Results of Operations

Results of operations as a percentage of applicable revenues are as follows (dollars in thousands):

		Year Ended																								% Change
REVENUES:		2010								2009								2008									2010/2009				2009/2008
Services		$	605,974				76.3	%		$	553,772				79.6	%		$	597,695				76.5	%			9.4	%			(7.3	%)
Product Sales			188,679				23.7	%			141,767				20.4	%			183,141				23.5	%			33.1	%			(22.6	%)
			794,653				100.0	%			695,539				100.0	%			780,836				100.0	%			14.2	%			(10.9	%)
OPERATING EXPENSES:
Cost of services*			383,079				63.2	%			352,039				63.6	%			387,145				64.8	%			8.8	%			(9.1	%)
Cost of product sales*			130,711				69.3	%			105,730				74.6	%			127,637				69.7	%			23.6	%			(17.2	%)
Total cost of services and product sales			513,790				64.7	%			457,769				65.8	%			514,782				65.9	%			12.2	%			(11.1	%)
General and administrative expenses			33,029				4.1	%			30,372				4.4	%			31,646				4.1	%			8.7	%			(4.0	%)
Depreciation and amortization			23,113				2.9	%			23,818				3.4	%			21,773				2.8	%			(3.0	%)			9.4	%
Other (income) expense, net			(2,205	)			(0.3	%)			(3,202	)			(0.5	%)			5,580				0.7	%		NM				NM
OPERATING INCOME			226,926				28.6	%			186,782				26.9	%			207,055				26.5	%			21.5	%			(9.8	%)
(Gain) loss on early extinguishment of        debt			1,939				0.3	%			-				-				(2,829	)			(0.4	%)			100.0	%			(100.0	%)
Interest expense			15,839				2.0	%			15,523				2.3	%			21,610				2.8	%			2.0	%			(28.2	%)
Income before income tax expense			209,148				26.3	%			171,259				24.6	%			188,274				24.1	%			22.1	%			(9.0	%)
Income tax expense			63,747				8.0	%			57,164				8.2	%			56,766				7.3	%			11.5	%			0.7	%
Net income			145,401				18.3	%			114,095				16.4	%			131,508				16.8	%			27.4	%			(13.2	%)
Net income attributable to non-controlling interest			484				0.1	%			491				0.1	%			342				-	%			(1.4	%)			43.6	%
Net income attributable to Core Laboratories N.V.		$	144,917				18.2	%		$	113,604				16.3	%		$	131,166				16.8	%			27.6	%			(13.4	%)
*Percentage based on applicable revenue rather than total revenue.
"NM" means not meaningful.

Operating Results for the Year Ended December 31, 2010 Compared to the Years Ended December 31, 2009 and 2008

We evaluate our operating results by analyzing revenues, operating income margin (defined as operating income divided by total revenue) and net income margin (defined as net income divided by total revenue).  Since we have a relatively fixed cost structure, increases in revenues generally translate into higher operating income margin and income margin percentages.  Results for the years ended December 31, 2010, 2009 and 2008 are summarized in the following chart:

 

 

Service Revenues

Service revenues increased to $606.0 million for 2010 from $553.8 million for 2009 and $597.7 million for 2008.  The increase in service revenue from 2009 to 2010 was due, in part, to the increased demand for reservoir rock studies, reservoir fluids phase-behavior studies, and for crude oil testing, inspection, distillation, assay, fractionation and characterization projects worldwide.  The decrease in revenue in 2009 compared with 2008 was the result of a significant decline in oil and gas prices and drilling activity from record highs reached mid-year 2008; however, this decrease was softened by our improved penetration of international markets in 2009.  Our large scale core analyses and reservoir fluid projects combined with our fluid and derived products inspection, calibration and assay work continue to provide meaningful revenue streams in the Middle East, Asia-Pacific, offshore deepwater regions of the Gulf of Mexico and the southern-Atlantic margins off the coasts of West Africa and Brazil.  Activity in North American shale plays, especially the liquid-rich plays, has strengthened throughout 2010 leading to growth in reservoir characterization projects.

Product Sale Revenues

Product sale revenues increased to $188.7 million for 2010, from $141.8 million for 2009 and $183.1 million for 2008.  The increase in revenue from 2009 to 2010 was driven by (1) the acceptance and demand of our specialized completion products introduced over the last three years, (2) an increased market share in North American natural gas and oil shale reservoirs and (3) an increased market penetration in the Middle East and Asia-Pacific perforating markets.  Our product sales revenues were impacted by the significant decline in the North American drilling activity during 2009; however, our revenues declined at a much lower rate compared to the 42% decrease in the average North American rig count from 2008 to 2009.  This revenue decline was mitigated by the additional market share and the acceptance of our specialized reservoir optimizing technologies.  These specialized reservoir optimizing technologies are focused on high-end well completion and stimulation programs mainly in the Haynesville, Marcellus and Eagle Ford shale plays and in multi-stage completions in the Bakken oil-shale play.  We are also providing high margin completion and recompletion technologies to be used in the redevelopment of major, giant, and super-giant fields in southern Iraq.

Cost of Services

Cost of services increased to $383.1 million for 2010 from $352.0 million for 2009 and $387.1 million for 2008.  As a percentage of service revenue, cost of services have continued to decrease to 63.2% in 2010 from 63.6% in 2009 and 64.8% in 2008.  The continuous decline in the cost of services relative to service revenue has been primarily a result of our continued focus on emphasizing higher value and thus higher margin services as well as managing our cost structure.

Cost of Product Sales

Cost of product sales increased to $130.7 million for 2010 from $105.7 million for 2009 and $127.6 million for 2008.  As a percentage of product sale revenues, cost of sales decreased to 69.3% for 2010 compared to 74.6% for 2009 and 69.7% for 2008.  The decrease in cost of sales as a percentage of product sale revenue in 2010, as compared to 2009, was primarily due to the growing demand for our new technologies, which are our higher margin products, and from an overall increase in sales, which improved absorption of our fixed cost structure.  In addition, our capital investments in our manufacturing processes resulted in increased productivity and increased manufacturing efficiencies which contributed to the decrease in cost of sales.  The reduction in margins from 2008 to 2009 came primarily from reduced manufacturing efficiencies associated with lower production levels as a result of the significant decline in North American drilling activity.

General and Administrative Expense

General and administrative expenses include corporate management and centralized administrative services that benefit our operations. General and administrative expenses were $33.0 million for 2010, which was 9% higher than in 2009, due to higher building maintenance costs, increased computer hardware and software costs and additional compensation expenses. General and administrative expenses decreased in 2009 by 4% in comparison to 2008 primarily due to lower compensation benefits for certain members of management.

Depreciation and Amortization Expense

Depreciation and amortization expense of $23.1 million decreased slightly by $0.7 million in 2010 compared to 2009, after increasing $2.0 million in 2009 compared to 2008.  The increase in 2009 compared to 2008 was primarily due to normal capital expenditures for replacement of existing equipment and investment in areas of growth.

In 2010, we sold our minority investment in a technology company acquired in 2001, resulting in a gain of $0.8 million.

In April, 2010, we recorded a Euro-denominated income tax receivable in The Netherlands.  Payment was received in June after the Euro fell 9% resulting in a foreign exchange loss of $1.4 million.   During 2009, most foreign currencies gained versus the USD as compared to 2008 when the USD strengthened significantly against most other currencies.  Virtually all of the foreign currency gains experienced in 2009 were offset by our foreign currency losses related to the devaluation of the Venezuelan Bolivar (“VEB”).

In 2008, we revised our estimate of a contingent liability associated with non-income related taxes, and as a result, a charge to income of $5.0 million was recorded in the Consolidated Statements of Operations to Other Expense (Income), net.  This contingent liability was included in Other Long-term Liabilities in the Consolidated Balance Sheet at December 31, 2008.  As a result of finalizing a settlement agreement for $2.5 million, we released the remaining $2.5 million during the second quarter of 2009.

In 2008, we recorded a gain of $1.1 million in connection with the sale of a small office building.

Gain on Repurchase of Senior Exchangeable Notes

During the fourth quarter of 2008, we repurchased $61.3 million of our Notes at a discount which resulted in a gain of $2.8 million.

Loss on Exchange of Senior Exchangeable Notes

Under the terms of our Notes the early exchange option for the holders of our Notes was enabled in the second, third and fourth quarters of 2010. We received 21 requests during 2010 to exchange 82,251 Notes, which were settled during the year for $82.3 million in cash and 808,367 shares of our common stock, all of which were Treasury Shares, resulting in a loss of $1.9 million.

Interest Expense

Interest expense increased slightly in 2010 compared to 2009 and decreased $6.1 million in 2009 compared to 2008.  At the end of the second quarter of 2008, the early exchange feature of our Notes was triggered which resulted in our Notes being classified as short-term and required the write-off of $3.5 million in deferred debt acquisition costs to interest expense.  In 2008, we repurchased approximately 20% of our Notes at a discount; consequently, the monthly amortization of the debt discount was lower in 2009 than in 2008.  Cash interest expense on our Notes was only $0.6 million, $0.6 million and $0.8 million for the years ended December 31, 2010, 2009 and 2008, respectively.

Income Tax Expense

Income tax expense increased $6.6 million in 2010 compared to 2009 commensurate with the overall increase in income before income tax expense.  Income tax expense increased $0.4 million in 2009 compared to 2008 despite a decrease in net income before taxes due primarily to the recapture of tax consolidation benefits in Mexico with respect to recent changes in the tax laws and additional taxes provided for specific tax uncertainties in the various jurisdictions in which we operate.  The effective tax rate was 30.5% for 2010, 33.4% for 2009 and 30.2% for 2008. The lower tax rate for 2010 was the result of a change in the earnings mix in the various jurisdictions in which we operate.  The higher tax rate for 2009 compared to 2008 was due to the recapture of tax consolidation benefits in Mexico with respect to recent changes in the tax laws, additional taxes provided for specific tax uncertainties in the various jurisdictions in which we operate and the operational losses and asset write down in Venezuela that are without tax benefit.

Segment Analysis

The following charts and tables summarize the operating results for our three complementary business segments.