10-Q 1 clb-2017930x10q.htm 2017 Q3 10-Q Document


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
(Mark One)
 
Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 23, 2017 was 44,147,365.




CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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)
 
September 30,
2017
 
December 31,
2016
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
13,780

 
$
14,764

Accounts receivable, net of allowance for doubtful accounts of $3,050 and $3,139 at 2017 and 2016, respectively
129,656

 
114,329

Inventories
34,499

 
33,720

Prepaid expenses
10,019

 
10,711

Income taxes receivable
8,801

 
6,426

Other current assets
6,374

 
6,511

TOTAL CURRENT ASSETS
203,129

 
186,461

PROPERTY, PLANT AND EQUIPMENT, net
124,120

 
129,882

INTANGIBLES, net
9,533

 
9,936

GOODWILL
179,044

 
179,044

DEFERRED TAX ASSETS, net
15,574

 
20,605

OTHER ASSETS
51,344

 
47,124

TOTAL ASSETS
$
582,744

 
$
573,052

LIABILITIES AND EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable
$
34,904

 
$
33,720

Accrued payroll and related costs
25,576

 
19,411

Taxes other than payroll and income
7,275

 
5,816

Unearned revenue
14,297

 
15,690

Income taxes payable
1,223

 
15,718

Other current liabilities
9,863

 
13,668

TOTAL CURRENT LIABILITIES
93,138

 
104,023

LONG-TERM DEBT, net
233,864

 
216,488

DEFERRED COMPENSATION
51,286

 
46,251

DEFERRED TAX LIABILITIES, net
5,099

 
6,277

OTHER LONG-TERM LIABILITIES
46,060

 
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 44,147,284 outstanding at
2017 and 44,796,252 issued and 44,151,261 outstanding at 2016
1,148

 
1,148

Additional paid-in capital
61,768

 
52,850

Retained earnings
176,446

 
187,957

Accumulated other comprehensive income (loss)
(9,510
)
 
(9,828
)
Treasury shares (at cost), 648,968 at 2017 and 644,991 at 2016
(80,481
)
 
(80,773
)
Total Core Laboratories N.V. shareholders' equity
149,371

 
151,354

Non-controlling interest
3,926

 
3,943

TOTAL EQUITY
153,297

 
155,297

TOTAL LIABILITIES AND EQUITY
$
582,744

 
$
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
 
September 30,
 
2017
 
2016
 
(Unaudited)
REVENUE:
 
 
 
Services
$
117,550

 
$
114,137

Product sales
48,697

 
29,346

Total revenue
166,247

 
143,483

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
83,807

 
80,419

Cost of product sales, exclusive of depreciation expense shown below
37,083

 
26,734

General and administrative expense, exclusive of depreciation expense shown below
11,887

 
8,406

Depreciation
5,841

 
6,548

Amortization
250

 
176

Other (income) expense, net
(97
)
 
(288
)
OPERATING INCOME
27,476

 
21,488

Interest expense
2,707

 
2,569

Income before income tax expense
24,769

 
18,919

Income tax expense
3,716

 
2,081

Net income
21,053

 
16,838

Net income (loss) attributable to non-controlling interest
(33
)
 
108

Net income attributable to Core Laboratories N.V.
$
21,086

 
$
16,730

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
0.48

 
$
0.38

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
0.48

 
$
0.38

 
 
 
 
Cash dividends per share
$
0.55

 
$
0.55

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
44,141

 
44,110

Diluted
44,332

 
44,320


















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

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

 
Nine Months Ended
 
September 30,
 
2017
 
2016
 
(Unaudited)
REVENUE:
 
 
 
Services
$
355,725

 
$
355,079

Product sales
132,232

 
90,120

Total revenue
487,957

 
445,199

OPERATING EXPENSES:
 

 
 

Cost of services, exclusive of depreciation expense shown below
247,839

 
249,062

Cost of product sales, exclusive of depreciation expense shown below
104,741

 
80,904

General and administrative expense, exclusive of depreciation expense shown below
35,743

 
30,595

Depreciation
18,136

 
19,706

Amortization
684

 
616

Other (income) expense, net
752

 
(339
)
OPERATING INCOME
80,062

 
64,655

Interest expense
8,017

 
9,024

Income before income tax expense
72,045

 
55,631

Income tax expense
10,601

 
7,141

Net income
61,444

 
48,490

Net income (loss) attributable to non-controlling interest
10

 
54

Net income attributable to Core Laboratories N.V.
$
61,434

 
$
48,436

EARNINGS PER SHARE INFORMATION:
 

 
 

Basic earnings per share attributable to Core Laboratories N.V.
$
1.39

 
$
1.12

 
 
 
 
Diluted earnings per share attributable to Core Laboratories N.V.
$
1.39

 
$
1.11

 
 
 
 
Cash dividends per share
$
1.65

 
$
1.65

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

Basic
44,155

 
43,265

Diluted
44,335

 
43,450

















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

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Net income
$
21,053

 
$
16,838

 
$
61,444

 
$
48,490

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Gain (loss) in fair value of interest rate swaps
(47
)
 
199

 
(244
)
 
(2,221
)
Interest rate swap amounts reclassified to interest expense
112

 
207

 
419

 
631

Income taxes on derivatives
(23
)
 
(150
)
 
(61
)
 
585

Total derivatives
42

 
256

 
114

 
(1,005
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefit plans
 
 
 
 
 
 
 
Prior service cost
 
 
 
 
 
 
 
Amortization to net income of prior service cost
(20
)
 
(20
)
 
(58
)
 
(58
)
Amortization to net income of actuarial loss
110

 
148

 
330

 
444

Income taxes on pension and other postretirement benefit plans
(22
)
 
(32
)
 
(68
)
 
(96
)
Total pension and other postretirement benefit plans
68

 
96

 
204

 
290

 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
110

 
352

 
318

 
(715
)
Comprehensive income
21,163

 
17,190

 
61,762

 
47,775

Comprehensive income (loss) attributable to non-controlling interest
(33
)
 
108

 
10

 
54

Comprehensive income attributable to Core Laboratories N.V.
$
21,196

 
$
17,082

 
$
61,752

 
$
47,721



























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

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CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine Months Ended
 
September 30,
 
2017
 
2016
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
61,444

 
$
48,490

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

 
 

Stock-based compensation
17,323

 
16,762

Depreciation and amortization
18,820

 
20,322

Changes to value of life insurance policies
(4,541
)
 
(505
)
Deferred income taxes
3,914

 
(3,910
)
Other non-cash items
(696
)
 
(1,226
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(15,488
)
 
37,610

Inventories
(796
)
 
2,995

Prepaid expenses and other current assets
(1,545
)
 
4,029

Other assets
1,960

 
(128
)
Accounts payable
2,307

 
(3,023
)
Accrued expenses
(10,676
)
 
(13,017
)
Unearned revenue
(1,393
)
 
(1,111
)
Other long-term liabilities
7,722

 
1,396

Net cash provided by operating activities
78,355

 
108,684

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(14,264
)
 
(7,740
)
Patents and other intangibles
(282
)
 
(205
)
Business acquisition, net of cash acquired

 
(1,242
)
Proceeds from sale of assets
643

 
705

Premiums on life insurance
(1,351
)
 
(2,015
)
Net cash used in investing activities
(15,254
)
 
(10,497
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Repayment of debt borrowings
(89,000
)
 
(290,226
)
Proceeds from debt borrowings
106,000

 
63,000

Excess tax benefits from stock-based compensation

 
(187
)
Non-controlling interest - dividend
(27
)
 
(211
)
Dividends paid
(72,861
)
 
(70,883
)
Repurchase of common shares
(8,197
)
 
(2,157
)
Issuance of common shares

 
197,202

Net cash used in financing activities
(64,085
)
 
(103,462
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(984
)
 
(5,275
)
CASH AND CASH EQUIVALENTS, beginning of period
14,764

 
22,494

CASH AND CASH EQUIVALENTS, end of period
$
13,780

 
$
17,219














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 nine months ended September 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 nine months ended September 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):
 
September 30,
2017
 
December 31,
2016
Finished goods
$
21,777

 
$
21,635

Parts and materials
11,143

 
11,185

Work in progress
1,579

 
900

Total inventories
$
34,499

 
$
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 nine months ended September 30, 2017.


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4.  DEBT, NET

We have no capital lease obligations. Long-term debt is as follows (in thousands):
 
September 30,
2017
 
December 31,
2016
Senior notes
$
150,000

 
$
150,000

Credit facility
85,000

 
68,000

Total long-term debt
235,000

 
218,000

Less: Debt issuance costs
(1,136
)
 
(1,512
)
Long-term debt, net
$
233,864

 
$
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 $17.5 million at September 30, 2017, resulting in an available borrowing capacity under the Credit Facility of $297.5 million. In addition to those items under the Credit Facility, we had $14.6 million of outstanding letters of credit and performance guarantees and bonds from other sources as of September 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 September 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
401

 
$
364

 
$
1,142

 
$
1,097

Interest cost
295

 
332

 
838

 
1,001

Expected return on plan assets
(249
)
 
(279
)
 
(709
)
 
(841
)
Amortization of prior service cost
(20
)
 
(20
)
 
(58
)
 
(58
)
Amortization of actuarial loss
110

 
148

 
330

 
444

Net periodic pension cost
$
537

 
$
545

 
$
1,543

 
$
1,643


During the nine months ended September 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 September 30, 2017, we repurchased 8,404 of our common shares for $0.8 million. These consisted of rights to shares that were surrendered to us pursuant to the terms of a stock-based compensation plan in consideration of the participants' tax burdens that may result from the issuance of common shares under that plan. During the nine months ended September 30, 2017, we repurchased 77,832 of our common shares for $8.2 million; included in this total were rights to 22,832 shares valued at $2.5 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 27,453 and 73,855 treasury shares upon vesting of stock-based awards during the three and nine months ended September 30, 2017, respectively.

In February, May and August 2017, we paid quarterly dividends of $0.55 per share of common stock. In addition, on October 10, 2017, we declared a quarterly dividend of $0.55 per share of common stock for shareholders of record on October 20, 2017 and payable on November 21, 2017.

The following table summarizes our changes in equity for the nine months ended September 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

 
8,834

 

 

 
8,489

 

 
17,323

Repurchase of common shares

 

 

 

 
(8,197
)
 

 
(8,197
)
Dividends paid

 

 
(72,861
)
 

 

 

 
(72,861
)
Non-controlling interest dividends

 

 

 

 

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

 

 

 
204

 

 

 
204

Interest rate swaps, net of tax

 

 

 
114

 

 

 
114

Net income

 

 
61,434

 

 

 
10

 
61,444

 
 
 
 
 
 
 
 
 
 
 
 
 

September 30, 2017
$
1,148

 
$
61,768

 
$
176,446

 
$
(9,510
)
 
$
(80,481
)
 
$
3,926

 
$
153,297


Accumulated other comprehensive income (loss) consisted of the following (in thousands):
 
September 30,
2017
 
December 31,
2016
Prior service cost
$
556

 
$
600

Unrecognized net actuarial loss
(9,521
)
 
(9,769
)
Fair value of derivatives, net of tax
(545
)
 
(659
)
Total accumulated other comprehensive income (loss)
$
(9,510
)
 
$
(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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Weighted average basic common shares outstanding
44,141

 
44,110

 
44,155

 
43,265

Effect of dilutive securities:
 
 
 
 
 
 
 
Performance shares
159

 
147

 
148

 
119

Restricted stock
32

 
63

 
32

 
66

Weighted average diluted common and potential common shares outstanding
44,332

 
44,320

 
44,335

 
43,450



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9. OTHER (INCOME) EXPENSE, NET

The components of Other (income) expense, net, were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Sale of assets
$
(12
)
 
$
(56
)
 
$
(314
)
 
$
(544
)
Results of non-consolidated subsidiaries
(112
)
 
(126
)
 
(287
)
 
(450
)
Foreign exchange
105

 
220

 
559

 
1,432

Rents and royalties
(99
)
 
(105
)
 
(329
)
 
(304
)
Severance, compensation and other charges

 

 
1,145

 

Other, net
21

 
(221
)
 
(22
)
 
(473
)
Total other (income) expense, net
$
(97
)
 
$
(288
)
 
$
752

 
$
(339
)

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

2017
 
2016
 
2017
 
2016
British Pound
(27
)
 
39

 
(82
)
 
514

Canadian Dollar
(153
)
 
(6
)
 
(230
)
 
(54
)
Euro
431

 
45

 
1,266

 
215

Russian Ruble
(26
)
 
21

 
(151
)
 
(73
)
Other currencies, net
(120
)
 
121

 
(244
)
 
830

Total (gain) loss, net
$
105

 
$
220

 
$
559

 
$
1,432


10.  INCOME TAX EXPENSE

The effective tax rates for the three months ended September 30, 2017 and 2016 were 15.0% and 11.0%, respectively. The effective tax rates for the nine months ended September 30, 2017 and 2016 were 14.7% and 12.8%, respectively. Income tax expense of $3.7 million in the third quarter of 2017 increased by $1.6 million compared to $2.1 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.

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.

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.


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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 September 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
 
 
 
September 30, 2017
 
December 31, 2016
 
Balance Sheet Classification
Derivatives designated as hedges:
 
 
 
 
 
5 year interest rate swap
$
62

 
$
211

 
Other long-term liabilities
10 year interest rate swap
809

 
835

 
Other long-term liabilities
 
$
871

 
$
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 September 30,
 
Nine Months Ended
September 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
Income Statement Classification
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
5 year interest rate swap
$
31

 
$
79

 
$
136

 
$
242

 
Increase to interest expense
10 year interest rate swap
81

 
128

 
283

 
389

 
Increase to interest expense
 
$
112

 
$
207

 
$
419

 
$
631

 
 


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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
 
 
 
September 30, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
27,880

 
$

 
$
27,880

 
$

Liabilities:
 

 
 

 
 
 
 
Deferred compensation plan
$
35,528

 
$

 
$
35,528

 
$

5 year interest rate swap
62

 

 
62

 

10 year interest rate swap
809

 

 
809

 

 
$
36,399

 
$

 
$
36,399

 
$


 
 
 
Fair Value Measurement at
 
 
 
December 31, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Deferred compensation trust assets (1)
$
25,350

 
$

 
$
25,350

 
$

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 September 30, 2017
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
101,442

 
$
64,805

 
$

 
$
166,247

Inter-segment revenue
54

 
87

 
(141
)
 

Segment operating income (loss)
14,621

 
12,972

 
(117
)
 
27,476

Total assets (at end of period)
315,346

 
207,186

 
60,212

 
582,744

Capital expenditures
2,930

 
1,605

 
367

 
4,902

Depreciation and amortization
4,383

 
1,190

 
518

 
6,091

Three Months Ended September 30, 2016
 
 
 
 
 
 
 

Revenue from unaffiliated clients
$
105,427

 
$
38,056

 
$

 
$
143,483

Inter-segment revenue
533

 
563

 
(1,096
)
 

Segment operating income (loss)
21,274

 
118

 
96

 
21,488

Total assets (at end of period)
322,222

 
190,479

 
49,437

 
562,138

Capital expenditures
2,020

 
318

 
100

 
2,438

Depreciation and amortization
4,647

 
1,429

 
648

 
6,724

Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
310,650

 
$
177,307

 
$

 
$
487,957

Inter-segment revenue
275

 
537

 
(812
)
 

Segment operating income (loss)
49,231

 
31,132

 
(301
)
 
80,062

Total assets
315,346

 
207,186

 
60,212

 
582,744

Capital expenditures
7,605

 
5,394

 
1,265

 
14,264

Depreciation and amortization
13,531

 
3,732

 
1,557

 
18,820

Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
Revenue from unaffiliated clients
$
321,129

 
$
124,070

 
$

 
$
445,199

Inter-segment revenue
1,579

 
1,167

 
(2,746
)
 

Segment operating income (loss)
60,011

 
4,615

 
29

 
64,655

Total assets
322,222

 
190,479

 
49,437

 
562,138

Capital expenditures
6,376

 
856

 
508

 
7,740

Depreciation and amortization
13,914

 
4,518

 
1,890

 
20,322

(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. Upon adoption we expect to utilize the modified retrospective approach, which requires a cumulative adjustment to retained earnings and no adjustments to prior periods.

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 anticipate the adoption of this standard will have a material impact on our Consolidated Balance Sheets, increasing both asset balances and liability balances; however, there should not be a material impact to our Consolidated Statement of Operations.

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 September 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 4,600 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.

We expect fourth quarter 2017 North American completion activity levels to continue expanding although at a lower rate than it did for the first nine months of 2017. We are encouraged by the increasing focus of our major clients regarding capital management, return on invested capital “ROIC” and returning capital back to their shareholders, as opposed to just production growth. The companies adopting these metrics tend to be the more technologically sophisticated operators and form the foundation of Core’s worldwide client base. We expect to benefit from our clients’ shift in focus from strictly production growth to employing higher technological solutions in their efforts to maximize economic production growth and EURs, as we believe our clients are willing to spend money on technologies which also improve their ROIC and cash flow.

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 continued to decrease in 2016, prices showed some signs of improvement in the second half of the year and remained more stable year-to-date 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 year-to-date 2017. According to Baker Hughes, the U.S. land-based rig count at the September 30, 2017 was 44% higher than the beginning of the year. We believe this increase is in response to the improved pricing of crude oil as the average price of crude oil for the nine months ended September 30, 2017 was approximately $50.50 per barrel while the average price of crude oil for same period in 2016 was approximately $41.50 per barrel. We expect fourth quarter 2017 North American completion activity levels to continue to expand although at a lower rate than the first six months of 2017.

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 three quarters of 2017. Internationally, a number of Final Investment Decisions ("FIDs") have been announced during the third quarter by oil and gas companies; however, activities for Core Lab relating to those FIDs are not expected to materially increase in 2017 as the operators are currently developing their project plans and should begin to implement those plans early in 2018. Further, the international rig count remains flat due to limited capital projects underway by international operators. However, operators continue to spend from their operating budgets to maximize recovery from their existing producing fields. We expect fourth quarter 2017 international activity levels to remain stable or improve slightly from third quarter levels with most ongoing projects to be funded largely from operating budgets.



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Results of Operations

Our results of operations as a percentage of applicable revenue were as follows (in thousands):
 
Three Months Ended September 30,
 
Change
 
2017
 
2016
 
$
 
%
REVENUE:
 
 
 
 
 
Services
$
117,550

 
71
%
 
$
114,137

 
80
%
 
$
3,413

 
3
 %
Product sales
48,697

 
29
%
 
29,346

 
20
%
 
19,351

 
66
 %
Total revenue
166,247

 
100
%
 
143,483

 
100
%
 
22,764

 
16
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
 


 


Cost of services, exclusive of depreciation expense shown below*
83,807

 
71
%
 
80,419

 
70
%
 
3,388

 
4
 %
Cost of product sales, exclusive of depreciation expense shown below*
37,083

 
76
%
 
26,734

 
91
%
 
10,349

 
39
 %
Total cost of services and product sales
120,890

 
73
%
 
107,153

 
75
%
 
13,737

 
13
 %
General and administrative expense
11,887

 
7
%
 
8,406

 
6
%
 
3,481

 
41
 %
Depreciation and amortization
6,091

 
4
%
 
6,724

 
5
%
 
(633
)
 
(9
)%
Other (income) expense, net
(97
)
 
%
 
(288
)
 
%
 
191

 
NM

Operating income
27,476

 
17
%
 
21,488

 
15
%
 
5,988

 
28
 %
Interest expense
2,707

 
2
%
 
2,569

 
2
%
 
138

 
5
 %
Income before income tax expense
24,769

 
15
%
 
18,919

 
13
%
 
5,850

 
31
 %
Income tax expense
3,716

 
2
%
 
2,081

 
1
%
 
1,635

 
79
 %
Net income
21,053

 
13
%
 
16,838

 
12
%
 
4,215

 
25
 %
Net income (loss) attributable to non-controlling interest
(33
)
 
%
 
108

 
%
 
(141
)
 
NM

Net income attributable to Core Laboratories N.V.
$
21,086

 
13
%
 
$
16,730

 
12
%
 
$
4,356

 
26
 %
"NM"  means not meaningful
 
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 
 
 
 
 


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Three Months Ended
 
Change
 
Sep 30, 2017
 
Jun 30, 2017
 
$
 
%
REVENUE:
 
 
 
 
 
 
 
 
 
 
 
Services
$
117,550

 
71
%
 
$
117,239

 
72
%
 
$
311

 
 %
Product sales
48,697

 
29
%
 
46,664

 
28
%
 
2,033

 
4
 %
Total revenue
166,247

 
100
%
 
163,903

 
100
%
 
2,344

 
1
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
 

 

Cost of services, exclusive of depreciation expense shown below*
83,807

 
71
%
 
80,431

 
69
%
 
3,376

 
4
 %
Cost of product sales, exclusive of depreciation expense shown below*
37,083

 
76
%
 
36,687

 
79
%
 
396

 
1
 %
Total cost of services and product sales
120,890

 
73
%
 
117,118

 
71
%
 
3,772

 
3
 %
General and administrative expense
11,887

 
7
%
 
11,100

 
7
%
 
787

 
7
 %
Depreciation and amortization
6,091

 
4
%
 
6,302

 
4
%
 
(211
)
 
(3
)%
Other (income) expense, net
(97
)
 
%
 
(24
)
 
%
 
(73
)
 
NM

Operating income
27,476

 
17
%
 
29,407

 
18
%
 
(1,931
)
 
(7
)%
Interest expense
2,707

 
2
%
 
2,692

 
2
%
 
15

 
1
 %
Income before income tax expense
24,769

 
15
%
 
26,715

 
16
%
 
(1,946
)
 
(7
)%
Income tax expense
3,716

 
2
%
 
4,006

 
2
%
 
(290
)
 
(7
)%
Net income
21,053

 
13
%
 
22,709

 
14
%
 
(1,656
)
 
(7
)%
Net income (loss) attributable to non-controlling interest
(33
)
 
%
 
19

 
%
 
(52
)
 
NM

Net income attributable to Core Laboratories N.V.
$
21,086

 
13
%
 
$
22,690

 
14
%
 
$
(1,604
)
 
(7
)%
"NM"  means not meaningful
 
 
 
 
 
 
 
 
 
 
 
* Percentage based on applicable revenue rather than total revenue.
 
 
 
 
 
 
 
 




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Nine Months Ended September 30,
 
Change
 
2017
 
2016
 
$
 
%
REVENUE:
 
 
 
 
 
Services
$
355,725

 
73
%
 
$
355,079

 
80
 %
 
$
646

 
 %
Product sales
132,232

 
27
%
 
90,120

 
20
 %
 
42,112

 
47
 %
Total revenue
487,957

 
100
%
 
445,199

 
100
 %
 
42,758

 
10
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
 

 

Cost of services, exclusive of depreciation expense shown below*
247,839

 
70
%
 
249,062

 
70
 %
 
(1,223
)
 
 %
Cost of product sales, exclusive of depreciation expense shown below*
104,741

 
79
%
 
80,904

 
90
 %
 
23,837

 
29
 %
Total cost of services and product sales
352,580

 
72
%
 
329,966

 
74
 %
 
22,614

 
7
 %
General and administrative expense
35,743

 
7
%
 
30,595

 
7
 %
 
5,148

 
17
 %
Depreciation and amortization
18,820

 
4
%
 
20,322

 
4
 %
 
(1,502
)
 
(7
)%
Other (income), net
752

 
%
 
(339
)
 
 %
 
1,091

 
NM

Operating income
80,062

 
16
%
 
64,655

 
15
 %
 
15,407

 
24
 %
Interest expense
8,017

 
2
%
 
9,024

 
2
 %
 
(1,007
)
 
(11
)%
Income before income tax expense
72,045

 
15
%
 
55,631

 
12
 %
 
16,414

 
30
 %
Income tax expense
10,601

 
2
%
 
7,141

 
2
 %
 
3,460

 
48
 %
Net income
61,444

 
13
%
 
48,490

 
11
 %
 
12,954

 
27
 %
Net income (loss) attributable to non-controlling interest
10

 
%
 
54

 
 %
 
(44
)
 
NM

Net income attributable to Core Laboratories N.V.
$
61,434

 
13
%
 
$
48,436

 
11
 %
 
$
12,998

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

Operating Results for the Three Months Ended September 30, 2017 Compared to the Three Months Ended June 30, 2017 and September 30, 2016 and for the Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016

Services Revenue

Services revenue increased slightly to $117.6 million for the third quarter of 2017 from $117.2 million for the second quarter of 2017 and increased 3% from $114.1 million in the third quarter of 2016. The year over year increase was driven by the increase in U.S. land-based activity. Hurricanes Harvey, Irma and Maria negatively impacted revenue in the third quarter 2017. For the nine months ended September 30, 2017, services revenue increased slightly to $355.7 million as compared to $355.1 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 - Phase II as well as several major enhanced oil recovery ("EOR") projects for unconventional reservoirs such as the newly initiated Unconventional EOR in the Eagle Ford Formation and similar EOR joint industry projects for tight-oil developments in other basins.

Product Sales Revenue

Revenue associated with product sales increased 4% to $48.7 million for the third quarter of 2017 from $46.7 million for the second quarter of 2017 and increased 66% from $29.3 million in the third 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 89% on a year-over-year quarterly basis. This outpaced the 51% increase in the U.S. Energy Information Administration ("EIA") reported U.S. well completions for the same periods, indicating increased market penetration of our newly introduced HERO® PerFRAC technology. For the nine months ended September 30, 2017, product sales revenue increased 47% to $132.2 million as compared to $90.1 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 up slightly at 71% for the three months ended September 30, 2017, compared to 69% and 70% for the three months ended June 30, 2017 and September 30, 2016, respectively. This increase was due to the effects of Hurricanes Harvey, Irma and Maria as we and our clients suffered interruptions of business due to flooding, power outages and wind damage resulting in a decrease in business activity in the affected areas. Cost of services as a percentage of services revenue remained consistent at 70% for each of the nine months ended September 30, 2017 and September 30, 2016.

Cost of Product Sales, excluding depreciation

Cost of product sales expressed as a percentage of product sales revenue improved to 76% for the three months ended September 30, 2017, compared to 79% and 91% for the three months ended June 30, 2017 and September 30, 2016, respectively. Cost of product sales expressed as a percentage of product sales revenue improved to 79% for the nine months ended September 30, 2017, compared to 90% 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 the increase in activity levels which drove higher revenue in the quarter.

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 September 30, 2017 was $11.9 million compared to $11.1 million and $8.4 million for the three months ended June 30, 2017 and September 30, 2016, respectively. The increases were primarily due to higher headcount and compensation costs in the third quarter of 2017. General and administrative expense for the nine months ended September 30, 2017 was $35.7 million compared to $30.6 million for the same period in 2016, primarily due to higher compensation costs in 2017.

Depreciation and Amortization Expense

Depreciation and amortization expense for the three months ended September 30, 2017 was $6.1 million compared to $6.3 million and $6.7 million for the three months ended June 30, 2017 and September 30, 2016, respectively. Depreciation and amortization expense for the nine months ended September 30, 2017 was $18.8 million compared to $20.3 million for the same period in 2016. Reduced capital expenditures during 2016 in response to the industry downturn led to lower depreciation expense in 2017.

Other (Income) Expense, Net

The components of other (income) expense, net, were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Sale of assets
$
(12
)
 
$
(56
)
 
$
(314
)
 
$
(544
)
Results of non-consolidated subsidiaries
(112
)
 
(126
)
 
(287
)
 
(450
)
Foreign exchange
105

 
220

 
559

 
1,432

Rents and royalties
(99
)
 
(105
)
 
(329
)
 
(304
)
Severance, compensation and other charges

 

 
1,145

 

Other, net
21

 
(221
)
 
(22
)
 
(473
)
Total other (income) expense, net
$
(97
)
 
$
(288
)
 
$
752

 
$
(339
)



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Foreign exchange (gain) loss, net by currency is summarized in the following table (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
British Pound
(27
)
 
39

 
(82
)
 
514

Canadian Dollar
(153
)
 
(6
)
 
(230
)
 
(54
)
Euro
431

 
45

 
1,266

 
215

Russian Ruble
(26
)
 
21

 
(151
)
 
(73
)
Other currencies, net
(120
)
 
121

 
(244
)
 
830

Total (gain) loss, net
$
105

 
$
220

 
$
559

 
$
1,432


Interest Expense

Interest expense for the three months ended September 30, 2017 was $2.7 million compared to $2.7 million and $2.6 million for the three months ended June 30, 2017 and