clb-10q_1q2010.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
     
FORM 10-Q
 
(Mark One)
 
   
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 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 ______________
 
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 ý  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 (§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 ý
Accelerated filer  ¨
Non-accelerated filer  ¨
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 ý

    The number of common shares of the registrant, par value EUR 0.04 per share, outstanding at April 28, 2010 was 22,326,027.



 
 

 


CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2010
 
INDEX
 
 
Page
PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets (Unaudited) at March 31, 2010 and December 31, 2009
1
     
 
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2010 and 2009
2
     
 
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2010 and 2009
3
     
 
Notes to the Unaudited Consolidated Interim Financial Statements
4
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
15
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
21
     
Item 4.
Controls and Procedures
21
     
     
PART II - OTHER INFORMATION
     
Item 1.
Legal Proceedings
23
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
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,
 
   
2010
   
2009
 
ASSETS
 
       (Unaudited)
 
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 138,768     $ 181,045  
Accounts receivable, net of allowance for doubtful accounts of $3,757 and
               
  $3,202 at 2010 and 2009, respectively
    130,986       133,758  
Inventories, net
    32,652       32,184  
Prepaid expenses and other current assets
    33,371       43,550  
TOTAL CURRENT ASSETS
    335,777       390,537  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    99,668       98,784  
INTANGIBLES, net
    9,469       6,520  
GOODWILL
    154,217       148,600  
OTHER ASSETS
    15,019       13,725  
TOTAL ASSETS
  $ 614,150     $ 658,166  
                 
LIABILITIES AND EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 36,526     $ 33,009  
Accrued payroll and related costs
    24,302       24,368  
Taxes other than payroll and income
    6,791       8,183  
Unearned revenues
    23,616       16,528  
Income tax payable
    15,444       15,433  
Short-term debt
    212,915       -  
Other accrued expenses
    9,215       8,887  
TOTAL CURRENT LIABILITIES
    328,809       106,408  
                 
LONG-TERM DEBT
    -       209,112  
DEFERRED COMPENSATION
    17,896       16,866  
DEFERRED TAX LIABILITIES
    7,528       7,692  
OTHER LONG-TERM LIABILITIES
    33,204       36,330  
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 22,312,593 outstanding at 2010
               
and 25,519,956 issued and 22,986,704 outstanding at 2009
    1,430       1,430  
Additional paid-in capital
    61,048       61,719  
Retained earnings
    498,963       469,454  
Accumulated other comprehensive (loss)
    (6,451 )     (6,536 )
Treasury shares (at cost), 3,207,363 at 2010 and 2,533,252 at 2009
    (330,748 )     (246,699 )
      Total Core Laboratories N.V. shareholders' equity
    224,242       279,368  
Non-controlling interest
    2,471       2,390  
TOTAL EQUITY
    226,713       281,758  
TOTAL LIABILITIES AND EQUITY
  $ 614,150     $ 658,166  




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,
 
 
 
2010
   
2009
 
   
(Unaudited)
 
REVENUES:
           
Services
  $ 143,442     $ 141,692  
Product sales
    44,895       37,184  
      188,337       178,876  
OPERATING EXPENSES:
               
Cost of services, exclusive of depreciation expense shown below
    95,357       88,296  
Cost of product sales, exclusive of depreciation expense shown below
    30,231       27,736  
General and administrative expenses
    6,380       9,274  
Depreciation
    5,419       5,527  
Amortization
    335       181  
Other expense (income), net
    (798 )     1,243  
OPERATING INCOME
    51,413       46,619  
Interest expense
    4,059       3,800  
Income before income tax expense
    47,354       42,819  
Income tax expense
    15,068       13,580  
Net income
    32,286       29,239  
    Net income attributable to non-controlling interest
    81       47  
Net income attributable to Core Laboratories N.V.
  $ 32,205     $ 29,192  
                 
EARNINGS PER SHARE INFORMATION:
               
Basic earnings per share attributable to Core Laboratories N.V.
  $    1.44     $    1.27  
                 
Diluted earnings per share attributable to Core Laboratories N.V.
  $ 1.38     $ 1.26  
                 
Cash dividends per share
  $ 0.12     $  0.10  
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
               
Basic
    22,418       22,970  
                 
Diluted
    23,410       23,210  
                 


















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,
 
 
 
2010
   
2009
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 32,286     $ 29,239  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net provision for (recoveries of) doubtful accounts
    752       424  
Provisions for inventory obsolescence
    222       22  
Equity in earnings of affiliates
    (113 )     (48 )
Stock-based compensation
    1,613       1,322  
Depreciation and amortization
    5,754       5,708  
Non-cash interest expense
    3,839       3,574  
Gain on sale of assets
    (30 )     (77 )
Realization of pension obligation
    85       58  
(Increase) decrease in value of life insurance policies
    (513 )     603  
Deferred income taxes
    428       (3,638 )
Changes in assets and liabilities:
               
Accounts receivable
    2,020       12,312  
Inventories
    (690 )     1,840  
Prepaid expenses and other current assets
    9,587       1,127  
Other assets
    (263 )     85  
Accounts payable
    3,517       (14,370 )
Accrued expenses
    5,969       5,327  
Other long-term liabilities
    (2,097 )     6,610  
Net cash provided by operating activities
    62,366       50,118  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
    (6,155 )     (2,655 )
Patents and other intangibles
    (84 )     (96 )
Acquisitions
    (9,000 )     -  
Proceeds from sale of assets
    66       86  
Premiums on life insurance
    (441 )     (582 )
Net cash used in investing activities
    (15,614 )     (3,247 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Stock options exercised
    274       169  
Excess tax benefits from stock-based compensation
    (140 )     45  
Dividends paid
    (2,696 )     (2,302 )
Repurchase of common shares
    (86,467 )     (7,885 )
Net cash used in financing activities
    (89,029 )     (9,973 )
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (42,277 )     36,898  
CASH AND CASH EQUIVALENTS, beginning of period
    181,045       36,138  
CASH AND CASH EQUIVALENTS, end of period
  $ 138,768     $  73,036  
                 
                 
   





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

 
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 and should be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Core Laboratories N.V. uses the equity method of accounting for 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 the periods presented have been included in these financial statements.  Furthermore, the operating results presented for the three months ended March 31, 2010 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2010.

Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2009 was derived from the 2009 audited consolidated financial statements but does not include all disclosures in accordance with GAAP.

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


2.  INVENTORIES

Inventories consist of the following (in thousands):

   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
Finished goods
  $ 23,019     $ 22,161  
Parts and materials
    8,386       8,756  
Work in progress
    1,247       1,267  
  Total inventories, net
  $ 32,652     $ 32,184  

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


3. GOODWILL AND INTANGIBLES

We account for intangible assets with indefinite lives, including goodwill, in accordance with the accounting guidance, 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.

On January 15, 2010, we acquired assets associated with the fracture diagnostics business of Gray Wireline Service, Inc. for $9 million in cash.  The acquisition was recorded in the Production Enhancement business segment and resulted in an increase of $5.6 million in goodwill and an increase of $3.2 million in intangible assets.  The intangible assets will be amortized over a period of 36 to 60 months.  The acquisition did not have a material impact to the Production Enhancement business segment or Consolidated operating results for the quarter ended March 31, 2010.  The remaining composition of goodwill by business segment at March 31, 2010 is consistent with the amounts disclosed in our Annual Report on Form 10-K as of December 31, 2009.


 
4

 

4.  DEBT AND CAPITAL LEASE OBLIGATIONS

Debt is summarized in the following table (in thousands):
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
        (Unaudited)
 
Senior exchangeable notes
  $ 238,658     $ 238,658  
Discount on senior exchangeable notes
    (25,743 )     (29,546 )
  Net senior exchangeable notes
  $ 212,915     $ 209,112  

In 2006, Core Laboratories LP, a wholly owned subsidiary of Core Laboratories N.V., issued $300 million aggregate principal amount of Senior Exchangeable Notes (the "Notes") which are fully and unconditionally guaranteed by Core Laboratories N.V. and due November 2011.  The Notes bear interest at a rate of 0.25% per year paid on a semi-annual basis.

With the additional amortization of the discount on the Notes, the effective interest rate is 7.48% for the period ended March 31, 2010, which resulted in additional non-cash interest expense of $3.8 million and $3.5 million for the three months ended March 31, 2010 and 2009, respectively.  Each Note carries a $1,000 principal amount and is exchangeable into shares of Core Laboratories N.V. under certain circumstances at a conversion rate of $92.49 or 10.8120 per Note.  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, 2010 and December 31, 2009. At March 31, 2010, the Notes were trading at 143.3% of their face value which would result in $103.3 million of value in excess of the principal. At December 31, 2009 the Notes were trading at 134% of their face value which would result in $81.1 million of value in excess of the principal.  There were 238,658 Notes outstanding at March 31, 2010.

Under the terms of the Notes, on March 31, 2010, the early conversion option for the holders of the Notes was enabled. As a result, the Notes can be converted during the subsequent quarter and have been reclassified from a long-term liability to a short-term liability.

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 borrowing capacity under the Credit Facility was reduced by outstanding letters of credit and performance guarantees and bonds arranged totaling $12.0 million at March 31, 2010 relating to certain projects in progress.  Our available borrowing capacity under the Credit Facility at March 31, 2010 was $88.0 million. As of March 31, 2010, we had $25.2 million of outstanding letters of credit and performance guarantees and bonds in addition to those under the Credit Facility.


5.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS

We provide a noncontributory defined benefit pension plan covering substantially all of our Dutch employees (the "Dutch Plan") who were hired prior to 2007 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 the Dutch Plan by purchasing investment contracts from a large multi-national insurance company.  The investment contracts are purchased annually and expire after five years at which time they are replaced with new contracts that are adjusted to include changes in the benefit obligation for the current year and redemption of the expired contracts.  We determine the fair value of these plan assets with the assistance of an actuary using observable inputs (Level 2).  We make annual premium payments to the insurance company, based on each employee's age and current salary.

The following table summarizes the components of net periodic pension cost under this plan for the three months ended March 31, 2010 and 2009 (in thousands):

 
5

 


   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
Service cost
  $ 323     $ 253  
Interest cost
    376       324  
Expected return on plan assets
    (119 )     (178 )
Amortization of transition asset
    (22 )     (22 )
Amortization of prior service cost
    40       40  
Amortization of net loss
    94       61  
   Net periodic pension cost
  $ 692     $ 478  

During the three months ended March 31, 2010, we contributed approximately $1.1 million, as determined by the insurance company, to fund the estimated 2010 premiums on investment contracts held by the plan.

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 "Internal Revenue Code").  The Deferred Compensation Plan also provides for employer contributions to be made on behalf of participants equal in amount to certain forfeitures of, and/or reductions in, employer contributions that participants could have received under the 401(k) Plan in the absence of certain limitations imposed by the Internal Revenue Code. Employer contributions to the Deferred Compensation Plan vest ratably over a period of five years. Contributions to the plan are invested in equity and other investment fund assets, and carried on the balance sheet at fair value.  The benefits under these contracts are fully vested and payment of benefits generally commences as of the last day of the month following the termination of services except that the payment of benefits for select executives generally commences on the first working day following a six month waiting period following the date of termination.

On a recurring basis, we use the market approach to value certain assets and liabilities at fair value at quoted prices in an active market (Level 1) and certain assets and liabilities using significant other observable inputs (Level 2). We do not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). Gains and losses related to the fair value changes in the deferred compensation assets and liabilities are recorded in General and Administrative Expenses in the Consolidated Statements of Operations.  The following table summarizes the fair value balances (in thousands):

(Unaudited)
       
Fair Value Measurement at March 31, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
   Deferred compensation plan trust assets
  $ 6,646     $ -     $ 6,646     $ -  
                                 
Liabilities:
                               
   Deferred compensation plan
  $ 10,086     $ 1,525     $ 8,561     $ -  

         
Fair Value Measurement at December 31, 2009
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
   Deferred compensation plan trust assets
  $ 6,193     $ -     $ 6,193     $ -  
                                 
Liabilities:
                               
   Deferred compensation plan
  $ 9,366     $ 1,339     $ 8,027     $ -  


 
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.


7.  EQUITY

During the three months ended March 31, 2010, we repurchased 703,902 of our common shares for $86.5 million. Included in this total were rights to 3,529 shares valued at $0.4 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 months ended March 31, 2010, 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 February 25, 2010, we paid a dividend of $0.12 per share of common stock.  In addition, on April 16, 2010, we declared a quarterly dividend of $0.12 per share of common stock for shareholders of record on April 27, 2010 and payable on May 27, 2010.

The following table summarizes our changes in equity for the three months ended March 31, 2010 (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, 2009
  $ 1,430     $ 61,719     $ 469,454     $ (6,536 )   $ (246,699 )   $ 2,390     $ 281,758  
Stock options exercised
    -       (1,218 )     -       -       1,492       -       274  
Stock based-awards
    -       687       -       -       926       -       1,613  
Tax benefit of stock-based awards issued
    -       (140 )     -       -       -       -       (140 )
Repurchase of common shares
    -       -       -       -       (86,467 )     -       (86,467 )
Dividends paid
    -       -       (2,696 )     -       -       -       (2,696 )
Comprehensive income:
                                                       
Amortization of pension,
net of tax
    -       -       -       85       -       -       85  
Net income
    -       -       32,205       -       -       81       32,286  
Total comprehensive income
                                                    32,371  
                                                         
March 31, 2010
  $ 1,430     $ 61,048     $ 498,963     $ (6,451 )   $ (330,748 )   $ 2,471     $ 226,713  

Comprehensive Income

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

   
Three months ended
March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
Net income
  $ 32,286     $ 29,239  
Realization of pension obligation
    85       58  
  Total comprehensive income
  $ 32,371     $ 29,297  


 
7

 


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

   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
Prior service cost
  $ (941 )   $ (971 )
Transition asset
    373       389  
Unrecognized net actuarial loss
    (5,883 )     (5,954 )
  Total accumulated other comprehensive loss
  $ (6,451 )   $ (6,536 )


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,
 
   
2010
   
2009
 
   
(Unaudited)
 
Weighted average basic common shares outstanding
    22,418       22,970  
Effect of dilutive securities:
               
Stock options
    29       100  
Contingent shares
    15       13  
Restricted stock and other
    262       127  
Senior exchangeable notes and warrants
    686       -  
Weighted average diluted common and potential common shares outstanding
    23,410       23,210  

In 2006, we sold warrants that give the holder the right to acquire up to 3.2 million of our common shares beginning at a current exercise price of $124.52 per share.  Included in the table above within the amount for Senior exchangeable notes and warrants line are 14,000 shares which were added to the share count because the average share price exceeded the strike price of the warrants.  These shares were included in calculating the impact to our dilutive earnings per share for the three months ended March 31, 2010.


9. OTHER EXPENSE (INCOME), NET

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

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
(Gain) loss on sale of assets
  $ (31 )   $  (77 )
Foreign exchange loss (gain)
    (91 )     1,888  
Interest income
    (12 )     (39 )
Rents and royalties
    (473 )     (341 )
Other, net
    (191 )     (188 )
  Total other expense (income), net
  $ (798 )   $ 1,243  


 
8

 


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

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
British Pound
  $ 258     $ 72  
Canadian Dollar
    (385 )     348  
Euro
    (30 )     163  
Kazakhstan Tenge
    1       167  
Malaysian Ringgit
    (73 )     136  
Mexican Peso
    108       132  
Russian Ruble
    54       596  
Other currencies, net
    (24 )     274  
  Total loss (gain)
  $ (91 )   $ 1,888  


10.  INCOME TAX EXPENSE

The effective tax rates for the three months ended March 31, 2010 and 2009 were 31.8% and 31.7%, respectively.  The higher effective tax rate reflects the change in activity levels between jurisdictions with different tax rates.


11.  SEGMENT REPORTING

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

*
Reservoir Description: Encompasses the characterization of petroleum reservoir rock, fluid and gas samples. We provide analytical and field services to characterize properties of crude oil and petroleum products to the oil and gas industry.
   
*
Production Enhancement: Includes products and services relating to reservoir well completions, perforations, stimulations and production. We provide integrated services to evaluate the effectiveness of well completions and to develop solutions aimed at increasing the effectiveness of enhanced oil recovery projects.
   
*
Reservoir Management: Combines and integrates information from reservoir description and production enhancement services to increase production and improve recovery of oil and gas from our clients' reservoirs.

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, 2010
                         
Revenues from unaffiliated customers
  $ 104,093     $ 68,844     $ 15,400     $ -     $ 188,337  
Inter-segment revenues
    300       294       288       (882 )     -  
Segment operating income (loss)
    25,084       20,943       5,620       (234 )     51,413  
Total assets
    257,184       182,943       18,216       155,807       614,150  
Capital expenditures
    5,329       672       38       116       6,155  
Depreciation and amortization
    3,507       1,623       158       466       5,754  
                                         
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 (loss)
    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       -       5       2,655  
Depreciation and amortization
    3,357       1,462       177       712       5,708  
                                         
(1) "Corporate & Other" represents those items that are not directly related to a particular segment and eliminations.
 


12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

The following condensed consolidating financial information is included so that separate financial statements of Core Laboratories LP are not required to be filed with the U.S. Securities and Exchange Commission (the "SEC"). 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, 2010 and December 31, 2009, statements of operations for each of the three months ended March 31, 2010 and 2009 and the statements of cash flows for each of the three months ended March 31, 2010 and 2009 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, 2010
 
   
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
  $ 17,005     $ 109,067     $ 12,696     $ -     $ 138,768  
Accounts receivable, net
    1       31,136       99,849       -       130,986  
Inventories, net
    -       2,202       30,450       -       32,652  
Prepaid expenses and other current assets
    16,723       5,732       10,916       -       33,371  
Total current assets
    33,729       148,137       153,911       -       335,777  
                                         
PROPERTY, PLANT AND EQUIPMENT, net
    -       21,516       78,152       -       99,668  
GOODWILL AND INTANGIBLES, net
    46,986       16,519       100,181       -       163,686  
INTERCOMPANY RECEIVABLES
    37,674       265,369       288,046       (591,089 )     -  
INVESTMENT IN AFFILIATES
    571,968       -       1,599,556       (2,171,091 )     433  
DEFERRED TAX ASSET
    2,951       -       7,753       (10,704 )     -  
OTHER ASSETS
    2,987       9,315       2,284       -       14,586  
TOTAL ASSETS
  $ 696,295     $ 460,856     $ 2,229,883     $ (2,772,884 )   $ 614,150  
                                         
LIABILITIES AND EQUITY
                                 
CURRENT LIABILITIES:
                                       
Accounts payable
  $ 441     $ 5,733     $ 30,352     $ -     $ 36,526  
Short-term debt
     -       212,915       -       -       212,915  
Other accrued expenses
    2,345       30,149       46,874       -       79,368  
Total current liabilities
    2,786       248,797       77,226       -       328,809  
                                         
LONG-TERM DEBT
    -       -       -       -       -  
DEFERRED COMPENSATION
    6,199       10,905       792       -       17,896  
DEFERRED TAX LIABILITY
    -       17,934       298       (10,704 )     7,528  
INTERCOMPANY PAYABLES
    449,769       24,058       117,262       (591,089 )     -  
OTHER LONG-TERM LIABILITIES
    13,299       7,152       12,753       -       33,204  
                                         
SHAREHOLDERS' EQUITY
    224,242       152,010       2,019,081       (2,171,091 )     224,242  
NON-CONTROLLING INTEREST
    -       -       2,471       -       2,471  
TOTAL EQUITY
    224,242       152,010       2,021,552       (2,171,091 )     226,713  
                                         
TOTAL LIABILITIES AND EQUITY
  $ 696,295     $ 460,856     $ 2,229,883     $ (2,772,884 )   $ 614,150  


 
11

 


Condensed Consolidating Balance Sheets
                             
                               
(In thousands)
 
December 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
  $ 73,998     $ 95,048     $ 11,999     $ -     $ 181,045  
Accounts receivable, net
    1       29,452       104,305       -       133,758  
Inventories, net
    -       2,679       29,505       -       32,184  
Prepaid expenses and other current assets
    11,809       22,209       9,532       -       43,550  
Total current assets
    85,808       149,388       155,341       -       390,537  
                                         
PROPERTY, PLANT AND EQUIPMENT, net
    -       21,988       76,796       -       98,784  
GOODWILL AND INTANGIBLES, net
    46,986       7,949       100,185       -       155,120  
INTERCOMPANY RECEIVABLES
    37,681       216,670       232,802       (487,153 )     -  
INVESTMENT IN AFFILIATES
    540,724       -       1,387,715       (1,928,118 )     321  
DEFERRED TAX ASSET
    2,951       4,644       14,359       (21,954 )     -  
OTHER ASSETS
    2,828       8,770       1,806       -       13,404  
TOTAL ASSETS
  $ 716,978     $ 409,409     $ 1,969,004     $ (2,437,225 )   $ 658,166  
                                         
LIABILITIES AND EQUITY
                                 
CURRENT LIABILITIES:
                                       
Accounts payable
  $ 501     $ 6,404     $ 26,104     $ -     $ 33,009  
Other accrued expenses
    673       29,738       42,988       -       73,399  
Total current liabilities
    1,174       36,142       69,092       -       106,408  
                                         
LONG-TERM DEBT
    -       209,112       -       -       209,112  
DEFERRED COMPENSATION
    6,046       10,094       726       -       16,866  
DEFERRED TAX LIABILITY
    -       29,646       -       (21,954 )     7,692  
INTERCOMPANY PAYABLES
    417,618       -       69,535       (487,153 )     -  
OTHER LONG-TERM LIABILITIES
    12,772       7,702       15,856       -       36,330  
                                         
SHAREHOLDERS' EQUITY
    279,368       116,713       1,811,405       (1,928,118 )     279,368  
NON-CONTROLLING INTEREST
    -       -       2,390       -       2,390  
TOTAL EQUITY
    279,368       116,713       1,813,795       (1,928,118 )     281,758  
                                         
TOTAL LIABILITIES AND EQUITY
  $ 716,978     $ 409,409     $ 1,969,004     $ (2,437,225 )   $ 658,166  









 
12

 


Condensed Consolidating Statements of Operations (Unaudited)
                         
                               
(In thousands)
 
Three Months Ended March 31, 2010
 
   
Core Laboratories N.V. (Parent/ Guarantor)
   
Core Laboratories LP (Issuer)
   
Other Subsidiaries (Non- Guarantors)
   
Consolidating Adjustments
   
Consolidated Total
 
REVENUES
                             
Operating revenues
  $ -     $ 45,161     $ 143,176     $ -     $ 188,337  
Intercompany revenues
    288       4,587       35,509       (40,384 )     -  
Earnings from consolidated affiliates
    35,189       -       100,759       (135,948 )     -  
Total revenues
    35,477       49,748       279,444       (176,332 )     188,337  
                                         
OPERATING EXPENSES
                                       
Operating costs
    390       24,984       100,214       -       125,588  
General and administrative expenses
    2,167       4,210       3       -       6,380  
Depreciation and amortization
    -       1,558       4,196       -       5,754  
Other expense (income), net
    (135 )     1,591       28,308       (30,562 )     (798 )
                                         
Operating income
    33,055       17,405       146,723       (145,770 )     51,413  
Interest expense
    -       4,055       4       -       4,059  
                                         
Income before income tax expense
    33,055       13,350       146,719       (145,770 )     47,354  
Income tax expense (benefit)
    850       5,482       8,736       -       15,068  
                                         
Net income
    32,205       7,868       137,983       (145,770 )     32,286  
Net income attributable to non-controlling interest
    -       -       81       -       81  
                                         
Net income attributable to Core Laboratories
  $ 32,205     $ 7,868     $ 137,902     $ (145,770 )   $ 32,205  


Condensed Consolidating Statements of Cash Flows (Unaudited)
                         
                               
(In thousands)
 
Three Months Ended March 31, 2010
 
   
Core Laboratories N.V. (Parent/ Guarantor)
   
Core Laboratories LP (Issuer)
   
Other Subsidiaries (Non- Guarantors)
   
Consolidating Adjustments
   
Consolidated Total
 
                               
Net cash provided by operating activities
  $ 32,036     $ 25,991     $ 4,339     $ -     $ 62,366  
                                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                                 
Capital expenditures
    -       (2,520 )     (3,635 )     -       (6,155 )
Patents and other intangibles
    -       (20 )     (64 )     -       (84 )
Acquisitions, net of cash
    -       (9,000 )     -       -       (9,000 )
Proceeds from sale of assets
    -       9       57       -       66  
Premiums on life insurance
    -       (441 )     -       -       (441 )
Net cash used in investing activities
    -       (11,972 )     (3,642 )     -       (15,614 )
                                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                                 
Stock options exercised
    274       -       -       -       274  
Excess tax benefit from stock-based payments
    (140 )     -       -       -       (140 )
Dividends paid
    (2,696 )     -       -       -       (2,696 )
Repurchase of common shares
    (86,467 )     -       -       -       (86,467 )
Net cash used in financing activities
    (89,029 )     -       -       -       (89,029 )
                                         
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (56,993 )     14,019       697       -       (42,277 )
CASH AND CASH EQUIVALENTS, beginning of period
    73,998       95,048       11,999       -       181,045  
CASH AND CASH EQUIVALENTS, end of period
  $ 17,005     $ 109,067     $ 12,696     $ -     $ 138,768  


 
13

 



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       4       -       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
    -       2       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  


 
14

 


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, 2010 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, 2009.

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 5,000 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 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;
   
-
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;

 
15

 


   
-
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 and/or financial 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 in oil producing or consuming countries;
   
-
level of consumption of oil, gas and petrochemicals by consumers;
   
-
changes in existing laws or regulations;
   
-
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.

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, 2009, 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 that are based on market conditions existing at the time our targets were established.  Based on recent developments, we believe that the current level of activities, workflows, and operating margins outside North America will grow slightly and that North American activity levels may decrease slightly in response to lower natural gas prices.  Recent natural gas production data indicates that the North American supply continues to increase and may continue to increase over the next several quarters.  In addition, the North American rig count has continued to increase throughout the first quarter of 2010.

 
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Results of Operations

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

(Unaudited)
 
Three Months Ended March 31,
   
% Change
 
   
2010
   
2009
      2010/2009  
REVENUES:
             
Services
  $ 143,442       76   $ 141,692       79     1
Product sales
    44,895       24     37,184       21     21
  Total revenues
    188,337       100     178,876       100     5
OPERATING EXPENSES:
                                       
Cost of services*
    95,357       66     88,296       62     8
Cost of product sales*
    30,231       67     27,736       75     9
  Total cost of services and product sales
    125,588       67     116,032       65     8
General and administrative expenses
    6,380       3     9,274       5     (31 %)
Depreciation and amortization
    5,754       3     5,708       3     1
Other expense (income), net
    (798 )     -       1,243       1     (164 %)
Operating income
    51,413       27     46,619       26     10
Interest expense
    4,059       2     3,800       2     7
Income before income tax expense
    47,354       25     42,819       24     11
Income tax expense
    15,068       8     13,580       8     11
Net income
    32,286       17     29,239       16     10
Net income attributable to
non-controlling interest
    81       -       47       -       72
Net income attributable to
    Core Laboratories N.V.
  $ 32,205       17   $ 29,192       16     10
                                         
*Percentage based on applicable revenue rather than total revenue
                 

Operating Results for the Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009 (unaudited)

Service Revenues

Service revenues increased to $143.4 million for the first quarter of 2010, up 1% when compared to $141.7 million for the first quarter of 2009.  We have seen a recent increase in activity as a result of additional work on potential lower Tertiary reservoirs in the deepwater Gulf of Mexico.   Our large scale core analyses and reservoir fluid projects combined with our fluid and derived products inspection, calibration and assay work continue to provide meaningful revenue streams in Europe, the Middle East, Asia-Pacific, offshore deepwater regions of the Gulf of Mexico and the southern-Atlantic margins off the coast of West Africa and Brazil.

Product Sales Revenues

Revenues associated with product sales increased to $44.9 million for the quarter ended March 31, 2010, up 21% from $37.2 million for the first quarter of 2009.  The increase in revenue was driven by the acceptance and demand of our specialized completion products introduced over the last three years and has led to increased market share in North American natural gas and oil shale reservoirs and has increased market penetration in Middle East and Asia-Pacific perforating markets.  These specialized optimizing technologies are focused on high-end well completion and stimulation programs mainly in the Haynesville, Marcellus and Eagle Ford shale plays and in multi-stage completions in the Bakken oil-shale play.

Cost of Services

Cost of services expressed as a percentage of service revenue was 66% for the quarter ended March 31, 2010, up from 62% for the same period in 2009.  The increase in the cost of services relative to service revenue was primarily a result of slightly higher sales of lower margins services.

 
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Cost of Product Sales

Cost of product sales as a percentage of product sales revenues was 67% for the quarter ended March 31, 2010, down from 75% for the same period in 2009.  The decrease in cost of sales as a percentage of product sale revenues was primarily due to the growing demand for our new technologies which are our higher margin products and from an overall increase in sales which improved absorption of our fixed cost structure.

 
General and Administrative Expenses

General and administrative expenses totaled $6.4 million for the first quarter of 2010, down 31% from the $9.3 million incurred in the first quarter of 2009, primarily from a reduction in compensation expense in 2010 and increased severance costs in the first quarter of 2009.

Depreciation and Amortization Expense

Depreciation and amortization expense increased to $5.8 million for the first quarter of 2010, which was virtually unchanged when compared to $5.7 million for the first quarter of 2009.

Other Expense (Income), Net

Other expense (income), net consisted of the following for the quarter ended March 31, 2010 and 2009 (in thousands):

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
(Gain) loss on sale of assets
  $ (31 )   $  (77 )
Foreign exchange loss (gain)
    (91 )     1,888  
Interest income
    (12 )     (39 )
Rents and royalties
    (473 )     (341 )
Other, net
    (191 )     (188 )
  Total other expense (income), net
  $ (798 )   $ 1,243  

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

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
British Pound
  $ 258     $ 72  
Canadian Dollar
    (385 )     348  
Euro
    (30 )     163  
Kazakhstan Tenge
    1       167  
Malaysian Ringgit
    (73 )     136  
Mexican Peso
    108       132  
Russian Ruble
    54       596  
Other currencies, net
    (24 )     274  
  Total loss (gain)
  $ (91 )   $ 1,888  

Income Tax Expense

The effective tax rates for the three months ended March 31, 2010 and 2009 were 31.8% and 31.7%, respectively.  The higher effective tax rate reflects the change in activity levels between jurisdictions with different tax rates.

 
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Segment Analysis

Our operations are managed primarily in three complementary segments - Reservoir Description, Production Enhancement and Reservoir Management.  The following tables summarize our results by operating segment for the three months ended March 31, 2010 and 2009 (in thousands):

   
Three Months Ended
March 31,
   
% Change
 
   
2010
   
2009
      2010/2009  
Revenues:
 
(Unaudited)
         
Reservoir Description
  $ 104,093     $ 102,523       2
Production Enhancement
    68,844       63,100       9
Reservoir Management
    15,400       13,253       16
   Consolidated
  $ 188,337     $ 178,876       5
                         
Operating income:
                       
Reservoir Description
  $ 25,084     $ 24,752       1
Production Enhancement
    20,943       18,324       14
Reservoir Management
    5,620       3,478       62
Corporate and Other1
    (234 )     65    
NM
 
   Consolidated
  $ 51,413     $ 46,619       10
                         
(1) "Corporate and Other" represents those items that are not directly related to a particular segment
 
"NM"  means not meaningful
 

Reservoir Description

Revenues from the Reservoir Description segment increased 2%, or $1.6  million, to $104.1  million in the first quarter of 2010, compared to $102.5  million in the first quarter of 2009.  This segment’s operations continued to benefit from high volumes of core analyses, reservoir fluids phase-behavior studies, and crude oil testing, inspection, distillation, fractionation, and characterization projects from both offshore South Atlantic margins, Europe, the Middle East, including projects in both northern and southern Iraq, and Asia-Pacific regions.

Operating income in the first quarter of 2010 increased by 1%, or $0.3 million, to $25.1 million compared to $24.8  million for the first quarter of 2009.  The segment continues to benefit from maintaining an emphasis on higher value and thus higher margin services on internationally-based development and production-related crude oil projects in addition to the de-emphasis of the more cyclical exploration-related projects.  There also continues to be an emphasis on controlling costs.  Operating margins for the quarter ended March 31, 2010 were 24%, representing no change from the same period in 2009. 

Production Enhancement

Revenues from the Production Enhancement segment increased by 9%, or $5.7 million, to $68.8 million in the first quarter of 2010 as compared to $63.1 million in the first quarter in 2009. The increase in revenues was due to the increase in North American rig count coupled with client acceptance of our completion products and our fracture diagnostic services, as well as increased market share of our perforating charges and gun systems in the North American natural gas and oil shale reservoirs as well as Middle East and Asia-Pacific markets.

Operating income in the first quarter of 2010 increased by 14%, or $2.6 million, to $20.9 million from $18.3 million for the first quarter of 2009.  Operating margins increased to 30% in the first quarter of 2010 compared to 29% for the same period in 2009.   The increase in margins was primarily driven by our continued market penetration of higher-margin services including our proprietary and patented diagnostic technologies, such as SpectraChem® Plus+ and ZeroWash®, and our HERO™ line of perforating charges and gun systems.

 
19

 


Reservoir Management

Revenues from the Reservoir Management segment in the first quarter of 2010 increased 16% to $15.4 million from $13.3 million as compared to the first quarter of 2009.  The increase in revenue was due to continued interest in several of our existing multi-client reservoir studies including such studies in the Eagle Ford Shale in south Texas, Haynesville Shale, and Marcellus Shale along with the continued participation in our North American Gas Shale Study.  We initiated a joint-industry study of the Montney Shale in northeastern British Columbia and northern Alberta.

Operating income in the first quarter of 2010 increased 62% to $5.6 million from $3.5 million for the first quarter of 2009. The increase in operating income was primarily related to the mix of activity in our consortium projects and the timing of our 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 regarding the cash that was available in the period that was in excess of our needs to fund our capital expenditures and operating activities. Free cash flow is not a measure of operating performance under GAAP, and should not be considered in isolation nor construed as an alternative to operating profit, net income (loss) or cash flows from operating, investing or financing activities, each as determined in accordance with GAAP. Free cash flow does not represent residual cash available for distribution because we may have other non-discretionary expenditures that are not deducted from the measure. Moreover, since free cash flow is not a measure determined in accordance with GAAP and thus is susceptible to varying interpretations and calculations, free cash flow as presented, may not be comparable to similarly titled measures presented by other companies.  The following table reconciles this non-GAAP financial measure to the most directly comparable measure calculated and presented in accordance with GAAP for the three months ended March 31, 2010 and 2009 (in thousands):

   
Three Months Ended
March 31,
   
% Change
 
   
2010
   
2009
      2010/2009  
Free cash flow calculation:
 
(Unaudited)
         
Net cash provided by operating activities
  $ 62,366     $ 50,118       24
Less:  capital expenditures
    6,155       2,655       132
    Free cash flow
  $ 56,211     $ 47,463       18

The increase in free cash flow in 2010 compared to 2009 was due to an increase in net income and improved working capital excluding cash and senior exchangeable notes, primarily from collection of receivables over payments made to vendors.

Cash Flows

The following table summarizes cash flows for the three months ended March 31, 2010 and 2009 (in thousands):

   
Three Months Ended
March 31,
   
% Change
 
   
2010
   
2009
      2010/2009  
Cash provided by/(used in):
 
(Unaudited)
         
    Operating activities
  $ 62,366     $ 50,118       24
    Investing activities
    (15,614 )     (3,247 )     381
    Financing activities
    (89,029 )     (9,973 )     793
Net change in cash and cash equivalents
  $ (42,277 )   $ 36,898       (215 %)


 
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The increase in cash flows provided by operating activities was primarily attributable to an increase in net income and improved working capital excluding cash and senior exchangeable notes, primarily from collection of receivables over payments made to vendors.

Cash flows used in investing activities increased due to higher capital expenditures of $6.2 million for the period and an acquisition for $9.0 million.

The increase in cash flows used in financing activities relates primarily to an increase in the number of shares repurchased under our common share repurchase program.  In the first three months of 2010, we repurchased 703,902 shares for an aggregate price of $86.5 million compared to 121,605 shares for an aggregate price of $7.9 million during the same period in 2009.

In 2006, Core Laboratories LP, a wholly owned subsidiary of Core Laboratories N.V., issued $300 million aggregate principal amount of Senior Exchangeable Notes (the "Notes") which are fully and unconditionally guaranteed by Core Laboratories N.V. and due November 2011.  Under the terms of the Notes, on March 31, 2010, the early conversion option for the holders of the Notes was enabled. As a result, the Notes can be converted during the subsequent quarter and have been reclassified from a long-term liability to a short-term liability.

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 borrowing capacity under the Credit Facility is reduced by outstanding letters of credit and performance guarantees and bonds arranged under the Credit Facility which totaled $12.0 million at March 31, 2010 and related to certain projects in progress.  Our available borrowing capacity under the Credit Facility at March 31, 2010 was $88.0 million. As of March 31, 2010, we had $25.2 million of outstanding letters of credit and performance guarantees and bonds in addition to those under the Credit Facility.

The terms of the Credit Facility require us to meet certain financial and operational covenants. We believe that we were in compliance with all such covenants at March 31, 2010.  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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.


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, 2009.

 
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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 SEC.  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, 2010 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, 2010, 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.


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, 2010:

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 (3)
 
January 1-31, 2010
    664,373     $ 122.89       664,373       3,341,484  
February 1-28, 2010 (1)
    23,364       118.34       23,364       3,321,561  
March 1-31, 2010 (2)
    16,165       127.42       16,165       3,325,746  
Total
    703,902     $ 122.84       703,902          

(1) Contains 364 shares valued at approximately $44 thousand, or $122.04 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 2010.
(2) Contains 3,165 shares valued at $0.4 million, or $124.37 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 2010.
(3) In connection with our initial public offering in September 1995, our shareholders authorized our Management Board to repurchase up to 10% of our issued share capital, the maximum allowed under Dutch law at the time, for a period of 18 months.  This authorization was renewed at subsequent annual shareholder meetings.  At a special shareholders’ meeting on January 29, 2009, following a change in Dutch law that permitted us to repurchase up to 50% of our issued share capital in open market purchases, our shareholders authorized an extension through July 29, 2010 to purchase up to 25.6% of our issued share capital, consisting of 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.




 
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
       


 
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 29, 2010
By:
/s/ Richard L. Bergmark
   
Richard L. Bergmark
   
Chief Financial Officer
   
(Duly Authorized Officer and
   
Principal Financial Officer)

 

 


 
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