UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For fiscal year ended December 31, 20042005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period from to
Commission File Number 1-4601
Schlumberger N.V. (Schlumberger Limited)
(Exact name of registrant as specified in its charter)
| Netherlands Antilles | 52-0684746 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
153 East 53 Street, New York, New York, | 10022-4624 | |
42, rue Saint-Dominique Paris, France | 75007 | |
Parkstraat 83, The Hague, The Netherlands | 2514 JG | |
| (Addresses of principal executive offices) | (Zip Codes) | |
Registrant’s telephone number in the United States, including area code, is:
(212) 350-9400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
| Common Stock, par value $0.01 per share | New York Stock Exchange Euronext Paris Euronext Amsterdam The London Stock Exchange SWX Swiss Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YESx NO¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES¨ NOx
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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESx NO¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
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 Accelerated filer¨ Non-accelerated filer¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES¨ NOx NO ¨
As of June 30, 2004,2005, the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was approximately $36.3$43.7 billion.
As of January 31, 2005,2006, Number of Shares of Common Stock Outstanding: 589,258,183.590,868,693.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document have been incorporated herein by reference into Part III of this Form 10-K: Definitive Proxy Statement for the 20052006 Annual General Meeting of Stockholders (“Proxy Statement”).
1
Table of Contents
Form 10-K
| Page | ||||
Item 1. | 3 | |||
Item | 6 | |||
Item | 9 | |||
| Item 2. | Properties | 9 | ||
| Item 3. | Legal Proceedings | |||
Item 4. | ||||
Item 5. | ||||
Item 6. | ||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | |||
Item 7A. | ||||
Item 8. | ||||
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | |||
| Item 9A. | Controls and Procedures | 75 | ||
| Item 9B. | Other Information | 75 | ||
| ||||
| ||||
PART III | ||||
Item 10. | ||||
Item 11. | ||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management | |||
Item 13. | ||||
| Item 14. | Principal Accountant Fees and Services | 76 | ||
| ||||
PART IV | ||||
Item 15. | ||||
| 77 | ||||
| 79 | ||||
Part 1, Item 1
2
All references herein to “Registrant”, “Company” and “Schlumberger” refer to Schlumberger Limited and its consolidated subsidiaries.
Founded in 1927, Schlumberger is the world’s leading oilfield services company, supplying technology, project management and information solutions that optimize performance in the oil and gas industry. As of December 31, 2004,2005, the Company employed more than 52,00060,000 people of over 140 nationalities operating in more than 80 countries. Schlumberger has principal executive offices in New York, Paris, and The Hague. Schlumberger consists of two business segments: Schlumberger Oilfield Services and WesternGeco. Schlumberger Oilfield Services is the world’s premier oilfield services company supplying a wide range of technology services and solutions to the international oil and gas industry. WesternGeco, jointly70% owned withby Schlumberger and 30% owned by Baker Hughes, is one of the world’s largest and most advanced surface seismic companies.
On January 29, 2004, Schlumberger completed the sale of the SchlumbergerSema business to Atos Origin. During 2004, Schlumberger completed the initial public offering of Axalto and no longer retains any ownership interest in this business. Including other divestitures completed in 2004 and 2005, Schlumberger’s divestiture program of its non-oilfield businesses is now complete.company.
Schlumberger Oilfield Services is the world’s leading provider of technology, project management and information solutions to the international petroleum industry. With 46,000more than 60,000 employees, Schlumberger Oilfield Services manages its business through 27 Oilfield Services GeoMarket* regions, which are grouped into four geographic areas: North America;America, Latin America;America, Europe/CIS/W. Africa;Africa and Middle East & Asia. The GeoMarket structure offers customers a single point of contact at the local level for field operations and brings together geographically focused teams to meet local needs and deliver customized solutions.
Schlumberger invented wireline logging in 1927 as a technique for obtaining downhole data in oil and gas wells. Today, Schlumberger Oilfield Services operates in each of the major oilfield service markets covering the entire life cycle of the reservoir. These services, are organized into seven technology product lines, in which Schlumberger holds a number of market leading positions, are organized into six Technology groups to capitalize on technical synergies and introduce innovative solutions within the GeoMarket regions.
| · | Wireline – provides the information necessary to evaluate the formation, plan and monitor well construction, and monitor and evaluate production. Wireline offers both open-hole and cased-hole services. |
| · | Drilling & Measurements – supplies directional drilling, measurements-while-drilling, and logging-while-drilling services. |
| · | Well Services – provides services to construct oil and gas wells, as well as maintain optimal production through the life of an oil and gas field. These include pressure pumping, well stimulation services, coiled tubing, cementing and engineering services. |
| · | Well Completions & Productivity – provides testing, completion, and oil- and gas- production optimization services. Services range from well testing and perforating, to intelligent completions and artificial lift systems. |
| · | Data & Consulting Services – supplies measurement, interpretation and integration of all exploration and production data types, as well as expert consulting services for reservoir characterization, production enhancement, field development planning, and multi-disciplinary reservoir and production solutions. |
| · | Schlumberger Information Solutions – provides consulting, software, information management, and IT infrastructure services that support oil and gas industry core operational processes. |
Part 1, Item 1
One other service, Integrated Project Management –(IPM), provides consulting, project management and engineering services leveraging the expertise from the other technology segments for the E&P industry.
six Technologies.
The technology product linesTechnologies are also responsible for overseeing operational processes, resource allocation, personnel and quality, health, safety, and environmental matters in the GeoMarket.
3
Supporting the service technology product linessix Technologies are 23 research and development (R&D) centers. Through its R&D, Schlumberger is committed to advanced technology programs that will enhance oilfield efficiency, lower finding and producing costs, improve productivity, maximize reserve recovery, increase asset value and accomplish all of these goals in a safe, environmentally sound manner.
Schlumberger Oilfield Services uses its own personnel to market its products and services. The customer base, business risks, and opportunities for growth are essentially uniform across all services. There is a sharing of manufacturing and engineering facilities as well as research centers; the labor force is interchangeable. Technological innovation, quality of service, and price are the principal methods of competition. Competition varies geographically with respect to the different services offered. While there are numerous competitors, both large and small, Schlumberger believes that it is an industry leader in providing wireline logging, production testing, measurements-while-drilling, and logging-while-drilling, directional drilling services, and fully computerized logging and geoscience software and computing services. A large proportion of the Company’sSchlumberger’s offering is non-rig related; consequently, revenue does not necessarily correlate to rig count fluctuations.
Schlumberger is a 40% owner in M-I Drilling Fluids, a joint venture with Smith International that offers drilling and completion fluids utilized to stabilize rock strata during the drilling process and minimize formation damage during completion and workover operations.
WesternGeco, which is 70% owned by Schlumberger and 30% owned by Baker Hughes, provides comprehensive worldwide reservoir imaging, monitoring, and development services, with the most extensive seismic crews and data processing centers in the industry, as well as the world’s largesta leading multiclient seismic library. Services range from 3D and time-lapse (4D) seismic surveys to multi-component surveys for delineating prospects and reservoir management. Seismic solutions include proprietary Q*-Technology technology for enhanced reservoir description, characterization, and monitoring throughout the life of the field - field—from exploration through enhanced recovery.
Positioned for meeting a full range of customer needs in land, marine and shallow-water transition-zone services, WesternGeco offers a wide rangescope of technologies and services:
| · | Land Seismic – provides comprehensive resources for seismic data acquisition on land and across shallow-water transition zones. |
| · | Marine Seismic – delivers a fully calibrated single-sensor marine seismic acquisition and processing system, delivering the seismic technology breakthrough needed for new-generation reservoir management. |
| · | Multiclient Services – supplies high-quality seismic data from the most prospective hydrocarbon basins with a leading multiclient data library. |
| · | Reservoir Services – provides the people, tools and technology to help customers capture the benefits of a completely integrated approach to locating, defining and monitoring the reservoir. |
| · | Seismic Data Processing – offers extensive seismic data processing centers for complex processing projects. |
Part 1, Item 1
Acquisitions
Information on acquisitions made by Schlumberger or its subsidiaries appears under the heading “Acquisitions” on page 5450 of this Report withinin Note 5 of theNotes to Consolidated Financial Statements.
GENERAL
Research & Development
Research to support the engineering and development efforts of Schlumberger’sSchlumberger activities is conducted at Schlumberger Doll Research, Ridgefield, Connecticut and Boston, Massachusetts, USA;United States; Schlumberger Cambridge Research, Cambridge, England,England; and at Stavanger, Norway; Moscow, Russia and Dhahran, Saudi Arabia.
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Patents
While Schlumberger seeks and holds numerous patents, no particular patent or group of patents is considered material to Schlumberger’s business.
Seasonality
Although weather and natural phenomena can temporarily affect delivery of oilfield services, the widespread geographic location of such services precludes the overall business from being characterized as seasonal. However, because oilfield services are provided predominantly in the Northern Hemisphere, severe weather can temporarily affect the delivery of such services and products.
Customers and Backlog of Orders
No single customer exceeded 10% of consolidated revenue. Oilfield Services has no backlog due to the nature of their business. The WesternGeco backlog at December 31, 2004,2005, was $670$790 million (2003: $408(2004: $670 million), the majority of which is expected to be realized in 2005.2006.
Government Contracts
No material portion of Schlumberger’s business is subject to renegotiation of profits or termination of contracts by the USUnited States or other governments.
Employees
As of December 31, 2004,2005, Schlumberger had approximately 52,50060,000 employees.
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 68% of our consolidated revenues in 2004 and approximately 70% of our consolidated revenues during 2003. Risk 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, trade restrictions or embargoes imposed by the US or other countries, exchange controls and currency fluctuations. 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.
Environmental Protection
Compliance with governmental provisions relating to the protection of the environment does not materially affect Schlumberger’s capital expenditures, earnings or competitive position. Management believes that Schlumberger is currently in substantial compliance with applicable environmental laws and regulations. For more information, seeEnvironmental Matters on page 33 of this Report.
Financial Information
Financial information by business segment for the years ended December 31, 2005, 2004 2003 and 20022003 is given on pages 6560 to 6762 of this Report, within theNotes to Consolidated Financial Statements.
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Internet WebsiteAvailable Information
Schlumberger’s Internet website can be found at www.slb.com.www.slb.com. Schlumberger makes available free of charge on or through ourits internet website atwww.slb.com/ir access to its annual reportAnnual Report on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, its proxy statement and Forms 3, 4 and 5 filed on behalf of directors and executive officers and amendments to those reports as soon as reasonably practicable after such material is filed with or furnished to the Securities and Exchange Commission (“SEC”). Additionally, Alternatively, you may access these reports at the SEC’s Internet website atwww.sec.gov.
Part 1, Item 1, 1A
Schlumberger’s corporate governance materials, including Board Committee Charters, Corporate Governance Guidelines and Code of Ethics, may also be found onwww.slb.com/ir.ir. From time to time to time, corporate governance materials on our website may be updated to comply with rules issued by the SEC and the New York Stock Exchange (“NYSE”) or as desirable to promote the effective governance of Schlumberger. In addition, amendments to the Code of Ethics and any grant of a waiver from a provision of the Code of Ethics requiring disclosure under applicable SEC or NYSE rules will be disclosed on our website.
Any stockholder wishing to receive, without charge, a copy of any of the SEC filings or corporate governance materials should write the Secretary, Schlumberger Limited, 153 East 53rd Street, 57th Floor, New York, New York, 10022.
Schlumberger has filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this Report. In 2005, Schlumberger submitted to the NYSE the CEO certification required by Section 303A.12(a) of the NYSE’s Listed Company Manual. In 2006, Schlumberger expects to submit this certification to the NYSE after the Annual General Meeting of Stockholders.
The reference to thisinformation on our website address doesor any other website is not constitute incorporationincorporated by reference in this Report.
We urge you to carefully consider the risks described below and the other information in this Report. If any of the information containedmatters described below or elsewhere in this Report were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business and operations.
Demand for the majority of our oilfield services is substantially dependent on the websitelevel of expenditures by the oil and should not be construed as partgas industry. A substantial or an extended decline in oil or gas prices could result in lower expenditures by the oil and gas industry and reduce our revenue.
Demand for the majority of this report.our oilfield services is substantially dependent on the level of expenditures by the oil and gas industry for the exploration, development and production of crude oil and natural gas reserves, which are sensitive to oil and natural gas prices and generally dependent on the industry’s view of future oil and gas prices. Oil and gas prices have historically been volatile and are affected by numerous factors, including:
| demand for energy, which is affected by worldwide population growth and general economic and business conditions; |
| · | the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels for oil; |
| · | oil and gas production by non-OPEC countries; |
| · | political and economic uncertainty and socio-political unrest; |
| · | the level of worldwide oil exploration and production activity; |
| · | the cost of exploring for, producing and delivering oil and gas; |
| · | technological advances affecting energy consumption; and |
| · | weather conditions. |
Part 1, Item 1A
The oil and gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for our oilfield services and downward pressure on the prices we charge. A significant downturn in the oil and gas industry could result in a reduction in demand for oilfield services and could harm our operating results.
A significant portion of our revenue is derived from our non-United States operations, which exposes us to risks inherent in doing business in each of the more than 80 countries in which we operate.
Our non-United States operations accounted for approximately 75% of our consolidated revenue in 2005 and 74% in both 2004 and 2003. Operations in countries other than the United States are subject to various risks, including:
| · | unsettled political and economic conditions in certain areas; |
| · | exposure to possible expropriation or other governmental actions; |
| · | social unrest, acts of terrorism, war or other armed conflict; |
| · | confiscatory taxation or other adverse tax policies; |
| · | deprivation of contract rights; |
| · | trade restrictions or embargoes imposed by the United States or other countries; |
| · | restrictions on the repatriation of income or capital; |
| · | exchange controls; |
| · | inflation; and |
| · | currency fluctuations and devaluations. |
In addition, we are subject to risks associated with our operations in countries, including Iran, Syria, Sudan, Libya and Cuba, which are subject to trade, economic sanctions or other restrictions imposed by the United States government.
The occurrence of any of the risks described above could reduce our earnings and our cash available for operations.
Environmental compliance costs and liabilities could reduce our earnings and cash available for operations.
We are subject to increasingly stringent laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges and waste management. We incur, and expect to continue to incur, capital and operating costs to comply with environmental laws and regulations. The technical requirements of environmental laws and regulations are becoming increasingly expensive, complex and stringent. These laws may provide for “strict liability” for damages to natural resources or threats to public health and safety. Strict liability can render a party liable for environmental damage without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances.
Part 1, Item 1A
We use and generate hazardous substances and wastes in our operations. In addition, many of our current and former properties are or have been used for industrial purposes. Accordingly, we could become subject to potentially material liabilities relating to the investigation and cleanup of contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could reduce our earnings and our cash available for operations. We believe we are currently in substantial compliance with environmental laws and regulations.
We could be subject to substantial liability claims, which would adversely affect our results and financial condition.
Certain equipment used in the delivery of oilfield services, such as directional drilling equipment, perforating systems, subsea completion equipment and well completion systems, are used in hostile environments, such as exploration, development and production applications. An accident or a failure of a product can cause personal injury, loss of life, damage to property, equipment or the environment, and suspension of operations. Our insurance may not adequately protect us against liability for some kinds of events, including events involving pollution, or against losses resulting from business interruption. Moreover, in the future we may not be able to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Substantial claims made under our policies could cause our premiums to increase. Any future damages caused by our products that are not covered by insurance, or are in excess of policy limits or are subject to substantial deductibles, could reduce our earnings and our cash available for operations.
Limitations on our ability to protect our intellectual property rights, including our trade secrets, could cause a loss in revenue and any competitive advantage we hold.
Some of our products or services, and the processes we use to produce or provide them, have been granted United States patent protection, have patent applications pending or are trade secrets. Our business may be adversely affected if our patents are unenforceable, the claims allowed under our patents are not sufficient to protect our technology, our patent applications are denied, or our trade secrets are not adequately protected. Our competitors may be able to develop technology independently that is similar to ours without infringing on our patents or gaining access to our trade secrets.
We may be subject to litigation if another party claims that we have infringed upon its intellectual property rights.
The tools, techniques, methodologies, programs and components we use to provide our services may infringe upon the intellectual property rights of others. Infringement claims generally result in significant legal and other costs and may distract management from running our core business. Royalty payments under licenses from third parties, if available, would increase our costs. If a license were not available we might not be able to continue providing a particular product or service, which would reduce our revenue. Additionally, developing non-infringing technologies would increase our costs.
Part I, Item 1A,1B,2, 3,4
Failure to obtain and retain skilled technical personnel could impede our operations.
We require highly skilled personnel to operate and provide technical services and support for our business. Competition for the personnel required for our oilfield service businesses intensifies as activity increases. In periods of high utilization it may become more difficult to find and retain qualified individuals. This could increase our costs or have other adverse effects on our operations.
Item 1B Unresolved Staff Comments
None
Schlumberger owns or leases manufacturing facilities, administrative offices, service centers, research centers, sales offices and warehouses in North and South America, Europe, Africa, Asia and Australia. Some facilities are owned and some are held through long-term leases. No significant lease is scheduled to terminate in the near future, and Schlumberger believes comparable space is readily obtainable should any lease expire without renewal. Schlumberger believes all of its properties are generally well maintained and adequate for the intended use.
Outside the United States the principal owned or leased facilities of Oilfield Services are located in Hassi Massoud, Algeria; Luanda, Angola; Perth, Australia; Baku, Azerbaijan; Rio de Janeiro, Brazil; Calgary and Edmonton, Canada; Beijing, China; Bogota, Colombia; Cairo, Egypt; Clamart, and Paris, France; Bombay, India; Balikpapan and Jakarta, Indonesia; Milan, Italy; Fuchinobe, Japan; Atyrau, Kazakhstan; Kuwait City, Kuwait; Kuala Lumpur, Malaysia; Mexico City and Reynosa, Mexico; Port Harcourt, Nigeria; Belfast, Northern Ireland; Stavanger, Norway; Doha, Qatar; Moscow, Nefteyugansk and Noyabrsk, Russia; Al-Khobar, Saudi Arabia; Singapore; Bangkok, Thailand; Abu Dhabi and Dubai, United Arab Emirates; and Aberdeen and Stonehouse, United Kingdom; and Caracas, Venezuela.
Kingdom.
Within the United States, the principal owned or leased facilities of Oilfield Services are located in Anchorage, Alaska; Lawrence, Kansas; New Orleans, Louisiana; Bartlesville, Oklahoma; and Houston, Rosharon and Sugar Land, Texas.
Outside the United States, the principal owned or leased facilities of WesternGeco are located in Luanda, Angola; Perth, Australia; Baku, Azerbaijan; Rio de Janeiro, Brazil; Calgary, Canada; Cairo, Egypt; Atyrau, Kazakhstan; Kuwait City, Kuwait; Kuala Lumpur, Malaysia; Mexico City and Poza Rica, Mexico; Lagos, Nigeria; Bergen, Oslo and Stavanger, Norway; Moscow, Russia; Al-Khobar, Saudi Arabia; Singapore; Abu Dhabi, Dubai and Jebel Ali, United Arab Emirates; Gatwick, and London, United Kingdom; and Caracas, Venezuela.
Within the United States, the principal owned or leased facilities of WesternGeco are located in Denver, Colorado; Dead Horse, Alaska,Alaska; and Houston, Texas.
In addition to the properties noted above, Schlumberger also owns a facility in Montrouge, France.Item 3 Legal Proceedings
6
The information with respect to Item 3 is set forth under the headingContingencies on page 6560 of this Report, within theNotes to Consolidated Financial Statements.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Schlumberger’s security holders during the fourth quarter of the fiscal year covered by this report.Report.
Part I, Item 4
Executive Officers of Schlumberger
Information with respect to the executive officers of Schlumberger and their ages as of February 28, 200520, 2006 is set forth below. The positions have been held for at least five years, except where stated.
Name | Age | Present Position and Five-Year Business Experience | ||
Andrew Gould | Chairman and Chief Executive Officer, since February 2003; President and Chief Operating Officer, March 2002 to February 2003; and Executive Vice President | |||
Jean-Marc Perraud | Executive Vice President and Chief Financial Officer, since March 2002; Controller and Chief Accounting Officer, April 2001 to March 2002; and Treasurer, January 1999 to May 2001. | |||
Chakib Sbiti | Executive Vice President, since February 2003; President Oilfield Services Middle East & Asia, July 2001 to February 2003; and President Oilfield Services Asia, August 2000 to July
| |||
Dalton Boutte | Executive Vice President, since February 2004 and President WesternGeco, since January 2003; Vice President OFS Operations, May 2001 to January 2003; and President OFS Europe/C.I.S./Africa, March 2000 to May
| |||
Ellen Summer | Secretary and General Counsel, since March 2002; Director of Legal Services, April 2001 to March 2002; and Deputy General Counsel, March 2001 and prior. | |||
Simon Ayat | Vice President Treasurer since February 2005; Vice President, Controller and Business Processes, since December 2002; Vice President Finance SchlumbergerSema, April 2001 to December 2002; and Oilfield Services Controller, September 1998 to April 2001. | |||
Mark Danton | Vice President | |||
Andre Erlich | Chief Information Officer, since May 2002; Vice President Technology and General Manager, April 2001 to May 2002; and Vice President Business Development, October 1999 to April 2001. | |||
Jean Chevallier | Vice President Industry Affairs, since February 2005; Seconded to Atos Origin February 2004 to February 2005; Vice President Business Development SchlumbergerSema, September 2001 to February 2004; President of Utilities Services, SchlumbergerSema, March 2001 to September 2001; Chief Information Officer, Schlumberger Limited, January 1999 to September 2001. | |||
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| 34 |
Manager from July 1998 to July 2001. | ||||
Philippe Lacour-Gayet | Vice President and Chief Scientist, since January
| |||||
Satish Pai | Vice President since February 2004 and Vice President Oilfield Technologies since March 2002; President Schlumberger Information Solutions, January 2001 to March 2002; and President IndigoPool.Com, April 2000 to January
| |||||
Doug Pferdehirt | Vice President Communications and Investor Relations, since July 2003; President SchlumbergerSema NSA, August 2002 to July 2003; Vice President Marketing and Technique, April 2002 to August 2002; and Gulf Coast GeoMarket Manager, February 2000 to April
| |||||
Part I, Item 4, Part II, Item 5
|
| |||
David Tournadre | Vice President Personnel since August 2003; Operations Manager REW, September 2001 to August 2003; Management and Technical Training Program, April 2001 to September 2001; and Seconded as Vice President Personnel, Exploration and Production to Yukos, December 1998 to April 2001. | |||
| Item 5 | Market for Schlumberger’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |
As of January 31, 2005,2006, there were 589,258,183590,868,693 shares of the Common Stock of Schlumberger outstanding, exclusive of 77,847,83276,237,389 shares held in treasury, and approximately 22,50019,800 stockholders of record. The principal United States market for Schlumberger’s Common Stock is the New York Stock Exchange.
Exchange where it is traded under the symbol “SLB”.
Schlumberger’s Common Stock is also traded on the Euronext Paris, Euronext Amsterdam, London and SWX Swiss stock exchanges.
Common Stock, Market Prices and Dividends Declared per Share
Quarterly high and low prices for Schlumberger common stock as reported by the New York Stock Exchange (composite transactions), together with dividends declared per share in each quarter of 2005 and 2004, were:
| Price Range | Dividends Declared | ||||||||
| High | Low | ||||||||
2005 | |||||||||
QUARTERS | |||||||||
First | $ | 78.320 | $ | 63.140 | $ | 0.2100 | |||
Second | 78.450 | 64.620 | 0.2100 | ||||||
Third | 87.800 | 74.850 | 0.2100 | ||||||
Fourth | 102.980 | 77.300 | 0.2100 | ||||||
2004 | |||||||||
QUARTERS | |||||||||
First | $ | 66.750 | $ | 52.530 | $ | 0.1875 | |||
Second | 64.700 | 54.750 | 0.1875 | ||||||
Third | 67.850 | 58.640 | 0.1875 | ||||||
Fourth | 69.890 | 61.010 | 0.1875 | ||||||
There are no legal restrictions on the payment of dividends or ownership or voting of such shares, except as to shares held as treasury stock. Under current legislation, United States stockholders are not subject to any Netherlands Antilles withholding or other Netherlands Antilles taxes attributable to the ownership of such shares.
On January 19, 2006, Schlumberger announced that the Board of Directors had approved a two-for-one stock split. Each stockholder of record March 1, 2006 will receive one additional share for every outstanding share held on the record date, with a payment date on April 7, 2006.
On January 19, 2006, Schlumberger announced that the Board of Directors had approved a 19% increase in the quarterly dividend, to $0.25 per share (on a pre-split basis). The increase is effective commencing with the dividend payable on April 7, 2006 to shareholders of record on March 1, 2006.
Part II, Item 5
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 quarterthree months ended December 31, 2004.2005.
8
| (Stated in thousands except per share amounts) | |||||||||
| Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Maximum number of shares that may yet be purchased under the program | ||||||
October 1 through October 31, 2004 | 330 | $ | 63.22 | 330 | 10,854 | ||||
November 1 through November 30, 2004 | 533 | $ | 62.58 | 533 | 10,321 | ||||
December 1 through December 31, 2004 | 469 | $ | 62.77 | 469 | 9,852 | ||||
| 1,332 | $ | 62.80 | 1,332 | ||||||
| (Stated in thousands except per share amounts) | |||||||||
| Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Maximum of shares | ||||||
October 1 through October 31, 2005 | 340 | $ | 84.76 | 340 | 4,005 | ||||
November 1 through November 30, 2005 | 358 | $ | 91.22 | 358 | 3,647 | ||||
December 1 through December 31, 2005 | 1,433 | $ | 99.50 | 1,433 | 2,214 | ||||
| 2,131 | $ | 95.76 | 2,131 | ||||||
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.
Part II, Item 6
Common Stock, Market Prices and Dividends Declared per ShareItem 6 Selected Financial Data
The informationfollowing selected consolidated financial data should be read in conjunction with respect to this portion“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statement and Supplementary Data”:
| (Stated in millions except per share amounts) | ||||||||||||||||||||
| Year Ended December 31, | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||
SUMMARY OF OPERATIONS | ||||||||||||||||||||
Operating revenue: | ||||||||||||||||||||
Oilfield Services | $ | 12,648 | $ | 10,239 | $ | 8,823 | $ | 8,171 | $ | 8,381 | ||||||||||
WesternGeco | 1,662 | 1,238 | 1,183 | 1,476 | 1,702 | |||||||||||||||
Eliminations and other | (1 | ) | 3 | 11 | 10 | 770 | ||||||||||||||
Total operating revenue | $ | 14,309 | $ | 11,480 | $ | 10,017 | $ | 9,657 | $ | 10,853 | ||||||||||
% increase (decrease) over prior year | 25 | % | 15 | % | 4 | % | (11 | )% | 28 | % | ||||||||||
Pretax Segment income: | ||||||||||||||||||||
Oilfield Services | $ | 2,805 | $ | 1,801 | $ | 1,537 | $ | 1,278 | $ | 1,585 | ||||||||||
WesternGeco | 317 | 124 | (20 | ) | 71 | 221 | ||||||||||||||
Eliminations and other | (233 | ) | (208 | ) | (142 | ) | (115 | ) | (116 | ) | ||||||||||
Pretax Segment income | $ | 2,889 | $ | 1,717 | $ | 1,375 | $ | 1,234 | $ | 1,690 | ||||||||||
% increase (decrease) over prior year | 68 | % | 25 | % | 11 | % | (27 | )% | 87 | % | ||||||||||
Interest income1 | 98 | 54 | 49 | 68 | 154 | |||||||||||||||
Interest expense1 | 187 | 201 | 329 | 364 | 380 | |||||||||||||||
Charges (Credits)2 | (172 | ) | 243 | 638 | 283 | 28 | ||||||||||||||
Taxes on income2 | 682 | 277 | 210 | 252 | 592 | |||||||||||||||
Minority interest2 | (91 | ) | (36 | ) | 151 | 86 | (47 | ) | ||||||||||||
Income from Continuing Operations | $ | 2,199 | $ | 1,014 | $ | 398 | $ | 489 | $ | 797 | ||||||||||
Income (loss) from Discontinued Operations | 8 | 210 | (15 | ) | (2,809 | ) | (275 | ) | ||||||||||||
Net income (loss) | $ | 2,207 | $ | 1,224 | $ | 383 | $ | (2,320 | ) | $ | 522 | |||||||||
Basic earnings per share | ||||||||||||||||||||
Income from Continuing Operations | $ | 3.73 | $ | 1.72 | $ | 0.68 | $ | 0.84 | $ | 1.39 | ||||||||||
Income (loss) from Discontinued Operations | 0.01 | 0.36 | (0.03 | ) | (4.85 | ) | (0.48 | ) | ||||||||||||
Net income (loss) | $ | 3.75 | $ | 2.08 | $ | 0.66 | $ | (4.01 | ) | $ | 0.91 | |||||||||
Add back amortization of goodwill | – | – | – | – | 0.50 | |||||||||||||||
Adjusted earnings (loss) per share | $ | 3.75 | $ | 2.08 | $ | 0.66 | $ | (4.01 | ) | $ | 1.41 | |||||||||
Diluted earnings per share | ||||||||||||||||||||
Income from Continuing Operations | $ | 3.62 | $ | 1.70 | $ | 0.68 | $ | 0.84 | $ | 1.38 | ||||||||||
Income (loss) from Discontinued Operations | 0.01 | 0.34 | (0.03 | ) | (4.83 | ) | (0.47 | ) | ||||||||||||
Net income (loss) | $ | 3.64 | $ | 2.04 | $ | 0.65 | $ | (3.99 | ) | $ | 0.91 | |||||||||
Add back amortization of goodwill | – | – | – | – | 0.50 | |||||||||||||||
Adjusted earnings (loss) per share | $ | 3.64 | $ | 2.04 | $ | 0.65 | $ | (3.99 | ) | $ | 1.41 | |||||||||
Cash dividends declared per share | $ | 0.84 | $ | 0.75 | $ | 0.75 | $ | 0.75 | $ | 0.75 | ||||||||||
Part II, Item 5 is set forth under the headingCommon Stock, Market Prices and Dividends Declared per Shareon page 33 of this Report.6
9
FIVE-YEAR SUMMARY
| (Stated in millions except per share amounts) | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2004 | 20031 | 20021 | 2001 1 | 20001 | ||||||||||||||||
SUMMARY OF OPERATIONS | ||||||||||||||||||||
Operating revenue: | ||||||||||||||||||||
Oilfield Services | $ | 10,239 | $ | 8,823 | $ | 8,171 | $ | 8,381 | $ | 6,855 | ||||||||||
WesternGeco | 1,238 | 1,183 | 1,476 | 1,702 | 511 | |||||||||||||||
Eliminations and other | 3 | 11 | 10 | 770 | 1,138 | |||||||||||||||
Total operating revenue | $ | 11,480 | $ | 10,017 | $ | 9,657 | $ | 10,853 | $ | 8,504 | ||||||||||
% increase (decrease) over prior year | 15 | % | 4 | % | (11 | )% | 28 | % | 14 | % | ||||||||||
Pretax Segment income: | ||||||||||||||||||||
Oilfield Services | $ | 1,801 | $ | 1,537 | $ | 1,278 | $ | 1,585 | $ | 1,061 | ||||||||||
WesternGeco | 124 | (20 | ) | 71 | 221 | (25 | ) | |||||||||||||
Eliminations and other2 | (208 | ) | (142 | ) | (115 | ) | (116 | ) | (131 | ) | ||||||||||
Pretax Segment income before Minority interest | 1,717 | 1,375 | 1,234 | 1,690 | 905 | |||||||||||||||
Minority interest | (36 | ) | 15 | (9 | ) | (57 | ) | — | ||||||||||||
Total Pretax Segment income, before charges | $ | 1,681 | $ | 1,390 | $ | 1,225 | $ | 1,633 | $ | 905 | ||||||||||
% increase (decrease) over prior year | 21 | % | 13 | % | (25 | )% | 80 | % | 99 | % | ||||||||||
Interest income | 54 | 49 | 68 | 153 | 297 | |||||||||||||||
Interest expense | 201 | 329 | 364 | 380 | 273 | |||||||||||||||
Charges (Credits), net of minority interest3 | 243 | 502 | 188 | 17 | (36 | ) | ||||||||||||||
Taxes on income3 | 277 | 210 | 252 | 592 | 240 | |||||||||||||||
Income, continuing operations | $ | 1,014 | $ | 398 | $ | 489 | $ | 797 | $ | 725 | ||||||||||
% increase (decrease) over prior year | 155 | % | (20 | )% | (39 | )% | 10 | % | 177 | % | ||||||||||
Income (loss), discontinued operations | $ | 210 | $ | (15 | ) | $ | (2,809 | ) | $ | (275 | ) | $ | 10 | |||||||
Net income (loss) | $ | 1,224 | $ | 383 | $ | (2,320 | ) | $ | 522 | $ | 735 | |||||||||
% increase (decrease) over prior year | 220 | % | — | — | (29 | )% | 100 | % | ||||||||||||
Basic earnings per share | ||||||||||||||||||||
Continuing operations | $ | 1.72 | $ | 0.68 | $ | 0.84 | $ | 1.39 | $ | 1.27 | ||||||||||
Discontinued operations | 0.36 | (0.03 | ) | (4.85 | ) | (0.48 | ) | 0.02 | ||||||||||||
Net income (loss) | $ | 2.08 | $ | 0.66 | $ | (4.01 | ) | $ | 0.91 | $ | 1.29 | |||||||||
Add back amortization of goodwill | — | — | — | 0.50 | 0.17 | |||||||||||||||
Adjusted earnings (loss) per share | $ | 2.08 | $ | 0.66 | $ | (4.01 | ) | $ | 1.41 | $ | 1.46 | |||||||||
Diluted earnings per share | ||||||||||||||||||||
Continuing operations | $ | 1.70 | $ | 0.68 | $ | 0.84 | $ | 1.38 | $ | 1.25 | ||||||||||
Discontinued operations | 0.34 | (0.03 | ) | (4.83 | ) | (0.47 | ) | 0.02 | ||||||||||||
Net income (loss) | $ | 2.04 | $ | 0.65 | $ | (3.99 | ) | $ | 0.91 | $ | 1.27 | |||||||||
Add back amortization of goodwill | — | — | — | 0.50 | 0.17 | |||||||||||||||
Adjusted earnings (loss) per share | $ | 2.04 | $ | 0.65 | $ | (3.99 | ) | $ | 1.41 | $ | 1.44 | |||||||||
Cash dividends declared per share | $ | 0.75 | $ | 0.75 | $ | 0.75 | $ | 0.75 | $ | 0.75 | ||||||||||
10
| (Stated in millions except per share amounts) | ||||||||||||||||||||||||||||||||||
| (Stated in millions except per share amounts) | ||||||||||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||||||||||||||
| 2004 | 20031 | 20021 | 20011 | 20001 | ||||||||||||||||||||||||||||||
SUMMARY OF FINANCIAL DATA | ||||||||||||||||||||||||||||||||||
Fixed asset additions | $ | 1,216 | $ | 872 | $ | 1,169 | $ | 1,811 | $ | 1,242 | $ | 1,593 | $ | 1,216 | $ | 872 | $ | 1,169 | $ | 1,811 | ||||||||||||||
Depreciation expense | $ | 1,007 | $ | 1,016 | $ | 1,076 | $ | 1,027 | $ | 939 | $ | 1,092 | $ | 1,007 | $ | 1,016 | $ | 1,076 | $ | 1,027 | ||||||||||||||
Avg. number of shares outstanding: | ||||||||||||||||||||||||||||||||||
Basic | 589 | 584 | 579 | 574 | 570 | 589 | 589 | 584 | 579 | 574 | ||||||||||||||||||||||||
Assuming dilution | 613 | 586 | 582 | 580 | 580 | 615 | 613 | 586 | 582 | 580 | ||||||||||||||||||||||||
ON DECEMBER 31 | ||||||||||||||||||||||||||||||||||
Net Debt 4 | $ | (1,459 | ) | $ | (4,176 | ) | $ | (5,021 | ) | $ | (5,037 | ) | $ | 422 | ||||||||||||||||||||
Net Debt 3 | $ | 532 | $ | 1,459 | $ | 4,176 | $ | 5,021 | $ | 5,037 | ||||||||||||||||||||||||
Working capital | $ | 2,328 | $ | 1,554 | $ | 735 | $ | 1,487 | $ | 3,502 | $ | 3,039 | $ | 2,359 | $ | 3,574 | $ | 735 | $ | 1,487 | ||||||||||||||
Total assets | $ | 16,038 | $ | 20,041 | $ | 19,435 | $ | 22,326 | $ | 17,173 | $ | 18,077 | $ | 16,001 | $ | 20,041 | $ | 19,435 | $ | 22,326 | ||||||||||||||
Long-term debt | $ | 3,944 | $ | 6,097 | $ | 6,029 | $ | 6,216 | $ | 3,573 | $ | 3,591 | $ | 3,944 | $ | 6,097 | $ | 6,029 | $ | 6,216 | ||||||||||||||
Stockholders’ equity | $ | 6,117 | $ | 5,881 | $ | 5,606 | $ | 8,378 | $ | 8,295 | $ | 7,592 | $ | 6,117 | $ | 5,881 | $ | 5,606 | $ | 8,378 | ||||||||||||||
Number of employees continuing operations | 52,500 | 51,000 | 51,000 | 53,000 | 53,000 | 60,000 | 52,500 | 51,000 | 51,000 | 53,000 | ||||||||||||||||||||||||
| 1. | Excludes amounts which are either included in |
| 2. |
| For details of Charges and Credits and the related income taxes and minority interest, see |
| As defined on page |
Part II, Item 7
11
The following discussion of resultsand analysis contains forward-looking statements including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and resources. Such forward-looking statements should be read in conjunction with the Consolidated Financial Statements.our disclosures under “Item 1A. Risk Factors” beginning on page 6 of this Report.
2004 SummaryExecutive Overview
Schlumberger consists of two business segments: Oilfield Services and WesternGeco.
Oilfield Services experienced strong growth in 2005 with a sharp rise in operating margins due to increasing activity, strong pricing momentum and accelerated technology introduction. Oil prices ended the year 41% higher than at the beginning of the year, while natural gas prices surged 82% over the same period.
In the United States, the absence of a meaningful increase in natural gas production supported strong natural gas prices in 2005, which averaged more than $9 per MMBtu in 2005. Additionally, the devastating hurricane season resulted in a severe disruption of the already stretched United States oil industry. Eastern Hemisphere activity grew significantly but is still at a fairly early stage with the supply response only now translating into increased exploration, development and production maintenance operations in key international areas such as Russia and the Middle East. Internationally, projects ramped up throughout the year, supporting a steady growth in 2005. Growing levels of activity and increasing preparations for new projects in the Eastern Hemisphere indicate a trend that is expected to continue in 2006.
WesternGeco delivered excellent results. Demand for seismic acquisition, principally marine, as well as multiclient data indicate a strong renewed interest in exploration. The year markedcontinued acceptance of Q technology resulted in impressive growth, which is expected to continue in 2006.
In Russia, the transformationcooperation and confidence established during the initial period of Schlumberger into a pureour minority holding of PetroAlliance Services Company Limited, Russia’s largest independent oilfield services company, withhas confirmed our belief that the company will play a clear record for growth and technology leadership. Income from continuing operations before income taxes and minority interest was $1.3 billionmajor role in 2004 compared to $457 million in 2003. The 2004 and 2003 results include pretax charges of $243 million and $638 million, respectively, which are described in detail on pages 22 to 25. The growth in earnings from continuing operations far exceeded the 15% growth in revenue.
Oilfield Services reached new revenue and pretax operating income records of $10.24 billion and $1.80 billion, respectively. Strong growth was experienced in all Areas, but most notably in North America, Middle East and Asia. Pretax return on sales for the full year was 17.6%, considerably higher than the 15% objective set in March of 2003.
WesternGeco returned to profitability with pretax operating income of $124 million versus a loss of $20 million in 2003. Our approach has been threefold: to bring capacity and cost down to appropriate levels, to take a cautious approach to new investment in the data library, and to continue aggressive introduction of Q* technology. The keys to success are industry discipline in managing capacity but above all clear demonstration of the differentiation in Q-technology. Q-revenue more than doubled from $79 million in 2003 to $162 million in 2004.
Our divestiture program of non-Oilfield businesses is now complete. During 2004, we finalized the sale of SchlumbergerSema, completed the initial public offering of Axalto, and divested of substantially all remaining non-oilfield businesses. As a result net debt fell below $1.5 billion at December 31, 2004 and is at a level consistent with the longer-term capital structure of Schlumberger.
In May 2004,our continued expansion. Schlumberger completed the acquisition of a 26%acquired an additional 25% equity stake in PetroAlliance Russia’s largest independent oilfield service company. A further 25% stakein 2005, bringing Schlumberger’s total ownership to 51%. Schlumberger initially acquired 26% in the second quarter of 2004. The acquisition of the remaining 49% of the company is expected to be acquiredcompleted in 2006, subject to performance requirements, regulatory approval, and other customary provisions.
Recent seismic, logging and well testing contracts show a renewed interest in exploration in both new and existing areas. This shift, together with increasing customer spending, tightening service industry resources, and faster deployment of new technologies creates an environment in which Schlumberger is well positioned.
Ongoing supply constraints and resilient demand growth support high-energy prices with OPEC giving the first halfmarket strong signals that it considers the $50 to $70 range per barrel for WTI (West Texas Intermediate) to be appropriate. Limited spare production capacity combined with geopolitical tensions that threaten supply availability provide upside potential for oil prices. Supply problems may prove even more severe for natural gas as accelerated production decline rates, and limited ability to increase drilling activity, continue to challenge United States and Canadian gas producers.
IEA (International Energy Agency) projections show oil demand growth continuing at an annual rate of about 1.8 million barrels per day to 2 million barrels per day through to 2010 to reach a total of approximately 92.5 million barrels per day. This represents an increase of nearly 9 million barrels per day over demand in 2005. WeThe IEA also finalizedshow supply capacity growth just matching demand growth in 2007, 2008 and 2010, with capacity growth managing to increase slightly faster than demand in 2006 and 2009. In short, based on the acquisitionIEA numbers, the degree of SGK, a joint venture with which we have been associated with forspare upstream capacity is not expected to increase significantly before the past four years in Russia. The market potential in Russia is substantial, and this typeend of investment will benefit Schlumberger and the Russian oil industry by facilitating growth through access to technology.decade.
Part II, Item 7
Several trends will define activity in 2006. First, rig count increases will be largely limited to onshore work as the global offshore rig market will remain constrained until new builds are mobilized beyond 2006. Second, shortages of people and equipment across the industry are likely to result in cost inflation and project delays, placing a high premium on reliable suppliers of both technology and skilled personnel. Third, the technology that can improve the productivity of the limited base of skilled personnel will be in high demand. This is clearly demonstrated both by the success of Schlumberger Petrel* seismic-to-simulation software tools, and by growing acceptance of the remote monitoring of job execution to achieve superior performance from technology. Fourth, exploration activity, where Schlumberger has an unmatched portfolio of services, is expected to show a large increase in 2006 and to continue for a number of years.
The industry has already recognized the need for an unprecedented effort to increase secure hydrocarbon supply. Plans are being put in place to achieve this, but it will take several years of sustained activity to develop the new production that can reliably replace today’s supply, much of which was developed during the up-cycle of the 1970s and 1980s. In June 2004, we outlined our growth strategy with a particular focus on the production-oriented environment. Newaddition, this new supply will generally come from smaller reservoirs and increased investment in additional production capacity, largely in the international and deepwater marketsmore hostile environments where Schlumberger is strongest,
12
coupled withuniquely placed to meet the requirement to prolong production from existing reservoirs, will be reflected in higher levels of oilfield service activity for many years to come. Seventy percent of today’s oil production comes from fields that have been in production for more than thirty years. As these fields continue to age, their performance declines and remedial actions are required to maintain their output. The significance of this can be seen from the fact that as much as three-quarters of today’s investment in the upstream industry is directed at such activity–with the remaining quarter being spent on developing new sources of oil for the future. There are three key avenues that Schlumberger intends to exploit in addition to maintaining our leading position in exploration and development technology for harsh and complex environments.
First, Schlumberger already has broad geographical spread. However, our strong positions in the strategically important areas for new production in the Middle East, the Caspian and in deepwater regions provide a unique growth opportunity. Schlumberger sees the largest opportunity to be in Russia as well as to some extent in China.
The second avenue for growth is through technology, both developed internally and acquired externally. A wide range of internally developed products and services has created a portfolio targeted at growth in the production-oriented market. Schlumberger’s research and engineering expenditures have been relatively constant while the rate of introduction of new products and services is accelerating. We consider complementary technology acquisition with subsequent enhancement and integration into our portfolio to be an on-going feature of our future growth.
The third avenue of growth for Schlumberger will be our ability to perform reservoir-oriented project management. Conceived largely as a well construction business, and confirmed by successful execution of projects such as Burgos in Mexico, Integrated Project Management (IPM) is now developing more and more expertise in the execution of projects designed to boost production in mature areas.
Early in 2004, we set a number of new financial goals for the Company. These included the anticipation that the compound annual growth rate in revenue would be in double digits throughout the remainder of the decade - although such growth may not be linear as the industry will remain to some extent cyclical; an after-tax return-on-sales target, before minority interests, of 15% -including WesternGeco; and a target return on capital employed consistently in the upper teens.
challenge.
The following discussion and analysis of results of operations should be read in conjunction with theConsolidated Financial Statements.
| (Stated in millions) | |||||||||||||||||||||||||||||
| (Stated in millions) | |||||||||||||||||||||||||||||
| 2004 | 2003 | % Change | 2005 | 2004 | % Change | 2004 | 2003 | % Change | |||||||||||||||||||||
OILFIELD SERVICES | |||||||||||||||||||||||||||||
Operating Revenue | $ | 10,239 | $ | 8,823 | 16 | % | $ | 12,648 | $ | 10,239 | 24 | % | $ | 10,239 | $ | 8,823 | 16 | % | |||||||||||
Pretax Segment Income1 | $ | 1,801 | $ | 1,537 | 17 | % | |||||||||||||||||||||||
Pretax Segment Income | $ | 2,805 | $ | 1,801 | 56 | % | $ | 1,801 | $ | 1,537 | 17 | % | |||||||||||||||||
WESTERNGECO | |||||||||||||||||||||||||||||
Operating Revenue | $ | 1,238 | $ | 1,183 | 5 | % | $ | 1,662 | $ | 1,238 | 34 | % | $ | 1,238 | $ | 1,183 | 5 | % | |||||||||||
Pretax Segment Income1 | $ | 124 | $ | (20 | ) | — | % | ||||||||||||||||||||||
Pretax Segment Income | $ | 317 | $ | 124 | 155 | % | $ | 124 | $ | (20 | ) | — | % | ||||||||||||||||
Pretax segment income represents the business segments’ income before taxes and minority interest. Pretax segment income excludes corporate expenses, interest income, interest expense, amortization of certain intangibles, interest on post-retirement benefits, stock-based compensation costs and the Charges and Credits described in detail in Note 4 to theConsolidated Financial Statements, as these items are not allocated to the segments.
Oilfield Services
As2005 Results
Revenue of $12.65 billion increased 24% in 2005 versus 2004. Both Latin America and Europe/CIS/Africa increased 27%, Middle East & Asia increased 22% and North America increased 21%. The strong activity levels around the world reflected the growing response to the current narrow margin of excess production capacity.
Pretax operating income of $2.81 billion in 2005 was 56% higher than in 2004 demonstrating high demand for oilfield services and accelerating technology delivery. Both higher activity and stronger pricing contributed to the sharp increase in pretax operating margins that strengthened across all Oilfield Services geographical areas.
Pricing showed strong improvement in North America and continued to make excellent progress internationally. Customer concern over the availability of certain services and products coupled with recognition of elements of cost inflation has led to inclusion of price-escalation clauses in longer-term contracts.
Activity increased universally, with the largest growth recorded in the GeoMarkets in Canada; US Land; Peru/Colombia/Ecuador; Russia; Nigeria; Australasia; Saudi Arabia; and the Arabian Gulf. Both organic growth and acquisitions contributed to the more than 50% revenue growth in Russia in 2005 versus 2004.
Part II, Item 7
Demand for all Technologies increased sharply, but particularly for Well Services and Well Completions & Productivity services. Technology introduction accelerated during the year. The Scope* family of Drilling & Measurements services for improved drilling performance and enhanced formation evaluation, met growing acceptance as customers realized step changes in well-placement accuracy in several geographical areas. During the year progressed, oil prices continuedSchlumberger also launched the Scanner Family* of wireline logging services, a revolutionary suite of downhole rock and fluid characterization measurements.
North America
Revenue of $3.76 billion increased 21% over 2004 mainly driven by Canada and US Land, which benefited from strong Well Services and Drilling & Measurements activity coupled with strong pricing improvements.
The Canada GeoMarket experienced strong equipment and personnel utilization, higher pricing and increased demand for high-tier services.
The robust growth in US Land resulted from the combination of positive trends in activity and favorable pricing.
During the third quarter, activity was severely disrupted in the Gulf of Mexico with more than 25 days of operating time lost due to climb, rising from $32.50 per barrel on January 1stthe disastrous hurricane season. Damage sustained by production platforms and mobile offshore drilling units led to $38 per barrel atreduced activity throughout the endthird quarter with some lingering effect in the fourth quarter.
Pretax operating income of June$933 million was 80% higher than in 2004 led by US Land and Canada. The steep growth was primarily due to double-digit price increases, particularly for Well Services, Wireline and Drilling & Measurements technologies. New technology introduction and continuing activity growth also contributed to these results. The severe hurricane season in the Gulf of Mexico had an estimated impact of approximately $70 million in lost revenue, and $52 million in lost pretax operating income.
Latin America
Revenue of $2.21 billion in 2005 increased 27% over 2004 with the highest growth recorded in the Peru/Colombia/Ecuador and Latin America South GeoMarkets.
Mexico recorded significant revenue growth, mainly due to a recordhigh number of over $55 per barrelwells being completed on the Burgos project, coupled with an overall rise in late October. Despite oil tradingthird-party managed services revenue.
Activity in Venezuela increased primarily from IPM and Well Services operations. During the year, continued progress was highlighted with the signing of a short-term renewable agreement with PDVSA in early 2005 for operations on average some $15 per barrel higher in 2004 than in 2003, robust world demandthe PRISA project. Discussions regarding the settlement of certain outstanding receivables were still on going at year-end.
The Peru/Colombia/Ecuador GeoMarket contributed significantly to the revenue growth due to the start of over 2 million barrels per day continued throughoutseveral new Drilling & Measurements contracts for the second half of 2004. Consumption, especiallyexpanding customer base.
The growth in the USLatin America South GeoMarket was primarily driven by increased IPM activity, although Brazil experienced strong activity from the deployment of Drilling & Measurements and China, pushed demandWireline technologies.
Pretax operating income of $330 million in 2005 increased 49% versus 2004. This strong increase in operating income resulted mainly from an improved drilling environment in Venezuela coupled with stronger operating efficiencies in Well Services and Drilling & Measurements services and across all GeoMarkets, particularly in the Peru/Colombia/Ecuador GeoMarket.
Europe/CIS/Africa
Revenue of $3.53 billion in 2005 increased 27% over 2004 with the highest growth recorded in the Russia and Nigeria GeoMarkets.
Part II, Item 7
Strong revenue increases were recorded offshore Nigeria and in deepwater West Africa GeoMarket operations mainly benefiting Well Completions & Productivity, Wireline, and Drilling & Measurements with the rapid market acceptance of Scope technology.
The CIS reached a new revenue record at $1.17 billion, an increase of 42% over 2004. The significant increase in revenue in Russia was due to an average 82.5 million barrels per day in 2004, a year-on-yearcombination of organic growth, of 3.3% and the sharpest growth rate since 1976. Supplyimpact of the acquisitions of PetroAlliance and the Siberian Geophysical Company. Organic growth in 2004Russia was restraineddriven by a numberrecovery in activity for Yuganskneftegaz during the first quarter, increased demand for stimulation and cementing services, strengthening of factors that, when added together resulted in an extremely tight supply-demand balance that pushed prices higher than prior year forecasts. The factors that created this tight environment are expected to remainIPM operations, and robust uptake of new technology.
Pretax operating income of $704 million in 2005 includingincreased 57% compared to 2004. Nigeria and West Africa contributed significantly due to increased activity, pricing improvements, and accelerated technology deployment. Operating income in the North Africa GeoMarket also increased markedly due to the growing presence of international oil companies in the region. The North Sea GeoMarket was a strong oilcontributor to operating income through increased drilling activity and strong demand geopolitical tension, a stretched refining system, relatively low crudefor production technologies from Well Services and product inventories, limitedWireline.
Middle East & Asia
Revenue of $3.03 billion in 2005 increased 22% over 2004 with the highest growth recorded in the Australasia, Brunei/Malaysia/Philippines, Saudi Arabia and Gulf GeoMarkets.
The importance of the Middle East in responding to the current lack of spare production capacity is reflected in the strong activity plans that were implemented in the region in 2005. The marked revenue growth seen in the Saudi Arabia GeoMarket was principally due to the increase in rig count as Saudi Aramco continued to increase activity in line with their announced spending plans.
East Africa & East Mediterranean GeoMarket growth was mainly due to the expanded market for Drilling & Measurements and the start of a new Wireline campaign. In the Gulf GeoMarket, the start-up of Wireline services for Petroleum Development Oman (PDO) and burgeoning gas activity in Qatar also contributed to the revenue growth. The Arabian, the Gulf and East Africa & East Mediterranean GeoMarkets recorded revenue increases of more than 30% and operating income growth of more than 40%.
The solid contribution from the Brunei/Malaysia/Philippines GeoMarket was mainly due to higher customer expenditures, improved pricing, and a weak US dollar. Accordingly, most forecasts call for some earlymove by several operators into increased deepwater exploration uniquely benefiting Schlumberger technologies.
Activity in China strengthened throughout the year as a result of accelerated adoption of advanced Drilling & Measurements and Wireline technologies.
Australasia experienced a robust revenue growth rate mainly due to rising development activity in offshore Australia combined with growing land-based activity in New Zealand.
Pretax operating income of $871 million in 2005 softeningincreased 34% compared to 2004. The steady increase in prices after a relatively mild winter followed by average oil prices at or slightly above 2004 levels. The main risksoperating income and operating margins throughout the year was due to this scenario remain a dramatic slowingactivity improvement across all GeoMarkets and significant price increases—principally in Drilling & Measurements, Well Completions & Productivity, and Wireline Technologies—coupled with the start up of world economic growth and supply side disruption.
13
Upstream exploration and production (E&P) spending trended higher in 2004, up an estimated 13% over 2003. International spending, accounting for over 70%new projects throughout the Area. Improved results of the total, sawBokor integrated project in the largest gain of 14%, while North America was up 11%. Exploration spending remained flat in 2004 while development and production sawBrunei/Malaysia/Philippines GeoMarket also contributed to the majority of the increase as operators focused on maintaining production in aging fields. Worldwide rig counts were up 13% over 2003.
The outlook for 2005 remains robust with the industry now clearly focused on the need to build additional supply capacity for both oil and gas. This is evidenced by increased new field development plans, as well as unprecedented efforts to increase production and recovery from existing reservoirs. Exploration, especially in challenging environments such as deep water, should see a substantial increase in 2005. Strong market fundamentals, our extensive technology portfolio and unique global workforce make us ideally placed to grow in this environment.operating income growth.
2004 Results
Revenue of $10.24 billion increased 16% in 2004 versus 2003. North America increased 18%, Middle East & Asia increased 19%, and Latin America increased 21%. Europe/CIS/West Africa was up by 4%. Pretax operating income of $1.80 billion in 2004 was 17% higher than in 2003.
Part II, Item 7
Activity increased in almost all regions with the largest growth recorded in the GeoMarkets in India; Mexico; Russia; East Africa and the Eastern Mediterranean; and the Caspian. Russia continued to make impressive progress with growth exceeding our expectations despite the absence of any activity for YuganskneftegasYuganskneftegaz at the end of the year.
Demand for all technology servicesTechnologies increased, but particularly for Drilling & Measurements technologies including the PowerDrive* and newly introduced PowerV* rotary steerablerotary-steerable systems as well as Wireline ABC* Analysis Behind Casing and PressureXpressPressureXpress* services. Increased demand for Well Services production technologies also contributed significantly to the growth. These technologies included the successful launch of the PowerCLEAN* system, an integrated solution for optimizing production through wellbore fill removal using coiled tubing. The Well Completions & Productivity technology servicetechnologies also showed strong growth for production-based technologiestechnology services, while IPM activity continued its expansion. The rate of new technology introductions is expected to accelerate over the coming two-year period.
Offshore and deepwater activity in India utilizing Wireline, Drilling & Measurements and Well Completions & Productivity technologies continued to drive significant year-on-year growth. Growth in India was supported by the award of a completion sales tender for subsurface safety valves and a three-year contract for wireline logging on onshore fields for ONGC valued at more than $125 million.
During the year Schlumberger opened a Technology Hub on the campus of the Gubkin Russian State University of Oil and Gas, Russia’s leading oil and gas educational facility.establishment. The Hub complements other Schlumberger research and engineering activities in Russia.
Shell International Exploration and Production BV and Schlumberger Information Solutions establishedformed an alliance for the research and development of next generationnext-generation Smart Fields™Fields™ hydrocarbon development solutions.
North America
Revenue of $3.11 billion increased 18% over 2003 led principally by Canada and US Land, which benefited from the strong performance of most technology services,Technologies, coupled with pricing improvements particularly for Well Services.
Growth in Canada was due to increased activity and substantially higher pricing.
US Land delivered robust revenue growth primarily due to continued favorable oil and gas industry dynamics, the expansion of the unconventional gas market, an improved pricing environment as a result of tighter resource availability, and strong overall market demand combined with increasing demand for ABC* Analysis Behind CasingABC technologies, and Drilling & Measurements PowerDrive rotary steerablerotary-steerable systems. These technology advances are demonstrating value and are helping drive activity while enabling price increases and efficiency gains.
14
Pretax operating income of $519 million was 42% higher than in 2003 due mainly to increased operating leverage in US Land, with double-digit price improvements in Wireline and Well Services and Wireline Technologies over 2003 averages. In Canada, increased activity coupled with sustained pricing improvements, and the favorable exchange rate effect led to a notable improvement in operating income.
At the end of the year, the technology component of turnkey service revenue in the Gulf of Mexico was evaluated against our objectives but proved insufficient to outweigh the risk associated with the turnkey drilling business model. As a result, the decision was made to exit the activity.
Latin America
Revenue of $1.75 billion grew 21% over 2003 as all the GeoMarkets, except Venezuela, posted revenue increases. Record revenue in Mexico was mainly due to PEMEX drilling activity coupled with higher levels of IPM activity.
Part II, Item 7
Increasing demand for Integrated Project ManagementIPM services in Argentina, an increase in Wireline activity associated with the Peruvian jungle operations, and growing demand for rotary steerable systems in Brazil also contributed to the revenue growth.
In Venezuela, revenue decreased slightly on lower activity with PDVSA due to ongoing contract negotiation on certain integrated projects.
Pretax operating income of $221 million was flat over 2003. The substantial revenue growth did not materialize into higher operating income mainly because of a larger contribution of Schlumberger-managed third-party services on IPM projects in Mexico as well as an unfavorable revenue mix in Mexico. Additionally, throughout the year, certain barges in West Venezuela were partially idled while contractual negotiations continued with PDVSA.
A key contract award during the fourth quarter of 2004 included a new 350-well IPM contract in the Burgos Basin for PEMEX in Mexico. The multi-year contract value is estimated at $550 million and will include drilling and completion work for development and appraisal gas wells.
Europe/CIS/West Africa
Revenue of $2.79 billion increased 7% over 2003 mainly due to Russia, the Caspian and West Africa with gains recorded in all technology servicesTechnologies led by Drilling & Measurements and Well Services.
CIS reached a new revenue record atreached $825 million, a 33% increase over 2003. Activity was particularly sustained in Russia mainly due to the continued expansion of the customer base and the deployment of new production-related technologies. The revenue growth was tempered by the halt of activities for YuganskneftegasYuganskneftegaz in Russia in the fourth quarter. However, successful redeployment of the equipment previously working for YuganskneftegasYuganskneftegaz was completed by the end of the year.
West Africa continued to deliver robust performance achieving record activity levels mainly due to the development of deepwater projects combined with price increases through the introduction of new services and increasing demand for Well Services and Well Completions & Productivity technology services.
technologies.
Pretax operating income of $447 million declined 3% over 2003 mainly due to persistent union strikes in Norway, redeployment costs and associated decreased operating efficiency in Russia, weak results in North Africa, and the appreciation of local currencies against the US dollar. These were partially offset by the continued strengthening of activity in Continental Europe and the Caspian.
15
In Russia, Sibneft awarded Schlumberger a contract for more than $100 million to provide well construction and stimulation services in Western Siberia.
Middle East & Asia
Revenue in 2004 reached a record of $2.48 billion, increasing 19% over 2003. The GeoMarkets in the Middle East, Malaysia and India primarily drove the growth. Activity in Saudi Arabia was focused on increasing production capacity, which resulted in higher levels of drilling activity throughout the year. This trend is expected to continue in 2005. India reached record revenue with the ramp-up in deepwater activity for ONGC and deepwater exploration activity for Reliance Industries Ltd. Activity in Qatar continued to increase due to ongoing gas development projects in the North Field. Also contributing to the record revenue level was the start of a new fracturing campaign in Oman. Demand for Well Completions & Productivity technologies was particularly strong, mainly in the Gulf from projects with RasGas, in Saudi Arabia from the commissioning of the Abu Safah project, and in Malaysia from higher testing activities and artificial lift sales.
Pretax operating income of $649 million increased 27% over 2003 primarily driven by India, due to a substantial increase in deepwater activity combined with strong technology deployment, the ramp up of favorable projects in the Gulf, improved pricing on contract renewals, and new technology introductions.
Key technology solutions that were deployed included the CHDT* Cased Hole Dynamic Tester tool, part of the suite of ABC Analysis Behind Casing technology services, was used to identify a high-pressured zone in a depleted reservoir in China; to acquire pressures and fluid samples in Saudi Arabia and Abu Dhabi; and to acquire samples and pressure readings in Malaysia.
Part II, Item 7
In the Gulf, demonstrated service quality and the introduction of new technology services led to the award of major contracts in Qatar and Oman. These included a $320 million, multi-year wireline and tubing conveyed perforating contract by Petroleum Development Oman (PDO)PDO for their North and South operations.
2003WesternGeco
2005 Results
Revenue of $8.8Operating revenue for 2005 was $1.66 billion increased 8% in 2003 versus 2002 led by North America with an increase of 14%; followed by Latin America and Middle East & Asia, which both increased 9%; and Europe/CIS/West Africa, which was up 4%. Pretax operating income of $1.54$1.24 billion in 20032004. This strong performance was 20% higher than in 2002, primarily duemainly attributable to strong customer demand resulting from increased E&P expenditures and customerthe continued market acceptance of new technologies. Overhead cost savingsQ-Technology*, a higher level of $67Multiclient sales and improved operating leverage in Marine acquisition.
Backlog reached an all-time high of $790 million generated from restructuring and downsizing efforts, principally in Europe/CIS/West Africa and North & South America, also contributed to the increased profitability during the year.
Oilfield Services began the year with relatively flat revenue in the first quarter, then achieved modest, but continuous growth over the following three quarters due to new contracts, the introduction of new technologies, and increased demand for Integrated Project Management. The results were positively impacted by an upturn in natural gas drilling in North America, and increased activity in Mexico, Russia and the Middle East, partially offset by a nationwide strike in Venezuela and unrest in Nigeria.
All technology product lines helped drive revenue growth. Well Services and Drilling & Measurements’ record levels of revenue contributed to more than half of the increase in Oilfield Services revenue. Data & Consulting services drew the award of several contracts for reservoir modeling, field development planning, and production optimization. Integrated Project Management experienced high activity levels principally fueled by Latin America.
North America
North America revenue of $2.6 billion increased 14% versus 2002. The growth in revenue was mainly due to increased activity in US Land, as well as Canada. Both markets were driven by strong commodity prices, which, in turn, were caused by the record low gas storage levels at the end of 2005 compared to $670 million at the 2003 drawdown season. This growth was not mirroredend of last year, reflecting increasing exploration and production budgets for 2006.
Q-Technology revenues reached $399 million in 2005, representing 24% of total revenue in 2005, more than doubling the Gulf of Mexico where activity was essentially flat year-on-year.
16
Pretax operating income of $365$162 million increased 33% over 2002 primarily due to a beneficial fall-through resulting from improved equipment utilizationachieved in US Land following asset rationalization and cost containment. Increased demand for Drilling & Measurements, cased hole wireline and hydraulic fracturing solutions, related to increased complexity in developing new gas reserves in US Land, also contributed to profitability improvement.
Latin America
Latin America revenue of $1.4 billion increased 9% versus 2002 primarily due to substantial increases in Mexico, Brazil and Argentina, partially offset by a significant decline in Venezuela. Large-scale project management contracts substantially accounted for the growth in activity in Mexico. Growth in Brazil was driven by a strong increase in Petrobras exploration activity, and Argentina benefited from the high oil price.
The political turmoil in the early part2004. Utilization of the year substantially impacted results in Venezuela, however the focus on restoring production favorably drove the revenue in the latter half of the year. The increase in E&P spending in Mexico was driven by the compelling need to satisfy the domestic demand for natural gas, increase the light oil production and ramp-up the oil production potential. Key contracts that contributed to revenue growth included project management of a four-year, $500 million integrated oilfield services project which represents the most significant oil development project in Mexico in the last 20 years.
Pretax operating income of $221 million was up 31% year-on-year with all areas excluding Venezuela contributing to improved profitability. There were record levels of Integrated Project Management contracts in Mexico and positive fall-through on incremental revenue in Argentina and Brazil.
Europe/CIS/West Africa
Revenue of $2.6 billion increased 4% over 2002, primarily in Russia due to growth in E&P spending and continued expansion of the addressable market, which drove increased fracturing activity, high sales of artificial lift pumps, and the adoption of more advanced drilling technologies. CISfive Q-equipped vessels reached a record revenue level of $629 million, 22% higher than 2002. An increase in the number of E&P companies entering the development phase of deepwater projects in West Africa during the second half of 2003 also contributed to overall activity improvement in the Area, principally in Well Completions & Productivity and Well Services technologies. These results were partially offset by lower exploration activity by the major oil companies in the North Sea and by production shutdowns in the Western Niger delta in Nigeria due to socio-political unrest.
Pretax operating income of $460 million increased 20% over 2002 primarily due to cost savings generated at the beginning of the year, as well as increased activities in West Africa due to deepwater activities moving into a more lucrative development phase.
Middle East & Asia
Revenue of $2.1 billion increased 9% over 2002 with more than half the growth coming from Saudi Arabia/Kuwait, Egypt and Indonesia. Despite geopolitical uncertainty in the period leading up to the war in Iraq and relative softness in Asia principally caused by the SARS outbreak, revenue showed marked improvement primarily due to higher demand for Drilling & Measurements, Wireline and Well Completion & Productivity technologies in Egypt, Saudi Arabia/Kuwait and Indonesia partially offset by reduced activity in Malaysia /Brunei/Philippines due to the suspension of planned deepwater development work resulting from the deepwater acreage dispute between Malaysia and Brunei.
17
Pretax operating income of $509 million increased 12%, primarily due to the operating leverage on increased revenue across most GeoMarkets, principally caused by increased activity in Indonesia and stimulation activity and artificial lift sales in East Africa.
2002 Results
Revenue for 2002 was $8.2 billion versus $8.4 billion in 2001 reflecting reduced activity in North America and Latin America, which was partially mitigated by higher activity in Europe/CIS/W. Africa and the Middle East & Asia. Pretax operating income of $1.3 billion decreased 19% primarily from reduced margins in Wireline and Well Services as activity declined in North America.
A sharp fall in revenue at the beginning of 2002 reflected declining activity levels in North America, which remained depressed for the remainder of the year, together with political and economic uncertainty in Latin America. In the second and third quarters, robust activity in Europe/CIS/W. Africa, and signs of a possible recovery in Asia, mitigated the effects of low North American drilling levels resulting in increased revenue. However, this trend was short-lived as slower activity outside North America, due mainly to seasonal influences, coupled with budget cuts, resulted in lower fourth quarter revenue.
From a technology standpoint, the strongest performer was Well Completions & Productivity where acquisitions, testing, advanced completions systems and artificial lift technology showed market share gains.
During 2002, Schlumberger acquired A. Comeau & Associates Limited, a leading provider of electrical engineering products and services for artificially lifted wells. This addition, combined with the successful integration of Sensa and Phoenix technologies into the Schlumberger Artificial Lift services portfolio, contributed to higher sales in 2002, particularly in the Eastern Hemisphere. The Drilling & Measurements technology service also recorded solid revenue growth fuelled largely by the continued penetration of the PowerDrive475* rotary steerable system into new GeoMarkets.
Schlumberger made two further acquisitions during 2002 to bolster its real-time reservoir management suite of services. In January, Schlumberger acquired Norwegian-based Inside Reality AS, providing new 3D virtual reality systems that create a unique and powerful environment for interactive well planning and real-time geosteering analysis. Schlumberger also acquired the software and services business of Technoguide AS, a leader in the reservoir modeling domain.
North America
Revenue of $2.3 billion decreased 19% versus 2001. A steep revenue decline at the outset of the year reflected a continued lackluster drilling environment and unseasonably mild weather conditions. Throughout the remainder of the year activity levels remained depressed resulting in essentially flat revenue for 2002. Other factors contributing to reduced revenue included lower non-rig related activity resulting in lower Wireline, Well Services, and Well Completions & Productivity revenue, the effects of the tropical storms in the third quarter of 2002 and a slow pick-up in Canadian activity post spring break-up in 2002.
Pretax operating income of $274 million decreased from $637 million in 2001 due to pricing pressures across all services, particularly in Well Services and Well Completions & Productivity.
Latin America
Revenue of $1.3 billion decreased 9% versus 2001. Ongoing political and economic uncertainty in the region continued to affect business conditions, particularly in Venezuela and Argentina. This particularly impacted results in the first half of the year. In sharp contrast, the second half of 2002 saw solid growth partly as a result of higher demand for Drilling & Measurements and Well Completions technologies connected to contracts in the Burgos Basin.
18
Pretax operating income of $169 million declined 8% as a result of decreased activity in Venezuela and Argentina.
Europe/CIS/West Africa
Revenue of $2.5 billion increased 17% versus 2001. Strong revenue growth was recorded in the first three quarters of 2002 reflecting increased activity levels and market share gains particularly in the Caspian and Russia GeoMarkets in respect to artificial lift and drilling technologies. The Well Completions & Productivity and Drilling & Measurements technologies recorded the strongest growth. This growth was partially mitigated by a steep revenue drop93% in the fourth quarter of 20022005. Q-Technology revenue is expected to grow by another 80% in 2006.
Multiclient sales increased 17%, to $509 million, mainly in North America due to exceptionally severe winter weather conditionsan especially strong Central Gulf of Mexico lease sale, higher sales in Asia, the Caspian, South America and West Africa—reflecting an improved exploration-spending environment. Approximately 64% of the multiclient surveys sold in 2005 had no net book value due to prior amortization of capitalized costs, compared to approximately 52% in 2004 and only 7.7% of the revenue related to surveys that were impaired in 2003 and 2002.
Marine activity grew 63% mainly from strong activity in the North Sea, Asia, India and Russia that affected all services. In addition, operator budget cutsthe Gulf of Mexico, combined with higher vessel utilization, steady price increases and more favorable contractual terms regarding risk sharing with customers for downtime.
Land activity increased 31% mainly in the Nigeria GeoMarketMiddle East reflecting higher activity in Saudi Arabia, Algeria and refocused investment decisionsKuwait. The Land seismic crew count increased from 18 at the end of 2004 to 24 at the end of 2005.
Data Processing increased 14% reflecting higher acquisition volumes, higher levels of Q-processing, and higher activity in the UK contributed to lower fourth quarter revenue.
South America and Russia.
Pretax operating income was $383reached $317 million in 2005 compared to $385$124 million in 2001, with the very slight decrease2004 due to softeningaccelerating demand for Q-Marine* coupled with improved pricing and increased vessel utilization, together with strong Multiclient sales.
Driven by Q-Marine demand, WesternGeco announced plans to convert two more vessels to Q-Technology standards. The first, theWestern Regent, was completed and began operations in pricing towardsJune of 2005, while the end of the year and restructuring in the regionsecond,Western Monarch, is expected to reduce support infrastructure to match slowing activity levels.
Middle East & Asia
Revenue of $1.9 billion increased 8% versus 2001. After a decline at the beginning of 2002 resulting from exceptional artificial lift sales at the end of 2001, the Asian market showed signs of recovery highlighted by strong revenue growthenter service in the second quarter. Over the year, the India and Malaysia/Brunei/Philippines GeoMarkets recorded the strongest growth due to increased activity in these countries. In addition, the Wireline and Well Services technologies posted the highest growth. This was partly offset by a slowdown in activity in the second halfquarter of 2002 due to a number of major projects nearing completion and lower equipment sales.
Pretax operating income of $453 million was up 9% versus 2001.
WesternGeco2006.
2004 Results
The revenue increase of 5% to $1.24 billion in 2004 from $1.18 billion in 2003 was mainly attributable to the successful expansion of Q-Technology together with strong Multiclient sales. Q-revenueQ revenues grew from $79 million in 2003 to $162 million in 2004, with a similar growth rate expected in 2005.
2004.
Multiclient sales increased 24%, to $436 million, mainly in the Gulf of Mexico driven by the renewed interest in the library resulting from a higher oil price environment and an increasing number of blocks in the Gulf of Mexico coming up for renewal. Approximately 47%52% of the multiclient surveys sold in 2004 had no net book value due to prior amortization of capitalized costs and only 5% of the revenue related to surveys soldthat were impaired in 2003 and 2002.
Land activity decreased 8% reflecting the completion of some projects in Malaysia and the Middle East, and the shutdown of several crews active in the previous year in Alaska, Mexico and West Africa.
Part II, Item 7
Marine activity declined 3% mainly as a result of the decision to reduce the number of vessels in the WesternGeco fleet, coupled with adverse weather in Latin America, lower activity in the Caspian and a high number of vessel transits at the end of the year. Marine activity in the first half of 2005 is expected to recover with higher vessel utilization and improved pricing.
Data Processing increased 6% reflecting higher acquisition volumes, higher levels of Q-processing,Q processing, and robust third-party work, coupled with improved operational efficiencies.
Pretax operating income reached $124 million in 2004 compared to a loss of $20 million in 2003 due to lower amortization cost following the impairments of the Multiclient library in 2003 and 2002 coupled with savings related to restructuring measures taken in 2003, accelerating demand for reservoir-focused Q-Marine activity together with strong Multiclient sales. Data Processing also contributed to this improvement due to better operating efficiency.
19
The WesternGeco backlog at the end of the year reached $670 million, increasing 64% over 2003, of which 86% areis committed over the next year.
Driven by Q-Marine vessel utilization, WesternGeco decided to convert the Western Regent vessel to Q-technology. The vessel is scheduled for deployment in the first half of 2005.
2003 Results
Revenue in 2003 was $1.2 billion versus $1.5 billion in 2002, a 20% decrease which was primarily due to lower land crew activity following the exiting of the North American Land market combined with the completion of some contracts in the Middle East. The decrease in revenue was also due to declines in Multiclient sales principally in North & South America, partially offset by increased Marine activity in Europe, CaspianInterest and the Middle East. Q-Marine continued to gain customer acceptance. The end of 2003 saw a return to traditional seasonal Multiclient revenue levels partially helped by the signing of a long-term business agreement with a major energy company that included the licensing of part of the WesternGeco data library, as well as joint R&D and training on new technology for seismic data processing.
Q-Marine continued to command significant pricing premiums as a result of the added value obtained from the delivered product, but pricing across other business segments was flat to down for conventional marine, land and data processing activity due to continued overcapacity in the industry. Q-Marine penetration continued strong, reflected by the doubling of Q-revenue year-on-year.
Pretax operating loss was $20 million versus a profit of $71 million in 2002 (excluding Multiclient impairment and other charges in both years described on page 24) mainly due to significantly higher Multiclient amortization charges as a result of lower estimated future revenues. The lower Multiclient sales were primarily due to an overall lessening in interest in the Gulf of Mexico from the major oil companies coupled with an average price reduction of approximately 30% during the year.
The WesternGeco backlog at the end of the year reached $408 million.
2002 Results
WesternGeco revenue of $1.5 billion decreased 13% compared to 2001, primarily due to decreased activity in North America and Europe/CIS/W. Africa, which were partially offset by increases in Latin America and the Middle East & Asia.
The seismic downturn continued throughout 2002 resulting in significantly lower activity levels, a reduction in Multiclient sales, and extreme pricing pressures on all services due to large overcapacity in the seismic industry. Significant workforce reductions were made in the fourth quarter of 2002 as a result of the decision to stop Land acquisition activities in the US lower 48 states and Canada.
Pretax operating income of $71 million fell 68% in 2002, primarily due to significantly lower Multiclient sales and decreased activities in North America coupled with Land seismic contract losses in Mexico and Marine seismic contract losses in India, both of which were related to production delays.
20
Research & Engineering
Expenditures by business segment were as follows:
| (Stated in millions) | |||||||||
| 2004 | 2003 | 2002 | |||||||
Oilfield Services | $ | 416 | $ | 375 | $ | 379 | |||
WesternGeco | 48 | 52 | 68 | ||||||
Other | 3 | 4 | 5 | ||||||
| $ | 467 | $ | 431 | $ | 452 | ||||
Interest Expense
Interest expense in 2004 of $272 million included a pretax charge of $73 million and a pretax credit of $10 million related to US interest rate swaps (seeCharges Continuing OperationsOther Income). Excluding these items, interest expense decreased $126 million in 2004 due to a $2 billion decrease in average debt balances and a decrease in the weighted average borrowing rates from 4.6% to 3.9%. The decrease in 2003 of $34 million, to $334 million, was due to a decrease in average debt balances of $185 million and a decrease in the weighted average borrowing rates from 4.9% to 4.6%. The decrease in 2002 of $17 million, to $368 million, was due to a decrease in the weighted average borrowing rates from 5.8% to 4.9%, which more than offset a $1 billion increase in average debt balances.
Interest Income
Interest and other income consisted of $56 millionthe following:
| (Stated in millions) | ||||||||||
| 2005 | 2004 | 2003 | ||||||||
Interest income | $ | 100 | $ | 56 | $ | 52 | ||||
Equity in net earnings of affiliated companies | 109 | 94 | 75 | |||||||
Gain on sale of facility in Montrouge, France1 | 163 | – | – | |||||||
Gain on sale of Hanover Compressor investment 1 | 21 | – | – | |||||||
Loss on sale of Atos Origin shares1 | – | (21 | ) | – | ||||||
Gain on sale of Hanover Compressor note1 | – | – | 32 | |||||||
Gains on sales of other assets | 15 | – | 7 | |||||||
| $ | 408 | $ | 129 | $ | 166 | |||||
| 1. | Refer to Note 4 to the Consolidated Financial Statements for details regarding these items. |
Interest Income
The average return on investment increased from 2% in 2004 was $4to 3.3% in 2005 and the average investment balance of $3.0 billion in 2005 increased $297 million higher than 2003. compared to 2004.
The average return on investment in 2004 was 2%,; a reduction of 0.4% compared to 2003, due to lower interest rates. The average investment balance in 2004 was $2.7 billion, an increase of $567 million over 2003 due to cash flow from operations and business divestiture proceeds. The 2003 interest income of $52 million was $16 million lower than 2002. The average return on investment in 2003 decreased by 1.4% to 2.4% compared to 2002 due to lower interest rates. The average investment balance in 2003 was $2.2 billion an increase of $352 million over 2002 due mainly to cash flow generated by operations and the sale of Hanover note.2003.
Equity in Net Earnings of Affiliated Companies
The equity in net earnings of affiliated companies primarily represents Schlumberger’s share of the results of its 40% interest in a drilling fluids joint venture that it operates with Smith International Inc.
Interest Expense
Excluding the impact of the net $64 million charge in 2004 related to the United States interest rate swaps (see Charges and Credits), interest expense decreased $11 million in 2005 to $197 million. The weighted average borrowing rates increased from 3.9% in 2004 to 4.4% in 2005 while the average debt balance of $4.5 billion in 2005 decreased by $865 million compared to 2004.
Part II, Item 7
Interest expense in 2004 of $272 million included a net charge of $64 million related to the United States interest rate swaps; excluding the net charge, interest expense decreased $126 million in 2004 as compared to 2003 due to a $2 billion decrease in average debt balances and a decrease in the weighted average borrowing rates from 4.6% to 3.9%.
Other
Gross margin was 21%25.8%, 16%21.2% and 18% for15.9% in 2005, 2004 2003 and 2002,2003, respectively. The chargesCharges and credits described in detailCredits noted on pages 22 to 25page 24 of this Report adversely impacted the gross margin by 1%, 5%0.4% and 3%4.7% in 2004 2003 and 2002, respectively. 2003. Charges and Credits had an insignificant impact on the 2005 gross margin. Gross margin increased from 21.2% in 2004 to 25.8% in 2005 primarily 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, research and& engineering, marketing and general and& administrative expenses are as follows:
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||
Research and engineering | 3.5 | % | 4.1 | % | 4.3 | % | ||||||||||||
Marketing | 0.4 | % | 0.5 | % | 0.7 | % | 0.3 | % | 0.4 | % | 0.5 | % | ||||||
Research and engineering | 4.1 | % | 4.3 | % | 4.7 | % | ||||||||||||
General and administrative | 3.0 | % | 3.2 | % | 3.3 | % | 2.6 | % | 3.0 | % | 3.2 | % | ||||||
Research and engineering expenditures, by segment, were as follows:
| (Stated in millions) | |||||||||
| 2005 | 2004 | 2003 | |||||||
Oilfield Services | $ | 451 | $ | 416 | $ | 375 | |||
WesternGeco | 51 | 48 | 52 | ||||||
Other | 4 | 3 | 4 | ||||||
| $ | 506 | $ | 467 | $ | 431 | ||||
Income Taxes
The reported effective tax rate, including charges Charges and Credits,was 22.9% in 2005, 20.9% in 2004 and 46.0% in 20032003. The Charges and 38.4%Credits noted on page 24 of this Report decreased the effective rate by 1.5% in 2002. The charges2005 and credits described in detail on pages 22 to 25 increased the effective tax rate by 0.4% in 2004 and 21.2% in 2003 and 13.7%2003.
The increase in 2002. the reported effective tax from 2004 to 2005 is primarily attributable to the country mix of results in Oilfield Services, which experienced a higher proportion of pretax profitability in higher-tax jurisdictions in 2005. This increase was mitigated primarily by the impact of the $163 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.
The decrease in the reported effective tax rate betweenfrom 2003 to 2004 and 2003 was primarily due to lowerthe result of a significant amount of non-tax effective charges in 2003, including $168 million of charges related to the extinguishment of European debt, as well as changes in 2003, and the country mix of earnings in WesternGeco. The rate for 2003 was higher than 2002 mainly due to the non-tax effective charges related to the extinguishment of European debt in 2003.
Part II, Item 7
21
Hanover Compressor CompanyCharges and Credits
In August 2001, Schlumberger sold its Oilfield Services worldwide gas compression activity to Hanover Compressor Company. The proceeds included 8.7 million sharesDuring each of Hanover Compressor common stock, with a value at closing of $173 million, which was restricted from sale until August 30,2005, 2004 and a $150 million long-term subordinated note maturing December 15, 2005. Schlumberger’s investment in Hanover Compressor is classified as an available-for-sale security and is included inOther Assets in theConsolidated Balance Sheet.
In the fourth quarter of 2003, Schlumberger sold the subordinated note for $177 millionrecorded significant charges and realized a pretax gain of $32 million.
At December 31, 2003 the carrying value of Schlumberger’s investment in Hanover Compressor common stock exceeded the market value. As the decline in the market value of the Stock was deemed to be “other than temporary”, Schlumberger wrote down the cost basis of its investment to the fair market value of $91.4 million at December 31, 2003 and recorded a pretax and after-tax charge of $81.2 million in accordance with generally accepted accounting principles (SFAS 115).
At December 31, 2004 the market value of Schlumberger’s investment in Hanover Compressor was $123 million.
Charges – Continuing Operations
Schlumberger recorded the following charges/credits in continuing operations:
Debt Extinguishment Costs
In June 2004, Schlumberger Technology Corporation bought backoperations. These charges and retired $351 million of its outstanding $1 billion 6.5% Notes due 2012. As a result, Schlumberger recorded a pretax charge of $37 million ($23 million after-tax),credits, which included market premium and transaction costs.
In March 2004, Schlumberger plc (SPLC) accepted tenders for the outstanding £175 million SPLC 6.50% Guaranteed Bonds due 2032. In addition, Schlumberger SA (SSA) bought back €25 million of the outstanding €274 million SSA 5.25% Guaranteed Bonds due 2008 and €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.
Between June 12 and July 22, 2003, subsidiaries of Schlumberger launched and concluded tender offersare summarized below, are more fully described in Note 4 to acquire three series of outstanding European bonds; $1.3 billion of principal was repurchased for a total cost of $1.5 billion, which included the premium, and issuing and tender costs. The total pretax and after- tax charge on the tenders was $168 million, of which $81.5 million was recorded in the second quarter of 2003, when the first tender closed, with the balance of $86.3 million recorded in the third quarter of 2003.
The above pretax charges are classified inDebt extinguishment costs in theConsolidated Statement of IncomeFinancial Statements.
Other Charges
2004
Third quarter of 2004:
22
Second quarter of 2004:
First quarter of 2004:
23
The following is a summary of the above 2004 charges:2005 Charges and Credits:
| (Stated in millions) | |||||||||||||||
| Pretax | Tax | Min Int | Net | ||||||||||||
Charges & Credits: | |||||||||||||||
- Debt extinguishment costs | $ | 115 | $ | 14 | $ | — | $ | 101 | |||||||
- Restructuring program charges | 27 | 6 | — | 21 | |||||||||||
- Intellectual Property settlement charge | 11 | 1 | — | 10 | |||||||||||
- Loss on sale of Atos Origin shares | 21 | — | — | 21 | |||||||||||
- US interest-rate swap settlement gain | (10 | ) | (4 | ) | — | (6 | ) | ||||||||
- Vacated leased facility reserve | 11 | — | — | 11 | |||||||||||
- Litigation reserve release | (5 | ) | — | — | (5 | ) | |||||||||
- Loss recognized on interest-rate swaps | 73 | 27 | — | 46 | |||||||||||
| $ | 243 | $ | 44 | $ | — | $ | 199 | ||||||||
2003
In December 2003, Schlumberger recorded a pretax gain of $32 million ($20 million after-tax) resulting from the sale of the Hanover Compressor note. The pretax gain is classified inInterest and other income in theConsolidated Statement of Income.
In December 2003, Schlumberger recorded a pretax and after-tax charge of $81 million relating to the write-down to fair market value of Schlumberger’s investment in Hanover Compressor common stock. This charge is classified inCost of goods sold and services in theConsolidated Statement of Income.
In September 2003, Schlumberger recorded a pretax multiclient library impairment charge of $398 million ($204 million, after a tax credit of $74 million and a minority interest of $120 million), following an evaluation of current and expected future conditions in the seismic sector, a pretax seismic vessel impairment charge of $54 million ($38 million, after a minority interest credit of $16 million) and a $31 million pretax and after-tax gain on the sale of a drilling rig. The pretax amounts are classified inCost of goods sold and services in theConsolidated Statement of Income.
| (Stated in millions) | |||||||||||||
| Pretax | Tax | Net | Income Statement Classification | ||||||||||
Charges & Credits | |||||||||||||
–Gain on sale of Hanover Compressor stock | $ | (21 | ) | $ | – | $ | (21 | ) | Interest and other income | ||||
–Gain on sale of Montrouge facility | (163 | ) | – | (163 | ) | Interest and other income | |||||||
–Other real-estate related charges | 12 | 1 | 11 | Cost of goods sold and services | |||||||||
Net Credits | $ | (172 | ) | $ | 1 | $ | (173 | ) | |||||
The following is a summary of the above 2003 charges:2004 Charges and Credits:
| (Stated in millions) | ||||||||||||||||
| Pretax | Tax | Min Int | Net | |||||||||||||
Charges & Credits: | ||||||||||||||||
- Debt extinguishment costs | $ | 168 | $ | — | $ | — | $ | 168 | ||||||||
- Gain on sale of Hanover Compressor note | (32 | ) | (12 | ) | — | (20 | ) | |||||||||
- Write-down of Hanover Compressor stock | 81 | — | — | 81 | ||||||||||||
- Multiclient seismic library impairment | 398 | 74 | (120 | ) | 204 | |||||||||||
- Seismic vessel impairment | 54 | — | (16 | ) | 38 | |||||||||||
- Gain on sale of rig | (31 | ) | — | — | (31 | ) | ||||||||||
| $ | 638 | $ | 62 | $ | (136 | ) | $ | 440 | ||||||||
2002
In the fourth quarter of 2002, Schlumberger recorded net pretax charges of $256 million ($182 after-tax and minority interest). Schlumberger recorded severance and other costs in an effort to reduce costs at WesternGeco. These costs related to expenses that offered no future benefit to the ongoing operations of this business. The severance costs related to a reduction in workforce of approximately 1,700 employees. Schlumberger also recorded an impairment charge, to reflect a change in the business projections of the WesternGeco business, related to capitalized multiclient seismic library costs, a valuation allowance against a deferred tax asset in Europe, a gain on the sale of drilling rigs and other costs. These pretax charges are classified inCost of goods sold and services in theConsolidated Statement of Income.
24
In March 2002, Schlumberger recorded a charge of $26 million (pretax $27 million and minority interest credit of $1 million) related to the financial/economic crisis in Argentina where in January 2002, the government eliminated all US dollar contracts and converted US dollar denominated accounts receivable into pesos. As a result, Schlumberger’s currency exposure increased significantly. With currency devaluation, an exchange loss (net of hedging) on net assets, primarily customer receivables, was incurred. This pretax charge is classified inCost of goods sold and services in theConsolidated Statement of Income.
| (Stated in millions) | ||||||||||||||
| Pretax | Tax | Net | ||||||||||||
Charges & Credits: | ||||||||||||||
- Debt extinguishment costs | $ | 115 | $ | 14 | $ | 101 | Debt extinguishment costs | |||||||
- Restructuring program charges | 27 | 6 | 21 | Cost of goods sold and services | ||||||||||
- Intellectual Property settlement charge | 11 | 1 | 10 | Cost of goods sold and services | ||||||||||
- Loss on sale of Atos Origin stock | 21 | – | 21 | Interest and other income | ||||||||||
- US interest-rate swap settlement gain | (10 | ) | (4 | ) | (6 | ) | Interest expense | |||||||
- Vacated leased facility reserve | 11 | – | 11 | Cost of goods sold and services | ||||||||||
- Litigation reserve release | (5 | ) | – | (5 | ) | Cost of goods sold and services | ||||||||
- Loss recognized on interest-rate swaps | 73 | 27 | 46 | Interest expense | ||||||||||
Net Charges | $ | 243 | $ | 44 | $ | 199 | ||||||||
The following is a summary of the above 2002 charges:2003 Charges and Credits:
| (Stated in millions) | ||||||||||||||||
| Pretax | Tax | Min Int | Net | |||||||||||||
Charges & Credits: | ||||||||||||||||
- Multiclient seismic library impairment | $ | 184 | $ | — | $ | (55 | ) | $ | 129 | |||||||
-WesternGeco severance and other | 117 | 7 | (38 | ) | 72 | |||||||||||
-Valuation allowance | — | (42 | ) | — | 42 | |||||||||||
- Gain on sale of drilling rigs | (87 | ) | — | — | (87 | ) | ||||||||||
- Other | 42 | 16 | 26 | |||||||||||||
- Argentina exchange loss | 27 | (1 | ) | 26 | ||||||||||||
| $ | 283 | $ | (19 | ) | $ | (94 | ) | $ | 208 | |||||||
| ( Stated in millions ) | ||||||||||||||||||
| Pretax | Tax | Min Int | Net | Income Statement Classification | ||||||||||||||
Charges & Credits: | ||||||||||||||||||
- Debt extinguishment costs | $ | 168 | $ | – | $ | – | $ | 168 | Debt extinguishment costs | |||||||||
- Gain on sale of Hanover Compressor note | (32 | ) | (12 | ) | – | (20 | ) | Interest and other income | ||||||||||
- Impairment of Hanover Compressor stock | 81 | – | – | 81 | Cost of goods sold and services | |||||||||||||
- Multiclient seismic library impairment | 398 | 74 | (120 | ) | 204 | Cost of goods sold and services | ||||||||||||
- Seismic vessel impairment | 54 | – | (16 | ) | 38 | Cost of goods sold and services | ||||||||||||
- Gain on sale of rig | (31 | ) | – | – | (31 | ) | Cost of goods sold and services | |||||||||||
Net Charges | $ | 638 | $ | 62 | $ | (136 | ) | $ | 440 | |||||||||
Business Divestitures – Discontinued Operations
During 2004, Schlumberger divested the following businesses which are accounted for asDiscontinued Operations:
On February 2, 2004, Schlumberger sold 9.6 million of the Atos Origin shares for a net consideration of €500 million ($625 million). As a result of this sale, Schlumberger’s investment was reduced to approximately 15% of the outstanding common shares of Atos Origin. The equity in earnings representing Schlumberger’s interest in Atos Origin for the four days ending February 2, 2004 was not material. This investment was accounted for using the cost method as of February 2, 2004. On April 30, 2004 Schlumberger sold its remaining holding of 9.7 million Atos Origin shares for consideration of €465 million ($551 million), net of expenses. The losses on the sales of the Atos Origin shares of $21 million are classified inInterest and other incomein the Consolidated Statement of Income.
25
In the third quarter, a gain of $18 million was recognized consisting of (1) a $9 million gain on the sale of Schlumberger’s residual investment of 5.1 million shares in Axalto (the sale price was €16.59 per share resulting in net proceeds, after expenses, of $99 million) and (2) a $9 million reversal of a liability related to the sale. The net assets were approximately $700 million, including goodwill of $415 million.
During 2003, Schlumberger divested the followingbegan an active program to divest of all of its non-oilfield services businesses, which arewas completed in 2005. These divestitures, which were accounted for asDiscontinued Operations:
Part II, Item 7
During 2002, Schlumberger divested the following business which was accounted for asDiscontinued Operations:
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The following table summarizes the results of these discontinued operations:
| (Stated in millions) | ||||||||||||||||||||||
| (Stated in millions) | ||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||
Revenues | $ | 467 | $ | 4,367 | $ | 4,311 | $ | 8 | $ | 590 | $ | 4,367 | ||||||||||
Income (loss) before taxes | $ | 63 | $ | 103 | $ | (2,844 | ) | $ | (1 | ) | $ | 55 | $ | 104 | ||||||||
Tax expense | 16 | 32 | 31 | – | 16 | 33 | ||||||||||||||||
Gains (losses) on disposal, net of tax | 162 | (86 | ) | 66 | 9 | 171 | (86 | ) | ||||||||||||||
Income (loss) from discontinued operations | $ | 209 | $ | (15 | ) | $ | (2,809 | ) | $ | 8 | $ | 210 | $ | (15 | ) | |||||||
SchlumbergerSema GoodwillStock-based Compensation and Other Charges – Discontinued operations
On December 10, 2002, Schlumberger announced that the Board of Directors had approved an updated strategy for its SchlumbergerSema business segment. The new strategic plan outlook, current business valuesStock-based compensation expense was approximately $40 million in 2005 and the reorganization of SchlumbergerSema constituted significant events that required an impairment analysisis currently estimated to be performedapproximately $110 million in accordance with SFAS No. 142. SchlumbergerSema was ‘valued’ on a stand-alone basis; each reporting unit within SchlumbergerSema was valued using a discounted cash flow analysis based on a long-term forecast prepared by SchlumbergerSema management with2006. This increase will be principally due to (i) the assistanceadoption of a third party valuation expert. The implied multiples yielded byFAS 123R, as discussed in Note 16 to the discounted cash flow analysis were comparedConsolidated Financial Statements, which requires companies to observed trading multiplesexpense the unamortized portion of comparable companies and recent transactions in the IT services industrystock options granted prior to assess2003 when Schlumberger adopted the fair value recognition provisions of SFAS 123, (ii) 2006 will be the first year that the full 4-year impact of the reporting units. Theadoption of the fair value was belowrecognition provisions of SFAS 123 (adopted by Schlumberger in January 2003), will be reflected in Schlumberger’s results and (iii) valuations of 2006 stock-based compensation awards are expected to increase due to the book value. As a result, a $2.638 billion pretax and after-tax goodwill impairment charge was recorded. This impairment reflected the difficulties of the telecommunications industry and the severely depressed market values of the IT companies serving SchlumbergerSema’s sector at the time of the charge. Certain intangible assets wererecent upward movement in Schlumberger’s stock price.
During 2006, Schlumberger will relocate its United States corporate office from New York to Houston. Schlumberger will also identified and written down as part of this process, resultingrelocate its United States research center from Ridgefield to Boston in a $1472006. Schlumberger currently estimates that it will incur approximately $25 million pretax charge ($132to $30 million after-tax). Additional charges recorded included $97 million ($78 million after-tax) of severance, facility and other costs in an effort to reduce costs at SchlumbergerSema and a $52 million valuation allowance against a deferred tax assetincremental expenses in Europe.
The following is a summary of the above 2002 charges includedconnection with these moves in loss from discontinued operations:2006.
| (Stated in millions) | |||||||||||||
| Pretax | Tax | Min Int | Net | ||||||||||
Charges & Credits: | |||||||||||||
- Goodwill impairment | $ | 2,638 | $ | — | $ | — | $ | 2,638 | |||||
- Intangibles impairment | 147 | 15 | — | 132 | |||||||||
- SchlumbergerSema severance and other | 97 | 19 | — | 78 | |||||||||
- Valuation allowance | — | (52 | ) | — | 52 | ||||||||
| $ | 2,882 | $ | (18 | ) | $ | — | $ | 2,900 | |||||
Cash Flow
In 2005, cash provided by operations was $3.0 billion as net income plus depreciation & amortization were partly offset by increases in customer receivables and inventories, due to higher operating revenues.
Cash used in investing activities was $2.04 billion and included investments in fixed assets ($1.59 billion) and multiclient seismic data ($60 million), the purchase of short-term investments ($707 million), proceeds from the sale of the Montrouge facility ($230 million) and the sale of the investment in Hanover Compressor ($110 million).
Cash used in financing activities was $994 million with the proceeds from employee stock plans ($345 million) offset by the payment of dividends to shareholders ($482 million), the repurchase of 7.64 million shares of Schlumberger stock ($612 million) and an overall reduction in debt of $216 million.
Part II, Item 7
“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 change in Net Debt follows:
| (Stated in millions) | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Net Debt, beginning of year | $ | (1,459 | ) | $ | (4,176 | ) | $ | (5,021 | ) | |||
Income from continuing operations | 2,199 | 1,014 | 398 | |||||||||
Excess of equity income over dividends received | (86 | ) | (66 | ) | (75 | ) | ||||||
Charges and credits, net of tax | (173 | ) | 199 | 440 | ||||||||
Depreciation and amortization1 | 1,351 | 1,308 | 1,341 | |||||||||
Increase in working capital | (286 | ) | (502 | ) | (186 | ) | ||||||
US pension plan contributions | (172 | ) | (254 | ) | (119 | ) | ||||||
Capital expenditures1 | (1,652 | ) | (1,279 | ) | (1,021 | ) | ||||||
Proceeds from employee stock plans | 345 | 278 | 172 | |||||||||
Stock repurchase program | (612 | ) | (320 | ) | – | |||||||
Dividends paid | (482 | ) | (441 | ) | (437 | ) | ||||||
Proceeds from business divestitures | 22 | 1,729 | 299 | |||||||||
Proceeds from the sale of the Montrouge facility | 230 | – | – | |||||||||
Sale of Hanover Compressor stock | 110 | – | – | |||||||||
PetroAlliance acquisition (cash paid) | (40 | ) | (12 | ) | – | |||||||
Net debt acquired | (50 | ) | – | – | ||||||||
Other business acquisitions | (77 | ) | (31 | ) | – | |||||||
Distribution to joint venture partner | (30 | ) | ||||||||||
Sale of Axalto stock | – | 99 | – | |||||||||
Sale of Atos Origin stock | – | 1,165 | – | |||||||||
Debt extinguishment costs | – | (111 | ) | (168 | ) | |||||||
Settlement of US interest rate swap | – | (70 | ) | – | ||||||||
Sale of Grant Prideco stock | – | – | 106 | |||||||||
Sale of Hanover Compressor note | – | – | 177 | |||||||||
Translation effect on net debt | 94 | (75 | ) | (461 | ) | |||||||
Discontinued operations | 3 | 51 | 19 | |||||||||
Other | 233 | 35 | 360 | |||||||||
Net Debt, end of year | $ | (532 | ) | $ | (1,459 | ) | $ | (4,176 | ) | |||
| 1. | Includes Multiclient seismic data costs. |
| (Stated in millions) | ||||||||||||
| Dec. 31 | Dec. 31 | Dec. 31 | ||||||||||
| Components of Net Debt | 2005 | 2004 | 2003 | |||||||||
Cash and short term investments | $ | 3,496 | $ | 2,997 | $ | 3,109 | ||||||
Fixed income investments, held to maturity | 360 | 204 | 223 | |||||||||
Bank loans and current portion of long-term debt | (797 | ) | (716 | ) | (1,411 | ) | ||||||
Long-term debt | (3,591 | ) | (3,944 | ) | (6,097 | ) | ||||||
| $ | (532 | ) | $ | (1,459 | ) | $ | (4,176 | ) | ||||
At December 31, 2005, cash and short-term investments of $3.5 billion and the remaining credit facilities of $4.4 billion are sufficient to meet future business requirements for at least the next twelve months.
Part II, Item 7
Summary of Major Contractual Commitments
| (Stated in millions) | |||||||||||||||
| Payment Period | |||||||||||||||
| Contractual Commitments | Total | 2006 | 2007 - 2008 | 2009 - 2010 | After 2010 | ||||||||||
Debt | $ | 4,388 | $ | 797 | $ | 1,300 | $ | 1,345 | $ | 946 | |||||
Operating Leases | $ | 449 | $ | 125 | $ | 169 | $ | 76 | $ | 79 | |||||
Refer to Note 5 of theConsolidated Financial Statement for details regarding potential commitments associated with Schlumberger’s prior business acquisitions.
Schlumberger has outstanding letters of credit/guarantees which relate to business performance bonds, custom/excise tax commitments, facility lease/rental obligations, etc. These were entered into in the ordinary course of business and are customary practices in the various countries where Schlumberger operates.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires Schlumberger to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. The following accounting policies involve “critical accounting estimates” because they are particularly dependent on estimates and assumptions made by Schlumberger about matters that are inherently uncertain. A summary of all of Schlumberger’s significant accounting policies including those discussed below, are included in Note 2 to theConsolidated Financial Statements.
Schlumberger bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
27
Multiclient Seismic Data
The WesternGeco segment capitalizes the costcosts associated with obtaining multiclient seismic data. Such costs are charged toCost of goods sold and services based on the percentage of the total costs to the estimated total revenue that Schlumberger expects to receive from the sales of such data. However, under no circumstance will an individual survey carry a net book value greater than a 4-year straight-lined amortized value.
The carrying value of surveys is reviewed for impairment annually as well as when an event or change in circumstance indicates an impairment may have occurred. Adjustments to the carrying value are recorded when it is determined that estimated future revenues, which involvesinvolve significant judgment on the part of Schlumberger, would not be sufficient to recover the carrying value of the surveys. Significant adverse changes in Schlumberger’s estimated future revenuescash flows could result in impairment charges in a future period. For purposes of performing the annual impairment test of the multiclient library, future cash flows are analyzed based on two pools of surveys: USUnited States and non-US.non-United States. The USUnited States and non-USnon-United States pools were determined to be the most appropriate level at which to perform the impairment review based upon a number of factors including (i) various macroeconomic factors that influence the ability to successfully market surveys and (ii) the focus of the sales force and related costs.
Schlumberger recorded an impairment chargescharge relating to the multiclient library of $398 million in 2003 and $184 million in 2002.2003. The carrying value of the library at December 31, 2005, 2004 and 2003 was $222 million, $347 million and $506 million, respectively. Following the 2003 impairment charge, Schlumberger will not generally not commence a multiclient project unless the project is significantly pre-funded by one or more customers. The reduction in the carrying value of the library from 2003 to 2004over recent years is primarily attributable to a cautious approach to new investment combined with the significant pre-funding requirement.
Part II, Item 7
Allowance for Doubtful Accounts
Schlumberger maintains allowancesan allowance for doubtful accounts in order to record accounts receivable at their net realizable value. A significant amount of judgment is involved in recording and making adjustments to this reserve. Allowances have been recorded for estimated losses resulting fromreceivables believed to be uncollectible, including amounts for the inabilityresolution of its customers to make required payments. Ifpotential credit and other collection issues such as disputed invoices, customer satisfaction claims and pricing discrepancies. Depending on how such potential issues are resolved, or if the financial condition of Schlumberger’s customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowancesadjustments to the allowance may be required.
Inventory Reserves
Schlumberger writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Goodwill, Intangible Assets and Long-Lived Assets
Schlumberger records as goodwill the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), requires goodwill to be tested for impairment annually as well as when an event or change in circumstance indicates an impairment may have occurred. Goodwill is tested for impairment using a two-step approach. The first step tests for impairment by comparing the fair value of Schlumberger’s individual reporting units to their carrying amount to determine if there is a potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value.
28
For purposes of performing the impairment test for goodwill as required by SFAS 142, Schlumberger’s reporting units are primarily the four geographic areas comprising the Oilfield Services segment andin addition to the WesternGeco segment. Schlumberger estimates the fair value of these reporting units using a discounted cash flow analysis and/or applying various market multiples. From time to time a third party valuation expert may be utilized to assist in the determination of fair value. Determining the fair value of a reporting unit is judgmental and often involves the use of significant estimates and assumptions. Schlumberger’s estimates of the fair value of each of its previously mentioned reporting units was significantly in excess of their respective carrying value duringvalues at the time of the annual goodwill impairment tests for 2005, 2004 2003 and 2002.2003.
Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management. In order to estimate the fair value of a long-lived asset, Schlumberger may engage a third-partthird-party to assist with the valuation. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, Schlumberger could be required to recognize impairment charges in the future. Schlumberger evaluates the remaining useful life of its intangible assets on a periodic basis to determine whether events and circumstances warrant a revision to the remaining estimated amortization period.
Part II, Item 7
Investments
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 at December 31, 2005 and 2004 and 2003 was $716$802 million and $657$716 million, respectively. The carrying value of this joint venture is evaluated for impairment annually as well as when an event or change in circumstance indicates that a decline in the fair value of this investment that is other than temporary has occurred. Fair value is generally estimated by comparing the significance of this joint venture to Smith International Inc., a publicly traded company, and then referencing the market capitalization of Smith International Inc. To date, Schlumberger has not recorded any impairment charges relating to this investment as this analysis has indicated that the fair value of this investment is significantly in excess of its carrying value.
Losses on Contracts
Losses on contracts are provided for when such losses become known and can be reasonably estimated. Historically, losses on contracts that have had a material impact on Schlumberger’s consolidated results of operations have been rare.
Income Taxes
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.
29
Schlumberger had net deferred tax assets of $583$564 million at December 31, 2004,2005, which excluded $312$213 million relating to net operating losses in certain countries for which there is a valuation allowance. In assessing the need for valuation allowances, Schlumberger considers the probable likelihood of future taxable income and available tax planning strategies.
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 material 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, any such additional costs are not expected to be material relative to consolidated liquidity, financial position or future results of operations.
TheConsolidated Balance Sheet includedincludes accruals for estimated future expenditures, relating to potential contractual obligations, associated with business divestitures which 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.
In December 2004, WesternGeco and Schlumberger received grand jury subpoenas from the USUnited States Attorney’s office in the Southern District of Texas seeking documents relating to possible fraud in obtaining visas for non-USnon-United States 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 currently unable to predict the outcome of this matter and the related impact it might have on Schlumberger’s financial position and results of operations.
Part II, Item 7
Pension and Postretirement Benefits
Schlumberger’s pension benefit and postretirement medical benefit obligations and related costs are calculated using actuarial concepts, which include critical assumptions related to the discount rate, expected return on plan assets and medical cost trend rates. These assumptions are important elements of expense and/or liability measurement and are updated on an annual basis at the beginning of each fiscal year, or more frequently upon the occurrence of significant events.
The discount rate we use reflects the prevailing market rate of a portfolio of high-quality debt instruments with maturities matching the expected timing of the payment of the benefit obligations. The discount rate utilized to determine both the projectedaccumulated benefit obligation (“ABO”) for Schlumberger’s USUnited States pension planplans and the accumulated postretirement benefit obligation (“APBO”) for Schlumberger’s United States postretirement medical plans was reduced from 6.25% at December 31, 2003 to 6.00% at December 31, 2004.2004 to 5.75% at December 31, 2005. The discount rate utilized to determine the projected benefit obligationexpense for Schlumberger’s UKUnited States pension plans and postretirement medical plans was reduced from 5.60% at December 31, 20036.25% in 2004 to 5.40% at December 31, 2004. These changes were6.00% in 2005. The change in the discount rate was made to reflect market interest rate conditions. A lower discount rate increases the present value of benefit obligations and increases pension expense. A change of 25 basis points in the discount rate assumption would have an estimated $12 million impact on annual pension expense.
The expected rate of return for our retirement benefit plans represents the average rate of return expected to be earned on plan assets over the period that benefits included in the benefit obligation, are expected to be paid. Schlumberger’sThe expected rate of return for Schlumberger’s United States pension plans has been determined based upon expectations regarding future rates of return for the investment portfolio, with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class. The expected rate of return on plan assets was 8.50% in both 20042005 and 2003.2004. A lower expected rate of return would increase pension expense. A change of 25 basis points in the expected rate of return would impact annual pension expense by approximately $4 million.
30
Schlumberger’s medical cost trend rate assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. The overall medical cost trend rate assumption utilized in 2005 was 10% graded to 6% over the next six years and 5% thereafter. The overall medical cost trend rate assumption utilized in 2004 was 10% graded to 5% over the next five years and 5% thereafter. If
The following illustrates the assumedsensitivity to changes in certain assumptions, holding all other assumptions constant, for the United States pension plans:
| (Stated in millions) | ||||||
| Change in Assumption | Effect on 2005 Pretax Pension Expense | Effect on Dec. 31, 2005 ABO | ||||
25 basis point decrease in discount rate | +$ | 6.6 | +$64.7 | |||
25 basis point increase in discount rate | - $ | 6.4 | -$62.6 | |||
25 basis point decrease in expected return on plan assets | +$ | 3.2 | $ – | |||
25 basis point increase in expected return on plan assets | - $ | 3.2 | $ – | |||
The following illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for Schlumberger’s United States postretirement medical cost trend rate was increased by one percentage point, health care cost in 2004 would have increased by $15 million, and the accumulated postretirement obligation would have increased by $137 million on December 31, 2004. If the assumed medical cost trend rate was decreased by one percentage point, health care cost in 2004 would have decreased by $13 million, and the accumulated postretirement obligation would have decreased by $113 million on December 31, 2004.plans:
| (Stated in millions) | ||||||
| Change in Assumption | Effect on 2005 Pretax Postretirement Medical Expense | Effect on Dec. 31, 2005 APBO | ||||
25 basis point decrease in discount rate | +$ | 3.5 | +$ | 27.9 | ||
25 basis point increase in discount rate | - $ | 3.3 | - $ | 26.9 | ||
100 basis point decrease in medical cost trend rate | - $ | 11.5 | - $ | 103.5 | ||
100 basis point increase in medical cost trend rate | +$ | 14.4 | +$ | 126.2 | ||
Part II, Item 7A
Cash FlowItem 7A Quantitative and Qualitative Disclosures About Market Risk
In 2004, cash provided by operations was $1.85 billion as net income plus depreciation & amortization and net charges, including the extinguishment of US and European debt, were only partially offset by increases in customer receivables and inventories, due to higher operating revenues.
Cash provided by investing activities was $1.68 billion as the proceeds from non-oilfield business divestitures ($1.66 billion) and the proceeds from the sale Schlumberger’s investment of 19.3 million shares in of Atos Origin ($1.16 billion) was partially offset by investments in fixed assets ($1.22 billion) and multiclient seismic data ($63 million).
Cash used in financing activities was $3.59 billion with the proceeds from employee stock plans ($278 million) offset by the payment of dividends to shareholders ($441 million), the costs related to the extinguishment of certain US and European debt ($111 million), the repurchase of 5.15 million shares of Schlumberger stock ($320 million) and an overall reduction in debt of $2.93 billion.
“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 change in Net Debt follows:
31
| (Stated in millions) | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
Net Debt, beginning of year | $ | (4,176 | ) | $ | (5,021 | ) | $ | (5,037 | ) | |||
Income from continuing operations | 1,014 | 398 | 489 | |||||||||
Excess of equity income over dividends received | (66 | ) | (75 | ) | (38 | ) | ||||||
Gain on sale of drilling rigs | — | — | (87 | ) | ||||||||
Net charges | 199 | 440 | 295 | |||||||||
Depreciation & amortization1 | 1,308 | 1,341 | 1,309 | |||||||||
(Increase) decrease in working capital | (492 | ) | (186 | ) | (118 | ) | ||||||
Proceeds from business divestitures | 1,729 | 299 | 259 | |||||||||
Proceeds from the sale of Axalto shares | 99 | — | — | |||||||||
Proceeds from the sale of Atos Origin shares | 1,165 | — | — | |||||||||
Stock repurchase program | (320 | ) | — | — | ||||||||
Proceeds from sale of drilling rigs | — | 58 | 119 | |||||||||
Fixed asset additions1 | (1,279 | ) | (1,021 | ) | (1,515 | ) | ||||||
Dividends paid | (441 | ) | (437 | ) | (433 | ) | ||||||
US pension plan contributions | (254 | ) | (119 | ) | — | |||||||
Proceeds from employee stock plans | 278 | 172 | 175 | |||||||||
Debt extinguishment costs | (111 | ) | (168 | ) | — | |||||||
Settlement of US interest rate swap | (70 | ) | — | — | ||||||||
Sale of Grant Prideco stock | — | 106 | — | |||||||||
Sale of Hanover Compressor note | — | 177 | — | |||||||||
Acquisition of Sema plc | — | — | (132 | ) | ||||||||
Other business acquisitions | (31 | ) | — | (44 | ) | |||||||
Acquisition related payments | — | — | (70 | ) | ||||||||
Investment in PetroAlliance | (12 | ) | — | — | ||||||||
Translation effect on net debt | (75 | ) | (461 | ) | (507 | ) | ||||||
Discontinued operations | 41 | 19 | 133 | |||||||||
Other | 35 | 302 | 181 | |||||||||
Net Debt, end of year | $ | (1,459 | ) | $ | (4,176 | ) | $ | (5,021 | ) | |||
| Dec. 31 2004 | Dec. 31 2003 | Dec. 31 2002 | ||||||||||
Components of Net Debt | ||||||||||||
Cash and short term investments | $ | 2,997 | $ | 3,109 | $ | 1,736 | ||||||
Fixed income investments, held to maturity | 204 | 223 | 408 | |||||||||
Bank loans and current portion of long-term debt | (716 | ) | (1,411 | ) | (1,136 | ) | ||||||
Long-term debt | (3,944 | ) | (6,097 | ) | (6,029 | ) | ||||||
| $ | (1,459 | ) | $ | (4,176 | ) | $ | (5,021 | ) | ||||
At December 31, 2004, the cash and short-term investments of $3.0 billion and the remaining credit facilities of $4.5 billion are sufficient to meet future business requirements.
Summary of Major Contractual Commitments
| (Stated in millions) | |||||||||||||||
| Payment Period | |||||||||||||||
Contractual Commitments | Total | 2005 | 2006 - 2007 | 2008 - 2009 | After 2009 | ||||||||||
Debt | $ | 4,660 | $ | 716 | $ | 992 | $ | 1,512 | $ | 1,440 | |||||
Operating Leases | $ | 384 | $ | 102 | $ | 151 | $ | 71 | $ | 60 | |||||
Schlumberger has outstanding letters of credit/guarantees which relate to business performance bonds, custom/excise tax commitments, facility lease/rental obligations, etc. These were entered into in the ordinary course of business and are customary practices in the various countries where Schlumberger operates.
32
Common Stock, Market Prices and Dividends Declared per Share
Quarterly high and low prices for Schlumberger common stock as reported by the New York Stock Exchange (composite transactions), together with dividends declared per share in each quarter of 2004 and 2003, were:
| Price Range | Dividends Declared | ||||||||
| High | Low | ||||||||
2004 | |||||||||
QUARTERS | |||||||||
First | $ | 66.750 | $ | 52.530 | $ | 0.1875 | |||
Second | 64.700 | 54.750 | 0.1875 | ||||||
Third | 67.850 | 58.640 | 0.1875 | ||||||
Fourth | 69.890 | 61.010 | 0.1875 | ||||||
2003 | |||||||||
QUARTERS | |||||||||
First | $ | 43.330 | $ | 35.620 | $ | 0.1875 | |||
Second | 50.150 | 36.080 | 0.1875 | ||||||
Third | 52.100 | 44.500 | 0.1875 | ||||||
Fourth | 56.240 | 45.460 | 0.1875 | ||||||
The number of holders of record of Schlumberger common stock at December 31, 2004, was approximately 22,500. There are no legal restrictions on the payment of dividends or ownership or voting of such shares, except as to shares held in the Schlumberger Treasury. Under current legislation, US stockholders are not subject to any Netherlands Antilles withholding or other Netherlands Antilles taxes attributable to ownership of such shares.
On January 25, 2005, Schlumberger announced that the Board of Directors had approved a 12% increase in the quarterly dividend, to $0.21 per share. The increase is effective commencing with the dividend payable on April 8, 2005.
Environmental Matters
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. 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.
New Accounting Standard
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 anticipates applying the modified prospective method whereby companies would recognize compensation cost for the unamortized portion of vested awards outstanding at the effective date of SFAS 123R (July 1, 2005 for Schlumberger) and granted after January 1, 1995. Such cost will be recognized in Schlumberger’s financial statements over the remaining vesting period. As described in Note 19, 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 July 1, 2005, Schlumberger will have to apply the provisions of SFAS 123R to 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 2005 diluted earnings per share by approximately $0.03.
33
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; expected depreciation and amortization expense; expected pension funding; 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 fourth quarter and full year 2004 earnings release, this Report 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.
Schlumberger is subject to market risk primarily associated with changes in foreign currency exchange rates and interest rates and equity prices.
rates.
As a multinational company, Schlumberger conducts its business in over 80 countries. Schlumberger’s functional currency is primarily the US dollar, which is consistent with the oil and gas industry. Approximately 85%80% of Schlumberger’s operating revenue in 20042005 was denominated in US dollars. However, outside the US,United States, a significant portion of Schlumberger’s expenses are incurred in foreign currencies. Therefore, when the US dollar strengthens in relation to the foreign currencies of the countries in which Schlumberger conducts business, the US dollar-reported expenses will decrease.
A 5% change in the average exchange rates of all the foreign currencies in 20042005 would have changed operating revenue by approximately 1%. If the 20042005 average exchange rates of the US dollar against all foreign currencies had increased by 5%, Schlumberger’s income from continuing operations would have increased by 8%4%. Conversely, a 5% weakening of the US dollar average exchange rates would have decreased income from continuing operations by 11%4%.
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. ForwardForeign currency forward contracts provide a hedge against currency fluctuations either on assets/liabilities denominated in other than a functional currency or on expenses. Option contracts are usually entered into as a hedge against currency variations on firm commitments generally involving the construction of long-lived assets.
On December 31, 2004,2005, contracts were outstanding for the US dollar equivalent of $1.1$1.9 billion in various foreign currencies. These contracts mature on various dates in 2005.
2006.
Schlumberger does not enter into foreign currency or interest rate derivatives for speculative purposes.
34
Schlumberger is subject to interest rate risk on its debt. Schlumberger maintains an interest rate risk management strategy that uses a mix of variable- and fixed-rate debt together with interest rate swaps, where appropriate, to fix or lower borrowing costs.
At December 31, 2004,2005, Schlumberger had fixed rate debt aggregating approximately $2.9$2.8 billion and variable rate debt aggregating $1.8$1.6 billion.
Schlumberger’s exposure to interest rate risk associated with its debt is also somewhat mitigated by its investment portfolio. BothShort-term investments andFixed income investments, held to maturity, which totaled approximately $3.0$3.7 billion at December 31, 2004,2005, are comprised primarily of eurodollar time deposits, certificates of deposit and commercial paper, euronotes and eurobonds, and are substantially all denominated in US dollars. The average return on investment was 2%3.3% in 2004.2005.
Part II, Item 7A
The following table represents principal amounts of Schlumberger’s debt at December 31, 20042005 by year of maturity:
| (Stated in millions) | ||||||||||||||||||||||||||||||||||||||||||
| (Stated in millions) | ||||||||||||||||||||||||||||||||||||||||||
| Expected Maturity Dates | ||||||||||||||||||||||||||||||||||||||||||
| Expected Maturity Dates | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | ||||||||||||||||||||||||||||||||||||
Fixed rate debt | ||||||||||||||||||||||||||||||||||||||||||
1.5% Series A Convertible Debentures | $ | 975 | $ | 975 | $ | 975 | $ | 975 | ||||||||||||||||||||||||||||||||||
6.5% Notes due 2012 | $ | 648 | 648 | $ | 648 | 648 | ||||||||||||||||||||||||||||||||||||
2.125% Series B Convertible Debentures | 450 | 450 | $ | 450 | 450 | |||||||||||||||||||||||||||||||||||||
5.875% Guaranteed Bonds due 2011 (Euro denominated) | 342 | 342 | 298 | 298 | ||||||||||||||||||||||||||||||||||||||
5.25% Guaranteed Bonds (Euro denominated) | 327 | 327 | 286 | 286 | ||||||||||||||||||||||||||||||||||||||
7.0% Notes (Canadian dollar denominated) | $ | 101 | 101 | 91 | 91 | |||||||||||||||||||||||||||||||||||||
6.25% Guaranteed Bonds (British pound denominated) | 33 | 33 | 30 | 30 | ||||||||||||||||||||||||||||||||||||||
Total fixed rate debt | $ | — | $ | 101 | $ | — | $ | 1,335 | $ | — | $ | 1,440 | $ | 2,876 | $ | 91 | $ | – | $ | 1,291 | $ | – | $ | 450 | $ | 946 | $ | 2,778 | ||||||||||||||
Variable rate debt | $ | 716 | $ | 246 | $ | 645 | $ | 13 | $ | 164 | $ | — | $ | 1,784 | $ | 706 | $ | – | $ | 9 | $ | 103 | $ | 792 | $ | – | $ | 1,610 | ||||||||||||||
Total | $ | 716 | $ | 347 | $ | 645 | $ | 1,348 | $ | 164 | $ | 1,440 | $ | 4,660 | $ | 797 | $ | – | $ | 1,300 | $ | 103 | $ | 1,242 | $ | 946 | $ | 4,388 | ||||||||||||||
On or after June 6, 2008 (in the case of the Series A Convertible Debentures) or June 6, 2010 (in the case of the Series B Convertible Debentures), Schlumberger may redeem for cash all or part of the applicable series of debentures, upon notice to the holders, at the redemption prices of 100% of the principal amount of the debentures, plus accrued and unpaid interest to the date of redemption. On June 1, 2008, June 1, 2013, and June 1, 2018, holders of Series A debentures may require Schlumberger to repurchase their Series A debentures. On June 1, 2010, June 1, 2013 and June 1, 2018, holders of Series B debentures may require Schlumberger to repurchase their Series B debentures. The repurchase price will be 100% of the principal amount of the debentures plus accrued and unpaid interest to the repurchase date. The repurchase price for repurchases on June 1, 2008 (in the case of the Series A debentures) and June 1, 2010 (in the case of the Series B debentures) will be paid in cash. On the other repurchase dates, Schlumberger may choose to pay the repurchase price in cash or common stock or any combination of cash and common stock. In addition, upon the occurrence of a Fundamental Change (defined as a change in control or a termination of trading of Schlumberger’s common stock), holders may require Schlumberger to repurchase all or a portion of their debentures, in cash or, at Schlumberger’s election, common stock valued at 99% of its market price or any combination of cash and common stock, at a repurchase price equal to 100% of the principal amount of the debentures plus accrued and unpaid interest to the redemption date. The debentures will mature on June 1, 2023 unless earlier redeemed or repurchased.
The fair market value of the outstanding fixed rate debt was approximately $3.1$3.4 billion as of December 31, 2004.2005. The weighted average interest rate on the variable rate debt as of December 31, 20042005 was approximately 3.7%4.8%.
35
On December 31, 2004,2005, interest rate swap arrangements outstanding were pay floating/receive fixed on US dollar debt of $117$93 million. These arrangements mature at various dates to December 2009. Interest rate swap arrangements increaseddecreased consolidated interest expense in 20042005 by $60 million$3 million.
Part II, Item 7A
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 margins; operating and capital expenditures by Schlumberger and the oil and gas industry; the business strategies of Schlumberger’s customers; expected depreciation and amortization expense; expected pension and post-retirement funding; expected stock compensation costs; and future results of operations. These statements involve risks and uncertainties, including, but not limited to, the $73 million charge recordedglobal economy; changes in exploration and production spending by Schlumberger’s customers and changes in the first quarterlevel of 2004 foroil and natural gas exploration and development; general economic and business conditions in key regions of the settlementworld; political and cancellationeconomic uncertainty and socio-political unrest; and other factors described elsewhere in this Report, including under “Item 1A, Risk Factors” beginning on page 6 of $500 million outstanding interest rate swaps inthis Report. If one or more of these risks or uncertainties materialize (or the US.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.
Part II, Item 8
With respect to equity market risks, Schlumberger’s investment portfolio includes equity investments in publicly held companies that are classified as available-for-sale (our investment in the Hanover Compressor Company)
Item 8 Financial Statements and other strategic equity holdings in privately held companies. These securities are exposed to price fluctuations. As of December 31, 2004, the fair market value of Schlumberger’s investment in Hanover Compressor of $123 million, exceeded its cost basis by approximately $31.6 million. At December 31, 2003, Schlumberger wrote down the cost basis of this investment to its fair market value of $91.4 million at December 31, 2003 and recorded a pretax and after-tax impairment charge of $81.2 million. No investment impairment charges were recorded in 2004. Schlumberger’s policy is not to hedge equity price risk.Supplementary Data
36
SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS ANTILLES)
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
| (Stated in thousands except per share amounts) | ||||||||||||||||||||||||
| Year Ended December 31, | 2005 | 2004 | 2003 | |||||||||||||||||||||
| (Stated in thousands except per share amounts) | ||||||||||||||||||||||||
Year Ended December 31, | 2004 | 2003 | �� | 2002 | ||||||||||||||||||||
Operating revenue | $ | 11,480,165 | $ | 10,017,215 | $ | 9,657,407 | $ | 14,309,182 | $ | 11,480,165 | $ | 10,017,215 | ||||||||||||
Interest and other income | 128,698 | 166,493 | 139,068 | 407,769 | 128,698 | 166,493 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Cost of goods sold and services | 9,041,972 | 8,428,631 | 7,935,757 | 10,623,096 | 9,041,972 | 8,428,631 | ||||||||||||||||||
Research & engineering | 467,354 | 430,801 | 451,527 | 505,513 | 467,354 | 430,801 | ||||||||||||||||||
Marketing | 40,310 | 47,589 | 70,917 | 47,024 | 40,310 | 47,589 | ||||||||||||||||||
General & administrative | 344,448 | 317,326 | 315,284 | 372,498 | 344,448 | 317,326 | ||||||||||||||||||
Debt extinguishment costs | 114,894 | 167,801 | — | – | 114,894 | 167,801 | ||||||||||||||||||
Interest | 272,448 | 334,336 | 367,973 | 197,090 | 272,448 | 334,336 | ||||||||||||||||||
Income from Continuing Operations before taxes and minority interest | 1,327,437 | 457,224 | 655,017 | 2,971,730 | 1,327,437 | 457,224 | ||||||||||||||||||
Taxes on income | 276,949 | 210,381 | 251,632 | 681,927 | 276,949 | 210,381 | ||||||||||||||||||
Income from Continuing Operations before minority interest | 1,050,488 | 246,843 | 403,385 | 2,289,803 | 1,050,488 | 246,843 | ||||||||||||||||||
Minority interest | (36,436 | ) | 151,326 | 85,472 | (90,808 | ) | (36,436 | ) | 151,326 | |||||||||||||||
Income from Continuing Operations | 1,014,052 | 398,169 | 488,857 | 2,198,995 | 1,014,052 | 398,169 | ||||||||||||||||||
Income (Loss) from Discontinued Operations | 209,818 | (15,167 | ) | (2,808,852 | ) | 7,972 | 209,818 | (15,167 | ) | |||||||||||||||
Net Income (Loss) | $ | 1,223,870 | $ | 383,002 | $ | (2,319,995 | ) | |||||||||||||||||
Net Income | $ | 2,206,967 | $ | 1,223,870 | $ | 383,002 | ||||||||||||||||||
Basic earnings per share: | ||||||||||||||||||||||||
Income from Continuing Operations | $ | 1.72 | $ | 0.68 | $ | 0.84 | $ | 3.73 | $ | 1.72 | $ | 0.68 | ||||||||||||
Income (Loss) from Discontinued Operations | 0.36 | (0.03 | ) | (4.85 | ) | 0.01 | 0.36 | (0.03 | ) | |||||||||||||||
Net Income (Loss) | $ | 2.08 | $ | 0.66 | $ | (4.01 | ) | |||||||||||||||||
Net Income1 | $ | 3.75 | $ | 2.08 | $ | 0.66 | ||||||||||||||||||
Diluted earnings per share: | ||||||||||||||||||||||||
Income from Continuing Operations | $ | 1.70 | $ | 0.68 | $ | 0.84 | $ | 3.62 | $ | 1.70 | $ | 0.68 | ||||||||||||
Income (Loss) from Discontinued Operations | 0.34 | (0.03 | ) | (4.83 | ) | 0.01 | 0.34 | (0.03 | ) | |||||||||||||||
Net Income (Loss) | $ | 2.04 | $ | 0.65 | $ | (3.99 | ) | |||||||||||||||||
Net Income1 | $ | 3.64 | $ | 2.04 | $ | 0.65 | ||||||||||||||||||
Average shares outstanding | 589,089 | 583,904 | 578,588 | 589,288 | 589,089 | 583,904 | ||||||||||||||||||
Average shares outstanding assuming dilution | 612,872 | 586,491 | 581,933 | 614,858 | 612,872 | 586,491 | ||||||||||||||||||
| 1. | Amounts may not add due to rounding |
See theNotes to Consolidated Financial Statements
Part II, Item 8
37
SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS ANTILLES)
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
| (Stated in thousands) | (Stated in thousands) | |||||||||||||||
| December 31, | 2005 | 2004 | ||||||||||||||
| (Stated in thousands) | ||||||||||||||||
December 31, | 2004 | 2003 | ||||||||||||||
ASSETS | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash | $ | 223,503 | $ | 234,192 | $ | 190,954 | $ | 223,503 | ||||||||
Short-term investments | 2,773,922 | 2,874,781 | 3,304,727 | 2,773,922 | ||||||||||||
Receivables less allowance for doubtful accounts (2004 - $114,403; 2003 - $128,199) | 2,663,642 | 2,568,425 | ||||||||||||||
Receivables less allowance for doubtful accounts | 3,383,803 | 2,633,049 | ||||||||||||||
Inventories | 819,745 | 796,559 | 1,010,448 | 819,745 | ||||||||||||
Deferred taxes | 239,111 | 315,350 | 233,167 | 239,111 | ||||||||||||
Other current assets | 274,647 | 341,973 | 430,814 | 305,240 | ||||||||||||
Assets held for sale | 65,179 | 3,237,841 | – | 65,179 | ||||||||||||
| 7,059,749 | 10,369,121 | 8,553,913 | 7,059,749 | |||||||||||||
Fixed Income Investments, held to maturity | 203,750 | 223,300 | 359,750 | 203,750 | ||||||||||||
Investments in Affiliated Companies | 883,598 | 776,965 | 988,781 | 883,598 | ||||||||||||
Fixed Assets less accumulated depreciation | 3,761,729 | 3,799,711 | 4,200,638 | 3,761,729 | ||||||||||||
Multiclient Seismic Data | 346,522 | 505,784 | 222,106 | 346,522 | ||||||||||||
Goodwill | 2,789,048 | 3,377,583 | 2,922,465 | 2,789,048 | ||||||||||||
Intangible Assets | 346,833 | 403,319 | 319,929 | 346,833 | ||||||||||||
Deferred Taxes | 343,584 | 316,277 | 331,037 | 343,584 | ||||||||||||
Other Assets | 265,964 | 269,266 | 178,873 | 265,964 | ||||||||||||
| $ | 16,000,777 | $ | 20,041,326 | $ | 18,077,492 | $ | 16,000,777 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 2,980,790 | $ | 3,247,545 | $ | 3,564,854 | $ | 2,980,790 | ||||||||
Estimated liability for taxes on income | 858,785 | 807,938 | 1,028,571 | 858,785 | ||||||||||||
Dividend payable | 111,136 | 110,511 | 124,733 | 111,136 | ||||||||||||
Long-term debt - current portion | 143,385 | 889,678 | ||||||||||||||
Long-term debt – current portion | 269,158 | 143,385 | ||||||||||||||
Bank & short-term loans | 572,487 | 521,490 | 527,420 | 572,487 | ||||||||||||
Liabilities held for sale | 34,617 | 1,217,568 | – | 34,617 | ||||||||||||
| 4,701,200 | 6,794,730 | 5,514,736 | 4,701,200 | |||||||||||||
Long-term Debt | 3,944,180 | 6,097,418 | 3,591,338 | 3,944,180 | ||||||||||||
Postretirement Benefits | 670,765 | 614,850 | 707,040 | 670,765 | ||||||||||||
Other Liabilities | 151,457 | 254,709 | 167,611 | 151,457 | ||||||||||||
| 9,467,602 | 13,761,707 | 9,980,725 | 9,467,602 | |||||||||||||
Minority Interest | 416,438 | 398,330 | 505,182 | 416,438 | ||||||||||||
Stockholders’ Equity | ||||||||||||||||
Common Stock | 2,454,219 | 2,258,488 | 2,750,570 | 2,454,219 | ||||||||||||
Income retained for use in the business | 6,287,905 | 5,505,744 | 7,999,770 | 6,287,905 | ||||||||||||
Treasury stock at cost | (1,684,394 | ) | (1,508,239 | ) | (2,113,276 | ) | (1,684,394 | ) | ||||||||
Accumulated other comprehensive loss | (940,993 | ) | (374,704 | ) | (1,045,479 | ) | (940,993 | ) | ||||||||
| 6,116,737 | 5,881,289 | 7,591,585 | 6,116,737 | |||||||||||||
| $ | 16,000,777 | $ | 20,041,326 | $ | 18,077,492 | $ | 16,000,777 | |||||||||
See theNotes to Consolidated Financial Statements
Part II, Item 8
38
SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS ANTILLES)
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
| (Stated in thousands) | (Stated in thousands) | |||||||||||||||||||||||
| Year Ended December 31, | 2005 | 2004 | 2003 | |||||||||||||||||||||
| (Stated in thousands) | ||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net Income | $ | 2,206,967 | $ | 1,223,870 | $ | 383,002 | ||||||||||||||||||
Less: Income (loss) from discontinued operations | 7,972 | 209,818 | (15,167 | ) | ||||||||||||||||||||
Year Ended December 31, | 2004 | 2003 | 2002 | |||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Income from continuing operations | 1,014,052 | 398,169 | 488,857 | 2,198,995 | 1,014,052 | 398,169 | ||||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
Depreciation and amortization1 | 1,307,931 | 1,341,102 | 1,308,658 | 1,350,969 | 1,307,931 | 1,341,102 | ||||||||||||||||||
Gain on the sale of Grant Prideco stock | — | (1,320 | ) | — | ||||||||||||||||||||
Charges, net of tax & minority interest2 | 198,801 | 439,976 | 295,281 | |||||||||||||||||||||
Gain on sale of drilling rigs | — | — | (86,858 | ) | ||||||||||||||||||||
Charges and credits, net of tax & minority interest2 | (173,010 | ) | 198,801 | 439,976 | ||||||||||||||||||||
Earnings of companies carried at equity, less dividends received | (65,748 | ) | (74,596 | ) | (38,280 | ) | (85,941 | ) | (65,748 | ) | (74,596 | ) | ||||||||||||
Decrease (increase) deferred taxes | 6,774 | (12,286 | ) | (48,702 | ) | 30,482 | 42,436 | (80,391 | ) | |||||||||||||||
Stock based compensation expense | 26,466 | 13,229 | — | 40,204 | 26,466 | 13,229 | ||||||||||||||||||
Provision for losses on accounts receivable | 25,744 | 53,303 | 66,425 | 24,239 | 25,744 | 53,303 | ||||||||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||||||||||
(Increase) decrease in receivables | (414,856 | ) | (34,668 | ) | 657,340 | |||||||||||||||||||
Change in operating assets and liabilities:3 | ||||||||||||||||||||||||
Increase in receivables | (716,218 | ) | (414,856 | ) | (34,668 | ) | ||||||||||||||||||
(Increase) decrease in inventories | (166,698 | ) | 56,639 | (3,715 | ) | (180,099 | ) | (166,698 | ) | 56,639 | ||||||||||||||
Decrease (increase) in other current assets | 7,856 | (57,206 | ) | 112,499 | ||||||||||||||||||||
Decrease in accounts payable and accrued liabilities | (295,633 | ) | (303,513 | ) | (897,124 | ) | ||||||||||||||||||
Increase in estimated liability for taxes on income | 87,470 | 98,994 | (53,318 | ) | ||||||||||||||||||||
(Increase) decrease in other current assets | (126,306 | ) | 7,856 | (57,206 | ) | |||||||||||||||||||
Increase (decrease) in accounts payable and accrued liabilities | 306,259 | (295,633 | ) | (303,513 | ) | |||||||||||||||||||
Increase in estimated liability | ||||||||||||||||||||||||
for taxes on income | 209,182 | 87,470 | 98,994 | |||||||||||||||||||||
Increase in postretirement benefits | 54,998 | 70,394 | 39,659 | 36,097 | 54,998 | 70,394 | ||||||||||||||||||
Other - net | 58,721 | 27,171 | 39,842 | |||||||||||||||||||||
Other – net | 89,032 | 23,059 | 93,956 | |||||||||||||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 1,845,878 | 2,015,388 | 1,880,564 | 3,003,885 | 1,845,878 | 2,015,388 | ||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Purchases of fixed assets | (1,215,847 | ) | (871,539 | ) | (1,169,978 | ) | (1,592,511 | ) | (1,215,847 | ) | (871,539 | ) | ||||||||||||
Multiclient seismic data capitalized | (63,206 | ) | (149,765 | ) | (344,705 | ) | (59,868 | ) | (63,206 | ) | (149,765 | ) | ||||||||||||
Capitalization of intangible assets | (77,171 | ) | (94,639 | ) | (125,622 | ) | (33,403 | ) | (77,171 | ) | (94,639 | ) | ||||||||||||
Proceeds from sale of fixed assets & other | 48,304 | 171,895 | 276,022 | |||||||||||||||||||||
Sale of Grant Prideco stock | — | 105,590 | — | |||||||||||||||||||||
Proceeds from the sale of Grant Prideco stock | – | – | 105,590 | |||||||||||||||||||||
PIGAP settlement | — | 58,000 | — | – | – | 58,000 | ||||||||||||||||||
Proceeds from the sale of the Montrouge facility | 229,801 | – | – | |||||||||||||||||||||
Sale of investment in Hanover Compressor | 110,175 | – | – | |||||||||||||||||||||
Proceeds from the sale of Hanover Compressor note | — | 176,955 | — | – | – | 176,955 | ||||||||||||||||||
Acquisition of Sema plc | — | — | (132,155 | ) | ||||||||||||||||||||
Other business acquisitions | (42,834 | ) | — | (44,431 | ) | (108,782 | ) | (42,834 | ) | – | ||||||||||||||
Other acquisition related payments | — | — | (70,340 | ) | ||||||||||||||||||||
Proceeds from business divestitures | 1,664,310 | 298,674 | 259,271 | 21,871 | 1,664,310 | 298,674 | ||||||||||||||||||
Proceeds from the sale of Atos shares | 1,164,662 | — | — | – | 1,164,662 | – | ||||||||||||||||||
Proceeds from the sale of Axalto shares | 98,851 | — | — | – | 98,851 | – | ||||||||||||||||||
Proceeds from the sale of drilling rigs | — | 58,100 | 95,000 | – | – | 58,100 | ||||||||||||||||||
Option payment on sale of drilling rigs | — | — | 24,900 | |||||||||||||||||||||
Sale (purchase) of investments, net | 104,820 | (1,145,700 | ) | 51,334 | ||||||||||||||||||||
(Purchase) sale of investments, net | (706,762 | ) | 104,820 | (1,145,700 | ) | |||||||||||||||||||
Other | 94,994 | 48,304 | 171,895 | |||||||||||||||||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 1,681,889 | (1,392,429 | ) | (1,180,704 | ) | |||||||||||||||||||
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | (2,044,485 | ) | 1,681,889 | (1,392,429 | ) | |||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Dividends paid | (441,219 | ) | (437,023 | ) | (433,134 | ) | (481,583 | ) | (441,219 | ) | (437,023 | ) | ||||||||||||
Distribution to joint venture partner | (30,000 | ) | – | – | ||||||||||||||||||||
Proceeds from employee stock purchase plan | 71,565 | 132,741 | 107,810 | 81,733 | 71,565 | 132,741 | ||||||||||||||||||
Proceeds from exercise of stock options | 206,543 | 39,752 | 67,275 | 263,496 | 206,543 | 39,752 | ||||||||||||||||||
Proceeds from issuance of convertible debentures (net of fees) | — | 1,375,612 | — | |||||||||||||||||||||
Proceeds from issuance of convertible debentures, net of fees | – | – | 1,375,612 | |||||||||||||||||||||
Stock repurchase program | (320,224 | ) | — | — | (611,641 | ) | (320,224 | ) | – | |||||||||||||||
Debt extinguishment costs | (111,034 | ) | (167,801 | ) | — | – | (111,034 | ) | (167,801 | ) | ||||||||||||||
Settlement of US Interest Rate Swap | (70,495 | ) | — | — | – | (70,495 | ) | – | ||||||||||||||||
Proceeds from issuance of commercial paper | 4,085,486 | 2,041,304 | 933,709 | |||||||||||||||||||||
Payments of principal on commercial paper and long-term debt | (7,075,402 | ) | (3,399,773 | ) | (1,216,321 | ) | ||||||||||||||||||
Net increase (decrease) in short-term debt | 64,364 | (167,150 | ) | (308,623 | ) | |||||||||||||||||||
Decrease in commercial paper and long-term debt | (170,666 | ) | (2,989,916 | ) | (1,358,469 | ) | ||||||||||||||||||
Net increase (decrease) increase in short-term debt | (45,031 | ) | 64,364 | (167,150 | ) | |||||||||||||||||||
NET CASH USED IN FINANCING ACTIVITIES | (3,590,416 | ) | (582,338 | ) | (849,284 | ) | (993,692 | ) | (3,590,416 | ) | (582,338 | ) | ||||||||||||
Discontinued operations | 50,787 | 19,006 | 133,244 | |||||||||||||||||||||
Cash flows from discontinued operations (revised)4 | ||||||||||||||||||||||||
Discontinued operations – Operating activities | 2,972 | 66,399 | 190,845 | |||||||||||||||||||||
Discontinued operations – Investing activities | – | (15,612 | ) | (171,839 | ) | |||||||||||||||||||
| 2,972 | 50,787 | 19,006 | ||||||||||||||||||||||
Net (decrease) increase in cash before translation effect | (11,862 | ) | 59,627 | (16,180 | ) | (31,320 | ) | (11,862 | ) | 59,627 | ||||||||||||||
Translation effect on cash | 1,173 | 6,455 | 6,586 | (1,229 | ) | 1,173 | 6,455 | |||||||||||||||||
Cash, beginning of year | 234,192 | 168,110 | 177,704 | 223,503 | 234,192 | 168,110 | ||||||||||||||||||
Cash, end of year | $ | 223,503 | $ | 234,192 | $ | 168,110 | $ | 190,954 | $ | 223,503 | $ | 234,192 | ||||||||||||
| 1. | Includes multiclient seismic data costs, excluding impairment charges. |
| 2. | See Note |
| 3. | Net of the effect of business acquisitions and divestitures. |
| 4. | See Note 3Discontinued Operations. |
See theNotes to Consolidated Financial Statements
Part II, Item 8
39
SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS ANTILLES) AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
| (Stated in thousands) | |||||||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||
| Issued | In Treasury | Retained Income | Marked to Market | Pension Liability | Translation Adjustment | Comprehensive Income (Loss) | |||||||||||||||||||||
Balance, January 1, 2003 | $ | 2,170,965 | $ | (1,578,358 | ) | $ | 5,560,712 | $ | (72,989 | ) | $ | (203,564 | ) | $ | (270,628 | ) | $ | (2,580,338 | ) | ||||||||
Translation adjustment | 201,503 | $ | 201,503 | ||||||||||||||||||||||||
Derivatives marked to market | 60,356 | 60,356 | |||||||||||||||||||||||||
Minimum pension liability | (114,236 | ) | (114,236 | ) | |||||||||||||||||||||||
Tax benefit on minimum pension liability | 34,725 | 34,725 | |||||||||||||||||||||||||
Sale of investment in Grant Prideco stock | (9,871 | ) | (9,871 | ) | |||||||||||||||||||||||
Shares sold to optionees less shares exchanged | 15,335 | 24,271 | |||||||||||||||||||||||||
Shares granted to Directors | 81 | 65 | |||||||||||||||||||||||||
Proceeds from employee stock plans | 51,302 | 45,783 | |||||||||||||||||||||||||
Stock based compensation cost | 13,229 | ||||||||||||||||||||||||||
Net income | 383,002 | 383,002 | |||||||||||||||||||||||||
Dividend declared ($0.75 per share) | (437,970 | ) | |||||||||||||||||||||||||
Tax benefit on stock options | 7,576 | ||||||||||||||||||||||||||
Balance, December 31, 2003 | 2,258,488 | (1,508,239 | ) | 5,505,744 | (22,504 | ) | (283,075 | ) | (69,125 | ) | $ | 555,479 | |||||||||||||||
Translation adjustment | (27,370 | ) | $ | (27,370 | ) | ||||||||||||||||||||||
Derivatives marked to market | 1,097 | 1,097 | |||||||||||||||||||||||||
Hanover stock marked to market | 31,618 | 31,618 | |||||||||||||||||||||||||
Interest rate swap cancellation | 42,562 | 42,562 | |||||||||||||||||||||||||
Sale of SchlumbergerSema | 75,346 | (552,000 | ) | (476,654 | ) | ||||||||||||||||||||||
Sale of Axalto | (110,000 | ) | (110,000 | ) | |||||||||||||||||||||||
Minimum pension liability | (44,337 | ) | (44,337 | ) | |||||||||||||||||||||||
Tax benefit on minimum pension liability | 16,795 | 16,795 | |||||||||||||||||||||||||
Shares sold to optionees less shares exchanged | 101,329 | 105,214 | |||||||||||||||||||||||||
Shares granted to Directors | 560 | 270 | |||||||||||||||||||||||||
Proceeds from employee stock plans | 46,812 | 30,747 | |||||||||||||||||||||||||
Stock repurchase plan | (320,224 | ) | |||||||||||||||||||||||||
Purchase of PetroAlliance | 16,430 | 7,838 | |||||||||||||||||||||||||
Stock based compensation cost | 26,466 | ||||||||||||||||||||||||||
Shares issued on conversion of debentures | 2 | ||||||||||||||||||||||||||
Net income | 1,223,870 | 1,223,870 | |||||||||||||||||||||||||
Dividends declared ($0.75 per share) | (441,709 | ) | |||||||||||||||||||||||||
Tax benefit on stock options | 4,132 | ||||||||||||||||||||||||||
Balance, December 31, 2004 | 2,454,219 | (1,684,394 | ) | 6,287,905 | 52,773 | (235,271 | ) | (758,495 | ) | $ | 657,581 | ||||||||||||||||
Translation adjustment | 28,587 | $ | 28,587 | ||||||||||||||||||||||||
Derivatives marked to market | (38,197 | ) | (38,197 | ) | |||||||||||||||||||||||
Sale of Hanover Compressor stock | (31,618 | ) | (31,618 | ) | |||||||||||||||||||||||
Sale of Essentis | (7,043 | ) | (7,043 | ) | |||||||||||||||||||||||
Minimum pension liability | (80,505 | ) | (80,505 | ) | |||||||||||||||||||||||
Tax benefit on minimum pension liability | 24,290 | 24,290 | |||||||||||||||||||||||||
Shares sold to optionees less shares exchanged | 135,257 | 128,239 | |||||||||||||||||||||||||
Shares granted to Directors | 1,012 | 486 | |||||||||||||||||||||||||
Proceeds from employee stock plans | 49,499 | 28,484 | |||||||||||||||||||||||||
Stock repurchase plan | (611,641 | ) | |||||||||||||||||||||||||
Purchase of PetroAlliance | 53,438 | 25,550 | |||||||||||||||||||||||||
Stock based compensation cost | 40,204 | ||||||||||||||||||||||||||
Shares issued on conversion of debentures | 7 | ||||||||||||||||||||||||||
Net income | 2,206,967 | 2,206,967 | |||||||||||||||||||||||||
Dividends declared ($0.84 per share) | (495,102 | ) | |||||||||||||||||||||||||
Tax benefit on stock options | 16,934 | ||||||||||||||||||||||||||
Balance, December 31, 2005 | $ | 2,750,570 | $ | (2,113,276 | ) | $ | 7,999,770 | $ | (17,042 | ) | $ | (291,486 | ) | $ | (736,951 | ) | $ | 2,102,481 | |||||||||
See theNotes to Consolidated Financial Statements
Part II, Item 8
SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS
ANTILLES) AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTSHARES OF STOCKHOLDERS’ EQUITYCOMMON STOCK
| (Stated in thousands) | |||||||||||||||||||||||||||
| Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||
| Common Stock | Retained Income | Marked to Market | Pension Liability | Translation Adjustment | Comprehensive Income (Loss) | ||||||||||||||||||||||
| Issued | In Treasury | ||||||||||||||||||||||||||
Balance, January 1, 2002 | $ | 2,045,437 | $ | (1,694,884 | ) | $ | 8,314,766 | $ | (49,569 | ) | $ | — | $ | (237,269 | ) | $ | 374,583 | ||||||||||
Translation adjustment | (55,422 | ) | $ | (55,422 | ) | ||||||||||||||||||||||
Reed Hycalog disposition | 22,063 | 22,063 | |||||||||||||||||||||||||
Derivatives marked to market, net of tax | (33,291 | ) | (33,291 | ) | |||||||||||||||||||||||
Minimum pension liability (US/UK Plans) | (313,564 | ) | (313,564 | ) | |||||||||||||||||||||||
Tax benefit on minimum pension liability | 110,000 | 110,000 | |||||||||||||||||||||||||
Investment in Grant Prideco stock, net of tax | 9,871 | 9,871 | |||||||||||||||||||||||||
Shares sold to optionees less shares exchanged | 25,410 | 41,671 | |||||||||||||||||||||||||
Shares granted to Directors | 129 | 65 | |||||||||||||||||||||||||
Proceeds from employee stock plans | 58,056 | 49,754 | |||||||||||||||||||||||||
Net loss | (2,319,995 | ) | (2,319,995 | ) | |||||||||||||||||||||||
Dividends declared ($0.75 per share) | (434,059 | ) | |||||||||||||||||||||||||
Technoguide acquisition | 34,496 | 25,036 | |||||||||||||||||||||||||
Tax benefit on stock options | 7,437 | ||||||||||||||||||||||||||
Balance, December 31, 2002 | 2,170,965 | (1,578,358 | ) | 5,560,712 | (72,989 | ) | (203,564 | ) | (270,628 | ) | $ | (2,580,338 | ) | ||||||||||||||
Translation adjustment | 201,503 | $ | 201,503 | ||||||||||||||||||||||||
Derivatives marked to market, net of tax | 60,356 | 60,356 | |||||||||||||||||||||||||
Minimum pension liability (US/UK Plans) | (114,236 | ) | (114,236 | ) | |||||||||||||||||||||||
Tax benefit on minimum pension liability | 34,725 | 34,725 | |||||||||||||||||||||||||
Sale of investment in Grant Prideco stock, net of tax | (9,871 | ) | (9,871 | ) | |||||||||||||||||||||||
Shares sold to optionees less shares exchanged | 15,335 | 24,271 | |||||||||||||||||||||||||
Shares granted to Directors | 81 | 65 | |||||||||||||||||||||||||
Proceeds from employee stock plans | 51,302 | 45,783 | |||||||||||||||||||||||||
Stock based compensation cost | 13,229 | ||||||||||||||||||||||||||
Net income | 383,002 | 383,002 | |||||||||||||||||||||||||
Dividends declared ($0.75 per share) | (437,970 | ) | |||||||||||||||||||||||||
Tax benefit on stock options | 7,576 | ||||||||||||||||||||||||||
Balance, December 31, 2003 | 2,258,488 | (1,508,239 | ) | 5,505,744 | (22,504 | ) | (283,075 | ) | (69,125 | ) | $ | 555,479 | |||||||||||||||
Translation adjustment | (27,370 | ) | $ | (27,370 | ) | ||||||||||||||||||||||
Derivatives marked to market, net of tax | 1,097 | 1,097 | |||||||||||||||||||||||||
Hanover stock marked to market, net of tax | 31,618 | 31,618 | |||||||||||||||||||||||||
Interest rate swap cancellation, net of tax | 42,562 | 42,562 | |||||||||||||||||||||||||
Sale of SchlumbergerSema | 75,346 | (552,000 | ) | (476,654 | ) | ||||||||||||||||||||||
Sale of Axalto | (110,000 | ) | (110,000 | ) | |||||||||||||||||||||||
Minimum pension liability (US/UK Plans) | (44,337 | ) | (44,337 | ) | |||||||||||||||||||||||
Tax benefit on minimum pension liability | 16,795 | 16,795 | |||||||||||||||||||||||||
Shares sold to optionees less shares exchanged | 101,329 | 105,214 | |||||||||||||||||||||||||
Shares granted to Directors | 560 | 270 | |||||||||||||||||||||||||
Proceeds from employee stock plans | 46,812 | 30,747 | |||||||||||||||||||||||||
Stock repurchase plan | (320,224 | ) | |||||||||||||||||||||||||
Purchase of PetroAlliance | 16,430 | 7,838 | |||||||||||||||||||||||||
Stock based compensation cost | 26,466 | ||||||||||||||||||||||||||
Shares issued on conversion of debentures | 2 | ||||||||||||||||||||||||||
Net income | 1,223,870 | 1,223,870 | |||||||||||||||||||||||||
Dividends declared ($0.75 per share) | (441,709 | ) | |||||||||||||||||||||||||
Tax benefit on stock options | 4,132 | ||||||||||||||||||||||||||
Balance, December 31, 2004 | $ | 2,454,219 | $ | (1,684,394 | ) | $ | 6,287,905 | $ | 52,773 | $ | (235,271 | ) | $ | (758,495 | ) | $ | 657,581 | ||||||||||
| Issued | In Treasury | Outstanding | ||||||
Balance, January 1, 2003 | 667,104,668 | (84,931,553 | ) | 582,173,115 | ||||
Shares sold to optionees less shares exchanged | 1,320 | 1,306,305 | 1,307,625 | |||||
Shares granted to Directors | – | 3,500 | 3,500 | |||||
Employee stock plan | – | 2,464,088 | 2,464,088 | |||||
Balance, December 31, 2003 | 667,105,988 | (81,157,660 | ) | 585,948,328 | ||||
Shares sold to optionees less shares exchanged | – | 5,610,259 | 5,610,259 | |||||
Shares granted to Directors | – | 14,500 | 14,500 | |||||
Employee stock plan | – | 1,654,879 | 1,654,879 | |||||
Stock repurchase plan | – | (5,148,200 | ) | (5,148,200 | ) | |||
Purchase of PetroAlliance | – | 421,870 | 421,870 | |||||
Shares issued on conversion of debentures | 27 | – | 27 | |||||
Balance, December 31, 2004 | 667,106,015 | (78,604,352 | ) | 588,501,663 | ||||
Shares sold to optionees less shares exchanged | – | 5,456,707 | 5,456,707 | |||||
Shares granted to Directors | – | 22,000 | 22,000 | |||||
Employee stock plan | – | 1,308,749 | 1,308,749 | |||||
Stock repurchase plan | – | (7,637,400 | ) | (7,637,400 | ) | |||
Purchase of PetroAlliance | – | 1,150,323 | 1,150,323 | |||||
Shares issued on conversion of debentures | 67 | – | 67 | |||||
Balance, December 31, 2005 | 667,106,082 | (78,303,973 | ) | 588,802,109 | ||||
See the Notes to Consolidated Financial Statements
Part II, Item 8
40
SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS
ANTILLES) AND SUBSIDIARY COMPANIES
SHARES OF COMMON STOCK
| Issued | In Treasury | Shares Outstanding | ||||||
Balance, January 1, 2002 | 667,094,178 | (91,203,780 | ) | 575,890,398 | ||||
Shares sold to optionees less shares exchanged | 10,490 | 2,243,400 | 2,253,890 | |||||
Shares granted to Directors | — | 3,500 | 3,500 | |||||
Employee stock plan | — | 2,677,842 | 2,677,842 | |||||
Acquisition of Technoguide | — | 1,347,485 | 1,347,485 | |||||
Balance, December 31, 2002 | 667,104,668 | (84,931,553 | ) | 582,173,115 | ||||
Shares sold to optionees less shares exchanged | 1,320 | 1,306,305 | 1,307,625 | |||||
Shares granted to Directors | — | 3,500 | 3,500 | |||||
Employee stock plan | — | 2,464,088 | 2,464,088 | |||||
Balance, December 31, 2003 | 667,105,988 | (81,157,660 | ) | 585,948,328 | ||||
Shares sold to optionees less shares exchanged | — | 5,610,259 | 5,610,259 | |||||
Shares granted to Directors | — | 14,500 | 14,500 | |||||
Employee stock plan | — | 1,654,879 | 1,654,879 | |||||
Stock repurchase plan | — | (5,148,200 | ) | (5,148,200 | ) | |||
Purchase of PetroAlliance | — | 421,870 | 421,870 | |||||
Shares issued on conversion of debentures | 27 | — | 27 | |||||
Balance, December 31, 2004 | 667,106,015 | (78,604,352 | ) | 588,501,663 | ||||
See theNotes to Consolidated Financial Statements
41
Notes to Consolidated Financial Statements1. Business Description
Founded in 1927, Schlumberger Limited (Schlumberger) is the world’s leading oilfield services company, supplying technology, project management, and information solutions that optimize performance in the oil and gas industry. Schlumberger consists of two business segments: Oilfield Services and WesternGeco. Oilfield Services is the world’s premier oilfield service company supplying a wide range of technology services and solutions to the international petroleum industry. The Oilfield Services segment provides virtually all exploration and production services required during the life of an oil and gas reservoir. WesternGeco provides comprehensive worldwide reservoir imaging, monitoring, and development services, with extensive seismic crews and data processing centers as well as a large multiclient seismic library. Services range from 3D and time-lapse (4D) seismic surveys to multi-component surveys for delineating prospects and reservoir management. WesternGeco is 70% owned by Schlumberger and 30% owned by Baker Hughes.
2. Summary of Accounting Policies
TheConsolidated Financial Statements of Schlumberger Limited have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation
The accompanyingConsolidated Financial Statements include the accounts of majority-owned subsidiaries. Significant 20% - 50%Schlumberger, its wholly owned companiessubsidiaries, and subsidiaries over which it exercises a controlling financial interest. All significant intercompany transactions and balances have been eliminated. Investments in entities in which Schlumberger does not have a controlling financial interest, but over which it has significant influence are carried onaccounted for using the equity method and classified inInvestments in Affiliated Companies. The pro ratamethod. Schlumberger’s share of Schlumbergerthe after-tax earnings of equity method investees is included inInterest and other income. All inter-company accountsInvestments in which Schlumberger does not have the ability to exercise significant influence are accounted for using the cost method. Both equity and transactions have been eliminated.cost method investments are classified inInvestments in Affiliated Companies.
Reclassifications
Certain items from prior years have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, Schlumberger evaluates its estimates, including those related to bad debts,collectability of accounts receivable, valuation of inventories and investments, recoverability of goodwill and intangible assets, income taxes, multiclient seismic data, contingencies and actuarial assumptions for employee benefit plans. Schlumberger bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Part II, Item 8
Revenue Recognition
Oilfield Services
Products and Services Revenue
Schlumberger’sSchlumberger recognizes revenue for products and services are sold based upon purchase orders, contracts or other persuasive evidence of an arrangement with the customer that include fixed or determinable prices and that do not include right of return or other similar provisions or other significant post delivery obligations. Revenue is recognized for products upon delivery, customer acceptance and when collectibility is reasonably assured. Sale of product represented less than 10% of Schlumberger’s operating revenue in 2004. Revenue is recognized when services are rendered and collectibility is reasonably assured. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimated.
42
Software Revenue
Revenue derived from the sale of licenses of Schlumberger software includes installation, maintenance, and related services may include installation, consulting and training services.
If services are not essential to the functionality of the software, the revenue for each element of the contract is recognized separately based on its respective vendor specific objective evidence of fair value when all of the following conditions are met: a signed contract is obtained, delivery has occurred, the fee is fixed or determinable and collectibility is probable.
If an ongoing vendor obligation exists under the license arrangement, or if any uncertainties with regard to customer acceptance are significant, revenue for the related element is deferred based on its vendor specific objective evidence of fair value. Vendor specific objective evidence of fair value is determined as being the price for the element when sold separately. If vendor specific objective evidence of fair value does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.
The percentage of completion method of accounting is applied to contracts whereby software is being customized to a customer’s specifications.
WesternGeco
Revenues from all services are recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable and collectibility is reasonably assured. Revenues from contract services performed on a dayrate basis are recognized as the service is performed. Revenues from other contract services, including pre-funded multiclient surveys, are recognized as the seismic data is acquired and/or processed on a proportionate basis as work is performed. This method requires revenue to be recognized based upon quantifiable measures of progress, such as square kilometers acquired. Multiclient data surveys are licensed or sold to customers on a non-transferable basis. Revenues on completed multiclient data surveys are recognized upon obtaining a signed licensing agreement and providing customers access to such data. Losses on contracts are recognized during the period in which the loss first becomes probable and can be reasonably estimated.
Multiple Deliverable Arrangements
Sales in both segments may be generated from contractual arrangements that include multiple deliverables. Revenues from these arrangements are recognized as each item is delivered based on their relative fair value and when the delivered items have stand-alone value to the customer.
Translation of Non-USNon-United States Currencies
Schlumberger’s functional currency is primarily the US dollar. All assets and liabilities recorded in functional currencies other than US dollars are translated at current exchange rates. The resulting adjustments are charged or credited directly to theStockholders’ Equity section of theConsolidated Balance Sheet. Revenue and expenses are translated at the weighted-average exchange rates for the period. All realized and unrealized transaction gains and losses are included in income in the period in which they occur. Schlumberger’s policy is to hedge against unrealized gains and losses on a monthly basis. Transaction losses of $13 million and $9 million were recognized in 2005 and 2004, respectively. Included in the 20042003 results were transaction losses of $9 million, compared with gaingains of $1 million in 2003 and a loss of $2 million in 2002.million.
Part II, Item 8
43
Currency exchange contracts are entered into as a hedge against the effect of future settlement of assets and liabilities denominated in other than the functional currency of the individual businesses. Gains or losses on the contracts are recognized when the currency exchange rates fluctuate, and the resulting charge or credit partially offsets the unrealized currency gains or losses on those assets and liabilities. On December 31, 2004, contracts were outstanding for the US dollar equivalent of $1.1 billion in various foreign currencies. These contracts mature on various dates in 2005.
Investments
TheConsolidated Balance Sheet reflects the Schlumberger investment portfolio separated between current and long term, based on maturity. Under normal circumstances it is the intent of Schlumberger to hold the investments until maturity, with the exception of investments that are considered trading (December 31, 2005 – $157 million; December 31, 2004 – $153 million). BothShort-term investments andFixed income investments, held to maturity are comprised primarily of money market funds, eurodollar time deposits, certificates of deposit and commercial paper, euronotes and eurobonds, and are substantially denominated in US dollars. They are stated at cost plus accrued interest, which approximates market. Short-term investments that are designated as trading are stated at market. The unrealized gains/losses on such securities at both December 31, 20042005 and 20032004 were not significant.
Long-term fixed income investments of $360 million mature as follows: $109 million in 2007, $136 million in 2008, $95 million in 2009 and $20 million in 2010.
For purposes of theConsolidated Statement of Cash Flows, Schlumberger does not consider short-term investments to be cash equivalents as a significant portion of them hashave original maturities in excess of three months.
At December 31, 2004, Schlumberger had an investment in Hanover Compressor Company which was classified as an available-for-sale security. Accordingly, it was stated at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity. The fair market value of Schlumberger’s investment in Hanover Compressor was $123 million at December 31, 2004 and it was included inOther Assets in theConsolidated Balance Sheet. As further described in Note 4, Schlumberger sold this investment in 2005.
Inventories
Inventories are stated at average cost or at market, whichever is lower. Inventory consists of materials, supplies and finished goods. Costs included in inventories consist of materials, direct labor and manufacturing overhead.
Fixed Assets and Depreciation
Fixed assets are stated at cost less accumulated depreciation, which is provided for by charges to income over the estimated useful lives of the assets using the straight-line method. Fixed assets include the manufacturing cost of oilfield technical equipment manufactured or assembled by subsidiaries of Schlumberger. Expenditures for renewals, replacements and improvements are capitalized. Maintenance and repairs are charged to operating expenses as incurred. Upon sale or other disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income.
Multiclient Seismic Data
The multiclient library consists of completed and in-process seismic surveys that are licensed on a nonexclusive basis. This data may be acquired and/or processed by Schlumberger or subcontractors. Multiclient surveys are primarily generated utilizing Schlumberger resources. Schlumberger capitalizes costs directly incurred in acquiring and processing the multiclient seismic data. Such costs are charged toCost of goods sold and services based on the percentage of the total costs to the estimated total revenue that Schlumberger expects to receive from the sales of such data. However, under no circumstance will an individual survey carry a net book value greater than a 4- year4-year straight-lined amortized value.
The carrying value of the multiclient library is reviewed for impairment annually as well as when an event or change in circumstance indicating impairment may have occurred. Adjustments to the carrying value are recorded when it is determined that estimated future revenues,cash flows estimation of which involves significant judgment on the part of Schlumberger, would not be sufficient to recover the carrying value of the surveys. Significant adverse chargeschanges in Schlumberger’s estimated future revenuescash flows could result in impairment charges in a future period.
Part II, Item 8
44
Goodwill, Other Intangibles and Long-lived Assets
Schlumberger records as goodwill the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired. Statement of Financial Accounting Standards 142, “Goodwill and Other Intangible Assets” (SFAS 142), requires goodwill to be tested for impairment annually as well as when an event or change in circumstance indicates an impairment may have occurred. Goodwill is tested for impairment using a two-step approach. The first step tests for impairment by comparing the fair value of Schlumberger’s individual reporting units to their carrying amount to determine if there is a potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value.
For purposes of performing the impairment test for goodwill as required by SFAS 142, Schlumberger’s reporting units are primarily the four geographic areas comprising the Oilfield Services segment in addition to the WesternGeco segment. Schlumberger estimates the fair value of these reporting units using a discounted cash flow analysis and/or applying various market multiples. From time to time a third party valuation expert may be utilized to assist in the determination of fair value. Determining the fair value of a reporting unit is judgmental and often involves the use of significant estimates and assumptions. Schlumberger’s estimates of the fair value of each of its previously mentioned reporting units was significantly in excess of their respective carrying value duringvalues for 2005, 2004 2003 and 2002.2003. Schlumberger performs the annual goodwill impairment test of its WesternGeco reporting unit on October 1st1st of every year while the reporting units comprising the Oilfield Services segment are tested as of December 31st.
31st.
Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management. In order to estimate the fair value of a long-lived asset, Schlumberger may engage a third-party to assist with the valuation. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, Schlumberger could be required to recognize impairment charges in the future.
Schlumberger evaluates the remaining useful life of its intangible assets on a periodic basis to determine whether events and circumstances warrant a revision to the remaining estimated amortization period.
Schlumberger capitalizes certain costs of internally developed software. Capitalized costs include purchased materials and services, payroll and payroll related costs and interest costs. The costs of internally developed software are amortized on a straight-line basis over the estimated useful life, which is principally 5 to 7 years.
Taxes on Income
Schlumberger and its subsidiaries compute taxes on income in accordance with the tax rules and regulations of the many taxing authorities where the income is earned. The income tax rates imposed by these taxing authorities vary substantially. Taxable income may differ from pretax income for financial accounting purposes. To the extent that differences are due to revenue or expense items reported in one period for tax purposes and in another period for financial accounting purposes, an appropriate provision for deferred income taxes is made. Any effect of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of the deferred tax asset will not be realized in the future, Schlumberger provides a corresponding valuation allowance against deferred tax assets.
Part II, Item 8
45
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 regulation, 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.
Approximately $3.0$4.5 billion of consolidated income retained for use in the business on December 31, 20042005 represented undistributed earnings of consolidated subsidiaries and the pro rata SchlumbergerSchlumberger’s share of 20%-50% owned companies.equity method investees. No provision is made for deferred income taxes on those earnings considered to be indefinitely reinvested or earnings that would not be taxed when remitted.
Concentration of Credit Risk
Schlumberger’s financial instruments which potentially subject the companyassets that are exposed to concentrationconcentrations of credit risk consist primarily of accounts receivable.cash, short-term investments, fixed income investments held to maturity, and receivables from clients. Schlumberger places its cash, short-term investments and fixed income investments held to maturity with financial institutions and corporations, and limits the amount of credit exposure with any one of them. Schlumberger regularly evaluates the creditworthiness of the issuers in which it invests. The receivables from clients are spread over many countries and customers. Schlumberger maintains an allowance for uncollectible accounts receivable based on expected collectibility and performs ongoing credit evaluations of its customers’ financial condition.
Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income, as adjusted for the interest on convertible debentures unless the adjustment is anti-dilutive, by the weighted average number of common shares outstanding assuming dilution, the calculation of which assumes (i) that all stock options which are in the money are exercised at the beginning of the period and the proceeds used by Schlumberger to purchase shares at the average market price for the period, and (ii) the convertible debentures have been converted unless the effect is anti-dilutive.
Part II, Item 8
The following is a reconciliation from basic earnings per share to diluted earnings per share from continuing operations for each of the last three years:
46
| (Stated in thousands except per share amounts) | (Stated in thousands except per share amounts) | ||||||||||||||||||||||
| (Stated in thousands except per share amounts) | Income from Continuing Operations | Weighted Average Shares Outstanding | Earnings Per Share from Continuing Operations | ||||||||||||||||||||
2005 | |||||||||||||||||||||||
Basic | $ | 2,198,995 | 589,288 | $ | 3.73 | ||||||||||||||||||
Assumed conversion of debentures | 28,788 | 19,105 | |||||||||||||||||||||
Assumed exercise of stock options | 6,465 | ||||||||||||||||||||||
Diluted | $ | 2,227,783 | 614,858 | $ | 3.62 | ||||||||||||||||||
| Income from Continuing Operations | Weighted Average Shares Outstanding | Earnings Per Share from Continuing Operations | |||||||||||||||||||||
2004 | |||||||||||||||||||||||
Basic | $ | 1,014,052 | 589,089 | $ | 1.72 | $ | 1,014,052 | 589,089 | $ | 1.72 | |||||||||||||
Assumed conversion of debentures | 28,788 | 19,105 | 28,788 | 19,105 | |||||||||||||||||||
Assumed exercise of stock options | 4,678 | 4,678 | |||||||||||||||||||||
Diluted | $ | 1,042,840 | 612,872 | $ | 1.70 | ||||||||||||||||||
| $ | 1,042,840 | 612,872 | $ | 1.70 | |||||||||||||||||||
2003 | |||||||||||||||||||||||
Basic | $ | 398,169 | 583,904 | $ | 0.68 | $ | 398,169 | 583,904 | $ | 0.68 | |||||||||||||
Assumed conversion of debentures | 15,938 | 10,566 | 15,938 | 10,566 | |||||||||||||||||||
Assumed exercise of stock options | 2,587 | 2,587 | |||||||||||||||||||||
| $ | 414,107 | 597,057 | $ | 0.69 | $ | 414,107 | 597,057 | $ | 0.69 | ||||||||||||||
less: Anti-dilutive effect of assumed conversion of debentures | (15,938 | ) | (10,566 | ) | (0.01 | ) | (15,938 | ) | (10,566 | ) | (0.01 | ) | |||||||||||
| $ | 398,169 | 586,491 | $ | 0.68 | |||||||||||||||||||
2002 | |||||||||||||||||||||||
Basic | $ | 488,857 | 578,588 | $ | 0.84 | ||||||||||||||||||
Assumed exercise of stock options | 3,345 | ||||||||||||||||||||||
Diluted | $ | 488,857 | 581,933 | $ | 0.84 | $ | 398,169 | $ | 586,491 | $ | 0.68 | ||||||||||||
Employee stock options to purchase approximately 8.7 million 24.8 million and 28.124.8 million shares of common stock at December 31, 2004 2003 and 2002,2003, respectively, were outstanding but not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common stock, and therefore, the effect on diluted earnings per share would have been anti-dilutive. In addition, computation of diluted earnings per share at December 31, 2003 also excludes the effects of approximately 19.1 million common shares issuable upon conversion 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.
Research & Engineering
All research and engineering expenditures are expensed as incurred, including costs relating to patents or rights that may result from such expenditures.
New Accounting Standard3. Discontinued Operations
In December 2004,During the Financial Accounting Standards Board issued SFAS 123R(Share-Based Payment.)The standard amends SFAS 123 (Accounting for Stock Based Compensation)second quarter of 2005, Credence Systems Corporation, the current owners of Schlumberger’s former NPTest semiconductor testing business, agreed to settle an outstanding contingent liability by paying Schlumberger $4 million in cash and concludes that services received from employees in exchange for stock-based compensation results615,157 shares of common stock valued at approximately $5 million, resulting in a cost$9 million gain. Schlumberger sold its NPTest semiconductor testing business in July 2003 and reported it as a discontinued operation. This $9 million pretax and after-tax gain is reported asIncome from Discontinued Operations in theConsolidated Statement of Income in the second quarter of 2005.
Part II, Item 8
During the first quarter of 2005, Schlumberger completed the sales of its Global Tel*Link, Public Phones and Essentis activities for $18 million in cash. The results of these businesses were reported asDiscontinued Operations in theConsolidated Statement of Income and, in the fourth quarter of 2004 include accruals of approximately $15 million relating to the employer that must be recognized net losses on the sale of Public Phones and Essentis and a $17 million impairment charge relating to goodwill and intangible assets associated with the Essentis business.
The assets and liabilities of the Public Phones, Essentis and Global Tel*Link businesses which were subsequently eliminated from the SchlumbergerConsolidated Balance Sheetin the financial statements. The costfirst quarter of such awards should be measured2005 were aggregated and presented on theConsolidated Balance Sheet at fair value at the date of grant. SFAS 123R provides public companies with a choice of transition methods to implement the standard. Schlumberger anticipates applying the modified prospective method whereby companies would recognize compensation cost for the unamortized portion of vested awards outstanding at the effective date of SFAS 123R (July 1, 2005 for Schlumberger) and granted after January 1, 1995. Such cost will be recognized in Schlumberger’s financial statements over the remaining vesting period. As described in Note 19, in 2003 Schlumberger adopted the fair value recognition provisions of SFAS Nos. 123 and 148 (Accounting for Stock-Based Compensation – Transition and Disclosure) on a prospective basis for grants after January 1, 2003. Therefore, effective July 1, 2005, Schlumberger will have to apply the provisions of SFAS 123R to the unvested portion of awards granted during the period of January 1, 1995 to December 31, 2002. The adoption2004 asAssets held for sale ($65 million) andLiabilities held for sale ($35 million).
An analysis of this standardthe Assets and Liabilities held for sale at December 31, 2004 is currently expected to reduce Schlumberger’s 2005 diluted earnings per share by approximately $0.03.as follows:
47
| (Stated in millions) | |||
Assets held for sale | |||
Cash | $ | 7 | |
Receivables | 18 | ||
Other current assets | 13 | ||
Other assets | 27 | ||
| $ | 65 | ||
Liabilities held for sale | |||
Accounts payable and accrued liabilities | $ | 26 | |
Other liabilities | 9 | ||
| $ | 35 | ||
The results of the following businesses are reported asDiscontinued Operations in theConsolidated Statement of Income. All gains and losses disclosed below are presented net of related income taxes, where applicable.
2004
| · | The sale of the SchlumbergerSema business was completed in January 2004. Schlumberger received €393 million after adjustments ($495 million) in cash and 19.3 million shares of common stock of Atos Origin with a value of €1.02 billion ($1.27 billion), which represented approximately 29% of the outstanding common shares of Atos Origin after the transaction was completed. The results of SchlumbergerSema include, in the first quarter of 2004, a gain of $26 million on the sale and in the second quarter of 2004, a credit of $15 million related to adjustments to several accruals. The net assets were approximately $2.2 billion, including $1.3 billion of goodwill. |
On February 2, 2004, Schlumberger sold 9.6 million of the Atos Origin shares for a net consideration of €500 million ($625 million). As a result of this sale, Schlumberger’s investment was reduced to approximately 15% of the outstanding common shares of Atos Origin. The equity in earnings representing Schlumberger’s interest in Atos Origin for the four days ending February 2, 2004 was not material. This investment was accounted for using the cost method as of February 2, 2004. On April 30, 2004 Schlumberger sold its remaining holding of 9.7 million Atos Origin shares for consideration of €465 million ($551 million) net of expenses. The losses on the sales of the Atos Origin shares of $21 million are classified inInterest and other incomein the Consolidated Statement of Income (see Note 5)4).
| · | In February 2004, Schlumberger sold its Telecom Billing Software business for $37 million in cash, excluding potential future cash proceeds of up to $10 million, of which $7 million was received in the third quarter of 2004. A $17 million gain on the sale was recognized in the first quarter of 2004 and a gain of $7 million related to the additional cash proceeds received was recognized in the third quarter. The net assets were approximately $17 million. |
At December 31, 2003, the assets and liabilities of the SchlumbergerSema business that were subsequently eliminated from Schlumberger’sConsolidated Balance Sheet, were aggregated and presented asAssets held for sale ($3.24 billion) andLiabilities held for sale ($1.22 billion).
Part II, Item 8
The components of theAssets and Liabilities held for sale as of December 31, 2003 is as follows:
| · | In March 2004, Schlumberger sold its Infodata business for $104 million in cash. A $48 million gain on the sale was recognized in the first quarter of 2004 and an additional $3 million gain was recognized in the fourth quarter of 2004. The net assets were approximately $47 million, including goodwill of $42 million. |
| (Stated in millions) | |||
Assets held for sale | |||
Receivables | $ | 978 | |
Inventories | 37 | ||
Other current assets | 159 | ||
Fixed assets | 481 | ||
Goodwill | 1,334 | ||
Intangible assets | 158 | ||
Deferred taxes | 35 | ||
Other assets | 56 | ||
| $ | 3,238 | ||
Liabilities held for sale | |||
Accounts payable and accrued liabilities | $ | 1,066 | |
Liability for taxes on income | 14 | ||
Other liabilities | 133 | ||
Minority interest | 5 | ||
| $ | 1,218 | ||
| · | In April 2004, Schlumberger completed the sale of its Business Continuity (BCO) business for $237 million in cash. A $48 million gain on the sale was recognized in the second quarter of 2004. The net assets were approximately $160 million, including goodwill of $83 million. |
48
| · | In May 2004, Schlumberger’s wholly owned subsidiary Schlumberger BV sold, via a public offering, 34.8 million ordinary shares that it had held in its smart card business Axalto Holding NV, which represented 87% of the total ordinary shares outstanding. The sale price was €14.80 per share, resulting in net proceeds, after expenses, of $606 million, including a subsequent placement of 166,250 shares. A $7 million loss on the sale was recognized in the second quarter of 2004. |
In the third quarter of 2004, a gain of $18 million was recognized consisting of (1) a $9 million gain on the sale of Schlumberger’s residual investment of 5.1 million shares in Axalto (the sale price was €16.59 per share giving net proceeds, after expenses, of $99 million) and (2) a $9 million reversal of a liability related to the sale. The net assets were approximately $700 million, including goodwill of $415 million.
| In July 2004, Schlumberger completed the sale of its Electricity Metering North America business for $248 million in cash. The results of Electricity Metering North America included a net gain of $25 million including a |
The assets and liabilities which will be eliminated from the SchlumbergerConsolidated Balance Sheetin the first quarter of 2005 have been aggregated and presented on theConsolidated Balance Sheet at December 31, 2004 asAssets held for sale ($65 million) andLiabilities held for sale ($35 million).
49
An analysis of the Assets and Liabilities held for sale at December 31, 2004 is as follows:
| (Stated in millions) | |||
Assets held for sale | |||
Cash | $ | 7 | |
Receivables | 18 | ||
Other current assets | 13 | ||
Other assets | 27 | ||
| $ | 65 | ||
Liabilities held for sale | |||
Accounts payable and accrued liabilities | $ | 26 | |
Other liabilities | 9 | ||
| $ | 35 | ||
2003
| · | In July 2003, Schlumberger completed the sale of its NPTest semiconductor testing business to a partnership led by Francisco Partners and Shah Management. The proceeds received were $220 million in cash, resulting in a $12 million loss on the sale. Additionally, the partnership has a contingent obligation to make a further payment to Schlumberger under certain circumstances. The net assets were $202 million. |
| · | In August 2003, Schlumberger completed the sale of its Verification Systems business by a proceed-free management buyout resulting in an $18 million loss on the sale. The net assets were $17 million. |
| · | In October 2003, Schlumberger completed the sale of its e-City ‘pay & display’ parking solutions business to Apax Partners. The proceeds received were $84 million in cash resulting in a $56 million loss on the sale. The net assets were $120 million, including $65 million of goodwill. |
2002
Part II, Item 8
The following table summarizes the results of these discontinued operations:
| (Stated in millions) | ||||||||||||||||||||||
| (Stated in millions) | (Stated in millions) | |||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||
Revenues | $ | 467 | $ | 4,367 | $ | 4,311 | $ | 8 | $ | 590 | $ | 4,367 | ||||||||||
Income (loss) before taxes | $ | 63 | $ | 95 | $ | (2,841 | ) | $ | (1 | ) | $ | 55 | $ | 104 | ||||||||
Tax expense | 16 | 34 | 31 | – | 16 | 33 | ||||||||||||||||
Gains (losses) on disposal, net of tax | 163 | (76 | ) | 63 | 9 | 171 | (86 | ) | ||||||||||||||
Income (loss) from discontinued operations | $ | 210 | $ | (15 | ) | $ | (2,809 | ) | $ | 8 | $ | 210 | $ | (15 | ) | |||||||
50
SchlumbergerSema Goodwill4. Charges and Other Charges – Discontinued operationsCredits
On December 10, 2002, Schlumberger announced thatrecorded the Board of Directors had approved an updated strategy for its SchlumbergerSema business segment. The new strategic plan outlook, current business values and the reorganization of SchlumbergerSema constituted significant events that required an impairment analysis to be performedfollowing charges/credits in accordance with SFAS 142. SchlumbergerSema was ‘valued’ on a stand-alone basis; each reporting unit within SchlumbergerSema was valued using a discounted cash flow analysis based on a long-term forecast prepared by SchlumbergerSema management with the assistance of a third party valuation expert. The implied multiples yielded by the discounted cash flow analysis were compared to observed trading multiples of comparable companies and recent transactions in the IT services industry to assess the fair value of the reporting units. The fair value was below the book value. As a result, a $2.638 billion pretax and after-tax goodwill impairment charge was recorded. This impairment reflected the difficulties of the telecommunications industry and the severely depressed market values of the IT companies serving SchlumbergerSema’s sector at the time of the charge. Certain intangible assets were also identified and written down as part of this process resulting in a $147 million pretax charge ($132 million after-tax). Additional charges recorded included $97 million ($78 million after-tax) of severance, facility and other costs in an effort to reduce costs at SchlumbergerSema and a $52 million valuation allowance against a deferred tax asset in Europe.continuing operations:
The following is a summary of the above 2002 charges included in loss from discontinued operations:Hanover Compressor Company
| (Stated in millions) | |||||||||||||
| Pretax | Tax | Min Int | Net | ||||||||||
Charges & Credits: | |||||||||||||
- Goodwill impairment | $ | 2,638 | $ | — | $ | — | $ | 2,638 | |||||
- Intangibles impairment | 147 | 15 | — | 132 | |||||||||
- SchlumbergerSema severance and other | 97 | 19 | — | 78 | |||||||||
- Valuation allowance | — | (52 | ) | — | 52 | ||||||||
| $ | 2,882 | $ | (18 | ) | $ | — | $ | 2,900 | |||||
In August 2001, Schlumberger sold its Oilfield Services worldwide gas compression activity to Hanover Compressor Company. The proceeds included 8.7 million shares of Hanover Compressor common stock, with a value at closing of $173 million which was restricted from sale until August 30, 2004, and a $150 million long-term subordinated note maturing December 15, 2005. Schlumberger’s investment in Hanover Compressor, which is classified as an available-for-sale security, is stated at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity, net of tax. This investment is included inOther Assets in theConsolidated Balance Sheet.
In the fourth quarter of 2003, Schlumberger sold the subordinated note for $177 million and realized a pretax gain of $32 million ($20 million after-tax). The pretax gain is classified inInterest and other income in theConsolidated Statement of Income.
At December 31, 2003, the carrying value of Schlumberger’s investment in Hanover Compressor common stock exceeded the market value. As the decline in the market value of the Stockstock was deemed to be “other than temporary”, Schlumberger wrote down the cost basis of its investment to the fair market value of $91.4 million at December 31, 2003 and recorded a pretax and after-tax impairment charge of $81.2$81 million classified inCost of goods sold and servicesin accordance with generally accepted accounting principles (SFAS No. 115)theConsolidated Statement of Income.
At December 31, 2004,In the fair market valuefourth quarter of Schlumberger’s2005, Schlumberger sold its investment in Hanover Compressor was $123Company for net proceeds of $110 million resulting in a pretax and after-tax gain of $21 million.
Schlumberger recorded The pretax gain is classified inInterest and other income in the following charges/credits in continuing operations:Consolidated Statement of Income.
Debt Extinguishment Costs
In June 2004, Schlumberger Technology Corporation bought back and retired $351 million of its outstanding $1 billion 6.5% Notes due 2012. As a result, Schlumberger recorded a pretax charge of $37 million ($23 million after-tax), which included market premium and transaction costs.
51
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.
Between June 12 and July 22, 2003, subsidiaries of Schlumberger launched and concluded tender offers to acquire three series of outstanding European bonds; $1.3 billion of principal was repurchased for a total cost of $1.5 billion, which included the premium, and issuing and tender costs. The total pretax and after-tax charge on the tenders was $168 million, of which $81.5 million was recorded in the second quarter of 2003, when the first tender closed, with the balance of $86.3 million recorded in the third quarter of 2003.
The above pretax charges are classified inDebt extinguishment costs in the Consolidated Statement of Income.
Part II, Item 8
Other Charges and Credits
2005
Third quarter of 2005:
Schlumberger recorded a pretax and after-tax gain of approximately $18 million relating to the resolution of a contingency associated with the March 2005 sale of its facility in Montrouge, France. This gain is classified inInterest and other income in theConsolidated Statement of Income.Income.
First quarter of 2005:
Other ChargesIn March 2005, Schlumberger sold its facility in Montrouge, France for $230 million, resulting in a pretax and after-tax gain of $146 million, which is classified inInterest and other income in theConsolidated Statement of Income. Schlumberger also recorded other real estate related pretax charges of $12 million ($11 million after-tax), which are classified inCost of goods sold and services in theConsolidated Statement of Income.
The following is a summary of 2005 Charges & Credits:
| (Stated in millions) | |||||||||||
| Pretax | Tax | Net | |||||||||
Charges & Credits | |||||||||||
- Gain on sale of Hanover Compressor stock | $ | (21 | ) | $ | – | $ | (21 | ) | |||
- Gain on sale of Montrouge facility | (163 | ) | – | (163 | ) | ||||||
- Other real estate related charges | 12 | 1 | 11 | ||||||||
Net Credits | $ | (172 | ) | $ | 1 | $ | (173 | ) | |||
2004
Third quarter of 2004:
| In connection with its ongoing restructuring program in order to reduce overhead, Schlumberger recorded, a pretax and after-tax charge of $3 million related to employee severance. This charge is classified inCost of goods sold |
| Schlumberger recorded a pretax charge of $11 million ($10 million |
Second quarter of 2004:
| Schlumberger sold 9.7 million ordinary shares of Atos Origin SA at a price of €48.50 per share. The net proceeds for the sale were $551 million and Schlumberger recorded a pretax and after-tax loss of $7 million on this transaction which reflects both banking fees and currency effect. The pretax charge is classified inInterest and other income in theConsolidated Statement of Income. As a result of this transaction Schlumberger does not have any remaining ownership interest in Atos Origin SA. |
| In connection with its continuing restructuring program in order to reduce overhead, Schlumberger recorded a pretax and after-tax charge of $4 million related to employee terminations. This charge is classified inCost of goods sold |
| Schlumberger Technology Corporation settled its |
Part II, Item 8
| Schlumberger recorded a pretax and after-tax charge of $11 million related to a vacated leased facility in the UK which is classified inCost of goods sold |
| Schlumberger recorded a pretax and after-tax credit of $5 million related to the release of a litigation reserve which was no longer required and is classified inCost of goods sold |
52
First quarter of 2004:
| Schlumberger Technology Corporation paid off its commercial paper program in the |
| 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 inInterest and other income in theConsolidated Statement of Income. |
| Schlumberger has 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 inCost of goods sold |
The following is a summary of the above 2004 charges:Charges & Credits:
| (Stated in millions) | |||||||||||||||||||||||||||
| (Stated in millions) | |||||||||||||||||||||||||||
| Pretax | Tax | Net | |||||||||||||||||||||||||
| Pretax | Tax | Min Int | Net | ||||||||||||||||||||||||
Charges & Credits: | |||||||||||||||||||||||||||
- Debt extinguishment costs | $ | 115 | $ | 14 | $ | — | $ | 101 | $ | 115 | $ | 14 | $ | 101 | |||||||||||||
- Restructuring program charges | 27 | 6 | — | 21 | 27 | 6 | 21 | ||||||||||||||||||||
- Intellectual Property settlement charge | 11 | 1 | — | 10 | 11 | 1 | 10 | ||||||||||||||||||||
- Loss on sale of Atos Origin shares | 21 | — | — | 21 | |||||||||||||||||||||||
- Loss on sale of Atos Origin stock | 21 | – | 21 | ||||||||||||||||||||||||
- US interest-rate swap settlement gain | (10 | ) | (4 | ) | — | (6 | ) | (10 | ) | (4 | ) | (6 | ) | ||||||||||||||
- Vacated leased facility reserve | 11 | — | — | 11 | 11 | – | 11 | ||||||||||||||||||||
- Litigation reserve release | (5 | ) | — | — | (5 | ) | (5 | ) | – | (5 | ) | ||||||||||||||||
- Loss recognized on interest-rate swaps | 73 | 27 | — | 46 | 73 | 27 | 46 | ||||||||||||||||||||
Net Charges | $ | 243 | $ | 44 | $ | 199 | |||||||||||||||||||||
| $ | 243 | $ | 44 | $ | — | $ | 199 | ||||||||||||||||||||
2003
In December 2003, Schlumberger recorded a pretax gain of $32 million ($20 million after-tax) resulting from the sale of the Hanover Compressor note. The pretax gain is classified inInterest and other income in theConsolidated Statement of Income.
In December 2003, Schlumberger recorded a pretax and after-tax charge of $81 million relating to the write-down to fair market value of Schlumberger’s investment in Hanover Compressor common stock. This charge is classified inCost of goods sold and services in theConsolidated Statement of Income.
In September 2003, Schlumberger recorded a pretax multiclient library impairment charge of $398 million ($204 million, after a tax credit of $74 million and a minority interest of $120 million), following an evaluation of current and expected future conditions in the seismic sector, a pretax seismic vessel impairment charge of $54 million ($38 million, after a minority interest credit of $16 million) and a $31 million pretax and after-tax gain on the sale of a drilling rig. The pretax amounts are classified inCost of goods sold and services in theConsolidated Statement of Income.
53
The following is a summary of the above 2003 charges:Part II, Item 8
| (Stated in millions) | ||||||||||||||||
| Pretax | Tax | Min Int | Net | |||||||||||||
Charges & Credits: | ||||||||||||||||
- Debt extinguishment costs | $ | 168 | $ | — | $ | — | $ | 168 | ||||||||
- Gain on sale of Hanover Compressor note | (32 | ) | (12 | ) | — | (20 | ) | |||||||||
- Write-down of Hanover Compressor stock | 81 | — | — | 81 | ||||||||||||
- Multiclient seismic library impairment | 398 | 74 | (120 | ) | 204 | |||||||||||
- Seismic vessel impairment | 54 | — | (16 | ) | 38 | |||||||||||
- Gain on sale of rig | (31 | ) | — | — | (31 | ) | ||||||||||
| $ | 638 | $ | 62 | $ | (136 | ) | $ | 440 | ||||||||
2002
In the fourth quarter of 2002, Schlumberger recorded net pretax charges of $256 million ($182 after-tax and minority interest). Schlumberger recorded severance and other costs in an effort to reduce costs at WesternGeco. These costs related to expenses that offer no future benefit to the ongoing operations of this business. The severance costs related to a reduction in workforce of approximately 1,700 employees. Schlumberger also recorded an impairment charge, to reflect a change in the business projections of the WesternGeco business, related to capitalized multiclient seismic library costs, a valuation allowance against a deferred tax asset in Europe, a gain on the sale of drilling rigs and other costs. These pretax charges are classified inCost of goods sold and services in theConsolidated Statement of Income.
In March 2002, Schlumberger recorded a charge of $26 million (pretax $27 million and minority interest credit of $1 million) related to the financial/economic crisis in Argentina where in January, the government eliminated all US dollar contracts and converted US dollar denominated accounts receivable into pesos. As a result, Schlumberger’s currency exposure increased significantly. With currency devaluation, an exchange loss (net of hedging) on net assets, primarily customer receivables, was incurred. This pretax charge is classified inCost of goods sold and services in theConsolidated Statement of Income.
The following is a summary of the above 2002 charges:2003 Charges & Credits:
| (Stated in millions) | ||||||||||||||||
| Pretax | Tax | Min Int | Net | |||||||||||||
Charges & Credits: | ||||||||||||||||
- Multiclient seismic library impairment | $ | 184 | $ | — | $ | (55 | ) | $ | 129 | |||||||
- WesternGeco severance and other | 117 | 7 | (38 | ) | 72 | |||||||||||
- Valuation allowance | — | (42 | ) | — | 42 | |||||||||||
- Gain on sale of drilling rigs | (87 | ) | — | — | (87 | ) | ||||||||||
- Other | 42 | 16 | 26 | |||||||||||||
- Argentina exchange loss | 27 | (1 | ) | 26 | ||||||||||||
| $ | 283 | $ | (19 | ) | $ | (94 | ) | $ | 208 | |||||||
| (Stated in millions) | ||||||||||||||||
| Pretax | Tax | Min Int | Net | |||||||||||||
Charges & Credits: | ||||||||||||||||
- Debt extinguishment costs | $ | 168 | $ | – | $ | – | $ | 168 | ||||||||
- Gain on sale of Hanover Compressor note | (32 | ) | (12 | ) | – | (20 | ) | |||||||||
- Impairment of Hanover Compressor stock | 81 | – | – | 81 | ||||||||||||
- Multiclient seismic library impairment | 398 | 74 | (120 | ) | 204 | |||||||||||
- Seismic vessel impairment | 54 | – | (16 | ) | 38 | |||||||||||
- Gain on sale of rig | (31 | ) | – | – | (31 | ) | ||||||||||
Net Charges | $ | 638 | $ | 62 | $ | (136 | ) | $ | 440 | |||||||
5. Acquisitions
On December 9, 2003, Schlumberger announced that it had signed an agreement to acquire PetroAlliance Services Company Limited (“PetroAlliance Services”), Russia’s largest independent oilfield service company, over a 3-year period. Schlumberger acquired 26% of PetroAlliance Services in the second quarter of 2004 for $12 million in cash and 421,870 shares of Schlumberger common stock valued at $24 million. During the second quarter of 2005, Schlumberger acquired an additional 25% of PetroAlliance Services for $40 million in cash and 1,150,323 shares of Schlumberger common stock valued at $79 million bringing its total ownership interest to 51%.
Under the terms of the agreement, a further 25%the remaining 49% interest mayis expected to be acquired in the second quarter of 2005 and the remaining interest one year later. Completion of each stage of the acquisition is2006, subject to performance requirements regulatory approval and other customary conditions. The total acquisition price will continue to be determined by a performance-based formula, and paid one-third in cash and two-thirds in Schlumberger stock.
AsSchlumberger began consolidating the results of December 31, 2004, Schlumberger’s investment in PetroAlliance Services isin the second quarter of 2005. This investment had previously been accounted for under the equity method. During
The $119 million purchase price paid in the second quarter of 2005 when it is expected Schlumberger’s ownershiphas been allocated to the assets acquired and the liabilities assumed according to their fair value at the date of the transaction as follows:
54
interest may increase to 51% at which time Schlumberger will consolidate the results of PetroAlliance Services.
| (Stated in millions) | ||||
Cash | $ | 8 | ||
Accounts receivable | 61 | |||
Fixed assets | 61 | |||
Other assets | 17 | |||
Goodwill | 106 | |||
Other intangible assets | 24 | |||
Total assets acquired | $ | 277 | ||
Accounts payable and accrued liabilities | $ | 36 | ||
Long-term debt – current portion | 53 | |||
Long-term debt | 5 | |||
Minority interest | 26 | |||
Total liabilities acquired | $ | 120 | ||
Sub-total | $ | 157 | ||
Less: proportionate share of net assets previously held through equity investment | (38 | ) | ||
Net assets acquired | $ | 119 | ||
Other AcquisitionsApproximately $106 million has been allocated to goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired. This goodwill is not tax deductible. The amounts allocated to other intangible assets primarily relate to customer relationships, which will be amortized on a straight line basis over a 12 year period.
Part II, Item 8
During 2004, subsidiaries2005, Schlumberger made certain other acquisitions and minority interest investments, none of Schlumberger acquired the following:
During 2004, Schlumberger made certain technology-related milestones are achieved. Additional paymentsacquisitions, none of up to $17 million will be made in 2007 provided AGO achieves certain milestones relating to revenue, net income and technology. Assets acquired included approximately $5 million of intangible assets (intellectual property).
Under the assumptionterms of certain past acquisitions, Schlumberger has obligations to pay additional consideration if specific conditions are met. Schlumberger made payments of $21 million during 2005 and expects to make payments of debt. Assets acquired included $14 million of goodwill.
During 2002, subsidiaries of Schlumberger acquired the following:
These acquisitions were accounted for using the purchase method of accounting.
prior years.
Pro forma results pertaining to the above acquisitions are not presented as the impact was not significant.
6. 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 December 31, 2005 and 2004 and 2003 was $716$802 million and $657$716 million, respectively. Schlumberger’s equity income from this joint venture in 20042005 was $84 million, $68 million in 2004 and $52 million in 2003 and $482003. Schlumberger received cash distributions from the joint venture of $28 million in 2002.
2005, $28 million in 2004 and $4 million in 2003.
The carrying value of this joint venture is evaluated for impairment annually as well as when an event or change in circumstance indicates that a decline in the fair value of this investment that is other than temporary has occurred. Fair value is generally estimated by comparing the significance of this joint venture to Smith International Inc., a publicly-tradedpublicly traded company, and then referencing the market capitalization of Smith International Inc. To date, Schlumberger has not recorded any impairment charges relating to this investment as this analysis has indicated that the fair value of this investment is significantly in excess of its carrying value.
55
The Consolidated Balance Sheet reflects the Schlumberger investment portfolio separated between current and long term, based on maturity. Under normal circumstances it is the intent of Schlumberger to hold the investments until maturity, with the exception of investments that are considered trading (December 31, 2004 - $153 million; December 31, 2003 - $151 million).
Long-term fixed income investments of $204 million mature as follows: $64 million in 2006, $59 million in 2007, $36 million in 2008 and $45 million in 2009.
On December 31, 2004, there were no interest rate swap arrangements outstanding related to investments.
In September 2000, aA wholly owned subsidiary of Schlumberger entered intohas an agreement to borrow up to $250 million and sell, on an ongoing basis, up to $220 million of an undivided interest in its accounts receivable, which was subsequently amended up to $250 million.receivable. The amount of receivables sold under this agreement totaled $236$470 million at December 31, 2004. Unless2005 (of which $34 million was drawn) as compared to $367 million at December 31, 2004 (of which $236 million was drawn). The previous agreement was extended by amendment, the agreement expires in September 2005.2005 for a further twelve months. Schlumberger expects to terminate this agreement in the first quarter of 2006. Schlumberger does not have any retained interest in the accounts receivable sold under this agreement.
8. Inventory
A summary of inventory follows:
| (Stated in millions) | ||||||||||||
| As at December 31 | 2005 | 2004 | ||||||||||
| (Stated in millions) | ||||||||||||
As at December 31 | 2004 | 2003 | ||||||||||
Raw Materials & Field Materials | $ | 812 | $ | 721 | $ | 976 | $ | 812 | ||||
Work in Process | 59 | 74 | 96 | 59 | ||||||||
Finished Goods | 74 | 141 | 65 | 74 | ||||||||
| 945 | 936 | 1,137 | 945 | |||||||||
Less reserves for obsolescence | 125 | 139 | 127 | 125 | ||||||||
| $ | 820 | $ | 797 | $ | 1,010 | $ | 820 | |||||
Part II, Item 8
9. Fixed Assets
A summary of fixed assets follows:
| (Stated in millions) | ||||||||||||
| As at December 31, | 2005 | 2004 | ||||||||||
| (Stated in millions) | ||||||||||||
As at December 31, | 2004 | 2003 | ||||||||||
Land | $ | 58 | $ | 56 | $ | 66 | $ | 71 | ||||
Buildings & Improvements | 1,135 | 1,239 | 989 | 1,119 | ||||||||
Machinery & Equipment | 9,876 | 9,682 | 10,750 | 9,879 | ||||||||
Total cost | 11,069 | 10,977 | ||||||||||
| 11,805 | 11,069 | |||||||||||
Less accumulated depreciation | 7,307 | 7,177 | 7,604 | 7,307 | ||||||||
| $ | 3,762 | $ | 3,800 | $ | 4,201 | $ | 3,762 | |||||
The estimated useful lives of Buildings & Improvements are primarily 30 to 40 years. For Machinery & Equipment, 8% is being depreciated over 16 to 25 years, 5%6% over 10 to 15 years and 87%86% over 2 to 9 years.years determined on a gross book value basis.
Depreciation and amortization expense relating to fixed assets was $1.092 billion, $1.007 billion and $1.016 billion in 2005, 2004 and 2003, respectively.
5610. Multiclient Seismic Data
The change in the carrying amount of multiclient seismic data is as follows:
| (Stated in millions) | ||||||||||||||||
| (Stated in millions) | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| 2004 | 2003 | |||||||||||||||
Balance at beginning of year | $ | 506 | $ | 1,018 | $ | 347 | $ | 506 | ||||||||
Capitalized in year | 63 | 150 | 60 | 63 | ||||||||||||
Charged to cost of sales | (222 | ) | (263 | ) | (185 | ) | (222 | ) | ||||||||
Impairment, charged to income | — | (399 | ) | |||||||||||||
Balance at end of year | $ | 347 | $ | 506 | ||||||||||||
| $ | 222 | $ | 347 | |||||||||||||
11. Goodwill
The changes in the carrying amount of goodwill by business segment in 2005 was as follows:
| (Stated in millions) | |||||||||||
| Oilfield Services | Western- Geco | Total | |||||||||
Balance at beginning of year | $ | 2,545 | $ | 244 | $ | 2,789 | |||||
Additions | 146 | 2 | 148 | ||||||||
Other | 6 | – | 6 | ||||||||
Impact of change in exchange rates | (21 | ) | – | (21 | ) | ||||||
| $ | 2,676 | $ | 246 | $ | 2,922 | ||||||
The changes in the carrying amount of goodwill by business segment in 2004 iswas as follows:
| (Stated in millions) | ||||||||||||||||||||||||||||
| Oilfield Services | Western- Geco | Other | Total | |||||||||||||||||||||||||
| Oilfield Services | Western - Geco | Other | Total | |||||||||||||||||||||||||
Balance at beginning of year | $ | 2,495 | $ | 229 | $ | 654 | $ | 3,378 | $ | 2,495 | $ | 229 | $ | 654 | $ | 3,378 | ||||||||||||
Additions | 15 | 15 | — | 30 | 15 | 15 | – | 30 | ||||||||||||||||||||
Impact of change in exchange rates | 35 | — | (8 | ) | 27 | 35 | – | (8 | ) | 27 | ||||||||||||||||||
Businesses divested | — | — | (634 | ) | (634 | ) | – | – | (634 | ) | (634 | ) | ||||||||||||||||
Reclassified toAssets held for sale | — | — | (12 | ) | (12 | ) | – | – | (12 | ) | (12 | ) | ||||||||||||||||
Balance at end of year | $ | 2,545 | $ | 244 | $ | — | $ | 2,789 | ||||||||||||||||||||
| $ | 2,545 | $ | 244 | $ | – | $ | 2,789 | |||||||||||||||||||||
The changes in the carrying amount of goodwill by business segment in 2003 is as follows:
Part II, Item 8
| (Stated in millions) | ||||||||||||||||||
| Oilfield Services | Western - Geco | Schlumberger Sema | Other | Total | ||||||||||||||
Balance at beginning of year | $ | 1,877 | $ | 215 | $ | 1,562 | $ | 670 | $ | 4,324 | ||||||||
Other1 | 486 | 14 | (516 | ) | (84 | ) | (100 | ) | ||||||||||
Impact of change in exchange rates | 132 | — | 288 | 68 | 488 | |||||||||||||
Reclassified toAssets held for sale | — | — | (1,334 | ) | — | (1,334 | ) | |||||||||||
Balance at end of year | $ | 2,495 | $ | 229 | $ | — | $ | 654 | $ | 3,378 | ||||||||
In conjunction with the formation of WesternGeco in November 2000, Schlumberger and Baker Hughes entered into an agreement whereby Schlumberger or Baker Hughes will make a cash true-up payment to the other party based on a formula comparing the ratio of the net present value of sales revenue from each party’s contributed multiclient seismic data libraries during the four-year period ending November 30, 2004 and the ratio of those libraries as of November 30, 2000. The maximum payment that either party will be required to make as a result of this adjustment is $100 million. Schlumberger currently estimates making a payment to Baker Hughes of approximately $9 million and such amount has been recorded as an adjustment to goodwill associated with the WesternGeco business segment as of December 31, 2004.12. Intangible Assets
57
A summary of intangible assets follows:
| (Stated in millions) | ||||||||||||
| As at December 31, | 2005 | 2004 | ||||||||||
| (Stated in millions) | ||||||||||||
As at December 31, | 2004 | 2003 | ||||||||||
Gross book value | $ | 591 | $ | 796 | $ | 630 | $ | 591 | ||||
Less accumulated amortization | 244 | 393 | 310 | 244 | ||||||||
| $ | 347 | $ | 403 | $ | 320 | $ | 347 | |||||
The amortization charged to incomeexpense was $75 million in 2005, $78 million in 2004 and $61 million in 2003 and $62 million in 2002.
2003.
Intangible assets principally comprise patents, software, technology and other. At December 31, the gross book value, accumulated amortization and amortization periods of intangible assets were as follows:
| (Stated in millions) | ||||||||||||||||||||||||||||
| (Stated in millions) | ||||||||||||||||||||||||||||
| 2005 | 2004 | |||||||||||||||||||||||||||
| 2004 | 2003 | Amortization Periods | Gross Book Value | Accumulated Amortization | Gross Book Value | Accumulated Amortization | Amortization Periods | |||||||||||||||||||||
| Gross Book Value | Accumulated Amortization | Gross Book Value | Accumulated Amortization | |||||||||||||||||||||||||
Software | $ | 409 | $ | 138 | $ | 401 | $ | 146 | 5 - 10 years | $ | 428 | $ | 187 | $ | 409 | $ | 138 | 5 – 10 years | ||||||||||
Technology | 147 | 77 | 178 | 76 | 5 - 10 years | 144 | 98 | 147 | 77 | 5 – 10 years | ||||||||||||||||||
Patents | 12 | 7 | 171 | 143 | 5 - 10 years | 12 | 9 | 12 | 7 | 5 – 10 years | ||||||||||||||||||
Other | 23 | 22 | 46 | 28 | 1 - 15 years | 46 | 16 | 23 | 22 | 1 – 15 years | ||||||||||||||||||
| $ | 591 | $ | 244 | $ | 796 | $ | 393 | $ | 630 | $ | 310 | $ | 591 | $ | 244 | |||||||||||||
The weighted average amortization period for all intangible assets is approximately 6.57 years.
Amortization charged to income for the subsequent five years is estimated, based on the December 31, 20042005 Gross Book Value, to be 2005 - $100 million, 2006 - $79– $86 million, 2007 - $64– $69 million, 2008 - $58– $50 million, 2009 – $24 million and 2009 - $232010 – $20 million.
Included in intangible assets at December 31, 2004 is approximately $75 million ($47 million at December 31, 2003) of capitalized internal costs relating to developed software which Schlumberger has not yet place into service. This software is estimated to be fully developed in the second half of 2005 at which time Schlumberger will begin amortizing these costs.13. Long-term Debt and Debt Facility Agreements
A summary of long-term debt by currency, analyzed by Bonds, Commercial Paper (CP) and Other, at December 31 follows:
| (Stated in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| (Stated in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2005 | 2004 | |||||||||||||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | Bonds and Convertible Debentures | CP | Other | Total | Bonds and Convertible Debentures | CP | Other | Total | |||||||||||||||||||||||||||||||||||||||
| Bonds and Convertible Debentures | CP | Other | Total | Bonds and Convertible Debentures | CP | Other | Total | |||||||||||||||||||||||||||||||||||||||||
US dollar | $ | 2,073 | $ | 641 | $ | 93 | $ | 2,807 | $ | 2,422 | $ | 1,475 | $ | 335 | $ | 4,232 | $ | 2,073 | $ | 753 | $ | 73 | $ | 2,899 | $ | 2,073 | $ | 641 | $ | 93 | $ | 2,807 | ||||||||||||||||
Euro | 669 | — | 88 | 757 | 665 | 6 | 284 | 955 | 584 | – | 44 | 628 | 669 | – | 88 | 757 | ||||||||||||||||||||||||||||||||
UK pound | 33 | — | — | 33 | 339 | 24 | 135 | 498 | 30 | – | – | 30 | 33 | – | – | 33 | ||||||||||||||||||||||||||||||||
Canadian dollar | 101 | — | — | 101 | 93 | — | — | 93 | – | – | – | – | 101 | – | – | 101 | ||||||||||||||||||||||||||||||||
Japanese yen | — | — | 98 | 98 | — | — | 46 | 46 | – | – | – | – | – | – | 98 | 98 | ||||||||||||||||||||||||||||||||
Norwegian kroner | — | — | 148 | 148 | — | — | 221 | 221 | – | – | 34 | 34 | – | – | 148 | 148 | ||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | 52 | 52 | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
| $ | 2,876 | $ | 641 | $ | 427 | $ | 3,944 | $ | 3,519 | $ | 1,505 | $ | 1,073 | $ | 6,097 | $ | 2,687 | $ | 753 | $ | 151 | $ | 3,591 | $ | 2,876 | $ | 641 | $ | 427 | $ | 3,944 | |||||||||||||||||
In June 2004, Schlumberger Technology Corporation (STC) bought back and retired $351 million of its outstanding $1 billion 6.5% Notes due 2012 (see Note 54Charges – Continuing Operationsand Credits).) These notes were issued in 2002 in a private placement and resold under rule 144A without registration rights. The fair market value of the STC outstanding US dollar denominated bonds at December 31, 20042005 was $723$705 million.
58
In March 2004, STC paid off its commercial paper program in the US,United States, and in April 2004 STC settled the outstanding $500 million USUnited States interest rate swaps which it had written down in March 2004. See Note 54Charges – Continuing Operationsand Credits.
Part II, Item 8
In March 2004, Schlumberger plc (SPLC) accepted tenders for the outstanding £175 million SPLC 6.5% Guaranteed Bonds due 2032. In addition, Schlumberger SA (SSA) bought back €25 million of the outstanding €274 million SSA 5.25% Guaranteed Bonds due 2008 and €7 million of the outstanding €259 million SSA 5.875% Guaranteed Bonds due 2011. See Note 54Charges – Continuing Operationsand Credits. The fair market value of the outstanding euro denominated bonds at December 31, 20042005 was $736$633 million.
On June 9, 2003, Schlumberger Limited issued $850 million aggregate principal amount of 1.5% Series A Convertible Debentures due June 1, 2023 and $450 million aggregate principal amount of 2.125% Series B Convertible Debentures due June 1, 2023. On July 2, 2003, Schlumberger Limited issued an additional $125 million aggregate principal amount of the Series A debentures pursuant to an option granted to the initial purchasers.
The debentures were sold to Citigroup Global Markets Inc. and Goldman, Sachs & Co.the initial purchasers pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933. The debentures1933 and were resold, with registration rights, by the initial purchasers in transactions exempt from registration under Rule 144A of the Securities Act. The aggregate offering price of the debentures was $1.425 billion, the initial purchasers’ discount was $25.4 million and the net proceeds to Schlumberger Limited were $1.4 billion.
The Series A debentures and the Series B debentures are convertible, at the holders’ option, into shares of common stock of Schlumberger Limited. Holders of the Series A debentures may convert their debentures into common stock at a conversion rate of 13.8255 shares for each $1,000 principal amount of Series A debentures (equivalent to an initial conversion price of $72.33 per share). Holders of the Series B debentures may convert their debentures into common stock at a conversion rate of 12.5 shares for each $1,000 principal amount of Series B debentures (equivalent to an initial conversion price of $80.00 per share). Each conversion rate may be adjusted for certain events, but it will not be adjusted for accrued interest.
On or after June 6, 2008 (in the case of the Series A debentures) or June 6, 2010 (in the case of the Series B debentures), Schlumberger may redeem for cash all or part of the applicable series of debentures, upon notice to the holders, at the redemption prices of 100% of the principal amount of the debentures, plus accrued and unpaid interest to the date of redemption. On June 1, 2008, June 1, 2013, and June 1, 2018, holders of Series A debentures may require Schlumberger to repurchase their Series A debentures. On June 1, 2010, June 1, 2013 and June 1, 2018, holders of Series B debentures may require Schlumberger to repurchase their Series B debentures. The repurchase price will be 100% of the principal amount of the debentures plus accrued and unpaid interest to the repurchase date. The repurchase price for repurchases on June 1, 2008 (in the case of the Series A debentures) and June 1, 2010 (in the case of the Series B debentures) will be paid in cash. On the other repurchase dates, Schlumberger may choose to pay the repurchase price in cash or common stock or any combination of cash and common stock. In addition, upon the occurrence of a Fundamental Change (defined as a change in control or a termination of trading of Schlumberger’s common stock), holders may require Schlumberger to repurchase all or a portion of their debentures, in cash or, at Schlumberger’s election, common stock valued at 99% of its market price or any combination of cash and common stock, at a repurchase price equal to 100% of the principal amount of the debentures plus accrued and unpaid interest to the redemption date. The debentures will mature on June 1, 2023 unless earlier redeemed or repurchased. The fair market value of the Series A and Series B debentures at December 31, 20042005 was $1.06$1.3 billion and $486$584 million, respectively.
59
Commercial paper borrowings are classified as long-term debt to the extent of their backup by available and unused committed facilities maturing in more than one-year and the intent to maintain these obligations for longer than one year.
Commercial paper borrowings outstanding at December 31, 2005 and 2004 include notes issued in currencies other than the US dollar which were swapped for US dollars on the date of issue until maturing.
Long-term debt on December 31, 2004,2005, is due as follows $347 million in 2006, $645 million in 2007, $1,348 million$1.300 billion in 2008, $164$103 million in 2009, $1.242 billion in 2010 and $1,440$946 million thereafter.
Part II, Item 8
On December 31, 2004,2005, interest rate swap arrangements outstanding were pay floating/receive fixed on US dollar debt of $117$93 million. These arrangements mature at various dates to December 2009. Interest rate swap arrangements increaseddecreased consolidated interest expense in 20042005 by $60 million including the charges mentioned above.
Between June 12 and July 22, 2003, certain subsidiaries of Schlumberger launched and concluded a tender offer on three of its outstanding European bonds. The companies bought back $1.3 billion of principal of these bonds for a total cost of $1.5 billion, which includes the premium, and issuing and tender costs. See Note 5Charges – Continuing Operations.
$3 million.
On December 31, 2004,2005, wholly owned subsidiaries of Schlumberger had separate lines of creditdebt facility agreements aggregating $6.3$4.4 billion with commercial banks, of which $5.4$3.6 billion was committed and $4.5$2.8 billion was available and unused. It included $3.7$2.5 billion of committed facilities which support commercial paper programs in the United States and Europe, and mature in January 2007.April 2010. Interest rates and other terms of borrowing under these lines of credit vary from country to country.
14. Derivative Instruments and Hedging Activities
Schlumberger uses derivative instruments such as interest rate swaps, currency swaps, forward currency contracts and foreign currency options.
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. Forward currency contracts provide a hedge against currency fluctuations either on assets/liabilities denominated in other than a functional currency or on expenses. Options are usually entered into as a hedge against currency variations on firm commitments generally involving the construction of long-lived assets. Schlumberger also maintains an interest rate risk management strategy that uses a mix of variable- and fixed-rate debt together with interest rate swaps, where appropriate, to fix or lower borrowing costs.
Schlumberger does not enter into foreign currency or interest rate derivatives for speculative purposes.
By using derivative financial instruments to hedge exposure to changes in exchange rates and interest rates, Schlumberger exposes itself to credit 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.
As a result of Schlumberger Technology Corporation paying off its commercial paper program in the USUnited States in the first quarter of 2004, $500 million USUnited States 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) in March 2004 to recognize unrealized losses previously recorded inOther Comprehensive Income.Income. See Note 54Charges – Continuing Operationsand Credits. These interest rate swaps were settled in April 2004.
Currency exchange contracts are entered into as a hedge against the effect of future settlement of assets and liabilities denominated in other than the functional currency of the individual businesses. Gains or losses on the contracts are recognized when the currency exchange rates fluctuate, and the resulting charge or credit partially offsets the unrealized currency gains or losses on those assets and liabilities. On December 31, 2005, contracts were outstanding for the US dollar equivalent of $1.9 billion in various foreign currencies. These contracts mature on various dates in 2006.
At December 31, 2004,2005, Schlumberger recognized a cumulative net $21$17 million gainloss in Stockholders’ Equity relating to derivative instruments and hedging activities. This gainloss was primarily due to the revaluation of foreign currency forward currency contracts at December 31, 2004.2005.
6015. Capital Stock
Schlumberger is authorized to issue 1,500,000,000 shares of common stock, par value $0.01 per share of which 588,501,663588,802,109 and 585,948,328588,501,663 shares were outstanding on December 200431, 2005 and 2003,2004, respectively. Schlumberger is also authorized to issue 200,000,000 shares of cumulative preferred stock, par value $0.01 per share, which may be issued in series with terms and conditions determined by the Board of Directors. No shares of preferred stock have been issued. Holders of common stock are entitled to one vote for each share of stock held.
See Note 23Subsequent Event.
Part II, Item 8
16. Stock Compensation Plans
Schlumberger has two types of stock-based compensation plans, which are described below. Effective January 1, 2003, Schlumberger adopted the fair value recognition provisions of SFAS Nos. 123 and 148. Schlumberger began recording stock option and discounted stock purchase plan (DSPP) expense in theConsolidated Statement of Income 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 2004 was $26 million. The effect on 2003 net income was $13 million.
Schlumberger applies the intrinsic value method of APB Opinion 25 for grants prior to January 1, 2003. Had compensation cost for stock-based awards granted prior to January 1, 2003 been determined based on the fair value at the grant dates, 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) | ||||||||||||||||||||||||
| (Stated in millions except per share amounts) | ||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||||
Net income (loss) | ||||||||||||||||||||||||
As reported | $ | 1,224 | $ | 383 | $ | (2,320 | ) | $ | 2,207 | $ | 1,224 | $ | 383 | |||||||||||
Pro forma adjustments: | ||||||||||||||||||||||||
Cost of DSPP | — | (18 | ) | (42 | ) | – | – | (18 | ) | |||||||||||||||
Cost of Stock Options | (39 | ) | (81 | ) | (120 | ) | (40 | ) | (58 | ) | (72 | ) | ||||||||||||
Tax benefit | 6 | 4 | 6 | |||||||||||||||||||||
Pro forma | $ | 1,191 | $ | 288 | $ | (2,476 | ) | $ | 2,167 | $ | 1,166 | $ | 293 | |||||||||||
Basic earnings (loss) per share | ||||||||||||||||||||||||
As reported | $ | 2.08 | $ | 0.66 | $ | (4.01 | ) | $ | 3.75 | $ | 2.08 | $ | 0.66 | |||||||||||
Pro forma adjustments: | ||||||||||||||||||||||||
Cost of DSPP | — | (0.03 | ) | (0.07 | ) | – | – | (0.03 | ) | |||||||||||||||
Cost of Stock Options | (0.07 | ) | (0.14 | ) | (0.21 | ) | (0.07 | ) | (0.10 | ) | (0.12 | ) | ||||||||||||
Tax benefit | 0.01 | 0.01 | 0.01 | |||||||||||||||||||||
Pro forma | $ | 2.02 | $ | 0.50 | $ | (4.28 | ) | $ | 3.68 | $ | 1.98 | $ | 0.51 | |||||||||||
Diluted earnings (loss) per share | ||||||||||||||||||||||||
As reported | $ | 2.04 | $ | 0.65 | $ | (3.99 | ) | $ | 3.64 | $ | 2.04 | $ | 0.65 | |||||||||||
Pro forma adjustments: | ||||||||||||||||||||||||
Cost of DSPP | — | (0.03 | ) | (0.07 | ) | – | – | (0.03 | ) | |||||||||||||||
Cost of Stock Options | (0.06 | ) | (0.14 | ) | (0.21 | ) | (0.07 | ) | (0.09 | ) | (0.12 | ) | ||||||||||||
Tax benefit | 0.01 | 0.01 | 0.01 | |||||||||||||||||||||
Pro forma | $ | 1.99 | $ | 0.49 | $ | (4.26 | ) | $ | 3.57 | $ | 1.95 | $ | 0.50 | |||||||||||
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 periods. 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 the unvested portion of awards granted during the period of January 1, 1995 to December 31, 2002; the adoption of this standard will result in Schlumberger recording additional stock-based compensation charges of approximately $20 million in 2006 and $5 million in 2007.
Part II, Item 8
Stock Option Plans
Officers and key employees are granted stock options under Schlumberger stock option plans. For all of the stock options granted, the exercise price of each option equals the market price of Schlumberger stock on the date of grant; an option’s maximum term is generally ten years, and options generally vest in increments over four or five years. The gain on the awards granted subsequent to January 2003 is capped at 125% of the exercise price. This cap on the gain was implementedSchlumberger recorded stock-based compensation expense relating to reduce expenses, while at the same time maintain the incentivestock options of the program.$28 million, $13 million and $5 million in 2005, 2004 and 2003, respectively.
61
As required by SFAS 123, the fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for 2005, 2004 2003 and 2002:2003:
| 2004 | 2003 | 2002 | ||||||||||
Dividend | $ | 0.75 | $ | 0.75 | $ | 0.75 | ||||||
Dividend yield | 1.53 | % | 1.41 | % | 1.60 | % | ||||||
Expected volatility | 24.4 | % | 36.2 | % | 34.0 | % | ||||||
Risk free interest rates - officers | 3.57 | % | 2.71 | % | 4.80 | % | ||||||
Risk free interest rates - other employees | 3.57 | % | 2.71 | % | 3.89 | % | ||||||
Expected option life - officers | 4.50 years | 4.71 years | 6.60 years | |||||||||
Expected option life - other employees | 4.50 years | 4.71 years | 5.07 years | |||||||||
| 2005 | 2004 | 2003 | |||||||
Dividend yield | 1.32 | % | 1.53 | % | 1.41 | % | |||
Expected volatility | 31 | % | 24 | % | 36 | % | |||
Risk free interest rates | 3.79 | % | 3.57 | % | 2.71 | % | |||
Expected option life | 4.50 years | 4.50 years | 4.71 years | ||||||
A summary of the status of the Schlumberger stock option plans as of December 31, 2005, 2004 2003 and 2002,2003, and changes during the years ending on those dates is presented below:
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||||||||||||||||||||||
Fixed Options | Shares | Weighted- average exercise price | Shares | Weighted - average exercise price | Shares | Weighted- average exercise price | Shares | Weighted- average exercise price | Shares | Weighted- average exercise price | Shares | Weighted- average exercise price | ||||||||||||||||||||||||||||||
Outstanding at | 37,556,547 | $ | 56.50 | 36,869,684 | $ | 57.03 | 32,836,340 | $ | 55.80 | 30,062,025 | $ | 59.83 | 37,556,547 | $ | 56.50 | 36,869,684 | $ | 57.03 | ||||||||||||||||||||||||
Granted | 2,959,250 | $ | 63.44 | 3,460,150 | $ | 45.04 | 7,314,617 | $ | 55.14 | 3,651,490 | $ | 66.67 | 2,959,250 | $ | 63.44 | 3,460,150 | $ | 45.04 | ||||||||||||||||||||||||
Exercised | (5,648,858 | ) | $ | 37.05 | (1,319,174 | ) | $ | 30.68 | (2,296,593 | ) | $ | 30.02 | (5,502,348 | ) | $ | 48.56 | (5,648,858 | ) | $ | 37.05 | (1,319,174 | ) | $ | 30.68 | ||||||||||||||||||
Forfeited | (4,804,914 | ) | $ | 62.84 | (1,454,113 | ) | $ | 66.92 | (984,680 | ) | $ | 66.69 | (1,721,764 | ) | $ | 64.04 | (4,804,914 | ) | $ | 62.84 | (1,454,113 | ) | $ | 66.92 | ||||||||||||||||||
Outstanding at year-end | 30,062,025 | $ | 59.83 | 37,556,547 | $ | 56.50 | 36,869,684 | $ | 57.03 | 26,489,403 | $ | 62.77 | 30,062,025 | $ | 59.83 | 37,556,547 | $ | 56.50 | ||||||||||||||||||||||||
Options exercisable at | 20,044,742 | 23,460,758 | 21,142,473 | 17,056,452 | 20,044,742 | 23,460,758 | ||||||||||||||||||||||||||||||||||||
Weighted-average fair | $ | 12.33 | $ | 10.34 | $ | 20.22 | $ | 14.24 | $ | 12.33 | $ | 10.34 | ||||||||||||||||||||||||||||||
The following table summarizes information concerning currently outstanding and exercisable options by five ranges of exercise prices on December 31, 2004:2005:
| OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | |||||||||||
Range of exercise prices | Number outstanding as of 12/31/04 | Weighted- average remaining contractual life | Weighted- average exercise price | Number exercisable as of 12/31/04 | Weighted- average exercise price | |||||||
$ 3.831 - $22.073 | 32,617 | 1.14 | $ | 21.98 | 32,617 | $ | 21.98 | |||||
$24.142 - $30.710 | 1,481,546 | 0.94 | $ | 30.09 | 1,481,546 | $ | 30.09 | |||||
$30.795 - $44.843 | 3,425,518 | 3.23 | $ | 39.80 | 2,799,798 | $ | 39.56 | |||||
$46.020 - $65.330 | 16,446,084 | 6.95 | $ | 55.74 | 7,912,971 | $ | 54.93 | |||||
$71.315 - $82.348 | 8,676,260 | 4.23 | $ | 80.71 | 7,817,810 | $ | 80.74 | |||||
| 30,062,025 | 5.44 | $ | 59.83 | 20,044,742 | $ | 60.96 | ||||||
| OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | |||||||||||
Range of exercise prices | Number outstanding as of 12/31/05 | Weighted- average remaining contractual life | Weighted- average exercise price | Number exercisable as of 12/31/05 | Weighted- average exercise price | |||||||
$ 3.831 – $22.073 | 1,049 | 0.19 | $ | 20.734 | 1,049 | $ | 20.734 | |||||
$24.142 – $30.710 | 284,044 | 0.07 | $ | 30.710 | 284,044 | $ | 30.710 | |||||
$30.795 – $44.843 | 2,057,425 | 3.14 | $ | 40.511 | 1,608,435 | $ | 40.388 | |||||
$46.020 – $65.330 | 15,960,646 | 6.64 | $ | 57.476 | 7,944,485 | $ | 55.449 | |||||
$69.655 – $82.348 | 8,186,239 | 3.88 | $ | 79.811 | 7,218,439 | $ | 80.857 | |||||
| 26,489,403 | 5.45 | $ | 62.772 | 17,056,452 | $ | 64.367 | ||||||
Part II, Item 8
Employee Stock Purchase Plan
Under the Schlumberger Discounted Stock Purchase Plan, Schlumberger is authorized to issue up to 22,012,245 shares of common stock to its employees. Under the terms of the plan, employees can choose to have up to 10% of their annual earnings withheld to purchase Schlumberger common stock. Effective July 1, 2003 the purchase price of the stock was 92.5% of the lower of its beginning or end of the plan year market price at six month intervals. Prior to July 1, 2003, the purchase price was 85% at one year intervals. Under the Plan, Schlumberger sold 1,308,749, 1,654,879 2,464,088 and 2,677,8422,464,088 shares to employees in 2005, 2004 and 2003, respectively. Schlumberger recorded stock-based compensation expense relating to the DSPP of $12 million, $13 million and 2002,$8 million in 2005, 2004 and 2003, respectively. Pro forma compensation cost has been computed for theThe fair value of the employees’ purchase rights which was estimated using the Black-Scholes model with the following assumptions and resulting weighted average fair value per share.share:
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||||
Dividend | $ | 0.75 | $ | 0.75 | $ | 0.75 | ||||||||||||||||||
Dividend yield | 1.52 | % | 1.41 | % | 1.60 | % | 1.35 | % | 1.52 | % | 1.41 | % | ||||||||||||
Expected volatility | 30 | % | 36 | % | 34 | % | 26 | % | 30 | % | 36 | % | ||||||||||||
Risk free interest rates | 1.25 | % | 0.92 | % | 1.74 | % | 2.12 | % | 1.25 | % | 0.92 | % | ||||||||||||
Weighted average fair value per share | $ | 8.35 | $ | 7.91 | $ | 13.32 | $ | 9.51 | $ | 8.35 | $ | 7.91 | ||||||||||||
6217. Income Tax Expense
Schlumberger and its subsidiaries operate in more than 100 taxing jurisdictions where statutory tax rates generally vary from 0% to 50%.
As more fully described in Note 54Charges – Continuing Operationsand Credits, Schlumberger reported net pretax chargescredits in continuing operations in 2005 of $172 million ($19 million of net credits in the United States; $153 million of credits outside the United States), and net pretax charges of $243 million ($119 million of net charges in the United States; $124 million of net charges outside of the United States) and $638 million and $283($316 million of net charges in the United States; $323 million of net charges outside of the United States) in 2004 and 2003, and 2002, respectively. In 2004, the pretax income in the US included $119 of such charges, primarily relating to the US Interest Rate Swap and the US bonds debt extinguishment costs. In 2003, the pretax loss in the US included $315 million of charges, primarily relating to the WesternGeco multiclient impairment and the Hanover Compressor investment and related note. In 2002, the pretax income in the US included $75 million of charges.
Pretax book income from continuing operations subject to USUnited States and non-USnon-United States income taxes for each of the three years ended December 31, was a follows:
| (Stated in millions) | ||||||||||||||||||||
| (Stated in millions) | ||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||
United States | $ | 286 | $ | (213 | ) | $ | 127 | $ | 892 | $ | 286 | $ | (213 | ) | ||||||
Outside United States | 1,041 | 670 | 528 | 2,080 | 1,041 | 670 | ||||||||||||||
Pretax income | $ | 1,327 | $ | 457 | $ | 655 | $ | 2,972 | $ | 1,327 | $ | 457 | ||||||||
The components of net deferred tax assets were as follows:
| (Stated in millions) | ||||||||||||
| (Stated in millions) | ||||||||||||
| 2005 | 2004 | |||||||||||
| 2004 | 2003 | |||||||||||
Postretirement and other long-term benefits | $ | 251 | $ | 213 | $ | 262 | $ | 251 | ||||
Current employee benefits | 123 | 183 | 118 | 123 | ||||||||
Fixed assets, inventory and other | 196 | 194 | 173 | 196 | ||||||||
Net operating losses | 13 | 42 | 11 | 13 | ||||||||
| $ | 583 | $ | 632 | $ | 564 | $ | 583 | |||||
The deferred tax assets relating to net operating losses at December 31, 20042005 and 20032004 are net of a valuation allowances in certain countries of $312$213 million and $374$303 million, respectively.
As described in Note 4, Schlumberger entered into an agreementsold its facility in late 2004Montrouge, France during 2005. This transaction allowed for the utilization of a $57 million deferred tax asset relating to sell certain fixed assets. Providing that requisite approvals are obtained, this transaction will be consummated during 2005 and will result in a material gain. Due to the existence of net operating losses for which there is currentlythat were previously offset by a fullvaluation allowance. The remaining decrease in the valuation allowance there will not be any income tax expense associated with this potential gain.from 2004 to 2005 is primarily due to changes in foreign currency exchange rates.
Part II, Item 8
63
The United States and Canadian operations of the WesternGeco joint venture are structured as limited liability companies (LLC) and are treated as partnerships for income tax purposes. The net income of the WesternGeco business segment, as presented in Note 23,21Segment Information, reflects tax expense as if the LLC was subject to income taxes as this is how management evaluates the results of this segment. However, the tax expense on theConsolidated Statement of Income only includes Schlumberger’s share of the tax expense associated with the LLC.Minority Interest on theConsolidated Statement of Income primarily represents the minority partner’s share of the pretax results of the LLCs as well as their share of the after-tax results of the non-USnon-United States and Canadian operations of the venture. Prior years have been reclassified to conform to this revised presentation.
The components of consolidated income tax expense from continuing operations were as follows:
| (Stated in millions) | ||||||||||||||||||||||
| (Stated in millions) | (Stated in millions) | |||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||
Current: | ||||||||||||||||||||||
United States - Federal | $ | 13 | $ | 97 | $ | (16 | ) | |||||||||||||||
United States - State | 1 | 11 | (2 | ) | ||||||||||||||||||
United States – Federal | $ | 256 | $ | 13 | $ | 97 | ||||||||||||||||
United States – State | 24 | 1 | 11 | |||||||||||||||||||
Outside United States | 221 | 183 | 211 | 372 | 221 | 183 | ||||||||||||||||
| $ | 235 | $ | 291 | $ | 193 | $ | 652 | $ | 235 | $ | 291 | |||||||||||
Deferred: | ||||||||||||||||||||||
United States - Federal | $ | 30 | $ | (88 | ) | $ | 16 | |||||||||||||||
United States - State | 6 | (15 | ) | 2 | ||||||||||||||||||
United States – Federal | $ | 12 | $ | 30 | $ | (88 | ) | |||||||||||||||
United States – State | 2 | 6 | (15 | ) | ||||||||||||||||||
Outside United States | 6 | (40 | ) | (106 | ) | 77 | 6 | (40 | ) | |||||||||||||
Valuation allowance | — | 62 | 147 | (61 | ) | – | 62 | |||||||||||||||
| $ | 42 | $ | (81 | ) | $ | 59 | $ | 30 | $ | 42 | $ | (81 | ) | |||||||||
Consolidated taxes on income | $ | 277 | $ | 210 | $ | 252 | $ | 682 | $ | 277 | $ | 210 | ||||||||||
A reconciliation of the USUnited States statutory federal tax rate (35%) to the consolidated effective tax rate is:
| 2005 | 2004 | 2003 | ||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||
US statutory federal rate | 35 | 35 | 35 | 35 | 35 | 35 | ||||||||||||
US state income taxes | 1 | – | – | |||||||||||||||
Non US income taxed at different rates | (10 | ) | (20 | ) | (28 | ) | (8 | ) | (10 | ) | (20 | ) | ||||||
Effect of equity method investment | (1 | ) | (5 | ) | (3 | ) | (1 | ) | (1 | ) | (5 | ) | ||||||
Minority partner’s share of LLC earnings | (1 | ) | 1 | (2 | ) | (1 | ) | (1 | ) | 1 | ||||||||
Valuation allowance | — | 14 | 22 | – | – | 14 | ||||||||||||
Other | (2 | ) | — | — | (1 | ) | (2 | ) | – | |||||||||
Charges and credits | — | 21 | 14 | (2 | ) | – | 21 | |||||||||||
Effective income tax rate | 21 | 46 | 38 | 23 | 21 | 46 | ||||||||||||
The chargesCharges and creditsCredits described in Note 54Charges – Continuing Operationsand Credits lowered Schlumberger’s effective tax rate by two percentage points in 2005 and increased Schlumberger’sthe effective tax rate by twenty-one percentage points in 2003. Charges and fourteen percentage pointscredits did not have a significant impact on the effective tax rate in 2003 and 2002 respectively; in 2004, there was no significant effect.2004.
18. Leases and Lease Commitments
Total rental expense relating to continuing operations was $532 million in 2005, $464 million in 2004 and $345 million in 2003 and $310 million in 2002.2003. Future minimum rental commitments under noncancelable leases for each of the next five years are as follows:
| (Stated in millions) | ||||||
2005 | $ | 102 | ||||
| (Stated in millions) | ||||||
2006 | 86 | $ | 125 | |||
2007 | 65 | 99 | ||||
2008 | 40 | 70 | ||||
2009 | 31 | 43 | ||||
2010 | 33 | |||||
Thereafter | 60 | 79 | ||||
| $ | 384 | $ | 449 | |||
Part II, Item 8
64
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, any such additional costs are not expected to be material relative to consolidated liquidity, financial position or future results of operations.
TheConsolidated Balance sheet includesSheet included accruals for estimated future expenditures, relating to potential contractual obligations, associated with business divestitures which have been completed. It is possible that the ultimate expenditures may exceeddiffer from the amounts recorded. In the opinion of management, such additional expendituresdifferences 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 USUnited States Attorney’s office in the Southern District of Texas seeking documents relating to possible fraud in obtaining visas for non-USnon-United States 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 onor 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 joint venture agreements with Baker Hughes, with respect to WesternGeco, and Smith International, Inc., with respect to the drilling fluids joint venture, both contain provisions under which either party to the respective joint ventures may offer to sell their entire interest in the venture to the other party at a cash purchase price per percentage interest specified in an offer notice. If the offer to sell is not accepted, the offering party will be obligated to purchase the entire interest of the other party at the same price per percentage interest as the prices specified in the offer notice.
In the normal course of business, Schlumberger is liable for contract completion and product performance. In the opinion of management, such obligations are not material in relation to the consolidated liquidity, financial position or future results of operations.
Schlumberger’s assets that are exposed to concentrations of credit risk consist primarily of cash, short-term investments, fixed income investments held to maturity, and receivables from clients. Schlumberger places its cash, short-term investments and fixed income investments held to maturity with financial institutions and corporations, and limits the amount of credit exposure with any one of them. Schlumberger regularly evaluates the creditworthiness of the issuers in which it invests. The receivables from clients are spread over many countries and customers.20. Segment Information
Schlumberger operates two reportable business segments: Oilfield Services (OFS) and WesternGeco.
65
The Oilfield Services segment falls into four clearly defined economic and geographical areas and is evaluated on the following basis: North America is a major self-contained market; Latin America comprises regional markets that share a common dependence on the United States; Europe is a major self-contained market that includes the CIS and West Africa, whose economy is increasingly linked to that of Europe; Middle East & Asia includes the remainder of the Eastern Hemisphere, which consists of many countries at different stages of economic development that share a common dependence on the oil and gas industry. The Oilfield Services segment provides virtually all exploration and production services required during the life of an oil and gas reservoir. Schlumberger believes that all the products/services are interrelated and expects similar performance from each.
Part II, Item 8
The WesternGeco segment provides comprehensive worldwide reservoir imaging, monitoring, and development services, with extensive seismic crews and data processing centers, as well as a large multiclient seismic library. Services range from 3D and time-lapse (4D) seismic surveys to multi-component surveys for delineating prospects and reservoir management. WesternGeco is 70% owned by Schlumberger and 30% owned by Baker Hughes.
Financial information for the years ended December 31, 2005, 2004 2003 and 2002,2003, by segment, is as follows:
| (Stated in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Stated in millions) | (Stated in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2005 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2004 | Operating Revenue | Income after tax & Min. Int. | Minority Interest | Tax Expense | Income before tax & Min. Int. | Assets | Depn. & Amortn. | Capital Expenditure | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating Revenue | Income after tax & Min. Int. | Minority Interest | Tax Expense | Income before tax & Min. Int. | Assets | Depn. & Amortn. | Capital Expenditure | ||||||||||||||||||||||||||||||||||||||||||||||||
OFS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
North America | $ | 3,108 | $ | 340 | $ | — | $ | 179 | $ | 519 | $ | 1,969 | $ | 253 | $ | 247 | $ | 3,760 | $ | 609 | $ | – | $ | 324 | $ | 933 | $ | 2,041 | $ | 279 | $ | 376 | |||||||||||||||||||||||
Latin America | 1,746 | 181 | — | 40 | 221 | 1,246 | 142 | 131 | 2,209 | 261 | – | 69 | 330 | 1,332 | 143 | 152 | |||||||||||||||||||||||||||||||||||||||
Europe/CIS/W. Africa | 2,788 | 367 | — | 80 | 447 | 1,846 | 233 | 262 | |||||||||||||||||||||||||||||||||||||||||||||||
Europe/CIS/Africa | 3,533 | 569 | 8 | 127 | 704 | 1,974 | 265 | 338 | |||||||||||||||||||||||||||||||||||||||||||||||
Middle East & Asia | 2,478 | 569 | — | 80 | 649 | 1,724 | 228 | 361 | 3,033 | 774 | – | 97 | 871 | 2,017 | 271 | 414 | |||||||||||||||||||||||||||||||||||||||
Elims/Other | 119 | (45 | ) | — | 10 | (35 | ) | 3,770 | 60 | 62 | 113 | (54 | ) | – | 21 | (33 | ) | 1,842 | 48 | 106 | |||||||||||||||||||||||||||||||||||
| 10,239 | 1,412 | — | 389 | 1,801 | 10,555 | 916 | 1,063 | 12,648 | 2,159 | 8 | 638 | 2,805 | 9,206 | 1,006 | 1,386 | ||||||||||||||||||||||||||||||||||||||||
WESTERNGECO | 1,238 | 53 | 22 | 49 | 124 | 1,504 | 378 | 212 | 1,662 | 140 | 60 | 117 | 317 | 1,396 | 338 | 264 | |||||||||||||||||||||||||||||||||||||||
Corporate eliminations & Other | 3 | (61 | ) | 14 | (161 | ) | (208 | ) | 3,877 | 14 | 4 | (1 | ) | (183 | ) | 23 | (73 | ) | (233 | ) | 4,553 | 7 | 2 | ||||||||||||||||||||||||||||||||
Goodwill | 2,922 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 14,309 | $ | 2,116 | $ | 91 | $ | 682 | $ | 18,077 | $ | 1,351 | $ | 1,652 | ||||||||||||||||||||||||||||||||||||||||||
Interest Income | 98 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Expense | (187 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Charges & Credits | 172 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 2,972 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Stated in millions) | (Stated in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2004 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating Revenue | Income after tax & Min. Int. | Minority Interest | Tax Expense | Income before tax & Min. Int. | Assets | Depn. & Amortn. | Capital Expenditure | ||||||||||||||||||||||||||||||||||||||||||||||||
OFS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
North America | $ | 3,108 | $ | 340 | $ | – | $ | 179 | $ | 519 | $ | 1,668 | $ | 253 | $ | 247 | |||||||||||||||||||||||||||||||||||||||
Latin America | 1,746 | 181 | – | 40 | 221 | 1,244 | 142 | 131 | |||||||||||||||||||||||||||||||||||||||||||||||
Europe/CIS/Africa | 2,787 | 368 | – | 80 | 448 | 1,721 | 233 | 262 | |||||||||||||||||||||||||||||||||||||||||||||||
Middle East & Asia | 2,478 | 569 | – | 80 | 649 | 1,723 | 228 | 361 | |||||||||||||||||||||||||||||||||||||||||||||||
Elims/Other | 120 | (46 | ) | – | 10 | (36 | ) | 1,561 | 60 | 62 | |||||||||||||||||||||||||||||||||||||||||||||
| 10,239 | 1,412 | – | 389 | 1,801 | 7,917 | 916 | 1,063 | ||||||||||||||||||||||||||||||||||||||||||||||||
WESTERNGECO | 1,238 | 53 | 22 | 49 | 124 | 1,267 | 378 | 212 | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate eliminations & Other | 3 | (61 | ) | 14 | (161 | ) | (208 | ) | 3,963 | 14 | 4 | ||||||||||||||||||||||||||||||||||||||||||||
Goodwill | 2,789 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued operations assets | 65 | 65 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 11,480 | $ | 1,404 | $ | 36 | $ | 277 | $ | 16,001 | $ | 1,308 | $ | 1,279 | $ | 11,480 | $ | 1,404 | $ | 36 | $ | 277 | $ | 16,001 | $ | 1,308 | $ | 1,279 | ||||||||||||||||||||||||||||
Interest Income | 54 | 54 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Expense | (201 | ) | (201 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Charges | (243 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Charges & Credits | (243 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 1,327 | $ | 1,327 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Part II, Item 8
66
| (Stated in millions) | ||||||||||||||||||||||||||||
| 2003 | ||||||||||||||||||||||||||||
| Operating Revenue | Income after tax & Min. Int. | Minority Interest | Tax Expense | Income before tax & Min. Int. | Assets | Depn. & Amortn. | Capital Expenditure | |||||||||||||||||||||
OFS | ||||||||||||||||||||||||||||
North America | $ | 2,626 | $ | 234 | $ | — | $ | 131 | $ | 365 | $ | 1,818 | $ | 265 | $ | 140 | ||||||||||||
Latin America | 1,439 | 177 | — | 44 | 221 | 1,136 | 153 | 102 | ||||||||||||||||||||
Europe/CIS/W. Africa | 2,605 | 379 | — | 81 | 460 | 1,644 | 218 | 167 | ||||||||||||||||||||
Middle East & Asia | 2,090 | 451 | — | 58 | 509 | 1,443 | 206 | 246 | ||||||||||||||||||||
Elims/Other | 63 | (46 | ) | — | 28 | (18 | ) | 3,482 | 30 | 114 | ||||||||||||||||||
| 8,823 | 1,195 | — | 342 | 1,537 | 9,523 | 872 | 769 | |||||||||||||||||||||
WESTERNGECO | 1,183 | (17 | ) | (7 | ) | 4 | (20 | ) | 1,644 | 442 | 240 | |||||||||||||||||
Corporate eliminations & Other | 11 | 138 | (144 | ) | (136 | ) | (142 | ) | 4,199 | 27 | 12 | |||||||||||||||||
Discontinued operations assets | 4,675 | |||||||||||||||||||||||||||
| $ | 10,017 | $ | 1,316 | $ | (151 | ) | $ | 210 | $ | 20,041 | $ | 1,341 | $ | 1,021 | ||||||||||||||
Interest Income | 49 | |||||||||||||||||||||||||||
Interest Expense | (329 | ) | ||||||||||||||||||||||||||
Charges | (638 | ) | ||||||||||||||||||||||||||
| $ | 457 | |||||||||||||||||||||||||||
| (Stated in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Stated in millions) | (Stated in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2002 | Operating Revenue | Income after tax & Min. Int. | Minority Interest | Tax Expense | Income before tax & Min. Int. | Assets | Depn. & Amortn. | Capital Expenditure | ||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Revenue | Income after tax & Min. Int. | Minority Interest | Tax Expense | Income before tax & Min. Int. | Assets | Depn. & Amortn. | Capital Expenditure | |||||||||||||||||||||||||||||||||||||||||||||||||
OFS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
North America | $ | 2,308 | $ | 174 | $ | — | $ | 100 | $ | 274 | $ | 1,866 | $ | 280 | $ | 197 | $ | 2,626 | $ | 234 | $ | – | $ | 131 | $ | 365 | $ | 1,530 | $ | 265 | $ | 140 | ||||||||||||||||||||||||
Latin America | 1,318 | 143 | — | 26 | 169 | 1,143 | 157 | 124 | 1,439 | 177 | – | 44 | 221 | 1,136 | 153 | 102 | ||||||||||||||||||||||||||||||||||||||||
Europe/CIS/W. Africa | 2,496 | 305 | — | 78 | 383 | 1,629 | 215 | 285 | ||||||||||||||||||||||||||||||||||||||||||||||||
Europe/CIS/Africa | 2,605 | 379 | – | 81 | 460 | 1,619 | 218 | 167 | ||||||||||||||||||||||||||||||||||||||||||||||||
Middle East & Asia | 1,916 | 402 | — | 50 | 452 | 1,396 | 198 | 272 | 2,090 | 451 | – | 58 | 509 | 1,441 | 206 | 246 | ||||||||||||||||||||||||||||||||||||||||
Elims/Other | 133 | (26 | ) | — | 26 | — | 3,195 | 21 | 93 | 63 | (46 | ) | – | 28 | (18 | ) | 1,578 | 30 | 114 | |||||||||||||||||||||||||||||||||||||
| 8,171 | 998 | — | 280 | 1,278 | 9,229 | 871 | 971 | 8,823 | 1,195 | – | 342 | 1,537 | 7,304 | 872 | 769 | |||||||||||||||||||||||||||||||||||||||||
WESTERNGECO | 1,476 | 4 | 1 | 66 | 71 | 2,324 | 388 | 515 | 1,183 | (17 | ) | (7 | ) | 4 | (20 | ) | 1,415 | 442 | 240 | |||||||||||||||||||||||||||||||||||||
Corporate eliminations & Other | 10 | 65 | (86 | ) | (94 | ) | (115 | ) | 2,716 | 50 | 29 | 11 | 138 | (144 | ) | (136 | ) | (142 | ) | 4,033 | 27 | 12 | ||||||||||||||||||||||||||||||||||
Goodwill | 2,614 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued operations assets | 5,166 | 4,675 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 9,657 | $ | 1,067 | $ | (85 | ) | $ | 252 | $ | 19,435 | $ | 1,309 | $ | 1,515 | $ | 10,017 | $ | 1,316 | $ | (151 | ) | $ | 210 | $ | 20,041 | $ | 1,341 | $ | 1,021 | |||||||||||||||||||||||||||
Interest Income | 68 | 49 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest Expense | (364 | ) | (329 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Charges | (283 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Charges & Credits | (638 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 655 | $ | 457 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Oilfield Services net income eliminations include certain headquarters administrative costs which are not allocated geographically, manufacturing and certain other operations, and costs maintained at the Oilfield Services level.
Corporate income eliminations principally comprise the amortization of other intangibles, as well as nonoperating expenses, such as certain intersegment charges, amortization of certain intangible assets, interest on postretirement benefits, stock-based compensation costs and interest expense (except as shown above), which are not included in the segments’ income. Corporate assets largely comprise short-term investments and fixed income investments, held to maturity.
During the three years ended December 31, 2004,2005, no single customer exceeded 10% of consolidated revenue.
Schlumberger did not have revenue from third-party customers in its country of domicile during the last three years. In each of the last three years, only revenue in the USUnited States exceeded 10% of consolidated revenue. Revenue in the USUnited States in 2005, 2004 2003 and 20022003 was $3.6 billion, $3.0 billion and $3.3$2.6 billion, respectively.
67
Interest expense excludes amounts which are included in the segments’ income (2004 - $8(2005 – $10 million: 2004 –$8 million: 2003 -– $5 million: 2002 - $4 million).
Depreciation & Amortization and Capital Expenditure include Multiclient seismic data costs.
Part II, Item 8
US21. Pension and Other Benefit Plans
United States Defined Benefit Pension Plans
Schlumberger and its USUnited States subsidiary sponsor several defined benefit pension plans that cover substantially all employees hired prior to October 1, 2004. The benefits are based on years of service and compensation on a career-average pay basis. These plans are funded through a trust in respect to past and current service. Charges to expense are based upon costs computed by independent actuaries. The funding policy is to annually contribute amounts that are based upon a number of factors including the actuarial accrued liability and amounts that are allowable for income tax purposes. These contributions are intended to provide for benefits earned to date and those expected to be earned in the future. Schlumberger’s contribution during 20042005 was $254$172 million. The contribution in 20052006 is expected to be between $150$200 million and $200$250 million.
Schlumberger uses a December 31 measurement date to calculate its end of year benefit obligations, fair value of plan assets and annual net periodic benefit cost.
The assumed discount rate, compensation increases and return on plan assets used to determine pension expense were as follows:
| 2005 | 2004 | 2003 | ||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||
Assumed discount rate | 6.25 | % | 6.75 | % | 7.25 | % | 6.00 | % | 6.25 | % | 6.75 | % | ||||||
Compensation increases | 3.00 | % | 3.00 | % | 3.00 | % | 3.00 | % | 3.00 | % | 3.00 | % | ||||||
Return on plan assets | 8.50 | % | 8.50 | % | 8.50 | % | 8.50 | % | 8.50 | % | 8.50 | % | ||||||
Net pension cost in the USUnited States for 2005, 2004 2003 and 2002,2003, included the following components:
| (Stated in millions) | (Stated in millions) | |||||||||||||||||||||||
| (Stated in millions) | 2005 | 2004 | 2003 | |||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||
Service cost - benefits earned during the period | $ | 53 | $ | 56 | $ | 51 | ||||||||||||||||||
Service cost – benefits earned during the period | $ | 53 | $ | 53 | $ | 56 | ||||||||||||||||||
Interest cost on projected benefit obligation | 98 | 93 | 90 | 108 | 98 | 93 | ||||||||||||||||||
Expected return on plan assets [actual return: 2004 - $123; 2003 - $177; 2002 - $(114)] | (90 | ) | (87 | ) | (93 | ) | ||||||||||||||||||
Expected return on plan assets [actual return: 2005 – $132; 2004 – $123; 2003 – $177] | (109 | ) | (90 | ) | (87 | ) | ||||||||||||||||||
Amortization of prior service cost | 5 | 5 | 7 | 8 | 5 | 5 | ||||||||||||||||||
FAS 88 charge | 6 | — | — | – | 6 | – | ||||||||||||||||||
Amortization of unrecognized net loss | 19 | 4 | — | 25 | 19 | 4 | ||||||||||||||||||
Net pension cost | $ | 91 | $ | 71 | $ | 55 | $ | 85 | $ | 91 | $ | 71 | ||||||||||||
Part II, Item 8
68
The changechanges in the projected benefit obligation, plan assets and funded status of the plans on December 31, 2005 and 2004, and 2003, waswere as follows:
| (Stated in millions) | ||||||||||||||||
| (Stated in millions) | (Stated in millions) | |||||||||||||||
| 2005 | 2004 | |||||||||||||||
| 2004 | 2003 | |||||||||||||||
Projected benefit obligation at beginning of the year | $ | 1,583 | $ | 1,441 | $ | 1,724 | $ | 1,583 | ||||||||
Service cost | 53 | 56 | 53 | 53 | ||||||||||||
Interest cost | 98 | 93 | 108 | 98 | ||||||||||||
Actuarial losses | 84 | 94 | 110 | 84 | ||||||||||||
Benefits paid | (92 | ) | (82 | ) | (95 | ) | (92 | ) | ||||||||
Amendments | (8 | ) | (6 | ) | 84 | (8 | ) | |||||||||
Divestiture | — | (13 | ) | |||||||||||||
FAS 88 charge | 6 | — | – | 6 | ||||||||||||
Projected benefit obligation at end of the year | $ | 1,724 | $ | 1,583 | $ | 1,984 | $ | 1,724 | ||||||||
Plan assets at market value at beginning of the year | $ | 1,107 | $ | 952 | $ | 1,386 | $ | 1,107 | ||||||||
Actual return on plan assets | 123 | 177 | 132 | 123 | ||||||||||||
Contributions | 254 | 69 | 172 | 254 | ||||||||||||
Benefits paid | (92 | ) | (82 | ) | (95 | ) | (92 | ) | ||||||||
Divestiture | — | (9 | ) | |||||||||||||
Administrative expense | (6 | ) | — | (7 | ) | (6 | ) | |||||||||
Plan assets at market value at end of the year | $ | 1,386 | $ | 1,107 | $ | 1,588 | $ | 1,386 | ||||||||
Excess of projected benefit obligation over assets | $ | (338 | ) | $ | (476 | ) | $ | (395 | ) | $ | (338 | ) | ||||
Unrecognized net loss | 371 | 324 | 440 | 371 | ||||||||||||
Unrecognized prior service cost | (11 | ) | 11 | 64 | (11 | ) | ||||||||||
Pension asset (liability) at end of the year | $ | 22 | $ | (141 | ) | |||||||||||
Pension asset at end of the year | $ | 109 | $ | 22 | ||||||||||||
Plan assets at market value at end of the year | $ | 1,386 | $ | 1,107 | $ | 1,588 | $ | 1,386 | ||||||||
Accumulated benefits obligation at end of the year | (1,620 | ) | (1,478 | ) | (1,867 | ) | (1,620 | ) | ||||||||
Minimum liability | (234 | ) | (371 | ) | (279 | ) | (234 | ) | ||||||||
Pension (asset) liability at end of the year | (22 | ) | 141 | |||||||||||||
Pension asset at end of the year | (109 | ) | (22 | ) | ||||||||||||
Intangible asset | — | 11 | 64 | – | ||||||||||||
Charged to other comprehensive income (loss) | $ | (256 | ) | $ | (219 | ) | $ | (324 | ) | $ | (256 | ) | ||||
In instances in which plan assets are less than the accumulated benefit obligation (ABO), a minimum liability equal to this difference must be recognized, partially offset by an intangible asset for unrecognized prior service cost, with the remainder charged to equity, net of tax. In addition, any prepaid pension asset in excess of unrecognized prior service cost must be reversed through a net-of-tax charge to equity. The combined weak market performance in 2002 and 2003 and declining interest rates have decreasedABO represents the actuarial present value of assets heldbenefits based on employee service and compensation as of a certain date and does not include an assumption about future compensation levels. Changes in the US pension plans and have correspondingly increased the amount by which the pension plans are under-funded. As a result of the declineunfunded ABO result from factors such as a change in the value ofinterest rate used to discount the ABO to its present settlement amount, contributions to the pension plan assets and a decline in the interest rates, which increases the present value of the benefit obligations, investment return generated by pension plan assets.
Schlumberger recorded an additionala non-cash pretax charge toStockholders’ Equity of $37$67 million ($2342 million after-tax) in 2004.2005 to reflect this minimum liability referred to above. At December 31, 2004,2005, the cumulative non-cash pretax charge recorded inStockholders’ Equitywas $256$324 million ($159201 million after-tax). A recovery in market returns in future periods may reverseThe charge toStockholders’ Equity represents a portion of the charge.net loss not yet recognized as pension expense.
69
The assumed discount rate, the rate of compensation increases and the expected long-term rate of return on plan assets used to determine the projected benefit obligations were as follows:
| 2005 | 2004 | |||||||||||
| 2004 | 2003 | |||||||||||
Assumed discount rate | 6.00 | % | 6.25 | % | 5.75 | % | 6.00 | % | ||||
Compensation increases | 3.00 | % | 3.00 | % | 3.00 | % | 3.00 | % | ||||
Return on plan assets | 8.50 | % | 8.50 | % | 8.50 | % | 8.50 | % | ||||
On December 31, 2004,2005, there is no investment of the plan assets in Schlumberger common stock.
Part II, Item 8
The following is a breakdown of the plan assets:
| (Stated in millions) | ||||||||||||
| 2005 | 2004 | |||||||||||
| (Stated in millions) | ||||||||||||
| 2004 | 2003 | |||||||||||
US Equity - Actively managed | $ | 480 | $ | 381 | ||||||||
US Equity - Indexed | 189 | 131 | ||||||||||
US Equity – Actively managed | $ | 546 | $ | 480 | ||||||||
US Equity – Indexed | 215 | 189 | ||||||||||
Non-US Equity | 251 | 180 | 334 | 251 | ||||||||
Long-term fixed income | 276 | 257 | 320 | 276 | ||||||||
Cash or cash equivalents | 146 | 103 | 86 | 146 | ||||||||
Other investments | 44 | 55 | 87 | 44 | ||||||||
| $ | 1,386 | $ | 1,107 | $ | 1,588 | $ | 1,386 | |||||
The asset allocation objectives are to diversify the portfolio among several asset classes to reduce volatility while maintaining an asset mix that provide the highest expected rate of return consistent with an acceptable level of risk. The investment strategies include a rebalancing of the asset mix as necessary to the previously defined levels and reassessing funding levels and asset allocation strategy at least annually. In order to increase diversification and limit management risk, Schlumberger generally does not allocate more than 15% of fund assets to a single investment manager.
The expected long-term rate of return on assets is 8.5%. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the portfolio considering the asset distribution and related historical rates of return. The appropriateness of the assumption is reviewed at least annually. The pension trust’s performance over the last 10 years has been an annualized return of 10.2%8.8%.
The expected benefits to be paid under the plan are as follows:
| (Stated in millions) | ||||||
2005 | $ | 91 | ||||
| (Stated in millions) | ||||||
2006 | $ | 93 | $ | 98 | ||
2007 | $ | 94 | $ | 99 | ||
2008 | $ | 97 | $ | 102 | ||
2009 | $ | 100 | $ | 105 | ||
2010 - 2014 | $ | 585 | ||||
2010 | $ | 108 | ||||
2011 – 2015 | $ | 635 | ||||
Non-USOther Defined Benefit Pension Plans
OutsideIn addition to the US, subsidiaries of Schlumberger sponsor severalpreviously disclosed United States defined benefit andpension plans, Schlumberger sponsors several other defined contribution plans that cover substantially all employees who are not covered by statutorybenefit pension plans. For defined contribution plans, funding and cost are generally based upon a predetermined percentage of employee compensation. Charges to expense in 2004, 2003 and 2002,for these plans were $39$62 million, $33 million and $33$28 million respectively.
70
For defined benefit plans, charges to expensein 2005, 2004 and 2003, respectively, and are based upon costs computed by independent actuaries. These plans are funded through trusts in respect to past and current service. For all defined benefit plans, pension expense was $54 million, $35 million and $32 million in 2004, 2003 and 2002, respectively.
Based on plan assets and the projected benefit obligation, the only significant defined benefit plan is in the UK. The contribution in 2005UK, which covers employees hired prior to the UK plan is expected to be between $30 million and $35 million.
April 1, 1999.
Schlumberger uses a December 31 measurement date to calculate its end of year benefits obligations, fair value of plan assets and annual net periodic benefit cost.
cost of the UK defined benefit plan.
The assumed discount rate, compensation increases and return on plan assets used to determine pension expense were as follows:
| 2005 | 2004 | 2003 | |||||||||||||||
| 2004 | 2003 | 2002 | |||||||||||||||
Assumed discount rate | 5.60 | % | 5.70% | 5.75 | % | 5.40 | % | 5.60 | % | 5.70 | % | ||||||
Compensation increases | 4.00 | % | 3.75% - 2.50% | 4.00 | % | 4.10 | % | 4.00 | % | 3.75% – 2.50 | % | ||||||
Return on plan assets | 8.00 | % | 8.50% | 9.00 | % | 8.00 | % | 8.00 | % | 8.50 | % | ||||||
Part II, Item 8
Net pension cost in the UK plan for 2005, 2004 2003 and 20022003 (translated into US dollars at the average exchange rate for the periods), included the following components:
(Stated in millions) | (Stated in millions) | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| (Stated in millions) | ||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||
Service cost - benefits earned during the period | $ | 24 | $ | 24 | $ | 25 | ||||||||||||||||||
Service cost – benefits earned during the period | $ | 25 | $ | 24 | $ | 24 | ||||||||||||||||||
Interest cost on projected benefit obligation | 32 | 24 | 19 | 38 | 32 | 24 | ||||||||||||||||||
Expected return on plan assets [actual return: 2004 - $48; | ||||||||||||||||||||||||
2003 - $57; 2002 - $(42)] | (38 | ) | (36 | ) | (37 | ) | ||||||||||||||||||
Expected return on plan assets [actual return: 2005 – $106; 2004 – $48; 2003 – $57] | (45 | ) | (38 | ) | (36 | ) | ||||||||||||||||||
Amortization of unrecognized loss | 10 | 2 | — | 13 | 10 | 2 | ||||||||||||||||||
Net pension cost | $ | 28 | $ | 14 | $ | 7 | $ | 31 | $ | 28 | $ | 14 | ||||||||||||
71
The changechanges in the projected benefit obligation, plan assets and funded status of the plan (translated into US dollars at year-end exchange rates) waswere as follows:
| (Stated in millions) | ||||||||||||||||
(Stated in millions) | (Stated in millions) | |||||||||||||||
| 2005 | 2004 | |||||||||||||||
| 2004 | 2003 | |||||||||||||||
Projected benefit obligation at beginning of the year | $ | 1,570 | $ | 1,142 | $ | 754 | $ | 1,570 | ||||||||
Service cost | 29 | 52 | 24 | 29 | ||||||||||||
Interest cost | 32 | 66 | 38 | 32 | ||||||||||||
Contributions by Plan participants | 2 | 7 | 2 | 2 | ||||||||||||
Transfer in | 34 | 18 | – | 34 | ||||||||||||
Actuarial losses | 32 | 165 | 97 | 32 | ||||||||||||
Currency effect | 52 | 152 | (84 | ) | 52 | |||||||||||
Benefits paid | (16 | ) | (32 | ) | (19 | ) | (16 | ) | ||||||||
Disposals | 22 | — | ||||||||||||||
SchlumbergerSema divestiture | (1,003 | ) | — | – | (1,003 | ) | ||||||||||
Other | (11 | ) | 22 | |||||||||||||
Projected benefit obligation at end of the year | $ | 754 | $ | 1,570 | $ | 801 | $ | 754 | ||||||||
Plan assets at market value at beginning of the year | $ | 1,108 | $ | 815 | $ | 592 | $ | 1,108 | ||||||||
Actual return on plan assets | 48 | 152 | 106 | 48 | ||||||||||||
Currency effect | 43 | 106 | (68 | ) | 43 | |||||||||||
Employer contributions | 34 | 47 | 29 | 34 | ||||||||||||
Employee contributions | 2 | 7 | 2 | 2 | ||||||||||||
Transfer in | 15 | 15 | 13 | 15 | ||||||||||||
Benefits paid | (16 | ) | (32 | ) | (19 | ) | (16 | ) | ||||||||
Disposals | 26 | (2 | ) | |||||||||||||
SchlumbergerSema divestiture | (668 | ) | — | – | (668 | ) | ||||||||||
Other | (8 | ) | 26 | |||||||||||||
Plan assets at market value at end of the year | $ | 592 | $ | 1,108 | $ | 647 | $ | 592 | ||||||||
Excess of projected benefit obligation over assets | $ | (162 | ) | $ | (462 | ) | $ | (154 | ) | $ | (162 | ) | ||||
Unrecognized net loss | 238 | 498 | 232 | 238 | ||||||||||||
Unrecognized prior service cost | 19 | — | 3 | 19 | ||||||||||||
Unrecognized net asset at transition date | (1 | ) | (1 | ) | – | (1 | ) | |||||||||
Pension asset | $ | 94 | $ | 35 | $ | 81 | $ | 94 | ||||||||
Assets of under-funded plans at market value at end of the year | $ | 592 | $ | 882 | ||||||||||||
Accumulated benefit obligation of under-funded plans at end of the year | (626 | ) | (1,097 | ) | ||||||||||||
Assets of under-funded plan at market value at end of the year | $ | 647 | $ | 592 | ||||||||||||
Accumulated benefit obligation of under-funded plan at end of the year | (674 | ) | (626 | ) | ||||||||||||
Minimum liability of under-funded plans | (34 | ) | (215 | ) | ||||||||||||
Pension (asset) liability of under-funded plans | (94 | ) | 6 | |||||||||||||
Minimum liability | (27 | ) | (34 | ) | ||||||||||||
Pension (asset) liability of under-funded plan | (81 | ) | (94 | ) | ||||||||||||
Intangible asset | 19 | — | 3 | 19 | ||||||||||||
Charged to other comprehensive income (loss) | $ | (109 | ) | $ | (209 | ) | $ | (105 | ) | $ | (109 | ) | ||||
The combined weak market performance in 2002 and 2003 and declining interest rates have decreased the value of assets held in the UK pension plans and have correspondingly increased the amount by which the pension plans are under-funded. As a result of the decline in the value of the pension plan assets and a decline in the interest rates, which increased the present value of the benefit obligations, Schlumberger recorded an additionala non-cash pretax chargecredit toStockholders’ Equity of $7$4 million ($52 million after-tax) in 2004.2005 to reflect the minimum liability referred to above. At December 31, 2004,2005, the cumulative non-cash pretax charge recorded inStockholders’ Equity was $109$105 million ($7674 million after-tax). A recovery in market returns in future periods may reverseSee page 64 for a portiondescription of the charge.how this charge is calculated.
Part II, Item 8
The assumed discount rate and rate of compensation increases used to determine the projected benefit obligation were as follows:
| 2005 | 2004 | ||||||||||
| 2004 | 2003 | ||||||||||
Assumed discount rate | 5.40 | % | 5.60% | 4.90 | % | 5.40 | % | ||||
Compensation increases | 4.10 | % | 4.00% - 3.50% | 4.20 | % | 4.10 | % | ||||
72
The following is a breakdown of the plan assets:
| (Stated in millions) | ||||||||||||
(Stated in millions) | (Stated in millions) | |||||||||||
| 2005 | 2004 | |||||||||||
| 2004 | 2003 | |||||||||||
Equity securities | $ | 385 | $ | 818 | $ | 427 | $ | 385 | ||||
Fixed income securities | 118 | 178 | 120 | 118 | ||||||||
Index linked gilts | 63 | 56 | 60 | 63 | ||||||||
Real estate | — | 17 | ||||||||||
Other investments | 26 | 39 | 40 | 26 | ||||||||
| $ | 592 | $ | 1,108 | $ | 647 | $ | 592 | |||||
The trustees of all the UK plansplan determine their investment strategy with regard to the liability profile of each Fundthe fund on an individual basis and have determined benchmarks which they believe provide an adequate balance between maximizing the return on the assets and minimizing the risk of failing to meet the liabilities over the long-term.
Overall, the trustees of eachthe plan aim to have a sufficiently diversified portfolio of appropriate liquidity, which will generate income and capital growth to meet, together with new contributions from members and the employers, the cost of current and future liabilities which eachthe plan provides. They achieve this by using active investment managers who are set specific benchmarks and various restrictions to avoid undue concentration of assets. As the plans mature,plan matures, the Trustees review the appropriateness of their investment strategy.
The overall expected return on assets assumption is derived as the weighted average of the expected returns from each of the main asset classes. The expected return for each asset class reflects a combination of historical performance analysis, the forward looking views of the financial markets (as suggested by the yields available) and the views of investment organizations. Consideration is also given to the rate of return expected to be available for reinvestment. The pension trusts’ performance over the last 10 years has been an annualized return of 6.8%6.4%; over the last 15 years it is an annualized return of 8.0%10.0%.
The expected benefits to be paid under the plan are as follows:
| (Stated in millions) | ||||||
2005 | $ | 14 | ||||
(Stated in millions) | (Stated in millions) | |||||
2006 | $ | 14 | $ | 13 | ||
2007 | $ | 15 | $ | 14 | ||
2008 | $ | 16 | $ | 15 | ||
2009 | $ | 18 | $ | 16 | ||
2010 - 2014 | $ | 122 | ||||
2010 | $ | 18 | ||||
2011 – 2015 | $ | 123 | ||||
Contributions to the UK plan in 2006 are expected to be between $30 million and $50 million.
Other Deferred Benefits
In addition to providing defined pension benefits, Schlumberger and its subsidiaries have other deferred benefit programs, primarily profit sharing.sharing and defined contribution pension plans. Expenses for these programs were $151$273 million, $134$211 million and $138$174 million in 2005, 2004 and 2003, and 2002, respectively.
Part II, Item 8
Health Care Benefits
Schlumberger and its USUnited States subsidiary provide health care benefits for certain active employees. The costs of providing these benefits are expensed when incurred, and aggregated $65 million, $68 million and $70 million in 2005, 2004 and $79 million in 2004, 2003, and 2002, respectively. Outside the US,United States, such benefits are mostly provided through government-sponsored programs.
73
Postretirement Benefits Other than Pensions
Schlumberger and its USUnited States subsidiary provide certain health care benefits to former employees who have retired under the USUnited States pension plans.
On May 19, 2004, FASB Staff Position No. 106-2 (“FSP”) was issued by FASB to provide guidance relating to the prescription drug subsidy provided by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). Schlumberger currently provides postretirement benefits to former employees who have retired under the USUnited States pension plans. For these former employees, the prescription drug benefit provided by Schlumberger would be considered to be actuarially equivalent to the benefit provided under the Act. As permitted by the FSP, Schlumberger prospectively adopted the provisions of the FSP effective July 1, 2004. This resulted in a reduction in the accumulated postretirement benefit obligation (“APBO”) for the subsidy of approximately $82 million. The subsidy will resultresulted in a reduction in net periodic postretirement costs of approximately $12 million (pretax), of which $6 million was recorded during the third quarter of 2004 with the remaining portion being recorded in the fourth quarter of 2004. The components of this approximate $12 million in pretax savings are a reduction in interest costs on APBO of $5 million, a reduction of amortization of net loss of $4 million and a reduction in current period service costs of $3 million.
Schlumberger uses a December 31 measurement date to calculate its end of year benefit obligations and annual net periodic benefit cost.
The principal actuarial assumptions used to measure costs were a discount rate of 6.00% in 2005, 6.25% in 2004 and 6.75% in 2003 and 7.25% in 2002.2003. The overall medical cost trend rate assumption is 9.8%10% graded to 5%6% over the next six years and 5% thereafter.
Net periodic postretirement benefit cost in the USUnited States for 2005, 2004 2003 and 2002,2003, included the following components:
(Stated in millions) | (Stated in millions) | ||||||||||||||||||
| 2005 | 2004 | 2003 | |||||||||||||||||
| (Stated in millions) | |||||||||||||||||||
| 2004 | 2003 | 2002 | |||||||||||||||||
Service cost - benefits earned during the period | $ | 29 | $ | 28 | $ | 21 | |||||||||||||
Service cost – benefits earned during the period | $ | 29 | $ | 29 | $ | 28 | |||||||||||||
Interest cost on accumulated postretirement benefit obligation | 51 | 53 | 41 | 45 | 51 | 53 | |||||||||||||
Amortization of unrecognized net loss and other | 6 | 11 | 4 | (3 | ) | 6 | 11 | ||||||||||||
| $ | 86 | $ | 92 | $ | 66 | $ | 71 | $ | 86 | $ | 92 | ||||||||
74
The change in accumulated postretirement benefit obligation and funded status on December 31, 20042005 and 2003,2004, was as follows:
| (Stated in millions) | ||||||||||||||||
(Stated in millions) | (Stated in millions) | |||||||||||||||
| 2005 | 2004 | |||||||||||||||
| 2004 | 2003 | |||||||||||||||
Accumulated postretirement benefit obligation at beginning of the year | $ | 933 | $ | 676 | $ | 840 | $ | 940 | ||||||||
Service cost | 29 | 28 | 29 | 29 | ||||||||||||
Interest cost | 51 | 53 | 45 | 51 | ||||||||||||
Actuarial (gains) losses | (44 | ) | 202 | – | (44 | ) | ||||||||||
Benefits paid | (29 | ) | (26 | ) | (33 | ) | (29 | ) | ||||||||
Plan amendments | (107 | ) | — | (96 | ) | (107 | ) | |||||||||
Accumulated postretirement benefit obligation at the end of the year | 833 | 933 | 785 | 840 | ||||||||||||
Unrecognized net loss | (269 | ) | (326 | ) | (252 | ) | (269 | ) | ||||||||
Unrecognized prior service cost/other | 100 | (2 | ) | 174 | 100 | |||||||||||
Postretirement benefit liability on December 31 | $ | 664 | $ | 605 | $ | 707 | $ | 671 | ||||||||
Part II, Item 8
In 2004, amendments to the plan were enacted whereby Schlumberger is no longer required to accrue for postretirement benefit obligations until employees attain the age of 40; at this time employees are now required to make an election to either participate and contribute to the plan, or not participate in the plan. Under the previous terms of the plan, Schlumberger was required to accrue for postretirement benefit obligations from the date of employment regardless of the employee’s age.
In 2005, amendments to the plan were enacted whereby the retiree cost sharing was increased effective in 2006.
To date this plan has been unfunded. However, Schlumberger currently expects to make a contribution to this plan in 2006 of between $30 million and $40 million.
The components of the accumulated postretirement benefit obligation on December 31, 20042005 and 2003,2004, were as follows:
| (Stated in millions) | ||||||||||||
(Stated in millions) | (Stated in millions) | |||||||||||
| 2005 | 2004 | |||||||||||
| 2004 | 2003 | |||||||||||
Retirees | $ | 420 | $ | 404 | $ | 427 | $ | 424 | ||||
Fully eligible | 222 | 162 | 192 | 224 | ||||||||
Actives | 191 | 367 | 166 | 192 | ||||||||
| $ | 833 | $ | 933 | $ | 785 | $ | 840 | |||||
The assumed discount rate used to determine the accumulated postretirement benefit obligation was 5.75% for 2005 and 6.00% for 2004 and 6.25% for 2003.
2004.
If the assumed medical cost trend rate was increased by one percentage point, health care cost in 20042005 would have been $101$85 million, and the accumulated postretirement benefit obligation would have been $970$911 million on December 31, 2004.
2005.
If the assumed medical cost trend rate was decreased by one percentage point, health care cost in 20042005 would have been $73$59 million, and the accumulated postretirement benefit obligation would have been $720$681 million on December 31, 2004.2005.
The expected payments to be paid under the plan are as follows and are net of the annual Medicare Part D subsidy which ranges from $3 million to $6 million per year:
(Stated in millions) | |||
2006 | $ | 31 | |
2007 | $ | 33 | |
2008 | $ | 35 | |
2009 | $ | 38 | |
2010 | $ | 40 | |
2011 – 2015 | $ | 230 | |
22. Supplementary Information
Cash paid for interest and income taxes for continuing operations was as follows:
(Stated in millions) | (Stated in millions) | |||||||||||||||||
| Year ended December 31, | 2005 | 2004 | 2003 | |||||||||||||||
| (Stated in millions) | ||||||||||||||||||
Year ended December 31, | 2004 | 2003 | 2002 | |||||||||||||||
Interest | $ | 85 | $ | 354 | $ | 373 | $ | 196 | $ | 284 | $ | 354 | ||||||
Income taxes | $ | 253 | $ | 150 | $ | 251 | $ | 446 | $ | 253 | $ | 150 | ||||||
Part II, Item 8
75
Accounts payable and accrued liabilities are summarized as follows:
(Stated in millions) | (Stated in millions) | |||||||||||
| As at December 31, | 2005 | 2004 | ||||||||||
| (Stated in millions) | ||||||||||||
As at December 31, | 2004 | 2003 | ||||||||||
Payroll, vacation and employee benefits | $ | 631 | $ | 654 | $ | 671 | $ | 631 | ||||
Trade | 813 | 800 | 1,070 | 813 | ||||||||
Taxes, other than income | 190 | 160 | 241 | 190 | ||||||||
Pension | 290 | 543 | 358 | 290 | ||||||||
Accrued expenses | 832 | 1,005 | 879 | 832 | ||||||||
Other | 225 | 86 | 346 | 225 | ||||||||
| $ | 2,981 | $ | 3,248 | $ | 3,565 | $ | 2,981 | |||||
Interest and other income includes the following:
(Stated in millions) | (Stated in millions) | |||||||||||||||||||
| Year ended December 31, | 2005 | 2004 | 2003 | |||||||||||||||||
Interest income | $ | 100 | $ | 56 | $ | 52 | ||||||||||||||
Equity in net earnings of affiliated companies | 109 | 94 | 75 | |||||||||||||||||
Gain on sale of facility in Montrouge, France | 163 | – | – | |||||||||||||||||
Gain on sale of Hanover Compressor stock | 21 | – | – | |||||||||||||||||
Loss on sale of Atos Origin stock | – | (21 | ) | – | ||||||||||||||||
Gain on sale of Hanover Compressor note | – | – | 32 | |||||||||||||||||
Gain on sale of assets | 15 | – | 7 | |||||||||||||||||
| (Stated in millions) | $ | 408 | $ | 129 | $ | 166 | ||||||||||||||
Year ended December 31, | 2004 | 2003 | 2002 | |||||||||||||||||
Interest income | $ | 56 | $ | 52 | $ | 69 | ||||||||||||||
Equity in net earnings of affiliated companies | 94 | 75 | 64 | |||||||||||||||||
Loss on sale of Atos Origin shares | (21 | ) | — | — | ||||||||||||||||
Gain on sale of Hanover Compressor note | — | 32 | — | |||||||||||||||||
Gain on sale of investments | — | 2 | — | |||||||||||||||||
Gain on sale of financial instruments | — | 5 | 6 | |||||||||||||||||
| $ | 129 | $ | 166 | $ | 139 | |||||||||||||||
Allowance for doubtful accounts is as follows:
Year ended December 31, | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||
Balance at beginning of year | $ | 128 | $ | 173 | $ | 114 | $ | 128 | $ | 173 | ||||||||||
Provision in year | 26 | 55 | 25 | 26 | 53 | |||||||||||||||
Written off in year | (27 | ) | (65 | ) | (34 | ) | (27 | ) | (65 | ) | ||||||||||
Reclassified toAssets held for Sale | (3 | ) | (36 | ) | – | (3 | ) | (36 | ) | |||||||||||
Other1 | (10 | ) | 1 | (2 | ) | (10 | ) | 3 | ||||||||||||
Balance at end of year | $ | 114 | $ | 128 | $ | 103 | $ | 114 | $ | 128 | ||||||||||
| 1. | Includes business acquisitions and divestitures |
Part II, Item 8
23. Subsequent Event
On January 19, 2006, Schlumberger announced that the Board of Directors had approved a two-for-one stock split. Each stockholder of record at the close of business on March 1, 2006 will receive one additional share for every outstanding share held on the record date with a payment date on April 7, 2006. The total number of authorized common stock shares and associated par value was unchanged by this action. Additionally, Schlumberger’s income retained for use in the business will not be affected. The stock split will require retroactive restatement of all historical per share data in the first quarter ending March 30, 2006. All references to the number of shares outstanding in theseConsolidated Financial Statements are presented on a pre-split basis.
Schlumberger’s historical earnings per share on a proforma basis, assuming the stock split had occurred as of January 1, 2003, would be as follows (unaudited):
| 2005 | 2004 | 2003 | ||||||||
Basic earnings per share: | ||||||||||
Income from Continuing Operations | $ | 1.89 | $ | 0.89 | $ | 0.34 | ||||
Income (loss) from Discontinued Operations | 0.01 | 0.18 | (0.01 | ) | ||||||
Net Income1 | $ | 1.90 | $ | 1.06 | $ | 0.33 | ||||
Diluted earnings per share: | ||||||||||
Income from Continuing Operations | $ | 1.81 | $ | 0.85 | $ | 0.34 | ||||
Income (loss) from Discontinued Operations | 0.01 | 0.17 | (0.01 | ) | ||||||
Net Income1 | $ | 1.82 | $ | 1.02 | $ | 0.33 | ||||
| 1 | Amounts may not add due to rounding |
Part II, Item 8
76
Management’s Report on Internal Control Over Financial Reporting
The management of Schlumberger Limited is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a – 15(f) of the Securities Exchange Act of 1934. Schlumberger Limited’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Schlumberger Limited management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2004.2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Control – Integrated Framework. Based on our assessment we have concluded that, as of December 31, 2004,2005, the company’s internal control over financial reporting is effective based on those criteria.
Schlumberger Limited’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 20042005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 78pages 73 and 74 of this Annual Report on Form 10-K.
Part II, Item 8
Report of Independent Registered Public Accounting Firm
77
To the Board of Directors and Stockholders
of Schlumberger Limited
We have completed an integrated auditaudits of Schlumberger Limited’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 20042005, and auditsan audit of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheetssheet and the related consolidated statements of income, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Schlumberger Limited and its subsidiaries at December 31, 20042005 and 2003,2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20042005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 19 to the Consolidated Financial Statements, in 2003 the Company changed its accounting method for stock options.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing on page 7772 of this Annual Report on Form 10-K, that the Company maintained effective internal control over financial reporting as of December 31, 20042005, based on criteria established inInternal Control -– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004,2005, based on criteria established inInternal Control -– Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of the Company’s internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
Part II, Item 8
78
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ PRICEWATERHOUSECOOPERS LLP |
|
|
New York, New York February 22, 2006 |
March 1, 2005
Part II, Item 8, 9, 9A, 9B
79
Quarterly Results
(UNAUDITED)
The following table summarizes Schlumberger’s results for each of the four quarters for the years ended December 31, 20042005 and 2003.2004. Revenue and Grossgross margin, which equals operating revenue less cost of goods sold and services, has been restated to exclude discontinued operations.
| (Stated in millions except per share amounts) | ||||||||||||||||||
| Revenue | Gross Margin | Net Income | Earnings per share 7 | |||||||||||||||
| Basic | Diluted | |||||||||||||||||
Quarters-2004 | ||||||||||||||||||
First1 | $ | 2,673 | $ | 552 | $ | 220 | $ | 0.37 | $ | 0.37 | ||||||||
Second2 | 2,833 | 602 | 356 | 0.60 | 0.59 | |||||||||||||
Third3 | 2,906 | 605 | 318 | 0.54 | 0.53 | |||||||||||||
Fourth | 3,068 | 679 | 330 | 0.56 | 0.55 | |||||||||||||
| $ | 11,480 | $ | 2,438 | $ | 1,224 | $ | 2.08 | $ | 2.04 | |||||||||
Quarters-2003 | ||||||||||||||||||
First | $ | 2,359 | $ | 469 | $ | 149 | $ | 0.26 | $ | 0.26 | ||||||||
Second4 | 2,512 | 537 | 112 | 0.19 | 0.19 | |||||||||||||
Third5 | 2,522 | 83 | (55 | ) | (0.09 | ) | (0.09 | ) | ||||||||||
Fourth6 | 2,624 | 500 | 177 | 0.30 | 0.30 | |||||||||||||
| $ | 10,017 | $ | 1,589 | $ | 383 | $ | 0.66 | $ | 0.65 | |||||||||
| (Stated in millions except per share amounts) | |||||||||||||||
Revenue | Gross | Net | Earnings per share7 | ||||||||||||
| Basic | Diluted | ||||||||||||||
Quarters-2005 | |||||||||||||||
First1 | $ | 3,159 | $ | 754 | $ | 523 | $ | 0.89 | $ | 0.86 | |||||
Second | 3,429 | 880 | 482 | 0.82 | 0.80 | ||||||||||
Third2 | 3,698 | 941 | 541 | 0.92 | 0.89 | ||||||||||
Fourth3 | 4,023 | 1,111 | 661 | 1.12 | 1.08 | ||||||||||
| $ | 14,309 | $ | 3,686 | $ | 2,207 | $ | 3.75 | $ | 3.64 | ||||||
Quarters-2004 | |||||||||||||||
First4 | $ | 2,673 | $ | 552 | $ | 220 | $ | 0.37 | $ | 0.37 | |||||
Second5 | 2,833 | 602 | 356 | 0.60 | 0.59 | ||||||||||
Third6 | 2,906 | 605 | 318 | 0.54 | 0.53 | ||||||||||
Fourth | 3,068 | 679 | 330 | 0.56 | 0.55 | ||||||||||
| $ | 11,480 | $ | 2,438 | $ | 1,224 | $ | 2.08 | $ | 2.04 | ||||||
| Includes net, after-tax credits of $134 million. |
| 2 | Includes an after-tax credit of $18 million. |
| 3 | Includes an after-tax credit of $21 million. |
| 4 | Includes net, after-tax charges of $152 million. |
| Includes net, after-tax charges of $33 million. |
| Includes net, after-tax charges of $13 million. |
| The addition of earnings per share by quarter may not equal total earnings per share for the year. |
| * | Mark of Schlumberger |
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
NONENone
Item 9A Controls and Procedures
Schlumberger has carried out an evaluation under the supervision and with the participation of Schlumberger’s management, including the Chief Executive Officer (‘CEO”) and the Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of Schlumberger’s disclosure controls and procedures. Based upon Schlumberger’s evaluation, the CEO and the CFO have concluded that, as of December 31, 2004,2005, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports Schlumberger files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
80
There has been no change in Schlumberger’s internal control over financial reporting during Schlumberger’s quarter ended December 31, 20042005 that has materially affected, or is reasonably likely to materially affect, Schlumberger’s internal control over financial reporting.
See page 7772 of this Report for Management’s Report on Internal Control Over Financial Reporting.
NONE
81None
Part III, Item 10, 11, 12, 13, 14
Item 10 Directors and Executive Officers of Schlumberger
See Part I (on pages 710 and 8)11 of this Report) for Item 10 information regarding Executive Officers of Schlumberger. The information with respect to the remaining portion of Item 10 is set forth in the first section under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Members of the CommitteeCommittees of the Board of Directors,” and “Audit Committee,” in Schlumberger’s Proxy Statement to be filed for the 20052006 Annual General Meeting andof Stockholders is incorporated herein by reference.
Schlumberger had adopted a Code of Ethics that applies to all of it directors, officers and employees, including its principal executive, financial and accounting officers, or persons performing similar functions. Schlumberger’s Code of Ethics is posted on its corporate governance website located atwww.slb.com/ir.ir. In addition, amendments to the Code of Ethics and any grant of a waiver from a provision of the Code of Ethics requiring disclosure under applicable SEC rules will be disclosed on Schlumberger’s corporate governance website located atwww.slb.com/ir.ir.
Item 11 Executive Compensation
The information set forth under the captions “Director Compensations” and “Executive Compensation” (other than that set forth under the subcaptions “Corporate Performance Graph” and “Compensation Committee Report on Executive Compensation”) in Schlumberger’s Proxy Statement to be filed for the 20052006 Annual General Meeting of Stockholders is incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information with respect to Item 12 is set forth in Schlumberger’s Proxy Statement to be filed for the 2005 Annual General Meeting under the caption “Security Ownership of Certain Beneficial Owners and Management,” and such information is incorporated herein by reference.
Equity Compensation Plan Information
The information with respect to “Equity Compensation Plan Information” is set forthManagement” in Schlumberger’s Proxy Statement to be filed for the 20052006 Annual General Meeting of Stockholders is incorporated herein by reference.
Equity Compensation Plan Information
The information under the caption “Equity Compensation Plan Information,” and such informationInformation” in Schlumberger’s Proxy Statement to be filed for the 2006 Annual General Meeting of Stockholders is incorporated herein by reference.
Item 13 Certain Relationships and Related Transactions
Information regarding this item may be foundThe information on page 3, the last two sentences of footnote 1, in Schlumberger’s Proxy Statement to be filed for the 20052006 Annual General Meeting andof Stockholders is incorporated by reference.
Item 14 Principal Accountant Fees and Services
Information concerningThe information under the fees billed by our independent auditor and the naturecaption “Appointment of services comprising the fees for each of the two most recent fiscal yearsIndependent Registered Public Accounting Firm” in each of the following categories: (i) audit fees, (ii) audit – related fees, (iii) tax fees and (iv) all other fees, is set forth in the Audit Committee Report segment of Schlumberger’s Proxy Statement to be filed for the 20052006 Annual General Meeting andof Stockholders is incorporated herein by reference.
Information concerning Schlumberger’s Audit Committee policies and procedures pertaining to pre-approval of audit and non-audit services rendered by our independent auditor is set forth in the Audit Committee segment of Schlumberger’s Proxy Statement to be filed for the 2005 Annual General Meeting and is incorporated herein by reference.
Part IV, Item 15
82
Item 15 Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this |
| Page(s) | ||||
| ||||
(1) Financial Statements | ||||
Consolidated Statement of Income for the three years ended December 31, 2005 | 34 | |||
| 35 | ||||
Consolidated Statement of Cash Flows for the three years ended December 31, 2005 | 36 | |||
Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2005 | 37 | |||
Notes to Consolidated | ||||
Financial statements of 20% -– 50% owned companies accounted for under the equity method and unconsolidated subsidiaries have been omitted because they do not meet the materiality tests for assets or income.
| (2) Financial Statement Schedules not required |
(3) The following Exhibits are filed or incorporated by reference as indicated in Index to Exhibits: | ||||
Articles of Incorporation as last amended on | Exhibit 3.1 | |||||
Amended and Restated By-Laws as last amended on April | Exhibit 3.2 | |||||
Indenture, dated as of June 9, 2003, by and between Schlumberger and Citibank N.A., as Trustee | Exhibit 4.3 | |||||
First Supplemental Indenture, dated as of June 9, 2003, by and between Schlumberger and Citibank, N.A., as Trustee | Exhibit 4.4 | |||||
Schlumberger is party to a number of other long-term debt agreements that, pursuant to Regulation S-K, Item 601(b)(4)(iii), are not filed as exhibits. Schlumberger agrees to furnish copies of these agreements to the Commission upon its request.
Schlumberger 1994 Stock Option | Exhibit 10.1 | |||
Schlumberger 1994 Stock Option | Exhibit 10.2 | |||
Schlumberger 1994 Stock Option | Exhibit 10.3 | |||
83
Schlumberger Limited Supplementary Benefit | Exhibit 10.4 | |||
Schlumberger 1989 Stock Incentive | Exhibit 10.5 | |||
Schlumberger 1989 Stock Incentive | Exhibit 10.6 | |||
Schlumberger Restoration Savings Plan | Exhibit 10.7 | |||
Schlumberger 1998 Stock Option | Exhibit 10.8 | |||
Schlumberger 1998 Stock Option | Exhibit 10.9 | |||
1997 Long-Term Incentive Plan of Camco International Inc.; Long-Term Incentive Plan of Camco International Inc. Production Operators Corp. 1992 Long-Term Incentive Plan; Camco 1996 Savings Related Share Option Scheme; Camco International Inc. Amended and Restated Stock Option Plan for Non-Employee Directors * | Exhibit 10.10 | |||
| * | Compensatory plan or agreement required to be filed as an exhibit. |
Part IV, Item 15
| Page(s) | ||||
Schlumberger 2001 Stock Option Plan* | Exhibit 10.11 | |||
Schlumberger 2005 Stock Option Plan* | Exhibit 10.12 | |||
Schlumberger Limited 2004 Stock and Deferral Plan for Non-Employee Directors* | ||||
| Exhibit 10.13 | ||||
Form of Option Agreement, | Exhibit 10.14 | |||
Form of Option Agreement, Non-Qualified Stock Option | Exhibit 10.15 | |||
Employment Agreement, dated July 21, 2005 between Schlumberger and Frank A. Sorgie | Exhibit 10.16 | |||
Form of Indemnification Agreement | Exhibit 10.17 | |||
Subsidiaries | Exhibit 21 | |||
Consent of Independent | Exhibit 23 | |||
Powers of Attorney John Deutch, Jamie S. Gorlick, Andrew Gould, Tony Isaac, Adrian Lajous, André Lévy-Lang, Didier Primat, Nicolas Seydoux, Tore Sandvold, Linda G. Stuntz – dated January | Exhibit 24 | |||
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 31.1 | |||
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 31.2 | |||
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 32.1 | |||
84
Certification of Chief Financial 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 | |||
| * | Compensatory plan or agreement required to be filed as an exhibit. |
85
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 23, 2006 |
| |||||||
| By: | /s/ | ||||||
Chief Accounting Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this reportReport has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Name | Title | |||
|
| |||
Director, Chairman and Chief Executive Officer | ||||
| Andrew Gould | (Principal Executive Officer) | |||
/s/ | Executive Vice President and Chief Financial Officer | |||
| Jean-Marc Perraud | (Principal Financial Officer) | |||
/s/ | Chief Accounting Officer | |||
| (Principal Accounting Officer) | ||||
* | Director | |||
| John Deutch | ||||
* | Director | |||
| Jamie S. Gorelick | ||||
* | Director | |||
| Tony Isaac | ||||
* | Director | |||
| Adrian Lajous | ||||
* | Director | |||
| André Lévy-Lang | ||||
* | Director | |||
| Michael E. Marks | ||||
* | Director | |||
| Didier Primat | ||||
* | Director | |||
| Tore Sandvold | ||||
* | Director | |||
| Nicolas Seydoux | ||||
* | Director | |||
| Linda G. Stuntz | ||||
* | Director | |||
| Rana Talwar | ||||
| February 23, 2006 | |||
| *By Ellen Summer Attorney-in-Fact | ||||
86
INDEX TO EXHIBITS
87
INDEX TO EXHIBITS
| Exhibit | Page | |||||
| Form of Option Agreement, Incentive Stock Option, incorporated by reference to Exhibit 10.2 to Form 10-Q for quarter ended September 30, 2004 | 10.13 | - | ||||
| Form of Option Agreement, Non-Qualified Stock Option, incorporated by reference to Exhibit 10.3 to Form 10-Q for quarter ended September 30, 2004 | 10.14 | - | ||||
| Subsidiaries | 21 | 89 | ||||
| Consent of Independent Accountants | 23 | 90 | ||||
Powers of Attorney John Deutch Jamie S. Gorelick Andrew Gould Tony Isaac Adrian Lajous André Lévy-Lang Didier Primat Tore Sandvold Nicolas Seydoux Linda G. Stuntz | dated: January 20, 2005 | 24 | 91 | |||
| Additional Exhibits: | ||||||
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 | 31.1 | 91 | ||||
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 | 31.2 | 93 | ||||
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 | 32.1 | 94 | ||||
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 32.2 | 95 | ||||
Form S-8 Undertakings | 99 | 96 | ||||
| Exhibit | Page | |||
Articles of Incorporation as last amended 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 | 3.1 | – | ||
Amended and Restated By-Laws as last amended on April 21, 2005, incorporated by reference to Exhibit 3.1 to Form 8-K filed April 22, 2005 | 3.2 | – | ||
Indenture, dated as of June 9, 2003, by and between Schlumberger and Citibank N.A., as Trustee, incorporated by reference to Exhibit 4.3 to Registration Statement S-3 filed on September 12, 2003 | 4.3 | |||
First Supplemental Indenture, dated as of June 9, 2003, by and between Schlumberger and Citibank, N.A., as Trustee, incorporated by reference to Exhibit 4.4 to Registration Statement S-3 filed on September 12, 2003 | 4.4 | |||
Schlumberger 1994 Stock Option Plan, as amended on January 5, 1995, incorporated by reference to Exhibit 10(a) to Form 10-K for year 1995 | 10.1 | – | ||
Schlumberger 1994 Stock Option Plan – Second Amendment incorporated by reference to Exhibit 10(b) to Form 10-K for the year 1999 | 10.2 | – | ||
Schlumberger 1994 Stock Option Plan – Third Amendment incorporated by reference to Exhibit 10(c) to Form 10-K for the year 1999 | 10.3 | – | ||
Schlumberger Limited Supplementary Benefit Plan, as amended, on January 1, 1995, incorporated by reference to Exhibit 10(b) to Form 10-K for 1996 | 10.4 | – | ||
Schlumberger 1989 Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10(c) to Form 10-K for year 1995 | 10.5 | – | ||
Schlumberger 1989 Stock Incentive Plan – Third Amendment incorporated by reference to Exhibit 10(f) to Form 10-K for the year 1999 | 10.6 | – | ||
Schlumberger Restoration Savings Plan, incorporated by reference to Exhibit 10(f) to Form 10-K for year 1995 | 10.7 | – | ||
Schlumberger 1998 Stock Option Plan, incorporated by reference to Exhibit 10(g) to Form 10-K for year 1997 | 10.8 | – | ||
Schlumberger 1998 Stock Option Plan – First Amendment incorporated by reference to Exhibit 10(i) to Form 10-K for the year 1999 | 10.9 | – | ||
1997 Long-Term Incentive Plan of Camco International Inc.; Long-Term Incentive Plan of Camco International Inc.; Production Operators Corp. 1992 Long-Term Incentive Plan; Camco 1996 Savings Related Share Option Scheme; Camco International Inc. Amended and Restated Stock Option Plan for Nonemployee Directors; incorporated by reference to Exhibit 10 to Form S-8 of August 31, 1998 | 10.10 | – | ||
Schlumberger 2001 Stock Option Plan, incorporated by reference to Form 10-Q for the period ended March 31, 2001 | 10.11 | – | ||
Schlumberger 2005 Stock Option Plan, incorporated by reference to Appendix 2 to Schlumberger’s definitive proxy statement for the 2005 Annual General Meeting of Stockholders held on April 13, 2005 | 10.12 | – | ||
88
INDEX TO EXHIBITS
| Exhibit | Page | |||||
Schlumberger Limited 2004 Stock and Deferral Plan for Non-Employee Directors, incorporated by reference to Exhibit 10.1 to Form 10-Q for quarter ended September 30, 2004 | 10.13 | – | ||||
Form of Option Agreement, Incentive Stock Option, incorporated by reference to Exhibit 10.1 to Schlumberger’s Current Report on Form 8-K filed on January 19, 2006 | 10.14 | – | ||||
Form of Option Agreement, Non-Qualified Stock Option, incorporated by reference to Exhibit 10.2 to Form 8-K filed on January 19, 2006 | 10.15 | – | ||||
Employment Agreement, dated July 21, 2005 and effective as of August 1, 2005, between Schlumberger N.V. (Schlumberger Limited) and Frank A. Sorgie, incorporated by reference to Exhibit 10.1 to Schlumberger’s Current Report on Form 8-K filed on July 25, 2005 | 10.16 | – | ||||
Form of Indemnification Agreement, incorporated by reference to Exhibit 10.1 to Form 8-K filed April 22, 2005 | 10.17 | |||||
Subsidiaries | 21 | 82 | ||||
Consent of Independent Registered Public Accounting Firm | 23 | 83 | ||||
Power of Attorney John Deutch Jamie S. Gorelick Andrew Gould Tony Isaac Adrian Lajous André Lévy-Lang Didier Primat Tore Sandvold Nicolas Seydoux Linda G. Stuntz | dated: January 25, 2006 | 24 | 84 | |||
Additional Exhibits: | ||||||
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 | 31.1 | 85 | ||||
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 | 31.2 | 86 | ||||
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 | 32.1 | 87 | ||||
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 32.2 | 88 | ||||
81