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.)
153 EAST 53 STREET, 57th Floor
NEW YORK, NEW YORK, U.S.A.
42 RUE SAINT-DOMINIQUE
PARIS, FRANCE
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 March 31, 2005
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)
Three Months Ended
March 31,
Operating revenue
Interest & other income
EXPENSES:
Cost of goods sold & services
Research & engineering
Marketing
General & administrative
Debt extinguishment costs
Interest
Income from Continuing Operations before taxes and minority interest
Taxes on income
Income from Continuing Operations before minority interest
Minority interest
Income from Continuing Operations
Income (Loss) from Discontinued Operations
Net Income
Basic earnings per share:
Income from Discontinued Operations
Diluted earnings per share:
Net Income *
Average shares outstanding:
Basic
Assuming dilution
See Notes to Consolidated Financial Statements
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CONSOLIDATED BALANCE SHEET
(Stated in thousands)
Dec. 31,
2004
ASSETS
CURRENT ASSETS:
Cash
Short-term investments
Receivables less allowance for doubtful accounts (2005 - $112,817; 2004 - $114,403)
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)
Charges and credits, net of tax & minority interest (2)
Earnings of companies carried at equity, less dividends received
Increase in deferred taxes
Stock based compensation expense
Provision for losses on accounts receivable
Change in operating assets and liabilities excluding acquisitions/divestitures:
Increase in receivables
Increase in inventories
Increase in other current assets
Decrease in accounts payable and accrued liabilities
Increase in estimated liability for taxes on income
Increase in 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
Proceeds from the sale of fixed assets & other
Sale of Atos shares
Proceeds from business divestitures
Sale of Montrouge facility
Sale (purchase) of investments, net
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES
Cash flows from financing activities:
Dividends paid
Proceeds from employee stock purchase plan
Proceeds from exercise of stock options
Stock repurchase program
Proceeds from issuance of long-term debt
Payments of principal on long-term debt
Net increase 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
Balance, January 1, 2005
Net income
Hanover stock marked to market, net of tax
Derivatives marked to market, net of tax
Translation adjustment
Minimum pension liability - (US/UK Plans)
Tax benefit on minimum pension liability
Dividends declared
Stock repurchase plan
Proceeds from shares sold to optionees less shares exchanged
Stock based compensation cost
Balance, March 31, 2005
SHARES OF COMMON STOCK
Employee stock plan
Shares sold to optionees less shares exchanged
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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 three month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2005. The December 31, 2004 balance sheet information has been derived from the audited 2004 financial statements. For further information, refer to the Consolidated Financial Statements and notes thereto, included in Schlumberger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 4, 2005.
Certain items from prior year have been reclassified to conform to the current year presentation.
2. Charges and Credits– Continuing Operations
2005
In March 2005, Schlumberger sold its facility in Montrouge, France to a third party for $230 million resulting in a pretax and after-tax gain of approximately $146 million, which is classified in Interest and other income in the Consolidated Statement of Income. This transaction included the utilization of a deferred tax asset that was previously offset by a valuation allowance of approximately $51 million. Schlumberger also recorded other real estate related pretax charges of approximately $12 million ($11 million after-tax), which are classified in Cost of goods sold & services in the Consolidated Statement of Income.
Debt Extinguishment 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 €7 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. This charge is classified in Debt extinguishment costs in the Consolidated Statement of Income.
Other Charges
Schlumberger Technology Corporation paid off its commercial paper program in the US. As a result, the $500 million US interest-rate swaps that were designated as cash-flow hedges became ineffective. Schlumberger recorded a pretax non-cash charge of $73 million ($46 million after-tax) to recognize unrealized losses previously recorded in Other Comprehensive Income. The pretax charge is classified in Interest expense in the Consolidated Statement of Income.
Schlumberger sold 9.6 million ordinary shares of Atos Origin SA at a price of €52.95 per share. The net proceeds for the sale were $625 million and Schlumberger recorded a pretax and after-tax loss of $14 million on this transaction, which reflects both banking fees and currency effect. The pretax charge is classified in Interest and other income in the Consolidated Statement of Income.
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Schlumberger had commenced a restructuring program in order to reduce overhead. Consequently, a pretax charge of $20 million ($14 million after-tax) was taken in the quarter related to a voluntary early retirement program in the United States and is classified in Cost of goods sold & services in the Consolidated Statement of Income.
The following is a summary of the above 2004 charges:
Charges & Credits:
- Debt extinguishment costs
- Restructuring program charges
- Loss on sale of Atos Origin shares
- Loss recognized on interest-rate swaps
3. Business Divestitures – Discontinued Operations
During the first quarter of 2005, Schlumberger completed the sales of its Global Tel*Link, Public Phones and Essentis businesses for $18 million in cash. At December 31, 2004, the assets and liabilities of these businesses that were subsequently eliminated from Schlumberger’sConsolidated Balance Sheet, were aggregated and presented as Assets held for sale ($65 million) and Liabilities held for sale ($35 million).
During 2004, Schlumberger completed the sales of the following businesses: SchlumbergerSema, Telcom Billing Software, Infodata, Business Continuity, Axalto, Electricity Metering North America and Telecom Messaging.
During the first quarter of 2004, Schlumberger recognized gains, net of taxes, related to the divestitures of SchlumbergerSema, Telecom Billing Software and Infodata of $26 million, $17 million and $48 million, respectively. The results of all of these divested business are reported as Discontinued Operations in the Consolidated Statement of Income.
The following table summarizes the results of these discontinued operations during the first quarter of 2005 and 2004:
Three months ended March 31,
Revenue
Income (loss) before tax
Tax expense
Gains on disposal, net of tax
Income from discontinued operations
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4. Earnings Per Share
The following is a reconciliation from basic earnings per share to diluted earnings per share from continuing operations:
Three Months
Income from
ContinuingOperations
Earnings Per
Share fromContinuingOperations
Dilutive effect of convertible debentures
Dilutive effect of options
Diluted
At March 31, 2005 and 2004, approximately 8.1 million and 12.4 million, respectively, of outstanding options to purchase shares of common stock were not included in the computation of diluted earnings per share because to do so would have had an antidilutive effect. In addition, the computation of diluted earnings per share at March 31, 2004 also excludes the effects of approximately 19.1 million common shares issuable upon conversation of the 1.5% Series A Convertible Debentures and the 2.125% Series B Convertible Debentures as their inclusion would have also had an anti-dilutive effect.
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 March 31, 2005 was $739 million and on December 31, 2004 was $716 million. Schlumberger’s equity income from this joint venture, which is included in Interest and other income in the Consolidated Statement of Income, was $19 million in the first quarter of 2005 and $17 million in the first quarter of 2004.
6. Securitization
A wholly owned subsidiary of Schlumberger has an agreement to sell, on an ongoing basis, up to $250 million of an undivided interest in its accounts receivable. The amount currently drawn under this agreement totaled $194 million at March 31, 2005. Unless extended by amendment, the agreement expires in September 2005. Schlumberger does not have any retained interest in the accounts receivable sold under this agreement.
7. Inventory
A summary of inventory follows:
Dec. 31
Raw Materials & Field Materials
Work in Process
Finished Goods
Reserves
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8. Fixed Assets
A summary of fixed assets follows:
Mar. 31
Property plant & equipment
Less: Accumulated depreciation
9. Multiclient Seismic Data
The change in the carrying amount of multiclient seismic data is as follows:
Balance at December 31, 2004
Capitalized in period
Charged to cost of goods sold & services
Balance at March 31, 2005
10. Goodwill
The changes in the carrying amount of goodwill by business segment for the three months ended March 31, 2005 are as follows:
Additions
Other
Impact of change in exchange rates
11. Intangible Assets
A summary of intangible assets follows:
Gross book value
Less: Accumulated amortization
The amortization charged to income was $20 million during the first quarter of 2005 and $21 million for the same period in 2004.
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At March 31, 2005, the gross book value, accumulated amortization and amortization periods of intangible assets were as follows:
Software
Technology
Patents
The weighted average amortization period for all intangible assets is approximately 6 years.
12. Stock Compensation Plans
As of March 31, 2005, 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-based compensation 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 first quarter of 2005 was $8.8 million in the first quarter of 2005 and $6.5 million in the first quarter of 2004. 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:
(Stated in millions except per share amounts)
As reported
Proforma adjustments:
Cost of Stock Options
Tax benefit
Proforma
Basic earnings per share
Pro forma
Diluted earnings per share
In December 2004, the Financial Accounting Standards Board issued SFAS 123R (Share-Based Payment.) The standard amends SFAS 123 (Accounting for Stock Based Compensation) and concludes that services received from employees in exchange for stock-based compensation results in a cost to the employer that must be recognized in the financial statements. The cost of such awards should be measured at fair value at the date of grant. SFAS 123R provides public companies with a choice of transition methods to implement the standard. Schlumberger will apply the modified prospective method whereby compensation cost will be recognized for the unamortized portion of vested awards outstanding at January 1, 2006, the effective date of SFAS 123R, and granted after January 1, 1995. Such cost will be recognized in Schlumberger’s financial statements over the remaining vesting period. As described above, in 2003 Schlumberger adopted the fair value recognition provisions of SFAS Nos. 123 and 148 on a prospective basis for grants after January 1, 2003. Therefore, effective January 1, 2006, Schlumberger will have to apply the provisions of SFAS 123R to
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the unvested portion of awards granted during the period of January 1, 1995 to December 31, 2002. The adoption of this standard is currently expected to reduce Schlumberger’s earnings by approximately $23 million in 2006 and $6 million in 2007.
13. Income Tax
Pretax book income from continuing operations subject to US and non-US income taxes was as follows:
United States
Outside United States
Pretax income
Schlumberger reported charges and credits in continuing operations during the first quarters of 2005 and 2004. These are more fully described in Note 2 - Charges and credits – Continuing Operations. US pretax results in the first quarter of 2005 included charges of $2 million. Outside the US, the pretax results in the first quarter of 2005 included a net credit of approximately $136 million, primarily relating to the sale of a facility. The US pretax results in the first quarter of 2004 included charges of $93 million related to the US Interest Rate Swap and the restructuring program. Outside the US, pretax results included charges of $91 million related to the debt extinguishment costs and the loss on sale of Atos Origin common stock.
The components of net deferred tax assets were as follows:
Postretirement and other long-term benefits
Current employee benefits
Fixed assets, inventory and other
Net operating losses
The deferred tax assets relating to net operating losses at March 31, 2005 and December 31, 2004 are net of valuation allowances in certain countries of $254 million and $312 million, respectively.
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
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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
Effect of equity method investment
Minority partner’s share of LLC earnings
Valuation allowance (excluding charges and credits)
Charges and credits
Effective income tax rate
The charges and credits described in Note 2 Charges – Continuing Operations, including the associated effect of changes in valuation allowance, decreased Schlumberger’s effective tax rate by five percentage points in the first quarter of 2005 and increased Schlumberger’s effective tax rate by six percentage points in the first quarter of 2004.
14. Contingencies
TheConsolidated 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 where it is probable that Schlumberger has incurred a liability and such amount can be reasonably estimated. 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 December 2004, WesternGeco and Schlumberger received grand jury subpoenas from the US Attorney’s office in the Southern District of Texas seeking documents relating to possible fraud in obtaining visas for non-US citizens working as crewmembers on vessels operating in the Gulf of Mexico. We are in the process of responding to the investigation, including providing information sought by the subpoenas. Schlumberger is unable to determine the outcome of this matter and the related impact it might have on Schlumberger’s financial condition and results of operations.
In addition, Schlumberger and its subsidiaries are party to various other legal proceedings. A liability is accrued when a loss is both probable and can be reasonably estimable. At this time the ultimate disposition of these proceedings is not presently determinable and therefore, it is not possible to estimate the amount of loss or range of possible losses that might result from an adverse judgment on settlement in these matters. However, 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 tax filings are subject to regular audit by the tax authorities in most of the jurisdictions in which it conducts business. These audits may result in assessments for additional taxes which are resolved with the authorities or, potentially, through the courts. Tax liabilities are recorded based on estimates of additional taxes which will be due upon the conclusion of these audits. Estimates of these tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates. In such an event, Schlumberger will record additional tax expense or tax benefit in the year in which such resolution occurs.
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15. 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.
Oilfield Services
North America
Latin America
Europe/CIS/W. Africa
Middle East & Asia
Elims/Other
WesternGeco
Elims & Other
Interest Income
Interest Expense (1)
Charges and credits (2)
16. Pension and Other Postretirement Benefits
Net pension cost in the US for the first quarter of 2005 and 2004 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
Net pension cost in the UK plan for the three months ended March 2005 and 2004 included the following components:
Amortization of unrecognized loss
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Net postretirement benefit cost in the US for the first quarter of 2005 and 2004 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
Pretax operating income represents income before taxes and minority interest, excluding interest income, interest expense and amortization of intangibles, a net pretax credit of $134 million in the first quarter of 2005 and a pretax charges of $184 million in the first quarter of 2004 (see pages 6 and 7 for the description of charges and credits).
First Quarter 2005 Compared to First Quarter 2004
Operating revenue for the first quarter of 2005 was $3.16 billion versus $2.67 billion for the same period last year. Income from continuing operations before income taxes and minority interest was $679 million in 2005 compared to $162 million in 2004. The 2005 results include net pretax credits of $134 million. The 2004 results include pretax charges of $184 million. These credits and charges are described in detail on pages 6 and 7.
Net income for the first quarter of 2005, was $523 million compared to $220 million in the first quarter of last year. Net income includes a loss from discontinued operations of $1 million in the first quarter of 2005 compared to a gain from discontinued operations of $113 million in the first quarter of last year.
Oilfield Services revenue of $2.78 billion increased 2% sequentially and 18% compared to the same quarter of last year. Pretax business segment operating income of $559 million increased 16% sequentially and 32% year-on-year.
WesternGeco revenue of $378 million increased 14% sequentially and 21% year-on-year. Pretax business segment operating income of $64 million increased 48% sequentially and 89% year-on-year.
OILFIELD SERVICES
First-quarter revenue of $2.78 billion was 2% higher sequentially but increased 18% year-on-year. Pretax operating income of $559 million increased 16% sequentially and grew 32% year-on-year.
Overall, sequential revenue increases were highest in the Canada, North Sea, Nigeria, West Africa and the Gulf GeoMarkets. Demand was particularly strong for Drilling & Measurements and Well Services technologies.
Robust year-on-year revenue growth was experienced across all regions with the Canada, US Land, Russia, Nigeria, the Gulf and India GeoMarkets posting the highest increases. By technology, all service segments recorded double-digit increases.
Pretax operating income recorded exceptional sequential growth driven by accelerating pricing and asset utilization levels in US Land and Canada; strengthening levels of activity in West Africa; and a more favorable mix of activity in Latin America.
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Revenue of $868 million increased 2% sequentially and 20% year-on-year. Pretax operating income of $203 million increased 29% sequentially and 65% year-on-year.
The sequential revenue increase was primarily driven by Canada with maximum equipment and personnel utilization, higher pricing levels and increased demand for high-tier services. This revenue growth rate was partially reduced by the absence of any turnkey drilling operations as this activity was exited in the prior quarter.
The year-on-year revenue growth was mainly fueled by strong pricing gains in US Land and by Wireline and Well Services technologies with fracturing crews operating at near capacity.
The robust growth in pretax operating income was driven by improvements in pricing, particularly for Well Services and Wireline technologies, and activity ramp-up in US Land and Canada, coupled with much higher margins in the Gulf Coast—a consequence of the absence of turnkey drilling operations in the quarter.
Revenue of $469 million declined 4% sequentially but was 19% higher year-on-year. Pretax operating income of $64 million increased 22% sequentially and 5% compared to the same quarter of last year.
Revenue in Mexico, while growing significantly year-on-year, fueled by large integrated projects, declined sequentially as the result of much lower levels of third-party managed services revenue associated with these projects.
Sequentially, lower activity in Western Venezuela was partially offset by increased revenue from PDVSA in other areas. During the quarter, an important milestone was passed in reaching an agreement with PDVSA for moving forward to resolve issues related to the PRISA project. This agreement included a payment of a significant amount of the outstanding receivables, a framework for future activity on the project and for resolution of some past issues, including negotiation of outstanding receivables.
Sequential revenue growth in the Latin America South GeoMarket was due mainly to higher Well Completions & Productivity, Drilling & Measurements and Wireline activity in Brazil and Argentina, where the Repsol D-150 Integrated Project Management (IPM) operation reached the 100-well milestone.
The strong sequential pretax operating income improvement was experienced evenly across all the GeoMarkets with an improved drilling environment in the Venezuela/Trinidad/Tobago GeoMarket and a better revenue mix in the Mexico/Central America GeoMarket between Schlumberger technologies and third-party managed services.
Europe/CIS/West Africa
Revenue of $751 million increased 7% sequentially and 16% year-on-year. Pretax operating income of $124 million increased 16% both sequentially and year-on-year.
Sequential revenue growth was mainly driven by North Africa, Nigeria and West Africa with increases in Well Completions & Productivity, Wireline and Drilling & Measurements technologies. Activity was robust in the North Sea, particularly due to growth in Schlumberger Information Solutions and Well Completions & Productivity technologies. However, growth was somewhat offset by adverse weather early in the quarter.
In the Russia GeoMarket, activity grew significantly, driven by recovery of activity in Yuganskneftegaz that reached pre-September 2004 levels towards the end of the quarter. Increased demand for stimulation and cementing technologies and strengthening IPM operations were experienced across the GeoMarket. The demand for, and speed of, technology uptake remains strong.
Most GeoMarkets recorded double-digit increases year-on-year, led by Nigeria with higher rig count spurring growth in Drilling & Measurements and Wireline technologies; in West Africa mainly from Well Completions & Productivity technologies; and in Continental Europe with stronger activity across all technologies.
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The robust sequential growth in operating income was mainly in Western Africa and Nigeria from increasing activity and pricing improvements combined with the resumption of activities for Yuganskneftgaz in Russia following shut-downs in the prior quarter.
Revenue of $668 million was flat sequentially but grew 19% year-on-year. Pretax operating income of $174 million declined 4% sequentially but increased 25% year-on-year.
The flat sequential revenues resulted from the revenue growth in the Thailand/Vietnam, East Africa and East Mediterranean, and the Gulf GeoMarkets, were offset by reduced deepwater activity in the Malaysia/Brunei/Philippines and Indonesia GeoMarkets.
Year-on-year revenue growth was led by the Malaysia/Brunei/Philippines GeoMarket with high demand for Well Completions & Productivity, Wireline and Drilling & Measurements technologies. Increased offshore exploration activity in India, start-up of Wireline services for PDO in Oman, and burgeoning gas activity in Qatar also contributed to this growth.
The sequential decline in operating income resulted from seasonal effects and from increased personnel costs associated with the preparation of new contracts and activity. These contracts will only take full effect in the coming quarters.
WESTERNGECO
First-quarter revenue of $378 million was 14% higher sequentially and 21% higher compared to the same period of last year. Pretax operating income of $64 million increased 48% sequentially and 89% year-on-year.
Sequentially, Land revenue increased mainly in the Middle East reflecting higher conventional activity in Saudi Arabia, Chad, Algeria and Pakistan, and increased Q-Land* activity in Kuwait; partially offset by the completion of a project in Mexico and of a 2D-Transitional project in New Zealand.
Marine revenue increased mainly in Asia with three conventional vessels working at higher prices, full utilization of the Q* vessel Topaz in India and increased activity for the Neptune on the Q Magno survey in Mexico; partially offset by lower activity in Europe.
Multiclient sales increased to $141 million in the first quarter of 2005, mainly in North America following the Central Gulf of Mexico lease sale. Approximately 70% of the surveys sold in the first quarter of 2005 had no net book value due to prior amortization of capitalized costs (compared to 50% in 2004) and only 3% of the surveys sold were impaired in 2003 and 2002. Multiclient sales were $135 million in the first quarter of 2004.
Data Processing declined slightly mainly due to seasonally lower activity in West Africa, Europe and North America.
Year-on-year revenue growth was driven by Marine, reflecting strong utilization and pricing, and by Land reflecting four additional crews working in the Middle East. Data Processing also contributed to this improvement with stronger Q processing and higher activity in the Middle East and Asia.
Sequential and year-on-year improvements in pretax income were mainly in Marine, resulting from significantly higher utilization for both Q and conventional seismic, improved pricing and increased Multiclient sales. Land also contributed to the improvement mainly in the Middle East and in Algeria due to higher revenue.
Q-Marine* utilization remained high during the quarter. The conversion of the previously announced fifth Q vessel will be completed in early summer 2005.
The WesternGeco backlog at the end of the first quarter was $668 million, flat sequentially but increasing by almost 40% year-on-year.
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INCOME STATEMENT
Interest income of $19 million increased $5.4 million compared to the same quarter last year. The average return on investment increased from 1.8% to 2.8% year-over-year. The average investment balance of $2.8 billion decreased $321 million as compared to last year. Gross margin increased from 20.6% in 2004 to 23.9% in 2005, due to a combination of record activity levels in Oilfield Services, with operations at capacity in a number of regions, and continued pricing improvements in both Oilfield Services and WesternGeco. As a percentage of revenue, marketing expense was flat compared to last year and research & engineering expense decreased 0.3% from last year. General and administrative expense as a percentage of revenue decreased from 2.9% to 2.7%. Interest expense of $47 million decreased $22.7 million compared to same quarter last year. Excluding the impact of the $73 million charge in 2004 related to the US interest rate swaps described on page 6, average borrowing rates increased from 4.0% to 4.1% compared to the same quarter last year. The average debt balance of $4.6 billion decreased $2.3 billion over the same quarter last year.
The effective tax rate for the first quarter of 2005 was 20.3% compared to 28.4% in the prior year. The rate in 2005 reflects the impact of the $146 million gain on the sale of the Montrouge facility. This transaction allowed for the utilization of a deferred tax asset that was previously offset by a valuation allowance and had the effect of lowering the effective tax rate during the first quarter by 5.5%. The rate in 2004 reflects the impact of the $77 million of costs associated with the repurchase of European bonds, which was not tax effective. Excluding the impact of these transactions, the effective tax rate increased from the first quarter of 2004 to the first quarter of 2005. This increase is primarily attributable to a different geographic mix, with a higher proportion of operating income derived from North America in both Oilfield Services and WesternGeco.
Charges and Credits – Continuing Operations
In March 2005, Schlumberger sold its facility in Montrouge, France to a third party for $230 million resulting in a pretax and after-tax gain, of approximately $146 million, which is classified in Interest and other income in the Consolidated Statement of Income. This transaction allowed for the utilization of a deferred tax asset that was previously offset by a valuation allowance. Schlumberger also recorded other real estate related pretax charges of approximately $12 million ($11 million after-tax), which are classified in Cost of goods sold and services in the Consolidated Statement of Income.
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 €7 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. This charge is classified in Debt extinguishment costs in theConsolidated Statement of Income.
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Schlumberger had commenced a restructuring program in order to reduce overhead. Consequently, a pretax charge of $20 million ($14 million after-tax) was taken in the quarter related to a voluntary early retirement program in the United States and is classified in Cost of goods sold& services in the Consolidated Statement of Income.
Discontinued Operations
During the first quarter of 2005, Schlumberger completed the sales of its Global Tel*Link, Public Phones and Essentis businesses for $18 million in cash. At December 31, 2004, the assets and liabilities of these businesses that were subsequently eliminated from Schlumberger’s Consolidated Balance Sheet were aggregated and presented as Assets held for sale ($65 million) and Liabilities held for sale ($35 million).
During the first quarter of 2004 Schlumberger recognized gains, net of taxes, related to the divestitures of SchlumbergerSema, Telecom Billing Software and Infodata of $26 million, $17 million and $48 million, respectively. The results of all of these divested business are reported as Discontinued Operations in the Consolidated Statement of Income.
The following table summarizes the results of these discontinued operations during the first quarter of 2004:
Revenues
CASH FLOW
During the first three months of 2005, cash provided by operations was $354 million as net income plus depreciation/amortization and charges/credits, including the gain on the sale of the Montrouge facility, were only partially offset by increases in customer receivables and inventories. Cash used by investing activities was $162 million with proceeds from the sale of the Montrouge facility ($230 million) mainly offset by investments in fixed assets ($315 million). Cash used by financing activities was $192 million as the payment of dividends to shareholders ($110 million), stock repurchase plan ($73 million) and a net reduction in debt of $61 million were only partially offset by the proceeds from employee stock plans ($52 million).
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Net Debt is gross debt less cash, short-term investments and fixed income investments held to maturity. Management believes that “net debt” provides useful information regarding the level of Schlumberger’s indebtedness by reflecting cash and investments that could be used to repay debt, and that the level of net debt provides useful information as to the results of Schlumberger’s deleveraging efforts. Details of the Net Debt follows:
Net Debt, beginning of period
Net income from continuing operations
Excess of equity income over dividends received
Charges and credits, net of tax and minority interest
Depreciation and amortization
Increase in working capital requirements
Capital expenditures
Proceeds from stock plans
Proceeds from the sale of Montrouge facility
Stock purchase program
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
FORWARD-LOOKING STATEMENTS
This report 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 first quarter 2005 earnings release, our most recent Form 10-K 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.
Non-US Operations
Schlumberger derives a significant portion of its revenues from non-US operations, which subject Schlumberger to risks which may affect such operations. Schlumberger’s non-US operations accounted for approximately 69% of our consolidated revenues the first quarters of both 2005 and 2004. Risks which may adversely affect our operations in such countries include unsettled political and economic conditions in certain areas, exposure to possible expropriation or other governmental actions, social unrest, acts of terrorism, outbreak of war or other armed conflict, deprivation of contract rights, exchange control and currency fluctuation. In addition, we are subject to risks associated with our operations in countries, including Iran, Syria, Sudan and Libya, which are subject to trade, economic or other restrictions imposed by the US government. Although it is impossible to predict such occurrences or their effects on Schlumberger, management believes these risks are acceptable. Management also believes that the geographical diversification of our activities reduces the risk that loss of operations in any one country would be material to all the operations taken as a whole.
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Item 3: Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk affecting Schlumberger, see Item 7A, “Quantitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2004. Schlumberger’s exposure to market risk has not changed materially since December 31, 2004.
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 March 31, 2005 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 March 31, 2005 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
None
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.
The following table sets forth information on Schlumberger’s common stock repurchase program activity for the quarter ended March 31, 2005.
Maximum Number of
shares that may yet
be purchased
under the program
January 1 through January 31, 2005
February 1 through February 28, 2005
March 1 through March 31, 2005
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.
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Item 4: Submission of Matters to a Vote of Security Holders
John Deutch
Jamie S. Gorelick
Andrew Gould
Tony Isaac
Adrian Lajous
André Lévy-Lang
Michael E. Marks
Didier Primat
Tore I. Sandvold
Nicolas Seydoux
Linda Gillespie Stuntz
Rana Talwar
The votes cast were as follows:
Directors
Linda G. Stuntz
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Financials:
For
Against
Abstain
Mandatory Amendments to the Articles of Incorporation:
Voluntary Amendments to the Articles of Incorporation:
Schlumberger 2005 Stock Option Plan:
Amendment to Schlumberger Discounted Stock Purchase Plan:
PricewaterhouseCoopers:
Item 6: Exhibits
Exhibit 3.1 Articles of Incorporation of Schlumberger Limited (Schlumberger N.V.) as last amended and restated on April 13, 2005 (incorporated by reference to Appendix 1 to Schlumberger’s definitive proxy statement for the 2005 Annual General Meeting of Stockholders held on April 13, 2005).
Exhibit 3.2 Amended and Restated Bylaws of Schlumberger Limited (Schlumberger N.V.) (incorporated by reference to Exhibit 3.1 to Schlumberger’s Current Report on Form 8-K filed on April 22, 2005).
Exhibit 10.1 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to Schlumberger’s Current Report on Form 8-K filed on April 22, 2005).
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.
Date: April 28, 2005
/s/ Frank A. Sorgie
Chief Accounting Officer and Duly Authorized
Signatory
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