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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 September 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 November 11, 2002 was 33,273,821.
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CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
Page
Part I -- Financial Information
Item 1 -- Financial Statements
Consolidated Balance Sheets at September 30, 2002 and December 31, 2001..................... 1
Consolidated Statements of Operations for the Three Months Ended
September 30, 2002 and 2001............................................................ 2
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2002 and 2001............................................................ 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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
Item 4-- Controls and Procedures................................................................ 18
Part II -- Other Information
Item 1-- Legal Proceedings...................................................................... 19
Item 2-- Changes in Securities.................................................................. 19
Item 3-- Defaults Upon Senior Securities........................................................ 19
Item 4-- Submission of Matters to a Vote of Security Holders ................................... 19
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)
September 30, December 31,
2002 2001
---------- ----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 14,581 $ 14,456
Accounts receivable, less allowance for doubtful accounts of
$7,512 and $7,829 in 2002 and 2001, respectively.................... 92,187 100,718
Inventories ................................................................ 38,004 41,109
Prepaid expenses and other current assets................................... 13,827 9,728
Deferred tax asset.......................................................... 9,596 9,123
---------- ----------
Total current assets............................................................. 168,195 175,134
PROPERTY, PLANT AND EQUIPMENT, net............................................... 96,132 97,615
INTANGIBLES, GOODWILL AND OTHER LONG-TERM ASSETS, net............................ 150,269 166,751
---------- ----------
Total assets............................................................ $ 414,596 $ 439,500
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........................................ $ 823 $ 454
Accounts payable............................................................ 15,563 19,721
Other accrued expenses...................................................... 16,218 19,832
---------- ----------
Total current liabilities........................................................ 32,604 40,007
LONG-TERM DEBT .................................................................. 88,000 95,089
OTHER LONG-TERM LIABILITIES...................................................... 21,974 27,983
MINORITY INTEREST................................................................ 577 815
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,
33,273,821 and 33,204,571 issued and outstanding
at 2002 and 2001, respectively.......................................... 546 546
Additional paid-in capital.................................................. 187,349 186,751
Retained earnings........................................................... 83,546 88,309
---------- ----------
Total shareholders' equity.............................................. 271,441 275,606
---------- ----------
Total liabilities and shareholders' equity......................... $ 414,596 $ 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
September 30,
2002 2001
---------- ----------
(Unaudited)
SERVICES......................................................................... $ 78,484 $ 77,321
SALES............................................................................ 14,857 19,776
------------- -------------
93,341 97,097
OPERATING EXPENSES:
Cost of services............................................................ 61,092 57,107
Cost of sales............................................................... 13,575 15,337
General and administrative expenses ........................................ 4,679 4,259
Depreciation and amortization............................................... 5,064 4,808
Goodwill amortization....................................................... - 1,062
Other, net.................................................................. (271) (55)
------------- -------------
84,139 82,518
INCOME BEFORE INTEREST EXPENSE AND
INCOME TAX EXPENSE.......................................................... 9,202 14,579
INTEREST EXPENSE................................................................. 1,849 2,000
------------- -------------
INCOME BEFORE INCOME TAX EXPENSE................................................. 7,353 12,579
INCOME TAX EXPENSE............................................................... 2,059 3,522
------------- -------------
NET INCOME....................................................................... $ 5,294 $ 9,057
============= =============
PER SHARE INFORMATION:
BASIC EARNINGS PER SHARE................................................... $ 0.16 $ 0.27
============= =============
WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING........................... 33,266,451 33,165,470
============= =============
DILUTED EARNINGS PER SHARE................................................. $ 0.16 $ 0.27
============= =============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING......................... 33,465,481 33,795,537
============= =============
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)
Nine Months Ended
September 30,
2002 2001
---------- ------------
(Unaudited)
SERVICES......................................................................... $ 221,786 $ 224,956
SALES............................................................................ 44,083 54,747
------------- -------------
265,869 279,703
OPERATING EXPENSES:
Cost of services............................................................ 173,753 170,413
Cost of sales............................................................... 40,269 43,429
General and administrative expenses ........................................ 14,320 11,803
Depreciation and amortization............................................... 14,651 13,761
Goodwill amortization....................................................... - 3,128
Other, net.................................................................. 571 (637)
------------- -------------
243,564 241,897
INCOME BEFORE INTEREST EXPENSE, INCOME TAX EXPENSE
AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................................... 22,305 37,806
INTEREST EXPENSE................................................................. 5,737 5,921
------------- -------------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................................... 16,568 31,885
INCOME TAX EXPENSE............................................................... 4,639 8,928
------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................................................ 11,929 22,957
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.............................. (16,692) -
------------- -------------
NET (LOSS) INCOME................................................................ $ (4,763) $ 22,957
============= =============
PER SHARE INFORMATION:
BASIC EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE.............................. $ 0.36 $ 0.69
------------- -------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......................... (0.50) -
------------- -------------
BASIC (LOSS) EARNINGS PER SHARE............................................. $ (0.14) $ 0.69
============= =============
WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING............................ 33,240,828 33,032,668
============= =============
DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE.............................. $ 0.35 $ 0.68
------------- -------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......................... (0.49) -
------------- -------------
DILUTED (LOSS) EARNINGS PER SHARE........................................... $ (0.14) $ 0.68
============= =============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING.......................... 33,669,853 34,005,908
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
2002 2001
---------- ----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ (4,763) $ 22,957
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.................................................... 237 (29)
Depreciation and amortization........................................... 14,651 16,889
Debt issuance costs..................................................... 226 408
Gain on sale of fixed assets............................................ (146) (148)
Changes in assets and liabilities:
Decrease in accounts receivable......................................... 8,366 124
(Increase) decrease in inventories...................................... 3,105 (6,411)
Increase in prepaid expenses and other current assets................... (4,099) (4,084)
Decrease in accounts payable............................................ (4,158) (8,720)
Decrease in other accrued expenses...................................... (2,714) (2,237)
Other................................................................... 395 (1,604)
------------- -------------
Net cash provided by operating activities.......................... 27,792 17,145
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (13,952) (20,817)
Acquisitions, net of cash acquired.......................................... (7,991) (12,735)
Proceeds from sale of fixed assets.......................................... 1,153 201
Other ...................................................................... (467) (90)
------------- -------------
Net cash used in investing activities................................... (21,257) (33,441)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt.................................................. (18,829) (6,124)
Borrowings under long-term debt............................................. 11,803 20,716
Capital lease obligation, net............................................... (24) (203)
Exercise of stock options................................................... 598 2,720
Other....................................................................... 42 (24)
------------- -------------
Net cash used in financing activities................................... (6,410) 17,085
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ 125 789
CASH AND CASH EQUIVALENTS, beginning of period................................... 14,456 12,519
------------- -------------
CASH AND CASH EQUIVALENTS, end of period......................................... $ 14,581 $ 13,308
============= =============
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 nine-month period
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002. Balance sheet information at
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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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.
In May 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Due to the nature of our business, FASB 44, 64 and Amendment of
FASB 13 are not applicable. SFAS 145 eliminates SFAS No. 4 "Reporting Gains and
Losses from Extinguishment of Debt" and states that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". APB
Opinion No. 30 defines extraordinary items as events and transactions that are
distinguished by their unusual nature and by the infrequency of their
occurrence. The provisions of SFAS 145 related to the classification of gains or
losses attributable to debt extinguishments are effective for fiscal years
beginning after May 15, 2002. We do not expect the implementation of SFAS 145 to
have a material impact on our results of operations.
5
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan. We
will adopt SFAS 146 for all exit or disposal activities initiated after December
31, 2002.
2. ACQUISITIONS
On July 1, 2002, we acquired certain assets of Advanced Data Solutions
("ADS") 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 and an adjustment would subsequently be made to goodwill
reflecting the amount of the additional consideration.
3. 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.
Inventories consisted of the following (in thousands):
September 30, December 31,
2002 2001
------------ -----------
(Unaudited)
Finished goods........................ $ 29,971 $ 31,967
Parts and materials................... 5,497 6,561
Work in process....................... 4,379 4,428
Valuation reserves.................... (1,843) (1,847)
---------- ----------
Total inventories..... $ 38,004 $ 41,109
========== ==========
4. 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 for
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
6
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 September 30, Six Months Ended September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss)................ $ 5,294 $ 9,057 $ (4,763) $ 22,957
Add back: Goodwill amortization........... - 1,062 - 3,128
---------- ---------- ---------- ----------
Adjusted net income (loss)................ $ 5,294 $ 10,119 $ (4,763) $ 26,085
========== ========== ========== ==========
Basic Earnings per Share
Three Months Ended September 30, Six Months Ended September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss)................ $ 0.16 $ 0.27 $ (0.14) $ 0.69
Add back: Goodwill amortization........... - 0.04 - 0.10
---------- ---------- ---------- ----------
Adjusted net income (loss)................ $ 0.16 $ 0.31 $ (0.14) $ 0.79
========== ========== ========== ==========
Diluted Earnings per Share
Three Months Ended September 30, Six Months Ended September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss)................ $ 0.16 $ 0.27 $ (0.14) $ 0.68
Add back: Goodwill amortization........... - 0.03 - 0.09
---------- ---------- ---------- ----------
Adjusted net income (loss)................ $ 0.16 $ 0.30 $ (0.14) $ 0.77
========== ========== ========== ==========
5. LONG-TERM DEBT
Long-term debt is summarized in the following table (in thousands):
September 30, December 31,
2002 2001
------------- -------------
(Unaudited)
Credit Facility with a bank group:
$100,000 revolving debt facilities......................... $ 13,000 $ 20,000
Senior Notes................................................. 75,000 75,000
Other indebtedness........................................... 823 543
------------- -------------
Total debt.............................................. 88,823 95,543
Less - current maturities.................................... 823 454
------------- -------------
Total long-term debt................................. $ 88,000 $ 95,089
============= =============
7
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 September 30, 2002, approximately $87 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 September 30, 2002 was 3.13%, and the average for the
nine months ended September 30, 2002 was 3.15%. 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.
6. 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 fourth quarter 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 September 30, 2002 was $1.5 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
September 30, 2002.............. 116 557 230 -- 85 988
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at September 30, 2002.. $ 444 $ -- $ 150 $ -- $ 59 $ 653
=========== =========== =========== =========== =========== ===========
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.
8
7. 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.
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 September 30, Nine Months Ended September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Revenues:
Reservoir Description................. $ 55,973 $ 55,842 $ 160,152 $ 156,131
Production Enhancement................ 22,802 28,307 67,307 81,229
Reservoir Management.................. 14,566 12,948 38,410 42,343
---------- ---------- ---------- ----------
Consolidated.................... $ 93,341 $ 97,097 $ 265,869 $ 279,703
========== ========== ========== ==========
Income (Loss) Before Interest Expense and
Income Tax Expense:
Reservoir Description................. $ 7,915 $ 10,468 $ 20,128 $ 24,845
Production Enhancement................ 1,040 5,119 2,287 13,691
Reservoir Management.................. 316 (993) 795 (682)
Corporate and Other (1)............... (69) (15) (905) (48)
---------- ---------- ---------- ----------
Consolidated.................... $ 9,202 $ 14,579 $ 22,305 $ 37,806
========== ========== ========== ==========
1) "Corporate and Other" represents non-operational charges.
9
8. 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 September 30, Nine months ended September 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Weighted average basic common
shares outstanding....................... 33,266,451 33,165,470 33,240,828 33,032,668
Effect of dilutive stock options (1)........ 199,030 630,067 429,025 973,240
-------------- -------------- -------------- --------------
Weighted average diluted
common shares outstanding................ 33,465,481 33,795,537 33,669,853 34,005,908
============== ============== ============== ==============
1) Options totaling 3,280,710 and 1,071,551 equivalent common shares for the
three months ended September 30, 2002 and 2001, and 2,357,176 and 51,801 for
the nine months ended September 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.
9. SUBSEQUENT EVENT
On October 10, 2002, Core Laboratories announced that it will activate a
share repurchase program as approved by shareholders at our last annual meeting
in May 2002, authorizing the purchase of up to 10% of our outstanding shares
through November 29, 2003. The repurchase of the shares will take place in the
open market and will be at the discretion of management. It is expected that
funding of the program will come from operating cash flow. As of November 8,
2002, we repurchased approximately 213,000 shares of Core Laboratories common
stock for an aggregate purchase price of approximately $2,025,000.
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 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 access to capital, interest rates and the cost of capital.
11
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:
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 war;
o civil unrest;
o fluctuations and changes in currency exchange rates; and
o the impact of inflation.
Other risks
The events of September 11, 2001, 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 assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason.
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 4,450
employees.
12
Results of Operations
Service revenues for the third quarter of 2002 increased $1.2 million from
the same period last year, largely due to increased oilfield activities
primarily outside the North American markets. Service revenues for the nine
month period ended September 30, 2002 decreased $3.2 million, a 1.4% decrease
from the same period last year, primarily due to continued weak activity levels
of our clients in North America.
Cost of services expressed as a percentage of service revenue were 78% and
74% in the third quarter of 2002 and the same period last year, respectively,
and 78% and 76% in the nine month period ended September 30, 2002 and in the
same period last year, respectively. The increase in the cost of services
percentage is primarily due to the completion of international projects with
lower margins coupled with a decrease in higher margin projects in the North
American Production Enhancement business.
Sales revenues decreased to $14.9 million in the third quarter of 2002 from
$19.8 million in the third quarter of 2001, a 25% decrease. Sales revenue for
the nine month period ended September 30, 2002 decreased $10.6 million to $44.1
million from $54.7 million in the same period in 2001, a 19% 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. Sequentially, revenues in the third quarter of 2002
increased $5.8 million, or 7%, from the second quarter of 2002 as the rig count
and related activity levels in North America improved slightly.
Cost of sales in the third quarter of 2002 was 91% of sales revenue as
compared to 78% for the same period last year. For the nine month period ended
September 30, 2002, cost of sales was 91% as compared to 79% in the prior year.
Although cost reduction efforts have been made during the year, including this
quarter, to minimize our cost structure, the deep decline in drilling for
natural gas in North American markets has caused significantly lower demand for
our products. Consequently, cost of sales as a percentage of revenues continues
to run at higher than desired levels.
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
$0.4 million and $2.5 million for the three and nine month periods ended
September 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 third quarter of 2002
increased $0.3 million and $0.9 million for the nine month period ended
September 30, 2002, as compared to the corresponding periods in 2001. These
increases were due to the purchase of certain assets from Advanced Data
Solutions ("ADS") as well as additional capital investments, which include
additions to the Houston facility.
13
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 $3.1 million for the three and nine month periods ended September
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 and we intend to
relocate one of our operations from Dallas to the Houston Advanced Technology
Center in the fourth quarter 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 September 30, 2002 was $1.5 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
September 30, 2002.............. 116 557 230 -- 85 988
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at September 30, 2002.. $ 444 $ -- $ 150 $ -- $ 59 $ 653
=========== =========== =========== =========== =========== ===========
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.
14
Segment Analysis
(in Thousands)
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Revenues:
Reservoir Description................. $ 55,973 $ 55,842 $ 160,152 $ 156,131
Production Enhancement................ 22,802 28,307 67,307 81,229
Reservoir Management.................. 14,566 12,948 38,410 42,343
---------- ---------- ---------- ----------
Consolidated.................... $ 93,341 $ 97,097 $ 265,869 $ 279,703
========== ========== ========== ==========
Income (Loss) Before Interest Expense and
Income Tax Expense:
Reservoir Description................. $ 7,915 $ 10,468 $ 20,128 $ 24,845
Production Enhancement................ 1,040 5,119 2,287 13,691
Reservoir Management.................. 316 (993) 795 (682)
Corporate and Other (1)............... (69) (15) (905) (48)
---------- ---------- ---------- ----------
Consolidated.................... $ 9,202 $ 14,579 $ 22,305 $ 37,806
========== ========== ========== ==========
1) "Corporate and Other" represents non-operational charges.
Reservoir Description
Revenues from the Reservoir Description segment increased to $56.0 million
in the third quarter of 2002 from $55.8 million in the same period in the prior
year. Revenues for the nine month period ended September 30, 2002 increased $4.0
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 $2.6 million in the third quarter of 2002 and $4.7 million in the
nine month period ended September 30, 2002, compared to the same periods in the
prior year due to decreased margins relating primarily to reduced activity
levels in the North American natural gas markets. Sequentially, revenues in the
third quarter of 2002 increased $1.5 million, or 3%, from the second quarter of
2002 while earnings before interest and taxes in the third quarter of 2002
increased $0.7 million, or 10%, from the second quarter of 2002. Although
international activity levels have been flat, as indicated by drilling activity,
we have been able to increase revenue and earnings on a sequential basis through
the addition of new services and increases in market penetration.
Production Enhancement
Revenues from the Production Enhancement segment were $22.8 million in the
third quarter of 2002 compared to $28.3 million in the same period in the prior
year, a decrease of 19%. For the nine month period ended September 30, 2002,
revenues decreased $13.9 million to $67.3 million, a decrease of 17% 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 third quarter. Earnings
before interest and taxes decreased $4.1 million in the third quarter and $11.4
million in the nine month period ended September 30, 2002 compared to the same
periods in 2001. Sequentially, Production Enhancement revenues in the third
15
quarter of 2002 increased $1.7 million, or 8%, from the second quarter of 2002
while earnings before interest and taxes in the third quarter of 2002 increased
$0.7 million, or 216%, from the second quarter of 2002 as the rig count and
related activity in North America has improved slightly.
Reservoir Management
Revenues from the Reservoir Management segment in the third quarter of 2002
were $14.6 million, an increase of $1.6 million compared to the same period in
the prior year, while revenues for the nine month period ended September 30,
2002 decreased $3.9 million compared to the same period in 2001. The increase in
the third quarter of 2002 was primarily the additional activity resulting from
the purchase of the ADS assets and due to the completion of large projects in
Mexico.
Liquidity and Capital Resources
We have historically financed our activities through cash flows from
operating activities, bank credit facilities, equity financing and the issuance
of debt.
For the nine month period ended September 30, 2002, cash flows from
operating activities were $27.8 million, an increase of $10.6 million from the
same period in 2001. At September 30, 2002, we had working capital of $135.6
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 nine month period ended September 30, 2002, our investing
activities used $21.3 million compared to $33.4 million in the same period in
2001. Included in the capital expenditures is a new lab and office facility in
Moscow, Russia. We also acquired certain assets from ADS for approximately $8.0
million. For the nine month period ended September 30, 2002 our financing
activities used $6.4 million and provided $17.1 million in the same period in
2001. The use of cash in 2002 financing activities was due to a net reduction of
approximately $7.0 million in the balance outstanding under the Credit Facility.
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 operating activities, supplemented, if necessary, 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 5 - 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 September 30, 2002, our variable rate debt
outstanding of $13.0 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.
CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation of the effectiveness of the design and operation of
the issuer's disclosure controls and procedures (as defined in 17 CFR
ss.ss.240.13a-14(c) and 240 15d-14c). Such evaluation was carried out under the
supervision and with the participation of the issuer's management, including the
issuer's chief executive officer and chief financial officer; and it is the
conclusion of the chief executive officer and chief financial officer that such
disclosure controls and procedures operate such that important information flows
to appropriate collection and disclosure points in a timely manner and are
effective in ensuring that material information is accumulated and communicated
to management of the issuer, and made known to the chief executive officer and
chief financial officer particularly during the period in which this report was
prepared, as appropriate to allow timely decisions regarding required
disclosure.
18
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.
None
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
None
(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: November 13, 2002 By: /s/ Richard L. Bergmark
-----------------------
Richard L. Bergmark
Chief Financial Officer
20
Certification
I, David M. Demshur, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Core Laboratories N.V.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a)all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ David M. Demshur
-----------------------
David M. Demshur
Chief Executive Officer
21
I, Richard L. Bergmark, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Core Laboratories N.V.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a)all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ Richard L. Bergmark
-----------------------
Richard L. Bergmark
Chief Financial Officer
22