AT&T Inc. is a North American telecommunications company. In addition to telephone, data and video telecommunications, AT&T also provides mobile communications and internet services for companies, private customers and government organizations. AT&T has long had a monopoly in the United States and Canada.
United States
Washington, D.C. 20549
(Mark One)
|X|
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
or
Transition Report Pursuant to Section 13 or 15(d) of the
For the transition period from to
Commission File Number 1-8610
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
At April 30, 2001, 3,367,966,050 common shares were outstanding.
- -------------------------------------------------------------------------- Three months ended March 31, 2001 2000 - -------------------------------------------------------------------------- Operating Revenues Landline local service $ 5,568 $ 5,124 Wireless subscriber 54 1,500 Network access 2,603 2,665 Long distance service 793 803 Directory advertising 830 882 Other 1,342 1,579 - -------------------------------------------------------------------------- Total operating revenues 11,190 12,553 - -------------------------------------------------------------------------- Operating Expenses Operations and support 6,083 7,214 Depreciation and amortization 2,448 2,263 - -------------------------------------------------------------------------- Total operating expenses 8,531 9,477 - -------------------------------------------------------------------------- Operating Income 2,659 3,076 - -------------------------------------------------------------------------- Other Income (Expense) Interest expense (459) (356) Interest income 178 24 Equity in net income of affiliates 401 200 Other income (expense) - net 106 17 - -------------------------------------------------------------------------- Total other income (expense) 226 (115) - -------------------------------------------------------------------------- Income Before Income Taxes 2,885 2,961 - -------------------------------------------------------------------------- Income taxes 1,021 1,139 - -------------------------------------------------------------------------- Income Before Extraordinary Item 1,864 1,822 - -------------------------------------------------------------------------- Extraordinary item, net of tax (10) - - -------------------------------------------------------------------------- Net Income $ 1,854 $ 1,822 ========================================================================== Earnings Per Common Share: Income Before Extraordinary Item $ 0.55 $ 0.54 Net Income $ 0.55 $ 0.54 - -------------------------------------------------------------------------- Earnings Per Common Share - Assuming Dilution: Income Before Extraordinary Item $ 0.55 $ 0.53 Net Income $ 0.54 $ 0.53 - -------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding (in millions) 3,377 3,396 Dividends Declared Per Common Share $ 0.25625 $0.25375 ========================================================================== See Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------- March 31, December 31, 2001 2000 - -------------------------------------------------------------------------------- Assets (Unaudited) Current Assets Cash and cash equivalents $ 551 $ 643 Accounts receivable - net of allowances for uncollectibles of $1,008 and $1,032 9,315 10,144 Prepaid expenses 999 550 Deferred income taxes 612 671 Notes receivable from Cingular Wireless 9,138 9,568 Other current assets 1,099 1,640 - -------------------------------------------------------------------------------- Total current assets 21,714 23,216 - -------------------------------------------------------------------------------- Property, plant and equipment - at cost 121,365 119,753 Less: accumulated depreciation and amortization 73,815 72,558 - -------------------------------------------------------------------------------- Property, Plant and Equipment - Net 47,550 47,195 - -------------------------------------------------------------------------------- Intangible Assets - Net of Accumulated Amortization of $557 and $746 5,022 5,475 Investments in Equity Affiliates 11,399 12,378 Other Assets 11,640 10,387 - -------------------------------------------------------------------------------- Total Assets $ 97,325 $ 98,651 ================================================================================ Liabilities and Shareowners’ Equity Current Liabilities Debt maturing within one year $ 10,643 $ 10,470 Accounts payable and accrued liabilities 13,770 15,432 Accrued taxes 2,645 3,592 Dividends payable 867 863 - -------------------------------------------------------------------------------- Total current liabilities 27,925 30,357 - -------------------------------------------------------------------------------- Long-Term Debt 16,561 15,492 - -------------------------------------------------------------------------------- Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 7,288 6,806 Postemployment benefit obligation 9,811 9,767 Unamortized investment tax credits 302 318 Other noncurrent liabilities 4,622 4,448 - -------------------------------------------------------------------------------- Total deferred credits and other noncurrent liabilities 22,023 21,339 - -------------------------------------------------------------------------------- Corporation-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts* 500 1,000 - -------------------------------------------------------------------------------- Shareowners' Equity Common shares issued ($1 par value) 3,433 3,433 Capital in excess of par value 12,105 12,125 Retained earnings 19,333 18,341 Guaranteed obligations of employee stock ownership plans (ESOP) (21) (21) Deferred compensation - leveraged ESOP (LESOP) (33) (37) Treasury shares (at cost) (2,933) (2,071) Accumulated other comprehensive loss (1,568) (1,307) - -------------------------------------------------------------------------------- Total shareowners' equity 30,316 30,463 - -------------------------------------------------------------------------------- Total Liabilities and Shareowners' Equity $ 97,325 $ 98,651 ================================================================================ * The trusts contain $515 in principal amount of the Subordinated Debentures of Pacific Telesis Group. See Notes to Consolidated Financial Statements.
- ------------------------------------------------------------------------------- Three months ended March 31, 2001 2000 - ------------------------------------------------------------------------------- Operating Activities Net income $ 1,854 $ 1,822 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,448 2,263 Undistributed earnings from investments in equity affiliates 216 (152) Provision for uncollectible accounts 230 211 Amortization of investment tax credits (16) (18) Deferred income tax expense 649 352 Gain on sales of investments (129) (191) Extraordinary item, net of tax 10 - Changes in operating assets and liabilities: Accounts receivable 574 408 Other current assets (386) (508) Accounts payable and accrued liabilities (2,468) (581) Other - net (1,032) (657) - ------------------------------------------------------------------------------- Total adjustments 96 1,127 - ------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 1,950 2,949 - ------------------------------------------------------------------------------- Investing Activities Construction and capital expenditures (2,807) (2,349) Investments in affiliates 1,158 (103) Proceeds from short-term investments 510 - Dispositions 244 215 Acquisitions - (3,663) Other 1 1 - ------------------------------------------------------------------------------- Net Cash Used in Investing Activities (894) (5,899) - ------------------------------------------------------------------------------- Financing Activities Net change in short-term borrowings with original maturities of three months or less (84) 4,867 Issuance of long-term debt 2,238 - Repayment of long-term debt (980) (526) Early redemption of corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts (500) - Purchase of treasury shares (1,065) (284) Issuance of treasury shares 90 60 Dividends paid (859) (834) Other 12 29 - ------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities (1,148) 3,312 - ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (92) 362 - ------------------------------------------------------------------------------- Cash and cash equivalents beginning of year 643 495 - ------------------------------------------------------------------------------- Cash and Cash Equivalents End of Period $ 551 $ 857 =============================================================================== Cash paid during the three months ended March 31 for: Interest $ 550 $ 462 Income taxes, net of refunds $ 1,237 $ 1,179 See Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------------------------------------------------- Guaranteed Accumulated Capital in Obligations of Deferred Other Common Excess of Retained Employee Stock Compensation- Treasury Comprehensive Shares Par Value Earnings Ownership Plans LESOP Shares Loss - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 $ 3,433 $ 12,125 $ 18,341 $ (21) $ (37) $ (2,071) $ (1,307) Net income - - 1,854 - - - - Other comprehensive loss - - - - - - (261) Dividends to shareowners - - (863) - - - - Reduction of debt associated with ESOP - - - - - - - Cost of LESOP trust shares allocated to employee accounts - - - - 4 - - Purchase of treasury shares - - - - - (1,065) - Issuance of treasury shares - (72) - - - 203 - Other - 52 1 - - - - - -------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2001 $ 3,433 $ 12,105 $ 19,333 $ (21) $ (33) $ (2,933) $ (1,568) ========================================================================================================================== See Notes to Consolidated Financial Statements. SELECTED FINANCIAL AND OPERATING DATA At March 31, or for the three months then ended: 2001 2000 - --------------------------------------------------- --------------------- Debt ratio ..................................... 46.9% 46.7% Network access lines in service (000)........... 61,254 61,154 Resold lines (000).............................. 1,597 1,562 Access minutes of use (000,000)................. 69,388 69,475 Cingular Wireless customers* (000).............. 20,535 17,294 Number of employees ............................ 216,180 208,380 *Amounts represent the 100% pro forma customers of Cingular Wireless.
SBC COMMUNICATIONS INC.MARCH 31, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)Dollars in millions except per share amounts
-------------------------------------------------------------------------------- Three months ended March 31, 2001 2000 -------------------------------------------------------------------------------- Net income $ 1,854 $ 1,822 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment (238) (110) Net unrealized gain (loss) on securities: Unrealized gain (loss) on available for sale securities (23) 49 Less: reclassification adjustment for (gain) loss included in net income - (38) -------------------------------------------------------------------------------- Net unrealized gain (loss) on securities (23) 11 -------------------------------------------------------------------------------- Other comprehensive income (loss) (261) (99) -------------------------------------------------------------------------------- Total comprehensive income $ 1,593 $ 1,723 ================================================================================
Condensed Consolidating Statements of Income For the Three Months Ended March 31, 2001 Parent PAC PacBell SWBell Other Adjs. Total ---------------------------------------------------------------------------------- ------- Total operating revenues $ - $2,949 $ 2,582 $2,901 $ 5,665 $(2,907) $11,190 Total operating expenses (35) 1,843 1,614 2,138 4,910 (1,939) 8,531 ---------------------------------------------------------------------------------- ------- Operating Income 35 1,106 968 763 755 (968) 2,659 ---------------------------------------------------------------------------------- ------- Interest expense 148 101 98 100 263 (251) 459 Equity in net income of affiliates 1,812 3 - - 398 (1,812) 401 Royalty income (expense) 115 - (102) (115) - 102 - Other income (expense) - net 218 (1) 1 - 220 (154) 284 ---------------------------------------------------------------------------------- ------- Income Before Income Taxes 2,032 1,007 769 548 1,110 (2,581) 2,885 ---------------------------------------------------------------------------------- ------- Income taxes 178 403 310 202 238 (310) 1,021 ---------------------------------------------------------------------------------- ------- Income Before Extraordinary Item 1,854 604 459 346 872 (2,271) 1,864 ---------------------------------------------------------------------------------- ------- Extraordinary item, net of tax - (10) - - - - (10) ---------------------------------------------------------------------------------- ------- Net Income $ 1,854 $ 594 $ 459 $ 346 $ 872 $(2,271) $ 1,854 ================================================================================== ======= Condensed Consolidating Statements of Income For the Three Months Ended March 31, 2000 Parent PAC PacBell SWBell Other Adjs. Total --------------------------------------------------------------------------------- -------- Total operating revenues $ - $2,902 $ 2,520 $2,830 $ 7,080 $(2,779) $12,553 Total operating expenses (101) 2,160 1,891 2,237 5,440 (2,150) 9,477 --------------------------------------------------------------------------------- -------- Operating Income 101 742 629 593 1,640 (629) 3,076 --------------------------------------------------------------------------------- -------- Interest expense 63 115 100 97 364 (383) 356 Equity in net income of affiliates 1,685 - - - 220 (1,705) 200 Royalty income (expense) 115 - (102) (115) - 102 - Other income (expense) - net 71 61 - 1 171 (263) 41 --------------------------------------------------------------------------------- -------- Income Before Income Taxes 1,909 688 427 382 1,667 (2,112) 2,961 --------------------------------------------------------------------------------- -------- Income taxes 87 267 175 143 642 (175) 1,139 --------------------------------------------------------------------------------- -------- Net Income $ 1,822 $ 421 $ 252 $ 239 $ 1,025 $(1,937) $ 1,822 ================================================================================= ======== Condensed Consolidating Balance Sheets March 31, 2001 Parent PAC PacBell SWBell Other Adjs. Total -------------------------------------------------------------------------------------- -------- Cash and cash equivalents $ 391 $ 11 $ 19 $ 14 $ 135 $ (19) $ 551 Accounts receivable - net 10,106 2,758 2,135 1,934 7,955 (15,573) 9,315 Other current assets 850 510 516 749 9,739 (516) 11,848 -------------------------------------------------------------------------------------- -------- Total current assets 11,347 3,279 2,670 2,697 17,829 (16,108) 21,714 -------------------------------------------------------------------------------------- -------- Property, plant and equipment - net 133 13,661 13,227 15,226 18,530 (13,227) 47,550 -------------------------------------------------------------------------------------- -------- Intangible assets - net - - - - 5,022 - 5,022 -------------------------------------------------------------------------------------- -------- Investments in equity affiliates 31,944 628 - - 14,497 (35,670) 11,399 -------------------------------------------------------------------------------------- -------- Other assets 2,314 2,248 2,180 257 11,725 (7,084) 11,640 -------------------------------------------------------------------------------------- -------- Total Assets $45,738 $19,816 $18,077 $18,180 $67,603 $(72,089) $97,325 ====================================================================================== ======== Debt maturing within one year $ 9,414 $ 2,425 $ 2,262 $ 3,274 $ 3,156 $ (9,888) $10,643 Other current liabilities 1,701 3,034 3,209 3,318 15,041 (9,021) 17,282 -------------------------------------------------------------------------------------- -------- Total current liabilities 11,115 5,459 5,471 6,592 18,197 (18,909) 27,925 -------------------------------------------------------------------------------------- -------- Long-term debt 1,740 4,354 4,294 3,977 11,344 (9,148) 16,561 -------------------------------------------------------------------------------------- -------- Postemployment benefit obligation 80 3,027 2,844 3,009 3,695 (2,844) 9,811 -------------------------------------------------------------------------------------- -------- Other noncurrent liabilities 2,487 1,791 1,646 1,183 6,801 (1,696) 12,212 -------------------------------------------------------------------------------------- -------- Corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts - 500 - - - - 500 -------------------------------------------------------------------------------------- -------- Total shareowners' equity 30,316 4,685 3,822 3,419 27,566 (39,492) 30,316 -------------------------------------------------------------------------------------- -------- Total Liabilities and Shareowners' Equity $ 45,738 $19,816 $18,077 $18,180 $67,603 $(72,089) $97,325 ====================================================================================== ======== Condensed Consolidating Balance Sheets December 31, 2000 Parent PAC PacBell SWBell Other Adjs. Total --------------------------------------------------------------------------------------- -------- Cash and cash equivalents $ 436 $ 5 $ 9 $ 52 $ 150 $ (9) $ 643 Accounts receivable - net 9,503 2,838 2,219 2,111 8,662 (15,189) 10,144 Other current assets 2,195 480 474 697 9,057 (474) 12,429 --------------------------------------------------------------------------------------- -------- Total current assets 12,134 3,323 2,702 2,860 17,869 (15,672) 23,216 Property, plant and equipment - net 138 13,461 13,028 14,984 18,612 (13,028) 47,195 --------------------------------------------------------------------------------------- -------- Intangible assets - net - - - - 5,475 - 5,475 --------------------------------------------------------------------------------------- -------- Investments in equity affiliates 30,072 611 - - 15,904 (34,209) 12,378 --------------------------------------------------------------------------------------- -------- Other assets 2,186 2,136 2,061 272 10,644 (6,912) 10,387 --------------------------------------------------------------------------------------- -------- Total Assets $ 44,530 $19,531 $ 17,791 $18,116 $68,504 $(69,821) $98,651 ======================================================================================= ======== Debt maturing within one year $ 8,918 $ 1,214 $ 1,776 $ 2,648 $ 4,157 $ (8,243) $10,470 Other current liabilities 2,527 3,906 3,794 4,112 15,845 (10,297) 19,887 --------------------------------------------------------------------------------------- -------- Total current liabilities 11,445 5,120 5,570 6,760 20,002 (18,540) 30,357 --------------------------------------------------------------------------------------- -------- Long-term debt 568 4,353 4,293 3,976 11,445 (9,143) 15,492 Postemployment benefit obligation 83 3,000 2,817 2,993 3,691 (2,817) 9,767 --------------------------------------------------------------------------------------- -------- Other noncurrent liabilities 1,971 1,686 1,536 1,314 6,602 (1,537) 11,572 --------------------------------------------------------------------------------------- -------- Corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts - 1,000 - - - - 1,000 --------------------------------------------------------------------------------------- -------- Total shareowners' equity 30,463 4,372 3,575 3,073 26,764 (37,784) 30,463 --------------------------------------------------------------------------------------- -------- Total Liabilities and Shareowners' Equity $ 44,530 $19,531 $ 17,791 $18,116 $68,504 $(69,821) $98,651 ======================================================================================= ======== Condensed Consolidating Statements of Cash Flows Three Months Ended March 31, 2001 Parent PAC PacBell SWBell Other Adjs. Total --------------------------------------------------------------------------------------- -------- Net cash from operating activities $ (1,286) $ 273 $ 410 $ 142 $ 4,938 $(2,527) $ 1,950 Net cash from investing activities 1,450 (694) (672) (807) (930) 759 (894) Net cash from financing activities (209) 427 272 627 (4,023) 1,758 (1,148) --------------------------------------------------------------------------------------- -------- Net Increase (Decrease) in Cash $ (45) $ 6 $ 10 $ (38) $ (15) $ (10) $ (92) ======================================================================================= ======== Condensed Consolidating Statements of Cash Flows Three Months Ended March 31, 2000 Parent PAC PacBell SWBell Other Adjs. Total --------------------------------------------------------------------------------------- -------- Net cash from operating activities $ (119) $ 953 $ 744 $ 761 $ 96 $ 514 $ 2,949 Net cash from investing activities (3,403) (606) (590) (587) (973) 260 (5,899) Net cash from financing activities 3,539 (336) (143) (182) 1,219 (785) 3,312 --------------------------------------------------------------------------------------- -------- Net Increase (Decrease) in Cash $ 17 $ 11 $ 11 $ (8) $ 342 $ (11) $ 362 ======================================================================================= ========
------------------------------------------------------------------- Three months ended March 31, 2001 2000 ------------------------------------------------------------------- Numerators Numerator for basic earnings per share: Income before extraordinary item $ 1,864 $1,822 ------------------------------------------------------------------- Dilutive potential common shares: Other stock-based compensation 1 1 ------------------------------------------------------------------- Numerator for diluted earnings per share $ 1,865 $1,823 =================================================================== Denominators (000,000) Denominator for basic earnings per share: Weighted average number of common shares outstanding 3,377 3,396 ------------------------------------------------------------------- Dilutive potential common shares: Stock options 28 29 Other stock-based compensation 8 7 ------------------------------------------------------------------- Denominator for diluted earnings per share: 3,413 3,432 =================================================================== Basic earnings per share: Income before extraordinary item $ 0.55 $ 0.54 Extraordinary item - - ------------------------------------------------------------------- Net income $ 0.55 $ 0.54 =================================================================== Diluted earnings per share: Income before extraordinary item $ 0.55 $ 0.53 Extraordinary item (0.01) - ------------------------------------------------------------------- Net income $ 0.54 $ 0.53 ===================================================================
--------------------------------------------------------------------------------------------- Revenues At March 31, 2001 or for the three from external Intersegment Income before Segment months ended customers revenues income taxes assets --------------------------------------------------------------------------------------------- Wireline $ 10,099 $ 8 $ 1,640 $ 66,130 Wireless 2,031 - 189 13,390 Directory 793 31 380 2,412 International 61 9 278 11,267 Other 171 17 189 59,977 Cingular de-consolidation (1,965) - - (11,666) Eliminations - (65) - (44,185) Normalizing adjustments - - 209 - --------------------------------------------------------------------------------------------- Total $ 11,190 $ - $ 2,885 $ 97,325 ============================================================================================= --------------------------------------------------------------------------------------------- Revenues At March 31, 2000 or for the three from external Intersegment Income before Segment months ended customers revenues income taxes assets --------------------------------------------------------------------------------------------- Wireline $ 9,571 $ 54 $ 2,135 $ 58,141 Wireless 1,826 - 301 12,231 Directory 843 28 383 2,398 International 61 - 239 13,140 Other 252 23 (74) 50,961 Eliminations - (105) - (47,470) Normalizing adjustments - - (23) - --------------------------------------------------------------------------------------------- Total $ 12,553 $ - $ 2,961 $ 89,401 =============================================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsDollars in millions except per share amounts
RESULTS OF OPERATIONS
Throughout this document, SBC Communications Inc. is referred to as "we" or "SBC". A reference to a Note in this section refers to the accompanying Notes to Consolidated Financial Statements.
Overview Our financial results for the first three months of 2001 and 2000 are summarized as follows:
- ------------------------------------------------------------------------------- First Quarter - ------------------------------------------------------------------------------- Percent 2001 2000 Change - ------------------------------------------------------------------------------- Operating revenues $ 11,190 $ 12,553 (10.9)% Operating expenses 8,531 9,477 (10.0) Operating income 2,659 3,076 (13.6) Income before income taxes and extraordinary item 2,885 2,961 (2.6) Income before extraordinary item 1,864 1,822 2.3 Extraordinary item, net of tax (10) - - Net income 1,854 1,822 1.8 ===============================================================================
We reported net income of $1,854, or $0.54 per share assuming dilution, in the first quarter of 2001 compared to $1,822, or $0.53 per share assuming dilution, in the first quarter of 2000. The first quarter of 2001 includes an extraordinary loss of $10, net of taxes of $4, related to the early redemption of approximately $500 of our corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts.
The net effect of excluding these normalizing items was to decrease net income by $125 in 2001 and to increase net income by $88 in 2000. In addition to these normalizing items, for internal management purposes, we include the 60% proportional consolidation of Cingular Wireless (Cingular) in our 2001 normalized results. The following table summarizes our normalized results for the first three months of 2001 and 2000.
- --------------------------------------------------------------------------------- First Quarter - --------------------------------------------------------------------------------- Percent 2001 2000 Change - --------------------------------------------------------------------------------- Operating revenues $ 13,144 $ 12,553 4.7% Operating expenses 10,388 9,454 9.9 Operating income 2,756 3,099 (11.1) Income before income taxes and extraordinary item 2,676 2,984 (10.3) Income before extraordinary item 1,739 1,910 (9.0) =================================================================================
Consolidated normalized revenues increased due to growth in demand for data communications and wireless services and products. These increases were partially offset by a decrease in demand for other wireline services and products due to the slowing United States' (U.S.) economy and lower directory advertising revenues due to changes in the timing of directory publications. Consolidated normalized operating expenses increased more than revenues due to investments in new products and services, including Digital Subscriber Line (DSL), national expansion and long distance service, the acquisition of Sterling and the service issues in the Ameritech region. These factors contributed to the decline in operating income and income before extraordinary item.
Segment Results
The following tables show components of normalized results of operations by segment. A discussion of significant segment results is also presented. Intercompany interest affects the segment results of operations but is not discussed as it is eliminated in consolidation. The consolidated results section discusses interest expense, interest income, other income (expense) - net and income taxes.
- ------------------------------------------------------------------------------- First Quarter - ------------------------------------------------------------------------------- Percent 2001 2000 Change - ------------------------------------------------------------------------------- Operating revenues Local service $ 5,564 $ 5,128 8.5% Network access 2,603 2,688 (3.2) Long distance service 748 763 (2.0) Other 1,192 1,046 14.0 - -------------------------------------------------------------------- Total Operating Revenues 10,107 9,625 5.0 - -------------------------------------------------------------------- Operating expenses Operations and support 6,182 5,408 14.3 Depreciation and amortization 1,967 1,787 10.1 - -------------------------------------------------------------------- Total Operating Expenses 8,149 7,195 13.3 - -------------------------------------------------------------------- Operating Income 1,958 2,430 (19.4) - -------------------------------------------------------------------- Interest Expense 333 317 5.0 - -------------------------------------------------------------------- Other Income (Expense) - Net 15 22 (31.8) - -------------------------------------------------------------------- Income Before Income Taxes $ 1,640 $ 2,135 (23.2)% ===============================================================================
- -------------------------------------------------------------------------------- First Quarter - -------------------------------------------------------------------------------- Percent 2001 2000 Change - -------------------------------------------------------------------------------- Operating revenues Subscriber revenue $ 1,688 $ 1,500 12.5% Other 343 326 5.2 - ---------------------------------------------------------------------- Total Operating Revenues 2,031 1,826 11.2 - ---------------------------------------------------------------------- Operating expenses Operations and support 1,455 1,173 24.0 Depreciation and amortization 287 279 2.9 - ---------------------------------------------------------------------- Total Operating Expenses 1,742 1,452 20.0 - ---------------------------------------------------------------------- Operating Income 289 374 (22.7) - ---------------------------------------------------------------------- Interest Expense 142 39 - - ---------------------------------------------------------------------- Equity in Net Income of Affiliates 7 1 - - ---------------------------------------------------------------------- Other Income (Expense) - Net 35 (35) - - ---------------------------------------------------------------------- Income Before Income Taxes $ 189 $ 301 (37.2)% ================================================================================
As a result of our joint venture with BellSouth Corporation, we account for our 60% economic interest in Cingular under the equity method of accounting. However, for evaluating the results of Cingular internally, we use proportional consolidation. In the table above, Cingular's proportional results are included in 2001 along with our wireless properties pending contribution, while the 2000 amounts reflect our similar historical wireless operations.
- ------------------------------------------------------------------------------- First Quarter - ------------------------------------------------------------------------------- Percent 2001 2000 Change - ------------------------------------------------------------------------------- Operating Revenues $ 824 $ 871 (5.4)% - --------------------------------------------------------------------- Operating expenses Operations and support 440 482 (8.7) Depreciation and amortization 9 8 12.5 - --------------------------------------------------------------------- Total Operating Expenses 449 490 (8.4) - --------------------------------------------------------------------- Operating Income 375 381 (1.6) - --------------------------------------------------------------------- Interest Expense - 3 - - --------------------------------------------------------------------- Other Income (Expense) - Net 5 5 - - --------------------------------------------------------------------- Income Before Income Taxes $ 380 $ 383 (0.8)% ===============================================================================
- -------------------------------------------------------------------------------- First Quarter - -------------------------------------------------------------------------------- Percent 2001 2000 Change - -------------------------------------------------------------------------------- Operating Revenues $ 70 $ 61 14.8% - --------------------------------------------------------------------- Operating Expenses 75 89 (15.7) - --------------------------------------------------------------------- Operating Income (Loss) (5) (28) 82.1 - --------------------------------------------------------------------- Interest Expense 1 70 (98.6) - --------------------------------------------------------------------- Equity in Net Income of Affiliates 177 199 (11.1) - --------------------------------------------------------------------- Other Income (Expense) - Net 107 138 (22.5) - --------------------------------------------------------------------- Income Before Income Taxes $ 278 $ 239 16.3% ================================================================================
- -------------------------------------------------------------------------------- First Quarter - -------------------------------------------------------------------------------- Percent 2001 2000 Change - -------------------------------------------------------------------------------- Operating Revenues $ 188 $ 275 (31.6)% - -------------------------------------------------------------------------------- Operating Expenses 49 333 (85.3) - ---------------------------------------------------------------------- Operating Income (Loss) 139 (58) - - ---------------------------------------------------------------------- Interest Expense 260 210 23.8 - ---------------------------------------------------------------------- Other Income (Expense) - Net 310 194 59.8 - ---------------------------------------------------------------------- Income (Loss) Before Income Taxes $ 189 $ (74) - % ===============================================================================
Interest expense increased $103, or 28.9%, in the first quarter of 2001. The majority of the increase was due to higher average debt levels related to our acquisition of Sterling in March 2000.
Interest income increased $154 in the first quarter of 2001. The increase was primarily due to the income accrued from Cingular for the amount owed to us on notes receivable previously eliminated in consolidation. However, this income was mostly offset against our equity earnings from Cingular, which included the interest expense on these notes; therefore having an immaterial impact on consolidated net income.
Other income (expense) - net increased $89 from $17 in the first quarter of 2000 to $106 in the first quarter of 2001. The first quarter of 2001 included gains on the sale of investments of approximately $129, consisting of the sale of Amdocs Limited (Amdocs) shares and other investments. These gains were partially offset by minority interest and dividends paid on preferred securities issued by Ameritech subsidiaries of approximately $21. Additionally, in the first quarter of 2001, we recognized expense of approximately $581 related to an endowment of Amdocs shares to the SBC Foundation and income of $575 from the related mark to market adjustment on the Amdocs shares, for a net expense of $6.
The first quarter of 2000 included a gain on the sale of Telmex L shares of approximately $133, which was offset by the expense of marking the Debt Exchangeable for Common Stock (DECS) redeemable in Telmex L shares to market of $138. The first quarter of 2000 also included a gain on the sale of a cost investment of approximately $58, minority interest of $55 and interest rate swap income of $20.
Income Taxes in 2001 and 2000 reflect the tax effect of the normalizing items previously described in the Overview section. These charges increased income taxes by $84 and $65 in the first quarter of 2001 and 2000. The net effective tax rate on these one-time items differed as a result of nondeductible items included in the charges. Excluding these items, income taxes would have been $937 and $1,074 for the first quarter of 2001 and 2000. Income taxes were lower due primarily to lower income before income taxes. The decrease in the effective tax rate is due to increased utilization of tax credits and a decrease in non-deductible goodwill for businesses that were disposed of in 2000.
Reciprocal Compensation is billed to our wireline subsidiaries by competitors for the termination of certain local exchange traffic to competitors' customers. In February 1999, the Federal Communications Commission (FCC) declared that Internet traffic is not local traffic, but instead is primarily interstate, subject to interstate jurisdiction. However, the FCC found that existing federal law did not address to what extent, if any, compensation should be paid to competitors that deliver Internet traffic to Internet service providers and initiated a proceeding to establish such rules. In March 2000, the Court of Appeals for the District of Columbia vacated the FCC's February 1999 holding that Internet traffic is interstate and remanded the holding to the FCC for a more reasoned explanation of that conclusion. In April 2001, the FCC issued an order and further notice of proposed rulemaking (FNPR) addressing that remand.
In its April 2001 order, the FCC ruled that calls to Internet service providers are interstate access and not subject to reciprocal compensation. However, instead of immediately eliminating all compensation, the FCC established a transitional compensation mechanism for exchange of this traffic. Under this mechanism, the per-minute-of-use fee will be capped at 0.15 cents during the first six months following the order and decline to 0.07 cents after two years. In addition, the FCC capped the growth of Internet minutes for which carriers may seek compensation. The FCC transition plan is optional for incumbent local exchange carriers and in order to opt into the plan, incumbents must offer to exchange local and wireless traffic at the same compensation rate as Internet traffic. Although we cannot determine the exact impact of the FCC order at this time, we expect it to reduce our annual reciprocal compensation expense.
In its April 2001 FNPR, the FCC launched a broad examination of all forms of inter-carrier compensation as well as proposed to eliminate all reciprocal compensation when the transitional mechanism expires.
Ameritech Merger On October 8, 1999, we completed the merger of one of our subsidiaries with Ameritech. The FCC issued an order approving the transaction, subject to certain conditions, including fostering out-of-region competition (see "National-Local" below), promoting advanced services, opening local markets to competition and improving residential services. These FCC conditions require specific performance and reporting and contain enforcement provisions that could potentially trigger more than $2 billion in payments if certain goals are not met. Associated with these conditions, in the first quarter of 2001 we incurred approximately $23 in additional expenses, including payments for failing to meet certain performance measurements.
National-Local In 1999, we began implementation of our "National-Local" initiative in conjunction with our acquisition of Ameritech. We are required by the FCC to offer local exchange services in 30 new markets across the country by April 2002 or pay up to $40 for each market missed. We introduced service in five new markets in 2000 and 15 more by April 2001. In March of 2001, we scaled back our service offerings in these areas in response to certain economic environment and regulatory factors, while still fulfilling our FCC merger condition requirements. The effect of this initiative on our future results of operations and financial position cannot be determined at this time.
Pricing Flexibility In March 2001, the FCC issued a decision granting our petition requesting Phase I pricing flexibility for interstate, special access and dedicated transport services in 18 market areas and Phase II pricing flexibility in four additional market areas. In addition, we received Phase I pricing flexibility for dedicated transport and the carrier side of special access services in 13 market areas and Phase II pricing flexibility in 28 additional market areas. The market areas included in this decision represent certain metropolitan areas in our wireline subsidiaries' service regions, including Chicago, Illinois, Los Angeles, California and Dallas, Texas. Phase I flexibility permits our subsidiaries to offer volume and term discounts under contract for certain access services after they have demonstrated that competitors have made substantial investments in facilities in their market areas. Phase II flexibility permits special access and dedicated transport services to be removed from price cap regulation entirely after our subsidiaries have demonstrated that a greater level of competitive investment exists. We expect this decision to have a favorable effect on our results of operations and financial position, however we cannot determine the amount at this time.
Long Distance Applications In April 2001, we filed an application with the FCC to provide long distance service in Missouri and the FCC has 90 days from the filing date to rule on the application. We continue to seek long distance approval in our other in-region states and have filed applications with state commissions in Arkansas, California and Nevada.
Opportunity Indiana In March 2001, the Indiana Utility Regulatory Commission approved our Opportunity Indiana 2000 settlement agreement with certain modifications, including tightened service standard measurements, thus extending alternative regulation in Indiana through December 2003. This agreement is not expected to have a material effect on our results of operations or financial position.
Connecticut In March 2001, the Connecticut Department of Public Utility Control (CDPUC) issued a final decision granting our request to close our cable television business operating under the Southern New England Telecommunications Corporation (SNET) brand in Connecticut. Additionally, in April 2001, the CDPUC issued a draft decision extending SNET's alternative regulation plan indefinitely and the monitoring period until 2004. In its decision, the CDPUC rejected our request for authority to adjust local residential service rates annually based on the rate of inflation. The CDPUC is expected to issue a final alternative regulation decision in the second quarter of 2001.
New Accounting Standards On January 1, 2001, we adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires all derivatives to be recorded on the balance sheet at fair value. Our adoption did not have a significant effect on our financial position or results of operations.
Valuation Adjustment See Note 9 for a discussion of the impairment of our cable operations.
Communications Workers of America Contract In March 2001, our telephone subsidiaries and the Communications Workers of America (CWA) ratified four labor contracts covering employees in 13 states.
We had $551 in cash and cash equivalents available at March 31, 2001. During the first three months of 2001 our primary source of funds continued to be cash provided by operating activities. In the first quarter of 2000 our primary sources of funds included cash provided by operating activities and short-term borrowings issued to finance our acquisition of Sterling. We have entered into agreements with several banks for committed lines of credit totaling $4,200, all of which may be used to support commercial paper borrowings. We had no borrowings outstanding under these lines of credit as of March 31, 2001. Commercial paper borrowings as of March 31, 2001 and December 31, 2000 totaled $6,345 and $6,437, out of $8,000 authorized.
During the first quarter of 2001 we closed on an additional 632 towers under our agreement with SpectraSite Communications, Inc. (SpectraSite). The terms of the agreement call for us to receive cash and a proportionate amount of stock. In the first quarter of 2001 we received $162 in cash.
In the first quarter of 2001, we received approximately $783 related to the sale of our investment in diAx to TDC. Approximately $565 was recorded as a dividend, due to the nature of our investment in TDC, and was included in undistributed earnings from investments in equity affiliates.
Our investing activities during the first three months of 2001 consisted of $2,807 in construction and capital expenditures, primarily in the wireline segment, including $458 in fiber, electronics and other technology equipment for our broadband initiative, known as Project Pronto. Investing activities during the first three months of 2001 also included a receipt of $966 from Cingular for payment on notes receivable and asset dispositions of $244, primarily related to the sale of SecurityLink and the sale of Amdocs shares. There were no asset acquisitions during the first quarter of 2001. Investing activities during the first three months of 2000 included asset dispositions of $215, due to the sale of Telmex L shares, and asset acquisitions of $3,663 related to the acquisition of Sterling.
Short-term borrowings decreased $84 due to the repayment of notes with maturities of 90 days or less. We also spent $1,065 on the repurchase of shares of our common stock under the repurchase plan announced in January 2000. As of April 30, 2001, we have repurchased a total of approximately 83 million shares of our common stock of the 100 million shares authorized to be repurchased. Financing activities during the first three months of 2000 included new short-term borrowings to finance our acquisition of Sterling. Cash paid for dividends in the first three months of 2001 was $859, or 3.0% higher than in the first three months of 2000 due to an increase in dividends declared per share.
In February 2001, we redeemed prior to maturity approximately $500 of the Trust Originated Preferred Securities (TOPrS) with an interest rate of 7.56%. The TOPrS had an original maturity of 30 years and were included on the balance sheet as corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts.
In March 2001, we paid the principal amount of each of the DECS, as adjusted by the exchange rate specified in the DECS, in the form of cash, which we received from settlement of our note receivable with characteristics similar to the DECS.
In March 2001, we issued approximately $1,250 of ten-year, 6.25%, global notes. Additionally, we issued two, one-year notes for approximately $500 each, which carry variable interest rates. Each note's interest is calculated based on the London Interbank Offer Rate (LIBOR), one recalculating monthly at the LIBOR less 1 basis point and the other recalculating quarterly at the LIBOR less 2.5 basis points. In April 2001, we issued approximately $2,000 of five-year, 5.75%, global notes. The March and April 2001 notes are redeemable at any time, in whole or in part, and under certain circumstances, at a premium. The proceeds from these issuances were used to repay a portion of outstanding commercial paper debt and for general corporate purposes.
There has been no material change in the disclosures about our sensitivities to market risks related to financial instruments since December 31, 2000.
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially impact our future earnings.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the first quarter of 2001, non-employee directors acquired from the Company shares of common stock pursuant to the Company's Non-Employee Director Stock and Deferral Plan. Under the plan, a director may make an annual election to receive all or part of his or her annual retainer or fees in the form of SBC shares or deferred stock units (DSUs) that are convertible into SBC shares. Each Director also receives an annual grant of DSUs. During this period, an aggregate of 54,194 SBC shares and DSUs were acquired by non-employee directors at prices ranging from $44.63 to $52.38, in each case the fair market value of the shares on the date of acquisition. The issuances of shares and DSUs were exempt from registration pursuant to Section 4(2) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Exhibit 12 Computation of Ratios of Earnings to Fixed Charges. (b) Reports on Form 8-K On April 24, 2001, SBC filed a Form 8-K, reporting on Item 5. Other Events and Item 7. Financial Statements and Exhibits. In the report, SBC disclosed a press release announcing first quarter earnings for 2001.
SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SBC Communications Inc. May 11, 2001 /s/ Donald E. KiernanDonald E. Kiernan Senior Executive Vice President and Chief Financial Officer
SBC COMMUNICATIONS INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Dollars in Millions Three Months Ended March 31, Year Ended December 31, --------------------- ------------------------------------------------------ 2001 2000 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income Before Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Changes* $ 3,101 $ 2,809 $ 12,367 $ 10,382 $ 11,859 $ 6,356 $ 8,789 Add: Interest Expense 459 356 1,592 1,430 1,605 1,550 1,418 Dividends on Preferred Securities 21 26 118 118 114 98 68 1/3 Rental Expense 49 50 252 236 228 202 188 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Adjusted Earnings $ 3,630 $ 3,241 $ 14,329 $ 12,166 $ 13,806 $ 8,206 $ 10,463 ========== ========== ========== ========== ========== ========== ========== Total Interest Charges $ 489 $ 376 $ 1,693 $ 1,511 $ 1,691 $ 1,700 $ 1,589 Dividends on Preferred Securities 21 26 118 118 114 98 68 1/3 Rental Expense 49 50 252 236 228 202 188 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Adjusted Fixed Charges $ 559 $ 452 $ 2,063 $ 1,865 $ 2,033 $ 2,000 $ 1,845 ========== ========== ========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges 6.49 7.17 6.95 6.52 6.79 4.10 5.67 *Undistributed earnings on investments accounted for under the equity method have been excluded.