CORE LABORATORIES N V - Annual Report: 2010 (Form 10-K)

 

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨	For the fiscal year ended December 31, 2010
	OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from       ____________________ to   ____________________

The Netherlands	Not Applicable
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Herengracht 424
1017 BZ Amsterdam
The Netherlands	Not Applicable
(Address of principal executive offices)	(Zip Code)

Title of each class	Name of exchange on which registered
Common Shares, EUR 0.02 Par Value Per Share	New York Stock Exchange

Large accelerated filer  ý	Accelerated filer  ¨	Non-accelerated filer  ¨	Smaller reporting company  ¨
		(Do not check if a smaller reporting company)

		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	11
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
Item 6.	Selected Financial Data	14
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation	15
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 8.	Financial Statements and Supplementary Data	29
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29
Item 9A.	Controls and Procedures	29
Item 9B.	Other Information	30
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	30
Item 11.	Executive Compensation	30
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	30
Item 13.	Certain Relationships and Related Transactions and Director Independence	30
Item 14.	Principal Accountant Fees and Services	30
PART IV
Item 15.	Exhibits, Financial Statement Schedules	31

-	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.

 

 

-	general and economic business conditions;
-	market prices of oil and gas and expectations about future prices;
-	cost of producing oil and natural gas;
-	the level of drilling and production activity;
-	mergers, consolidations and downsizing among our clients;
-	coordination by OPEC;
-	the impact of commodity prices on the expenditure levels of our clients;
-	financial condition of our client base and their ability to fund capital expenditures;
-	the physical effects of climatic change, including adverse weather or geologic/geophysical conditions;
-	the adoption of legal requirements or taxation relating to climate change that lower the demand for petroleum-based fuels;
-	civil unrest or political uncertainty in oil producing or consuming countries;
-	level of consumption of oil, gas and petrochemicals by consumers;
-	changes in existing laws, regulations, or other governmental actions;
-	the business opportunities (or lack thereof) that may be presented to and pursued by us; and
-	availability of services and materials for our clients to grow their capital expenditures.

-	global economic conditions;
-	political actions and requirements of national governments including trade restrictions, embargoes, seizure, detention, nationalization and expropriations of assets;
-	interpretation of tax statutes and requirements of taxing authorities worldwide, routine examination by taxing authorities and assessment of additional taxes, penalties and/or interest;
-	civil unrest;
-	acts of terrorism;
-	fluctuations and changes in currency exchange rates (see section below);
-	the impact of inflation;
-	difficulty in repatriating foreign currency received in excess of the local currency requirements; and
-	current conditions in oil producing countries such as Venezuela, Nigeria, Iran and Iraq considering their potential impact on the world markets.

-	increased financial leverage;
-	ability to obtain additional financing;
-	increased interest expense; and
-	difficulties involved in combining disparate company cultures and facilities.

*

Climate Change.  Climate change legislation establishing a "cap-and-trade" plan for greenhouse gasses ("GHGs") was approved by the U.S. House of Representatives in the recently concluded session of Congress.  It is not possible at this time to predict whether or when the current session of Congress may act on climate change legislation.  The U.S. Environmental Protection Agency ("EPA") also has taken recent actions to monitor and report upon or otherwise restrict emissions of GHGs.  Based on recent developments, the EPA now purports to have a basis to restrict emissions of GHGs under existing federal Clean Air Act, effective January 2, 2011.  Adoption and implementation of laws and regulations limiting emissions of GHGs from our equipment or operations could require us to incur costs to comply with such requirements and also could adversely affect demand for the production of oil and natural gas and thus reduce demand for the services we provide to the oil and natural gas industry.

*

Hydraulic Fracturing.  The U.S. Congress considered legislation in the recently concluded session to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process.  Currently, regulation of hydraulic fracturing is primarily conducted at the state level through permitting and other compliance requirements.  It is not possible at this time to predict whether or when the current session of Congress may act on hydraulic fracturing legislation.  Any such legislation, if adopted, could establish an additional level of regulation and permitting at the federal level as well as require the disclosure of chemicals that are mixed with the water and sand pumped underground in the process, which disclosed information could be proprietary in nature and could be used by third parties opposing hydraulic fracturing to initiate legal proceedings alleging that specific chemicals used in the process adversely affect groundwater.  Even though Core Laboratories is not a hydraulic fracturing company, it does supply and analyze chemicals used during such processes for reservoir diagnostic purposes and could be adversely affected by such legislation.  In addition, the EPA has initiated a study of the potential environmental impacts of hydraulic fracturing, the results of which are anticipated to be available by late 2012, and the U.S. House of Representatives has commenced an investigation into hydraulic fracturing practices, which inquiries could result in the introduction of legislation restricting aspects of hydraulic fracturing.

		High				Low
2010
First Quarter		$	66.33			$	58.30
Second Quarter			78.26				64.73
Third Quarter			89.80				73.63
Fourth Quarter			91.56				77.70
2009
First Quarter		$	38.81			$	30.25
Second Quarter			49.47				35.64
Third Quarter			52.48				39.05
Fourth Quarter			59.67				49.29

 

 

 
 

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 Be Purchased Under The Program (3)
October 1-31, 2010			0				0				0				7,927,848
November 1-30,2010 (1)			580			$	82.86				580				8,051,851
December 1-31, 2010 (2)			4,168			$	86.81				4,168				8,514,691
Total			4,748			$	86.33				4,748				8,514,691

(1)	580 shares valued at $48 thousand, or $82.86 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.

(2)	4,168 shares valued at $0.4 million, or $86.81 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.

(3)	During the quarter 601,929 shares were distributed from the share repurchase program relating to stock-based awards, stock options, and the early exchange of our Senior Exchangeable Notes.

		Year Ended December 31,
		2010				2009				2008 (3)				2007 (3)				2006 (3)
		(in thousands, except per share and other data)
Financial Statement Data:
Revenues		$	794,653			$	695,539			$	780,836			$	670,540			$	575,689
Net income attributable to Core Laboratories N.V.			144,917				113,604				131,166				111,212				81,045
Working capital			69,967				284,129				139,955				116,276				130,249
Total assets			636,042				658,166				521,535				476,754				467,244
Long-term debt and capital lease obligations,
including current maturities			147,543				209,112				194,568				230,594				214,503
Total equity			292,340				281,758				188,285				108,026				127,572
Earnings Per Share Information:
Net income attributable to Core Laboratories N.V.:
Basic		$	3.23			$	2.47			$	2.85			$	2.36			$	1.61
Diluted		$	3.00			$	2.43			$	2.74			$	2.28			$	1.51
Weighted average common shares outstanding:
Basic			44,830				45,939				46,017				47,073				50,314
Diluted			48,241				46,657				47,887				48,815				53,776
Cash dividends declared per share		$	0.89			$	0.575			$	0.60			$	-			$	-
Other Data:
Current ratio (1)		1.2:1				3.7:1				2.5:1				2.2:1				2.5:1
Debt to capitalization ratio (2)			27	%			34	%			52	%			69	%			62	%

 

 

(1)	Current ratio is calculated as follows: current assets divided by current liabilities.

(2)	Debt to capitalization ratio is calculated as follows: debt divided by the sum of cash, debt and equity.

(3)	Results have been revised upon adoption of FASB Accounting Standards Codification 470-20.  See Note 8 Debt and Capital Lease Obligations for more information.

-	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.

 

Account		Nature of Estimates Required		Assumptions Used
Allowance for doubtful accounts		We evaluate whether client receivables are collectible.		See "Allowance for Doubtful Accounts."
Inventory reserves		We forecast client demand, considering changes in technology which could result in obsolescence.		See "Inventory Valuation Allowances."
Depreciation and amortization		We estimate the useful lives and salvage values of our assets.		Useful lives assigned reflect our best estimate based on historical data of the respective asset's useful life and salvage value. These assets could become impaired if our operating plans or business environment changes.
Pensions and other postretirement benefits		We utilize an actuary to assist in determining the value of the projected benefit obligation under a Dutch pension plan.  This valuation requires various estimates and assumptions concerning mortality, future pay increases and discount rate used to value our obligations.  In addition, we recognize net periodic benefit cost based upon these estimates.		The actuarial assumptions used are based upon professional judgment and historical experience, including trends in mortality rates, and credit market rates (discount rate).
Stock-based compensation		We evaluate the probability that certain of our stock-based plans will meet targets established within the respective agreements and result in the vesting of such awards.  In addition, we derive an estimated forfeiture rate that is used in calculating the expense for these awards.		See "Stock-Based Compensation." Comparisons to our stock price, a return on our stock price compared to certain stock indices or a return on equity calculation.
Income taxes		We estimate the likelihood of the recoverability of our deferred tax assets (particularly, net operating loss carry-forwards).		See "Income Taxes." We examine our historical and projected operating results, review the eligible carry-forward period and tax planning opportunities and consider other relevant information. Changes in tax laws for the jurisdictions in which we operate could significantly impact our estimates.
Long-lived assets, intangibles and goodwill		We evaluate the recoverability of our assets periodically, but at least annually, by examining current and projected operating results to identify any triggering events, which may indicate impairment.  We compare the carrying value of the assets to a projection of fair value, utilizing judgment as to the identification of reporting units, the allocation of corporate assets amongst reporting units and the determination of the appropriate discount rate.		See "Long-Lived Assets, Intangibles and Goodwill." Our impairment analysis is subjective and includes estimates based on assumptions regarding future growth rates, interest rates and operating expenses.

		Year Ended																								% Change
REVENUES:		2010								2009								2008									2010/2009				2009/2008
Services		$	605,974				76.3	%		$	553,772				79.6	%		$	597,695				76.5	%			9.4	%			(7.3	%)
Product Sales			188,679				23.7	%			141,767				20.4	%			183,141				23.5	%			33.1	%			(22.6	%)
			794,653				100.0	%			695,539				100.0	%			780,836				100.0	%			14.2	%			(10.9	%)
OPERATING EXPENSES:
Cost of services*			383,079				63.2	%			352,039				63.6	%			387,145				64.8	%			8.8	%			(9.1	%)
Cost of product sales*			130,711				69.3	%			105,730				74.6	%			127,637				69.7	%			23.6	%			(17.2	%)
Total cost of services and product sales			513,790				64.7	%			457,769				65.8	%			514,782				65.9	%			12.2	%			(11.1	%)
General and administrative expenses			33,029				4.1	%			30,372				4.4	%			31,646				4.1	%			8.7	%			(4.0	%)
Depreciation and amortization			23,113				2.9	%			23,818				3.4	%			21,773				2.8	%			(3.0	%)			9.4	%
Other (income) expense, net			(2,205	)			(0.3	%)			(3,202	)			(0.5	%)			5,580				0.7	%		NM				NM
OPERATING INCOME			226,926				28.6	%			186,782				26.9	%			207,055				26.5	%			21.5	%			(9.8	%)
(Gain) loss on early extinguishment of        debt			1,939				0.3	%			-				-				(2,829	)			(0.4	%)			100.0	%			(100.0	%)
Interest expense			15,839				2.0	%			15,523				2.3	%			21,610				2.8	%			2.0	%			(28.2	%)
Income before income tax expense			209,148				26.3	%			171,259				24.6	%			188,274				24.1	%			22.1	%			(9.0	%)
Income tax expense			63,747				8.0	%			57,164				8.2	%			56,766				7.3	%			11.5	%			0.7	%
Net income			145,401				18.3	%			114,095				16.4	%			131,508				16.8	%			27.4	%			(13.2	%)
Net income attributable to non-controlling interest			484				0.1	%			491				0.1	%			342				-	%			(1.4	%)			43.6	%
Net income attributable to Core Laboratories N.V.		$	144,917				18.2	%		$	113,604				16.3	%		$	131,166				16.8	%			27.6	%			(13.4	%)
*Percentage based on applicable revenue rather than total revenue.
"NM" means not meaningful.

 

		Year Ended December 31,
		2010				2009				2008
(Gain) loss on sale of assets		$	(176	)		$	90			$	(2,015	)
Equity in (income) of affiliates			(376	)			(92	)			(300	)
Foreign exchange (gain) loss			1,032				(331	)			6,555
Interest (income)			(249	)			(138	)			(848	)
Non-income tax (benefit) expense			-				(2,500	)			5,030
Rent and royalty (income)			(1,550	)			(1,358	)			(2,150	)
Other (gain) loss			(886	)			1,127				(692	)
Total other (income) expense, net		$	(2,205	)		$	(3,202	)		$	5,580

 

 

                             

 

                                  

 

		For the Years Ended December 31,
(dollars in thousands)		2010				% Change				2009				% Change				2008
Reservoir Description		$	425,829				2.6	%		$	414,934				(4.7	%)		$	435,425
Production Enhancement			313,956				36.1	%			230,652				(21.3	%)			293,017
Reservoir Management			54,868				9.8	%			49,953				(4.7	%)			52,394
Total Revenues		$	794,653				14.2	%		$	695,539				(10.9	%)		$	780,836

		For the Years Ended December 31,
(dollars in thousands)		2010				% Change				2009				% Change				2008
Reservoir Description		$	106,179				(0.2	%)		$	106,421				4.6	%		$	101,783
Production Enhancement			101,241				55.6	%			65,076				(30.0	%)			93,025
Reservoir Management			19,759				35.2	%			14,620				(9.9	%)			16,224
Corporate and other (1)			(253	)		NM		(2)			665			NM		(2)			(3,977	)
Operating Income		$	226,926				21.5	%		$	186,782				(9.8	%)		$	207,055
(1) “Corporate and other" represents those items that are not directly relating to a particular segment.
(2) "NM" means not meaningful.

		For the Years Ended December 31,
		2010				2009				2008
		Margin				Margin				Margin
Reservoir Description			24.9	%			25.6	%			23.4	%
Production Enhancement			32.2	%			28.2	%			31.7	%
Reservoir Management			36.0	%			29.3	%			31.0	%
Total Company			28.6	%			26.9	%			26.5	%
(1) Calculated by dividing "Operating Income" by "Revenue".

		Year Ended December 31,
Free Cash Flow Calculation		2010				2009				2008
Net cash provided by operating activities		$	205,832			$	181,873			$	155,207
Less: capital expenditures			(27,569	)			(17,289	)			(30,950	)
Free cash flow		$	178,263			$	164,584			$	124,257

		Year Ended December 31,
		2010				2009				2008
Cash provided by/(used in):
Operating activities		$	205,832			$	181,873			$	155,207
Investing activities			(38,581	)			(18,540	)			(41,108	)
Financing activities			(214,416	)			(18,426	)			(103,578	)
Net change in cash and cash equivalents		$	(47,165	)		$	144,907			$	10,521

		Total				Less than 1 year				1-3 Years				3-5 Years				More than 5 Years
Contractual Obligations:
Short-term debt (1)		$	156,407			$	156,407			$	-			$	-			$	-
Operating leases			53,278				13,965				19,200				10,861				9,252
Pension (2)			1,787				1,787				-				-				-
Total contractual obligations		$	211,472			$	172,159			$	19,200			$	10,861			$	9,252
(1) Not included in the above balances are anticipated cash payments for interest of $0.4 million for 2011 on the short-term debt that is due October 2011.
(2) Our Dutch pension plan requires annual employer contributions. Amounts payable in the future will be based on future workforce factors which cannot be projected beyond one year.

-	our ability to continue to develop or acquire new and useful technology;
-	the realization of anticipated synergies from acquired businesses and future acquisitions;
-	our dependence on one industry, oil and gas, and the impact of commodity prices on the expenditure levels of our clients;
-	competition in the markets we serve;
-	the risks and uncertainties attendant to adverse industry, political, economic and financial market conditions, including stock prices, government regulations, interest rates and credit availability;
-	unsettled political conditions, war, civil unrest, currency controls and governmental actions in the numerous countries in which we operate;
-	changes in the price of oil and natural gas;
-	integration of acquired businesses; and
-	the effects of industry consolidation.

		Year Ended December 31,
(Gains) losses by currency		2010				2009				2008
Australian Dollar		$	(135	)		$	(438	)		$	654
British Pound			390				(106	)			654
Canadian Dollar			(711	)			(1,686	)			2,706
Euro			1,788				(81	)			(132	)
Russian Ruble			(6	)			421				688
Venezuelan Bolivar			(267	)			1,335				(2	)
Other currencies			(27	)			224				1,987
Total (gain) loss		$	1,032			$	(331	)		$	6,555

(a)	Financial Statements

	Page
Report of Independent Registered Public Accounting Firm-PricewaterhouseCoopers LLP	F-1
Consolidated Balance Sheets as of December 31, 2010 and 2009	F-2
Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008	F-3
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2010, 2009 and 2008	F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008	F-6
Notes to Consolidated Financial Statements	F-7