The Rising Influence of Rising Affluence

[DewDiligence]

CLB Reports 2Q10 Results

[CLB logged another great quarter, but the stock sold off 5% the next day (July 22) because investors were evidently expecting stronger guidance for 3Q10 (see below). I recently added to my position.

2Q10 revenue grew 19% YoY. 2Q10 non-GAAP EPS was 0.75 vs 0.62 in 2Q09 and 0.69 in 1Q10. Non-GAAP EPS guidance for 3Q10 is 0.76-0.78; this is up about 2% from 2Q10, which is not bad, but investors were evidently expecting more. (Note: CLB split 2:1 on 7/9/10; all figures in this PR are adjusted accordingly.)

During 2010 to date, management raised the regular dividend 20% (#msg-45530658), issued a special dividend payable on Aug 23 (#msg-52199320), repurchased 1.5M shares of its own stock, and generated the best ROIC in the oil-services industry.

The only negative I’m aware of is a spate of insider selling at prices close to the all-time high on July 26-30: $7.1M worth by CEO, David Demshur; $6.3M worth by COO, Monty Davis; $3M worth by CFO, Richard Bergmark; $3M worth by director, Joseph Perna; and $2.7M worth by director, John Ogren. The above sales represented 20%, 27%, 17%, 50%, and 35% of these insider’s holdings, respectively.]

http://finance.yahoo.com/news/Core-Lab-Reports-EPS-of-075-prnews-484941305.html?x=0&.v=1

›Core Lab Reports EPS of $0.75 for Q2 2010, EX-FX; YTD FCF Reaches Record $2.08 per Diluted Share; Quarterly Dividend and Special Dividend Announced

July 21, 2010, 5:44 pm EDT

AMSTERDAM, July 21 /PRNewswire-FirstCall/ -- Core Laboratories N.V. (NYSE:CLB) reported second quarter 2010 earnings of $0.75 per diluted share (EPS), excluding $0.04 EPS related to losses from currency translations (FX). Excluding the foreign currency translation losses, second quarter 2010 EPS increased by 21% compared with year-earlier second quarter EPS totals that also excluded various non-operational gains and a higher effective tax rate. All per share and share count data have been adjusted for the Company's two-for-one stock split that was effective on 8 July 2010.

Second quarter 2010 net income, excluding foreign currency translations, was $35,835,000 and was over $2,000,000 higher than the upper target of previous Company guidance. Net income, including currency exchange losses, was $34,216,000. Quarterly revenue increased year-over-year by 19% to $198,902,000, while second quarter 2010 operating income, excluding foreign currency translations, was $55,432,000. Operating margins, calculated by dividing operating income, excluding losses from currency translations, by revenue, reached 28%, equaling the highest quarterly margin ever reported by Core. Second quarter 2010 free cash flow (FCF), defined as cash from operations in excess of capital expenditures, increased 27% over year-earlier totals to $42,453,000, or $0.89 per diluted share. As has been the case for the last six quarters, net income was exceeded by FCF, most of which has been, or will be, returned to shareholders via second quarter 2010 share repurchases or in the form of a regular quarterly dividend of $0.06 per share and a special dividend of $0.65 per share, both payable on 23 August 2010.

As reported the previous three quarters, the Board of Supervisory Directors (the "Board") of Core Laboratories N.V. has established an internal performance metric of achieving a return on invested capital (ROIC) in the top decile of the service companies listed as Core's Peers by Bloomberg Financial. Based on Bloomberg's calculations for the latest comparable data available, Core's ROIC was the highest of its oilfield services Peer Group. Moreover, Core's ROIC exceeded the Peer Group average ROIC by approximately 26 percentage points, and the Company had the highest ROIC to weighted average cost of capital (WACC) ratio in the Peer Group.

For the first six months of 2010, Core's revenue increased 12% to $387,239,000; net income, excluding foreign currency translations and one-time items, was up 15% to $68,040,000; and EPS per diluted share, excluding foreign currency translations and one-time items, was $1.44, increasing 13% over the first two quarters of 2009. First half 2010 operating margins were 28%, and year-to-date free cash flow reached a record $98,664,000, or $2.08 per diluted share. Cash balances reached a quarter-ending total of approximately $173,600,000, up approximately $35,000,000 from previous-quarter totals, and the second highest quarter-ending total in Company history.

Segment Highlights

Core Laboratories reports results under three operating segments: Reservoir Description, Production Enhancement, and Reservoir Management.

Reservoir Description

Reservoir Description operations posted second quarter 2010 revenue of $106,528,000, an increase of 3% from the year-earlier quarter, while the MI-Swaco non-North American effective rig count increased by 2% for the same period. Operating income, excluding foreign currency exchange losses, was $25,427,000, yielding operating margins of 24%, equal to the previous quarter's margins. Core anticipates increased international activity in the second half of 2010 which should produce higher revenues and margins for its internationally focused Reservoir Description business.

During the quarter, the Company continued to work large-scale core analysis and advanced rock properties studies from the eastern Mediterranean region, the Middle East, and both South Atlantic offshore margins. Reservoir rock data sets from the eastern Mediterranean region were used to calibrate wireline logs and confirm additional natural gas reserves in the region. Middle East projects included advanced rock properties testing that will help maintain or expand the productive capacity of oil reservoirs. South Atlantic offshore margin projects included large-scale core analysis and reservoir geology studies for better definition of the quality and lateral extent of recent post- and pre-salt hydrocarbon developments. Core continued to realize increased demand for reservoir fluids phase-behavior studies and for crude oil testing, inspection, distillation, assay, fractionation, and characterization projects worldwide.

Production Enhancement

Production Enhancement operations posted second quarter 2010 revenue that increased 53% year over year to $79,717,000, and operating income, excluding foreign currency exchange losses, increased 91% to $26,250,000. Operating margins reached 33%, and year-over-year incremental quarterly margins, defined as the year-over-year change in quarterly operating income divided by the changes in corresponding revenue for those quarters, were 45%. Increased North American natural gas drilling, increased demand for Core's patented and proprietary completions and fracture diagnostics technologies, and several large international projects bolstered results.

The Company continued to see increased market penetration and increased demand for its ZeroWash®, SpectraScan®, and SpectraChem® fracture diagnostics technologies. Demand for Core's line of patented and proprietary High Efficiency Reservoir Optimization, or HERO™, perforating charges and gun systems increased throughout the quarter. Particularly strong demand was experienced in the oil-related Bakken and Eagle Ford shale plays. Internationally, Production Enhancement continued to monitor the efficiency of a pilot study for a major miscible field-flood project in Abu Dhabi. Core also began providing high-margin completion and recompletion technologies and services for reworking major, giant, and super giant fields in southern Iraq.

Reservoir Management

Reservoir Management operations posted second quarter 2010 revenue gains of 8% to $12,657,000, while operating income, excluding foreign currency exchange gains, increased 17% to $3,592,000 over second quarter 2009 totals. Operating margins for the second quarter of 2010 reached 28%.

In addition to the numerous joint-industry projects, including extended studies of the Montney shales in Canada and Eagle Ford shales in South Texas, Reservoir Management also worked on numerous proprietary studies, many of which parallel the joint-industry projects.

Proprietary studies included detailed reservoir studies offshore Ivory Coast and Nigeria and a gas-shale reconnaissance project in Indonesia. Reservoir Management was also contracted to evaluate "Wolfberry" reservoir systems in West Texas and to investigate the effectiveness of horizontal wells in the Woodbine, Eagle Ford, and Buda Limestone formations in East Texas.

Free Cash Flow, Cash, Share Count, Share Repurchase, and Senior Exchangeable Notes

For the second quarter of 2010, Core generated approximately $48,994,000 in cash from operations and made $6,541,000 in capital expenditures, yielding a free cash flow of $42,453,000, or $0.89 per diluted share. For the first six months of 2010, Core generated $98,664,000 in FCF, or $2.08 per diluted share, the highest first-half yearly total ever reported by the Company. Core concluded the second quarter of 2010 with $173,600,000 in cash balances, an increase of $70,000,000 over second quarter 2009 levels and up $35,000,000 over previous-quarter totals. Net debt-to-capitalization was approximately 10% at quarter end.

Due to continued increases in the Company's share price, Core increased its GAAP-reported diluted share count during the second quarter 2010 because of its outstanding Senior Exchangeable Notes (the "Notes"), of which approximately $239,000,000 worth remains outstanding. Core's average share price for the second quarter of 2010 was approximately $71.00, which exceeded the Notes' exchange strike price of $46.21. Therefore, a proportionate number of shares was added to the GAAP diluted share total for future settlement of the Notes, which mature in 2011. For the second quarter, 2,638,490 shares are included in Core's diluted share count associated with the above mentioned Notes as well as warrants issued in 2006. These additional diluted shares were partially offset by the 1,483,280 shares purchased for $91,686,000, or an average price per share of $61.81, during the first half of 2010. Core's diluted share count at the end of the second quarter was approximately 47,957,000.

The Senior Exchangeable Notes have been classified on the balance sheet as current, rather than long-term, debt. This classification occurs in any quarter when Core Lab's share price exceeds the exchange premium by 30% over 20 of the last 30 trading days of the previous quarter. Consequently, the noteholders, at their option, could exchange their Notes during the second quarter 2010. The Company has received six exchange requests in the second quarter of 2010 for twenty-eight notes, and Core is confident that its high cash balances are sufficient to meet all anticipated requests.

Return On Invested Capital

[The following paragraph is impressive, but is old hat.]

As reported in the previous three quarters, the Company's Board has established an internal performance metric of achieving an ROIC in the top decile of the oilfield service companies listed as Core's Peers by Bloomberg Financial. The Company and its Board believe that ROIC is a leading performance metric used by shareholders to determine the relative investment value of publicly traded companies. Further, the Company and its Board believe shareholders will benefit if Core consistently performs at the highest ROIC levels among its Bloomberg Peers. According to the latest financial information from Bloomberg, Core Laboratories' ROIC was the highest of any of the oilfield service companies listed in its Peer Group. In addition, Core's ROIC was approximately 26 percentage points above the Peer Group average. Several of the Peer companies failed to post ROIC that exceeded their WACC, thereby eroding capital and shareholder value. Core's ratio of ROIC to WACC was the highest of any company in the Peer Group.

Peer companies listed by Bloomberg include Halliburton, Dril-Quip, Superior Energy Services, Schlumberger, Tidewater, Carbo Ceramics, FMC Technologies, Baker Hughes, Cameron International, Oceaneering, Weatherford, and Key Energy Services, among others. Core will update oilfield services sector returns for the second quarter 2010 in its third quarter 2010 earnings release.

Quarterly Dividend and Special Dividend

Core's Board of Supervisory Directors announced on 12 July 2010 that a quarterly cash dividend equal to $0.06 per share of common stock would be payable in the third quarter of 2010. This amount reflects the two-for-one stock split that was effective on 8 July 2010 and is equal in amount to the quarterly cash dividend of $0.12 per share paid in the second quarter of 2010. On an annualized basis, the quarterly cash dividend would equal a payout of $0.24 per split share of common stock. The quarterly cash dividend will be payable on 23 August 2010 to shareholders of record on 23 July 2010. Dutch withholding tax will be deducted from the dividend at a rate of 15%.

Core's Board also has declared a special cash dividend of $0.65 per share of common stock payable on 23 August 2010 to shareholders of record on 23 July 2010. This amount reflects the two-for-one stock split and is the equivalent of $1.30 per share before the split. Dutch withholding tax will be deducted from the special dividend at a rate of 15%.

Total Company payout for these third quarter dividends, combined with second quarter 2010 share repurchases, will be approximately $37,000,000, a total that equals most of the FCF generated during the second quarter of 2010. Including the third quarter dividends, Core will have returned approximately $129,000,000, or $2.72 per diluted share, to its shareholders in 2010. Since the inception of the Company's Share Repurchase Program in 2002 and dividend and special dividend programs since 2008, Core will have returned over $800,000,000, or almost $17.00 per diluted share, to the Company's shareholders.

…Third Quarter 2010 Earnings Guidance

For the third quarter of 2010, Core expects revenue of approximately $205,000,000, with EPS in the $0.76 to $0.78 range, up approximately 34% over year-earlier quarterly totals. Using the Company's outstanding diluted share count of 47,957,000 at the end of the second quarter of 2010, EPS guidance of $0.76 to $0.78 translates to approximately $36,400,000 to $37,400,000 of net income. Year-over-year third quarter net income is projected to increase approximately 38%. Operating margins are expected to be approximately 28%, equaling the highest ever reported by Core, with year-over-year quarterly incremental margins of up to approximately 32%.

This third quarter guidance excludes any gains or losses that may originate from the repurchase of outstanding debt, any effects of foreign currency translations, and assumes an effective tax rate of 31%. In addition, third quarter guidance does not consider shares that may be repurchased by the Company or shares that may be added to the share count relative to amounts outstanding on Core's Senior Exchangeable Notes and warrants.

Adjustment to Senior Exchangeable Notes Exchange Rate

The dividends described herein will result in an adjustment to the Exchange Rate on our Senior Exchangeable Notes. The new exchange rate will be 21.8728 per $1,000 principal amount of the outstanding Notes and is effective 19 July 2010.

The Company has scheduled a conference call to discuss Core's second quarter 2010 earnings announcement. The call will begin at 7:30 a.m. CDT on Thursday, 22 July 2010. To listen to the call, please go to Core's website at www.corelab.com.

Core Laboratories N.V. (www.corelab.com) is a leading provider of proprietary and patented reservoir description, production enhancement, and reservoir management services used to optimize petroleum reservoir performance. The Company has over 70 offices in more than 50 countries and is located in every major oil-producing province in the world.‹