<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 10-Q
---------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------------------------------------------------
For the Quarter ended: Commission file No.:
SEPTEMBER 30, 1999 1-4601
- ---------------------- --------------------
SCHLUMBERGER N.V.
(SCHLUMBERGER LIMITED)
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
NETHERLANDS ANTILLES 52-0684746
-------------------- ----------
(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
- --------------------------------- -----------
(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 _____
____
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, 1999
------------------ --------------------------------------
COMMON STOCK, $0.01 PAR VALUE 549,844,351
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1: Financial Statements
- ----------------------------
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED STATEMENT OF INCOME (1)
--------------------------------
(Unaudited)
(Stated in thousands except per share amounts)
<TABLE>
<CAPTION>
Periods Ended September 30,
--------------------------------------------------------------------------------
Third Quarter Nine Months
------------------------------------------ ------------------------------------
1999 1998 1999 1998
-------------------- -------------------- ----------------- -------------
<S> <C> <C> <C> <C>
REVENUE:
Operating $ 2,249,315 $ 2,932,447 $ 6,730,040 $ 9,040,053
Interest & other income 61,974 48,562 286,534 120,989
-------------- -------------- -------------- --------------
2,311,289 2,981,009 7,016,574 9,161,042
-------------- -------------- -------------- --------------
Expenses:
Cost of goods sold & services 1,744,912 2,581,356 5,382,887 6,956,899
Research & engineering 134,051 137,392 398,565 430,884
Marketing 113,252 119,966 324,006 349,081
General 99,065 112,782 300,904 341,439
Interest 47,681 41,665 142,420 92,854
-------------- -------------- -------------- --------------
2,138,961 2,993,161 6,548,782 8,171,157
-------------- -------------- -------------- --------------
Income (Loss) before taxes 172,328 (12,152) 467,792 989,885
Taxes on income 33,347 17,323 112,357 253,532
-------------- -------------- -------------- --------------
Net income (Loss) (1) $ 138,981 $ (29,475) $ 355,435 $ 736,353
============== ============== ============== ==============
Basic Earnings (Loss) Per Share $ 0.25 $ (0.05) $ 0.64 $ 1.36
============== ============== ============== ==============
Diluted Earnings (Loss) Per Share (1) $ 0.25 $ (0.05) $ 0.64 $ 1.31
============== ============== ============== ==============
Average Shares Outstanding 548,671 545,110 547,386 543,800
============== ============== ============== ==============
Average Shares Outstanding
assuming dilution 565,551 560,773 562,998 563,137
============== ============== ============== ==============
Dividends declared per share $ 0.1875 $ 0.1875 $ 0.5625 $ 0.5625
============== ============== ============== ==============
</TABLE>
(1) The 1998 third-quarter results included an after-tax charge of $380 million
($0.68 per share-diluted). The 1999 first-quarter results included an
after-tax charge of $90 million ($0.16 per share-diluted).
See Notes to Consolidated Financial Statements
-2-
<PAGE>
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED BALANCE SHEET
--------------------------
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Sept. 30, Dec. 31,
ASSETS 1999 1998*
- ------ ------------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 4,021,531 $ 3,956,694
Receivables less allowance for doubtful accounts
(1999 - $103,081; 1998 - $89,556) 2,694,001 2,968,070
Inventories 1,342,401 1,333,131
Deferred taxes on income 295,665 295,974
Other current assets 284,398 251,355
-------------- -------------
8,637,996 8,805,224
LONG-TERM INVESTMENTS, HELD TO MATURITY 694,679 855,172
INVESTMENTS IN AFFILIATED COMPANIES 516,189 84,844
FIXED ASSETS:
Property, plant and equipment 12,014,924 11,658,743
Less accumulated depreciation (7,145,655) (6,964,278)
-------------- -------------
4,869,269 4,694,465
EXCESS OF INVESTMENT OVER NET ASSETS OF
COMPANIES PURCHASED less amortization 1,321,744 1,302,678
DEFERRED TAXES ON INCOME 208,054 202,630
OTHER ASSETS 111,467 132,916
-------------- -------------
$ 16,359,398 $ 16,077,929
============== =============
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,459,195 $ 2,539,954
Estimated liability for taxes on income 411,502 480,123
Bank loans 621,461 708,978
Dividend payable 103,590 102,891
Long-term debt due within one year 120,266 86,722
-------------- -------------
3,716,014 3,918,668
LONG-TERM DEBT 3,563,146 3,285,444
POSTRETIREMENT BENEFITS 452,629 432,791
OTHER LIABILITIES 341,497 321,951
-------------- -------------
8,073,286 7,958,854
-------------- -------------
STOCKHOLDERS' EQUITY:
Common stock 1,639,218 1,539,408
Income retained for use in the business 8,929,792 8,882,455
Treasury stock at cost (2,179,382) (2,221,308)
Translation adjustment (103,516) (81,480)
-------------- -------------
8,286,112 8,119,075
-------------- -------------
$ 16,359,398 $ 16,077,929
============== =============
</TABLE>
* Reclassified, in part, for comparative purposes.
See Notes to Consolidated Financial Statements
-3-
<PAGE>
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
CONSOLIDATED STATEMENT OF CASH FLOW
-----------------------------------
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended
September 30,
Cash flows from operating activities: 1999 1998
------------ ------------
<S> <C> <C>
Net income $ 355,435 $ 736,353
First quarter 1999/third quarter 1998 charge 90,117 380,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 848,911 845,088
Earnings of companies carried at equity,
less dividends received (Dividends:
1999 - $506; 1998 - $671) (6,843) (9,150)
Provision for losses on accounts receivable 37,709 30,382
Change in operating assets and liabilities:
Decrease (increase) in receivables 152,068 (227,513)
(Increase) in inventories (73,342) (152,842)
(Increase) in deferred taxes on income (23,233) (14,083)
(Decrease) in accounts payable and accrued
liabilities (315,186) (149,981)
(Decrease) increase in estimated liability
for taxes on income (52,049) 108,657
Other - net (22,296) (99,355)
----------- -----------
Net cash provided by operating activities 991,291 1,447,556
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (991,433) (1,341,785)
Sales/retirements of fixed assets 3,450 71,863
Decrease (increase) in investments 192,035 (2,110,202)
Sale of financial instruments 203,572 -
Business acquired (419,338) (29,996)
Increase in other assets (6,735) (40,592)
----------- -----------
Net cash used in investing activities (1,018,449) (3,450,712)
----------- -----------
Cash flows from financing activities:
Dividends paid (307,444) (286,051)
Proceeds from employee stock purchase plan 70,765 70,461
Proceeds from exercise of stock options 70,971 60,844
Proceeds from issuance of long-term debt 1,110,664 3,203,652
Payments of principal on long-term debt (749,465) (988,453)
Net decrease in short-term debt (69,390) (71,316)
----------- -----------
Net cash provided by financing activities 126,101 1,989,137
----------- -----------
Net increase (decrease) in cash 98,943 (14,019)
Cash, beginning of period 105,321 147,395
----------- -----------
Cash, end of period $ 204,264 $ 133,376
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE>
SCHLUMBERGER LIMITED
--------------------
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
STOCKHOLDERS' EQUITY
--------------------
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Common Stock Retained Translation Comprehensive
----------------------------------
Issued In Treasury Income Adjustment Income
-------------- ------------------ --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $1,539,408 $(2,221,308) $8,882,455 $ (81,480) $ -
Net Income 355,435 355,435
Translation adjustment (22,036) (22,036)
Dividends declared (308,098)
Shares sold to optionees 29,045 41,926
Employee Stock Purchase Plan 70,765
-------------- ------------------ --------------- ---------------- -----------------
Balance, September 30, 1999 $1,639,218 $(2,179,382) $8,929,792 $ (103,516) $ 333,399
============== ================== =============== ================ =================
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE>
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 1998 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,
1999 are not necessarily indicative of the results of operations that may be
expected for the entire year.
Earnings per share
- ------------------
<TABLE>
<CAPTION>
The following is a reconciliation from basic earnings per share to diluted
earnings per share for the third quarter and the first nine months of 1999:
(Stated in thousands except per share amounts)
Average
Net Shares Earnings
Third Quarter Income Outstanding per Share
- ------------- --------------- -------------- ------------
<S> <C> <C> <C>
Basic $ 138,981 548,671 $0.25
Effect of dilution:
Options 8,769
Warrants 8,111
--------------- --------------
$ 138,981 565,551 $0.25
=============== ============== ============
Average
Net Shares Earnings
Nine Months Income Outstanding per Share
- ----------- --------------- -------------- ------------
Basic $ 355,435 547,386 $0.64
Effect of dilution:
Options 8,127
Warrants 7,485
--------------- --------------
$ 355,435 562,998 $0.64
=============== ============== ============
</TABLE>
-6-
<PAGE>
CONTINGENCIES
- -------------
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.
INVESTMENTS IN AFFILIATED COMPANIES
- -----------------------------------
Investments in affiliated companies include the Company's 40% investment in the
MI Drilling Fluids joint venture which was completed in July 1999. The
investment is $407 million.
OFFSHORE CONTRACT DRILLING BUSINESS
- -----------------------------------
On July 12, 1999, Schlumberger Limited and Transocean Offshore Inc. announced
the signing of definitive agreements under which the offshore contract drilling
business of Schlumberger (Sedco Forex Offshore) will be spun off and promptly
combined with Transocean Offshore in a merger of equals. The transaction is
expected to close by December 31, 1999.
Under the agreements, Schlumberger stockholders will own 52 percent of the fully
diluted stock in the resulting company, Transocean Sedco Forex Inc. Schlumberger
stockholders will receive approximately one newly issued Transocean Sedco Forex
share for every five Schlumberger shares held. The fully diluted ratio of
ownership in the stock of the resulting company is fixed and not subject to
adjustment. The spin-off and the merger transactions are expected to be free of
US federal income taxes and will be accounted for as a purchase with Sedco Forex
Offshore as the accounting acquirer. The agreement has been approved by the
Board of Directors of Transocean Offshore and Schlumberger, and is subject to
the approval of the stockholders of both companies as well as customary closing
conditions. The Companies' stockholders' meetings are scheduled for December 10,
1999. The Companies have received regulatory clearances in the U.K. and the U.S.
-7-
<PAGE>
<TABLE>
<CAPTION>
SEGMENT INFORMATION
- -------------------
(Stated in millions)
------------------------------------------------------------------------------------------------
North Latin Europe Other Sedco Forex Elims/ Total
Nine Months 1999 America America CIS/W. Afr. Eastern Camco Offshore Other OFS RMS T&T
- ---------------- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $1,038 $616 $1,065 $1,057 $554 $521 $ 24 $4,875 $1,018 $859
================================================================================================
Operating Income $ 38 $ 9 $ 52 $ 155 $ 51 $119 $(19) $ 405 $ (2) $ 21
Income Tax Expense (1) 19 15 25 38 26 10 1 134 6
-------------------------------------------------------------------------------------------------
Pretax Operating Income $ 57 $ 24 $ 77 $ 193 $ 77 $129 $(18) $ 539 $ 4 $ 21
-------------------------------------------------------------------------------------------------
Interest Income
Interest Expense $ (6)
First Quarter Charge
Pretax Income
---------------------------------------------------------------------------------------------------
<CAPTION>
Elims/
Nine Months 1999 Other Consolidated
- ---------------- ---------------------------
<S> <C> <C>
Revenue $(22) $6,730
===========================
Operating Income $(13) $ 411
Income Tax Expense (1) (32) 108
---------------------------
Pretax Operating Income $(45) $ 519
---------------------------
Interest Income 171
Interest Expense (136)
First Quarter (86)
-----------
Pretax Income $ 468
---------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
North Latin Europe/ Other Sedco Forex Elims Total
Nine Months 1998 America America CIS/W. Afr. Eastern Camco Offshore Other OFS RMS T&T
- ---------------- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $1,627 $884 $1,439 $1,383 $651 $831 $ 14 $6,829 $1,070 $911
=================================================================================================
Operating Income $ 142 $106 $ 169 $ 300 $ 83 $312 $(36) $1,076 $ 24 $ 47
Income Tax Expense (2) 83 35 45 76 45 35 6 325 14 17
-------------------------------------------------------------------------------------------------
Pretax operating Income $ 225 $141 $ 214 $ 376 $128 $347 $(30) $1,401 $ 38 $ 64
-------------------------------------------------------------------------------------------------
Interest Income
Interest Expense $ (8)
Third Quarter Charge
Pretax Income
---------------------------------------------------------------------------------------------------
<CAPTION>
Elims/
Nine Months 1998 Other (3) Consolidated
- ---------------- --------------------------------
<S> <C> <C>
Revenue $230 $9,040
================================
Operating Income $(55) $1,092
Income Tax Expense (2) (39) 317
--------------------------------
Pretax operating Income $(94) $1,409
--------------------------------
Interest Income 110
Interest Expense (85)
Third Quarter Charge (444)
----------
Pretax Income $990
---------------------===========
</TABLE>
(1) Income tax expense excludes a net charge of $4 million related to
the first quarter charge and gain on sale of financial
instruments.
(2) Income tax expense excludes a credit of $64 million related to
the third quarter charge.
(3) Includes the Retail Petroleum Services business sold on October
1, 1998.
Nonoperating expenses, such as certain intersegment charges and interest expense
(except as shown above), are not included in segment operating income.
-8-
<PAGE>
BUSINESS REVIEW
- ---------------
<TABLE>
<CAPTION>
(Stated in millions)
Resource
Oilfield Management Test &
Services Services Transactions (2)
----------------------------------- ------------------------------ -------------------------------
Third Quarter 1999 1998 % chg 1999 1998 % chg 1999 1998 % chg
- ------------- ---- ---- ----- ---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenue $1,607 $2,229 (28)% $ 330 $ 345 (4)% $332 $272 22%
Pretax Operating
Income (1) $ 167 $ 445 (63)% $ 6 $ 7 (14)% $ 11 $ 2 358%
Nine Months
- -----------
Operating Revenue $4,875 $6,829 (29)% $1,018 $1,070 (5)% $859 $911 (6)%
Pretax Operating
Income (1) $ 539 $1,401 (62)% $ 4 $ 38 (89)% $ 21 $ 64 (68)%
</TABLE>
(1) Pretax operating income represents income before taxes, excluding
interest expense, interest and other income and the third quarter 1998 and
first quarter 1999 charges.
(2) Test & Transactions results include Schlumberger Omnes, formerly
a joint venture which was 100% acquired during the quarter, and exclude the
Retail Petroleum Systems business sold on October 1, 1998.
Item 2: Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------
Results of Operations.
- ---------------------
Third Quarter 1999 Compared to Third Quarter 1998
-------------------------------------------------
Third quarter operating revenue of $2.25 billion was 23% below third quarter
1998. Before the 1998 third quarter charge, 1999 consolidated net income and
diluted earnings per share were $139 million and $0.25, both 60% lower than the
same period last year.
Oilfield Services revenue decreased 28%, while the rig count fell 16%. Revenue
fell in all the geographic regions and across all Oilfield Services activities.
Resource Management Services revenue was down 4%. Test & Transactions revenue
was 10% higher than in the third quarter of 1998 (excluding Schlumberger Omnes)
as Smart Cards & Terminals and Automated Test Equipment (ATE) revenue increased.
OILFIELD SERVICES
During the third quarter, Oilfield Services operating revenue increased 2%
sequentially and declined 28% year over year. The rig count declined 16%. Pretax
operating income grew 4% sequentially and fell 63% versus the third quarter of
1998. Compared with last year, revenue decreased in all major geographic regions
and across all of the oilfield services, except integrated project management.
Geographical comments below exclude Camco and Sedco Forex Offshore, which are
reported separately.
On July 14, 1999, Schlumberger and Smith International announced the completion
of the combination of their drilling fluids operations
-9-
<PAGE>
under a joint venture agreement. The joint venture is the world's largest
drilling and completions fluids business. Smith contributed its M-I LLC
operations, including M-I SWACO, and Schlumberger contributed its non-US
drilling fluids business. In addition, Schlumberger paid cash consideration of
$280 million to Smith. Smith and Schlumberger own a respective 60% and 40%
interest in the combined operations, which will continue to operate under the
name M-I LLC. Refer to Item 1, Part II, "Legal Proceedings", for information
regarding petitions filed by the US Department of Justice alleging that the
transaction violated a 1994 Consent Decree.
On November 5, 1999, Schlumberger purchased Secure Oil Tools from Stellarton
Corporation of Calgary, Alberta. Secure Oil Tools is an oil and gas service
company offering advanced products in the areas of enhanced production
technology (primarily plunger lift), Multi Lateral Production Systems (MLPS),
sand filters (MeshRite) and production and thermal tools. This acquisition will
advance the long-term Schlumberger strategy to be the leading service provider
in optimizing reservoir performance.
North America
- -------------
In North America, quarterly revenue of $375 million increased 18% sequentially
and declined 23% year over year as the rig count declined 11%. Pretax operating
income tripled sequentially and decreased 13% year over year. Compared with last
year, revenue declined across all oilfield services except integrated project
management. Improved production from PowerJet* perforating technology has
produced pricing premiums of over 20%. The combination with ClearFRAC* polymer-
free fracturing fluid is having a positive impact in a market focusing on
productivity of reservoirs.
The use of ClearFRAC fluid helped BP Amoco in Wyoming to reduce costs and
improve production. The fracturing fluid volume was greatly reduced, and the
initial gas production increased 2.5 times compared to conventional systems. In
Canada, the CoilFRAC* coiled tubing fracturing system was used to stimulate 27
wells, resulting in cost savings of 60% and an average production increase of
190%.
Agip Petroleum Company, Inc. signed a five-year contract for
PowerHouse* center-based E&P data management services and Finder*
data management software.
Latin America
- -------------
In Latin America, quarterly revenue of $212 million remained flat sequentially
and declined 19% year over year as the rig count declined 20%. Pretax operating
income decreased 13% sequentially and declined 77% year over year. Revenue for
all services in all regions declined, with the exception of 62% growth from
multipurpose service vessel (MPSV) activity and 58% growth in marine third-party
and nonexclusive proprietary seismic surveys in Brazil.
PEMEX has selected Holditch-Reservoir Technologies to conduct two integrated
reservoir studies of six fields to revitalize production and increase total
recovery.
Europe/CIS/West Africa
- ----------------------
Quarterly revenue of $335 million decreased 2% sequentially and 34% year over
year as the rig count declined 28%. Pretax operating income
-10-
<PAGE>
grew 24% sequentially and fell 69% year over year.
The new GHOST* sensor was introduced in the North Sea. This innovative
technology allows clients to directly measure the flow of gas, oil and water at
any point in a producing well.
In Norway, Statoil awarded Schlumberger Scandinavia 100% of its wireline logging
projects. The scope of work includes 17 installations on fixed platforms and
rigs, as well as additional future installations. The initial two-year contract
can be extended up to a total of six years.
In North Africa, the LiteCRETE* slurry system saved our client an average of 20
hours rig time and approximately $40,000 per cementing job. During another
drilling operation, a damaged well facing costly abandonment was saved with
InstanSeal** lost circulation sealant, designed to stop fluid loss while
drilling.
Other Eastern Hemisphere
- ------------------------
Quarterly revenue of $321 million decreased 8% sequentially and 31% year over
year, while the rig count declined 22%. Pretax operating income decreased 21%
sequentially and 62% year over year. Activity fell across the region, except in
integrated project management, which continued to grow in Asia.
Working closely with the client, a Schlumberger premium fracturing service team-
a seamless integration of Holditch-Reservoir Technologies, wireline, data
management, fluids management, and testing services-delivered customer savings
of $48 million for the development of a major gas field in Egypt.
Saudi Aramco awarded Schlumberger two separate land seismic acquisition
contracts with a combined duration of up to five years. The contracts will
utilize the Olympus-FRS* field recording system, a fully integrated component of
the Olympus* suite of seismic acquisition services, along with the new 80,000-
lb. Desert Explorer* vibrator source.
Camco
- -----
Quarterly revenue of $189 million increased 7% sequentially and declined 12%
year over year, as pretax operating income increased 44% sequentially and
decreased 19% year over year.
Schlumberger successfully installed remote flow-control devices in a dual-
lateral well in Wytch Farm for BP Amoco. These devices allowed the client to
manage the production of each lateral well from the surface without costly
interventions. In addition to saving considerable future operational costs,
production gains from the well were estimated at more than 500,000 barrels. To
date, Schlumberger has successfully installed seven of these intelligent
completions with no downhole failures.
Working with a drilling company in Venezuela, Schlumberger established a new
standard for drill bit performance, dramatically reducing costs while extending
a well. The operation was conducted using a single Reed-Hycalog 8-3/8" 345GMT
DuraDiamond* bit, instead of multiple conventional bits, thereby avoiding
unproductive rig time.
-11-
<PAGE>
Offshore Contract Drilling Activity
- -----------------------------------
The Sedco Forex Offshore rig utilization rate was 76.4% compared with 94.2% in
the third quarter of 1998. The semisubmersible utilization rate decreased from
95% to 72.2%, while the jackup utilization declined from 100% to 90%. The
industry offshore rig utilization was 69% versus 88% in the third quarter last
year.
At the end of September, the Sedco Forex Offshore fleet consisted of 24
semisubmersibles, 10 jackups, 2 drillships, 4 tenders, 6 swamp barges and 2 land
rigs. In addition, 3 semisubmersibles and 1 jackup are under construction. Sedco
Forex Offshore revenue and pretax operating income in the quarter were $165
million and $29 million, respectively, compared with $292 million and $132
million, respectively, last year.
RESOURCE MANAGEMENT SERVICES
Resource Management Services recorded a 4% decline in revenue in the third
quarter compared with last year. Orders grew 2%. Pretax operating income fell
14%. On October 12, Schlumberger signed a 15-year agreement with PECO Energy of
Philadelphia, Pennsylvania, whereby Resource Management Services will provide
metering data and asset management services to PECO. This agreement represents
the largest of its kind in the utility market.
In North America, revenue was up 2% compared with last year, while orders
increased 26%. Growth in the US and Canada was mostly driven by a still-buoyant
housing market and by aggressive infrastructure upgrades by utilities preparing
for deregulated markets. Overall water meter sales were strong, notably for
products including automatic reading and billing features. Demand was also
strong for electricity meters, particularly for the state-of-the-art Centron*
static meter with built-in AMR (automatic meter reading) capabilities.
In Europe, revenue decreased 7% year over year, while orders fell 9% over the
same period, mostly due to declines in the German electricity and gas
businesses, lower demand for electricity products and services in the UK, and
continued adverse business conditions in the CIS. In France, water activity grew
on firmer demand from domestic utilities, offsetting softer demand for gas
products. A major energy data management system was begun for the extensive
heating network in Stockholm, Sweden. Orders remained high in the electricity
market in Spain, in the water market in France and in the gas market in Italy.
In South America, third-quarter revenue fell 18% compared with last year, while
orders decreased 7%, reflecting continuing adverse economic conditions in
Brazil.
In Asia, revenue grew 91% year over year, and orders rose 39% as a result of
renewed growth in the region combined with higher export deliveries. Significant
shipments included electricity meters for India, Thailand and Taiwan, and water
meters for the Malaysian market.
-12-
<PAGE>
TEST & TRANSACTIONS
Test & Transactions orders, including customer solutions activities, were up 41%
compared with the same quarter last year and up 4% over last quarter. Revenue
increased 10% compared with last year and 16% versus the second quarter of 1999.
Both orders and revenue figures exclude results from Schlumberger Omnes,
formerly a joint venture which was 100% acquired during the quarter.
Smart Cards & Terminals revenue was 5% higher than last year and 6% above last
quarter, while orders grew 13% versus last year and 8% over last quarter. Orders
for cards were led by mobile communications SIM (subscriber identity module)
cards in Asia and Europe, including the first Simera* Java***-programmable SIM
cards orders in Malaysia and Taiwan.
Asian smart card sales grew largely due to the shipment of Qianflex* smart cards
for several Chinese banks. European card sales increased strongly over the same
period last year due to growing demand for Simera cards. Municipalities sales
also rose strongly, reflecting high activity from the Paris regional transport
authority (RATP) and first deliveries for London's Docklands Light Railway (DLR)
ticketing project. New York City selected Schlumberger to provide an integrated
on- and off-street parking solution that features the nation's first centralized
wireless communication capability.
Automated Test Equipment (ATE) revenue rose 15% compared with the third quarter
of 1998. Orders rose 212% year over year, and rose 6% sequentially. ATE
experienced growth in orders across all businesses. Test Systems orders surged,
reflecting strong demand for new system-on-chip (SOC) testers, as well as
multiple orders for test systems for RDRAM**** and DDR (double data rate) memory
devices from North America, Asia and Japan. ATE has taken an early leadership
Position in RDRAM, with orders from three of the world's five leading
manufacturers. The strong level of orders for SOC testers was the highest since
the introduction of the initial product. In addition, Verification Systems
revenue increased significantly compared with the third quarter of 1998,
primarily because the front-end business in North America and Taiwan has grown
over the last two quarters.
Leveraging ATE leadership in providing value-added business and engineering
services worldwide, Schlumberger launched the industry-first Schlumberger
Advanced Business Engineering Resources (SABER*) Technology Institute to serve
as the premier instructional and certifying body for technical and professional
semiconductor engineering and operational personnel.
INCOME STATEMENT
Interest and other income increased $13 million from the same period last year
primarily due to a $14 million increase in interest income (higher average
investment balances). Excluding 1998 third-quarter charge, gross margin
decreased from 27% to 22%. Research and engineering expense declined 2% from
last year representing 6% of operating revenue compared with 4.7% in 1998.
Marketing expense was down 6%. General expense, expressed as a percentage of
operating revenue, increased from 3.8% to 4.4%. Interest expense increased $6
million due to higher debt balances relating to the financing of the Camco
merger. Effective tax rate of 19% remained unchanged from last year.
-13-
<PAGE>
First Nine Months 1999 Compared to First Nine Months 1998
---------------------------------------------------------
Revenue of $6.73 billion was 26% lower than the same period last year. Net
income and diluted earnings per share were $446 million and $0.80, both 60%
below the same period last year before the third-quarter 1998 and first-quarter
1999 charges.
OILFIELD SERVICES
Oilfield Services revenue decreased 29%, while the rig count fell 29%. Revenue
decreased in all the geographic regions and across all Oilfield Services
activities. Pretax operating income was down 62%.
North America
- -------------
Revenue of $1.04 billion decreased 36% compared with the first nine months of
1998, and pretax operating income was down 75%. The rig count declined 32%. All
oilfield services of North America experienced weakness except integrated
project management. US Land and Canada markets suffered the most declines. New
technologies, such as the PS PLATFORM* production suite and PowerJet* shaped
charges, which can greatly improve reservoir productivity, are having a positive
impact on revenue.
Latin America
- -------------
Latin American revenue of $616 million was down 30% from last year. Pretax
operating income decreased 83% as the rig count declined 24%. All areas
experienced revenue shortfalls with Mexico & Central America suffering the
largest declines while Venezuela, Trinidad & Tobago declined less than other
areas. Contract drilling revenue was 28% ahead of last year due to ongoing
deepwater contracts. Revenue from data management services were down slightly
with continued clients' interest in integrated applications and solutions.
Europe/CIS/West Africa
- ----------------------
Revenue of $1.07 billion fell 26% compared with the prior year. Pretax operating
income decreased 64%. Continental Europe and West & South Africa were severely
impacted by the activity downturn.
Other Eastern Hemisphere
- ------------------------
Revenue of $1.06 billion declined 24% from the same period last year, and pretax
operating income decreased 49%. Activity was weak in all regions with the
exception of integrated project management. Drilling services revenue fell 40%.
Camco
- -----
Revenue of $554 million declined 15%, and pretax operating income decreased 39%
compared with the prior year.
Production Operators' revenue increased 23% reflecting strong demand in gas
compression in the US and Latin America. Camco was awarded two large contracts
by Venezuela to construct and service gas compression facilities.
-14-
<PAGE>
Offshore Contract Drilling Activity
- -----------------------------------
Sedco Forex Offshore revenue and pretax operating income in the first nine
months were $521 million and $129 million, respectively, compared with $831
million and $347 million, respectively, last year.
RESOURCE MANAGEMENT SERVICES
Resource Management Services revenue was down 5% compared with the first nine
months of 1998, due to weak market conditions in Europe and South America.
Orders declined 10%. Pretax operating income included a charge of $15 million
($11 million after tax) due to the write-off of certain assets, including a
provision for the divestiture of a small business.
Revenue in North America rose 3%. Orders were down from last year, which
included a large order from Illinois Power which was cancelled in November 1999.
High demands for electricity and water meters are supported by a strong housing
market in the US and Canada. Sales also increased in the replacement market for
more advanced and high-accuracy meters. Revenue from South America dropped 25%
while orders declined 18% reflecting the market uncertainty due to the budget
cuts and currency devaluation in Brazil.
In Europe, revenue was down 5% partly due to a strong US dollar. Other factors
include lower demand for service and maintenance revenues in the UK, declined
activity in electricity and gas products in Germany and poor economic conditions
in the CIS. Orders were 5% lower than last year.
In Asia, revenue grew 43% reflecting an improved economy in the region and
continued growth in export deliveries. Orders were up 61% from last year.
TEST & TRANSACTIONS
Revenue was 10% below last year while pretax operating declined 68%. Orders
increased 9%. The above figures exclude results from Schlumberger Omnes,
formerly a joint venture which was 100% acquired in the third quarter.
Smart Cards & Terminals revenue rose 7% over the same period last year, mainly
due to higher subscriber identity module-based (SIM) card sales. Orders for
cards increased year over year, with strong bookings in Europe for our recently
introduced Cyberflex Simera* high-capacity, multi-application smart card.
Municipalities sales rose strongly with higher shipments to local governments
throughout the world.
Revenue for ATE declined 30%. Compared to last year, orders were up 12% with
growth in all major product lines. Several new products in each business segment
were commercially launched. System-On-Chip (SOC) Testers, Verification Systems
and Automated Systems all showed increased orders due to new product
introductions. SABER (Schlumberger Advanced Business Engineering Resources), the
semiconductor customer solutions business, continued to grow substantially.
-15-
<PAGE>
INCOME STATEMENT
Interest and other income increased $166 million from the same period last year
primarily due to a $103 million gain on sale of financial instruments relating
to the sale of Retail Petroleum Systems, and a $64 million increase in interest
income (higher average investment balances). Excluding the third-quarter 1998
and first-quarter 1999 charges, gross margin decreased from 28% to 23%. Research
and engineering expense declined 8% from last year representing 5.9% of
operating revenue compared with 4.8% in 1998. Marketing expense was down 7%.
General expense, expressed as a percentage of operating revenue, increased from
3.8% to 4.5%. Interest expense increased $50 million due to higher debt balances
relating to the financing of the Camco merger. Effective tax rate of 19%
decreased three percentage points from last year.
NEW ACCOUNTING STANDARDS
- ------------------------
In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." All prior periods have been restated. For
details, see "Segment Information" on page 8 of this 10-Q report.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
that the Company recognize all derivative instruments as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The standard is effective in the year 2001 for the Company.
Occasionally, the Company uses derivative instruments such as interest rate
swaps, currency swaps, forward currency contracts and foreign currency options.
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 the new standard will have a material effect on the
consolidated financial position and results of operations.
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
Overview
The "Year 2000 issue" is the inability of computers and computing technology to
process the Year 2000 date change correctly.
The Company recognizes that the Year 2000 issue creates a significant
uncertainty to its business, and has a proactive, Company-wide Year 2000
Readiness Program (the "Program").
As part of the Program, most non-ready systems have been 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
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
-16-
<PAGE>
parties, including outside consultants and service providers, to assist the
Company in its Program efforts.
In 1994, the Company decided to upgrade its main internal business systems with
Year 2000-ready programs. The planned upgrades have been completed in September
1999. Those aspects of the Company's internal business systems that were not
scheduled to be covered by this upgrade effort have been separately addressed
through a repair of existing legacy systems to Year 2000-ready status. These
repairs have been completed.
Due to the Company's centralized engineering/manufacturing profile, more than
80% of Year 2000 efforts affecting products and services were concentrated in
our major engineering and manufacturing sites. A Year 2000 Quality Assurance
Program was in place to maintain strong project discipline and to monitor and
report Program issues and progress to management. The Year 2000 readiness of the
Company's key products and services was completed as of the end of September
1999.
The Company's field operating units have been actively involved in a Year 2000
Field Readiness program since October 1998 to cover key business applications,
products and services not covered by the engineering/manufacturing efforts. This
program was completed in all key respects as of the end of September 1999 and
remaining issues, which are not material, will be completed in November 1999.
Overall, the Company has reached Year 2000 Readiness in all key areas as of
September 1999 and the remaining efforts are now concentrated on setting up Year
2000 rollover teams and helpdesks which are being implemented throughout our
global operations to support both our customers and any mission essential
systems that will need to be live and supported over critical Year 2000 dates.
Program Description
The Program used a business risk assessment and prioritization approach to
produce Year 2000-ready products/services and to minimize disruptions in
business operations. The Program was divided into three major readiness
categories: Assets, Information Technology (IT) and Commercial. Within each
category, there were two Program stages.
- - Stage I: Assessment and Preparation - this stage focused on up-front
planning, data gathering and correction planning. This included 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 focused on "fixing"
Year 2000 problems (and testing these fixes), followed by user-acceptance,
redeployment 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. Stage II was completed in all material respects
as of September 1999.
-17-
<PAGE>
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
complete. The Implementation of the SAP****** system has been completed in the
US and Canada. The Company also repaired associated legacy systems outside the
US and Canada. This plan used independent contractors, legacy system vendors and
Company employees to rewrite and test certain software modules, and was
completed in September 1999. The activities associated with other systems in
this IT category (computer hardware/software, IT networks and communications
equipment) have also been completed.
Commercial. This category dealt with the Company's efforts to avoid being
adversely affected by Year 2000 issues from external entities (suppliers,
financial institutions, service providers, etc.). Work in this category has been
completed. Based on assessment of these responses the Company has developed
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 third-party
entities.
Contingency Planning
The Company has reviewed the activities associated with each category and has
determined which activities are at risk or have the potential to cause business
disruption. Appropriate contingency plans have been implemented for each of the
"at risk" activities to minimize the effect of potential Year 2000 disruption,
both internally and on the Company's customers. Furthermore, a Year 2000
rollover plan has been developed for any mission essential systems that will
need to be live and supported over important Year 2000 dates. As part of this
plan, a Year 2000 helpdesk structure is being implemented throughout our global
operations to support existing organizational structures in any potentially
escalating Year 2000 issues during the millennium rollover period. This process
will commence in the early hours of December 31, 1999, and continue for hours,
days, or weeks as circumstances require.
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, results of operations or liquidity.
The Company estimates the cost of the Program to be in the order of $60 million
(approximately $58 million spent to date), with a breakdown of costs estimated
at 36% for employee resources, 24% for IT-related upgrades and repair and 39%
for non-IT embedded chip technology. It should be noted that these costs do not
include the normal upgrading of business systems, products and applications
already defined by our business plans.
Risks
The most significant difficulty associated with predicting Year 2000 failures
stems from the general uncertainty inherent in the Year 2000 issues (partially
attributable to the interconnection of global businesses). Accordingly, the
Company cannot fully 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 of systems or infrastructure outside our control or
failure of the company's Year 2000 program to have detected all Year 2000
issues, could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially and
-18-
<PAGE>
adversely affect the Company's operations, liquidity and financial condition.
Because of the uncertainties described above, the Company 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 became the official single currency of the European
Economic and Monetary Union. As of that date, the conversion rates of the
national currencies of the eleven member states adopting the euro were fixed
irrevocably. The national currencies will initially remain in circulation as
nondecimal 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 July 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 the
Schlumberger euro implementation program, project teams have been set up
throughout the Company. Euro implementation plans cover both phases of the euro
implementation. Initially these plans will ensure 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. Test & 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 by 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 impact the
introduction of the single currency will have.
-19-
<PAGE>
Based upon results to date, the Company believes that the implementation of the
euro can be performed according to the time frame 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.
FORWARD-LOOKING STATEMENTS
- --------------------------
The Company cautions that, except for the historical information and discussions
contained herein, statements in this 10-Q report and elsewhere may constitute
forward-looking statements. These include statements as to expectations, beliefs
and future financial performance, such as statements regarding business
prospects in the key industries in which the Company operates and growth
opportunities for the Company in those industries. These statements involve a
number of risks, uncertainties, assumptions and other factors that could cause
actual results to differ materially from those in the forward-looking
statements. Such factors include: the extent and duration of the recovery in oil
prices, continuing customer commitment to certain key oilfield projects, non-
cancellation of key long-term services and solutions contracts, growth in demand
for RDRAM memory devices and mixed signal devices produced by the Company's test
equipment customers, general economic and business conditions in key regions of
the world, and changes in business strategy or development plans relating to the
Company's targeted growth opportunities.
Item 3: Quantitative and Qualitative Disclosure about Market Risk.
- -----------------------------------------------------------------
The Company does not believe it has a material exposure to market risk. The
Company manages the exposure to interest rate changes by using a mix of debt
maturities and variable- and fixed-rate debt together with interest rate swaps,
where appropriate, to fix or lower borrowing costs. With regard to foreign
currency fluctuations, the Company enters into various contracts, which change
in value as foreign exchange rates change, to protect the value of external and
intercompany transactions in foreign currencies. The Company does not enter into
foreign currency or interest rate transactions for speculative purposes.
* Mark of Schlumberger
** Mark of Statoil
*** Java is a registered trademark of Sun Microsystems, Inc.
**** RDRAM is a registered trademark of Rambus, Inc.
***** MFG/PRO is a registered trademark of QAD
****** SAP is a registered trademark of SAP AG
-20-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 1: Legal Proceedings
- --------------------------
On July 27, 1999, the US Department of Justice filed petitions against the
Company and Smith International, Inc. with the United States District Court in
Washington, DC, alleging civil and criminal contempt in connection with the
completion of the MI drilling fluids joint venture transaction between the
Company and Smith. The petitions allege that the transaction violated a 1994
Consent Decree entered in US v. Baroid Corporation. The Justice Department's
petitions request that the Court rescind the transaction, and impose fines
against the parties as the Court deems appropriate. The parties strongly believe
that the transaction does not violate the Decree and are vigorously defending
their position.
Item 6: Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K: None
-21-
<PAGE>
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 12, 1999 /s/ Jack Liu
----------------- -------------------------
Jack Liu
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
-22-
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