Item 1. Financial Statements
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
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, 2018 (the "2018 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, 2019 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2019.
Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2018 was derived from the 2018 audited consolidated financial statements but does not include all disclosures in accordance with U.S. GAAP.
References to "Core Lab", the "Company", "we", "our" and similar phrases are used throughout this Quarterly Report on Form 10-Q and relate collectively to Core Laboratories N.V. and its consolidated subsidiaries.
We operate our business in two reportable segments. These complementary segments provide different services and products and utilize different technologies for improving reservoir performance and increasing oil and gas recovery from new and existing fields.
|
•
|
Reservoir Description: Encompasses the characterization of petroleum reservoir rock, fluid and gas samples 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.
|
Certain reclassifications were made to prior period amounts in order to conform to the current period presentation. These reclassifications had no impact on the reported net income or cash flows for the three and nine months ended September 30, 2018.
9
Return to Index
2. INVENTORIES
Inventories consisted of the following (in thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Finished goods
|
|
$
|
28,915
|
|
|
$
|
26,636
|
|
Parts and materials
|
|
|
22,385
|
|
|
|
13,704
|
|
Work in progress
|
|
|
2,228
|
|
|
|
5,324
|
|
Total inventories
|
|
$
|
53,528
|
|
|
$
|
45,664
|
|
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. SIGNIFICANT ACCOUNTING POLICIES UPDATE
Our significant accounting policies are detailed in "Note 2: Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2018. Significant changes to our accounting policies as a result of adopting Topic 842 - Leases are discussed below:
Leases
We have operating leases primarily consisting of offices and lab space, machinery and equipment and vehicles. We determine if an arrangement is a lease at inception. Operating leases are included in right of use (“ROU”) assets, current operating lease liabilities and long-term operating lease liabilities in our Consolidated Balance Sheet. Finance leases, if any, are included in property and equipment, other current liabilities and other long term liabilities in our Consolidated Balance Sheet.
Lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Where our lease does not provide an implicit rate, we estimate the discount rate used to discount the future minimum lease payments using our incremental borrowing rate and other information available at the commencement date. The ROU assets also include all initial direct costs incurred. Our lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
4. CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets and liabilities result due to the timing of revenue recognition, billings and cash collections.
Contract assets include our right to payment for goods and services already transferred to a customer when the right to payment is conditional on something other than the passage of time, for example contracts where we recognize revenue over time but do not have a contractual right to payment until we complete the performance obligations. Contract assets are included in accounts receivable in our Consolidated Balance Sheet.
Contract liabilities consist of advance payments received and billings in excess of revenue recognized. We generally receive up-front payments relating to our consortia studies; we recognize revenue over the life of the study as the testing and analysis results are made available to our consortia members. We record billings in excess of revenue recognized for contracts with a duration less than twelve months as unearned revenue. We classify contract liabilities for contracts with a duration greater than twelve months as current or non-current based on the timing of when we expect to recognize revenue. The current portion of contract liabilities is included in unearned revenue and the non-current portion of contract liabilities is included in other long-term liabilities in our Consolidated Balance Sheet.
The balance of contract assets and contract liabilities consisted of the following (in thousands):
10
Return to Index
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Contract assets
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,339
|
|
|
$
|
1,145
|
|
Non-Current
|
|
|
397
|
|
|
|
188
|
|
|
|
$
|
1,736
|
|
|
$
|
1,333
|
|
Contract Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
3,929
|
|
|
$
|
5,963
|
|
Non-current
|
|
|
434
|
|
|
|
1,401
|
|
|
|
$
|
4,363
|
|
|
$
|
7,364
|
|
|
|
September 30,
2019
|
|
Estimate of when contract liabilities will be recognized as revenue
|
|
|
|
|
within 12 months
|
|
$
|
3,929
|
|
within 12 to 24 months
|
|
|
434
|
|
greater than 24 months
|
|
|
—
|
|
We did not recognize any impairment losses on our receivables and contract assets for the three and nine months ended September 30, 2019.
5. ACQUISITIONS
In 2018, we acquired a business providing downhole technologies associated with perforating systems for $48.9 million in cash. These downhole technologies will significantly enhance Core Lab's Production Enhancement operations and its ability to bring new and innovative product offerings to our clients. During the three months ended September 30, 2019, we finalized the fair value assessment of the assets acquired. We have determined the fair value of tangible assets acquired to be $4.1 million, and intangible assets, including patents, customer-relationship benefits, non-compete agreements and trade secrets to be $9.4 million. We have accounted for this acquisition by allocating the purchase price to the net assets acquired based on their fair values at the date of acquisition which resulted in an increase to goodwill of $35.4 million. During the three months ended September 30, 2019, we increased the fair value of intangible assets by $0.9 million. The acquisition is included in the Production Enhancement business segment.
The acquisition of this business did not have a material impact on our Consolidated Balance Sheet or Consolidated Statements of Operations.
6. DISCONTINUED OPERATIONS
In 2018, in a continuing effort to streamline our business and align our business strategy for further integration of services and products, the Company committed to divest the business of our full range of permanent downhole monitoring systems and related services, which had been part of our Production Enhancement segment.
On June 7, 2019, we entered into a definitive purchase agreement for the divestiture of our full range of permanent downhole monitoring systems and related services, which was previously part of our Production Enhancement segment for approximately $16.6 million in cash. The purchase agreement also provides for additional proceeds of up to $2.5 million based on the results of operations of the sold business in 2019 and 2020, none of which has been recognized. A pre-tax gain of $8.3 million was recognized in connection with this transaction, subject to adjustments for working capital purposes and is classified in Income from discontinued operations in the Consolidated Statements of Operations.
The associated results of operations are separately reported as Discontinued Operations for all periods presented on the Consolidated Statements of Operations. Balance sheet items for this discontinued business, including an allocation of goodwill from the Production Enhancement segment, have been reclassified to Other current assets and Other current liabilities in the Consolidated Balance Sheet as of December 31, 2018. Cash flows from this discontinued business are shown below. As such,
11
Return to Index
the results from continuing operations for the Company and segment highlights for Production Enhancement, exclude these discontinued operations.
Selected data for this discontinued business consisted of the following (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Service revenue
|
|
$
|
—
|
|
|
$
|
167
|
|
Product sales
|
|
|
—
|
|
|
|
2,058
|
|
Total revenue
|
|
|
—
|
|
|
|
2,225
|
|
Cost of services, exclusive of depreciation expense shown below
|
|
|
—
|
|
|
|
87
|
|
Cost of product sales, exclusive of depreciation expense shown below
|
|
|
—
|
|
|
|
1,944
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
14
|
|
Other expense
|
|
|
—
|
|
|
|
(1
|
)
|
Operating income (loss)
|
|
|
—
|
|
|
|
181
|
|
Adjustment to gain on sale
|
|
|
(485
|
)
|
|
|
—
|
|
Income (loss) from discontinued operations before income tax expense
|
|
|
(485
|
)
|
|
|
181
|
|
Income tax expense (benefit)
|
|
|
(88
|
)
|
|
|
(27
|
)
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
(397
|
)
|
|
$
|
208
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Service revenue
|
|
$
|
1,165
|
|
|
$
|
1,069
|
|
Product sales
|
|
|
4,233
|
|
|
|
3,768
|
|
Total revenue
|
|
|
5,398
|
|
|
|
4,837
|
|
Cost of services, exclusive of depreciation expense shown below
|
|
|
690
|
|
|
|
961
|
|
Cost of product sales, exclusive of depreciation expense shown below
|
|
|
3,196
|
|
|
|
4,124
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
115
|
|
Other expense
|
|
|
91
|
|
|
|
22
|
|
Operating income (loss)
|
|
|
1,421
|
|
|
|
(385
|
)
|
Gain on sale
|
|
|
8,319
|
|
|
|
—
|
|
Income (loss) from discontinued operations before income tax expense
|
|
|
9,740
|
|
|
|
(385
|
)
|
Income tax expense
|
|
|
1,907
|
|
|
|
81
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
7,833
|
|
|
$
|
(466
|
)
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Current assets
|
|
$
|
—
|
|
|
$
|
3,712
|
|
Non-current assets
|
|
|
—
|
|
|
|
1,848
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
5,560
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
—
|
|
|
$
|
1,633
|
|
Non-current liabilities
|
|
|
—
|
|
|
|
82
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
1,715
|
|
Net cash provided by (used in) operating activities of discontinued operations for the nine months ended September 30, 2019 and 2018 was $0.1 million and $(0.5) million, respectively.
Net cash provided by investing activities of discontinued operations for the nine months ended September 30, 2019 and 2018 was $14.8 million and $0.0 million, respectively.
12
Return to Index
7. LONG-TERM DEBT, NET
We have no financing lease obligations.
Long-term debt is as follows (in thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Senior Notes
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Credit Facility
|
|
|
149,000
|
|
|
|
142,000
|
|
Total long-term debt
|
|
|
299,000
|
|
|
|
292,000
|
|
Less: Debt issuance costs
|
|
|
(1,852
|
)
|
|
|
(2,230
|
)
|
Long-term debt, net
|
|
$
|
297,148
|
|
|
$
|
289,770
|
|
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.
The aggregate borrowing commitment under our revolving credit facility (the “Credit Facility”) is $300 million. The Credit Facility provides an option to increase the commitment under the Credit Facility by an additional $100 million to bring the total borrowings available to $400 million if certain prescribed conditions are met by the Company. The Credit Facility bears interest at variable rates from LIBOR plus 1.375% to a maximum of LIBOR plus 2.00%. Any outstanding balance under the Credit Facility is due June 19, 2023, 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 $19.1 million at September 30, 2019, resulting in an available borrowing capacity under the Credit Facility of $131.9 million. In addition to those items under the Credit Facility, we had $12.0 million of outstanding letters of credit and performance guarantees and bonds from other sources as of September 30, 2019.
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. The terms of our Credit Facility allow us to negotiate in good faith to amend any ratio or requirement to preserve the original intent of the agreement if any change in accounting principle would affect the computation of any financial ratio or requirement of the Credit Facility. The adoption on January 1, 2019 of ASU 2016-02 does not affect the calculation of consolidated EBITDA under the agreement. 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, one of which expired during the three months ended September 30, 2019. See Note 15 - Derivative Instruments and Hedging Activities.
The estimated fair value of total debt at September 30, 2019 and December 31, 2018 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.
13
Return to Index
8. 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 2000. The pension benefit is based on years of service and final pay or career average pay, depending on when the employee began participating. The benefits earned by the employees are immediately vested.
The following table summarizes the components of net periodic pension cost under the Dutch Plan (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Service cost
|
|
$
|
191
|
|
|
$
|
359
|
|
|
$
|
572
|
|
|
$
|
1,100
|
|
Interest cost
|
|
|
259
|
|
|
|
308
|
|
|
|
778
|
|
|
|
944
|
|
Expected return on plan assets
|
|
|
(231
|
)
|
|
|
(266
|
)
|
|
|
(692
|
)
|
|
|
(815
|
)
|
Amortization of prior service cost
|
|
|
(25
|
)
|
|
|
(19
|
)
|
|
|
(75
|
)
|
|
|
(58
|
)
|
Amortization of actuarial loss
|
|
|
15
|
|
|
|
84
|
|
|
|
44
|
|
|
|
252
|
|
Net periodic pension cost
|
|
$
|
209
|
|
|
$
|
466
|
|
|
$
|
627
|
|
|
$
|
1,423
|
|
During the nine months ended September 30, 2019, we contributed $1.5 million to fund the estimated 2019 premiums on investment contracts held by the Dutch Plan.
9. 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. A liability is accrued when a loss is both probable and can be reasonably estimated.
10. EQUITY
During the three and nine months ended September 30, 2019, we repurchased 8,397 and 24,453 of our common shares for $0.4 million and $1.5 million, respectively, which were surrendered to us pursuant to the terms of a stock-based compensation plan in consideration of the participants' tax burdens that may result from the issuance of common shares under that plan. Such common shares, unless canceled, may be reissued for a variety of purposes such as future acquisitions, non-employee director stock awards or employee stock awards. We distributed 28,452 and 82,460 treasury shares upon vesting of stock-based awards during the three and nine months ended September 30, 2019.
In February, May and August 2019, we paid a quarterly dividend of $0.55 per share of common stock. In addition, on October 8, 2019, we declared a quarterly dividend of $0.55 per share of common stock for shareholders of record on October 18, 2019 and payable on November 19, 2019.
Accumulated other comprehensive loss consisted of the following (in thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Prior service cost
|
|
$
|
537
|
|
|
$
|
593
|
|
Unrecognized net actuarial loss
|
|
|
(6,210
|
)
|
|
|
(6,243
|
)
|
Fair value of derivatives, net of tax
|
|
|
(931
|
)
|
|
|
194
|
|
Total accumulated other comprehensive loss
|
|
$
|
(6,604
|
)
|
|
$
|
(5,456
|
)
|
14
Return to Index
11. 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted average basic common shares
outstanding
|
|
|
44,371
|
|
|
|
44,216
|
|
|
|
44,349
|
|
|
|
44,199
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance shares
|
|
|
4
|
|
|
|
221
|
|
|
|
111
|
|
|
|
269
|
|
Restricted stock
|
|
|
341
|
|
|
|
154
|
|
|
|
394
|
|
|
|
145
|
|
Weighted average diluted common and
potential common shares outstanding
|
|
|
44,716
|
|
|
|
44,591
|
|
|
|
44,854
|
|
|
|
44,613
|
|
12. 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Gain on sale of assets
|
|
$
|
(151
|
)
|
|
$
|
(136
|
)
|
|
$
|
(458
|
)
|
|
$
|
(643
|
)
|
Results of non-consolidated subsidiaries
|
|
|
(96
|
)
|
|
|
(57
|
)
|
|
|
(193
|
)
|
|
|
(126
|
)
|
Foreign exchange
|
|
|
570
|
|
|
|
1,135
|
|
|
|
389
|
|
|
|
2,221
|
|
Rents and royalties
|
|
|
(134
|
)
|
|
|
(264
|
)
|
|
|
(727
|
)
|
|
|
(500
|
)
|
Employment related charges
|
|
|
—
|
|
|
|
—
|
|
|
|
2,866
|
|
|
|
—
|
|
Return on pension assets and other pension costs
|
|
|
(232
|
)
|
|
|
(201
|
)
|
|
|
(714
|
)
|
|
|
(621
|
)
|
Acquisition-related costs
|
|
|
—
|
|
|
|
623
|
|
|
|
—
|
|
|
|
623
|
|
Gain on sale of business
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,154
|
)
|
|
|
—
|
|
Cost reduction and other charges
|
|
|
—
|
|
|
|
—
|
|
|
|
2,977
|
|
|
|
—
|
|
Other, net
|
|
|
(669
|
)
|
|
|
(970
|
)
|
|
|
(333
|
)
|
|
|
(784
|
)
|
Total other (income) expense, net
|
|
$
|
(712
|
)
|
|
$
|
130
|
|
|
$
|
2,653
|
|
|
$
|
170
|
|
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
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
British Pound
|
|
$
|
163
|
|
|
$
|
89
|
|
|
$
|
341
|
|
|
$
|
65
|
|
Canadian Dollar
|
|
|
197
|
|
|
|
(113
|
)
|
|
|
285
|
|
|
|
244
|
|
Euro
|
|
|
18
|
|
|
|
108
|
|
|
|
20
|
|
|
|
92
|
|
Other currencies, net
|
|
|
192
|
|
|
|
1,051
|
|
|
|
(257
|
)
|
|
|
1,820
|
|
Total loss, net
|
|
$
|
570
|
|
|
$
|
1,135
|
|
|
$
|
389
|
|
|
$
|
2,221
|
|
During the nine months ended September 30, 2019, we sold a business for a cash payment of $3.0 million. As this represented a single location within our business units, the sale did not constitute a discontinued operation and, accordingly, the effects of this transaction are included in continuing operations.
15
Return to Index
13. INCOME TAX EXPENSE
The effective tax rates for the three months ended September 30, 2019 and 2018 were 12.1% and 29.8%, respectively. The income tax expense of $3.3 million for the three months ended September 30, 2019 decreased by $6.1 million compared to $9.4 million in the same period in 2018, due to the result of several items discrete to each quarter, along with changes in activity levels in jurisdictions with differing tax rates. The effective tax rates for the nine months ended September 30, 2019 and 2018 were (30.2)% and 21.7%, respectively. Tax expense for the nine months ended September 30, 2019 includes a net tax benefit of $58.5 million which resulted from a corporate restructuring in the first quarter and tax expense of $26.7 million related to unremitted earnings of foreign subsidiaries that we no longer consider to be indefinitely reinvested, each of which was a discrete item in the first quarter of 2019.
14. LEASES
We have operating leases primarily consisting of offices and lab space, machinery and equipment and vehicles. The components of lease expense are as follows (in thousands):
|
Three months ended
|
|
|
Nine months ended
|
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
Lease Cost
|
|
|
|
|
|
|
|
Operating lease cost
|
$
|
4,724
|
|
|
$
|
14,027
|
|
Short-term lease cost
|
|
402
|
|
|
|
1,024
|
|
Variable lease cost
|
|
162
|
|
|
|
521
|
|
Total lease cost
|
$
|
5,288
|
|
|
$
|
15,572
|
|
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
4,306
|
|
|
$
|
13,729
|
|
Right-of-use assets obtained in exchange for new lease obligations:
|
|
|
|
|
|
|
|
Operating leases
|
$
|
3,837
|
|
|
$
|
11,066
|
|
Weighted-average remaining lease term- operating leases
|
9.18 years
|
|
|
9.18 years
|
|
Weighted-average discount rate - operating leases
|
|
4.95
|
%
|
|
|
4.95
|
%
|
Scheduled undiscounted cash flows for non-cancellable leases at September 30, 2019 consist of the following (in thousands):
|
Operating Leases
|
|
Remainder of 2019
|
$
|
4,132
|
|
2020
|
|
14,566
|
|
2021
|
|
12,130
|
|
2022
|
|
10,754
|
|
2023
|
|
9,193
|
|
Thereafter
|
|
43,842
|
|
Total undiscounted lease payments
|
$
|
94,617
|
|
Less: Imputed Interest
|
|
(18,994
|
)
|
Total lease liabilities
|
$
|
75,623
|
|
We adopted ASU 2017-06 using the cumulative effect transition method on January 1, 2019. As required, the following disclosure is provided for periods prior to adoption. Scheduled minimum rental commitments under non-cancellable operating leases at December 31, 2018, consist of the following (in thousands):
16
Return to Index
|
Operating Leases
|
|
2019
|
$
|
16,267
|
|
2020
|
|
12,572
|
|
2021
|
|
9,774
|
|
2022
|
|
7,955
|
|
2023
|
|
4,938
|
|
Thereafter
|
|
14,815
|
|
Total commitments
|
$
|
66,321
|
|
|
|
|
|
The Company has elected to apply the short-term lease exemption to all of its classes of underlying assets. Accordingly, no ROU asset or lease liability is recognized for leases with a term of twelve months or less.
The Company has elected to apply the practical expedient for combining lease and non-lease components for vehicle leases and elected not to apply the practical expedient for combining lease and non-lease components to all other classes of underlying assets.
15. 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
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. The first swap agreement of $25 million expired on August 29, 2019, and under the second swap agreement, we have fixed the LIBOR portion of the interest rate at 2.5% through August 29, 2024. This swap is measured at fair value and recorded in our Consolidated Balance Sheet as an asset or liability. It is designated and qualifies as a cash flow hedging instrument and is highly effective. Unrealized losses are deferred to shareholders' equity as a component of accumulated other comprehensive gain (loss) and are recognized in income as an increase or decrease to interest expense in the period in which the related cash flows being hedged are recognized in expense.
Our Credit Facility bears interest at variable rates from LIBOR plus 1.375% to a maximum of LIBOR plus 2.00%. As a result of the interest rate swap agreement, we are subject to interest rate risk on debt in excess of $25 million drawn on our Credit Facility.
At September 30, 2019, we had fixed rate long-term debt aggregating $175 million and variable rate long-term debt aggregating $124 million, after taking into account the effect of the swap.
The fair values of outstanding derivative instruments are as follows (in thousands):
|
|
Fair Value of Derivatives
|
|
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Balance Sheet
Classification
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
5 year interest rate swap
|
|
$
|
—
|
|
|
$
|
135
|
|
|
Other current assets
|
10 year interest rate swap
|
|
|
(1,359
|
)
|
|
|
(70
|
)
|
|
Other long-term (liabilities)
|
|
|
$
|
(1,359
|
)
|
|
$
|
65
|
|
|
|
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.
17
Return to Index
The effect of the interest rate swaps on the Consolidated Statement of Operations was as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Income Statement
Classification
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 year interest rate swap
|
|
$
|
(24
|
)
|
|
$
|
(23
|
)
|
|
$
|
(120
|
)
|
|
$
|
(27
|
)
|
|
(Decrease) to interest expense
|
10 year interest rate swap
|
|
|
16
|
|
|
|
27
|
|
|
|
18
|
|
|
|
120
|
|
|
Increase to interest expense
|
|
|
$
|
(8
|
)
|
|
$
|
4
|
|
|
$
|
(102
|
)
|
|
$
|
93
|
|
|
|
16. 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, 2019
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation assets (1)
|
|
$
|
44,630
|
|
|
$
|
—
|
|
|
$
|
44,630
|
|
|
$
|
—
|
|
|
|
$
|
44,630
|
|
|
$
|
—
|
|
|
$
|
44,630
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
33,714
|
|
|
$
|
—
|
|
|
$
|
33,714
|
|
|
$
|
—
|
|
10 year interest rate swap
|
|
|
1,359
|
|
|
|
—
|
|
|
|
1,359
|
|
|
|
—
|
|
|
|
$
|
35,073
|
|
|
$
|
—
|
|
|
$
|
35,073
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value Measurement at
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation assets (1)
|
|
$
|
42,161
|
|
|
$
|
—
|
|
|
$
|
42,161
|
|
|
$
|
—
|
|
5 year interest rate swap
|
|
|
135
|
|
|
|
—
|
|
|
|
135
|
|
|
|
—
|
|
|
|
$
|
42,296
|
|
|
$
|
—
|
|
|
$
|
42,296
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
33,287
|
|
|
$
|
—
|
|
|
$
|
33,287
|
|
|
$
|
—
|
|
10 year interest rate swap
|
|
|
70
|
|
|
|
—
|
|
|
|
70
|
|
|
|
—
|
|
|
|
$
|
33,357
|
|
|
$
|
—
|
|
|
$
|
33,357
|
|
|
$
|
—
|
|
(1)
|
Deferred compensation assets consist of the cash surrender value of life insurance policies and are intended to assist in the funding of the deferred compensation agreements.
|
17. SEGMENT REPORTING
We operate our business in two reportable segments. These complementary segments provide different services and products and utilize different technologies for improving reservoir performance and increasing oil and gas recovery from new and existing fields.
18
Return to Index
|
•
|
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.
|
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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from unaffiliated clients
|
|
$
|
109,339
|
|
|
$
|
63,861
|
|
|
$
|
—
|
|
|
$
|
173,200
|
|
Inter-segment revenue
|
|
|
99
|
|
|
|
199
|
|
|
|
(298
|
)
|
|
|
—
|
|
Segment operating income
|
|
|
18,835
|
|
|
|
11,456
|
|
|
|
916
|
|
|
|
31,207
|
|
Total assets (at end of period)
|
|
|
347,475
|
|
|
|
287,431
|
|
|
|
152,790
|
|
|
|
787,696
|
|
Capital expenditures
|
|
|
3,260
|
|
|
|
1,982
|
|
|
|
65
|
|
|
|
5,307
|
|
Depreciation and amortization
|
|
|
3,684
|
|
|
|
1,650
|
|
|
|
363
|
|
|
|
5,697
|
|
Three months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from unaffiliated clients
|
|
$
|
103,609
|
|
|
$
|
78,537
|
|
|
$
|
—
|
|
|
$
|
182,146
|
|
Inter-segment revenue
|
|
|
58
|
|
|
|
141
|
|
|
|
(199
|
)
|
|
|
—
|
|
Segment operating income
|
|
|
14,956
|
|
|
|
19,243
|
|
|
|
680
|
|
|
|
34,879
|
|
Total assets (at end of period)
|
|
|
321,025
|
|
|
|
276,345
|
|
|
|
69,227
|
|
|
|
666,597
|
|
Capital expenditures
|
|
|
2,437
|
|
|
|
1,680
|
|
|
|
31
|
|
|
|
4,148
|
|
Depreciation and amortization
|
|
|
4,138
|
|
|
|
1,037
|
|
|
|
505
|
|
|
|
5,680
|
|
Nine months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from unaffiliated clients
|
|
$
|
318,280
|
|
|
$
|
193,152
|
|
|
$
|
—
|
|
|
$
|
511,432
|
|
Inter-segment revenue
|
|
|
346
|
|
|
|
419
|
|
|
|
(765
|
)
|
|
|
—
|
|
Segment operating income
|
|
|
40,892
|
|
|
|
31,792
|
|
|
|
2,945
|
|
|
|
75,629
|
|
Total assets
|
|
|
347,475
|
|
|
|
287,431
|
|
|
|
152,790
|
|
|
|
787,696
|
|
Capital expenditures
|
|
|
7,906
|
|
|
|
9,114
|
|
|
|
517
|
|
|
|
17,537
|
|
Depreciation and amortization
|
|
|
11,505
|
|
|
|
4,377
|
|
|
|
1,188
|
|
|
|
17,070
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from unaffiliated clients
|
|
$
|
306,525
|
|
|
$
|
221,114
|
|
|
$
|
—
|
|
|
$
|
527,639
|
|
Inter-segment revenue
|
|
|
178
|
|
|
|
293
|
|
|
|
(471
|
)
|
|
|
—
|
|
Segment operating income
|
|
|
44,473
|
|
|
|
55,357
|
|
|
|
814
|
|
|
|
100,644
|
|
Total assets
|
|
|
321,025
|
|
|
|
276,345
|
|
|
|
69,227
|
|
|
|
666,597
|
|
Capital expenditures
|
|
|
10,002
|
|
|
|
5,465
|
|
|
|
596
|
|
|
|
16,063
|
|
Depreciation and amortization
|
|
|
12,675
|
|
|
|
3,045
|
|
|
|
1,646
|
|
|
|
17,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) "Corporate & Other" represents those items that are not directly related to a particular segment, eliminations and the assets and liabilities of discontinued operations.
|
|
18. RECENT ACCOUNTING PRONOUNCEMENTS
Pronouncements Adopted in 2019
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. In July 2018, the FASB issued ASU 2018-11 ("Targeted Improvements to Leases"), which
19
Return to Index
provides companies with an additional transition method that allows the effects of the adoption of the new standard to be recognized as a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We elected this optional transition method for adoption. The adoption of this standard on January 1, 2019 had a material impact to our Consolidated Balance Sheet; but not to our Consolidated Statement of Operations or Cash Flows. The most significant impact was the recognition of $77.5 million of ROU assets and liabilities for operating leases, while our accounting for finance leases remained substantially unchanged.
Pronouncements Not Yet Effective
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. The adoption of this standard will not have a significant impact on our consolidated financial statements or on our accounting policies and processes.
20
Return to Index