UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
SCHLUMBERGER N.V.
(SCHLUMBERGER LIMITED)
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
PARKSTRAAT 83
THE HAGUE,
THE NETHERLANDS
Registrant’s telephone number: (212) 350-9400
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at September 30, 2004
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
SCHLUMBERGER LIMITED
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Stated in thousands except per share amounts)
REVENUE:
Operating
Interest & other income
EXPENSES:
Cost of goods sold & services
Research & engineering
Marketing
General
Debt extinguishment costs
Interest
Income (Loss) from Continuing Operations before taxes and minority interest
Taxes on income
Income (Loss) from Continuing Operations before minority interest
Minority interest
Income (Loss) from Continuing Operations
Income from Discontinued Operations
Net Income (Loss)
Basic earnings per share:
Diluted earnings per share:
Average shares outstanding:
Basic
Assuming dilution
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE SHEET
Dec. 31,
2003
ASSETS
CURRENT ASSETS:
Cash
Short-term investments
Receivables less allowance for doubtful accounts (2004 - $113,012; 2003 - $128,199)
Inventories
Deferred taxes
Other current assets
Assets held for sale
FIXED INCOME INVESTMENTS, HELD TO MATURITY
INVESTMENTS IN AFFILIATED COMPANIES
FIXED ASSETS
MULTICLIENT SEISMIC DATA
GOODWILL
INTANGIBLE ASSETS
DEFERRED TAXES
OTHER ASSETS
LIABILITIES & STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities
Estimated liability for taxes on income
Dividend payable
Long-term debt - current portion
Bank & short-term loans
Liabilities held for sale
LONG-TERM DEBT
POSTRETIREMENT BENEFITS
OTHER LIABILITIES
MINORITY INTEREST
STOCKHOLDERS’ EQUITY:
Common stock
Income retained for use in the business
Treasury stock at cost
Accumulated other comprehensive loss
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CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Income from continuing operations
Adjustments to reconcile income from continuing operations to cash provided by operating activities:
Depreciation and amortization (1)
Gain on sale of Grant Prideco stock
Charges, net of tax & minority interest (2)
Earnings of companies carried at equity, less dividends received
(Increase) decrease in deferred taxes
Provision for losses on accounts receivable
Change in operating assets and liabilities excluding acquisitions/divestitures:
Increase in receivables
(Increase) decrease in inventories
Increase in other current assets
Decrease in accounts payable and accrued liabilities
Increase in estimated liability for taxes on income
Postretirement benefits
Other - net
NET CASH PROVIDED BY OPERATING ACTIVITIES
Cash flows from investing activities:
Purchase of fixed assets
Multiclient seismic data capitalized
Capitalization of intangible assets
Retirement of fixed assets & other
Sale of Grant Prideco stock
Proceeds from the sale of rigs
Proceeds from business divestitures
Stock repurchase program
Shares of Axalto shares
Proceeds from the sale of Atos Origin shares
Acquisition of PetroAlliance
Sale (purchase) of investments, net
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
Cash flows from financing activities:
Dividends paid
Proceeds from employee stock purchase plan
Proceeds from exercise of stock options
Proceeds from issuance of convertible debentures (net of fees)
Proceeds from issuance of commercial paper
Settlement of US Interest Rate Swap
Payments of principal on commercial paper and long-term debt
Net increase (decrease) in short-term debt
NET CASH USED BY FINANCING ACTIVITIES
Discontinued operations
Net decrease in cash before translation
Translation effect on cash
Cash, beginning of period
CASH, END OF PERIOD
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CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Issued
In Treasury
Retained
Income
Marked to
Market
Pension
Liability
Translation
Adjustment
Comprehensive
Income (Loss)
Balance, January 1, 2004
Net Income
Hanover stock marked to market
Derivatives & investments marked to market
Interest rate swap cancellation
Translation adjustment
Sale of SchlumbergerSema
Sale of Axalto
Minimum pension liability - (US/UK Plans)
Tax benefit on minimum pension liability
Dividends declared
Stock repurchase plan
Proceeds from shares sold to optionees
Shares granted to Directors
Stock based compensation cost
Tax benefit on stock options
Shares issued on conversion of debentures
Purchase of PetroAlliance
Balance, September 30, 2004
SHARES OF COMMON STOCK
Stock Repurchase Plan
Conversion of Debentures
Employee Stock Purchase Plan
Shares sold to optionees
Granted to Directors
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements, which include the accounts of Schlumberger Limited (“Schlumberger”) and its subsidiaries, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. All intercompany transactions and balances have been eliminated in consolidation. Operating results for the nine month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2004. The December 31, 2003 balance sheet information has been derived from the audited 2003 financial statements. For further information, refer to the Consolidated Financial Statements and notes thereto, included in Schlumberger’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 3, 2004, for the fiscal year ended December 31, 2003.
1. Discontinued Operations
The sale of the SchlumbergerSema business was completed in January 2004. Schlumberger received €393 million after adjustments ($495 million) in cash and 19.3 million shares of common stock of Atos Origin with a value of €1.02 billion ($1.275 billion). The results of SchlumbergerSema are reported as Discontinued Operations in the Consolidated Statement of Income and include, in the first quarter of 2004, a gain of $26 million on the sale and in the second quarter of 2004, a credit of $15 million related to adjustments to several accruals. The net assets sold were approximately $2.2 billion. See Note 8 for further information.
On February 18, 2004, Schlumberger sold its Telecom Billing Software business for an all-cash amount of $37 million, excluding potential future cash receipts of up to $10 million of which $7 million was received in the third quarter. The results of Telecom Billing Software are reported as Discontinued Operations in theConsolidated Statement of Income and include, in the first quarter of 2004 a gain of $17 million on the sale and in the third quarter of 2004 a $7 million credit related to the additional proceeds received in the third quarter. The net assets sold were approximately $17 million.
On March 19, 2004, Schlumberger sold its Infodata business for an all-cash amount of $104 million. The results of Infodata are reported as Discontinued Operations in the Consolidated Statement of Income and include, in the first quarter of 2004, a gain of $50 million on the sale. The net assets sold were approximately $47 million.
On April 29, 2004, Schlumberger completed the sale of its Business Continuity (BCO) business for an all-cash amount of $233 million. The results of BCO are reported in Discontinued Operations in the Consolidated Statement of Income and include, in the second quarter of 2004, a gain of $48 million on the sale. The net assets sold were approximately $160 million.
On May 18, 2004, Schlumberger’s wholly owned subsidiary Schlumberger BV placed 34.8 million ordinary shares in its smart card business Axalto Holding NV, representing 87% of the total ordinary shares outstanding. The sale price was €14.80 per share giving net proceeds, after expenses, of $606 million, which included a subsequent placement of 166,250 shares. The results of Axalto are reported asDiscontinued Operations in the Consolidated Statement of Income and include, in the second quarter of 2004, a loss of $7 million on the sale, in the third quarter of 2004 credits for (1) a $9 million gain on the sale of Schlumberger’s residual investment of 5.1 million shares in Axalto – the sale price was €16.59 per share giving net proceeds, after expenses, of $99 million and (2) a $9 million credit related to the net assets sold. The net assets sold were approximately $700 million.
On July 1, 2004, Schlumberger completed the sale of its Electricity Metering North America business for an all-cash amount of $248 million. The results of Electricity Metering North America are reported in Discontinued Operations in the Consolidated Statement of Income and included in the second quarter of 2004, a credit of $25 million including a US tax valuation allowance release of $49 million related to a tax loss carry forward associated with the sale of SchlumbergerSema (which is also included in Discontinued Operations). This transaction allowed for the recognition of a deferred tax asset that was previously unrecorded. Excluding the tax release, the transaction would have resulted in a loss of $24 million. The net assets sold were approximately $134 million.
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On July 26, 2004, Schlumberger completed the sale of its Telecom Messaging business for an amount of $15 million ($6 million in cash and $9 million in future payments). The results of Telecom Messaging are reported as Discontinued Operations in the Consolidated Statement of Income and included in the third quarter of 2004, a loss of $4 million on the sale. The net assets sold were approximately $15 million.
Revenue and pretax income (loss) from discontinued operations excluding gains (losses) on sale were as follows:
SchlumbergerSema
Revenue
Pretax income
Infodata
Telecom Billing Software
Pretax income (loss)
Axalto
Electricity Meters North America
Business Continuity
Telecom Messaging
Pretax loss
eCity
NPTest
Verification Systems
2. Reclassification
Certain items from prior years have been reclassified to conform to the current year presentation.
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3. Earnings Per Share
The following is a reconciliation from basic earnings per share to diluted earnings per share from continuing operations:
Third Quarter
Dilutive effect of convertible debentures
Dilutive effect of options
Diluted
Nine Months
Earnings
per Share
The approximate number of outstanding options at September 30 to purchase shares of common stock which were not included in the computation of diluted earnings per share because to do so would have had an antidilutive effect, were as follows:
Third quarter
Nine months
For the third quarter and nine months 2003, the computation of diluted earnings per share excludes any effects of the convertible debentures because to do so would have had an antidilutive effect.
4. Charges – Continuing Operations
Debt Extinguishment Costs
In June 2004, Schlumberger Technology Corporation bought back and retired $351 million of its outstanding $1 billion 6.5% Notes due 2012. As a result Schlumberger recorded a pretax charge of $37 million ($23 million after tax—$0.04 per share), which included market premium and transaction costs.
In March 2004, Schlumberger plc (SPLC) accepted tenders for the outstanding £175 million SPLC 6.50% Guaranteed Bonds due 2032. In addition, Schlumberger SA (SSA) bought back €25 million of the outstanding €274 million SSA 5.25% Guaranteed Bonds due 2008 and €8 million of the outstanding €259 million SSA 5.875% Guaranteed Bonds due 2011. As a result, Schlumberger recorded a pretax and after-tax charge of $77 million, which included market and tender premiums, and transaction costs.
Between June 12 and July 22, 2003 subsidiaries of Schlumberger launched and concluded tender offers to acquire three series of outstanding European bonds; $1.3 billion of principal was repurchased for a total cost of $1.5 billion, which included the premium, and issuing and tender costs. The total charge on the tenders was $168 million, of which $81 million ($0.14 per share – diluted) was recorded in the second quarter of 2003, when the first tender closed, with the balance of $86 million ($0.14 per share) recorded in the third quarter of 2003.
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The above pretax charges are classified in Debt extinguishment costs in the Consolidated Statement of Income.
Other Charges
Third quarter of 2003:
First quarter of 2004:
Second quarter of 2004:
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Third quarter of 2004:
5. Investments in Affiliated Companies
Schlumberger and Smith International Inc. operate a drilling fluids joint venture of which Schlumberger owns a 40% interest and records income using the equity method of accounting. Schlumberger’s investment on September 30, 2004 was $719 million and on December 31, 2003 was $657 million. Schlumberger’s equity income from this joint venture was $17 million in the third quarter of 2004 ($13 million in 2003) and $49 million year to date 2004 ($36 million in 2003) and is included in Interest and other income in the Consolidated Statement of Income.
6. Securitization
In September 2000, a wholly owned subsidiary of Schlumberger entered into an agreement to sell, on an ongoing basis, up to $220 million of an undivided interest in its accounts receivable, which was subsequently amended up to $250 million. The amount of receivables sold under this agreement totaled $250 million at September 30, 2004. Unless extended by amendment, the agreement expires in September 2005.
7. Financing
In June 2004, Schlumberger Technology Corporation bought back and retired $351 million of its outstanding $1 billion 6.5% Notes due 2012. See Note 4 Charges – Continuing Operations.
In April 2004, Schlumberger Technology Corporation settled the Interest Rate Swaps which it had written down in March 2004. See Note 4 Charges – Continuing Operations.
In March 2004 SPLC accepted tenders for the outstanding £175 million SPLC 6.5% Guaranteed Bonds due 2032. In addition, Schlumberger SA (SSA) bought back €25 million of the outstanding €274 million SSA 5.25% Guaranteed Bonds due 2008 and €8 million of the outstanding €259 million SSA 5.875% Guaranteed Bonds due 2011. See Note 4 Charges – Continuing Operations.
In March 2004 Schlumberger Technology Corporation paid off its commercial paper program in the US. See Note 4 Charges – Continuing Operations.
8. Sale of SchlumbergerSema to Atos Origin and Investment in Atos Origin
On September 22, 2003, Schlumberger announced the signing of an agreement with Atos Origin for the sale of the SchlumbergerSema business.
On January 29, 2004 the sale transaction was completed. As consideration for the transaction, Schlumberger received €393 million after adjustments ($495 million) in cash, and 19.3 million shares of common stock of Atos Origin with a value of €1.02 billion ($1.275 billion), which represented approximately 29% of the outstanding common shares of Atos Origin after the transaction was completed.
On February 2, 2004 Schlumberger sold 9.6 million of the Atos Origin shares for a net consideration of €500 million ($625 million). As a result of this sale, Schlumberger’s investment was reduced to approximately 15% of the outstanding common shares of Atos Origin. The equity in earnings representing Schlumberger’s interest in Atos Origin for the four days ending February 2, 2004 was not material. This investment was accounted for using the cost method as of February 2, 2004.
On April 30, 2004 Schlumberger sold its remaining holding of 9.7 million Atos Origin shares for a net consideration after expenses of €465 million ($551 million).
At December 31, 2003, the assets and liabilities of the SchlumbergerSema business that were subsequently eliminated from the Schlumberger’s Consolidated Balance Sheet, were aggregated and presented on the consolidated Balance Sheet as Assets held for sale ($3.24 billion) and Liabilities held for sale ($1.22 billion).
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9. Inventory
A summary of inventory follows:
Sept. 30
2004
Dec. 31
Raw Materials & Field Materials
Work in Process
Finished Goods
Reserves
10. Fixed Assets
A summary of fixed assets follows:
Property plant & equipment
Less: Accumulated depreciation
11. Multiclient Seismic Data
The change in the carrying amount of multiclient seismic data is as follows:
Balance at December 31, 2003
Capitalized in period
Charged to cost of goods sold & services
Balance at September 30, 2004
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12. Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2004 is as follows:
Additions
Divestitures
Impact of change in exchange rates
13. Intangible Assets
A summary of intangible assets follows:
Gross book value
Less: Accumulated amortization
The amortization charged to income for the third quarter and nine months of 2004 was $19 million and $60 million respectively.
At September 30, 2004, the gross book value, accumulated amortization and amortization periods of intangible assets were as follows:
Gross
Book Value
Accumulated
Amortization
Software
Technology
Patents
Other
The weighted average amortization period for all intangible assets is approximately 6 years.
14. Stock Compensation Plans
As of September 30, 2004, Schlumberger had two types of stock-based compensation plans which are described in Schlumberger’s 2004 Annual Report on Form 10-K. Schlumberger recorded stock options expense in the Consolidated Statement of Income under SFAS 123 commencing in the third quarter of 2003, on a prospective basis for grants after January 1, 2003. The effect of stock based compensation expense on net income in the third quarter of 2004 was $7.4 million ($0.01 per share) and $20.1 million for the nine months ended September 30, 2004 ($0.03 per share). The effect on the third quarter and nine months 2003 net income was $7.2 million ($0.01 per share). Schlumberger applied APB 25 for grants prior to January 1, 2003. Had compensation cost for the stock-based Schlumberger plans been determined based on the fair value at the grant dates for awards prior to January 1, 2003, consistent with the method of SFAS 123, Schlumberger net income and earnings per share would have been the pro forma amounts indicated below:
Net income (loss)
As reported
Proforma adjustments:
Cost of DSPP
Cost of Stock Options
Tax benefit
Proforma
Basic earnings (loss) per share
Tax benefit on Stock Options
Pro forma
Diluted earnings (loss) per share
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15. Income Tax
Pretax book income from continuing operations subject to US and non-US income taxes was as follows:
United States
Outside United States
Schlumberger reported charges in continuing operations in 2004 and 2003. These are more fully described in the note Charges – Continuing Operations. US pretax results in the third quarter of 2004 included charges of $3 million. Outside the US, charges were $11 million. The US pretax results for the first nine months of 2004 included charges of $124 million related to the US Interest Rate Swap, the restructuring program, the US bonds debt extinguishment costs and an intellectual property settlement. Outside the US pretax results included charges of $119 million related to the debt extinguishment costs, the restructuring program, the loss on sale of Atos Origin common stock, an intellectual property settlement and severance charges.
Schlumberger had net deferred tax assets of $601 million on September 30, 2004 and $632 million on December 31, 2003. Significant components of net deferred tax assets at September 30, 2004 included postretirement and other long-term benefits ($241 million), current employee benefits ($153 million), fixed assets, inventory and other ($181 million) and net operating losses ($26 million). At December 31, 2003, net deferred tax assets included postretirement and other long-term benefits ($213 million), current employee benefits ($183 million), fixed assets, inventory and other ($194 million) and net operating losses ($42 million).
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The components of consolidated income tax expense from continuing operations were as follows:
Current:
United States - Federal
United States - State
Deferred:
Valuation allowance
Consolidated taxes on income
A reconciliation of the US statutory federal tax rate (35%) to the consolidated effective tax rate follows:
US federal statutory rate
US state income taxes
Non US income taxed at different rates
Charges
Effective income tax rate
16. Contingencies
The Consolidated Balance Sheet includes accruals for the estimated future costs associated with certain environmental remediation activities related to the past use or disposal of hazardous materials. Substantially all such costs relate to divested operations and to facilities or locations that are no longer in operation. Due to a number of uncertainties, including uncertainty of timing, the scope of remediation, future technology, regulatory changes, the risk of personal injury, natural resource or property damage claims and other factors, it is possible that the ultimate remediation costs may exceed the amounts estimated. However, in the opinion of management, such additional costs are not expected to be material relative to consolidated liquidity, financial position or future results of operations.
The Consolidated Balance sheet includes accruals for estimated future expenditures associated with business divestitures which have been completed. It is possible that the ultimate expenditures may exceed the amounts recorded. In the opinion of management, such additional expenditures are not expected to be material relative to consolidated liquidity, financial position or future results of operations.
In addition, Schlumberger and its subsidiaries are party to various other legal proceedings. Although the ultimate disposition of these proceedings is not presently determinable, in the opinion of Schlumberger any liability that might ensue would not be material in relation to the consolidated liquidity, financial position or future results of operations.
Schlumberger’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and receivables from clients. Schlumberger places its cash and cash equivalents with financial institutions and corporations, and limits the amount of credit exposure with any one of them. Schlumberger actively evaluates the creditworthiness of the issuers in which it invests. The receivables from clients are concentrated within a few significant industries and geographies.
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17. Segment Information
Schlumberger operates two primary reportable business segments: Oilfield Services and WesternGeco.
Prior periods have been restated so as to be comparable with the current reporting structure.
after tax
& MI
Minority
Tax
Expense
before tax
Oilfield Services
North America
Latin America
Europe/CIS/W. Africa
Middle East & Asia
Elims/Other
WesternGeco
Elims & Other
Interest Income
Interest Expense (1)
Charges (2)
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18. Pension and Other Postretirement Benefits
Net pension cost in the US for the third quarter and nine months of 2004 and 2003 included the following components:
Service cost - benefits earned during period
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of prior service cost/other
Amortization of unrecognized net loss
Net pension cost
Schlumberger’s contribution during the nine months ended September 30, 2004 was $249 million. Schlumberger does not anticipate making any contribution during the fourth quarter of 2004.
Net pension cost in the UK plan for the third quarter and nine months of 2004 and 2003 included the following components:
On May 19, 2004, FASB Staff Position No. 106-2 (“FSP”) was issued by FASB to provide guidance relating to the prescription drug subsidy provided by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). Schlumberger currently provides postretirement benefits to former employees who have retired under the US pension plans. For these former employees, the prescription drug benefit provided by Schlumberger would be considered to be actuarially equivalent to the benefit provided under the Act. As permitted by the FSP, Schlumberger prospectively adopted the provisions of the FSP effective July 1, 2004. This resulted in a reduction in the accumulated postretirement benefit obligation (“APBO”) for the subsidy related to benefits attributed to past service of approximately $77 million. The subsidy will result in a reduction in net periodic post retirement costs of approximately $12 million (pretax), of which $6 million was recorded during the third quarter of 2004 with the remaining portion being recorded in the fourth quarter of 2004. The components of this approximate $12 million in pretax savings are a reduction in interest costs on APBO of $5 million, a reduction of amortization of net loss of $4 million and a reduction in current period service costs of $3 million.
Net postretirement benefit cost in the US for the third quarter and nine months of 2004 and 2003 included the following components:
Interest cost on accumulated postretirement benefit obligation
Amortization of unrecognized net loss/other
Net postretirement benefit cost
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.
BUSINESS REVIEW
Operating Revenue
Pretax Operating Income (1)
Other (4)
Third Quarter 2004 Compared to Third Quarter 2003
Operating revenue for the third quarter was $2.93 billion versus $2.54 billion in the third quarter of 2003, an increase of 15%. Income from continuing operations before charges was $310 million, or $0.52 per share-diluted versus $0.36 in the third quarter of last year. Including charges of $13 million, income from continuing operations in the third quarter was $297 million, or $0.50 per share, compared to a loss of $88 million, or $0.15 per share, last year, which included net charges of $298 million. The $13 million charges in 2004 comprised of $10 million for an intellectual property settlement and $3 million for severance. The $298 million net charges in 2003 comprised debt extinguishment costs of $86 million, multiclient library and seismic vessel impairment charges of $243 million, and a gain on the sale of a rig of $31 million.
Discontinued operations recorded a gain of $21 million ($0.03 per share) in the quarter. This resulted in a net income of $318 million, or $0.53 per share-diluted, compared to a net loss of $55 million, or $0.09 per share, last year.
Oilfield Services revenue of $2.61 billion increased 3% sequentially and 16% compared to the same quarter of last year. Pretax business segment operating income of $440 million decreased 3% sequentially but grew 10% year-on-year.
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WesternGeco revenue of $301 million increased 3% sequentially and 14% year-on-year. Pretax business segment operating income of $33 million improved $19 million sequentially and $70 million compared to the same quarter of last year.
OILFIELD SERVICES
Third-quarter revenue of $2.61 billion was 3% higher sequentially and increased 16% year-on-year. Pretax operating income of $440 million declined 3% sequentially but rose 10% year-on-year.
The sequential revenue increases that were particularly strong in Nigeria, Canada and Russia were substantially offset by Norway, Indonesia, Saudi Arabia and North Africa. Wireline and Well Services technologies were the principal contributors to the sequential revenue growth.
Sequential operating income decline was the result of four main causes: weather-related issues in the Gulf of Mexico; performance-related issues in the Gulf of Mexico and Mexico; delays in contract renegotiations in Venezuela; and slower activity in Russia for YUKOS. In contrast the Middle East continued to deliver strong performance.
The highest year-on-year activity growth was experienced in India, Russia, Mexico and US Land GeoMarkets. By technology, Drilling & Measurements, Well Services, Well Completions & Productivity, Wireline and Integrated Project Management recorded double-digit gains.
Revenue of $789 million increased 6% sequentially and 17% year-on-year. Pretax operating income of $119 million decreased 1% sequentially but increased 31% year-on-year.
Sequential revenue growth was mainly due to Canada and land activity in the United States. Well Services operated near capacity throughout most of the quarter and recorded double-digit price improvement from 2003 averages. However, higher product costs are beginning to dampen the operating leverage. Pricing momentum remains positive.
Sequentially, the decline in operating income was mainly due to suspended operations in the Gulf of Mexico as a result of multiple hurricanes and a loss on a turnkey drilling project.
Robust year-on-year revenue growth was recorded in US Land and Canada, which benefited from the strong performance of most technology segments, coupled with pricing improvements particularly for Well Services. Stronger demand for Well Completions & Productivity and Well Services contributed to the year-on-year growth in the Gulf of Mexico.
Revenue of $434 million increased 2% sequentially and 14% year-on-year. Pretax operating income of $45 million declined 28% both sequentially and year-on-year.
Demand for Integrated Project Management services in Mexico continued to fuel year-on-year growth; however, the revenue flattened sequentially due to a slowdown in drilling activity, which will likely persist through early next year.
The year-on-year and sequential pretax operating income drop was mainly due to an unfavorable revenue mix in Mexico; reduced level of activity for PEMEX in a project bearing a high structural cost; and losses on a low-margin project with a major E&P company for which the contract has subsequently been improved. During the quarter, certain barges in West Venezuela were partially idled while contractual negotiations continued with PDVSA.
Drilling & Measurements, Well Completions & Productivity and Wireline continued to experience strong growth, particularly in Latin America South, leading to record revenue in Brazil. Drilling & Measurements leveraged its experience of drilling more than seven million feet in the Faja del Orinoco of Eastern Venezuela by expanding its geosteering market with new multi-well contracts in both Venezuela and Trinidad.
Integrated Project Management saw increased activity in Ecuador with new contracts and services on multiple exploration and development wells. The work included project management, well engineering, well site supervision and all related well construction and completion services.
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Europe/CIS/West Africa
Revenue of $737 million increased 5% sequentially and 12% year-on-year. Pretax operating income of $117 million was flat sequentially but declined 4% year-on-year.
Sequential activity growth in the region was affected by union strikes in Norway and a slowdown in Russia as YUKOS started reducing its operations late in the quarter. Further declines are expected with YUKOS in the coming quarters and assets are consequently being redeployed within Russia to cover expanding activity elsewhere.
Sequential margin deterioration was due to reduced activity for YUKOS in Russia and union strikes in Norway that were partially offset by improvements in Nigeria and Continental Europe. This resulted in a flattening of operating income in the region.
Year-on-year revenue growth was led by Russia, Caspian and West Africa, with gains recorded in all technology Segments led by Drilling & Measurements and Well Services. Nigeria also contributed to the year-on-year and sequential revenue growth with particular strength in deepwater.
Revenue of $617 million decreased 3% sequentially but grew 16% year-on-year. Pretax operating income of $166 million increased 3% sequentially and 29% year-on-year.
Sequential activity decline was mainly due to the completion of a 90-well VDA* Viscoelastic Diverting Acid stimulation campaign in the prior quarter in Saudi Arabia and lower Integrated Project Management activities in Indonesia. This decline was partially offset by strong activity in the Thailand/Vietnam and Malaysia/Brunei/Philippines GeoMarkets.
The improved sequential operating income was the result of a better revenue mix with the completion of a low profitability contract in Asia in the quarter and the ramp up of favorable projects in the Gulf.
WESTERNGECO
Third-quarter revenue of $301 million was 3% higher sequentially and 14% higher compared to the same period last year. Pretax operating income of $33 million improved $19 million sequentially and $70 million year-on-year.
Sequentially, Marine activity increased 7% due to better vessel utilization, particularly for Q-Marine* technology. The activity growth was strongest in West Africa, Mexico and South America. Land declined 8% reflecting the completion of some projects in Malaysia and the Middle East. Multiclient sales increased 3% mainly in North America, partially offset by the completion of a long-term volume agreement awarded in December 2003. Data Processing increased 10% due to a higher level of Q* processing and robust third-party work coupled with improved operational efficiencies.
Year-on-year revenue increased mainly from strong growth in Multiclient sales coupled with higher activity in North America. This reflected the renewed interest in the library resulting from higher oil prices and an increasing number of blocks in the Gulf of Mexico coming up for renewal. Data Processing grew 29% resulting in increased amounts of Q* processing and improved third-party backlog. Land revenue was flat year-on-year while Marine declined 9% due to lower activity in the Caspian coupled with an ocean-bottom cable crew operating on a substantially pre-funded Multiclient project in the Gulf of Mexico.
Sequential operating income increases were mainly in Marine resulting from higher vessel utilization and sustained Q* pricing. Data Processing also contributed to this improvement due to better operating efficiency.
The year-on-year operating income increase was led by Multiclient due to lower amortization cost following the impairment of the Multiclient library in the third quarter of last year, coupled with improved sales in North America. Marine also contributed to the improved performance with better pricing on Q* contracts.
The WesternGeco backlog at the end of the third quarter reached $602 million, increased 1% over the previous quarter and more than doubled year-on-year.
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OTHER
Global revenue for the third quarter was $14 million with pretax income of $1 million; Essentis revenue was $3 million and pretax operating loss was $3 million; Public Phones revenue was $8 million and pretax operating income was breakeven.
INCOME STATEMENT
Interest income of $15 million increased $3.8 million compared to the same quarter last year. The average return on investment increased from 1.7% to 2.2% year-over-year. The average investment balance of $2.6 billion was down $20 million over last year. Gross margin (excluding net charges of $14 million in 2004 and $421 million in 2003) of 21% increased 1% compared to the same period last year. As a percentage of revenue, marketing expense was 0.2% less than last year and research & engineering expense decreased 0.5% from last year. General expense as a percentage of revenue decreased from 3.2% to 2.9%. Interest expense of $44 million decreased $32 million compared to same quarter last year. Average borrowing rates decreased from 4.0% to 3.6% compared to the same quarter last year. The average debt balance of $4.4 billion decreased $3 billion over the same quarter last year. The effective tax rate for the third quarter, excluding the charges of $14 million in 2004 and $507 million in 2003, was 19% for both 2004 and 2003.
Nine Months 2004 Compared to Nine Months 2003
Revenue for the nine month period ended September 30, 2004 of $8.5 billion increased 13% over the same period last year. Income from continuing operations of $656 million includes charges aggregating $199 million. The primary components of these charges are debt extinguishment costs ($100 million), costs related to the ineffectiveness/settlement of the US Interest Rate Swaps ($40 million), loss on the sale of Atos Origin SA common stock ($21 million), an Intellectual Property settlement ($10 million), and restructuring charges ($21 million). Excluding charges, income from continuing operations was $1.43 per share, compared to $1.00 per share for the same period last year.
Oilfield Services revenue of $7.5 billion increased 15% versus the same period last year. Pretax operating income was $1.3 billion, an increase of 18% year-on-year.
WesternGeco revenue of $905 million increased 3% compared to the same period last year. Pretax operating income was $81 million compared to a loss of $52 million last year.
Discontinued operations recorded a gain of $238 million ($0.39 per share) in 2004 and a gain of $437,000 in 2003.
Net income was $894 million, or $1.49 per share - diluted compared to a net income of $206 million, or $0.36 per share - diluted, in the third quarter of 2003.
Nine months revenue of $7.5 billion was 15% higher versus the same period last year. Pretax operating income of $1.3 billion increased 18% year-on-year. Revenue growth year-on-year was strongest in India, Mexico, Caspian, Russia and East Africa and East Mediterranean GeoMarkets. From a technology standpoint, double-digit gains were recorded in Well Services from growth in all regions, Wireline, Drilling & Measurements, Well Completions & Productivity and Integrated Project Management, with all remaining technology segments also higher year-on-year.
Revenue of $2.3 billion increased 16% versus the same period last year. Pretax operating income of $362 million increased 40% year-on-year. Robust year-on-year growth was recorded in US Land and Canada, which benefited by strong performances in most technology Segments, particularly for Well Services. Alaska also posted growth mainly from increased activity for Well Completions & Productivity. Turnkey operations and stronger demand for Drilling & Measurements fueled year-on-year increases in the Gulf Coast. By technology, all segments, with the exception of Schlumberger Information Solutions, were higher year-on-year. Severe tropical storms and multiple hurricanes coupled with losses on a turnkey project in the Gulf Coast negatively affected growth in pretax income.
Revenue of $1.3 billion was 22% higher year-on-year. Pretax operating income of $169 million increased 10% versus the same period last year. Demand for integrated services continued to drive significant growth in Mexico. Latin America South grew due to market share gains for Drilling & Measurements in Brazil, integrated projects in Argentina,
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and increased activity for Well Completions & Productivity and Schlumberger Information Solutions. Venezuela experienced decreased activity mainly due to ongoing contractual issues with PDVSA, which also largely dampened growth in pre-tax income in the region. By technology, significant growth was recorded across most segments.
Revenue of $2.1 billion increased 8% year-on-year. Pretax operating income of $340 million decreased 1% year-on-year. Year-on-year growth was led by Russia with increases recorded in most segments, Caspian and West Africa GeoMarkets with demand particularly strong for Well Completions & Productivity, Drilling & Measurements and Wireline. These increases were partially offset by declines in United Kingdom due to the completion of integrated contracts in the prior year and lower activity in the North Sea. By technology, all segments, with the exception of Integrated Project Management and Schlumberger Information Solutions grew year-on-year. Year-on-year pretax income was impacted by local currency appreciation (Russian Ruble, Algerian Dinar, CFA and Euro) against the US dollar, unrest in Nigeria resulting in production shutdowns in the Western Delta and union strikes in Norway.
Revenue of $1.8 billion was 17% higher year-on-year. Pretax operating income of $466 million was 23% higher versus the same period last year. Offshore and deepwater activity utilizing Wireline, Drilling & Measurements and Well Completions & Productivity technologies continued to drive year-on-year increases in India. Strong year-on-year growth was also reflected across most GeoMarkets, particularly in East Africa and East Mediterranean from increased activity in East and West Mediterranean, Indonesia from integrated projects and in the Gulf from higher demand for Wireline, Drilling & Measurements and Well Services technologies.
Nine months revenue for WesternGeco of $905 million was 3% higher compared to the same period last year. The increase was driven by strong Multiclient sales reflecting the increased interest in the library resulting from a steady high oil price and an increasingly larger numbers of blocks in the Gulf of Mexico coming up for renewal, coupled with an increase in pre-commit revenue in North America. Land revenue declined mainly due to the shutdown of several crews active in the previous year in Alaska, Cameroon and Germany and lower activity in Mexico; partially offset by improvements in South America, Asia and the Middle East. Marine declined marginally on account of lower activity in Caspian, partially offset by higher vessel utilization in other regions while Data Processing improved marginally.
Q - Technology revenue grew 125% compared to the same period last year, with higher utilization of the Q-Marine fleet and the startup of the first Q-Seabed crew.
Pretax income of $81 million improved by $134 million mainly in Multiclient due to the impact of higher sales coupled with lower amortization following the impairment of the Multiclient library in September last year; Marine improved on account of better pricing and utilization; Data Processing improved on account of higher third party work while Land declined marginally.
Global revenue for the nine months was $43 million with pretax income of $2 million; Essentis revenue was $9 million and pretax operating loss was $9 million; Public Phones revenue was $18 million and pretax operating loss was $3 million.
Interest income of $40 million increased 3.5% compared to the same period last year. The average return on investment decreased from 2.5% to 1.8% year-over-year. The average investment balance of $2.8 billion increased by $821 million over last year due to liquidity generated by operations and business divestiture proceeds. Gross margin of 20% decreased 1.4% compared to the same period last year (excluding net charges of $44 million in 2004 and $421 million in 2003). As a percentage of revenue, marketing expense and research & engineering was 0.2% less than last year. General expense as a percentage of revenue decreased from 3.3% to 2.9%. Interest expense of $228 million decreased $33.4 million compared to the same period last year and decreased $101 million excluding the $63.9 million
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charge related to the US Interest Rate Swap. Excluding this charge the average borrowing rates decreased from 4.8% to 3.6%. The average debt balance decreased $1.1 billion compared to the same period last year. The effective tax rate for the first nine months, excluding the charges of $243 million in 2004 and $589 million in 2003, was 22% compared to 23% for the same period last year. The main cause of the decrease from last year were reduced losses for which valuation allowances were required and the geographic mix of results in WesternGeco.
CASH FLOW
During the first nine months of 2004, cash provided by operations was $978 million as net income plus depreciation/amortization and charges, including the extinguishment of European and US debt and the US Interest Rate Swap, were only partially offset by increases in customer receivables and inventories. Cash provided by investing activities was $2.4 billion with proceeds from the sales of the SchlumbergerSema business ($494 million), the Infodata business ($104 million), the Telecom Billing Software business ($37 million), the Business Continuity business ($233 million), the Axalto business ($606 million) the Electricity Meters North America business ($248 million), the proceeds from the sale of the Atos Origin shares ($1.16 billion) and a net change in investments ($556 million) only partially offset by investments in fixed assets ($801 million). Cash used by financing activities was $3.42 billion as the debt repayment of $3.5 billion, the payment of dividends to shareholders ($331 million), stock repurchase plan ($237 million) and debt extinguishment costs ($111 million) were only partially offset by the proceeds from employee stock plans ($213 million).
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Net Debt is gross debt less cash, short-term investments and fixed income investments held to maturity. Details of the Net Debt follows:
Net Debt, beginning of period
Net income from continuing operations
Excess of equity income over dividends received
Charges, net of tax and minority interest
Depreciation and amortization
Increase in working capital requirements
Capital expenditures
Employee stock plans
Proceeds from the sale of the SchlumbergerSema business
Proceeds from the sale of the Telecom Billing Software business
Proceeds from the sale of the Infodata business
Proceeds from the sale of the Business Continuity business
Proceeds from the sale of the Axalto business
Proceeds from the sale of Axalto shares
Proceeds from the sale of the Electricity Meters North America business
Proceeds from the sale of Telecom Messaging business
Stock purchase program
US pension plan payments
Settlement of US interest rate swap
Investment in PetroAlliance
Translation effect on net debt
Net Debt, end of period
Components of Net Debt
Cash and short-term investments
Fixed income investments, held to maturity
Bank loans and current portion of long-term debt
Long-term debt
INFORMATION ON NON-GAAP MEASURES
In addition to financial results determined in accordance with generally accepted accounting principles (GAAP) this document also includes the following non-GAAP financial measures:
The following is a reconciliation of:
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Per Consolidated Statement of Income
Add back Charges:
- Intellectual Property settlement charge
- Severance charge
Continuing operations before charges
Effective tax rate
Diluted Earnings per Share
Add back Charges & Credits:
- Debt extinguishment costs
- Muticlient library impairment charge
- Vessel impairment charge
- Gain on sale of rig
Continuing operations before charges & credits
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- US interest-rate swap settlement gain
- Loss on sale of Atos Origin shares
- Vacated leased facility reserve
- Litigation reserve release
- Loss recognized on interest-rate swaps
- Restructuring program charge
- Multclient library impairment charge
Reasons for excluding charges and credits - Management believes that the exclusion of these items enables it to more effectively evaluate Schlumberger’s operations period over period and to identify operating trends that could otherwise be masked by the excluded items.
The foregoing non-GAAP financial measure should be considered in addition to, not as a substitute for, or superior to, total debt, net income, cash flows or other measures of financial performance prepared in accordance with GAAP as more fully discussed in Schlumberger’s financial statements and filings with the Securities and Exchange Commission.
FORWARD-LOOKING STATEMENTS
This 10-Q report, the third quarter 2004 earnings release and other statements we make contain forward looking statements, which include any statements that are not historical facts, such as our expectations regarding business outlook; growth for Schlumberger as a whole and for each of Oilfield Services and WesternGeco; oil and natural gas demand and production growth; operating and capital expenditures by Schlumberger and the oil and gas industry; the business strategies of Schlumberger’s customers; and future results of operations. These statements involve risks and uncertainties, including, but not limited to, the global economy; changes in exploration and production spending by Schlumberger’s customers and changes in the level of oil and natural gas exploration and development; general economic and business conditions in key regions of the world; political and economic uncertainty and socio-political unrest; and other factors detailed in our most recent Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. If one or more of these risks or uncertainties materialize (or the consequences of such a development changes), or should underlying assumptions prove incorrect, actual outcomes may vary materially from those forecasted or expected. Schlumberger disclaims any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise.
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Item 3: Quantitative and Qualitative Disclosures about Market Risk
Schlumberger does not believe it has a material exposure to financial market risk. Schlumberger manages the exposure to interest rate changes by using a mix of debt maturities and variable- and fixed-rate debt. With regard to foreign currency fluctuations, Schlumberger enters into various contracts, which change in value as foreign exchange rates change, to protect the value of external and intercompany transactions in foreign currencies. Schlumberger does not enter into foreign currency or interest rate transactions for speculative purposes.
Item 4: Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of Schlumberger’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of Schlumberger’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the CEO and CFO have concluded that Schlumberger’s disclosure controls and procedures were effective as of September 30, 2004 to ensure that information required to be disclosed by Schlumberger in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There has been no change in our internal controls over financial reporting that occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During the quarter ended September 30, 2004, Schlumberger issued 27 shares of its common stock upon conversion of $2,000 aggregate principal amount of its 1.500% Series A Convertible Debentures due June 1, 2023. Such shares were issued in a transaction exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as amended.
On May 27, 2004, Schlumberger delivered from treasury 421,870 shares of its common stock as partial consideration for the acquisition of an approximately 26% equity stake in PetroAlliance Services Company Limited. Such shares were issued in transactions exempt from registration under Regulations D and S of the Securities Act of 1933, as amended.
Share Repurchases
On July 22, 2004, the Board of Directors of Schlumberger approved a share buyback program of up to 15 million shares to be acquired in the open market before December 2006, subject to market conditions.
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The following table sets forth information on Schlumberger’s common stock repurchase program activity for the quarter ended September 30, 2004.
Maximum Number ofshares that may yetbe purchased
under the program
July 1 through July 31, 2004
August 1 through August 31, 2004
September 1 through September 30, 2004
In connection with the exercise of stock options under Schlumberger’s incentive compensation plans, Schlumberger routinely receives shares of its common stock from optionholders in consideration of the exercise price of the stock options. Schlumberger does not view these transactions as implicating the disclosure required under this Item. The number of shares of Schlumberger common stock received from optionholders is immaterial.
Item 6: Exhibits
Exhibit 3.1 Deed of Incorporation of Schlumberger Limited as last amended on May 4, 2001, incorporated by reference to Exhibit 3 (a) to Form 10-Q for the period ended June 30, 2001.
Exhibit 3.2 Amended and Restated Bylaws of Schlumberger Limited incorporated by reference to Exhibit 3 to Form 8-K filed April 17, 2003.
Exhibit 10.1 Schlumberger Limited 2004 Stock Deferral Plan for Non-Employee Directors.
Exhibit 10.2 Form of Option Agreement, Incentive Stock Option.
Exhibit 10.3 Form of Option Agreement, Non-Qualified Stock Option.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Form of Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Form of Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in his capacity as Chief Accounting Officer.
Schlumberger Limited
(Registrant)
Date: November 4, 2004
/s/ Frank A. Sorgie
Frank A. Sorgie
Chief Accounting Officer and Duly Authorized Signatory
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