International oilfield services giant Schlumberger Ltd. announced that it will take its largest one-time charge ever in the fourth quarter, a $3.17 billion, or $5.44/share, charge to earnings mainly related to problems in its recently acquired technology business.

The company also said it plans to lay off 3,300 workers, or about 4% of its worldwide work force, in its technology and oilfield services operations.

In 2001 Schlumberger paid $5.2 billion for Anglo-French software firm Sema PLC to, among other things, enhance the information gathering and delivery process of its oilfield services operation. But the massive decline in the telecommunications industry sharply reduced the value of the unit’s assets. As a result, Schlumberger has adopted a new strategic realignment and has altered current business values of the unit.

SchlumbergerSema will recognize fourth quarter charges of $2.9 billion, or $4.96/share, after-tax, including $2.6 billion related to impairment of goodwill and a further $267 million impairment associated with intangibles and other costs, including a provision against a deferred tax asset in Europe.

The unit also will change its focus to IT consulting, systems integration, and network and infrastructure solutions, primarily in global energy while continuing to develop specific regional market sectors in areas where it enjoys a successful competitive position based on scale and domain knowledge. The volume products activities, which include smart cards, point of sales terminals, pay phones, eCity terminals, electricity meters, payment systems and telecom software products will be managed separately.

The costs of this business realignment within SchlumbergerSema, amounting to $77 million after tax ($0.13 per share), are mainly related to facility closures and workforce reductions in Continental Europe and the United States of 1,600 people, the company said.

Schlumberger also said demand for oilfield services in the United States would remain lackluster in the fourth quarter, while activity in the North Sea and Nigeria would soften. Current work stoppages also have increased uncertainty in relation to the level of oilfield activity in Venezuela.

In addition, the operating losses experienced by its WesternGeco joint venture with Baker Hughes (30%) in the third quarter 2002 are expected to be repeated in the fourth quarter due to the seasonal slowdown in European marine activity and the reduction of land activity in the United States.

Schlumberger will record an after-tax charge of $77 million related to reducing the WesternGeco workforce by 1,700 people, closing the land-based seismic operations in the Lower 48 states and Canada and reducing the marine seismic fleet. Schlumberger also will record after-tax charges of $129 million related to a partial impairment of the WesternGeco multi client library. This represents 15% of the total library. These figures reflect the Schlumberger share of the seismic joint venture and correspond to $0.35 per share.

The total cash impact of the fourth quarter charges is less than $160 million, while the restructuring of SchlumbergerSema and WesternGeco is expected to generate a total of $250 million in annualized pre-tax costs savings, the company said. Furthermore, management expects to achieve its goal of reducing the company’s net debt to under $4 billion by year-end 2003 from roughly $7.5 billion of total debt outstanding and $5.5 billion of net debt.

Moody’s Investors Service downgraded the senior unsecured debt ratings of Schlumberger and its guaranteed subsidiaries to A1 from Aa3. Moody’s said its decision to downgrade Schlumberger’s ratings was based on lower than expected future cash flow from its IT services segment over the longer term, the company’s relatively high financial leverage when compared to its Aa rated peers, limited opportunities to realize a material improvement in cash flow from its oilfield services operations in the near term, and a fairly high degree of execution risk related to planned asset divestitures that are critical to management’s achievement of its deleveraging plan. The rating outlook is stable.

In addition Standard & Poor’s Ratings Services lowered its corporate credit and senior unsecured debt ratings on Schlumberger to A+ from AA- and lowered its commercial paper rating to A-1 from A-1+. S&P also said the outlook remains negative.

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