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)
Registrant’s telephone number: (713) 513-2000
Indicate by check mark whether the 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
SCHLUMBERGER LIMITED
Table of Contents
First Quarter 2007 Form 10-Q
PART I
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1A.
Item 6.
2
PART I. FINANCIAL INFORMATION
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Stated in thousands except
per share amounts)
Operating revenue
Interest & other income
Expenses
Cost of goods sold & services
Research & engineering
Marketing
General & administrative
Interest
Income before taxes and minority interest
Taxes on income
Income before minority interest
Minority interest
Net Income
Basic earnings per share:
Diluted earnings per share:
Average shares outstanding:
Basic
Assuming dilution
See Notes to Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEET
ASSETS
CURRENT ASSETS:
Cash
Short-term investments
Receivables less allowance for doubtful accounts(2007—$113,947; 2006—$114,654)
Inventories
Deferred taxes
Other current assets
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
CONVERTIBLE DEBENTURES
OTHER LONG-TERM DEBT
POSTRETIREMENT BENEFITS
OTHER LIABILITIES
STOCKHOLDERS’ EQUITY:
Common stock
Income retained for use in the business
Treasury stock at cost
Accumulated other comprehensive loss
4
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization (1)
Earnings of companies carried at equity
Deferred income taxes
Stock-based compensation expense
Provision for losses on accounts receivable
Change in operating assets and liabilities (2)
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
Business acquisitions and related payments
Sale of investments, net
Other
NET CASH USED 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
Repayment of long-term debt
Net increase in short-term debt
NET CASH USED BY FINANCING ACTIVITIES
Net decrease in cash before translation effect
Translation effect on cash
Cash, beginning of period
CASH, END OF PERIOD
5
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Balance, January 1, 2007
Net income
Derivatives marked to market, net of tax
Translation adjustment
Amortization of prior service cost, net of tax
Amortization of actuarial net loss, net of tax
Dividends declared
Stock repurchase plan
Proceeds from shares sold to optionees less shares exchanged
Stock based compensation cost
Shares issued on conversion of debentures
Tax benefits on stock options
Balance, March 31, 2007
6
SHARES OF COMMON STOCK
Employee stock plan
Shares sold to optionees less shares exchanged
7
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 three-month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007. The December 31, 2006 balance sheet information has been derived from the audited 2006 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, 2006, filed with the Securities and Exchange Commission on February 16, 2007.
Certain items from the prior year have been reclassified to conform to the current year presentation.
The following is a reconciliation from basic earnings per share to diluted earnings per share:
Three Months
Assumed conversion of debentures
Assumed exercise of stock options
Unvested restricted stock
Diluted
At March 31, 2007, approximately 624,000 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.
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, 2007 was $1.02 billion and on December 31, 2006 was $970 million. Schlumberger’s equity income from this joint venture, which is recorded one month in arrears, was $38 million for the first quarter of 2007 and $28 million for the first quarter of 2006.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of inventory follows:
Raw Materials & Field Materials
Work in Process
Finished Goods
Less reserves for obsolescence
A summary of fixed assets follows:
Property plant & equipment
Less: Accumulated depreciation
Depreciation and amortization expense relating to fixed assets was $348 million during the first quarter of 2007 and $285 million during the first quarter of 2006.
The change in the carrying amount of multiclient seismic data is as follows:
Balance at December 31, 2006
Capitalized in period
Charged to cost of goods sold & services
Balance at March 31, 2007
The changes in the carrying amount of goodwill by business segment for the three months ended March 31, 2007 are as follows:
Additions
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Intangible assets principally comprise software, technology and customer relationships. The gross book value and accumulated amortization of intangible assets were as follows:
Software
Technology
Customer Relationships
Amortization expense was $29 million during the first quarter of 2007 and $21 million during the first quarter of 2006.
The weighted average amortization period for all intangible assets is approximately 10 years.
Based on the net book value of intangible assets at March 31, 2007, amortization charged to income for the subsequent five years is estimated to be: remainder of 2007–$92 million, 2008–$110 million, 2009–$87 million, 2010–$77 million, 2011–$70 million and 2012–$66 million.
Schlumberger has three types of stock-based compensation programs: stock options, restricted stock and a discounted stock purchase plan (“DSPP”).
The following summarizes stock-based compensation expense recognized in the first quarter of 2007 and 2006:
Stock options
Restricted stock
DSPP
Pretax book income from continuing operations subject to US and non-US income taxes was as follows:
United States
Outside United States
Pretax income
10
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, 2007 and December 31, 2006 are net of valuation allowances in certain countries of $219 million and $218 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
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
Domestic production and other deductions/credits
Effective income tax rate
11
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertain tax positions. This interpretation requires companies to recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Schlumberger adopted the provisions of FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on Schlumberger’s total liabilities or stockholders’ equity.
Included in Schlumberger’s Consolidated Balance Sheet at January 1, 2007 is approximately $764 million of liabilities associated with uncertain tax positions in the over 100 jurisdictions in which it conducts business. This amount includes $94 million of accrued interest and penalties. Approximately $739 million of unrecognized tax benefits, if recognized, would impact Schlumberger’s effective tax rate.
Schlumberger classifies interest and penalties relating to uncertain tax positions within Taxes on income in the Consolidated Statement of Income.
The following table summarizes the tax years that are either currently under audit or remain open and subject to examination by the tax authorities in the most significant jurisdictions in which Schlumberger operates:
Canada
Mexico
Russia
Saudi Arabia
United Kingdom
In certain of the jurisdictions noted above, Schlumberger operates through more than one legal entity, each of which has different open years subject to examination. The table above presents the open years subject to examination for the most material of the legal entities in each jurisdiction. Additionally, it is important to note that years are technically not closed until the statute of limitations in each respective jurisdiction expires. In the jurisdictions noted above, the statute of limitations can extend beyond the open years subject to examination.
Due to the breadth of Schlumberger’s operations, numerous tax audits may be ongoing throughout the world at any point in time. 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.
The Consolidated Balance Sheet includes accruals for estimated future expenditures, relating to contractual obligations, associated with business divestitures that have been completed. It is possible that the ultimate expenditures may differ from the amounts recorded. In the opinion of management, such differences are not expected to be material relative to consolidated liquidity, financial position or future results of operations.
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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 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, 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, any such additional costs are not expected to be material relative to consolidated liquidity, financial position or future results of operations.
In December 2004, WesternGeco L.L.C. and Schlumberger Technology Corporation received federal grand jury subpoenas issued by the United States District Court for the Southern District of Texas. The subpoenas sought documents relating to possible fraud in obtaining visas for foreign crewmembers working on vessels operating on the Outer Continental Shelf of the Gulf of Mexico. On June 16, 2006, WesternGeco L.L.C. entered into an agreement with the United States Attorney’s Office for the Southern District of Texas (“USAO”) resolving the issues raised in the federal investigation. Under the terms of the agreement, WesternGeco L.L.C. accepted responsibility for U.S. visa violations and agreed to pay a monetary penalty of $18 million and reimburse the United States Government for $1.6 million in investigation expenses. Additionally, WesternGeco L.L.C. accepted a deferred prosecution agreement covering a one-year period, during which time WesternGeco L.L.C.’s Gulf of Mexico activities will be subject to monitoring by the USAO. At the conclusion of the one-year period, if WesternGeco L.L.C. has complied with the deferred prosecution agreement, such agreement will expire and no prosecution arising from the investigation will be brought. WesternGeco has also developed and implemented a comprehensive visa and immigration compliance program to prevent a recurrence of any improper visa practices.
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 estimated. 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 or 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.
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Schlumberger operates two business segments: Oilfield Services and WesternGeco.
Oilfield Services
North America
Latin America
Europe/CIS/W. Africa
Middle East & Asia
Elims/Other
WesternGeco
Elims & Other
Interest Income
Interest Expense (2)
Net pension cost for the US plans for the first quarter of 2007 and 2006 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
Amortization of net loss
Net pension cost
* Mark of Schlumberger
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Net pension cost for the UK plan for the first quarter of 2007 and 2006 included the following components:
Amortization of net loss & other
Net postretirement benefit cost for the US plans for the first quarter of 2007 and 2006 included the following components:
Interest cost on accumulated postretirement benefit obligation
Net postretirement benefit cost
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BUSINESS REVIEW
Operating Revenue
Pretax Segment Income
Pretax operating income represents the business segments’ income before taxes and minority interest. The pretax operating income excludes corporate expenses, interest income, interest expense, amortization of certain intangible assets, interest on postretirement benefits and stock-based compensation costs, as these items are not allocated to the segments.
First Quarter 2007 Compared to First Quarter 2006
Operating revenue for the first quarter of 2007 was $5.46 billion versus $4.24 billion for the same period last year. Income before income taxes and minority interest was $1.55 billion in 2007 compared to $1.02 billion in 2006.
OILFIELD SERVICES
Oilfield Services revenue of $4.76 billion increased 3% sequentially and 28% year-on-year. Pretax business segment operating income of $1.41 billion increased 6% sequentially and 47% year-on-year.
Sequential revenue increases were highest in the West and South Africa, Arabian, North Sea and Eastern Mediterranean GeoMarkets. Double-digit sequential growth rates were also experienced in Alaska, Australia/Papua New Guinea, Thailand/Vietnam, North Africa and India. Across all Oilfield Services Areas demand was particularly strong for Drilling & Measurements, Wireline, Well Testing and Data & Consulting Services technologies. However, growth was partially offset by lower Schlumberger Information Solutions (SIS) and Artificial Lift Systems sales following seasonal highs in the prior quarter.
The sequential pretax operating income increase was mainly driven by higher overall activity and a favorable technology mix in the West and South Africa, Eastern Mediterranean, Arabian, North Sea and Australia/Papua New Guinea GeoMarkets; by increased rig count in Canada, Alaska, North Africa and Thailand/Vietnam; and by efficiency gains in the North America Area. This resulted in Oilfield Services pretax operating margins reaching 29.5%.
Revenue of $1.37 billion decreased 4% sequentially but increased 12% year-on-year. Pretax operating income of $431 million decreased 2% sequentially but increased 15% year-on-year.
Sequentially, the Alaska GeoMarket recorded strong revenue growth resulting from increased exploration activity and increased demand for Drilling & Measurements, Well Testing and Well Services technologies.
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Seasonal growth in Canada was moderate due partly to project slowdowns in the East, but mainly as a result of declining activity in the regions of shallow gas and coalbed methane production. However, the growth in the Alaska and Canada GeoMarkets was more than offset by a lower overall Area rig count; the seasonal land-access restrictions and weather activity in US Land; and a change in service mix in the US Gulf Coast.
The year-on-year growth of 12% was led by the US Gulf Coast with continued pricing momentum coupled with the prior-year quarter being impacted by the after effects of Hurricane Katrina. Strong exploration activity generated growth in Alaska, while US Land grew on rising rig count, further traction on pricing and increased efficiency. Canada declined year-on-year primarily as a result of declining activity in the regions of shallow gas and coalbed methane production.
Sequential pretax operating margins were driven by the favorable activity mix in Alaska and by overall efficiency gains in the Area to reach 31.4% in spite of the lower activity levels seen in US Land, and the less favorable service mix in the US Gulf Coast.
Year-on-year pretax operating income growth of 15% was achieved as a result of premium priced exploration activity in the US Gulf Coast and Alaska. In addition, US Land margins increased due to efficiency gains coupled with moderate pricing gains. These gains were offset by a significant deterioration of pretax income in Canada due to lower operating efficiencies following the lower winter peak activity and the earlier spring break-up compared to the prior year.
Revenue of $728 million increased 8% sequentially and 23% year-on-year. Pretax operating income of $163 million increased 15% sequentially and 70% year-on-year.
During the quarter, the drilling and engineering contracts associated with the drilling barges in Venezuela were finalized, resulting in certain previously deferred revenues and related costs being recognized. This accounted for the majority of the Area’s sequential revenue growth, but had only a marginal impact on the Area’s pretax operating income. Discussions regarding finalization of two remaining contracts are ongoing.
Excluding the impact of the drilling and engineering contracts associated with the drilling barges in Venezuela, year-on-year revenue growth was driven by Venezuela/Trinidad/Tobago with increased demand for Drilling & Measurements technologies and increased Completions sales. Peru/Columbia/Ecuador increased with rising exploration activity while Mexico grew due to increased offshore drilling and Well Testing activity. Latin America South increased on strengthening customer activity in Brazil and Argentina.
Sequential pretax operating margins improved by 136 basis points (bps) as a result of a more favorable activity mix in the Mexico GeoMarket; increased Drilling & Measurements and Well Testing activities in Peru/Colombia/Ecuador; together with higher Wireline, Well Services and Well Testing services and higher Artificial Lift Systems sales in Latin America South.
The year-on-year pretax income increase was led by Mexico with a rise in premium priced Drilling & Measurements activity combined with pricing improvements on integrated projects. Latin America South margins rose through improved product sale pricing in Well Services, Artificial Lift and Completions and strong Wireline activity in Brazil. In addition, Venezuela/Trinidad/Tobago and Peru/Columbia/Ecuador experienced improved margins due to pricing traction.
Europe/CIS/West Africa
Revenue of $1.52 billion increased 6% sequentially and 45% year-on-year. Pretax operating income of $430 million increased 12% sequentially and 87% year-on-year.
Sequential revenue growth was driven by higher activity in the West and South Africa, North Sea, North Africa, Nigeria and Libya GeoMarkets. This was partially offset by weather-related seasonal drilling activity slowdowns
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in Russia, coupled with seasonal drilling shutdowns in northern Russia and offshore Sakhalin, as well as lower activity in the Caspian GeoMarket. Across the Area demand was particularly strong for Drilling & Measurements, Wireline, Well Services and Well Testing technologies.
Year-on-year revenue growth of 45% was achieved through strong double digit growth in all regions, with pricing momentum and increased application of high tier services driving growth in West and South Africa, North Sea, Nigeria, North Africa and Continental Europe. Russia improved with a much milder winter season combined with increased demand for Integrated Project Management services.
Sequential pretax operating margins grew by 150 bps driven by demand for exploration-related services in West and South Africa and Libya; increased demand for Drilling & Measurements technologies in the North Sea; and new technology Well Testing services in North Africa. This growth was partially offset by lower SIS and Completions sales across the Area and the seasonal weather activity slowdown in Russia.
Pretax operating income increased 87% year-on-year driven by margin expansion in all regions with the exception of the North Africa GeoMarket where margins slightly deteriorated. The strongest margin gains were posted in Caspian, Continental Europe and West and South Africa from the pricing momentum and increased application of high-tier technologies, and in Russia where margins improved following lower down time during the present winter season.
Revenue of $1.09 billion increased 5% sequentially and 34% year-on-year. Pretax operating income of $374 million increased 11% sequentially and 49% year-on-year.
The sequential growth in revenue resulted from increasing exploration activity in the Australia/Papua New Guinea and Thailand/Vietnam GeoMarkets, stronger deepwater activity in East Mediterranean and India, together with higher activity levels in the Arabian GeoMarket. This growth was dampened by lower activity levels in Brunei/Malaysia/Philippines and a weather-related activity slowdown in China. Strong demand for Drilling & Measurements, Well Services and Well Testing technologies, together with double-digit growth in Completions product sales were recorded in the quarter, but this was partially offset by lower SIS and Artificial Lift Systems sales in the Area.
Year-on-year revenue growth of 34% was driven by increased rig count in the Arabian GeomArketand a surge in exploration activity in East Mediterranean, Thailand/Vietnam and Australia/Papua New Guinea GeoMarkets.
Sequential pretax operating margins grew by 165 bps to reach 34.3% driven by exploration-related activity in Australia/Papua New Guinea, Thailand/Vietnam and deepwater India, together with strong demand for new technology Drilling & Measurements, Well Services and Well Testing services in the Arabian GeoMarket.
Year-on-year pretax operating income grew 49% mainly driven by the higher activity, improved pricing and increased acceptance of new technology introductions in the Arabian, East Mediterranean, Thailand/Vietnam and Australia/Papua New Guinea GeoMarkets
WESTERNGECO
First-quarter revenue of $706 million decreased 2% sequentially but increased 33% compared to the same period last year. Pretax operating income of $266 million increased 2% sequentially and 79% year-on-year.
Sequentially, Multiclient continued to register growth due to high demand for E-surveys in the US Gulf of Mexico. However, this growth was more than offset by the decline in Marine due to vessel transits; lower Land
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activity associated with project completions and new project start-up delays; together with lower Data Processing revenue following the reassignment of resources toward processing Multiclient surveys.
The year-on-year revenue increase was led by Multiclient, which increased 67%, arising predominantly from sales of E-projects in North America. Marine increased with higher pricing on both Q and conventional technology while Land increased due to improved pricing, technology, project start-ups and new crew mobilisations. Data Processing growth was driven by increased activity and pricing gains.
Pretax operating margins improved sequentially by 142 bps to reach 37.7% driven by increased higher margin Multiclient sales in North America and improved efficiencies in Land and Data Processing.
The year-on-year increase in pre-tax income was led by Multiclient due to significant activity within the Gulf of Mexico on E-Projects as well as in Africa. Marine and Land improved primarily due to pricing gains and increased activity while Data Processing increased due to additional multiclient reprocessing in North America.
Interest and Other Income
Interest and other income consisted of the following for the first quarter of 2007 and 2006:
Interest income
Equity in net earnings of affiliated companies
The average return on investment increased to 5.0% in the first quarter of 2007 from 4.0% in the first quarter of 2006 and the average investment balance of $2.8 billion in 2007 decreased $805 million compared to 2006.
Interest Expense
Interest expense of $68.1 million in the first quarter of 2007 increased by $20.3 million compared to the same period last year. The weighted average borrowing rates of 4.8% increased in the first quarter of 2007 from 4.4% in the same period last year. Average debt balance of $5.8 billion in the first quarter of 2007 increased by $1.4 billion compared to the same period last year. The increase in the average debt balance was primarily attributable to the funding of Schlumberger’s acquisition of the minority interest in WesternGeco from Baker Hughes Incorporated during the second quarter of 2006.
Gross margin was 33.8% and 29.4% in 2007 and 2006, respectively. The increase in gross margin was driven by higher overall activity, a favorable technology mix and by efficiency gains in Oilfield Services, together with higher multiclient sales in WesternGeco.
As a percentage of revenue, research & engineering, marketing and general & administrative expenses for the first quarter of 2007 and 2006 are as follows:
Research and engineering
General and administrative
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Research and engineering expenditures, by segment for the first quarter of 2007 and 2006, were as follows:
The effective tax rate for the first quarter of 2007 was 24.0% compared to 25.1% in same period last year. The reduction in the rate is primarily attributable to the geographic mix of pretax income in Oilfield Services.
Stock-Based Compensation
Stock-based compensation expense was $37 million in the first quarter of 2007 compared to $26 million in the first quarter of the prior year. Total stock-based compensation expense for all of fiscal 2006 was $114 million and it is currently estimated to be $140 million in 2007.
This increase in stock-based compensation expense primarily reflects the increase in the valuations of stock-based compensation awards due to the upward movement in Schlumberger’s stock price as compared to prior years.
CASH FLOW
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 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 deleveraging efforts. Details of the Net Debt follows:
Net Debt, beginning of period
Excess of equity income over dividends received
Depreciation and amortization 1
Increase in working capital
US pension plan contributions
Capital expenditures 1
Proceeds from employee stock plans
Translation effect on net debt
Net Debt, end of period
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Components of Net Debt
Cash and short term investments
Fixed income investments, held to maturity
Bank loans and current portion of long-term debt
Convertible debentures
Other long-term debt
During the first three months of 2007, cash provided by operations was $1.02 billion as net income plus non-cash items were only partially offset by a seasonal upswing in working capital requirements. Cash used by investing activities was $371 million was due mainly to the purchase of fixed assets ($553 million). Cash used by financing activities was $676 million as the net repayments of debt ($407 million), payment of dividends to shareholders ($147 million) and stock repurchase program ($332 million) were only partially offset by the proceeds from employee stock plans ($184 million).
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 (and for specified products or geographic areas within each segment); oil and natural gas demand and production growth; operating margins; operating and capital expenditures by Schlumberger and the oil and gas industry; effective tax rate; the business strategies of Schlumberger customers; stock-based compensation expense; the Schlumberger stock buy-back program; 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 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, this 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.
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, 2006. Schlumberger exposure to market risk has not changed materially since December 31, 2006.
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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 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, 2007 to ensure that information required to be disclosed by Schlumberger in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that information required to be disclosed is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure. There has been no change in Schlumberger’s internal control over financial reporting that occurred during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, Schlumberger’s internal control over financial reporting.
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PART II. OTHER INFORMATION
The information with respect to Item 1 is set forth under the heading Contingencies on page 13 of this Report, within the Notes to Consolidated Financial Statements.
See the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
Unregistered Sales of Equity Securities
During the quarter ended March 31, 2007, Schlumberger issued 82 shares of its common stock upon conversion of $3,000 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.
Share Repurchases
On April 20, 2006, the Board of Directors of Schlumberger approved a share buy-back program of up to 40 million shares to be acquired in the open market before April 2010, subject to market conditions.
The following table sets forth information on Schlumberger’s common stock repurchase program activity for the three months ended March 31, 2007.
January 1 through January 31, 2007
February 1 through February 28, 2007
March 1 through March 31, 2007
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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Philippe Camus
Jamie S. Gorelick
Andrew Gould
Tony Isaac
Nikolay Kudryavtsev
Adrian Lajous
Michael E. Marks
Didier Primat
Leo Rafael Reif
Tore I. Sandvold
Nicolas Seydoux
Linda Gillespie Stuntz
Rana Talwar
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The votes cast were as follows:
Directors:
Linda G. Stuntz
Financials:
Appointment of PricewaterhouseCoopers LLP:
Exhibit 3.1 Articles of Incorporation of Schlumberger Limited (Schlumberger N.V.) as last amended on April 12, 2006 (incorporated by reference to Exhibit 3.1 to Schlumberger’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006).
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 31.1 Certification of Chief Executive Officer pursuant to 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 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.
(Registrant)
Howard Guild
Chief Accounting Officer and Duly Authorized Signatory
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