SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter ended: Commission file No.:
SEPTEMBER 30, 1998 1-4601
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SCHLUMBERGER N.V.
(SCHLUMBERGER LIMITED)
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(Exact name of registrant as specified in its charter)
NETHERLANDS ANTILLES 52-0684746
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(State or other jurisdiction of (I.R.S. Employer
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
277 PARK AVENUE
NEW YORK, NEW YORK, U.S.A. 10172
42 RUE SAINT-DOMINIQUE
PARIS, FRANCE 75007
PARKSTRAAT 83
THE HAGUE,
THE NETHERLANDS 2514 JG
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(Addresses of principal executive (Zip Codes)
offices)
Registrant's telephone number: (212) 350-9400
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 and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class OUTSTANDING AT OCTOBER 31, 1998
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COMMON STOCK, $0.01 PAR VALUE 545,897,972
PART I. FINANCIAL INFORMATION
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Item 1: Financial Statements
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SCHLUMBERGER LIMITED
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(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED STATEMENT OF INCOME (1)
------------------------------------
(Unaudited)
(Stated in thousands except per share amounts)
Periods Ended September 30,
------------------------------------------------------------------------------
Third Quarter Nine Months
-------------------------------------- ----------------------------------
1998 1997 1998 1997
----------------- --------------- -------------- --------------
REVENUE:
Operating $ 2,932,447 $ 2,970,708 $ 9,040,053 $ 8,388,076
Interest and other income 48,562 35,675 120,989 76,490
------------------ ----------------- ---------------- ----------------
2,981,009 3,006,383 9,161,042 8,464,566
------------------ ----------------- ---------------- ----------------
EXPENSES:
Cost of goods sold and services(2) 2,581,356 2,138,441 6,956,899 6,103,449
Research & engineering 137,392 129,093 430,884 380,763
Marketing 119,966 105,637 349,081 313,750
General 112,782 102,342 341,439 316,321
Interest 41,665 25,822 92,854 66,836
------------------ ----------------- ---------------- ----------------
2,993,161 2,501,335 8,171,157 7,181,119
------------------ ----------------- ---------------- ----------------
Income (Loss) before taxes (12,152) 505,048 989,885 1,283,447
Taxes on income 17,323 121,456 253,532 297,824
------------------ ----------------- ---------------- ----------------
Net Income (Loss)(2) $ (29,475) $ 383,592 $ 736,353 $ 985,623
Basic Earnings (Loss) Per Share $ (0.05) $ 0.71 $ 1.36 $ 1.83
================== ================= ================ ================
Diluted Earnings (Loss) Per Share(2) $ (0.05) $ 0.68 $ 1.31 $ 1.76
================== ================= ================ ================
Average shares outstanding 545,110 539,934 543,800 538,433
================== ================= ================ ================
Average shares outstanding
assuming dilution 560,773 562,659 563,137 557,739
================== ================= ================ ================
Dividends declared per share $ 0.1875 $ 0.1875 $ 0.5625 $ 0.5625
================== ================= ================ ================
(1) All prior periods have been restated to reflect the acquisition of Camco
International Inc., which has been accounted for as a pooling of interests.
(2) The 1998 third quarter results include an after-tax charge of $380
million ($0.68 per share) consisting of the following:
- - A charge of $268 million related to Oilfield Services, including
severance costs of $64 million (5,600 employees, of which 2,700 have been
released in the quarter); facilities closure/relocation costs of $40
million; operating asset write-offs of $114 million; and $39 million of
customer receivable reserves where collection is considered doubtful due to
the customers' financial condition and/or country risk. This charge results
from the slowdown in business.
- - A charge of $63 million for merger-related costs in connection with the
acquisition of Camco.
-2-
- - A charge of $43 million related to Measurement & Systems, consisting
primarily of employee severance, facilities' rationalizations and
environmental costs resulting from a reassessment of ongoing future
monitoring and maintenance requirements at locations no longer in operation.
The pretax charge of $444 million is classified in cost of goods sold and
services.
See notes to consolidated financial statements
-3-
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED BALANCE SHEET
--------------------------
(Unaudited)
(Dollars in thousands)
Sep. 30, Dec. 31,
1998 1997 (1)
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ASSETS
- ------
CURRENT ASSETS:
Cash and short-term investments $ 3,867,241 $ 1,818,332
Receivables less allowance for doubtful accounts
(1998 - $135,804; 1997 - $76,818) 3,158,799 2,997,010
Inventories 1,435,551 1,300,541
Deferred taxes on income 234,098 220,015
Other current assets 293,953 241,823
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8,989,642 6,577,721
LONG-TERM INVESTMENTS, HELD TO MATURITY 791,012 742,751
FIXED ASSETS:
Property, plant and equipment 11,615,427 10,925,373
Less accumulated depreciation (7,101,298) (6,803,422)
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4,514,129 4,121,951
EXCESS OF INVESTMENT OVER NET ASSETS OF
COMPANIES PURCHASED less amortization 1,366,522 1,379,412
DEFERRED TAXES ON INCOME 239,751 174,084
OTHER ASSETS 259,857 189,962
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$16,160,913 $13,185,881
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LIABILITIES & STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,608,139 $ 2,514,220
Estimated liability for taxes on income 509,024 425,318
Bank loans 697,018 750,303
Dividend payable 102,811 93,821
Long-term debt due within one year 87,500 104,357
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4,004,492 3,888,019
LONG-TERM DEBT 3,433,288 1,179,356
POSTRETIREMENT BENEFITS 435,331 414,432
OTHER LIABILITIES 336,070 322,905
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8,209,181 5,804,712
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STOCKHOLDERS' EQUITY:
Common stock 1,537,171 1,428,624
Income retained for use in the business 8,707,005 8,265,642
Treasury stock at cost (2,227,007) (2,249,765)
Translation adjustment (65,437) (63,332)
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7,951,732 7,381,169
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$16,160,913 $13,185,881
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(1) Restated to reflect the acquisition of Camco International Inc., which has
been accounted for as a pooling of interests.
See notes to consolidated financial statements
-4-
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
1998 1997 (1)
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Cash flows from operating activities:
Net income after 1998 third-quarter charge $ 736,353 $ 985,623
Third-quarter charge 380,000 -
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 845,088 761,400
Earnings of companies carried at equity,
less dividends received (Dividends:
1998 - $671; 1997 - $1,856) (9,150) (3,473)
Provision for losses on accounts receivable 30,382 15,488
Other adjustments 23 (2,033)
Change in operating assets and liabilities:
Increase in receivables (227,513) (513,855)
Increase in inventories (152,842) (221,116)
(Increase) decrease in deferred taxes
on income (14,083) 47,112
(Decrease) increase in accounts payable
and accrued liabilities (149,981) 40,796
Increase in estimated
liability for taxes on income 108,657 53,938
Other - net (99,378) 85,120
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Net cash provided by operating activities 1,447,556 1,249,000
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Cash flows from investing activities:
Purchases of fixed assets (1,341,785) (1,067,553)
Sales/retirements of fixed assets 71,863 68,256
Increase in investments (2,110,202) (646,155)
Businesses acquired (29,996) (11,753)
Net proceeds on sale of drilling rigs(2) - 174,000
(Increase) decrease in other assets (40,592) 1,524
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Net cash used in investing activities (3,450,712) (1,481,681)
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Cash flows from financing activities:
Dividends paid (286,051) (282,511)
Proceeds from exercise of stock options 60,844 76,243
Proceeds from employee stock purchase plan 70,461 50,055
Proceeds from issuance of long-term debt 3,203,652 325,047
Payments of principal on long-term debt (988,453) (50,207)
Net (decrease) increase in short-term debt (71,316) 100,565
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Net cash (used) provided by financing activities 1,989,137 219,192
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Net decrease in cash (14,019) (13,489)
Cash, beginning of period 147,395 180,105
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Cash, end of period $ 133,376 $ 166,616
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(1) Restated to reflect the acquisition of Camco International Inc., which has
been accounted for as a pooling of interests.
(2) In September 1997, the Sedco Forex semisubmersibles Drillstar and Sedco
Explorer were sold to a newly formed venture in which Schlumberger has a 25%
interest. The rigs are operated by Sedco Forex under bareboat charters. The gain
on sale was deferred and is being amortized over a six-year period. This
transaction had no effect on 1997 third quarter results and will have no
significant impact on future results of operations.
See notes to consolidated financial statements
-5-
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
STOCKHOLDERS' EQUITY
--------------------
(Unaudited)
(Dollars in thousands)
Common Stock
--------------------------- Retained Translation Comprehensive
Issued In Treasury Income Adjustment Income
------------- ------------- ------------- ------------- -------------
Balance, January 1, 1998 $ 1,428,624 $ (2,249,765) $ 8,265,642 $ (63,332) $ -
Net Income 736,353 736,353
Translation adjustment (2,105) (2,105)
Dividends declared (294,990)
Shares sold to optionees,
DSPP and fees 108,547 22,758
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Balance, Sept. 30, 1998 $ 1,537,171 $ (2,227,007) $ 8,707,005 $ (65,437) $ 734,248
============= ============= ============= ============= =============
See notes to consolidated financial statements
-6-
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
In the opinion of management, all adjustments necessary to present fairly the
financial position and the results of operations have been made in the
accompanying interim financial statements. The Company's significant accounting
policies are summarized in its 1997 Annual Report. These policies have been
consistently applied during the interim period presented in this report. The
results of operations for the three- and nine-month periods ended September 30,
1998 are not necessarily indicative of the results of operations that may be
expected for the entire year.
EARNINGS PER SHARE
- ------------------
As required by SFAS 128, the Company must report both basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income by the
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the average number of common
shares outstanding assuming dilution, the calculation of which assumes that all
stock options and warrants are exercised at the beginning of the period and the
proceeds used by the Company to purchase shares at the average market price for
the period.
The following is a reconciliation from basic earnings per share to diluted
earnings per share for the third quarter and nine months of 1998:
(Stated in thousands except per share amounts)
Third Quarter
- ------------- Average
Net Shares Loss
Loss Outstanding per share
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Basic $ (29,475) 545,110 $ (0.05)
Effect of dilution:
Options 8,448
Warrants 7,215
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Diluted $ (29,475) 560,773 $ (0.05)
=========== =========== ===========
Nine Months
- ----------- Average
Net Shares Earnings
Income Outstanding per share
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Basic $ 736,353 543,800 $ 1.36
Effect of dilution:
Options 10,900
Warrants 8,437
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Diluted $ 736,353 563,137 $ 1.31
========== =========== =========
-7-
CONTINGENCIES
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The Company and its subsidiaries comply with government laws and regulations and
responsible management practices for the protection of the environment. The
Consolidated 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
monitoring and maintenance requirements at facilities or locations that are no
longer in operation. Due to a number of uncertainties, including uncertainty of
timing, future technology, regulatory changes and other factors, it is possible
that the ultimate 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.
In addition, the Company and its subsidiaries are party to various other legal
proceedings. Although the ultimate disposition of these proceedings is not
presently determinable, in the opinion of the Company, any liability that might
ensue would not be material in relation to the Consolidated Financial
Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
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In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS NO. 130 - Reporting Comprehensive Income. The required disclosure of
comprehensive income is reported in the analysis of Stockholders' Equity.
In June 1997, the FASB issued SFAS No. 131 - Disclosures about Segments of a
Business Enterprise and Related Information. The Standard is effective December
31, 1998 for the Company. Early this year, the Company announced a significant
management reorganization in the Oilfield Services segment. This new structure
has been formally in place for only several months and is being evaluated. The
1998 Annual Report will show the required disclosures for Oilfield Services
disaggregated according to the new management structure. The required
information for the Measurement & Systems segment will be presented on the basis
of how that segment is managed.
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities. The Standard is effective in the third
quarter of 1999 for the Company. Currently, the Company primarily uses
derivative instruments such as interest rate swaps, forward currency contracts
and foreign currency options. The interest rate swaps are generally entered into
to adjust non-US denominated debt and interest rates to US dollars. Forward
currency contracts provide a hedge against currency fluctuations on
assets/liabilities denominated in other than a functional currency. Options are
usually entered into to hedge against currency variations on firm commitments
generally involving the construction of long-lived assets such as seismic
vessels and drilling rigs. The Company does not anticipate that the
implementation of this new Standard will have a material effect on consolidated
financial position and results of operations. The Standard will be adopted as
required.
-8-
Item 2: Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
- --------------
Third Quarter 1998 Compared to Third Quarter 1997
-------------------------------------------------
Third quarter operating revenue was $2.93 billion, 1% below the same quarter
last year.
Before the third quarter charge discussed below, net income and diluted
earnings per share were $351 million and $0.63, 9% and 7% lower,
respectively, than the same period last year.
Oilfield Services revenue was flat with third quarter 1997. Contract
drilling results remained strong, while seismic services and rig activity
related businesses, including pressure pumping, wireline and directional
drilling services, declined versus last year. A reduction in North American
activity was partly offset by increases in Europe, Africa and the Middle East.
Measurement & Systems revenue decreased 3% compared with the same period
last year. Revenue at Test & Transactions was flat, while Resource Management
Services decreased 6%.
An after-tax charge of $380 million ($0.68 per share) was taken this
quarter. This charge relates to merger costs and the costs of actions taken to
adjust operations in light of the current and expected levels of activity.
Business Review
(Stated in millions)
Oilfield Services Measurement & Systems
---------------------- ---------------------
Third Quarter 1998 1997 % change 1998 1997 % change
- ------------- ---- ---- -------- ---- ---- --------
Operating Revenue $ 2,229 $ 2,243 (1)% $ 704 $ 726 (3)%
Operating Income(1) $ 435 $ 474 (8)% $ - $ 29 (100)%
(1) Operating income represents income before income taxes, excluding
interest expense, interest and other income and the third-quarter 1998 charge.
OILFIELD SERVICES
Oilfield Services operating revenue was flat during the third quarter, with
increases of 22% in contract drilling and 8% in data services being offset by
declines in other oilfield services. Europe and North Africa reported
significant revenue growth, while revenue in North America decreased compared
with last year. The worldwide rig count declined 21%.
On October 21, Schlumberger and Smith International, Inc. announced the signing
of a memorandum of understanding for the creation of a drilling fluids joint
venture, which will be the world leader in drilling and completions fluids
products and services. The joint venture will enhance Schlumberger participation
in the Integrated Fluids Engineering process, which improves drilling efficiency
and maximizes reservoir performance while lowering total well costs.
Schlumberger will also broaden its integrated solutions offerings through
participation in the solids control and waste remediation business.
-9-
NORTH AMERICA
Revenue was 18% lower than in the third quarter of 1997, representing 20% of
consolidated revenue, while the number of drilling rigs fell 28%.
Operating income decreased by 67%. Severe weather disruptions in the Gulf of
Mexico also reduced revenue and earnings.
Schlumberger and Burlington Resources have signed a five-year, $8-million
services contract for GeoQuest Powerhouse* center-based exploration and
production data management services and Finder* data management software. The
PowerHouse service provides a seamless data environment enabling the reduction
of project cycle time, improved data quality and increased productivity of
professional staff.
An integrated services team performed the first successful coiled
tubing-based reentry operation in the Gulf of Mexico, demonstrating cost
effective well construction and evaluation without involving a conventional
drilling rig. Operating from a vessel in more than 100 feet of water, the team
deployed coiled tubing to cut a window in the side of the existing well, drill a
new well and evaluate the reservoir using VIPER* and SlimAccess* technology.
OUTSIDE NORTH AMERICA
In spite of a fall in rig count of 10%, revenue grew 7%, representing 57% of
consolidated revenue, and operating income grew 14%.
A major gas producer in Indonesia contracted Schlumberger data management
services to assess its production data handling environment. The Schlumberger
team, including engineers, geoscientists and information technology specialists,
is involved in defining the optimal requirements for replacement of computer
hardware and software and assessing Year 2000 implications.
Schlumberger production enhancement engineers assigned to the customer's
office - a first for the West African Geomarket - collaborated with the
customer to design a coiled tubing treatment program that optimized return on
investment for the project, boosting field performance by 12,000 barrels of oil
per day (BOPD).
CAMCO
Schlumberger completed the acquisition of Camco International Inc. on
August 31, further enhancing the capability of Schlumberger Oilfield
Services to offer premium reservoir optimization solutions and systems.
Examples of important synergies between the main divisions of Camco and
Schlumberger Oilfield Services include:
- - The Camco Drilling Group and Schlumberger drilling services complement
each other in the areas of drilling performance improvement and rotary
steerable systems;
- - Production Operators provides additional competencies for production
maximization;
- - Camco Products and Services and Reda strengthen the Schlumberger offering in
completions and reservoir optimization.
-10-
An Advanced Technology Group has been created to accelerate the development of
innovative completion solutions as part of the IRO* Integrated Reservoir
Optimization initiative. The Group will initially focus on multilateral
completions and services, advanced instrumented completion systems and sandface
completions and service support.
CONTRACT DRILLING ACTIVITY
Revenue from contract drilling operations grew 22% compared with the same
quarter last year. Offshore rig utilization was higher than last year, with
jackup utilization at 100%, and semisubmersible utilization at 95%. The
utilization onshore was 91%, compared with 93% a year ago. At the end of the
quarter, the offshore fleet included 26 semisubmersible rigs, 2 drillships, 16
jackups, 1 lake barge and 4 tenders. Onshore, the land fleet consists of 27 land
rigs, 7 swamp barge rigs, 12 workover units and 5 snubbing units. Additionally,
there were minority joint venture interests in 2 jackups, 1 multipurpose service
vessel and 8 land rigs. Ten of the offshore rigs were under bareboat charter or
management contract.
TECHNOLOGY HIGHLIGHTS
Aimed at enhancing value through improving productivity and efficiency and
reducing overall costs, Schlumberger introduced several notable
technological developments during the quarter.
In September, Schlumberger advanced the use of high-performance 3D data
visualization in the oil and gas industry through the introduction of
GeoViz* software and the Alternate Realities Corporation's VisionDome**
system, for which Schlumberger is the exclusive licensed reseller to the
industry. This combination provides geoscientists and engineers with the
first fully immersive, portable, virtual-reality environment for
constructing 3D models of subsurface reservoirs, selecting drilling targets and
designing well trajectories to maximize oil and gas recovery.
Schlumberger seismic services created the first time-lapse 3D-called
4D-seismic volume map designed to show reservoir changes over the lifetime of an
offshore oil field in the UK North Sea. In this case, the type of production
facilities ruled out conventional reservoir monitoring techniques using time-
lapse wireline logging of downhole production and water saturation. Hydrophones
were installed in the seabed over the reservoir in 1995, and both seabed and
surface seismic surveys were run. Repeating the surveys over the same area using
the already embedded hydrophones provided two pairs of time-lapse 3D data sets
to be evaluated by the oil company. Aided by direct hydrocarbon indicator
processing, 4D seismic analysis using repeated 3D surveys has proved effective
in monitoring fluid movements in the reservoir following production. Also during
the quarter, the recently converted Geco Triton (formerly American Champion)
successfully completed 10-streamer operations in the North Sea before joining
Geco Topaz on a 7500-km2 [3000-mi2] project offshore West Africa.
Among the notable innovations in Schlumberger drilling services,
Schlumberger successfully ran the first RAPIDAccess* multilateral
completion system for an oil company in North America. The installation of this
novel completion allowed the customer to double the reservoir
penetration. In West Africa, the new AIM* At-bit Inclination Measurement
technology was used to keep a well within a one-foot target window,
-11-
providing unsurpassed accuracy in well placement.
During the quarter, two fluid technologies for maximizing drilling and
production efficiencies were introduced. The DeepCRETE* cementing system,
designed to address the challenges associated with well construction in deep
water, helped customers improve performance and reduce overall costs in Norway,
Gabon, Congo and Nigeria. The new STARDRILL* drill-in fluid, used while drilling
through the reservoir, improved hydrocarbon production rates by limiting damage
to the reservoir from the drilling process in wells in Equatorial Guinea, Norway
and Gabon.
SERVICE INITIATIVES
Schlumberger has created two additional groups that extend integrated
solutions capabilities beyond the traditional project management function. The
Support Center Group renders technical and commercial support on production
management, field development and Integrated Reservoir Optimization project
evaluation. The Coiled Tubing Drilling (CTD) Group provides expertise to furnish
oil and gas companies with enhanced and more fully integrated CTD solutions.
During the quarter, the MaxPro* initiative was launched to maximize the
productivity of oil and gas wells. The MaxPro initiative, involving a new
organization and new technology, offers solutions spanning an entire range of
production services, including perforating, cement evaluation, reservoir
monitoring, completion services, corrosion monitoring, well repair, production
monitoring and diagnosis. To date, five major MaxPro locations have been set up
in Asia, Europe and North America.
The latest in a series of new MaxPro technologies was also introduced in
the third quarter - the breakthrough PS PLATFORM* wireline production
logging tool that provides monitoring and diagnosis of fluid flow in
producing oil and gas wells. The PS PLATFORM service enables oil and gas
companies to benefit from more accurate measurements and greatly enhanced
operational efficiency through real-time answers, faster operating speed and
smaller, lighter and more rugged tools. PS PLATFORM technology provides the
measurements for more accurate well diagnoses and is one of the vehicles for
future developments critical to optimal management of the reservoir.
MEASUREMENT & SYSTEMS
Test & Transactions revenue was flat compared with the third quarter of
last year. Orders decreased 24%. The growth in smart cards was attributable to a
sales increase of 22% for cellular phone SIM (subscriber identity module) cards
and a 50% increase for banking and financial cards. Regionally, North American
card sales improved 41%, while European and Asian sales both grew 8%. During the
quarter, Schlumberger became the number one producer of smart cards. Compared
with last year, Parking and Mass Transit Systems rose 25%, following the
successful introduction of the new Stelio* parking system. Automated Test
Equipment (ATE) revenue decreased 22% versus last year. Semiconductor Test and
Automated Handling Systems activity in North America and Asia declined during
the quarter. Diagnostic Systems experienced an increase in revenue, resulting
from sales of the newly launched IDS 2000* flip-chip optical probe system.
Consistent with the current business cycle, initiatives have been launched to
reduce operating expenses, while maintaining investment in new product
-12-
development. Our Retail Petroleum Systems activities were sold to Tokheim
Corporation on October 1.
Resource Management Services revenue fell 6% compared with the third
quarter of 1997. Europe was down 4%, largely due to the lower activity in France
caused by the ongoing shift from electromechanical to electronic products in the
local electricity market, reduced purchases by domestic water utilities and a
decline in export shipments to the CIS and Asia. Germany was down significantly
due to a 60% drop in the industrial gas business, lower sales of gas pressure
regulators and price reductions in the heat and water businesses. Asia fell 49%
on lower shipments across all countries. North America dropped 6% due to a
reduced electricity networking market and uncertainties related to electricity
deregulation in the US. Orders decreased 11% against last year. Europe was
negatively affected by a decline in UK activity. Asian orders fell 58% due to
the shrinkage of local markets. North American orders were lower by 15%,
reflecting the phaseout of the construction service business and the weakened
market for major product lines.
During the quarter, the new QUANTUM* Q1000 high-end electrical meter was
introduced with initial shipments made to Electricite de France (EDF).
Delivery of long-life, single-phase electromechanical electricity meters
also commenced to Shanghai Power from the Mecoindo manufacturing facility in
Indonesia. A six-year contract was signed with the South Australia water utility
to meet their metering requirements. In South Africa, a five-year contract was
signed to manage and maintain a prepayment electricity system on a shared-
benefit basis for an area where 850,000 people live. The Resource Management
Services (RMS) business signed agreements in Europe and North America with
Itron, Inc. for the mutual licensing and distribution of Automatic Meter Reading
(AMR) technology.
Interest and other income increased $13 million from the same period last year
primarily due to a $18 million increase in interest income (higher average
investment balances). Gross margin decreased from 28% to 27% excluding the third
quarter charge. Research and engineering expense increased 6% from last year
representing 4.7% of operating revenue compared with 4.3% in 1997. Marketing
expense was up 14%. General expense, expressed as a percentage of operating
revenue, increased from 3.4% to 3.8%. Interest expense increased $16 million, of
which $13 million was related to the financing of the Camco merger. Excluding
the third quarter charge, the effective tax rate of 19% decreased five
percentage points from last year.
FIRST NINE MONTHS 1998 COMPARED TO FIRST NINE MONTHS 1997
---------------------------------------------------------
Net income for the first nine months of $736 million and diluted earnings per
share of $1.31 were 25% and 26%, respectively, below the same period 1997.
Before the third quarter charge, net income and diluted earnings per share were
$1.1 billion and $1.99, 13% above 1997. Operating revenue for the first nine
months was $9 billion, 8% higher than 1997.
Oilfield Services revenue increased 9%, while rig count worldwide declined 7%.
Operating income grew 11%. Contract drilling and data services contributed
significantly to the results.
-13-
Measurement & Systems revenue grew 4%. Revenue at Test & Transactions was up
18%, while Resource Management Services decreased 8%.
BUSINESS REVIEW
(Stated in millions)
Oilfield Services Measurement & Systems
---------------------- ----------------------
Nine Months 1998 1997 % change 1998 1997 % change
- ----------- ---- ---- -------- ---- ---- --------
Operating Revenue $ 6,829 $ 6,251 9% $ 2,214 $ 2,137 4%
Operating Income(1) $ 1,374 $ 1,234 11% $ 72 $ 95 (24)%
(1) Operating income represents income before income taxes, excluding
interest expense, interest and other income, and the third-quarter 1998 charge.
OILFIELD SERVICES
Operating revenue for Oilfield Services rose $578 million (9%) over last year.
Substantial increases were posted by contract drilling, up 28%, data services,
up 20%, pumping and cementing, up 7%, and marine seismic services, up 6%.
Revenue in South America, Europe and Asia regions increased significantly from
last year.
In response to evolving client needs and employee-identified opportunities,
Schlumberger management undertook a reorganization of Oilfield Services into the
Solutions Group and the Products Group. The Solutions Group is organized along
geographic lines in close proximity to customers to develop, sell and implement
all oilfield services as well as customized and integrated solutions to meet
specific client needs. The Products Group, formed by utilizing existing service
expertise, is responsible for product development across the organization as
well as training and technical support for each type of service in the field to
ensure the highest standards of service to clients.
NORTH AMERICA
Revenue increased 3% from the same period last year while operating income
decreased 11%. Rig count fell 10%.
In spite of an activity slowdown in North America, gas well-related market and
demand for MDT* Modular Formation Dynamics Tester service experiened growth, due
to its new sampling and reservoir characterization techniques, delivering
greater operating efficiency. Wireline services successfully completed the
deepest logging job ever performed in the Gulf of Mexico, using innovative
packaging and design techniques to overcome the high-temperature and high-
pressure well conditions.
Sand Control, which has been shown to improve well productivity, was widely
accepted by clients with its ClearFRAC* fracturing fluid, the industry's first
polymer-free fluid.
Schlumberger acquired Coastal Management Corporation (CMC), a leading
provider of integrated project management services to the North American
oil and gas industry. This acquisition will enhance the Schlumberger
position as the industry-leading provider of comprehensive project
-14-
management and services in the areas of field development, drilling and
workover operation, and production operations. CMC employs 160 people.
OUTSIDE NORTH AMERICA
Outside North America revenue was up 12%. Operating income rose 21%. Rig count
declined 4% from last year. Latin America recorded a gain of 16% from last year,
followed by Asia, up 17%. Drilling activity was up 28% reflecting improved
utilization levels and higher activity.
Marine seismic activity increased 7% from last year driven by higher streamer
capacity and new technology. The implementation of the ultra-slim NESSIE*4
seismic streamer, which provides improved data quality compared with other 4C
systems, was a result of a major upgrade of the Geco Resolution to eight-
streamer capacity. The increased demand for multicomponent seismic acquisition
led to a major conversion of the Geco Angler to operate as a dedicated,
multicomponent 3D survey vessel. Schlumberger now offers a complete range of
networked seismic services, including onboard processing, onshore processing and
the new SeisConnect* data communication service. The SeisConnect service
combines the convenience of an oil company's in-house processing operation with
the massive computing power of our seismic processing hub.
Innovative interpretation techniques, developed for advanced technology
measurements, are improving production through optimal well completion. In
particular, the images acquired by the RAB* Resistivity-at-the-Bit LWD tool now
identify the highest potential formations during the drilling process resulting
in greater cost-effectiveness for the client.
SCALE BLASTER* technology, deployed on coiled tubing, has provided clients with
a highly effective and valuable way of improving production without a rig
intervention.
The worldwide introduction of the VISION475* MWD/LWD system for small-diameter
wells has been highly successful. This application gives clients improved
confidence in evaluating the growing number of horizontal and highly deviated
wells and reentry wells. The use of key acoustic velocity information during
drilling has significantly increased following the introduction of the slimmer
6.75-inch ISONIC* logging-while-drilling tool.
The PLATFORM EXPRESS* service and the new CMR-200* combinable magnetic resonance
technology are gaining recognition for its superior measurement of hydrocarbon
type and quantity.
Schlumberger entered into strategic alliances with two Russian oil companies,
Yukos and Sibneft, which will enable them to outsource an agreed level of
oilfield services in their Russian oil fields over the next five years.
Schlumberger will be the sole provider of services on a number of selected
fields under development by Yukos and Sibneft. In keeping with its long-standing
policy, Schlumberger will remain an independent service provider and will not
take ownership of reserves or production.
-15-
MEASUREMENT & SYSTEMS
Revenue increased 4% from last year. Strong growth at Smart Cards & Terminals
and Automatic Test Equipment (ATE) more than offset the decline in metering
activities. Operating income fell 24%.
During the first nine months, Smart Cards & Terminals revenue rose 26%,
primarily due to higher smart card shipments. Orders increased 25%. Revenue for
smart cards was up 29% over last year with strong demand for SIM (subscriber
identity module) cards and higher shipments of microprocessor cards for
financial applications. Revenue for point-of-sale terminals more than doubled
driven by the success of the MagIC* 9000 portable handheld electronic payment
terminal and shipments of Delta* 21 terminals. Parking and Mass Transit Systems
was up 24% from last year due to the new Stelio system. Regionally, revenues for
Asia, North America and Europe were up 106%, 24% and 17%, respectively. Revenue
for Automated Test Equipment was 16% higher than last year reflecting the demand
for 400-MHz high-end logic testers and the newly introduced IDS 2000* flip-chip
optical probe system. Orders for ATE declined 50%.
Resource Management Services revenue was down 8% from last year. Asia revenue
was down 37% on lower shipments across all countries. Europe was down 10% with
the most significant shortfall in France, down 9%, as the electricity business
was severely impacted by the ongoing technology shift from electromechanical
products toward electronic products. Orders were down 9% from last year. Germany
activity fell 11% from lower sales of residential and industrial gas meters and
pressure regulators. UK sales suffered a 10% decline reflecting weaker demand on
gas meters and lower installation work by Maclean & Nuttall. Italy revenue was
down significantly reflecting decreased orders from ENEL and a price drop in the
electricity market. These declines were offset by improvements in South America
and CIS.
Interest and other income increased $44 million from the same period last year
primarily due to a $43 million increase in interest income (higher average
investment balances). Gross margin remained at 28% excluding the third quarter
charge. Research and engineering expense increased 13% from last year
representing 4.8% of operating revenue compared with 4.5% in 1997. Marketing
expense was up 11%. General expense, expressed as a percentage of operating
revenue, remained at 3.8%. Interest expense increased $26 million of which $13
million was related to the financing of the Camco merger. Excluding the third
quarter charge, the effective tax rate of 22% decreased one percentage point
from last year.
YEAR 2000 READINESS DISCLOSURES
- -------------------------------
OVERVIEW
The "Year 2000 issue" is the inability of computers and computing technology to
correctly process the year 2000 date change. The Company recognizes that the
Year 2000 issue creates a significant uncertainty to its business, and has
established a proactive, Company-wide Year 2000 readiness program (the
"Program"). As part of the Program, most non-ready systems will be replaced or
upgraded with new systems that will provide certain competitive benefits, as
well as ensure Year 2000 readiness to minimize customer and shareholder business
-16-
disruptions caused by this issue. A Company-wide task force was formed in late
1997 to provide guidance to the Company's business units and monitor progress of
the Program. The Company has also consulted with and engaged various third
parties, including outside consultants and service providers, to assist the
Company in its Program efforts.
Overall the Program is proceeding on schedule. In 1994, the Company decided to
upgrade its main internal business systems with Year 2000-ready programs such
as SAP R/3*** ("SAP") and QAD MFG/PRO**** ("MFG/PRO"). This is expected to be
complete in 1999. Those aspects of the Company's internal business systems that
are not scheduled to be covered by this upgrade effort are being separately
addressed through an upgrade of existing legacy systems to Year 2000-ready
status.
Due to the Company's centralized engineering/manufacturing profile, more than
80% of Year 2000 efforts affecting products and services have been concentrated
in our major engineering and manufacturing sites. The Company's key products
and services are on schedule to be Year 2000 ready by March 1999. As part of the
Program, all of the Company's engineering/manufacturing business units have
active Year 2000 efforts underway to meet this schedule. A Year 2000 Quality
Assurance program also is in place to maintain strong project discipline and to
monitor and report Program issues and progress to management.
Also under the Program is a project to have the Company's field operating units
Year 2000 ready by June 1999 on all key business applications, products, and
services not covered by the engineering/manufacturing efforts.
PROGRAM
The Program uses a business risk assessment and prioritization approach, and is
intended to produce Year 2000-ready products/services and to minimize
disruptions in business operations. The Program is divided into three major
readiness categories: Assets, Information Technology ("IT"), and Commercial.
Within each category, there are two Program stages:
. Stage I: Assessment and Preparation - this stage focuses on up-front
planning, data gathering and correction planning. This includes raising Year
2000 awareness; carrying out a detailed business unit asset inventory;
assessing the scope of the Year 2000 problem; determining appropriate
corrections, testing/validation, acceptance and deployment approaches; and
preparing project plans and budgets.
. Stage II: Repairs, Testing, and Deployment - this stage focuses on "fixing"
Year 2000 problems (and testing these fixes), followed by user-acceptance,
re-deployment and operational validation of the fixed (i.e., repaired,
replaced, etc.) systems.
Assets. This category consists of (1) products and services the Company either
sells or uses to provide services to our customers, and (2) hardware and
software associated with embedded computer chips that are used in the operation
of our products and facilities. Program progress under this category is on
schedule with the majority of Stage I activities completed; most business units
are now implementing Stage II activities. The Company expects activities
associated with Asset Year 2000 readiness to be completed by March 1999.
-17-
Information Technology. This category deals with traditional IT infrastructure,
such as business applications, computer hardware/software, IT networks, and
communication equipment. The implementation of the MFG/PRO system is on
schedule and should be fully operational in all assigned areas by March 1999.
Implementation of the SAP system is scheduled to be completed in the United
States, Canada, United Kingdom, and Norway by October 1999. Both as a
contingency plan (for any delays in SAP migration) and to cover other areas of
the world where SAP is not scheduled for deployment by 2000, the Company has
developed and implemented a contingency plan to repair associated legacy
systems. This contingency plan, which continues to evolve, addresses the use of
independent contractors, legacy system vendors, and Company employees to re-
write and test certain software modules. This contingency program is on schedule
and expected to conclude by August 1999. The activities associated with other
systems in this IT category (computer hardware/software, IT networks, and
communications equipment) also are on schedule. Stage I activities have been
completed and the majority of the business units are implementing their Stage II
activities. The Company expects activities associated with this category to be
completed by mid-1999.
Commercial. This category deals with the Company's efforts to avoid being
adversely affected by Year 2000 issues from external entities (suppliers,
financial institutions, service providers, etc.) not affiliated with the
Company. Stage I of the Program includes a process for mitigating the Year 2000
issues associated with key suppliers. The Company is communicating with its key
suppliers, business partners, and customers seeking their assurances that they
will be Year 2000 ready. Based on responses, the Company will develop
contingency plans for those areas that pose significant risk from the Year 2000
issue; however the Company could potentially experience disruptions to some
aspects of its operations from non-compliant systems utilized by unrelated third
party entities. Work in this category is on schedule. The majority of the
business units have completed their Stage I activities and are implementing
their Stage II efforts (which are expected to be completed by March 1999).
CONTINGENCY PLANNING
The Company will review the activities associated with each category and
determine those activities at risk of not being completed in time to prevent a
Year 2000 disruption. Appropriate contingency plans will then be designed for
each of the "at risk" activities to provide an alternative means of functioning
which minimizes the effect of the potential Year 2000 disruption, both
internally and on the Company's customers. These contingency planning activities
will begin in December 1998 and are expected to be on-going through June 1999.
COSTS
Year 2000 Program funding requirements have been incorporated into the Company's
capital and operating plans and are not expected to have an adverse material
impact on the Company's financial condition or liquidity. The Company in recent
disclosures estimated the cost to address its Year 2000 issues to be $40 million
- - $60 million. Using the Quality Assurance data collected during third quarter
-18-
of 1998, the overall estimated costs of the Program are $60 million with an
approximate breakdown of costs estimated at: 28% for employee resources
(approximately 120 man years), 27% for IT related upgrades and repair, and 45%
for non-IT embedded chip technology. It should be noted that these costs do not
include the normal upgrading of business and financial systems that would be
Year 2000 ready such as SAP and MFG/PRO, or rationalization costs of Year 2000-
ready technology already defined by our business plans.
RISKS
Dates and schedules for the Company's Year 2000 Program are based on
management's best estimates, which involve numerous assumptions including (but
not limited to): the results of Stage I assessments; the continued availability
of certain resources; third-parties' Year 2000 status and plans; and other
factors. There can be no guarantee that these estimates will be achieved, or
that there will not be delays in, or increased costs associated with,
implementation of the Year 2000 Program. Specific factors that might cause
differences between present estimates and actual results include, but are not
limited to, the availability and cost of skilled personnel, consultants, and
independent contractors; the ability to locate and correct all relevant computer
code; timely and effective action by third-parties and suppliers; the ability to
implement interfaces between Year 2000-ready systems and those systems not being
replaced; and similar uncertainties. Due to the general uncertainty inherent in
the Year 2000 issues (partially attributable to the interconnection of global
businesses), the Company cannot confidently predict its ability to resolve
appropriately all Year 2000 issues that may affect its operations and business
or expose it to third-party liability.
The failure to correct a Year 2000 problem could result in an interruption in,
or a failure of, certain normal business activities or operations. Such
failures could materially and adversely affect the Company's operations and
financial condition. Due to the uncertainties described above, the Company
presently is unable to determine whether the consequences of such Year 2000
failures will have a material impact on the Company's results of operations,
liquidity or financial condition.
EURO DISCLOSURES
- ----------------
On January 1, 1999, the euro will become the official single currency of the
Economic and Monetary Union. As of this date, the conversion rates of the
national currencies of the eleven Member States adopting the euro will be fixed
irrevocably. The national currencies will initially remain in circulation as
non-decimal sub-units of the euro and will be replaced by euro bills and coins
by July 2002. During the transition period between January 1999 and January
2002, public and private parties may pay for goods and services using either the
euro or the national currency on a "no compulsion, no prohibition" basis.
A "Euro Readiness Program" has been established throughout Schlumberger to
ensure that all business segments meet the euro requirements. To this effect a
Euro Steering Committee has been established and, to maintain focus on
Schlumberger's euro implementation program, Project Teams have been set up
throughout the Company. Deadlines and objectives are being set for the
-19-
completion of the euro implementation plans by the end of 1998. These plans will
cover both phases of the euro implementation. Initially ensuring that,
progressively through 1999, all business units of Schlumberger will be able to
transact in the euro. Thereafter, ensuring that during the transitional period
all corporate, financial, commercial, employment, and other documentation that
refer to the participating currencies are converted to the euro in accordance
with the regulatory requirements.
During the transition period conversion rates can no longer be computed directly
from one participating currency to another. Instead, a triangulation algorithm
will be applied which requires that national currency amounts be converted first
to the euro according to the fixed conversion rates before being converted into
the second national currency. This requires specific conversion modules to be
included in business information systems. Furthermore, such programs will be
required to provide the additional functionality needed to convert all
participating currency denominated financial data to the euro. A review of all
financial information systems has commenced and their functionality for
processing euro transactions is being tested.
Schlumberger recognizes that the euro will affect its various businesses
differently. Oilfield Services operates in an essentially US dollar-denominated
environment in which the introduction of the euro is expected to have limited
consequences. Testing transactions will be affected in terms of the ability of
products such as smart cards and terminals to process euro transactions.
Resource Management Systems, which has now set up a pan-European manufacturing
structure covering all European Union markets, expects to participate in the
general growth generated by the euro. The increased price transparency created
by the euro accompanied with deregulation and increased competition among our
customers, the utilities, should also contribute to providing new "solutions"
opportunities in these businesses. The full assessment of the effects the euro
will have on each business segment is incomplete and hence the Company cannot as
yet make a final conclusion on the anticipated business impacts the introduction
of the single currency will have.
Based upon results to date, the Company believes that the implementation of the
euro can be performed according to the timeframe defined by the European Union.
The Company does not expect the total cost of addressing this issue to be
material to financial condition, results of operations and liquidity. This cost
estimate does not include the normal upgrading of business and financial systems
that would be euro ready.
* Mark of Schlumberger
** VisionDome is a registered trademark of Alternate Realities Corporation
*** SAP and R/3 are registered trademarks of SAP AG
**** MFG/PRO is a registered trademark of QAD
-20-
PART II. OTHER INFORMATION
---------------------------
Item 6: Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits: Exhibit 99(1) Press Release dated October 21, 1998 headed
"Schlumberger and Smith International Announce
Fluids Joint Venture".
(b) Reports on Form 8-K:(1) Report dated August 31, 1998, filed as of September
15, 1998, to report on the completion of the
acquisition of Camco International, Inc., a Delaware
Corporation.
(2) Report 8-K/A dated August 31, 1998, filed as of
October 30, 1998.
-21-
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in his capacity as principal
financial officer.
Schlumberger Limited
(Registrant)
Date: November 13, 1998 /S/ Arthur Lindenauer
----------------- ----------------------
Arthur Lindenauer
Executive Vice President - Finance
and Chief Financial Officer
-22-
INDEX TO EXHIBITS
Exhibit No. Description Page
- ---------- ----------- ----
99 Press Release dated October 21, 1998 headed 24
"Schlumberger and Smith International Announce
Fluids Joint Venture".
-23-
EXHIBIT 99 (1)
PRESS RELEASE SMITH [LOGO]
Schlumberger [LOGO]
FOR IMMEDIATE RELEASE: WEDNESDAY, OCTOBER 21, 1998
SCHLUMBERGER AND SMITH INTERNATIONAL ANNOUNCE
DRILLING FLUIDS JOINT VENTURE
New York, October 21-Schlumberger Limited [NYSE:SLB] and Smith International,
Inc. [NYSE, PSE: SII] today announced the signing of a memorandum of
understanding for the creation of a drilling fluids joint venture. The
transaction is expected to close in the first quarter of 1999, and is subject to
signing a definitive agreement and to regulatory and Board approvals.
Under the terms of the agreement, Smith will contribute its M-I L.L.C. fluids
businesses, including M-I Swaco, and Schlumberger will contribute its drilling
fluids business. In addition, Schlumberger will pay Smith $280 million in cash.
As a result, Smith and Schlumberger will respectively own 60% and 40% of the
venture, which will continue to operate as M-I.
M-I and Schlumberger drilling fluids operations, combined, would have proforma
1998 revenue of approximately $1.3 billion and will be the world leader in
drilling and completions fluids products and services.
Schlumberger Vice Chairman Victor Grijalva commented, "This joint venture
enhances Schlumberger participation in the Integrated Fluids Engineering
process, which improves drilling effficiency and maximizes reservoir performance
while lowering total well costs. It also gives us an opportunity to contribute
to the growth of the solids control and waste remediation business, broadening
our integrated solutions offering."
Loren Carroll, President & CEO of M-I, stated, "We're excited about the
opportunities this new venture creates. By aligning ourselves more closely with
the wide range of Schlumberger products and technological capabilities, we're
able to advance our technology lead in all aspects of fluids management."
Schlumberger is a worldwide leader in technical services with operations in over
100 countries. In 1997, revenue was $10.65 billion.
Smith International, Inc. is a leading supplier of premium products and services
to the oil and gas exploration and production industry through its five
principal business units - M-I Fluids, M-I Swaco, Smith Bits, Smith Drilling &
Completions and Wilson Supply.
# # #
For further information, contact:
- ---------------------------------
Simone Crook John J. Kennedy
Director Investor Relations Senior Vice President &
& Communications Chief Financial Officer
Schlumberger Limited New York Smith International, Inc.
Phone: (1-212) 350-9432 Phone: (1-281) 443-3370
Email: crook@new-york.sl.slb.com
-24-
5
1,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
3,867,241
0
3,294,603
(135,804)
1,435,551
8,989,642
11,615,427
(7,101,298)
16,160,913
4,004,492
0
0
0
1,537,171
6,414,561
16,160,913
2,339,683
9,161,042
1,594,476
6,956,899
1,214,258
30,382
92,854
989,885
253,532
736,353
0
0
0
736,353
1.36
1.31
As required by SFAS 128.
