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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File Number 001-14273
CORE LABORATORIES N.V.
(Exact name of registrant as specified in its charter)
The Netherlands Not Applicable
State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Herengracht 424
1017 BZ Amsterdam
The Netherlands Not Applicable
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (31-20)420-3191
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 X No
-------- ------
The number of common shares of the Registrant, par value EUR 0.01 per
share, outstanding at May 13, 2002 was 33,240,821.
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CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002
INDEX
Page
Part I -- Financial Information
Item 1 -- Financial Statements
Consolidated Balance Sheets at March 31, 2002 and December 31, 2001......................... 1
Consolidated Statements of Operations for the Three Months Ended
March 31, 2002 and 2001................................................................ 2
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001................................................................ 3
Notes to Consolidated Financial Statements ................................................. 4
Item 2-- Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................ 10
Item 3-- Quantitative & Qualitative Disclosures of Market Risk.................................. 15
Part II -- Other Information
Item 1-- Legal Proceedings...................................................................... 16
Item 2-- Changes in Securities.................................................................. 16
Item 3-- Defaults Upon Senior Securities........................................................ 16
Item 4-- Submission of Matters to a Vote of Security Holders ................................... 16
Item 5-- Other Information...................................................................... 16
Item 6-- Exhibits and Reports on Form 8-K....................................................... 16
Signature ....................................................................................... 17
ii
CORE LABORATORIES N.V.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 31, 2002 December 31, 2001
-------------- -----------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 15,467 $ 14,456
Accounts receivable, less allowance for doubtful accounts of
$7,760 and $7,829 in 2002 and 2001, respectively..........................
95,913 104,933
Inventories ................................................................ 39,366 41,109
Prepaid expenses and other.................................................. 12,615 9,728
Deferred tax asset.......................................................... 9,464 9,123
---------- ----------
Total current assets............................................................. 172,825 179,349
PROPERTY, PLANT AND EQUIPMENT, net............................................... 96,305 97,615
INTANGIBLES AND GOODWILL, net.................................................... 135,271 151,257
OTHER LONG-TERM ASSETS........................................................... 11,301 11,279
---------- ----------
Total assets..................................................... $ 415,702 $ 439,500
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........................................ $ 455 $ 454
Accounts payable................................................................. 15,946 19,721
Other accrued expenses...................................................... 13,890 19,832
---------- ----------
Total current liabilities........................................................ 30,291 40,007
LONG-TERM DEBT .................................................................. 94,000 95,089
OTHER LONG-TERM LIABILITIES...................................................... 28,534 27,983
MINORITY INTEREST................................................................ 745 815
SHAREHOLDERS' EQUITY:
Preference shares, EUR 0.01 par value; 3,000,000 shares authorized,
no shares issued or outstanding......................................... -- --
Common shares, EUR 0.01 par value; 100,000,000 shares authorized,
33,233,571 and 33,204,571 issued and outstanding
at March 31, 2002 and December 31, 2001, respectively................... 546 546
Additional paid-in capital.................................................. 186,957 186,751
Retained earnings........................................................... 74,629 88,309
---------- ----------
Total shareholders' equity.............................................. 262,132 275,606
---------- ----------
Total liabilities and shareholders' equity......................... $ 415,702 $ 439,500
---------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
1
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Three Months Ended
March 31,
---------------------
2002 2001
----- ----
(Unaudited)
SERVICES..........................................................................$ 69,599 $ 73,525
SALES............................................................................. 15,465 17,821
----------- ----------
85,064 91,346
OPERATING EXPENSES:
Cost of services............................................................ 55,056 56,424
Cost of sales............................................................... 13,882 15,076
General and administrative expenses ........................................ 4,665 3,560
Depreciation and amortization............................................... 4,749 4,385
Goodwill amortization....................................................... - 1,033
Other income, net........................................................... 561 398
----------- ----------
78,913 80,876
INCOME BEFORE INTEREST EXPENSE, INCOME TAX EXPENSE
AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................................... 6,151 10,470
INTEREST EXPENSE................................................................. 1,968 1,978
----------- ----------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................................... 4,183 8,492
INCOME TAX EXPENSE............................................................... 1,171 2,378
----------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................................................ 3,012 6,114
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.............................. (16,692) -
----------- ----------
NET (LOSS) INCOME................................................................ $ (13,680) $ 6,114
=========== ==========
PER SHARE INFORMATION:
BASIC EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE.............................. $ 0.09 $ 0.19
=========== ==========
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......................... $ (0.50) $ -
=========== ==========
BASIC (LOSS) EARNINGS PER SHARE............................................ $ (0.41) $ 0.19
=========== ==========
WEIGHTED AVERAGE BASIC COMMON SHARES
OUTSTANDING........................................................... 33,209,793 32,885,031
=========== ==========
DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE.............................. $ 0.09 $ 0.18
=========== ==========
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......................... $ (0.50) $ -
=========== ==========
DILUTED (LOSS) EARNINGS PER SHARE.......................................... $ (0.41) $ 0.18
=========== ==========
WEIGHTED AVERAGE DILUTED COMMON SHARES
OUTSTANDING........................................................... 33,693,688 33,958,092
=========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
2
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
--------------------------
2002 2001
----------- ----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ (13,680) $ 6,114
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Cumulative effect of change in accounting principle..................... 16,692 -
Deferred tax expense.................................................... 109 81
Depreciation and amortization........................................... 4,749 5,417
Debt issuance costs..................................................... 136 136
Gain on sale of fixed assets............................................ (112) (15)
Changes in assets and liabilities:
Decrease in accounts receivable......................................... 8,183 5,943
(Increase) decrease in inventories...................................... 1,743 (1,430)
Increase in prepaid expenses............................................ (1,115) (2,691)
Decrease in accounts payable............................................ (3,775) (6,040)
Increase (decrease) in payroll taxes.................................... (430) 156
Increase (decrease) in income tax payable............................... (988) 2,703
Decrease in taxes other than payroll and income......................... (1,824) (688)
Decrease in other accrued expenses...................................... (3,329) (1,648)
Increase (decrease) in other long-term liabilities...................... 157 (166)
Other................................................................... (509) 494
----------- ----------
Net cash provided by operating activities.......................... 6,007 8,366
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (4,013) (5,411)
Proceeds from sale of fixed assets.......................................... 299 22
Other ...................................................................... (467) 15
----------- ----------
Net cash used in investing activities................................... (4,181) (5,374)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt.................................................. (5,014) (3,087)
Borrowings under long-term debt............................................. 4,002 -
Capital lease obligation, net............................................... (8) (88)
Exercise of stock options................................................... 206 1,422
Other....................................................................... (1) (29)
----------- ----------
Net cash used in financing activities................................... (815) (1,782)
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ 1,011 1,210
CASH AND CASH EQUIVALENTS, beginning of period................................... 14,456 12,519
----------- ----------
CASH AND CASH EQUIVALENTS, end of period......................................... $ 15,467 $ 13,729
=========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Core Laboratories N.V. and have been prepared in accordance with
United States of America ("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, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. Balance sheet information as of
December 31, 2001 was derived from the 2001 annual audited financial statements.
These financial statements should be read in conjunction with the financial
statements and the summary of significant accounting policies and notes thereto
included in our Form 10-K for the year ended December 31, 2001.
Recent Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS 143 requires that the fair value of a
liability associated with an asset retirement be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset and subsequently depreciated over the life of the asset.
SFAS 143 will be effective for fiscal years beginning after December 31, 2002.
We do not expect SFAS 143 to have a material adverse effect on our financial
position or results of operations.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." SFAS 144 provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets and modifies the accounting and reporting of
discontinued operations. SFAS 144 is effective for fiscal years beginning after
December 31, 2001. We do not expect SFAS 144 to have a material adverse effect
on our financial position or results of operations.
In November 2001, the Emerging Issues Task Force ("EITF") staff issued
Topic D-103, "Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred." As a result, customer reimbursements,
including those relating to travel and other out-of-pocket expenses and other
similar third-party costs, will be required to be included as revenues effective
January 1,
4
2002, and an equivalent amount of reimbursable expenses will be
included in expenses. We do not expect EITF Topic D-103 to have an impact on our
financial position or results of operations.
2. INVENTORIES
Inventories consist of manufactured goods, materials and supplies used for
sales or services provided to customers. Inventories are stated at the lower of
average or standard cost (includes direct material, labor and overhead) or
estimated net realizable value, and are reflected net of valuation reserves of
$1,824,000 and $1,847,000 at March 31, 2002 and December 31, 2001. Respectively,
inventories consisted of the following (in thousands):
March 31, December 31,
2002 2001
----------------- -----------------
(Unaudited)
Finished goods....................... $ 28,722 $ 30,120
Parts and materials.................. 6,433 6,561
Work in process...................... 4,211 4,428
----------------- -----------------
Total inventories...... $ 39,366 $ 41,109
----------------- -----------------
3. BUSINESS COMBINATIONS, INTANGIBLES AND GOODWILL
Intangibles include patents, trademarks, service marks and trade names.
Goodwill represents the excess of purchase price over the value of the net
assets and individual intangibles acquired in acquisitions accounted for as
purchases. Intangibles are charged to expense in equal amounts over their
estimated useful lives.
In June 2001, the FASB issued two statements, SFAS 141, "Business
Combinations", and SFAS 142, "Goodwill and Other Intangible Assets", that amend
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations", and
supersede APB Opinion No. 17, "Intangible Assets." SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations and
establishes the purchase method of accounting as the only acceptable method on
all business combinations initiated after June 30, 2001. Goodwill resulting from
a business combination after June 30, 2001 was recognized as an asset but not
amortized, while goodwill existing at June 30, 2001 was amortized through
December 31, 2001. Beginning January 1, 2002, we no longer amortize goodwill but
will test for impairment annually or more frequently if circumstances indicate a
potential impairment. We determined our reporting unit level to be our operating
units. Using the discounted cash flow method under the requirements of SFAS 142,
we have reflected impairment of goodwill of approximately $16.7 million related
to our Reservoir Management Segment as a result of adoption of SFAS 142 on
January 1, 2002. This impairment is reflected in the statement of operations as
a cumulative effect of change in accounting principle. The cessation of goodwill
amortization under the guidelines will result in a reduction of approximately
$4.2 million in annual operating expenses, assuming no additional impairment of
goodwill. The components of intangibles and goodwill are as follows:
5
Original
Life March 31, December 31,
in Years 2002 2001
------------- ------------- --------------
(Unaudited)
(in thousands)
Acquired trade secrets................................ 5 $ 165 $ 165
Acquired patents, trademarks and trade names... 10-20 4,965 4,944
Acquired trade name................................. 40 4,730 4,704
------------- ------------
Total intangibles............................. 9,860 9,813
------------- ------------
Total goodwill............................... 142,661 160,728
------------- ------------
Total intangibles and goodwill......... 152,521 170,541
Less - accumulated amortization.................. 17,250 19,284
------------- ------------
Net intangibles and goodwill...... $ 135,271 $ 151,257
============= ============
4. LONG-TERM DEBT
Long-term debt is summarized in the following table (in thousands):
March 31, December 31,
2002 2001
------------- -------------
(Unaudited)
Credit Facility with a bank group:
$100,000 revolving debt facilities......................... $ 19,000 $ 20,000
Senior Notes.................................................. 75,000 75,000
Other indebtedness............................................ 455 543
------------- -------------
Total debt.............................................. 94,455 95,543
Less - current maturities..................................... 455 454
------------- -------------
Total long-term debt................................. $ 94,000 $ 95,089
============= =============
In July 1999, we entered into a $100 million Credit Facility which provides
for (i) a committed revolving debt facility of $95 million and (ii) a
Netherlands guilder denominated revolving debt facility with U.S. dollar
equivalency of $5 million. At March 31, 2002, approximately $81 million was
available for borrowing under the revolving credit facility. Loans under the
Credit Facility bear interest from LIBOR plus 1.25% to a maximum of LIBOR plus
1.75%. The average interest rate in effect at March 31, 2002 was 3.51% and the
average for 2002 was 3.33%. The revolving credit facilities require interest
payments only, until maturity in June 2004.
In July 1999, we issued $75 million in Senior Notes which bear an average
interest rate of 8.16% and require annual principal payments beginning in July
2005 and continuing through July 2011.
The terms of the Credit Facility and Senior Notes require us to meet
certain financial covenants, including certain minimum equity and cash flow
tests. We believe that we are in compliance with all such covenants contained in
our credit agreements. All of our material wholly owned subsidiaries are
guarantors or co-borrowers under both credit agreements.
6
5. RESTRUCTURING CHARGES
During the fourth quarter of 2001, we had several transactions which
impacted certain operations that were not viewed as ongoing. We restructured
certain operations in Mexico, the United Kingdom, the U.S. and other countries
to improve operating efficiencies. This restructuring expense included
write-offs of assets and leasehold improvements, and an accrual for facility
restoration, severance benefits and lease termination costs. Approximately 100
field employees were terminated. During 2002, we intend to relocate one of our
operations from Dallas to the Houston Advanced Technology Center and another
facility from Mexico City, Mexico to Villahermosa, Mexico. This charge of
approximately $3.0 million affected each of our operating segments as follows:
Reservoir Description - $0.8 million; Production Enhancement - $0.1 million;
Reservoir Management - $2.1 million. Substantially all employee terminations
were completed by the end of the first quarter of 2002. Total cash required for
this restructuring charge of $2.1 million will be funded from operating
activities. Cash required for the costs incurred through March 31, 2002 was $0.9
million. This charge is summarized in the following table:
Restructuring Charge
(in thousands)
Lease Asset
Obligations Severance Restoration Write-offs (1) Other Total
----------- ----------- ----------- ----------- ----------- -----------
Total restructuring charges.............. $ 598 $ 951 $ 380 $ 862 $ 184 $ 2,975
Less: Costs incurred through
December 31, 2001............... 38 394 -- 862 40 1,334
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at December 31, 2001... 560 557 380 -- 144 1,641
----------- ----------- ----------- ----------- ----------- -----------
Less: Costs incurred through
March 31, 2002.................. 40 355 -- -- -- 395
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at March 31, 2002 ... $ 520 $ 202 $ 380 $ -- $ 144 $ 1,246
=========== =========== =========== =========== =========== ===========
1) The fixed assets and leasehold improvements were disposed of by the end of
December 2001. The write-off approximates the carrying amount as these assets
were abandoned or sold for salvage value. Depreciation expense was reduced by
approximately $20 in 2001, and will be reduced by $82 in 2002 and $281
thereafter. The asset write-offs of $862 were attributable to the Reservoir
Management segment.
6. SEGMENT REPORTING
Our business units have been aggregated into three complementary segments
which provide products and services for improving reservoir performance and
increasing oil and gas recovery from new and existing fields.
o Reservoir Description: Encompasses the characterization of petroleum
reservoir rock, fluid and gas samples. We provide analytical and field
services to characterize properties of crude oil and petroleum products
to the oil and gas industry.
o Production Enhancement: Includes products and services relating to
reservoir well completions, perforations, stimulations and production.
We provide integrated services to evaluate the effectiveness of well
completions and to develop solutions aimed at increasing the
effectiveness of enhanced oil recovery projects.
7
o Reservoir Management: Combines and integrates information from
reservoir description and production enhancement services to increase
production and improve recovery of oil and gas from our clients'
reservoirs.
Segment Analysis
We manage our business segments separately due to the different
technologies each segment utilizes and requires. Results of these segments are
presented below using the same accounting policies as used to prepare the
Consolidated Balance Sheets and Statements of Operations. We evaluate
performance based on income or loss from operations before income tax, interest
and other non-operating income (expense). Summarized financial information
concerning our segments is shown in the following table (in thousands):
Three Months Ended March 31,
2002 2001
-----------------------------------------
Revenues (Unaudited)
Reservoir Description.......$ 49,637 $ 48,166
Production Enhancement...... 23,402 26,759
Reservoir Management........ 12,025 16,421
--------------- ----------------
Consolidated..............$ 85,064 $ 91,346
=============== ================
Three Months Ended March 31,
2002 2001
-----------------------------------------
Income (loss) before interest and
taxes and cumulative effect of
change in accounting principle
(Unaudited)
Reservoir Description....... $ 5,011 $ 6,116
Production Enhancement...... 918 3,777
Reservoir Management........ 453 625
Corporate and Other (1)..... (231) (48)
-------------- ---------------
Consolidated.............. $ 6,151 $ 10,470
============== ===============
1) "Corporate and Other" represents those items that are not directly
related to a particular segment.
7. EARNINGS PER SHARE
We present earnings per share in accordance with SFAS No. 128, "Earnings
per Share" which requires dual presentation of both basic and diluted earnings
per share on the Consolidated Statement of Operations. Basic earnings per common
share is computed by dividing net income available to common stockholders by the
weighted average number of common share outstanding during the period. Diluted
earnings per share reflects the net additional shares which would be issued if
all dilutive stock options outstanding were exercised.
8
The following table summarizes the calculation of weighted average common
shares outstanding used in the computation of earnings per share:
Three Months
Ended March 31,
2002 2001
--------------------------
Weighted average basic common shares outstanding. 33,209,793 32,885,031
Effect of dilutive stock options (1)............. 483,895 1,073,061
---------- ----------
Weighted average diluted common shares outstanding 33,693,688 33,958,092
========== ==========
1) Options totaling 2,363,426 and 14,676 equivalent common shares were not
included in the computation of weighted average diluted common shares for the
three months ended March 31, 2002, and 2001, respectively, because the impact
of these options was anti- dilutive.
9
CORE LABORATORIES N.V.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This discussion includes 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. We have based the forward-looking statements
relating to our operations on our current expectations, estimates and
projections. We caution you that these statements are not guarantees of future
performance and involve risks and uncertainties that we cannot predict. In
addition, we have based many of these forward-looking statements on assumptions
about future events that may prove to be inaccurate. Accordingly, our actual
outcomes and results may differ materially from what we have expressed or
forecast in the forward-looking statements. Our forward-looking statements are
based on assumptions that we believe to be reasonable but that may not prove to
be accurate. All of our forward-looking information is, therefore, subject to
risks and uncertainties that could cause actual results to differ materially
from the results expected. Although it is not possible to identify all factors,
these risks and uncertainties include the risk factors discussed below.
Industry risks
The oil and gas industry is highly cyclical and there are numerous
factors affecting the supply of and demand for oil and natural gas, which
include:
o market prices of oil and gas;
o cost of producing oil and natural gas;
o the level of drilling and production activity;
o mergers, consolidations and downsizing among our clients;
o coordination by the OPEC; and
o the impact of commodity prices on the expenditure levels of our
customers.
Business risks
Our results of operations could be adversely affected by risks and
uncertainties in the business environment in which we operate, including:
o competition in our markets;
o the realization of anticipated synergies from acquired businesses and
future acquisitions; o our ability to continue to develop or acquire
new and useful technology; and
o interest rates and the cost of capital.
International risks
We conduct our business in over 50 countries and are subject to
political and economic instability and the laws and regulations in the countries
in which we operate. These include:
10
o global economic conditions;
o political actions and requirements of national governments including
trade restrictions, and embargos and expropriations of assets;
o potential income tax liabilities in multiple jurisdictions;
o civil unrest;
o fluctuations and changes in currency exchange rates; and
o the impact of inflation.
Other risks
The events of September 11, the economic downturn and political events
that followed and continue to unfold could result in lower demand for our
products and services. Our client base could be impacted by events we cannot
predict or we could be impacted by a change in the conduct of business,
transportation and security measures. In addition we are subject to other risk
factors such as the impact of environmental regulations, litigation risks as
well as the dependence on the oil and gas industry. Many of these risks are
beyond our control. In addition, future trends for pricing, margins, revenues
and profitability remain difficult to predict in the industries we serve and
under current economic and political conditions. We do not feel obligated to
publicly update any of our forward-looking statements.
Our operations are subject to various risk and other factors including,
but not limited to:
o our ability to continue to develop or acquire new and useful technology.
o the realization of anticipated synergies from acquired businesses and
future acquisitions.
o our dependence on the oil and gas industry, and the impact of commodity
prices on the expenditure levels of our customers.
o competition in our markets.
o the risks and uncertainties attendant to adverse industry, political,
economic and financial market conditions, including stock prices,
government regulations, interest rates and credit availability.
Core Laboratories 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 to the oil and gas industry. These
services are directed toward enabling our clients to improve reservoir
performance and increase oil and gas recovery from their producing fields. We
have over 70 offices in more than 50 countries and have approximately 4,200
employees.
Results of Operations
Service revenues for the first quarter of 2002 decreased $3.9 million, or
5% from the same period last year, primarily due to decreased worldwide oilfield
activities.
Cost of services expressed as a percentage of service revenue were 79% and
77% in the first quarter of 2002 and the same period last year, respectively.
Our relatively fixed cost structure for our services caused our cost of
services, in relation to revenues, to rise in the first quarter of 2002 compared
to same time period in the prior year.
11
Sales revenues decreased to $15.5 million in the first quarter of 2002 from
$17.8 million in the first quarter of 2001, a 13% decrease. This decrease was
caused, in most part, to the deep decline in drilling for natural gas in the
North American markets. Consequently, there was lower demand for our well
completion products.
Cost of sales in the first quarter of 2002 was 90% of sales revenue as
compared to 85% the same period last year. We have taken further actions,
including reducing headcount an additional 15%, in our manufacturing operations
in an effort to reduce cost of sales.
General and administrative expenses are comprised of corporate management
and centralized administrative services which benefit our operating
subsidiaries. Although general and administrative expenses are generally more
fixed in nature as a percentage of revenues, we did experience an increase of
$1.1 million in 2002 compared to the prior year which was largely attributable
to growth in the number of people necessary to support increases in the scope of
our operations. Part of the increase was due to an increase in our direct
marketing effort focused on providing integrated solutions to our clients.
Depreciation and amortization expense for the first quarter of 2002
increased $0.4 million as compared to the corresponding period in 2001. This
increase was due to additional capital investments, which include an extension
to the new Houston facility.
As a result of adoption of SFAS 142 beginning January 1, 2002, we no longer
amortize goodwill but will test for impairment annually or more frequently if
circumstances indicate a potential impairment. Under the requirements, we have
reflected impairment of goodwill of approximately $16.7 million related to our
Reservoir Management segment. This impairment is reflected in the statement of
operations as a cumulative effect of a change in accounting principle. The
cessation of goodwill amortization under the guidelines will result in a
reduction of approximately $4.2 million in annual operating expenses, assuming
no additional impairment of goodwill.
Included in other income are foreign exchange charges of $0.9 million
primarily related to Venezuela.
The effective income tax rate remained at 28% for both periods.
During the fourth quarter of 2001, we had several transactions which
impacted certain operations that were not viewed as ongoing. We restructured
certain operations in Mexico, the United Kingdom, the U.S. and other countries
to improve operating efficiencies. This restructuring expense included
write-offs of assets and leasehold improvements, and an accrual for facility
restoration, severance benefits and lease termination costs. Approximately 100
field employees were terminated. During 2002, we intend to relocate one of our
operations from Dallas to the Houston Advanced Technology Center and another
facility from Mexico City, Mexico to Villahermosa, Mexico. This charge of
approximately $3.0 million affected each of our operating segments as follows:
Reservoir Description - $0.8 million; Production Enhancement - $0.1 million;
Reservoir Management - $2.1 million. Substantially all employee terminations
were completed by the end of the first quarter of 2002. Total cash required for
this restructuring charge of $2.1 million will be funded from operating
activities. Cash required for the costs incurred through March 31, 2002 was $0.9
million. This charge is summarized in the following table:
12
Restructuring Charge
(in thousands)
Lease Asset
Obligations Severance Restoration Write-offs (1) Other Total
----------- ----------- ----------- ----------- ----------- -----------
Total restructuring charges.............. $ 598 $ 951 $ 380 $ 862 $ 184 $ 2,975
Less: Costs incurred through
December 31, 2001............... 38 394 -- 862 40 1,334
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at December 31, 2001... 560 557 380 -- 144 1,641
----------- ----------- ----------- ----------- ----------- -----------
Less: Costs incurred through
March 31, 2002.................. 40 355 -- -- -- 395
----------- ----------- ----------- ----------- ----------- -----------
Accrual remaining at March 31, 2002 ... $ 520 $ 202 $ 380 $ -- $ 144 $ 1,246
=========== =========== =========== =========== =========== ===========
1) The fixed assets and leasehold improvements were disposed of by the end of
December 2001. The write-off approximates the carrying amount as these assets
were abandoned or sold for salvage value. Depreciation expense was reduced by
approximately $20 in 2001, and will be reduced by $82 in 2002 and $281
thereafter. The asset write-offs of $862 were attributable to the Reservoir
Management segment.
Segment Analysis
(in Thousands)
Three Months Ended March 31,
2002 2001
-----------------------------------------
Revenues (Unaudited)
Reservoir Description.......$ 49,637 $ 48,166
Production Enhancement...... 23,402 26,759
Reservoir Management........ 12,025 16,421
--------------- ----------------
Consolidated..............$ 85,064 $ 91,346
=============== ================
Three Months Ended March 31,
2002 2001
-----------------------------------------
Income (loss) before interest and
taxes and cumulative effect of
change in accounting principle
(Unaudited)
Reservoir Description....... $ 5,011 $ 6,116
Production Enhancement...... 918 3,777
Reservoir Management........ 453 625
Corporate and Other (1)..... (231) (48)
-------------- ---------------
Consolidated.............. $ 6,151 $ 10,470
============== ===============
1) "Corporate and Other" represents those items that are not directly
related to a particular segment.
Reservoir Description
Revenues from the Reservoir Description segment increased $1.5 million in
the first quarter of 2002. Increased international demand for our existing
services and deepwater services, as well as the introduction of new technologies
into international arenas, bolstered revenue in this segment. Income before
interest and taxes decreased by $1.1 million due to decreased margins due to
seasonal slowness and the reduced worldwide economic activity causing a negative
impact on our crude oil and petroleum product characterization unit.
13
Production Enhancement
Revenues from the Production Enhancement segment were $23.4 million in the
first quarter of 2002 compared to $26.8 million in the same period in the prior
year, a decrease of 13%, due to decreased demand for our well completion and
stimulation technologies; primarily in North American markets. Income before
interest and taxes decreased $2.9 million to $0.9 million, a 76% decrease, again
caused by the severity of the reduction in activity. The rig count in North
America dropped by 38% compared to the corresponding period in the prior year.
Reservoir Management
Revenues from the Reservoir Management segment in the first quarter of 2002
were $12.0 million, a decrease of $4.4 million compared to the same period in
the prior year due to decreasing activity levels of our clients and our decision
not to attain business with unacceptable earnings' margins. Despite this
decrease in revenue our income before interest and taxes remained at a constant
level, as we were able to significantly reduce our cost structure in this unit
after taking the restructuring charge in the fourth quarter of 2001.
Liquidity and Capital Resources
We have historically financed our activities through cash flows from
operations, bank credit facilities, equity financing and the issuance of debt.
During the first quarter of 2002, cash flows from operating activities were
$6.0 million, a decrease of $2.4 million from the same period in 2001. At March
31, 2002, we had working capital of $142.5 million and a current ratio of 5.7 to
1.0, compared to working capital of $139.3 million and a current ratio of 4.5 to
1.0 at December 31, 2001. We are a Netherlands holding company and we conduct
substantially all of our operations through subsidiaries. Consequently, our cash
flow is dependent upon the ability of our subsidiaries to pay cash dividends or
otherwise distribute or advance funds to us.
Our investing activities used $4.2 million in the first quarter of 2002
compared to $5.4 million in the same period in 2001 due to a reduction in our
capital expenditure program. Our financing activities used $0.8 million in the
first quarter of 2002, and $1.8 million in the same period in 2001.
Our ability to maintain and grow our operating income and cash flows is
dependent upon continued investing activities. We believe our future cash flows
from operations, supplemented by our borrowing capacity and issuances of
additional equity should be sufficient to fund debt requirements, capital
expenditures, working capital and future acquisitions.
14
CORE LABORATORIES N.V.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Market Risk
We are exposed to market risk, which is the potential loss arising from
adverse changes in market prices and rates. We do not enter, or intend to enter,
into derivative financial instruments for trading or speculative purposes. We do
not believe that our exposure to market risks, which are primarily related to
interest rate changes and fluctuations in foreign exchange rates, are material.
During 1999, we issued fixed rate Senior Notes denominated in U.S. dollars. The
proceeds were used to pay off variable rate term loans. This significantly
reduced our exposure to market risk. This section should be read in conjunction
with "Note 4 - Long-Term Debt" of the Notes to Consolidated Financial
Statements.
Interest Rate Risk
We are exposed to interest rate risk on our Credit Facility debt that
carries a variable interest rate. At March 31, 2002, our variable rate debt
outstanding of $19.0 million approximated its fair value. A one percent change
in the interest rate would not cause a material change in interest expense on an
annual basis. We attempt to balance the benefit of variable rate debt that has
inherent increased risk with fixed rate debt that has less market risk.
15
CORE LABORATORIES N.V.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
We are from time to time subject to legal proceedings and claims that arise
in the ordinary course of business. We believe that the outcome of current legal
actions will not have a material adverse effect upon our consolidated financial
position or results of operations.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
All references to the nominal value of EUR 0.01 (formerly NLG 0.03) of each
share in the share capital of Core Laboratories N.V. is made with reference to
article 2:67c of the Dutch Civil Code.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Core Laboratories N.V. 1995 Long Term Incentive Plan (as amended
and restated) Employee Bonus Restricted Share Agreement.
10.2 Core Laboratories N.V. 1995 Long Term Incentive Plan (as amended
and restated) Executive Share Matching Restricted Share
Agreement.
10.3 Core Laboratories N.V. 1995 Long Term Incentive Plan (as amended
and restated) Performance Share Award Restricted Share Agreement.
10.4 Third Amendment to Supplemental Executive Retirement Plan (John
D. Denson).
10.5 Third Amendment to Supplemental Executive Retirement Plan (Monty
L. Davis).
10.6 Third Amendment to Supplemental Executive Retirement Plan (Joseph
R. Perna, David M. Demshur, Stephen D. Weinroth and Richard L.
Bergmark).
(b) Reports on Form 8-K
During the quarter ended March 31, 2002, we filed Form 8-K,
reporting under Item 4 "Change in Registrant's Certifying Accountant".
The report disclosed the decision to no longer engage Arthur Andersen
LLP as our independent public accountants and our appointment of
PricewaterhouseCoopers LLP.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Core Laboratories N.V., has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CORE LABORATORIES N.V.
by: Core Laboratories International B.V.
Dated: May 15, 2002 By: /s/ Richard L. Bergmark
------------------------------
Richard L. Bergmark
Chief Financial Officer
17