10-Q


 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 September 30, 2015
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 October 22, 2015 was 42,366,187.




CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015
 
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)
 
September 30,
2015
 
December 31,
2014
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
18,461

 
$
23,350

Accounts receivable, net of allowance for doubtful accounts of $3,746 and $3,397 at 2015 and 2014, respectively
152,448

 
197,163

Inventories
44,462

 
43,371

Prepaid expenses
11,013

 
14,246

Income taxes receivable
5,852

 
10,980

Other current assets
9,987

 
12,710

TOTAL CURRENT ASSETS
242,223

 
301,820

PROPERTY, PLANT AND EQUIPMENT, net
146,965

 
149,014

INTANGIBLES, net
13,523

 
10,642

GOODWILL
178,159

 
164,464

DEFERRED TAX ASSETS, net
10,087

 
3,876

OTHER ASSETS
44,148

 
45,837

TOTAL ASSETS
$
635,105

 
$
675,653

LIABILITIES AND EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable
$
40,539

 
$
47,084

Accrued payroll and related costs
33,016

 
34,617

Taxes other than payroll and income
9,225

 
11,199

Unearned revenue
13,918

 
11,009

Income taxes payable
7,217

 
8,333

Other current liabilities
20,148

 
19,624

TOTAL CURRENT LIABILITIES
124,063

 
131,866

LONG-TERM DEBT
428,000

 
356,000

DEFERRED COMPENSATION
42,809

 
42,705

DEFERRED TAX LIABILITIES, net
2,505

 
7,210

OTHER LONG-TERM LIABILITIES
43,643

 
43,879

COMMITMENTS AND CONTINGENCIES (Note 6)


 


EQUITY (DEFICIT):
 
 
 

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, 44,350,002 issued and 42,407,281 outstanding at
2015 and 45,600,002 issued and 43,636,984 outstanding at 2014
1,142

 
1,174

Additional paid-in capital
269

 

Retained earnings
236,041

 
415,906

Accumulated other comprehensive income (loss)
(11,901
)
 
(11,894
)
Treasury shares (at cost), 1,942,721 at 2015 and 1,963,018 at 2014
(237,795
)
 
(317,613
)
Total Core Laboratories N.V. shareholders' equity (deficit)
(12,244
)
 
87,573

Non-controlling interest
6,329

 
6,420

TOTAL EQUITY (DEFICIT)
(5,915
)
 
93,993

TOTAL LIABILITIES AND EQUITY
$
635,105

 
$
675,653



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
 
September 30,
 
2015
 
2014
 
(Unaudited)
REVENUE:
 
 
 
Services
$
150,128

 
$
203,578

Product sales
47,137

 
72,557

Total revenue
197,265

 
276,135

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
94,117

 
113,917

Cost of product sales, exclusive of depreciation expense shown below
34,933

 
53,010

General and administrative expense, exclusive of depreciation expense shown below
12,155

 
12,316

Depreciation
6,695

 
6,362

Amortization
215

 
483

Other (income) expense, net
2,332

 
927

OPERATING INCOME
46,818

 
89,120

Interest expense
3,471

 
2,561

Income before income tax expense
43,347

 
86,559

Income tax expense
9,753

 
19,909

Net income
33,594

 
66,650

Net income (loss) attributable to non-controlling interest
190

 
153

Net income attributable to Core Laboratories N.V.
$
33,404

 
$
66,497

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
0.79

 
$
1.51

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
0.78

 
$
1.50

 
 
 
 
Cash dividends per share
$
0.55

 
$
0.50

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
42,517

 
44,152

Diluted
42,685

 
44,381
















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)

 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
(Unaudited)
REVENUE:
 
 
 
Services
$
469,963

 
$
580,612

Product sales
144,834

 
225,988

Total revenue
614,797

 
806,600

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
295,374

 
336,194

Cost of product sales, exclusive of depreciation expense shown below
112,569

 
160,560

General and administrative expense, exclusive of depreciation expense shown below
37,463

 
33,983

Depreciation
19,792

 
18,731

Amortization
614

 
1,065

Other (income) expense, net
4,467

 
(14
)
Severance and other charges
7,090

 

OPERATING INCOME
137,428

 
256,081

Interest expense
8,990

 
7,718

Income before income tax expense
128,438

 
248,363

Income tax expense
29,100

 
56,464

Net income
99,338

 
191,899

Net income (loss) attributable to non-controlling interest
(91
)
 
604

Net income attributable to Core Laboratories N.V.
$
99,429

 
$
191,295

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
2.32

 
$
4.29

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
2.31

 
$
4.27

 
 
 
 
Cash dividends per share
$
1.65

 
$
1.50

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
42,879

 
44,571

Diluted
43,038

 
44,823














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

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
Net income
$
33,594

 
$
66,650

 
$
99,338

 
$
191,899

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Gain (loss) in fair value of interest rate swaps
(1,475
)
 

 
(1,880
)
 

Interest rate swap amounts reclassified to interest expense
246

 

 
734

 

Income taxes on derivatives
455

 

 
822

 

Total derivatives
(774
)
 

 
(324
)
 

 
 
 
 
 
 
 
 
Pension and other postretirement benefit plans
 
 
 
 
 
 
 
Prior service cost
 
 
 
 
 
 
 
Amortization to net income of transition asset
(22
)
 
(21
)
 
(66
)
 
(65
)
Amortization to net income of prior service cost
(21
)
 
2

 
(59
)
 
5

Amortization to net income of actuarial loss
181

 
135

 
548

 
405

Income taxes on pension and other postretirement benefit plans
(33
)
 
(29
)
 
(106
)
 
(86
)
Total pension and other postretirement benefit plans
105

 
87

 
317

 
259

 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
(669
)
 
87

 
(7
)
 
259

Comprehensive income
32,925

 
66,737

 
99,331

 
192,158

Comprehensive income (loss) attributable to non-controlling interest
190

 
153

 
(91
)
 
604

Comprehensive income attributable to Core Laboratories N.V.
$
32,735

 
$
66,584

 
$
99,422

 
$
191,554


























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)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
99,338

 
$
191,899

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

 
 

Stock-based compensation
15,964

 
15,497

Depreciation and amortization
20,406

 
19,796

(Increase) decrease in value of life insurance policies
2,190

 
(724
)
Deferred income taxes
(3,445
)
 
(190
)
Other non-cash items
1,259

 
1,069

Changes in assets and liabilities:
 
 
 
Accounts receivable
43,775

 
(959
)
Inventories
(138
)
 
(3,053
)
Prepaid expenses and other current assets
8,039

 
(7,041
)
Other assets
2,061

 
1,529

Accounts payable
(10,864
)
 
(2,171
)
Accrued expenses
(8,582
)
 
(10,604
)
Unearned revenue
2,909

 
158

Other long-term liabilities
(3,142
)
 
453

Net cash provided by operating activities
169,770

 
205,659

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(18,276
)
 
(27,624
)
Patents and other intangibles
(1,502
)
 
(753
)
Business acquisition, net of cash acquired
(13,824
)
 
(1,200
)
Proceeds from sale of assets
1,193

 
1,098

Premiums on life insurance
(2,210
)
 
(3,482
)
Net cash used in investing activities
(34,619
)
 
(31,961
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Repayment of debt borrowings
(49,693
)
 
(57,157
)
Proceeds from debt borrowings
120,000

 
160,000

Excess tax benefits from stock-based compensation
180

 
2,680

Debt financing costs
(339
)
 
(1,054
)
Non-controlling interest - dividend

 
(393
)
Dividends paid
(70,933
)
 
(67,153
)
Repurchase of common shares
(139,255
)
 
(210,402
)
Net cash used in financing activities
(140,040
)
 
(173,479
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(4,889
)
 
219

CASH AND CASH EQUIVALENTS, beginning of period
23,350

 
25,088

CASH AND CASH EQUIVALENTS, end of period
$
18,461

 
$
25,307













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, 2014 (the "2014 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 nine months ended September 30, 2015 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2015.

Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2014 was derived from the 2014 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 nine months ended September 30, 2014.

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):
 
September 30,
2015
 
June 30,
2015
 
December 31,
2014
Finished goods
$
30,654

 
$
34,298

 
$
32,249

Parts and materials
10,790

 
10,817

 
9,147

Work in progress
3,018

 
2,470

 
1,975

Total inventories
$
44,462

 
$
47,585

 
$
43,371


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

3.  ACQUISITIONS

In June 2015, we acquired a business providing additional reservoir fluids technology for $17.2 million in cash. We have accounted for this acquisition by allocating the purchase price to the net assets acquired based on their estimated fair values at the date of acquisition, resulting in an increase to goodwill of $13.7 million and an increase of $2.0 million in intangible assets. The acquisition was recorded in the Reservoir Description business segment.

The acquisition of this entity did not have a material impact on our Consolidated Balance Sheet or Consolidated Statements of Operations.





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4.  LONG-TERM DEBT

We have no capital lease obligations. Long-term debt is summarized in the following table (in thousands):
 
September 30,
2015
 
December 31,
2014
Senior notes
$
150,000

 
$
150,000

Credit facility
278,000

 
206,000

Long-term debt
$
428,000

 
$
356,000


We have two series of senior notes outstanding with an aggregate principal amount of $150 million ("Senior Notes") issued 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.
    
On March 13, 2015, we entered into an agreement to amend our revolving credit facility (the "Credit Facility") to increase the aggregate borrowing capacity from $350 million to $400 million and to keep the uncommitted availability of an additional $50 million to bring the total borrowings available to $450 million if certain prescribed conditions are met by the Company. The Credit Facility bears interest at variable rates from LIBOR plus 1.25% to a maximum of LIBOR plus 2.00%. Any outstanding balance under the Credit Facility is due August 29, 2019, when the Credit Facility matures. Our available capacity at any point in time is reduced by borrowings outstanding at the time and outstanding letters of credit which totaled $24.9 million at September 30, 2015, resulting in an available borrowing capacity under the Credit Facility of $97.1 million. In addition to those items under the Credit Facility, we had $12.6 million of outstanding letters of credit and performance guarantees and bonds from other sources as of September 30, 2015.

The terms of the Credit Facility and the Senior Notes require us to meet certain covenants, including, but not limited to, certain minimum 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.

In 2014, we entered into two interest rate swap agreements for a total notional amount of $50 million. See Note 12 - Derivative Instruments and Hedging Activities.

The estimated fair value of total debt at September 30, 2015 and December 31, 2014 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 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.

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The following table summarizes the components of net periodic pension cost under the Dutch Plan for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
453

 
$
361

 
$
1,356

 
$
1,103

Interest cost
301

 
439

 
904

 
1,341

Expected return on plan assets
(249
)
 
(326
)
 
(748
)
 
(995
)
Amortization of transition asset
(22
)
 
(21
)
 
(66
)
 
(65
)
Amortization of prior service cost
(21
)
 
2

 
(59
)
 
5

Amortization of actuarial loss
181

 
135

 
548

 
405

Net periodic pension cost
$
643

 
$
590

 
$
1,935

 
$
1,794


During the nine months ended September 30, 2015, we contributed approximately $1.0 million to fund the estimated 2015 premiums on investment contracts held by the Dutch Plan.

Defined Contribution Plans

We maintain defined contribution plans for the benefit of eligible employees in certain countries including Canada, The Netherlands, the United Kingdom, and the United States.

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.

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, due to certain limitations imposed by the U.S. Internal Revenue Code of 1986, as amended.

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 September 30, 2015, we repurchased 268,594 of our common shares for $28.7 million. Included in this total were rights to 5,295 shares valued at $0.6 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 nine months ended September 30, 2015, we repurchased 1,311,616 of our common shares for $144.5 million. Included in this total were rights to 23,773 shares valued at $2.6 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

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future acquisitions, non-employee director stock awards or employee stock awards. During the three and nine months ended September 30, 2015, 19,139 and 81,913, respectively, treasury shares were distributed upon vesting of stock-based awards.

At the annual meeting of shareholders on May 21, 2015, our shareholders approved the cancellation of 1,250,000 shares of our common stock then held as treasury stock. These treasury shares were cancelled after the expiration of the waiting period required under Dutch law. In accordance with ASC 505-30-30-8, we charged the excess of the cost of the treasury stock over its par value to additional paid-in capital and retained earnings.

In February, May and August 2015, we paid a quarterly dividend of $0.55 per share of common stock. In addition, on October 13, 2015, we declared a quarterly dividend of $0.55 per share of common stock for shareholders of record on October 23, 2015 and payable on November 24, 2015.

The following table summarizes our changes in equity for the nine months ended September 30, 2015 (in thousands):
 
Common Shares
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
Treasury Stock
 
Non-Controlling Interest
 
Total Equity
December 31, 2014
$
1,174

 
$

 
$
415,906

 
$
(11,894
)
 
$
(317,613
)
 
$
6,420

 
$
93,993

Stock based-awards

 
3,181

 
(2,094
)
 

 
14,877

 

 
15,964

Tax benefit of stock-based awards issued

 
180

 

 

 

 

 
180

Repurchase of common shares

 

 

 

 
(144,450
)
 

 
(144,450
)
Dividends paid

 

 
(70,933
)
 

 

 

 
(70,933
)
Cancellation of common shares
(32
)
 
(3,092
)
 
(206,267
)
 

 
209,391

 

 

Amortization of deferred pension costs, net of tax

 

 

 
317

 

 

 
317

Interest rate swaps

 

 

 
(324
)
 

 

 
(324
)
Net income (loss)

 

 
99,429

 

 

 
(91
)
 
99,338

 
 
 
 
 
 
 
 
 
 
 
 
 

September 30, 2015
$
1,142

 
$
269

 
$
236,041

 
$
(11,901
)
 
$
(237,795
)
 
$
6,329

 
$
(5,915
)

Accumulated other comprehensive income (loss) consisted of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
Transition asset
$
15

 
$
65

Prior service cost
674

 
718

Unrecognized net actuarial loss
(11,184
)
 
(11,595
)
Fair value of derivatives, net of tax
(1,406
)
 
(1,082
)
Total accumulated other comprehensive income (loss)
$
(11,901
)
 
$
(11,894
)

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 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):

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Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Weighted average basic common shares outstanding
42,517

 
44,152

 
42,879

 
44,571

Effect of dilutive securities:
 
 
 
 
 
 
 
Performance shares
114

 
121

 
95

 
110

Restricted stock
54

 
108

 
64

 
142

Weighted average diluted common and potential common shares outstanding
42,685

 
44,381

 
43,038

 
44,823


9. OTHER (INCOME) EXPENSE, NET

The components of other (income) expense, net, were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Sale of assets
$
(100
)
 
$
(442
)
 
$
(362
)
 
$
(740
)
Results of non-consolidated subsidiaries
(131
)
 
(165
)
 
(211
)
 
(295
)
Foreign exchange
2,612

 
1,858

 
4,454

 
2,158

Rents and royalties
(115
)
 
(209
)
 
(370
)
 
(656
)
Other, net
66

 
(115
)
 
956

 
(481
)
Total other (income) expense, net
$
2,332

 
$
927

 
$
4,467

 
$
(14
)

Foreign exchange (gain) loss, net by currency is summarized in the following table (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Angolan Kwanza
$
311

 
$

 
$
819

 
$
(3
)
Australian Dollar
3

 
104

 
186

 
166

British Pound
173

 
770

 
285

 
496

Canadian Dollar
549

 
903

 
1,772

 
1,071

Euro
615

 
(449
)
 
(145
)
 
(446
)
Indonesian Rupiah
219

 
82

 
381

 
48

Malaysian Ringgit
361

 
77

 
533

 
90

Nigerian Naira
238

 
48

 
557

 
118

Russian Ruble
(32
)
 
162

 
(37
)
 
202

Other currencies, net
175

 
161

 
103

 
416

Total (gain) loss, net
$
2,612

 
$
1,858

 
$
4,454

 
$
2,158


10.  INCOME TAX EXPENSE

The effective tax rates for the three months ended September 30, 2015 and 2014 were 22.5% and 23.0%, respectively. The effective tax rates for the nine months ended September 30, 2015 and 2014 were both 22.7%. The change in tax expense for the three-month comparison is primarily the result of changes in activity levels among jurisdictions with different tax rates.

11.  SEVERANCE AND OTHER CHARGES

In response to lower commodity pricing and reduced spending by our clients related to oil and gas producing fields in 2015, we decided during the first quarter of 2015 to reduce our cost structure, primarily through a reduction in our workforce, to better align with anticipated activity levels for 2015. As a result of these cost reductions, we recorded a charge of $7.1 million

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in the first quarter of 2015. Depending on how the market situation evolves, further actions may be necessary, which could result in additional charges in future periods.
During the second and third quarters of 2015, we continued to closely monitor rig counts, crude oil and natural gas prices, and activity levels within the industry. We continued to execute our reduction in force initiative which began in the first quarter of 2015, but no additional accruals or write-offs were recorded during the second or third quarters of 2015.

12.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to market risks related to fluctuations in interest rates. To mitigate these risks, we utilize derivative instruments in the form of interest rate swaps. We do not enter into derivative transactions for speculative purposes.

Interest Rate Risk

Our Credit Facility bears interest at variable rates from LIBOR plus 1.25% to a maximum of LIBOR plus 2.00%. We are subject to interest rate risk on the debt carried through our Credit Facility.

In 2014, we entered into two interest rate swap agreements for a total notional amount of $50 million to hedge changes in the variable rate interest expense on $50 million of our existing or replacement LIBOR-priced debt. Under the first swap agreement of $25 million, we have fixed the LIBOR portion of the interest rate at 1.73% through August 29, 2019, and under the second swap agreement of $25 million, we have fixed the LIBOR portion of the interest rate at 2.5% through August 29, 2024. Each swap is measured at fair value and recorded in our Consolidated Balance Sheet as a liability. They are designated and qualify as cash flow hedging instruments and are highly effective. Unrealized gains/losses are deferred to shareholders' equity as a component of accumulated other comprehensive income/loss and are recognized in income as a decrease/increase to interest expense in the period in which the related cash flows being hedged are recognized in expense.

At September 30, 2015, we had fixed rate debt aggregating $200 million and variable rate debt aggregating $228 million, after taking into account the effect of the swaps.

The fair values of outstanding derivative instruments are as follows:
 
Fair Value of Derivatives
 
 
 
September 30, 2015
 
December 31, 2014
 
Balance Sheet Classification
Derivatives designated as hedges:
 
 
 
 
 
5 year interest rate swap
$
667

 
$
201

 
Other long-term liabilities
10 year interest rate swap
1,561

 
881

 
Other long-term liabilities
 
$
2,228

 
$
1,082

 
 

The fair value of all outstanding derivatives was determined using a model with inputs that are observable in the market (Level 2) or can be derived from or corroborated by observable data.

The effect of the interest rate swaps on the Consolidated Statement of Operations was as follows:
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
Income Statement Classification
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
5 year interest rate swap
$
98

 
$

 
$
293

 
$

 
Increase to interest expense
10 year interest rate swap
148

 

 
441

 

 
Increase to interest expense
 
$
246

 
$

 
$
734

 
$

 
 

13.  FINANCIAL INSTRUMENTS

The Company's only financial assets and liabilities which involve fair value measures relate to certain aspects of the Company's benefit plans and our derivative instruments. We use the market approach to value certain assets and liabilities at fair value 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 quoted prices in an active market (Level 1) or significant

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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. Gains and losses related to the fair value of the interest rate swaps are recorded in Other comprehensive income (loss). The following table summarizes the fair value balances (in thousands):
 
 
 
Fair Value Measurement at
 
 
 
September 30, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
23,058

 
$

 
$
23,058

 
$

Liabilities:
 

 
 

 
 
 
 
Deferred compensation plan
$
28,114

 
$

 
$
28,114

 
$

5 year interest rate swap
667

 

 
667

 

10 year interest rate swap
1,561

 

 
1,561

 

 
$
30,342

 
$

 
$
30,342

 
$


 
 
 
Fair Value Measurement at
 
 
 
December 31, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
24,199

 
$

 
$
24,199

 
$

Liabilities:
 

 
 
 
 
 
 
Deferred compensation plan
$
29,153

 
$

 
$
29,153

 
$

5 year interest rate swap
201

 

 
201

 

10 year interest rate swap
881

 

 
881

 

 
$
30,235

 
$

 
$
30,235

 
$

 
 
 
 
 
 
 
 
(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.

14.  SEGMENT REPORTING

We operate our business in three reportable segments.  These complementary segments provide different services and products and utilize different technologies 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.

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):

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Reservoir Description
 
Production Enhancement
 
Reservoir Management
 
Corporate & Other 1
 
Consolidated
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
117,943

 
$
64,918

 
$
14,404

 
$

 
$
197,265

Inter-segment revenue
1,770

 
140

 
37

 
(1,947
)
 

Segment operating income (loss)
30,338

 
11,367

 
4,796

 
317

 
46,818

Total assets (at end of period)
334,892

 
210,209

 
24,320

 
65,684

 
635,105

Capital expenditures
5,224

 
309

 
7

 
426

 
5,966

Depreciation and amortization
4,287

 
1,614

 
401

 
608

 
6,910

Three Months Ended September 30, 2014
 
 
 

 
 

 
 

 
 

Revenue from unaffiliated clients
$
131,380

 
$
122,161

 
$
22,594

 
$

 
$
276,135

Inter-segment revenue
4,734

 
52,916

 
1,422

 
(59,072
)
 

Segment operating income (loss)
35,377

 
45,735

 
7,553

 
455

 
89,120

Total assets (at end of period)
317,741

 
277,320

 
33,646

 
56,425

 
685,132

Capital expenditures
4,577

 
2,678

 
2,021

 
(1,439
)
 
7,837

Depreciation and amortization
4,158

 
1,830

 
350

 
507

 
6,845

Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
358,613

 
$
210,652

 
$
45,532

 
$

 
$
614,797

Inter-segment revenue
6,957

 
1,509

 
244

 
(8,710
)
 

Segment operating income (loss)
89,812

 
35,666

 
12,114

 
(164
)
 
137,428

Total assets
334,892

 
210,209

 
24,320

 
65,684

 
635,105

Capital expenditures
13,958

 
2,821

 
273

 
1,224

 
18,276

Depreciation and amortization
12,302

 
5,024

 
1,254

 
1,826

 
20,406

Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
387,225

 
$
343,434

 
$
75,941

 
$

 
$
806,600

Inter-segment revenue
10,266

 
54,097

 
2,189

 
(66,552
)
 

Segment operating income (loss)
106,571

 
120,597

 
27,821

 
1,092

 
256,081

Total assets
317,741

 
277,320

 
33,646

 
56,425

 
685,132

Capital expenditures
15,673

 
5,508

 
2,388

 
4,055

 
27,624

Depreciation and amortization
11,941

 
5,605

 
955

 
1,295

 
19,796

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

15. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU 2014-09 ("Revenue from Contracts with Customers"), which provides guidance on revenue recognition. The core principle 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 years, beginning after December 15, 2017 (on July 9, 2015, the FASB deferred the implementation date for one year). We are evaluating the impact that the adoption of this standard will have on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02 ("Amendments to the Consolidation Analysis"), which affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those for registered money market funds. This pronouncement is effective for public business entities for fiscal years, and for interim periods within those fiscal years,

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beginning after December 15, 2015. We are evaluating the impact that the adoption of this standard will have on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11 ("Simplifying the Measurement of Inventory") to require the measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This pronouncement is effective for public business entities for fiscal years, and for interim periods within those fiscal 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 September 30, 2015 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 ("Quarterly Report") 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, 2014 (the "2014 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 4,400 people worldwide.

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

We operate our business in three reportable segments.  These complementary segments provide different services and products and utilize different technologies 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 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 Quarterly Report, 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.

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 2014 Annual Report and in Part II of this Quarterly Report, as well as the other reports filed by us with the Securities and Exchange Commission (“SEC”).




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Outlook

As part of our long-term growth strategy, we continue our long-term efforts to expand our market presence by opening or expanding facilities in strategic areas and realizing synergies within our business lines subject to client demand and market conditions. We believe our market presence provides us a unique opportunity to service clients who have global operations whether they are international oil companies, national oil companies, or independent oil companies.

During the fourth quarter of 2014, the prices for both WTI and Brent crude oil began to fall sharply, particularly after the OPEC meeting held on November 27, 2014. Average prices for the majority of the 2014 calendar year were in excess of $99 per barrel for WTI and in excess of $105 per barrel for Brent; however, were down to approximately $50 per barrel by year’s end. These depressed prices have caused a significant decrease in the activities associated with both the exploration and production of oil during 2015.

In North America, land-based activity has been significantly impacted by a 56% decrease to the rig count from the end of the third quarter of 2014 compared to the same period of 2015. If the WTI crude oil price remains near its current level, we believe the significantly lower levels of industry activity experienced in the first nine months of 2015 may continue through the remainder of 2015 and into 2016, which could negatively impact our North America operations.

Outside of North America, activities associated with the exploration and production of oil have also decreased from 2014 levels, although not as significantly as the land-based activities in North America. The international rig count at the end of the third quarter of 2015 is down approximately 8% from the same period of 2014. These reduced international activities have impacted most regions, except the Middle East, where we continue to see sustained levels for the final quarter of 2015. As with North American land-based activity, we believe international activities will also remain at reduced levels, without a meaningful improvement in the current Brent crude oil prices.

We saw U.S. crude oil production continue its sharp decline in the third quarter of 2015 which we believe is an indication that the balancing of worldwide crude-oil markets is well underway. Additionally, the most recent International Energy Agency estimates project worldwide demand to increase in 2015 by 1.8 million barrels of oil per day in response to low commodity prices. With the very steep decline curves associated with the unconventional tight oil reservoirs in the U.S., we now believe that U.S. supply growth rolled over in April of 2015 and that year-over-year crude-oil production will be down several hundreds-of-thousands of barrels per day. Therefore, at current industry activity levels, U.S. crude oil production could fall significantly in 2015 and 2016, while worldwide oil production continues to stagnate or decrease slightly because recent international production gains may not be sustainable over the long term.

Response to Decline in Oilfield Services Activities

In response to lower commodity pricing and reduced spending by our clients related to oil and gas producing fields in 2015, we decided during the first quarter of 2015 to reduce our cost structure, primarily consisting of reductions in our workforce, to better align with anticipated activity levels for 2015. As a result of these cost reductions, we recorded a charge of $7.1 million in the first quarter of 2015. Depending on how the market situation evolves, further actions may be necessary, which could result in additional charges in future periods.
During the second and third quarters of 2015, we continued to closely monitor rig counts, crude oil and natural gas prices, and activity levels within the industry. We continued to execute our reduction in force initiative which began in the first quarter of 2015, but no additional accruals or write-offs were recorded during the second or third quarters of 2015.















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Results of Operations

Our results of operations as a percentage of applicable revenue were as follows (in thousands):
 
Three Months Ended September 30,
 
$ Change
% Change
 
2015
 
2014
 
2015/2014

2015/2014

REVENUE:
 
 
 
 

Services
$
150,128

 
76
%
 
$
203,578

 
74
%
 
$
(53,450
)
(26
)%
Product sales
47,137

 
24
%
 
72,557

 
26
%
 
(25,420
)
(35
)%
Total revenue
197,265

 
100
%
 
276,135

 
100
%
 
(78,870
)
(29
)%
OPERATING EXPENSES:
 

 
 

 
 

 
 

 




Cost of services, exclusive of depreciation expense shown below*
94,117

 
63
%
 
113,917

 
56
%
 
(19,800
)
(17
)%
Cost of product sales, exclusive of depreciation expense shown below*
34,933

 
74
%
 
53,010

 
73
%
 
(18,077
)
(34
)%
Total cost of services and product sales
129,050

 
65
%
 
166,927

 
60
%
 
(37,877
)
(23
)%
General and administrative expense
12,155

 
6
%
 
12,316

 
4
%
 
(161
)
(1
)%
Depreciation and amortization
6,910

 
4
%
 
6,845

 
2
%
 
65

1
 %
Other (income) expense, net
2,332

 
1
%
 
927

 
0
%
 
1,405

NM

Operating income
46,818

 
24
%
 
89,120

 
32
%
 
(42,302
)
(47
)%
Interest expense
3,471

 
2
%
 
2,561

 
1
%
 
910

36
 %
Income before income tax expense
43,347

 
22
%
 
86,559

 
31
%
 
(43,212
)
(50
)%
Income tax expense
9,753

 
5
%
 
19,909

 
7
%
 
(10,156
)
(51
)%
Net income
33,594

 
17
%
 
66,650

 
24
%
 
(33,056
)
(50
)%
Net income (loss) attributable to non-controlling interest
190

 
0
%
 
153

 
0
%
 
37

24
 %
Net income attributable to Core Laboratories N.V.
$
33,404

 
17
%
 
$
66,497

 
24
%
 
$
(33,093
)
(50
)%
"NM"  means not meaningful
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 

 
 
 


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   Nine Months Ended September 30,
 
$ Change
% Change
 
2015
 
2014
 
2015/2014

2015/2014
REVENUE:
 
 
 
 
Services
$
469,963

 
76
 %
 
$
580,612

 
72
 %
 
$
(110,649
)
(19
)%
Product sales
144,834

 
24
 %
 
225,988

 
28
 %
 
(81,154
)
(36
)%
Total revenue
614,797

 
100
 %
 
806,600

 
100
 %
 
(191,803
)
(24
)%
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation expense shown below*
295,374

 
63
 %
 
336,194

 
58
 %
 
(40,820
)
(12
)%
Cost of product sales, exclusive of depreciation expense shown below*
112,569

 
78
 %
 
160,560

 
71
 %
 
(47,991
)
(30
)%
Total cost of services and product sales
407,943

 
66
 %
 
496,754

 
62
 %
 
(88,811
)
(18
)%
General and administrative expense
37,463

 
6
 %
 
33,983

 
4
 %
 
3,480

10
 %
Depreciation and amortization
20,406

 
3
 %
 
19,796

 
2
 %
 
610

3
 %
Other (income), net
4,467

 
1
 %
 
(14
)
 
0
 %
 
4,481

NM

Severance and other charges
7,090

 
1
 %
 

 
0
 %
 
7,090

NM

Operating income
137,428

 
22
 %
 
256,081

 
32
 %
 
(118,653
)
(46
)%
Interest expense
8,990

 
1
 %
 
7,718

 
1
 %
 
1,272

16
 %
Income before income tax expense
128,438

 
21
 %
 
248,363

 
31
 %
 
(119,925
)
(48
)%
Income tax expense
29,100

 
5
 %
 
56,464

 
7
 %
 
(27,364
)
(48
)%
Net income
99,338

 
16
 %
 
191,899

 
24
 %
 
(92,561
)
(48
)%
Net income (loss) attributable to non-controlling interest
(91
)
 
0
 %
 
604

 
0
 %
 
(695
)
(115
)%
Net income attributable to Core Laboratories N.V.
$
99,429

 
16
 %
 
$
191,295

 
24
 %
 
$
(91,866
)
(48
)%
"NM"  means not meaningful
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 
 
 
 

Operating Results for the Three and Nine Months Ended September 30, 2015 Compared to the Three and Nine Months Ended September 30, 2014

Services Revenue

Services revenue decreased 26% to $150.1 million for the third quarter of 2015 when compared to $203.6 million for the third quarter of 2014. For the nine months ended September 30, 2015, services revenue decreased to $470.0 million as compared to $580.6 million for the same period of 2014. Since the end of the third quarter of 2014, prices for WTI and Brent crude oil declined 51% and 50%, respectively, and as a result, the global rig count fell by 39%, primarily driven by decreases in North America. However, over this same time period, our service revenue was down only 19%, as demand for our analytical, diagnostic, and completion services was less impacted by the significant decrease in drilling activities. Our continued focus on worldwide crude oil related and large natural gas liquefaction projects, especially those related to the development of deepwater fields off West and East Africa and the eastern Mediterranean, kept services revenue from declining further.

Product Sales Revenue

Revenue associated with product sales decreased to $47.1 million for the third quarter of 2015, compared to $72.6 million for the third quarter of 2014. For the nine months ended September 30, 2015, product sales revenue decreased to $144.8 million compared to $226.0 million during the same period in 2014. Although rig count for the US and Canada declined 55% and 51%, respectively, during the nine months ended September 30, 2015, our revenue decreased only 36% as a result of our differentiated well completion products.

Cost of Services

Cost of services expressed as a percentage of services revenue increased to 63% for the three and nine months ended September 30, 2015, compared to 56% and 58% for the three and nine months ended September 30, 2014, respectively. These

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increases are primarily due to a reduced absorption rate of our fixed-cost structure across lower revenues in 2015 when compared to 2014. We took actions to reduce our cost structure in response to the sharp decline in global activity during the first quarter of 2015.

Cost of Product Sales

Cost of product sales expressed as a percentage of product sales revenue increased to 74% and 78% for the three and nine months ended September 30, 2015, respectively, compared to 73% and 71%, respectively, for the same periods in 2014. These increases are primarily due to a reduced absorption rate of our fixed-cost structure across lower revenue in 2015 when compared to 2014. We took actions to reduce our cost structure in response to the sharp decline in North America activity during the first quarter of 2015.
 
General and Administrative Expense

General and administrative ("G&A") expense includes corporate management and centralized administrative services that benefit our operations. G&A expense for the three and nine months ended September 30, 2015 was $12.2 million and $37.5 million, respectively, compared to $12.3 million and $34.0 million, respectively, for the same periods in 2014. The increase for the nine-month comparison is primarily due to compensation expense.

Depreciation and Amortization Expense

Depreciation and amortization expense for the three and nine months ended September 30, 2015 was $6.9 million and $20.4 million, respectively, compared to $6.8 million and $19.8 million, respectively, for the same periods in 2014.

Severance and Other Charges

In response to lower commodity pricing and reduced spending by our clients related to oil and gas producing fields in 2015, we decided during the first quarter of 2015 to reduce our cost structure, primarily through a reduction in our workforce, to better align with anticipated activity levels for 2015. As a result of these cost reductions, we recorded a charge of $7.1 million in the first quarter of 2015. Depending on how the market situation evolves, further actions may be necessary, which could result in additional charges in future periods.
During the second and third quarters of 2015, we continued to closely monitor rig counts, crude oil and natural gas prices, and activity levels within the industry. We continued to execute our reduction in force initiative which began in the first quarter of 2015, but no additional accruals or write-offs were recorded during the second or third quarters of 2015.

Other (Income) Expense, Net

The components of other (income) expense, net, were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Sale of assets
$
(100
)
 
$
(442
)
 
$
(362
)
 
$
(740
)
Results of non-consolidated subsidiaries
(131
)
 
(165
)
 
(211
)
 
(295
)
Foreign exchange
2,612

 
1,858

 
4,454

 
2,158

Rents and royalties
(115
)
 
(209
)
 
(370
)
 
(656
)
Other, net
66

 
(115
)
 
956

 
(481
)
Total other (income) expense, net
$
2,332

 
$
927

 
$
4,467

 
$
(14
)

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Foreign exchange (gain) loss, net by currency is summarized in the following table (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Angolan Kwanza
$
311

 
$

 
$
819

 
$
(3
)
Australian Dollar
3

 
104

 
186

 
166

British Pound
173

 
770

 
285

 
496

Canadian Dollar
549

 
903

 
1,772

 
1,071

Euro
615

 
(449
)
 
(145
)
 
(446
)
Indonesian Rupiah
219

 
82

 
381

 
48

Malaysian Ringgit
361

 
77

 
533

 
90

Nigerian Naira
238

 
48

 
557

 
118

Russian Ruble
(32
)
 
162

 
(37
)
 
202

Other currencies, net
175

 
161

 
103

 
416

Total (gain) loss, net
$
2,612

 
$
1,858

 
$
4,454

 
$
2,158


Interest Expense

Interest expense for the three months ended September 30, 2015 and 2014 was $3.5 million and $2.6 million, respectively. Interest expense for the nine months ended September 30, 2015 and 2014 was $9.0 million and $7.7 million, respectively. Interest expense is higher in 2015 due to the increased borrowings on our revolver.

Income Tax Expense

The effective tax rates for the three months ended September 30, 2015 and 2014 were 22.5% and 23.0%, respectively. The effective tax rates for the nine months ended September 30, 2015 and 2014 were both 22.7%. The change in tax expense for the three-month comparison is primarily the result of 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 nine months ended September 30, 2015 and 2014 (in thousands):
 
 
Three Months Ended September 30,
 
$ Change
% Change
 
Three Months Ended June 30,
 
$ Change
% Change
 
 
2015
 
2014
 
2015/2014
2015/2014
 
2015
 
Q3/Q2
Q3/Q2
Revenue:
 
 
 
 
 

 
 
 
 
 
Reservoir Description
 
$
117,943

 
$
131,380

 
$
(13,437
)
(10
)%
 
$
118,911

 
$
(968
)
(1
)%
Production Enhancement
 
64,918

 
122,161

 
(57,243
)
(47
)%
 
70,589

 
(5,671
)
(8
)%
Reservoir Management
 
14,404

 
22,594

 
(8,190
)
(36
)%
 
14,389

 
15

0
 %
Consolidated
 
$
197,265

 
$
276,135

 
$
(78,870
)
(29
)%
 
$
203,889

 
$
(6,624
)
(3
)%
Operating income (loss):