SLB

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 2001, for Schlumberger Limited (Schlumberger N.V.). The reporting period is defined by a major strategic shift: the acquisition of Sema plc for $5.15 billion, completed in April 2001. Consequently, the company reorganized into two reportable segments: Oilfield Services and SchlumbergerSema. The Oilfield Services segment continues to benefit from a global increase in drilling activity, while the new SchlumbergerSema segment integrates IT services and smart card technologies.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 55% year-over-year in Q2 2001, driven by a 44% surge in Oilfield Services revenue and the inclusion of Sema plc operations.
• Profitability Impact: Despite revenue growth, the company reported a net loss of $93.3 million in Q2 2001, compared to a net income of $155.9 million in Q2 2000. This reversal was primarily caused by a $280 million impairment charge related to the expected disposition of certain Resource Management Services businesses (Electricity, Water, and Gas).
• Adjusted Performance: Excluding the $280 million charge, Q2 2001 net income would have been $187 million ($0.32 per share), representing a 20% increase over the prior year.
• Liquidity and Debt: To finance the Sema acquisition, the company borrowed $3 billion in April 2001. Total debt increased significantly, while cash and short-term investments declined by approximately $1.5 billion from the prior year-end.
• Segment Shift: The Oilfield Services segment saw pretax operating income rise 101% year-over-year. Conversely, the new SchlumbergerSema segment reported a pretax operating loss of $15 million, attributed to utility sector losses and integration costs.

Guidance, Outlook, and Risks

• Outlook: Management expects the Oilfield Services segment to continue benefiting from improved pricing and new technologies, though the seismic market remains soft due to spare capacity. The SchlumbergerSema segment faces challenges in the telecommunications sector, specifically regarding excess inventories of mobile communication cards.
• Divestitures: The company plans to dispose of certain Resource Management Services businesses, Semiconductor Solutions, and Global Tel*Link. The $280 million impairment charge reflects the write-off of goodwill and translation adjustments associated with these divestitures.
• Accounting Changes: The company adopted SFAS 133 (Derivatives) in 2001, resulting in a $27 million charge to Stockholders' Equity. SFAS 142 (Goodwill) will be adopted in 2002, which is expected to reduce quarterly goodwill amortization from $85 million to approximately $12 million.
• Risks: Key risks include the timing of the telecommunications industry recovery, the ability to integrate Sema plc and realize synergies, and fluctuations in oil and gas exploration spending. Environmental remediation costs for divested operations remain a contingency, though management does not expect them to be material.

Investor Verification Checklist

• Impairment Charge Details: Verify the specific assets written off in the $280 million charge and the timeline for the divestiture of Resource Management Services.
• Sema Integration: Assess the progress of integrating Sema plc, specifically regarding the realization of cost synergies and the stabilization of the utility and telecom sectors.
• Debt Servicing: Review the impact of the increased debt load ($3 billion new borrowing) on interest expense and future liquidity, noting the average borrowing rate decreased slightly to 6.4%.
• Oilfield Rig Counts: Monitor the M-I rig count trends, which grew 27% year-over-year but declined 5% sequentially, to gauge the sustainability of Oilfield Services revenue growth.
• Goodwill Amortization: Confirm the impact of the upcoming SFAS 142 adoption on future earnings, specifically the reduction in quarterly amortization expenses starting in 2002.