Item 1. Financial Statements
The accompanying notes are an integral part of these interim consolidated financial statements.
The accompanying notes are an integral part of these interim consolidated financial statements.
The accompanying notes are an integral part of these interim consolidated financial statements.
The accompanying notes are an integral part of these interim consolidated financial statements.
The accompanying notes are an integral part of these interim consolidated financial statements.
The accompanying notes are an integral part of these interim consolidated financial statements.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim 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 for the annual financial statements, 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, 2019 (the "2019 Annual Report"). Core Laboratories N.V.'s balance sheet information for the year ended December 31, 2019 was derived from the 2019 audited consolidated financial statements.
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, 2020 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2020.
References to “Core Lab”, "Core Laboratories", 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, 2019.
2. INVENTORIES
Inventories consisted of the following (in thousands):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Finished goods
|
|
$
|
18,369
|
|
|
$
|
26,507
|
|
Parts and materials
|
|
|
20,727
|
|
|
|
21,419
|
|
Work in progress
|
|
|
3,812
|
|
|
|
2,237
|
|
Total inventories
|
|
$
|
42,908
|
|
|
$
|
50,163
|
|
9
Return to Index
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. See Note 12, Inventory Write-down for additional information.
3. SIGNIFICANT ACCOUNTING POLICIES UPDATE
Our significant accounting policies are detailed in "Note 2: Summary of Significant Accounting Policies" of our 2019 Annual Report. Significant changes to our accounting policies as a result of adopting Topic 326 – Financial Instruments-Credit Losses and Topic 350 – Intangibles-Goodwill and Other are discussed below:
Financial Instruments-Credit Losses
We have adopted the expected credit losses methodology for measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss impairment methodology. Our financial instruments that are potentially subject to credit losses consist primarily of cash and cash equivalents and accounts receivable. There is no significant impact in our consolidated financial statements or on our accounting policies and processes upon the adoption of this standard.
Intangibles-Goodwill and Other
We assess goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying value, then there is an impairment loss limited to the amount of goodwill allocated to that reporting unit. Our reporting units are the same as our two reportable segments. On January 1, 2020, we adopted the FASB new methodology for assessing goodwill impairment, see Note 20, Recent Accounting Pronouncements for additional information.
4. CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets and liabilities arise from differences in 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, we have 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 Sheets.
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 revenue recognition. 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 Sheets.
The balance of contract assets and contract liabilities consisted of the following (in thousands):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Contract assets
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,350
|
|
|
$
|
2,183
|
|
Non-Current
|
|
|
—
|
|
|
|
244
|
|
|
|
$
|
1,350
|
|
|
$
|
2,427
|
|
Contract Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,558
|
|
|
$
|
4,473
|
|
Non-current
|
|
|
387
|
|
|
|
383
|
|
|
|
$
|
1,945
|
|
|
$
|
4,856
|
|
10
Return to Index
|
|
September 30,
2020
|
|
Estimate of when contract liabilities will be recognized as revenue
|
|
|
|
|
within 12 months
|
|
$
|
1,558
|
|
within 12 to 24 months
|
|
|
387
|
|
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, 2020 and 2019.
5. ACQUISITIONS
We had no significant acquisitions during the three and nine months ended September 30, 2020.
6. LONG-TERM DEBT, NET
We have no financing lease obligations.
Long-term debt is as follows (in thousands):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Senior Notes
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Credit Facility
|
|
|
116,000
|
|
|
|
157,000
|
|
Total debt
|
|
|
266,000
|
|
|
|
307,000
|
|
Less: Debt issuance costs
|
|
|
(1,434
|
)
|
|
|
(1,717
|
)
|
Less: Current maturities of long-term debt
|
|
|
(75,000
|
)
|
|
|
—
|
|
Long-term debt, net
|
|
$
|
189,566
|
|
|
$
|
305,283
|
|
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.
On June 22, 2020, we entered into Amendment No. 1 (the “Amendment”) to the Seventh Amended and Restated Credit Agreement, dated June 19, 2018 (as amended, the “Credit Facility”). The Amendment increases the maximum leverage ratio permitted under the Credit Facility for certain periods. Pursuant to the terms of the Amendment, the maximum leverage ratio permitted under the Credit Facility is as follows:
Quarter ending
|
|
Maximum leverage ratio permitted
|
|
June 30, 2020
|
|
|
3.00
|
|
September 30, 2020
|
|
|
3.00
|
|
December 31, 2020
|
|
|
3.00
|
|
March 31, 2021
|
|
|
3.00
|
|
June 30, 2021
|
|
|
3.00
|
|
September 30, 2021
|
|
|
2.75
|
|
December 31, 2021 and thereafter
|
|
|
2.50
|
|
Moreover, the Amendment modified the range of variable interest rates that the Credit Facility may bear to be a range from LIBOR plus 1.500% to LIBOR plus 2.875% and included the addition of a LIBOR floor of 0.50%. The Amendment also reduced the aggregate borrowing commitment under the Credit Facility to $225 million and the amount by which we may elect to increase the facility size, known as the “accordion” feature, to $50 million, subject to the satisfaction of certain conditions. Any outstanding balance under the Credit Facility is due on maturity on June 19, 2023. Our available capacity at any point in time is reduced by outstanding borrowings and outstanding letters of credit which totaled $13.3 million at September 30, 2020,
11
Return to Index
resulting in an available borrowing capacity under the Credit Facility of $95.7 million. In addition to indebtedness under the Credit Facility, we had $6.6 million of outstanding letters of credit and performance guarantees and bonds from other sources as at September 30, 2020.
The Credit Facility remains unsecured, and contains customary representations, warranties, terms and conditions for similar types of facilities.
The terms of the Credit Facility and Senior Notes require us to meet certain covenants, including, but not limited to, an interest coverage ratio (calculated as consolidated EBITDA divided by interest expense) and a leverage ratio (calculated as 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 and Senior Notes each include a cross-default provision, whereby a default under one agreement may trigger a default in the other agreement. The Credit Facility has more restrictive covenants with a minimum interest coverage ratio of 3.0 to 1.0 and permits a maximum leverage ratio as described above. The Credit Facility allows non-cash charges such as impairment of assets, stock compensation and other non-cash charges to be added back in the calculation of consolidated EBITDA. The terms of our Credit Facility also 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 principles would affect the computation of any financial ratio or covenant of the Credit Facility. In accordance with the terms of the Credit Facility, our leverage ratio is 2.49, and our interest coverage ratio is 5.39, each for the period ended September 30, 2020. We believe that we are in compliance with all covenants contained in our Credit Facility and Senior Notes. Our parent, Core Laboratories N.V., together with certain of our material, wholly-owned subsidiaries, are guarantors or co-borrowers under the Credit Facility and Senior Notes.
We entered into two interest rate swap agreements for a total notional amount of $50 million, including one of which was entered during the nine months ended September 30, 2020. See Note 16, Derivative Instruments and Hedging Activities for additional information.
The estimated fair value of total debt at September 30, 2020 and December 31, 2019 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 maturity date.
During the three months ended September 30, 2020, the Company incurred approximately $1.5 million in professional service fees and expenses associated with the evaluation of various corporate debt issuances and/or debt refinancing opportunities. These corporate finance and capital structure costs were expensed immediately and classified as interest expense.
Subsequent to the three months ended September 30, 2020, on October 16, 2020, we, along with Core Laboratories (U.S.) Interests Holdings, Inc. as issuer, entered into two new series of senior notes with aggregate principal amount of $60 million in a private placement transaction (“2020 Senior Notes”). The 2020 Senior Notes are scheduled to be issued and funded on January 12, 2021. Series A of the 2020 Senior Notes consists of $45 million in aggregate principal amount that bear interest at a fixed rate of 4.09% and are due in full on January 12, 2026. Series B of the 2020 Senior Notes consists of $15 million in aggregate principal amount that bear interest at a fixed rate of 4.38% and are due in full on January 12, 2028. Interest on each series of the 2020 Senior Notes is payable semi-annually on June 30 and December 30, commencing on June 30, 2021.
The terms of the 2020 Senior Notes require us to meet certain covenants, including, but not limited to, an interest coverage ratio (calculated as consolidated EBITDA divided by interest expense) and a leverage ratio (calculated as consolidated net indebtedness divided by consolidated EBITDA), where consolidated EBITDA (as defined in the Note Purchase Agreement) and interest expense are calculated using the most recent four fiscal quarters; and a priority indebtedness ratio (calculated as Priority Indebtedness divided by Consolidated Total Assets (as defined in the Notes Purchase Agreement.) The financial covenants for the 2020 Senior Notes Agreement are aligned with the Credit Facility and the associated Note Purchase Agreement also allows renegotiation of the ratios in consideration of changes in accounting principles. Our parent, Core Laboratories N.V., together with certain of our material, wholly-owned subsidiaries, are guarantors or co-borrowers under the 2020 Senior Notes.
12
Return to Index
7. PENSION
Defined Benefit Plan
Prior to January 2020, we provided a noncontributory defined benefit pension plan covering substantially all of our Dutch employees ("Dutch Plan") who were hired prior to 2000. During 2019, there was a curtailment of the Dutch Plan for our Dutch employees whose pension benefit was based on years of service and final pay or career average pay, depending on when the employee began participating. These employees have been moved into the Dutch defined contribution plan. However, the unconditional indexation for this group of participants continues for so long as they remain in active service with the Company. There is no further contribution to fund the Dutch Plan since December 31, 2019.
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
191
|
|
|
$
|
—
|
|
|
$
|
572
|
|
Interest cost
|
|
|
179
|
|
|
|
259
|
|
|
|
514
|
|
|
|
778
|
|
Expected return on plan assets
|
|
|
(164
|
)
|
|
|
(231
|
)
|
|
|
(472
|
)
|
|
|
(692
|
)
|
Amortization of prior service cost
|
|
|
—
|
|
|
|
(25
|
)
|
|
|
—
|
|
|
|
(75
|
)
|
Amortization of actuarial loss
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
44
|
|
Net periodic pension cost
|
|
$
|
15
|
|
|
$
|
209
|
|
|
$
|
43
|
|
|
$
|
627
|
|
8. 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 and 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.
9. EQUITY
During the three and nine months ended September 30, 2020, we repurchased 7,500 and 55,000 of our common shares for $0.2 million and $1.6 million, respectively. Included in this total were rights to 25,000 shares valued at $0.5 million, 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 24,929 and 84,134 treasury shares upon vesting of stock-based awards during the three and nine months ended September 30, 2020, respectively.
In February, May and August 2020, we paid a quarterly dividend of $0.25, $0.01 and $0.01 per share of common stock, respectively. In addition, on October 15, 2020 we declared a quarterly dividend of $0.01 per share of common stock for shareholders of record on October 26, 2020 and payable on November 17, 2020.
Accumulated other comprehensive loss, net of tax, consisted of the following (in thousands):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Unrecognized net actuarial loss
|
|
$
|
(5,640
|
)
|
|
$
|
(5,640
|
)
|
Fair value of derivatives
|
|
|
(2,409
|
)
|
|
|
(690
|
)
|
Total accumulated other comprehensive loss
|
|
$
|
(8,049
|
)
|
|
$
|
(6,330
|
)
|
13
Return to Index
10. 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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Weighted average basic common shares
outstanding
|
|
|
44,491
|
|
|
|
44,371
|
|
|
|
44,470
|
|
|
|
44,349
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance shares
|
|
|
345
|
|
|
|
341
|
|
|
|
—
|
|
|
|
394
|
|
Restricted stock
|
|
|
63
|
|
|
|
4
|
|
|
|
—
|
|
|
|
111
|
|
Weighted average diluted common and
potential common shares outstanding
|
|
|
44,899
|
|
|
|
44,716
|
|
|
|
44,470
|
|
|
|
44,854
|
|
For the nine months ended September 30, 2020, the number of outstanding performance and restricted shares of Core Laboratories N.V. common stock that were excluded from the diluted earnings per share calculation, as their impact would be antidilutive, were as follows (in thousands):
|
|
Nine Months Ended
|
|
|
|
September 30, 2020
|
|
Performance shares
|
|
|
348
|
|
Restricted stock
|
|
|
71
|
|
11. IMPAIRMENTS AND OTHER CHARGES
The coronavirus disease 2019 (“COVID-19”) global pandemic resulted in government mandated shut-downs, cross-border travel restrictions, home sheltering and social distancing efforts to contain the virus and mitigate the incidence of infection. The COVID-19 mitigation efforts globally resulted in a sharp decline in the consumption of crude-oil and refined petroleum products, which in turn led to a significant decrease in spot and forward commodity prices. These events have resulted in substantial declines in the valuation of companies operating in the oil and gas services industry, including Core Laboratories. As a result, in March 2020, we determined that it was more likely than not that the fair value of our reporting units was less than their carrying value, which triggered an updated impairment assessment by the Company as of March 31, 2020. We performed an impairment test in accordance with ASC Topic 360, Impairment or Disposal of Long-Lived Assets and ASC Topic 350, Intangibles-Goodwill and Other, on our indefinite-lived and long-lived assets related to asset groups, and our reporting units.
We have two reporting units that are the same as our two reportable segments, with goodwill balances aggregating $213.4 million as of March 31, 2020. We performed a detailed quantitative impairment assessment of our reporting units. We determined that the fair value of one of the reporting units, our Production Enhancement segment representing approximately $114.0 million of the goodwill, was less than the carrying value. As a result, we concluded that the goodwill associated with our Production Enhancement segment was fully impaired, resulting in a $114.0 million goodwill impairment charge in March of 2020. We determined that the Reservoir Description reporting unit’s fair value is above the carrying value, which represented the remaining balance of $99.4 million of goodwill.
We identified a triggering event for one of the asset groups under the Production Enhancement reporting unit. The estimated fair value, based on applying the income approach model, of one of the asset groups was determined to be below its carrying value. As of March 31, 2020, we recorded a charge of $8.2 million to impair the intangible assets relating to the business acquisition of Guardian Technology in 2018. This impairment charge was associated with our Production Enhancement segment.
14
Return to Index
During the three months ended June 30, 2020 and September 30, 2020, respectively, we determined that there were no triggering events which require the Company to perform further impairment assessment for any of its reporting units or asset groups.
12. INVENTORY WRITE-DOWN
During the nine months ended September 30, 2020 as a result of the continuing adverse impact of COVID-19 and significant reduction in rig count and completions that affect the current consumption and anticipated demand for certain of our products, in June 2020, we recorded an additional inventory obsolescence and write-down of $9.9 million in our Production Enhancement segment.
13. 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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Gain on sale of assets
|
|
$
|
(206
|
)
|
|
$
|
(151
|
)
|
|
$
|
(556
|
)
|
|
$
|
(458
|
)
|
Results of non-consolidated subsidiaries
|
|
|
33
|
|
|
|
(96
|
)
|
|
|
(176
|
)
|
|
|
(193
|
)
|
Foreign exchange
|
|
|
982
|
|
|
|
570
|
|
|
|
308
|
|
|
|
389
|
|
Rents and royalties
|
|
|
(114
|
)
|
|
|
(134
|
)
|
|
|
(356
|
)
|
|
|
(727
|
)
|
Employment related charges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,866
|
|
Return on pension assets and other pension costs
|
|
|
(161
|
)
|
|
|
(232
|
)
|
|
|
(468
|
)
|
|
|
(714
|
)
|
Gain on sale of business
|
|
|
—
|
|
|
|
(58
|
)
|
|
|
—
|
|
|
|
(1,154
|
)
|
Curtailment
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,034
|
)
|
|
|
—
|
|
Cost reduction and other charges
|
|
|
—
|
|
|
|
—
|
|
|
|
3,943
|
|
|
|
2,977
|
|
Loss (recovery) on lease abandonment
|
|
|
(122
|
)
|
|
|
—
|
|
|
|
504
|
|
|
|
—
|
|
Rebates and other credits
|
|
|
(763
|
)
|
|
|
—
|
|
|
|
(763
|
)
|
|
|
—
|
|
Other, net
|
|
|
(737
|
)
|
|
|
(611
|
)
|
|
|
(415
|
)
|
|
|
(333
|
)
|
Total other (income) expense, net
|
|
$
|
(1,088
|
)
|
|
$
|
(712
|
)
|
|
$
|
987
|
|
|
$
|
2,653
|
|
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
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
British Pound
|
|
$
|
361
|
|
|
$
|
163
|
|
|
$
|
373
|
|
|
$
|
341
|
|
Canadian Dollar
|
|
|
106
|
|
|
|
197
|
|
|
|
410
|
|
|
|
285
|
|
Euro
|
|
|
682
|
|
|
|
18
|
|
|
|
594
|
|
|
|
20
|
|
Other currencies, net
|
|
|
(167
|
)
|
|
|
192
|
|
|
|
(1,069
|
)
|
|
|
(257
|
)
|
Total (gain) loss, net
|
|
$
|
982
|
|
|
$
|
570
|
|
|
$
|
308
|
|
|
$
|
389
|
|
14. INCOME TAX EXPENSE
The Company recorded an income tax expense of $3.7 million and $3.3 million for the three months ended September 30, 2020 and 2019, respectively, and income tax benefit of $0.6 million and $19.5 million for the nine months ended September 30, 2020 and 2019, respectively. The effective tax rate for the three and nine months ended September 30, 2020 were 55.0% and 0.6% recorded on income from continuing operations before taxes of $6.7 million and loss of $111.7 million, respectively. The income tax expense for the nine months ended September 30, 2020, was primarily impacted by the impairment of goodwill, intangible assets and other charges recorded during these periods, which were largely not deductible for tax purposes.
The effective tax rate for the three months ended September 30, 2019 was 12.1% on income from continuing operations before tax of $27.5 million. The effective tax rate for the nine months ended September 30, 2019 was (30.2%) on income from continuing operations before tax of $64.5 million. Tax benefit for the nine months ended September 30, 2019 includes a net tax
15
Return to Index
benefit of $58.5 million, which resulted from a corporate restructuring in the first quarter of 2019 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.
15. 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,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating lease expense
|
|
$
|
4,356
|
|
|
$
|
4,724
|
|
|
$
|
12,982
|
|
|
$
|
14,027
|
|
Short-term lease expense
|
|
|
359
|
|
|
|
402
|
|
|
|
1,223
|
|
|
|
1,024
|
|
Variable lease expense
|
|
|
312
|
|
|
|
162
|
|
|
|
1,086
|
|
|
|
521
|
|
Total lease expense
|
|
$
|
5,027
|
|
|
$
|
5,288
|
|
|
$
|
15,291
|
|
|
$
|
15,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities:
|
|
Operating cash flows used for operating leases
|
|
$
|
4,250
|
|
|
$
|
4,306
|
|
|
$
|
13,203
|
|
|
$
|
13,729
|
|
Right-of-use assets obtained in exchange for new lease liabilities
|
|
$
|
2,098
|
|
|
$
|
3,837
|
|
|
$
|
4,502
|
|
|
$
|
11,066
|
|
Weighted-average remaining lease term- operating leases
|
|
8.68 years
|
|
|
9.18 years
|
|
|
8.68 years
|
|
|
9.18 years
|
|
Weighted-average discount rate - operating leases
|
|
|
4.76
|
%
|
|
|
4.95
|
%
|
|
|
4.76
|
%
|
|
|
4.95
|
%
|
Scheduled undiscounted cash flows for non-cancellable leases at September 30, 2020 consist of the following (in thousands):
|
Operating Leases
|
|
Remainder of 2020
|
$
|
3,807
|
|
2021
|
|
13,527
|
|
2022
|
|
11,787
|
|
2023
|
|
9,998
|
|
2024
|
|
7,674
|
|
Thereafter
|
|
37,019
|
|
Total undiscounted lease payments
|
|
83,812
|
|
Less: Imputed interest
|
|
(15,356
|
)
|
Total operating lease liabilities
|
$
|
68,456
|
|
During the three and nine months ended September 30, 2020, the Company recorded a net loss (recovery) on lease abandonment of $(0.1) million and $0.5 million, for certain properties that ceased in use and are expected to provide no future economic benefits.
The Company has elected to apply the short-term lease exemption to all of its classes of underlying assets. Accordingly, no right of use asset or operating 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.
16. 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.
16
Return to Index
Interest Rate Risk
Our Credit Facility bears interest at variable rates from LIBOR plus 1.500% to a maximum of LIBOR plus 2.875% and includes the addition of a LIBOR floor of 0.50%. 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.
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 2.5% through August 29, 2024. In February 2020, we entered into the second swap agreement of $25 million, we have fixed the LIBOR portion of the interest rate at 1.3% through February 28, 2025. Each swap is measured at fair value and recorded in our Consolidated Balance Sheet as an asset or 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 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.
At September 30, 2020, we had fixed rate long-term debt aggregating $200 million and variable rate long-term debt aggregating $66 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,
2020
|
|
|
December 31,
2019
|
|
|
Balance Sheet
Classification
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
5 year interest rate swap
|
|
$
|
(916
|
)
|
|
$
|
—
|
|
|
Other current (liabilities)
|
10 year interest rate swap
|
|
|
(2,315
|
)
|
|
|
(1,054
|
)
|
|
Other long-term (liabilities)
|
|
|
$
|
(3,230
|
)
|
|
$
|
(1,054
|
)
|
|
|
The fair value of all outstanding derivatives was determined using a model with inputs that are observable in the market or can be derived from or corroborated by observable data (Level 2).
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,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Income Statement
Classification
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 year interest rate swap
|
|
$
|
72
|
|
|
$
|
(24
|
)
|
|
$
|
117
|
|
|
$
|
(120
|
)
|
|
Increase (decrease) to interest expense
|
10 year interest rate swap
|
|
|
149
|
|
|
|
16
|
|
|
|
327
|
|
|
|
18
|
|
|
Increase (decrease) to interest expense
|
|
|
$
|
221
|
|
|
$
|
(8
|
)
|
|
$
|
444
|
|
|
$
|
(102
|
)
|
|
|
17
Return to Index
17. 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, 2020
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation assets (1)
|
|
$
|
42,498
|
|
|
$
|
—
|
|
|
$
|
42,498
|
|
|
$
|
—
|
|
|
|
$
|
42,498
|
|
|
$
|
—
|
|
|
$
|
42,498
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
|
$
|
33,829
|
|
|
$
|
—
|
|
|
$
|
33,829
|
|
|
$
|
—
|
|
5 year interest rate swap
|
|
|
916
|
|
|
|
—
|
|
|
|
916
|
|
|
|
—
|
|
10 year interest rate swap
|
|
|
2,315
|
|
|
|
—
|
|
|
|
2,315
|
|
|
|
—
|
|
|
|
$
|
37,059
|
|
|
$
|
—
|
|
|
$
|
37,059
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value Measurement at
|
|
|
|
|
|
|
|
December 31,
2019
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation assets (1)
|
|
$
|
47,009
|
|
|
$
|
—
|
|
|
$
|
47,009
|
|
|
$
|
—
|
|
|
|
$
|
47,009
|
|
|
$
|
—
|
|
|
$
|
47,009
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
|
$
|
34,081
|
|
|
$
|
—
|
|
|
$
|
34,081
|
|
|
$
|
—
|
|
10 year interest rate swap
|
|
|
1,054
|
|
|
|
—
|
|
|
|
1,054
|
|
|
|
—
|
|
|
|
$
|
35,135
|
|
|
$
|
—
|
|
|
$
|
35,135
|
|
|
$
|
—
|
|
(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.
|
18. 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 approximately $16.6 million in cash. 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 as Income from discontinued operations in the Consolidated Statements of Operations. 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.
The associated results of operations are separately reported as Discontinued Operations for all periods presented on the Consolidated Statements of Operations. Cash flows from this discontinued business are shown below. As such, the results from continuing operations for the Company and segment highlights for Production Enhancement, exclude these discontinued operations.
18
Return to Index
Selected data for this discontinued business consisted of the following (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
Services
|
|
$
|
—
|
|
|
$
|
1,165
|
|
Product sales
|
|
|
—
|
|
|
|
4,233
|
|
Total revenue
|
|
|
—
|
|
|
|
5,398
|
|
Cost of services
|
|
|
—
|
|
|
|
690
|
|
Cost of product sales
|
|
|
—
|
|
|
|
3,196
|
|
Other expense
|
|
|
—
|
|
|
|
91
|
|
Operating income (loss)
|
|
|
—
|
|
|
|
1,421
|
|
Gain on sale
|
|
|
(485
|
)
|
|
|
8,319
|
|
Income (loss) from discontinued operations before income tax expense
|
|
|
(485
|
)
|
|
|
9,740
|
|
Income tax expense (benefit)
|
|
|
(88
|
)
|
|
|
1,907
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
(397
|
)
|
|
$
|
7,833
|
|
There are no activities recorded for the three and nine months ended September 30, 2020 and no balances recorded for the discontinued operations as of September 30, 2020 and December 31, 2019.
Net cash provided by operating activities of discontinued operations for the nine months ended September 30, 2020 and 2019 was $0.0 million and $0.1 million, respectively.
19. 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.
|
•
|
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.
|
19
Return to Index
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, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from unaffiliated clients
|
|
$
|
80,060
|
|
|
$
|
25,322
|
|
|
$
|
—
|
|
|
$
|
105,382
|
|
Inter-segment revenue
|
|
|
43
|
|
|
|
39
|
|
|
|
(82
|
)
|
|
|
—
|
|
Segment operating income (loss)
|
|
|
11,022
|
|
|
|
(321
|
)
|
|
|
630
|
|
|
|
11,331
|
|
Total assets (at end of period)
|
|
|
306,369
|
|
|
|
128,832
|
|
|
|
155,613
|
|
|
|
590,814
|
|
Capital expenditures
|
|
|
1,377
|
|
|
|
641
|
|
|
|
154
|
|
|
|
2,172
|
|
Depreciation and amortization
|
|
|
3,391
|
|
|
|
1,512
|
|
|
|
261
|
|
|
|
5,164
|
|
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
|
|
Nine months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from unaffiliated clients
|
|
$
|
271,203
|
|
|
$
|
102,315
|
|
|
$
|
—
|
|
|
$
|
373,518
|
|
Inter-segment revenue
|
|
|
205
|
|
|
|
443
|
|
|
|
(648
|
)
|
|
|
—
|
|
Segment operating income (loss)
|
|
|
35,618
|
|
|
|
(137,944
|
)
|
|
|
2,117
|
|
|
|
(100,209
|
)
|
Total assets (at end of period)
|
|
|
306,369
|
|
|
|
128,832
|
|
|
|
155,613
|
|
|
|
590,814
|
|
Capital expenditures
|
|
|
4,609
|
|
|
|
3,753
|
|
|
|
216
|
|
|
|
8,578
|
|
Depreciation and amortization
|
|
|
10,364
|
|
|
|
4,860
|
|
|
|
806
|
|
|
|
16,030
|
|
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 (at end of period)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) "Corporate & Other" represents those items that are not directly related to a particular segment, eliminations and the assets and liabilities of discontinued operations.
|
|
20. RECENT ACCOUNTING PRONOUNCEMENTS
Pronouncements Adopted in 2020
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. We adopted this standard on January 1, 2020, and there has been no significant impact on our consolidated financial statements or on our accounting policies and processes.
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In January 2017, the FASB issued ASU 2017-04 (“Simplifying the Test for Goodwill Impairment”) which eliminates a step in computing the implied fair value of goodwill with a new methodology of an entity performing an annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. We adopted this standard on January 1, 2020, and although the new methodology was applied for the goodwill impairment analysis performed for the three month period ended March 31, 2020, it did not change the conclusion that goodwill had been impaired, and there has been no significant impact on our consolidated financial statements or on our accounting policies and processes as a result of adopting this updated accounting standard.
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