CLB-2014.6.30-10Q


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
(Mark One)
 
Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
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 or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
Strawinskylaan 913
 
 
Tower A, Level 9
 
1077 XX 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 Q  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 Q  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 Q
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
 
 
(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 Q

The number of common shares of the registrant, par value EUR 0.02 per share, outstanding at July 24, 2014 was 44,420,900.




CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2014
 
INDEX
 
PART I - FINANCIAL INFORMATION
 
 
Page
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CORE LABORATORIES N.V.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
June 30,
2014
 
December 31,
2013
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
29,548

 
$
25,088

Accounts receivable, net of allowance for doubtful accounts of $3,371 and $2,872 at 2014 and 2013, respectively
200,990

 
201,322

Inventories
51,392

 
46,821

Prepaid expenses
14,892

 
13,128

Income taxes receivable
13,863

 
5,294

Other current assets
11,557

 
12,215

TOTAL CURRENT ASSETS
322,242

 
303,868

PROPERTY, PLANT AND EQUIPMENT, net
143,926

 
138,824

INTANGIBLES, net
12,037

 
10,949

GOODWILL
163,337

 
163,337

DEFERRED TAX ASSETS, net
4,214

 
4,452

OTHER ASSETS
43,372

 
39,580

TOTAL ASSETS
$
689,128

 
$
661,010

LIABILITIES AND EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable
$
51,292

 
$
50,821

Accrued payroll and related costs
34,266

 
38,969

Taxes other than payroll and income
9,687

 
6,979

Unearned revenue
11,844

 
10,887

Income taxes payable
13,057

 
14,462

Other accrued expenses
13,778

 
13,657

TOTAL CURRENT LIABILITIES
133,924

 
135,775

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
333,000

 
267,002

DEFERRED COMPENSATION
41,125

 
38,014

DEFERRED TAX LIABILITIES, net
3,230

 
8,870

OTHER LONG-TERM LIABILITIES
41,568

 
41,960

COMMITMENTS AND CONTINGENCIES (Note 6)


 


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, 46,750,002 issued and 44,480,019 outstanding at 2014 and 46,750,002 issued and 45,101,389 outstanding at 2013
1,203

 
1,203

Additional paid-in capital
2,691

 

Retained earnings
495,792

 
415,930

Accumulated other comprehensive income (loss)
(8,454
)
 
(8,626
)
Treasury shares (at cost), 2,269,983 at 2014 and 1,648,613 at 2013
(361,074
)
 
(245,184
)
Total Core Laboratories N.V. shareholders' equity
130,158

 
163,323

Non-controlling interest
6,123

 
6,066

TOTAL EQUITY
136,281

 
169,389

TOTAL LIABILITIES AND EQUITY
$
689,128

 
$
661,010



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

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

 
Three Months Ended
 
June 30,
 
2014
 
2013
 
(Unaudited)
REVENUE:
 
 
 
Services
$
188,299

 
$
187,676

Product sales
79,263

 
75,463

Total revenue
267,562

 
263,139

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
111,706

 
109,661

Cost of product sales, exclusive of depreciation expense shown below
56,452

 
53,842

General and administrative expense, exclusive of depreciation expense shown below
11,148

 
11,173

Depreciation
6,027

 
5,656

Amortization
291

 
308

Other (income) expense, net
(2,196
)
 
630

OPERATING INCOME
84,134

 
81,869

Interest expense
2,794

 
2,263

Income before income tax expense
81,340

 
79,606

Income tax expense
17,244

 
19,664

Net income
64,096

 
59,942

Net income (loss) attributable to non-controlling interest
362

 
266

Net income attributable to Core Laboratories N.V.
$
63,734

 
$
59,676

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
1.43

 
$
1.30

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
1.42

 
$
1.29

 
 
 
 
Cash dividends per share
$
0.50

 
$
0.32

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
44,660

 
45,841

Diluted
44,910

 
46,128












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



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

 
Six Months Ended
 
June 30,
 
2014
 
2013
 
(Unaudited)
REVENUE:
 
 
 
Services
$
377,034

 
$
370,157

Product sales
153,431

 
153,909

Total revenue
530,465

 
524,066

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
222,277

 
219,814

Cost of product sales, exclusive of depreciation expense shown below
107,550

 
107,334

General and administrative expense, exclusive of depreciation expense shown below
21,667

 
23,982

Depreciation
12,369

 
11,379

Amortization
582

 
610

Other (income) expense, net
(941
)
 
41

OPERATING INCOME
166,961

 
160,906

Interest expense
5,157

 
4,532

Income before income tax expense
161,804

 
156,374

Income tax expense
36,555

 
39,700

Net income
125,249

 
116,674

Net income (loss) attributable to non-controlling interest
451

 
482

Net income attributable to Core Laboratories N.V.
$
124,798

 
$
116,192

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
2.79

 
$
2.52

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
2.77

 
$
2.51

 
 
 
 
Cash dividends per share
$
1.00

 
$
0.64

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
44,783

 
46,020

Diluted
45,045

 
46,313



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CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Unaudited)
Net income
$
64,096

 
$
59,942

 
$
125,249

 
$
116,674

Pension and other postretirement benefit plans
 
 
 
 
 
 
 
Prior service cost
 
 
 
 
 
 
 
Amortization to net income of transition asset
(22
)
 
(22
)
 
(44
)
 
(44
)
Amortization to net income of prior service cost
1

 
40

 
3

 
80

Amortization to net income of actuarial loss
135

 
117

 
270

 
234

Income taxes on pension and other postretirement benefit plans
(28
)
 
(34
)
 
(57
)
 
(68
)
Comprehensive income
64,182

 
60,043

 
125,421

 
116,876

Comprehensive income (loss) attributable to non-controlling interest
362

 
266

 
451

 
482

Comprehensive income attributable to Core Laboratories N.V.
$
63,820

 
$
59,777

 
$
124,970

 
$
116,394

































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

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CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Six Months Ended
 
June 30,
 
2014
 
2013
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
125,249

 
$
116,674

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Stock-based compensation
10,646

 
10,176

Depreciation and amortization
12,951

 
11,989

(Increase) decrease in value of life insurance policies
(1,497
)
 
(1,456
)
Deferred income taxes
(4,436
)
 
(709
)
Other non-cash items
878

 
(420
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
261

 
(5,345
)
Inventories
(4,824
)
 
(6,168
)
Prepaid expenses and other current assets
(10,887
)
 
5,433

Other assets
1,219

 
(450
)
Accounts payable
1,464

 
2,081

Accrued expenses
(3,256
)
 
(1,939
)
Unearned revenue
957

 
2,490

Other long-term liabilities
2,508

 
4,145

Net cash provided by operating activities
131,233

 
136,501

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(19,787
)
 
(17,935
)
Patents and other intangibles
(304
)
 
(2,229
)
Business acquisition, net of cash acquired
(1,200
)
 

Proceeds from sale of assets
604

 
697

Premiums on life insurance
(2,866
)
 
(1,527
)
Net cash used in investing activities
(23,553
)
 
(20,994
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Repayment of debt borrowings
(37,041
)
 
(35,025
)
Proceeds from debt borrowings
103,000

 
51,000

Stock options exercised

 
83

Excess tax benefits from stock-based compensation
1,449

 
2,353

Debt financing costs
(3
)
 

Non-controlling interest - dividend
(394
)
 

Dividends paid
(44,937
)
 
(29,508
)
Repurchase of common shares
(125,294
)
 
(100,416
)
Net cash used in financing activities
(103,220
)
 
(111,513
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
4,460

 
3,994

CASH AND CASH EQUIVALENTS, beginning of period
25,088

 
19,226

CASH AND CASH EQUIVALENTS, end of period
$
29,548

 
$
23,220










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

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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 audited 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, 2013 (the "2013 Annual Report").

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 but does exert significant influence. We use the cost method to record certain other investments in which we own less than 20% of the outstanding equity and do not exercise control or exert significant influence. Non-controlling interests have 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 statement of the results for the interim periods presented have been included in these financial statements. Furthermore, the operating results presented for the three and six months ended June 30, 2014 may not necessarily be indicative of the results that may be expected for the year ended December 31, 2014.

Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2013 was derived from the 2013 audited consolidated financial statements but does not include all disclosures in accordance with U.S. GAAP.

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 or cash flows for the three and six months ended June 30, 2013.

References to "Core Lab", the "Company", "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):
 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Finished goods
$
38,332

 
$
37,143

Parts and materials
11,180

 
8,323

Work in progress
1,880

 
1,355

Total inventories
$
51,392

 
$
46,821


We include freight costs incurred for shipping inventory to customers in the Cost of product 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 is possible. Based upon our most recent evaluation at the end of 2013, we determined that intangible assets, including goodwill, are not impaired. We amortize intangible assets with a finite life on a straight-line basis over their respective useful lives.

4.  DEBT AND CAPITAL LEASE OBLIGATIONS

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

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June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Senior notes
$
150,000

 
$
150,000

Credit facility
183,000

 
117,000

Capital lease obligations
11

 
28

Total debt
333,011

 
267,028

Less - current maturities of long-term debt and capital lease obligations
11

 
26

Long-term debt and capital lease obligations, net
$
333,000

 
$
267,002


In 2011, we issued two series of senior notes with an aggregate principal amount of $150 million ("Senior Notes") in a private placement transaction. Series A consists of $75 million in aggregate principal amount of notes that bear interest at a fixed rate of 4.01% and are due in full on September 30, 2021. Series B consists of $75 million in aggregate principal amount of notes that bear interest at a fixed rate of 4.11% and are due in full on September 30, 2023. Interest on each series of the Senior Notes is payable semi-annually on March 30 and September 30.
    
We maintain a revolving credit facility (the "Credit Facility") with an aggregate borrowing capacity of $300 million at June 30, 2014. The Credit Facility provides an option to increase the commitment under the Credit Facility to $350 million, if certain conditions are met. The Credit Facility bears interest at variable rates from LIBOR plus 1.50% to a maximum of LIBOR plus 2.25%. Any outstanding balance under the Credit Facility is due September 28, 2016 when the Credit Facility matures. Interest payment terms are variable depending upon the specific type of borrowing under this facility. Our available capacity at any point in time is reduced by borrowings outstanding at the time and outstanding letters of credit which totaled $21.9 million at June 30, 2014, resulting in an available borrowing capacity under the Credit Facility of $95.1 million. In addition to those items under the Credit Facility, we had $24.4 million of outstanding letters of credit and performance guarantees and bonds from other sources as of June 30, 2014.

The terms of the Credit Facility and the Senior Notes require us to meet certain covenants, including, but not limited to, certain minimum equity and cash flow ratios. We believe that we are in compliance with all such covenants contained in our credit agreements. Certain of our material, wholly-owned subsidiaries are guarantors or co-borrowers under the Credit Facility and Senior Notes.

The estimated fair value of total debt at June 30, 2014 and December 31, 2013 approximated the book value of total debt. The fair value was estimated using Level 2 inputs by calculating the sum of the discounted future interest and principal payments through the date of maturity.

5.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Defined Benefit Plan

We provide a non-contributory defined benefit pension plan for substantially all of our Dutch employees ("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. The benefits earned by the employees are immediately vested. We fund the future obligations of the Dutch Plan by purchasing insurance contracts from a large multi-national insurance company. The insurance contracts are purchased annually and renew 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 make annual premium payments to the insurance company based on each employee's age and current salary, and the contractual growth rate. We determine the fair value of these plan assets with the assistance of an actuary using observable inputs (Level 2), which approximates the contract value of the investments.

The following table summarizes the components of net periodic pension cost under the Dutch Plan for the three and six months ended June 30, 2014 and 2013 (in thousands):

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Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Unaudited)
Service cost
$
372

 
$
388

 
$
742

 
$
784

Interest cost
452

 
411

 
902

 
831

Expected return on plan assets
(335
)
 
(317
)
 
(669
)
 
(640
)
Amortization of transition asset
(22
)
 
(22
)
 
(44
)
 
(44
)
Amortization of prior service cost
1

 
40

 
3

 
80

Amortization of actuarial loss
135

 
117

 
270

 
234

Net periodic pension cost
$
603

 
$
617

 
$
1,204

 
$
1,245


During the six months ended June 30, 2014, we contributed approximately $1.1 million to fund the estimated 2014 premiums on investment contracts held by the Dutch Plan.

Defined Contribution Plans

We maintain five defined contribution plans (the "Defined Contribution Plans") for the benefit of eligible employees in Canada, The Netherlands, Puerto Rico, the United Kingdom and the United States. In accordance with the terms of each plan, we and our participating employees contribute up to specified limits, and under certain plans, we may make discretionary contributions in accordance with the terms of the Defined Contribution Plans.

Deferred Compensation Arrangements

We have entered into deferred compensation contracts for certain key employees. The benefits under these contracts are fully vested and benefits are paid when the participants attain 65 years of age. Life insurance policies with cash surrender values have been purchased for the purpose of assisting in the funding of the deferred compensation contracts.

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 otherwise received under the Defined Contribution Plan for U.S. employees qualified under Internal Revenue Code Section 401(k) had there not been 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 within life insurance policies, and carried on the balance sheet at fair value. A participant's plan benefits include the participant's deferrals, the vested portion of the employer's contributions, and deemed investment gains and losses on such amounts. 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.

The Company's only financial assets and liabilities which involve fair value measures relate to certain aspects of the Company's benefit plans. 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) with the assistance of a third party specialist. 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 Expense in the Consolidated Statements of Operations. The following table summarizes the fair value balances (in thousands):


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(Unaudited)
 
 
Fair Value Measurement at
 
 
 
June 30, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
23,137

 
$

 
$
23,137

 
$

Liabilities:
 

 
 

 
 
 
 
Deferred compensation plan
$
28,105

 
$

 
$
28,105

 
$


 
 
 
Fair Value Measurement at
 
 
 
December 31, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
20,104

 
$

 
$
20,104

 
$

Liabilities:
 

 
 
 
 
 
 
Deferred compensation plan
$
25,470

 
$
1,182

 
$
24,288

 
$

 
 
 
 
 
 
 
 
(1) Trust assets consist of the cash surrender value of life insurance policies intended to assist in the funding of the deferred compensation plan and are included in Other assets in the Balance Sheet.

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 services and products. 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.

In connection with an audit of the 2008 and 2009 U.S. federal income tax returns of our U.S. consolidated group, the U.S. Internal Revenue Service has proposed that certain transfer pricing positions taken by the Company be adjusted, which could result in additional federal income tax of approximately $11 million plus interest for this two-year audit period. We believe that these transactions are valid as originally recorded, and we are appealing this proposed adjustment. It is our belief that we will prevail on this issue; consequently, we have made no additional income tax accrual for this proposed adjustment.

7.  EQUITY

During the three months ended June 30, 2014, we repurchased 455,219 of our common shares for $78.5 million. Included in this total were rights to 17,918 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. During the six months ended June 30, 2014, we repurchased 709,559 of our common shares for $125.3 million. Included in this total were rights to 25,394 shares valued at $4.7 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 canceled, may be reissued for a variety of purposes such as future acquisitions, non-employee director stock awards or employee stock awards.

In February and May 2014, we paid a quarterly dividend of $0.50 per share of common stock. In addition, on July 8, 2014, we declared a quarterly dividend of $0.50 per share of common stock for shareholders of record on July 18, 2014 and payable on August 18, 2014.

The following table summarizes our changes in equity for the six months ended June 30, 2014 (in thousands):

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(Unaudited)
Common Shares
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
Treasury Stock
 
Non-Controlling Interest
 
Total Equity
December 31, 2013
$
1,203

 
$

 
$
415,930

 
$
(8,626
)
 
$
(245,184
)
 
$
6,066

 
$
169,389

Stock options exercised

 


 

 

 


 

 

Stock based-awards

 
1,242

 

 

 
9,404

 

 
10,646

Tax benefit of stock-based awards issued

 
1,449

 

 

 

 

 
1,449

Repurchase of common shares

 

 

 

 
(125,294
)
 

 
(125,294
)
Dividends paid

 

 
(44,936
)
 

 

 

 
(44,936
)
Non-controlling interest dividends

 

 

 

 

 
(394
)
 
(394
)
Amortization of deferred pension costs, net of tax

 

 

 
172

 

 

 
172

Net income (loss)

 

 
124,798

 

 

 
451

 
125,249

 
 
 
 
 
 
 
 
 
 
 
 
 

June 30, 2014
$
1,203

 
$
2,691

 
$
495,792

 
$
(8,454
)
 
$
(361,074
)
 
$
6,123

 
$
136,281


Accumulated other comprehensive income (loss) consisted of the following (in thousands):
 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Prior service cost
$
(52
)
 
$
(55
)
Transition asset
98

 
131

Unrecognized net actuarial loss
(8,500
)
 
(8,702
)
Total accumulated other comprehensive income (loss)
$
(8,454
)
 
$
(8,626
)

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Unaudited)
Weighted average basic common shares outstanding
44,660

 
45,841

 
44,783

 
46,020

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options

 

 

 
2

Performance shares
111

 
116

 
105

 
105

Restricted stock
139

 
171

 
157

 
186

Weighted average diluted common and potential common shares outstanding
44,910

 
46,128

 
45,045

 
46,313





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9. OTHER (INCOME) EXPENSE, NET

The components of other (income) expense, net, were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Unaudited)
Sale of assets
$
(180
)
 
$
(323
)
 
$
(298
)
 
$
(532
)
Results of non-consolidated subsidiaries
(52
)
 
(89
)
 
(130
)
 
(185
)
Foreign exchange
(1,300
)
 
1,631

 
300

 
2,522

Interest income
(185
)
 
(219
)
 
(186
)
 
(590
)
Rents and royalties
(223
)
 
(213
)
 
(447
)
 
(443
)
Insurance recovery

 
(7
)
 

 
(546
)
Other, net
(256
)
 
(150
)
 
(180
)
 
(185
)
Total other (income) expense, net
$
(2,196
)
 
$
630

 
$
(941
)
 
$
41


Foreign exchange (gain) loss by currency is summarized in the following table (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Unaudited)
Australian Dollar
$
69

 
$
164

 
$
62

 
$
209

British Pound
(222
)
 
79

 
(274
)
 
541

Canadian Dollar
(860
)
 
665

 
168

 
968

Euro
(50
)
 
126

 
2

 
354

Mexican Peso
(28
)
 
191

 
(62
)
 
64

Russian Ruble
(136
)
 
(60
)
 
40

 
(54
)
Other currencies, net
(73
)
 
466

 
364

 
440

Total (gain) loss
$
(1,300
)
 
$
1,631

 
$
300

 
$
2,522


10.  INCOME TAX EXPENSE

The effective tax rates for the three months ended June 30, 2014 and 2013 were 21.2% and 24.7%, respectively. The effective tax rates for the six months ended June 30, 2014 and 2013 were 22.6% and 25.4%, respectively. The change in tax expense is primarily the result of several items discrete to each quarter along with changes in activity levels among 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 segments provide different services and products 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 services and products 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.


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Results for these segments are presented below. We use the same accounting policies to prepare our segment results as are used to prepare our Consolidated Financial Statements. All interest and other non-operating income (expense) is attributable to the Corporate & Other area and is not allocated to specific segments. Summarized financial information concerning our segments is shown in the following table (in thousands):
(Unaudited)
Reservoir Description
 
Production Enhancement
 
Reservoir Management
 
Corporate & Other 1
 
Consolidated
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
130,589

 
$
110,993

 
$
25,980

 
$

 
$
267,562

Inter-segment revenue
2,763

 
384

 
347

 
(3,494
)
 

Segment operating income (loss)
36,341

 
37,660

 
9,794

 
339

 
84,134

Total assets (at end of period)
318,370

 
264,784

 
39,795

 
66,179

 
689,128

Capital expenditures
6,280

 
1,755

 
282

 
3,802

 
12,119

Depreciation and amortization
3,935

 
1,880

 
366

 
137

 
6,318

Three Months Ended June 30, 2013
 
 
 

 
 

 
 

 
 

Revenue from unaffiliated clients
$
129,222

 
$
110,199

 
$
23,718

 
$

 
$
263,139

Inter-segment revenue
1,090

 
740

 
400

 
(2,230
)
 

Segment operating income (loss)
36,918

 
37,239

 
7,475

 
237

 
81,869

Total assets (at end of period)
299,399

 
255,987

 
35,570

 
64,160

 
655,116

Capital expenditures
6,424

 
1,851

 
517

 
700

 
9,492

Depreciation and amortization
3,599

 
1,797

 
189

 
379

 
5,964

Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
255,845

 
$
221,273

 
$
53,347

 
$

 
$
530,465

Inter-segment revenue
5,532

 
1,181

 
767

 
(7,480
)
 

Segment operating income (loss)
71,194

 
74,862

 
20,268

 
637

 
166,961

Total assets
318,370

 
264,784

 
39,795

 
66,179

 
689,128

Capital expenditures
11,096

 
2,830

 
367

 
5,494

 
19,787

Depreciation and amortization
7,783

 
3,775

 
605

 
788

 
12,951

Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
254,467

 
$
217,630

 
$
51,969

 
$

 
$
524,066

Inter-segment revenue
1,475

 
1,677

 
823

 
(3,975
)
 

Segment operating income (loss)
71,769

 
71,477

 
17,321

 
339

 
160,906

Total assets
299,399

 
255,987

 
35,570

 
64,160

 
655,116

Capital expenditures
11,853

 
3,939

 
1,036

 
1,107

 
17,935

Depreciation and amortization
7,224

 
3,614

 
380

 
771

 
11,989

(1) "Corporate & Other" represents those items that are not directly related to a particular segment and eliminations.

12. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the Financial Accounting Standards Board ("FASB") issued ASU 2013-11 relating to income taxes (FASB ASC Topic 740), which provides guidance on the presentation of unrecognized tax benefits. The intent is to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We have adopted this pronouncement for our fiscal year beginning January 1, 2014. The adoption of this pronouncement did not have a material effect on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 relating to revenue from contracts with customers (FASB ASC Topic 606), which provides guidance on revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to apply a five-step method to (1) identify the contract(s) with customers; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation(s) in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This pronouncement is effective for fiscal years, and interim periods within those

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years, beginning after December 15, 2016. We are evaluating the impact that the adoption of this standard will have on our consolidated financial statements.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion summarizes the financial position of Core Laboratories N.V. and its subsidiaries as of June 30, 2014 and should be read in conjunction with (i) the unaudited consolidated interim financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the audited consolidated financial statements and accompanying notes to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the "2013 Annual Report").

General

Core Laboratories N.V. is a limited liability company incorporated and domiciled in The Netherlands. It was established in 1936 and is one of the world's leading providers of proprietary and patented reservoir description, production enhancement and reservoir management services and products to the oil and gas industry. These services and products can enable our clients to improve reservoir performance and increase oil and gas recovery from their producing fields. Core Laboratories N.V. has over 70 offices in more than 50 countries and employs approximately 5,000 people worldwide.

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

Our business units have been aggregated into three complementary reportable segments, which provide services and products 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 services and products relating to reservoir well completions, perforations, stimulations and production. We provide integrated services to evaluate the effectiveness of well completions and to develop solutions aimed at increasing the effectiveness of enhanced oil recovery projects.
Reservoir Management: Combines and integrates information from reservoir description and production enhancement services to increase production and improve recovery of oil and gas from our clients' reservoirs.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations section, including those under the headings "Outlook" and "Liquidity and Capital Resources", and in other parts of this Form 10-Q, are forward-looking. In addition, from time to time, we may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. Forward-looking statements can be identified by the use of forward-looking terminology such as "may", "will", "believe", "expect", "anticipate", "estimate", "continue", or other similar words, including statements as to the intent, belief, or current expectations of our directors, officers, and management with respect to our future operations, performance, or positions or which contain other forward-looking information. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, no assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While we believe that these statements are and will be accurate, our actual results and experience may differ materially from the anticipated results or other expectations expressed in our statements due to a variety of risks and uncertainties.

The oil and gas industry is highly cyclical and demand for the majority of our oilfield services and products is substantially dependent on the level of expenditures by the oil and gas industry for the exploration, development and production of crude oil and natural gas reserves, which are sensitive to oil and natural gas prices and generally dependent on the industry's view of future oil and gas prices. There are numerous factors affecting the supply of and demand for our services and products, which are summarized as:

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general and economic business conditions;
market prices of oil and gas and expectations about future prices;
cost of producing and the ability to deliver oil and natural gas;
the level of drilling and production activity;
mergers, consolidations and downsizing among our clients;
coordination by OPEC;
the impact of commodity prices on the expenditure levels of our clients;
financial condition of our client base and their ability to fund capital expenditures;
the physical effects of climatic change, including adverse weather or geologic/geophysical conditions;
the adoption of legal requirements or taxation relating to climate change that lower the demand for petroleum-based fuels;
civil unrest or political uncertainty in oil producing or consuming countries;
level of consumption of oil, gas and petrochemicals by consumers;
changes in existing laws, regulations, or other governmental actions;
the business opportunities (or lack thereof) that may be presented to and pursued by us;
availability of services and materials for our clients to grow their capital expenditures;
ability of our clients to deliver product to market;
availability of materials and equipment from key suppliers; and
cyber attacks on our network that disrupt operations or result in lost or compromised critical data.

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see "Item 1A - Risk Factors" in our 2013 Annual Report and in Part II of this document, as well as the other reports filed by us with the Securities and Exchange Commission (“SEC”).

Outlook

We continue our efforts to expand our market presence by opening or expanding facilities in strategic areas and realizing synergies within our business lines. We believe our market presence provides us a unique opportunity to service clients who have global operations in addition to the national oil companies.

We have established internal earnings targets that are based on market conditions existing at the time our targets were established. We anticipate North American activity will continue to increase for emerging unconventional oil plays while activity will remain at reduced, yet stable, levels in established unconventional tight-oil and gas plays. We also anticipate greater levels of deepwater coring programs during the second half of 2014, especially in the deepwater Gulf of Mexico. High pressure and temperature reservoir fluid phase behavior projects are also expected to remain at high levels. Internationally, in response to very supportive Brent crude prices, we project modest growth through the end of 2014, but expect higher levels of activity in 2015.


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Results of Operations

Our results of operations as a percentage of applicable revenue were as follows (in thousands):
(Unaudited)
Three Months Ended June 30,
 
$ Change
% Change
 
2014
 
2013
 
2014/2013

2014/2013

REVENUE:
 
 
 
 

Services
$
188,299

 
70
 %
 
$
187,676

 
71
%
 
$
623

0
 %
Product sales
79,263

 
30
 %
 
75,463

 
29
%
 
3,800

5
 %
Total revenue
267,562

 
100
 %
 
263,139

 
100
%
 
4,423

2
 %
OPERATING EXPENSES:
 

 
 

 
 

 
 

 




Cost of services, exclusive of depreciation expense shown below*
111,706

 
59
 %
 
109,661

 
58
%
 
2,045

2
 %
Cost of product sales, exclusive of depreciation expense shown below*
56,452

 
71
 %
 
53,842

 
71
%
 
2,610

5
 %
Total cost of services and product sales
168,158

 
63
 %
 
163,503

 
62
%
 
4,655

3
 %
General and administrative expense
11,148

 
4
 %
 
11,173

 
4
%
 
(25
)
0
 %
Depreciation and amortization
6,318

 
2
 %
 
5,964

 
2
%
 
354

6
 %
Other (income) expense, net
(2,196
)
 
(1
)%
 
630

 
0
%
 
(2,826
)
(449
)%
Operating income
84,134

 
31
 %
 
81,869

 
31
%
 
2,265

3
 %
Interest expense
2,794

 
1
 %
 
2,263

 
1
%
 
531

23
 %
Income before income tax expense
81,340

 
30
 %
 
79,606

 
30
%
 
1,734

2
 %
Income tax expense
17,244

 
6
 %
 
19,664

 
7
%
 
(2,420
)
(12
)%
Net income
64,096

 
24
 %
 
59,942

 
23
%
 
4,154

7
 %
Net income (loss) attributable to non-controlling interest
362

 
0
 %
 
266

 
0
%
 
96

36
 %
Net income attributable to Core Laboratories N.V.
$
63,734

 
24
 %
 
$
59,676

 
23
%
 
$
4,058

7
 %
* Percentage based on applicable revenue rather than total revenue.
 
 

 
 
 


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(Unaudited)
   Six Months Ended June 30,
 
$ Change
% Change
 
2014
 
2013
 
2014/2013

2014/2013
REVENUE:
 
 
 
 
Services
$
377,034

 
71
 %
 
$
370,157

 
71
%
 
$
6,877

2
 %
Product sales
153,431

 
29
 %
 
153,909

 
29
%
 
(478
)
0
 %
Total revenue
530,465

 
100
 %
 
524,066

 
100
%
 
6,399

1
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation expense shown below*
222,277

 
59
 %
 
219,814

 
59
%
 
2,463

1
 %
Cost of product sales, exclusive of depreciation expense shown below*
107,550

 
70
 %
 
107,334

 
70
%
 
216

0
 %
Total cost of services and product sales
329,827

 
62
 %
 
327,148

 
62
%
 
2,679

1
 %
General and administrative expense
21,667

 
4
 %
 
23,982

 
5
%
 
(2,315
)
(10
)%
Depreciation and amortization
12,951

 
2
 %
 
11,989

 
2
%
 
962

8
 %
Other (income), net
(941
)
 
0
 %
 
41

 
0
%
 
(982
)
NM

Operating income
166,961

 
31
 %
 
160,906

 
31
%
 
6,055

4
 %
Interest expense
5,157

 
1
 %
 
4,532

 
1
%
 
625

14
 %
Income before income tax expense
161,804

 
31
 %
 
156,374

 
30
%
 
5,430

3
 %
Income tax expense
36,555

 
7
 %
 
39,700

 
8
%
 
(3,145
)
(8
)%
Net income
125,249

 
24
 %
 
116,674

 
22
%
 
8,575

7
 %
Net income (loss) attributable to non-controlling interest
451

 
0
 %
 
482

 
0
%
 
(31
)
(6
)%
Net income attributable to Core Laboratories N.V.
$
124,798

 
24
 %
 
$
116,192

 
22
%
 
$
8,606

7
 %
"NM"  means not meaningful
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 
 
 
 

Operating Results for the Three and Six Months Ended June 30, 2014 Compared to the Three and Six Months Ended June 30, 2013 (unaudited)

Services Revenue

Services revenue increased to $188.3 million for the second quarter of 2014, a slight increase when compared to $187.7 million for the second quarter of 2013. For the six months ended June 30, 2014, services revenue increased to $377.0 million, up 2% when compared to $370.2 million for the same period of 2013.

Product Sales Revenue

Revenue associated with product sales increased 5%, to $79.3 million, for the second quarter of 2014, compared to $75.5 million for the second quarter of 2013. For the six months ended June 30, 2014, product sales revenue was approximately the same at $153.4 million, compared to $153.9 million during the same period in 2013. Product sales revenue is driven primarily by the increasing market penetration of new technologies such as our new completion systems for optimizing completions and stimulations of horizontal wells, including our HTD-BLASTTM and KODIAKTM Enhanced Perforating System and our permanent reservoir monitoring systems, primarily in the Canadian market.

Cost of Services

Cost of services expressed as a percentage of services revenue was 59.3% for the three months ended June 30, 2014, as compared to 58.4% in the same period in 2013. For the six months ended June 30, 2014, cost of services expressed as a percentage of services revenue was 59.0%, an improvement from 59.4% in the same period in 2013. The margin improvement for the six months ended June 30, 2014 is a result of a better mix of projects aimed at more complex reservoirs, over the fixed cost structure.



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Cost of Product Sales

Cost of product sales expressed as a percentage of product sales revenue remained flat at 71% for the three months ended June 30, 2014 and 2013. For the six months ended June 30, 2014, cost of product sales expressed as a percentage of product sales revenue was 70%, comparable to the same period in 2013.
 
General and Administrative Expense

General and administrative ("G&A") expense include corporate management and centralized administrative services that benefit our operations. G&A expense for the second quarter of 2014 was 4.2% of revenue, comparable to the second quarter of 2013. For the six months ended June 30, 2014, G&A expense was 4.1% of revenue, an improvement from the same period in 2013 when it was 4.6% of revenue. The improvement for the six months ended June 30, 2014 was primarily attributable to lower variable compensation costs recorded in the second quarter of 2014.

Depreciation and Amortization Expense

Depreciation and amortization expense was $6.3 million for the second quarter of 2014 compared to $6.0 million in the second quarter of 2013. For the six months ended June 30, 2014, depreciation and amortization expense was $13.0 million compared to $12.0 million for the same period in 2013. The increase is a result of growth in our client-directed capital expenditure program.

Other (Income) Expense, Net

The components of other (income) expense, net, were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Unaudited)
Sale of assets
$
(180
)
 
$
(323
)
 
$
(298
)
 
$
(532
)
Results of non-consolidated subsidiaries
(52
)
 
(89
)
 
(130
)
 
(185
)
Foreign exchange
(1,300
)
 
1,631

 
300

 
2,522

Interest income
(185
)
 
(219
)
 
(186
)
 
(590
)
Rents and royalties
(223
)
 
(213
)
 
(447
)
 
(443
)
Insurance recovery

 
(7
)
 

 
(546
)
Other, net
(256
)
 
(150
)
 
(180
)
 
(185
)
Total other (income) expense, net
$
(2,196
)
 
$
630

 
$
(941
)
 
$
41


Foreign exchange (gain) loss by currency is summarized in the following table (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Unaudited)
Australian Dollar
$
69

 
$
164

 
$
62

 
$
209

British Pound
(222
)
 
79

 
(274
)
 
541

Canadian Dollar
(860
)
 
665

 
168

 
968

Euro
(50
)
 
126

 
2

 
354

Mexican Peso
(28
)
 
191

 
(62
)
 
64

Russian Ruble
(136
)
 
(60
)
 
40

 
(54
)
Other currencies, net
(73
)
 
466

 
364

 
440

Total (gain) loss
$
(1,300
)
 
$
1,631

 
$
300

 
$
2,522


Interest Expense

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Interest expense for the three months ended June 30, 2014 and 2013 was $2.8 million and $2.3 million, respectively. Interest expense for the six months ended June 30, 2014 and 2013 was $5.2 million and $4.5 million, respectively.

Income Tax Expense

The effective tax rates for the three months ended June 30, 2014 and 2013 were 21.2% and 24.7%, respectively. The effective tax rates for the six months ended June 30, 2014 and 2013 were 22.6% and 25.4%, respectively. The change in tax expense is primarily the result of several items discrete to each quarter along with changes in activity levels among jurisdictions with different tax rates.

Segment Analysis

Our operations are managed primarily in three complementary reportable segments - Reservoir Description, Production Enhancement and Reservoir Management. The following tables summarize our results by segment for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
 
Three Months Ended June 30,
 
$ Change
% Change
 
 
2014
 
2013
 
2014/2013
2014/2013
Revenue:
 
(Unaudited)
 
 
 

Reservoir Description
 
$
130,589

 
$
129,222

 
$
1,367

1
 %
Production Enhancement
 
110,993

 
110,199

 
794

1
 %
Reservoir Management
 
25,980

 
23,718

 
2,262

10
 %
Consolidated
 
$
267,562

 
$
263,139

 
$
4,423

2
 %
Operating income (loss):
 
 

 
 

 




Reservoir Description
 
$
36,341

 
$
36,918

 
$
(577
)
(2
)%
Production Enhancement
 
37,660

 
37,239

 
421

1
 %
Reservoir Management
 
9,794

 
7,475

 
2,319

31
 %
Corporate and Other1
 
339

 
237

 
102

NM

Consolidated
 
$
84,134

 
$
81,869

 
$
2,265

3
 %
(1) "Corporate and Other" represents those items that are not directly related to a particular segment
"NM"  means not meaningful
 
 
   Six Months Ended June 30,
 
$ Change
% Change
 
 
2014
 
2013
 
2014/2013
2014/2013
Revenue:
 
(Unaudited)
 
 
 

Reservoir Description
 
$
255,845

 
$
254,467

 
$
1,378

1
 %
Production Enhancement
 
221,273

 
217,630

 
3,643

2
 %
Reservoir Management
 
53,347

 
51,969

 
1,378

3
 %
Consolidated
 
$
530,465

 
$
524,066

 
$
6,399

1
 %
Operating income (loss):
 
 

 
 

 
 
 

Reservoir Description
 
$
71,194

 
$
71,769

 
$
(575
)
(1
)%
Production Enhancement
 
74,862

 
71,477

 
3,385

5
 %
Reservoir Management
 
20,268

 
17,321

 
2,947

17
 %
Corporate and Other1
 
637

 
339

 
298

NM

Consolidated
 
$
166,961

 
$
160,906

 
$
6,055

4
 %
(1) "Corporate and Other" represents those items that are not directly related to a particular segment
"NM"  means not meaningful

Reservoir Description


19
                                                                    Return to Index



Revenue from the Reservoir Description segment increased to $130.6 million in the second quarter of 2014 compared to $129.2 million in the second quarter of 2013. For the six months ended June 30, 2014, revenue increased $1.4 million, to $255.8 million, compared to the same period in 2013. This segment’s operations, which focus on international crude-oil related products, continued to benefit from large-scale core analyses and reservoir fluids characterization studies in the Asia-Pacific areas, offshore West and East Africa, the Eastern Mediterranean region and the Middle East, including Iraq, Kuwait, and the United Arab Emirates.

Operating income decreased slightly to $36.3 million in the second quarter of 2014 compared to $36.9 million in the second quarter of 2013. Operating income for the six months ended June 30, 2014 decreased to $71.2 million compared to $71.8 million for the same period of 2013. Operating margins were 28% in the second quarter of 2014. This segment emphasizes technologically demanding services on internationally-based development and production-related crude oil projects over more cyclical exploration-related projects.

Production Enhancement

Revenue from the Production Enhancement segment increased to $111.0 million in the second quarter of 2014 compared to $110.2 million in the second quarter of 2013. Revenue increased to $221.3 million for the six months ended June 30, 2014, compared to $217.6 million for the same period in 2013. Revenue increased primarily due to the continued successful introduction of Core's FLOWPROFILERTM service, our new completion diagnostic service for optimizing completions and stimulations of horizontal wells.

Operating income in the second quarter of 2014 increased to $37.7 million from $37.2 million for the second quarter of 2013. For the six months ended June 30, 2014, operating income increased $3.4 million, to $74.9 million, from $71.5 million for the same period in 2013. Operating margins were 34% in the second quarter of 2014, up slightly when compared to the same period in 2013. Operating income increased from 2013 to 2014 primarily due to increased demand for the Company's proprietary and patented hydraulic fracture and field-flood diagnostic technologies from services such as FLOWPROFILER™, SPECTRACHEM®, ZERO WASH®, and SPECTRAFLOOD™ tracers in North America and internationally.

Reservoir Management

Revenue from the Reservoir Management segment increased 10% to $26.0 million in the second quarter of 2014, compared to $23.7 million for the second quarter of 2013. Revenue for the six months ended June 30, 2014 increased by 3% to $53.3 million, compared to $52.0 million for the same period in 2013. The increase in revenue was due to the timing of the completion of certain consortium and joint industry projects.

Operating income in the second quarter of 2014 increased 31% to $9.8 million, from $7.5 million for the second quarter of 2013. For the six months ended June 30, 2014, operating income was $20.3 million compared to $17.3 million for the same period in 2013. Operating margins were 38% in the second quarter of 2014, up over 600 basis points when compared to the same period in 2013. Operating income increased in the second quarter of 2014 primarily as a result of additional participants in our joint industry projects, including the Utica, Duvernay, and Mississippi Lime studies and the Marcellus, Niobrara, Wolfcamp, and Eagle Ford plays.

Liquidity and Capital Resources

General

We have historically financed our activities through cash on hand, cash flows from operations, bank credit facilities, or the issuance of debt and equity financing.

We utilize the non-GAAP financial measure of free cash flow to evaluate our cash flows and results of operations. Free cash flow is defined as net cash provided by operating activities (which is the most directly comparable GAAP measure) less cash paid for capital expenditures. Management believes that free cash flow provides useful information to investors regarding the cash available in the period that was in excess of our needs to fund our capital expenditures and operating activities. Free cash flow is not a measure of operating performance under GAAP, and should not be considered in isolation nor construed as an alternative to operating profit, net income (loss) or cash flows from operating, investing or financing activities, each as determined in accordance with GAAP. Free cash flow does not represent residual cash available for distribution because we may have other non-discretionary expenditures that are not deducted from the measure. Moreover, since free cash flow is not a measure determined in accordance with GAAP and thus is susceptible to varying interpretations and calculations, free cash flow as presented, may not be comparable to similarly titled measures presented by other companies. The following table

20
                                                                    Return to Index



reconciles this non-GAAP financial measure to the most directly comparable measure calculated and presented in accordance with GAAP for the six months ended June 30, 2014 and 2013 (in thousands):
 
   Six Months Ended June 30,
 
% Change
 
2014
 
2013
 
2014/2013
Free cash flow calculation:
(Unaudited)
 
 

Net cash provided by operating activities
$
131,233

 
$
136,501

 
(4
)%
Less: cash paid for capital expenditures
19,787

 
17,935

 
10
 %
Free cash flow
$
111,446

 
$
118,566

 
(6
)%

The decrease in free cash flow for the first six months of 2014 compared to the same period in 2013 was primarily due to an increase in capital expenditures, timing of income tax installment payments, changes in working capital, and cash provided by operations.

Cash Flows

The following table summarizes cash flows for the six months ended June 30, 2014 and 2013 (in thousands):
 
   Six Months Ended June 30,
 
% Change
 
2014
 
2013
 
2014/2013
Cash provided by/(used in):
(Unaudited)
 
 

Operating activities
$
131,233

 
$
136,501

 
(4
)%
Investing activities
(23,553
)
 
(20,994
)
 
12
 %
Financing activities
(103,220
)
 
(111,513
)
 
(7
)%
Net change in cash and cash equivalents
$
4,460