clb-10q_3q2010.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
     
FORM 10-Q
 
(Mark One)
 
   
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ______________
 
Commission File Number:  001-14273
 
CORE LABORATORIES N.V.
(Exact name of registrant as specified in its charter)
 
The Netherlands
Not Applicable
(State of other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
   
Herengracht 424
 
1017 BZ Amsterdam
 
The Netherlands
Not Applicable
(Address of principal executive offices)
(Zip Code)
   
(31-20) 420-3191
(Registrant's telephone number, including area code)
 
None
(Former name, former address and former fiscal year, if changed since last report)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý  No ¨

    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý  No ¨

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
   
(Do not check if a smaller reporting company)

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No ý

    The number of common shares of the registrant, par value EUR 0.02 per share, outstanding at October 22, 2010 was 44,924,005.


 
 

 


CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
     
 
     
 
     
 
     
 
     
 
     
Item 2.
     
Item 3.
     
Item 4.
     
     
PART II - OTHER INFORMATION
     
Item 1.
     
Item 2.
     
Item 6.
     
 
     

 
 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CORE LABORATORIES N.V.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

   
September 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
 
(Unaudited)
       
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 167,953     $ 181,045  
Accounts receivable, net of allowance for doubtful accounts of $3,489 and $3,202 at 2010 and 2009, respectively
    141,113       133,758  
Inventories, net
    30,537       32,184  
Prepaid expenses and other current assets
    24,013       43,550  
TOTAL CURRENT ASSETS
    363,616       390,537  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    101,957       98,784  
INTANGIBLES, net
    8,911       6,520  
GOODWILL
    154,217       148,600  
OTHER ASSETS
    16,328       13,725  
TOTAL ASSETS
  $ 645,029     $ 658,166  
                 
LIABILITIES AND EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 38,509     $ 33,009  
Accrued payroll and related costs
    29,186       24,368  
Taxes other than payroll and income
    6,838       8,183  
Unearned revenue
    14,923       16,528  
Income tax payable
    24,917       15,433  
Short-term debt – Senior Exchangeable Notes
    198,193       -  
Other accrued expenses
    10,839       8,887  
TOTAL CURRENT LIABILITIES
    323,405       106,408  
                 
LONG-TERM DEBT – SENIOR EXCHANGEABLE NOTES
    -       209,112  
DEFERRED COMPENSATION
    20,055       16,866  
DEFERRED TAX LIABILITIES
    8,026       7,692  
OTHER LONG-TERM LIABILITIES
    29,454       36,330  
COMMITMENTS AND CONTINGENCIES
    -       -  
                 
EQUITY COMPONENT OF SHORT-TERM DEBT – SENIOR EXCHANGEABLE NOTES
    16,099       -  
                 
EQUITY:
               
Preference shares, EUR 0.02 par value; 6,000,000 shares authorized, none issued or outstanding
    -       -  
Common shares, EUR 0.02 par value; 200,000,000 shares authorized, 49,739,912 issued and 44,924,005 outstanding at 2010 and
51,039,912 issued and 45,973,408 outstanding at 2009
    1,396       1,430  
Additional paid-in capital
    -       61,719  
Retained earnings
    519,052       469,454  
Accumulated other comprehensive (loss)
    (6,279 )     (6,536 )
Treasury shares (at cost), 4,815,907 at 2010 and 5,066,504 at 2009
    (268,980 )     (246,699 )
      Total Core Laboratories N.V. shareholders' equity
    245,189       279,368  
Non-controlling interest
    2,801       2,390  
TOTAL EQUITY
    247,990       281,758  
TOTAL LIABILITIES AND EQUITY
  $ 645,029     $ 658,166  


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

1

 

CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

   
Three Months Ended
September 30,
 
 
 
2010
   
2009
 
   
(Unaudited)
 
REVENUE:
           
Services
  $ 151,671     $ 133,819  
Product sales
    47,550       33,983  
      199,221       167,802  
OPERATING EXPENSES:
               
Cost of services, exclusive of depreciation expense shown below
    92,914       85,792  
Cost of product sales, exclusive of depreciation expense shown below
    32,858       26,383  
General and administrative expenses
    8,416       6,637  
Depreciation
    5,496       5,840  
Amortization
    318       183  
Other expense (income), net
    (998 )     (1,232 )
OPERATING INCOME
    60,217       44,199  
Loss on exchange of Senior Exchangeable Notes
    675       -  
Interest expense
    4,015       3,895  
Income before income tax expense
    55,527       40,304  
Income tax expense
    16,764       9,189  
Net income
    38,763       31,115  
    Net income attributable to non-controlling interest
    209       127  
Net income attributable to Core Laboratories N.V.
  $ 38,554     $ 30,988  
                 
EARNINGS PER SHARE INFORMATION:
               
Basic earnings per share attributable to Core Laboratories N.V.
  $    0.86     $    0.67  
                 
Diluted earnings per share attributable to Core Laboratories N.V.
  $ 0.79     $ 0.67  
                 
Cash dividends per share
  $ 0.71     $ 0.43  
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
               
Basic
    44,736       45,939  
                 
Diluted
    48,955       46,499  
                 

















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

2

 

CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

   
Nine Months Ended
September 30,
 
 
 
2010
   
2009
 
   
(Unaudited)
 
REVENUE:
           
Services
  $ 448,123     $ 410,182  
Product sales
    138,337       103,758  
      586,460       513,940  
OPERATING EXPENSES:
               
Cost of services, exclusive of depreciation expense shown below
    284,682       258,489  
Cost of product sales, exclusive of depreciation expense shown below
    95,595       78,715  
General and administrative expenses
    24,007       22,595  
Depreciation
    16,345       17,091  
Amortization
    989       546  
Other expense (income), net
    (508     (6,002 )
OPERATING INCOME
    165,350       142,506  
Loss on exchange of Senior Exchangeable Notes
    675       -  
Interest expense
    12,188       11,535  
Income before income tax expense
    152,487       130,971  
Income tax expense
    47,076       40,653  
Net income
    105,411       90,318  
    Net income attributable to non-controlling interest
    436       331  
Net income attributable to Core Laboratories N.V.
  $ 104,975     $ 89,987  
                 
EARNINGS PER SHARE INFORMATION:
               
Basic earnings per share attributable to Core Laboratories N.V.
  $    2.35     $    1.96  
                 
Diluted earnings per share attributable to Core Laboratories N.V.
  $ 2.19     $ 1.94  
                 
Cash dividends per share
  $ 0.83     $ 0.53  
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
               
Basic
    44,741       45,930  
                 
Diluted
    47,923       46,422  
                 


















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,
 
 
 
2010
   
2009
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 105,411     $ 90,318  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net provision for doubtful accounts
    787       1,487  
Provisions for inventory obsolescence
    513       362  
Equity in earnings of affiliates
    (342 )     (103 )
Stock-based compensation
    6,016       4,261  
Depreciation and amortization
    17,334       17,637  
Non-cash interest expense
    11,590       10,917  
Gain on sale of assets
    (80 )     (312 )
Loss on exchange of Senior Exchangeable Notes
    675       -  
Realization of pension obligation
    257       176  
Increase in value of life insurance policies
    (575 )     (1,640 )
Deferred income taxes
    (5,315 )     3,853  
Changes in assets and liabilities:
               
Accounts receivable
    (8,142 )     24,825  
Inventories
    1,134       159  
Prepaid expenses and other current assets
    25,185       (1,434 )
Other assets
    (436     (246 )
Accounts payable
    5,500       (13,607 )
Accrued expenses
    13,304       2,409  
Other long-term liabilities
    (3,687 )     5,852  
Net cash provided by operating activities
    169,129       144,914  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
    (19,661 )     (9,994 )
Patents and other intangibles
    (180 )     (191 )
Business Acquisitions
    (9,000 )     -  
Non-controlling interest - contributions
    156       -  
Proceeds from sale of assets
    406       522  
Premiums on life insurance
    (1,357 )     (1,183 )
Net cash used in investing activities
    (29,636 )     (10,846 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of debt borrowings
    (24,366 )     -  
Stock options exercised
    336       399  
Excess tax benefits from stock-based compensation
    798       127  
Non-controlling interest - dividends
    (181 )     (246 )
Dividends paid
    (37,095 )     (24,117 )
Repurchase of common shares
    (92,077 )     (9,144 )
Net cash used in financing activities
    (152,585 )     (32,981 )
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (13,092 )     101,087  
CASH AND CASH EQUIVALENTS, beginning of period
    181,045       36,138  
CASH AND CASH EQUIVALENTS, end of period
  $ 167,953     $  137,225  
                 
Non-cash investing and financing activities:
               
Financed capital expenditures
  $ -     $ 1,810  
                 





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

4

 

CORE LABORATORIES N.V.
NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Core Laboratories N.V. and its subsidiaries for which we have a controlling voting interest and/or a controlling financial interest. These financial statements have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") for interim financial information using the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnote disclosures required by U.S. GAAP and should be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Core Laboratories N.V. uses the equity method of accounting for investments in which it has less than a majority interest and over which it does not exercise control. Non-controlling interest has been recorded to reflect outside ownership attributable to consolidated subsidiaries that are less than 100% owned.  In the opinion of management, all adjustments considered necessary for the periods presented have been included in these financial statements.  Furthermore, the operating results presented for the three and nine months ended September 30, 2010 may not necessarily be indicative of the results that may be expected for the year ended December 31, 2010.

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

At our annual meeting on June 10, 2010, the shareholders approved an amendment to increase the authorized shares of our common stock from 100 million to 200 million and to increase the authorized shares of our preference stock from 3 million to 6 million.  In addition, shareholders approved the two-for-one stock split authorized by the Supervisory Board and thereby reduced the par value of each share from EUR 0.04 to EUR 0.02. As a result of the stock split, shareholders of record on June 30, 2010 received an additional share of common stock for each common share held.  The additional shares were distributed on July 8, 2010.  All references in the consolidated financial statements and the accompanying notes to common shares, share prices, per share amounts and stock plans have been restated retroactively for the stock split.

Certain reclassifications were made to prior period amounts in order to conform to the current period presentation.  These reclassifications had no impact on the reported net income for the three month and nine month periods ended September 30, 2010.

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


2.  INVENTORIES

Inventories consist of the following (in thousands):

   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
Finished goods
  $ 22,349     $ 22,161  
Parts and materials
    5,642       8,756  
Work in progress
    2,546       1,267  
  Total inventories, net
  $ 30,537     $ 32,184  

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


3. GOODWILL AND INTANGIBLES

We account for intangible assets with indefinite lives, including goodwill, in accordance with the applicable accounting guidance, which requires us to evaluate these assets for impairment annually, or more frequently if an indication of impairment has occurred.  Based upon our most recent evaluation, we determined that goodwill is not impaired.  We amortize intangible assets with a defined term on a straight-line basis over their respective useful lives.

5

 


In January 2010, we acquired fracture diagnostics assets for $9.0 million in cash.  The acquisition was recorded in the Production Enhancement business segment and resulted in an increase of $5.6 million in goodwill and an increase of $3.2 million in intangible assets.  The intangible assets will be amortized over a period of 36 to 60 months.  The acquisition did not have a material impact to the Production Enhancement business segment or consolidated operating results for the nine months ended September 30, 2010.  The remaining composition of goodwill by business segment at September 30, 2010 was consistent with the amounts disclosed in our Annual Report on Form 10-K as of December 31, 2009.


4.  DEBT AND CAPITAL LEASE OBLIGATIONS

Debt is summarized in the following table (in thousands):

   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
Senior exchangeable notes
  $ 214,292     $ 238,658  
Discount on senior exchangeable notes
    (16,099 )     (29,546 )
  Net senior exchangeable notes
  $ 198,193     $ 209,112  

In 2006, Core Laboratories LP, a wholly owned subsidiary of Core Laboratories N.V., issued $300 million aggregate principal amount of Senior Exchangeable Notes (the "Notes") which are fully and unconditionally guaranteed by Core Laboratories N.V. and mature on October 31, 2011.  The Notes bear interest at a rate of 0.25% per year paid on a semi-annual basis.

With the additional amortization of the discount on the Notes, the effective interest rate is 7.48% for the nine-month period ended September 30, 2010, which resulted in additional non-cash interest expense of $3.8 million and $3.7 million for the three months ended September 30, 2010 and 2009, respectively, and $11.5 million and $10.8 million for the nine months ended September 30, 2010 and 2009, respectively.  Each Note carries a $1,000 principal amount and is exchangeable into shares of Core Laboratories N.V. common stock under certain circumstances at an exchange price of $45.78 per share, or 21.8425 shares per Note.  Upon exchange, holders will receive cash for the principal amount plus any amount related to fractional shares, and any excess exchange value will be delivered in whole shares of Core Laboratories N.V. common stock at the completion of the valuation period as defined under the Notes agreement.  At September 30, 2010, the Notes were trading at 189.3% of their face value which is equivalent to $191.4 million of value in excess of the aggregate principal amount. At December 31, 2009, the Notes were trading at 134% of their face value which is equivalent to $81.1 million of value in excess of the aggregate principal amount.  There were 214,292  and 238,658 Notes outstanding at September 30, 2010 and December 31, 2009, respectively.

Under the terms of the Notes the early exchange option for the holders of the Notes was enabled in the third quarter of 2010, as it was in the second quarter of 2010. As a result, the Notes can be exchanged during the fourth quarter of 2010 and will remain classified as a short-term liability at September 30, 2010.  In addition, the equity component of the Notes at September 30, 2010 was classified as temporary equity.  This balance combined with the debt amount reflects the outstanding principcal amount of the Notes.  We received 10 notices during the second and third quarters of 2010 to exchange 24,366 Notes, which were settled during the third quarter for 224,338 shares of our common stock, all of which were treasury shares, and $24.4 million in cash resulting in a loss of $0.7 million.

 We received three notices during the third quarter to exchange 5,564 Notes which we will settle during the fourth quarter.  Subsequent to September 30, 2010, we have received an additional notice to exchange 8,029 Notes which we will settle during the fourth quarter.

We maintain a revolving credit facility (the "Credit Facility") that allows for an aggregate borrowing capacity of $100.0 million. The Credit Facility provides an option to increase the commitment under the Credit Facility to $150.0 million, if certain conditions are met.  The Credit Facility bears interest at variable rates from LIBOR plus 0.5% to a maximum of LIBOR plus 1.125%.  Any outstanding balance under the Credit Facility is due in December 2010 when the Credit Facility matures.  We are currently reviewing the Credit Facility and its extension.  Interest payment terms are variable depending upon the specific type of borrowing under this facility. Our available borrowing capacity under the Credit Facility was reduced by outstanding letters of credit and performance guarantees and bonds arranged totaling $12.6 million at September 30, 2010 relating to certain projects in progress.  Our available borrowing capacity under the Credit Facility at September 30, 2010 was $87.4 million. As of September 30, 2010, we had $17.0 million of outstanding letters of credit and performance guarantees and bonds in addition to those under the Credit Facility.

6

 


The terms of the Credit Facility require us to meet certain financial and operational covenants. We believe that we were in compliance with all such covenants at September 30, 2010.  All of our material, wholly owned subsidiaries are guarantors or co-borrowers under the Credit Facility.


5.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS

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

The following table summarizes the components of net periodic pension cost under this plan for the three and nine months ended September 30, 2010 and 2009 (in thousands):


   
Three Months Ended September 30,
   
Nine Months Ended September 30
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
Service cost
  $ 294     $ 278     $ 921     $ 796  
Interest cost
    341       356       1,069       1,019  
Expected return on plan assets
    (108 )     (196 )     (338 )     (560 )
Amortization of transition asset
    (22 )     (22 )     (66 )     (66 )
Amortization of prior service cost
    40       40       120       120  
Amortization of net loss
    94       61       283       183  
   Net periodic pension cost
  $ 639     $ 517     $ 1,989     $ 1,492  

During the nine months ended September 30, 2010, we contributed approximately $2.1 million, as determined by the insurance company, to fund the estimated 2010 premiums on investment contracts held by the Dutch Plan.

We have adopted a non-qualified deferred compensation plan that allows certain highly compensated employees to defer a portion of their salary, commission and bonus, as well as the amount of any reductions in their deferrals under the deferred compensation plan for employees in the United States (the "Deferred Compensation Plan"), due to certain limitations imposed by the U.S. Internal Revenue Code of 1986, as amended (the "Internal Revenue Code").  The Deferred Compensation Plan also provides for employer contributions to be made on behalf of participants equal in amount to certain forfeitures of, and/or reductions in, employer contributions that participants could have received under the 401(k) Plan in the absence of certain limitations imposed by the Internal Revenue Code. Employer contributions to the Deferred Compensation Plan vest ratably over a period of five years. Contributions to the plan are invested in equity and other investment fund assets, and carried on the balance sheet at fair value.  The benefits under these contracts are fully vested and payment of benefits generally commences as of the last day of the month following the termination of services except that the payment of benefits for select executives generally commences on the first working day following a six month waiting period following the date of termination.

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

7

 


(Unaudited)
       
Fair Value Measurement at
September 30, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
   Deferred compensation plan trust assets
  $ 7,501     $ -     $ 7,501     $ -  
                                 
Liabilities:
                               
   Deferred compensation plan
  $ 11,651     $ 2,167     $ 9,484     $ -  

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


6. COMMITMENTS AND CONTINGENCIES

We have been and may from time to time be named as a defendant in legal actions that arise in the ordinary course of business.  These include, but are not limited to, employment-related claims and contractual disputes or claims for personal injury or property damage which occur in connection with the provision of our products and services.  Management does not currently believe that any of our pending contractual, employment-related, personal injury or property damage claims and disputes will have a material effect on our future results of operations, financial position or cash flow.

During the quarter ended September 30, 2010, our office and laboratory facilities in Finland were partially damaged by fire, resulting in the loss of the laboratory portion of the building, as well as some of the laboratory equipment.  In August 2010, we filed claims with our insurance carrier for reimbursement of these costs.  We are still in the process of determining the extent of our loss, but we expect that the insurance proceeds will be adequate to recover our costs.


7.  EQUITY

During the three months ended September 30, 2010, we repurchased 4,989 of our common shares for $0.4 million. This total consists of rights to shares that were surrendered to us pursuant to the terms of a stock-based compensation plan in consideration of the participants' tax burdens that may result from the issuance of common shares under that plan.  During the nine months ended September 30, 2010, we repurchased 1,488,269 of our common shares for $92.1 million. Included in this total were rights to 47,523 shares valued at $3.3 million that were surrendered to us pursuant to the terms of a stock-based compensation plan in consideration of the participants' tax burdens that may result from the issuance of common shares under that plan. Such common shares, unless cancelled, may be reissued for a variety of purposes such as future acquisitions, employee stock awards, exchange of the Notes, or settlement of warrants.

During the three and nine months ended September 30, 2010, we recognized tax benefits of $0 and $0.8 million, respectively, relating to tax deductions in excess of book expense for stock-based compensation awards.  These tax benefits are recorded to additional paid-in capital to the extent deductions reduce current taxable income.

At the annual meeting of shareholders on June 10, 2010, the shareholders approved the cancellation of 1.3 million shares of our common stock currently held as treasury stock.  These treasury shares were cancelled on September 2, 2010, after the expiration of the waiting period required under Dutch law.  We charge the excess of the cost of the treasury stock over its par value to additional paid-in capital.  If additional paid-in-capital is not sufficient for this charge, the remainder is charged directly to retained earnings.

In February, May, and August 2010, we paid a quarterly dividend of $0.06 per share of common stock.  In addition, we paid a special cash dividend of $0.65 per share in August 2010.  In addition, on October 12, 2010, we declared a quarterly dividend of $0.06 per share of common stock for shareholders of record on October 22, 2010 and payable on November 24, 2010.
 
 

8

 


The following table summarizes our changes in equity for the nine months ended September 30, 2010 (in thousands):

                     
Accumulated
                   
         
Additional
         
Other
         
Non-
       
   
Common
   
Paid-In
   
Retained
   
Comprehensive
   
Treasury
   
Controlling
   
Total
 
(Unaudited)
 
Shares
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Interest
   
Equity
 
                                           
December 31, 2009
  $ 1,430     $ 61,719     $ 469,454     $ (6,536 )   $ (246,699 )   $ 2,390     $ 281,758  
Stock options exercised
    -       (1,483 )     -       -       1,819       -       336  
Stock based-awards
    -       (1,005 )     -       -       7,021       -       6,016  
Tax benefit of stock-based awards issued
    -       798       -       -       -       -       798  
Repurchase of common shares
    -       -       -       -       (92,077 )     -       (92,077 )
Dividends paid
    -       -       (37,095 )     -       -       -       (37,095 )
Equity component of short-term debt
    -       (16,099 )     -       -       -       -       (16,099 )
Exchange of Senior Exchangeable Notes
    -       (10,186 )     -       -       8,896       -       (1,290 )
Non-controlling interest contribution
    -       -       -       -       -       156       156  
Non-controlling interest dividend
    -       -       -       -       -       (181 )     (181 )
Cancellation of common shares
    (34 )     (33,744 )     (18,282 )     -       52,060       -       -  
Comprehensive income:
                                                       
Amortization of pension,
       net of tax
    -       -       -       257       -       -       257  
Net income
    -       -       104,975       -       -       436       105,411  
Total comprehensive income
                                                    105,668  
                                                         
September 30, 2010
  $ 1,396     $ -     $ 519,052     $ (6,279 )   $ (268,980 )   $ 2,801     $ 247,990  

Comprehensive Income

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

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
Net income
  $ 38,763     $ 31,115     $ 105,411     $ 90,318  
Realization of pension obligation
    86       59       257       176  
  Total comprehensive income
  $ 38,849     $ 31,174     $ 105,668     $ 90,494  

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

   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
Prior service cost
  $ (881 )   $ (971 )
Transition asset
    341       389  
Unrecognized net actuarial loss
    (5,739 )     (5,954 )
  Total accumulated other comprehensive loss
  $ (6,279 )   $ (6,536 )


9

 


8.  EARNINGS PER SHARE

We compute basic earnings per common share by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common shares include additional shares in the weighted average share calculations associated with the incremental effect of dilutive employee stock options, restricted stock awards and contingently issuable shares, as determined using the treasury stock method. The
following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted earnings per share (in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
Weighted average basic common shares outstanding
    44,736       45,939       44,741       45,930  
Effect of dilutive securities:
                               
Stock options
    55       88       58       124  
Contingent shares
    38       40       37       32  
Restricted stock and other
    591       432       564       336  
Senior exchangeable notes
    2,030       -       1,735       -  
Warrants
    1,505       -       788       -  
Weighted average diluted common and potential common shares outstanding
    48,955       46,499       47,923       46,422  

In 2006, we sold warrants on our common shares, which have an exercise price of $61.63 per share, and will settle in January 2012.  The warrant agreement calls for the net value of these warrants to be settled with Core Laboratories N.V. common shares.  Included in the table above are 1,505,000 and 788,000 shares which were added to the share count for the three and nine months ended September 30, 2010 because the average share price exceeded the strike price of the warrants.  These shares were included in calculating the impact to our dilutive earnings per share for the three and nine months ended September 30, 2010.


9. OTHER EXPENSE (INCOME), NET

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
Loss (gain) on sale of assets
  $ (88 )   $ 33     $ (80 )   $ (312 )
Foreign exchange loss (gain)
    (547 )     (859 )     1,074       (1,868 )
Interest income
    -       (17 )     (142 )     (115 )
Non-income tax accrual
    -       -       -       (2,500 )
Rents and royalties
    (352 )     (212 )     (1,052 )     (1,061 )
Other, net
    (11 )     (177 )     (308 )     (146 )
  Total other expense (income), net
  $ (998 )   $ (1,232 )   $ (508 )   $ (6,002 )

As a result of finalizing a non-income related tax settlement agreement, we released the remaining $2.5 million of the contingent liability during the second quarter of 2009.

10

 


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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
Australian Dollar
  $ (213 )   $ (168 )   $ (110 )   $ (446 )
British Pound
    (133 )     105       283       (127 )
Canadian Dollar
    (102 )     (815 )     (338 )     (1,582 )
Euro
    76       35       1,665       (178 )
Russian Ruble
    (18 )     (35 )     (33 )     189  
Venezuelan Bolivar
    (10 )     (1 )     (201 )     (2 )
Other currencies, net
    (147 )     20       (192 )     278  
  Total loss (gain)
  $ (547 )   $ (859 )   $ 1,074     $ (1,868 )


10.  INCOME TAX EXPENSE

The effective tax rates for the three months ended September 30, 2010 and 2009 were 30.2% and 22.8%, respectively.  The lower effective tax rate for 2009 included an adjustment to income tax expense and deferred tax liabilities associated with monetary assets and liabilities of our foreign subsidiaries.  The effective tax rates for year-to-date 2010 and 2009 were 30.9% and 31.0%, respectively.  These rates reflect the change in activity levels between jurisdictions with different tax rates. 

11.  SEGMENT REPORTING

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

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

Results for these business segments are presented below.  We use the same accounting policies to prepare our business segment results as are used to prepare our Consolidated Financial Statements.  We evaluate performance based on income or loss before income tax, interest and other non-operating income (expense). Summarized financial information concerning our segments is shown in the following table (in thousands):

11

 



(Unaudited)
 
Reservoir Description
   
Production Enhancement
   
Reservoir Management
   
Corporate &
Other 1
   
Consolidated
 
Three Months Ended September 30, 2010
                             
Revenue from unaffiliated customers
  $ 106,485     $ 78,992     $ 13,744     $ -     $ 199,221  
Inter-segment revenue
    441       390       319       (1,150 )     -  
Segment operating income
    28,014       26,260       5,535       408       60,217  
Total assets
    261,582       189,481       14,958       179,008       645,029  
Capital expenditures
    5,351       1,135       201       278       6,965  
Depreciation and amortization
    3,485       1,600       199       530       5,814  
                                         
Three Months Ended September 30, 2009
                                       
Revenue from unaffiliated customers
  $ 101,475     $ 54,398     $ 11,929     $ -     $ 167,802  
Inter-segment revenue
    332       317       636       (1,285 )     -  
Segment operating income (loss)
    26,792       14,627       3,498       (718 )     44,199  
Total assets
    251,410       168,781       15,389       155,219       590,799  
Capital expenditures
    2,915       767       17       975       4,674  
Depreciation and amortization
    3,659       1,492       175       697       6,023  
                                         
Nine Months Ended September 30, 2010
                                       
Revenue from unaffiliated customers
  $ 317,106     $ 227,553     $ 41,801     $ -     $ 586,460  
Inter-segment revenue
    989       1,103       1,034       (3,126 )     -  
Segment operating income (loss)
    78,229       73,355       14,827       (1,061 )     165,350  
Total assets
    261,582       189,481       14,958       179,008       645,029  
Capital expenditures
    15,280       2,527       458       1,396       19,661  
Depreciation and amortization
    10,515       4,849       523       1,447       17,334  
                                         
Nine Months Ended September 30, 2009
                                       
Revenue from unaffiliated customers
  $ 307,477     $ 169,512     $ 36,951     $ -     $ 513,940  
Inter-segment revenue
    806       1,125       1,372       (3,303 )     -  
Segment operating income
    83,006       47,370       10,460       1,670       142,506  
Total assets
    251,410       168,781       15,389       155,219       590,799  
Capital expenditures
    7,098       1,755       69       1,072       9,994  
Depreciation and amortization
    10,609       4,416       530       2,082       17,637  
                                         
(1) "Corporate & Other" represents those items that are not directly related to a particular segment and eliminations.
 



12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
 
Core Laboratories N.V. has fully and unconditionally guaranteed all of the Notes issued by Core Laboratories LP in 2006. Core Laboratories LP is a wholly owned subsidiary of Core Laboratories N.V.
The following condensed consolidating financial information is included so that separate financial statements of Core Laboratories LP are not required to be filed with the U.S. Securities and Exchange Commission (the "SEC"). The condensed consolidating financial statements present investments in both consolidated and unconsolidated affiliates using the equity method of accounting.

The following condensed consolidating financial information presents: balance sheets as of September 30, 2010 and December 31, 2009, statements of operations for each of the three and nine months ended September 30, 2010 and 2009 and the statements of cash flows for each of the nine months ended September 30, 2010 and 2009 of (a) Core Laboratories N.V., parent/guarantor, (b) Core Laboratories LP, issuer of public debt securities guaranteed by Core Laboratories N.V., (c) the non-guarantor subsidiaries, (d) consolidating adjustments necessary to consolidate Core Laboratories N.V. and its subsidiaries and (e) Core Laboratories N.V. on a consolidated basis.

12

 


Condensed Consolidating Balance Sheets (Unaudited)
                         
                               
(In thousands)
 
September 30, 2010
 
   
Core Laboratories N.V. (Parent/ Guarantor)
   
Core Laboratories LP (Issuer)
   
Other Subsidiaries (Non- Guarantors)
   
Consolidating Adjustments
   
Consolidated Total
 
ASSETS
                             
CURRENT ASSETS:
                             
Cash and cash equivalents
  $ 9,227     $ 145,029     $ 13,697     $ -     $ 167,953  
Accounts receivable, net
    1       30,281       110,831       -       141,113  
Inventories, net
    -       3,185       27,352       -       30,537  
Prepaid expenses and other current assets
    6,035       9,403       8,575       -       24,013  
Total current assets
    15,263       187,898       160,455       -       363,616  
                                         
PROPERTY, PLANT AND EQUIPMENT, net
    -       21,330       80,627       -       101,957  
GOODWILL AND INTANGIBLES, net
    46,986       16,046       100,096       -       163,128  
INTERCOMPANY RECEIVABLES
    32,955       208,770       269,743       (511,468 )     -  
INVESTMENT IN AFFILIATES
    616,519       -       1,813,896       (2,429,753 )     662  
DEFERRED TAX ASSET
    2,810       -       6,515       (8,671 )     654  
OTHER ASSETS
    2,955       9,960       2,097       -       15,012  
TOTAL ASSETS
  $ 717,488     $ 444,004     $ 2,433,429     $ (2,949,892 )   $ 645,029  
                                         
        LIABILITIES AND EQUITY
                                 
CURRENT LIABILITIES:
                                       
Accounts payable
  $ 630     $ 6,703     $ 31,176     $ -     $ 38,509  
Short-term debt
     -       198,193       -       -       198,193  
Other accrued expenses
    2,207       27,105       57,391       -       86,703  
Total current liabilities
    2,837       232,001       88,567       -       323,405  
                                         
LONG-TERM DEBT
    -       -       -       -       -  
DEFERRED COMPENSATION
    6,506       13,450       99       -       20,055  
DEFERRED TAX LIABILITY
    -       16,697       -       (8,671 )     8,026  
INTERCOMPANY PAYABLES
    449,509       35,590       26,369       (511,468 )     -  
OTHER LONG-TERM LIABILITIES
    13,447       3,062       12,945       -       29,454  
                                         
Equity Component of Short-term Debt -Senior Exchangeable Notes
    -       16,099       -       -       16,099  
                                         
SHAREHOLDERS' EQUITY
    245,189       127,105       2,302,648       (2,429,753 )     245,189  
NON-CONTROLLING INTEREST
    -       -       2,801       -       2,801  
TOTAL EQUITY
    245,189       127,105       2,305,449       (2,429,753 )     247,990  
                                         
TOTAL LIABILITIES AND EQUITY
  $ 717,488     $ 444,004     $ 2,433,429     $ (2,949,892 )   $ 645,029  


13

 


Condensed Consolidating Balance Sheets
                             
                               
(In thousands)
 
December 31, 2009
 
   
Core Laboratories N.V. (Parent/ Guarantor)
   
Core Laboratories LP (Issuer)
   
Other Subsidiaries (Non- Guarantors)
   
Consolidating Adjustments
   
Consolidated Total
 
ASSETS
                             
CURRENT ASSETS:
                             
Cash and cash equivalents
  $ 73,998     $ 95,048     $ 11,999     $ -     $ 181,045  
Accounts receivable, net
    1       29,452       104,305       -       133,758  
Inventories, net
    -       2,679       29,505       -       32,184  
Prepaid expenses and other current assets
    11,809       22,209       9,532       -       43,550  
Total current assets
    85,808       149,388       155,341       -       390,537  
                                         
PROPERTY, PLANT AND EQUIPMENT, net
    -       21,988       76,796       -       98,784  
GOODWILL AND INTANGIBLES, net
    46,986       7,949       100,185       -       155,120  
INTERCOMPANY RECEIVABLES
    37,681       216,670       232,802       (487,153 )     -  
INVESTMENT IN AFFILIATES
    540,724       -       1,387,715       (1,928,118 )     321  
DEFERRED TAX ASSET
    2,951       4,644       14,359       (21,954 )     -  
OTHER ASSETS
    2,828       8,770       1,806       -       13,404  
TOTAL ASSETS
  $ 716,978     $ 409,409     $ 1,969,004     $ (2,437,225 )   $ 658,166  
                                         
        LIABILITIES AND EQUITY
                                 
CURRENT LIABILITIES:
                                       
Accounts payable
  $ 501     $ 6,404     $ 26,104     $ -     $ 33,009  
Other accrued expenses
    673       29,738       42,988       -       73,399  
Total current liabilities
    1,174       36,142       69,092       -       106,408  
                                         
LONG-TERM DEBT
    -       209,112       -       -       209,112  
DEFERRED COMPENSATION
    6,046       10,094       726       -       16,866  
DEFERRED TAX LIABILITY
    -       29,646       -       (21,954 )     7,692  
INTERCOMPANY PAYABLES
    417,618       -       69,535       (487,153 )     -  
OTHER LONG-TERM LIABILITIES
    12,772       7,702       15,856       -       36,330  
                                         
SHAREHOLDERS' EQUITY
    279,368       116,713       1,811,405       (1,928,118 )     279,368  
NON-CONTROLLING INTEREST
    -       -       2,390       -       2,390  
TOTAL EQUITY
    279,368       116,713       1,813,795       (1,928,118 )     281,758  
                                         
TOTAL LIABILITIES AND EQUITY
  $ 716,978     $ 409,409     $ 1,969,004     $ (2,437,225 )   $ 658,166  









14

 


Condensed Consolidating Statements of Operations (Unaudited)
                         
                               
(In thousands)
 
Three Months Ended September, 2010
 
   
Core Laboratories N.V. (Parent/ Guarantor)
   
Core Laboratories LP (Issuer)
   
Other Subsidiaries (Non- Guarantors)
   
Consolidating Adjustments
   
Consolidated Total
 
REVENUE
                             
Operating revenue
  $ -     $ 48,856     $ 150,365     $ -     $ 199,221  
Intercompany revenue
    356       6,230       37,948       (44,534 )     -  
Earnings from consolidated affiliates
    42,764       -       69,553       (112,317 )     -  
Total revenue
    43,120       55,086       257,866       (156,851 )     199,221  
                                         
OPERATING EXPENSES
                                       
Operating costs
    346       24,928       100,498       -       125,772  
General and administrative expenses
    1,416       6,997       3       -       8,416  
Depreciation and amortization
    -       1,610       4,204       -       5,814  
Other expense (income), net
    1,178       3,850       26,265       (32,291 )     (998 )
                                         
Operating income
    40,180       17,701       126,896