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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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
incorporation or organization) Identification No.)
Herengracht 424
1017 BZ Amsterdam
The Netherlands Not Applicable
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (31-20)420-3191
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- ------
The number of common shares of the Registrant, par value EUR 0.01 per
share, outstanding at August 8, 2002 was 33,264,821.
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CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Page
Part I -- Financial Information
Item 1 -- Financial Statements
Consolidated Balance Sheets at June 30, 2002 and December 31, 2001.......................... 1
Consolidated Statements of Operations for the Three Months Ended
June 30, 2002 and 2001................................................................. 2
Consolidated Statements of Operations for the Six Months Ended
June 30, 2002 and 2001................................................................. 3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001................................................................. 4
Notes to Consolidated Financial Statements ................................................. 5
Item 2-- Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................ 11
Item 3-- Quantitative & Qualitative Disclosures of Market Risk.................................. 17
Part II -- Other Information
Item 1-- Legal Proceedings...................................................................... 18
Item 2-- Changes in Securities.................................................................. 18
Item 3-- Defaults Upon Senior Securities........................................................ 18
Item 4-- Submission of Matters to a Vote of Security Holders ................................... 18
Item 5-- Other Information...................................................................... 19
Item 6-- Exhibits and Reports on Form 8-K....................................................... 19
Signature ....................................................................................... 20
CORE LABORATORIES N.V.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 30, December 31,
2002 2001
---------- ----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 17,535 $ 14,456
Accounts receivable, less allowance for doubtful accounts of
$7,297 and $7,829 in 2002 and 2001, respectively.................... 88,030 100,718
Inventories ................................................................ 39,364 41,109
Prepaid expenses and other current assets................................... 13,380 9,728
Deferred tax asset.......................................................... 9,691 9,123
---------- ----------
Total current assets............................................................. 168,000 175,134
PROPERTY, PLANT AND EQUIPMENT, net............................................... 97,620 97,615
INTANGILES, GOODWILL AND OTHER LONG-TERM ASSETS, net............................. 143,737 166,751
---------- ----------
Total assets..................................................... $ 409,357 $ 439,500
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........................................ $ 30 $ 454
Accounts payable............................................................ 15,339 19,721
Other accrued expenses...................................................... 16,691 19,832
---------- ----------
Total current liabilities........................................................ 32,060 40,007
LONG-TERM DEBT .................................................................. 89,000 95,089
OTHER LONG-TERM LIABILITIES...................................................... 21,434 27,983
MINORITY INTEREST................................................................ 761 815
SHAREHOLDERS' EQUITY:
Preference shares, EUR 0.01 par value; 3,000,000 shares authorized,
no shares issued or outstanding......................................... -- --
Common shares, EUR 0.01 par value; 100,000,000 shares authorized,
33,264,821 and 33,204,571 issued and outstanding
at 2002 and 2001, respectively.......................................... 546 546
Additional paid-in capital.................................................. 187,304 186,751
Retained earnings........................................................... 78,252 88,309
---------- ----------
Total shareholders' equity.............................................. 266,102 275,606
---------- ----------
Total liabilities and shareholders' equity......................... $ 409,357 $ 439,500
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
1
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Three Months Ended
June 30,
2002 2001
---------- ----------
(Unaudited)
SERVICES......................................................................... $ 73,703 $ 74,110
SALES............................................................................ 13,761 17,150
---------- ----------
87,464 91,260
OPERATING EXPENSES:
Cost of services............................................................ 57,605 56,881
Cost of sales............................................................... 12,812 13,017
General and administrative expenses ........................................ 4,976 3,984
Depreciation and amortization............................................... 4,838 4,569
Goodwill amortization....................................................... - 1,033
Other, net.................................................................. 281 (982)
---------- ----------
80,512 78,502
INCOME BEFORE INTEREST EXPENSE AND
INCOME TAX EXPENSE.......................................................... 6,952 12,758
INTEREST EXPENSE................................................................. 1,920 1,943
---------- ----------
INCOME BEFORE INCOME TAX EXPENSE................................................. 5,032 10,815
INCOME TAX EXPENSE............................................................... 1,409 3,028
---------- ----------
NET INCOME....................................................................... $ 3,623 $ 7,787
========== ==========
PER SHARE INFORMATION:
BASIC EARNINGS PER SHARE................................................... $ 0.11 $ 0.24
========== ==========
WEIGHTED AVERAGE BASIC COMMON SHARES
OUTSTANDING........................................................... 33,245,618 33,044,424
========== ==========
DILUTED EARNINGS PER SHARE.................................................. $ 0.11 $ 0.23
========== ==========
WEIGHTED AVERAGE DILUTED COMMON SHARES
OUTSTANDING........................................................... 33,865,501 34,192,362
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
2
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Six Months Ended
June 30,
2002 2001
---------- ----------
(Unaudited)
SERVICES......................................................................... $ 143,302 $ 147,635
SALES............................................................................ 29,226 34,971
---------- ----------
172,528 182,606
OPERATING EXPENSES:
Cost of services............................................................ 112,661 113,305
Cost of sales............................................................... 26,694 28,093
General and administrative expenses ........................................ 9,641 7,543
Depreciation and amortization............................................... 9,587 8,953
Goodwill amortization....................................................... - 2,066
Other, net................................................................. 842 (582)
---------- ----------
159,425 159,378
INCOME BEFORE INTEREST EXPENSE, INCOME TAX EXPENSE
AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................................... 13,103 23,228
INTEREST EXPENSE................................................................. 3,888 3,921
---------- ----------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................................... 9,215 19,307
INCOME TAX EXPENSE............................................................... 2,580 5,406
---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................................................ 6,635 13,901
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.............................. (16,692) -
---------- ----------
NET (LOSS) INCOME................................................................ $ (10,057) $ 13,901
========== ==========
PER SHARE INFORMATION:
BASIC EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE.............................. $ 0.20 $ 0.42
---------- ----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......................... (0.50) -
---------- ----------
BASIC (LOSS) EARNINGS PER SHARE............................................ $ (0.30) $ 0.42
========== ==========
WEIGHTED AVERAGE BASIC COMMON SHARES
OUTSTANDING........................................................... 33,227,805 32,965,168
========== ==========
DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE.............................. $ 0.20 $ 0.41
---------- ----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......................... (0.50) -
---------- ----------
DILUTED (LOSS) EARNINGS PER SHARE.......................................... $ (0.30) $ 0.41
========== ==========
WEIGHTED AVERAGE DILUTED COMMON SHARES
OUTSTANDING........................................................... 33,775,622 34,123,653
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
2002 2001
---------- ----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ (10,057) $ 13,901
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Cumulative effect of change in accounting principle..................... 16,692 -
Deferred tax expense.................................................... 199 129
Depreciation and amortization........................................... 9,587 11,019
Debt issuance costs..................................................... 205 272
Gain on sale of fixed assets............................................ (135) (38)
Changes in assets and liabilities:
Decrease in accounts receivable......................................... 11,851 5,179
Decrease (increase) in inventories...................................... 1,745 (4,409)
Increase in prepaid expenses and other current assets................... (3,652) (5,590)
Decrease in accounts payable............................................ (4,382) (5,469)
Increase (decrease) in accrued payroll expenses......................... 1,704 (1,394)
Increase (decrease) in income tax payable............................... (643) 3,512
Decrease in taxes other than payroll and income......................... (1,554) (2,179)
Decrease in other accrued expenses...................................... (3,013) (1,166)
Increase (decrease) in other long-term liabilities...................... 840 (273)
Other................................................................... 636 (513)
---------- ----------
Net cash provided by operating activities.......................... 20,023 12,981
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (11,159) (13,781)
Proceeds from sale of fixed assets.......................................... 580 79
Other ...................................................................... (467) 15
---------- ----------
Net cash used in investing activities................................... (11,046) (13,687)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt.................................................. (10,443) (4,100)
Borrowings under long-term debt............................................. 4,003 5,070
Capital lease obligation, net............................................... (18) (161)
Exercise of stock options................................................... 553 2,576
Other....................................................................... 7 (37)
---------- ----------
Net cash used in financing activities................................... (5,898) 3,348
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ 3,079 2,642
CASH AND CASH EQUIVALENTS, beginning of period................................... 14,456 12,519
---------- ----------
CASH AND CASH EQUIVALENTS, end of period......................................... $ 17,535 $ 15,161
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
4
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Core Laboratories N.V. and have been prepared in accordance with
United States of America ("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, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the six-month period
ended June 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. Balance sheet information as of
December 31, 2001 was derived from the 2001 annual audited consolidated
financial statements. These financial statements should be read in conjunction
with the consolidated financial statements and the summary of significant
accounting policies and notes thereto included in our Form 10-K for the year
ended December 31, 2001. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Recent Pronouncements
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." SFAS 144 provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets and modifies the accounting and reporting of
discontinued operations. SFAS 144 is effective for fiscal years beginning after
December 31, 2001. We do not expect SFAS 144 to have a material adverse effect
on our financial position or results of operations.
5
2. INVENTORIES
Inventories consist of manufactured goods, materials and supplies used for
sales or services provided to customers. Inventories are stated at the lower of
average or standard cost (includes direct material, labor and overhead) or
estimated net realizable value and are reflected net of valuation reserves of
approximately $1,695,000 and $1,847,000 at June 30, 2002 and December 31, 2001,
respectively. Inventories consisted of the following (in thousands):
June 30, December 31,
2002 2001
---------- ----------
(Unaudited)
Finished goods........................ $ 28,536 $ 30,120
Parts and materials................... 5,745 6,561
Work in process....................... 5,083 4,428
---------- ----------
Total inventories..... $ 39,364 $ 41,109
---------- ----------
3. BUSINESS COMBINATIONS, INTANGIBLES AND GOODWILL
Intangibles include patents, trademarks, service marks and trade names.
Goodwill represents the excess of purchase price over the fair value of the net
assets and individual intangibles acquired in acquisitions accounted for under
the purchase method of accounting. Intangibles are charged to expense in equal
amounts over their estimated useful lives.
In June 2001, the FASB issued two statements, SFAS 141, "Business
Combinations", and SFAS 142, "Goodwill and Other Intangible Assets", that amend
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations", and
supersede APB Opinion No. 17, "Intangible Assets." SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations and
establishes the purchase method of accounting as the only acceptable method on
all business combinations initiated after June 30, 2001. This statement requires
that goodwill resulting from a business combination after June 30, 2001 be
recognized as an asset but not amortized, while goodwill existing at June 30,
2001 was amortized through December 31, 2001. Beginning January 1, 2002, we no
longer amortize goodwill but will test for impairment annually or more
frequently if circumstances indicate a potential impairment. We determined our
reporting unit level to be our operating units. Using the discounted cash flow
method under the requirements of SFAS 142, we have reflected impairment of
goodwill of approximately $16.7 million related to our Reservoir Management
Segment as a result of adoption of SFAS 142 on January 1, 2002. This impairment
was recorded in the first quarter of 2002 and is reflected in the statement of
operations as a cumulative effect of change in accounting principle. The
cessation of goodwill amortization under the guidelines will result in a
reduction of approximately $4.2 million in annual operating expenses, assuming
no additional impairment of goodwill. Proforma information relating to goodwill
amortization is presented in the following tables:
Net Income
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss)................ $ 3,623 $ 7,787 $ (10,057) $ 13,901
Add back: Goodwill amortization........... - 1,033 - 2,066
---------- ---------- ---------- ----------
Adjusted net income (loss)................ $ 3,623 $ 8,820 $ (10,057) $ 15,967
========== ========== ========== ==========
6
Basic Earnings per Share
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss)................ $ 0.11 $ 0.24 $ (0.30) $ 0.42
Add back: Goodwill amortization........... - 0.03 - 0.06
---------- ---------- ---------- ----------
Adjusted net income (loss)................ $ 0.11 $ 0.27 $ (0.30) $ 0.48
========== ========== ========== ==========
Diluted Earnings per Share
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss)................ $ 0.11 $ 0.23 $ (0.30) $ 0.41
Add back: Goodwill amortization........... - 0.03 - 0.06
---------- ---------- ---------- ----------
Adjusted net income (loss)................ $ 0.11 $ 0.26 $ (0.30) $ 0.47
========== ========== ========== ==========
4. LONG-TERM DEBT
Long-term debt is summarized in the following table (in thousands):
June 30, December 31,
2002 2001
------------- -------------
(Unaudited)
Credit Facility with a bank group:
$100,000 revolving debt facilities......................... $ 14,000 $ 20,000
Senior Notes................................................. 75,000 75,000
Other indebtedness........................................... 30 543
------------- -------------
Total debt.............................................. 89,030 95,543
Less - current maturities.................................... 30 454
------------- -------------
Total long-term debt................................. $ 89,000 $ 95,089
============= =============
In July 1999, we entered into a $100 million Credit Facility which provides
for (i) a committed revolving debt facility of $95 million and (ii) a Euro
denominated revolving debt facility with U.S. dollar equivalency of $5 million.
At June 30, 2002, approximately $86 million was available for borrowing under
the revolving Credit Facility. Loans under the Credit Facility bear interest
from LIBOR plus 1.25% to a maximum of LIBOR plus 1.75%. The average interest
rate in effect at June 30, 2002 was 3.26%, and the average for 2002 was 3.28%.
The revolving Credit Facility requires interest payments only, until maturity in
June 2004.
In July 1999, we issued $75 million in Senior Notes which bear an average
interest rate of 8.16% and require annual principal payments beginning in July
2005 and continuing through July 2011.
The terms of the Credit Facility and Senior Notes require us to meet
certain financial covenants, including certain minimum equity and cash flow
tests. We believe that we are in compliance with all such covenants contained in
our credit agreements. All of our material wholly owned subsidiaries are
guarantors or co-borrowers under both credit agreements.
7
5. RESTRUCTURING CHARGES
During the fourth quarter of 2001, we had several transactions which
impacted certain operations that were not viewed as ongoing. We restructured
certain operations in Mexico, the United Kingdom, the U.S. and other countries
to improve operating efficiencies. This restructuring expense included
write-offs of assets and leasehold improvements and an accrual for facility
restoration, severance benefits and lease termination costs. Approximately 100
field employees were terminated. In the second quarter of 2002, we relocated a
facility from Mexico City, Mexico to Villahermosa, Mexico and we intend to
relocate one of our operations from Dallas to the Houston Advanced Technology
Center in the second half of 2002. This charge of approximately $3.0 million
affected each of our operating segments as follows: Reservoir Description - $0.8
million; Production Enhancement - $0.1 million; Reservoir Management - $2.1
million. Substantially all employee terminations were completed by the end of
the first quarter of 2002. Total cash required for this restructuring charge of
$2.1 million will be funded from operating activities. Cash required for the
costs incurred through June 30, 2002 was $1.3 million. This charge is summarized
in the following table:
Restructuring Charge
(in thousands)
Lease Asset
Obligations Severance Restoration Write-offs (1) Other Total
----------- ----------- ----------- ----------- ----------- -----------
Total restructuring charges.............. $ 598 $ 951 $ 380 $ 862 $ 184 $ 2,975
Less: Costs incurred through
December 31, 2001............... 38 394 -- 862 40 1,334
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at December 31, 2001... 560 557 380 -- 144 1,641
----------- ----------- ----------- ----------- ----------- -----------
Less: Costs incurred through
June 30, 2002................... 78 557 230 -- 6 871
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at June 30, 2002....... $ 482 $ -- $ 150 $ -- $ 138 $ 770
=========== =========== =========== =========== =========== ===========
1) The fixed assets and leasehold improvements were disposed of by the end of
December 2001. The write-off approximates the carrying amount as these assets
were abandoned or sold for salvage value. Depreciation expense was reduced by
approximately $20 in 2001 and will be reduced by $82 in 2002 and $281
thereafter. The asset write-offs of $862 were attributable to the Reservoir
Management segment.
6. SEGMENT REPORTING
Our business units have been aggregated into three complementary segments
which provide products and services for improving reservoir performance and
increasing oil and gas recovery from new and existing fields.
o 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.
o 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.
8
o Reservoir Management: Combines and integrates information from
reservoir description and production enhancement services to increase
production and improve recovery of oil and gas from our clients'
reservoirs.
Segment Analysis
We manage our business segments separately due to the different
technologies each segment utilizes and requires. Results of these segments are
presented below using the same accounting policies as used to prepare the
Consolidated Balance Sheets and Statements of Operations. We evaluate
performance based on income or loss from operations before income tax, interest
and other non-operating income (expense). Summarized financial information
concerning our segments is shown in the following table (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Revenues:
Reservoir Description................. $ 54,542 $ 52,123 $ 104,179 $ 100,289
Production Enhancement................ 21,103 26,163 44,505 52,922
Reservoir Management.................. 11,819 12,974 23,844 29,395
---------- ---------- ---------- ----------
Consolidated.................... $ 87,464 $ 91,260 $ 172,528 $ 182,606
========== ========== ========== ==========
Income (Loss) Before Interest Expense and
Income Tax Expense:
Reservoir Description................. $ 7,202 $ 8,260 $ 12,213 $ 14,376
Production Enhancement................ 329 4,795 1,247 8,572
Reservoir Management.................. 26 (314) 479 311
Corporate and Other (1)............... (605) 17 (836) (31)
---------- ---------- ---------- ----------
Consolidated.................... $ 6,952 $ 12,758 $ 13,103 $ 23,228
========== ========== ========== ==========
1) "Corporate and Other" represents non-operational charges.
9
7. EARNINGS PER SHARE
We present earnings per share in accordance with SFAS No. 128, "Earnings
per Share" which requires dual presentation of both basic and diluted earnings
per share on the Consolidated Statement of Operations. Basic earnings per common
share is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share reflects the net additional shares which would be issued if
all dilutive stock options outstanding were exercised.
The following table summarizes the calculation of weighted average common
shares outstanding used in the computation of earnings per share:
Three months ended June 30, Six months ended June 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Weighted average basic common
shares outstanding....................... 33,245,618 33,044,424 33,227,805 32,965,168
Effect of dilutive stock options (1)........ 619,883 1,147,938 547,817 1,158,485
-------------- -------------- -------------- --------------
Weighted average diluted
common shares outstanding................ 33,865,501 34,192,362 33,775,622 34,123,653
============== ============== ============== ==============
1) Options totaling 1,871,051 and 41,801 equivalent common shares for the
three months ended June 30, 2002 and 2001, respectively, and 1,881,051 and
41,801 for the six months ended June 30, 2002, and 2001, respectively, were
not included in the computation of weighted average diluted common shares
because the impact of these options was anti-dilutive.
8. SUBSEQUENT EVENT
On July 1, 2002, we acquired certain assets of Advanced Data Solutions
for approximately $8.0 million. The transaction resulted in an increase in
goodwill of approximately $5.7 million. In accordance with SFAS 142, goodwill
relating to this purchase will not be amortized. In the event certain contingent
goals are achieved at year-end 2002, additional consideration in an amount up to
$8.0 million may be due.
10
CORE LABORATORIES N.V.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This discussion includes 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. We have based the forward-looking statements
relating to our operations on our current expectations, estimates and
projections. We caution you that these statements are not guarantees of future
performance and involve risks and uncertainties that we cannot predict. In
addition, we have based many of these forward-looking statements on assumptions
about future events that may prove to be inaccurate. Accordingly, our actual
outcomes and results may differ materially from what we have expressed or
forecast in the forward-looking statements. Our forward-looking statements are
based on assumptions that we believe to be reasonable but that may not prove to
be accurate. All of our forward-looking information is, therefore, subject to
risks and uncertainties that could cause actual results to differ materially
from the results expected. Although it is not possible to identify all factors,
these risks and uncertainties include the risk factors discussed below.
Industry risks
The oil and gas industry is highly cyclical and there are numerous
factors affecting the supply of and demand for oil and natural gas, which
include:
o market prices of oil and gas;
o cost of producing oil and natural gas;
o the level of drilling and production activity;
o mergers, consolidations and downsizing among our clients;
o coordination by the OPEC; and
o the impact of commodity prices on the expenditure levels of our customers.
Business risks
Our results of operations could be adversely affected by risks and
uncertainties in the business environment in which we operate, including:
o competition in our markets;
o the realization of anticipated synergies from acquired businesses and
future acquisitions;
o our ability to continue to develop or acquire new and useful technology;
and
o interest rates and the cost of capital.
International risks
We conduct our business in over 50 countries and are subject to
political and economic instability and the laws and regulations in the countries
in which we operate. These include:
11
o global economic conditions;
o political actions and requirements of national governments including trade
restrictions and embargos and expropriations of assets;
o potential income tax liabilities in multiple jurisdictions;
o civil unrest;
o fluctuations and changes in currency exchange rates; and
o the impact of inflation.
Other risks
The events of September 11, the economic downturn and political,
corporate and credit events that followed and continue to unfold could result in
lower demand for our products and services. Our client base could be impacted by
events we cannot predict or we could be impacted by a change in the conduct of
business, transportation and security measures. In addition, we are subject to
other risk factors such as the impact of environmental regulations and
litigation risks, as well as the dependence on the oil and gas industry. Many of
these risks are beyond our control. In addition, future trends for pricing,
margins, revenues and profitability remain difficult to predict in the
industries we serve and under current economic and political conditions. We do
not feel obligated to publicly update any of our forward-looking statements.
Our operations are subject to various risk and other factors including,
but not limited to:
o our ability to continue to develop or acquire new and useful technology;
o the realization of anticipated synergies from acquired businesses and
future acquisitions;
o our dependence on the oil and gas industry, and the impact of commodity
prices on the expenditure levels of our customers;
o competition in our markets; and
o the risks and uncertainties attendant to adverse industry, political,
economic and financial market conditions, including stock prices,
government regulations, interest rates and credit availability.
Core Laboratories was established in 1936 and is one of the world's leading
providers of proprietary and patented reservoir description, production
enhancement and reservoir management services to the oil and gas industry. These
services are directed toward enabling our clients to improve reservoir
performance and increase oil and gas recovery from their producing fields. We
have over 70 offices in more than 50 countries and have approximately 4,200
employees.
Results of Operations
Service revenues for the second quarter of 2002 decreased $0.4 million, or
less than 1% from the same period last year, primarily due to decreased
worldwide oilfield activities. Service revenues for the six month period ended
June 30, 2002 decreased $4.3 million a 3% decrease from the same period last
year.
Cost of services expressed as a percentage of service revenue were 78% and
77% in the second quarter of 2002 and the same period last year, respectively,
and 79% and 77% in the six month period ended June 30, 2002 and in the same
period last year, respectively. Our relatively fixed cost structure
12
for our services caused our cost of services, in relation to revenues, to rise
in 2002 compared to same time period in the prior year.
Sales revenues decreased to $13.8 million in the second quarter of 2002
from $17.2 million in the second quarter of 2001, a 20% decrease. Sales revenue
for the six month period ended June 30, 2002 decreased $5.7 million to $29.2
million from $35.0 million in the same period in 2001, a 16% decrease. These
decreases were caused, in most part, to the deep decline in drilling for natural
gas in the North American markets. Consequently, there was lower demand for our
well completion products.
Cost of sales in the second quarter of 2002 was 93% of sales revenue as
compared to 76% for the same period last year. For the six month period ended
June 30, 2002, cost of sales was 91% as compared to 80% in the prior year. Our
actual cost of sales have decreased year over year, due in part to our efforts
to reduce costs. However, the reduction is not evidenced in our margin due to
the reduction in our sales revenue in 2002.
General and administrative expenses are comprised of corporate management
and centralized administrative services which benefit our operating
subsidiaries. Although general and administrative expenses are generally more
fixed in nature as a percentage of revenues, we did experience an increase of
$1.0 million and $2.1 million for the three and six month periods ended June 30,
2002, respectively, as compared to the corresponding periods in 2001. These
increases were largely attributable to growth in the number of people necessary
to support increases in the scope of our operations as well as an increase in
our direct marketing effort focused on providing integrated solutions to our
clients.
Depreciation and amortization expense for the second quarter of 2002
increased $0.3 million and $0.6 million for the three and six month periods
ended June 30, 2002, as compared to the corresponding periods in 2001. These
increases were due to additional capital investments, which include additions to
the Houston facility.
As a result of adoption of SFAS 142 beginning January 1, 2002, we no longer
amortize goodwill but will test for impairment annually or more frequently if
circumstances indicate a potential impairment. Under the requirements, in the
first quarter we reflected impairment of goodwill of approximately $16.7 million
related to our Reservoir Management segment. This impairment is reflected in the
consolidated statement of operations as a cumulative effect of change in
accounting principle. The cessation of goodwill amortization under the
guidelines resulted in a reduction in operating expenses of approximately $1.0
million and $2.1 million for the three and six month periods ended June 30,
2002, respectively, and will result in a reduction of approximately $4.2 million
in annual operating expenses, assuming no additional impairment of goodwill.
The effective income tax rate remained at 28% of income before cumulative
effect of change in accounting principle for all periods.
During the fourth quarter of 2001, we had several transactions which
impacted certain operations that were not viewed as ongoing. We restructured
certain operations in Mexico, the United Kingdom, the U.S. and other countries
to improve operating efficiencies. This restructuring expense included
write-offs of assets and leasehold improvements and an accrual for facility
restoration, severance benefits and lease termination costs. Approximately 100
field employees were terminated. In the second quarter of 2002, we relocated a
facility from Mexico City, Mexico to Villahermosa, Mexico
13
and we intend to relocate one of our operations from Dallas to the Houston
Advanced Technology Center in the second half of 2002. This charge of
approximately $3.0 million affected each of our operating segments as follows:
Reservoir Description - $0.8 million; Production Enhancement - $0.1 million;
Reservoir Management - $2.1 million. Substantially all employee terminations
were completed by the end of the first quarter of 2002. Total cash required for
this restructuring charge of $2.1 million will be funded from operating
activities. Cash required for the costs incurred through June 30, 2002 was
$1.3 million. This charge is summarized in the following table:
Restructuring Charges
(in thousands)
Lease Asset
Obligations Severance Restoration Write-offs (1) Other Total
----------- ----------- ----------- ----------- ----------- -----------
Total restructuring charges.............. $ 598 $ 951 $ 380 $ 862 $ 184 $ 2,975
Less: Costs incurred through
December 31, 2001............... 38 394 -- 862 40 1,334
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at December 31, 2001... 560 557 380 -- 144 1,641
----------- ----------- ----------- ----------- ----------- -----------
Less: Costs incurred through
June 30, 2002................... 78 557 230 -- 6 871
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at June 30, 2002....... $ 482 $ -- $ 150 $ -- $ 138 $ 770
=========== =========== =========== =========== =========== ===========
1) The fixed assets and leasehold improvements were disposed of by the end of
December 2001. The write-off approximates the carrying amount as these assets
were abandoned or sold for salvage value. Depreciation expense was reduced by
approximately $20 in 2001 and will be reduced by $82 in 2002 and $281
thereafter. The asset write-offs of $862 were attributable to the Reservoir
Management segment.
Segment Analysis
(in Thousands)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Revenues:
Reservoir Description................. $ 54,542 $ 52,123 $ 104,179 $ 100,289
Production Enhancement................ 21,103 26,163 44,505 52,922
Reservoir Management.................. 11,819 12,974 23,844 29,395
---------- ---------- ---------- ----------
Consolidated.................... $ 87,464 $ 91,260 $ 172,528 $ 182,606
========== ========== ========== ==========
Income (Loss) Before Interest Expense and
Income Tax Expense:
Reservoir Description................. $ 7,202 $ 8,260 $ 12,213 $ 14,376
Production Enhancement................ 329 4,795 1,247 8,572
Reservoir Management.................. 26 (314) 479 311
Corporate and Other (1)............... (605) 17 (836) (31)
---------- ---------- ---------- ----------
Consolidated.................... $ 6,952 $ 12,758 $ 13,103 $ 23,228
========== ========== ========== ==========
1) "Corporate and Other" represents non-operational charges.
Reservoir Description
Revenues from the Reservoir Description segment increased $2.4 million in
the second quarter of 2002 compared to the same period in the prior year.
Revenues for the six month period ended June
14
30, 2002 increased $3.9 million.
Increased international demand for our existing services and deepwater services,
as well as the introduction of new technologies into international arenas
bolstered revenue in this segment. Earnings before interest and taxes decreased
by $1.1 million in the second quarter of 2002 and $2.2 million in the six month
period ended June 30, 2002, compared to the same periods in the prior year due
to decreased margins relating primarily to slowness in the activity levels in
the North American natural gas markets.
Production Enhancement
Revenues from the Production Enhancement segment were $21.1 million in the
second quarter of 2002 compared to $26.2 million in the same period in the prior
year, a decrease of 19%. For the six month period ended June 30, 2002, revenues
decreased $8.4 million to $44.5 million, a decrease of 16% from the same period
in the prior year. Due to lower industry activity levels, we continued to
experience decreased demand for our well completion and stimulation
technologies, primarily in North American markets in the second quarter.
Earnings before interest and taxes decreased $4.5 million in the second quarter
and $7.3 million in the six month period ended June 30, 2002 compared to the
same periods in 2001.
Reservoir Management
Revenues from the Reservoir Management segment in the second quarter of
2002 were $11.8 million, a decrease of $1.2 million compared to the same period
in the prior year, while revenues for the six month period ended June 30, 2002
decreased $5.6 million compared to the same period in 2001. As part of our
refocus effort in this group, we have elected to no longer bid on projects that
could earn lower than acceptable margins. Consequently, our revenues have
decreased; however, our earnings have improved. Further, we have been able to
significantly reduce our cost structure in this unit after taking the
restructuring charge in the fourth quarter of 2001.
Liquidity and Capital Resources
We have historically financed our activities through cash flows from
operations, bank credit facilities, equity financing and the issuance of debt.
For the six month period ended June 30, 2002, cash flows from operating
activities were $20.0 million, an increase of $7.0 million from the same period
in 2001. At June 30, 2002, we had working capital of $135.9 million and a
current ratio of 5.2 to 1.0, compared to working capital of $135.1 million and a
current ratio of 4.4 to 1.0 at December 31, 2001. We are a Netherlands holding
company and we conduct substantially all of our operations through subsidiaries.
Consequently, our cash flow is dependent upon the ability of our subsidiaries to
pay cash dividends or otherwise distribute or advance funds to us.
For the six month period ended June 30, 2002, our investing activities used
$11.0 million compared to $13.7 million in the same period in 2001 due to a
reduction in our capital expenditure program. Included in the capital
expenditures is a new lab and office facility in Moscow, Russia. For the six
month period ended June 30, 2002 our financing activities used $5.9 million and
provided $3.3 million in the same period in 2001. The use of cash in 2002
financing activities was due to a net reduction of approximately $6.4 million in
the Credit Facility.
15
Our ability to maintain and grow our operating income and cash flows is
dependent upon continued investing activities. We believe our future cash flows
from operations, supplemented by our borrowing capacity and issuances of
additional equity should be sufficient to fund debt requirements, capital
expenditures, working capital and future acquisitions.
16
CORE LABORATORIES N.V.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Market Risk
We are exposed to market risk, which is the potential loss arising from
adverse changes in market prices and rates. We do not enter, or intend to enter,
into derivative financial instruments for trading or speculative purposes. We do
not believe that our exposure to market risks, which are primarily related to
interest rate changes and fluctuations in foreign exchange rates, are material.
During 1999, we issued fixed rate Senior Notes denominated in U.S. dollars. The
proceeds were used to pay off variable rate term loans. This significantly
reduced our exposure to market risk. This section should be read in conjunction
with "Note 4 - Long-Term Debt" of the Notes to Consolidated Financial
Statements.
Interest Rate Risk
We are exposed to interest rate risk on our Credit Facility debt that
carries a variable interest rate. At June 30, 2002, our variable rate debt
outstanding of $14.0 million approximated its fair value. A one percent change
in the interest rate would not cause a material change in interest expense on an
annual basis. We attempt to balance the benefit of variable rate debt that has
inherent increased risk with fixed rate debt that has less market risk.
17
CORE LABORATORIES N.V.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
We are from time to time subject to legal proceedings and claims that arise
in the ordinary course of business. We believe that the outcome of current legal
actions will not have a material adverse effect upon our consolidated financial
position or results of operations.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Stockholders voting at the Annual Meeting on May 30, 2002 and by proxy,
elected eight members (each, a "Supervisory Director") to the Board of
Supervisory Directors of the Company (the "Supervisory Board"), consisting of
(i) David M. Demshur; (ii) Rene R. Joyce; (iii) Jacobus Schouten, as Class I
Supervisory Directors, (i) D. John Ogren; (ii) Joseph R. Perna, (iii) Timothy J.
Probert as Class II Supervisory Directors and (i) Richard L. Bergmark; (ii)
Alexander Vriesendorp, to serve until the annual meeting of shareholders in
2005, 2004 and 2003, respectively, and until their successors shall have been
duly elected and qualified.
The vote tabulation for the individual Supervisory Directors was as
follows:
Director Shares for Shares Withheld
-------- ---------- ---------------
David M. Demshur 20,607,680 34,212
Rene R. Joyce 20,607,680 34,212
Timothy J. Probert 20,607,680 34,212
Jacobus Schouten 20,607,680 34,212
D. John Ogren 20,607,680 34,212
Joseph R. Perna 20,607,680 34,212
Richard L. Bergmark 20,607,680 34,212
Alexander Vriesendorp 20,607,680 34,212
Shareholders also confirmed the Dutch Statutory Annual Accounts for the
year ended December 31, 2001. The proposal was approved by 20,608,275 votes for,
18,130 votes against, with 15,487 abstentions.
Shareholders approved the extension of the authority of the Management
Board of the Company to repurchase up to 10% of the outstanding share capital of
the Company until November 29, 2003. The proposal was approved by 20,611,475
votes in favor, 16,452 votes against, with 13,965 abstentions.
18
Shareholders approved the extension of the authority of the Supervisory
Board to issue and/or to grant rights (including options to purchase) of common
and/or preferred shares of the Company until May 29, 2007. The proposal was
approved by 20,023,751 votes in favor, 591,169 votes against, with 26,972
abstentions.
Shareholders approved the extension of the authority of the Supervisory
Board to limit or to exclude the preemptive right of holders of common shares of
the Company until May 29, 2007. The proposal was approved by 18,091,463 votes in
favor, 2,517,674 votes against, with 32,755 abstentions.
Item 5. Other Information.
All references to the nominal value of EUR 0.01 (formerly NLG 0.03) of each
share in the share capital of Core Laboratories N.V. is made with reference to
article 2:67c of the Dutch Civil Code.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification by Chief Executive Officer
99.2 Certification by Chief Financial Officer
(b) Reports on Form 8-K
None
19
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.
Dated: August 9, 2002 By: /s/ Richard L. Bergmark
------------------------------
Richard L. Bergmark
Chief Financial Officer
20