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1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1999
-----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ___________to __________
Commission File Number 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 (IRS Employer
incorporation or organization) Identification No.)
277 Park Avenue
New York, New York, U.S.A. 10172-0266
42, rue Saint-Dominique
Paris, France 75007
Parkstraat 83,
The Hague,
The Netherlands 2514 JG
- ------------------------------------------- --------------
(Addresses of principal executive offices) (Zip Codes)
Registrant's telephone number in the United States, including area code, is:
(212) 350-9400.
(Cover page 1 of 2 pages)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock, Par Value $0.01 New York Stock Exchange
Paris Stock Exchange
The London Stock Exchange
Amsterdam Stock Exchange
Swiss Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
As of February 24, 2000, the aggregate market value of the voting stock held by
non-affiliates, calculated on the basis of the closing price on the NYSE
Composite Tape, was $38,783,445,087.
As of February 24, 2000, Number of Shares of Common Stock Outstanding:
566,698,741.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated herein by reference
into the Parts indicated:
Definitive Proxy Statement for the Annual General Meeting of
Stockholders to be held April 12, 2000 ("Proxy Statement"), Part III.
(Cover page 2 of 2 pages)
PART I
- ------
Item 1 Business
- ------ --------
All references herein to Registrant" and "Company" refer to Schlumberger Limited
and its consolidated subsidiaries. Registrant operates three businesses: (1)
Oilfield Services, (2) Resource Management Services, and (3) Test &
Transactions.
Oilfield Services
- -----------------
Oilfield Services is the leading supplier of services and technology to the
international petroleum industry. It provides virtually every type of service to
the upstream exploration and production industry. The business segment is
managed geographically. Within the four geographic areas are 25 GeoMarkets. The
network of GeoMarkets brings together geographically focused teams to meet local
needs and to provide customized solutions. New technology development is assured
by the 13 Service Groups to exploit synergies and to introduce innovative
solutions into the delivery of products and services within the GeoMarkets. The
Service Groups reflect key areas of Schlumberger expertise. They are organized
into three Product Groups that represent the key processes that dominate oil
company thinking throughout the life cycle of the reservoir. Reservoir
Evaluation combines wireline and seismic services. Reservoir Development
combines all services relevant to well construction and well productivity:
directional drilling, pressure pumping, drilling fluids, testing, drilling bits,
electrical submersible pumps and completion products. Reservoir Management
combines integrated services, the software products and consulting services of
GeoQuest data management services, gas compression services and the production
systems business.
Registrant's oilfield services are marketed by its own personnel. The customer
base, business risks, and opportunities for growth are essentially uniform
across all services. There is a sharing of production facilities and research
centers; labor force is interchangeable. Technological innovation, quality of
service, and price are the principal methods of competition. Competition varies
geographically with respect to the different services offered. While there are
numerous competitors, both large and small, Registrant believes that it is an
industry leader in providing seismic services, measurements-while-drilling and
logging-while-drilling services, and fully computerized wireline logging and
geoscience software and computing services.
On December 30, 1999, Schlumberger completed the spin-off to its stockholders of
its offshore contract drilling business, Sedco Forex. Following the spin-off, on
December 31, 1999, Sedco Forex merged with Transocean Offshore Inc., which
changed its name to Transocean Sedco Forex Inc. The transaction created the
world's largest offshore drilling company and the third largest oilfield
services company by market capitalization. Upon completion of the merger,
Schlumberger stockholders owned approximately 52% of the shares of Transocean
Sedco Forex, and Transocean Offshore shareholders owned the remaining 48%.
Schlumberger retained no ownership in the combined company.
Resource Management Services
- ----------------------------
Resource Management Services provides professional business services for
utilities, energy service providers, and industry worldwide. Through consulting,
meter deployment and management, data collection and processing, and information
analysis, Resource Management Services helps clients achieve network
optimization, greater operating efficiency and increased customer loyalty in all
utility sectors: water, gas, electricity, and heat.
Resource Management Services is a global solutions provider to electricity, gas
and water resource industry clients worldwide, helping them to manage resources
and enhance
1
transactions. The Resource Management Services group delivers innovative
solutions through strategic consulting services combined with smart measurement
products, systems and services for creating and sharing value with all clients.
It designs systems for management of electricity distribution and usage
(residential metering and energy management systems; utility revenue collection
systems; commercial, industrial, transmission and distribution measurement and
billing products and systems; and load management systems); systems for
management of gas usage (residential, commercial and industrial gas meters;
regulators, governors, safety valves, stations and systems; gas treatment
including filtration, odorization and heating; network management; and
prepayment systems); meters and systems for management of residential,
commercial and industrial water usage covering the range of effective water
distribution management and diverse heat distribution and industrial
applications; meter communication systems, including remote metering and
wireless communication systems for utility markets; distributed measurement
solutions, systems integration and data services; and services, providing
software and turnkey installation, repair and maintenance solutions to add value
in fully managed projects.
Test & Transactions
- -------------------
Test & Transactions comprises three units: Automated Test Equipment, Smart Cards
and Terminals, and Omnes.
Test & Transactions supplies technology, products, services, and systems to the
semiconductor, banking, telecommunications, and transportation industries. Test
& Transactions designs and implements broad-based, customized solutions to help
clients improve time to market, optimize their business opportunities and
improve their productivity. It designs and manufactures smart and magnetic
stripe cards, terminals, equipment and management systems for transactions in a
wide range of sectors, including telecommunications, retail and banking, network
access and security, parking and mass transit, and campus communities. It also
designs and manufactures back-end manufacturing equipment for testing
semiconductor devices, including diagnostic systems, automated handling systems
and test equipment. It provides metrology solutions for the front-end
semiconductor fabrication equipment market and equipment for testing complete
electronic assemblies for the telecommunications and automotive industries.
Within Test & Transactions, Omnes provides information technology and
communications services, including design, deployment, and operation of secure
networks. It offers solutions for wide- and local-area networks, including
satellite-based networks, network security, Internet, Intranet, and messaging.
Products of the Resource Management Services and the Test & Transactions
industry segments are primarily sold through Registrant's own sales force,
augmented through distributors and representatives. The nature of the product
range and customer profile allow for transferability of sales personnel and
cross-product sales forces in key geographic areas. Such teams operate in Asia,
Russia, South America and Central America. Product demand and pricing are
affected by global and national economic conditions. The price of products in
this industry segment varies from less than one hundred dollars to more than a
million dollars. There are numerous competitors with regard to these products,
and the principal methods of competition are price, performance, and service.
Year 2000 Issue
- ---------------
For information describing the Company's estimate of the effects of the Year
2000 Issue on its businesses, refer to page 26 of this 10-K Report for
information within Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and headed "Year 2000 Readiness
Disclosure".
2
Acquisitions
- ------------
Information on acquisitions made by the Registrant or its subsidiaries appears
under the heading "Acquisitions" on page 37 of this 10-K Report.
GENERAL
- -------
Research & Development
- ----------------------
Research to support the engineering and development efforts of Registrant's
activities is conducted at Schlumberger Austin Product Center, Austin, Texas;
Schlumberger Doll Research, Ridgefield, Connecticut; Schlumberger Cambridge
Research, Cambridge, England, and at Montrouge, France.
Patents
- -------
While Registrant seeks and holds numerous patents, no particular patent or group
of patents is considered material to Registrant's business.
Seasonality
- -----------
Although weather and natural phenomena can temporarily affect delivery of
oilfield services, the widespread geographic location of such services precludes
the overall business from being characterized as seasonal. However, because
oilfield services are provided in the Northern Hemisphere, severe winter weather
can temporarily affect the delivery of such services and products in the winter
months.
Customers and Backlog of Orders
- -------------------------------
No single customer exceeded 10% of consolidated revenue. Oilfield Services has
no backlog since it is primarily service rather than product related. Resource
Management Services and Test & Transactions had respective backlogs of orders,
believed to be firm, of $417 million and $314 million at December 31, 1999, and
$520 million and $254 million at December 31, 1998. There is no assurance that
any of the current backlog will actually result in sales.
Government Contracts
- --------------------
No material portion of Registrant's business is subject to renegotiation of
profits or termination of contracts by the US Government.
Employees
- ---------
As of December 31, 1999, Registrant had approximately 55,000 employees.
Non-US Operations
- -----------------
Registrant's non-US operations are subject to the usual risks which may affect
such operations. Such risks include unsettled political conditions in certain
areas, exposure to possible expropriation or other governmental actions,
exchange controls, and currency fluctuations. Although it is impossible to
predict such occurrences or their effect on the Registrant, management believes
these risks to be acceptable.
Environmental Protection
- ------------------------
Compliance with governmental provisions relating to the protection of the
environment does not materially affect Registrant's capital expenditures,
earnings or competitive
3
position.
Financial Information
- ---------------------
Financial information by segment for the years ended December 31, 1999, 1998 and
1997 is given on pages 44 and 45 of this 10-K report, within the "Notes to
Consolidated Financial Statements".
Item 2 Properties
- ------ ----------
Registrant owns or leases manufacturing facilities, administrative offices,
service centers, research centers, sales offices and warehouses in North
America, Latin America, Europe, Africa, Australia, New Zealand, and Asia. Some
facilities are owned in fee and some are held through long-term leases. No
significant lease is scheduled to terminate in the near future, and Registrant
believes comparable space is readily obtainable should any lease expire without
renewal. Registrant believes all of its properties are generally well maintained
and adequate for the intended use.
The principal manufacturing facilities related to Oilfield Services are owned in
fee or leased. Outside of the United States, they are located at Stonehouse,
England; Clamart, France; Fuchinobe, Japan; Belfast, Northern Ireland; Horten
and Bergen, Norway; Inverurie, Scotland; and in Singapore.
Within the United States, the principal manufacturing facilities of the Oilfield
Services are located in Lawrence, Kansas; Bartlesville, Oklahoma; Austin,
Houston, La Marque, Rosharon, and Sugar Land, Texas.
Outside of the United States, the principal owned or leased facilities related
to Resource Management Services are located at Buenos Aires, Argentina;
Adelaide, Australia; Schwechat, Austria; Brussels, Belgium; Americana and
Campinas, Brazil; Trois Rivieres, Quebec, Canada; Santiago, Chile; Chongqing,
China; Bogota, Colombia; Bagnolet, Chasseneuil, Colombes, Hagenau, Macon, Massy,
and Reims, France; Ettlingen, Hameln, Karlsruhe, and Oldenburg, Germany;
Dordrecht, Holland; Godollo, Hungary; Asti, Frosinone, and Naples, Italy; Mexico
City, Mexico; Lima, Peru; Famalicao, Portugal; Atlantis, South Africa;
Montornes, Spain; Taipei County, Taiwan; Kiev, Ukraine; Great Harwood, Port
Glasgow, Stretford, and Warrington in the United Kingdom, Montevideo, Uruguay;
and Caracas, Venezuela.
Within the United States, Resource Management Services facilities are located in
Tallassee, Alabama; Norcross, Georgia; Weponset, Illinois; Owenton, Kentucky,
and Oconee, South Carolina.
Outside of the United States, the principal owned or leased facilities of Test &
Transactions are located in Buenos Aires, Argentina; Sydney, Australia; Curitiba
and Sao Paulo, Brazil; Santiago, Chile; Changsha, Hong Kong and Shenyang, China;
Bogota, Colombia; Besancon, Orleans, Pont Audemer, and Chambray-les-Tours,
France; Frankfurt, Germany; Fuchinobe, Japan; Mexico City, Mexico; Lima, Peru;
Barcelona, Spain; Hsinchu, Taiwan; Felixstowe, Ferndown and Reading in the
United Kingdom; Montevideo, Uruguay; and Caracas, Venezuela.
Within the United States, facilities of Test & Transactions are located in
Mobile, Alabama; San Jose and Simi Valley, California; Owings Mill, Maryland;
Concord, Massachusetts; Moorestown, New Jersey; and Columbus, Ohio.
The following locations serve both Resource Management Services and Test &
Transactions: Montrouge, France; Milan, Italy; New Delhi, India; Jakarta,
Indonesia; Kuala Lumpur, Malaysia; St. Petersburg, Russia, and Felixstowe in the
United Kingdom.
4
Test & Transactions' principal facilities (all leased) located outside of the US
are located in London, England; Caracas, Venezuela; Montrouge, France; Jakarta,
Indonesia; and Dubai, United Arab Emirates. Within the United States, its
principal facilities are located in Houston, Texas.
See also "Research & Development", on page 3 for a description of research
facilities.
Item 3 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 alleged that the transaction violated a 1994
consent decree entered in U.S. v. Baroid Corporation (the "Baroid decree"). On
December 9, 1999, the Company, Smith and the Department of Justice agreed to
settle the civil contempt claim. The Court subsequently found Smith and the
Company in criminal contempt and fined each $750,000. The December 22, 1999
order approving the civil settlement agreement provides for the modification of
the Baroid decree, with the consent of the Department of Justice, to remove the
reference to "Schlumberger Ltd." from the Baroid decree, and for disgorgement of
the net income of the joint venture from the time of its creation through the
date of the settlement agreement. The Company's share of the amount payable in
connection with the settlement is $6.34 million. On March 13, 2000, following
expiration of a public comment period regarding the proposed modification, the
Court signed the order modifying the Baroid decree.
Other information with respect to Item 3 is set forth under the heading
"Contingencies" (page 43 of this 10-K Report) within the "Notes to Consolidated
Financial Statements" as part of Item 8, "Financial Statements and Supplementary
Data".
Item 4 Submission of matters to a vote of security holders
- ------ ---------------------------------------------------
A Special General Meeting of security holders was held on December 10, 1999. The
information on this meeting and the voting results were reported on Form 8-K,
dated December 30, 1999 filed with the Securities and Exchange Commission.
Executive Officers of the Registrant
- ------------------------------------
The executive officers of the Registrant, their ages as of March 1, 2000, and
their five-year business histories are as follows:
Name Age Present Position and Five-Year Business Experience
- -----------------------------------------------------------------------------------------------------------------
D. Euan Baird 62 Chairman, President and Chief Executive Officer
since prior to 1992.
Victor E. Grijalva 61 Vice Chairman since April 1998;
Executive Vice President - Oilfield Services,
1994 to April 1998;
Executive Vice President for Wireline, Testing & Anadrill,
1992 to 1994.
5
Name Age Present Position and Five-Year Business Experience
- -----------------------------------------------------------------------------------------------------------------
Jack Liu 50 Executive Vice President, Chief Financial Officer and
Chief Accounting Officer, since January 1999;
Controller, July 1998 to December 31,1998;
President - Measurement & Systems Asia,
October 1993 to June 1998.
Andrew Gould 53 Executive Vice President - Oilfield Services,
since January 1999;
Executive Vice President - OFS Products,
February 1998 to January 1999;
President - Wireline & Testing,
October 1993 to February 1998;
President - Sedco Forex, September 1993 and prior.
Clermont A. Matton 58 Executive Vice President - Resource Management Services,
since June 1997;
Executive Vice President - Measurement & Systems,
1993 to June 1997;
Executive Vice President - Technologies, 1992 and prior.
Irwin Pfister 54 Executive Vice President - Test & Transactions,
since June 1997;
General Manager - Automated Test Equipment,
June 1997 and prior.
Jean-Paul Bize 57 Vice President - Business Development, since June 1997;
President and General Manager - Electronic Transactions,
November 1994 to June 1997;
President and General Manager - Electricity Management,
November 1994 and prior.
Pierre E. Bismuth 55 Vice President - Personnel, since 1994;
Personnel Director - Oilfield Services,
October 1993 to January 1994;
Personnel Director - Wireline, Testing & Anadrill,
1993 and prior.
Jean Chevallier 52 Vice President - Information Technology,
since February 1999;
President - Omnes, August 1994 to February 1999;
Vice President - Schlumberger Communications, February
1994 to August 1994;
Vice President - Research and Engineering, and
General Manager - Sedco Forex Drilling Services,
1983 to February 1994.
Mark Danton 43 Vice President - Director of Taxes, since January 1, 1999;
Deputy Director of Taxes, January 1995 to January 1999;
Tax Manager - Atlantic Asia Oilfield Services,
June 1991 to January 1995.
J-D. Percevault 54 Vice President - European Affairs, since May 1994;
President - Geco-Prakla, May 1994 and prior.
6
Name Age Present Position and Five-Year Business Experience
- -----------------------------------------------------------------------------------------------------------------
Rex Ross 56 Vice President - Communications, since October 1999;
President - Omnes, January to September 1999;
President - Oilfield Services North America, 1998;
President - GeoQuest, 1995 through 1997.
James L. Gunderson 44 Secretary and General Counsel, since January 1999;
Deputy General Counsel, October 1994 to January 1999.
Jean-Marc Perraud 52 Treasurer since January 1, 1999;
Vice President - Director of Taxes,
1993 through December 1998;
Group Controller - Schlumberger Industries, 1991 to 1993.
7
PART II
- -------
Item 5 Market for the Registrant's Common Stock and Related Stockholder
----------------------------------------------------------------
Matters
-------
As of December 31, 1999, there were 565,931,130 shares of the Common Stock of
the Registrant outstanding, exclusive of 101,123,676 shares held in Treasury,
and held by approximately 25,000 stockholders of record. The principal United
States market for Registrant's Common Stock is the New York Stock Exchange.
Registrant's Common Stock is also traded on the Amsterdam, London, Paris, and
Swiss stock exchanges.
Common Stock Market Prices and Dividends Declared per Share
- -----------------------------------------------------------
The information with respect to this portion of Item 5 is set forth under the
heading "Common Stock, Market Prices and Dividends Declared per Share" on page
25 of this 10-K Report.
8
Item 6 Selected Financial Data
- ------ -----------------------
FIVE-YEAR SUMMARY [Restated for comparative purposes*]
(Stated in millions except per share amounts)
Year Ended December 31, 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS
Operating revenue:
Oilfield Services $ 5,869 $ 7,796 $ 7,654 $ 6,196 $ 5050
Resource Management Services 1,375 1,465 1,569 1,765 1771
Test & Transactions 1,183 1,226 1,066 741 684
Eliminations and other1 (32) 238 363 336 325
---------- ---------- ---------- ---------- ----------
Total operating revenue $ 8,395 $ 10,725 $ 10,652 $ 9,038 $ 7,830
========== ========== ========== ========== ==========
% (decrease) increase
over prior year (22)% 1% 18% 15% 13%
---------- ---------- ---------- ---------- ----------
Operating income:
Oilfield Services $ 576 $ 1,306 $ 1,419 $ 939 $ 666
Resource Management Services 15 50 71 111 121
Test & Transactions 27 73 103 35 48
Eliminations and other (72) (140) (141) (122) (88)
---------- ---------- ---------- ---------- ----------
Total operating income $ 546 $ 1,289 $ 1,452 $ 963 $ 747
========== ========== ========== ========== ==========
% (decrease) increase
over prior year (58)% (11)% 51% 29% 24%
---------- ---------- ---------- ---------- ----------
Interest expense 184 127 70 66 88
---------- ---------- ---------- ---------- ----------
Charges2 120 432 - 380 -
---------- ---------- ---------- ---------- ----------
Taxes on income3 141 276 388 (156) 137
---------- ---------- ---------- ---------- ----------
Income, continuing operations $ 329 $ 618 $ 1,087 $ 744 $ 616
---------- ---------- ---------- ---------- ----------
% (decrease) increase
over prior year (47)% (43)% 46% 21% 16%
---------- ---------- ---------- ---------- ----------
Income, discontinued operations $ 37 $ 396 $ 297 $ 175 $ 76
---------- ---------- ---------- ---------- ----------
Net income $ 367 $ 1,014 $ 1,385 $ 919 $ 692
========== ========== ========== ========== ==========
% (decrease) increase
over prior year (64)% (27)% 51% 33% 20%
Basic earning per share
Continuing operations $ 0.60 $ 1.14 $ 2.02 $ 1.39 $ 1.17
Discontinued operations 0.07 0.72 0.55 0.33 0.14
---------- ---------- ---------- ---------- ----------
Net income $ 0.67 $ 1.86 $ 2.57 $ 1.72 $ 1.31
========== ========== ========== ========== ==========
Diluted earning per share
Continuing operations $ 0.58 $ 1.10 $ 1.94 $ 1.37 $ 1.16
Discontinued operations 0.07 0.71 0.53 0.32 0.14
---------- ---------- ---------- ---------- ----------
Net income $ 0.65 $ 1.81 $ 2.47 $ 1.69 $ 1.30
========== ========== ========== ========== ==========
Cash dividends declared per share $ 0.75 $ 0.75 $ 0.75 $ 0.75 $ 0.7125
========== ========== ========== ========== ==========
9
(Dollar amounts stated in millions)
Year Ended December 31, 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
SUMMARY OF FINANCIAL DATA
Income as % of operating revenue,
continuing operations /4/ 5% 9% 10% 8% 8%
---------- --------- --------- --------- ---------
Return on average stockholders'
equity, continuing operations /4/ 6% 13% 16% 13% 12%
---------- --------- --------- --------- ---------
Fixed asset additions $ 792 $ 1,463 $ 1,404 $ 1,069 $ 908
---------- --------- --------- --------- ---------
Depreciation expense $ 929 $ 935 $ 848 $ 764 $ 697
---------- --------- --------- --------- ---------
Avg. number of shares outstanding:
Basic 549 544 539 534 529
---------- --------- --------- --------- ---------
Assuming dilution 564 562 560 546 532
---------- --------- --------- --------- ---------
AT DECEMBER 31,
Liquidity /5/ $ 1,231 $ 731 $ 527 $ 171 $ 91
---------- --------- --------- --------- ---------
Working capital $ 5,131 $ 4,887 $ 2,690 $ 1,767 $ 1,456
---------- --------- --------- --------- ---------
Total assets $ 15,081 $ 16,078 $ 13,186 $ 11,272 $ 9,770
---------- --------- --------- --------- ---------
Long-term debt $ 3,183 $ 3,285 $ 1,179 $ 731 $ 731
---------- --------- --------- --------- ---------
Stockholders' equity $ 7,721 $ 8,119 $ 7,381 $ 6,221 $ 5,501
---------- --------- --------- --------- ---------
Number of employees
continuing operations 55,000 59,000 64,000 57,000 52,000
---------- --------- --------- --------- ---------
* Restated to reflect the treatment of Sedco Forex as a Discontinued Operation.
/1/ Includes the Retail Petroleum Systems business sold on October 1, 1998.
/2/ See "1999 and 1998 Charges - Continuing Operation" on page 35 of this 10-K
report
/3/ In 1999, the normal recurring provision for income taxes, before the tax
benefit on the charge and the tax expense on the gain on the sale of RPS
financial instruments, was $133 million. In 1998, the normal recurring
provision for income taxes, before the tax benefit on the third quarter
charge, was $340 million. In 1996, the normal recurring provision for income
taxes, before recognition of the US tax loss carryforward benefit and the
tax effect of the unusual items, was $226 million.
/4/ In 1999 and 1998, excluding the charges.
/5/ Liquidity is defined as cash plus short-term and long-term investments less
debt.
10
Item 7 Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Schlumberger operates three businesses: Oilfield Services, Resource Management
Services and Test & Transactions.
(Stated in millions)
OILFIELD SERVICES RESOURCE MANAGEMENT SERVICES TEST & TRANSACTIONS/2/
1999 1998/3/ % Change 1999 1998 % Change 1999 1998 % Change
---------------------------------- ---------------------------------- ----------------------------------
Operating Revenue $5,869 $7,796 (25)% $1,375 $1,465 (6)% $1,183 $1,226 (4)%
Pretax Operating
Income/1/ $ 576 $1,306 (56)% $ 15 $ 50 (71)% $ 27 $ 73 (63)%
/1/ Pretax operating income represents income before taxes, excluding interest
income and interest expense, and the 1999 and 1998 charges.
/2/ Test & Transactions results include Omnes, formerly a joint venture which
was 100% acquired during the third quarter of 1999, and exclude the Retail
Petroleum Systems (RPS) business sold on October 1, 1998.
/3/ Restated for comparative purposes.
Oilfield Services
- -----------------
On December 30, Schlumberger completed the spin-off to its stockholders of its
offshore contract drilling business, Sedco Forex. Following the spin-off, on
December 31, Sedco Forex merged with Transocean Offshore Inc., which changed its
name to Transocean Sedco Forex Inc. The transaction created the world's largest
offshore drilling company and the third largest oilfield services company by
market capitalization. Upon completion of the merger, Schlumberger stockholders
owned approximately 52% of the shares of Transocean Sedco Forex, and Transocean
Offshore shareholders owned the remaining 48%. Schlumberger retained no
ownership in the combined company. Sedco Forex is treated as a discontinued
operation for all periods, and all Oilfield Services results have been restated
to exclude Sedco Forex.
1999 Results
After continued slow activity across all regions in the first half of the year,
Oilfield Services activity in North America started to improve in the third
quarter as oil and gas companies continued to gradually increase their spending.
The seismic services industry experienced a severe downturn throughout 1999.
This negative impact was felt across all regions within Schlumberger, most
notably in North America, Europe and Asia, and resulted in a significant
decrease in seismic revenue.
Oilfield Services revenue declined 25% compared with 1998, in line with the
estimated 23% reduction in exploration and production (E&P) expenditures, and
consistent with the 22% fall in the average rig count.
North America
North American revenue fell 28%, with a 22% decline in the average rig count.
The slowdown was particularly dramatic in the first half of the year, with the
average rig count down 40%. All product groups ended the year with lower revenue
than in 1998. Pretax operating income dropped 60%.
11
Increased activity during the fourth quarter was mainly focused on gas
development projects, primarily in the lower 48 states and Canada.
Latin America
Latin American revenue fell 24%, in line with the 23% decrease in the average
rig count. The reduced activity resulted from a slowdown in all product groups
with the exception of drilling services, which saw a 41% increase due to the
commencement of MPSV* multipurpose service vessel operations on Lake Maracaibo
in Venezuela. Pretax operating income was down 83%, mainly due to lower prices
and reduced activity across the region.
Europe/CIS/West Africa
Revenue declined 29% in the Europe/CIS/West Africa region, in line with the
decline in the average rig count. Revenue from all product groups and
geographical areas fell, with the exception of the CIS, where growth in pressure
pumping activity fueled a notable increase in revenue over 1998. Pretax
operating income for the region decreased 63%.
Other Eastern Hemisphere
Revenue in Other Eastern Hemisphere declined 24%, led by significantly lower
activity in the Eastern Mediterranean and the Australia GeoMarket areas.
Compared with 1998, the average rig count fell 16% in the Middle East and 20% in
Asia. Revenue from all services fell, with the exception of Reservoir Management
as the MPSV Bima continued to provide value-added services to customers in
Indonesia. Pretax operating income fell 47%.
Camco
Camco revenue fell 16%, with declines in all business lines except contract gas
compression. Pretax operating income declined 37%. The new Schlumberger
Reservoir Completions Center (SRC) was officially launched in October and
showcased the successful integration of Camco into Schlumberger. The event was
attended by more than 700 customers, investors and financial analysts. More than
400 Schlumberger specialists work at this facility to develop advanced
intelligent completions applications. This technology is at the heart of many
solutions Schlumberger provides to its customers to meet the growing challenge
of optimizing oil and gas recovery from new as well as existing reservoirs in a
cost-effective manner.
Highlights
Addressing reservoir optimization through leading-edge technology
Demonstrating success with record-setting directional drilling technology
applications has long been a hallmark of Schlumberger service. During 1999 at
Wytch Farm, UK, Schlumberger continued to play a major role as contractor for
directional drilling, measurements-while-drilling (MWD) and
logging-while-drilling (LWD) services on this extended-reach drilling project.
During the year, the world's longest well extension, was drilled. At 6.7 mi
(10.8 km) long and drilled in 8-1/2-in hole, the well extension exceeded by 469
ft (143 m) the prior record of 6.6 mi (10.6 km) set by Schlumberger in Argentina
earlier in the year. Drilling and casing the well at Wytch Farm took 123 days,
and the well also set a new industry depth record of 37,001 ft (11,278 m). Other
high-end technologies helped guide the drilling process by providing real-time
information at the bit, including the CDR* Compensated Dual Resistivity tool
with annulus pressure measurements, the ADN* Azimuthal Density Neutron tool and
the PowerPulse* MWD telemetry system. In addition, Schlumberger set yet another
record for the deepest MWD triple-combo run, breaking the old record, also held
by Schlumberger, by 332 ft (101 m).
Using advanced reservoir monitoring and control technology, Schlumberger also
found a way to tap reserves from the eastern extremities of the Wytch Farm
reservoir in order to access two pockets of bypassed oil that otherwise would
not have been economically
12
recoverable. Schlumberger drilled an innovative dual-lateral well and installed
flow-control devices in each wellbore to permit each to produce oil
independently and to prolong the life of the new well. These devices allow the
customer 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 are estimated at more than one million
barrels over the life of the reservoir.This technology received the BPAmoco 1999
Technology Award for Outstanding Performance.
In a North Sea well offshore Norway, Schlumberger installed surface-controlled
downhole valves to regulate the amounts of oil, gas and water entering the well,
and used an innovative intelligent gas lift solution to assist in optimizing
production from the well. Further installations will continue over the next
three to four years, and it is estimated that over the 20-year life of the
field, this technology will improve overall production by 5%, equal to 60
million barrels.
An alliance between Schlumberger and MoBPTeCh -- a cooperative E&P technology
program sponsored by Mobil, BP Amoco, Texaco and Chevron -- was established to
build a commercial drilling simulator prototype for the oil and gas industry.
The prototype's PC-based software applications work in conjunction with earth
science interpretation and visualization tools to model the drilling process,
from well planning through real-time optimization, to post-well analysis. This
innovative approach will create a comprehensive new framework within which
previously stand-alone components can work together seamlessly. As a result, oil
and gas companies will be able to develop reservoirs using the most
cost-efficient drilling program.
Many new technologies developed by Schlumberger were successfully introduced
during the year. Working with a drilling company in Venezuela, Schlumberger
established a new standard for drill bit performance, dramatically reducing the
customer's costs while extending a well. The operation was conducted using a
single Reed-Hycalog 8-3/8-in 345GMT DuraDiamond* bit, instead of several
conventional bits, thereby avoiding unproductive rig time. Following its
successful field tests in many locations around the world, the HRLA*
High-Resolution Laterolog Array tool also successfully completed field testing
in the Middle East. The tool's improved true resistivity measurement provides
more accurate information about reservoir fluids and their movement. In field
tests during the fourth quarter, the new SlimPulse* third-generation slim hole
retrievable MWD system achieved outstanding results. The SlimPulse application
was designed to operate in wellbore diameters as small as 2-3/8 in, with the
capability for extended longevity in high-temperature and high-shock
environments.
Following a highly successful field test, the first-ever commercial order for
the RapidConnect* multilateral system was received for an application in West
Africa. The system will be used to provide a high-strength junction through
which a second offshoot well will be drilled and completed, enabling more
economic access to additional reserves. Designed to reduce completion and
production costs, RapidConnect technology can be used in both new and existing
wells. Coupled with other Schlumberger multilateral technologies, this advanced
application creates field development and redevelopment opportunities throughout
West Africa and in other hydrocarbon basins around the world.
ClearFRAC* fracturing fluid sales continued to grow as an increasing number of
customers experienced the benefits of this unique system. In its latest
successful application, ClearFRAC fluid was used by Eni Agip to rehabilitate
sand control completions in the Giovanna gas fields in Italy. The use of
ClearFRAC fluid more than doubled the rate of production and yielded significant
productivity increases on a number of the wells. Ultimately, total platform
production tripled following the ClearFRAC treatments.
13
Maximizing value through equipment integration and optimization
In its drive to make production operations more efficient, Schlumberger launched
three new MPSVs (Prisa 110, 111 and 112) on Lake Maracaibo, Venezuela. The
launch of these advanced multipurpose vessels followed the introduction of the
MPSV Bima offshore Indonesia in the fourth quarter of 1998. Schlumberger MPSV
technology provides a complete well intervention package and ensures rapid,
efficient operations through reduced logistic requirements, costs and
weather-related downtime.
In March, Schlumberger launched the industry's most advanced seismic vessel,
Geco Eagle. Its innovative aft deck design and state-of-the-art data acquisition
equipment address the industry's need for more accurately and efficiently
acquired surveys. Expanded capacity allows this single vessel to tow up to 20
streamers in combination, with spreads as wide as 1500 m [4921 ft]. Geco Eagle
broke several world records during its first acquisition contract in Brazil: The
vessel took fewer than seven days between deploying the first streamer section
and recording the first commercial 10-streamer production; once in full service,
Geco Eagle was the first vessel to deploy 60 km (37.3 mi) of streamers; and,
Geco Eagle also recorded the world's biggest single-vessel tow, ten 6000-m
(3.73-mi) streamers, as well as the largest footprint.
In December, Schlumberger launched the DeepSTIM* vessel, the first in a new
class of stimulation vessels designed to operate in the Gulf of Mexico and other
deepwater environments. The DeepSTIM vessel is equipped with the latest
technology for data acquisition and transmission, process control and
environmental waste containment. Its large size provides greater stability in
severe weather, and its higher capacity allows the vessel to remain at sea for
extended periods, thereby greatly reducing customer costs.
Portfolio management creates new growth opportunities
Further demonstrating the Schlumberger focus on reservoir optimization,
Schlumberger acquired Calgary-based Merak, a market leader in petroleum software
solutions for economic evaluation, decision and risk analysis, field
optimization and data visualization. In addition, during the second quarter,
Schlumberger acquired substantially all of the assets of Calgary-based Panther
Software Corporation, a provider of hardware and software products and services
for managing, indexing, loading and cataloging large volumes of seismic data
throughout the seismic data life cycle.
The rapidly increasing use of information technology and the Internet within the
upstream oil and gas industry offers a significant opportunity for Schlumberger
to launch a major external e-business initiative. Schlumberger experience in
network solutions coupled with our reputation for integrity in data handling
uniquely positions us to exploit the market through two distinct value-added
solutions. On January 31, 2000, Schlumberger launched www.IndigoPool.com. This
new web-based workspace delivers a unique global gateway for customers to market
oil and gas properties and data. It will be rapidly expanded to offer global
information management services for the E&P industry.
On July 14, Schlumberger and Smith International announced the combination of
their drilling fluids operations under a joint venture agreement, creating the
world's largest drilling and completions fluids business. Smith contributed its
M-I operations, including M-I SWACO, and Schlumberger contributed its non-US
drilling fluids business. In addition, Schlumberger paid a cash consideration of
$325 million to Smith. Smith and Schlumberger own a 60% and 40% interest,
respectively, in the combined operations, which will continue to operate under
the name M-I. The equity income for 1999 is not material.
14
In the fourth quarter, Schlumberger completed the purchase of Calgary-based
Secure Oil Tools. Secure Oil Tools offers advanced products in the areas of
enhanced production technology (primarily plunger lift), multilateral production
systems (MLPS), sand filters (MeshRite) and production and thermal tools. This
acquisition provides Schlumberger with additional technology in the rapidly
expanding market for multilateral and other advanced completion systems designed
to improve reservoir recovery.
GeoQuest won a key contract for the United Kingdom Department of Trade and
Industry and the UK Offshore Operators' Association to facilitate the trading of
UK oil and gas licenses via the World Wide Web. The GeoQuest-developed web site,
License Information for Trading (LIFT, www.uklift.co.uk), went live on November
1, and within ninety days carried 93 properties worth over $370 million.
Customers include Amerada Hess, BP Amoco Exploration, Burlington Resources (UK),
Chevron UK, Elf Exploration UK, Enterprise Oil, Kerr-Mcgee (UK), OMV (UK),
PanCanadian Petroleum (UK), Shell UK, Texaco, Veba Oil and Gas UK, and
Wintershall (UK).
1998 Results
After continued strong growth in the first half of the year Oilfield Services
activity slowed in the third quarter and reversed direction in the fourth
quarter as oil companies reduced spending or cancelled projects.
Oilfield Services revenue grew 2%, despite a decline in the average rig count of
13%. The growth resulted from continued deployment of new technologies and the
impact of the new geographic organization, which focused on providing customized
solutions for customers. The acquisition of Camco, completed on August 31,
strengthened our portfolio with leading technology and expertise in smart
completions, production services and drilling products.
North America
North American revenue was 6% below 1997, despite a 17% decline in average rig
count. The slowdown was particularly significant in the second half of the year,
with the average rig count down by 38% in the fourth quarter compared with the
same period last year. Wireline, testing and directional drilling services ended
the year with lower revenue than in 1997. Pretax operating income dropped 32%.
Latin America
A revenue gain of 9% in Latin America resulted from strong data services,
wireline services and testing services, despite the 12% fall in the average rig
count. Revenue from Mexico increased by 25% compared with 1997, with a large
contribution from the Burgos gas fields. Pretax operating income was 20% lower,
mainly due to the reduction of activity in Venezuela.
Europe/CIS/West Africa
Revenue was up 2% in the Europe/CIS/West Africa region due to increased
directional drilling and data management services, despite an 11% fall in the
average rig count (excluding CIS rigs). Revenue from the CIS increased
significantly due to the start-up of new projects in Kazakhstan and Azerbaijan,
and revenue from West Africa showed firm growth, supported by strong land
drilling activity. Pretax operating income fell 10%.
Other Eastern Hemisphere
Revenue grew by 5% compared with 1997, while the average rig count increased 1%.
Pretax operating income increased 6%. Asia revenue was 7% above 1997, mainly due
to East Asia and Indonesia and with strong increases in all service lines except
seismic services, which was flat with 1997. Revenue in the Middle East was up
3%, with the overall growth slowing in the second half of the year, notably from
seismic services.
15
Camco
Camco revenue in 1998 was 3% higher than the prior year, despite an overall
decline in drilling and completion activity. Pretax operating income grew 16%.
Strong sales growth was recorded for Reda electrical submersible pumps and
Production Operators gas compression systems. Production Operators commenced
operations on the El Furrial project, a 20-year service operating contract in
Venezuela. In spite of the declining rig market, Hycalog, the market leader in
polycrystalline diamond compact (PDC) bits, showed a slight increase in revenue
due primarily to expansion in the Middle East and Africa. Sales were also up in
Latin America despite lower drilling activity levels. Revenue from completion
products and services was down as completion activity declined, particularly in
the second half of the year.
Highlights
Throughout 1998 Schlumberger demonstrated continuing leadership in oilfield
services technology deployment through advances focused on productivity
maximization and reservoir optimization. In addition, Schlumberger expanded its
range of integrated services offerings to include project engineering and
project management for well construction, coiled tubing drilling service, MPSV
units, IRO* Integrated Reservoir Optimization service and engineering and
construction alliances. During the year, Schlumberger commenced work on more
than 40 major integrated project contracts.
Launched in five major locations in Asia, Europe and North America, the MAXPRO*
initiative builds on the new organization and latest technology and 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.
Schlumberger launched the breakthrough PS Platform* production logging tool as
one in a series of MAXPRO applications. The PS Platform service provides
monitoring and diagnosis of fluid flow in producing wells and 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 is one of the
vehicles for future developments critical to optimal management of the
reservoir.
The first horizontal well in the Gulf of Mexico drilled with coiled tubing was
achieved by an integrated services team implementing an array of new
Schlumberger technologies, including the VIPER* coiled tubing drilling system,
STARDRILL* fluids and SlimAccess* logging tools.
A new seismic coverage record was set by Geco Orion, equipped with the new
proprietary MK2 Monowing* multistreamer towing technology, towing 6 streamers,
each 8 km long in a 1-km spread [5 mi by 0.625 mi]. Geco Orion also successfully
used the MK2 Monowing technology to achieve a spread of 1400 m [4592 ft], the
widest ever towed by a single vessel unassisted by tugboats. In addition,
Schlumberger seismic services achieved the first three-dimensional, time-lapse
(called 4D seismic) volume map designed to show reservoir changes over time in
an offshore oil field in the North Sea.
Schlumberger further 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. 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.
16
Throughout the year, advanced technologies to improve well construction and
reservoir performance 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. 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.
The revolutionary SCALE BLASTER* application was tested and proved successful at
removing scale on downhole piping. In oil and gas wells, the buildup of
inorganic scale can restrict, and even prevent, the flow of hydrocarbons to the
surface. 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 continuing worldwide introduction of the VISION475*
MWD/LWD system for small-diameter wells was 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 significantly increased following the introduction
of the slimmer 6.75-in ISONIC* LWD tool.
In an effort to improve the measurement of multiphase production, Schlumberger
and FRAMO Engineering A.S. of Norway signed a joint venture agreement to provide
surface and subsea flow meters to measure oil, gas and water flow in producing
wells. A joint technology center called 3-Phase Measurement A.S., located in
Bergen, Norway, designs and manufactures products and provides marketing and
technical support.
1997 Results
Oilfield Services pretax operating income grew 52% over 1996, with strong
contributions from all activities. Operating revenue increased 24% to $7.65
billion. Worldwide oil demand increased by a strong 2.7%. Oil companies
worldwide increased their exploration and production expenditures by 18% over
1996 levels to meet the increase in demand. The average rig count rose 15%.
North American revenue and pretax operating income grew 32% and 80%,
respectively, compared with 1996. All services posted exceptional gains. The
average rig count rose 26%. Latin America experienced a revenue increase of 34%,
while pretax operating income grew 14%. All businesses posted gains, while the
average rig count declined 2%. Revenue and pretax operating income were 13% and
25% higher in the Europe/CIS/West Africa region than in 1996, largely due to
higher activity levels in reservoir evaluation wireline and reservoir
development services. All other businesses posted gains, except seismic
services. The average rig count fell 3%. Other Eastern Hemisphere revenue
climbed 22% versus 1996, mainly due to increased directional drilling and
wireline activity. All other businesses also posted gains, except for data
management services. Pretax operating income was 53% higher than in 1996. The
average rig count grew 9%. Camco revenue increased 20% compared with 1996,
primarily due to increased market activity, improved pricing in selected markets
and the year-over-year impact of acquisitions.
Highlights
In 1997, Oilfield Services introduced technologies for operating in harsher
environments and reducing finding and development costs. In the fall of 1997,
Schlumberger introduced the IRO service which combines new-generation reservoir
characterization and flow simulation tools with a team approach to evaluate
various field development and production strategies. Working closely with the
client, an experienced multidisciplinary team selects and implements the optimal
development plan. Reservoir monitoring and control processes are included to
head off future production problems. The IRO concept offers numerous benefits
because it is proactive and closely links development decisions with a thorough
understanding of reservoir architecture, flow dynamics and response to various
well interventions with the ultimate aim of achieving near real-time,
interactive reservoir management.
17
Construction, operating and intervention costs in oil fields were reduced in
1997 through the proliferation and improved placement of highly deviated and
horizontal wells, and multilaterals drilled from a common trunk. The
introduction of new VISION475 technology was highly successful. The VISION475
application possesses unique logging sensors that allow operators to steer to
the most productive zones in a formation. Worldwide deployment of this
technology has significantly improved field development returns on investment
for clients.
Resource Management Services
- ----------------------------
1999 Results
Throughout 1999, the uncertainty created by deregulation, privatization and
globalization in the utility industry continued to delay investment by many
utilities in new products and services. Still, in electricity and gas markets
around the world there were encouraging signs of change. In the US and parts of
Europe, where deregulation has advanced the furthest, major contract awards have
demonstrated the increased interest in the Schlumberger solutions approach.
Resource Management Services (RMS) revenue declined 6% and orders fell 3%
compared with 1998. The downturn resulted from continuing pressure on prices and
the negative impact of currency movements. Adverse economic conditions in
Brazil, which underwent a currency devaluation, and in the CIS, also contributed
to the downturn. Pretax operating income dropped 71%, reflecting margin
deterioration and charges during the year. Contributions came from North America
and Asia, where market growth and higher shipments made a positive impact on
business.
In North America, revenue increased 1%, while orders rose 7%, reflecting a
strong new housing market in the US and Canada. Demand for electricity meters
was high, including a contribution from the new Centron* static meter with
built-in AMR (automatic meter reading) capabilities. An agreement signed with
PECO Energy of Philadelphia in October included the installation of 750,000 of
these new meters. Schlumberger will also provide asset management and metering
data services to PECO for over more than two million metering points over a
15-year period. On February 1, 2000, Schlumberger agreed to acquire the assets
of CellNet Data Systems, Inc. The acquisition will be handled through a Chapter
11 procedure and is subject to final approval by the bankruptcy court.
European revenue declined 7% and orders slipped 9% due to continued price
pressure, lower demand for electricity products in the UK and ongoing
unfavorable business conditions in the CIS. In Stockholm, a major thermal energy
data management project, begun in the third quarter, progressed on schedule and
highlighted the trend toward integrated metering data networks as well as our
ability to provide large-scale, customized solutions. In France, Schlumberger
won a contract to supply 20,000 Gallus* residential gas meters equipped with
radio communication modules developed jointly by Schlumberger and Itron. In
Belgium, a large utility confirmed an order for the first phase of a
multiresource (electricity and gas) prepayment system using the TaleXus Vendor*
system and PayGuard* smart card-based vending units for 24,000 residences.
In South America, revenue dropped 22% and orders decreased 19%. Business was
affected by a significant fall-off in Brazil's domestic activity due to broad
public spending cuts and the devaluation of the national currency.
Revenue in Asia increased 31% and orders jumped 66%, reflecting both a return of
new investment in the region after the economic downturn last year and continued
growth in exports. Shipments of water meters commenced from a new factory in
South Australia, and there was a rise in shipments of residential electricity
meters to Taiwan and commercial and industrial meters to Thailand.
18
1998 Results
RMS revenue fell 7% in 1998 compared with 1997. The decline resulted from lower
demand for electricity and gas products as well as from difficult financial
environments in developing countries. Product orders were flat for the year.
In Europe, revenue declines caused by industrial overcapacity and price
competition were offset by higher electricity sales to EDP, the Portuguese
national electric company. North American revenue was down 4%, reflecting market
uncertainty caused by ongoing electricity deregulation in the US. However,
revenue from Africa and the Middle East rose 29%, driven by stronger gas and
water meter shipments to North Africa and Turkey.
Pretax operating income dropped 30%, reflecting margin deterioration due to
lower sales in North and South America, France and Germany. Favorable
contributions came from South and Central Europe and from savings as a result of
the restructuring of RMS, which was initiated in 1996.
1997 Results
Revenue for RMS fell 11% compared with 1996, as poor business conditions
severely impacted European electricity and gas metering activity. Orders fell
8%.
The revenue decline was highest in Italy and in the UK. South American revenue
grew significantly on high demand for water meters and the newly introduced
single-phase, electromechanical meter. North America experienced strong water
and gas meter sales. Pretax operating income fell 36% due to deregulation and
privatization of the world's utilities accompanied by restricted procurements.
Test & Transactions
- -------------------
1999 Results
Revenue at Test & Transactions, including customer solutions activities and
Omnes, declined 4% compared with 1998. Orders rose 16%. The year was
characterized by volatility due to changing business environments in several
Test & Transactions market segments. Smart Cards & Terminals, whose business
continues to be derived in part from emerging economies, suffered from pricing
pressures associated with highly competitive markets, such as mobile
communications. Automated Test Equipment (ATE) was negatively impacted by market
uncertainties associated with the Rambus memory device rollout as well as by a
softening in the high-end logic test business, a market in which ATE maintains
share leadership.
Smart Cards & Terminals revenue improved 3% versus 1998, while ATE revenue
including SABER (Schlumberger Advanced Business Engineering Resources) services,
decreased 27%. Orders for Smart Cards & Terminals and ATE both increased, 4% and
15%, respectively.
During 1999, new product introductions at both Smart Cards & Terminals and ATE
contributed to Test & Transactions revenue. Fourteen new products were
introduced at ATE. Smart Cards & Terminals successfully launched the Simera*
Java***-programmable subscriber identity module (SIM) card, Cryptoflex* e-gate*
cards and MagIC* 6000 terminals into the booming GSM, PC and retail markets. The
rapid growth of the mobile communications market, which was accompanied by
increasing demand for multi-application and open-platform cards, provided a
strong impetus for the accelerated adoption of the Simera cards as well as the
continued use of Cyberflex* Simera cards. However, despite a strong increase in
orders for SIM cards over 1998, global price pressure
19
significantly reduced the revenue generated. Card sales grew in both Asia and
Europe, the two most prominent consumer markets for smart cards.
The Smart Cards & Terminals Municipalities solutions business experienced
revenue growth for the second consecutive year. In 1999, solutions sales showed
a significant increase over 1998, with key contributions from Parking and Mass
Transit applications.
At ATE, Schlumberger entered the front-end (process equipment) semiconductor
equipment business with the first shipments of the Odyssey 300* wafer defect
detection system. Although the initiative to focus on Rambus dynamic random
access memory (RDRAM) technology resulted in an early leadership position for
Schlumberger, the slow pace of the emerging RDRAM market delayed orders.
1998 Results
Compared with 1997, revenue for Test & Transactions rose 15%. Smart Cards &
Terminals, including the smart card-based solutions businesses, grew 31%, while
ATE, including SABER services activities, was flat. Both businesses experienced
volatile business cycles but outpaced their respective markets. In 1998, smart
card volume increased more than 40% compared with the industry's growth rate of
32%. Despite an industry downturn, ATE increased market share for mixed-signal
and logic test systems. In October, the Retail Petroleum Systems business was
sold to Tokheim Corporation.
Test & Transactions benefited from its reorganization into three
groups--Solutions, Products and Manufacturing. Products and Manufacturing
provide product core expertise, while the regional Solutions groups deliver
integrated solutions and services. Each group aligned its roles and
responsibilities to enhance its customer orientation. The transition to the new
organization moved quickly and yielded improved quality, customer focus and
integrated systems offerings.
Throughout the year, Smart Cards & Terminals concentrated on growing its share
of key smart card markets--mobile phones, finance and banking, municipalities
(parking and mass transit) and health care-which presented significant
opportunities for the smart card-based solutions and systems integration
businesses. One successful system integration business was exemplified by the
launch of the Cyberflex Mobile Solution. This integrated product and service
offering included a Cyberflex Simera smart card, a software developer's kit with
an easy-to-use SIMnario* graphical interface for rapid prototyping, the Aremis*
SIM-based service management system and the Aremis marketing platform.
Schlumberger also offered a wide range of consulting, engineering and turnkey
project management services to facilitate the design of these systems.
Strong revenue growth came from the mobile phone SIM card market, from financial
and banking cards and from the Municipalities Solutions business, which
comprises smart card-based parking, pay phone and mass transit systems. The
Stelio* parking system was successfully introduced and made a significant
contribution to revenue.
At ATE, strong orders in the first half of the year were offset by the decline
during the second half. Activity at ATE system services was up 15% year over
year. To reflect the downturn in the semiconductor business, a cost reduction
plan was implemented in ATE. Investments for critical new product developments,
however, were maintained.
During the year, ATE introduced D-RDRAM, SDRAM and RDRAM memory test systems.
The new RDX2200* series of RDRAM test systems was anticipated to establish a new
market standard for test accuracy, throughput and cost. The RDX2200 series of
test systems developed its accuracy and performance advantage from ATE test
technology in high-end logic design and test methodology.
20
Also successfully introduced in 1998 was the IDS2000* probe system. This
laser-based system, focused on the emerging flip chip market, provides the same
diagnostic capabilities as high-end e-beam tools. Several IDS2000 systems were
installed during the year.
In 1998, the SABER services group was formed and achieved profitability. The
SABER business model, which derives from the Schlumberger service culture, is an
innovative concept that provides consulting, turnkey engineering and operational
services for the semiconductor industry.
1997 Results
Test & Transactions revenue grew 44% versus 1996. This higher growth resulted
mainly from significantly greater ATE activity, increased demand for smart cards
and terminals and previously announced acquisitions. Pretax operating income and
orders grew 194% and 55%, respectively.
Smart Cards & Terminals revenue was 48% higher than in 1996, mainly due to smart
card sales, including the Solaic activity acquired in December 1996. Increasing
demand for both microprocessor and memory cards used in cellular mobile
communications, banking and pay phone applications led Schlumberger to establish
additional smart card production operations in Hong Kong and Mexico, which
resulted in improved telecom equipment sales.
ATE revenue rose 37%, compared with 1996. ATE market share increased across all
semiconductor test market segments. Orders increased, due largely to stronger
demand for the ITS9000* family of products at Test Systems and sales of the P2X*
semiconductor analysis system. In October, ATE acquired Interactive Video
Systems, Inc., a metrology solutions provider for the front-end semiconductor
fabrication equipment market.
Income - Continuing Operations
- ------------------------------
(Stated in millions except per share amounts)
Income from Earnings per share
Continuing ------------------
Operations Basic Diluted
---------- ----- -------
1999/1/ $ 329 $0.60 $0.58
======== ===== =====
1998/2/ $ 618 $1.14 $1.10
======== ===== =====
1997 $ 1,087 $2.02 $1.94
======== ===== =====
/1/ Includes an after-tax charge of $129 million ($0.23 per share-diluted). For
details, see "1999 and 1998 Charges - Continuing Operations" on page 23.
/2/ Includes an after-tax charge of $368 million ($0.65 per share-diluted). For
details, see "1999 and 1998 Charges - Continuing Operations " on page 23.
In 1999, Oilfield Services operating net income decreased $551 million, or 58%,
to $402 million. All areas reported substantial declines as a result of the
worldwide reduction in E&P expenditures due to reduced oil prices, which led to
a 22% fall in average rig count. Resource Management Services operating net
income of $6 million was down $26 million, or 82%. Test & Transactions operating
net income decreased $25 million, or 46%, to $30 million, as stronger results
from Smart Cards & Terminals activities were more than offset by declines at
ATE, which was negatively impacted by Rambus-related market uncertainties and by
a softening of the high-end logic test business for which it is a leading
supplier.
21
In 1998, Oilfield Services operating net income of $954 million was down 11%,
reflecting the 13% decrease in average rig count. The main decrease was in North
America, which was impacted by strong pricing pressure and a slowdown in
activity in the second half of the year. Resource Management Services operating
net income decreased $15 million, or 32%, largely due to market weakness as a
result of industry consolidation and privatization, compounded by the financial
crisis in emerging countries. Test & Transactions operating net income of $55
million was down 25% as growth in the Smart Cards & Terminals activities was
offset by a severe market decline for ATE, due to curtailment of capital
expenditures by the semiconductor industry in the latter half of the year.
In 1997, Oilfield Services operating net income increased $336 million, or 45%,
to $1.07 billion. The growth reflected the continued higher demand for oil and
gas and the strong increase in exploration and production spending by oil
companies. These underlying factors, combined with new technology and greater
efficiencies, resulted in stronger pricing and higher market share. The Asian
and North American markets were significant growth areas. Resource Management
Services operating net income decreased $41 million, or 47%, due to the adverse
exchange rate effects and to a decline in the European metering activities,
which were impacted by increased competition and severe price erosion. Test &
Transactions operating net income increased $38 million, or 109%, reflecting
significantly increased demand for semiconductor test equipment and smart cards
and systems, as well as higher activity in Asia.
Currency Risks
Refer to page 32, "Translation of Non-US Currencies" in the "Notes to
Consolidated Financial Statements," for a description of the Schlumberger policy
on currency hedging. There are no material unhedged assets, liabilities or
commitments which are denominated in other than a business's functional
currency.
While changes in exchange rates do affect revenue, especially in the Resource
Management Services and Test & Transactions segments, they also affect costs.
Generally speaking, Schlumberger is currency neutral. For example, a 5% change
in average exchange rates of OECD currencies would have had no material effect
on consolidated revenue and net income.
Schlumberger businesses operate principally in US dollars, most European
currencies and most South American currencies.
In general, when the US dollar weakens against other currencies, consolidated
revenue increases, usually with no material effect on net income. This is
principally because the fall-through incremental margin in the Resource
Management Services and Test & Transactions segments offset the higher Oilfield
Services non-US dollar denominated expenses.
Income Tax Expense
In 1996, with increasing profitability and a strong outlook in the US,
Schlumberger recognized 50% of the US income tax benefit related to its US
subsidiary's tax loss carryforward and all temporary differences. This resulted
in a credit of $360 million. Refer to page 42 in the "Notes to Consolidated
Financial Statements" under "Income Tax Expense" for more information. In 1997,
the remaining 50% of the US income tax benefit was recognized, which resulted in
no significant reduction of income tax expense.
22
Research & Engineering
Expenditures were as follows: (Stated in millions)
1999 1998 1997
------ ------ ------
Oilfield Services $354 $371 $344
Resource Management Services 57 57 61
Test & Transactions 111 115 89
Other/1/ - 14 16
----- ----- -----
$522 $557 $510
===== ===== =====
/1/ Primarily comprises the Retail Petroleum Systems business sold on October 1,
1998.
Interest Expense
Interest expense increased $56 million in 1999, primarily due to a full year's
effect of the significantly higher debt balances incurred in 1998 by the
principal US subsidiary of Schlumberger and relating to the Camco acquisition.
The increase in interest expense in 1998 of $62 million was mainly due to the
financing of the Camco acquisition.
1999 and 1998 Charges - Continuing Operations
Schlumberger recorded the following after-tax charges for continuing operations
in 1999 and 1998:
. In December 1999, $71 million primarily relating to the reduction of its
marine seismic fleet due to depressed market conditions and the
restructuring of its land drilling activity following the spin-off of its
offshore drilling business to stockholders.
. In March 1999, $138 million primarily relating to the downsizing of its
global Oilfield Services activities to meet prevailing market conditions,
and an after-tax credit of $80 million from the gain on sale of financial
instruments in connection with the 1998 sale of the Retail Petroleum
Systems business.
. In September 1998, $368 million to reflect the estimated costs of
consolidating resources and locations and making significant cuts in
personnel necessitated by the E&P industry downturn.
Severance costs included in the September 1998 charge (6200 people) and the
March 1999 charge (4700 people) have been paid. The December 1999 charge
included severance costs of $13 million (300 people) of which $5 million had
been paid by December 31, 1999.
23
Liquidity
A measure of financial position is liquidity, defined as cash plus short-term
and long-term investments, less debt. The following table summarizes the change
in Schlumberger consolidated liquidity for each of the past three years:
(Stated in millions)
1999 1998 1997/1/
------ ------ ---------
Net Income from continuing operations $ 329 $ 618 $ 1,087
Charges 129 368 -
Depreciation & amortization 1,021 1,012 924
Decrease (increase) in working
capital requirements 73 (138) (505)
Fixed assets additions (792) (1,463) (1,404)
Dividends paid (410) (388) (378)
Proceeds from
employee stock plans 174 139 148
Business (acquired) sold (135) 61 (31)
Exercise of stock warrants/2/ 450 - -
Sale of financial instruments 204 - -
Drilling fluids joint venture (325) - -
Discontinued operations/3/ (52) 107 395
Other (166) (112) 121
------ ------- ---------
Net increase in liquidity $ 500 $ 204 $ 357
====== ======= =========
Liquidity - end of period $1,231 $ 731 $ 527
====== ======= =========
/1/ Restated for comparative purposes.
/2/ On December 16, 1999, Dow Chemical exercised a warrant to purchase
15,153,018 shares of Schlumberger common stock. The warrant was received by Dow
Chemical as part of the 1993 transaction under which Schlumberger acquired Dow
Chemical's 50% share of the Dowell Schlumberger joint venture.
/3/ 1999 includes $304 million received in settlement of intercompany balances
between Schlumberger and Sedco Forex.
The current consolidated liquidity level, combined with liquidity expected from
operations, should satisfy future business requirements.
24
Common Stock, Market Prices and Dividends Declared per Share
- ------------------------------------------------------------
Quarterly high and low prices for Schlumberger common stock as reported by the
New York Stock Exchange (composite transactions) and as adjusted for the
spin-off of the Schlumberger offshore contract drilling business on December 30,
1999 (see "Discontinued Operations" in the Notes to Consolidated Financial
Statements), together with dividends declared per share in each quarter of 1999
and 1998, were:
Price Range
-----------------------
Dividends
High Low Declared
------ ------- ---------
1999
QUARTERS
First $ 55.268 $ 40.301 $ 0.1875
Second 58.428 49.226 0.1875
Third 62.696 51.166 0.1875
Fourth 61.144 45.955 0.1875
1998
QUARTERS
First $ 72.287 $ 58.428 $ 0.1875
Second 76.943 58.539 0.1875
Third 62.031 38.527 0.1875
Fourth 51.665 35.534 0.1875
The number of holders of record of Schlumberger common stock at December 31,
1999, was approximately 25,000. There are no legal restrictions on the payment
of dividends or ownership or voting of such shares, except as to shares held in
the Schlumberger Treasury. US stockholders are not subject to any Netherlands
Antilles withholding or other Netherlands Antilles taxes attributable to
ownership of such shares.
Environmental Matters
- ---------------------
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
divested operations and to facilities or locations that are no longer in
operation. Due to a number of uncertainties, including timing, scope of
remediation, future technology, regulatory changes and other factors, it is
possible that the ultimate remediation 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. Consistent with the Schlumberger commitment to protection
of the environment, safety and employee health, additional costs, including
capital expenditures, are incurred related to current operations.
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, which requires
that Schlumberger 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 Schlumberger.
Occasionally, Schlumberger 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
25
fluctuations on assets/liabilities denominated in other than a functional
currency. Options are usually entered into as a hedge against currency
variations on firm commitments generally involving the construction of long-
lived assets. Schlumberger does not anticipate that the implementation of the
new standard in 2001 will have a material effect on the consolidated financial
position and results of operations.
Year 2000 Readiness Disclosure
- ------------------------------
Overview
Schlumberger has had a proactive, enterprise wide Year 2000 Readiness Program
(the "Program") in place since September 1997. Overall, Schlumberger reached
Year 2000 Readiness in all key areas by September 1999. Appropriate contingency
plans were also implemented for each of the "at risk" activities to minimize the
effect of potential Year 2000 disruption, both internally and on Schlumberger
customers. Furthermore, helpdesks were implemented throughout our global
operations to support both our customers and any mission-essential systems over
critical Year 2000 dates.
Readiness
Evidence to date indicates that the Year 2000 Program has been successful in
that Schlumberger was able to perform "business as usual" over the critical
dates and it does not expect any significant disruptions from this issue in the
coming months or year.
Costs
Year 2000 Program funding requirements have been incorporated into the
Schlumberger capital and operating plans and were not material to its financial
condition, results of operations or liquidity. The cost of the Program was on
the order of $60 million, with a breakdown of costs estimated at 36% for
employee resources, 24% for IT-related upgrades and repair and 40% for non-IT
embedded chip technology. Furthermore, Schlumberger estimates that 60% of the
overall cost was "opportunity cost" in that it was directed at accelerating the
upgrade and/or rationalization of products, services and applications to best
position Schlumberger for the 21/st/ century.
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). Although evidence
from the successful transition by Schlumberger over the critical dates indicates
that no significant failures will occur from the Year 2000 issue, Schlumberger
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 the
failure of the Schlumberger 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 adversely
affect Schlumberger operations, liquidity and financial condition.
Euro Disclosures
- ----------------
On January 1, 1999, the euro became the official single currency of the European
Economic and Monetary Union. As of this 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 subunits 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.
26
Schlumberger recognizes that the euro will affect its various businesses
differently, but Schlumberger cannot as yet make a final conclusion on the
anticipated business impacts of the introduction of the single currency.
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
Services, 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 utility customers
should also contribute to providing new solutions opportunities in these
businesses.
Based upon results to date, Schlumberger believes that the implementation of the
euro can be performed according to the schedule defined by the European Union.
Schlumberger does not expect the total cost of addressing this issue to be
material to financial condition, results of operations and liquidity.
Forward-looking Statements
- --------------------------
Schlumberger cautions that, except for historical information, statements in
this Form 10-K 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 Schlumberger operates and growth opportunities for
Schlumberger 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; changes in E&P spending by
major oil companies; the extent and timing of utilities' investment in
integrated solutions to utility management; noncancellation of key long-term
services and solutions contracts; growth in demand for smart cards in e-commerce
and Internet-enabled solutions and for RDRAM memory devices and high-end logic
devices produced by Schlumberger test equipment customers; general economic and
business conditions in key regions of the world; and changes in business
strategy or development plans relating to targeted Schlumberger growth
opportunities.
Item 7A Quantitative and Qualitative Disclosure about Market Risk
- -----------------------------------------------------------------
Schlumberger does not believe it has a material exposure to financial market
risk. Schlumberger 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, Schlumberger 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. Schlumberger does
not enter into foreign currency or interest rate transactions for speculative
purposes.
27
Item 8 Financial Statements and Supplementary Data
- ------ -------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------
(Stated in thousands except per share amounts)
Year Ended December 31, 1999 1998 1997
------------ ----------- ------------
Revenue
Operating $ 8,394,947 $10,725,030 $ 10,652,097
Interest and other income 356,758 173,006 103,092
------------ ----------- ------------
8,751,705 10,898,036 10,755,189
------------ ----------- ------------
Expenses
Cost of goods sold
and services 6,748,839 8,414,383 7,847,796
Research & engineering 522,240 556,882 509,562
Marketing 433,871 467,592 433,911
General 383,695 427,775 412,614
Interest 192,954 137,211 75,677
------------ ----------- ------------
8,281,599 10,003,843 9,279,560
------------ ----------- ------------
Income before taxes 470,106 894,193 1,475,629
Taxes on income 140,772 276,231 388,401
------------ ----------- ------------
Income from
Continuing operations 329,334 617,962 1,087,228
Discontinued operations,
net of tax 37,360 396,237 297,321
------------ ----------- ------------
Net Income $ 366,694 $ 1,014,19 $ 1,384,549
============ =========== ============
Basic earnings per share:
Continuing operations $ 0.60 $ 1.14 $ 2.02
Discontinued operations 0.07 0.72 0.55
------------ ----------- ------------
Net Income $ 0.67 $ 1.86 $ 2.57
============ =========== ============
Diluted earnings per share:
Continuing operations $ 0.58 $ 1.10 $ 1.94
Discontinued operations 0.07 0.71 0.53
------------ ----------- ------------
Net Income $ 0.65 $ 1.81 $ 2.47
============ =========== ============
Average shares outstanding 548,680 544,338 539,330
Average shares outstanding
assuming dilution 563,789 561,855 559,653
See the Notes to Consolidated Financial Statements
Schlumberger Limited (Schlumberger N.V., Incorporated in the Netherlands
Antilles) and Subsidiary Companies.
28
CONSOLIDATED BALANCE SHEET
(Stated in thousands)
December 31, 1999 1998
----------- ------------
ASSETS
Current Assets
Cash and short-term investments $ 4,389,837 $ 3,956,694
Receivables less allowance for doubtful accounts
(1999-$89,030; 1998-$89,556) 2,429,842 2,968,070
Inventories 1,268,500 1,333,131
Deferred taxes on income 259,257 295,974
Other current assets 258,532 251,355
----------- ------------
8,605,968 8,805,224
Investments in Affiliated Companies 535,434 84,844
Long-term Investments, held to maturity 726,496 855,172
Fixed Assets less accumulated depreciation 3,560,740 4,694,465
Excess of Investment Over Net Assets
of Companies Purchased less amortization 1,333,681 1,302,678
Deferred Taxes on Income 209,597 202,630
Other Assets 109,276 132,916
----------- -------------
$15,081,192 $ 16,077,929
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 2,282,884 $ 2,539,954
Estimated liability for taxes on income 383,159 480,123
Bank loans 444,221 708,978
Dividend payable 106,653 102,891
Long-term debt due within one year 257,571 86,722
----------- -----------
3,474,488 3,918,668
Long-term Debt 3,183,174 3,285,444
Postretirement Benefits 451,466 432,791
Other Liabilities 251,036 321,951
----------- -----------
7,360,164 7,958,854
----------- -----------
Stockholders' Equity
Common stock 1,820,186 1,539,408
Income retained for use in the business 7,916,612 8,882,455
Treasury stock at cost (1,878,612) (2,221,308)
Translation adjustment (137,158) (81,480)
----------- -----------
7,721,028 8,119,075
----------- -----------
$15,081,192 $16,077,929
=========== ===========
See the Notes to Consolidated Financial Statements
Schlumberger Limited (Schlumberger N.V., Incorporated in the Netherlands
Antilles) and Subsidiary Companies.
29
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------
(Stated in thousands)
Year Ended December 31, 1999 1998 1997
Cash flows from operating activities: ---------- ----------- -----------
Net income $ 366,694 $ 1,014,199 $ 1,384,549
Adjustments to reconcile net income
to net cash provided by operating activities:
Discontinued operations 213,676 136,206 110,780
Depreciation and amortization 1,020,862 1,011,582 924,223
Earnings of companies carried at equity,
less dividends received (1999-$3,401;
1998-$4,996; 1997-$4,934) (13,904) (9,576) (1,270)
Provision for losses on accounts receivable 37,943 36,861 27,871
Charges 128,508 368,499 -
Other adjustments - (58) (2,278)
Change in operating assets and liabilities:
Decrease (increase) in receivables 265,588 (20,507) (647,470)
Increase in inventories (43,635) (122,622) (220,813)
(Increase) decrease in deferred taxes (21,672) (75,959) 32,140
(Decrease) increase in accounts payable
and accrued liabilities (181,731) (72,940) 175,664
(Decrease) increase in estimated liability
for taxes on income (69,338) 79,677 51,215
Other-net (182,426) (116,784) 25,916
------------ ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,520,565 2,228,578 1,860,527
------------ ------------ -----------
Cash flows from investing activities:
Purchases of fixed assets (792,001) (1,462,620) (1,404,323)
Sales/retirements of fixed assets & other 68,005 111,262 97,390
Drilling fluids joint venture (325,000) - -
(Purchase) sale of
other businesses (135,338) 61,662 (28,233)
Increase in investments (295,075) (2,292,163) (867,894)
Sale of financial instruments 203,572 - -
(Increase) decrease in other assets (43,166) 4,660 19,453
Discontinued operations (291,953) (424,749) (13,411)
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (1,610,956) (4,001,948) (2,197,018)
------------ ------------ -----------
Cash flows from financing activities:
Dividends paid (410,494) (388,379) (377,636)
Proceeds from employee stock purchase plan 70,765 70,461 50,055
Proceeds from exercise of stock options 103,084 68,780 97,899
Exercise of stock warrants 449,625 - -
Proceeds from issuance of long-term debt 1,062,935 2,909,156 925,579
Payments of principal on long-term debt (916,242) (863,966) (419,962)
Net (decrease) increase in short-term debt (242,014) (64,756) 50,831
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 117,659 1,731,296 326,766
------------ ------------ -----------
Net increase (decrease) in cash 27,268 (42,074) (9,725)
Cash, beginning of year 105,321 147,395 157,120
------------ ------------ -----------
CASH, END OF YEAR $ 132,589 $ 105,321 $ 147,395
============ ============ ===========
See the Notes to Consolidated Financial Statements
Schlumberger Limited (Schlumberger N.V., Incorporated in the Netherlands
Antilles) and Subsidiary Companies.
30
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock (Dollar amounts in thousands)
------------------------------------------------- Income
Issued In Treasury Retained for
----------------------- ------------------------ Translation Use in the Comprehensive
Shares Amount Shares Amount Adjustment Business Income
---------- ----------- ---------- ------------ ------------ -------------- ---------
Balance,
January 1, 1997 661,842,453 $ 1,307,717 124,661,624 $ 2,315,946 $ (25,626) $ 7,255,108 $ 925,243
===========
Translation adjustment (37,706) $ (37,706)
Sales to optionees less
shares exchanged 395,950 37,316 (3,323,223) (61,743)
Employee stock
purchase plan 1,399,623 50,055
Net income 1,384,549 1,384,549
IVS acquisition 16,324 (238,812) (4,438)
Tax benefit on
stock options 16,600
Change in subsidiary
year end 612 4,560
Dividends declared
($0.75 per share) (378,575)
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balance,
December 31, 1997 663,638,026 1,428,624 121,099,589 2,249,765 (63,332) 8,265,642 $ 1,346,843
===========
Translation adjustment (18,148) (18,148)
Sales to optionees less
shares exchanged 796,992 40,323 (1,531,607) (28,457)
Employee stock
purchase plan 1,266,840 70,461
Net income 1,014,199 1,014,199
Dividends declared
($0.75 per share) (397,386)
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balance,
December 31, 1998 665,701,858 1,539,408 119,567,982 2,221,308 (81,480) 8,882,455 $ 996,051
===========
Translation adjustment (55,678) (55,678)
Sales to optionees less
shares exchanged 28,100 41,931 (3,291,288) (61,153)
Employee stock
purchase plan 1,324,848 70,765
Net income 366,694 366,694
Dividends declared
($0.75 per share) (414,210)
Sedco Forex spin-off (918,327)
Exercise of stock warrants 168,082 (15,153,018) (281,543)
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balance,
December 31, 1999 667,054,806 $ 1,820,186 101,123,676 $ 1,878,612 $ (137,158) $ 7,916,612 $ 311,016
=========== =========== =========== =========== =========== ============= ===========
See Notes to Consolidated Financial Statements
Schlumberger Limited (Schlumberger N.V., Incorporated in the Netherlands
Antilles) and Subsidiary Companies.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Accounting Policies
- ------------------------------
The Consolidated Financial Statements of Schlumberger Limited and its
subsidiaries have been prepared in accordance with accounting principles
generally accepted in the United States.
DISCONTINUED OPERATIONS
On December 31, 1999, Schlumberger completed the spin-off of its offshore
contract drilling business, Sedco Forex, to its stockholders and the subsequent
merger of Sedco Forex and Transocean Offshore Inc., which changed its name to
Transocean Sedco Forex Inc. following the merger. The results for the Sedco
Forex operations spun off by Schlumberger are reported as Discontinued
Operations for all periods presented in the Consolidated Statement of Income.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of majority-owned
subsidiaries. Significant 20% - 50% owned companies are carried on the equity
method and classified in Investments in Affiliated Companies. The pro rata share
of Schlumberger after-tax earnings is included in Interest and other income.
Equity in undistributed earnings of all 50%-owned companies on December 31, 1999
was not material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. While actual
results could differ from these estimates, management believes that the
estimates are reasonable.
REVENUE RECOGNITION
Generally, revenue is recognized after services are rendered or products are
shipped.
TRANSLATION OF NON-US CURRENCIES
Oilfield Services' functional currency is primarily the US dollar. Resource
Management Services' and Test & Transactions' functional currencies are
primarily local currencies. All assets and liabilities recorded in functional
currencies other than US dollars are translated at current exchange rates. The
resulting adjustments are charged or credited directly to the Stockholders'
Equity section of the Consolidated Balance Sheet. Revenue and expenses are
translated at the weighted-average exchange rates for the period. All realized
and unrealized transaction gains and losses are included in income in the period
in which they occur. Schlumberger policy is to hedge against unrealized gains
and losses on a monthly basis. Included in the 1999 results were transaction
losses of $12 million, compared with losses of $6 million and $10 million in
1998 and 1997, respectively.
Currency exchange contracts are entered into as a hedge against the effect of
future settlement of assets and liabilities denominated in other than the
functional currency of the individual businesses. Gains or losses on the
contracts are recognized when the currency exchange rates fluctuate, and the
resulting charge or credit partially offsets the unrealized currency gains or
losses on those assets and liabilities. On December 31, 1999, contracts and
options were outstanding for the US dollar equivalent of $110 million in various
foreign currencies. These contracts mature on various dates in 2000 and 2001.
Investments
Both short-term and long-term investments held to maturity are stated at cost
plus accrued interest, which approximates market, and comprise primarily
eurodollar time deposits,
32
certificates of deposit and commercial paper, euronotes and eurobonds,
substantially all denominated in US dollars. Substantially all the investments
designated as held to maturity that were purchased and sold during the year had
original maturities of less than three months. Short-term investments that are
designated as trading are stated at market. The unrealized gains/losses on such
securities on December 31, 1999 were not significant.
For purposes of the Consolidated Statement of Cash Flows, Schlumberger does not
consider short-term investments to be cash equivalents as they generally have
original maturities in excess of three months. Short-term investments on
December 31, 1999 and 1998 were $4.26 billion and $3.85 billion, respectively.
INVENTORIES
Inventories are stated principally at average cost or at market, if lower.
Inventory consists of materials, supplies, finished goods and nonexclusive
proprietary seismic surveys.
EXCESS OF INVESTMENT OVER NET ASSETS OF COMPANIES PURCHASED
Cost in excess of net assets of purchased companies (goodwill) is amortized on a
straight-line basis over 5 to 40 years. Accumulated amortization was $516
million and $434 million on December 31, 1999 and 1998, respectively. Of the
goodwill on December 31, 1999, 40% is being amortized over 40 years, 11% is
being amortized over 28 years, 23% is being amortized over 25 years and 26% is
being amortized over periods of up to 25 years.
FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost less accumulated depreciation, which is provided
for by charges to income over the estimated useful lives of the assets using the
straight-line method. Fixed assets include the manufacturing cost (average cost)
of oilfield technical equipment manufactured by subsidiaries of Schlumberger.
Expenditures for renewals, replacements and improvements are capitalized.
Maintenance and repairs are charged to operating expenses as incurred. Upon sale
or other disposition, the applicable amounts of asset cost and accumulated
depreciation are removed from the accounts and the net amount, less proceeds
from disposal, is charged or credited to income.
CAPITALIZED INTEREST
Schlumberger capitalizes interest expense during the new construction or upgrade
of qualifying assets. Interest expense capitalized in 1999 and 1998 was $5
million and $7 million, respectively. No interest expense was capitalized in
1997.
IMPAIRMENT OF LONG-LIVED ASSETS
Schlumberger reviews the carrying value of its long-lived assets, including
goodwill, whenever events or changes in circumstances indicate that the
historical cost-carrying value of an asset may no longer be appropriate.
Schlumberger assesses recoverability of the carrying value of the asset by
estimating the future net cash flows expected to result from the asset,
including eventual disposition. If the future net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value.
TAXES ON INCOME
Schlumberger and its subsidiaries compute taxes on income in accordance with the
tax rules and regulations of the many taxing authorities where the income is
earned. The income tax rates imposed by these taxing authorities vary
substantially. Taxable income may differ from pretax income for financial
accounting purposes. To the extent that differences are due to revenue or
expense items reported in one period for tax purposes and in another period for
financial accounting purposes, an appropriate provision for deferred income
taxes is made.
Approximately $3.2 billion of consolidated income retained for use in the
business on December 31, 1999 represented undistributed earnings of consolidated
subsidiaries and the
33
pro rata Schlumberger share of 20%-50% owned companies. No provision is made for
deferred income taxes on those earnings considered to be indefinitely reinvested
or earnings that would not be taxed when remitted.
Tax credits and other allowances are credited to current income tax expense
using the flow-through method of accounting.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the average
number of common shares outstanding during the year. Diluted earnings per share
is calculated 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 which are in the money are exercised at the beginning of
the period and the proceeds used, by Schlumberger, 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 from continuing
operations for each of the last three years:
(Stated in thousands except per share amounts)
Income from Average
Continuing Shares Earnings
Operations Outstanding Per Share
--------------- -------------- -------------
1999
Basic $ 329,334 548,680 $ 0.60
Effect of dilution:
Options 7,916
Warrants 7,193
------------ ----------
Diluted $ 329,334 563,789 $ 0.58
============ ========== ======
1998
Basic $ 617,962 544,338 $ 1.14
Effect of dilution:
Options 9,723
Warrants 7,794
------------ ----------
Diluted $ 617,962 561,855 $ 1.10
============ ========== ======
1997
Basic $ 1,087,228 539,330 $ 2.02
Effect of dilution:
Options 12,185
Warrants 8,138
------------ ----------
Diluted $ 1,087,228 559,653 $ 1.94
============ ========== ======
RESEARCH & ENGINEERING
All research and engineering expenditures are expensed as incurred, including
costs relating to patents or rights that may result from such expenditures.
34
1999 AND 1998 CHARGES - CONTINUING OPERATIONS
Schlumberger recorded the following charges in continuing operations in 1999 and
1998:
In December 1999, a pre-tax charge of $77 million ($71 million after tax, $0.13
per share - diluted), classified in Cost of goods sold and services, consisting
primarily of the following:
. A charge of $31 million ($26 million after tax) including $23 million of
asset impairments and $8 million of severance costs related to reductions
in the marine seismic fleet due to depressed market conditions.
. A charge of $38 million ($37 million after tax) including $33 million of
asset impairments and $5 million of severance costs related to the
restructuring of its land drilling activity following the spin-off of its
offshore drilling business to stockholders.
In March 1999, a pretax charge of $147 million partially offset by a pretax gain
of $103 million (net - $58 million after tax, $0.10 per share - diluted),
consisting of the following:
. A charge of $118 million ($118 million after tax) related to the downsizing
of its global Oilfield Services activities, including $108 million of
severance costs and $10 million for asset impairments.
. A charge of $29 million ($20 million after tax) related to RMS and Test &
Transactions, consisting principally of $16 million of severance costs at
several RMS facilities resulting from a downturn in business and $5 million
of asset write-downs.
. A credit of $103 million ($80 million after tax) from the gain on the sale
of financial instruments received in connection with the 1998 sale of RPS.
The pretax gain on the sale of financial instruments is included in Interest &
other income. The pretax charge of $147 million is classified in Cost of goods
sold and services.
In September 1998, a pretax charge of $432 million ($368 million after tax,
$0.65 per share - diluted), classified in Cost of goods sold and services,
consisting primarily of the following:
. A charge of $314 million ($257 million after tax) related to Oilfield
Services, including severance costs of $69 million; facility closure costs
of $61 million; operating assets write-offs of $137 million; and $43
million of customer receivable reserves where collection was considered
doubtful due to the customers' financial condition and/or country risk.
This charge was due to the reduction in business activity.
. A charge of $48 million ($63 million after tax) for merger-related costs in
connection with the acquisition of Camco.
. A charge of $61 million ($43 million after tax) related to RMS and Test &
Transactions, consisting primarily of $21 million of severance and $40
million of environmental costs resulting from a reassessment of ongoing
future monitoring and maintenance requirements at locations no longer in
operation.
Severance costs included in the September 1998 charge (6200 people; $90 million)
and the March 1999 charge (4700 people; $124 million) have been paid. The actual
number of employees terminated was slightly higher than originally planned;
however, this had no material impact on the actual severance costs paid as
compared with the amount originally accrued. The December 1999 charge included
severance costs of $13 million (300 people), of which $5 million had been paid
at December 31, 1999.
The $61 million of facility closure costs accrued in 1998 have substantially
been paid in accordance with the original plan.
35
Discontinued Operations
- -----------------------
On December 31, 1999, Schlumberger completed the spin-off of its offshore
contract drilling business, Sedco Forex, to its stockholders and the subsequent
merger of Sedco Forex and Transocean Offshore Inc., which changed its name to
Transocean Sedco Forex Inc. following the merger. The spin-off was approved by
stockholders on December 10, 1999.
Upon completion of the merger, Schlumberger stockholders held approximately 52%
of the ordinary shares of Transocean Sedco Forex Inc., and Transocean Offshore
Inc. shareholders held the remaining 48%. Schlumberger retained no ownership in
the combined company.
In the spin-off, Schlumberger stockholders received one share of Sedco Forex for
each share of Schlumberger owned on the record date of December 20, 1999. In the
merger, each Sedco Forex share was exchanged for 0.1936 ordinary share of
Transocean Sedco Forex Inc. Stockholders received cash in lieu of fractional
shares.
Results for the Sedco Forex operations spun off by Schlumberger for this
transaction are reported as discontinued operations for all periods presented in
the Consolidated Statement of Income.
Discontinued Operations on the Consolidated Statement of Income includes the
operating results of the spun-off Sedco Forex business and the following
charges:
- - In December 1999, an after-tax charge of $50 million ($0.09 per share -
diluted) for costs directly associated with the spin-off.
- - In March 1999, an after-tax charge of $33 million ($0.06 per share -
diluted) for severance costs ($13 million) and legal claims.
- - In September 1998, an after-tax charge of $12 million ($0.02 per share -
diluted) for severance costs.
As a result of the spin-off, Schlumberger Income Retained for Use in the
Business was reduced by $918 million representing the spun-off net assets of
Sedco Forex ($1.23 billion) less payments received in settlement of intercompany
balances between Schlumberger and Sedco Forex ($313 million). The net assets
spun off included $1.3 billion of fixed assets.
Pursuant to Accounting Principles Board Opinion (APB) No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, the revenue and expenses of Sedco Forex have been excluded from
the respective captions in the Consolidated Statement of Income. The net
operating results of Sedco Forex have been reported, net of applicable income
taxes, as Discontinued Operations.
Summarized financial information for the discontinued operations, is as follows:
(Stated in millions)
1999 1998 1997
-------- -------- --------
Operating revenue $ 648 $ 1,091 $ 891
Income before taxes $ 29 $ 428 $ 329
Income after taxes $ 37 $ 396 $ 297
======== ======== ========
36
Acquisitions
- ------------
During 1999, subsidiaries of Schlumberger acquired Merak, a market leader in
petroleum software solutions; Secure Oil Tools, a leader in multilateral
completions; and substantially all of the assets of Panther Software
Corporation, a provider of hardware and software products and services for
managing large volumes of seismic data. These acquisitions were accounted for
using the purchase method of accounting. Costs in excess of net assets acquired
were $106 million which are being amortized on a straight-line basis over 7 to
20 years.
In the third quarter of 1999, the Omnes joint venture, created in 1995 between
Schlumberger and Cable & Wireless, was restructured into two separate business
units. Under the agreement, equal ownership and access to products, technology
and intellectual property was given to both parent companies. Schlumberger
retained ownership of the Omnes name. Omnes is now a fully operational company
within Test & Transactions.
On August 31, 1998, the merger of Schlumberger Technology Corporation, a wholly
owned subsidiary of Schlumberger, and Camco International Inc. was completed.
Under the terms of the merger agreement, approximately 38.2 million shares of
Camco common stock were exchanged for 45.1 million shares of Schlumberger common
stock at the exchange rate of 1.18 shares of Schlumberger stock for each share
of Camco. Based on the Schlumberger average price of $47-7/8 on August 28, the
transaction was valued at $2.2 billion. The business combination was accounted
for using the pooling-of-interests method of accounting.
During 1997, subsidiaries of Schlumberger acquired Interactive Video Systems,
Inc., a metrology solutions provider for the front-end semiconductor fabrication
equipment market, and S.A. Holditch and Associates, Inc., a petroleum and
geoscience consulting services company. These acquisitions were accounted for
using the purchase method of accounting. Costs in excess of net assets acquired
were $38 million which are being amortized on a straight-line basis over periods
of 5 and 15 years, respectively.
Investments in Affiliated Companies
- -----------------------------------
In the third quarter of 1999, Schlumberger and Smith International Inc. entered
into an agreement whereby their drilling fluids operations were combined to form
a joint venture. Under the terms of the agreement, Schlumberger contributed its
non-US drilling fluids business and a total of $325 million to the joint
venture. Schlumberger owns a 40% interest in the joint venture and records
income using the equity method of accounting. The total investment on December
31, 1999 was $414 million. The equity income for 1999 is not material.
Investments
- -----------
The Consolidated Balance Sheet reflects the Schlumberger investment portfolio
separated between current and long term, based on maturity. Except for $130
million of investments which are considered trading on December 31, 1999 ($125
million in 1998), it is the intent of Schlumberger to hold the investments until
maturity.
Long-term investments mature as follows: $133 million in 2001, $358 million in
2002 and $235 million thereafter.
On December 31, 1999, there were no interest rate swap arrangements outstanding
related to investments. Interest rate swap arrangements had no material effect
on consolidated interest income.
37
Fixed Assets
- ------------
A summary of fixed assets follows:
(Stated in millions)
December 31, 1999 1998
-------- -------
Land $ 68 $ 78
Buildings &
Improvements 1,086 1,108
Machinery &
Equipment 8,485 10,472
-------- -------
Total cost 9,639 11,658
Less accumulated
depreciation 6,078 6,964
-------- -------
$ 3,561 $ 4,694
======== =======
The decreases in cost and accumulated depreciation reflect the assets of the
Sedco Forex offshore contract drilling business, which was spun off on December
30, 1999 (see Discontinued Operations on page 36).
The estimated useful lives of Buildings & Improvements are primarily 30 to 40
years. For Machinery & Equipment, 13% is being depreciated over 16 to 25 years,
14% over 10 to 15 years and 73% over 2 to 9 years.
Long-term Debt
- --------------
A summary of long-term debt by currency follows:
(Stated in millions)
December 31, 1999 1998
------- -------
US dollar $ 2,369 $ 2,284
Euro 335 -
Japanese yen 146 125
Canadian dollar 105 80
Italian lira 76 91
UK pound 20 270
French franc - 201
German mark - 160
Other 132 74
------- -------
$ 3,183 $ 3,285
======= =======
The majority of the long-term debt is at variable interest rates; the
weighted-average interest rate of the debt outstanding on December 31, 1999 was
5.9%. Such rates are reset every six months or sooner. The carrying value of
long-term debt on December 31, 1999 approximates the aggregate fair market
value.
Long-term debt on December 31, 1999 is due as follows: $92 million in 2001, $57
million in 2002, $2,322 million in 2003, $424 million in 2004 and $288 million
thereafter.
38
On December 31, 1999, interest rate swap arrangements outstanding were: pay
fixed/receive floating on US dollar debt of $600 million; pay floating/receive
fixed on US dollar debt of $214 million; pay fixed/receive floating on Japanese
yen debt of $107 million. Also outstanding on December 31, 1999 was a hedge in
the notional amount of $76 million against the US 10-year Treasury Note interest
rate. These arrangements mature at various dates to August 2008. Interest rate
swap arrangements had no material effect on consolidated interest expense in
1999 and no impact in 1998. The likelihood of nonperformance by the other
parties to the arrangements is considered to be remote.
Lines of Credit
- ---------------
On December 31, 1999, the principal US subsidiary of Schlumberger had an
available unused Revolving Credit Agreement with a syndicate of banks. The
Agreement provided that the subsidiary may borrow up to $1 billion until August
2003 at money market-based rates (6.1% on December 31, 1999) of which $375
million was outstanding on December 31, 1999; on December 31, 1998, there was no
outstanding amount. In addition, on December 31, 1999 and 1998, Schlumberger and
its subsidiaries also had available unused lines of credit of approximately $793
million and $630 million, respectively. Commitment and facility fees are not
material.
Capital Stock
- -------------
Schlumberger is authorized to issue 1,000,000,000 shares of common stock, par
value $0.01 per share, of which 565,931,130 and 546,133,876 shares were
outstanding on December 31, 1999 and 1998, respectively. Schlumberger is also
authorized to issue 200,000,000 shares of cumulative preferred stock, par value
$0.01 per share, which may be issued in series with terms and conditions
determined by the Board of Directors. No shares of preferred stock have been
issued. Holders of common stock and preferred stock are entitled to one vote for
each share of stock held.
In January 1993, Schlumberger acquired the remaining 50% interest in the Dowell
Schlumberger group of companies. The purchase price included a warrant, expiring
in 7.5 years and valued at $100 million, to purchase 15,153,018 shares of
Schlumberger common stock at an exercise price of $29.672 per share. The warrant
was exercised by Dow Chemical on December 16, 1999.
39
Stock Compensation Plans
- ------------------------
As of December 31, 1999, Schlumberger had two types of stock-based compensation
plans, which are described below. Schlumberger applies APB Opinion 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans and its stock
purchase plan. Had compensation cost for the stock-based Schlumberger plans been
determined based on the fair value at the grant dates for awards under those
plans, consistent with the method of SFAS 123, Schlumberger net income and
earnings per share would have been the pro forma amounts indicated below:
(Stated in millions except per share amounts)
1999 1998 1997
---- ---- ----
Net income
As reported $ 367 $ 1,014 $ 1,385
Pro forma $ 260 $ 882 $ 1,315
Basic earnings
per share
As reported $ 0.67 $ 1.86 $ 2.57
Pro forma $ 0.47 $ 1.62 $ 2.44
Diluted earnings
per share
As reported $ 0.65 $ 1.81 $ 2.47
Pro forma $ 0.46 $ 1.57 $ 2.35
Stock Option Plans
During 1999, 1998, 1997 and in prior years, officers and key employees were
granted stock options under Schlumberger stock option plans. For all of the
stock options granted, the exercise price of each option equals the market price
of Schlumberger stock on the date of grant; an option's maximum term is ten
years, and options generally vest in 20% increments over five years.
As required by SFAS 123, the fair value of each grant is estimated on the date
of grant using the multiple option Black-Scholes option-pricing model with the
following weighted-average assumptions used for 1999, 1998 and 1997: Dividend of
$0.75; expected volatility of 25%-29% for 1999 grants, 21%-25% for 1998 grants
and 21% for 1997 grants; risk-free interest rates for the 1999 grants of
4.92%-5.29% for officers and 4.80%-6.25% for the 1999 grants to all other
employees; risk-free interest rates for the 1998 grant to officers of
5.59%-5.68% and 4.35%-5.62% for the 1998 grants to all other employees;
risk-free interest rates for 1997 grants of 6.19% for officers and 5.80%-6.77%
for all other employees; and expected option lives of 7.14 years for officers
and 5.28 years for other employees for 1999 grants, 6.98 years for officers and
5.02 years for other employees for 1998 grants and 7.27 years for officers and
5.09 years for other employees for 1997 grants.
40
A summary of the status of the Schlumberger stock option plans as of December
31, 1999, 1998 and 1997 and changes during the years ending on those dates is
presented below:
1999/1/ 1998/1/ 1997/1/
---- ---- ----
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- -------------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 30,310,579 $42.50 31,542,758 $39.81 28,904,607 $28.57
Granted 6,012,168 $54.04 2,027,812 $62.57 7,497,432 $73.09
Exercised (3,634,790) $28.68 (2,527,380) $24.15 (4,238,496) $24.77
Forfeited (1,074,033) $52.50 (732,611) $47.61 (620,785) $32.55
---------- --------- --------
Outstanding at
year-end 31,613,924 $37.91 30,310,579 $42.50 31,542,758 $39.81
========== ========== ==========
Options exercisable
at year-end 16,396,821 15,914,440 12,754,955
Weighted-average
fair value of options
granted during the year $17.72 $22.24 $23.02
/1/ Shares and exercise price have been restated to reflect adjustments made as
a result of the spin-off of Sedco Forex, in accordance with EITF Issue 90-9,
"Changes to Fixed Employee Stock Option Plans as Result of Equity
Restructuring."
================================================================================
The following table summarizes information concerning currently outstanding and
exercisable options by three ranges of exercise prices at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Number Weighted-average Number
Range of outstanding remaining Weighted-average exercisable Weighted-average
exercise prices as of 12/31/99 contractual life exercise price as of 12/31/99 exercise price
- --------------- -------------- ---------------- -------------- -------------- --------------
$ 3.831 - $30.710 12,692,062 4.21 $27.403 10,985,705 $27.061
$30.795 - $55.619 12,062,599 7.87 $46.746 3,262,756 $39.519
$55.875 - $82.348 6,859,263 7.94 $78.828 2,148,360 $84.037
--------- ---------
31,613,924 6.42 $45.942 16,396,821 $37.005
---------- ----------
Employee Stock Purchase Plan
Under the Schlumberger Discounted Stock Purchase Plan, Schlumberger is
authorized to issue up to 22,012,245 shares of common stock to its employees.
Under the terms of the Plan, employees can choose each year to have up to 10% of
their annual earnings withheld to purchase Schlumberger common stock. The
purchase price of the stock is 85% of the lower of its beginning or end of the
Plan year market price. Under the Plan, Schlumberger sold 1,324,848, 1,266,840
and 1,399,623 shares to employees in 1999, 1998 and 1997, respectively.
Compensation cost has been computed for the fair value of the employees'
purchase rights, which was estimated using the Black-Scholes model with the
following assumptions for 1999, 1998 and 1997: Dividend of $0.75; expected life
of one year; expected volatility of 40% for 1999, 34% for 1998 and 28% for 1997;
and risk-free interest rates of 5.33% for 1999, 4.44% for 1998 and 5.64% for
1997. The weighted-average fair value of those purchase rights granted in 1999,
1998 and 1997, was $19.829, $19.817 and $17.845, respectively.
41
Income Tax Expense
- ------------------
Schlumberger and its subsidiaries operate in more than 100 taxing jurisdictions
where statutory tax rates generally vary from 0% to 50%.
Pretax book income from continuing operations subject to US and non-US income
taxes for each of the three years ending December 31 was as follows:
(Stated in millions)
1999 1998 1997
---- ---- ----
United States $ (172) $ 24 $ 482
Outside United States 642 870 994
------- ------- -------
Pretax income $ 470 $ 894 $ 1,476
======= ======= =======
Schlumberger had net deductible temporary differences of $1.1 billion on
December 31, 1999 and $1.2 billion on December 31, 1998. Significant temporary
differences pertain to postretirement medical benefits, fixed assets, employee
benefits and inventory.
The components of consolidated income tax expense from continuing operations
were as follows:
(Stated in millions)
1999 1998 1997
---- ---- ----
Current:
United States--Federal $ (74) $ 124 $ 93
United States--State (7) 15 19
Outside United States 206 225 244
------- ------- -------
$ 125 $ 364 $ 356
------- ------- -------
Deferred:
United States--Federal $ 14 $ (68) $ 18
United States--State 1 (7) (2)
Outside United States 1 (13) 16
------- ------- -------
$ 16 $ (88) $ 32
------- ------- -------
Consolidated taxes on income $ 141 $ 276 $ 388
======= ======= =======
Effective tax rate 30% 31% 26%
======= ======= =======
For the three years, the variations from the US statutory federal tax rate (35%)
and Schlumberger effective tax rates were due to several factors, including the
effect of the US operating loss carryforward in 1997 and a substantial
proportion of operations in countries where taxation on income is lower than in
the US.
In the third quarter of 1996, with increasing profitability and a strong outlook
in the US, Schlumberger recognized 50% of the US income tax benefit related to
its US subsidiary's tax loss carryforward and all temporary differences. This
resulted in a credit of $360 million. In the second quarter of 1997,
Schlumberger released the remaining valuation allowance related to its US
subsidiary's tax loss carryforward and all temporary differences. The resulting
reduction in income tax expense was not significant.
42
Leases and Lease Commitments
- ----------------------------
Total rental expense was $303 million in 1999, $304 million in 1998 and $265
million in 1997. Future minimum rental commitments under noncancelable leases
for years ending December 31 are: $111 million in 2000; $99 million in 2001; $86
million in 2002; $62 million in 2003; and $52 million in 2004. For the ensuing
three five-year periods, these commitments decrease from $79 million to $4
million. The minimum rentals over the remaining terms of the leases aggregate to
$43 million.
Contingencies
- -------------
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
divested operations and to facilities or locations that are no longer in
operation. Due to a number of uncertainties, including uncertainty of timing,
the scope of remediation, future technology, regulatory changes and other
factors, it is possible that the ultimate remediation 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, Schlumberger 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 Schlumberger, any liability that might
ensue would not be material in relation to the consolidated liquidity, financial
position or future results of operations.
Segment Information
- -------------------
Schlumberger operates three reportable segments: Oilfield Services (OFS),
Resource Management Services (RMS) and Test & Transactions (T&T).
The Schlumberger OFS segment falls into four clearly defined economic and
geographical areas and is evaluated on the following basis: First, North America
(NAM) is a major self-contained market. Second, Latin America (LAM) comprises
regional markets that share a common dependence on the United States. Third,
Europe is another major self-contained market that includes West Africa and the
CIS, whose economy is increasingly linked to that of Europe. Fourth, Other
Eastern includes the remainder of the Eastern Hemisphere, which consists of many
countries at different stages of economic development that share a common
dependence on the oil and gas industry. Camco is managed as a separate unit
within OFS.
The OFS segment provides virtually all exploration and production services
required during the life of an oil and gas reservoir. Schlumberger believes that
all the products/services are interrelated and expects similar performance from
each. The RMS segment is essentially a global provider of measurement solutions,
products and systems for electricity, gas and water utilities worldwide. The T&T
segment supplies technology products, services and system solutions to the
semiconductor, banking, telecommunications, transportation and health care
industries. The segment consists of Automated Test Equipment, Smart Cards &
Terminals and Omnes. Services and products are described in more detail on pages
1 and 2 of this 10-K report.
43
Financial information for the years ended December 31, 1999, 1998 and 1997, by
segment, is as follows:
(Stated in millions)
----------------------------------------------------------------------------------------------------
Europe/ Other Elims/ Total Elims/
1999 NAM LAM CIS/W. Afr. Eastern Camco Other OFS RMS T&T Other Consolidated
----------------------------------------------------------------------------------------------------
Revenue $1,470 $ 850 $ 1,360 $1,394 $ 749 $ 46 $5,869 $1,375 $1,183 $ (32) $ 8,395
====================================================================================================
Segment Income $ 68 $ 5 $ 67 $ 215 $ 74 $ (27) $ 402 $ 6 $ 30 $ (25) $ 413
Income Tax Expense/(1)/ 35 22 32 45 38 2 174 9 (3) (47) 133
----------------------------------------------------------------------------------------------------
Pretax Segment Income $ 103 $ 27 $ 99 $ 260 $ 112 $ (25) $ 576 $ 15 $ 27 $ (72) $ 546
========================================================================================
Interest Income 228
Interest Expense $ (6) $ (1) $ (1) $ (1) (184)
================= =================
First & Fourth Quarter Charges (120)
------------
Pretax Income $ 470
====================================================================================================
Segment Assets $1,354 $ 884 $ 1,348 $1,217 $ 1,168 $1,434 $7,405 $1,006 $ 989 $ - $ 9,400
Corporate Assets 5,681
------------
Total Assets $ 15,081
====================================================================================================
Depreciation/Amortization $ 193 $ 134 $ 216 $ 217 $ 72 $ 39 $ 871 $ 88 $ 48 $ 14 $ 1,021
====================================================================================================
Capital Expenditures $ 160 $ 118 $ 121 $ 133 $ 107 $ 50 $ 689 $ 49 $ 44 $ 10 $ 792
====================================================================================================
(1) 1999 income tax expense excludes a credit of $8 million
related to the First & Fourth Quarter Charges.
44
(Stated in millions)
----------------------------------------------------------------------------------------------------
Europe/ Other Elims/ Total Elims/
1998 NAM LAM CIS / W. Afr. Eastern Camco Other OFS RMS T&T Other Consolidated
----------------------------------------------------------------------------------------------------
Revenue $2,035 $1,113 $ 1,907 $1,826 $ 896 $ 19 $7,796 $1,465 $1,226 $ 238 $ 10,725
====================================================================================================
Segment Income $ 165 $ 115 $ 211 $ 402 $ 116 $ (55) $ 954 $ 32 $ 55 $ (92) $ 949
Income Tax Expense/(2)/ 93 44 58 92 62 3 352 18 18 (48) 340
----------------------------------------------------------------------------------------------------
Pretax Segment Income $ 258 $ 159 $ 269 $ 494 $ 178 $ (52) $1,306 $ 50 $ 73 $ (140) $ 1,289
========================================================================================
Interest Income 164
Interest Expense $ (9) $ (1) (127)
========= =========
Third Quarter Charge (432)
------------
Pretax Income $ 894
====================================================================================================
Segment Assets $1,094 $ 933 $ 1,523 $1,483 $1,089 $ 967 $7,089 $1,184 $1,069 $ - $ 9,342
Corporate Assets 5,316
Discontinued Operations Assets 1,420
------------
Total Assets $ 16,078
====================================================================================================
Depreciation/Amortization $ 204 $ 113 $ 205 $ 203 $ 75 $ 65 $ 865 $ 87 $ 48 $ 12 $ 1,012
====================================================================================================
Capital Expenditures $ 107 $ 269 $ 342 $ 293 $ 131 $ 179 $1,321 $ 61 $ 53 $ 28 $ 1,463
----------------------------------------------------------------------------------------------------
/(2)/ 1998 income tax expense excludes a credit of $64 million related to the Third Quarter Charge.
(Stated in millions)
----------------------------------------------------------------------------------------------------
Europe/ Other Elims/ Total Elims/
1997 NAM LAM CIS / W. Afr. Eastern Camco Other OFS RMS T&T Other Consolidated
----------------------------------------------------------------------------------------------------
Revenue $2,168 $1,019 $1,863 $1,745 $ 869 $ (10) $7,654 $1,569 $1,066 $ 363 $ 10,652
====================================================================================================
Segment Income $ 265 $ 154 $ 250 $ 384 $ 99 $ (79) $1,073 $ 47 $ 73 $ (129) $ 1,064
Income Tax Expense 113 45 48 83 54 3 346 24 30 (12) 388
----------------------------------------------------------------------------------------------------
Pretax Segment Income $ 378 $ 199 $ 298 $ 467 $ 153 $ (76) $1,419 $ 71 $ 103 $ (141) $ 1,452
========================================================================================
Interest Income 94
Interest Expense $ (5) $ (1) (70)
========= ========= ------------
Pretax Income $ 1,476
====================================================================================================
Segment Assets $1,451 $ 852 $1,370 $1,339 $1,042 $ 843 $6,897 $1,219 $1,088 $ - $ 9,204
Corporate Assets 2,966
Discontinued Operations Assets 1,016
------------
Total Assets $ 13,186
====================================================================================================
Depreciation/Amortization $ 187 $ 92 $ 191 $ 174 $ 62 $ 68 $ 774 $ 93 $ 44 $ 13 $ 924
====================================================================================================
Capital Expenditures $ 280 $ 216 $ 305 $ 313 $ 96 $ 51 $1,261 $ 67 $ 63 $ 13 $ 1,404
----------------------------------------------------------------------------------------------------
Corporate assets largely comprise short-term and long-term investments.
During the three years ended December 31, 1999, no single customer exceeded 10%
of consolidated revenue.
The accounting policies of the segments are the same as those described in
Summary of Accounting Policies.
Oilfield Services' net income eliminations include: certain headquarters
administrative costs which are not allocated geographically, goodwill
amortization, and certain costs maintained at the OFS level.
Nonoperating expenses, such as certain intersegment charges and interest expense
(except as shown above), are not included in segment operating income.
Schlumberger did not have revenue from third-party customers in its country of
domicile during the last three years. In each of the three years, only revenue
in the US exceeded 10% of consolidated revenue. Revenue in the US in 1999, 1998
and 1997 was $2.5 billion, $3.4 billion and $3.5 billion, respectively.
45
Pension and Other Benefit Plans
- -------------------------------
US PENSION PLANS
Schlumberger and its US subsidiary sponsor several defined benefit pension plans
that cover substantially all employees. The benefits are based on years of
service and compensation on a career-average pay basis. These plans are fully
funded with a trustee in respect to past and current service. Charges to expense
are based upon costs computed by independent actuaries. The funding policy is to
annually contribute amounts that are allowable for federal income tax purposes.
These contributions are intended to provide for benefits earned to date and
those expected to be earned in the future.
The assumed discount rate, compensation increases and return on plan assets used
to determine pension expense in 1999 were 7%, 4.5% and 9%, respectively. In
1998, the assumptions were 7.5%, 4.5% and 9%, respectively. In 1997, the
assumptions were 8%, 4.5% and 8.5%, respectively.
Net pension cost in the US for 1999, 1998 and 1997, included the following
components:
(Stated in millions)
1999 1998 1997
---- ---- ----
Service cost-benefits
earned during the period $45 $39 $33
Interest cost on projected
benefit obligation 73 68 61
Expected return on
plan assets (actual
return: 1999-$211;
1998-$167; 1997-$165) (86) (77) (63)
Amortization of
transition asset (2) (2) (2)
Amortization of prior
service cost/other 6 3 4
---- ---- ----
Net pension cost $36 $31 $33
==== ==== ====
Effective January 1, 1998, Schlumberger and its subsidiaries amended their
pension plans to improve retirement benefits for retired employees. The funded
status on December 31, 1997, reflects the amendment.
46
The change in the projected benefit obligation, plan assets and funded status of
the plans on December 31, 1999 and 1998, was as follows:
(Stated in millions)
1999 1998
------ ------
Projected benefit obligation
at beginning of the year $ 1,060 $ 906
Service cost 45 39
Interest cost 73 68
Actuarial (gains) losses (70) 86
Benefits paid (56) (46)
Amendments - 2
Special termination benefits - 9
Other - (4)
------ ------
Project benefit obligation
at end of the year $ 1,052 $ 1,060
------ ------
Plan assets at market value
at beginning of the year $ 1,119 $ 978
Actual return on plan assets 211 167
Employer contribution 2 20
Benefits paid (56) (46)
------ ------
Plan assets at market value
at end of the year $ 1,276 $ 1,119
------ ------
Excess of assets over
projected benefit obligation 224 59
Unrecognized net gain (395) (198)
Unrecognized prior service cost 44 50
Unrecognized net asset
at transition date (2) (4)
------ ------
Pension liability $ (129) $ (93)
====== ======
The assumed discount rate, the rate of compensation increases and the expected
long-term rate of return on plan assets used to determine the projected benefit
obligations were 7.75%, 4.5% and 9%, respectively, in 1999, and 7%, 4.5% and 9%
respectively, in 1998. Plan assets on December 31, 1999, consisted of common
stocks ($843 million), cash or cash equivalents ($152 million), fixed income
investments ($197 million) and other investments ($84 million). Less than 1% of
the plan assets on December 31, 1999, were represented by Schlumberger common
stock.
NON-US PENSION PLANS
Outside the US, subsidiaries of Schlumberger sponsor several defined benefit and
defined contribution plans that cover substantially all employees who are not
covered by statutory plans. For defined benefit plans, charges to expense are
based upon costs computed by independent actuaries. These plans are
substantially fully funded with trustees in respect to past and current service.
For all defined benefit plans, pension expense was $19 million, $17 million and
$15 million in 1999, 1998 and 1997, respectively. The only significant defined
benefit plan is in the UK.
The assumed discount rate, compensation increases and return on plan assets used
to determine pension expense in 1999 were 7%, 4% and 9%, respectively. In 1998,
the
47
assumptions were 7.5%, 5% and 9%, respectively. In 1997, the assumptions were
8%, 5% and 8.5%, respectively.
Net pension cost in the UK plan for 1999, 1998 and 1997 (translated into US
dollars at the average exchange rate for the periods), included the following
components:
(Stated in millions)
1999 1998 1997
------ ----- ----
Service cost-benefits
earned during the period $ 22 $18 $16
Interest cost on projected
benefit obligation 15 18 15
Expected return on
plan assets (actual
return: 1999-$96;
1998-$22; 1997-$28) (33) (30) (25)
Amortization of transition
asset and other (6) (6) (5)
------ ----- ----
Net pension cost $ (2) $ - $ 1
====== ===== ====
The change in the projected benefit obligation, plan assets and funded status of
the plan (translated into US dollars at year-end exchange rates) was as follows:
(Stated in millions)
1999 1998
------ ------
Projected benefit obligation
at beginning of the year $ 229 $ 239
Service cost 22 18
Interest cost 15 18
Actuarial losses (gains) 36 (37)
Benefits paid (12) (9)
------ ------
Projected benefit obligation
at end of the year $ 290 $ 229
------ ------
Plan assets at market value
at beginning of the year $ 366 $ 350
Actual return on plan assets 96 22
Employer contribution 4 3
Benefits paid (12) (9)
Plan assets at market value ------ ------
at end of the year $ 454 $ 366
------ ------
Excess of assets over
projected benefit obligation 164 137
Unrecognized net gain (135) (114)
Unrecognized prior service cost 2 3
Unrecognized net asset
at transition date (3) (4)
------ ------
Pension asset $ 28 $ 22
====== ======
48
The assumed discount rate and rate of compensation increases used to determine
the projected benefit obligation were 6.5% and 4%, respectively, in 1999, and 7%
and 4%, respectively, in 1998; the expected long-term rate of return on plan
assets was 9% in 1999 and 1998. Plan assets consisted of common stocks ($339
million), cash or cash equivalents ($90 million) and fixed income investments
($25 million). None of the plan assets represented Schlumberger common stock.
For defined contribution plans, funding and cost are generally based upon a
predetermined percentage of employee compensation. Charges to expense in 1999,
1998 and 1997, were $24 million, $25 million and $25 million, respectively.
OTHER DEFERRED BENEFITS
In addition to providing pension benefits, Schlumberger and its subsidiaries
have other deferred benefit programs. Expenses for these programs were $73
million, $128 million and $127 million in 1999, 1998 and 1997, respectively.
HEALTH CARE BENEFITS
Schlumberger and its US subsidiary provide health care benefits for certain
active employees. The cost of providing these benefits is recognized as expense
when incurred and aggregated $53 million, $54 million and $46 million in 1999,
1998 and 1997, respectively. Outside the US, such benefits are mostly provided
through government-sponsored programs.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Schlumberger and its US subsidiary provide certain health care benefits to
former employees who have retired under the US pension plans.
The principal actuarial assumptions used to measure costs were a discount rate
of 7% in 1999, 7.5% in 1998 and 8% in 1997. The overall medical cost trend rate
assumption beginning December 31, 1996, was 9% graded to 5% over the next six
years and 5% thereafter. Previously, the overall assumption had been 10% graded
to 6% over the next six years and 6% thereafter.
Net periodic postretirement benefit cost in the US for 1999, 1998 and 1997,
included the following components:
(Stated in millions)
1999 1998 1997
----- ---- ----
Service cost-benefits
earned during the period $ 11 $ 11 $ 9
Interest cost on accumulated
postretirement benefit
obligation 23 22 22
Amortization of unrecognized
net gain and other (3) (6) (6)
----- ---- ----
$ 31 $ 27 $ 25
===== ==== ====
49
The change in accumulated postretirement benefit obligation and funded status on
December 31, 1999 and 1998, was as follows:
(Stated in millions)
1999 1998
---- ----
Accumulated postretirement
benefit obligation
at beginning of the year $354 $313
Service cost 11 11
Interest cost 23 22
Actuarial (gains) losses (52) 18
Benefits paid (16) (11)
Acquisition - 1
---- ----
Accumulated postretirement
benefit obligation
at end of the year 320 354
Unrecognized net gain 124 74
Unrecognized prior service cost 4 5
---- ----
Postretirement benefit
liability on December 31 $448 $433
==== ====
The components of the accumulated postretirement benefit obligation on December
31, 1999 and 1998, were as follows:
(Stated in millions)
1999 1998
---- ----
Retirees $161 $165
Fully eligible 45 48
Actives 114 141
---- ----
$320 $354
==== ====
The assumed discount rate used to determine the accumulated postretirement
benefit obligation was 7.75% for 1999 and 7% for 1998.
If the assumed medical cost trend rate was increased by one percentage point,
health care cost in 1999 would have been $39 million, and the accumulated
postretirement benefit obligation would have been $372 million on December 31,
1999.
If the assumed medical cost trend rate was decreased by one percentage point,
health care cost in 1999 would have been $26 million, and the accumulated
postretirement benefit obligation would have been $278 million on December 31,
1999.
50
Supplementary Information
- -------------------------
Operating revenue and related cost of goods sold and services for continuing
operations comprised the following:
Year ended (Stated in millions)
December 31, 1999 1998 1997
-------- -------- --------
Operating revenue
Sales $ 3,822 $ 4,623 $ 4,703
Services 4,573 6,102 5,949
-------- -------- --------
$ 8,395 $10,725 $10,652
======== ======== ========
Direct operating costs
Goods sold $ 2,461 $ 2,916 $ 2,949
Services 4,288 5,498 4,899
-------- -------- --------
$ 6,749 $ 8,414 $ 7,848
======== ======== ========
Cash paid for interest and income taxes for continuing operations was as
follows:
Year ended (Stated in millions)
December 31, 1999 1998 1997
------ ------ ------
Interest $ 200 $ 128 $ 77
Income taxes $ 182 $ 299 $ 296
Accounts payable and accrued liabilities are summarized as follows:
Year ended (Stated in millions)
December 31, 1999 1998
------- --------
Payroll, vacation and
employee benefits $ 564 $ 582
Trade 663 820
Taxes, other than income 169 176
Other 887 962
------- --------
$ 2,283 $ 2,540
======= ========
Interest and other income includes interest income, principally from short-term
and long-term investments, of $235 million, $167 million and $99 million for
1999, 1998 and 1997, respectively, and in 1999, a gain of $103 million on the
sale of financial instruments.
* Mark of Schlumberger.
+ Microsoft and Windows are trademarks of Microsoft Corporation.
** Rambus is a trademark of Rambus, Inc.
++ Trademark of Alternate Realities Corporation.
*** Trademark of Sun Microsystems, Inc.
51
To the Board of Directors and Stockholders
of Schlumberger Limited
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Schlumberger
Limited and its subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- --------------------------------------
PricewaterhouseCoopers LLP
New York, New York
January 26, 2000
52
QUARTERLY RESULTS (UNAUDITED)
- -----------------------------
The following table summarizes results for each of the four quarters for the
years ended December 31, 1999 and 1998. Gross profit equals operating revenue
less cost of goods sold and services.
(Stated in millions except per share amounts)
Continuing Operations Total
-------------------------------------------------------- -----------------------
Gross Net Earning per share /4/ Net Earnings per share /4/
--------------------- -----------------------
Revenue Profit Income Basic Diluted Income Basic Diluted
------- ------ ------ --------- ------- ------ --------- -----------
Quarters-1999
First /1/ $ 2,177 $ 342 $ 69 $ 0.13 $ 0.12 $ 89 $ 0.16 $ 0.16
Second 2,012 429 91 0.17 0.16 128 0.23 0.23
Third 2,087 469 111 0.20 0.20 139 0.25 0.25
Fourth /2/ 2,179 406 58 0.11 0.10 11 0.02 0.02
------- ------- ------- ------- ------- ------- ------- --------
$ 8,395 $ 1,646 $ 329 $ 0.60 $ 0.58 $ 367 $ 0.67 $ 0.65
======= ======= ======= ======= ======= ======= ======= ========
Quarters-1998
First $ 2,766 $ 758 $ 297 $ 0.55 $ 0.53 $ 378 $ 0.70 $ 0.67
Second 2,807 742 283 0.52 0.50 387 0.71 0.69
Third /3/ 2,642 222 (135) (0.25) (0.24) (29) (0.05) (0.05)
Fourth 2,510 589 173 0.32 0.31 278 0.51 0.50
------- ------- ------- ------- ------- ------- ------- --------
$10,725 $ 2,311 $ 618 $ 1.14 $ 1.10 $ 1,014 1.86 $ 1.81
======= ======= ======= ======= ======= ======= ======= ========
/1/ Includes an after-tax charge of $58 million ($0.10 per share--diluted).
/2/ Includes an after-tax charge of $71 million ($0.13 per share--diluted).
/3/ Includes an after-tax charge of $368 million ($0.65 per share--diluted).
/4/ Due to rounding, the addition of earnings per share by quarter may not
equal total earnings per share for the year.
Item 9 Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosures
-------------------------
NONE
53
PART III
- --------
Item 10 Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
See Part I (commencing on page 5 through page 7) for Item 10 information
regarding Executive Officers of the Registrant. The information with respect to
the remaining portion of Item 10 is set forth in the first section under the
caption, "Election of Directors", in the Company's Proxy Statement dated March
8, 2000 for the April 12, 2000 Annual General Meeting, and is incorporated by
reference.
Item 11 Executive Compensation
- ------- ----------------------
The information set forth under "Executive Compensation" (other than that set
forth under the subcaptions "Corporate Performance Graph" and "Compensation
Committee Report on Executive Compensation") in the Company's Proxy Statement
dated March 8, 2000 is incorporated by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The information with respect to Item 12 is set forth in the Company's Proxy
Statement dated March 8, 2000 under the caption, "Security Ownership of Certain
Beneficial Owners and Management," and such information is incorporated herein
by reference.
Item 13 Certain Relationships and Related Transactions
- ------- ----------------------------------------------
Information regarding this item may be found on page 3, the last two sentences
of footnote 3, in the Company's Proxy Statement dated March 8, 2000 for the
April 12, 2000 Annual General Meeting and is incorporated by reference.
54
PART IV
Item 14 Exhibits Financial Statement Schedules and Reports on Form 8-K
- ------- -------- -----------------------------------------------------
The following documents are filed as part of this report: Page(s)
(1) Financial Statements
Consolidated Statement of Income
for the three years ended December 31, 1999 28
Consolidated Balance Sheet
at December 31, 1999 and 1998 29
Consolidated Statement of Cash Flows
for the three years ended December 31, 1999 30
Consolidated Statement of Stockholders' Equity
for the three years ended December 31, 1999 31
Notes to Consolidated Financial Statements 32 to 51
Report of Independent Accountants 52
Quarterly Results (Unaudited) 53
Financial statements of 20% - 50% owned companies accounted for under the equity
method and unconsolidated subsidiaries have been omitted because they do not
meet the materiality tests for assets or income.
(2) Financial Statement Schedules not required.
(3) The following Exhibits are filed:
Deed of Incorporation
as last amended on April 29, 1997 Exhibit 3
By-Laws
as last amended on October 20, 1993 Exhibit 3
Schlumberger 1994 Stock Option Plan*
as amended on January 5, 1995 Exhibit 10(a)
Schlumberger 1994 Stock Option Plan*
Second Amendment Exhibit 10(b)
Schlumberger 1994 Stock Option Plan*
Third Amendment Exhibit 10(c)
Schlumberger Limited Supplementary Benefit Plan*
as amended on January 1, 1995 Exhibit 10(d)
Schlumberger 1989 Stock Incentive Plan*
as amended Exhibit 10(e)
___________________________
* Compensatory plan required to be filed as an exhibit.
55
Schlumberger 1989 Stock Incentive Plan*
Third Amendment Exhibit 10(f)
Schlumberger Restoration Savings Plan* Exhibit 10(g)
Schlumberger 1998 Stock Option Plan* Exhibit 10(h)
Schlumberger 1998 Stock Option Plan*
First Amendment Exhibit 10(i)
1997 Long-Term Incentive Plan of Camco
International Inc.; Long-Term Incentive Plan
of Camco International Inc. Production Operators
Corp. 1992 Long-Term Incentive Plan;
Camco 1996 Savings Related Share Option
Scheme; Camco International Inc. Amended
and Restated Stock Option Plan for
Nonemployee Directors Exhibit 10(j)
Subsidiaries Exhibit 21
Consent of Independent Accountants Exhibit 23
Powers of Attorney Exhibit 24
(a) Don E. Ackerman - dated 1/14/00
(b) D. Euan Baird - dated 1/17/00
(c) John Deutch - dated 1/19/00
(d) Victor E. Grijalva - dated 1/17/00
(e) Denys Henderson - dated 1/19/00
(f) Andre Levy-Lang - dated 1/18/00
(g) William T. McCormick, Jr. - dated 1/21/00
(h) Didier Primat - dated 1/20/00
(i) Nicolas Seydoux - dated 1/19/00
(j) Linda G. Stuntz - dated 1/18/00
(k) Sven Ullring - dated 1/17/00
(l) Yoshihiko Wakumuto - dated 1/27/00
Financial Data Schedule Exhibit 27
Additional Exhibit:
Form S-8 Undertakings Exhibit 99
One report on Form 8-K, dated December 30, 1999, was filed by the registrant
with the Securities and Exchange Commission.
___________________________
* Compensatory plan required to be filed as an exhibit.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SCHLUMBERGER LIMITED
Date: March 30, 2000 By: /s/ Jack Liu
--------------------------------
Jack Liu
Executive Vice President, Chief Financial
Officer and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title
- -------------------------------- ------------------------------
*
- --------------------------------- Director, Chairman, President and
D. Euan Baird Chief Executive Officer
*
- --------------------------------- Director, Vice Chairman
Victor E. Grijalva
/s/ Jack Liu
- --------------------------------- Executive Vice President, Finance,
Jack Liu Chief Financial Officer, and Chief
Accounting Officer
*
- --------------------------------- Director
Don E. Ackerman
*
- --------------------------------- Director
John Deutch
*
- --------------------------------- Director
Denys Henderson
*
- --------------------------------- Director
Andre Levy-Lang
57
SIGNATURES
Name Title
- --------------------------------- ----------------------------------
*
- --------------------------------- Director
William T. McCormick, Jr.
*
- --------------------------------- Director
Didier Primat
*
- --------------------------------- Director
Nicolas Seydoux
*
- --------------------------------- Director
Linda G. Stuntz
*
- --------------------------------- Director
Sven Ullring
*
- --------------------------------- Director
Yoshihiko Wakumoto
/s/ James L. Gunderson March 30, 2000
- ----------------------------------
* By James L. Gunderson Attorney-in-Fact
58
INDEX TO EXHIBITS
Exhibit Page
Deed of Incorporation as last amended on April 28, 1997 3 -
incorporated by reference to Form 10-Q for the period
ended March 31, 1997
By-Laws as last amended on October 20, 1993, incorporated
by reference to Exhibit 3 to Form 10-K for 1993 3 -
Schlumberger 1994 Stock Option Plan, as amended on January 10(a) -
5, 1995, incorporated by reference to Exhibit 10(a) to
Form 10-K for year 1995
Schlumberger 1994 Stock Option Plan - Second Amendment 10(b) 61
Schlumberger 1994 Stock Option Plan - Third Amendment 10(c) 62
Schlumberger Limited Supplementary Benefit Plan, as 10(d) -
amended, on January 1, 1995, incorporated by reference
to Exhibit 10(b) to Form 10K for 1996
Schlumberger 1989 Stock Incentive Plan, as amended, 10(e) -
incorporated by reference to Exhibit 10(c) to Form
10-K for year 1995
Schlumberger 1989 Stock Incentive Plan - Third Amendment 10(f) 63
Schlumberger Restoration Savings Plan, incorporated by
reference to Exhibit 10(f) to Form 10-K for year 1995 10(g) -
Schlumberger 1998 Stock Option Plan, incorporated by
reference to Exhibit 10(g) to Form 10-K for year 1997 10(h) -
Schlumberger 1998 Stock Option Plan - First Amendment 10(i) 64
1997 Long-Term Incentive Plan of Camco International Inc.; 10(j) -
Long-Term Incentive Plan of Camco International Inc.;
Production Operators Corp. 1992 Long-Term Incentive Plan;
Camco 1996 Savings Related Share Option Scheme;
Camco International Inc. Amended and Restated Stock Option
Plan for Nonemployee Directors; incorporated by reference
to Exhibit 10 to Form S-8 of August 31, 1998
Subsidiaries 21 65
Consent of Independent Accountants 23 66
59
INDEX TO EXHIBITS
Exhibit Page
Powers of Attorney dated:
Don E. Ackerman January 14, 2000 24(a) 67
D. Euan Baird January 17, 2000 24(b) 68
John Deutch January 19, 2000 24(c) 69
Victor E Grijalva January 17, 2000 24(d) 70
Denys Henderson January 19, 2000 24(e) 71
Andre Levy-Lang January 18, 2000 24(f) 72
William T. McCormick, Jr. January 21, 2000 24(g) 73
Didier Primat January 20, 2000 24(h) 74
Nicolas Seydoux January 19, 2000 24(i) 75
Linda G. Stuntz January 18, 2000 24(j) 76
Sven Ullring January 17, 2000 24(k) 77
Yoshihiko Wakumoto January 27, 2000 24(l) 78
Financial Data Schedule
27 79
Additional Exhibits: 99 80
Form S-8 Undertakings
60