Document


 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, 2016
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 20, 2016 was 44,109,761.




CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016
 
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,
2016
 
December 31,
2015
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
17,219

 
$
22,494

Accounts receivable, net of allowance for doubtful accounts of $3,146 and $4,136 at 2016 and 2015, respectively
108,520

 
145,689

Inventories
37,339

 
40,906

Prepaid expenses
8,971

 
12,053

Income taxes receivable
6,374

 
7,209

Other current assets
6,931

 
10,196

TOTAL CURRENT ASSETS
185,354

 
238,547

PROPERTY, PLANT AND EQUIPMENT, net
131,210

 
143,211

INTANGIBLES, net
10,019

 
10,041

GOODWILL
179,044

 
178,159

DEFERRED TAX ASSETS, net
9,793

 
11,693

OTHER ASSETS
46,718

 
43,607

TOTAL ASSETS
$
562,138

 
$
625,258

LIABILITIES AND EQUITY (DEFICIT)
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable
$
32,201

 
$
33,474

Accrued payroll and related costs
23,541

 
36,475

Taxes other than payroll and income
6,816

 
9,495

Unearned revenue
12,990

 
14,101

Income taxes payable
5,596

 
1,733

Other current liabilities
12,398

 
25,480

TOTAL CURRENT LIABILITIES
93,542

 
120,758

LONG-TERM DEBT, net
206,363

 
430,987

DEFERRED COMPENSATION
45,977

 
43,478

DEFERRED TAX LIABILITIES, net
5,859

 
4,881

OTHER LONG-TERM LIABILITIES
47,600

 
48,853

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, 44,796,252 issued and 44,100,116 outstanding at
2016 and 44,350,002 issued and 42,375,905 outstanding at 2015
1,148

 
1,142

Additional paid-in capital
62,479

 

Retained earnings
196,760

 
219,207

Accumulated other comprehensive income (loss)
(11,253
)
 
(10,538
)
Treasury shares (at cost), 696,136 at 2016 and 1,974,097 at 2015
(91,545
)
 
(238,875
)
Total Core Laboratories N.V. shareholders' equity (deficit)
157,589

 
(29,064
)
Non-controlling interest
5,208

 
5,365

TOTAL EQUITY (DEFICIT)
162,797

 
(23,699
)
TOTAL LIABILITIES AND EQUITY (DEFICIT)
$
562,138

 
$
625,258



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

1
                                                                    Return to Index



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

 
Three Months Ended
 
September 30,
 
2016
 
2015
 
(Unaudited)
REVENUE:
 
 
 
Services
$
114,137

 
$
150,128

Product sales
29,346

 
47,137

Total revenue
143,483

 
197,265

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
80,419

 
94,117

Cost of product sales, exclusive of depreciation expense shown below
26,734

 
34,933

General and administrative expense, exclusive of depreciation expense shown below
8,406

 
12,155

Depreciation
6,548

 
6,695

Amortization
176

 
215

Other (income) expense, net
(288
)
 
2,332

OPERATING INCOME
21,488

 
46,818

Interest expense
2,569

 
3,471

Income before income tax expense
18,919

 
43,347

Income tax expense
2,081

 
9,753

Net income
16,838

 
33,594

Net income (loss) attributable to non-controlling interest
108

 
190

Net income attributable to Core Laboratories N.V.
$
16,730

 
$
33,404

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
0.38

 
$
0.79

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
0.38

 
$
0.78

 
 
 
 
Cash dividends per share
$
0.55

 
$
0.55

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
44,110

 
42,517

Diluted
44,320

 
42,685














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

2
                                                                    Return to Index



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

 
Nine Months Ended
 
September 30,
 
2016
 
2015
 
(Unaudited)
REVENUE:
 
 
 
Services
$
355,079

 
$
469,963

Product sales
90,120

 
144,834

Total revenue
445,199

 
614,797

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
249,062

 
295,374

Cost of product sales, exclusive of depreciation expense shown below
80,904

 
112,569

General and administrative expense, exclusive of depreciation expense shown below
30,595

 
37,463

Depreciation
19,706

 
19,792

Amortization
616

 
614

Other (income) expense, net
(339
)
 
4,467

Severance and other charges

 
7,090

OPERATING INCOME
64,655

 
137,428

Interest expense
9,024

 
8,990

Income before income tax expense
55,631

 
128,438

Income tax expense
7,141

 
29,100

Net income
48,490

 
99,338

Net income (loss) attributable to non-controlling interest
54

 
(91
)
Net income attributable to Core Laboratories N.V.
$
48,436

 
$
99,429

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
1.12

 
$
2.32

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
1.11

 
$
2.31

 
 
 
 
Cash dividends per share
$
1.65

 
$
1.65

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
43,265

 
42,879

Diluted
43,450

 
43,038














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

3
                                                                    Return to Index



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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
Net income
$
16,838

 
$
33,594

 
$
48,490

 
$
99,338

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Gain (loss) in fair value of interest rate swaps
199

 
(1,475
)
 
(2,221
)
 
(1,880
)
Interest rate swap amounts reclassified to interest expense
207

 
246

 
631

 
734

Income taxes on derivatives
(150
)
 
455

 
585

 
822

Total derivatives
256

 
(774
)
 
(1,005
)
 
(324
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plans
 
 
 
 
 
 
 
Prior service cost
 
 
 
 
 
 
 
Amortization to net income of transition asset

 
(22
)
 

 
(66
)
Amortization to net income of prior service cost
(20
)
 
(21
)
 
(58
)
 
(59
)
Amortization to net income of actuarial loss
148

 
181

 
444

 
548

Income taxes on pension and other postretirement benefit plans
(32
)
 
(33
)
 
(96
)
 
(106
)
Total pension and other postretirement benefit plans
96

 
105

 
290

 
317

 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
352

 
(669
)
 
(715
)
 
(7
)
Comprehensive income
17,190

 
32,925

 
47,775

 
99,331

Comprehensive income (loss) attributable to non-controlling interest
108

 
190

 
54

 
(91
)
Comprehensive income attributable to Core Laboratories N.V.
$
17,082

 
$
32,735

 
$
47,721

 
$
99,422


























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

4
                                                                    Return to Index



CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine Months Ended
 
September 30,
 
2016
 
2015
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
48,490

 
$
99,338

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

 
 

Stock-based compensation
16,762

 
15,964

Depreciation and amortization
20,322

 
20,406

Changes to value of life insurance policies
(505
)
 
2,190

Deferred income taxes
(3,910
)
 
(3,445
)
Other non-cash items
(1,226
)
 
1,259

Changes in assets and liabilities:
 
 
 
Accounts receivable
37,610

 
43,775

Inventories
2,995

 
(138
)
Prepaid expenses and other current assets
4,029

 
8,039

Other assets
(128
)
 
2,061

Accounts payable
(3,023
)
 
(10,864
)
Accrued expenses
(13,017
)
 
(8,582
)
Unearned revenue
(1,111
)
 
2,909

Other long-term liabilities
1,396

 
(3,142
)
Net cash provided by operating activities
108,684

 
169,770

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(7,740
)
 
(18,276
)
Patents and other intangibles
(205
)
 
(1,502
)
Business acquisition, net of cash acquired
(1,242
)
 
(13,824
)
Proceeds from sale of assets
705

 
1,193

Premiums on life insurance
(2,015
)
 
(2,210
)
Net cash used in investing activities
(10,497
)
 
(34,619
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Repayment of debt borrowings
(290,226
)
 
(49,693
)
Proceeds from debt borrowings
63,000

 
120,000

Excess tax benefits from stock-based compensation
(187
)
 
180

Debt financing costs

 
(339
)
Non-controlling interest - dividend
(211
)
 

Dividends paid
(70,883
)
 
(70,933
)
Repurchase of common shares
(2,157
)
 
(139,255
)
Issuance of common shares
197,202

 

Net cash used in financing activities
(103,462
)
 
(140,040
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(5,275
)
 
(4,889
)
CASH AND CASH EQUIVALENTS, beginning of period
22,494

 
23,350

CASH AND CASH EQUIVALENTS, end of period
$
17,219

 
$
18,461













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

5
                                                                    Return to Index



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, 2015 (the "2015 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, 2016 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2016.

Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2015 was derived from the 2015 audited consolidated financial statements but does not include all disclosures in accordance with U.S. GAAP.

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,
2016
 
December 31,
2015
Finished goods
$
23,863

 
$
25,778

Parts and materials
11,929

 
12,637

Work in progress
1,547

 
2,491

Total inventories
$
37,339

 
$
40,906


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 the second quarter of 2015, we acquired a business providing additional reservoir fluids technology for $17.2 million in cash. We 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 of this entity did not have a material impact on our Consolidated Balance Sheet or Consolidated Statements of Operations, and was recorded in the Reservoir Description business segment.


6
                                                                    Return to Index



4.  LONG-TERM DEBT

We have no capital lease obligations. Long-term debt is summarized in the following table (in thousands):
 
September 30,
2016
 
December 31,
2015
Senior notes
$
150,000

 
$
150,000

Credit facility
58,000

 
283,000

Other indebtedness
18

 
2,244

Total debt
208,018

 
435,244

Less: Short-term debt included in other indebtedness
(18
)
 
(2,244
)
Less: Debt issuance costs
(1,637
)
 
(2,013
)
Long-term debt, net
$
206,363

 
$
430,987


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.
    
We maintain a revolving credit facility ("Credit Facility") that allows for an aggregate borrowing capacity of $400 million. The Credit Facility also provides an option to increase the commitment under the Credit Facility by 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 $25.7 million at September 30, 2016, resulting in an available borrowing capacity under the Credit Facility of $316.3 million. In addition to those items under the Credit Facility, we had $9.4 million of outstanding letters of credit and performance guarantees and bonds from other sources as of September 30, 2016.

The terms of the Credit Facility and Senior Notes require us to meet certain covenants, including, but not limited to, an interest coverage ratio (consolidated EBITDA divided by interest expense) and a leverage ratio (consolidated net indebtedness divided by consolidated EBITDA), where consolidated EBITDA (as defined in each agreement) and interest expense are calculated using the most recent four fiscal quarters. The Credit Facility has the more restrictive covenants with a minimum interest coverage ratio of 3.0 to 1.0 and a maximum leverage ratio of 2.5 to 1.0. 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, 2016 and December 31, 2015 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.  PENSION

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. The pension benefit is 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.

The following table summarizes the components of net periodic pension cost under the Dutch Plan for the three and nine months ended September 30, 2016 and 2015 (in thousands):

7
                                                                    Return to Index



 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
364

 
$
453

 
$
1,097

 
$
1,356

Interest cost
332

 
301

 
1,001

 
904

Expected return on plan assets
(279
)
 
(249
)
 
(841
)
 
(748
)
Amortization of transition asset

 
(22
)
 

 
(66
)
Amortization of prior service cost
(20
)
 
(21
)
 
(58
)
 
(59
)
Amortization of actuarial loss
148

 
181

 
444

 
548

Net periodic pension cost
$
545

 
$
643

 
$
1,643

 
$
1,935


During the nine months ended September 30, 2016, we contributed $1.1 million to fund the estimated 2016 premiums on investment contracts held by the Dutch Plan.

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.

7.  EQUITY

During the three months ended September 30, 2016, we repurchased 24,795 of our common shares for $2.8 million. Included in this total were rights to 8,795 shares valued at $1.0 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, 2016, we repurchased 34,959 of our common shares for $3.9 million. Included in this total were rights to 18,959 shares valued at $2.2 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. We distributed 29,028 and 62,920 treasury shares upon vesting of stock-based awards during the three and nine months ended September 30, 2016, respectively.

In February, May and August 2016, we paid quarterly dividends of $0.55 per share of common stock. In addition, on October 11, 2016, we declared a quarterly dividend of $0.55 per share of common stock for shareholders of record on October 21, 2016 and payable on November 22, 2016.

On May 17, 2016 we completed a public offering of 1,475,000 shares of our common stock. The purchase price paid by the underwriter was $116.67 per share. On May 26, 2016, the underwriter exercised in full its option to purchase an additional 221,250 shares of common stock at the public offering price of $116.67 per share bringing the total shares issued from the offering to 1,696,250. The net proceeds from these issuances of common stock were $197.2 million, after deducting underwriting discounts and offering expenses. The proceeds were used to repay a portion of the outstanding borrowings under our Credit Facility.

At the annual meeting of shareholders on May 19, 2016, our shareholders approved the cancellation of 1,250,000 shares of our common stock then held as treasury stock. This treasury stock was cancelled on August 2, 2016, 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.


8
                                                                    Return to Index



The following table summarizes our changes in equity for the nine months ended September 30, 2016 (in thousands, except share data):
 
Shares Outstanding
 
Common Shares
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
Treasury Stock
 
Non-Controlling Interest
 
Total Equity
December 31, 2015
42,375,905

 
$
1,142

 
$

 
$
219,207

 
$
(10,538
)
 
$
(238,875
)
 
$
5,365

 
$
(23,699
)
Stock based-awards
62,920

 

 
8,457

 

 

 
8,305

 

 
16,762

Tax detriment of stock-based awards

 

 
(187
)
 

 

 

 

 
(187
)
Repurchase of common shares
(34,959
)
 

 

 

 

 
(3,962
)
 

 
(3,962
)
Issuance of common shares
1,696,250

 
38

 
197,164

 

 

 

 

 
197,202

Dividends paid

 

 

 
(70,883
)
 

 

 

 
(70,883
)
Cancellation of treasury shares

 
(32
)
 
(142,955
)
 

 

 
142,987

 

 

Non-controlling interest dividends

 

 

 

 

 

 
(211
)
 
(211
)
Amortization of deferred pension costs, net of tax

 

 

 

 
290

 

 

 
290

Interest rate swaps, net of tax

 

 

 

 
(1,005
)
 

 

 
(1,005
)
Net income

 

 

 
48,436

 

 

 
54

 
48,490

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

September 30, 2016
44,100,116

 
$
1,148

 
$
62,479

 
$
196,760

 
$
(11,253
)
 
$
(91,545
)
 
$
5,208

 
$
162,797


Accumulated other comprehensive income (loss) consisted of the following (in thousands, net of tax):
 
September 30,
2016
 
December 31,
2015
Prior service cost
$
618

 
$
661

Unrecognized net actuarial loss
(9,868
)
 
(10,201
)
Fair value of derivatives
(2,003
)
 
(998
)
Total accumulated other comprehensive income (loss)
$
(11,253
)
 
$
(10,538
)


9
                                                                    Return to Index



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):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Weighted average basic common shares outstanding
44,110

 
42,517

 
43,265

 
42,879

Effect of dilutive securities:
 
 
 
 
 
 
 
Performance shares
147

 
114

 
119

 
95

Restricted stock
63

 
54

 
66

 
64

Weighted average diluted common and potential common shares outstanding
44,320

 
42,685

 
43,450

 
43,038


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,
 
2016
 
2015
 
2016
 
2015
Sale of assets
$
(56
)
 
$
(100
)
 
$
(544
)
 
$
(362
)
Results of non-consolidated subsidiaries
(126
)
 
(131
)
 
(450
)
 
(211
)
Foreign exchange
220

 
2,612

 
1,432

 
4,454

Rents and royalties
(105
)
 
(115
)
 
(304
)
 
(370
)
Other, net
(221
)
 
66

 
(473
)
 
956

Total other (income) expense, net
$
(288
)
 
$
2,332

 
$
(339
)
 
$
4,467


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,
 
2016
 
2015
 
2016
 
2015
Angolan Kwanza
$
(32
)
 
$
311

 
$
473

 
$
819

British Pound
39

 
173

 
514

 
285

Canadian Dollar
(6
)
 
549

 
(54
)
 
1,772

Euro
45

 
615

 
215

 
(145
)
Indonesian Rupiah
(56
)
 
219

 
(168
)
 
381

Malaysian Ringgit
25

 
361

 
22

 
533

Nigerian Naira
273

 
238

 
431

 
557

Other currencies, net
(68
)
 
146

 
(1
)
 
252

Total (gain) loss, net
$
220

 
$
2,612

 
$
1,432

 
$
4,454



10
                                                                    Return to Index



10.  INCOME TAX EXPENSE

The effective tax rate for the three months ended September 30, 2016 was 11.0% compared to 22.5% for the three months ended September 30, 2015. The effective tax rate for the nine months ended September 30, 2016 was 12.8% compared to 22.7% for the same period in 2015. Income tax expense of $2.1 million in the third quarter of 2016 decreased by $7.7 million compared to $9.8 million in the same period in 2015, primarily in the United States as taxable income recognized in the United States decreased by $18.2 million in the third quarter of 2016 compared to 2015. No other jurisdiction in which we operate had a material change in income tax expense.

11.  SEVERANCE AND OTHER CHARGES

In 2015 and throughout 2016, in response to reduced spending by our clients on their oil and gas fields as a result of lower commodity prices for crude oil and natural gas, we reduced our cost structure, primarily through a reduction in our workforce, to better align with the decreasing activity levels into the foreseeable future. As a result of these cost reductions, we recorded severance charges of $8.8 million in 2015, of which $7.1 million was recorded during the nine months ended September 30, 2015. At September 30, 2016, $0.6 million was accrued and remaining to be paid.

During the third quarter of 2016, we continued to closely monitor rig counts, crude oil and natural gas prices, and activity levels within the industry. We continued to execute our cost reduction initiative which began in the first quarter of 2015, but no additional expenses associated with severance or asset impairments were recorded during the three or nine months ended September 30, 2016.

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%. As a result of two interest rate swap agreements, we are subject to interest rate risk on debt in excess of $50 million drawn on 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. Unrealized losses are deferred to shareholders' equity as a component of accumulated other comprehensive loss (AOCL) and are recognized in income as an increase to interest expense in the period in which the related cash flows being hedged are recognized in expense.

At September 30, 2016, we had fixed rate long-term debt aggregating $200 million and variable rate long-term debt aggregating $8 million, after taking into account the effect of the swaps.

The fair values of outstanding derivative instruments are as follows (in thousands):
 
Fair Value of Derivatives
 
 
 
September 30, 2016
 
December 31, 2015
 
Balance Sheet Classification
Derivatives designated as hedges:
 
 
 
 
 
5 year interest rate swap
$
651

 
$
353

 
Other long-term liabilities
10 year interest rate swap
2,521

 
1,229

 
Other long-term liabilities
 
$
3,172

 
$
1,582

 
 

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.


11
                                                                    Return to Index



The effect of the interest rate swaps on the Consolidated Statement of Operations was as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
Income Statement Classification
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
5 year interest rate swap
$
79

 
$
98

 
$
242

 
$
293

 
Increase to interest expense
10 year interest rate swap
128

 
148

 
389

 
441

 
Increase to interest expense
 
$
207

 
$
246

 
$
631

 
$
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 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, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
25,010

 
$

 
$
25,010

 
$

Liabilities:
 

 
 

 
 
 
 
Deferred compensation plan
$
31,018

 
$

 
$
31,018

 
$

5 year interest rate swap
651

 

 
651

 

10 year interest rate swap
2,521

 

 
2,521

 

 
$
34,190

 
$

 
$
34,190

 
$


 
 
 
Fair Value Measurement at
 
 
 
December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
23,737

 
$

 
$
23,737

 
$

Liabilities:
 

 
 
 
 
 
 
Deferred compensation plan
$
29,155

 
$

 
$
29,155

 
$

5 year interest rate swap
353

 

 
353

 

10 year interest rate swap
1,229

 

 
1,229

 

 
$
30,737

 
$

 
$
30,737

 
$

 
 
 
 
 
 
 
 
(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.


12
                                                                    Return to Index



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 diagnostic 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 Corporate & Other and is not allocated to specific segments. Summarized financial information concerning our segments is shown in the following table (in thousands):
 
Reservoir Description
 
Production Enhancement
 
Reservoir Management
 
Corporate & Other 1
 
Consolidated
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
100,267

 
$
37,552

 
$
5,664

 
$

 
$
143,483

Inter-segment revenue
761

 
179

 
36

 
(976
)
 

Segment operating income (loss)
20,395

 
1,121

 
(125
)
 
97

 
21,488

Total assets (at end of period)
308,739

 
187,846

 
16,116

 
49,437

 
562,138

Capital expenditures
2,012

 
318

 
8

 
100

 
2,438

Depreciation and amortization
4,455

 
1,294

 
327

 
648

 
6,724

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

Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
304,778

 
$
120,846

 
$
19,575

 
$

 
$
445,199

Inter-segment revenue
3,054

 
563

 
65

 
(3,682
)
 

Segment operating income (loss)
57,824

 
6,017

 
784

 
30

 
64,655

Total assets (at end of period)
308,739

 
187,846

 
16,116

 
49,437

 
562,138

Capital expenditures
6,352

 
856

 
24

 
508

 
7,740

Depreciation and amortization
13,345

 
4,062

 
1,025

 
1,890

 
20,322

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 (at end of period)
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

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


13
                                                                    Return to Index



15. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-02 ("Amendments to the Consolidation Analysis") which amends the guidelines for determining whether certain legal entities should be consolidated. This update eliminates the presumption that a general partner should consolidate a limited partnership and modifies the evaluation of whether limited partnerships are variable interest entities or voting interest entities. Overall, the amendments in this Update are an improvement to current GAAP because they simplify the Codification and reduce the number of consolidation models through the elimination of the indefinite deferral of Statement 167 and because they place more emphasis on risk of loss when determining a controlling financial interest. This update is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We adopted this standard on January 1, 2016. The adoption of this standard had no effect on our current consolidated financial statements or on the entities that we consolidate.

In November 2015, the FASB issued ASU 2015-17 ("Balance Sheet Classification of Deferred Taxes") to simplify the presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This pronouncement is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. We early adopted this standard for our fiscal year beginning on January 1, 2016 and applied the adoption prospectively. The adoption of this standard had no effect on our current Consolidated Statements of Operations and Consolidated Statement of Cash Flows but had an immaterial effect on our Consolidated Balance Sheet with the reclassification of certain deferred tax balance sheet accounts. The comparative prior period Consolidated Balance Sheet as of December 31, 2015 was not retrospectively adjusted.

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). Since the issuance of ASU 2014-09, the FASB has issued several amendments which clarify certain points in the new Topic 606 - Revenue from Contracts with Customers, including ASU 2016-08 ("Principal versus Agent Considerations - Reporting Revenue Gross versus Net"), ASU 2016-10 ("Identifying Performance Obligations and Licensing"), ASU 2016-11 ("Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting"), and ASU 2016-12 ("Narrow-Scope Improvements and Practical Expedients"). We anticipate adopting all of these standards at the same time. We are evaluating the impact that the adoption of these standards 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. The adoption of this standard will have no material effect on our current consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 ("Leases"), which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. We are evaluating the impact that the adoption of this standard will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09 ("Improvements to Employee Share-Based Payment Accounting") which simplifies several aspects of accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. We are evaluating the impact that the adoption of this standard will have on our consolidated financial statements.


14
                                                                    Return to Index



In June 2016, the FASB issued ASU 2016-13 ("Measurement of Credit Losses on Financial Instruments") which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are evaluating the impact that the adoption of this standard will have on our consolidated financial statements.


15
                                                                    Return to Index



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, 2016 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, 2015 (the "2015 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 diagnostic 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 2015 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").




16
                                                                    Return to Index



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 2015, average crude oil prices decreased 48% compared to 2014, which resulted in a significant decrease in activities and spending related to the exploration and production of oil and natural gas. Although crude oil prices showed some strengthening during 2016, with West Texas Intermediate ("WTI") increasing from $37.13 per barrel at December 31, 2015 to $47.72 per barrel at September 30, 2016, the average price during the first nine months of 2015 and 2016 was $50.94 and $41.35, respectively, a 19% decrease.

In North America, land-based activity continues to be the most significantly impacted by these lower commodity prices, as the average land-based rig count for the third quarter of 2016 decreased 45% from the same period of 2015. However, the average land-based rig count in North America increased 16% sequentially, responding to some stability and improvement in the commodity prices during the quarter. During the quarter, however, the number of completions declined according to information provided by the U.S. Energy Information Administration ("EIA").

Outside of North America, activities associated with the exploration and production of oil and gas have also decreased from 2015 levels, although not as significantly as the land-based activities in North America. The average international rig count for the third quarter of 2016 is down 17% from the same period in 2015. These reduced international activities have impacted most regions, except the Middle East, where we continued to see sustained levels for the third quarter of 2016.

We believe the anticipated "V-shaped" worldwide commodity recovery has begun. One indication is that several U.S.-based operators continue to announce rig additions. Further, global demand for hydrocarbon-based energy continues to increase, while worldwide crude oil supply peaked in the second half of 2015 and began a decline that we believe will continue through all of 2016 and 2017. We have observed that U.S. oil production peaked at approximately 9,700,000 barrels of oil per day ("BOPD") in March 2015 and has fallen since then by an estimated 1,300,000 BOPD, with decreases of 450,000 BOPD in 2015 and another 850,000 BOPD so far in 2016.

At current activity levels, we predict 2016 U.S. onshore oil production will fall more than 1,100,000 BOPD which may be somewhat offset by deepwater Gulf of Mexico ("GOM") gains of approximately 100,000 BOPD (significantly lower than previously projected), yielding a U.S. net decline of 1,000,000 BOPD and an updated net decline curve rate of approximately 11%. Based on currently available worldwide crude oil production data, coupled with internal Core Lab data, we estimate that the net worldwide annual crude oil production decline rate is approximately 3.3%. That is supported by recent International Energy Agency ("IEA") reports that worldwide crude oil production continued to fall through the third quarter of 2016 and by recent bullish U.S. inventory trends. In addition to the U.S. decline, we expect 2016 production declines in Angola, China, Colombia, Indonesia, Iraq, Mexico, Nigeria, and Venezuela, among others. China recently reported a year-over-year production decline of 10% to less than 3,900,000 BOPD, nearing a six-year low.

The net worldwide decline rate is predicated on sharper decline curve rates for tight-oil reservoirs and a significant reduction of maintenance capital expenditures for the existing crude oil production base. These factors, together with the continuing decline in global production, recent Organization of the Petroleum Exporting Countries ("OPEC") action, the accelerated decline in U.S.-based inventories, and the continuing increase in global energy consumption are creating a tighter crude oil supply market and are expected to result in increasing crude prices and industry activity levels worldwide. This expectation does not take into account any unanticipated demand or supply fluctuations caused by industry or geopolitical events.

Response to Decline in Oilfield Services Activities

In 2015 and throughout 2016, in response to reduced spending by our clients on their oil and gas fields as a result of lower commodity prices for crude oil and natural gas, we reduced our cost structure, primarily through a reduction in our workforce, to better align with the decreasing activity levels into the foreseeable future. As a result of these cost reductions, we recorded severance charges of $8.8 million in 2015, of which $7.1 million was recorded in the nine months ended September 30, 2015. At September 30, 2016, $0.6 million was accrued and remaining to be paid.

During the third quarter of 2016, we continued to closely monitor rig counts, crude oil and natural gas prices, and activity levels within the industry. We continued to execute our cost reduction initiative which began in the first quarter of 2015, but no additional accruals or write-offs were recorded during the three or nine months ended September 30, 2016.

17
                                                                    Return to Index




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

 
2016
 
2015
 
2016/2015

2016/2015

REVENUE:
 
 
 
 

Services
$
114,137

 
80
 %
 
$
150,128

 
76
%
 
$
(35,991
)
(24
)%
Product sales
29,346

 
20
 %
 
47,137

 
24
%
 
(17,791
)
(38
)%
Total revenue
143,483

 
100
 %
 
197,265

 
100
%
 
(53,782
)
(27
)%
OPERATING EXPENSES:
 

 
 

 
 

 
 

 




Cost of services, exclusive of depreciation expense shown below*
80,419

 
71
 %
 
94,117

 
63
%
 
(13,698
)
(15
)%
Cost of product sales, exclusive of depreciation expense shown below*
26,734

 
91
 %
 
34,933

 
74
%
 
(8,199
)
(23
)%
Total cost of services and product sales
107,153

 
75
 %
 
129,050

 
65
%
 
(21,897
)
(17
)%
General and administrative expense
8,406

 
6
 %
 
12,155

 
6
%
 
(3,749
)
(31
)%
Depreciation and amortization
6,724

 
5
 %
 
6,910

 
4
%
 
(186
)
(3
)%
Other (income) expense, net
(288
)
 
(1
)%
 
2,332

 
1
%
 
(2,620
)
NM

Operating income
21,488

 
15
 %
 
46,818

 
24
%
 
(25,330
)
(54
)%
Interest expense
2,569

 
2
 %
 
3,471

 
2
%
 
(902
)
(26
)%
Income before income tax expense
18,919

 
13
 %
 
43,347

 
22
%
 
(24,428
)
(56
)%
Income tax expense
2,081

 
1
 %
 
9,753

 
5
%
 
(7,672
)
(79
)%
Net income
16,838

 
12
 %
 
33,594

 
17
%
 
(16,756
)
(50
)%
Net income (loss) attributable to non-controlling interest
108

 
 %
 
190

 
%
 
(82
)
NM

Net income attributable to Core Laboratories N.V.
$
16,730

 
12
 %
 
$
33,404

 
17
%
 
$
(16,674
)
(50
)%
"NM"  means not meaningful
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 

 
 
 



18
                                                                    Return to Index



 
Three Months Ended
 
$ Change

% Change

 
Sep 30, 2016
 
Jun 30, 2016
 
Q3/Q2

Q3/Q2

REVENUE:
 
 
 
 
 
 
 
 
 
 
Services
$
114,137

 
80
 %
 
$
118,172

 
80
 %
 
$
(4,035
)
(3
)%
Product sales
29,346

 
20
 %
 
29,897

 
20
 %
 
(551
)
(2
)%
Total revenue
143,483

 
100
 %
 
148,069

 
100
 %
 
(4,586
)
(3
)%
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation expense shown below*
80,419

 
71
 %
 
83,349

 
71
 %
 
(2,930
)
(4
)%
Cost of product sales, exclusive of depreciation expense shown below*
26,734

 
91
 %
 
26,650

 
89
 %
 
84

 %
Total cost of services and product sales
107,153

 
75
 %
 
109,999

 
74
 %
 
(2,846
)
(3
)%
General and administrative expense
8,406

 
6
 %
 
11,139

 
8
 %
 
(2,733
)
(25
)%
Depreciation and amortization
6,724

 
5
 %
 
6,751

 
5
 %
 
(27
)
 %
Other (income) expense, net
(288
)
 
(1
)%
 
(47
)
 
(1
)%
 
(241
)
NM

Operating income
21,488

 
15
 %
 
20,227

 
14
 %
 
1,261

6
 %
Interest expense
2,569

 
2
 %
 
3,021

 
2
 %
 
(452
)
(15
)%
Income before income tax expense
18,919

 
13
 %
 
17,206

 
12
 %
 
1,713

10
 %
Income tax expense
2,081

 
1
 %
 
671

 
1
 %
 
1,410

210
 %
Net income
16,838

 
12
 %
 
16,535

 
11
 %
 
303

2
 %
Net income (loss) attributable to non-controlling interest
108

 
 %
 
(89
)
 
 %
 
197

NM

Net income attributable to Core Laboratories N.V.
$
16,730

 
12
 %
 
$
16,624

 
11
 %
 
$
106

1
 %
"NM"  means not meaningful
 
 
 
 
 
 
 
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 
 
 
 
 
 


19
                                                                    Return to Index



 
   Nine Months Ended September 30,
 
$ Change

% Change

 
2016
 
2015
 
2016/2015

2016/2015

REVENUE:
 
 
 
 
Services
$
355,079

 
80
 %
 
$
469,963

 
76
 %
 
$
(114,884
)
(24
)%
Product sales
90,120

 
20
 %
 
144,834

 
24
 %
 
(54,714
)
(38
)%
Total revenue
445,199

 
100
 %
 
614,797

 
100
 %
 
(169,598
)
(28
)%
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation expense shown below*
249,062

 
70
 %
 
295,374

 
63
 %
 
(46,312
)
(16
)%
Cost of product sales, exclusive of depreciation expense shown below*
80,904

 
90
 %
 
112,569

 
78
 %
 
(31,665
)
(28
)%
Total cost of services and product sales
329,966

 
74
 %
 
407,943

 
66
 %
 
(77,977
)
(19
)%
General and administrative expense
30,595

 
7
 %
 
37,463

 
6
 %
 
(6,868
)
(18
)%
Depreciation and amortization
20,322

 
5
 %
 
20,406

 
3
 %
 
(84
)
0
 %
Other (income), net
(339
)
 
(1
)%
 
4,467

 
2
 %
 
(4,806
)
NM

Severance and other charges

 
0
 %
 
7,090

 
1
 %
 
(7,090
)
NM

Operating income
64,655

 
15
 %
 
137,428

 
22
 %
 
(72,773
)
(53
)%
Interest expense
9,024

 
3
 %
 
8,990

 
1
 %
 
34

0
 %
Income before income tax expense
55,631

 
12
 %
 
128,438

 
21
 %
 
(72,807
)
(57
)%
Income tax expense
7,141

 
1
 %
 
29,100

 
5
 %
 
(21,959
)
(75
)%
Net income
48,490

 
11
 %
 
99,338

 
16
 %
 
(50,848
)
(51
)%
Net income (loss) attributable to non-controlling interest
54

 
0
 %
 
(91
)
 
0
 %
 
145

NM

Net income attributable to Core Laboratories N.V.
$
48,436

 
11
 %
 
$
99,429

 
16
 %
 
$
(50,993
)
(51
)%
"NM"  means not meaningful
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 
 
 
 

Operating Results for the Three Months Ended September 30, 2016 Compared to the Three Months Ended June 30, 2016 and September 30, 2015 and for the Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

Services Revenue

Services revenue decreased 3% to $114.1 million for the third quarter of 2016 from $118.2 million for the second quarter of 2016 and decreased 24% as compared to $150.1 million for the third quarter of 2015. The sequential decrease in service revenue is primarily due to reduced activity in South America and Asia-Pacific regions. The year-over-year decrease is primarily due to the decrease in industry activity; however, the global average rig count for the third quarter of 2016 decreased 30% when compared to the same period of 2015. Our services revenue outperformed the decrease in the global rig count as demand for our analytical, diagnostic, and completion services are less impacted by decreases in drilling activities. For the nine months ended September 30, 2016, services revenue decreased 24% to $355.1 million as compared to $470.0 million for the same period of 2015. The average global rig count for the nine months ended September 30, 2016 fell by 36% compared to the same period in 2015, primarily driven by decreases in North America. 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.


20
                                                                    Return to Index



Product Sales Revenue

Revenue associated with product sales decreased 2% to $29.3 million for the third quarter of 2016 from $29.9 million for the second quarter of 2016 and decreased 38% as compared to $47.1 million for the third quarter of 2015. Our product sales revenue is primarily driven by sales in the North American market and, more specifically, the activity associated with the completion of wells. During the third quarter of 2016, the number of active rigs did show a slight increase; however, this has not translated into an increase of wells being completed which are down sequentially according to the EIA. As a result of our differentiated well completion products, we continued to outperform in the market place, and as a result our product sales did not decrease as much as the average North America rig count, which declined 43% year-over-year. For the nine months ended September 30, 2016, product sales revenue decreased 38% to $90.1 million compared to $144.8 million during the same period in 2015 where the average rig count in North America decreased by 52%.

Cost of Services

Cost of services expressed as a percentage of services revenue was flat at 71% for the three months ended September 30, 2016 and June 30, 2016 and increased compared to 63% for the three months ended September 30, 2015. Cost of services expressed as a percentage of services revenue increased to 70% for the nine months ended September 30, 2016, compared to 63% for the same period in 2015. These increases were primarily due to our fixed-cost structure not being absorbed on lower revenue in 2016 when compared to 2015.

Cost of Product Sales

Cost of product sales expressed as a percentage of product sales revenue was 91% for the three months ended September 30, 2016, compared to 89% and 74% for the three months ended June 30, 2016 and </