Core Laboratories Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Core Laboratories provides reservoir description and production enhancement services and products to the oil and gas industry. On May 1, 2023, it completed a redomestication from the Netherlands to Delaware; the filing accounts for it as a common-control transaction, with comparative financial statements unchanged.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $127.9 million | $120.9 million | $256.2 million | $236.2 million |
| Operating income | $18.9 million | $11.7 million | $25.4 million | $11.3 million |
| Net income attributable to Core Laboratories Inc. | $22.8 million | $7.1 million | $25.2 million | $5.2 million |
| Diluted EPS | $0.48 | $0.15 | $0.53 | $0.11 |
- Q2 revenue rose 6% year over year; service revenue increased 9% while product sales declined 2%. Six-month revenue rose 8%, with services up 8% and product sales up 9%.
- Q2 operating margin was approximately 14.8%, versus 9.6% a year earlier. Six-month operating margin was approximately 9.9%, versus 4.8%.
- Net income includes a significant tax benefit: $7.3 million in Q2 and $6.6 million for the six months, largely from reversal of deferred tax liabilities following redomestication. The reported effective tax rates were negative 46.3% and negative 35.5%, respectively; earnings growth should be considered in light of this unusual tax item.
- Six-month operating cash flow was $5.6 million, down from $5.9 million. Capital expenditures were $4.4 million; reported free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $1.2 million versus $0.4 million.
- Cash and cash equivalents were $26.2 million at June 30, up from $15.4 million at year-end. Current assets were $236.1 million and current liabilities $96.2 million; the reported current ratio was 2.45.
- Gross debt principal was $185 million; long-term debt, net of issuance costs, was $182.6 million. Net debt using reported cash was approximately $158.8 million. The company reported leverage of 1.85x under its credit-facility definition and interest coverage of 6.66x, and stated it was in covenant compliance.
Changes and operating drivers
- Reservoir Description revenue increased 10% year over year in Q2, to $83.4 million; segment operating income was $13.3 million. Growth reflected international core and reservoir-fluid analysis activity, particularly in the Middle East, and improved European activity as crude-oil supply routes adjusted.
- Production Enhancement revenue was $44.5 million, approximately flat year over year and down 8% sequentially; segment operating income was $5.5 million. International strength was offset by softer U.S. onshore activity and delayed sales associated with political instability in South America.
- Improved laboratory utilization and manufacturing efficiencies supported margins. Material and shipping inflation continued to pressure product costs. Q2 G&A fell year over year and sharply sequentially, partly because of stock-compensation reversals and gains on company-owned life insurance; Q1 included accelerated stock compensation and facility-exit costs.
- Inventory rose to $71.7 million from $60.4 million at year-end. Management cited extended raw-material lead times and higher inventory as a supply-chain buffer; working-capital use contributed to weak operating cash conversion.
Debt, outlook, risks and unusual items
- In June, the company issued $50 million of 2023 senior notes at fixed rates of 7.25% and 7.50%, with 2028 and 2030 maturities; proceeds repaid the outstanding credit-facility balance. The $75 million 2011 senior notes mature September 30, 2023, and the company intends to repay them using its credit facility. Reported facility availability was approximately $126 million, including the effect of letters of credit.
- The credit facility has a $135 million commitment and a $50 million accordion feature. Its maturity is July 2026, subject to a potential July 2025 springing maturity linked to the 2021 Series A notes and liquidity conditions. Debt agreements include cross-default and financial covenant provisions.
- Management expects client appraisal, development and production activity to remain at or increase from current levels for the rest of 2023, citing expected oil demand and client activity. It also expects growth in carbon capture and sequestration work. These are expectations, not quantified earnings or revenue guidance.
- Management identified market uncertainty from oil and gas prices, OPEC+ supply decisions, Russia-Ukraine-related sanctions and changing crude-oil logistics. Other noted pressures include weaker U.S. natural-gas-related activity, inflation in materials and shipping, foreign-exchange movements, and longer supply-chain lead times. Russia operations remained open and profitable; Ukraine operations and assets were described as immaterial.
- Six-month unusual items included $0.6 million of lease-abandonment costs, $1.0 million of asset write-downs related to Canadian facility integration, and a $0.6 million settlement for an expropriated Louisiana facility access road. Legal claims may arise in the ordinary course; the filing provides no clear quantified material contingency.
- The company maintained a quarterly dividend of $0.01 per share and declared another $0.01 dividend payable August 28, 2023. The 2022 at-the-market offering was terminated in July 2023; no shares had been sold under it.
Important facts for investors to verify
- How much of reported earnings improvement is sustainable operating performance versus the redomestication-related tax benefit, stock-compensation adjustments and insurance-policy gains?
- Can operating cash flow improve as inventory and other working-capital requirements normalize, and how much inventory is needed to manage supplier lead times?
- How will the September 2023 maturity of the $75 million notes be funded, and what will be the cost and covenant headroom after refinancing?
- Will international growth offset weakening U.S. onshore activity, and how sensitive are results to product-sales timing, commodity prices, inflation and geopolitical developments?
- Review the credit agreement’s springing-maturity and cross-default terms, covenant calculations, and the location and availability of the $17.9 million of cash held by foreign subsidiaries.