Consolidating Statements of Operations (Unaudited)

             
                       
   

(In thousands)

Three Months Ended March 31, 2008

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

REVENUES

                 
 

Operating revenues

$                   - 

 

$        39,665 

 

$        139,772 

 

$                     - 

 

$      179,437 

 

Intercompany revenues

267 

 

3,852 

 

32,669 

 

(36,788)

 

 

Earnings from consolidated affiliates

35,551 

 

 

95,282 

 

(130,833)

 

   

Total revenues

35,818 

 

43,517 

 

267,723 

 

(167,621)

 

179,437 

                       

OPERATING EXPENSES

                 
 

Operating costs

297 

 

21,161 

 

98,015 

 

 

119,473 

 

General and administrative expenses

3,520 

 

4,766 

 

 

 

8,289 

 

Depreciation and amortization

 

1,372 

 

3,867 

 

 

5,239 

 

Other expense (income), net

4,537 

 

823 

 

21,833 

 

(25,128)

 

2,065 

                     

Operating income

27,464 

 

15,395 

 

144,005 

 

(142,493)

 

44,371 

Interest expense

36 

 

4,746 

 

 

 

4,782 

                   

Income before income tax expense

27,428 

 

10,649 

 

144,005 

 

(142,493)

 

39,589 

Income tax expense (benefit)

681 

 

1,363 

 

10,695 

 

 

12,739 

                   

Net income

26,747 

 

9,286 

 

133,310 

 

(142,493)

 

26,850 

   Net income attributable to
   non-controlling interest

 

 

103 

 

 

103 

NET INCOME ATTRIBUTABLE
     TO CORE LABORATORIES N.V.

$          26,747 

 

$         9,286 

 

$       133,207 

 

$        (142,493)

 

$        26,747 

 

Condensed Consolidating Statements of Cash Flows (Unaudited)

             
                       
   

(In thousands)

Three Months Ended March 31, 2008

     

Core Laboratories N.V. (Parent/ Guarantor)

 

Core Laboratories LP (Issuer)

 

Other Subsidiaries (Non- Guarantors)

 

Consolidating Adjustments

 

Consolidated Total

                   

Net cash provided by operating activities

$     14,287 

 

$       6,238 

 

$        4,915 

 

$                - 

 

$       25,440 

                 

   

CASH FLOWS FROM INVESTING ACTIVITIES:

               
 

Capital expenditures

 

(3,636)

 

(1,982)

 

 

(5,618)

 

Patents and other intangibles

 

(22)

 

(64)

 

 

(86)

 

Proceeds from sale of assets

 

2,227 

 

240 

 

 

2,467 

 

Premiums on life insurance

 

(430)

 

 

 

(430)

Net cash used in investing activities

 

(1,861)

 

(1,806)

 

 

(3,667)

                   

CASH FLOWS FROM FINANCING ACTIVITIES:

               
 

Repayment of debt

(1,120)

 

(5,000)

 

 

 

(6,120)

 

Proceeds from debt borrowings

 

5,000 

 

 

 

5,000 

 

Capital lease obligations

 

 

(1)

 

 

(1)

 

Stock options exercised

633 

 

 

 

 

633 

 

Repurchase of common shares

(28,815)

 

 

 

 

(28,815)

 

Excess tax benefit from stock-based payments

10,440 

 

 

 

 

10,440 

Net cash used in financing activities

(18,862)

 

 

(1)

 

 

(18,863)

                   

NET CHANGE IN CASH AND CASH

   EQUIVALENTS

(4,575)

 

4,377 

 

3,108 

 

 

2,910 

CASH AND CASH EQUIVALENTS,

   beginning of period

6,712 

 

7,818 

 

11,087 

 

 

25,617 

CASH AND CASH EQUIVALENTS,

   end of period

$      2,137 

 

$     12,195 

 

$       14,195 

 

$                - 

 

$       28,527 

 

14

 

 

12. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments ("FAS 107-1"). FAS 107-1 requires the disclosure of the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in the annual financial statements. FAS 107-1 is effective for interim reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. We elected to early adopt this pronouncement for our interim financial statements ending March 31, 2009. FAS 107-1 did not have an impact on our financial position or results of operations.

 

Return to Index

15

 

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

The following discussion summarizes the financial position of Core Laboratories N.V. and its subsidiaries as of March 31, 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 4,900 people worldwide.

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

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

*

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

   

*

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

   

*

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


Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report 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.

 

16

 

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 recent sharp declines in commodity prices 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. It is too early to determine the impact of these recently announced changes in capital programs by certain of our clients.

Results of Operations

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

(Unaudited)

Three Months Ended March 31,

 

% Change

 

2009

 

2008

 

2009/2008

REVENUES:

     

Services

$      141,692 

 

79% 

 

$    138,409 

 

77% 

 

2% 

Product sales

37,184 

 

21% 

 

41,028 

 

23% 

 

(9%)

  Total revenues

178,876 

 

100% 

 

179,437 

 

100% 

 

OPERATING EXPENSES:

                 

Cost of services*

88,296 

 

62% 

 

91,159 

 

66% 

 

(3%)

Cost of sales*

27,736 

 

75% 

 

28,314 

 

69% 

 

(2%)

  Total cost of services and sales

116,032 

 

65% 

 

119,473 

 

67% 

 

(3%)

General and administrative expenses

9,274 

 

5% 

 

8,289 

 

5% 

 

12% 

Depreciation and amortization

5,708 

 

3% 

 

5,239 

 

3% 

 

9% 

Other expense, net

1,243 

 

1% 

 

2,065 

 

1% 

 

(40%)

Operating income

46,619 

 

26% 

 

44,371 

 

25% 

 

5% 

Interest expense

3,800 

 

2% 

 

4,782 

 

3% 

 

(21%)

Income before income tax expense

42,819 

 

24% 

 

39,589 

 

22% 

 

8% 

Income tax expense

13,580 

 

8% 

 

12,739 

 

7% 

 

7% 

Net income

  29,239 

 

16% 

 

  26,850 

 

15% 

 

9% 

     Net income attributable to
     non-controlling interest

47 

 

-    

 

103 

 

-    

 

(54%)

Net income attributable to
    Core Laboratories N.V.

$        29,192 

 

16% 

 

$       26,747

 

15% 

 

9% 

                   

*Percentage based on applicable revenue rather than total revenue

       


 

17

 

Operating Results for the Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008 (unaudited)

Service Revenues

Service revenues increased to $141.7 million for the first quarter of 2009, up 2% when compared to $138.4 million for the first quarter of 2008. Our service revenues continued to increase due to our significant international operations and projects. Significant projects that continue to provide revenue growth are in the Middle East, Asia-Pacific, the Gulf of Mexico and offshore deepwater regions of the southern-Atlantic margins off the coast of West Africa and Brazil.

Product Sale Revenues

Revenues associated with product sales decreased to $37.2 million for the first quarter of 2009, down 9% from $41.0 million for the first quarter of 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 27% decrease in the average year-over-year first quarter North American rig count. 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 Barnett, Haynesville, Fayetteville, Marcellus and Muskwa/Montney shale plays.

Cost of Services

Cost of services expressed as a percentage of service revenue was 62% for the quarter ended March 31, 2009, which was down from 66% for the same period in 2008. The decline in the cost of services relative to service revenue was primarily a result of higher incremental margins earned on revenues over our relatively fixed cost structure from our continued focus on emphasizing higher value and thus higher margin services. Incremental margins are calculated as the change in operating income divided by the change in revenues.

Cost of Sales

Cost of sales as a percentage of product sales revenues was 75% for the quarter ended March 31, 2009, up from 69% 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 $9.3 million for the first quarter of 2009, comparable to the $9.3 million incurred in the fourth quarter of 2008. These costs increased 12% when compared to $8.3 million for the first quarter of 2008, due to an increase in severance expense in 2009 compared to 2008.

Depreciation and Amortization Expense

Depreciation and amortization expense increased to $5.7 million for the first quarter of 2009, up 9% when compared to $5.2 million for the first quarter of 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, Net

Other expense, net consisted of the following at March 31, 2009 and 2008 (in thousands):

 

Three Months Ended

March 31,

 

2009

 

2008

 

(Unaudited)

Gain on sale of assets

$          (77)

 

$      (1,284)

Foreign exchange loss (gain)

1,888 

(746)

Interest income

(39)

 

(108)

Non-income tax accrual

 

5,030 

Other, net

(529)

 

(827)

  Total other expense, net

$      1,243 

 

$       2,065 

 

18

 

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. Additionally, 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

March 31,

 

2009

 

2008

 

(Unaudited)

Canadian Dollar

$        348 

 

$         215 

Euro

163 

 

(586)

Mexican Peso

132 

 

(47)

Malaysian Ringgit

136 

(55)

Russian Ruble

596 

 

(157)

Kazakhstan Tenge

167 

(3)

Other currencies, net

346 

(113)

  Total loss (gain)

$     1,888 

 

$        (746)

 

Income Tax Expense

The effective tax rates for the first quarter of 2009 and 2008 were 31.7% and 32.2%, respectively. The decrease in the effective tax rate for the first quarter of 2009 is primarily a result in a change in activity levels between jurisdictions with different tax rates.

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 months ended March 31, 2009 and 2008 (in thousands):

 

Three Months Ended
March 31,

 

2009

 

2008

Revenues:

(Unaudited)

Reservoir Description

$    102,523

 

$    100,501

Production Enhancement

63,100

 

67,024

Reservoir Management

13,253

 

11,912

   Consolidated

$    178,876

 

$    179,437

Operating income:

Reservoir Description

$     24,752 

 

$     23,018 

Production Enhancement

18,324 

 

21,940 

Reservoir Management

3,478 

 

4,227 

Corporate and Other1

65 

 

(4,814)

   Consolidated

$     46,619 

 

$     44,371 

       

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

Reservoir Description

Revenues from the Reservoir Description segment increased $2.0 million to $102.5 million in the first quarter of 2009, compared to $100.5 million in the first quarter of 2008. The revenue increase is the result of our significant international operations and projects such as our reservoir rock and reservoir fluids characterization projects in the Middle East and Asia-Pacific and our continued large scale core analyses studies as well as crude oil and derived petroleum products characterization studies on a global basis. The revenue growth was also driven, in part, by the continued expansion of worldwide deepwater projects in West Africa, Brazil and Gulf of Mexico.

Operating income in the first quarter of 2009 increased by 8%, or $1.8 million, to $24.8 million compared to $23.0 million for the first quarter of 2008. 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. Operating margins for the quarter ended March 31, 2009 were 24% compared to 23% for the same period in 2008.

 

19

 

Production Enhancement

Revenues from the Production Enhancement segment decreased $3.9 million to $63.1 million in the first quarter of 2009 as compared to $67.0 million in the first quarter in 2008. The decrease in revenues is due to the significant decline in North American drilling activity; however, this decline is less than the reduction in the average rig count for North America year over year. The primary reason for the slower decline in our revenues is 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 first quarter of 2009 decreased by 16%, or $3.6 million, to $18.3 million from $21.9 million for the first quarter of 2008. Operating margins decreased to 29% in the first quarter of 2009 compared to 33% for 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.

Reservoir Management

Revenues from the Reservoir Management segment increased $1.3 million in the first quarter of 2009 as compared to the first quarter of 2008. The increase in revenue for the quarter 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. Participation in our North American Gas Shale Study continues to expand with the addition of new companies throughout the period.

Operating income in the first quarter of 2009 decreased 18% to $3.5 million from $4.2 million for the first quarter of 2008. The decrease in operating income was primarily related to the mix of activity in our consortium projects and timing of analysis work on these projects.

Liquidity and Capital Resources

General

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

We utilize the non-GAAP financial measure of free cash flow to evaluate our cash flows and results of operations. Free cash flow is defined as net cash provided by operating activities (which is the most directly comparable GAAP measure) less capital expenditures. Management believes that free cash flow provides useful information to investors as it represents the cash that was available in the period that was in excess of our needs to fund our capital expenditures and operate our business. Free cash flow is not a measure of operating performance under GAAP, and should not be considered in isolation nor construed as an alternative to operating profit, net income (loss) or cash flows from operating, investing or financing activities, each as determined in accordance with GAAP. Moreover, since free cash flow is not a measure determined in accordance with GAAP and thus is susceptible to varying interpretations and calculations, free cash flow as presented, may not be comparable to similarly titled measures presented by other companies. The following table reconciles this non-GAAP financial measure to the most directly comparable measure calculated and presented in accordance with GAAP for the three month period ended March 31, 2009 and 2008 (in thousands):

   

Three Months Ended

March 31,

   

2009

 

2008

Free cash flow calculation:

 

(Unaudited)

Net cash provided by operating activities

$     50,118

$      25,440

Less: capital expenditures

 

2,655

 

5,618

    Free cash flow

 

$     47,463

 

$      19,822

The increase in free cash flow in 2009 compared to 2008 was due to higher net income, a decrease in working capital excluding cash and a decrease in capital expenditures. At March 31, 2009 and December 31, 2008, we had working capital of $171.7 million and $140.0 million, respectively.

 

20

 

Cash Flows

The following table summarizes cash flows for the three months ended March 31, 2009 and 2008 (in thousands):

   

Three Months Ended

March 31,

   

2009

 

2008

Cash provided by/(used in):

 

(Unaudited)

    Operating activities

$      50,118 

$      25,440 

    Investing activities

 

(3,247)

 

(3,667)

    Financing activities

 

(9,973)

 

(18,863)

Net change in cash and cash equivalents

 

$      36,898 

 

$        2,910 

The increase in cash flows provided by operating activities was primarily attributable to an increase in net income along with a reduction in current assets, 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 $3.0 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 three months of 2009, we repurchased 121,605 shares for an aggregate price of $7.9 million compared to 253,379 shares for an aggregate price of $28.8 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 $2.3 million paid in 2009.

We maintain a revolving credit facility (the "Credit Facility") that allows for an aggregate borrowing capacity of $100.0 million. As amended, this facility provides an option to increase the commitment under the Credit Facility to $150.0 million, if certain conditions are met. The Credit Facility bears interest at variable rates from LIBOR plus 0.5% to a maximum of LIBOR plus 1.125%. Any outstanding balance under the Credit Facility is due in December 2010 when the Credit Facility matures. Interest payment terms are variable depending upon the specific type of borrowing under this facility. Our available capacity is reduced by outstanding unsecured letters of credit and performance guarantees and bonds totaling $10.3 million at March 31, 2009 relating to certain projects in progress. Our available borrowing capacity under the Credit Facility at March 31, 2009 was $89.7 million.

The terms of the Credit Facility require us to meet certain financial and operational covenants. We believe that we are in compliance with all such covenants at March 31, 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.

Recent Accounting Pronouncements

In April 2009, the FASB issued FASB Staff Position ("FSP") No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments ("FAS 107-1"). FAS 107-1 requires the disclosure of the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in the annual financial statements. FAS 107-1 is effective for interim reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. We elected to early adopt this pronouncement for our interim financial statements ending March 31, 2009. FAS 107-1 did not have an impact on our financial position or results of operations.

Return to Index

21

 

Item 3. Quantitative and Qualitative Disclosures of Market Risk

There have been no material changes in market risk from the information provided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Return to Index

Item 4. Controls and Procedures

A complete discussion of our controls and procedures is included in our Annual Report on Form 10-K for the year ended December 31, 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 March 31, 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 March 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


 

22

 

CORE LABORATORIES N.V.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Return to Index

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

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

January 1-31, 2009

 

-

 

-

 

-

 

4,033,936

February 1-28, 2009 (1)

 

  98,364

 

$   63.35

 

  98,364

 

3,943,572

March 1-31, 2009 (2)

 

  23,241

 

$   71.18

 

  23,241

 

3,938,231

Total

 

121,605

 

$   64.84

 

121,605

   

(1) Contains 364 shares valued at $23.5 thousand, or $64.55 per share, surrendered to us by participants in a stock-based compensation plan to settle any personal tax liabilities which may result from the award in February 2009.
(2) Contains 3,241 shares valued at $0.2 million, or $75.40 per share, surrendered to us by participants in a stock-based compensation plan to settle any personal tax liabilities which may result from the award in March 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.

Return to Index

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

At our special meeting of shareholders on January 29, 2009, our shareholders voted on all matters presented to them with the results of the vote below.

Shareholders approved the authorization of our Management Board to repurchase up to 25.6% of our issued share capital from time to time for an 18 month period until July 29, 2010. The extraordinary meeting authorized the Management Board to repurchase up to 10% of our issued share capital which may be used for any legal purpose and an additional 15.6% of our issued share capital which will be held temporarily and may only be used for the satisfaction of any obligation we may have to deliver shares pursuant to our Senior Exchangeable Notes when they become due or pursuant to warrants sold to Lehman Brothers. The proposal was approved by 16,812,900 votes in favor, 23,422 votes against, with 6,954 abstentions.

Return to Index

23

 

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

         

Return to Index

24

SIGNATURE

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

 

 

CORE LABORATORIES N.V.

 

By:

Core Laboratories International B.V., its

   

Managing Director

     

Date:

April 24, 2009

By:

/s/ Richard L. Bergmark

   

Richard L. Bergmark

   

Chief Financial Officer

   

(Duly Authorized Officer and

   

Principal Financial Officer)

Return to Index

 

 

25