UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM 10-Q |
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(Mark One) |
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X |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2004 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ________________ to ______________ |
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Commission File Number 001-14273 |
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CORE LABORATORIES N.V. |
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(Exact name of registrant as specified in its charter) |
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The Netherlands |
Not Applicable |
(State of other jurisdiction of |
(I.R.S. Employer Identification No.) |
incorporation or organization) |
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Herengracht 424 |
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1017 BZ Amsterdam |
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The Netherlands |
Not Applicable |
(Address of principal executive offices) |
(Zip Code) |
Registrant's telephone number, including area code: (31-20) 420-3191 |
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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 __ |
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Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act. Yes X No __ |
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The number of common shares of the Registrant, par value EUR 0.01 per share, outstanding at May 6, 2004 was 27,243,757. |
CORE LABORATORIES N.V. |
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FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004 |
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INDEX |
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Page |
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Part I - Financial Information |
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Item 1 |
Financial Statements (Unaudited) |
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Consolidated Balance Sheets at March 31, 2004 and December 31, 2003 |
1 |
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Consolidated Statements of Operations for the Three Months Ended |
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March 31, 2004 and 2003 |
2 |
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Consolidated Statements of Cash Flows for the Three Months Ended |
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March 31, 2004 and 2003 |
3 |
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Notes to Consolidated Financial Statements |
4 |
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Item 2 |
Management's Discussion and Analysis of Financial Condition and |
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Results of Operations |
12 |
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Item 3 |
Quantitative and Qualitative Disclosures of Market Risk |
18 |
Item 4 |
Controls and Procedures |
19 |
Part II - Other Information |
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Item 1 |
Legal Proceedings |
20 |
Item 2 |
Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities |
20 |
Item 3 |
Defaults Upon Senior Securities |
20 |
Item 4 |
Submission of Matters to a Vote of Security Holders |
20 |
Item 5 |
Other Information |
21 |
Item 6 |
Exhibits and Reports on Form 8-K |
21 |
Signature |
22 |
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CORE LABORATORIES N.V. |
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CONSOLIDATED BALANCE SHEETS |
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(in thousands, except share and per share data) |
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March 31, |
December 31, |
|||||
ASSETS |
||||||
CURRENT ASSETS: |
||||||
Cash and cash equivalents |
$ 14,544 |
$ 16,225 |
||||
Accounts receivable, less allowance for doubtful accounts of |
||||||
$7,108 and $7,094 at 2004 and 2003, respectively |
89,525 |
89,204 |
||||
Inventories, net |
33,382 |
31,314 |
||||
Prepaid expenses and other current assets |
10,135 |
10,345 |
||||
Current assets held for sale |
11,749 |
19,717 |
||||
Total current assets |
159,335 |
166,805 |
||||
PROPERTY, PLANT AND EQUIPMENT, net |
84,079 |
87,336 |
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INTANGIBLES, net |
6,066 |
6,098 |
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GOODWILL |
132,178 |
132,178 |
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OTHER ASSETS |
8,969 |
9,136 |
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LONG TERM ASSETS HELD FOR SALE |
12,433 |
19,695 |
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Total assets |
$ 403,060 |
$ 421,248 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||
CURRENT LIABILITIES: |
||||||
Current maturities of long-term debt and capital lease obligations |
$ 2,108 |
$ 3,417 |
||||
Accounts payable |
21,885 |
25,490 |
||||
Accrued payroll and related cost |
13,734 |
11,271 |
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Current liabilities of assets held for sale |
4,157 |
6,277 |
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Other accrued expenses |
13,723 |
15,271 |
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Total current liabilities |
55,607 |
61,726 |
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS |
125,562 |
124,684 |
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DEFERRED COMPENSATION |
7,923 |
6,722 |
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DEFERRED TAX LIABILITY |
783 |
816 |
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OTHER LONG-TERM LIABILITIES |
6,177 |
5,820 |
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MINORITY INTEREST |
1,122 |
1,068 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS' EQUITY: |
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Preference shares, EUR 0.01 par value; 3,000,000 shares |
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authorized, none issued or outstanding |
- |
- |
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Common shares, EUR 0.01 par value; 100,000,000 shares authorized, |
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30,377,729 issued and 27,581,000 outstanding at 2004 and |
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30,099,578 issued and 27,883,020 outstanding at 2003 |
513 |
509 |
||||
Additional paid-in capital |
155,373 |
152,547 |
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Retained earnings |
91,410 |
97,947 |
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Treasury shares (at cost) 2,796,558 and 2,216,558 at 2004 |
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and 2003, respectively |
(41,410) |
(30,591) |
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Total shareholders' equity |
205,886 |
220,412 |
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Total liabilities and shareholders' equity |
$ 403,060 |
$ 421,248 |
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CORE LABORATORIES N.V. |
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CONSOLIDATED STATEMENTS OF OPERATIONS |
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(in thousands, except per share data) |
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Three Months Ended March 31, |
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2004 |
2003 |
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REVENUES: |
||||||
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SERVICES |
$ 77,657 |
$ 67,401 |
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SALES |
22,660 |
18,084 |
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100,317 |
85,485 |
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OPERATING EXPENSES: |
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Cost of services |
61,936 |
55,558 |
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Cost of sales |
17,996 |
16,127 |
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General and administrative expenses |
6,207 |
5,569 |
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Depreciation and amortization |
4,526 |
4,421 |
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Other expense, net |
194 |
193 |
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90,859 |
81,868 |
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INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE AND INCOME TAX |
9,458 |
3,617 |
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INTEREST EXPENSE |
2,037 |
1,642 |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE |
7,421 |
1,975 |
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INCOME TAX EXPENSE |
2,000 |
557 |
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INCOME FROM CONTINUING OPERATIONS |
5,421 |
1,418 |
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DISCONTINUED OPERATIONS: |
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Loss from operations of discontinued business (net of tax benefit of $212 and $129 in 2004 and 2003, respectively) |
(11,958) |
(261) |
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NET (LOSS) INCOME |
$ (6,537) |
$ 1,157 |
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EARNINGS PER SHARE INFORMATION: |
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Basic earnings from continuing operations |
$ 0.20 |
$ 0.05 |
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Loss from discontinued operations |
(0.43) |
(0.01) |
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BASIC (LOSS) EARNINGS PER SHARE |
$ (0.23) |
$ 0.04 |
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$ 0.19 |
$ 0.05 |
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Diluted earnings from continuing operations |
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Loss from discontinued operations |
(0.41) |
(0.01) |
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DILUTED (LOSS) EARNINGS PER SHARE |
$ (0.22) |
$ 0.04 |
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
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Basic |
27,671 |
32,085 |
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Diluted |
29,109 |
32,520 |
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The accompanying notes are an integral part of these consolidated financial |
CORE LABORATORIES N.V.
Three Months Ended March 31, |
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2004 |
2003 |
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CASH FLOWS FROM OPERATING ACTIVITIES: | |||||
Net (loss) income |
$ (6,537) |
$ 1,157 |
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Loss from discontinued operations (including impairment charges of $9,091) net of tax |
11,958 |
261 |
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Income from continuing operations |
5,421 |
1,418 |
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Adjustments to reconcile income from continuing operations to net cash income to net cash | |||||
provided by operating activities: | |||||
Provision for doubtful accounts |
252 |
555 |
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Inventory obsolescence |
348 |
200 | |||
Equity in loss (earnings) of unconsolidated affiliates |
246 |
(70) |
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Minority interest |
54 |
40 |
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Compensation plans plan |
1,201 |
311 |
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Depreciation and amortization |
4,526 |
4,421 |
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Debt issuance costs amortization |
64 |
20 |
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Loss on sale of assets |
143 |
31 |
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Deferred income taxes |
(32) |
910 |
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Increase in value of life insurance policies |
(68) |
(76) |
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Changes in assets and liabilities, net of effects of acquisitions: | |||||
Accounts receivable |
(573) |
(1,012) |
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Inventories |
(2,415) |
307 |
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Prepaid expenses and other current assets | 210 |
(2,345) |
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Other assets |
(63) |
103 |
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Accounts payable | (3,605) |
(423) |
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Accrued expenses | 1,634 |
642 |
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Net cash provided by continuing operations | 7,343 |
5,032 |
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Net cash provided by discontinued operations |
2,868 |
320 |
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Net cash provided by operating activities | 10,211 |
5,352 |
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CASH FLOWS FROM INVESTING ACTIVITIES: | |||||
Capital expenditures | (1,430) |
(2,651) |
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Intangibles | (58) |
(169) |
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Proceeds from sale of assets | 107 |
29 |
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Premiums on life insurance | (369) |
(22) |
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Discontinued operations | (1,717) |
(2,055) |
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Net cash used in investing activities | (3,467) |
(4,868) |
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CASH FLOWS FROM FINANCING ACTIVITIES: | |||||
Repayment of debt | (2,305) |
(1,000) |
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Proceeds from debt borrowings | 2,000 |
5,029 |
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Capital lease obligations | (132) |
(19) |
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Stock options exercised | 2,830 |
1 |
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Repurchase of common shares | (10,818) |
(8,853) |
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Net cash used in financing activities | (8,425) |
(4,842) |
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NET CHANGE IN CASH AND CASH EQUIVALENTS | (1,681) |
(4,358) |
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CASH AND CASH EQUIVALENTS, beginning of period | 16,225 |
14,415 |
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CASH AND CASH EQUIVALENTS, end of period | $ 14,544 |
$ 10,057 |
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Supplemental disclosures of cash flow information: | |||||
Cash payments for interest | $ 3,330 |
$ 3,393 |
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Cash payments for taxes | $ 2,197 |
$ 509 |
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Noncash investing and financing activities: | |||||
Capital lease additions | $ 5 |
$ 18 |
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The accompanying notes are an integral part of these consolidated financial statements.
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 and its subsidiaries and have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America ("U.S.") 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. The equity method of accounting is used for all investments in which we have less than a majority interest and do not exercise control. Minority interest has been recorded to reflect outside ownership attributable to consolidated subsidiaries that are less than 100% owned. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Balance sheet information as of December 31, 2003 was derived from the 2003 annual audited consolidated financial statements restated for discontinued operations. These financial statements should be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in our Form 10-K for the year ended December 31, 2003.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not require, companies to record compensation cost for employee stock-based compensation plans at fair value as determined by generally recognized option pricing models such as the Black-Scholes or the Binomial model. We have adopted the disclosure-only provisions of SFAS 123. We apply Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"), which does not require compensation costs to be recorded on options which have exercise prices at least equal to the market value of the stock on the date of grant. Accordingly, we have not recognized compensation cost for our stock-based plans other than compensation expense recognized for restricted shares granted under the Executive Restricted Share Matching Program. We have, however, included option shares in the diluted shares outstanding calculation that is used to determine diluted earnings per share. If we had accounted for our stock-based compensation plans using the fair value recognition provision of SFAS 123, our net income and diluted earnings per share would have been reduced to the pro forma amounts as follows (in thousands except per share data):
Three Months Ended March 31, |
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2004 |
2003 |
|
(Unaudited) |
||
Net (loss) income: |
|
|
As reported |
$ (6,537) |
$ 1,157 |
Add: stock-based compensation expense included in reported income, net of tax |
705 |
148 |
Less: stock-based compensation expense |
|
|
determined under fair value method, net of tax |
(1,160) |
(780) |
Pro forma |
$ (6,992) |
$ 525 |
Basic (loss) earnings per share: |
|
|
As reported |
$ (0.24) |
$ 0.04 |
Pro forma |
$ (0.25) |
$ 0.02 |
Diluted (loss) earnings per share: |
|
|
As reported |
$ (0.22) |
$ 0.04 |
Pro forma |
$ (0.24) |
$ 0.02 |
Weighted average fair value of options granted |
$ - |
$ 8.85 |
The pro forma value of options at the date of grant in 2003 was estimated using the Black-Scholes option-pricing model with the following assumptions:
Risk free interest rate |
- |
4% |
Expected volatility |
- |
58% |
Expected lives (in years) |
- |
7 |
Expected dividend yield |
- |
- |
On March 31, 2004, the Financial Accounting Standards Board issued a proposed statement, "Share-based Payment". The proposed statement would eliminate the ability to account for share-based compensation transactions using APB 25, and generally would require instead that such transactions be accounted for using a fair-value-based method. We will evaluate the provisions of that standard when issued and would expect to include a charge, if applicable, to our results of operations in each future reporting period after the new standard is required to be implemented.
Our performance restricted share program awards the right to receive common shares if certain targets are attained. None of these awards will vest unless our common shares perform better than the common stock of 50% of the companies comprising the Oil Service Sector Index ("OSX") during the applicable three-year period that began on January 1, 2002 in the case of the first tranche, January 1, 2003 in the case of the second tranche, and January 1, 2004 in the case of the third tranche. The first tranche will vest December 31, 2004, the second tranche will vest December 31, 2005.
For the first two tranches, if our common shares perform better than 75% of the companies comprising the OSX at the end of such periods, then all of the performance-restricted shares will vest at the end of each respective period. If our common shares perform better than between 50% and 75% of the companies comprising the OSX, then an interpolated percentage of between 20% and 100% of the performance restricted shares will vest at the end of the applicable three-year period. Upon a change in control of our company, all of the performance-restricted shares will vest.
In the first quarter of 2004 the Board of Supervisory Directors approved the third tranche under our performance restricted share program. Awards under this tranche are issuable based on a combination of (i) the performance of our common stock compared to the companies comprising the OSX determined in the same manner as the first two tranches and (ii) our return on equity versus the companies comprising the OSX. The terms of this program have not been finalized.
At March 31, 2004, we applied the formula described above to determine the number of contingently issuable shares applicable to the first two tranches as of March 31, 2004 as if this date were the measurement date. Based upon our performance versus the performance metrics required to be met by the plan, 230,000 common shares are included in the denominator of the diluted earnings per share computation.
If the actual measurement date had been on or before the end of the three-year period we would also have included approximately $7.4 million of compensation expense related to all three tranches in our results of operations. The compensation expense was determined using the March 31, 2004 closing share price. We have not included compensation expense for these performance restricted shares as the measurement date has not occurred and we do not believe it is probable, as of March 31, 2004, that the performance requirements of this plan have been met.
2. INVENTORIES
Inventories consist of the following (in thousands):
March 31, 2004 |
|
December 31, 2003 |
|
(Unaudited) |
|
||
Finished goods | $ 30,008 | $ 28,675 | |
Parts and materials | 3,808 | 4,297 | |
Work in progress |
2,335 |
941 |
|
Total inventories | 36,151 | 33,913 | |
Less - valuation reserves |
2,769 |
2,599 |
|
Inventories, net |
$ 33,382 |
$ 31,314 |
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt is summarized in the following table (in thousands):
March 31, 2004 |
|
December 31, 2003 |
|
(Unaudited) |
|
||
$75,000 Credit Facility |
$ 50,000 |
$ 49,000 |
|
Senior notes |
75,000 |
75,000 |
|
Capital lease obligations |
464 |
589 |
|
Other indebtedness |
2,206 |
3,512 |
|
Total debt and capital leases obligations |
127,670 |
128,101 |
|
Less - current maturities |
2,108 |
3,417 |
|
Long-term debt and capital lease obligations, net of |
|
|
|
current maturities |
$ 125,562 |
$ 124,684 |
At March 31, 2004, the weighted average interest rate was 2.71% and the average interest rate in effect was 2.62% for the Credit Facility. For the year ended December 31, 2003, the weighted average interest rate was 2.81% and the average interest rate in effect was 2.67%. The revolving Credit Facility requires interest payments only, until maturity in June 2006.
4. 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.
* | Reservoir Description: Encompasses the characterization of petroleum reservoir rock, fluid and gas samples. We provide analytical and field services to characterize properties of crude oil and petroleum products to the oil and gas industry. |
* | Production Enhancement: Includes products and services relating to reservoir well completions, perforations, stimulations and production. We provide integrated services to evaluate the effectiveness of well completions and to develop solutions aimed at increasing the effectiveness of enhanced oil recovery projects. |
* | Reservoir Management: Combines and integrates information from reservoir description and production enhancement services to increase production and improve recovery of oil and gas from our clients' reservoirs. |
In March 2004, we decided to exit the specialized geophysical and seismic-related business that is included in the Reservoir Management segment (See Note 9). All summarized financial information has been restated to reflect this decision.
Segment Analysis
We manage our business segments separately due to the different services and technologies each segment provides 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 operating income (expense). In March 2004, we decided to exit the specialized geophysical and seismic-related business, which was included in the Reservoir Management segment (See Note 9). This resulted in a reclassification of the assets related to this segment to Assets Held for Sale on the consolidated balance sheet at March 31, 2004.
Summarized financial information concerning our segments excluding discontinued operations is shown in the following tables (in thousands):
Three Months Ended March 31, |
||
2004 |
2003 |
|
(Unaudited) |
||
Revenues | ||
Reservoir Description |
$ 76,161 |
$ 68,376 |
Production Enhancement |
35,179 |
26,630 |
Reservoir Management |
5,785 |
5,148 |
Intersegment Revenues |
(16,808) |
(14,669) |
Consolidated |
$ 100,317 |
$ 85,485 |
Three Months Ended March 31, |
||
|
2004 |
2003 |
(Unaudited) |
||
Income (loss) before interest and taxes | ||
Reservoir Description |
$ 4,260 |
$ 2,969 |
Production Enhancement |
4,970 |
1,451 |
Reservoir Management |
336 |
(593) |
Corporate and other 1 |
(108) |
(210) |
Consolidated |
$ 9,458 |
$ 3,617 |
March 31, |
December 31, |
|||
Assets |
2004 |
2003 |
||
(Unaudited) |
||||
Reservoir Description |
$ 135,424 |
$ 135,933 |
||
Production Enhancement |
94,021 |
94,050 |
||
Reservoir Management |
9,613 |
10,175 |
||
Total business segments |
239,058 |
240,158 |
||
Corporate and other 1 |
139,820 |
141,678 |
||
Assets held for sale |
24,182 |
39,412 |
||
Consolidated |
$ 403,060 |
$ 421,248 |
1) "Corporate and other" represents those items that are not directly related to a particular segment.
5. EARNINGS PER SHARE
Basic earnings per common share amounts were computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the net additional shares, based on the treasury stock method, 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 (in thousands):
Three Months Ended March 31, |
|||
2004 |
2003 |
||
(Unaudited) |
|||
Weighted average basic common shares outstanding |
27,671 |
32,085 |
|
Effect of dilutive stock options, performance shares and restricted shares1 |
1,438 |
435 |
|
Weighted average diluted common shares outstanding |
29,109 |
32,520 |
6. SHAREHOLDERS' EQUITY
During the quarter ended March 31, 2004, we repurchased 580,000 treasury shares for approximately $10.8 million and issued approximately 278,000 shares due to stock option exercises for proceeds of approximately $2.8 million.
At March 31, 2004, we had the authority to repurchase approximately 1,842,000 additional shares under our stock repurchase program.
7. GOODWILL
In March 2004, we decided to exit the specialized geophysical and seismic-related business, which was included in the Reservoir Management segment (See Note 9). This decision resulted in goodwill impairment of approximately $3.1 million and a reclassification of the remaining balance of $5.5 million to Assets Held for Sale on the consolidated balance sheet at March 31, 2004.
8. OTHER (EXPENSE) INCOME
The components of other (expense) income, net, are as follows (in thousands):
Three Months Ended March 31, |
||||
2004 |
2003 |
|||
(Unaudited) |
||||
Minority interest |
$ (54) |
$ (40) |
||
Loss on sale of assets |
(143) |
(31) |
||
Equity in earnings of affiliates |
(246) |
70 |
||
Foreign exchange gain (loss) |
16 |
(874) |
||
Interest income |
56 |
40 |
||
Other |
177 |
642 |
||
Total other expense, net |
$ (194) |
$ (193) |
Foreign exchange gains and losses by currency are summarized in the following table (in thousands):
|
Three Months Ended March 31, |
|||
2004 |
2003 |
|||
(Unaudited) |
||||
British Pound |
$ 193 |
$ (17) |
||
Nigerian Naira |
141 |
(28) |
||
Mexican Peso |
42 |
(410) |
||
Canadian Dollar |
(75) |
220 |
||
Venezuelan Bolivar |
(550) |
(643) |
||
Other currencies |
265 |
4 |
||
Total gain (loss) |
$ 16 |
$ (874) |
In March 2004, the Board of Supervisory Directors approved a plan to exit the specialized geophysical and seismic-related business that is included in our Reservoir Management segment. The approved plan allowed management latitude in the method of exiting, including sales to a third party. In April 2004, we completed the sale to a third party of substantially all of this business (See Note 10). The remaining assets not sold will be abandoned during the next twelve months. We expect to incur additional expenses in future periods related to exiting the business which cannot be estimated at this time. In connection with the sales agreement, we may be required to pay severance for the employees of the disposed operation under the agreement with the buyer. This agreement terminates sixty days after closing. The results of operations of the specialized geophysical and seismic-related business to be sold or abandoned are reported as Discontinued Operations on the Consolidated Statement of Operations and the assets and liabilities of this business are classified as Assets and Liabilities Held for Sale.
Based on the sales price we adjusted the related assets to their estimated fair value. As a result, we recognized losses for the impairment of goodwill, intangible assets and long-lived assets. In addition, we recorded a charge to increase the provision for doubtful accounts. These charges have been included in the loss from discontinued operations. The pre-tax charges, measured using the offer from a third-party to purchase the related assets (See Note 10), are summarized below:
Impairment of goodwill to fair-value |
$ 3,144 |
Impairment of intangibles to fair-value |
3,092 |
Impairment of long-lived assets to fair-value |
1,655 |
Provision for doubtful account |
1,200 |
Total |
$ 9,091 |
The results of operations of the specialized geophysical and seismic-related business for the quarters ended March 31, 2004 and 2003 that have been reclassified are shown below (in thousands):
Three Months Ended March 31, |
||
2004 |
2003 |
|
Revenue |
$ 2,851 |
$ 7,475 |
Pretax Loss |
$ 12,170 |
$ 390 |
Loss After Tax Benefit |
$ 11,958 |
$ 261 |
The summarized balance sheet lines of the specialized geophysical and seismic-related business as of March 31, 2004 and December 31, 2003 that have been reclassified are shown below (in thousands):
March 31, |
December 31, |
|
2004 |
2003 |
|
Accounts receivable, net |
$ 11,061 |
$ 18,709 |
Other Current Assets |
688 |
1,008 |
Current Assets Held for Sale |
$ 11,749 |
$ 19,717 |
Property, Plant and Equipment, net |
$ 5,829 |
$ 7,475 |
Goodwill and Other Intangibles, net |
6,411 |
12,007 |
Other Assets |
193 |
213 |
Long Term Assets Held for Sale |
$ 12,433 |
$ 19,695 |
Accounts payable |
$ (407) |
$ (1,636) |
Accrued payroll and related cost |
(492) |
(578) |
Other accrued expenses |
(3,258) |
(4,063) |
Current liabilities of assets held for sale |
$ (4,157) |
$ (6,277) |
10. SUBSEQUENT EVENT
On April 22, 2004, we sold our specialized geophysical and seismic-related assets and business to Paradigm Geotechnology, a privately held company, for approximately $18.4 million in cash proceeds in addition to certain assumed liabilities. The amount of consideration paid was determined in arms-length negotiations between the parties. The transaction includes certain assets and liabilities in Calgary and Houston and two entities in Mexico, all of which were a part of our Reservoir Management segment. The final purchase price will be subject to certain working capital adjustments. We expect to incur additional expenses, including severance costs, in future periods related to exiting this business which cannot be estimated at this time. Proceeds from the sale of this business may be used to pay down debt, continue our stock repurchase program or fund potential future acquisitions.
11. LITIGATION
From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of business. Since April 2003, several putative class action lawsuits have been filed against us and certain of our officers in the United States District Court for the Southern District of New York, alleging, among other things, that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934; these cases have since been consolidated and transferred to the United States District Court for the Southern District of Texas. On March 21, 2004, lead plaintiffs filed their amended complaint, which generally alleges that the defendants overstated the company's revenues and net income during 2001 and 2002. The amended complaint seeks unspecified monetary damages. We intend to file a motion to dismiss the amended complaint under the Private Securities Litigation Reform Act of 1995 and to otherwise vigorously defend against this lawsuit.
CORE LABORATORIES N.V.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
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 4,600 employees.
Risk Factors
A list of our risk factors are included in our Form 10-K for the year ended December 31, 2003.
Results of Operations
Results of operations as a percentage of applicable revenue are as follows:
Three Months Ended March 31, |
% Change |
||||||
2004 |
2003 |
2004/2003 |
|||||
REVENUES: | |||||||
Services | $77,657 | 77.4% |
$67,401 |
78.8% |
15.2% |
||
Sales |
22,660 |
22.6% |
18,084 |
21.2% |
25.3% |
||
100,317 | 100.0% |
85,485 | 100.0% |
17.4% |
|||
OPERATING EXPENSES: | |||||||
Cost of services* | 61,936 | 79.8% |
55,558 | 82.4% |
11.5% |
||
Cost of sales* |
17,996 |
79.4% |
16,127 |
89.2% |
11.6% |
||
Total cost of services and sales | 79,932 |
79.7% |
71,685 |
83.9% |
11.5% |
||
General and administrative expenses | 6,207 |
6.2% |
5,569 |
6.5% |
11.4% |
||
Depreciation and amortization | 4,526 |
4.5% |
4,421 |
5.2% |
2.4% |
||
Other expense, net | 194 |
0.2% |
193 |
0.2% |
0.5% |
||
OPERATING INCOME FROM CONTINUING OPERATIONS | 9,458 |
9.4% |
3,617 |
4.2% |
161.5% |
||
Interest expense | 2,037 |
2.0% |
1,642 |
1.9% |
24.1% |
||
Income from continuing operations before income tax expense | 7,421 |
7.4% |
1,975 |
2.3% |
275.7% |
||
Income tax expense | 2,000 |
2.0% |
557 |
0.6% |
259.1% |
||
Income from continuing operations | 5,421 |
5.4% |
1,418 |
1.7% |
282.3% |
||
Loss from operations of discontinued business, net of tax | (11,958) |
(11.9%) |
(261) |
(0.3%) |
(4,481.6%) |
||
NET INCOME (LOSS) | $ (6,537) |
(6.5%) |
$ 1,157 |
1.4% |
(665.0%) |
||
*Percentage based on applicable revenue rather than total revenue. |
The discussion of operating results at the consolidated level is followed by a more detailed discussion of operating results by segment. The financial statements for prior periods have been restated to report separately the results of operations of our continuing operations and those of our discontinued.
Our revenues are derived from services and product sales. Service revenues in the first quarter of 2004 were $77.7 million as compared to $67.4 million for the same period last year, an increase of 15.2%. The increase was primarily due to increased North American oilfield activities driven by high commodity prices and increased international demand for our existing services, particularly in Europe, Africa, Asia and the former Soviet Union.
Cost of services expressed as a percentage of service revenue improved to 80% in the first quarter of 2004 as compared to 82% in the corresponding period in 2003.
Sales revenues increased to $22.7 million in the first quarter of 2004 from $18.1 million in the first quarter of 2003, a 25% increase. This increase was caused, in most part, to the increased drilling activity for natural gas in the North American markets. This increase in activity levels has caused higher demand for our well completion products.
Cost of sales in the first quarter of 2004 was 79% of sales revenue indicating an improvement as compared to 89% in the corresponding period in 2003 due primarily to cost reduction efforts we have made.
General and administrative expenses are comprised of corporate management and centralized administrative services that benefit our operating subsidiaries. General and administrative expenses were $6.2 million in the first quarter of 2004 as compared to $5.6 million for the same period last year, an increase of 11%. The increase was due primarily to compensation expense recognized for the Executive Restricted Share Matching Program. As a percentage of revenue, general and administrative expenses remained relative consistent in the first quarter of 2004 as compared to the corresponding period in 2003.
Depreciation and amortization expense in the first quarter of 2004 increased $0.1 million as compared to the corresponding period in 2003.
The components of other income (expense), net, are as follows (in thousands):
|
Three Months Ended March 31, |
|||
2004 |
2003 |
|||
Minority interest |
$ (54) |
$ (40) |
||
Loss on sale of assets |
(143) |
(31) |
||
Equity in earnings of affiliates |
(246) |
70 |
||
Foreign exchange gain (loss) |
16 |
(874) |
||
Interest income |
56 |
40 |
||
Other |
177 |
642 |
||
Total other expense, net |
$ (194) |
$ (193) |
Foreign exchange gains and losses by currency are summarized in the following table (in thousands):
|
Three Months Ended March 31, |
|||
2004 |
2003 |
|||
(Unaudited) |
||||
British Pound |
$ 193 |
$ (17) |
||
Nigerian Naira |
141 |
(28) |
||
Mexican Peso |
42 |
(410) |
||
Canadian Dollar |
(75) |
220 |
||
Venezuelan Bolivar |
(550) |
(643) |
||
Other currencies |
265 |
4 |
||
Total gain (loss) |
$ 16 |
$ (874) |
As a result of the ongoing political and financial situation in Venezuela, on February 9, 2004, the Venezuelan government devalued their currency, the Bolivar ("VEB"), by 20% to 1,918 VEB per United States Dollar ("USD") versus the rate of 1,596 VEB per USD established in February 2003. In the first quarter of 2004, we incurred foreign exchange losses of approximately $0.6 million on our net monetary assets denominated in VEB. We could be negatively impacted by any additional government-mandated devaluation of the VEB vs. the USD. At March 31, 2004, our net monetary assets denominated in VEB in Venezuela were $2.8 million. A change of 100 VEB in the exchange rate could result in a change of approximately $0.1 million in foreign exchange gain or loss subject to the amount of the net monetary assets at that time. We will continue to monitor our operations and financial position in this region.
In the first quarter of 2004 our effective income tax rate for continuing operations was 27% compared to 28% in the corresponding period in 2003. The Netherlands statutory rate is 34.5%.
Segment Analysis
(in Thousands)
Our operations are managed primarily in three complementary segments - Reservoir Description, Production Enhancement and Reservoir Management.
In March 2004, we decided to exit the specialized geophysical and seismic-related business that was included in the Reservoir Management segment (See Note 9 to the Consolidated Financial Statements). Our segment information has been restated to reflect this decision. We expect to incur additional expenses in future periods related to exiting the business which cannot be estimated at this time. In connection with the sales agreement, we may be required to pay severance for the employees of the disposed operation under the agreement with the buyer. This agreement terminates sixty days after closing.
Segment Information
Three Months Ended March 31, |
||
2004 |
2003 |
|
Revenues |
(Unaudited) |
|
Reservoir Description |
$ 60,485 |
$ 54,541 |
Production Enhancement |
34,401 |
26,529 |
Reservoir Management |
5,431 |
4,415 |
Consolidated |
$ 100,317 |
$ 85,485 |
Three Months Ended March 31, |
||
Income (loss) before interest and taxes |
2004 |
2003 |
(Unaudited) |
||
Reservoir Description |
$ 4,260 |
$ 2,969 |
Production Enhancement |
4,970 |
1,451 |
Reservoir Management |
336 |
(593) |
Corporate and Other 1 |
(108) |
(210) |
Consolidated |
$ 9,458 |
$ 3,617 |
1) "Corporate and Other" represents those items that are not directly related to a particular segment.
Reservoir Description
Revenues from the Reservoir Description segment increased $5.9 million in the first quarter of 2004 an increase of 11% over the same period last year. The increase was a result of higher North American oilfield activity levels driven by high commodity prices and increased international demand for our existing services, particularly in Europe, Africa, Asia and the former Soviet Union. Operating income increased by $1.3 million as a result of operating margin improvements and increased revenues. Operating margins increased to 7% compared to 5% in the same period last year primarily as a result of incremental margins earned from increased sales over our fixed base costs.
Production Enhancement
Revenues from the Production Enhancement segment were $34.4 million in the first quarter of 2004 compared to $26.5 million in the same period in the prior year, an increase of 30%. The revenue increase was primarily a result of increased demand for our perforating gun systems primarily in North American markets as well as increased demand for our domestic tracing and imaging services which help our clients analyze their fields to enhance production. We continued to successfully introduce SpectraFloodTM, into new markets, including West Africa, where a project in Nigeria is now in progress. SpectraFloodTM is used to optimize sweep efficiency in field floods. Operating income increased $3.5 million to $5.0 million. Operating margins improved to 15% in the first quarter of 2004 compared to 6% in the same period in the prior year. The operating margin improvement was primarily a result of incremental margins earned from increased sales over our fixed base cost s.
Reservoir Management
Revenues from the Reservoir Management segment in the first quarter of 2004 were $5.4 million, an increase of $1.0 million compared to the same period in the prior year, primarily as a result of revenues related to multi-client studies in the first quarter of 2004. Operating income was $0.3 million compared to an operating loss of $0.6 million in the prior year. Operating margins were 6% compared to a loss in the same period in the prior year. The operating margin improvement was primarily a result of incremental margins earned from increased sales over our fixed base costs. We will continue to focus on reservoir engineering services, studies, and products to optimize hydrocarbon production and maximize ultimate petroleum recovery rates on a field-wide to basin-wide scale.
Discontinued Operations
In the first quarter of 2004, Discontinued Operations incurred a pretax loss of $12.2 million as compared to a pretax loss of $0.4 million in the first quarter of 2003. Included in the 2004 loss were charges to reflect impairments goodwill and other intangibles and long-lived asset of $7.9 million as well as a $1.2 million charge to increase the provision for doubtful accounts. The 2004 loss related to operations was primarily a result of lower operating activities in Mexico.
Liquidity and Capital Resources
General
We have historically financed our activities through cash on hand, cash flows from operations, bank credit facilities, equity financing and the issuance of debt.
Cash Flows
During the first quarter of 2004, cash flows from operating activities of continuing operations were $7.3 million compared to $5.0 million in the corresponding period in 2003. At March 31, 2004, we had working capital of $103.7 million and a current ratio of 2.9 to 1.0, compared to working capital of $105.1 million and a current ratio of 2.7 to 1.0 at December 31, 2003. Cash from continuing operations in 2004 was positively impacted by higher earnings, partially offset by working capital requirements.
Our investing activities, which were comprised mainly of capital expenditures, used $3.5 million in the first quarter of 2004 compared to using $4.9 million in the same period in 2003. Capital expenditures from continuing operations in the first quarter of 2004 decreased to $1.4 million compared to the corresponding period in 2003.
Our financing activities for the first quarter of 2004 consisted of the repurchase of approximately 580,000 shares for an aggregate purchase price of approximately $10.8 million and the issuance of 278,000 shares due to stock option exercises resulting in proceeds of approximately $2.8 million. Our total borrowings were $2.0 million, while repayments were approximately $2.3 million. At March 31, 2004, $25.0 million was available under our $75.0 million Credit Facility.
In addition, we have Senior Notes, which bear interest at an average fixed interest rate of 8.16%. The Senior Notes require semi-annual interest payments, while interest payments on the Credit Facility are made based on the interest period selected. The terms of the Credit Facility and Senior Notes require us to meet certain financial and operational covenants. We believe that we are in compliance with all such covenants at March 31, 2004. All of our material, wholly owned subsidiaries are guarantors or co-borrowers under both agreements.
Our ability to maintain and grow our operating income and cash flows is dependent upon continued investing activities. 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. 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. On April 22, 2004, we sold our specialized geophysical and seismic-related assets and business to Paradigm Geotechnology, a privately held company, for approximately $18.4 million in cash proceeds in addition to certain assumed liabilities. Proceeds may be used to pay down debt, continue our Stock Repurchase Program or fund potential future acquisitions.At March 31, 2004, we had the authority to repurchase approximately 1,842,000 additional shares under our stock repurchase program. Our current authorization to repurchase stock is set to expire on April 25, 2005. At our annual meeting on June 2, 2004, our shareholders will be asked to approve a further extension of this authority for an additional 18-month period from the date of the annual meeting until December 1, 2005.
Outlook
We have established internal earnings targets that are based on current market conditions. Based on industry surveys, we anticipate North American spending by our clients in 2004 to increase slightly from 2003 levels in response to increasing oilfield activity. However, we believe that the activity levels outside of North America will remain constant in 2004 compared to 2003 levels. We expect to meet ongoing working capital and capital expenditure requirements from a combination of cash on hand, cash flow from operations and available borrowings under our revolving Credit Facility.
CORE LABORATORIES N.V.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Market Risk
There have been no material changes in market risk from the information provided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our 2003 10-K.
CONTROLS AND PROCEDURES
A complete discussion of our controls and procedures is included in our Form 10-K for the year ended December 31, 2003.
Changes in Disclosure Controls and Internal Controls
As part of our effort to have a common system of Internal Controls applicable to our operations world-wide, in 2001, we began an implementation of an enterprise-wide general ledger software system that included an Enterprise Resource Planning ("ERP") System for our manufacturing operations and budget and planning modules, as well as new business processes and procedures to support the software designed to provide us with a common set of Internal Controls in those locations where the new system is implemented. These changes are the result of our normal business process to evaluate and upgrade or replace our systems software and related business processes to support our evolving operational needs. At the end of 2002, approximately 62% of our business activity (as expressed in terms of consolidated revenues) was on this software system utilizing common business process and controls, primarily in the United States, Canada, the United Kingdom, and Mexico. In 2003, we installed this software and common set of Internal Controls for our operations in The Netherlands, Denmark, Venezuela, Australia and Thailand. We also upgraded our accounting software system to a more Internet capable version effective August 2003. At the end of the first quarter 2004, approximately 85% of our business activity was on this software system utilizing common business process and controls. We added our Nigerian business activity to our software system in the first quarter of 2004 and we anticipate adding Russian business activity in late 2004. In addition, we anticipate installing this same software system and common set of Internal Controls in Abu Dubai, Malaysia and Indonesia during the remainder of 2004.
Our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures, which have been designed to permit us to effectively identify and timely disclose important information. They concluded that the controls and procedures were effective as of March 31, 2004 to ensure that material information was accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. During the three months ended March 31, 2004, we have made no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
CORE LABORATORIES N.V.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of business. Since April 2003, several putative class action lawsuits have been filed against us and certain of our officers in the United States District Court for the Southern District of New York, alleging, among other things, that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934; these cases have since been consolidated and transferred to the United States District Court for the Southern District of Texas. On March 21, 2004, lead plaintiffs filed their amended complaint, which generally alleges that the defendants overstated the company's revenues and net income during 2001 and 2002. The amended complaint seeks unspecified monetary damages. We intend to file a motion to dismiss the amended complaint under the Private Securities Litigation Reform Act of 1995 and to otherwise vigorously defend against this lawsuit.
Item 2. Changes in Securities, Use of Proceeds and Issue Purchases of Equity Securities.
The following table provides information about purchases of equity securities that are registered by us pursuant to Section 12 of the Exchange Act during the quarter ended March 31, 2004:
PERIOD |
TOTAL NUMBER OF SHARES PURCHASED |
AVERAGE PRICE PAID PER SHARE |
TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PROGRAM (1) |
MAXIMUM NUMBER OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLAN |
January 1-31, 2004 |
200,600 |
$16.47 |
200,600 |
2,221,678 |
February 1-29, 2004 |
146,400 |
17.87 |
146,400 |
2,075,278 |
March 1-31, 2004 |
233,000 |
21.02 |
233,000 |
1,842,278 |
Total |
580,000 |
$18.65 |
580,000 |
1,842,278 |
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a)
Exhibit No. |
Exhibit Title |
Incorporated by reference from the following documents |
|
31.1 |
- |
Certification of Chief Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
- |
Certification of Chief Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
- |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
- |
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
(b) Reports on Form 8-K
During the quarter ended March 31, 2004, we filed a Form 8-K dated February 25, 2004, reporting under Item 12 "Disclosure of Results of Operations and Financial Condition". The report disclosed the press release announcing the results of operations for the quarter and year ended December 31, 2003.
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: May 7, 2004 | By: | /s/ Richard L. Bergmark |
Richard L. Bergmark | ||
Chief Financial Officer | ||