Form 10-K
Table of Contents

 

As filed with the Securities and Exchange Commission on February 27, 2003


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-K

 

(Mark One)

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For fiscal year ended December 31, 2002

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Transition period from             to             

 

Commission File Number 1-4601

 

Schlumberger N.V. (Schlumberger Limited)

(Exact name of registrant as specified in its charter)

 

Netherlands Antilles

(State or other jurisdiction of incorporation or organization)

 

52-0684746

(IRS Employer Identification No.)

153 East 53 Street, 57th Floor

New York, New York, U.S.A.

 

10022-4624

42, rue Saint-Dominique

Paris, France

 

75007

Parkstraat 83, The Hague,

The Netherlands

 

2514 JG

(Addresses of principal executive offices)

 

(Zip Codes)

 

Registrant’s telephone number in the United States, including area code, is: (212) 350-9400

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class


 

Name of each exchange on which registered


Common Stock, par value $0.01 per share

 

New York Stock Exchange

Euronext Paris

Euronext Amsterdam

The London Stock Exchange

SWX Swiss Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x    NO  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b.2 of the Act).  YES  x    NO  ¨

 

As of June 28, 2002, the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was approximately $26 billion.

 

As of February 20, 2003, Number of Shares of Common Stock Outstanding: 582,204,604.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the following documents have been incorporated herein by reference into the Parts indicated: Definitive Proxy Statement for the Annual General Meeting of Stockholders to be held April 11, 2003 (“Proxy Statement”), Part III.

 

1


Table of Contents

SCHLUMBERGER LIMITED

Table of Contents

Form 10-K

 

         

Page


PART I

         

Item 1.

  

Business

  

3

Item 2.

  

Properties

  

6

Item 3.

  

Legal Proceedings

  

7

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

7

PART II

         

Item 5.

  

Market for Schlumberger’s Common Stock and Related Stockholder Matters

  

9

Item 6.

  

Selected Financial Data

  

10

Item 7.

  

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

  

12

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

  

32

Item 8.

  

Financial Statements and Supplementary Data

  

33

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

68

PART III

         

Item 10.

  

Directors and Executive Officers of Schlumberger

  

69

Item 11.

  

Executive Compensation

  

69

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

69

Item 13.

  

Certain Relationships and Related Transactions

  

70

Item 14.

  

Controls and Procedures

  

70

PART IV

         

Item 15.

  

Exhibits, Financial Statement Schedules and Reports on Form 8-K

  

71

    

Signatures

  

74

    

Certifications

  

75-76

 

2


Table of Contents

PART I

 

Item 1     Business

 

All references herein to “Registrant”, “Company” and “Schlumberger” refer to Schlumberger Limited and its consolidated subsidiaries. The following discussion of results should be read in conjunction with the Consolidated Financial Statements.

 

Founded in 1927, Schlumberger Limited is a global technology services company consisting of three business segments: first, Schlumberger Oilfield Services, one of the leading providers of technology services and solutions to the international petroleum industry; second, SchlumbergerSema, an IT services company providing consulting and systems integration services, and network and infrastructure solutions, primarily to the global energy sector, including oil and gas, and other regional markets spanning the telecommunications, finance and public sectors and third, the Other business segment which principally comprises the Cards, Terminals, Meters North America and NPTest activities. With approximately 78,500 employees and operations in over 100 countries, Schlumberger has principal executive offices in Paris, New York and The Hague. The following summary describes the services and products for each business segment.

 

Schlumberger Oilfield Services is one of the leading providers of technology services and solutions to the international petroleum industry.

 

With 48,000 employees, Schlumberger Oilfield Services manages its business through 27 Oilfield Services GeoMarket* regions, which are grouped into four geographic areas: North America; Latin America; Europe, CIS and West Africa; and the Middle East & Asia. The GeoMarket regions offer customers a single point of contact at the local level for field operations and bring together geographically focused teams to meet local needs and deliver customized solutions.

 

Schlumberger invented wireline logging in 1927 as a technique for obtaining downhole data in oil and gas wells. Today, Schlumberger Oilfield Services operates in each of the major oilfield service markets covering the entire life cycle of the reservoir. These services are organized into seven technology segments, in which Schlumberger holds a number of market leading positions, to capitalize on technical synergies and introduce innovative solutions within the GeoMarket regions.

 

  n   Wireline – services that provide the information necessary to evaluate the reservoir, plan and monitor well construction, and monitor and evaluate production, divided into open-hole and cased-hole wireline logging.

 

  n   Drilling & Measurements – directional drilling, measurement-while-drilling and logging-while-drilling services.

 

  n   Well Services – services to construct oil and gas wells, as well as maintain optimal production through the life of an oil and gas field. These include pressure pumping, well stimulation services, coiled tubing, cementing and engineering services.

 

  n   Well Completions & Productivity – services for testing, completing and producing oil and gas wells ranging from well testing and perforating services, completions systems, intelligent completions to a full spectrum of artificial lift services.

 

  n   Integrated Project Management – consulting, project management and engineering services leveraging the expertise from the other technology segments for the E&P industry.

 

  n   Schlumberger Information Solutions – integrated business solutions comprising GeoQuest software, information management services, information technology and a complete range of expert services.

 

  n   WesternGeco Joint Venture (70% Schlumberger, 30% Baker Hughes) – land and marine seismic acquisition and processing.

 

The technology segments are also responsible for overseeing operational processes, resource allocation, personnel and quality, health, safety and environmental matters in the GeoMarket.

 

Supporting the service technology segments are 13 technology centers and five research centers. Through its research and product development, Schlumberger is committed to advanced technology programs that

 

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Table of Contents

will enhance oilfield efficiency, lower finding and producing costs, improve productivity, maximize reserve recovery, increase asset value and accomplish all of these goals in a safe, environmentally sound manner.

 

In addition, Schlumberger is a minority owner in M-I Drilling Fluids, a joint venture with Smith International that offers drilling and completion fluids utilized to stabilize rock strata during the drilling process and minimize formation damage during completion and workover operations.

 

Schlumberger also owns several jack up rigs, two of which were sold in the fourth quarter of 2002. In addition, the Reed Hycalog drillbits business was sold to Grant Prideco in December 2002 and has been treated as a discontinued operation.

 

Schlumberger’s oilfield services are marketed by its own personnel. The customer base, business risks and opportunities for growth are essentially uniform across all services. There is a sharing of manufacturing and engineering facilities as well as research centers; labor force is interchangeable. Technological innovation, quality of service, and price are the principal methods of competition. Competition varies geographically with respect to the different services offered. While there are numerous competitors, both large and small, Schlumberger believes that it is an industry leader in providing seismic services, measurements-while-drilling and logging-while-drilling services, and fully computerized logging and geoscience software and computing services. Land and marine seismic operations and technologies are managed and developed by WesternGeco. A large proportion of Schlumberger’s oilfield services are non-rig related; consequently, revenue does not necessarily correlate to rig count fluctuations.

 

The focus of Schlumberger Oilfield Services is on increasing the productivity of oil and gas reservoirs, which is being enhanced through the delivery, and application of real-time data. As oil and gas operators face declining production and challenges in adding new reserves economically, they are increasing their focus on improving recovery rates from existing and new reserves while reducing overall costs. As a result, the long-term objective is to fully integrate SchlumbergerSema IT solutions and services with oilfield operations to provide real-time reservoir management services that allow customers to optimize production and the recovery of their hydrocarbon reserves.

 

SchlumbergerSema provides IT consulting, systems integration, managed services together with network and infrastructure solutions, primarily in the global energy market which includes the oil and gas industry where Schlumberger holds a leadership position and the energy and utilities market. In addition, SchlumbergerSema provides these services in specific regional markets spanning the telecommunications, finance, transport and public sectors.

 

During 2002 SchlumbergerSema underwent two organizational changes:

 

  n   First, Schlumberger Network Solutions, previously under Oilfield Services, was combined with the Global Infrastructure Services business of SchlumbergerSema to create today’s Network & Infrastructure Solutions division of SchlumbergerSema.

 

  n   Second, on December 10, 2002 Schlumberger announced that it would separate the products businesses from the services businesses in SchlumbergerSema. The products businesses are now reported in the ‘Other’ business segment, which includes Payment Systems, Cards, Point of Sales Terminals, Electricity Metering and Parking Meters. Telecom software products remain part of the SchlumbergerSema segment but are managed separately.

 

The objective of the reorganizations is to maximize the synergies between SchlumbergerSema and Oilfield Services by rapidly developing IT services for the Energy sector.

 

With approximately 25,000 people serving customers in 65 countries, SchlumbergerSema is organized into 19 GeoMarkets grouped into three major geographic areas: North and South America; Europe, Africa, Middle East; and Asia.

 

SchlumbergerSema services are organized as follows:

 

  n   Network & Infrastructure Solutions that combines specialized technologies, domain experience and global infrastructure to enable the digital enterprise through their DeXa Suite of Services and provides secure global IP infrastructure, integrated information security solutions, wireless and remote network connectivity and complete network managed services.

 

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Table of Contents
  n   Consulting & Systems Integration which offers consulting services, business systems and large-scale technical systems designed to operate to the highest levels of reliability in demanding conditions. The knowledge, skills and methods used by Schlumberger consultants around the world, combined with technical, systems integration and outsourced managed services capability within SchlumbergerSema, enable the development, implementation and management of major business and IT programs that are core to the strategic goals and long-term success of all businesses.

 

  n   Telecom Products, which provides telecommunications enterprise software systems, such as billing, customer relationship management (CRM).

 

SchlumbergerSema was formed in April 2001, when Schlumberger Limited acquired Sema plc, and combined it with part of its former Test & Transactions business and other recent acquisitions.

 

Other

 

Schlumberger Volume Products offers a broad portfolio of hardware and software products that provide the foundation of the company’s best-in-class services and solutions. With more than 20 years experience as the smart card industry leader, Schlumberger was the first company to introduce Java-based smart card technology, and has sold more than 2.5 billion smart cards to date. Product expertise includes:

 

  n   Cards

 

  n   Payphones

 

  n   Point-of-sale (POS) terminals

 

  n   Parking and mass transit terminals

 

  n   Meters

 

  n   Trading systems

 

Also included in this segment is NPTest, which provides advanced test and diagnostic systems as well as engineering services to the semiconductor industry. These devices range from microprocessors, graphics processors, chipsets, devices for high-speed data transfer and communication applications to those used in increasingly complex consumer electronics such as DVDs and set-top boxes.

 

Acquisitions

 

Information on acquisitions made by Schlumberger or its subsidiaries appears under the heading “Acquisitions” on page 47 of this Report within the “Notes to Consolidated Financial Statements”.

 

GENERAL

 

Research & Development

 

Research to support the engineering and development efforts of Schlumberger’s activities is conducted at Schlumberger Doll Research, Ridgefield, Connecticut, USA; Schlumberger Cambridge Research, Cambridge, England, and at Stavanger, Norway; Moscow, Russia and Dhahran, Saudi Arabia.

 

Patents

 

While Schlumberger seeks and holds numerous patents, no particular patent or group of patents is considered material to Schlumberger’s business.

 

Seasonality

 

Although weather and natural phenomena can temporarily affect delivery of oilfield services, the widespread geographic location of such services precludes the overall business from being characterized as seasonal. However, because oilfield services are provided predominantly in the Northern Hemisphere, severe weather can temporarily affect the delivery of such services and products.

 

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Table of Contents

 

Customers and Backlog of Orders

 

No single customer exceeded 10% of consolidated revenue. Oilfield Services has no backlog since it is primarily service rather than product related. SchlumbergerSema backlog at December 31, 2002 was $4.7 billion of which $1.5 billion is the subsequent twelve month backlog. At December 31, 2001, the SchlumbergerSema backlog was $4.3 billion of which $1.5 billion was the subsequent twelve month backlog. The orders are believed to be firm but there is no assurance that any of the current backlog will actually result in sales.

 

Government Contracts

 

No material portion of Schlumberger’s business is subject to renegotiation of profits or termination of contracts by the US or other governments.

 

Employees

 

As of December 31, 2002, Schlumberger had approximately 78,500 employees.

 

Non-US Operations

 

Schlumberger’s non-US operations are subject to the usual risks which may affect such operations. Such risks include unsettled political conditions in certain areas, exposure to possible expropriation or other governmental actions, exchange controls, and currency fluctuations. Although it is impossible to predict such occurrences or their effect on Schlumberger, management believes these risks to be acceptable.

 

Environmental Protection

 

Compliance with governmental provisions relating to the protection of the environment does not materially affect Schlumberger’s capital expenditures, earnings or competitive position. Management believes that Schlumberger is currently in substantial compliance with applicable environmental laws and regulations. For more information, see Environmental Matters on page 30.

 

Financial Information

 

Financial information by business segment for the years ended December 31, 2002, 2001 and 2000 is given on pages 58-59 of this Report, within the Notes to Consolidated Financial Statements.

 

Internet Website

 

Schlumberger’s internet website can be found at www.slb.com. Schlumberger makes available free of charge, or through our internet website at investorcenter.slb.com, access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is filed, or furnished to the Securities and Exchange Commission.

 

Item 2    Properties

 

Schlumberger owns or leases manufacturing facilities, administrative offices, service centers, research centers, sales offices and warehouses in North and South America, Europe, Africa, Asia and Australia. Some facilities are owned and some are held through long-term leases. No significant lease is scheduled to terminate in the near future, and Schlumberger believes comparable space is readily obtainable should any lease expire without renewal. Schlumberger believes all of its properties are generally well maintained and adequate for the intended use.

 

Outside the United States the principal owned or leased facilities of Oilfield Services are located in Hassi Massoud, Algeria; Luanda, Angola; Perth, Australia; Baku, Azerbaijhan; Rio de Janeiro, Brazil; Calgary and Edmonton, Canada; Bogota, Colombia; Cairo, Egypt; Clamart and Paris, France; Jakarta, Indonesia; Milan, Italy; Fuchinobe, Japan; Atyrau, Kazakhstan; Kuwait City, Kuwait; Kuala Lumpur, Malaysia; Mexico City, Mexico; Port Harcourt, Nigeria; Belfast, Northern Ireland; Bergen and Stavanger, Norway;

 

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Table of Contents

Doha, Qatar; Moscow, Russia; Al-Khobar, Saudi Arabia; Singapore; Bangkok, Thailand; Abu Dhabi and Dubai, United Arab Emirates; Aberdeen, Gatwick, Inverurie, Stonehouse and Southampton, United Kingdom; Caracas, Venezuela.

 

Within the United States, the principal owned or leased facilities of Oilfield Services are located in Anchorage, Alaska; Lawrence, Kansas; New Orleans, Louisiana; Bartlesville, Oklahoma; Austin, Houston, La Marque, Rosharon and Sugar Land, Texas.

 

Within the United States, the principal owned or leased facilities of SchlumbergerSema are located in San Carlos, California; Denver, Colorado; Miami, Florida; Atlanta, Georgia; Owings Mills, Maryland; Boston, Massachusetts; Jersey City and Moorestown, New Jersey; Oconee, South Carolina; Austin and Houston, Texas.

 

Outside the United States, the principal owned or leased facilities of SchlumbergerSema are located in Buenos Aires, Argentina; Sydney, Australia; Brussels, Belgium; Curitiba and Sao Paulo, Brazil; Toronto and Quebec, Canada; Santiago, Chile; Beijing, Changsha, Guangzho, Hong Kong and Shanghai, China; Bogota, Colombia; San Jose, Costa Rica; Copenhagen, Denmark; Chambray-les-Tours, Louveciennes, Montrouge, Paris and Sophia Antopolis, France; Dreiech, Dusseldorf, Hamburg, Koln and Munich, Germany; Calcutta, Mumbai and New Delhi, India; Jakarta, Indonesia; Dublin, Ireland; Milan, Pont St. Martin, Naples and Rome, Italy; Tokyo, Japan; Seoul, Korea; Kuala Lumpur, Malaysia; Mexico City, Mexico; Asker and Oslo, Norway; Singapore; Cape Town and Johannesburg, South Africa; Barcelona and Madrid, Spain; Gothenburg, Kiruna, Malmo and Stockholm, Sweden; Geneva and Zurich, Switzerland; Taipei, Taiwan; Bangkok, Thailand; Birmingham, Crewe, Docklands, Glasgow, Nottingham, London, Reading and Wilmslow, United Kingdom.

 

Item 3    Legal Proceedings

 

The information with respect to Item 3 is set forth under the heading Contingencies on page 57 of this Report, within the Notes to Consolidated Financial Statements.

 

Item 4    Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of Schlumberger’s security holders during the fourth quarter of the fiscal year covered by this report.

 

Executive Officers of Schlumberger

 

Information with respect to the executive officers of Schlumberger and their ages as of February 28, 2003 is set forth below. The positions have been held for at least five years, except where stated.

 

Name


  

Age


  

Present Position and Five-Year Business Experience


Andrew Gould

  

56

  

Chairman and Chief Executive Officer, since February 2003;

President and Chief Operating Officer, March 2002 to February 2003;

Executive Vice President – Oilfield Services, January 1999 to March 2002; and

Executive Vice President – OFS Products, February 1998 to January 1999.

Jean-Marc Perraud

  

55

  

Executive Vice President and Chief Financial Officer, since March 2002;

Controller and Chief Accounting Officer, April 2001 to March 2002;

Treasurer, January 1999 to May 2001; and

Vice President – Director of Taxes, May 1993 to January 1999.

Xavier Flinois

  

40

  

Executive Vice President, since February 2003;

President SchlumbergerSema, July 2002 to February 2003;

President Network & Infrastructure Solutions, April 2002 to July 2002;

 

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Table of Contents

Name


  

Age


  

Present Position and Five-Year Business Experience


         

President Network Solutions, March 2000 to April 2002;

President Omnes, October 1999 to March 2000; and

Vice President Technology, Test & Transactions, March 1998 to October 1999.

Chakib Sbiti

  

48

  

Executive Vice President, since February 2003;

President Oilfield Services Middle East & Asia, July 2001 to February 2003;

President Oilfield Services Asia, August 2000 to July 2001; and

Oilfield Services Director of Personnel, January 1998 to August 2000.

Ellen Summer

  

56

  

Secretary and General Counsel, since March 2002;

Director of Legal Services, April 2001 to March 2002; and

Deputy General Counsel, March 2001 and prior.

Simon Ayat

  

48

  

Vice President, Controller and Business Processes, since December 2002;

Vice President Finance SchlumbergerSema, April 2001 to December 2002;

Oilfield Services Controller, September 1998 to April 2001; and

GeoMarket Manager Indonesia, February 1998 to September 1998.

Pierre E. Bismuth

  

58

  

Vice President – Personnel.

Mark Danton

  

46

  

Vice President – Director of Taxes, since January 1, 1999; and

Deputy Director of Taxes, January 1995 to January 1999.

Andre Erlich

  

55

  

Chief Information Officer, since May 2002;

Vice President Technology and General Manager, April 2001 to May 2002;

Vice President Business Development, October 1999 to April 2001; and

Vice President and General Manager SRPC, September 1997 to October 1999.

Rene Huck

  

55

  

Vice President QHSE & Industry Affairs, since March 2002;

President Reservoir Evaluation and Development, Oilfield Services, January 2001 to March 2002;

President Reservoir Development, Oilfield Services, December 1999 to January 2001;

President Camco International, September 1998 to December 1999; and

President European-Caspian Area, Oilfield Services, January 1998 to September 1998.

Philippe Lacour-Gayet

  

55

  

Vice President and Chief Scientist, since January 2001; and

Chief Scientist, July 1997 to January 2001.

Jean-Dominique Percevault

  

57

  

Vice President – European Affairs and Chairman France, since January 2002;

Vice President – European Affairs, December 2001 and prior.

Frank Sorgie

  

55

  

Chief Accounting Officer, since May 2002; and

Director of Financial Reporting, January 1993 to May 2002.

Michel Soublin

  

57

  

Treasurer, since May 2001;

Seconded as Chief Financial Officer to Yukos, January 1999 to May 2001;

Director Business Information Systems, September 1998 to January 1999;

and Vice President and Controller, Oilfield Services, January 1996 to September 1998.

 

 

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Table of Contents

PART II

 

Item 5    Market for Schlumberger’s Common Stock and Related Stockholder Matters

 

As of December 31, 2002, there were 582,173,115 shares of the Common Stock of Schlumberger outstanding, exclusive of 84,931,553 shares held in Treasury, and approximately 24,825 stockholders of record. The principal United States market for Schlumberger’s Common Stock is the New York Stock Exchange.

 

Schlumberger’s Common Stock is also traded on the Euronext Paris, Euronext Amsterdam, London and SWX Swiss stock exchanges.

 

Common Stock, Market Prices and Dividends Declared per Share

 

The information with respect to this portion of Item 5 is set forth under the heading Common Stock, Market Prices and Dividends Declared per Share on page 30 of this Report.

 

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Table of Contents

 

Item 6     Selected Financial Data

 

FIVE-YEAR SUMMARY

 

    

(Stated in millions except per share amounts)

 
    

Year Ended December 31,


 
    

2002


    

2001 1


    

2000 1


    

1999 1


    

1998 1


 

SUMMARY OF OPERATIONS

                                            

Operating revenue:

                                            

Oilfield Services

  

$

9,347

 

  

$

9,867

 

  

$

7,253

 

  

$

6,043

 

  

$

8,029

 

SchlumbergerSema 2

  

 

2,991

 

  

 

2,258

 

  

 

238

 

  

 

68

 

  

 

—  

 

Other 3

  

 

1,442

 

  

 

2,136

 

  

 

2,468

 

  

 

2,480

 

  

 

2,932

 

Eliminations and other

  

 

(306

)

  

 

(203

)

  

 

(128

)

  

 

(18

)

  

 

—  

 

    


  


  


  


  


Total operating revenue

  

$

13,474

 

  

$

14,058

 

  

$

9,831

 

  

$

8,573

 

  

$

10,961

 

    


  


  


  


  


% increase (decrease) over prior year

  

 

(4

)% 

  

 

43

%

  

 

15

%

  

 

(22

)%

  

 

1

%

Pretax segment income:

                                            

Oilfield Services

  

$

1,328

 

  

$

1,803

 

  

$

1,041

 

  

$

595

 

  

$

1,288

 

SchlumbergerSema 2

  

 

34

 

  

 

(33

)

  

 

(75

)

  

 

3

 

  

 

2

 

Other 3

  

 

20

 

  

 

93

 

  

 

155

 

  

 

103

 

  

 

159

 

Eliminations 4

  

 

(148

)

  

 

(420

)

  

 

(206

)

  

 

(169

)

  

 

(198

)

    


  


  


  


  


Pretax segment income before minority interest

  

 

1,234

 

  

 

1,443

 

  

 

915

 

  

 

532

 

  

 

1,251

 

Minority interest

  

 

 

  

 

38

 

  

 

7

 

  

 

11

 

  

 

9

 

    


  


  


  


  


Total pretax segment income, before charges

  

$

1,234

 

  

$

1,405

 

  

$

908

 

  

$

521

 

  

$

1,242

 

    


  


  


  


  


% increase (decrease) over prior year

  

 

(12

)%

  

 

55

%

  

 

74

%

  

 

(58

)%

  

 

(11

)%

Interest income

  

 

68

 

  

 

154

 

  

 

297

 

  

 

228

 

  

 

164

 

Interest expense

  

 

364

 

  

 

380

 

  

 

273

 

  

 

184

 

  

 

127

 

Charges (net of minority interest) 5

  

 

3,077

 

  

 

134

 

  

 

(7

)

  

 

120

 

  

 

432

 

Taxes on income 6

  

 

279

 

  

 

554

 

  

 

218

 

  

 

132

 

  

 

261

 

    


  


  


  


  


Income (loss), continuing operations

  

$

(2,418

)

  

$

491

 

  

$

721

 

  

$

313

 

  

$

586

 

    


  


  


  


  


% increase (decrease) over prior year

  

 

    —

 

  

 

(32

)%

  

 

130

%

  

 

(47

)%

  

 

(44

)%

    


  


  


  


  


Income, discontinued operations

  

$

98

 

  

$

31

 

  

$

14

 

  

$

54

 

  

$

428

 

    


  


  


  


  


Net income (loss)

  

$

(2,320

)

  

$

522

 

  

$

735

 

  

$

367

 

  

$

1,014

 

    


  


  


  


  


% increase (decrease) over prior year

  

 

—  

 

  

 

(29

)%

  

 

100

%

  

 

(64

)%

  

 

(27

)%

Basic earnings (loss) per share:

                                            

Continuing operations

  

$

(4.18

)

  

$

0.85

 

  

$

1.26

 

  

$

0.57

 

  

$

1.08

 

Discontinued operations

  

 

0.17

 

  

 

0.06

 

  

 

0.03

 

  

 

0.10

 

  

 

0.78

 

    


  


  


  


  


Net income (loss)

  

$

(4.01

)

  

$

0.91

 

  

$

1.29

 

  

$

0.67

 

  

$

1.86

 

Add back amortization of goodwill

  

 

—  

 

  

 

0.50

 

  

 

0.17

 

  

 

0.16

 

  

 

0.13

 

    


  


  


  


  


Adjusted earnings (loss) per share

  

$

(4.01

)

  

$

1.41

 

  

$

1.46

 

  

$

0.83

 

  

$

1.99

 

    


  


  


  


  


Diluted earnings (loss) per share:

                                            

Continuing operations

  

$

(4.18

)

  

$

0.85

 

  

$

1.25

 

  

$

0.55

 

  

$

1.04

 

Discontinued operations

  

 

0.17

 

  

 

0.06

 

  

 

0.02

 

  

 

0.10

 

  

 

0.77

 

    


  


  


  


  


Net income (loss)

  

$

(4.01

)

  

$

0.91

 

  

$

1.27

 

  

$

0.65

 

  

$

1.81

 

Add back amortization of goodwill

  

 

—  

 

  

 

0.50

 

  

 

0.17

 

  

 

0.15

 

  

 

0.12

 

    


  


  


  


  


Adjusted earnings (loss) per share

  

$

(4.01

)

  

$

1.41

 

  

$

1.44

 

  

$

0.80

 

  

$

1.93

 

    


  


  


  


  


Cash dividends declared per share

  

$

0.75

 

  

$

0.75

 

  

$

0.75

 

  

$

0.75

 

  

$

0.75

 

    


  


  


  


  


 

10


Table of Contents

 

    

(Stated in millions except per share amounts)

 
    

Year Ended December 31,


 
    

2002


    

2001 1


    

2000 1


    

1999 1


    

1998 1


 

SUMMARY OF FINANCIAL DATA

                                            

Income as % of operating revenue, continuing operations

  

 

(18

)%

  

 

3

%

  

 

7

%

  

 

4

%

  

 

5

%

    


  


  


  


  


Income as % of operating revenue, continuing operations excluding charges

  

 

5

%

  

 

6

%

  

 

7

%

  

 

5

%

  

 

9

%

    


  


  


  


  


Return on average stockholders’ equity, continuing operations

  

 

(31

)%

  

 

6

%

  

 

9

%

  

 

4

%

  

 

8

%

    


  


  


  


  


Return on average stockholders’ equity, continuing operations excluding charges

  

 

9

%

  

 

10

%

  

 

9

%

  

 

6

%

  

 

12

%

    


  


  


  


  


Fixed asset additions

  

$

1,366

 

  

$

2,044

 

  

$

1,317

 

  

$

787

 

  

$

1,458

 

    


  


  


  


  


Depreciation expense

  

$

1,256

 

  

$

1,178

 

  

$

936

 

  

$

923

 

  

$

 929

 

    


  


  


  


  


Avg. number of shares outstanding:

                                            

Basic

  

 

579

 

  

 

574

 

  

 

570

 

  

 

549

 

  

 

544

 

    


  


  


  


  


Assuming dilution

  

 

579

 

  

 

580

 

  

 

580

 

  

 

564

 

  

 

562

 

    


  


  


  


  


AT DECEMBER 31:

                                            

Liquidity 7

  

$

(5,021

)

  

$

(5,037

)

  

$

422

 

  

$

1,231

 

  

$

731

 

    


  


  


  


  


Working capital

  

$

735

 

  

$

1,487

 

  

$

3,502

 

  

$

4,787

 

  

$

4,681

 

    


  


  


  


  


Total assets

  

$

19,435

 

  

$

22,326

 

  

$

17,173

 

  

$

15,081

 

  

$

16,078

 

    


  


  


  


  


Long-term debt

  

$

6,029

 

  

$

6,216

 

  

$

3,573

 

  

$

3,183

 

  

$

3,285

 

    


  


  


  


  


Stockholders’ equity

  

$

5,606

 

  

$

8,378

 

  

$

8,295

 

  

$

7,721

 

  

$

8,119

 

    


  


  


  


  


Number of employees continuing operations

  

 

78,500

 

  

 

80,000

 

  

 

59,000

 

  

 

54,000

 

  

 

58,000

 

    


  


  


  


  


 

  1.   Restated, in part, for organization changes and discontinued operations.
  2.   Sema plc was acquired on April 1, 2001.
  3.   Principally includes the Cards, Terminals, Meters North America, NPTest and the divested Resource Management Systems (sold in 2001) and Retail Petroleum Services (sold in 1998) businesses.
  4.   Includes amortization of goodwill and other acquisition related intangibles.
  5.   For details of Charges, see pages 23-24 of this Report.
  6.   In 2002, the provision for income tax before the net tax expense on the charges was $246 million. In 2001, the provision for income taxes, before the tax expense on the charges was $391 million. In 2000, the provision for income taxes, before the tax benefit on the charges was $208 million. In 1999, the provision for income taxes, before the tax benefit on the charge and the tax expense on the gain on the sale of RPS financial instruments, was $124 million. In 1998, the provision for income taxes, before the tax benefit charge, was $324 million.
  7.   As defined on page 27 of this Report.

 

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Table of Contents

 

Item 7     Management’s Discussion and Analysis of Financial Condition

                and Results of Operations

 

Schlumberger operates three business segments: Oilfield Services, SchlumbergerSema and Other. The following discussion and analysis of results of operations should be read in conjunction with the Consolidated Financial Statements.

 

(Stated in millions)

 

OILFIELD SERVICES

  

2002

  

2001 1

      

% Change

 

Operating Revenue

  

$

9,347

  

$

9,867

 

    

(5

)%

Pretax Segment Income 2

  

$

1,328

  

$

1,803

 

    

(26

)%

SCHLUMBERGERSEMA 3

  

2002

  

2001

      

% Change

 

Operating Revenue

  

$

2,991

  

$

2,258

 

    

32

%

Pretax Segment Income 2

  

$

34

  

$

(33

)

    

—  

%

OTHER 4

  

2002

  

2001

      

% Change

 

Operating Revenue

  

$

1,442

  

$

2,136

 

    

(33

)%

Pretax Segment Income 2

  

$

20

  

$

93

 

    

(78

)%

 

1   Restated, in part, for organizational changes and discontinued operations.
2   Pretax segment income represents income before taxes and minority interest, excluding interest income, interest expense, gain on sale of securities and amortization of intangibles and charges, net (see pages 23-24 of this Report).
3   Sema plc was acquired April 1, 2001. Compared to 2001 and on a pro forma basis (assuming the acquisition occurred on January 1, 2001) SchlumbergerSema revenue for 2002 was up 7%.
4   Principally comprises the Cards, Terminals, Meters North America and NPTest activities and in 2001, the divested Resource Management Services businesses.

 

Oilfield Services

 

2002 Results

 

Revenue for 2002 was $9.3 billion versus $9.9 billion in 2001 reflecting a 5% decrease due to reduced activity in North America and Latin America, which were 24% and 7% lower respectively. This was partially mitigated by higher activity in Europe/CIS/West Africa, up 14% and the Middle East & Asia, where revenue increased 10%. The M-I rig count fell 17%. Pretax operating income decreased 26% primarily from reduced margins in wireline, well services and seismic technologies as activity declined in North America.

 

A sharp fall in revenue at the beginning of 2002 reflected declining activity levels in North America, which remained depressed for the remainder of the year, together with political and economic uncertainty in Latin America. In the second and third quarters, robust activity in Europe/CIS/West Africa, and signs of a possible recovery in Asia, mitigated the effects of low North American drilling levels resulting in increased revenues. However, this trend was short-lived as slower activity outside North America due mainly to seasonal influences coupled with budget cuts resulted in lower fourth quarter revenues. In 2002, the Caspian, Russia and Mexico GeoMarkets posted the highest double-digit revenue growth of 89%, 62% and 48% respectively versus 2001.

 

From a technology standpoint, the strongest performer was Well Completions & Productivity where acquisitions, testing, advanced completions systems and artificial lift technology market share gains resulted in 8% revenue growth. During the year Schlumberger acquired A. Comeau & Associates a leading provider of electrical engineering products and services for artificially lifted wells. This latest addition, combined with the successful integration of Sensa and Phoenix technologies into the Schlumberger Artificial Lift services portfolio, contributed to higher sales in 2002 particularly in the Eastern Hemisphere. The Drilling & Measurements technology segment also recorded solid revenue growth of 7% fuelled largely by the continued penetration of the PowerDrive475* rotary steerable system into new GeoMarkets.

 

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Table of Contents

In addition to A. Comeau & Associates Limited, Schlumberger made two further acquisitions during the year to bolster its real-time reservoir management suite of services. In January, Schlumberger acquired Norwegian-based Inside Reality AS providing new 3D virtual reality systems that create a unique and powerful environment for interactive well planning and real-time geosteering analysis. Schlumberger also acquired the software and services business of Technoguide AS a leader in the reservoir modeling domain.

 

The seismic downturn continued throughout 2002 resulting in significantly lower activity levels, a reduction in multiclient license sales and extreme pricing pressures for WesternGeco. As a result, Schlumberger announced operating losses in the third quarter related to contracts in India and Mexico, and in the fourth quarter, workforce reductions of 1,700 people coupled with the closure of its land-based seismic operations in the US lower 48 states and Canada. WesternGeco revenue of $1.5 billion decreased 13% and pretax operating income of $71 million fell 68%.

 

North America

 

North America revenue of $2.8 billion decreased 24% versus 2001 while the M-I rig count dropped 27%.

 

A steep revenue decline at the outset of the year reflected a continued lackluster drilling environment and unseasonably mild weather conditions. Throughout the remainder of the year activity levels remained depressed resulting in essentially flat revenue for 2002. Other factors contributing to reduced revenues included lower non-rig related activity resulting in lower wireline, well services and well completions & productivity revenues, the effects of the tropical storms in the third quarter, a slow pick-up in Canadian activity post spring break-up and the previously stated closure of US land-based and Canadian seismic operations.

 

Pretax operating income of $409 million decreased 52% due to pricing pressures across all services, particularly in well services, well completions & productivity and seismic services.

 

WesternGeco revenue of $548 million and pretax operating income of $131 million fell 36% and 40% respectively.

 

Latin America

 

Latin America revenue of $1.5 billion decreased 7% versus 2001 while the M-I rig count decreased 20%.

 

Ongoing political and economic uncertainty in the region continued to affect business conditions, particularly in Venezuela and Argentina. This particularly impacted results in the first half of the year. In sharp contrast, the second half of 2002 saw solid growth partly as a result of higher demand for drilling & measurements and well completions technologies connected to contracts in the Burgos Basin. In addition, the completion of an IPM project that involved the sale of production facilities in Ecuador for $26.5 million in the fourth quarter contributed to end-of-year higher revenue.

 

Pretax operating income of $175 million declined 13% as a result of decreased activity in Venezuela and Argentina.

 

WesternGeco revenue of $169 million increased 25%; however, pretax operating income of $4.9 million dropped 71% due to the recognition of land seismic contract losses in Mexico in the third quarter.

 

Europe/CIS/West Africa

 

Europe/CIS/West Africa revenue of $2.7 billion increased 14% versus 2001 as the M-I rig count decreased 5%.

 

Strong revenue growth was recorded in the first three quarters reflecting increased activity levels and market share gains particularly in the Caspian and Russia GeoMarkets in respect to artificial lift and drilling technologies. The Well Completions & Productivity technology segment recorded the strongest growth of 27% followed by Drilling & Measurements, which grew 24%.

 

13


Table of Contents

 

This growth was partially mitigated by a steep revenue drop in the fourth quarter due to exceptionally severe winter weather conditions in the North Sea and Russia that affected all services, particularly seismic and fracturing activities. In addition, operator budget cuts in the Nigeria GeoMarket and refocused investment decisions in the UK contributed to lower fourth quarter revenues.

 

Pretax operating income of $322 million decreased 6% due to softening in pricing towards the end of the year and restructuring in the region to reduce support infrastructure to match slowing activity levels.

 

WesternGeco revenue of $267 million decreased 5% and the pretax operating loss of $52 million was 67% higher than 2001.

 

Middle East & Asia

 

Middle East & Asia revenue of $2.4 billion increased 10% outpacing the M-I rig count, which grew 6% for the same period.

 

After a decline at the beginning of the year resulting from exceptional artificial lift sales at the end of 2001, the Asian market showed signs of recovery highlighted by strong revenue growth in the second quarter. Over the year, the India and Malaysia/Brunei/Philippines GeoMarkets recorded the strongest growth due to increased activity in these countries. In addition, the Wireline and Well Services technology segments posted the highest growth, up 14% and 10% respectively.

 

This was partly offset, however, by a slowdown in activity in the second half of 2002 due to a number of major projects nearing completion, lower equipment sales and a significant reduction in seismic activity throughout the Area.

 

Pretax operating income of $457 million was flat despite the revenue growth due to marine seismic contract losses incurred in India in the third quarter coupled with softening pricing in well completions and productivity services.

 

WesternGeco revenue of $490 million increased 15%; however, pretax operating income of $3.2 million declined 93% due to the recognition of marine seismic contract losses in India.

 

2001 Results

 

Record Oilfield Services operating revenue of $9.9 billion increased 36% over 2000 in sharp contrast with the worldwide M-I rig count, which grew only 15%. Increased non-rig related activity, partly attributable to the WesternGeco Joint Venture, and higher pricing levels contributed to the growth.

 

Operating revenue started to grow in the first quarter, due to continued high activity in North America and increased demand internationally. The latter continued throughout 2001 and was reflected in the Europe/CIS/West Africa and Middle East & Asia Area results. However, softening North American drilling activity in the third quarter, as a result of slower economic growth and declining natural gas drilling activity, offset international growth.

 

The WesternGeco Joint Venture in its first full financial reporting year was the largest contributor to double-digit growth in all Areas with the Malaysia/Brunei/Philippines, Alaska, Gulf Coast and West & South Africa GeoMarkets recording the strongest results versus 2000. Market share gains, improved pricing levels and the introduction of new technology contributed to strong growth in the Drilling & Measurements technology business. In addition, improved Reda submersible pump sales and the continued expansion of the PowerSTIM* well production optimization solution contributed to significant growth in the Well Completions & Productivity technology segment.

 

2001 was a significant year as Oilfield Services acquired several key technologies as part of its continuing focus to build a complete suite of real-time reservoir optimization services. In April 2001, Schlumberger acquired Baker Jardine, a leading provider of software tools, IT consulting and integrated solutions that help operators increase oil and gas production. Secondly, a unique Distributing Temperature Sensing technique was added to the Schlumberger real-time offering through the acquisition of Sensa. The

 

14


Table of Contents

recognized leader in fiber optic sensing technologies, Sensa provides operators with a continuous measurement for the monitoring of producing wells. Thirdly, Schlumberger acquired Phoenix, a leading provider of technologies and techniques for optimizing production from artificially lifted wells, in October 2001.

 

North America

 

North American operating revenue increased 49% versus 2000 outpacing the M-I rig count, which grew 17%. The strong operating revenue growth that continued in the first quarter of 2001 plateaued in the middle of the year. This was due to slower economic conditions and declining natural gas prices, which resulted in reduced activity towards the end of the year. The Alaska and Gulf Coast GeoMarkets recorded the strongest revenue growth due to increased demand for drilling and measurements and well services, wireline technologies and higher seismic activity.

 

Pretax operating income increased 124% particularly due to strong demand for well services technologies and the significant impact of the WesternGeco Joint Venture.

 

Latin America

 

Operating revenue increased 32% exceeding the M-I rig count growth of 13%. Increased activity across all services contributed to double-digit growth in the GeoMarkets. Growth was led by the Peru/Colombia/Ecuador and Latin America South GeoMarkets as a result of increased drilling and measurements and well services. Further, higher well completions services during the year, and an increase in land seismic activity in Bolivia during the fourth quarter contributed to growth in these GeoMarkets.

 

Pretax operating income increased 133% principally as a result of increases in IPM, Wireline and the impact of the WesternGeco Joint Venture.

 

Europe/CIS/West Africa

 

Operating revenue increased 41% in the Europe/CIS/West Africa Area, more than double the M-I rig count growth, which rose 15%. Overall moderate growth was recorded for the year led by high demand for well completions services in Nigeria and strong growth in drilling and measurements and wireline services in the Russia GeoMarket. In particular, strong growth was seen in the West and South Africa GeoMarket partly due to an Early Production Facility Project for IPM during the year.

 

Pretax operating income increased 59% due mainly to the Well Completions & Productivity segment, which recorded strong growth across most GeoMarkets.

 

Middle East & Asia

 

A 26% increase in operating revenue surpassed the M-I rig count four-fold in 2001. Almost all GeoMarkets in the region recorded strong double-digit growth led by seismic, drilling and measurements and well services activities in the Malaysia, Brunei and Philippines GeoMarket, and as a result of new contract wins in the Gulf GeoMarket. Moderate sequential growth was recorded throughout the year reflecting the pick up in international activity.

 

Pretax operating income increased 50% comprised mostly of an increase in Drilling & Measurements and in the Well Completions & Productivity technology segments.

 

2000 Results

 

Moderate growth was recorded during the first half of the year with sharp sequential growth in the second half of the year led by increased activity in North America and higher demand for drilling & measurements technologies, up 29%, and well services up 25%. The seismic down cycle, which started at the beginning of 1999, continued through the first half of the year. The second half of 2000 saw significant improvement leading to higher Schlumberger activity due to the introduction of new generation seismic Q* Marine technology and increased multiclient data sales.

 

15


Table of Contents

 

Oilfield Services operating revenue increased 20% compared with 1999 as the worldwide M-I rig count grew 30%.

 

North America

 

North America operating revenue increased 46% versus 1999, in line with the M-I rig count, which grew 47%. Increased activity, which started in the third quarter of 1999, continued into the beginning of 2000 with a significant increase in drilling activity due to the continued shift to natural gas exploration and development. Well Services posted the strongest revenue growth, up 56% followed by Drilling & Measurements, up 46% and Wireline, which increased 40%. Pretax operating income increased 233%.

 

Latin America

 

Latin America operating revenue increased 23% for the year, consistent with a 23% increase in the M-I rig count. There was strong growth in the second half of 2000 across most technology segments. Pretax operating segment income increased 390% due to improved profitability led by Drilling & Measurements and Well Services.

 

Europe/CIS/West Africa

 

Operating revenue increased 7% in Europe/CIS/West Africa during 2000, consistent with a 10% increase in the M-I rig count. Results in the first quarter were lower year over year due to continued flat activity and a sharp decline in seismic activity in this region for the same period. The increase in activity in the second half of the year was moderate compared with the other Areas. Pretax operating income increased 86% as a result of increased pricing for wireline and drilling & measurements technologies.

 

Middle East & Asia

 

Operating revenue in Middle East & Asia increased 5%, in line with a 5% increase in the M-I rig count. Lower first quarter results resulted from the continued industry down cycle, and the growth was moderate for the remainder of the year due to a slow increase in activity. Stronger sequential growth in the second half of the year resulted from increased activity in the Middle East and improved demand particularly for drilling & measurements and testing technologies. Pretax operating income increased 3%.

 

SchlumbergerSema

 

2002 Results

 

SchlumbergerSema operating revenue increased 32% compared with 2001 mainly due to the acquisition of Sema plc whose results were consolidated with effect from April 1, 2001. On a proforma basis, assuming the acquisition occurred on January 1, 2001, operating revenue in 2002 was up 7% compared to 2001. The pretax segment income of $34 million compared to a loss of $33 million in 2001, reflecting the cost reductions initiatives implemented since the integration of Sema plc into Schlumberger. The 2002 pretax segment income excludes the charges discussed on pages 23-24 of this Report.

 

In December an updated strategy for SchlumbergerSema was announced. The SchlumbergerSema focus is now on IT consulting and systems integration together with network and infrastructure solutions, primarily in global energy while continuing to develop specific regional market sectors in areas where it has a successful competitive position based on scale and domain knowledge. This strategy is designed to create industry leadership in the energy market by combining the systems integration skills of Sema with the global reach and energy sector knowledge of Schlumberger.

 

16


Table of Contents

 

SchlumbergerSema won the top prize at the prestigious Management Consultancies Association (MCA) Best Management Practice Awards in London for its work on the 2002 Salt Lake City Olympic Winter Games. At the 2002 Winter Olympic Games, SchlumbergerSema led a consortium of 15 technology partners in a three-year long project to deliver the IT infrastructure needed to run the Games. Dr Jacques Rogge, president of the International Olympic Committee commented “The Information Technology operations of any Olympic Games play a vital role in the overall success of the Games”. Schlumberger is also the official Worldwide Information Technology Partner for the Olympic Games in 2004, 2006 and 2008.

 

North & South America

 

Operating revenue increased 4% over 2001 primarily due to increased activity from the Network Infrastructure Solutions (NIS) business as a result of several large IT outsourcing projects. These include the Conoco and Dallas County IT projects and the DeXa.Net global connectivity solution to provide communications for Houston-based Atwood Oceanics offshore and land facilities around the world. Partially offsetting the increase in activity from NIS, revenue declined in the telecom and utility industries due primarily to the weak IT services spending environment as customers faced economic challenges and continued to revise budgets downwards and delay decisions on contract awards. However, major contracts have been awarded in the energy segment such as the Online Energy Management System for AES Infoenergy in Brazil and the systems integration and data management services contracts with Nebraska Public Power District (NPPD) of Columbus, Nebraska.

 

Despite the marginal increase in revenue, pretax operating loss of $43 million represented an improvement of 18% over 2001, mainly attributable to the cost reduction programs implemented throughout the area.

 

Europe/Middle East/Africa

 

Operating revenue increased 35% mainly due to the inclusion of a full year’s revenue from the acquisition of Sema plc compared to nine months in 2001. On a comparable basis the revenue increased by 4% despite a declining IT services market in Europe for the first time since 1993. The main contributor to the growth was the public sector mainly in the UK where SchlumbergerSema won large outsourcing contracts with the Association of Train Operating Companies, the Department of Work and Pension and the Vehicle Inspectorate. Also contributing to the improvements were an energy-related project for Brussels-based Electrabel S.A., a leading energy producer, distributor and supplier in Belgium, with power plants in eight European countries serving about 4.5 million customers daily and a health and welfare services project to Consignia’s 220,000 employees in the UK.

 

Pretax operating income increased 33% due mainly to the cost cutting program implemented throughout the year.

 

Asia

 

Operating revenue increased 38%. On a comparable basis, operating revenue would have been flat. The decreased activity in telecommunications, mainly in China and Taiwan, was offset by the increase in the finance segment on new outsourcing contracts in the insurance sector in Japan for Mass Mutual and delivery of payment systems in China.

 

Pretax operating income decreased 61% mainly attributable to pricing pressure and economic declines in the telecommunications IT services industry.

 

Telecom Products

 

Operating revenue increased 22% over 2001 principally due to the inclusion of Sema plc. On a comparable basis the activity was flat despite the sharp decline in the telecommunications industry. During the year the focus was on streamlining the product portfolio and reducing the number of R&D centers and reducing the workforce to the level of activity.

 

The pretax operating loss of $24 million was an improvement over the loss of $34 million in 2001 mainly due to the significant workforce reduction aimed at aligning R&D with the product development cycles.

 

17


Table of Contents

 

2001 Results

 

On April 6, 2001, Schlumberger completed the acquisition of Sema plc for $5.15 billion. Sema plc is a leading IT and technical services company with a strong European presence. The acquisition was financed through existing cash resources of Schlumberger and from borrowings under a $3 billion floating rate credit facility. As a result of the acquisition, the SchlumbergerSema business segment was created combining Sema plc and certain businesses of Schlumberger Test & Transactions and Resource Management Services, including CellNet and Convergent.

 

Operating revenue increased $2.0 billion over 2000 due to the acquisition of Sema plc. Excluding the acquisition of Sema plc the operating revenue increase would have been $383 million on a pro forma basis.

 

NIS experienced a 91% operating revenue growth for 2001 versus 2000 mostly due to E&P contracts demonstrating that this industry is recognizing the importance of IT connectivity and security.

 

North & South America

 

Operating revenue increased 233% versus 2000 essentially due to the inclusion of the full year’s activity for the Convergent Group, acquired in November 2000 and CellNet Data Systems, acquired in June 2000. Additionally the increased utilities activity was a result of strong demand for Real Time Energy Management Systems (RTEMS) services and further deployment of related networks, the extension of key existing utility business contracts in North America for utility data management services and the award of a significant contract for consulting and personal energy management advanced data services. Contributing to the growth was the award of NIS projects by University of Texas Medical Board, Shell and Ecopetrol.

 

Pretax operating loss was 22% lower than the previous year.

 

Europe/Middle East/Africa

 

Operating revenue increased significantly due to the inclusion of Sema plc. Excluding Sema plc the year on year pro forma operating revenue increase would have been $83 million due principally to the full inclusion of Data Marine Systems Limited acquired in October 2000 and to the award of multi-million dollar contracts in France for Banque de France and in the UK for Metropolitan Police.

 

Pretax operating income increased significantly due to the inclusion of Sema plc.

 

Asia

 

Operating revenue increased almost eight-fold largely due to the integration of Sema plc. Excluding Sema plc the year on year growth would have been $24 million entirely due to stronger NIS activity and to sustained demand for business continuity and outsourcing services throughout the area exemplified by the desktop outsourcing project for Caltex in Sumatra, Indonesia.

 

Pretax operating income increased significantly due to the inclusion of Sema plc.

 

Telecom Products

 

There was no activity prior to 2001.

 

The activity was mainly led by strong bookings in mobile messaging systems, with the first SemaPortal* short message server implementation and customer care and billing products system integration for mobile operators, such as the project awarded by Telecom Italia Mobile (TIM) which covers their operations in Europe and Brazil.

 

2000 Results

 

During the year, SchlumbergerSema took strategic steps in the global energy segment to build its solutions offerings through the acquisition in June 2000 of CellNet Data Systems, the leading provider of telemetry technology for the development and deployment of large-scale automatic meter reading (AMR) systems and the Convergent Group, a leading builder of digital enterprises focusing on the utility sector, in November 2000.

 

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Table of Contents

 

Operating revenue increased 250% year-on-year reflecting the above two acquisitions and the acquisition of the remaining 50% stake in Omnes, a joint venture previously equally owned by Schlumberger and Cable & Wireless.

 

North & South America

 

Operating revenue increased more than four-fold over 1999 due to market expansion, including the acquisition of CellNet Data Systems and the Convergent Group, the receipt of several major orders in Real Time Energy Management Systems (RTEMS) and the University of Texas Medical Board NIS’ contract.

 

The pretax operating loss reflected the newly acquired CellNet and Convergent activities.

 

Europe/Middle East/Africa

 

Operating revenue increased 158% and pretax operating income increased 37% due to the 50% consolidation of Omnes and the full consolidation of Data Marine Systems.

 

Asia

 

Operating revenue increased 108% and pretax operating income increased 8-fold entirely due to the consolidation of 100% of Omnes into Schlumberger.

 

Telecom Products

 

There was no activity in Telecom Products during the year 2000.

 

Other

 

Included in this segment are NPTest, consisting of the core product lines of Schlumberger Semiconductor Solutions, smart cards, point-of-sale terminals, eCity terminals, payphones, payments systems, electricity meters and the divested businesses of the former Resource Management Services segment.

 

On May 21, 2002 NPTest filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering of its shares of common stock which is not yet effective.

 

2002 Results

 

Operating revenue decreased 32% reflecting the divestiture of the Resource Management Services North American water metering activities and the non-North American electricity and water meter and worldwide gas meter businesses in November 2001.

 

NPTest activity increased due to a partial recovery in test equipment sales in North America and Asia partially offset by decreases in diagnostic equipment sales and equipment support services.

 

Volume Product activity remained flat despite the continuing slump in the telecommunications industry and the continued pricing pressure. This was partially offset by higher activity in banking and IT cards coupled with a favorable euro-dollar exchange rate.

 

Pretax operating income decreased 78% mainly due to the divestiture of Resource Management Services and eroded profitability in the smart cards business.

 

2001 Results

 

Operating revenue decreased 13% reflecting mainly the divestiture of the Resource Management Services businesses, which were sold in November 2001 and the decline in semiconductor activity, which followed the down cycle in the worldwide semiconductor industry.

 

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Volume Products operating revenue grew by 13% despite a slowdown in the telecommunications industry. Smart cards operating revenue increased 9% compared with 2000.

 

NPTest revenue decreased approximately 47% from the prior year due to the sharp decline in the industry, with all product lines affected.

 

Pretax operating income decreased 40% due mainly to pricing pressure in both the semiconductor and the smart cards industries.

 

2000 Results

 

Operating revenue was flat. Increased activity in the smart cards business, driven by outstanding growth of the mobile communications market and in NPTest (up 5%) was offset by the decline in Resource Management Services (down 16%) where pressure on utility prices resulted in a continued downturn for the utility industry.

 

Pretax operating income grew 49% year-on-year mainly attributable to the improved profitability in smart cards.

 

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Table of Contents

 

Income – Continuing Operations

 

             

(Stated in millions except per share amounts)

 
      

Income (loss)

from Continuing Operations


        
         

Earnings (loss) per share


 
         

Basic


    

Diluted


    

Adjusted5


 

20021

    

$

(2,418

)

  

$

(4.18

)

  

$

(4.18

)

  

$

(4.18

)

      


  


  


  


20012,4

    

$

491

 

  

$

0.85

 

  

$

0.85

 

  

$

1.35

 

      


  


  


  


20003,4

    

$

721

 

  

$

1.26

 

  

$

1.25

 

  

$

1.42

 

      


  


  


  


1   Includes a net, after-tax and minority interest charge of $3,110 million ($5.38 per share – diluted). For details, see Charges – Continuing Operations on page 44.
2   Includes a net, after-tax and minority interest charge of $297 million ($0.51 per share – diluted). For details, see Charges – Continuing Operations on page 44.
3   Includes a net, after-tax and minority interest charge of $3 million ($0.00 per share – diluted). For details, see Charges – Continuing Operations on page 44.
4   Restated for discontinued operations.
5   Excludes amortization of goodwill.

 

In 2002, Oilfield Services segment net income decreased $267 million, or 21%, to $987 million as revenue declined 5% compared to the worldwide M-I rig count reduction of 17%. North America registered the most significant decline as revenue decreased 24% on a M-I rig count reduction of 27%. SchlumbergerSema segment net income of $21 million improved from a loss of $22 million in 2001, reflecting the revenue increase of 32% (7% on a proforma basis – assuming the Sema plc acquisition took place on January 1, 2001) and the effect of the previously announced cost reduction program. In the Other segment, net income declined to $14 million, from $85 million in 2001 which included the divested Resource Management Services businesses.

 

In 2001, Oilfield Services segment net income increased $498 million, or 66%, to $1,254 million reflecting the 36% growth in revenue, which outpaced the 15% increase in the worldwide M-I rig count. Higher pricing levels and increased non-rig related activity were the major factors attributable to the record Oilfield Services revenues. SchlumbergerSema segment net loss of $22 million improved $19 million reflecting the incremental income from the newly acquired Sema plc. In the Other segment, net income of $85 million declined $34 million from the prior year with declines in the semiconductor-related and Cards activities.

 

In 2000, Oilfield Services segment net income increased $328 million, or 76%, to $756 million. Increases in E&P expenditures and in oil and gas prices, resulting from increased oil demand and the lowest level of excess oil production capacity in decades, were the underlying factors of the strong increases in most areas, and notably in North America. Average worldwide rig count increased 30% compared to 1999. SchlumbergerSema segment net loss of $41 million was down $43 million due to losses in the newly acquired CellNet and Convergent businesses in North America. In the Other segment, net income of $119 million increased $32 million from the prior year mainly due to stronger results from the Cards activity where revenue was up 26%.

 

Currency Risks

 

Refer to page 39, Translation of Non-US Currencies in the Notes to Consolidated Financial Statements, for a description of the Schlumberger policy on currency hedging. There are no material unhedged assets, liabilities or commitments which are denominated in other than a business’ functional currency. Schlumberger businesses operate principally in US dollars, the euro and most other European currencies and most South American currencies.

 

While changes in exchange rates affect revenue, especially in the SchlumbergerSema segment, they also affect costs. Generally speaking, Schlumberger is currency neutral. For example, a 5% change in average

 

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exchange rates of OECD currencies would have had no material effect on consolidated revenue and net income.

 

In general, when the US dollar weakens against other currencies, consolidated revenue increases, usually with no material effect on net income. This is principally because the fall-through incremental margin in the SchlumbergerSema segment offsets the higher Oilfield Services segment non-US dollar denominated expenses.

 

Research & Engineering

 

Expenditures by business segment were as follows:

 

         

(Stated in millions)

    

2002


  

2001


  

2000


Oilfield Services

  

$

438

  

$

425

  

$

365

SchlumbergerSema

  

 

84

  

 

86

  

 

18

Other

  

 

128

  

 

164

  

 

146

In-process R&D charge1

  

 

—  

  

 

25

  

 

—  

    

  

  

    

$

650

  

$

700

  

$

529

    

  

  

1   Relating to the Bull CP8 acquisition.

 

Interest Expense

 

Interest expense decreased $17 million, to $368 million mainly due to a decrease in average borrowing rates from 5.8% to 4.9%. The increase in 2001 of $109 million, to $385 million, was principally due to the significantly higher debt balances incurred, relating to the acquisition of Sema plc, which were only partially offset by a reduction in average borrowing rate from 6.9% to 5.8%. The increase in 2000 of $83 million, to $276 million, was mainly due to an increase in average borrowing rates from 5.8% to 6.9%.

 

Hanover Compressor Transaction

 

In August 2001, Schlumberger sold its Oilfield Services worldwide gas compression activity to Hanover Compressor Company. The proceeds included common stock of Hanover Compressor, with a value at closing of $173 million, which is restricted from marketability until August 30, 2004 and a $150 million long-term subordinated note maturing December 15, 2005.

 

The market value of Schlumberger’s investment in Hanover Compressor common stock was $80 million as of December 31, 2002. Following the decline in the market value of the stock below carrying value during the second quarter of 2002, Schlumberger has performed, and continues to perform, a periodic assessment in accordance with its policy to determine whether an other-than-temporary decline in fair value has occurred. Schlumberger evaluated the recoverability of its investment by reviewing recent information related to the industry and the operating results and financial position of Hanover Compressor and by considering Schlumberger’s requirement, ability and intent to hold the investment on a long-term basis. Schlumberger concluded that evidence existed at December 31, 2002 to support the recoverability of its carrying value, that there were no events or changes in circumstances specifically relating to the business prospects of Hanover Compressor, that the underlying business fundamentals are good with natural gas supplies reduced and higher natural gas prices in North America. In addition, the recently announced Hanover cutbacks in workforce and capital expenditures coupled with no immediate debt maturities should provide adequate capital resources in the near-term. Accordingly, Schlumberger concluded that the decline in market value of its investment ($93 million) in Hanover Compressor as of December 31, 2002 was temporary in nature and has not reduced the cost basis of that investment. If the decline in value persists or should Schlumberger’s assessment change, Schlumberger would take a charge to its earnings for the amount that is deemed unrecoverable.

 

The $150 million long-term subordinated note has a mandatory prepayment upon the issuance, sale or other disposition by Hanover Compressor of any shares of capital stock or other equity interests pursuant to a

 

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public offering or a private placement otherwise prepayment is discretionary. As of December 31, 2002, Schlumberger considers the carrying value of the note to be fully collectible.

 

As part of the sale agreement, Schlumberger agreed that the financing of the PIGAP II joint venture in Venezuela would be non-recourse to the buyer and would be executed prior to December 31, 2002. Accordingly, Schlumberger was obligated, with respect to the financing, to guarantee 30% (approximately $80 million) until the project was completed in 2002 and, if as of December 31, 2002, refinancing had not become non-recourse to the buyer or the project had not achieved substantial completion, Hanover Compressor had an option to put its interest in the joint venture back to Schlumberger.

 

As an outcome of the turmoil in Venezuela, although the project reached substantial completion, the non-recourse financing for the project was not achieved by December 31, 2002. On January 30, 2003, Hanover Compressor gave notice of its intention to exercise its right to put its ownership interest in the joint venture back to Schlumberger. The put is subject to certain consents and other conditions. Schlumberger’s obligation to provide a guarantee with respect to the financing was eliminated.

 

As Schlumberger originally deferred the gain on the sale of the joint venture in 2001, there is no impact on Schlumberger results of operations due to the Hanover Compressor exercise of its option.

 

Charges – Continuing Operations

 

Schlumberger recorded the following after-tax and minority interest charges/credits for continuing operations in 2002, 2001 and 2000:

 

  n   On December 10, 2002, Schlumberger announced that the Board of Directors had approved an updated strategy for its SchlumbergerSema business segment. The new strategic plan outlook, current business values and the reorganization of SchlumbergerSema constitute significant events that required an impairment analysis to be performed in accordance with FAS 142. SchlumbergerSema was ‘valued’ on a stand-alone basis; each reporting unit within SchlumbergerSema was valued using a discounted cash flow analysis based on a long-term forecast prepared by SchlumbergerSema management with the assistance of a third party valuation expert. The implied multiples yielded by the discounted cash flow analysis were compared to observed trading multiples of comparable companies and recent transactions in the IT services industry to assess the fair value of the reporting units. The fair value was below the book value. As a result, goodwill was written down to its estimated fair value based on Schlumberger’s valuation. The impairment of goodwill mainly reflects the current difficulties of the telecommunications industry and the severely depressed market values of the IT companies serving SchlumbergerSema’s sector. Certain intangible assets were also identified and written down as part of this process.

 

Schlumberger recorded severance, facility and other costs in an effort to reduce costs at SchlumbergerSema and WesternGeco. These costs related to expenses that offer no future benefit to the ongoing operations of these businesses. During the fourth quarter, Schlumberger also recorded an impairment charge, to reflect a change in the business projections of the WesternGeco business, related to capitalized multiclient seismic library costs, a deferred tax valuation allowance and other costs.

 

The total of the above charges was $3,168 million and consisted of (1) a goodwill impairment charge of $2,638 million; (2) an intangible assets impairment charge of $132 million; (3) SchlumbergerSema severance and other charges of $77 million in response to current business conditions; (4) WesternGeco severance and other charges of $72 million in response to current business conditions; (5) a WesternGeco multiclient library impairment charge of $129 million following a valuation of the library; (6) environmental related charges of $26 million; (7) a deferred tax valuation allowance charge of $94 million.

 

  n   In December 2002, a credit of $87 million reflecting the gain on the sale of two drilling rigs.

 

  n   In March 2002, a charge of $29 million related to the financial/economic crisis in Argentina.

 

  n   In March 2001, a charge of $25 million for in-process R&D related to the Bull CP8 acquisition.

 

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  n   In June 2001, a charge of $280 million for the estimated impairment charge from the disposition of certain Resource Management Services businesses.

 

  n   In September 2001, a net credit of $3 million representing the gain on the sale of the worldwide gas compression business, partially offset by an impairment charge relating to the expected disposition of certain activities.

 

  n   In December 2001, a net credit of $5 million, including an after tax gain on the sale of the former Resource Management Services North American Water division ($117 million). This gain was partially offset by certain charges: (1) a provision of $37 million for employee termination costs, principally in Europe and the US, related to Oilfield Services and SchlumbergerSema in response to the prevailing business conditions; (2) tax reorganization costs of $29 million; (3) a further $20 million charge related to the second quarter estimated loss on the divestiture of certain Resource Management Services businesses following the actual closing in the fourth quarter; (4) asset write down of $23 million for technological impairment related to certain Land seismic assets in the newly formed WesternGeco Joint Venture.

 

  n   In December 2000, $25 million charge primarily relating to the write down of certain inventory and severance costs in the semiconductor business resulting from reduced activity levels in the semiconductor test market, $39 million related to the creation of the WesternGeco joint venture (including asset impairment and severance costs for Schlumberger’s existing Geco-Prakla business), and a credit of $61 million from the gain on sale of two Gas Services businesses in Europe.

 

An analysis of the December 2002 pretax severance and facility charges is as follows:

 

(Stated in millions)

    

Severance


       

Facilities


    

Amount


       

Headcount


       

Amount


Charges

  

$

94.5

       

3,492

       

$

42.8

Paid in December 2002

  

 

32.9

       

1,643

       

 

6.6

    

       
       

Balance, December 31, 2002

  

$

61.6

       

1,849

       

$

36.2

    

       
       

 

The remaining severance costs are expected to be paid before September 30, 2003.

 

The December 2001 charge included severance costs of $41 million (775 people) which have been paid.

 

The December 2000 charges included severance costs of $9 million (380 people) which have been paid.

 

Critical Accounting Policies and Estimates

 

Schlumberger’s discussion and analysis of its financial condition and results of operations are based upon Schlumberger’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Schlumberger to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

 

On an on-going basis, Schlumberger evaluates its estimates, including those related to bad debts, valuation of inventories and investments, recoverability of long-lived assets, income tax provision and deferred taxes, profit assumptions on long-term percentage-of-completion contracts, contingencies and litigation and actuarial assumptions for employee benefit plans. Schlumberger bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

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Table of Contents

Schlumberger believes the critical accounting policies described below affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Schlumberger recognizes revenue and profit as work progresses on long-term, fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. Schlumberger follows this method since reasonably dependable estimates of the revenue and costs applicable to various stages of a contract can be made. Recognized revenue and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged or credited to income in the period in which the facts that give rise to the revision become known as a change in estimate. Losses on long-term contracts are provided for when such losses are known and reasonably estimated.

 

Schlumberger recognizes revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Whether the fee is fixed and determinable is assessed based on the payment terms associated with the transaction. Collection is assessed based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer.

 

Revenues from contracts with multiple element arrangements, such as those including installation and integration services, are recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements.

 

For sales, either a binding purchase order, signed license agreement or a written contract is used as evidence of an arrangement.

 

Revenue from maintenance services is recognized ratably over the contract term. The training and consulting services (time and materials) are billed based on hourly rates, and revenue is generally recognized as these services are performed. Revenue from outsourcing services is generally recognized as services are performed.

 

The Oilfield Services segment capitalizes the cost associated with obtaining multiclient seismic data. Such costs are charged to Cost of Goods Sold and Services based on a percentage of estimated total revenue that Schlumberger estimates that it will receive from the sales of such data. The carrying value of individual surveys is reviewed at least annually and adjustments to the value are made based upon the revised estimated revenues for the surveys.

 

Schlumberger maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Schlumberger’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

Schlumberger writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory writedowns may be required.

 

Schlumberger assesses the impairment of identifiable intangibles, long-lived assets and related goodwill at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following:

 

  n   significant underperformance relative to expected historical or projected future operating results;
  n   significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
  n   significant negative industry or economic trends;
  n   significant decline in Schlumberger’s stock price for a sustained period; and our market capitalization relative to net book value.

 

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When Schlumberger determines that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, any impairment is measured based on projected net cash flows expected to result from that asset, including eventual disposition.

 

Schlumberger has net deferred tax assets of $583 million at December 31, 2002. Schlumberger considers future taxable income and tax planning strategies in assessing the need for valuation allowances. In December 2002, in connection with the SchlumbergerSema strategic review Schlumberger determined that it would not be able to realize a part of its October 1, 2002 net deferred asset in the future relating to a certain European net operating loss. A valuation allowance of $94 million was charged to income in the fourth quarter. The cumulative valuation allowance relating to this European net operating loss is approximately $147 million at December 31, 2002.

 

With regard to pension and postretirement benefits, Schlumberger evaluates the appropriateness of assumptions used by an independent actuary, in particular assumptions as to discount rate, return on plan assets and medical cost trend rates. The assumptions are revised at least annually as circumstances require.

 

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Liquidity

 

A measure of financial position is liquidity, which Schlumberger defines as cash plus short-term and fixed income investments, less debt. Negative liquidity indicates net debt. The following table summarizes the change in consolidated liquidity for each of the past three years:

 

    

(Stated in millions)

    

2002


    

20011


    

20001


 

(Loss)/income from continuing operations

  

$

(2,418

)

  

$

491

 

  

$

721

 

(Gain)/loss on sale of businesses

  

 

(87

)

  

 

110

 

  

 

(61

)

Net charges

  

 

3,197

 

  

 

162

 

  

 

64

 

Depreciation & amortization2

  

 

1,545

 

  

 

1,896

 

  

 

1,271

 

Decrease (increase) in working capital requirements

  

 

167

 

  

 

(839

)

  

 

(104

)

Proceeds from business divestitures

  

 

354

 

  

 

896

 

  

 

155

 

Fixed asset additions2

  

 

(1,711

)

  

 

(2,469

)

  

 

(1,546

)

Dividends paid

  

 

(433

)

  

 

(430

)

  

 

(426

)

Proceeds from employee stock plans

  

 

175

 

  

 

122

 

  

 

229

 

Acquisition of Sema plc

  

 

(132

)

  

 

(4,853

)

  

 

—  

 

Other business acquisitions

  

 

(44

)

  

 

(453

)

  

 

(1,076

)

Acquisition related payments

  

 

(70

)

  

 

—  

 

  

 

—  

 

Impact of change in exchange rates

  

 

(507

)

  

 

(6

)

  

 

40

 

Other

  

 

(51

)

  

 

(117

)

  

 

(90

)

    


  


  


Net decrease in liquidity from continuing operations

  

 

(15

)

  

 

(5,490

)

  

 

(823

)

Discontinued operations

  

 

31

 

  

 

31

 

  

 

14

 

    


  


  


Net (increase) decrease in net debt/liquidity

  

 

16

 

  

 

(5,459

)

  

 

(809

)

Liquidity—beginning of period

  

 

(5,037

)

  

 

422

 

  

 

1,231

 

    


  


  


Liquidity—end of period

  

$

(5,021

)

  

$

(5,037

)

  

$

422

 

    


  


  


1   Reclassified, in part, for comparative purposes.
2   Including multiclient seismic data costs.

 

At December 31, 2002, Schlumberger’s liquidity was negative (debt exceeded cash plus investments). At December 31, 2002, Schlumberger had cash/short-term investments of $1.7 billion and remaining capacity in debt facilities of $3.7 billion which are sufficient to meet future business requirements.

 

Based on forecast 2003 net income, depreciation/amortization estimates, and other liquidity components, Schlumberger expects to improve liquidity with an objective of reducing the net debt to under $4 billion by year end 2003. This will largely be dependent upon the business segments operating results and the successful completion of certain business divestitures.

 

 

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Table of Contents

Acquisition of Sema plc

 

On February 12, 2001, Schlumberger announced that it had reached an agreement with the board of directors of Sema plc on the terms of a recommended offer for the entire issued and to be issued share capital of Sema plc.

 

On March 8, 2001, a wholly owned subsidiary of Schlumberger acquired, through market purchases, approximately 20% of the issued share capital of Sema at a cost of $1 billion.

 

On April 6, 2001, the offer for the shares of Sema plc was declared unconditional in all respects. The aggregate consideration for the acquisition of 100% of the issued Sema shares was $5.15 billion (including expenses of the transaction) which was financed from existing cash resources and borrowings under a $3 billion credit facility.

 

On October 3, 2001, wholly owned subsidiaries of Schlumberger issued $1.9 billion European bonds (Euro 1.4 billion and £425 million). The average interest rate of these bonds is 5.9% with maturity from 2008 through 2032. The proceeds from the issues were used to repay short-term bank loans originally taken out by those subsidiaries to finance the acquisition of Sema plc.

 

The acquisition was accounted for using the purchase method of accounting and the goodwill and identifiable intangibles aggregated $5.19 billion which were being amortized on a straight-line basis in 2001. Effective January 1, 2002, with the adoption of SFAS 142 (see New Accounting Standards), amortization of goodwill and workforce ceased. Identifiable intangibles continue to be amortized on a straight-line basis over a life of 10 years.

 

The aggregate value of goodwill and identifiable intangibles comprised the following:

 

(Stated in billions)

Cost (including expenses)

  

$

5.15

 

Purchase accounting adjustments

  

 

0.34

 

Net tangible assets acquired

  

 

(0.30

)

    


    

$

5.19

 

    


 

Purchase accounting adjustments consisted primarily of severance costs ($84 million – 1781 people), facility reductions ($33 million), pension plan adjustments ($136 million) and tax restructuring costs ($50 million). At December 31, 2001, $26 million (593 people) of the severance costs had been paid. All remaining severance was paid in 2002.

 

For financial reporting purposes, Schlumberger included the results of operations of Sema in its consolidated accounts commencing April 1, 2001. If Sema had been included in the consolidated financial statements of Schlumberger from January 1, consolidated revenue for the twelve months ended December 31, 2001 would have increased by $538 million to $14.3 billion and consolidated net income would have decreased by approximately $140 million, to $382 million, related primarily to increased interest expense, amortization of intangibles and lower interest income. On a proforma basis, Schlumberger 2000 operating revenue and net income would have been $12 billion and $300 million, respectively.

 

Sema is an IT services company (with approximately 22,000 employees at the date of acquisition) that provides its customers with design, implementation, operations and management of information systems and IT-related consulting services. Among the industry sectors which Sema serves, Sema has increasingly focused on the telecommunications and finance sectors, and provides a range of its own software products specifically designed for these sectors in addition to its IT services. Sema’s customers include a wide variety of businesses and governmental departments around the world. Sema’s services and product offerings include systems integration and consulting; software products for the telecommunications, energy, transport and finance sectors; and outsourcing.

 

 

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Table of Contents

Business Divestitures

 

During 2002, Schlumberger divested the following businesses:

 

  n   In December, the Reed Hycalog drillbits business. The proceeds included $259 million in cash and 9.7 million shares of Grant Prideco common stock with a value of $103 million. The after tax gain was $66 million. The divestiture of Reed Hycalog has been accounted for in Discontinued Operations.

 

During 2001, Schlumberger divested the following businesses:

 

  n   In August, the Oilfield Services worldwide gas compression activity primarily consisting of the Production Operators Corp. subsidiary. The proceeds included $274 million in cash, a $150 million long-term subordinated note and newly issued Hanover Compressor Company shares with a value of $173 million. The shares have a three year marketability restriction. The after-tax gain was $52 million.

 

  n   In November, the Resource Management Services North American water metering activities. Cash proceeds were $304 million and the after-tax gain was $117 million.

 

  n   In November, the Resource Management Services non-North American electricity and water meter, and worldwide gas meter businesses. The net cash proceeds were $256 million and the after-tax loss was $300 million, of which $280 million had been recorded as an impairment charge in June (See Charges-Continuing Operations).

 

  n   In November, the Yield Enhancement Systems division of Semiconductor Solutions. Cash proceeds were $62 million and the after-tax gain was $12 million.

 

Summary of Major Contractual Commitments

 

(Stated in millions)

         

Payment Period


Contractual Commitments


  

Total


  

Less than

1 year


  

2-3 years


  

4-5 years


  

After

5 years


Long-Term Debt

  

$

6,481

  

$

453

  

$

2,049

  

$

1,461

  

$

2,518

Operating Leases

  

$

1,278

  

$

219

  

$

317

  

$

226

  

$

516

 

Letters of credit/guarantees outstanding aggregated $771 million at December 31, 2002.

 

In general, the remaining amount of letters of credit/guarantees relate to business performance bonds, custom/excise tax commitments, facility lease/rental obligations, etc. All such were entered into in the ordinary course of business and are customary practices in the various countries where Schlumberger operates.

 

 

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Common Stock, Market Prices and Dividends Declared per Share

 

Quarterly high and low prices for Schlumberger common stock as reported by the New York Stock Exchange (composite transactions), together with dividends declared per share in each quarter of 2002 and 2001, were:

 

    

Price Range


         

Dividends

Declared


    

High


         

Low


         

2002

                                  

QUARTERS

                                  

First

  

$

62.430

         

$

49.150

         

$

0.1875

Second

  

 

59.890

         

 

46.300

         

 

0.1875

Third

  

 

47.400

         

 

35.870

         

 

0.1875

Fourth

  

 

46.850

         

 

33.400

         

 

0.1875

2001

                                  

QUARTERS

                                  

First

  

$

82.810

         

$

57.300

         

$

0.1875

Second

  

 

69.250

         

 

51.150

         

 

0.1875

Third

  

 

56.900

         

 

40.840

         

 

0.1875

Fourth

  

 

56.750

         

 

42.050

         

 

0.1875

 

The number of holders of record of Schlumberger common stock at December 31, 2002, was approximately 24,825. There are no legal restrictions on the payment of dividends or ownership or voting of such shares, except as to shares held in the Schlumberger Treasury. US stockholders are not subject to any Netherlands Antilles withholding or other Netherlands Antilles taxes attributable to ownership of such shares.

 

Environmental Matters

 

The Consolidated Balance Sheet includes accruals for the estimated future costs associated with certain environmental remediation activities related to the past use or disposal of hazardous materials. Substantially all such costs relate to divested operations and to facilities or locations that are no longer in operation. Due to a number of uncertainties, including 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.

 

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. As required by SFAS 142, Schlumberger undertook an initial review of goodwill impairment in the first quarter of 2002 and completed an “event driven” review in the fourth quarter of 2002. The findings of the independent valuation indicated there was an impairment write down of $2.6 billion which was approved by the Board of Directors in December 2002 in conjunction with the approval of the new strategic plan for SchlumbergerSema.

 

Amortization of goodwill and workforce ceased with effect from January 1, 2002. Assembled workforce, net of deferred taxes, of $175 million was reclassified to Goodwill.

 

30


Table of Contents

 

Amortization of goodwill and other intangibles included in Schlumberger’s results are as follows:

 

(Stated in millions)

    

Pretax


    

2002


         

2001


         

2000


Goodwill

  

$

—  

         

$

270

         

$

96

Workforce

  

 

—  

         

 

32

         

 

—  

Other intangibles

  

 

72

         

 

45

         

 

5

    

         

         

    

$

72

         

$

347

         

$

101

    

         

         

 

In June 2001, SFAS 143 (Accounting for Asset Retirement Obligations) was issued. SFAS 143 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 or results of operations.

 

In August 2001, SFAS 144 (Accounting for Impairment or Disposal of Long-Lived Assets) was issued. SFAS 144 was adopted by Schlumberger commencing January 1, 2002 and did not have a material effect on its financial position or results of operations.

 

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 operating revenue and cost of goods sold & services increased in 2001 by $557 million and in 2000 by $416 million. There was no effect on cash flow or net income.

 

On July 29, 2002, the Financial Accounting Standards Board issued SFAS 146 (Accounting for Costs Associated with Exit or Disposal Activities). The standard required 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 replaced Issue 94-3. Schlumberger will apply SFAS 146 prospectively to exit or disposal activities initiated after December 31, 2002.

 

In November 2002, FASB Interpretation No. 45 (Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others) was issued. It requires certain accounting and disclosures of guarantees to third parties including indebtedness. The statement is effective on a prospective basis for guarantees issued or modified after December 31, 2002. Schlumberger does not believe that the implementation of this statement will have a material effect on its financial position or results of operations.

 

In January 2003, the Emerging Issues Task Force (EITF) issued No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. This EITF establishes the criteria for recognizing revenue in arrangements when several items are bundled into one agreement. EITF 00-21 does not allow revenue recognition unless the fair value of the undelivered element(s) is available and the element has stand-alone value to the customer. EITF 00-21 also provides guidance on allocating the total contract revenue to the individual elements based upon the available fair value of each deliverable. Schlumberger is in the process of determining if this pronouncement will have a material impact on its financial position or results of operations.

 

 

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Table of Contents

Forward-looking Statements

 

This 10-K report, the fourth quarter and full year 2002 earnings release, associated web-based publications 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, improvements in liquidity, expected capex, multi-client and depreciation and amortization expenditures, the funding of pension plans and related pension expense, the timing and likelihood of NPTest’s initial public offering, conditions in the oilfield service business, including activity levels during 2003, production increases in non-OPEC areas, issues affecting the seismic industry, continued deepwater drilling activity, benefits from contract awards, future results of operations, pricing, future effective tax rates, the realization of cost reduction and savings in SchlumbergerSema and expectations regarding the future business and performance of SchlumbergerSema resulting from the updated strategy and business realignment. 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; recovery of activity levels; improved pricing and realization of cost reduction and cost savings targets associated with the seismic business; continuing customer commitment to certain key oilfield projects; general economic and business conditions in key regions of the world, including Argentina and political and economic uncertainty in Venezuela and further socio-political unrest in the Gulf and/or Asia; changes in business strategy for SchlumbergerSema businesses including the expected growth of Schlumberger IT Consulting and Systems Integration Services and Network and Infrastructure Solutions in the global energy sector; 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; continued growth in the demand for smart cards and related products; 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; the adoption and effect of new accounting standards; potential contributions to pension plans and other factors detailed in our fourth quarter and full year 2002 earnings release; and our most recent Forms 10-K and 10-Q 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 7A     Quantitative & Qualitative Disclosures about Market Risk

 

Schlumberger does not believe it has a material exposure to financial market risk. Schlumberger manages the exposure to interest rate changes by using a mix of debt maturities and variable- and fixed-rate debt together with interest rate swaps, where appropriate, to fix or lower borrowing costs. With regard to foreign currency fluctuations, Schlumberger enters into various contracts, which change in value as foreign exchange rates change, to protect the value of external and intercompany transactions in foreign currencies. Schlumberger does not enter into foreign currency or interest rate transactions for speculative purposes.

 

Schlumberger Oilfield Services has operations in Venezuela which represented about 4% of the 2002 Oilfield Services operating revenue. In light of the present labor unrest in Venezuela, Schlumberger is reviewing its potential currency and business exposure, and taking appropriate steps to minimize the risks. While the ultimate loss is not determinable at this time, such loss will not have a significant effect on Schlumberger’s consolidated financial position or liquidity.

 

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Table of Contents

 

Item 8    Financial Statements and Supplementary Data

 

SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS

ANTILLES) AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENT OF INCOME

 

(Stated in thousands except per share amounts)

Year Ended December 31,


  

2002


    

2001


    

2000


Revenue

                        

Operating

  

$

13,473,662

 

  

$

14,058,366

 

  

$

9,831,472

Interest and other income

  

 

139,068

 

  

 

242,258

 

  

 

423,255

    


  


  

    

 

13,612,730

 

  

 

14,300,624

 

  

 

10,254,727

    


  


  

Expenses

                        

Cost of goods sold and services

  

 

13,759,257

 

  

 

11,014,923

 

  

 

7,779,578

Research & engineering

  

 

650,038

 

  

 

700,096

 

  

 

529,107

Marketing

  

 

401,384

 

  

 

446,621

 

  

 

316,816

General

  

 

664,364

 

  

 

681,021

 

  

 

416,499

Interest

  

 

367,973

 

  

 

384,896

 

  

 

276,099

    


  


  

    

 

15,843,016

 

  

 

13,227,557

 

  

 

9,318,099

    


  


  

Income (Loss) from continuing operations before taxes and minority interest

  

 

(2,230,286

)

  

 

1,073,067

 

  

 

936,628

Taxes on income

  

 

279,122

 

  

 

553,887

 

  

 

218,337

    


  


  

Income (Loss) from continuing operations before minority interest

  

 

(2,509,408

)

  

 

519,180

 

  

 

718,291

Minority interest

  

 

91,879

 

  

 

(28,545

)

  

 

2,163

    


  


  

Income (Loss) from Continuing Operations

  

 

(2,417,529

)

  

 

490,635

 

  

 

720,454

Income from Discontinued Operations

  

 

97,534

 

  

 

31,582

 

  

 

14,142

    


  


  

Net Income (Loss)

  

$

(2,319,995

)

  

$

522,217

 

  

$

734,596

    


  


  

Basic earnings per share:

                        

Income (Loss) from Continuing operations

  

$

(4.18

)

  

$

0.85

 

  

$

1.26

Income from Discontinued Operations

  

 

0.17

 

  

 

0.06

 

  

 

0.03

    


  


  

Net Income (Loss)

  

 

(4.01

)

  

 

0.91

 

  

 

1.29

Add back amortization of goodwill

  

 

—  

 

  

 

0.50

 

  

 

0.17

    


  


  

Adjusted earnings (loss) per share

  

$

(4.01

)

  

$

1.41

 

  

$

1.46

    


  


  

Diluted earnings per share:

                        

Income (Loss) from Continuing operations

  

$

(4.18

)

  

$

0.85

 

  

$

1.25

Income from Discontinued Operations

  

 

0.17

 

  

 

0.06

 

  

 

0.02

    


  


  

Net Income (Loss)

  

 

(4.01

)

  

 

0.91

 

  

 

1.27

Add back amortization of goodwill

  

 

—  

 

  

 

0.50

 

  

 

0.17

    


  


  

Adjusted earnings (loss) per share

  

$

(4.01

)

  

$

1.41

 

  

$

1.44

    


  


  

Average shares outstanding

  

 

578,588

 

  

 

574,328

 

  

 

570,028

Average shares outstanding assuming dilution

  

 

578,588

 

  

 

580,214

 

  

 

580,076

 

See the Notes to Consolidated Financial Statements

 

33


Table of Contents

 

SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS

ANTILLES) AND SUBSIDIARY COMPANIES

 

CONSOLIDATED BALANCE SHEET

 

(Stated in thousands)

December 31,


  

2002


           

2001


 

ASSETS

                        

Current Assets

                        

Cash

  

$

168,110

 

         

$

177,704

 

Short-term investments

  

 

1,567,906

 

         

 

1,439,997

 

Receivables less allowance for doubtful accounts(2002—$172,871; 2001—$145,268)

  

 

3,489,406

 

         

 

4,028,450

 

Inventories

  

 

1,043,057

 

         

 

1,204,263

 

Deferred taxes

  

 

435,887

 

         

 

321,767

 

Other current assets

  

 

481,074

 

         

 

532,709

 

    


         


    

 

7,185,440

 

         

 

7,704,890

 

Fixed Income Investments, held to maturity

  

 

407,500

 

         

 

576,000

 

Investments in Affiliated Companies

  

 

687,524

 

         

 

648,183

 

Fixed Assets less accumulated depreciation

  

 

4,663,756

 

         

 

4,827,879

 

Multiclient Seismic Data

  

 

1,018,483

 

         

 

1,028,954

 

Goodwill

  

 

4,229,993

 

         

 

6,260,969

 

Intangible Assets

  

 

558,664

 

         

 

811,349

 

Deferred Taxes

  

 

147,013

 

         

 

126,057

 

Other Assets

  

 

536,822

 

         

 

342,086

 

    


         


    

$

19,435,195

 

         

$

22,326,367

 

    


         


LIABILITIES AND STOCKHOLDERS’ EQUITY

                        

Current Liabilities

                        

Accounts payable and accrued liabilities

  

$

4,580,762

 

         

$

4,506,634

 

Estimated liability for taxes on income

  

 

625,058

 

         

 

587,328

 

Dividend payable

  

 

109,565

 

         

 

108,642

 

Long-term debt—current portion

  

 

452,577

 

         

 

31,990

 

Bank & short-term loans

  

 

682,956

 

         

 

983,191

 

    


         


    

 

6,450,918

 

         

 

6,217,785

 

Long-term Debt

  

 

6,028,549

 

         

 

6,215,709

 

Postretirement Benefits

  

 

544,456

 

         

 

504,797

 

Other Liabilities

  

 

251,607

 

         

 

372,696

 

    


         


    

 

13,275,530

 

         

 

13,310,987

 

    


         


Minority Interest

  

 

553,527

 

         

 

636,899

 

    


         


Stockholders’ Equity

                        

Common Stock

  

 

2,170,965

 

         

 

2,045,437

 

Income retained for use in the business

  

 

5,560,712

 

         

 

8,314,766

 

Treasury stock at cost

  

 

(1,578,358

)

         

 

(1,694,884

)

Accumulated other comprehensive income (loss)

  

 

(547,181

)

         

 

(286,838

)

    


         


    

 

5,606,138

 

         

 

8,378,481

 

    


         


    

$

19,435,195

 

         

$

22,326,367

 

    


         


 

See the Notes to Consolidated Financial Statements

 

34


Table of Contents

 

SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS

ANTILLES) AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

(Stated in thousands)

Year Ended December 31,


  

2002


    

2001


    

2000


 

Cash flows from operating activities:

                          

Income (loss) from continuing operations

  

$

(2,417,529

)

  

$

490,635

 

  

$

720,454

 

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

                          

Depreciation and amortization 1

  

 

1,545,053

 

  

 

1,887,559

 

  

 

1,263,060

 

Non-cash charges and gains on sale of businesses

  

 

3,196,923

 

  

 

271,174

 

  

 

2,706

 

Gain on sale of drilling rigs

  

 

(86,858

)

  

 

—  

 

  

 

—  

 

Earnings of companies carried at equity, less dividends received

  

 

(64,280

)

  

 

(61,715

)

  

 

(39,805

)

Deferred taxes

  

 

(48,702

)

  

 

17,595

 

  

 

5,257

 

Provision for losses on accounts receivable

  

 

66,425

 

  

 

56,619

 

  

 

32,301

 

Change in operating assets and liabilities:

                          

Decrease (increase) in receivables

  

 

542,669

 

  

 

(907,535

)

  

 

(364,130

)

Decrease (increase) in inventories

  

 

72,383

 

  

 

(259,290

)

  

 

(194,640

)

Decrease (increase) in other current assets

  

 

47,938

 

  

 

(8,048

)

  

 

(38,656

)

(Decrease) increase in accounts payable and accrued liabilities

  

 

(592,878

)

  

 

204,751

 

  

 

493,104

 

Increase (decrease) in estimated liability for taxes on income

  

 

28,470

 

  

 

12,626

 

  

 

(12,069

)

Increase in postretirement benefits

  

 

39,659

 

  

 

28,417

 

  

 

24,914

 

Other – net

  

 

(144,158

)

  

 

(162,602

)

  

 

(221,900

)

    


  


  


NET CASH PROVIDED BY OPERATING ACTIVITIES

  

 

2,185,115

 

  

 

1,570,186

 

  

 

1,670,596

 

    


  


  


Cash flows from investing activities:

                          

Purchases of fixed assets

  

 

(1,365,996

)

  

 

(2,044,008

)

  

 

(1,316,611

)

Multiclient seismic data capitalized

  

 

(344,705

)

  

 

(416,188

)

  

 

(222,934

)

Capitalization of intangible assets

  

 

(169,354

)

  

 

(29,782

)

  

 

(28,034

)

Sales/retirements of fixed assets & other

  

 

276,022

 

  

 

30,824

 

  

 

149,494

 

Acquisition of Sema plc

  

 

(132,155

)

  

 

(4,778,498

)

  

 

—  

 

Other business acquisitions

  

 

(44,431

)

  

 

(452,951

)

  

 

(1,075,446

)

Other acquisition related payments

  

 

(70,340

)

  

 

—  

 

  

 

—  

 

Business divestitures

  

 

259,271

 

  

 

902,953

 

  

 

154,843

 

Sale of drilling rigs

  

 

95,000

 

  

 

—  

 

  

 

—  

 

Option payment on sale of drilling rigs

  

 

24,900

 

  

 

—  

 

  

 

—  

 

Sale (purchase) of investments, net

  

 

51,334

 

  

 

2,430,911

 

  

 

551,619

 

    


  


  


NET CASH USED IN INVESTING ACTIVITIES

  

 

(1,420,454

)

  

 

(4,356,739

)

  

 

(1,787,069

)

    


  


  


Cash flows from financing activities:

                          

Dividends paid

  

 

(433,134

)

  

 

(430,328

)

  

 

(426,465

)

Proceeds from employee stock purchase plan

  

 

107,810

 

  

 

78,965

 

  

 

69,089

 

Proceeds from exercise of stock options

  

 

67,275

 

  

 

42,795

 

  

 

160,281

 

Proceeds from issuance of long-term debt

  

 

933,709

 

  

 

4,815,028

 

  

 

956,641

 

Payments of principal on long-term debt

  

 

(1,179,321

)

  

 

(2,092,670

)

  

 

(724,911

)

Net (decrease) increase in short-term debt

  

 

(308,623

)

  

 

370,608

 

  

 

113,608

 

    


  


  


NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

  

 

(812,284

)

  

 

2,784,398

 

  

 

148,243

 

    


  


  


Discontinued operations

  

 

31,443

 

  

 

31,515

 

  

 

15,432

 

    


  


  


Net (decrease) increase in cash before translation effect

  

 

(16,180

)

  

 

29,360

 

  

 

47,202

 

Translation effect on cash

  

 

6,586

 

  

 

(12,374

)

  

 

(19,073

)

Cash, beginning of year

  

 

177,704

 

  

 

160,718

 

  

 

132,589

 

    


  


  


Cash, end of year

  

$

168,110

 

  

$

177,704

 

  

$

160,718

 

    


  


  


1   Includes multiclient seismic data costs.

 

See the Notes to Consolidated Financial Statements

 

35


Table of Contents

 

SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS

ANTILLES) AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

(Stated in thousands)

                       

Accumulated Other Comprehensive Income (Loss)


        
    

Common Stock


    

Retained

Income


    

Marked to

Market


    

Pension

Liability


    

Translation

Adjustment


    

Comprehensive

Income (Loss)


 
    

Issued


  

In Treasury


                

Balance, January 1, 2000

  

$

1,820,186

  

$

(1,878,612

)

  

$

7,916,612

 

  

$

—  

 

  

$

—  

 

  

$

(137,158

)

  

$

311,016

 

                                                        


Translation adjustment

                                             

 

(28,487

)

  

$

(28,487

)

Sales of businesses

                                             

 

26,441

 

  

 

26,441

 

Sales to optionees less shares exchanged

  

 

61,224

  

 

99,057

 

                                            

Employee stock purchase plan

  

 

42,495

  

 

26,594

 

                                            

Net income

                  

 

734,596

 

                             

 

734,596

 

Dividends declared ($0.75 per share)

                  

 

(427,732

)

                                   

Tax benefit on stock options

  

 

40,000

                                                     
    

  


  


  


  


  


  


Balance, December 31, 2000

  

 

1,963,905

  

 

(1,752,961

)

  

 

8,223,476

 

  

 

—  

 

  

 

—  

 

  

 

(139,204

)

  

$

732,550

 

                                                        


Translation adjustment

                                             

 

(171,930

)

  

$

(171,930

)

RMS disposition

                                             

 

73,865

 

  

 

73,865

 

Derivatives marked to market

                           

 

(49,569

)

                    

 

(49,569

)

Sales to optionees less shares exchanged

  

 

17,130

  

 

25,420

 

                                            

Shares granted to Directors

  

 

156

  

 

89

 

                                            

Employee stock purchase plan

  

 

46,397

  

 

32,568

 

                                            

Net income

                  

 

522,217

 

                             

 

522,217

 

Dividends declared ($0.75 per share)

                  

 

(430,927

)

                                   

Tax benefit on stock options

  

 

17,849

                                                     
    

  


  


  


  


  


  


Balance, December 31, 2001

  

 

2,045,437

  

 

(1,694,884

)

  

 

8,314,766

 

  

 

(49,569

)

  

 

—  

 

  

 

(237,269

)

  

$

374,583

 

                                                        


Translation adjustment

                                             

 

(55,422

)

  

$

(55,422

)

Reed Hycalog disposition

                                             

 

22,063

 

  

 

22,063

 

Derivatives marked to market

                           

 

(33,291

)

                    

 

(33,291

)

Minimum pension liability (US/UK Plans)

                                    

 

(313,564

)

           

 

(313,564

)

Tax benefit on minimum pension liability

                                    

 

110,000

 

           

 

110,000

 

Investment Grant Prideco stock

                           

 

9,871

 

                    

 

9,871

 

Sales to optionees less shares exchanged

  

 

25,410

  

 

41,671

 

                                            

Shares granted to Directors

  

 

129

  

 

65

 

                                            

Employee stock purchase plan

  

 

58,056

  

 

49,754

 

                                            

Net loss

                  

 

(2,319,995

)

                             

 

(2,319,995

)

Dividends declared ($0.75 per share)

                  

 

(434,059

)

                                   

Technoguide acquisition

  

 

34,496

  

 

25,036

 

                                            

Tax benefit on stock options

  

 

7,437

                                                     
    

  


  


  


  


  


  


Balance, December 31, 2002

  

$

2,170,965

  

$

(1,578,358

)

  

$

5,560,712

 

  

$

(72,989

)

  

$

(203,564

)

  

$

(270,628

)

  

$

(2,580,338

)

    

  


  


  


  


  


  


 

See the Notes to Consolidated Financial Statements

 

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SCHLUMBERGER LIMITED (SCHLUMBERGER N.V., INCORPORATED IN THE NETHERLANDS

ANTILLES) AND SUBSIDIARY COMPANIES

 

SHARES OF COMMON STOCK

 

    

Issued


  

In Treasury


    

Shares

Outstanding


Balance, January 1, 2000

  

667,054,806

  

(101,123,676

)

  

565,931,130

Employee stock purchase plan

  

—  

  

1,431,309

 

  

1,431,309

Sold to optionees

  

30,987

  

5,331,268

 

  

5,362,255

    
  

  

Balance, December 31, 2000

  

667,085,793

  

(94,361,099

)

  

572,724,694

Employee stock purchase plan

  

—  

  

1,752,833

 

  

1,752,833

Shares granted to Directors

  

—  

  

4,800

 

  

4,800

Sold to optionees

  

8,385

  

1,399,686

 

  

1,408,071

    
  

  

Balance, December 31, 2001

  

667,094,178

  

(91,203,780

)

  

575,890,398

Employee stock purchase plan

  

—  

  

2,677,842

 

  

2,677,842

Shares granted to Directors

  

—  

  

3,500

 

  

3,500

Sold to optionees

  

10,490

  

2,243,400

 

  

2,253,890

Acquisition of Technoguide

  

—  

  

1,347,485

 

  

1,347,485

    
  

  

Balance, December 31, 2002

  

667,104,668

  

(84,931,553

)

  

582,173,115

    
  

  

 

See the Notes to Consolidated Financial Statements

 

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Table of Contents

 

Notes to Consolidated Financial Statements

 

Business Description

 

Founded in 1927, Schlumberger Limited is a global technology services company consisting of three business segments: first, Schlumberger Oilfield Services, one of the leading providers of technology services and solutions to the international petroleum industry; second, SchlumbergerSema, an IT services company providing consulting and systems integration services, and network and infrastructure solutions, primarily to the global energy sector, including oil and gas, and other regional markets spanning the telecommunications, finance and public sectors and third, the Other business segment which principally comprises the Cards, Terminals, Meters North America and NPTest activities.

 

Summary of Accounting Policies

 

The Consolidated Financial Statements of Schlumberger Limited and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America.

 

Discontinued Operations

 

On December 20, 2002, Schlumberger completed the sale of its Reed Hycalog drillbits business. The proceeds included $259 million in cash and 9.7 million shares of Grant Prideco common stock with a value of $103 million. The results for the Reed Hycalog operations are reported as Discontinued Operations in the Consolidated Statement of Income and, in 2002, includes results of operations of $32 million and gain on sale of $66 million. The net assets sold were approximately $185 million.

 

Revenue and operating income from discontinued operating for 2002, 2001 and 2000 were as follows:

 

    

(Stated in millions)

    

Revenue


    

Operating

Income


2002

  

$

212

    

$

32

2001

  

$

245

    

$

32

2000

  

$

195

    

$

14

 

Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of majority-owned subsidiaries. Significant 20% - 50% owned companies are carried on the equity method and classified in Investments in Affiliated Companies. The pro rata share of Schlumberger after-tax earnings is included in Interest and Other Income. All inter-company accounts and transactions have been eliminated.

 

Reclassifications

 

Certain items from prior years have been reclassified to conform to the current year presentation.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, Schlumberger evaluates its estimates, including those related to bad debts, valuation of inventories and investments, recoverability of goodwill and intangible assets, income tax provision and deferred taxes, profit assumptions on long-term percentage-of-completion contracts, contingencies and litigation and actuarial assumptions for employee benefit plans. Schlumberger bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of

 

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which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue Recognition

 

Products and Services Revenue

 

Schlumberger’s products and services are generally sold based upon purchase orders or contracts with the customer that include fixed or determinable prices and that do not include right of return or other similar provisions or other significant post delivery obligations. Revenue is recognized for products upon delivery, customer acceptance and when title passes. Revenue is recognized when services are rendered and collectibility is reasonably assured.

 

Certain revenues are recognized on a time and materials basis, or on a percentage of completion basis, depending on the contract, as services are provided. Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price contracts is recognized over the contract term based on the percentage of the cost of services provided during the period compared to the total estimated cost of services to be provided over the entire contract. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimated.

 

Software Revenue

 

Revenue derived from the sale of licenses for its software, maintenance and related services may include installation, consulting and training services.

 

If services are not essential to the functionality of the software, the revenue for each element of the contract is recognized separately based on its respective vendor specific objective evidence of fair value when all of the following conditions are met: a signed contract is obtained, delivery has occurred, fee is fixed and determinable and collectibility is probable.

 

If an ongoing vendor obligation exists under the license arrangement, or if any uncertainties with regard to customer acceptance are significant, revenue for the related element is deferred based on its vendor specific objective evidence of fair value. Vendor specific objective evidence of fair value is determined as being the price for the element when sold separately. If vendor specific objective evidence of fair value does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.

 

Multiple Element Arrangement and Collectibility

 

Many sales are generated from complex contractual arrangements that require significant revenue recognition judgments, particularly in the areas of multiple element arrangements. Revenues from contracts with multiple element arrangements, such as those including installation and integration services, are recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements.

 

The assessment of collectibility is particularly critical in determining whether revenue should be recognized in the current market environment. As part of the revenue recognition process, Schlumberger determines whether trade and notes receivables are reasonably assured of collection based on various factors, including the ability to sell those receivables and whether there has been deterioration in the credit quality of customers that could result in the inability to sell the receivables. In situations where Schlumberger has the ability to sell the receivables without recourse, revenue is recognized to the extent of the value Schlumberger could reasonably expect to realize from the sale. Schlumberger defers revenue and related costs when it is uncertain as to whether it will be able to collect or sell the receivable. Schlumberger defers revenue but recognizes costs when it determines that the collection or sale of the receivable is unlikely.

 

 

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Table of Contents

Translation of Non-US Currencies

 

The Oilfield Services segment functional currency is primarily the US dollar. The SchlumbergerSema segment and Other segment functional currencies are primarily local currencies. All assets and liabilities recorded in functional currencies other than US dollars are translated at current exchange rates. The resulting adjustments are charged or credited directly to the Stockholders’ Equity section of the Consolidated Balance Sheet. Revenue and expenses are translated at the weighted-average exchange rates for the period. All realized and unrealized transaction gains and losses are included in income in the period in which they occur. Schlumberger’s policy is to hedge against unrealized gains and losses on a monthly basis. Included in the 2002 results were transaction losses of $2 million, compared with losses of $7 million and $4 million in 2001 and 2000, respectively.

 

Currency exchange contracts are entered into as a hedge against the effect of future settlement of assets and liabilities denominated in other than the functional currency of the individual businesses. Gains or losses on the contracts are recognized when the currency exchange rates fluctuate, and the resulting charge or credit partially offsets the unrealized currency gains or losses on those assets and liabilities. On December 31, 2002, contracts were outstanding for the US dollar equivalent of $1,594 million in various foreign currencies. These contracts mature on various dates in 2003.

 

Investments

 

Both short-term investments and fixed income investments, held to maturity comprise primarily eurodollar time deposits, certificates of deposit and commercial paper, euronotes and eurobonds, substantially all denominated in US dollars. They are stated at cost plus accrued interest, which approximates market. Substantially all the investments designated as held to maturity that were purchased and matured during the year had original maturities of less than three months. Short-term investments that are designated as trading are stated at market. The unrealized gains/losses on such securities at December 31, 2002 were not significant.

 

For purposes of the Consolidated Statement of Cash Flows, Schlumberger does not consider short-term investments to be cash equivalents as they generally have original maturities in excess of three months.

 

Inventories

 

Inventories are stated at average cost or at market, whichever is lower. Inventory consists of materials, supplies and finished goods.

 

Fixed Assets and Depreciation

 

Fixed assets are stated at cost less accumulated depreciation, which is provided for by charges to income over the estimated useful lives of the assets using the straight-line method. Fixed assets include the manufacturing cost (average cost) of oilfield technical equipment manufactured or assembled by subsidiaries of Schlumberger. Expenditures for renewals, replacements and improvements are capitalized. Maintenance and repairs are charged to operating expenses as incurred. Upon sale or other disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income.

 

Multiclient Seismic Data

 

Schlumberger capitalizes the cost of obtaining multiclient surveys. Such costs are charged to Cost of goods sold and services based on a percentage of estimated total revenue that Schlumberger expects to receive from the sales of such data. The carrying value of individual surveys is reviewed, at least annually, and adjustments to the value are made based upon the revised estimated revenues for the surveys.

 

Capitalized Software

 

The costs incurred for the development of computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established, generally when all of the planning, designing, coding and testing activities that are necessary in order to establish that the product can be produced to meet its design specifications including functions, features and technical performance requirements are completed. These capitalized costs are subject to an ongoing assessment of recoverability

 

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based on anticipated future revenues and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overheads.

 

Amortization of capitalized software development costs begins when the product is available for general release. Amortization is provided on the lesser of a product-by-product basis on the straight-line method or the sales ratio method over the estimated useful life. Unamortized capitalized software development costs determined to be in excess of the net realizable value of the product are expensed immediately.

 

Schlumberger capitalizes certain costs of internally developed software. Capitalized costs include purchased materials and services, payroll and payroll related costs and interest costs. The costs of internally developed software is amortized on a straight-line basis over the estimated useful life which is principally 6 years.

 

Impairment of Long-lived Assets

 

On an annual basis Schlumberger reviews the carrying value of its long-lived assets, including goodwill and intangible assets. In addition, whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate, a review is performed. Schlumberger assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value.

 

In accordance with SFAS 142 (Goodwill and Other Intangible Assets), which was adopted by Schlumberger commencing January 1, 2002, goodwill ceased to be amortized.

 

Taxes on Income

 

Schlumberger and its subsidiaries compute taxes on income in accordance with the tax rules and regulations of the many taxing authorities where the income is earned. The income tax rates imposed by these taxing authorities vary substantially. Taxable income may differ from pretax income for financial accounting purposes. To the extent that differences are due to revenue or expense items reported in one period for tax purposes and in another period for financial accounting purposes, an appropriate provision for deferred income taxes is made. Any effect of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of the deferred tax asset will not be realized in the future, Schlumberger provides a corresponding valuation allowance against deferred tax assets.

 

Approximately $2.5 billion of consolidated income retained for use in the business on December 31, 2002 represented undistributed earnings of consolidated subsidiaries and the pro rata Schlumberger share of 20%-50% owned companies. No provision is made for deferred income taxes on those earnings considered to be indefinitely reinvested or earnings that would not be taxed when remitted.

 

Earnings per Share

 

Basic earnings per share is calculated by dividing net income by the average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income by the average number of common shares outstanding assuming dilution, the calculation of which assumes that all stock options and warrants which are in the money are exercised at the beginning of the period and the proceeds used, by Schlumberger, to purchase shares at the average market price for the period. The following is a reconciliation from basic earnings per share to diluted earnings per share from continuing operations for each of the last three years:

 

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Table of Contents

 

    

(Stated in thousands except per share amounts)

 
    

Income (loss)

from Continuing

Operations


    

Average

Shares

Outstanding


    

Earnings (loss)

Per Share from

Continuing

Operations


 

2002

                        

Basic

  

$

(2,417,529

)

  

578,588

    

$

(4.18

)

Effects of dilution:

                        

Options

           

—  

    

 

—  

 

    


  
    


Diluted 1

  

$

(2,417,529

)

  

578,588

    

$

(4.18

)

    


  
    


2001

                        

Basic

  

$

490,635

 

  

574,328

    

$

0.85

 

Effects of dilution:

                        

Options

           

5,886

    

 

—  

 

    


  
    


Diluted

  

$

490,635

 

  

580,214

    

$

0.85

 

    


  
    


2000

                        

Basic

  

$

720,454

 

  

570,028

    

$

1.26

 

Effects of dilution:

                        

Options

           

10,048

    

 

(0.01

)

    


  
    


Diluted

  

$

720,454

 

  

580,076

    

$

1.25

 

    


  
    



1   There is no dilution of shares or earnings per share in 2002 due to the net loss.

 

Adjusted Net Income

 

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) on January 1, 2002 – see New Accounting Standards below.

 

    

(Stated in thousands)

    

2002


    

2001


  

2000


Reported Net Income (Loss)

  

$

(2,319,995

)

  

$

522,217

  

$

734,596

Goodwill amortization

  

 

—  

 

  

 

291,574

  

 

94,746

    


  

  

Adjusted Net Income (Loss)

  

$

(2,319,995

)

  

$

813,791

  

$

829,342

    


  

  

 

Research & Engineering

 

All research and engineering expenditures are expensed as incurred, including costs relating to patents or rights that may result from such expenditures. Included in 2001 expenditures was a charge of $25 million for in-process R&D related to the Bull CP8 acquisition.

 

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. As required by SFAS 142, Schlumberger undertook an initial review of goodwill impairment in the first quarter of 2002 and completed an “event driven” review in the fourth quarter of 2002. The findings of the independent valuation indicated there was

 

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an impairment writedown of $2.6 billion which was approved by the Board of Directors in December 2002 in conjunction with the approval of the new strategic plan for SchlumbergerSema.

 

Amortization of goodwill and workforce ceased with effect from January 1, 2002. Assembled workforce, net of deferred taxes, of $175 million was reclassified to Goodwill.

 

Amortization of goodwill and other intangibles included in Schlumberger’s results are as follows:

 

    

(Stated in millions)

    

Pretax


    

2002


  

2001


  

2000


Goodwill

  

$

—  

  

$

270

  

$

96

Workforce

  

 

—  

  

 

32

  

 

—  

Other intangibles

  

 

72

  

 

45

  

 

5

    

  

  

    

$

72

  

$

347

  

$

101

    

  

  

 

In June 2001, SFAS 143 (Accounting for Asset Retirement Obligations) was issued. SFAS 143 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.

 

In August 2001, SFAS 144 (Accounting for Impairment or Disposal of Long-Lived Assets) was issued. SFAS 144 was adopted by Schlumberger commencing January 1, 2002 and did not have a material effect on its financial position or results of operations.

 

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 operating revenue and cost of goods sold & services increased in 2001 by $557 million and in 2000 by $416 million. There was no effect on cash flow or net income.

 

On July 29, 2002, the Financial Accounting Standards Board issued SFAS 146 (Accounting for Costs Associated with Exit or Disposal Activities). The standard required 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 replaced Issue 94-3. Schlumberger will apply SFAS 146 prospectively to exit or disposal activities initiated after December 31, 2002. As a result, in the future, charges related to restructuring plans may be recorded over multiple reporting periods as opposed to the date the plan was approved.

 

In November 2002, FASB Interpretation No. 45 (Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others) was issued. It requires certain accounting and disclosures of guarantees to third parties including indebtedness. The statement is effective on a prospective basis for guarantees issued or modified after December 31, 2002. Schlumberger does not believe that the implementation of this statement will have a material effect on its financial position or results of operations.

 

In January 2003, the Emerging Issues Task Force (EITF) issued No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables”. This EITF establishes the criteria for recognizing revenue in arrangements when several items are bundled into one agreement. EITF 00-21 does not allow revenue recognition unless the fair value of the undelivered element(s) is available and the element has stand-alone value to the customer. EITF 00-21 also provides guidance on allocating the total contract revenue to the

 

43


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individual elements based upon the available fair value of each deliverable. Schlumberger is in the process of determining if this pronouncement will have a material impact on its financial position or results of operations.

 

Hanover Compressor Transaction

 

In August 2001, Schlumberger sold its Oilfield Services worldwide gas compression activity to Hanover Compressor Company. The proceeds included common stock of Hanover Compressor, with a value at closing of $173 million, which is restricted from marketability until August 30, 2004 and a $150 million long-term subordinated note maturing December 15, 2005.

 

The market value of Schlumberger’s investment in Hanover Compressor common stock was $80 million as of December 31, 2002. Following the decline in the market value of the stock below carrying value during the second quarter of 2002, Schlumberger has performed, and continues to perform, a periodic assessment in accordance with its policy to determine whether an other-than-temporary decline in fair value has occurred. Schlumberger evaluated the recoverability of its investment by reviewing recent information related to the industry and the operating results and financial position of Hanover Compressor and by considering Schlumberger’s requirement, ability and intent to hold the investment on a long-term basis. Schlumberger concluded that evidence existed at December 31, 2002 to support the recoverability of its carrying value, that there were no events or changes in circumstances specifically relating to the business prospects of Hanover Compressor, that the underlying business fundamentals are good with natural gas supplies reduced and higher natural gas prices in North America, that the decline in the market value of the stock is consistent with historical industry volatility and is largely attributable to the general market conditions. In addition, the recently announced Hanover cutbacks in workforce and capital expenditures coupled with no immediate debt maturities should provide adequate capital resources in the near-term. Schlumberger views the recent changes to Hanover Compressor’s senior management team as positive with respect to its investment. Accordingly, Schlumberger concluded that the decline in market value of its investment ($93 million) in Hanover Compressor as of December 31, 2002 was temporary in nature and has not reduced the cost basis of that investment. If the decline in value persists or should Schlumberger’s assessment change, Schlumberger would take a charge to its earnings for the amount that is deemed unrecoverable.

 

The $150 million long-term subordinated note has a mandatory prepayment upon the issuance, sale or other disposition by Hanover Compressor of any shares of capital stock or other equity interests pursuant to a public offering or a private placement otherwise prepayment is discretionary. As of December 31, 2002, Schlumberger considers the carrying value of the note to be fully collectible.

 

As part of the sale agreement, Schlumberger agreed that the financing of the PIGAP II joint venture in Venezuela would be non-recourse to the buyer and would be executed prior to December 31, 2002. Accordingly, Schlumberger was obligated, with respect to the financing, to guarantee 30% (approximately $80 million) until the project was completed in 2002 and, if as of December 31, 2002, refinancing had not become non-recourse to the buyer or the project had not achieved substantial completion, Hanover Compressor had an option to put its interest in the joint venture back to Schlumberger.

 

As Schlumberger originally deferred the gain on the sale of the joint venture in 2001, there would be no impact on Schlumberger results of operations if Hanover Compressor were to exercise its option.

 

Subsequent event (unaudited)

 

As an outcome of the turmoil in Venezuela, although the project reached substantial completion, the non-recourse financing for the project was not achieved by December 31, 2002. On January 30, 2003, Hanover Compressor gave notice of its intention to exercise its right to put its ownership interest in the joint venture back to Schlumberger. The put is subject to certain consents and other conditions. Schlumberger’s obligation to provide a guarantee with respect to the financing was eliminated.

 

 

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Charges – Continuing Operations

 

Schlumberger recorded the following charges/credits in continuing operations:

 

In December 2002, a net charge of $3,081 million ($5.30 per share). On December 10, 2002, Schlumberger announced that the Board of Directors had approved an updated strategy for its SchlumbergerSema business segment. The new strategic plan outlook, current business values and the reorganization of SchlumbergerSema constitute significant events that required an impairment analysis to be performed in accordance with FAS 142. SchlumbergerSema was ‘valued’ on a stand-alone basis; each reporting unit within SchlumbergerSema was valued using a discounted cash flow analysis based on a long-term forecast prepared by SchlumbergerSema management with the assistance of a third party valuation expert. The implied multiples yielded by the discounted cash flow analysis were compared to observed trading multiples of comparable companies and recent transactions in the IT services industry to assess the fair value of the reporting units. The fair value was below the book value. As a result, goodwill was written down to its estimated fair value based on Schlumberger’s valuation. The impairment of goodwill mainly reflects the current difficulties of the telecommunications industry and the severely depressed market values of the IT companies serving SchlumbergerSema’s sector. Certain intangible assets were also identified and written down as part of this process.

 

Schlumberger recorded severance, facility and other costs in an effort to reduce costs at SchlumbergerSema and WesternGeco. These costs related to expenses that offer no future benefit to the ongoing operations of these businesses. During the fourth quarter, Schlumberger also recorded an impairment charge, to reflect a change in the business projections of the WesternGeco business, related to capitalized multiclient seismic library costs, a deferred tax valuation allowance and other costs.

 

The total of the above charges was $3,168 million. A summary, including the gain on the sale of drilling rigs of $87 million, is as follows:

 

Goodwill impairment

  

$

2,638

 

Intangibles impairment

  

 

147

 

SchlumbergerSema severance & other

  

 

97

 

WesternGeco severance & other

  

 

117

 

Multiclient seismic library impairment

  

 

184

 

Other

  

 

42

 

    


Charges before tax and minority interest

  

 

3,225

 

Tax 1

  

 

33

 

Minority interest

  

 

(90

)

    


    

 

3,168

 

Gain on sale of drilling rigs

  

 

(87

)

    


    

$

3,081

 

    



1   Includes deferred tax valuation allowance of $94 million.

 

The above charges before tax and minority interest and the gain on sale of drilling rigs are recorded in Cost of goods sold & services.

 

In March 2002, a charge of $29 million (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

 

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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 change is classified in Cost of goods sold and services in the Consolidated Statement of Income.

 

In March 2001, a charge of $25 million ($0.04 per share – diluted) for in-process research and development related to the Bull CP8 acquisition.

 

In June 2001, a charge of $280 million ($0.48 per share – diluted) for the estimated impairment charge from the disposition of certain Resource Management Services businesses (Electricity and Water outside North America and worldwide Gas businesses). This charge included the writeoff of goodwill ($139 million) and cumulative translation adjustment ($79 million).

 

In September 2001, a pretax credit of $42 million (after tax $3 million) representing the gain on the sale of the worldwide gas compression business, partially offset by an impairment charge relating to the expected disposition of certain activities. The proceeds from the sale of the worldwide gas compression business included $274 million in cash, a $150 million long-term subordinated note and newly issued Hanover Compressor Company shares with a value of $173 million. The shares have a three year marketability restriction. As part of the transaction, Schlumberger agreed that the financing of a certain joint venture project (PIGAP II) would be non-recourse to the buyer and would be executed prior to December 31, 2002. Accordingly, Schlumberger was obligated with respect to the financing to guarantee 30% (approximately $80 million) until the project was completed in late 2002. If as of December 31, 2002 refinancing had not become non-recourse to the buyer or the project has not achieved substantial completion, the buyer has an option to put its interest in such joint venture back to Schlumberger. The gain on the sale of this joint venture was deferred.

 

In December 2001, a pretax credit of $119 million (net – $5 million after tax and minority interest, $0.01 per share – diluted), consisting primarily of the following:

 

  n   A credit of $223 million ($117 million after tax) from the sale of the former Resource Management Services North American Water division.

 

  n   A pretax charge of $43 million ($37 million after tax) for employee termination costs, principally in Europe and the US, related to Oilfield Services and SchlumbergerSema in response to the prevailing business conditions.

 

  n   A tax charge for reorganization costs of $29 million.

 

  n   A further pretax charge of $28 million ($20 million after tax) related to the second quarter estimated loss on the divestiture of certain Resource Management Services businesses following the actual closing in the fourth quarter.

 

  n   A $33 million pretax asset writedown ($23 million after tax and minority interest) for technological impairment related to certain Land seismic assets in the newly formed joint venture.

 

The above 2001 pretax amounts are recorded: an aggregated $119 million charge in Cost of goods sold and services, a $25 million charge in Research & engineering and a $10 million credit in Minority interest.

 

In December 2000, a pretax charge of $84 million offset by a pretax gain of $82 million (net – $3 million after tax and minority interest, $0.00 per share – diluted), consisting of the following:

 

  n   A charge of $29 million ($25 million after tax) related primarily to the writedown of certain inventory and severance costs in the semiconductor business due to weak market conditions.

 

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