Prepared by R.R. Donnelley Financial -- FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 

 
For the Quarter ended:
  
Commission file No.:
June 30, 2002
  
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 incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
153 EAST 53 STREET, 57th Floor
   
NEW YORK, NEW YORK, U.S.A.
 
10022
     
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: (212) 350-9400
 

 
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
 
YES
 
x
 
NO
 
¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class

 
Outstanding at June 30, 2002

COMMON STOCK, $0.01 PAR VALUE
 
577,436,089


PART I.    FINANCIAL INFORMATION
 
Item 1:    Financial Statements
 
SCHLUMBERGER LIMITED
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
 
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Stated in thousands except per share amounts)
 
    
Periods Ended June 30,

 
    
Second Quarter

      
Six Months

 
    
2002

      
2001

      
2002

      
2001

 
REVENUE:
                                         
Operating
  
$
3,388,561
 
    
$
3,771,438
 
    
$
6,697,917
 
    
$
6,785,095
 
Interest & other income
  
 
38,176
 
    
 
59,388
 
    
 
72,013
 
    
 
149,417
 
    


    


    


    


    
 
3,426,737
 
    
 
3,830,826
 
    
 
6,769,930
 
    
 
6,934,512
 
    


    


    


    


EXPENSES:
                                         
Cost of goods sold & services
  
 
2,637,495
 
    
 
3,206,384
 
    
 
5,237,585
 
    
 
5,502,346
 
Research & engineering
  
 
165,798
 
    
 
176,209
 
    
 
326,489
 
    
 
349,805
 
Marketing
  
 
95,331
 
    
 
140,948
 
    
 
191,074
 
    
 
228,365
 
General
  
 
163,360
 
    
 
193,885
 
    
 
324,627
 
    
 
314,480
 
Interest
  
 
96,413
 
    
 
108,757
 
    
 
178,666
 
    
 
184,958
 
    


    


    


    


    
 
3,158,397
 
    
 
3,826,183
 
    
 
6,258,441
 
    
 
6,579,954
 
    


    


    


    


Income before taxes and minority interest
  
 
268,340
 
    
 
4,643
 
    
 
511,489
 
    
 
354,558
 
Taxes on income
  
 
70,247
 
    
 
91,090
 
    
 
134,430
 
    
 
199,030
 
    


    


    


    


Income (Loss) before minority interest
  
 
198,093
 
    
 
(86,447
)
    
 
377,059
 
    
 
155,528
 
Minority interest
  
 
(2,058
)
    
 
(6,838
)
    
 
(8,552
)
    
 
(12,925
)
    


    


    


    


Net Income (Loss)
  
$
196,035
 
    
$
(93,285
)
    
$
368,507
 
    
$
142,603
 
    


    


    


    


Basic Earnings Per Share:
                                         
Net Income (Loss)
  
$
0.34
 
    
$
(0.16
)
    
$
0.64
 
    
$
0.25
 
Elimination of goodwill amortization
  
 
—  
 
    
 
0.13
 
    
 
—  
 
    
 
0.18
 
    


    


    


    


Adjusted Net Income (Loss)
  
$
0.34
 
    
$
(0.03
)
    
$
0.64
 
    
$
0.43
 
    


    


    


    


Diluted Earnings Per Share:
                                         
Net Income (Loss)
  
$
0.34
 
    
$
(0.16
)
    
$
0.64
 
    
$
0.25
 
Elimination of goodwill amortization
  
 
—  
 
    
 
0.13
 
    
 
—  
 
    
 
0.18
 
    


    


    


    


Adjusted Net Income (Loss)
  
$
0.34
 
    
$
(0.03
)
    
$
0.64
 
    
$
0.43
 
    


    


    


    


Average shares outstanding:
                                         
Basic
  
 
577,242
 
    
 
573,451
 
    
 
576,774
 
    
 
573,255
 
Assuming dilution
  
 
581,445
 
    
 
573,451
 
    
 
581,275
 
    
 
580,725
 
 
See Notes to Consolidated Financial Statements
 

2


SCHLUMBERGER LIMITED
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
 
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
    
Jun. 30, 2002
(Unaudited)

      
Dec. 31, 2001

 
ASSETS
                   
CURRENT ASSETS:
                   
Cash
  
$
153,359
 
    
$
177,704
 
Short-term Investments
  
 
1,559,045
 
    
 
1,439,997
 
Receivables less allowance for doubtful accounts (2002—$158,048; 2001—$145,268)
  
 
3,900,196
 
    
 
4,028,450
 
Inventories
  
 
1,232,877
 
    
 
1,204,263
 
Deferred taxes
  
 
310,626
 
    
 
321,767
 
Other current assets
  
 
654,584
 
    
 
532,709
 
    


    


    
 
7,810,687
 
    
 
7,704,890
 
FIXED INCOME INVESTMENTS, HELD TO MATURITY
  
 
511,000
 
    
 
576,000
 
INVESTMENTS IN AFFILIATED COMPANIES
  
 
836,097
 
    
 
820,806
 
FIXED ASSETS
  
 
4,784,215
 
    
 
4,827,879
 
MULTICLIENT SEISMIC DATA
  
 
1,144,882
 
    
 
1,028,954
 
GOODWILL
  
 
6,709,822
 
    
 
6,260,969
 
INTANGIBLE ASSETS
  
 
652,785
 
    
 
811,349
 
DEFERRED TAXES
  
 
190,835
 
    
 
126,057
 
OTHER ASSETS
  
 
208,039
 
    
 
169,463
 
    


    


    
$
22,848,362
 
    
$
22,326,367
 
    


    


LIABILITIES & STOCKHOLDERS’ EQUITY
                   
CURRENT LIABILITIES:
                   
Accounts payable and accrued liabilities
  
$
4,244,850
 
    
$
4,506,634
 
Estimated liability for taxes on income
  
 
487,009
 
    
 
587,328
 
Dividend payable
  
 
108,906
 
    
 
108,642
 
Long-term debt due within one year
  
 
119,900
 
    
 
31,990
 
Bank & short-term loans
  
 
752,328
 
    
 
983,191
 
    


    


    
 
5,712,993
 
    
 
6,217,785
 
LONG-TERM DEBT
  
 
7,170,532
 
    
 
6,215,709
 
POSTRETIREMENT BENEFITS
  
 
526,231
 
    
 
504,797
 
OTHER LIABILITIES
  
 
273,007
 
    
 
372,696
 
    


    


    
 
13,682,763
 
    
 
13,310,987
 
    


    


MINORITY INTEREST
  
 
649,333
 
    
 
636,899
 
    


    


STOCKHOLDERS’ EQUITY:
                   
Common stock
  
 
2,063,506
 
    
 
2,045,437
 
Income retained for use in the business
  
 
8,466,987
 
    
 
8,314,766
 
Treasury stock at cost
  
 
(1,666,360
)
    
 
(1,694,884
)
Accumulated other comprehensive income
  
 
(347,867
)
    
 
(286,838
)
    


    


    
 
8,516,266
 
    
 
8,378,481
 
    


    


    
$
22,848,362
 
    
$
22,326,367
 
    


    


 
See Notes to Consolidated Financial Statements
 

3


SCHLUMBERGER LIMITED
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
 
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
    
Six Months Ended
June 30,

 
Cash flows from operating activities:
  
 

2002

 

  
 

2001

 

Net income
  
$
368,507
 
  
$
142,603
 
Adjustments to reconcile net income to cash provided by operating activities:
                 
Depreciation and amortization (1)
  
 
755,350
 
  
 
903,541
 
Non-cash charges
  
 
28,923
 
  
 
305,000
 
Earnings of companies carried at equity, less dividends received (2002—$–; 2001—$–)
  
 
(33,335
)
  
 
(29,205
)
Deferred taxes
  
 
20,184
 
  
 
11,720
 
Provision for losses on accounts receivable
  
 
25,142
 
  
 
6,149
 
Change in operating assets and liabilities:
                 
Decrease (increase) in receivables
  
 
176,575
 
  
 
(653,017
)
Increase in inventories
  
 
(9,587
)
  
 
(286,855
)
Increase in other current assets
  
 
(107,478
)
  
 
(71,281
)
(Decrease) increase in accounts payable and accrued liabilities
  
 
(340,073
)
  
 
136,868
 
(Decrease) increase in estimated liability for taxes on income
  
 
(94,303
)
  
 
18,394
 
Increase in postretirement benefits
  
 
21,434
 
  
 
35,272
 
Other—net
  
 
(223,795
)
  
 
(284,631
)
    


  


NET CASH PROVIDED BY OPERATING ACTIVITIES
  
 
587,544
 
  
 
234,558
 
    


  


Cash flows from investing activities:
                 
Purchase of fixed assets
  
 
(720,820
)
  
 
(990,404
)
Multiclient seismic data capitalized
  
 
(180,970
)
  
 
(221,219
)
Sales/retirements of fixed assets & other
  
 
169,937
 
  
 
(17,971
)
Acquisition of Sema plc
  
 
(132,155
)
  
 
(4,778,498
)
Other businesses acquired
  
 
(36,000
)
  
 
(353,024
)
Other acquisition related payments
  
 
(57,600
)
  
 
—  
 
(Purchase) sale of investments, net
  
 
(47,535
)
  
 
2,510,047
 
    


  


NET CASH USED IN INVESTING ACTIVITIES
  
 
(1,005,143
)
  
 
(3,851,069
)
    


  


Cash flows from financing activities:
                 
Dividends paid
  
 
(216,022
)
  
 
(214,840
)
Proceeds from employee stock purchase plan
  
 
102,269
 
  
 
58,362
 
Proceeds from exercise of stock options
  
 
46,593
 
  
 
25,815
 
Proceeds from issuance of long-term debt
  
 
1,528,606
 
  
 
3,293,700
 
Payments of principal on long-term debt
  
 
(835,783
)
  
 
(25,581
)
Net (decrease) increase in short-term debt
  
 
(236,356
)
  
 
551,129
 
    


  


NET CASH PROVIDED BY FINANCING ACTIVITIES
  
 
389,307
 
  
 
3,688,585
 
    


  


Net (decrease) increase in cash before translation
  
 
(28,292
)
  
 
72,074
 
Translation effect on cash
  
 
3,947
 
  
 
(12,291
)
Cash, beginning of period
  
 
177,704
 
  
 
160,718
 
    


  


CASH, END OF PERIOD
  
$
153,359
 
  
$
220,501
 
    


  


 
(1)
 
Includes multiclient seismic data costs.
 
See Notes to Consolidated Financial Statements
 

4


SCHLUMBERGER LIMITED
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands)
 
                       
Accumulated Other
Comprehensive Income

        
    
Common Stock

    
Retained Income

    
Marked to
Market

    
Translation
Adjustment

    
Comprehensive Income

 
    
Issued

  
In Treasury

             
Equity, January 1, 2002
  
$
2,045,437
  
$
(1,694,884
)
  
$
8,314,766
 
  
$
(49,569
)
  
$
(237,269
)
  
$
—  
 
Net Income
                  
 
368,507
 
                    
 
368,507
 
Derivatives marked to market
                           
 
(4,855
)
           
 
(4,855
)
Translation adjustment
                                    
 
(56,174
)
  
 
(56,174
)
Dividends declared (1)
                  
 
(216,286
)
                          
Shares sold to optionees
  
 
18,069
  
 
28,524
 
                                   
    

  


  


  


  


  


Equity, June 30, 2002
  
$
2,063,506
  
$
(1,666,360
)
  
$
8,466,987
 
  
$
(54,424
)
  
$
(293,443
)
  
$
307,478
 
    

  


  


  


  


  


 
(1)
 
$0.375 per share
 
 
    
SHARES OF COMMON STOCK
(Unaudited)

           
Shares
Outstanding

    
Issued

  
In Treasury

    
Balance, January 1, 2002
  
667,094,178
  
(91,203,780
)
  
575,890,398
Sold to Optionees
  
10,490
  
1,535,201
 
  
1,545,691
    
  

  
Balance, June 30, 2002
  
667,104,668
  
(89,668,579
)
  
577,436,089
    
  

  
 
See Notes to Consolidated Financial Statements

5


SCHLUMBERGER LIMITED
(Schlumberger N.V., Incorporated in the Netherlands Antilles)
and Subsidiary Companies
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The accompanying unaudited consolidated financial statements, which include the accounts of Schlumberger Limited (“Schlumberger”) and its subsidiaries, have been prepared in accordance with generally accepted accounting principles 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 management, all adjustments considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. All intercompany transactions and balances have been eliminated in consolidation. Operating results for the six month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2002. For further information, refer to the consolidated financial statements and notes thereto, included in Schlumberger’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
 
 
RECLASSIFICATION
 
Certain items from prior years have been reclassified to conform to the current year presentation.
 
 
EARNINGS PER SHARE
 
The following is a reconciliation from basic earnings (loss) per share to diluted earnings (loss) per share for the second quarter 2002 and six months 2002:
 
    
2002

  
2001

 
Second Quarter

  
Net
Income

  
Average Shares
Outstanding

  
Earnings per Share

  
Net Loss

    
Average Shares
Outstanding

  
Loss per Share

 
Basic
  
$
196,035
  
577,242
  
$
0.34
  
$
(93,285
)
  
573,451
  
$
(0.16
)
Dilutive effect of options (1)
  
 
—  
  
4,203
  
 
—  
  
 
—  
 
  
—  
  
 
—  
 
    

  
  

  


  
  


Diluted
  
$
196,035
  
581,445
  
$
0.34
  
$
(93,285
)
  
573,451
  
$
(0.16
)
    

  
  

  


  
  


 
 
    
2002

  
2001

Six Months

  
Net
Income

  
Average Shares
Outstanding

  
Earnings per Share

  
Net Income

  
Average Shares
Outstanding

  
Earnings per Share

Basic
  
$
368,507
  
576,774
  
$
0.64
  
$
142,603
  
573,255
  
$
0.25
Dilutive effect of options
  
 
—  
  
4,501
  
 
—  
  
 
—  
  
7,470  
  
 
—  
    

  
  

  

  
  

Diluted
  
$
368,507
  
581,275
  
$
0.64
  
$
142,603
  
580,725
  
$
0.25
    

  
  

  

  
  

 
(1)
 
Due to the net loss, there is no dilutive effect in the second quarter of 2001.

6


 
ADJUSTED NET INCOME (LOSS)
 
The following is a reconciliation of reported net income (loss) to adjusted net income (loss) following the adoption of SFAS 142 (Goodwill and Other Intangible Assets).
 
 
    
(Stated in thousands)
    
Second Quarter

      
Six Months

    
2002

    
2001

      
2002

    
2001

Reported net income (loss)
  
$
196,035
    
$
(93,285
)
    
$
368,507
    
$
142,603
Elimination of goodwill amortization
  
 
—  
    
 
69,955
 
    
 
—  
    
 
99,826
    

    


    

    

Adjusted net income (loss)
  
$
196,035
    
$
(23,330
)
    
$
368,507
    
$
242,429
    

    


    

    

 
 
NON-CASH CHARGES
 
The first quarter 2002 included a $29 million charge (pretax $30 million and minority interest credit of $1 million; $0.05 per share – diluted) related to the financial/economic crisis in Argentina where, in January, the government eliminated all US dollar contracts and converted US dollar-denominated accounts receivable into pesos. As a result, Schlumberger’s currency exposure increased significantly. With currency devaluation, an exchange loss (net of hedging) on net assets, primarily customer receivables, was incurred. In addition, a provision was recorded for downsizing facilities and headcount. The small SchlumbergerSema exposure in Argentina was also provided for. The pretax charge is classified in Cost of goods sold and services in the Consolidated Statement of Income.
 
The first quarter 2001 included a $25 million pretax and after tax in-process research and development charge ($0.04 per share – diluted) related to the acquisition of Bull CP8. This charge is classified in Research and Engineering in the Consolidated Statement of Income.
 
The second quarter 2001 included a $280 million pretax and after tax impairment charge ($0.48 per share – diluted) related to the disposition of certain Resources Management Services businesses (Electricity and Water outside North America and worldwide Gas businesses). This charge, which included the write off of goodwill ($139 million) and cumulative translation adjustment ($79 million), is classified in Cost of goods sold and services in the Consolidated Statement of Income.
 
 
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, the risk of personal injury, natural resource or property damage claims 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.
 
Schlumberger’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and receivables from clients. Schlumberger places its cash and cash equivalents with financial institutions and corporations, and limits the amount of credit exposure with any one of them. Schlumberger actively evaluates the creditworthiness of the issuers in which it invests. The receivables from clients are concentrated within a few significant industries and geographies.

7


 
 
INVESTMENTS IN AFFILIATED COMPANIES
 
Investments in affiliated companies include Schlumberger’s 40% investment in the MI Drilling Fluids Joint Venture (June 30, 2002—$586 million; December 31, 2001—$573 million). Equity in income of investments carried under the equity method (second quarter 2002—$18 million; second quarter 2001—$15 million and six months 2002—$34 million; six months 2001—$29 million) are included in Interest & other income in the Consolidated Statement of Income.
 
 
NEW ACCOUNTING STANDARDS
 
In June 2001, SFAS 141 (Business Combinations) and SFAS 142 (Goodwill and Other Intangible Assets) were issued. SFAS 141 was adopted by Schlumberger for acquisitions subsequent to June 30, 2001. SFAS 142 was adopted by Schlumberger commencing January 1, 2002 and, based on the findings and conclusions of an independent valuation undertaken in the first quarter of 2002, Schlumberger determined that there is no impairment write down on the adoption of this standard.
 
Amortization of goodwill and workforce ceased with effect from January 1, 2002. Assembled workforce, net of deferred taxes, of $179 million has been reclassified to Goodwill.
 
SFAS 143 (Accounting for Asset Retirement Obligations) was issued in June 2001 and will be adopted by Schlumberger commencing January 1, 2003. Schlumberger does not believe that the implementation of this standard will have any material effect on its financial position and results of operations.
 
SFAS 144 (Accounting for Impairment or Disposal of Long-Lived Assets) was adopted by Schlumberger commencing January 1, 2002.
 
Effective January 1, 2002, Schlumberger adopted the FASB EITF Abstract 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred”. Prior year revenue has been restated to include reimbursable costs billed to customers which had been classified as a contra expense and now must be classified as revenue. The reclassification was only required in the Oilfield Services (OFS) segment as the SchlumbergerSema segment was already in compliance with the new standard. OFS revenue and cost of goods sold & services increased in the second quarter 2001 by $137 million and in the six months 2001 by $241 million. There was no effect on cash flow or net income.
 
On July 29, 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 replaces Issue 94-3. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.
 
 
SECURITIZATION
 
In September 2000, a wholly owned subsidiary of Schlumberger entered into an agreement to sell, on an ongoing basis, up to $220 million of an undivided interest in its accounts receivable and subsequently amended up to $350 million. The amount of receivables sold under this agreement totaled $168 million at June 30, 2002 and $176 million at December 31, 2001. Costs of the program, which primarily consist of the purchasers’ financing and administrative costs, were not significant. Unless extended by amendment, the agreement expires in September 2002.
 
 
FINANCING
 
During January 2002, two principal subsidiaries of Schlumberger in Europe initiated a Euro commercial paper program, which is guaranteed by Schlumberger Limited. At June 30, 2002, Euro commercial paper borrowings totaled $1.5 billion. Euro commercial paper borrowings are supported by a long-term revolving credit facility.
 
On April 4, 2002, the principal US subsidiary of Schlumberger issued $1 billion of 10 year senior unsecured notes with a coupon rate of 6.50% (6.634% including amortization of debt discount and expense) in the US capital markets. The notes were issued under rule 144A without registration rights for life. The proceeds partially replaced US commercial paper borrowings. At June 30, 2002, US commercial paper borrowings totaled $1.5 billion. US commercial paper borrowings are supported by a long-term revolving credit facility.

8


 
INVENTORY
 
A summary of inventory follows:
 
    
($ millions)

    
Jun. 30 2002

  
Dec. 31 2001

Raw Materials & Field Materials
  
$
1,126
  
$
1,087
Work in Process
  
 
201
  
 
180
Finished Goods
  
 
187
  
 
220
    

  

    
 
1,514
  
 
1,487
Less: Reserves
  
 
281
  
 
283
    

  

    
$
1,233
  
$
1,204
    

  

 
FIXED ASSETS
 
A summary of fixed assets follows:
 
    
($ millions)

    
Jun. 30 2002

  
Dec. 31
2001

Property plant & equipment
  
$
11,577
  
$
11,179
Less: Accumulated depreciation
  
 
6,793
  
 
6,351
    

  

    
$
4,784
  
$
4,828
    

  

 
 
GOODWILL
 
The changes in the carrying amount of goodwill for the six months ended June 30, 2002 is a follows:
 
    
($ millions)

Balance at December 31, 2001
  
$
6,261
Reclassification of Assembled Workforce, net of deferred taxes (1)
  
 
179
Impact of change in exchange rates
  
 
223
Other, including acquisitions
  
 
47
    

Balance at June 30, 2002
  
$
6,710
    

 
(1)
 
Following adoption of SFAS 142 on January 1, 2002.
 
 
INTANGIBLE ASSETS
 
A summary of intangible assets follows:
 
    
($ millions)

    
Jun. 30 2002

  
Dec. 31
2001

Gross book value
  
$
821
  
$
935
Less: Accumulated amortization
  
 
168
  
 
124
    

  

    
$
653
  
$
811
    

  

9


 
The amortization charge to income for the second quarter was $34 million and $55 million for the first six months. In accordance with SFAS 142 (see New Accounting Standards), $256 million (net of amortization) has been reclassified to Goodwill.
 
Intangible assets principally comprise patents, software and technology and other. At June 30, 2002, the approximate gross book value of intangible assets and amortization periods were as follows:
 
    
$ Millions

    
Amortization Periods

Patents
  
$
150
    
5—10 years
Software
  
 
350
    
5—10 years
Technology & other
  
 
321
    
5—10 years
    

      
    
$
821
      
    

      
 
The weighted average amortization period for all intangible assets is approximately 6 years.
 
 
SEGMENT INFORMATION
 
Following the acquisition of Sema plc on April 6, 2001, Schlumberger created a new business segment, SchlumbergerSema, which resulted from the merger of Sema plc with certain businesses from Schlumberger’s former segments, Test & Transactions and Resource Management Services. Following this reorganization, Schlumberger now operates two reportable segments, Oilfield Services (OFS) and SchlumbergerSema (SLSEMA).
 
There have been several reclassifications so that the prior periods are comparable with our current reporting structure.
 
Prior year revenue had been restated to include reimbursable costs billed to customers, which had been classified as a contra expense and now must be classified as revenue in accordance with FASB EITF Abstract 01-14. The reclassification was only required in the OFS segment as the SLSEMA segment was already in compliance with the new standard. As a result Oilfield Services second quarter 2001 and six months 2001 revenue and cost of goods sold & services increased by $137 million and $241 million, respectively. The adoption of this standard had no effect on cash flow or net income.
 
    
SECOND QUARTER 2002

    
SECOND QUARTER 2001

 
    
Revenue

    
Income after tax

    
Tax Expense

    
Minority Interest

  
Income before tax

    
Revenue

    
Income after tax

    
Tax Expense

    
Minority Interest

  
Income before tax

 
OFS
                                                                                     
North America
  
$
720
 
  
$
68
 
  
$
40
 
  
$
—  
  
$
108
 
  
$
970
 
  
$
145
 
  
$
82
 
  
$
—  
  
$
227
 
Latin America
  
 
335
 
  
 
31
 
  
 
8
 
  
 
—  
  
 
39
 
  
 
393
 
  
 
33
 
  
 
12
 
  
 
—  
  
 
45
 
Europe/CIS/W. Africa
  
 
676
 
  
 
72
 
  
 
24
 
  
 
—  
  
 
96
 
  
 
607
 
  
 
75
 
  
 
23
 
  
 
—  
  
 
98
 
Other Eastern
  
 
627
 
  
 
109
 
  
 
19
 
  
 
—  
  
 
128
 
  
 
533
 
  
 
90
 
  
 
17
 
  
 
—  
  
 
107
 
Elims/Other
  
 
103
 
  
 
(1
)
  
 
10
 
  
 
1
  
 
10
 
  
 
101
 
  
 
(20
)
  
 
8
 
  
 
5
  
 
(7
)
    


  


  


  

  


  


  


  


  

  


    
 
2,461
 
  
 
279
 
  
 
101
 
  
 
1
  
 
381
 
  
 
2,604
 
  
 
323
 
  
 
142
 
  
 
5
  
 
470
 
    


  


  


  

  


  


  


  


  

  


SLSEMA
                                                                                     
North & South America
  
 
157
 
  
 
(6
)
  
 
(5
)
  
 
—  
  
 
(11
)
  
 
185
 
  
 
(13
)
  
 
(10
)
  
 
—  
  
 
(23
)
Europe/M. East/Africa
  
 
615
 
  
 
22
 
  
 
12
 
  
 
—  
  
 
34
 
  
 
647
 
  
 
12
 
  
 
6
 
  
 
—  
  
 
18
 
Asia
  
 
89
 
  
 
—  
 
  
 
(1
)
  
 
1
  
 
—  
 
  
 
94
 
  
 
10
 
  
 
1
 
  
 
1
  
 
12
 
Elims/Other
  
 
(8
)
  
 
(11
)
  
 
(2
)
  
 
—  
  
 
(13
)
  
 
(49
)
  
 
(11
)
  
 
(9
)
  
 
—  
  
 
(20
)
    


  


  


  

  


  


  


  


  

  


    
 
853
 
  
 
5
 
  
 
4
 
  
 
1
  
 
10
 
  
 
877
 
  
 
(2
)
  
 
(12
)
  
 
1
  
 
(13
)
    


  


  


  

  


  


  


  


  

  


                                                                                       
OTHER (1)
  
 
95
 
  
 
(4
)
  
 
(2
)
  
 
—  
  
 
(6
)
  
 
311
 
  
 
8
 
  
 
(3
)
  
 
1
  
 
6
 
Elims & Other (2)
  
 
(20
)
  
 
(9
)
  
 
(33
)
  
 
—  
  
 
(42
)
  
 
(21
)
  
 
(66
)
  
 
(36
)
  
 
—  
  
 
(102
)
    


  


  


  

  


  


  


  


  

  


    
$
3,389
 
  
$
271
 
  
$
70
 
  
$
2
  
$
343
 
  
$
3,771
 
  
$
263
 
  
$
91
 
  
$
7
  
$
361
 
    


  


  


  

           


  


  


  

        
Interest Income
                                    
 
19
 
                                    
 
31
 
Interest Expense (3)
                                    
 
(94
)
                                    
 
(107
)
Charges
                                    
 
—  
 
                                    
 
(280
)
                                      


                                    


                                      
$
268
 
                                    
$
5
 
                                      


                                    


 

10


 
(1)
 
2001 includes the divested Resource Management Services businesses.
(2)
 
2001 includes goodwill amortization of $70 million.
(3)
 
Excludes interest expense included in the Segment results ($2 million in 2002; $2 million in 2001).
 
    
SIX MONTHS 2002

    
SIX MONTHS 2001

 
    
Revenue

    
Income after tax

    
Tax Expense

    
Minority Interest

    
Income before tax

    
Revenue

    
Income after tax

    
Tax Expense

    
Minority Interest

    
Income before tax

 
OFS
                                                                                         
North America
  
$
1,458
 
  
$
147
 
  
$
84
 
  
$
—  
 
  
$
231
 
  
$
1,920
 
  
$
284
 
  
$
171
 
  
$
—  
 
  
$
455
 
Latin America
  
 
720
 
  
 
89
 
  
 
16
 
  
 
—  
 
  
 
105
 
  
 
791
 
  
 
66
 
  
 
22
 
  
 
—  
 
  
 
88
 
Europe/CIS/W. Africa
  
 
1,293
 
  
 
132
 
  
 
43
 
  
 
—  
 
  
 
175
 
  
 
1,106
 
  
 
118
 
  
 
39
 
  
 
—  
 
  
 
157
 
Other Eastern
  
 
1,218
 
  
 
205
 
  
 
38
 
  
 
—  
 
  
 
243
 
  
 
1,020
 
  
 
167
 
  
 
31
 
  
 
—  
 
  
 
198
 
Elims/Other
  
 
189
 
  
 
(20
)
  
 
7
 
  
 
10
 
  
 
(3
)
  
 
194
 
  
 
(29
)
  
 
9
 
  
 
11
 
  
 
(9
)
    


  


  


  


  


  


  


  


  


  


    
 
4,878
 
  
 
553
 
  
 
188
 
  
 
10
 
  
 
751
 
  
 
5,031
 
  
 
606
 
  
 
272
 
  
 
11
 
  
 
889
 
    


  


  


  


  


  


  


  


  


  


SLSEMA (1)
                                                                                         
North & South America
  
 
320
 
  
 
(21
)
  
 
(10
)
  
 
—  
 
  
 
(31
)
  
 
315
 
  
 
(25
)
  
 
(17
)
  
 
—  
 
  
 
(42
)
Europe/M. East/Africa
  
 
1,210
 
  
 
40
 
  
 
22
 
  
 
1
 
  
 
63
 
  
 
746
 
  
 
23
 
  
 
11
 
  
 
—  
 
  
 
34
 
Asia
  
 
175
 
  
 
—  
 
  
 
2
 
  
 
—  
 
  
 
2
 
  
 
174
 
  
 
24
 
  
 
2
 
  
 
2
 
  
 
28
 
Elims/Other
  
 
(16
)
  
 
(15
)
  
 
(8
)
  
 
—  
 
  
 
(23
)
  
 
(57
)
  
 
(17
)
  
 
(9
)
  
 
—  
 
  
 
(26
)
    


  


  


  


  


  


  


  


  


  


    
 
1,689
 
  
 
4
 
  
 
6
 
  
 
1
 
  
 
11
 
  
 
1,178
 
  
 
5
 
  
 
(13
)
  
 
2
 
  
 
(6
)
    


  


  


  


  


  


  


  


  


  


OTHER (2)
  
 
179
 
  
 
(7
)
  
 
(5
)
  
 
—  
 
  
 
(12
)
  
 
616
 
  
 
9
 
  
 
(6
)
  
 
1
 
  
 
4
 
Elims & Other (3)
  
 
(48
)
  
 
(15
)
  
 
(55
)
  
 
(2
)
  
 
(72
)
  
 
(40
)
  
 
(86
)
  
 
(54
)
  
 
(1
)
  
 
(141
)
    


  


  


  


  


  


  


  


  


  


    
$
6,698
 
  
$
535
 
  
$
134
 
  
$
9
 
  
$
678
 
  
$
6,785
 
  
$
534
 
  
$
199
 
  
$
13
 
  
$
746
 
    


  


  


  


           


  


  


  


        
Interest Income
                                      
 
37
 
                                      
 
96
 
Interest Expense (4)
                                      
 
(174
)
                                      
 
(182
)
Charges
                                      
 
(30
)
                                      
 
(305
)
                                        


                                      


                                        
$
511
 
                                      
$
355
 
                                        


                                      


 
(1)
 
Includes the results of Sema plc which was acquired in April 2001. Compared to last year and on a proforma basis (assuming the acquisition occurred on January 1, 2001), SLSEMA revenue for the six months was down 1.4%.
(2)
 
2001 includes the divested Resource Management Services businesses.
(3)
 
2001 includes goodwill amortization of $100 million.
(4)
 
Excludes interest expense included in the Segment results ($4 million in 2002; $3 million in 2001).
 
 
Item 2:    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
 
BUSINESS REVIEW
 
    
(Stated in millions)

 
    
Oilfield Services

    
SchlumbergerSema (1)

    
Other (2)

 
Second Quarter

  
2002

  
2001

  
% chg

    
2002

  
2001

    
% chg

    
2002

    
2001

  
% chg

 
Operating Revenue
  
$
2,461
  
$
2,604
  
(5
)%
  
$
853
  
$
877
 
  
(3
)%
  
$
95
 
  
$
311
  
(70
)%
Pretax Operating Income (loss) (3)
  
$
381
  
$
470
  
(19
)%
  
$
10
  
$
(13
)
  
—  
%
  
$
(6
)
  
$
6
  
—  
%
Six Months

                                                                  
Operating Revenue
  
$
4,878
  
$
5,031
  
(3
)%
  
$
1,689
  
$
1,178
 
  
43
%
  
$
179
 
  
$
616
  
(71
)%
Pretax Operating Income (loss) (3)
  
$
751
  
$
889
  
(16
)%
  
$
11
  
$
(6
)
  
—  
%
  
$
(12
)
  
$
4
  
—  
%
 
(1)
 
Includes the results of Sema plc which was acquired in April 2001. Compared to last year and on a proforma basis (assuming the acquisition occurred on January 1, 2001), SchlumbergerSema revenue for the six months was down 1.4%.
(2)
 
2001 includes the divested Resource Management Services businesses.
(3)
 
Pretax operating income (loss) represents income (loss) before taxes and minority interest, excluding interest income, interest expense and amortization of intangibles ($34 million and $92 million for the second quarter in 2002 and 2001, respectively, and $55 million and $125 million for the first six months in 2002 and 2001, respectively).

11


Second Quarter 2002 Compared to Second Quarter 2001
 
Revenue for the second quarter of $3.4 billion decreased 10% over the same period last year. Net income was $196 million compared to a loss of $93 million last year. Diluted earnings were $0.34 per share. This compares with an adjusted $0.45 per share for the same period last year, excluding the impairment charge, and $0.35 per share excluding the charge related to losses following the economic and financial crisis in Argentina in the first quarter of 2002.
 
Oilfield Services revenue of $2.5 billion increased 2% including WesternGeco versus the first quarter of 2002. The worldwide M-I rig count fell 9% over the same period. Revenue decreased 5% year-on-year, substantially less than the average rig count decline of 23%.
 
SchlumbergerSema revenue of $853 million in the second quarter increased 2% sequentially despite the continued downturn in the IT services industry. The slight revenue increase reflected stronger mobile communication cards activity, a higher level of IT services in the UK, and euro-dollar exchange rate gains that were partially offset by lower activity in the Energy & Utilities and Telecommunications segments in North America. Compared to last year revenue fell 3%.
 
 
OILFIELD SERVICES
 
Despite the lackluster global economic recovery, and lower US gas demand leading to higher than average gas storage levels, second quarter activity showed signs of resurgence as Asia continued to recover. Activity in Europe, CIS and West Africa remained robust and the US rig count improved modestly, excluding Canada, amid growing concerns surrounding the sustainability of gas production.
 
Operating revenue of $2.46 billion in the second quarter decreased 5% versus last year, but increased 2% sequentially. This was in sharp contrast to M-I rig count declines of 23% and 9% respectively. Excluding WesternGeco, revenue declined 4% versus last year but increased 3% sequentially.
 
Revenue growth was led by the Middle East & Asia and Europe/CIS/West Africa Areas year-on-year and sequentially. The Caspian and India GeoMarkets recorded the largest year-on-year increases while the Caspian, China and Malaysia/Brunei/Philippines GeoMarkets led sequential growth.
 
From a technology standpoint, Well Completions & Productivity and Drilling & Measurements experienced strong growth year-on-year at 9% and 5% respectively, due to contract wins, new technology introduction and market share gains. All technology segments grew sequentially, with the exception of WesternGeco, which fell as a result of lower multiclient license sales.
 
Pretax operating income decreased 19% year-on-year but increased 3% sequentially. The sequential increase was attributable to sustained pricing levels and higher activity internationally.
 
Despite the depressed IT services market, demand rose for the Schlumberger DeXa suite of network and infrastructure solutions in the E&P industry. E&P related revenue increased 88% year-on-year and 33% sequentially.
 
 
North America
 
Revenue of $720 million decreased 26% versus the same quarter last year and 2% sequentially, compared with the M-I rig count which decreased 35% year-on-year and 14% sequentially. Pretax operating income of $108 million decreased 52% year-on-year and 12% sequentially.
 
These results continued to reflect the lower drilling activity on concerns surrounding the recovery of the US economy. Higher revenues in the US Land and Gulf Coast GeoMarkets in the latter part of the quarter due to increased market share in Drilling & Measurements services, together with a higher rig count and sustained pricing in the Gulf Coast, were offset by the Canadian break up resulting in a sequential revenue decrease in North America. Decreased revenue was recorded across all technology segments, particularly WesternGeco, due to low multiclient license sales in the Gulf of Mexico.

12


 
Latin America
 
Revenue of $335 million decreased 15% year-on-year and 13% sequentially in contrast to M-I rig count declines of 25% and 9% respectively. Pretax operating income of $39 million was 13% lower year-on-year and 41% lower sequentially, attributable to one-off contractual gains during the previous quarter.
 
Ongoing political and economic uncertainty in the region continued to affect business conditions, particularly in Venezuela and Argentina. This was offset to some degree by year-on-year revenue growth in the Mexico & Central America GeoMarket where Schlumberger was awarded an extension for integrated services on the Burgos Alliance II project.
 
 
Europe/CIS/West Africa
 
Revenue of $676 million increased 11% year-on-year and 10% sequentially exceeding the M-I rig count (excluding CIS) which was flat year-on-year and decreased 1% sequentially. Pretax operating income of $96 million decreased 2% year-on-year but increased 22% sequentially.
 
The Caspian GeoMarket led strong growth in the Area where Schlumberger achieved substantial market share gains in Drilling & Measurements, Wireline and Well Completions & Productivity services. Nigeria, Russia and the UK GeoMarkets also posted solid growth versus last year with activity in Nigeria higher due to the more stable environment. Revenue growth in Russia was due to integrated well construction services on the very successful Sibneft horizontal well project in Siberia, together with increased demand for production enhancement services as operators strive to increase production levels. A large number of new contract wins with independent oil companies in the North Sea, coupled with higher Well Completions & Productivity revenue, contributed to the strong growth in the UK. Sequentially, revenue was up in all GeoMarkets with the exception of Nigeria. Double-digit year-on-year growth was recorded across all technology segments except for WesternGeco and Schlumberger Information Solutions.
 
 
Middle East & Asia
 
Revenue of $627 million increased 18% year-on-year and 6% sequentially outpacing the increase in M-I rig count, which grew 7% and 2% respectively. Pretax operating income of $128 million increased 19% year-on-year and 10% sequentially.
 
The India GeoMarket experienced the strongest year-on-year revenue growth mainly due to increased seismic activity as private operators and the government aim to meet stringent exploration target dates following the 2001 licensing round. In addition, the Malaysia/Brunei/Philippines GeoMarket where a major fracturing campaign is underway, and Saudi Arabia where land seismic levels were high, reported significant revenue increases. Sequentially the China GeoMarket saw the largest growth outpacing the rig count as a result of higher seismic, drilling and pressure pumping services.
 
Year-on-year improvements were recorded across all technology segments led by WesternGeco with higher marine activity and multiple long-term land contracts. The Well Completions & Productivity segment led sequential growth and gained significant market share in artificial lift services as a result of a strategy to build world-class artificial lift solutions. This was highlighted by the award of several major artificial lift contracts in the Middle East & Asia Area during the quarter.
 
 
SCHLUMBERGERSEMA
 
Operating revenue of $853 million in the second quarter increased 2% sequentially despite the continued downturn in the IT services industry. The slight revenue increase reflected stronger mobile communication cards activity, a higher level of IT services in the UK, and euro-dollar exchange rate gains that were partially offset by lower activity in the Energy & Utilities and Telecommunications segments in North America. Compared to last year revenue fell 3%.
 
Pretax operating income of $10 million increased $9 million sequentially due to the effect of the cost synergy plan and as a result of higher margins in smart cards across all markets as well as in IT consulting and systems integration in the UK. Compared to last year pretax operating income

13


improved by $23 million due to cost synergies, which were partially offset by lower overall margins especially in smart cards.
 
The cost reduction plan, announced 12 months ago, achieved $148 million in annualized savings across the organization, exceeding the initial goal of $140 million; however, these cost savings are not sufficient for SchlumbergerSema to achieve its business objectives. Further cost savings, including additional headcount reductions, are being analyzed and may result in a charge in the third quarter. In addition, SchlumbergerSema will embark on preparing a strategic business plan which will reflect the expected operating environment and information gained during the integration of the business. It is expected that this plan will be completed, and reviewed and approved by the Company’s Board of Directors, in the fourth quarter of 2002.
 
Volume Products revenue of $201 million decreased 6% versus the same period last year but increased 7% sequentially. The sequential revenue increase was due primarily to significantly higher demand for smart cards across all the GeoMarkets and market segments. Pretax operating income of $6.3 million improved compared to last quarter.
 
 
Europe, Middle East and Africa
 
Revenue of $615 million decreased 5% year-on-year but increased 3% sequentially despite the reduced demand in Europe for systems integration and consulting services. Increased competition and low demand for IT services impacted pricing.
 
Sequential revenue growth was driven by the UK GeoMarket due to high demand in the public sector, especially in the health care industry. The Italian GeoMarket also recorded solid growth with strong activity in major events and telecommunications. The Spanish GeoMarket performed well in the public sector despite an across-the-board decline in demand for IT services, in particular by banks exposed to the South American market. The telecommunications market remained weak mainly in Germany, where budgets are frozen and new capital projects delayed. The France GeoMarket remained lackluster, mainly due to lower activity in the public sector during the French elections, which was offset to some degree by higher card activity in the GeoMarket within the banking sector.
 
Pretax operating income of $34 million increased 84% compared to last year and 18% sequentially mainly due to margin improvements in smart cards, the UK and as a result of the cost savings program initiated last year.
 
 
North and South America
 
Revenue of $157 million declined 15% year-on-year and 3% sequentially reflecting significantly lower Energy and Utilities IT services sales coupled with continued reduced capital spending in telecommunications services. This was partially offset by sustained growth in wireless communications cards to support the development of CDMA/GSM compatible networks.
 
Pretax operating loss of $11 million halved versus the same period last year and improved 41% sequentially. This is attributed to a better mix of product and service sales, improved margins in smart card sales and the cost savings program.
 
 
Asia
 
Revenue of $89 million declined 5% year-on-year but increased 4% sequentially. Strong demand in smart cards in China and the Philippines was offset by lower activity in managed services and lower demand for IT services in telecommunications.
 
Pretax operating income was break-even, representing decreases of $11 million year-on-year and $2 million sequentially. Continuous pricing pressure in telecommunications IT services and on low-end mobile smart cards in China resulted in the year-on-year and sequential decreases.
 
 
OTHER
 
On a comparable basis, excluding the Resource Management Services businesses divested in 2001, revenue was up 3% while the pretax loss improved by $10 million, to $6 million.

14


 
INCOME STATEMENT
 
Interest and other income decreased $21 million from the same period last year due to a $12 million decrease in interest income (2002—$19 million; 2001—$31 million) reflecting a decrease of $463 million in average investment balances and a decrease in average returns on investments from 5.6% to 4.6%; last year, interest and other income included a $9 million gain from the sale of investments. Excluding the $280 million impairment charge in 2001, gross margin was slightly below last year. As a percentage of revenue, research and engineering expense increased 0.2% and marketing expense decreased 0.9% from last year. General expense as a percentage of revenue decreased from 5.1% to 4.8%. Interest expense decreased by $12 million as average debt balances were up $1 billion and the average borrowing rates decreased from 6.4% to 4.9%. The effective tax rate for the second quarter was 26% compared to 24% in the first quarter (excluding the Argentina provision). On a comparable basis, excluding the impairment charge and amortization of goodwill and assembled workforce, the second quarter 2001 effective tax rate was also 26%.
 
 
Six Months 2002 Compared to Six Months 2001
 
OILFIELD SERVICES
 
Six months revenue for Oilfield Services of $4.88 billion was 3% lower compared to the same period last year and was in sharp contrast to worldwide M-I rig count decline of 22%. Despite a lackluster global economic recovery and lower US gas demand leading to higher average gas storage levels, the first six months showed signs of resurgence as activity in the Middle East & Asia and Europe, CIS and West Africa Areas improved robustly mitigating the declines in the North and Latin America Areas.
 
Revenue growth was led by GeoMarkets in the Middle East & Asia and Europe, CIS and West Africa Areas. The Caspian, Nigeria, India, Malaysia/Brunei/Philippines and Saudi Arabia/Kuwait/Bahrain GeoMarkets recorded the largest year-on-year increases.
 
From a technology standpoint, Well Completions & Productivity and Drilling & Measurements experienced strong growth due to contract wins, new technology introduction and market share gains, while SIS (Schlumberger Information Solutions) posted modest gains. The other technology segments fell as a result of rig count decline whereas WesternGeco continued to experience declines as a result of lower multiclient license sales, notably in the Gulf of Mexico.
 
Pretax operating income decreased 16% year-on-year mostly from lower profitability in North America but mitigated by higher activity internationally.
 
Despite the depressed IT services market, demand rose for the Schlumberger DeXa suite of network and infrastructure solutions in the E&P industry. E&P related revenue increased 95% year-on-year as demand increased for connectivity and security solutions. Strong growth was posted across all Areas, except for Latin America.
 
 
North America
 
Revenue in North America of $1.46 billion declined 24% versus the same period last year, compared with M-I rig count which decreased 32%. These results reflect lower drilling activity on concerns surrounding the recovery of the US economy coupled with lower US gas demand leading to higher average gas storage levels. All GeoMarkets with the exception of Alaska recorded declines. Decreased revenue was reported across all technology segments, particularly WesternGeco, due to low multiclient license sales in the Gulf of Mexico. Pretax operating income of $231 million decreased 49% due to pricing pressure on drilling related services affected by activity decline and due the to steep reduction in multiclient sales for WesternGeco.
 
 
Latin America
 
Latin America revenue of $720 million declined 9% year-over-year, compared to M-I rig count which declined 22%. Ongoing political and economic uncertainty in the region continued to affect

15


business conditions, particularly in Venezuela and Argentina. This was mitigated to some degree by growth in the Mexico & Central America GeoMarket where Schlumberger was awarded an extension for integrated services on the Burgos Alliance II project. Despite the lower revenue, pretax operating income of $105 million increased 19% year over year due to favorable fall-throughs from WesternGeco multiclient license transfer fees.
 
 
Europe/CIS/West Africa
 
Europe/CIS/West Africa revenue of $1.29 billion increased 17% versus the same period last year, compared with M-I rig count (excluding CIS) which increased 1%. The Caspian GeoMarket led strong growth in the Area where Schlumberger achieved substantial market share gains in Drilling & Measurements, Wireline and Well Completions & Productivity services. Nigeria, Russia and the UK GeoMarkets also posted solid growth versus last year with activity in Nigeria higher due to the more stable environment. Revenue growth in Russia was due to integrated well construction services on the very successful Sibneft horizontal well project in Siberia, together with increased demand for production enhancement services as operators strive to increase production levels. A large number of new contract wins with independent oil companies in the North Sea, coupled with higher Well Completions & Productivity revenue, contributed to the strong growth in the UK. By technology segment, all segments, with the exception of WesternGeco and IPM, posted strong growth. Pretax operating income of $175 million increased 11% compared to last year.
 
 
Middle East & Asia
 
Six months revenue in the Middle East & Asia Area of $1.22 billion increased 19% year over year compared with M-I rig count which increased 7%. The India GeoMarket experienced the strongest growth mainly due to increased seismic activity as private operators and the government aim to meet stringent exploration target dates following the 2001 licensing round. In addition, the Malaysia/Brunei/Philippines GeoMarket where a major fracturing campaign is underway, and Saudi Arabia where land seismic levels were high, reported significant revenue increases. Improvements were recorded across all technology segments led by WesternGeco with higher marine activity and multiple land long-term contracts. Pretax operating income of $243 million increased 23% compared to last year.
 
 
SCHLUMBERGERSEMA
 
Revenue was $1.7 billion (43% higher than last year reflecting the acquisition of Sama plc in April 2001) and pretax operating income was $11 million. Pretax operating income for Utilities increased $23 million while revenue decreased $28 million over the same period last year; the increase in pretax operating income was due mainly to a reduction in headcount, other cost reduction programs and also reflected higher margins. Revenue for Volume Products was $388 million down 8% over the same period last year. This was due mostly to sharp price decreases and lower activity in China following China Telecom reorganization. Volume Products pretax operating income was $9 million.
 
 
OTHER
 
On a comparable basis, excluding the Resource Management Services businesses divested in 2001, revenue was flat while the pretax loss improved by $23 million, to $12 million.
 
 
INCOME STATEMENT
 
Interest and other income decreased $77 million from the same period last year due to a $59 million decrease in interest income (2002—$37 million; 2001—$96 million) reflecting a decrease of $2.1 billion in average investment balances and a decrease in average returns on investments from 6.1% to 4.3%; last year, interest and other income included a $19 million gain from the sale of investments. Gross margin, excluding charges of $30 million in 2002 and the $280 million in 2001, of 22% was 0.7% below last year. Research and engineering expense and marketing expense as a percentage of revenue decreased 0.3% and 0.5%, respectively, over the same period last year. General expense as a percentage of revenue increased from 4.6% to 4.8%. Interest expense decreased by $6 million as average debt balances were up $1.8 billion and the average borrowing rates decreased from 6.5% to 4.7%. The effective tax rate for the first six month period was 25%

16


compared to 30% (excluding the Argentina provision in 2002 and the RMS impairment charge in 2001 for the same period last year). On a comparable basis, excluding the RMS impairment charge and amortization of goodwill and assembled workforce, the six month 2001 effective tax rate was 26.5%.
 
 
NEW ACCOUNTING STANDARDS
 
In June 2001, SFAS 141 (Business Combinations) and SFAS 142 (Goodwill and Other Intangible Assets) were issued. SFAS 141 was adopted by Schlumberger for acquisitions subsequent to June 30, 2001. SFAS 142 was adopted by Schlumberger commencing January 1, 2002 and, based on the findings of an independent valuation undertaken in the first quarter of 2002, Schlumberger determined that there is no impairment write down on the adoption of this standard.
 
Amortization of goodwill and workforce ceased with effect from January 1, 2002. Assembled workforce, net of deferred taxes, of $179 million has been reclassified to Goodwill.
 
SFAS 143 (Accounting for Asset Retirement Obligations) was issued in June 2001 and will be adopted by Schlumberger commencing January 1, 2003. Schlumberger does not believe that the implementation of this standard will have any material effect on its financial position and results of operations.
 
SFAS 144 (Accounting for Impairment or Disposal of Long-Lived Assets) was adopted by Schlumberger commencing January 1, 2002.
 
Effective January 1, 2002, Schlumberger adopted the FASB EITF Abstract 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred”. Prior year revenue has been restated to include reimbursable costs billed to customers which had been classified as a contra expense and now must be classified as revenue. The reclassification was only required in the Oilfield Services segment as the SchlumbergerSema segment was already in compliance with the new standard. Oilfield Services revenue and cost of goods sold & services increased in the second quarter 2001 by $137 million and in the six months 2001 by $241 million. There was no effect on cash flow or net income.
 
On July 29, 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 replaces Issue 94-3. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.
 
 
LIQUIDITY
 
A measure of financial position is liquidity, which Schlumberger defines as cash plus short-term and fixed income investments, less debt. The following summarizes the change in consolidated liquidity for the second quarter and six months ended June 30, 2002.
 
      
($ millions)

 
      
Second Quarter

    
Six Months

 
Funds provided by:
                   
Net income
    
$
196
 
  
$
369
 
Non-cash charges
    
 
—  
 
  
 
29
 
Depreciation and amortization (1)
    
 
387
 
  
 
755
 
Funds used for:
                   
Capital expenditures (1)
    
 
(450
)
  
 
(902
)
Dividends paid
    
 
(108
)
  
 
(216
)
Working capital
    
 
(60
)
  
 
(360
)
Sema plc acquisition payments
    
 
—  
 
  
 
(132
)
Impact of change in exchange rates
    
 
(392
)
  
 
(355
)
Other
    
 
(8
)
  
 
30
 
      


  


Change in liquidity
    
 
(435
)
  
 
(782
)
Liquidity, beginning of period
    
 
(5,384
)
  
 
(5,037
)
      


  


Liquidity, end of period
    
$
(5,819
)
  
$
(5,819
)
      


  


 
(1)
 
Including multiclient seismic data cost.

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Liquidity in the second quarter decreased $435 million due mainly to the adverse $392 million translation effect from the strengthening of the European currencies. The year to date decrease of $782 million was mainly due to the adverse $355 million currency translation effect, the expected $132 million payment to former LHS/Sema shareholders (under the terms of an exchange agreement to acquire Sema shares) and spending of severance and other 2001 provisions.
 
During January 2002, two principal subsidiaries of Schlumberger in Europe initiated a Euro commercial paper program, which is guaranteed by Schlumberger Limited. At June 30, 2002, Euro commercial paper borrowings totaled $1.5 billion. Euro commercial paper borrowings are supported by a long-term revolving credit facility.
 
On April 4, 2002, the principal US subsidiary of Schlumberger issued $1 billion of 10 year senior unsecured notes with a coupon rate of 6.50% (6.634% including amortization of debt discount and expense) in the US capital markets. The notes were issued under rule 144A without registration rights for life. The proceeds partially replaced US commercial paper borrowings. At June 30, 2002, US commercial paper borrowings totaled $1.5 billion. US commercial paper borrowings are supported by a long-term revolving credit facility.
 
 
FORWARD-LOOKING STATEMENTS
 
This 10-Q report, the second quarter 2002 earnings release and associated web-based publication and other statements we make contain forward looking statements, which include any statements that are not historical facts, such as our expectations regarding business outlook, economic recovery, expected capex, multiclient and depreciation and amortization expenditures, the timing and likelihood of NPTest’s initial public offering, conditions in the oilfield service business, including increases in activity during the second half of 2002 and into 2003, continued deepwater drilling activity, benefits from contract awards, future results of operations, pricing recovery, and cost reductions and improvements in the performance of SchlumbergerSema. These statements involve risks and uncertainties, including, but not limited to, the extent and timing of a rebound in the global economy, changes in exploration and production spending by major oil companies, including our expectations for renewed growth in gas drilling and the sustainability of gas pricing in NAM; continuing customer commitment to certain key oilfield projects, and continued growth in Schlumberger IT Services for E&P industry; general economic and business conditions in key regions of the world, including potential currency and business exposure in Argentina, Brazil and Venezuela; changes in business strategy, economic, competitive and technological factors affecting markets, services, and prices in SchlumbergerSema businesses including its ability to accelerate synergies with Oilfield Services and to increase cost savings; uncertainties created by deregulation in the utility industry particularly in NAM and the extent and timing of utilities’ investment in integrated solutions to utility management; continuing customer commitment to key long-term services and solutions contracts in our SchlumbergerSema businesses; a reversal of the weak IT environment and a significant increase in IT spending; the extent and timing of a recovery in the telecommunications industry; an increase in the pricing of and a growth in the demand for smart cards in e-commerce and network and Internet-enabled solutions; Schlumberger’s ability to meet its identified liquidity projections, including the generation of sufficient cash flow from oilfield operating results and the successful completion of certain business divestitures, and other factors detailed in this Form 10-Q, in our second quarter 2002 earnings release, our most recent Form 10-K and other filings with the Securities and Exchange Commission. If one or more of these risks or uncertainties materialize (or the consequences of such a development changes), or should underlying assumptions prove incorrect, actual outcomes may vary materially from those forecasted or expected. 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 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

18


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.
 
 
PART II.    OTHER INFORMATION
 
Item 6:    Exhibits and Reports on Form 8-K
 
(a)
 
Exhibits:
 
Exhibit 99.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Exhibit 99.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(b)
 
Reports on Form 8-K:
 
Report 8-K dated May 21, 2002, filed as of May 21, 2002 to report a press release dated May 21, 2002 announcing the filing with the Securities and Exchange Commission of a registration statement by NPTest, Inc., a wholly-owned subsidiary of Schlumberger Limited, for a proposed initial public offering of shares of NPTest’s common stock.
 
Report 8-K dated July 17, 2002, furnished as of July 18, 2002 to report under Item 9 a Question and Answer document on the July 17, 2002 Schlumberger Press Release.
 
Report 8-K dated July 23, 2002, furnished as of July 26, 2002 to report under Item 9 a transcript of a presentation entitled “Enabling the Promise of the Digital Enterprise”, with accompanying question and answer session, held by management and publicly disseminated via internet webcast.

19


 
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: August 8, 2002
 
/s/    Frank A. Sorgie
   
   
Frank A. Sorgie
   
Chief Accounting Officer

20
Prepared by R.R. Donnelley Financial -- STATEMENT UNDER OATH OF D. EUAN BAIRD
Exhibit 99.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Schlumberger N.V. (Schlumberger Limited), (the “Company”) on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, D. Euan Baird, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
 
and
 
(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
 
 
/s/    D. Euan Baird

D. Euan Baird
Chief Executive Officer
August 8, 2002
 
Prepared by R.R. Donnelley Financial -- STATEMENT UNDER OATH OF JEAN-MARC PERRAUD
Exhibit 99.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Schlumberger N.V. (Schlumberger Limited), (the “Company”) on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jean-Marc Perraud, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
 
and
 
(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
 
/s/    Jean-Marc Perraud

Jean-Marc Perraud
Chief Financial Officer
August 8, 2002