CORE LABORATORIES INC. Core Laboratories N.V. is aNetherlands limited liability company. We were established in 1936 and are one of the world's leading providers of proprietary and patented reservoir description and production enhancement services and products to the oil and gas industry, primarily through client relationships with many of the world's major, national and independent oil companies. We operate our business in two segments. These complementary operating segments provide different services and products and utilize different technologies for evaluating and improving reservoir performance and increasing oil and gas recovery from new and existing fields:
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Reservoir Description: Encompasses the characterization of petroleum reservoir rock and reservoir fluids samples to increase production and improve recovery of crude oil and natural gas from our clients' reservoirs. We provide laboratory-based analytical and field services to characterize properties of crude oil and crude oil-derived products to the oil and gas industry. We also provide proprietary and joint industry studies based on these types of analyses and manufacture associated laboratory equipment. In addition, we provide reservoir description capabilities that support various activities associated with energy transition projects, including services that support carbon capture, utilization and storage, hydrogen storage, geothermal projects, and the evaluation and appraisal of mining activities around lithium and other elements necessary for energy storage.
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Production Enhancement: Includes services and manufactured products associated with reservoir well completions, perforations, stimulations, production and well abandonment. 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.
General Overview
We provide services as well as design and produce products which enable our clients to evaluate and improve reservoir performance and increase oil and gas recovery from new and existing fields. These services and products are generally in higher demand when our clients are investing capital in their field development programs that are designed to increase productivity from existing fields or when exploring for appraising and developing new fields. Our clients' investment in capital expenditure programs tends to correlate over the longer term to oil and natural gas commodity prices. During periods of higher, stable prices, our clients generally invest more in capital expenditures and, during periods of lower or volatile commodity prices, they tend to invest less. Consequently, the level of capital expenditures by our clients impacts the demand for our services and products. The following table summarizes the annual average and year-end worldwide andU.S. rig counts for the years endedDecember 31, 2022 , 2021 and 2020, as well as the annual average and year-end spot price of a barrel of WTI crude,Europe Brent crude and an MMBtu of natural gas: 2022 2021 2020 Baker Hughes Worldwide Average Rig Count (1) 1,747 1,362 1,351 Baker Hughes U.S. Average Rig Count (1) 721 475 436 Baker HughesU.S. Land-based Average Rig Count (1) 706 461 420 Baker Hughes Worldwide Year-End Rig Count (2) 1,835 1,563 1,095 Baker Hughes U.S. Year-End Rig Count (2) 780 579 339 Baker HughesU.S. Land-based Year-End Rig Count (2) 763 565 324 Average Crude Oil Price per Barrel WTI (3) $ 94.90$ 68.14 $ 39.17 Average Crude Oil Price per Barrel Brent (4) $ 100.93$ 70.86 $ 41.96 Average Natural Gas Price per MMBtu (5) $ 6.45$ 3.89 $ 2.02 Year-end Crude Oil Price per Barrel WTI (3) $ 80.16$ 75.33 $ 48.35 Year-end Crude Oil Price per Barrel Brent (4) $ 82.82$ 77.24 $ 51.22 Year-end Natural Gas Price per MMBtu (5) $ 3.52$ 3.82 $ 2.36 (1) Twelve month average rig count as reported byBaker Hughes - Worldwide Rig Count. (2) Year-end rig count as reported byBaker Hughes - Worldwide Rig Count. (3) Average daily and year-end West Texas Intermediate ("WTI") crude spot price as reported by theU.S. Energy Information Administration ("EIA"). (4) Average daily and year-end Europe Brent crude spot price as reported by the EIA. (5) Average daily and year-endHenry Hub natural gas spot price as reported by the EIA. 24
-------------------------------------------------------------------------------- The events associated with the COVID-19 pandemic that began in 2020 continued in 2021 and began to subside in 2022. Certain international countries continued mandated shut-downs, home sheltering and social distancing policies that initially caused uncertainty in the demand for crude oil and associated products; however demand for these products has recovered more quickly than global production causing crude-oil commodity prices to increase significantly. AlthoughU.S. land drilling and completion activities continued to show improvement during 2021 and strengthened in 2022, activity still remains well below pre-pandemic levels. Additionally, in the first half of 2022, international activity continued to be adversely impacted by increasing infection rates associated with new variant strains of the COVID-19 virus during 2021 and 2022, which has continued to cause business disruptions associated with government mandated shut-downs, travel restrictions, quarantine protocols and worksite closures in various international regions. These disruptions started to ease during second half of 2022. The prices for both WTI and Brent crude oil decreased significantly at the end of the first quarter of 2020 and remained low throughout most of 2020. Crude-oil prices subsequently recovered in 2021 with more significant improvement during the second half of 2021, and the average price was 71% higher than in 2020, as growth in production was not keeping pace with the resurgence in consumer demand. The geopolitical conflict betweenRussia andUkraine that erupted inFebruary 2022 , has also resulted in disruptions to traditional supply chains associated with the movement of crude oil, primarily reducing the level of crude oil sourced fromRussia and being imported into various European ports. These disruptions have caused another sharp increase in the price of crude oil throughout the majority of 2022, which resulted in the average price being 41% higher in 2022 compared to 2021. However, in order to reduce oil prices in 2022,the United States government also released approximately 1 million barrels of oil per day from its Strategic Petroleum Reserve ("SPR") during most of 2022, reducing the United States SPR by approximately 220 million barrels. In general, activities associated with the exploration of oil and gas in theU.S. onshore market are more sensitive to changes in the crude-oil commodity prices, as opposed to larger international and offshore projects which take multiple years to plan and develop, and once announced and started, will continue through completion, despite changes in the current price of crude oil. Activity levels in theU.S. onshore market also responded immediately to the changes in demand, decreasing significantly to historically low levels in 2020, which bottomed in the summer of 2020, and subsequently began to recover in the second half of 2020 and into 2021. However, the growth in production has not kept pace with the resurgence in demand for energy produced from oil and gas, coupled with an adverse impact from global supply-chain challenges especially during the latter part of 2021. Crude-oil commodity prices remain volatile and continued to increase significantly during 2022, as a result of theRussia -Ukraine geopolitical conflict and the additional uncertainty in supply of crude oil and natural gas. The activities associated with the production of oil and gas increased throughout 2022; however, growth moderated due to limitations in personnel, equipment, supply chain disruptions, as well as the allocation of capital resources by oil and gas producing companies. Information published by the EIA, shows that the inventory of wells drilled but uncompleted (a "DUC" well) inthe United States , was 7,737 as ofDecember 31, 2020 , and declined to 5,099 and 4,577 at end of 2021 and 2022, respectively. This data indicates that during the period of higher activity prior to 2020, operators were drilling wells but not completing them as the DUC inventory grew. The activity levels began to decline in 2020 as operators began to drill fewer new wells and were completing some of the wells that had been previously drilled. As drilling and completing activity levels began to recovery in the second half of 2021 and 2022, the number of wells completed continued to outpace the number of new wells drilled during these periods. In theU.S. , the average land-based rig count increased approximately 10% from 2020 to 2021 as drilling activity began to recover from the disruptions caused by the COVID-19 pandemic. The growth inU.S. land drilling activity continued and the pace accelerated in 2022, as theU.S. average land-based rig count increased approximately 53% in 2022. Demand for product sales increased in tandem with the increase in the rig count and the increase in drilling and completing well activity. Demand for services has also improved and partially recovered but at a slower pace than demand for completion products. Activities on development projects and producing fields inU.S. unconventional reservoirs showed an increase when the commodity price strengthened, and demand for both services and product sales to this market responded accordingly. Outside of theU.S. , activities associated with the exploration for, and production of, oil also showed a decline in 2021 primarily due to the prolonged impact from the global pandemic as reflected by a decrease of 3% in the average number of active rigs outsidethe United States . In 2022, activity in most international regions increased which is reflected by an increase of 16% in the average number of active rigs outside theU.S. Long-term international and offshore projects which are commonly announced throughFinal Investment Decisions and subsequently initiated are not as susceptible or at-risk to delay or suspension due to short-term volatility in crude-oil commodity prices. In response to market conditions in 2020, the Company implemented cost reduction initiatives, which included (i) corporate and operating cost reductions; (ii) reduction in annual capital expenditures, and (iii) eliminating all non-essential costs. The corporate and operating cost reductions included reductions in workforce and reduction of senior executive and employee 25 -------------------------------------------------------------------------------- compensation. These initiatives continued in 2021. Following increased activity levels during the second half of 2021, the Company progressively reinstated certain employee costs, and inJanuary 2022 , temporary salary reduction measures were fully reinstated. Certain employee benefit plans have been partially reinstated beginningApril 2022 , and the Company will continue to evaluate the reinstatement of those benefits as the market for oilfield service companies continues to more fully recover and stabilize. The Company has also maintained its annual capital expenditures between$10 million and$13.5 million during the years 2020, 2021 and 2022, which is significantly reduced from average annual capital expenditures in years prior to 2020.
Results of Operations
Operating Results for the Year Ended
We evaluate our operating results by analyzing revenue, operating income and operating income margin (defined as operating income divided by total revenue). Since we have a relatively fixed cost structure, decreases in revenue generally translate into lower operating income results. Results for the years endedDecember 31, 2022 , 2021 and 2020 are summarized in the following chart. The year endedDecember 31, 2020 , operating loss includes approximately$132.6 million of charges associated with impairment of goodwill, intangible assets and inventory write-downs. [[Image Removed: img195230833_4.jpg]] 26
-------------------------------------------------------------------------------- Results of operations as a percentage of applicable revenue for the years endedDecember 31, 2022 , 2021 and 2020 are as follows (in thousands, except for per share information): 2022 / 2021 2021 / 2020 2022 2021 2020 % Change REVENUE: Services$ 346,974 70.8 %$ 344,342 73.2 %$ 376,421 77.3 % 0.8 % (8.5 )% Product sales 142,761 29.2 % 125,910 26.8 % 110,846 22.7 % 13.4 % 13.6 % Total revenue 489,735 100.0 % 470,252 100.0 % 487,267 100.0 % 4.1 % (3.5 )% OPERATING EXPENSES: Cost of services* (1) 274,297 79.1 % 267,641 77.7 % 279,281 74.2 % 2.5 % (4.2 )% Cost of product sales* (1) 119,358 83.6 % 100,255 79.6 % 95,486 86.1 % 19.1 % 5.0 % Total cost of services and product sales 393,655 80.4 % 367,896 78.2 % 374,767 76.9 % 7.0 % (1.8 )% General and administrative expense (1) 38,117 7.8 % 44,173 9.4 % 34,033 7.0 % (13.7 )% 29.8 % Depreciation and amortization 17,161 3.5 % 18,516 3.9 % 20,867 4.3 % (7.3 )% (11.3 )% Impairments and other charges - - - - 122,204 25.1 % NM NM Inventory write-down - - - - 10,375 2.1 % NM NM Other (income) expense, net (722 ) (0.1 )% (5,595 ) (1.2 )% 1,826 0.4 % NM NM OPERATING INCOME (LOSS) 41,524 8.5 % 45,262 9.6 % (76,805 ) (15.8 )% (8.3 )% NM Interest expense 11,570 2.4 % 9,152 1.9 % 14,372 2.9 % 26.4 % (36.3 )% Income (loss) from continuing operations before income taxes 29,954 6.1 % 36,110 7.7 % (91,177 ) (18.7 )% (17.0 )% NM Income tax expense (benefit) 10,296 2.1 % 15,891 3.4 % 5,896 1.2 % (35.2 )% 169.5 % Income (loss) from continuing operations 19,658 4.0 % 20,219 4.3 % (97,073 ) (19.9 )% (2.8 )% NM Income (loss) from discontinued operations, net of income taxes - - - - (424 ) (0.1 )% NM NM Net income (loss) 19,658 4.0 % 20,219 4.3 % (97,497 ) (20.0 )% (2.8 )% NM Net income (loss) attributable to non-controlling interest 205 - 492 0.1 % 140 - NM NM Net income (loss) attributable to Core Laboratories N.V.$ 19,453 4.0 %$ 19,727 4.2 %$ (97,637 ) (20.0 )% (1.4 )% NM Diluted earnings (loss) per share from continuing operations$ 0.42 $ 0.43 $ (2.18 ) (2.3 )% NM Diluted earnings (loss) per share attributable to Core Laboratories N.V.$ 0.42 $ 0.42 $ (2.20 ) 0.0 % NM Diluted weighted average common shares outstanding 46,813 46,690 44,477 Other Data: Current ratio (2) 2.05:1 2.08:1 1.85:1 Debt to EBITDA ratio (3) 2.68:1 2.70:1 NM Debt to Adjusted EBITDA ratio (4) 2.29:1 2.08:1 2.82:1 * Percentage based on applicable revenue rather than total revenue. "NM" means not meaningful. (1) Excludes depreciation. (2) Current ratio is calculated as follows: current assets divided by current liabilities. (3) Debt to EBITDA ratio is calculated as follows: debt less cash divided by the sum of consolidated net income plus interest, taxes, depreciation, and amortization. (4) Debt to Adjusted EBITDA ratio is calculated as follows: debt less cash divided by the sum of consolidated net income plus interest, taxes, depreciation, amortization, severance, and certain non-cash adjustments.
Service Revenue
Service revenue is primarily tied to activities associated with the exploration, production, movement and refinement of oil, gas and derived products outside theU.S. Service revenue for the year endedDecember 31, 2022 of$347.0 million was relatively flat compared to 2021. Disruptions resulting from the COVID-19 pandemic started to ease, and demand for crude oil progressively increased during 2022, however, the growth was offset by the disruptions to the movement and trading patterns of crude oil exported out ofRussia and into various European ports caused by theRussia -Ukraine geopolitical conflict. New logistical patterns associated with the supply lines of crude oil and derived products, coming out ofRussia and primarily coming intoEurope , continue to realign. Additionally, as over 70% of service revenue is generated from international markets, though our customer contracts substantially are denominated inU.S. Dollars, there are certain customer contracts denominated in foreign currencies. Therefore, the devaluation of most major currencies against theU.S. Dollar, primarily the Euro and British Pound, adversely impacted the growth of service revenue during the year endedDecember 31, 2022 . Service revenue 27 -------------------------------------------------------------------------------- for the year endedDecember 31, 2021 was$344.3 million down from$376.4 million in 2020, primarily due to the impact of the COVID-19 pandemic beginning inMarch 2020 and continuing throughout most of 2021, resulting in delays of exploration and production projects in both the offshore and international markets, as well as the U.S. market. We continue to focus on large-scale core analyses and reservoir fluids characterization studies in the Eagle Ford, thePermian Basin and theGulf of Mexico , along withGuyana ,Surinam ,Malaysia and other international locations such as offshoreSouth America ,Australia , and theMiddle East , includingKuwait and theUnited Arab Emirates . Analysis of crude oil and crude oil-derived products also occurs in every major producing region of the world.
Product Sales Revenue
Product sales revenue, which is equally tied to the completion of onshore wells in theU.S. and international activities, for the year endedDecember 31, 2022 was$142.8 million , an increase of 13% compared to 2021. The increase in product sales, which primarily include differentiated well completion products and specialized laboratory instrumentation, was attributable to growth in both theU.S. and international markets. Supply chain and logistical challenges continued throughout 2022 which have caused some delays in delivery of our products to certain international locations. Product sales revenue for the year endedDecember 31, 2021 was$125.9 million , an increase of 14% compared to 2020.
Cost of Services, excluding depreciation
Cost of services for the year endedDecember 31, 2022 was$274.3 million , or an increase of 2% compared to 2021, which corresponded with the change in revenue. The restoration of substantially all employee compensation and benefit costs during 2022 resulted in a higher employee compensation cost, however operating expenses outside theU.S. , and paid in local currencies, were lower when translated intoU.S. Dollars, as theU.S. Dollar strengthened against most foreign currencies during 2022. Cost of services for the year endedDecember 31, 2021 was$267.6 million , or a decrease of 4% compared to 2020, corresponding to the changes in revenue and the full benefit derived from the implementation of various employee compensation and cost reduction initiatives that began afterApril 2020 . Cost of services expressed as a percentage of services revenue increased to approximately 79% in 2022 primarily due to the effect of restoration of employee compensation costs as discussed above. Cost of services expressed as a percentage of service revenue increased to approximately 78% in 2021 from 74% in 2020, due to the subsequent restoration of certain cost reduction initiatives in the second half of 2021, and how our fixed cost structure is absorbed by revenue.
Cost of Product Sales, excluding depreciation
Cost of product sales for the year endedDecember 31, 2022 was$119.4 million , increased 19% compared to 2021, which increased slightly higher than the change in revenue. The restoration of substantially all employee compensation and benefit costs during 2022 resulted in a higher employee compensation costs as discussed above. In addition, inflation and global supply chain challenges impacted our raw materials and shipping costs also resulted in increased costs of product sales. Cost of product sales for the year endedDecember 31, 2021 was$100.3 million , increased 5% compared to 2020, corresponding to the changes in revenue, offset by improved manufacturing productivity and the full year benefit derived from the implementation of various employee compensation and cost reduction initiatives that began afterApril 2020 . Cost of product sales expressed as a percentage of product sales revenue increased to approximately 84% in 2022 as a result of elevated inflation and increased employee compensation as discussed above. Cost of product sales expressed as a percentage of product sales revenue decreased to 80% in 2021 from 86% in 2020 was primarily due to improved manufacturing productivity and absorption of fixed costs on a higher revenue base.
General and Administrative Expense, excluding depreciation
General and administrative ("G&A") expense includes corporate management and
centralized administrative services that benefit our operations. G&A expense was
$38.1 million in 2022, decreased 14% compared to 2021. The decrease is primarily
due to changes in compensation expense during the period and include accelerated
stock compensation expense recorded for retirement eligible employees of $3.9
million in 2022 compared to $7.2 million in 2021. Additionally, in 2022, $5.0
million of previously recognized compensation expense associated with
performance share awards was reversed, to align the compensation expense with
the vesting level of those performance share awards and revalue the awards.
However, the adjustments to reduce stock compensation expense in 2022 were
partially offset by the restoration of employee compensation and benefit costs
during 2022. G&A expenses were $44.2 million in 2021, an increase of
approximately $10.1 million , compared to 2020. The variance is primarily due to
changes in compensation expense during the period. In 2020, as a result of a
modification in the methodology of measuring performance conditions associated
with certain long-term employee stock-based compensation awards, these awards
were revalued, and $11.3 million of previously recognized stock compensation
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--------------------------------------------------------------------------------expense was reversed in 2020. See Note 17 - Stock-Based Compensation of the Notes to the Consolidated Financial Statements for further details.
Depreciation and Amortization
Depreciation and amortization expense for the year endedDecember 31, 2022 was$17.2 million decreased from$18.5 million and$20.9 million in 2021 and 2020, respectively, as capital expenditures have also decreased over the same period as a result of our cost reduction initiatives.
Impairments, Inventory Write-down and Other Charges
The geopolitical conflict betweenRussia andUkraine , which began inFebruary 2022 and continued throughDecember 31, 2022 , has resulted in disruptions to our operations inRussia andUkraine . The Company's operations and assets inUkraine are immaterial. As ofDecember 31, 2022 , all laboratory facilities, offices, and locations inRussia continued to operate and remained profitable and no specific asset losses were identified. For the years endedDecember 31, 2022 and 2021, there were no triggering events during the year, and, based on our assessment, we determined there was no impairment for any of our reporting units or asset groups, which included long-lived assets inRussia andUkraine , and no impairment has been recorded in 2022 or 2021. We completed our annual impairment assessment of goodwill for our reporting units as ofDecember 31, 2022 and 2021, by performing a qualitative assessment, which indicated it was not more likely than not that there was an impairment and therefore no quantitative test was required. In 2020, the events associated with the COVID-19 pandemic and the resulting sharp decrease in the consumption and demand for crude oil, which caused a sharp decrease in the price of crude oil, was identified as a triggering event inMarch 2020 . In response to the triggering event, the Company updated its analysis associated with future cash flows and the valuation of assets and potential impairment of goodwill and intangible assets. Our updated analysis resulted in the Company recording a total charge of$122.2 million for impairment of goodwill and intangible assets inMarch 2020 in our Production Enhancement operating segment. In addition, the Company recorded a charge of$10.4 million associated with the devaluation and obsolescence of inventory, primarily in our Production Enhancement operating segment. See Note 18 - Impairments and Other Charges and Note 19 - Inventory Write-down of the Notes to the Consolidated Financial Statements for further details.
Other (Income) Expense, net
The components of other (income) expense, net are as follows (in thousands):
For the Years Ended December 31,
2022 2021 2020
Gain on sale of assets $ (1,068 ) $ (427 ) $ (1,254 )
Results of non-consolidated subsidiaries (294 ) (62 ) (125 )
Foreign exchange (gain) loss, net 229 (228 ) 1,160
Rents and royalties (709 ) (571 ) (466 )
Return on pension assets and other pension costs (545 ) (306 ) (1,502 )
Gain on sale of business - (1,012 ) -
Insurance and other settlements (669 ) (2,236 ) -
Loss on lease abandonment - - 504
Severance and other charges 3,332 - 3,943
Other, net (998 ) (753 ) (434 )
Total other (income) expense, net $ (722 ) $
(5,595 )
In 2022, the Company sold its ownership interest of mineral rights in certain properties for a net gain of$0.7 million which is included in gain on sale of assets. We incurred property and other losses in a fire incident in 2020 that we received full and final insurance settlement of$0.6 million in 2021. TheNorth America mid-continent winter storm inFebruary 2021 caused business interruptions and property losses to certain facilities, and we received insurance settlements of$0.7 million and$1.6 million in 2022 and 2021, respectively. 29 -------------------------------------------------------------------------------- Foreign exchange (gain) loss, net is summarized in the following table (in thousands): For the Years Ended December 31, 2022 2021 2020 British Pound$ 212 $ 86 $ 653 Canadian Dollar 238 77 590 Colombian Peso (430 ) (281 )(331 ) Euro (382 ) (450 )458 Indonesian rupiah 379 123 (96 ) Other currencies, net 212 217
(114 )
Foreign exchange (gain) loss, net
Interest Expense Interest expense for the year endedDecember 31, 2022 was$11.6 million compared to$9.2 million in 2021. Interest expense in 2021, was lower by$1.4 million , associated with a net gain recognized upon the settlement and restructuring of our interest rate swap agreements, as described in Note 15 - Derivative Instruments and Hedging Activities of the Notes to the Consolidated Financial Statements. In 2022, the Company reduced its average outstanding debt by approximately 12%, when compared to 2021, however the decrease in debt outstanding was offset by a substantial increase in interest rates. Interest expense for the year endedDecember 31, 2021 was$9.2 million compared to$14.4 million in 2020. Interest expense in 2021 was lower than 2020 due to the following: 1) 2021 interest expense includes a$1.4 million net gain recorded for the settlement and restructuring of our interest rate swap agreements as discussed above, 2) the outstanding balance of our aggregated variable rate debt was reduced by$56.0 million , and 3) the balance of our long-term fixed rate debt was reduced by$15.0 million . See Note 11 - Long-term Debt, net of the Notes to the Consolidated Financial Statements for further detail.
Income Tax Expense
Income tax expense was$10.3 million in 2022 and resulted in an effective tax rate of 34.4%. The 2022 tax expense was primarily impacted by taxable gains in local jurisdictions associated with foreign currency revaluation ofU.S. denominated receivables, primarily in theU.K. andTurkey as well as certain non-deductible stock compensation expense inthe United States . Income tax expense was$15.9 million in 2021 and resulted in an effective tax rate of 44.0%. The 2021 tax expense was primarily impacted by taxable gains in local jurisdictions associated with foreign currency revaluation ofU.S. dollar denominated receivables, primarily inTurkey , and certain non-deductible stock compensation expense inthe United States . The financial results for 2020 include a goodwill impairment of$114.0 million and resulted in a loss before income taxes. However, the goodwill impairment was mostly non-deductible for income tax purposes, and as a result income tax expense was$5.9 million in 2020.
See Note 10 - Income Taxes of the Notes to the Consolidated Financial Statements for further detail of income tax expense.
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--------------------------------------------------------------------------------Segment Analysis
The following charts and tables summarize the annual revenue and operating results as a percentage of applicable revenue for our two complementary operating segments.
Segment Revenue[[Image Removed: img195230833_5.jpg]][[Image Removed: img195230833_6.jpg]][[Image Removed: img195230833_7.jpg]]
2022 / 2021 2021 / 2020
2022 2021 2020 % Change
REVENUE:
Reservoir
Description $ 307,691 62.8 % $ 313,609 66.7 % $ 355,041 72.9 % (1.9 )% (11.7 )%
Production
Enhancement 182,044 37.2 % 156,643 33.3 % 132,226 27.1 % 16.2 % 18.5 %
Total revenue
4.1 % (3.5 )%
OPERATING INCOME
(LOSS):
Reservoir
Description* $ 22,902 7.4 % $ 28,958 9.2 % $ 55,044 15.5 % (20.9 )% (47.4 )%
Production
Enhancement* 16,351 9.0 % 15,163 9.7 % (133,449 ) (100.9 )% 7.8 % NM Corporate and other (1) 2,271 0.5 % 1,141 0.2 % 1,600 0.3 % NM NM OPERATING INCOME (LOSS)$ 41,524 8.5 %$ 45,262 9.6 %$ (76,805 ) (15.8 )% (8.3 )% NM * Percentage, which represents operating margin, is based on operating income (loss) divided by applicable revenue rather than total revenue. '"NM" means not meaningful. (1) "Corporate and other" represents those items that are not directly relating to a particular operating segment.
Reservoir Description
Reservoir Description's operations are heavily exposed to international and offshore project activity levels, with approximately 80% of its revenue sourced from producing fields, development projects and movement of crude oil products outside theU.S. The Company continues to see improvement in international projects across several international regions; however, increases in project activity were offset by disruptions caused by theRussia -Ukraine geopolitical conflict, the COVID-19 pandemic and the devaluation of most currencies against theU.S. Dollar, primarily the Euro and British Pound, in 2022 as previously discussed. Revenue from the Reservoir Description operating segment was$307.7 million in 2022 and down slightly when compared to$313.6 million in 2021 primarily due to the factors discussed above. Revenue from the Reservoir Description operating segment in 2021 of$313.6 million compared to$355.0 million in 2020, decreased approximately 12% primarily due to the impact of the COVID-19 pandemic, which beganMarch 2020 and continued throughout 2021. The COVID-19 pandemic resulted in reduced activity associated with the exploration and production of oil and gas, as well as delays and disruptions to project workflows that slowed the progress on long term international and offshore projects. In addition, various weather events, such as theNorth America mid-continent winter storm and major named storms in theGulf of Mexico caused a significant disruption to crude oil production and supply activities during 2021. 31 -------------------------------------------------------------------------------- We continue to focus on large-scale core analysis and reservoir fluids characterization studies in theAsia-Pacific region , offshoreEurope andAfrica , offshoreSouth America ,North America , and theMiddle East . We are also engaged on both newly developed fields and brownfield extensions in offshore areas such asAustralia ,Brazil ,Guyana , theGulf of Mexico , theMiddle East and theNorth Sea . Analysis of crude oil derived products also occurs in every major producing region of the world. In particular, we anticipate increased demand for our proprietary laboratory technological services in theMiddle East as a result of several factors, includingCore Lab's completion of a comprehensive reservoir fluid laboratory inDoha, Qatar , resumption of production from the Wafra oilfield located within the onshorePartitioned Neutral Zone in the southern part ofKuwait , as well as expansion of the North Gas Field inQatar . Additionally, in 2022,Core Lab , under the direction ofThe CarbonNet Project commenced the second phase of advanced rock property analysis of conventional core extracted from the Gular-1 appraisal well, which is associated with the assessment of a large prospective geologic subsurface structure located in theGippsland Basin offshore the southeast coast ofAustralia which could be used for carbon capture and sequestration. Operating income of$22.9 million in 2022 decreased from$29.0 million in 2021. Operating margins decreased to 7.4% in 2022 compared to 9.2% in 2021. The decrease in operating income and operating margin in 2022, correlates to the decrease in revenue and the decrease in operating margins reflect the increase in costs during 2022, associated with the Company restoring employee compensation costs and benefits. Operating income of$29.0 million in 2021 significantly decreased compared to$55.0 million in 2020. Operating margins decreased to 9.2% in 2021 compared to 15.5% in 2020. The decrease in operating income and operating margin in 2021 correlates to the decrease in revenue and reflects additional costs associated with disruptions and damage to facilities caused by weather events during 2021 as discussed above. In addition, 2020 includes and adjustment of$7.6 million to reverse previously recognized stock compensation expense for certain employees' performance share awards. See Note 17 - Stock-Based Compensation of the Notes to the Consolidated Financial Statements for further detail.
Production Enhancement
Production Enhancement's operations are largely focused on complex completions in unconventional, tight-oil reservoirs in theU.S. as well as conventional projects across the globe. Drilling and completion activity levels in theU.S. onshore market began to significantly decrease starting in March of 2020 due to the global pandemic and bottomed out at a historically low level in May of 2020. Activity levels in theU.S. onshore market began to recover in the second half of 2020, and activity levels for both theU.S. onshore and international markets continued to strengthen in 2021 and 2022. However, the pace of growth in theU.S. onshore market was slower in 2022 compared to 2021. Revenue from the Production Enhancement operating segment of$182.0 million in 2022 increased 16% compared to 2021. The increase was driven by both an increase in the drilling and completion of onshore wells in theU.S. and improved activity in international markets. International sales continue to be impacted by the challenges in the global supply chains and logistical challenges that caused delays in delivery of our products to certain international locations. Revenue from the Production Enhancement operating segment of$156.6 million in 2021 increased approximately 19% compared to 2020 primarily driven by a significant increase in the drilling and completion of wells in theU.S. onshore market. TheU.S. average onshore rig count increased approximately 53% in 2022 and 10% in 2021 compared to 2021 and 2020, respectively. Operating income of$16.4 million in 2022 compared to$15.2 million in 2021. The increase in operating income correlates to the increase in revenue, however, operating costs in 2022 increased due to the restoration of employee compensation and benefit costs and the inflationary impact on our raw materials and shipping costs. Operating margin of 9.0% in 2022 decreased from 9.7% in 2021 primarily due to the increase in costs as discussed above. Operating income of$15.2 million in 2021 compared to an operating loss of$133.4 million in 2020. In 2020, we recorded non-cash charges of$132.6 million for impairment of goodwill, intangible assets and inventory write-down and other charges. See Note 18 - Impairments and Other Charges and Note 19 - Inventory Write-down of the Notes to the Consolidated Financial Statements for further details. This was partially offset by the benefit of cost reduction initiatives implemented during 2020 and reversal of previously recognized stock compensation expense associated with certain employees' long-term stock-based performance awards of$3.6 million . Operating income (loss) in 2020, after excluding these net non-cash charges was a loss of$0.8 million . The increase in operating income in 2021 compared to 2020, correlates to the increase in revenue. Operating margin was 9.7% in 2021, compared to a negative margin of 100.9% in 2020. The increased operating margin in 2021 compared to 2020 was primarily driven by the effect of non-cash charges recorded in 2020, as well as improved operating efficiencies associated with increased activity levels in 2021, as discussed above. The operating margin for 2020 was breakeven, when excluding the non-cash charges associated with the goodwill impairment, intangible assets and inventory write down.
Liquidity and Capital Resources
32
--------------------------------------------------------------------------------General
We have historically financed our activities through cash on hand, cash flows from operations, bank credit facilities, equity financing and the issuance of debt. Cash flows from operating activities provide the primary source of funds to finance operating needs, capital expenditures and our dividend and share repurchase programs. We believe our future cash flows from operations, supplemented by our borrowing capacity under our Amended Credit Facility and the ability to issue additional equity and debt, should be sufficient to fund our debt requirements, capital expenditures, working capital, dividend payments and future acquisitions. The Company will continue to monitor and evaluate the availability of debt and equity markets. In response to market conditions,Core Lab's Supervisory Board approved a plan to reduce the Company's quarterly dividends to$0.01 per share beginning with the second quarter of 2020 and to focus excess free cash flow on debt reduction. In 2020, the Company implemented cost reduction initiatives, which included: (i) corporate and operating cost reductions; (ii) reduction in annual capital expenditures, and (iii) eliminating all non-essential costs. The corporate and operating cost reductions included reductions in workforce and reduction of senior executive and employee compensation. These initiatives continued in 2021. Following increased activity levels during the second half of 2021, the Company progressively reinstated certain employee costs, and inJanuary 2022 , employee salaries were fully reinstated. Certain employee benefit plans have been partially reinstated beginningApril 2022 , and the Company will continue to evaluate the reinstatement of those benefits in 2023. Additionally, the Company has maintained its reduced dividend plan that was approved and implemented from second quarter of 2020, and excess free cash flow continues to primarily be used towards reducing debt. OnJuly 25, 2022 , we, along with our wholly owned subsidiaryCore Laboratories (U.S.) Interests Holdings, Inc. entered into an Eighth Amended and Restated Credit Agreement (as amended, the "Amended Credit Facility") modifying and extending the existing credit facility for an aggregate borrowing commitment of$135 million with a$50 million "accordion" feature. The Amended Credit Facility provided, among other things, a temporary increase to the maximum leverage ratio permitted under the Amended Credit Facility throughSeptember 30, 2022 . See Note 11 - Long-term Debt, net of the Notes to the Consolidated Financial Statements for additional information. OnDecember 17, 2020 , we entered into an Equity Distribution Agreement withWells Fargo Securities, LLC for the issuance and sale of up to$60.0 million of our common shares. Under terms of the Equity Distribution Agreement, sales of our common shares could be made by any method deemed to be an "at-the-market offering" as defined in Rule 415 under the Securities Act of 1933, as amended (the "2020 ATM program"). InMarch 2021 , we completed the sale of 1,658,012 common shares under the agreement at an average price of$36.19 per share, which generated aggregate proceeds of$59.1 million , net of commission and other associated costs. Proceeds were used to reduce debt on the Company's credit facility in 2021. OnJune 9, 2022 , we entered into an Equity Distribution Agreement with certain banks (the "2022 Equity Distribution Agreement") for the issuance and sale of up to$60.0 million of our common shares. Under the terms of the 2022 Equity Distribution Agreement, sales of our common shares may be made by any method deemed to be an "at-the-market offering" as defined in Rule 415 under the Securities Act of 1933 (the "2022 ATM program"). For the year endedDecember 31, 2022 and throughFebruary 9, 2023 , the Company has not sold any shares under the 2022 Equity Distribution Agreement. See Note 14 - Equity of the Notes to the Consolidated Financial Statements for additional information. OnJanuary 12, 2021 , the Company issued the 2021 Senior Notes with aggregate principal amount of$60 million in a private placement. The net proceeds from the 2021 Senior Notes were used exclusively to reduce outstanding debt under the Company's Credit Facility, which increased the available borrowing capacity and liquidity for the Company. See Note 11 - Long-term Debt, net of the Notes to the Consolidated Financial Statements for additional information. OnSeptember 30, 2021 , the Company retired$75 million in Series A of the 2011 Senior Notes. Series A of the 2011 Senior Notes were retired using a combination of cash on hand and$55 million in proceeds drawn from our Credit Facility. We intend to maintain sufficient borrowing capacity under the Credit Facility to both retire maturing debt obligations and provide additional liquidity, should the company require it for other purposes. As we are aNetherlands holding company, we conduct substantially all of our operations through subsidiaries. Our cash availability is largely dependent upon the ability of our subsidiaries to pay cash dividends or otherwise distribute or advance funds to us and on the terms and conditions of our existing and future credit arrangements. There are no restrictions preventing any of our subsidiaries from repatriating earnings, and there are no restrictions or income taxes associated with distributing cash to the parent company through loans or advances. As ofDecember 31, 2022 ,$9.4 million of our$15.4 million of cash was held by our foreign subsidiaries, including theU.S. 33 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes cash flows (in thousands):
For the Years Ended December 31,
2022 2021 2020
Cash provided by (used in):
Operating activities $ 24,956 $ 36,579 $ 57,868
Investing activities (3,856 ) (10,223 ) 7,851
Financing activities (23,375 ) (22,459 ) (63,005 )
Net change in cash and cash equivalents $ (2,275 ) $ 3,897 $ 2,714
Cash provided by operating activities in 2022, decreased approximately$11.6 million compared to 2021 due to a small decrease net income in 2022 compared to 2021, however, cash operating expenses and cash taxes paid increased in 2022, and these cash operating expenses and cash taxes paid were offset by a significant reduction in non-cash stock compensation expense during 2022.The increase in cash operating expenses during 2022 is primarily related to inflation and restoration of employee benefits in 2022. Cash provided by operating activities in 2021, decreased$21.3 million primarily due to increased working capital requirements of$21.0 million as market conditions and activity levels improved in the second half of 2021. Cash used by investing activities was$3.9 million in 2022 compared to$10.2 million in 2021. The decrease was primarily due to lower capital expenditure of$3.3 million and higher proceeds from sale of assets and net proceeds from company-owned life insurance policies of$1.2 million and$2.3 million , respectively, in 2022. Cash used by investing activities was$10.2 million in 2021 compared to cash provided by investing activities of$7.9 million in 2020. The variance was primarily due to higher capital expenditures of$13.5 million in 2021 compared to$11.9 million in 2020 and additional distribution received from company-owned life insurance policies of$20.4 million in 2020, partially offset by total proceeds of approximately$1.6 million from sale of business and insurance recovery in 2021. Cash used in financing activities in 2022 of$23.4 million compared to$22.5 million in 2021, increased$0.9 million primarily due to higher debt issuance costs in 2022 associated with renewing the Amended Credit Facility in 2022 as discussed above. Cash used in financing activities in 2021 decreased$40.5 million compared to 2020 as a result of: 1) a reduction of$10.6 million in dividends paid, and 2) net proceeds of$59.1 million raised in 2021 by issuing common shares through the 2020 ATM program. These decreases in cash used were offset by 1)$71.0 million of net reduction in long-term debt during 2021 compared to$46.0 million in 2020, and 2) the repurchase of our common shares of$8.3 million in 2021 compared to$2.8 million in 2020. During 2022, we repurchased 174,348 shares of our common stock for an aggregate amount of$3.9 million , or an average price of$22.39 per share, including rights to 102,067 shares valued at$2.1 million surrendered to us pursuant to the terms of a stock-based compensation plan in consideration of the participants' tax burdens resulting from the issuance of common shares under that plan. See Note 14 - Equity of the Notes to the Consolidated Financial Statements for additional information. We believe our share repurchase program has been beneficial to our shareholders over the longer term. Our share price has increased from$4.03 per share in 2002, when we began to repurchase shares, to$20.27 per share onDecember 31, 2022 , an increase exceeding 400%. We utilize the non-GAAP financial measure of free cash flow to evaluate our cash flows and results of operations. Free cash flow is defined as net cash provided by operating activities (which is the most directly comparableU.S. GAAP measure) less cash paid for capital expenditures. Management believes that free cash flow provides useful information to investors regarding the cash that was available in the period that was in excess of our needs to fund our capital expenditures and operating activities. Free cash flow is not a measure of operating performance underU.S. GAAP, and should not be considered in isolation nor construed as an alternative to operating profit, net income (loss) or cash flows from operating, investing or financing activities, each as determined in accordance withU.S. GAAP. Free cash flow does not represent residual cash available for distribution because we may have other non-discretionary expenditures that are not deducted from the measure. Moreover, since free cash flow is not a measure determined in accordance withU.S. GAAP and thus is susceptible to varying interpretations and calculations, free cash flow, as presented, may not be comparable to similarly titled measures presented by other companies. The following table reconciles this non-GAAP financial measure to the most directly comparable measure calculated and presented in accordance withU.S. GAAP (in thousands): 34 -------------------------------------------------------------------------------- For the Years Ended December 31, Free Cash Flow Calculation 2022 2021
2020
Net cash provided by operating activities
(11,880 ) Free cash flow$ 14,740 $ 23,040 $ 45,988 The decrease in free cash flow in 2022 compared to 2021 was primarily due to decreased cash provided by operating activities as discussed above, partially offset by a decrease of$3.3 million in capital spending in 2022 The decrease in free cash flow in 2021 compared to 2020 was primarily due to decreased cash provided by operating activities as discussed above, additionally, increased capital spending of$1.6 million in 2021, which were elevated by facility repair costs for damages caused by the 2021 winter storm inNorth America .
Senior Notes, Credit Facility and Available Future Liquidity
We have three series of senior notes outstanding with an aggregate principal amount of$135 million that were issued through private placement transactions. Series B of the senior notes issued in 2011 ("2011 Senior Notes") consists of$75 million in aggregate principal amount and bears interest at a fixed rate of 4.11% and is due in full onSeptember 30, 2023 . Interest on Series B of the 2011 Senior Notes is payable semi-annually onMarch 30 andSeptember 30 . We intend to repay the 2011 Senior Notes Series B with borrowings under our existing long-term Amended Credit Facility; therefore, we continue to classify them as long-term debt. Series A and Series B of the 2021 Senior Notes were issued and funded onJanuary 12, 2021 (the "2021 Senior Notes" and together with the 2011 Senior Notes, the "Senior Notes"). Series A of the 2021 Senior Notes consists of$45 million in aggregate principal amount that bear interest at a fixed rate of 4.09% and is due in full onJanuary 12, 2026 . Series B of the 2021 Senior Notes consists of$15 million in aggregate principal amount that bears interest at a fixed rate of 4.38% and is due in full onJanuary 12, 2028 . Interest on each series of the 2021 Senior Notes is payable semi-annually onJune 30 andDecember 30 . OnJuly 25, 2022 , we, along with our wholly owned subsidiaryCore Laboratories (U.S.) Interests Holdings, Inc. ("CLIH") entered into an Eighth Amended and Restated Credit Agreement (as amended, the "Amended Credit Facility") modifying and extending the existing credit facility for an aggregate borrowing commitment of$135 million with a$50 million "accordion" feature. The Amended Credit Facility is secured by first priority interests in (1) substantially all of the tangible and intangible personal property, and equity interest of CLIH and certain of the Company'sU.S. and foreign subsidiary companies; and (2) instruments evidencing intercompany indebtedness owing to the Company, CLIH and certain of the Company'sU.S. and foreign subsidiary companies. Under the Amended Credit Facility, the Secured Overnight Financing Rate ("SOFR") plus 2.00% to SOFR plus 3.00% will be applied to outstanding borrowings. Any outstanding balance under the Amended Credit Facility is due at maturity onJuly 25, 2026 , subject to springing maturity onJuly 12, 2025 , if the Company's liquidity does not equal or exceed the principal amount of the 2021 Senior Notes Series A outstanding on such date. The available capacity at any point in time is reduced by outstanding borrowings and outstanding letters of credit which totaled approximately$9 million atDecember 31, 2022 , resulting in an available borrowing capacity under the Amended Credit Facility of approximately$86 million . In addition to indebtedness under the Amended Credit Facility, we had approximately$6 million of outstanding letters of credit and performance guarantees and bonds from other sources as ofDecember 31, 2022 . The Amended Credit Facility does not substantially alter the calculation of the net leverage or interest coverage ratios. Pursuant to the terms of the Amended Credit Facility, the maximum leverage ratio permitted is as follows: Quarter ending Maximum leverage ratio permittedJune 30, 2022 andSeptember 30, 2022 2.75December 31, 2022 and thereafter 2.50 The terms of the Amended 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 Amended Credit Facility and Senior Notes include a cross-default provision, whereby a default under one agreement may trigger a default in the other agreements. The Amended Credit Facility has more restrictive covenants with a minimum interest coverage ratio of 3.00 to 1.00 and permits a maximum leverage ratio as described above. The Amended 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 Amended Credit Facility also allow us to negotiate in good faith to amend any ratio or requirement 35 -------------------------------------------------------------------------------- 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 Amended Credit Facility. In accordance with the terms of the Amended Credit Facility, our leverage ratio is 2.29, and our interest coverage ratio is 6.03, each for the year endedDecember 31, 2022 . We believe that we are in compliance with all covenants contained in our Amended Credit Facility and Senior Notes. Certain of our material, wholly-owned subsidiaries, are guarantors or co-borrowers under the Amended Credit Facility and Senior Notes. InMarch 2021 , we entered into a new forward interest rate swap agreement for a notional amount of$60 million and carried the fair value of the terminated 2014 and 2020 Variable-to-Fixed Swaps into the new agreement in a "blend and extend" structured transaction. The purpose of this forward interest rate swap agreement is to fix the underlying risk-free rate, that would be associated with the anticipated issuance of new long-term debt by the Company in future periods. OnApril 8, 2022 , the forward interest rate swap agreement was terminated and settled for a net gain of$0.6 million which is included in accumulated other comprehensive income (loss). See Note 15 - Derivative Instruments and Hedging Activities for additional information. In addition to our repayment commitments under our Amended Credit facility and our Senior Notes, we have non-cancellable operating lease arrangements under which we lease office and lab space, machinery, equipment and vehicles. We also have employer contribution commitments related to our Dutch pension plan with amounts payable in the future based upon workforce factors that cannot be estimated beyond one year. These material future contractual obligations are discussed in Note 7 - Leases, Note 11 - Long-term Debt, net and Note 12 - Pension and Other Postretirement Benefit Plans of the Notes to the Consolidated Financial Statements. We have no significant purchase commitments or similar obligations outstanding atDecember 31, 2022 . We also have uncertain tax positions of$3.5 million that we have accrued for atDecember 31, 2022 ; the amounts and timing of payment, if any, are uncertain. See Note 10 - Income Taxes of the Notes to the Consolidated Financial Statements for further detail of this amount. AtDecember 31, 2022 , we had tax net operating loss carry-forwards in various jurisdictions of$55.6 million . Although we cannot be certain that these net operating loss carry-forwards will be utilized, we anticipate that we will have sufficient taxable income in future years to allow us to fully utilize the carry-forwards that are not subject to a valuation allowance as ofDecember 31, 2022 . If unused, those carry-forwards which are subject to expiration may expire during the years 2023 through 2036. During 2022, no material net operating loss carry-forwards, which carried a full valuation allowance, expired unused. We expect our investment in capital expenditures to track with client demand for our services and products. Given the uncertain trend in industry activity levels, we have not determined, at this time, the level of investment that will be made in 2022. We will, however, continue to invest in the purchase or replacement of obsolete or worn-out instrumentation, tools and equipment, to consolidate certain facilities to gain operational efficiencies, and to increase our presence where requested by our clients.
Outlook
The events associated with the COVID-19 pandemic that began in 2020 continued in 2021 and 2022. Certain international countries continued mandated shut-downs, home sheltering and social distancing policies that initially caused uncertainty in the demand for crude oil and associated products; however demand for these products has recovered more quickly than global production causing crude-oil commodity prices to increase significantly. AlthoughU.S. onshore drilling and completion activities improved during 2021 and strengthened in 2022, activity still remains well below pre-pandemic levels. Additionally, international activity continued to be adversely impacted by increasing infection rates associated with new variant strains of the COVID-19 virus during 2021 and 2022, which has continued to cause business disruptions associated with government mandated shut-downs, travel restrictions, quarantine protocols and worksite closures in various international regions. These disruptions started to ease during the second half of 2022. The geopolitical conflict betweenRussia andUkraine that erupted inFebruary 2022 , has also resulted in disruptions to traditional supply chains associated with the movement of crude oil, primarily impacting crude oil sourced fromRussia and imported into various European ports. However, the supply chains associated with the movement of crude oil continue realigning to new logistical patterns, as we expectEurope will find new suppliers of crude oil to import into the region. These events have caused energy prices to increase throughout the world but even more so inEurope , as the current global demand for crude oil and natural gas has remained at a high level.Core Lab expects supply lines to realign, and the Company's volume of associated laboratory services to increase commensurate with the trading and movement of crude-oil intoEurope and across the globe. Additionally, European countries have begun elevating the level of LNG imports to offset the loss of natural gas sourced fromRussia . The Company provides some laboratory analytical services associated with the movement of LNG products, which may offer some additional opportunities for the Company in this region. InMarch 2022 , completion product 36 --------------------------------------------------------------------------------
sales delivered through our Production Enhancement operating segment into
The situation continues to evolve andthe United States , theEuropean Union , theUnited Kingdom and other countries may implement additional sanctions, export controls or other measures againstRussia ,Belarus and other countries, regions, officials, individuals or industries in the respective territories. We have no way to predict the progress or outcome of the conflict inUkraine or its impacts inUkraine ,Russia orBelarus as the conflict, and any resulting government responses, are fluid and beyond our control. Crude-oil commodity prices remain volatile and increased significantly throughout most of 2022. It is anticipated that crude-oil commodity prices for the near-to-mid-term will remain elevated and supported by increasing demand with only moderate growth in production levels. As such, activities associated with the production of oil and gas continued to increase in 2022, are expected to continue increasing moderately in 2023. The oil and gas industry continues to face limitations in personnel, equipment, and supply chain disruptions, which may moderate future growth, as well as the allocation of capital resources by oil and gas producing companies. Our clients' activities associated with the energy markets are also expected to increase in 2023, but may be impacted by the outlook for the global economy, decisions byOPEC nations associated with the production and supply of crude oil to the market, the pace ofChina's recovery from the COVID-19, and considerations associated with theRussia -Ukraine geopolitical conflict. Our major clients continue to focus on capital management, return on invested capital ("ROIC"), free cash flow, and returning capital to their shareholders, as opposed to a focus on production growth. The companies adopting value versus volume metrics tend to be the more technologically sophisticated operators and form the foundation ofCore Lab's worldwide client base. As oil and gas commodity prices are expected to remain elevated in the near to mid-term, the Company expects our clients' activities associated with increasing oil and gas reserves and production levels will continue to increase in the coming years. Additionally, some of our major clients have begun investing and developing other sources of energy, including renewables, and focusing on emission reduction initiatives. Some of these initiatives include deployment of technologies associated with hydrogen or lithium-based batteries, and carbon capturing and sequestration. Considering a longer-term strategy, we expect to be well positioned as our clients continue their focus on employing higher technological solutions in their efforts to optimize production and estimated ultimate recovery in the most cost efficient and environmentally responsible manner. We believe oil and gas operators will continue to manage their capital spending within free cash flow and maintain their focus on improving and maintaining a stronger balance sheet, which could constrain future growth in activities associated with the production of oil and gas.Core Laboratories expects that 2023 capital and operating budgets of oil and gas operators will expand over 2022 levels but also include a higher allocation of capital towards energy transition activities. Some of our major clients have begun actively investing and developing other renewable sources of energy and focusing on emission reduction initiatives.Core Laboratories is participating in some of these initiatives, which include deployment of technologies and new projects associated with hydrogen or lithium-based batteries, and CCS. In 2022, there has been moderate improvement in international activity levels, as the international rig count increased to 1,055 as we exited the year and is up approximately 7% from the end of 2021. We continue to work with clients and discuss the progression of longer-term international projects. Additionally, the reservoir fluids analysis performed on projects associated with current producing fields continues to be critical and has been less affected by lower commodity prices for crude oil. As part of our long-term growth strategy, we continue to expand our market presence by opening or expanding facilities in strategic areas and realizing synergies within our business lines consistent with client demand and market conditions. More recently, we have expanded our laboratory capabilities inQatar ,Saudi Arabia andBrazil . We believe our market presence in strategic areas provides us a unique opportunity to serve our clients who have global operations, whether they are international oil companies, national oil companies, or independent oil companies.Core Lab believes continued assessment of market conditions, will allowCore Lab , as it has for over 85 years, to navigate through these challenging times.Core Lab remains focused on preserving the quality of service for its clients and producing returns for its shareholders.
Critical Accounting Estimates
The preparation of financial statements in accordance withU.S. GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an 37 -------------------------------------------------------------------------------- ongoing basis and determine the adequacy of our estimates based on our historical experience and various other assumptions that we believe are reasonable under the circumstances. By nature, these judgments are subject to an inherent degree of uncertainty. We consider an accounting estimate to be critical if it is highly subjective and if changes in the estimate under different assumptions would result in a material impact on our financial condition and results of operations. The following transaction types require significant judgment and, therefore, are considered critical accounting policies as ofDecember 31, 2022 . Income Taxes Our income tax expense includes income taxes ofthe Netherlands , theU.S. and other foreign countries as well as local, state and provincial income taxes. We recognize deferred tax assets or liabilities for the differences between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the asset is expected to be recovered or the liability is expected to be settled. We estimate the likelihood of the recoverability of our deferred tax assets (particularly, net operating loss carry-forwards). Any valuation allowance recorded is based on estimates and assumptions of taxable income into the future and a determination is made of the magnitude of deferred tax assets which are more likely than not to be realized. Valuation allowances of our net deferred tax assets aggregated to$9.3 million and$7.4 million atDecember 31, 2022 and 2021, respectively. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowance against our deferred tax assets and our effective tax rate may increase which could result in a material adverse impact on our financial position, results of operations and cash flows. We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in our tax return. We also recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Long-Lived Assets, Intangibles and
Property, plant and equipment are carried at cost less accumulated depreciation.
Major renewals and improvements are capitalized while maintenance and repair
costs are charged to expense as incurred. They are depreciated using the
straight-line method based on their individual estimated useful lives, except
for leasehold improvements, which are depreciated over the remaining lease term,
if shorter. We estimate the useful lives and salvage values of our assets based
on historical data of similar assets. When long-lived assets are sold or
retired, the remaining costs and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in income. These
capitalized long-lived assets could become impaired if our operating plans or
business environment changes.
Intangible assets, including patents, trademarks and technology, are carried at
cost less accumulated amortization. Intangibles with determinable lives are
amortized using the straight-line method based on the estimated useful life of
the intangible. Intangibles with indeterminable lives, which consist primarily
of corporate trade names, are not amortized, but are tested for impairment
whenever events or changes in circumstances indicate that impairment is
possible.
We review our long-lived assets ("LLA"), including definite-lived intangible and
right-of-use assets, for impairment when events or changes in circumstances
indicate that their net book value may not be recovered over their remaining
service lives. Indicators of possible impairment may include significant
declines in activity levels in regions where specific assets or groups of assets
are located, extended periods of idle use, declining revenue or cash flow or
overall changes in general market conditions.
Whenever possible impairment is indicated, we compare the carrying value of the
assets or asset group to the sum of the estimated undiscounted future cash flows
expected from use, plus salvage value, less the costs of the subsequent
disposition of the assets. If impairment is still indicated, we compare the fair
value of the assets to the carrying amount and recognize an impairment loss for
the amount by which the carrying value exceeds the fair value.
We did not record impairment charges relating to our long-lived assets and
intangible assets during the years ended December 31, 2022 and 2021. We recorded
an impairment charge of $8.2 million for certain intangible assets during the
year ended December 31, 2020 .
The geopolitical conflict between Russia and Ukraine , which began in February
2022 and has continued through December 31, 2022 , has resulted in disruptions to
our operations in Russia and Ukraine . The Company evaluated LLA in Russia and
Ukraine as part of our assessment of our assets group and did not identify
triggering events as of December 31, 2022 . The Company's operation, assets and
facilities in Ukraine are immaterial. As of December 31, 2022 , all laboratory
facilities, offices, and locations in Russia continued to operate and remained
profitable and no specific asset losses were identified.
We record goodwill as the excess of the purchase price over the fair value of
the net assets acquired in acquisitions accounted for under the purchase method
of accounting. Goodwill is not subject to amortization and is tested for
impairment annually or
38
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more frequently if events or changes in circumstances indicate goodwill is more
likely than not impaired. We assess goodwill for impairment either by performing
a qualitative assessment or a quantitative test. The qualitative assessment is
to determine whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount, including goodwill. If it is concluded
that it is more-likely-than not that an impairment exists, a quantitative test
is required which compares the estimated fair value of a reporting unit to its
carrying value. If the estimated 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 operating segments. Significant judgments and assumptions are inherent
in our estimate of future cash flows used to determine the estimate of the
reporting unit's fair value which include assumptions regarding future revenue
growth rates, discount rates and expected margins.
We completed our annual impairment assessment of goodwill for our reporting
units as of December 31, 2022 and 2021, by performing a qualitative assessment,
which indicated it was not more likely than not that there was an impairment and
therefore no quantitative test was required. We performed detailed quantitative
test and recorded an impairment charge of $114.0 million for goodwill of our
Production Enhancement reporting units during the year ended December 31, 2020 .
Any subsequent impairment loss could result in a material adverse effect upon our financial position and results of operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements such as securitization agreements, liquidity trust vehicles or special purpose entities. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
Forward-Looking Statements
This Form 10-K and the documents incorporated in this Form 10-K by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These "forward-looking statements" are based on an analysis of currently available competitive, financial and economic data and our operating plans. They are inherently uncertain and investors should recognize that events and actual results could turn out to be significantly different from our expectations. By way of illustration, when used in this document, words such as "anticipate", "believe", "expect", "intend", "estimate", "project", "will", "should", "could", "may", "predict" and similar expressions are intended to identify forward-looking statements. You are cautioned that actual results could differ materially from those anticipated in forward-looking statements. Any forward-looking statements, including statements regarding the intent, belief or current expectations of us or our management, are not guarantees of future performance and involve risks, uncertainties and assumptions about us and the industry in which we operate, including, among other things:
•
our ability to continue to develop or acquire new and useful technology;
•
the realization of anticipated synergies from acquired businesses and future acquisitions;
•
our dependence on one industry, oil and gas, and the impact of commodity prices on the expenditure levels of our clients;
•
competition in the markets we serve;
•
the risks and uncertainties attendant to adverse industry, political, economic and financial market conditions, including stock prices, government regulations, interest rates and credit availability;
•
unsettled political conditions, war, civil unrest, currency controls and governmental actions in the numerous countries in which we operate;
•
changes in the price of oil and natural gas;
•
major outbreak of global pandemic and restricting mobilization of field personnel;
• weather and seasonal factors;
•
integration of acquired businesses; and
•
the effects of industry consolidation.
Our business depends, to a large degree, on the level of spending by oil and gas
companies for exploration, development and production activities. Therefore, a
sustained increase or decrease in the price of natural gas or oil, which could
have a material
39
--------------------------------------------------------------------------------impact on exploration, development and production activities, could also materially affect our financial position, results of operations and cash flows.
The above description of risks and uncertainties is by no means all-inclusive, but is designed to highlight what we believe are important factors to consider. For a more detailed description of risk factors, please see "Item 1A. Risk Factors" in this Form 10-K and our reports and registration statements filed from time to time with theSEC . All forward-looking statements in this Form 10-K are based on information available to us on the date of this Form 10-K. We do not intend to update or revise any forward-looking statements that we may make in this Form 10-K or other documents, reports, filings or press releases, whether as a result of new information, future events or otherwise, unless required by law.
Recent Accounting Pronouncements
Pronouncements Adopted
InDecember 2019 , the FASB issued ASU 2019-12 ("Simplifying the Accounting for Income Taxes") which affects general principles within Topic 740, Income Taxes. The amendment removes exceptions related to the incremental approach for intraperiod tax allocation, the recognition of a deferred tax liability for equity method investments in a foreign subsidiary, and the methodology for calculating income taxes in an interim period. The standard also simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, the effect of an enacted change in tax laws on the tax rate computation in interim periods, and specifying that an entity is not required to allocate consolidated tax expense to a legal entity not subject to tax in its separate financial statements. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2020 . We adopted this standard onJanuary 1, 2021 , and there has been no significant impact on our consolidated financial statements or on our accounting policies and processes. InMarch 2020 , the FASB issued ASU 2020-04 ("Facilitation of the Effects of Reference Rate Reform on Financial Reporting") which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. During the year endedDecember 31, 2022 , we elected to apply the optional expedient for hedging relationships affected by reference rate reform upon the Company's amending its existing credit facility that included a change in the reference rate. Accordingly, no outstanding balance on the Amended Credit Facility will preclude cash flow hedging with existing hedging instruments. See Note 11 - Long-term Debt, net and Note 15 - Derivative Instruments and Hedging Activities.
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