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 June 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Q
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Emerging growth company  o
 
 
(Do not check if a smaller reporting company)
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o

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

The number of common shares of the registrant, par value EUR 0.02 per share, outstanding at July 25, 2017 was 44,138,104.




CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2017
 
INDEX
 
PART I - FINANCIAL INFORMATION
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CORE LABORATORIES N.V.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
June 30,
2017
 
December 31,
2016
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
14,318

 
$
14,764

Accounts receivable, net of allowance for doubtful accounts of $2,905 and $3,139 at 2017 and 2016, respectively
128,983

 
114,329

Inventories
35,598

 
33,720

Prepaid expenses
11,353

 
10,711

Income taxes receivable
9,067

 
6,426

Other current assets
6,903

 
6,511

TOTAL CURRENT ASSETS
206,222

 
186,461

PROPERTY, PLANT AND EQUIPMENT, net
125,746

 
129,882

INTANGIBLES, net
9,705

 
9,936

GOODWILL
179,044

 
179,044

DEFERRED TAX ASSETS, net
13,748

 
20,605

OTHER ASSETS
49,293

 
47,124

TOTAL ASSETS
$
583,758

 
$
573,052

LIABILITIES AND EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable
$
41,607

 
$
33,720

Accrued payroll and related costs
22,817

 
19,411

Taxes other than payroll and income
7,318

 
5,816

Unearned revenue
17,046

 
15,690

Income taxes payable
943

 
15,718

Other current liabilities
11,075

 
13,668

TOTAL CURRENT LIABILITIES
100,806

 
104,023

LONG-TERM DEBT, net
233,739

 
216,488

DEFERRED COMPENSATION
49,308

 
46,251

DEFERRED TAX LIABILITIES, net
6,146

 
6,277

OTHER LONG-TERM LIABILITIES
42,307

 
44,716

COMMITMENTS AND CONTINGENCIES (Note 6)


 


EQUITY:
 
 
 

Preference shares, EUR 0.02 par value; 6,000,000 shares authorized,
none issued or outstanding

 

   Common shares, EUR 0.02 par value;
200,000,000 shares authorized, 44,796,252 issued and 44,128,235 outstanding at
2017 and 44,796,252 issued and 44,151,261 outstanding at 2016
1,148

 
1,148

Additional paid-in capital
59,043

 
52,850

Retained earnings
179,631

 
187,957

Accumulated other comprehensive income (loss)
(9,621
)
 
(9,828
)
Treasury shares (at cost), 668,017 at 2017 and 644,991 at 2016
(82,708
)
 
(80,773
)
Total Core Laboratories N.V. shareholders' equity
147,493

 
151,354

Non-controlling interest
3,959

 
3,943

TOTAL EQUITY
151,452

 
155,297

TOTAL LIABILITIES AND EQUITY
$
583,758

 
$
573,052



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

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

 
Three Months Ended
 
June 30,
 
2017
 
2016
 
(Unaudited)
REVENUE:
 
 
 
Services
$
117,239

 
$
118,172

Product sales
46,664

 
29,897

Total revenue
163,903

 
148,069

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
80,431

 
83,349

Cost of product sales, exclusive of depreciation expense shown below
36,687

 
26,650

General and administrative expense, exclusive of depreciation expense shown below
11,100

 
11,139

Depreciation
6,093

 
6,531

Amortization
209

 
220

Other (income) expense, net
(24
)
 
(47
)
OPERATING INCOME
29,407

 
20,227

Interest expense
2,692

 
3,021

Income before income tax expense
26,715

 
17,206

Income tax expense
4,006

 
671

Net income
22,709

 
16,535

Net income (loss) attributable to non-controlling interest
19

 
(89
)
Net income attributable to Core Laboratories N.V.
$
22,690

 
$
16,624

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
0.51

 
$
0.38

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
0.51

 
$
0.38

 
 
 
 
Cash dividends per share
$
0.55

 
$
0.55

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
44,164

 
43,297

Diluted
44,374

 
43,505


















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

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

 
Six Months Ended
 
June 30,
 
2017
 
2016
 
(Unaudited)
REVENUE:
 
 
 
Services
$
238,175

 
$
240,942

Product sales
83,535

 
60,774

Total revenue
321,710

 
301,716

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
164,032

 
168,643

Cost of product sales, exclusive of depreciation expense shown below
67,658

 
54,170

General and administrative expense, exclusive of depreciation expense shown below
23,856

 
22,189

Depreciation
12,295

 
13,158

Amortization
434

 
440

Other (income) expense, net
849

 
(51
)
OPERATING INCOME
52,586

 
43,167

Interest expense
5,310

 
6,455

Income before income tax expense
47,276

 
36,712

Income tax expense
6,885

 
5,060

Net income
40,391

 
31,652

Net income (loss) attributable to non-controlling interest
43

 
(54
)
Net income attributable to Core Laboratories N.V.
$
40,348

 
$
31,706

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
0.91

 
$
0.74

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
0.91

 
$
0.74

 
 
 
 
Cash dividends per share
$
1.10

 
$
1.10

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
44,162

 
42,839

Diluted
44,360

 
43,008

















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
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Net income
$
22,709

 
$
16,535

 
$
40,391

 
$
31,652

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Gain (loss) in fair value of interest rate swaps
(278
)
 
(800
)
 
(197
)
 
(2,420
)
Interest rate swap amounts reclassified to interest expense
140

 
211

 
307

 
424

Income taxes on derivatives
48

 
217

 
(39
)
 
735

Total derivatives
(90
)
 
(372
)
 
71

 
(1,261
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plans
 
 
 
 
 
 
 
Prior service cost
 
 
 
 
 
 
 
Amortization to net income of prior service cost
(19
)
 
(19
)
 
(38
)
 
(38
)
Amortization to net income of actuarial loss
110

 
148

 
220

 
296

Income taxes on pension and other postretirement benefit plans
(22
)
 
(32
)
 
(46
)
 
(64
)
Total pension and other postretirement benefit plans
69

 
97

 
136

 
194

 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
(21
)
 
(275
)
 
207

 
(1,067
)
Comprehensive income
22,688

 
16,260

 
40,598

 
30,585

Comprehensive income (loss) attributable to non-controlling interest
19

 
(89
)
 
43

 
(54
)
Comprehensive income attributable to Core Laboratories N.V.
$
22,669

 
$
16,349

 
$
40,555

 
$
30,639



























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

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CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
40,391

 
$
31,652

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

 
 

Stock-based compensation
11,563

 
11,087

Depreciation and amortization
12,729

 
13,598

Changes to value of life insurance policies
(48
)
 
(497
)
Deferred income taxes
6,766

 
(1,256
)
Other non-cash items
(561
)
 
(1,670
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(14,527
)
 
34,700

Inventories
(1,926
)
 
805

Prepaid expenses and other current assets
(3,675
)
 
(2,344
)
Other assets
(1,083
)
 
733

Accounts payable
8,443

 
(3,826
)
Accrued expenses
(12,459
)
 
(6,079
)
Unearned revenue
1,356

 
(2,987
)
Other long-term liabilities
1,507

 
(102
)
Net cash provided by operating activities
48,476

 
73,814

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(9,362
)
 
(5,302
)
Patents and other intangibles
(203
)
 
(99
)
Proceeds from sale of assets
511

 
539

Premiums on life insurance
(863
)
 
(970
)
Net cash used in investing activities
(9,917
)
 
(5,832
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Repayment of debt borrowings
(67,000
)
 
(258,676
)
Proceeds from debt borrowings
84,000

 
34,000

Excess tax benefits from stock-based compensation

 
(284
)
Non-controlling interest - dividend
(27
)
 
(211
)
Dividends paid
(48,590
)
 
(46,626
)
Repurchase of common shares
(7,388
)
 
(1,112
)
Issuance of common shares

 
197,211

Net cash used in financing activities
(39,005
)
 
(75,698
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(446
)
 
(7,716
)
CASH AND CASH EQUIVALENTS, beginning of period
14,764

 
22,494

CASH AND CASH EQUIVALENTS, end of period
$
14,318

 
$
14,778















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, 2016 (the "2016 Annual Report").

Core Laboratories N.V. uses the equity method of accounting for investments in which it has less than a majority interest and over which it does not exercise control but does exert significant influence. We use the cost method to record certain other investments in which we own less than 20% of the outstanding equity and do not exercise control or exert significant influence. Non-controlling interests have been recorded to reflect outside ownership attributable to consolidated subsidiaries that are less than 100% owned. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods presented have been included in these financial statements. Furthermore, the operating results presented for the three and six months ended June 30, 2017 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2017.

Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2016 was derived from the 2016 audited consolidated financial statements but does not include all disclosures in accordance with U.S. GAAP.

Core Lab's continuing efforts to streamline its business has led to a simplification of its reporting structure and as of January 1, 2017, the Company presents its operating results in two reporting segments: Reservoir Description and Production Enhancement. For more detail about our segments, see Note 13 - Segment Reporting.

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 or six months ended June 30, 2016.

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 consisted of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Finished goods
$
22,506

 
$
21,635

Parts and materials
11,762

 
11,185

Work in progress
1,330

 
900

Total inventories
$
35,598

 
$
33,720


We include freight costs incurred for shipping inventory to our clients in the Cost of product sales caption in the accompanying Consolidated Statements of Operations.

3.  ACQUISITIONS

We had no significant acquisitions during the six months ended June 30, 2017.


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4.  DEBT, NET

We have no capital lease obligations. Debt is as follows (in thousands):
 
June 30,
2017
 
December 31,
2016
Senior notes
$
150,000

 
$
150,000

Credit facility
85,000

 
68,000

Total debt
235,000

 
218,000

Less: Debt issuance costs
(1,261
)
 
(1,512
)
Long-term debt, net
$
233,739

 
$
216,488


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 $21.7 million at June 30, 2017, resulting in an available borrowing capacity under the Credit Facility of $293.3 million. In addition to those items under the Credit Facility, we had $13.4 million of outstanding letters of credit and performance guarantees and bonds from other sources as of June 30, 2017.

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 11 - Derivative Instruments and Hedging Activities.

The estimated fair value of total debt at June 30, 2017 and December 31, 2016 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 noncontributory defined benefit pension plan covering 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.

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The following table summarizes the components of net periodic pension cost under the Dutch Plan (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
366

 
$
375

 
$
741

 
$
733

Interest cost
268

 
342

 
543

 
669

Expected return on plan assets
(228
)
 
(287
)
 
(460
)
 
(562
)
Amortization of prior service cost
(19
)
 
(19
)
 
(38
)
 
(38
)
Amortization of actuarial loss
110

 
148

 
220

 
296

Net periodic pension cost
$
497

 
$
559

 
$
1,006

 
$
1,098


During the six months ended June 30, 2017, we contributed $1.6 million to fund the estimated 2017 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 June 30, 2017, we repurchased 58,676 of our common shares for $6.1 million; included in this total were rights to 3,676 shares valued at $0.4 million surrendered to us pursuant to the terms of a stock-based compensation plan in consideration of the participants' tax burdens that may result from the issuance of common shares under that plan. During the six months ended June 30, 2017, we repurchased 69,428 of our common shares for $7.4 million; included in this total were rights to 14,428 shares valued at $1.7 million 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 11,180 and 46,402 treasury shares upon vesting of stock-based awards during the three and six months ended June 30, 2017, respectively.

In February and May 2017, we paid quarterly dividends of $0.55 per share of common stock. In addition, on July 6, 2017, we declared a quarterly dividend of $0.55 per share of common stock for shareholders of record on July 17, 2017 and payable on August 14, 2017.


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The following table summarizes our changes in equity for the six months ended June 30, 2017 (in thousands):
 
Common Shares
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
Treasury Stock
 
Non-Controlling Interest
 
Total Equity
December 31, 2016
$
1,148

 
$
52,850

 
$
187,957

 
$
(9,828
)
 
$
(80,773
)
 
$
3,943

 
$
155,297

Adoption of ASU 2016-09 (see note 14)

 
84

 
(84
)
 

 

 

 

Stock based-awards

 
6,109

 

 

 
5,453

 

 
11,562

Repurchase of common shares

 

 

 

 
(7,388
)
 

 
(7,388
)
Dividends paid

 

 
(48,590
)
 

 

 

 
(48,590
)
Non-controlling interest dividends

 

 

 

 

 
(27
)
 
(27
)
Amortization of deferred pension costs, net of tax

 

 

 
136

 

 

 
136

Interest rate swaps, net of tax

 

 

 
71

 

 

 
71

Net income

 

 
40,348

 

 

 
43

 
40,391

 
 
 
 
 
 
 
 
 
 
 
 
 

June 30, 2017
$
1,148

 
$
59,043

 
$
179,631

 
$
(9,621
)
 
$
(82,708
)
 
$
3,959

 
$
151,452


Accumulated other comprehensive income (loss) consisted of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Prior service cost
572

 
600

Unrecognized net actuarial loss
(9,605
)
 
(9,769
)
Fair value of derivatives, net of tax
(588
)
 
(659
)
Total accumulated other comprehensive income (loss)
$
(9,621
)
 
$
(9,828
)

8.  EARNINGS PER SHARE

We compute basic earnings per common share by dividing net income attributable to Core Laboratories N.V. 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Weighted average basic common shares outstanding
44,164

 
43,297

 
44,162

 
42,839

Effect of dilutive securities:
 
 
 
 
 
 
 
Performance shares
148

 
127

 
143

 
105

Restricted stock
62

 
81

 
55

 
64

Weighted average diluted common and potential common shares outstanding
44,374

 
43,505

 
44,360

 
43,008



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9. OTHER (INCOME) EXPENSE, NET

The components of Other (income) expense, net, were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Sale of assets
$
(123
)
 
$
(122
)
 
$
(302
)
 
$
(488
)
Results of non-consolidated subsidiaries
(96
)
 
(136
)
 
(175
)
 
(324
)
Foreign exchange
358

 
433

 
455

 
1,212

Rents and royalties
(109
)
 
(98
)
 
(231
)
 
(199
)
Severance, compensation and other charges

 

 
1,145

 

Other, net
(54
)
 
(124
)
 
(43
)
 
(252
)
Total other (income) expense, net
$
(24
)
 
$
(47
)
 
$
849

 
$
(51
)

Foreign exchange gains and losses are summarized in the following table (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Gains) losses by currency

2017
 
2016
 
2017
 
2016
Angolan Kwanza
$
(4
)
 
$
43

 
$
(3
)
 
$
505

British Pound
(74
)
 
247

 
(55
)
 
475

Euro
732

 
(40
)
 
835

 
170

Mexican Peso
11

 
114

 
(28
)
 
136

Russian Ruble
(141
)
 
(57
)
 
(125
)
 
(93
)
Other currencies, net
(166
)
 
126

 
(169
)
 
19

Total (gain) loss, net
$
358

 
$
433

 
$
455

 
$
1,212


10.  INCOME TAX EXPENSE

The effective tax rates for the three months ended June 30, 2017 and 2016 were 15.0% and 3.9%, respectively. The effective tax rates for the six months ended June 30, 2017 and 2016 were 14.6% and 13.8%, respectively. Income tax expense of $4.0 million in the second quarter of 2017 increased by $3.3 million compared to $0.7 million in the same period in 2016, due to the result of several items discrete to each quarter, along with changes in activity levels in jurisdictions with differing tax rates. In addition, during the second quarter of 2016, we settled a tax audit covering the years 2010 through 2012 that resulted in the release of reserves for uncertain tax positions in the amount of $0.9 million which contributed to the lower effective tax rate in that quarter.

On March 29, 2017, the Prime Minister of the United Kingdom ("UK") formally notified the European Council of the UK's intention to withdraw from the European Union ("EU") under Article 50 of the Treaty of Lisbon. The UK's formal withdrawal may impact tax exemptions and reliefs on intra-European transactions between our UK affiliates and EU companies. In addition, it may impact transactions between our UK affiliates and non-EU based companies as EU tax treaties may no longer apply to these transactions.

Due to the uncertainty involved in evaluating the effect of the loss of tax exemptions and reliefs, we are unable to estimate the impact of these changes, if any, at this time. We will continue to monitor developments in this area.


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11.  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 and are highly effective. Unrealized losses are deferred to shareholders' equity as a component of accumulated other comprehensive loss 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 June 30, 2017, we had fixed rate long-term debt aggregating $200 million and variable rate long-term debt aggregating $35 million, after taking into account the effect of the swaps.

The fair values of outstanding derivative instruments are as follows:
 
Fair Value of Derivatives
 
 
 
June 30, 2017
 
December 31, 2016
 
Balance Sheet Classification
Derivatives designated as hedges:
 
 
 
 
 
5 year interest rate swap
$
103

 
$
211

 
Other long-term liabilities
10 year interest rate swap
833

 
835

 
Other long-term liabilities
 
$
936

 
$
1,046

 
 

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 June 30,
 
Six Months Ended
June 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
Income Statement Classification
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
5 year interest rate swap
$
46

 
$
81

 
$
105

 
$
163

 
Increase to interest expense
10 year interest rate swap
94

 
130

 
202

 
261

 
Increase to interest expense
 
$
140

 
$
211

 
$
307

 
$
424

 
 


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12.  FINANCIAL INSTRUMENTS

The Company's only financial assets and liabilities which are measured at fair value on a recurring basis 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. The following table summarizes the fair value balances (in thousands):
 
 
 
Fair Value Measurement at
 
 
 
June 30, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
26,788

 
$

 
$
26,788

 
$

Liabilities:
 

 
 

 
 
 
 
Deferred compensation plan
$
33,963

 
$

 
$
33,963

 
$

5 year interest rate swap
103

 

 
103

 

10 year interest rate swap
833

 

 
833

 

 
$
34,899

 
$

 
$
34,899

 
$


 
 
 
Fair Value Measurement at
 
 
 
December 31, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
25,530

 
$

 
$
25,530

 
$

Liabilities:
 

 
 
 
 
 
 
Deferred compensation plan
$
31,672

 
$

 
$
31,672

 
$

5 year interest rate swap
211

 

 
211

 

10 year interest rate swap
835

 

 
835

 

 
$
32,718

 
$

 
$
32,718

 
$

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

13.  SEGMENT REPORTING

Core Laboratories has taken steps to streamline its business by realigning its reporting structure into two reporting 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. In connection with the realignment of our reporting structure, amounts previously reported in our Reservoir Management segment are now presented within our Reservoir Description and Production Enhancement segments, and prior periods have been revised to conform to the current presentation.

Reservoir Description: Encompasses the characterization of petroleum reservoir rock, fluid and gas samples to increase production and improve recovery of oil and gas from our clients' reservoirs. We provide laboratory based analytical and field services to characterize properties of crude oil and petroleum products to the oil and gas industry. We also provide proprietary and joint industry studies based on these types of analysis.
Production Enhancement: Includes services and products relating to reservoir well completions, perforations, stimulations and production. We provide integrated diagnostic services to evaluate and monitor the effectiveness of well completions and to develop solutions aimed at increasing the effectiveness of enhanced oil recovery projects.


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Results for these segments are presented below. We use the same accounting policies to prepare our segment results as are used to prepare our Consolidated Financial Statements. All interest and other non-operating income (expense) is attributable to 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
 
Corporate & Other 1
 
Consolidated
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
104,313

 
$
59,590

 
$

 
$
163,903

Inter-segment revenue
47

 
249

 
(296
)
 

Segment operating income (loss)
18,670

 
10,765

 
(28
)
 
29,407

Total assets (at end of period)
319,433

 
206,096

 
58,229

 
583,758

Capital expenditures
2,098

 
769

 
46

 
2,913

Depreciation and amortization
4,528

 
1,256

 
518

 
6,302

Three Months Ended June 30, 2016
 
 
 
 
 
 
 

Revenue from unaffiliated clients
$
108,278

 
$
39,791

 
$

 
$
148,069

Inter-segment revenue
304

 
384

 
(688
)
 

Segment operating income (loss)
20,139

 
247

 
(159
)
 
20,227

Total assets (at end of period)
323,623

 
196,339

 
52,144

 
572,106

Capital expenditures
2,274

 
160

 
10

 
2,444

Depreciation and amortization
4,631

 
1,501

 
619

 
6,751

Six Months Ended June 30, 2017
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
209,208

 
$
112,502

 
$

 
$
321,710

Inter-segment revenue
221

 
450

 
(671
)
 

Segment operating income (loss)
34,610

 
18,160

 
(184
)
 
52,586

Total assets
319,433

 
206,096

 
58,229

 
583,758

Capital expenditures
4,675

 
3,789

 
898

 
9,362

Depreciation and amortization
9,148

 
2,542

 
1,039

 
12,729

Six Months Ended June 30, 2016
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
215,702

 
$
86,014

 
$

 
$
301,716

Inter-segment revenue
1,046

 
604

 
(1,650
)
 

Segment operating income (loss)
38,737

 
4,497

 
(67
)
 
43,167

Total assets
323,623

 
196,339

 
52,144

 
572,106

Capital expenditures
4,356

 
538

 
408

 
5,302

Depreciation and amortization
9,267

 
3,089

 
1,242

 
13,598

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



14.  RECENT ACCOUNTING PRONOUNCEMENTS

Pronouncements Adopted in 2017

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 price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted this standard on January 1, 2017. The adoption of this standard had no effect on our Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows.

In March 2016, the FASB issued ASU 2016-09 ("Improvements to Employee Share-Based Payment Accounting") to simplify the accounting for share-based payment transactions, including accounting for forfeitures, excess tax benefit/expense, and tax withholding requirements. Under this new guidance, (1) companies have the option to estimate how many shares in a grant will be forfeited or to elect to recognize forfeitures as they occur; (2) all excess tax benefit and expense is recognized as income tax benefit or expense in the income statement as a discrete item to the quarter, and the accumulated benefits in additional paid-in

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capital ("APIC") are eliminated; and (3) companies are able to withhold share amounts up to the statutory maximum and the award will still be classified as equity. We adopted this standard on January 1, 2017 and have elected to recognize forfeitures as they occur. This resulted in a reclassification between retained earnings and additional paid-in-capital of $84 thousand for the estimated forfeitures on unvested shares as of January 1, 2017. The adoption of this standard will result in periodic adjustments in the recognition of stock compensation expense associated with forfeitures in the period in which they occur. In addition to the income statement treatment of including the excess tax benefit/expense as a discrete income tax item each quarter, this has been removed from the Cash from financing activities section of the Statement of Cash Flows.

Pronouncements Not Yet Effective

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 currently analyzing the standard's impact on our revenues by looking at all of our revenue streams to determine the impact on our Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows. At this point, we do not anticipate any material changes to our revenue recognition policies and procedures nor to our financial statements, but extensive additional disclosures will be required.

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 do not anticipate the adoption of this standard to have a material impact on how we currently record lease transactions; however, it may have a significant impact on our Consolidated Balance Sheets, increasing both asset balances and liability balances.

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.


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

The following discussion summarizes the financial position of Core Laboratories N.V. and its subsidiaries as of June 30, 2017 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, 2016 (the "2016 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 and production enhancement 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.

Core Lab's continuing efforts to streamline its business has led to a simplification of its reporting structure and as of January 1, 2017, the Company presents its operating results in two reporting segments: Reservoir Description and Production Enhancement. 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 to increase production and improve recovery of oil and gas from our clients' reservoirs. We provide laboratory based analytical and field services to characterize properties of crude oil and petroleum products to the oil and gas industry. We also provide proprietary and joint industry studies based on these types of analysis.
Production Enhancement: Includes services and products relating to reservoir well completions, perforations, stimulations and production. We provide integrated diagnostic services to evaluate and monitor the effectiveness of well completions and to develop solutions aimed at increasing the effectiveness of enhanced oil recovery projects.

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 2016 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.

The volatility and significant reduction in the average price of crude oil during 2015 and 2016 resulted in a significant decrease in the activities associated with both the exploration and production of oil during 2015 and throughout most of 2016. Although the average price of oil and gas decreased in 2016, prices showed some signs of improvement in the second half of the year and remained more stable during the first half of 2017.

In the U.S., the land-based rig count decreased 39% during the first half of 2016, which greatly impacted both services and product sales to this market. The third quarter of 2016 marked the beginning of a recovery in onshore U.S. drilling activity that continued through the first half of 2017. According to Baker Hughes, the U.S. land-based rig count increased 15% during the second quarter of 2017 and 44% during the first half of 2017. We believe this increase is in response to the improved pricing of crude oil in the first quarter, where the average oil price increased almost 10%, although prices have been more volatile in the second quarter while trending down as the quarter progressed. We believe that further increases in the U.S. land-based rig count will begin to slow in the second half of 2017 and may flatten by the end of the year.

International and offshore activities associated with the exploration for and production of oil and natural gas also decreased during 2016, although not as significantly as the U.S. land-based activities. Our clients' activities relating to capital projects in the international and deepwater markets remained depressed throughout 2016 as well as the first half of 2017. Although several final investment decisions ("FID") have been recently announced by oil and gas companies, activities relating to those fields are not expected to materially increase in 2017 as the operators are currently developing their project plans and should begin to implement them in 2018.


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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 June 30,
 
Change
 
2017
 
2016
 
$
 
%
REVENUE:
 
 
 
 
 
Services
$
117,239

 
72
%
 
$
118,172

 
80
%
 
$
(933
)
 
(1
)%
Product sales
46,664

 
28
%
 
29,897

 
20
%
 
16,767

 
56
 %
Total revenue
163,903

 
100
%
 
148,069

 
100
%
 
15,834

 
11
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
 


 


Cost of services, exclusive of depreciation expense shown below*
80,431

 
69
%
 
83,349

 
71
%
 
(2,918
)
 
(4
)%
Cost of product sales, exclusive of depreciation expense shown below*
36,687

 
79
%
 
26,650

 
89
%
 
10,037

 
38
 %
Total cost of services and product sales
117,118

 
71
%
 
109,999

 
74
%
 
7,119

 
6
 %
General and administrative expense
11,100

 
7
%
 
11,139

 
8
%
 
(39
)
 
 %
Depreciation and amortization
6,302

 
4
%
 
6,751

 
5
%
 
(449
)
 
(7
)%
Other (income) expense, net
(24
)
 
%
 
(47
)
 
%
 
23

 
NM

Operating income
29,407

 
18
%
 
20,227

 
14
%
 
9,180

 
45
 %
Interest expense
2,692

 
2
%
 
3,021

 
2
%
 
(329
)
 
(11
)%
Income before income tax expense
26,715

 
16
%
 
17,206

 
12
%
 
9,509

 
55
 %
Income tax expense
4,006

 
2
%
 
671

 
1
%
 
3,335

 
497
 %
Net income
22,709

 
14
%
 
16,535

 
11
%
 
6,174

 
37
 %
Net income (loss) attributable to non-controlling interest
19

 
%
 
(89
)
 
%
 
108

 
NM

Net income attributable to Core Laboratories N.V.
$
22,690

 
14
%
 
$
16,624

 
11
%
 
$
6,066

 
36
 %
"NM"  means not meaningful
 
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 
 
 
 
 


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Three Months Ended
 
Change
 
Jun 30, 2017
 
Mar 31, 2017
 
$
 
%
REVENUE:
 
 
 
 
 
 
 
 
 
 
 
Services
$
117,239

 
72
%
 
$
120,936

 
77
%
 
$
(3,697
)
 
(3
)%
Product sales
46,664

 
28
%
 
36,871

 
23
%
 
9,793

 
27
 %
Total revenue
163,903

 
100
%
 
157,807

 
100
%
 
6,096

 
4
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
 

 

Cost of services, exclusive of depreciation expense shown below*
80,431

 
69
%
 
83,601

 
69
%
 
(3,170
)
 
(4
)%
Cost of product sales, exclusive of depreciation expense shown below*
36,687

 
79
%
 
30,971

 
84
%
 
5,716

 
18
 %
Total cost of services and product sales
117,118

 
71
%
 
114,572

 
73
%
 
2,546

 
2
 %
General and administrative expense
11,100

 
7
%
 
12,756

 
8
%
 
(1,656
)
 
(13
)%
Depreciation and amortization
6,302

 
4
%
 
6,427

 
4
%
 
(125
)
 
(2
)%
Other (income) expense, net
(24
)
 
%
 
873

 
1
%
 
(897
)
 
NM

Operating income
29,407

 
18
%
 
23,179

 
15
%
 
6,228

 
27
 %
Interest expense
2,692

 
2
%
 
2,618

 
2
%
 
74

 
3
 %
Income before income tax expense
26,715

 
16
%
 
20,561

 
13
%
 
6,154

 
30
 %
Income tax expense
4,006

 
2
%
 
2,879

 
2
%
 
1,127

 
39
 %
Net income
22,709

 
14
%
 
17,682

 
11
%
 
5,027

 
28
 %
Net income (loss) attributable to non-controlling interest
19

 
%
 
24

 
%
 
(5
)
 
NM

Net income attributable to Core Laboratories N.V.
$
22,690

 
14
%
 
$
17,658

 
11
%
 
$
5,032

 
28
 %
"NM"  means not meaningful
 
 
 
 
 
 
 
 
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 
 
 
 
 
 
 




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Six Months Ended June 30,
 
Change
 
2017
 
2016
 
$
 
%
REVENUE:
 
 
 
 
 
Services
$
238,175

 
74
%
 
$
240,942

 
80
 %
 
$
(2,767
)
 
(1
)%
Product sales
83,535

 
26
%
 
60,774

 
20
 %
 
22,761

 
37
 %
Total revenue
321,710

 
100
%
 
301,716

 
100
 %
 
19,994

 
7
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
 

 

Cost of services, exclusive of depreciation expense shown below*
164,032

 
69
%
 
168,643

 
70
 %
 
(4,611
)
 
(3
)%
Cost of product sales, exclusive of depreciation expense shown below*
67,658

 
81
%
 
54,170

 
89
 %
 
13,488

 
25
 %
Total cost of services and product sales
231,690

 
72
%
 
222,813

 
74
 %
 
8,877

 
4
 %
General and administrative expense
23,856

 
7
%
 
22,189

 
7
 %
 
1,667

 
8
 %
Depreciation and amortization
12,729

 
4
%
 
13,598

 
4
 %
 
(869
)
 
(6
)%
Other (income), net
849

 
%
 
(51
)
 
 %
 
900

 
NM

Operating income
52,586

 
16
%
 
43,167

 
14
 %
 
9,419

 
22
 %
Interest expense
5,310

 
2
%
 
6,455

 
2
 %
 
(1,145
)
 
(18
)%
Income before income tax expense
47,276

 
15
%
 
36,712

 
12
 %
 
10,564

 
29
 %
Income tax expense
6,885

 
2
%
 
5,060

 
2
 %
 
1,825

 
36
 %
Net income
40,391

 
13
%
 
31,652

 
10
 %
 
8,739

 
28
 %
Net income (loss) attributable to non-controlling interest
43

 
%
 
(54
)
 
 %
 
97

 
NM

Net income attributable to Core Laboratories N.V.
$
40,348

 
13
%
 
$
31,706

 
11
 %
 
$
8,642

 
27
 %
"NM"  means not meaningful
 
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 
 
 
 
 

Operating Results for the Three Months Ended June 30, 2017 Compared to the Three Months Ended March 31, 2017 and June 30, 2016 and for the Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016

Services Revenue

Services revenue decreased 3% to $117.2 million for the second quarter of 2017 from $120.9 million for the first quarter of 2017 and decreased 1% from $118.2 million in the second quarter of 2016. The sequential decrease was driven by the decrease in international activity and lower oil prices. For the six months ended June 30, 2017, services revenue decreased 1% to $238.2 million as compared to $240.9 million for the same period of 2016. We continue to focus on large-scale core analyses and reservoir fluids characterization studies in the U.S. Permian basin, offshore West and East Africa, offshore South America, and the Middle East, including Kuwait and the United Arab Emirates. Additionally, we have client interest in our existing multi-client reservoir studies such as the Tight Oil Reservoirs of the Midland Basin study and the Deepwater Gulf of Mexico ("GOM") Phase II as well as several major enhanced oil recovery ("EOR") projects for unconventional reservoirs underway in various stages in the laboratory.

Product Sales Revenue

Revenue associated with product sales increased 27% to $46.7 million for the second quarter of 2017 from $36.9 million for the first quarter of 2017 and increased 56% from $29.9 million in the second quarter of 2016. Our product sales revenue is primarily driven by completions of wells in the North American market and, more specifically, the activity associated with the completion of each stage in a wellbore. We continue to benefit from increasing completion activity in the U.S. as revenue from U.S. land-based completions increased 111% on a year-over-year quarterly basis. This outpaced the 47% increase in U.S. well completions for the same periods, indicating increased market penetration of our newly introduced HERO® PerFRAC technology. For the six months ended June 30, 2017, product sales revenue increased 37% to $83.5 million as compared to $60.8 million for the same period of 2016.


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Cost of Services, excluding depreciation

Cost of services expressed as a percentage of services revenue was 69% for the three months ended June 30, 2017, compared to 69% and 71% for the three months ended March 31, 2017 and June 30, 2016, respectively. Cost of services as a percentage of services revenue remained consistent at 69% and 70% for the six months ended June 30, 2017 and June 30, 2016, respectively.

Cost of Product Sales, excluding depreciation

Cost of product sales expressed as a percentage of product sales revenue improved to 79% for the three months ended June 30, 2017, compared to 84% and 89% for the three months ended March 31, 2017 and June 30, 2016, respectively. Cost of product sales expressed as a percentage of product sales revenue improved to 81% for the six months ended June 30, 2017, compared to 89% for the same period in 2016. The decrease in cost of product sales as a percentage of revenue was primarily due to the improved absorption of our fixed costs as a result of increased revenue and activity.

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 months ended June 30, 2017 was $11.1 million compared to $12.8 million and $11.1 million for the three months ended March 31, 2017 and June 30, 2016, respectively. The sequential decrease was primarily due to lower compensation costs in the second quarter of 2017. General and administrative expense for the six months ended June 30, 2017 was $23.9 million compared to $22.2 million for the same period in 2016, primarily due to lower compensation costs in 2016.

Depreciation and Amortization Expense

Depreciation and amortization expense for the three months ended June 30, 2017 was $6.3 million compared to $6.4 million and $6.8 million for the three months ended March 31, 2017 and June 30, 2016, respectively. Depreciation and amortization expense for the six months ended June 30, 2017 was $12.7 million compared to $13.6 million for the same period in 2016.

Other (Income) Expense, Net

The components of other (income) expense, net, were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Sale of assets
$
(123
)
 
$
(122
)
 
$
(302
)
 
$
(488
)
Results of non-consolidated subsidiaries
(96
)
 
(136
)
 
(175
)
 
(324
)
Foreign exchange
358

 
433

 
455

 
1,212

Rents and royalties
(109
)
 
(98
)
 
(231
)
 
(199
)
Severance, compensation and other charges

 

 
1,145

 

Other, net
(54
)
 
(124
)
 
(43
)
 
(252
)
Total other (income) expense, net
$
(24
)
 
$
(47
)
 
$
849

 
$
(51
)



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Foreign exchange (gain) loss, net by currency is summarized in the following table (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Angolan Kwanza
$
(4
)
 
$
43

 
$
(3
)
 
$
505

British Pound
(74
)
 
247

 
(55
)
 
475

Euro
732

 
(40
)
 
835

 
170

Mexican Peso
11

 
114

 
(28
)
 
136

Russian Ruble
(141
)
 
(57
)
 
(125
)
 
(93
)
Other currencies, net
(166
)
 
126