Business Context and Reporting Period
This Form 10-Q covers Schlumberger Limited (SLB) for the quarter and nine months ended September 30, 2001. The company operates primarily in two segments: Oilfield Services and SchlumbergerSema (formed by the acquisition of Sema plc in April 2001). The reporting period includes significant strategic shifts, including the integration of Sema, the divestiture of certain Resource Management Services (RMS) businesses, and the sale of Production Operators Corporation.
Key Financial Metrics
| Metric | Q3 2001 | Q3 2000 | 9M 2001 | 9M 2000 |
|---|---|---|---|---|
| Operating Revenue | $3,624.4M | $2,447.3M | $10,168.4M | $6,923.0M |
| Net Income | $194.6M | $204.6M | $337.3M | $496.7M |
| Diluted EPS | $0.34 | $0.35 | $0.59 | $0.86 |
| Operating Cash Flow (9M) | $792.2M (2001) vs $1,081.1M (2000) | |||
| Free Cash Flow (9M) | Approx. $(3,252M) after CapEx and M&A | |||
| Total Debt (Current + Long-Term) | $7.77B (Sept 30, 2001) vs $4.13B (Dec 31, 2000) | |||
| Cash & Short-Term Investments | $1.48B (Sept 30, 2001) vs $3.04B (Dec 31, 2000) | |||
| Effective Tax Rate (Q3) | ~43% (including non-deductible amortization) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 48% year-over-year in Q3 and 47% for the nine-month period, driven by a 36% increase in Oilfield Services revenue and the inclusion of Sema plc operations.
- Profitability Decline: Despite revenue growth, Net Income decreased 5% in Q3 and 32% for the nine months compared to 2000. This was primarily due to a $280M impairment charge in Q2 related to RMS divestitures, increased interest expense from Sema financing, and higher goodwill amortization.
- Debt Expansion: Total debt increased significantly to finance the $5.15 billion acquisition of Sema plc. Average debt balances rose by $3.8 billion, increasing interest expense by $30 million in Q3.
- Segment Performance: Oilfield Services pretax operating income grew 74% in Q3. SchlumbergerSema revenue grew 222% year-over-year but reported only $19M in pretax operating income due to integration costs and lower demand in the Cards segment.
Guidance, Outlook, and Risks
- Divestitures: The company expects to complete the divestiture of Resource Management Services (RMS) businesses in the fourth quarter. Proceeds will be used to pay down debt.
- Accounting Changes: Adoption of SFAS 142 (Goodwill) in 2002 is expected to reduce annual goodwill amortization from an estimated $350M in 2001 to $60M in 2002, potentially improving reported earnings.
- Market Risks: Management cites risks related to the integration of Sema, the timing of the telecom industry recovery, and fluctuations in oil and gas exploration spending. Currency volatility remains a risk, managed through derivative instruments.
- Unusual Items: Q3 included a $42.2M pretax credit from the sale of Production Operators Corporation. Q2 included a $280M impairment charge. Q1 included a $25M charge for in-process R&D related to the Bull CP8 acquisition.
Investor Verification Checklist
- Sema Integration: Verify the realization of cost synergies and revenue growth in the SchlumbergerSema segment, particularly in the Cards and Telecom sectors which showed sequential weakness.
- Debt Servicing: Confirm the impact of the $7.77B debt load on future interest expenses and liquidity, noting the recent issuance of $1.9B in European bonds to refinance short-term loans.
- Divestiture Timeline: Monitor the completion of the RMS divestiture and the actual cash proceeds received to assess debt reduction plans.
- Oilfield Rig Counts: Track the M-I rig count trends, which grew 14% year-over-year in Q3 but showed slowing sequential growth, indicating potential market saturation or economic slowdown in North America.
- Goodwill Amortization: Review the impact of the upcoming SFAS 142 adoption on 2002 earnings, as the reduction in amortization charges will significantly alter year-over-year comparisons.