Business Context and Reporting Period
Company: Schlumberger Limited (Schlumberger N.V.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Second Quarter and Six Months ended June 30, 1997
Business Overview: A global provider of oilfield services and measurement systems, operating in over 100 countries. The company is organized into two primary segments: Oilfield Services and Measurement & Systems.
Key Financial Metrics
| Metric (in thousands) | Q2 1997 | Q2 1996 | 6 Mo 1997 | 6 Mo 1996 |
|---|---|---|---|---|
| Operating Revenue | $2,601,679 | $2,150,790 | $5,003,739 | $4,178,618 |
| Net Income | $306,506 | $196,718 | $566,449 | $367,585 |
| Diluted EPS | $0.62 | $0.40 | $1.15 | $0.75 |
| Cash & Short-term Investments | $1,442,165 | N/A | N/A | N/A |
| Operating Cash Flow (6 Mo) | N/A | N/A | $621,212 | $422,978 |
| Long-term Debt | $726,068 | N/A | N/A | N/A |
| Current Ratio | 1.58x | N/A | N/A | N/A |
Note: EPS figures are adjusted for a two-for-one stock split on June 2, 1997. Current Ratio calculated as Current Assets ($5,492,470) / Current Liabilities ($3,470,163).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 21% in Q2 1997 and 20% for the six-month period compared to 1996.
- Profitability: Net income surged 56% in Q2 and 54% for the six months. Operating income for Oilfield Services grew 69% in Q2 and 76% for the six months.
- Segment Performance:
- Oilfield Services: Revenue grew 30% (Q2) and 29% (6 Mo), driven by a 17% increase in worldwide rig count and higher dayrates. North America was the primary growth driver.
- Measurement & Systems: Revenue grew 4% (Q2) and 2% (6 Mo). Growth was led by Automatic Test Equipment (ATE) and Electronic Transactions, offsetting declines in Metering.
- Cost Structure: Gross margin improved from 24% to 26%. Research & engineering expenses decreased as a percentage of revenue (4.6% in Q2 vs. 5.3% in 1996).
- Tax Rate: The effective tax rate increased to 20% in Q2 and 22% for the six months, reflecting the recognition of US income tax benefits related to loss carryforwards.
Outlook, Risks, and Contingencies
- Management Commentary: Management attributes growth to strong activity in the Gulf of Mexico, Canada, Latin America, and the North Sea. New technologies (e.g., CMR, MDT, DeepSEA EXPRESS) are gaining market acceptance.
- Legal Contingencies:
- Texas Case (1988 Settlement): A Texas Court of Appeals reinstated a ~$75 million jury award against Schlumberger. The case is pending before the Texas Supreme Court. No provision has been made as management believes the trial court's original exoneration was correct.
- Contract Dispute: A Texas trial court entered a judgment adverse to Schlumberger for $23 million (doubled) plus fees. An appeal has been filed; no provision has been made.
- Environmental: Accruals exist for remediation of past hazardous material use. Management believes potential additional costs will not be material.
- Accounting Changes: The company will adopt FASB Statement No. 128 (Earnings Per Share) in the fourth quarter of 1997, reporting diluted EPS alongside basic EPS.
Investor Verification Checklist
- Stock Split Adjustment: Verify that all per-share data (EPS, dividends) is adjusted for the June 2, 1997, two-for-one split.
- Legal Exposure: Monitor the status of the Texas Supreme Court case regarding the $75 million judgment and the appeal of the $23 million contract dispute.
- Oilfield Cyclicality: Assess the sustainability of the 17% rig count growth and high utilization rates (94% offshore, 87% land) in the current market environment.
- Tax Asset Realization: Confirm the continued realization of the $40 million US net operating loss carryforward and $850 million in temporary differences.
- Cash Flow Quality: Review the $621 million operating cash flow against the $591 million capital expenditure for the six-month period to evaluate free cash flow generation.