SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
---------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter ended: Commission file No.:
September 30, 2001 1-4601
------------------------------ -----------------------
SCHLUMBERGER N.V.
(SCHLUMBERGER LIMITED)
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(Exact name of registrant as specified in its charter)
NETHERLANDS ANTILLES 52-0684746
-------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
153 EAST 53 STREET, 57/th/ Floor
NEW YORK, NEW YORK, U.S.A. 10022
42 RUE SAINT-DOMINIQUE
PARIS, FRANCE 75007
PARKSTRAAT 83
THE HAGUE,
THE NETHERLANDS 2514 JG
------------------------------------------------ ---------------------
(Addresses of principal executive Zip Codes)
offices)
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 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, 2001
-------------------- ---------------------------------
COMMON STOCK, $0.01 PAR VALUE 575,720,064
PART I. FINANCIAL INFORMATION
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Item 1: Financial Statements
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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)
Periods Ended September 30,
-------------------------------------------------------------------
Third Quarter Nine Months
-------------------------------- --------------------------------
2001 2000/(1)/ 2001 2000/(1)/
--------------- -------------- --------------- -------------
REVENUE:
Operating $ 3,624,404 $ 2,447,272 $ 10,168,437 $ 6,922,980
Interest & other income 40,762 89,683 190,179 249,334
--------------- -------------- --------------- -------------
3,665,166 2,536,955 10,358,616 7,172,314
--------------- -------------- --------------- -------------
EXPENSES:
Cost of goods sold & services 2,711,686 1,891,290 7,978,970 5,381,315
Research & engineering 174,366 134,278 518,171 396,060
Marketing 120,277 74,580 348,642 230,596
General 189,836 106,180 504,316 314,455
Interest 102,319 72,495 287,277 200,932
--------------- -------------- --------------- -------------
3,298,484 2,278,823 9,637,376 6,523,358
--------------- -------------- --------------- -------------
Income before taxes and
minority interest 366,682 258,132 721,240 648,956
Taxes on income 157,358 51,974 356,388 145,588
--------------- -------------- --------------- -------------
Income before minority
interest 209,324 206,158 364,852 503,368
Minority interest (14,676) (1,560) (27,601) (6,689)
--------------- -------------- --------------- -------------
Net Income $ 194,648 $ 204,598 $ 337,251 $ 496,679
=============== ============== =============== =============
Basic Earnings Per Share $ 0.34 $ 0.36 $ 0.59 $ 0.87
=============== ============== =============== =============
Diluted Earnings Per Share $ 0.34 $ 0.35 $ 0.59 $ 0.86
=============== ============== =============== =============
Average shares outstanding 575,019 571,351 573,843 569,177
=============== ============== =============== =============
Average shares outstanding
assuming dilution 579,472 581,737 580,307 579,328
=============== ============== =============== =============
Depreciation and amortization
included in expenses/(2)/ $ 464,468 $ 295,260 $ 1,368,308 $ 919,153
=============== ============== =============== =============
Dividends declared per share $ 0.1875 $ 0.1875 $ 0.5625 $ 0.5625
=============== ============== =============== =============
(1) Reclassified, in part, for comparative purposes.
(2) Including multiclient seismic data costs.
See Notes to Consolidated Financial Statements
-2-
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED BALANCE SHEET
--------------------------
(Unaudited)
(Dollars in thousands)
Sept. 30, Dec. 31,
2001 2000/(1)/
------------ -------------
ASSETS
------
CURRENT ASSETS:
Cash and short-term investments $ 1,483,742 $ 3,040,150
Receivables less allowance for doubtful accounts
(2001 - $148,479; 2000 - $106,503) 4,493,966 2,768,848
Inventories 1,393,308 1,111,585
Deferred taxes on income 379,957 259,184
Other current assets 595,919 313,444
------------ ------------
8,346,892 7,493,211
------------ ------------
LONG-TERM INVESTMENTS, HELD TO MATURITY 617,000 1,547,132
INVESTMENTS IN AFFILIATED COMPANIES 746,160 654,516
FIXED ASSETS:
Property, plant and equipment 11,506,074 10,821,509
Less accumulated depreciation (6,665,858) (6,426,995)
------------ ------------
4,840,216 4,394,514
------------ ------------
MULTICLIENT SEISMIC DATA 1,012,098 975,775
EXCESS OF INVESTMENT OVER NET ASSETS OF
COMPANIES PURCHASED less amortization,
AND INTANGIBLE ASSETS 7,121,414 1,716,427
DEFERRED TAXES ON INCOME 124,196 271,059
OTHER ASSETS 256,060 120,097
------------ ------------
$ 23,064,036 $ 17,172,731
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 4,610,622 $ 2,910,725
Estimated liability for taxes on income 574,396 379,916
Bank loans 1,196,270 556,020
Dividend payable 110,152 108,043
Long-term debt due within one year 31,825 36,201
------------ ------------
6,523,265 3,990,905
LONG-TERM DEBT 6,577,515 3,573,047
POSTRETIREMENT BENEFITS 496,157 476,380
MINORITY INTEREST 634,500 605,313
OTHER LIABILITIES 564,021 231,870
------------ ------------
14,795,458 8,877,515
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 2,025,356 1,963,905
Income retained for use in the business 8,237,779 8,223,476
Treasury stock at cost (1,698,037) (1,752,961)
Accumulated other comprehensive income (296,520) (139,204)
------------ ------------
8,268,578 8,295,216
------------ ------------
$ 23,064,036 $ 17,172,731
============ ============
(1) Reclassified, in part, for comparative purposes.
See Notes to Consolidated Financial Statements
-3-
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
Cash flows from operating activities: 2001 2000/(1)/
----------- ----------
Net income $ 337,251 $ 496,679
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization/(2)/ 1,368,308 919,153
Impairment charges and gain on sale
of businesses 277,350 -
Earnings of companies carried at equity, less
dividends received (2001 - $-; 2000 - $-) (42,468) (24,325)
Provision for losses on accounts receivable 27,601 16,369
Change in operating assets and liabilities:
Increase in receivables (893,739) (159,882)
Increase in inventories (305,761) (108,550)
Increase in deferred taxes (6,967) (12,662)
Increase in other current assets (56,580) (35,999)
Increase in accounts payable and
accrued liabilities 187,419 102,101
Increase (decrease) in estimated liability
for taxes on income 45,479 (41,196)
Other - net (145,698) (70,583)
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 792,195 1,081,105
----------- ----------
Cash flows from investing activities:
Purchase of fixed assets (1,498,617) (880,001)
Multiclient seismic data capitalized (315,576) (162,280)
Sales/retirements of fixed assets & other 9,402 90,804
Decrease in investments 2,583,207 76,720
Businesses acquired, net of cash acquired (386,340) (261,446)
Acquisition of Sema plc, net of cash acquired (4,778,498) -
Sale of Production Operators Corporation 273,600 -
Decrease (increase) in other assets 68,576 (72,117)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (4,044,246) (1,208,320)
----------- ----------
Cash flows from financing activities:
Dividends paid (322,384) (319,157)
Proceeds from employee stock purchase plan 78,965 69,089
Proceeds from exercise of stock options 37,410 150,509
Proceeds from issuance of long-term debt 3,039,046 600,173
Payments of principal on long-term debt (83,238) (520,998)
Net increase in short-term debt 568,423 160,376
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,318,222 139,992
----------- ----------
Net increase in cash 66,171 12,777
Cash, beginning of period 160,718 132,589
----------- ----------
CASH, END OF PERIOD $ 226,889 $ 145,366
=========== ==========
(1) Restated, in part, for comparative purposes.
(2) Including multiclient seismic data costs.
See Notes to Consolidated Financial Statements
-4-
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
STOCKHOLDERS' EQUITY
--------------------
(Unaudited)
Accumulated Other
Comprehensive Income
--------------------------- ----------------
Common Stock Retained Mark to Translation Comprehensive
---------------------------
Issued In Treasury Income Market Adjustment Income
-------- ------------------ --------------- --------------------------- ----------------
Equity, January 1, 2001 $ 1,963,905 $(1,752,961) $ 8,223,476 $ - $ (139,204) $ -
Net Income 337,251 337,251
Derivatives marked to market (63,040) (63,040)
Translation adjustment (173,276) (173,276)
RMS disposition 79,000 79,000
Dividends declared (322,948)
Employee Stock Purchase
Plan 46,397 32,568
Shares sold to optionees (net
of fees) 14,898 22,267
Shares granted to Directors 156 89
----------- ----------- ----------- ----------- ----------- -----------
Equity, September 30, 2001 $ 2,025,356 $(1,698,037) $ 8,237,779 $ (63,040) $ (233,480) $ 179,935
=========== =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements
-5-
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
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 completed
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation,
have been included in the accompanying unaudited financial statements. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain amounts in prior years' consolidated financial statements
have been reclassified to conform to the current year presentation. Operating
results for the nine month period ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2001. For further information, refer to the consolidated financial
statements and notes thereto, included in Schlumberger's Annual Report on Form
10-K/A for the fiscal year ended in December 31, 2000.
EARNINGS PER SHARE
------------------
The following is a reconciliation from basic earnings per share to diluted
earnings per share for the third quarter and the first nine months of 2001:
(Stated in thousands except per share amounts)
Average
Net Shares Earnings
Third Quarter Income Outstanding per Share
------------- ------------ ------------ -----------
Basic $ 194,648 575,019 $0.34
Effect of dilution:
Options 4,453 -
------------ ------------ -----------
$ 194,648 579,472 $0.34
============ ============ ===========
Nine Months
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Basic $ 337,251 573,843 $0.59
Effect of dilution:
Options 6,464 -
------------ ------------ -----------
$ 337,251 580,307 $0.59
============ ============ ===========
CHARGES/CREDITS
---------------
The first quarter 2001 included a $25 million ($0.04 per share - diluted)
in-process research and development charge related to the acquisition of Bull
CP8. This charge is classified in Research & Engineering in the Consolidated
Statement of Income.
The second quarter 2001 included a $280 million ($0.48 per share - diluted)
estimated impairment charge from the expected disposition of certain Resource
Management Services businesses (Electricity and Water outside North America and
the worldwide Gas businesses). This charge,
-6-
which included the write off of goodwill ($139 million) and cumulative
translation adjustment ($79 million), is classified in Cost of goods sold and
services in the Consolidated Statement of Income.
The third quarter 2001 included a pretax credit of $42.2 million representing
the gain on the sale of Production Operators Corporation ($107 million)
partially offset by an impairment charge relating to the expected disposition of
certain other activities. This pretax credit is classified in Cost of goods sold
and services and the related net tax charge of $39.5 million is classified in
Taxes on income in the Consolidated Statement of Income. The after tax net
offset of these items was a gain of $3 million ($0.01 per share - diluted).
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 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.
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.
ACQUISITION OF SEMA PLC
-----------------------
On February 12, 2001, Schlumberger announced that it had reached an agreement
with the board of directors of Sema plc on the terms of a recommended offer for
the entire issued and to be issued share capital of Sema plc.
On March 8, 2001, Schlumberger acquired, through market purchases, approximately
20% of the issued share capital of Sema at a cost of $1 billion.
On April 6, 2001, the offer for the shares of Sema plc was declared
unconditional in all respects. The aggregate consideration for the acquisition
of 100% of the issued Sema shares was $5.15 billion (including expenses of the
transaction) which was financed from existing cash resources and borrowings
under a $3 billion credit facility.
On October 3, 2001, Schlumberger issued $1.9 billion European bonds (Euro 1.4
billion and (pound)425 million). The average rate of these bonds is 5.9% with
maturity from 2008 through 2032. The proceeds from the issue were used to repay
short-term bank loans originally taken out to finance the acquisition of Sema
plc.
The acquisition was accounted for using the purchase method of accounting and
the goodwill and identifiable intangibles aggregated $5.19 billion which are
being amortized on a straight line basis. Goodwill and identifiable intangibles
are currently amortized on a straight line basis over a composite life of 18
years.
The aggregate value of goodwill and identifiable intangibles comprised the
following:
-7-
(Dollars in billions)
Cost (including expenses) $ 5.15
Purchase accounting adjustments/(1)/ 0.34
Net tangible assets acquired (0.30)
-----------
$ 5.19
===========
(1) Purchase accounting adjustments consisted primarily of severance costs
($84 million), facility reductions ($33 million), pension plan adjustments
($136 million) and tax restructuring costs ($50 million).
For financial reporting purposes, Schlumberger included the results of
operations of Sema in its consolidated accounts commencing April 1, 2001. If
Sema had been included in the consolidated financial statements of Schlumberger
from January 1, consolidated revenue for the nine months ended September 30,
2001 would have increased by $538 million to $10.7 billion and consolidated net
income would have decreased by approximately $140 million related primarily to
increased interest expense and amortization of intangibles, and lower interest
income to $197 million.
Sema is an IT services company (with approximately 22,000 employees) that
provides its customers with design, implementation, operations and management of
information systems and IT-related consulting services. Among the industry
sectors which Sema serves, Sema has increasingly focused on the
telecommunications and finance sectors, and provides a range of its own software
products specifically designed for these sectors in addition to its IT services.
Sema's customers include a wide variety of businesses and governmental
departments around the world. Sema's services and product offerings include
systems integration and consulting; software products for the
telecommunications, energy, transport and finance sectors; and outsourcing.
OTHER BUSINESS ACQUISITIONS
---------------------------
In March 2001, Schlumberger acquired Bull CP8, a market leader in
microprocessor-based smart cards and associated systems applications for the
banking, mobile communications and network security industries. The acquisition
price was $313 million. Assets acquired included identifiable intangibles
(primarily patents) of $136 million and goodwill of $140 million. Additionally,
in-process research & development which aggregated $25 million was charged to
expense in the first quarter.
INVESTMENTS IN AFFILIATED COMPANIES
-----------------------------------
Investments in affiliated companies include Schlumberger's 40% investment in the
MI Drilling Fluids Joint Venture (September 30, 2001 - $513 million; December
31, 2000 - $461 million). Equity in income of investments carried under the
equity method (2001 - $42 million; 2000 - $24 million) are included in Interest
& other income on the Consolidated Statement of Income.
NEW ACCOUNTING STANDARDS
------------------------
Commencing January 1, 2001, Schlumberger adopted SFAS 133 (Accounting for
Derivative Instruments and Hedging Activities). Schlumberger uses derivative
instruments such as interest rate swaps, currency swaps, forward currency
contracts and foreign currency options. Forward currency contracts provide a
hedge against currency fluctuations on assets/liabilities denominated in other
than a functional currency. Options are usually entered into as a hedge against
currency variations on firm commitments generally involving the construction of
long-lived assets.
Schlumberger maintains a foreign-currency risk management strategy that uses
derivative instruments to protect its interests from unanticipated fluctuations
in earnings and cash flows caused by volatility in currency exchange rates.
Movements in foreign currency exchange rates pose a risk to Schlumberger's
operations as exchange rate changes may affect profitability and cash flow.
Schlumberger uses foreign currency forward exchange contracts, swaps and
options. Schlumberger also maintains an interest rate risk management strategy
that uses derivatives to minimize significant, unanticipated earnings
fluctuations caused by interest rate volatility.
-8-
Schlumberger's specific goals are (1) to manage interest rate sensitivity by
modifying the repricing or maturity characteristics of certain of its debt and
(2) to lower (where possible) the cost of borrowed funds.
By using derivative financial instruments to hedge exposure to changes in
exchange rates and interest rates, Schlumberger exposes itself to credit risk
and market risk. Schlumberger minimizes the credit risk by entering into
transactions with high-quality counterparties, limiting the exposure to each
counterparty and monitoring the financial condition of its counterparties.
Market risk is managed through the setting and monitoring of parameters that
limit the types and degree of market risk which are acceptable.
At September 30, 2001, Schlumberger recognized a net $63 million charge in
Stockholders' Equity relating to SFAS 133. This charge was primarily due to the
change in the fair market value of Schlumberger's US interest rate swaps as a
result of declining interest rates. The effect on Stockholders' Equity at
December 31, 2000 was not significant.
In June 2001, SFAS 141 (Business Combinations) and SFAS 142 (Goodwill and Other
Intangible Assets) were issued. SFAS 141 has been adopted by Schlumberger for
acquisitions subsequent to June 30, 2001. SFAS 142 will be adopted by
Schlumberger commencing January 1, 2002. As required by SFAS 142, Schlumberger
will undertake a review for impairment in 2002.
Amortization of goodwill and other intangibles included in Schlumberger's
results are as follows:
($ million - pretax)
Third Quarter Nine Months
-------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
$ 111 $ 25 $ 236 $ 71
The total amount for the year 2001 is expected to be $350 million (pretax) and
with the adoption of SFAS 142, the equivalent amount is estimated to be $60
million in 2002.
In June 2001, SFAS 143 (Accounting for Asset Retirement Obligations) was issued.
SFAS 143 will be adopted by Schlumberger commencing January 1, 2003.
Schlumberger does not believe that the implementation of this standard will have
any material effect on it's Financial Position and Results of Operations.
In August 2001, SFAS 144 (Accounting for Impairment or Disposal of Long-Lived
Assets) was issued. SFAS 144 will be adopted by Schlumberger commencing January
1, 2002. Schlumberger does not believe that the implementation of this standard
will have any material effect on it's Financial Position and Results of
Operations.
-9-
SEGMENT INFORMATION
-------------------
Following the acquisition of Sema plc on April 6, 2001, Schlumberger created a
new business segment, SchlumbergerSema, which resulted from the merger of Sema
plc with certain businesses from Schlumberger's former segments, Test &
Transactions and Resource Management Services. Following this reorganization,
Schlumberger now operates two reportable segments, Oilfield Services and
SchlumbergerSema.
(Stated in millions)
------------------------------------------------------------------------------------------------------
Elims/ Total Schlumberger Elims/
Nine Months 2001 NAM LAM ECA MEA Other OFS Sema Other(1) Other Consolidated
------------------------------------------------------------------------------------------------------
Revenue $2,807 $ 1,078 $1,565 $1,523 $ 309 $7,282 $ 2,091 $ 845 $ (50) $ 10,168
======================================================================================================
Segment Income $ 438 $ 102 $ 190 $ 279 $ (55) $ 954 $ 11 $ 28 (195) $ 798
Minority Interest - - - - 24 24 5 1 (2) 28
Income Tax Expense 265 31 59 50 8 413 (9) (4) (83) 317
------------------------------------------------------------------------------------------------------
Segment Income before tax $ 703 $ 133 $ 249 $ 329 $ (23) $1,391 $ 7 25 $(280) $ 1,143
============================================================================================
Interest Income 124
Interest Expense (4) (283)
Charges (263)
----------
Pretax Income $ 721
--------------------------------------------------------------------------------------------==========
------------------------------------------------------------------------------------------------------
Elims/ Total Schlumberger Elims/
Nine Months 2000 NAM LAM ECA MEA Other OFS Sema Other(1) Other Consolidated
------------------------------------------------------------------------------------------------------
Revenue $1,691 $ 810 $1,145 $1,210 $ 238 $5,094 $ 748 $1,128 $ (47) $ 6,923
======================================================================================================
Segment Income $ 147 $ 41 $ 91 $ 203 $ 31 $ 513 $ 20 $ 34 $ (94) $ 473
Minority Interest - - - - - - 5 1 - 6
Income Tax Expense 89 15 38 29 27 198 (15) 10 (47) 146
------------------------------------------------------------------------------------------------------
Segment Income before tax $ 236 $ 56 $ 129 $ 232 $ 58 $ 711 $ 10 $ 45 $(141) $ 625
============================================================================================
Interest Income 223
Interest Expense (2) (199)
----------
Pretax Income $ 649
--------------------------------------------------------------------------------------------==========
(1) Includes those Resource Management Services activities planned for
divestiture and Semiconductor Solutions.
-10-
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations.
-------------
BUSINESS REVIEW
---------------
(Stated in millions)
Oilfield
Services SchlumbergerSema Other/(1)/
------------------------ ----------------------- ------------------------
Third Quarter 2001 2000 % chg 2001 2000 % chg 2001 2000 % chg
------------- ---- ---- ----- ---- ---- ----- ---- ---- -----
Operating Revenue $2,492 $1,833 36% $ 870 $ 270 222% $ 273 $ 358 (24)%
Pretax Operating
Income/(2)/ $ 502 $ 288 74% $ 19 $ (2) -% $ 15 $ 12 28%
Nine Months
-----------
Operating Revenue $7,282 $5,094 43% $2,091 $ 748 180% $ 845 $1,128 (25)%
Pretax Operating
Income/(2)/ $1,391 $ 711 96% $ 7 $ 10 (30)% $ 25 $ 45 (44)%
(1) Includes those Resource Management Services activities planned for
divestiture and Semiconductor Solutions.
(2) Pretax operating income represents income before taxes and minority
interest, excluding interest expense, interest income, amortization of
goodwill and identifiable intangibles ($111 million and $236 million in the
third quarter 2001 and nine months 2001, respectively). All prior periods
have been restated for comparative purposes.
Third Quarter 2001 Compared to Third Quarter 2000
-------------------------------------------------
The third quarter operating revenue was $3.62 billion compared to $2.45 billion
in the same period last year. Net Income for the same period was $195 million
compared to $205 million last year. Diluted earnings per share, excluding
acquisition-related costs and the divestiture related net gain, were $0.51
compared with $0.39 for the same period last year and $0.47 per share for the
second quarter this year.
Oilfield Services revenue increased 36% including WesternGeco versus the third
quarter of 2000. The worldwide M-I rig count grew 14% over the same period.
Revenue growth of 1% compared to the second quarter of 2001 reflected the lower
quarterly average rig count growth of 2%.
SchlumbergerSema revenue of $870 million for the quarter decreased 3%
sequentially mostly as a result of a 17% decrease in Cards revenue following
lower demand in Europe. However pretax operating income improved to $19 million.
During the quarter, Schlumberger sold the Production Operators Corporation
natural gas compression business and related assets. The previously announced
divestiture of the Resource Management Services (RMS) businesses is expected to
be completed in the fourth quarter. Net cash proceeds from these divestitures
will be used to pay down debt.
OILFIELD SERVICES
Oilfield Services operating revenue of $2.5 billion in the third quarter
increased 36% year-on-year and 1% sequentially. The worldwide M-I rig count
increased 14% year-on-year and 2% sequentially.
The year-on-year increase was led by the North America and Middle East & Asia
Areas together with increased non-rig related activity, which was partly
attributable to the WesternGeco Joint Venture. Sequential revenue growth was
slightly lower than the rig count growth due to a slowdown in activity in North
America as a result of slower economic growth and declining gas prices, and
uncertainty following recent events.
Pretax operating income of $502 million increased 7% sequentially due to
improved pricing levels.
-11-
North America
-------------
Revenue of $942 million increased 51% compared with the same quarter last year
but was flat sequentially. The M-I rig count increased 20% year-on-year and 3%
sequentially. Pretax operating income of $251 million was 134% higher than the
third quarter last year and 11% higher than last quarter.
Year-on-year revenue growth was led by the US Land GeoMarket due to increased
demand for Well Services and Wireline technologies. Year-on-year pretax
operating income growth reflected pricing increases for new technology as well
as the higher rig count. Despite flat revenue, there was an increase in
sequential pretax operating income resulting from strong seasonal growth in the
Canada GeoMarket and increased margins from seismic activity that partially
offset the weather-induced reduction in activity in the Gulf Coast GeoMarket.
Latin America
-------------
Revenue of $358 million increased 20% year-on-year and 1% sequentially. The M-I
rig count increased 4% compared with the same quarter in 2000 but decreased 2%
sequentially. Pretax operating income of $46 million increased 42% compared to
last year and 4% sequentially.
Year-on-year revenue growth was broad-based led by the Latin America South and
Peru, Colombia and Ecuador (PCE) GeoMarkets. The modest sequential revenue
increase was led by strong Reda sales and Drilling & Measurements activities in
the PCE GeoMarket offset by lower than expected activity across all other Latin
American GeoMarkets.
Europe/CIS/West Africa
----------------------
Revenue of $551 million increased 30% year-on-year but was flat sequentially.
The M-I rig count, excluding CIS, increased 12% year-on-year and 1%
sequentially. Pretax operating income of $96 million increased 49% year-on-year
and was flat sequentially.
Strong growth was recorded in the Caspian GeoMarket from increased activities
related to the Chirag Extended Reach Project in Baku and the start-up of the
well construction services contract for the TengizChevroil Consortium in
Kazakhstan. In addition, substantial growth in the UK GeoMarket resulted from an
increase in the number of 4C proprietary seismic surveys acquired for North Sea
operators.
Higher demand for Drilling & Measurements services across the Area contributed
to the year-on-year increase in pretax operating income.
Middle East & Asia
------------------
Revenue of $547 million increased 35% year-on-year and 8% sequentially outpacing
the M-I rig count, which increased 4% compared with last year and only 1%
sequentially. Pretax operating income of $130 million increased 65% compared to
the third quarter last year and 20% sequentially.
The year-on-year increase was broad-based across the Area. Sequential revenue
increases were recorded by all service segments led by WesternGeco in the Saudi
Arabia, Australia and Indonesia GeoMarkets, with the exception of Well Services
due to reduced fracturing activity in Saudi Arabia. Year-on-year and sequential
pretax operating income growth were due partly to improved pricing through the
introduction of new technologies such as the CHFR* Cased Hole Formation
Resistivity reservoir characterization technique that allows formation
measurements to be made in wells that have already been cased. In addition, the
PowerSTIM* well production optimization solution continued to expand in the
Area, where it was deployed in the Indonesia GeoMarket for the first time.
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SCHLUMBERGERSEMA
The merger of Sema into Schlumberger made significant progress during the
quarter. Market resilience, particularly in the UK and in utilities, and
continued rapid exploitation of cost synergies, have provided the basis for
improved performance. The contracts awarded to SchlumbergerSema during the
quarter strongly support the rationale for integration and deployment of IT
services for customers with the six-year Conoco contract demonstrating
Schlumberger's ability to address enterprise-level commitments in connectivity,
security, systems integration and IT consulting.
SchlumbergerSema reported operating revenue for the quarter of $870 million.
Pretax operating income of $19 million increased as a result of improved
profitability in the utility and global services markets and the cost saving
synergy programs implemented last quarter.
Revenue from the utility market segment was flat sequentially with strong growth
in North America for Real Time Energy Management (RTEM) services and further
deployment of the wireless fixed network supporting those services. The
utilities-related systems integration business was weak in the quarter. Orders
increased 69% due to strong demand for remotely-readable meter installations,
which included the signing of a 15-year agreement to provide information
technology services to Milwaukee-based Wisconsin Electric-Wisconsin Gas.
Global Services revenue grew by 3% sequentially. Multi-year contracts were won
in the medical services, recovery services and outsourcing businesses.
Cards revenue of $147 million was down 17% compared to the prior quarter and
down 4% year-on-year. Revenue from mobile communications cards (SIM) was down
23% sequentially, reflecting reduced demand in Europe, and in Asia where
uncertainty continues in the telecom market. Orders for SIM cards showed strong
improvement in the later part of the quarter, up 47% sequentially, indicating
that an inflection point may have been reached. The lower revenues in SIM cards
were partially offset by improved shipments of IT and financial cards. In the
quarter, the first deliveries were made to the Department of Defense Common
Access Card program.
Demand for parking, mass transit and point-of-sales banking products resulted in
eTransaction terminals' revenue growth of 31% year-on-year and 9% sequentially.
The city of New York purchased an additional 220 multi-space parking terminals
for on-street parking. SchlumbergerSema parking terminals will replace more than
7,000 conventional single-space terminals as New York City moves forward with
its innovative commercial parking program.
Revenue from the telecom sector increased 3% sequentially while orders were
flat. This was largely due to increased sales in customer care and billing
systems in Europe and Latin America, which is the direct result of an expanded
customer base and subsequent realization of the synergies within
SchlumbergerSema.
OTHER
The segment includes the portion of the Resource Management Services businesses,
Semiconductor Solutions and Global Tel*Link which are expected to be disposed of
in the near future. Revenue from the Resource Management Services businesses was
14% below last year; Semiconductor Solutions revenue was 56% below a year ago.
The operating loss at Semiconductor Solutions was more than offset by the profit
at Resource Management Services.
INCOME STATEMENT
Interest and other income decreased $49 million from the same period last year
as a $51 million decrease in interest income (2001 - $28 million; 2000 - $79
million) reflecting a decrease of $2.9 billion in average investment balances
and a decrease in average returns on investments from 6.6% to 5.9%, was
partially offset by a $2 million increase in equity income. Gross margin,
excluding the $42 million divestiture related credit, of 24% was 1.6 percentage
points above last year. Research and engineering expense as a percentage of
revenue decreased 0.7% and marketing expense
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increased 0.3% from last year. General expense as a percentage of revenue
increased from 4.3% to 5.2%. Interest expense increased by $30 million as
average debt balances were up $3.8 billion due primarily to the Sema acquisition
and the average borrowing rates decreased from 7.1% to 5.2%. The effective tax
rate, excluding the $3 million credit, increased by 16 percentage points to 36%
primarily due to higher pretax income in North America and the effect of higher
non-tax deductible goodwill amortization.
First Nine Months 2001 Compared to First Nine Months 2000
---------------------------------------------------------
Operating revenue for the first nine months was $10.17 billion, a 47% increase
over the same period last year, and net income was $337 million ($0.59 per share
- diluted). Excluding charges/credits (See "Charges/Credits" in Notes to
Consolidated Financial Statements), net income was $640 million and diluted
earnings per share were $1.10, increases of 29% and 28%, respectively, over the
same period last year.
OILFIELD SERVICES
Operating revenue of $7.3 billion increased 43% due in large part to North
America and Europe/CIS/West Africa. Pretax operating income increased by 96%
over last year. The M-I rig count increased by 23%. Revenue outpaced rig count
due to higher pricing, market share gains, and increase in WesternGeco revenue.
North America
-------------
Revenue increased 66% to $2.81 billion compared to the first nine months of
2000, pretax operating income of $703 million increased 198%. The M-I rig count
increased 30% over the same period last year. The increase in revenue reflected
the higher non-rig related activities, price increase, new technologies and
better utilization of existing resources. This was reduced somewhat by the
slowing down in economic growth in the US.
Latin America
-------------
Latin America revenue of $1.08 billion increased by 33% compared to last year.
The pretax operating income increased by 139% and the M-I rig count increased by
21%. Compared to the same period last year, revenue growth was broad-based
driven by marked increases in activity from higher rig counts. There were
increases in market share and improvement in rig rates across all GeoMarkets led
by VTT (up 26%), Peru, Colombia & Ecuador (PCE up 51%) and Latin America South
(up 45%). In the Area, Seismic increased 36%, Wireline (up 37%), Drilling &
Measurements (up 44%), WCP (up 43%) and Well Services (up 29%).
Europe/CIS/West Africa
----------------------
Revenue of $1.56 billion increased 37% over the same period last year. Pretax
operating income increased 93% and the M-I rig count (excluding CIS) increased
by 18%. Year over year, revenue growth was driven both by increased activity as
result of rig count growth and by tremendous growth in non-rig related activity,
Seismic (up 137%) from the WesternGeco joint venture. Growth was led by West and
South Africa (up 80%) which includes the EPF project in Gabon. Strong growth was
also recorded in the UK (up 30%) & Russia (up 57%) GeoMarkets.
Middle East & Asia
------------------
Revenue increased 26% to $1.52 billion. Compared to the same period last year,
pretax operating income was up 42% and the M-I rig count increased by 6%.
Compared to last year, revenue increase was broad-based across the Area with the
majority of the GeoMarkets registering double-digit growths led by the Gulf (54%
increase), Eastern Mediterranean (up 30%), Saudi/Kuwait/Bahrain (up 27%). The
growth is due to increased activity (from higher rig counts) and from increase
in non-rig related activity (e.g. Seismic which is up 79% in the Area). The
successful implementation of new technologies also made some inroads in terms of
market share increases. Drilling & Measurements, WCP and SIS were up 47%, 26%
and 36%, respectively.
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SCHLUMBERGERSEMA
Revenue was $2.09 billion and pretax operating income was $7 million. Revenue
for Utilities and Transactions Systems increased by 101% and 46%, respectively,
over last year.
OTHER
Revenue from the Resource Management Services businesses decreased 20% compared
to last year. Semiconductor Solutions revenue declined 47%. The profit at
Resource Management Services was partially offset by Semiconductor Solutions
losses.
INCOME STATEMENT
Interest and other income decreased $59 million from the same period last year
as a $96 million decrease in interest income (2001 - $129 million; 2000 - $225
million) reflecting a decrease in average investment balances which were used to
finance the acquisition of Sema plc shares, was partially offset by a $19
million gain from the sale of investments, also related to funding the Sema plc
share purchases, and a $18 million increase in equity income. Average returns on
investments decreased from 5.6% to 5.5%. Gross margin, excluding the net charges
of $238 million, of 24% was one percentage point above last year. Research and
engineering, excluding the Bull CP8 charge of $25 million, as a percentage of
revenue decreased 0.8% over last year. Marketing and general expenses as a
percentage of revenue increased by 0.5% and remained flat, respectively, over
last year. Interest expense increased by $86 million as average borrowing rates
decreased from 6.1% to 5.4%. The increase in expenses was due mainly to the
acquisition of Sema plc. The effective tax rate, excluding the charges and
credit, increased from 22% to 32% for the same period last year due primarily to
higher profitability in North America and the effect of higher non-tax
deductible goodwill amortization.
NEW ACCOUNTING STANDARDS
------------------------
Commencing January 1, 2001, Schlumberger adopted SFAS 133 (Accounting for
Derivative Instruments and Hedging Activities). Schlumberger uses derivative
instruments such as interest rate swaps, currency swaps, forward currency
contracts and foreign currency options. Forward currency contracts provide a
hedge against currency fluctuations on assets/liabilities denominated in other
than a functional currency. Options are usually entered into as a hedge against
currency variations on firm commitments generally involving the construction of
long-lived assets.
Schlumberger maintains a foreign-currency risk management strategy that uses
derivative instruments to protect its interests from unanticipated fluctuations
in earnings and cash flows caused by volatility in currency exchange rates.
Movements in foreign currency exchange rates pose a risk to Schlumberger's
operations as exchange rate changes may affect profitability and cash flow.
Schlumberger uses foreign currency forward exchange contracts, swaps and
options. Schlumberger also maintains an interest rate risk management strategy
that uses derivatives to minimize significant, unanticipated earnings
fluctuations caused by interest rate volatility. Schlumberger's specific goals
are (1) to manage interest rate sensitivity by modifying the repricing or
maturity characteristics of certain of its debt and (2) to lower (where
possible) the cost of borrowed funds.
By using derivative financial instruments to hedge exposure to changes in
exchange rates and interest rates, Schlumberger exposes itself to credit risk
and market risk. Schlumberger minimizes the credit risk by entering into
transactions with high-quality counterparties, limiting the exposure to each
counterparty and monitoring the financial condition of its counterparties.
Market risk is managed through the setting and monitoring of parameters that
limit the types and degree of market risk which are acceptable.
At September 30, 2001, Schlumberger recognized a net $63 million charge in
Stockholders' Equity relating to SFAS 133. This charge was primarily due to the
change in the fair market value of
-15-
Schlumberger's US interest rate swaps as a result of declining interest rates.
The effect on Stockholders' Equity at December 31, 2000 was not significant.
In June 2001, SFAS 141 (Business Combinations) and SFAS 142 (Goodwill and Other
Intangible Assets) were issued. SFAS 141 has been adopted by Schlumberger for
acquisitions subsequent to June 30, 2001. SFAS 142 will be adopted by
Schlumberger commencing January 1, 2002. As required by SFAS 142, Schlumberger
will undertake a review for impairment in 2002.
Amortization of goodwill and other intangibles included in Schlumberger's
results are as follows:
($ million - pretax)
Third Quarter Nine Months
-------------------- ------------------
2001 2000 2001 2000
--------- --------- ---------- -------
$111 $ 25 $236 $ 71
The total amount for the year 2001 is expected to be $350 million (pretax) and
with the adoption of SFAS 142, the equivalent amount is estimated to be $60
million in 2002.
In June 2001, SFAS 143 (Accounting for Asset Retirement Obligations) was issued.
SFAS 143 will be adopted by Schlumberger commencing January 1, 2003.
Schlumberger does not believe that the implementation of this standard will have
any material effect on it's Financial Position and Results of Operations.
In August 2001, SFAS 144 (Accounting for Impairment or Disposal of Long-Lived
Assets) was issued. SFAS 144 will be adopted by Schlumberger commencing January
1, 2002. Schlumberger does not believe that the implementation of this standard
will have any material effect on it's Financial Position and Results of
Operations.
ACQUISITIONS
------------
In March 2001, Schlumberger acquired Bull CP8, a market leader in
microprocessor-based smart cards and associated systems applications for the
banking, mobile communications and network security industries. The acquisition
price was $313 million. Assets acquired included identifiable intangibles
(primarily patents) of $136 million and goodwill of $140 million. Additionally,
in-process research & development which aggregated $25 million was charged to
expense in the first quarter.
In April 2001, Schlumberger acquired Sema plc for an aggregate consideration of
$5.15 billion. See "Investment in Sema plc" in the "Notes to the Consolidated
Financial Statements".
LIQUIDITY
---------
In April 2001, Schlumberger borrowed $3 billion to finance the acquisition of
Sema plc ($2.5 billion in Europe). See "Investment in Sema plc" in the "Notes to
the Consolidated Financial Statements".
On October 3, 2001, Schlumberger issued $1.9 billion European bonds (Euro 1.4
billion and (pound)425 million). The average rate of these bonds is 5.9% with
maturity from 2008 through 2032. The proceeds from the issue were used to repay
short-term bank loans originally taken out to finance the acquisition of Sema
plc.
FORWARD-LOOKING STATEMENTS
--------------------------
Schlumberger cautions that, except for historical information, statements in
this 10-Q report, the third quarter 2001 earnings release and associated
conference call, and elsewhere may constitute forward-looking statements. These
include statements as to expectations, beliefs and future financial performance,
such as statements regarding business prospects in the key industries in which
Schlumberger operates and growth opportunities for Schlumberger in those
industries.
-16-
These statements involve a number of risks, uncertainties, assumptions and other
factors that could cause actual results to differ materially from those in the
forward-looking statements. Such factors include: continuing customer commitment
to certain key long-term contracts; changes in E&P spending by major oil and gas
companies, including renewed growth in gas drilling; economic, competitive and
technological factors affecting markets, services, and prices in Schlumberger
Sema businesses, including the extent and timing of a recovery in the
telecommunications industry segment and utilities investment in utility
management solutions; Schlumberger's ability to integrate newly acquired
businesses and to realize identified synergies and cost savings from those
acquisitions; timing and proceeds from anticipated divestitures; general
economic and business conditions in key regions of the world; and changes in
business strategy.
Item 3: Quantitative and Qualitative Disclosure 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 together with interest rate
swaps, where appropriate, to fix or lower borrowing costs. 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.
* Mark of Schlumberger
PART II. OTHER INFORMATION
--------------------------
Item 6: Exhibits and Reports on Form 8-K
-----------------------------------------
Exhibits: As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the
Registrant has not filed with this Quarterly Report on Form 10-Q certain
instruments defining the rights of holders of long-term debt of the Registrant
and it subsidiaries because the total amount of securities authorized under any
of such instruments does not exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. The Registrant agrees to furnish a
copy of any such agreements to the Securities and Exchange Commission upon
request.
Reports on Form 8-K: None
-17-
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 1, 2001 .../s/Jean-Marc Perraud
---------------- -----------------------
Jean-Marc Perraud
Controller and
Chief Accounting Officer
-18-