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8-K - FORM 8-K - SCHLUMBERGER LIMITED/NV | h80878e8vk.htm |
Exhibit 99
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
The unaudited pro forma condensed combined statements of income for the year ended December 31, 2010 combines the historical consolidated statements
of income of Schlumberger Limited (Schlumberger) and Smith International, Inc. (Smith), giving
effect to the merger as if it had occurred on January 1, 2010. The
historical consolidated financial information has been adjusted in the unaudited pro forma
condensed combined statement of income to give effect to pro forma events that are (1) directly
attributable to the merger, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The unaudited pro forma
condensed combined statement of income should be read in conjunction with the accompanying notes
to the unaudited pro forma condensed combined statement of income. In addition, the unaudited pro
forma condensed combined statement of income was based on and should be read in conjunction with
the separate historical financial
statements of Schlumberger as of and for
the year ended December 31, 2010 and the
related notes included in Schlumbergers
Annual Report on Form 10-K for the year
ended December 31, 2010.
The
unaudited pro forma condensed combined statement of income has been presented for
informational purposes only. The pro forma information is not necessarily indicative of what the
combined companys financial position or results of operations actually would have been had the
merger been completed as of January 1, 2010. In addition, the unaudited pro forma condensed
combined financial information does not purport to project the future financial position or
operating results of the combined company.
The unaudited pro forma condensed combined statement of income has been prepared using the
acquisition method of accounting under U.S. generally accepted accounting principles, and the
regulations of the SEC. All material transactions between Schlumberger and Smith during the period
presented in the unaudited pro forma condensed combined statement of income have been eliminated.
Schlumberger has been treated as the acquirer in the merger for accounting purposes.
The unaudited pro forma condensed combined statement of income does not reflect any cost
savings, operating synergies or revenue enhancements that the combined company may achieve as a
result of the merger, the costs to integrate the operations of Schlumberger and Smith, or the costs
necessary to achieve these cost savings, operating synergies and revenue enhancements.
SCHLUMBERGER LIMITED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the twelve months ended December 31, 2010
(In millions, except per share amounts)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the twelve months ended December 31, 2010
(In millions, except per share amounts)
Pro Forma | Pro Forma | |||||||||||||||||||
Schlumberger | Smith(*) | Reclassifications(A) | Adjustments | Combined | ||||||||||||||||
Revenue |
$ | 27,447 | $ | 5,967 | $ | (147 | )(B) | $ | 33,267 | |||||||||||
Interest and other income, net |
214 | 2 | $ | 16 | (78 | )(C) | 154 | |||||||||||||
Gain on investment in M-I SWACO |
1,270 | (1,270 | )(D) | |||||||||||||||||
Expenses: |
||||||||||||||||||||
Cost of revenue |
21,499 | 4,293 | 950 | (147 | )(B) | 26,535 | ||||||||||||||
(36 | )(E) | |||||||||||||||||||
(153 | ) (F) | |||||||||||||||||||
129 | (G) | |||||||||||||||||||
Research & engineering |
919 | 102 | 1,021 | |||||||||||||||||
General & administrative |
650 | 161 | 811 | |||||||||||||||||
Selling, general &
administrative |
1,235 | (1,235 | ) | |||||||||||||||||
Merger & integration |
169 | 38 | (189 | )(H) | 18 | |||||||||||||||
Restructuring & other |
331 | 331 | ||||||||||||||||||
Interest |
207 | 99 | (20 | )(I) | 286 | |||||||||||||||
Income from Continuing
Operations before taxes |
5,156 | 342 | | (1,079 | ) | 4,419 | ||||||||||||||
Taxes on income |
890 | 117 | 18 | (C) | 1,032 | |||||||||||||||
(32 | )(D) | |||||||||||||||||||
11 | (H) | |||||||||||||||||||
28 | (J) | |||||||||||||||||||
Income from Continuing
Operations |
4,266 | 225 | | (1,104 | ) | 3,387 | ||||||||||||||
Income attributable to
noncontrolling interests |
1 | (102 | ) | 96 | (C) | (5 | ) | |||||||||||||
Income from Continuing
Operations Attributable to
Schlumberger/Smith |
$ | 4,267 | $ | 123 | $ | | $ | (1,008 | ) | $ | 3,382 | |||||||||
Income from continuing
operations per share attributable to
Schlumberger/Smith: |
||||||||||||||||||||
Basic earnings per share |
$ | 3.41 | $ | 2.47 | ||||||||||||||||
Diluted earnings per share |
$ | 3.38 | $ | 2.45 | ||||||||||||||||
Average shares outstanding: |
||||||||||||||||||||
Basic |
1,250 | 1,368 | (K) | |||||||||||||||||
Assuming dilution |
1,263 | 1,381 | (K) |
(*)
|
Represents Smiths results for the period January 1, 2010 to August 27, 2010. |
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
Note 1: Description of Transaction
On August 27, 2010, Schlumberger acquired all of the outstanding shares of Smith, a leading
supplier of premium products and services to the oil and gas exploration and production industry.
The merger brings together the complementary drilling and measurements technologies and expertise
of Schlumberger and Smith in order to facilitate the engineering of complete drilling systems which
optimize all of the components of the drill string. Such systems will enable Schlumbergers
customers to achieve improved drilling efficiency, better well placement and increased wellbore
assurance as they face increasingly more challenging environments. In addition, Schlumbergers
geographic footprint will facilitate the extension of joint offerings on a worldwide basis.
Under the terms of the merger agreement, Smith became a wholly-owned subsidiary of
Schlumberger. Each share of Smith common stock issued and outstanding immediately prior to the
effective time of the merger was converted into the right to receive 0.6966 shares of Schlumberger
common stock, with cash paid in lieu of fractional shares.
At the effective time of the merger, each outstanding option to purchase Smith common stock
was converted pursuant to the merger agreement into a stock option to acquire shares of
Schlumberger common stock on the same terms and conditions as were in effect immediately prior to
the completion of the merger. The number of shares of Schlumberger common stock underlying each
converted Smith stock option was determined by multiplying the number of shares of Smith common
stock underlying such Smith stock options by the 0.6966 exchange ratio, and rounding down to the
nearest whole share. The exercise price per share of each converted Smith stock option was
determined by dividing the per share exercise price of such stock option by the 0.6966 exchange
ratio, and rounding up to the nearest whole cent. Smith stock options, whether or not then vested
and exercisable, became fully vested and exercisable and assumed by Schlumberger at the effective
date of the merger in accordance with preexisting change-in-control provisions. Smith stock options
were converted into 0.6 million Schlumberger stock options.
At the effective time of the merger, Smith restricted stock units, whether or not then vested,
became fully vested (except for grants between the date of the merger agreement and closing, which
were not significant and did not automatically vest) and were converted into shares of Schlumberger
common stock in connection with the merger, determined by multiplying the number of shares of Smith
common stock subject to each award by the 0.6966 exchange ratio, rounded to the nearest whole share
(assuming, in the case of performance-based Smith restricted stock unit awards, the deemed
attainment of the performance goals under the award at the target level).
Note 2: Calculation of Consideration Transferred
The following details the fair value of the consideration transferred to effect the
acquisition of Smith.
(In millions, except exchange ratio and per share amounts) | ||||
Number of shares of Smith common stock outstanding as of
August 27, 2010 |
248 | |||
Number of Smith unvested restricted stock units outstanding as
of August 27, 2010 |
4 | |||
252 | ||||
Multiplied by the exchange ratio |
0.6966 | |||
Equivalent Schlumberger shares of common stock issued |
176 | |||
Schlumberger closing share price on August 27, 2010 |
$ | 55.76 | ||
Common stock equity consideration |
$ | 9,812 | ||
Fair value of Schlumberger equivalent stock options issued |
16 | |||
Total fair value of the consideration transferred |
$ | 9,828 | ||
Certain amounts reflect rounding adjustments
Note 3: Adjustments to Unaudited Pro Forma Condensed Combined Income Statement
(A) | Certain reclassifications have been made to Smiths historical statement of income to conform to Schlumbergers presentation, primarily relating to selling and research and engineering expenses. | |
(B) | Reflects the elimination of revenue and cost of revenue in connection with Smith sales to Schlumberger. | |
(C) | Reflects the elimination of Schlumbergers equity earnings relating to M-I SWACO, a drilling fluids joint venture that was 40% owned by Schlumberger and 60% owned by Smith, as well as Smiths corresponding noncontrolling interest in the net income of the venture, respectively. This joint venture was structured as a partnership in the U.S. Smith consolidated the results of M-I SWACO and, as such, reflected the pretax income of the entire joint venture (including the U.S. partnership), and had appropriately not recorded income taxes associated with Schlumbergers 40% interest in the U.S. partnership. Therefore, an adjustment is required to reclassify these additional taxes which were previously reflected as a component of Schlumbergers equity income. | |
(D) | Represents a pro forma adjustment to eliminate Schlumbergers pretax gain and the related tax effect as a result of remeasuring its previously held equity interest in M-I SWACO. Generally accepted accounting principles require that an acquirer remeasure its previously held equity interest in an acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings. The gain is calculated based upon the acquisition date fair value of M-I SWACO. Because this pro forma adjustment will not have a continuing impact, it is excluded from the unaudited pro forma condensed combined statement of income. | |
(E) | To eliminate Smiths historical intangible asset amortization expense. | |
(F) | Schlumberger recorded an adjustment in purchase accounting of $153 million to write-up acquired inventory to its estimated fair market value. Schlumbergers cost of revenue reflected this increased valuation as this inventory was sold. The impact of this adjustment has been eliminated from the unaudited pro forma condensed combined statement of income because it will not have a continuing impact. | |
(G) | The fair value of identifiable intangible assets was determined primarily using the income approach, which requires a forecast of all of the expected future cash flows either through the use of the relief-from-royalty method or the multi-period excess earnings method. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, and the assessment of the assets life cycle, as well as other factors. The fair value of the identifiable intangible assets, the related amortization expense and their weighted-average useful lives have been estimated as follows: |
Weighted Average | Annual Amortization | |||||||||||
Fair Value | Estimated Useful Life | Expense | ||||||||||
(in millions) | (in years) | (in millions) | ||||||||||
Customer Relationships |
$ | 1,360 | 23 | $ | 59 | |||||||
Technology / Technical Know-How |
1,170 | 16 | 73 | |||||||||
Tradenames / Trademarks |
1,560 | 25 | 62 | |||||||||
$ | 4,090 | $ | 194 | |||||||||
The pro forma adjustment of $129 million represents the $194 million of annual amortization expense less the $65 million of amortization expense that Schlumberger recorded relating to these identifiable intangible assets during the period from August 27, 2010 to December 31, 2010. | ||
(H) | Reflects merger-related advisory and legal fees, and the related tax benefit, incurred by both Schlumberger and Smith during the year ended December 31, 2010 which do not have a continuing impact and therefore are not reflected in the unaudited pro forma condensed combined statement of income. | |
(I) | Represents the amortization associated with the fair value adjustment to increase Smiths fixed rate long-term debt and its fair value at the closing of the merger for the period from January 1, 2010 to August 27, 2010, over the weighted-average remaining term of the obligations. | |
(J) | Schlumberger has assumed a 35% tax rate when estimating the tax impacts of the appropriate pro forma adjustments, which represents the U.S. federal statutory tax rate. The effective tax rate of the combined company could be significantly different from what is presented in these unaudited pro forma condensed combined financial statements for a variety of reasons, including post-merger activities. |
The tax impact of the pro forma adjustments has been calculated as follows (in
millions):
Year Ended | ||||
December 31, | ||||
2010 | ||||
Elimination of Smiths historical
amortization expense |
$ | (36 | ) | |
Elimination
of inventory fair value adjustment |
(153 | ) | ||
Amortization expense associated with
intangible assets |
129 | |||
Amortization of debt fair value adjustment |
(20 | ) | ||
Pro forma
incremental income |
$ | (80 | ) | |
U.S. federal statutory tax rate |
35 | % | ||
Tax expense
relating to pro forma adjustments
|
$ | 28 | ||
(K) | Represents the adjusted weighted-average shares outstanding calculated as follows (in millions): |
Year Ended | ||||||||
December 31, 2010 | ||||||||
Assuming | ||||||||
Basic | Dilution | |||||||
Schlumberger historical shares outstanding |
1,250 | 1,263 | ||||||
Pro forma adjustment for the new Schlumberger shares of common stock issued |
118 | 118 | ||||||
1,368 | 1,381 | |||||||
The dilutive effect of Smith stock options that were converted into
Schlumberger stock options was not significant.