slb-10q_20180331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2018

Commission file No.: 1-4601

 

SCHLUMBERGER N.V.

(SCHLUMBERGER LIMITED)

(Exact name of registrant as specified in its charter)

 

 

CURAÇAO

 

52-0684746

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

42 RUE SAINT-DOMINIQUE

 

 

PARIS, FRANCE

 

75007

 

 

 

5599 SAN FELIPE

 

 

HOUSTON, TEXAS, U.S.A.

 

77056

 

 

 

62 BUCKINGHAM GATE

 

 

LONDON, UNITED KINGDOM

 

SW1E 6AJ

 

 

 

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:   (713) 513-2000

Indicate by check mark whether the 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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding at March 31, 2018

COMMON STOCK, $0.01 PAR VALUE PER SHARE

1,385,133,215

 


SCHLUMBERGER LIMITED

First Quarter 2018 Form 10-Q

Table of Contents

 

 

 

 

Page

 PART I

 

Financial Information

 

 

 

 

 

Item 1.

 

Financial Statements

3

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

19

 

 

 

 

Item 4.

 

Controls and Procedures

20

 

 

 

 

 PART II

 

Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

20

 

 

 

 

Item 1A.

 

Risk Factors

20

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

20

 

 

 

 

Item 4.

 

Mine Safety Disclosures

21

 

 

 

 

Item 5.

 

Other Information

21

 

 

 

 

Item 6.

 

Exhibits

22

 

 

 

 

 

 

Certifications

 

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

 

SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

 

 

(Stated in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

 

Revenue

 

 

 

 

 

 

 

Services

$

5,736

 

 

$

4,828

 

Product sales

 

2,093

 

 

 

2,066

 

Total Revenue

 

7,829

 

 

 

6,894

 

Interest & other income

 

42

 

 

 

46

 

Expenses

 

 

 

 

 

 

 

Cost of services

 

4,880

 

 

 

4,181

 

Cost of sales

 

1,922

 

 

 

1,895

 

Research & engineering

 

172

 

 

 

211

 

General & administrative

 

111

 

 

 

98

 

Merger & integration

 

-

 

 

 

82

 

Interest

 

143

 

 

 

139

 

Income before taxes

 

643

 

 

 

334

 

Taxes on income

 

113

 

 

 

50

 

Net income

 

530

 

 

 

284

 

Net income attributable to noncontrolling interests

 

5

 

 

 

5

 

Net income attributable to Schlumberger

$

525

 

 

$

279

 

 

 

 

 

 

 

 

 

Basic earnings per share of Schlumberger

$

0.38

 

 

$

0.20

 

 

 

 

 

 

 

 

 

Diluted earnings per share of Schlumberger

$

0.38

 

 

$

0.20

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

Basic

 

1,385

 

 

 

1,393

 

Assuming dilution

 

1,394

 

 

 

1,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

See Notes to Consolidated Financial Statements

 

 

 

3


SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

 

Net income

$

530

 

 

$

284

 

Currency translation adjustments

 

 

 

 

 

 

 

Unrealized net change arising during the period

 

39

 

 

 

45

 

Marketable securities

 

 

 

 

 

 

 

Unrealized gain (loss) arising during the period

 

19

 

 

 

(4

)

Cash flow hedges

 

 

 

 

 

 

 

Net gain on cash flow hedges

 

5

 

 

 

11

 

Reclassification to net income of net realized gain

 

(3

)

 

 

-

 

Pension and other postretirement benefit plans

 

 

 

 

 

 

 

Amortization to net income of net actuarial loss

 

56

 

 

 

43

 

Amortization to net income of net prior service (credit) cost

 

(1

)

 

 

20

 

Income taxes on pension and other postretirement benefit plans

 

-

 

 

 

(1

)

Comprehensive income

 

645

 

 

 

398

 

Comprehensive income attributable to noncontrolling interests

 

5

 

 

 

5

 

Comprehensive income attributable to Schlumberger

$

640

 

 

$

393

 

 

See Notes to Consolidated Financial Statements

 

 

 

4


SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

Mar. 31,

 

 

 

 

 

 

2018

 

 

Dec. 31,

 

 

(Unaudited)

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

$

1,865

 

 

$

1,799

 

Short-term investments

 

2,300

 

 

 

3,290

 

Receivables less allowance for doubtful accounts (2018 - $235; 2017 - $241)

 

8,472

 

 

 

8,084

 

Inventories

 

4,174

 

 

 

4,046

 

Other current assets

 

1,244

 

 

 

1,278

 

 

 

18,055

 

 

 

18,497

 

Investments in Affiliated Companies

 

1,483

 

 

 

1,519

 

Fixed Assets less accumulated depreciation

 

11,556

 

 

 

11,576

 

Multiclient Seismic Data

 

707

 

 

 

727

 

Goodwill

 

25,120

 

 

 

25,118

 

Intangible Assets

 

9,217

 

 

 

9,354

 

Other Assets

 

5,340

 

 

 

5,196

 

 

$

71,478

 

 

$

71,987

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

9,598

 

 

$

10,036

 

Estimated liability for taxes on income

 

1,311

 

 

 

1,223

 

Short-term borrowings and current portion of long-term debt

 

4,586

 

 

 

3,324

 

Dividends payable

 

700

 

 

 

699

 

 

 

16,195

 

 

 

15,282

 

Long-term Debt

 

13,526

 

 

 

14,875

 

Postretirement Benefits

 

1,027

 

 

 

1,082

 

Deferred Taxes

 

1,579

 

 

 

1,650

 

Other Liabilities

 

1,825

 

 

 

1,837

 

 

 

34,152

 

 

 

34,726

 

Equity

 

 

 

 

 

 

 

Common stock

 

12,998

 

 

 

12,975

 

Treasury stock

 

(3,937

)

 

 

(4,049

)

Retained earnings

 

32,022

 

 

 

32,190

 

Accumulated other comprehensive loss

 

(4,159

)

 

 

(4,274

)

Schlumberger stockholders' equity

 

36,924

 

 

 

36,842

 

Noncontrolling interests

 

402

 

 

 

419

 

 

 

37,326

 

 

 

37,261

 

 

$

71,478

 

 

$

71,987

 

 

See Notes to Consolidated Financial Statements

 

 

 

5


SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

530

 

 

$

284

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

Merger & integration charges

 

-

 

 

 

82

 

Depreciation and amortization (1)

 

874

 

 

 

989

 

Pension and other postretirement benefits expense

 

18

 

 

 

37

 

Stock-based compensation expense

 

90

 

 

 

88

 

Pension and other postretirement benefits funding

 

(39

)

 

 

(29

)

Earnings of equity method investments, less dividends received

 

(5

)

 

 

(10

)

Change in assets and liabilities: (2)

 

 

 

 

 

 

 

(Increase) decrease in receivables

 

(152

)

 

 

58

 

Increase in inventories

 

(81

)

 

 

(33

)

Increase in other current assets

 

(48

)

 

 

(115

)

Increase in other assets

 

(70

)

 

 

(56

)

Decrease in accounts payable and accrued liabilities

 

(600

)

 

 

(670

)

Increase (decrease) in estimated liability for taxes on income

 

45

 

 

 

(31

)

Decrease in other liabilities

 

(7

)

 

 

(28

)

Other

 

13

 

 

 

90

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

568

 

 

 

656

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(454

)

 

 

(381

)

SPM investments

 

(240

)

 

 

(144

)

Multiclient seismic data costs capitalized

 

(26

)

 

 

(116

)

Business acquisitions and investments, net of cash acquired

 

(13

)

 

 

(273

)

Sale of investments, net

 

980

 

 

 

883

 

Other

 

35

 

 

 

(24

)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

282

 

 

 

(55

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(692

)

 

 

(696

)

Proceeds from employee stock purchase plan

 

107

 

 

 

96

 

Proceeds from exercise of stock options

 

20

 

 

 

39

 

Stock repurchase program

 

(97

)

 

 

(372

)

Proceeds from issuance of long-term debt

 

12

 

 

 

334

 

Repayment of long-term debt

 

(51

)

 

 

(1

)

Net decrease in short-term borrowings

 

(105

)

 

 

(1,015

)

Other

 

19

 

 

 

(22

)

NET CASH USED IN FINANCING ACTIVITIES

 

(787

)

 

 

(1,637

)

Net increase (decrease) in cash before translation effect

 

63

 

 

 

(1,036

)

Translation effect on cash

 

3

 

 

 

9

 

Cash, beginning of period

 

1,799

 

 

 

2,929

 

Cash, end of period

$

1,865

 

 

$

1,902

 

 

 

(1) Includes depreciation of property, plant and equipment and amortization of intangible assets, multiclient seismic data costs and SPM investments.  

(2) Net of the effect of business acquisitions.

 

See Notes to Consolidated Financial Statements

 

 

 

6


SCHLUMBERGER LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Retained

 

 

Comprehensive

 

 

Noncontrolling

 

 

 

 

 

January 1, 2018 – March 31, 2018

Issued

 

 

In Treasury

 

 

Earnings

 

 

Loss

 

 

Interests

 

 

Total

 

Balance, January 1, 2018

$

12,975

 

 

$

(4,049

)

 

$

32,190

 

 

$

(4,274

)

 

$

419

 

 

$

37,261

 

Net income

 

 

 

 

 

 

 

 

 

525

 

 

 

 

 

 

 

5

 

 

 

530

 

Currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

5

 

 

 

44

 

Changes in unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

 

19

 

Changes in fair value of cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

2

 

Pension and other postretirement benefit plans

 

 

 

 

 

 

 

 

 

 

 

 

 

55

 

 

 

 

 

 

 

55

 

Shares sold to optionees, less shares exchanged

 

(20

)

 

 

40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

Vesting of restricted stock

 

(29

)

 

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Shares issued under employee stock purchase plan

 

(33

)

 

 

140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107

 

Stock repurchase program

 

 

 

 

 

(97

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(97

)

Stock-based compensation expense

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90

 

Dividends declared ($0.50 per share)

 

 

 

 

 

 

 

 

 

(693

)

 

 

 

 

 

 

 

 

 

 

(693

)

Other

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

 

(12

)

Balance, March 31, 2018

$

12,998

 

 

$

(3,937

)

 

$

32,022

 

 

$

(4,159

)

 

$

402

 

 

$

37,326

 

 

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Retained

 

 

Comprehensive

 

 

Noncontrolling

 

 

 

 

 

January 1, 2017 – March 31, 2017

Issued

 

 

In Treasury

 

 

Earnings

 

 

Loss

 

 

Interests

 

 

Total

 

Balance, January 1, 2017

$

12,801

 

 

$

(3,550

)

 

$

36,470

 

 

$

(4,643

)

 

$

451

 

 

$

41,529

 

Net income

 

 

 

 

 

 

 

 

 

279

 

 

 

 

 

 

 

5

 

 

 

284

 

Currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

 

 

 

 

45

 

Changes in unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

(4

)

Changes in fair value of cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

11

 

Pension and other postretirement benefit plans

 

 

 

 

 

 

 

 

 

 

 

 

 

62

 

 

 

 

 

 

 

62

 

Shares sold to optionees, less shares exchanged

 

(29

)

 

 

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

Vesting of restricted stock

 

(49

)

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Shares issued under employee stock purchase plan

 

(12

)

 

 

108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96

 

Stock repurchase program

 

 

 

 

 

(372

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(372

)

Stock-based compensation expense

 

88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

88

 

Dividends declared ($0.50 per share)

 

 

 

 

 

 

 

 

 

(697

)

 

 

 

 

 

 

 

 

 

 

(697

)

Other

 

(19

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

(27

)

Balance, March 31, 2017

$

12,780

 

 

$

(3,697

)

 

$

36,052

 

 

$

(4,529

)

 

$

448

 

 

$

41,054

 

 

SHARES OF COMMON STOCK

(Unaudited)

 

 

 

 

 

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Issued

 

 

In Treasury

 

 

Outstanding

 

Balance, January 1, 2018

 

1,434

 

 

 

(50

)

 

 

1,384

 

Shares issued under employee stock purchase plan

 

-

 

 

 

2

 

 

 

2

 

Stock repurchase program

 

-

 

 

 

(1

)

 

 

(1

)

Balance, March 31, 2018

 

1,434

 

 

 

(49

)

 

 

1,385

 

 

See Notes to Consolidated Financial Statements

 

 

7


SCHLUMBERGER LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.    Basis of Presentation

The accompanying unaudited consolidated financial statements of Schlumberger Limited and its subsidiaries (Schlumberger) have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of Schlumberger management, all adjustments considered necessary for a fair statement have been included in the accompanying unaudited financial statements.  All intercompany transactions and balances have been eliminated in consolidation.  Operating results for the three-month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018.  The December 31, 2017 balance sheet information has been derived from the Schlumberger 2017 audited financial statements.  For further information, refer to the Consolidated Financial Statements and notes thereto included in the Schlumberger Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on January 24, 2018.  

Recently Adopted Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers.  This ASU amended the existing accounting standards for revenue recognition and requires companies to recognize revenue when control of the promised goods or services is transferred to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services.  Schlumberger adopted this ASU on January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018.   Prior period amounts have not been adjusted and continue to be reflected in accordance with Schlumberger’s historical accounting.  The adoption of this ASU did not have a material impact on Schlumberger’s Consolidated Financial Statements.  

Schlumberger recognizes revenue upon the transfer of control of promised products or services to customers at an amount that reflects the consideration it expects to receive in exchange for these products or services.  The vast majority of Schlumberger’s services and product offerings are short-term in nature.  The time between invoicing and when payment is due under these arrangements is generally 30 to 60 days.

Revenue is occasionally generated from contractual arrangements that include multiple performance obligations.  Revenue from these arrangements is allocated to each performance obligation based on its relative standalone selling price.  Standalone selling prices are generally based on the prices charged to customers or using expected costs plus margin.

Revenue is recognized for certain long-term construction-type contracts over time.  These contracts involve significant design and engineering efforts in order to satisfy custom designs for customer-specific applications.  Revenue is recognized as work progresses on each contract.  Progress is measured by the ratio of actual costs incurred to date on the project in relation to total estimated project costs.  The estimate of total project costs has a significant impact on both the amount of revenue recognized as well as the related profit on a project.  Revenue and profits on contracts can also be significantly affected by change orders and claims.  Due to the nature of these projects, adjustments to estimates of contract revenue and total contract costs may be required as work progresses.  Progress billings are generally issued upon completion of certain phases of work as stipulated in the contract.  Any expected losses on a project are recorded in full in the period in which they became probable.

Revenue in excess of billings related to contracts where revenue is recognized over time was $0.3 billion at both March 31, 2018 and December 31, 2017.  Such amounts are included within Receivables less allowance for doubtful accounts in the Consolidated Balance Sheet.

Due to the nature of its business Schlumberger does not have significant backlog.  Total backlog was $2.8 billion at March 31, 2018, of which approximately 50% is expected to be recognized as revenue over the next 12 months.

Billings and cash collections in excess of revenue was $0.9 billion at March 31, 2018 and $0.8 billion at December 31, 2017.  Such amounts are included within Accounts payable and accrued liabilities in the Consolidated Balance Sheet.

Recently Issued Accounting Pronouncement

In February 2016, the FASB issued ASU No. 2016-02, Leases.  This ASU requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases, with the exception of short-term leases.  This ASU is effective for Schlumberger on

8


January 1, 2019, with early adoption permitted.  Based on its current lease portfolio, Schlumberger estimates that the adoption of this ASU will result in approximately $1.3 billion of additional assets and liabilities being reflected on its Consolidated Balance Sheet.

2.   Charges and Credits

2018

There were no charges or credits recorded during the first quarter of 2018.

2017

In connection with Schlumberger’s acquisition of Cameron International Corporation (“Cameron”), Schlumberger recorded $82 million of charges during the first quarter of 2017 relating to employee benefits, facility closures and other merger and integration-related costs.  These charges are classified in Merger & integration in the Consolidated Statement of Income.

On December 22, 2017, the US enacted the Tax Cuts and Jobs Act (the “Act”).  The Act, which is also commonly referred to as “US tax reform”, significantly changes US corporate income tax laws by, among other things, reducing the US corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of US subsidiaries.  As a result, Schlumberger recorded a net charge of $76 million during the fourth quarter of 2017.  This amount consisted of two components: (i) a $410 million charge relating to the one-time mandatory tax on previously deferred earnings of certain non-US subsidiaries that are owned either wholly or partially by a US subsidiary of Schlumberger, and (ii) a $334 million credit resulting from the remeasurement of Schlumberger’s net deferred tax liabilities in the US based on the new lower corporate income tax rate.

Although the $76 million net charge represents a reasonable estimate of the impact of the income tax effects of the Act on Schlumberger’s Consolidated Financial Statements as of December 31, 2017, it should be considered provisional. Once Schlumberger finalizes certain tax positions when it files its 2017 US tax return, it will be able to conclude whether any further adjustments are required. Any adjustments to these provisional amounts will be reported as a component of Taxes on income in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.

3.   Earnings Per Share

The following is a reconciliation from basic earnings per share of Schlumberger to diluted earnings per share of Schlumberger:

 

(Stated in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Schlumberger Net Income

 

 

Average

Shares

Outstanding

 

 

Earnings per Share

 

 

Schlumberger Net Income

 

 

Average

Shares

Outstanding

 

 

Earnings per Share

 

First Quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

525

 

 

 

1,385

 

 

$

0.38

 

 

$

279

 

 

 

1,393

 

 

$

0.20

 

Assumed exercise of stock options

 

-

 

 

 

1

 

 

 

 

 

 

 

-

 

 

 

4

 

 

 

 

 

Unvested restricted stock

 

-

 

 

 

8

 

 

 

 

 

 

 

-

 

 

 

5

 

 

 

 

 

Diluted

$

525

 

 

 

1,394

 

 

$

0.38

 

 

$

279

 

 

 

1,402

 

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The number of outstanding options to purchase shares of Schlumberger common stock that were not included in the computation of diluted earnings per share, because to do so would have had an antidilutive effect, was as follows:

 

(Stated in millions)

 

 

 

 

 

 

 

 

2018

 

 

2017

 

First Quarter

 

39

 

 

 

23

 

9


 

4.   Inventories

A summary of inventories, which are stated at the lower of average cost or net realizable value, follows:  

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

Mar. 31,

 

 

Dec. 31,

 

 

2018

 

 

2017

 

Raw materials & field materials

$

1,910

 

 

$

1,846

 

Work in progress

 

556

 

 

 

503

 

Finished goods

 

1,708

 

 

 

1,697

 

 

$

4,174

 

 

$

4,046

 

 

 

5.   Fixed Assets

A summary of fixed assets follows:

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

Mar. 31,

 

 

Dec. 31,

 

 

2018

 

 

2017

 

Property, plant & equipment

$

38,104

 

 

$

37,813

 

Less: Accumulated depreciation

 

26,548

 

 

 

26,237

 

 

$

11,556

 

 

$

11,576

 

 

Depreciation expense relating to fixed assets was $523 million and $613 million in first quarter of 2018 and 2017, respectively.

6.   Multiclient Seismic Data

The change in the carrying amount of multiclient seismic data for the three months ended March 31, 2018 was as follows:

 

(Stated in millions)

 

 

 

 

 

Balance at December 31, 2017

$

727

 

Capitalized in period

 

26

 

Charged to expense

 

(46

)

Balance at March 31, 2018

$

707

 

 

7.   Intangible Assets

The gross book value, accumulated amortization and net book value of intangible assets were as follows:

 

 

(Stated in millions)

 

 

 

 

 

Mar. 31, 2018

 

 

Dec. 31, 2017

 

 

Gross

 

 

Accumulated

 

 

Net Book

 

 

Gross

 

 

Accumulated

 

 

Net Book

 

 

Book Value

 

 

Amortization

 

 

Value

 

 

Book Value

 

 

Amortization

 

 

Value

 

Customer relationships

$

4,833

 

 

$

1,079

 

 

$

3,754

 

 

$

4,832

 

 

$

1,020

 

 

$

3,812

 

Technology/technical know-how

 

3,619

 

 

 

1,127

 

 

 

2,492

 

 

 

3,634

 

 

 

1,078

 

 

 

2,556

 

Tradenames

 

2,806

 

 

 

558

 

 

 

2,248

 

 

 

2,806

 

 

 

533

 

 

 

2,273

 

Other

 

1,326

 

 

 

603

 

 

 

723

 

 

 

1,295

 

 

 

582

 

 

 

713

 

 

$

12,584

 

 

$

3,367

 

 

$

9,217

 

 

$

12,567

 

 

$

3,213

 

 

$

9,354

 

 

10


Amortization expense charged to income was $165 million during the first quarter of 2018 and $169 million during the fist quarter of 2017.

Based on the net book value of intangible assets at March 31, 2018, amortization charged to income for the subsequent five years is estimated to be: remaining three quarters of 2018—$519 million; 2019—$672 million; 2020—$640 million; 2021—$617 million; 2022—$607 million; and 2023—$594 million.

 

8.   Long-term Debt

A summary of Long-term Debt follows:

 

(Stated in millions)

 

  

 

 

 

 

 

 

 

 

Mar. 31,

 

 

Dec. 31,

 

 

2018

 

 

2017

 

4.00% Senior Notes due 2025

$

1,742

 

 

$

1,741

 

3.30% Senior Notes due 2021

 

1,595

 

 

 

1,595

 

3.00% Senior Notes due 2020

 

1,594

 

 

 

1,593

 

3.65% Senior Notes due 2023

 

1,492

 

 

 

1,492

 

4.20% Senior Notes due 2021

 

1,100

 

 

 

1,100

 

2.40% Senior Notes due 2022

 

997

 

 

 

996

 

3.63% Senior Notes due 2022

 

846

 

 

 

846

 

2.65% Senior Notes due 2022

 

598

 

 

 

598

 

2.20% Senior Notes due 2020

 

498

 

 

 

498

 

7.00% Notes due 2038

 

212

 

 

 

212

 

4.50% Notes due 2021

 

134

 

 

 

135

 

5.95% Notes due 2041

 

115

 

 

 

115

 

3.60% Notes due 2022

 

109

 

 

 

110

 

5.13% Notes due 2043

 

99

 

 

 

99

 

4.00% Notes due 2023

 

82

 

 

 

82

 

3.70% Notes due 2024

 

56

 

 

 

56

 

0.63% Guaranteed Notes due 2019

 

-

 

 

 

712

 

1.50% Guaranteed Notes due 2019

 

-

 

 

 

603

 

Commercial paper borrowings

 

1,700

 

 

 

1,694

 

Other

 

557

 

 

 

598

 

 

$

13,526

 

 

$

14,875

 

 

The estimated fair value of Schlumberger’s Long-term Debt, based on quoted market prices at March 31, 2018 and December 31, 2017 was $13.6 billion and $15.2 billion, respectively.

Borrowings under Schlumberger’s commercial paper programs at both March 31, 2018 and December 31, 2017 were $3.0 billion, of which $1.3 billion was classified in Short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheet.  

 

9.   Derivative Instruments and Hedging Activities

Schlumberger is exposed to market risks related to fluctuations in foreign currency exchange rates and interest rates.  To mitigate these risks, Schlumberger utilizes derivative instruments.  Schlumberger does not enter into derivative transactions for speculative purposes.

Interest Rate Risk

Schlumberger is subject to interest rate risk on its debt and its investment portfolio.  Schlumberger maintains an interest rate risk management strategy that uses a mix of variable and fixed rate debt combined with its investment portfolio, and occasionally interest rate swaps, to mitigate the exposure to changes in interest rates.

During 2013, Schlumberger entered into a cross-currency swap for a notional amount of €0.5 billion in order to hedge changes in the fair value of Schlumberger’s €0.5 billion 1.50% Guaranteed Notes due 2019.  Under the terms of this swap, Schlumberger will receive

11


interest at a fixed rate of 1.50% on the euro notional amount and pay interest at a floating rate of three-month LIBOR plus approximately 64 basis points on the US dollar notional amount.

This cross-currency swap is designated as a fair value hedge of the underlying debt and is marked to market, with gains and losses recognized immediately in income to largely offset the effects on changes in the fair value of the hedged debt.  

During 2017, a Canadian dollar functional currency subsidiary of Schlumberger issued $1.1 billion of US dollar denominated debt.  Schlumberger entered into cross-currency swaps for an aggregate notional amount of $1.1 billion in order to hedge changes in the fair value of its $0.5 billion 2.20% Senior Notes due 2020 and its $0.6 billion 2.65% Senior Notes due 2022. These cross-currency swaps effectively convert the US dollar notes to Canadian dollar denominated debt with fixed annual interest rates of 1.97% and 2.52%, respectively.

These cross-currency swaps are designated as cash flow hedges. The changes in the fair values of the hedges are recorded on the Consolidated Balance Sheet and in Accumulated Other Comprehensive Loss. Amounts recorded in Accumulated Other Comprehensive Loss are reclassified to earnings in the same periods that the underlying hedged item affects net income.

At March 31, 2018, Schlumberger had fixed rate debt aggregating $13.6 billion and variable rate debt aggregating $4.5 billion, after taking into account the effect of interest rate swaps.

Short-term investments were $2.3 billion at March 31, 2018.  The carrying value of these investments approximated fair value.

Foreign Currency Exchange Rate Risk

As a multinational company, Schlumberger conducts its business in over 85 countries. Schlumberger’s functional currency is primarily the US dollar.  However, outside the United States, a significant portion of Schlumberger’s expenses is incurred in foreign currencies.  Therefore, when the US dollar weakens (strengthens) in relation to the foreign currencies of the countries in which Schlumberger conducts business, the US dollar-reported expenses will increase (decrease).  

Schlumberger is exposed to risks on future cash flows to the extent that the local currency is not the functional currency and expenses denominated in local currency are not equal to revenues denominated in local currency.  Schlumberger is also exposed to risks on future cash flows relating to certain of its fixed rate debt denominated in currencies other than the functional currency.  Schlumberger uses foreign currency forward contracts to provide a hedge against a portion of these cash flow risks.  These contracts are accounted for as cash flow hedges, with the changes in the fair value of the hedge recorded on the Consolidated Balance Sheet and in Accumulated Other Comprehensive Loss.  Amounts recorded in Accumulated Other Comprehensive Loss are reclassified into earnings in the same period or periods that the hedged item is recognized in earnings.  

At March 31, 2018, Schlumberger recognized a cumulative net $5 million gain in Accumulated other comprehensive loss relating to revaluation of foreign currency forward contracts designated as cash flow hedges, the majority of which is expected to be reclassified into earnings within the next 12 months.

At March 31, 2018, contracts were outstanding for the US dollar equivalent of $5.0 billion in various foreign currencies, of which $1.8 billion relates to hedges of debt denominated in currencies other than the functional currency.

12


The effect of derivative instruments designated as fair value and cash flow hedges, and those not designated as hedges, on the Consolidated Statement of Income was as follows:

 

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain Recognized in Income

 

 

 

 

First Quarter

 

 

 

 

2018

 

 

2017

 

 

Consolidated Statement of Income Classification

Derivatives designated as fair value hedges:

 

 

 

 

 

 

 

 

 

Cross currency swap

$

27

 

 

$

18

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

$

4

 

 

$

-

 

 

Cost of services/sales

Cross currency swap

 

19

 

 

 

-

 

 

Interest expense

 

$

23

 

 

$

-

 

 

 

Derivatives not designated as hedges:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

$

28

 

 

$

6

 

 

Cost of services/sales

 

10.   Contingencies

Schlumberger and its subsidiaries are party to various legal proceedings from time to time.  A liability is accrued when a loss is both probable and can be reasonably estimated.  Management believes that the probability of a material loss with respect to any currently pending legal proceeding is remote.  However, litigation is inherently uncertain and it is not possible to predict the ultimate disposition of any of these proceedings.  

11.   Segment Information

 

  

 

 

 

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter 2018

 

 

First Quarter 2017

 

 

 

 

 

 

Income

 

 

 

 

 

 

Income

 

 

 

 

 

 

Before

 

 

 

 

 

 

Before

 

 

Revenue

 

 

Taxes

 

 

Revenue

 

 

Taxes

 

Reservoir Characterization

$

1,556

 

 

$

307

 

 

$

1,618

 

 

$

281

 

Drilling

 

2,126

 

 

 

293

 

 

 

1,985

 

 

 

229

 

Production

 

2,959

 

 

 

216

 

 

 

2,187

 

 

 

110

 

Cameron

 

1,310

 

 

 

166

 

 

 

1,229

 

 

 

162

 

Eliminations & other

 

(122

)

 

 

(8

)

 

 

(125

)

 

 

(25

)

Pretax operating income

 

 

 

 

 

974

 

 

 

 

 

 

 

757

 

Corporate & other (1)

 

 

 

 

 

(225

)

 

 

 

 

 

 

(239

)

Interest income (2)

 

 

 

 

 

25

 

 

 

 

 

 

 

24

 

Interest expense (3)

 

 

 

 

 

(131

)

 

 

 

 

 

 

(126

)

Charges and credits (4)

 

 

 

 

 

-

 

 

 

 

 

 

 

(82

)

 

$

7,829

 

 

$

643

 

 

$

6,894

 

 

$

334

 

 

 

(1) Comprised principally of certain corporate expenses not allocated to the segments, stock-based compensation costs, amortization expense associated with certain intangible assets, certain centrally managed initiatives and other nonoperating items.  

(2)  Interest income excludes amounts which are included in the segments’ income ($3 million in 2018; $5 million in 2017).

(3)   Interest expense excludes amounts which are included in the segments’ income ($12 million in 2018; $13 million in 2017).

(4)   See Note 2 – Charges and Credits.

 

13


Revenue by geographic area was as follows:

 

 

 

 

 

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

2018

 

 

2017

 

North America

$

2,835

 

 

$

1,871

 

Latin America

 

870

 

 

 

952

 

Europe/CIS/Africa

 

1,704

 

 

 

1,652

 

Middle East & Asia

 

2,309

 

 

 

2,318

 

Eliminations & other

 

111

 

 

 

101

 

 

$

7,829

 

 

$

6,894

 

 

North America and International revenue disaggregated by Group was as follows:

 

 

 

 

 

 

 

 

 

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter 2018

 

 

North

 

 

 

 

 

 

Eliminations

 

 

 

 

 

 

America

 

 

International

 

 

& other

 

 

Total

 

Reservoir Characterization

$

222

 

 

$

1,197

 

 

$

137

 

 

$

1,556

 

Drilling

 

564

 

 

 

1,513

 

 

 

49

 

 

 

2,126

 

Production

 

1,500

 

 

 

1,458

 

 

 

1

 

 

 

2,959

 

Cameron

 

550

 

 

 

736

 

 

 

24

 

 

 

1,310

 

Other

 

(1

)

 

 

(21

)

 

 

(100

)

 

 

(122

)

 

$

2,835

 

 

$

4,883

 

 

$

111

 

 

$

7,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter 2017

 

 

North

 

 

 

 

 

 

Eliminations

 

 

 

 

 

 

America

 

 

International

 

 

& other

 

 

Total

 

Reservoir Characterization

$

231

 

 

$

1,267

 

 

$

120

 

 

$

1,618

 

Drilling

 

455

 

 

 

1,468

 

 

 

62

 

 

 

1,985

 

Production

 

739

 

 

 

1,451

 

 

 

(3

)

 

 

2,187

 

Cameron

 

444

 

 

 

792

 

 

 

(7

)

 

 

1,229

 

Other

 

2

 

 

 

(56

)

 

 

(71

)

 

 

(125

)

 

$

1,871

 

 

$

4,922

 

 

$

101

 

 

$

6,894

 

 

12.   Pension and Other Postretirement Benefit Plans

Net pension cost for the Schlumberger pension plans included the following components:

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

 

2018

 

 

2017

 

 

 

US

 

 

Int'l

 

 

US

 

 

Int'l

 

 

Service cost

$

16

 

 

$

32

 

 

$

15

 

 

$

29

 

 

Interest cost

 

43

 

 

 

77

 

 

 

44

 

 

 

78

 

 

Expected return on plan assets

 

(62

)

 

 

(147

)

 

 

(60

)

 

 

(136

)

 

Amortization of prior service cost

 

3

 

 

 

3

 

 

 

3

 

 

 

24

 

 

Amortization of net loss

 

12

 

 

 

44

 

 

 

10

 

 

 

33

 

 

 

$

12

 

 

$

9

 

 

$

12

 

 

$

28

 

 

14


 

The net periodic benefit credit for the Schlumberger US postretirement medical plan included the following components:

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

2018

 

 

2017

 

Service cost

$

8

 

 

$

8

 

Interest cost

 

11

 

 

 

11

 

Expected return on plan assets

 

(15

)

 

 

(15

)

Amortization of prior service credit

 

(7

)

 

 

(7

)

 

$

(3

)

 

$

(3

)

 

13. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following:

 

  

(Stated in millions)

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and

 

 

 

 

 

 

Currency

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Translation

 

 

Marketable

 

 

Cash Flow

 

 

Postretirement

 

 

 

 

 

 

Adjustments

 

 

Securities

 

 

Hedges

 

 

Benefit Plans

 

 

Total

 

Balance, January 1, 2018

$

(2,139

)

 

$

13

 

 

$

3

 

 

$

(2,151

)

 

$

(4,274

)

Other comprehensive gain before reclassifications

 

39

 

 

 

19

 

 

 

5

 

 

 

-

 

 

 

63

 

Amounts reclassified from accumulated other comprehensive loss

 

-

 

 

 

-

 

 

 

(3

)

 

 

55

 

 

 

52

 

Net other comprehensive income

 

39

 

 

 

19

 

 

 

2

 

 

 

55

 

 

 

115

 

Balance, March 31, 2018

$

(2,100

)

 

$

32

 

 

$

5

 

 

$

(2,096

)

 

$

(4,159

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and

 

 

 

 

 

 

Currency

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Translation

 

 

Marketable

 

 

Cash Flow

 

 

Postretirement

 

 

 

 

 

 

Adjustments

 

 

Securities

 

 

Hedges

 

 

Benefit Plans

 

 

Total

 

Balance, January 1, 2017

$

(2,136

)

 

$

21

 

 

$

(19

)

 

$

(2,509

)

 

$

(4,643

)

Other comprehensive gain (loss) before reclassifications

 

45

 

 

 

(4

)

 

 

11

 

 

 

-

 

 

 

52

 

Amounts reclassified from accumulated other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

63

 

 

 

63

 

Income taxes

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(1

)

Net other comprehensive income

 

45

 

 

 

(4

)

 

 

11

 

 

 

62

 

 

 

114

 

Balance, March 31, 2017

$

(2,091

)

 

$

17

 

 

$

(8

)

 

$

(2,447

)

 

$

(4,529

)

 

 

 

15


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

First Quarter 2018 Compared to First Quarter 2017

  

 

 

 

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter 2018

 

 

First Quarter 2017

 

 

 

 

 

 

Income

 

 

 

 

 

 

Income

 

 

 

 

 

 

Before

 

 

 

 

 

 

Before

 

 

Revenue

 

 

Taxes

 

 

Revenue

 

 

Taxes

 

Reservoir Characterization

$

1,556

 

 

$

307

 

 

$

1,618

 

 

$

281

 

Drilling

 

2,126

 

 

 

293

 

 

 

1,985

 

 

 

229

 

Production

 

2,959

 

 

 

216

 

 

 

2,187

 

 

 

110

 

Cameron

 

1,310

 

 

 

166

 

 

 

1,229

 

 

 

162

 

Eliminations & other

 

(122

)

 

 

(8

)

 

 

(125

)

 

 

(25

)

Pretax operating income

 

 

 

 

 

974

 

 

 

 

 

 

 

757

 

Corporate & other (1)

 

 

 

 

 

(225

)

 

 

 

 

 

 

(239

)

Interest income (2)

 

 

 

 

 

25

 

 

 

 

 

 

 

24

 

Interest expense (3)

 

 

 

 

 

(131

)

 

 

 

 

 

 

(126

)

Charges and credits (4)

 

 

 

 

 

-

 

 

 

 

 

 

 

(82

)

 

$

7,829

 

 

$

643

 

 

$

6,894

 

 

$

334

 

 

(1) Comprised principally of certain corporate expenses not allocated to the segments, stock-based compensation costs, amortization expense associated with certain intangible assets, certain centrally managed initiatives and other nonoperating items.

(2) Interest income excludes amounts which are included in the segments’ income ($3 million in 2018; $5 million in 2017).

(3)  Interest expense excludes amounts which are included in the segments’ income ($12 million in 2018; $13 million in 2017).

(4)  Charges and credits are described in detail in Note 2 to the Consolidated Financial Statements.

First-quarter 2018 revenue of $7.8 billion increased 14% year-on-year as the global rig count increased by the same percentage. The North America land rig count increased by 21% year-on-year, while the international rig count was up 8%. Production Group revenue increased 35% while Drilling Group revenue increased by 7%, both driven by strong land activity in North America. Cameron Group revenue increased by 7%, while Reservoir Characterization Group revenue declined 4%.

First-quarter 2018 pretax operating margin increased 145 basis points (“bps”) year-on-year to 12%, as a result of improved profitability in North America due to the land activity growth that benefited the Production and Drilling Groups.  As a result, Production Group pretax operating margin expanded 227 bps to 7% and the Drilling Group increased 222 bps to 14%.  Reservoir Characterization Group pretax operating margin increased 240 bps to 20% while the Cameron Group was essentially flat at 13%.

Reservoir Characterization Group

First-quarter 2018 revenue of $1.6 billion decreased 4% year-on-year primarily due to lower revenue on a long-term surface facility project in the Middle East.

Year-on-year, pretax operating margin increased 240 bps to 20% due to improved profitability for WesternGeco primarily as a result of a favorable mix of multiclient seismic license sales as well as reduced amortization following the multiclient impairment charge recorded during the fourth quarter of 2017.  

Drilling Group

First-quarter 2018 revenue of $2.1 billion increased 7% year-on-year primarily due to higher demand for directional drilling technologies on land in both North America and Russia.

 

Year-on-year, pretax operating margin increased 222 bps to 14% primarily due to improved profitability in North America due to the increased land activity and improved pricing.

 

 

16


Production Group

First-quarter 2018 revenue of $3.0 billion increased 35% year-on-year primarily due to the significant land activity growth in North America that benefited the hydraulic fracturing business.

Year-on-year, pretax operating margin increased 227 bps to 7% as a result of improved profitability in North America due to the growth in North America land activity combined with improved pricing. 

During the first quarter of 2018, the US land pressure pumping business was impacted by weaker-than-expected activity as well as softer pricing as compared to the fourth quarter of 2017,  rising supply chain costs, and rail logistical challenges. In spite of these factors, Schlumberger continued to deploy available fracturing assets, including equipment from our newly acquired capacity. Schlumberger expects the US land hydraulic fracturing market to improve during the second quarter of 2018, both in terms of pricing and in operational efficiency and it is, therefore continuing with its aggressive fleet reactivation and recommissioning program.

Cameron Group

First-quarter 2018 revenue of $1.3 billion increased 7% year-on-year due to improvements on land in North America that benefited the short-cycle businesses of Valves & Measurement and Surface Systems. 

Pretax operating margin of 13% was essentially flat year-on-year.

Interest and Other Income

Interest & other income consisted of the following:

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

2018

 

 

2017

 

Equity in net earnings of affiliated companies

$

14

 

 

$

17

 

Interest income

 

28

 

 

 

29

 

 

$

42

 

 

$

46

 

Other

Research & engineering and General & administrative expenses, as a percentage of Revenue, for the first quarter of both 2018 and 2017 were as follows:

 

  

First Quarter

 

 

2018

 

 

2017

 

Research & engineering

 

2.2

%

 

 

3.1

%

General & administrative

 

1.4

%

 

 

1.4

%

 

Research & engineering costs for the first quarter of 2018 have decreased as compared to the same period in 2017 as a result of cost control measures.

The effective tax rate for the first quarter of 2018 was 17.6% as compared to 14.8% for the same period of 2017.  The effective tax rate increased as a result of the change in the geographic mix of earnings, as Schlumberger generated a greater portion of its pretax earnings in North America during the first quarter of 2018 as compared to the same period last year.

Charges and Credits

2018

There were no charges or credits recorded during the first quarter of 2018.

2017

In connection with Schlumberger’s acquisition of Cameron, Schlumberger recorded $82 million of charges relating to  employee benefits, facility closures and other merger and integration-related costs.  These charges are classified in Merger & integration in the Consolidated Statement of Income.  

17


Liquidity and Capital Resources

Details of the components of liquidity as well as changes in liquidity follow: 

 

(Stated in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mar. 31,

 

 

Mar. 31,

 

 

Dec. 31,

 

Components of Liquidity

2018

 

 

2017

 

 

2017

 

Cash

$

1,865

 

 

$

1,902

 

 

$

1,799

 

Short-term investments

 

2,300

 

 

 

5,451

 

 

 

3,290

 

Fixed income investments, held to maturity

 

-

 

 

 

238

 

 

 

-

 

Short-term borrowings and current portion of long-term debt

 

(4,586

)

 

 

(2,449

)

 

 

(3,324

)

Long-term debt

 

(13,526

)

 

 

(16,538

)

 

 

(14,875

)

Net debt (1)

$

(13,947

)

 

$

(11,396

)

 

$

(13,110

)

 

 

Changes in Liquidity:

Three Months Ended Mar. 31,

 

 

2018

 

 

2017

 

Net income

$

530

 

 

$

284

 

Impairment and other charges

 

-

 

 

 

68

 

Depreciation and amortization (2)

 

874

 

 

 

989

 

Earnings of equity method investments, less dividends received

 

(5

)

 

 

(10

)

Pension and other postretirement benefits expense

 

18

 

 

 

37

 

Stock-based compensation expense

 

90

 

 

 

88

 

Pension and other postretirement benefits funding

 

(39

)

 

 

(29

)

Increase in working capital (3)

 

(836

)

 

 

(791

)

Other

 

(64

)

 

 

20

 

Cash flow from operations

 

568

 

 

 

656

 

Capital expenditures

 

(454

)

 

 

(381

)

SPM investments

 

(240

)

 

 

(144

)

Multiclient seismic data costs capitalized

 

(26

)

 

 

(116

)

Free cash flow (4)

 

(152

)

 

 

15

 

Dividends paid

 

(692

)

 

 

(696

)

Proceeds from employee stock plans

 

127

 

 

 

135

 

Stock repurchase program

 

(97

)

 

 

(372

)

 

 

(814

)

 

 

(918

)

Business acquisitions and investments, net of cash acquired plus debt assumed

 

(13

)

 

 

(273

)

Other

 

(10

)

 

 

(84

)

Increase in net debt

 

(837

)

 

 

(1,275

)

Net debt, beginning of period

 

(13,110

)

 

 

(10,121

)

Net debt, end of period

$

(13,947

)

 

$

(11,396

)

 

(1) 

Net debt” represents gross debt less cash, short-term investments and fixed income investments, held to maturity.  Management believes that Net debt provides useful information regarding the level of Schlumberger’s indebtedness by reflecting cash and investments that could be used to repay debt.  Net debt is a non-GAAP financial measure that should be considered in addition to, not as a substitute for or superior to, total debt.

(2) 

Includes depreciation of property, plant and equipment and amortization of intangible assets, multiclient seismic data costs and SPM investments.

(3) 

Includes severance payments of approximately $76 million and $140 million during the three months ended March 31, 2018 and 2017, respectively.

(4) 

“Free cash flow” represents cash flow from operations less capital expenditures, SPM investments and multiclient seismic data costs capitalized. Management believes that free cash flow is an important liquidity measure for the company and that it is useful to investors and management as a measure of our ability to generate cash.  Once business needs and obligations are met, this cash can be used to reinvest in the company for future growth or to return to shareholders through dividend payments or share repurchases.  Free cash flow does not represent the residual cash flow available for discretionary expenditures.  Free cash flow is a non-GAAP financial measure that should be considered in addition to, not as substitute for or superior to, cash flow from operations.

18


 Key liquidity events during the first three months of 2018 and 2017 included:

 

On July 18, 2013, the Schlumberger Board of Directors (“the Board”) approved a $10 billion share repurchase program for Schlumberger common stock to be completed at the latest by June 30, 2018.  This program was completed during May 2017.  On January 21, 2016, the Board approved a new $10 billion share repurchase program.  Schlumberger had repurchased $421 million under the new program as of March 31, 2018.  

The following table summarizes the activity under these share repurchase programs:

 

(Stated in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost

 

 

Total number

 

 

Average price

 

 

of shares

 

 

of shares

 

 

paid per

 

 

purchased

 

 

purchased

 

 

share

 

Three months ended March 31, 2018

$

97

 

 

 

1.4

 

 

$

69.79

 

Three months ended March 31, 2017

$

372

 

 

 

4.7

 

 

$

78.97

 

 

 

 

Capital expenditures were $0.5 billion during the first three months of 2018 compared to $0.4 billion during the first three months of 2017.  Capital expenditures for full-year 2018 are expected to be approximately $2.0 billion as compared to $2.1 billion in 2017.

Schlumberger operates in more than 85 countries.   As of December 31, 2017, only five of those countries individually accounted for greater than 5% of Schlumberger’s net receivables balance, of which only one (the United States) accounted for greater than 10% of such receivables.

As of March 31, 2018, Schlumberger had $4.2 billion of cash and short-term investments on hand.  Schlumberger had separate committed debt facility agreements aggregating $6.5 billion that support commercial paper programs, of which $3.5 billion was available and unused.  Schlumberger believes these amounts are sufficient to meet future business requirements for at least the next 12 months.

Borrowings under the commercial paper programs at March 31, 2018 were $3.0 billion.

FORWARD-LOOKING STATEMENTS

This first-quarter 2018 Form 10-Q, as well as other statements we make, contain “forward-looking statements” within the meaning of the federal securities laws, which include any statements that are not historical facts, such as our forecasts or expectations regarding business outlook; growth for Schlumberger as a whole and for each of its segments (and for specified products or geographic areas within each segment); oil and natural gas demand and production growth; oil and natural gas prices; improvements in operating procedures and technology, including our transformation program; capital expenditures by Schlumberger and the oil and gas industry; the business strategies of Schlumberger’s customers; the effects of US tax reform; our effective tax rate; the success of Schlumberger’s SPM projects, joint ventures and alliances; future global economic conditions; and future results of operations. These statements are subject to risks and uncertainties, including, but not limited to, global economic conditions; changes in exploration and production spending by Schlumberger’s customers and changes in the level of oil and natural gas exploration and development; general economic, political and business conditions in key regions of the world; foreign currency risk; pricing pressure; weather and seasonal factors; operational modifications, delays or cancellations; production declines; changes in government regulations and regulatory requirements, including those related to offshore oil and gas exploration, radioactive sources, explosives, chemicals, hydraulic fracturing services and climate-related initiatives; the inability of technology to meet new challenges in exploration; the inability to retain key employees; and other risks and uncertainties detailed in this first-quarter 2018 Form 10-Q and our most recent Forms 10-K, 10-Q, and 8-K filed with or furnished to the Securities and Exchange Commission. If one or more of these or other risks or uncertainties materialize (or the consequences of any such development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. Schlumberger disclaims any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

For quantitative and qualitative disclosures about market risk affecting Schlumberger, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of the Schlumberger Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Schlumberger’s exposure to market risk has not changed materially since December 31, 2017.

19


Item 4. Controls and Procedures.

Schlumberger has carried out an evaluation under the supervision and with the participation of Schlumberger’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of Schlumberger’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the CEO and the CFO have concluded that, as of the end of the period covered by this report, Schlumberger’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that Schlumberger files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Schlumberger’s disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to its management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure. There was no change in Schlumberger’s internal control over financial reporting during the quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, Schlumberger’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

The information with respect to this Item 1 is set forth under Note 10—Contingencies, in the Consolidated Financial Statements.

 

Item 1A. Risk Factors.

As of the date of this filing, there have been no material changes from the risk factors disclosed in Part 1, Item 1A, of Schlumberger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

None.

Issuer Repurchases of Equity Securities

As of March 31, 2018, Schlumberger had repurchased $421 million of Schlumberger common stock under its $10 billion share repurchase program.  

Schlumberger’s common stock repurchase activity for the three months ended March 31, 2018 was as follows:

 

(Stated in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of shares purchased

 

 

Average price paid per share

 

 

Total number of shares purchased as part of publicly announced programs

 

 

Maximum value of shares that may yet be purchased under the programs

 

January 2018

 

448.5

 

 

$

74.88

 

 

 

448.5

 

 

$

9,642,781

 

February 2018

 

441.6

 

 

$

68.63

 

 

 

441.6

 

 

$

9,612,478

 

March 2018

 

506.9

 

 

$

66.30

 

 

 

506.9

 

 

$

9,578,866

 

 

 

1,397.0

 

 

$

69.79

 

 

 

1,397.0

 

 

 

 

 

Item 3. Defaults Upon Senior Securities.

None.

20


Item 4. Mine Safety Disclosures.

Our mining operations are subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this report.  

Item 5. Other Information.

In 2013, Schlumberger completed the wind-down of its service operations in Iran. Prior to this, certain non-US subsidiaries provided oilfield services to the National Iranian Oil Company and certain of its affiliates (“NIOC”).

Schlumberger’s residual transactions or dealings with the government of Iran during the first quarter of 2018 consisted of payments of taxes and other typical governmental charges. Certain non-US subsidiaries of Schlumberger maintain depository accounts at the Dubai branch of Bank Saderat Iran (“Saderat”), and at Bank Tejarat (“Tejarat”) in Tehran and in Kish for the deposit by NIOC of amounts owed to non-US subsidiaries of Schlumberger for prior services rendered in Iran and for the maintenance of such amounts previously received. One non-US subsidiary also maintains an account at Tejarat for payment of local expenses such as taxes. Schlumberger anticipates that it will discontinue dealings with Saderat and Tejarat following the receipt of all amounts owed to Schlumberger for prior services rendered in Iran.

 

 

 

21


Item 6. Exhibits.

 

 

Exhibit 3.1—Articles of Incorporation of Schlumberger Limited (Schlumberger N.V.) (incorporated by reference to Exhibit 3.1 to Schlumberger’s Current Report on Form 8-K filed on April 6, 2016)

 

Exhibit 3.2—Amended and Restated By-laws of Schlumberger Limited (Schlumberger N.V.) (incorporated by reference to Exhibit 3.1 to Schlumberger’s Current Report on Form 8-K filed on January 19, 2017)

 

* Exhibit 23—Consent of Independent Registered Public Accounting Firm (+)

 

* Exhibit 31.1—Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

* Exhibit 31.2—Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

** Exhibit 32.1—Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

** Exhibit 32.2—Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

* Exhibit 95—Mine Safety Disclosures

 

* Exhibit 101—The following materials from Schlumberger Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income (Loss); (ii) Consolidated Statement of Comprehensive Income (Loss); (iii) Consolidated Balance Sheet; (iv) Consolidated Statement of Cash Flows; (v) Consolidated Statement of Equity and (vi) Notes to Consolidated Financial Statements.

 

* Filed with this Form 10-Q.

** Furnished with this Form 10-Q.

(+) Supersedes Exhibit 23 to Schlumberger Limited’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission on January 24, 2018.

 

 

22


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in his capacity as Chief Accounting Officer.

 

 

 

 

Schlumberger Limited

(Registrant)

Date:

April 25, 2018

 

/s/ Howard Guild

 

 

 

Howard Guild

 

 

 

Chief Accounting Officer and Duly Authorized Signatory

 

 

23