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 StatesSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
For the quarterly period ended March 31, 2002
or
For the transition period from toCommission File Number 1-8610
Incorporated under the laws of the State of DelawareI.R.S. Employer Identification Number 43-1301883175 E. Houston, San Antonio, Texas 78205Telephone 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 March 31, 2002, 3,340,171,095 common shares were outstanding.
See Notes to Consolidated Financial Statements.
SELECTED FINANCIAL AND OPERATING DATA
*Amounts represent 100% of the customers of Cingular Wireless (Cingular). The 2001 amount also includes the customers of Cellular Communications of Puerto Rico, which was contributed to Cingular in September 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)Dollars in millions except per share amounts
Segment results, including a reconciliation to SBC consolidated results, for the three months ended March 31, 2002 and 2001 are as follows:
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsDollars in Millions except per share amounts
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 2002 and 2001 are summarized as follows:
In the first quarter of 2002, we recorded a cumulative effect of accounting change related to the adoption of a new accounting standard, Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FAS 142). In the first quarter of 2001, we incurred an extraordinary loss related to the early redemption of $500 of our corporation-obligated mandatorily redeemable preferred securities of subsidiary trusts (TOPrS).
In addition, the first quarter of 2001 includes amortization expense related to goodwill and Federal Communications Commission (FCC) licenses, which are no longer amortized under FAS 142. If applied retroactively, this accounting change would have decreased the first quarter of 2001 operating expenses by approximately $56, increased equity in net income of affiliates by $86, and increased income before extraordinary item and cumulative effect of accounting change by approximately $117, or $0.03 per share.
Our reported operating revenues and expenses were lower in the first quarter of 2002 due to several factors in addition to the above-noted FAS 142 effect, including: lower equipment sales in 2002, sales of nonstrategic assets during 2001 and changes in the timing of directory publications. Revenues were also lower due to the weak United States (U.S.) economy and increased competition, including the use of substitute communication technology, which also contributed to the decline in operating income.
For internal management reporting purposes, we exclude (i.e., normalize) one-time items from our results and analyze them separately. We had no normalizing items in the first quarter of 2002. The net effect of excluding the normalizing items from the first quarter of 2001 was to decrease net income by $125. In addition to the normalizing items, for internal management purposes, we include the 60% proportional consolidation of Cingular Wireless (Cingular) in our normalized results. The proportional consolidation of Cingular changes our normalized revenues, expenses, operating income and nonoperating items, but does not change our net income. The following table summarizes our normalized results for the first quarter of 2002 and 2001.
In addition, our normalized results for the first quarter of 2001 include amortization expense related to goodwill and FCC licenses which are no longer amortized under FAS 142. If applied retroactively, this accounting change would have decreased the first quarter of 2001 normalized operating expenses by approximately $91, increased equity in net income of affiliates by $51, and increased income before extraordinary item and cumulative effect of accounting change by approximately $117, or $0.03 per share.
Excluding the impact of FAS 142, normalized operating revenues and expenses decreased in the first quarter of 2002 due to the same factors discussed above that impacted reported operating revenues and expenses. Operating expenses also decreased in the first quarter of 2002 primarily due to cost savings from employee reductions and favorable expense comparisons to 2001 now that we are beyond the first year of our launch of DSL and interLATA (Local Access and Transport Area) long distance services. The expense reduction was partially offset by an increase in our provision for uncollectible accounts due to the weak U.S. economic environment.
Excluding the FAS 142 impact, our diluted earnings per share, before extraordinary item and cumulative effect of accounting change would have declined 5.6%, while operating income would have declined 5.8%, during the same period. Our diluted earnings per share was favorably impacted by a decreasing effective tax rate and a decline in our weighted average common shares outstanding. However, this favorable impact was mostly offset by a decline in other income (expense) - net.
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, income taxes, extraordinary item and cumulative effect of accounting change.
We account for our 60% economic interest in Cingular under the equity method of accounting. However, we use proportional consolidation in order to evaluate the results of Cingular for internal management purposes. In the table above, Cingular’s proportional results are included along with the residual wireless properties we hold that have not been contributed.
Our other segment results in the first quarter of 2002 primarily consist of corporate and other operations. The first quarter of 2001 includes the results of our Ameritech security monitoring operations prior to its sale in January 2001, and our Ameritech cable television operations prior to its sale in November 2001.
Interest expensedecreased $109, or 23.7%, in the first quarter of 2002. Approximately one-half of the decrease was due to interest in 2001 that was accrued on payables of approximately $2,500 to Cingular that were netted with our notes receivable from Cingular in the second quarter of 2001. The remaining decrease was primarily related to lower composite rates.
Interest incomedecreased $36, or 20.2%, in the first quarter of 2002. The decrease was primarily related to lower income accrued on notes receivable from Cingular that were netted with notes payable to Cingular of approximately $2,500 in the second quarter of 2001. The income accrued from Cingular does not have a material impact on our net income because the interest income is mostly offset when we record our share of equity income in Cingular.
Other income (expense) - -net decreased $91 from $106 in the first quarter of 2001 to $15 in the first quarter of 2002. The first quarter of 2002 included a gain of approximately $90 on the sale of Amdocs Limited (Amdocs) shares. The gain was partially offset by a charge of approximately $60 related to the reduction of the valuation of our investment in Williams Communications Group Inc. to zero and loss of approximately $15 on the sale of our webhosting operations.
The first quarter of 2001 included gains on the sale of investments of approximately $129, consisting of the sale of 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.
Income taxesdecreased $181, or 17.7%, in the first quarter of 2002. Income taxes were lower due primarily to lower income and a decrease in our effective tax rate. Our effective tax rate for the first quarter of 2002 was 33.0% compared to 35.4% in the first quarter of 2001. This lower effective tax rate is primarily related to our adoption of FAS 142, which stops the non-deductible amortization of goodwill, and a decrease in the net tax rate for income from international operations after consideration of realizable foreign tax credits.
Extraordinary ItemThe 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 TOPrS (see Note 1). The remaining $500 of the TOPrS were redeemed in the second quarter of 2001 leaving none outstanding at December 31, 2001.
Cumulative Effect of Accounting Change On January 1, 2002, we were required to adopt FAS 142. Adoption of FAS 142 means that we stop amortizing goodwill and at least annually, we must test the remaining book value of goodwill for impairment. Future impairments will be recorded in operating expenses (see Note 1). During the first quarter of 2002 we performed the initial impairment test of goodwill under FAS 142 and determined that goodwill related to our investment in Sterling Commerce, Inc. (Sterling) was impaired by $1,791 (see Note 1). Our international holdings and Cingular are currently conducting their analyses of their goodwill and other unamortizable intangibles. We expect that they will complete them later in the year. Any FAS 142 impairment resulting from these analyses will be reflected as a cumulative effect of accounting change at January 1, 2002 and will require restatement of the first quarter of 2002.
Overview Despite passage of the Telecommunications Act of 1996, the U.S. telecommunications industry, including DSL and other advanced services, continues, in many respects, to operate as a heavily regulated industry. The expected transition from an industry overseen by multiple regulatory bodies to a market-driven industry monitored by state and federal agencies has been slow. Our wireline subsidiaries remain subject to regulation by state regulatory commissions for intrastate services and by the FCC for interstate services. This continuing difficult and uncertain regulatory environment combined with the downturn in the U.S. economy and increasing local competition from multiple wireline and wireless providers in various markets presents significant challenges for our business. A summary of significant first quarter 2002 regulatory developments follows.
Wireless Auction In March 2002, the FCC announced that it will return 85% of the auction deposits pertaining to the auction of licenses held by wireless companies that had previously filed for bankruptcy protection. In April 2002, Salmon PCS, an auction participant and a company Cingular has invested in, received a refund of approximately $358 and prepaid the same amount on the principal of their note payable to Cingular. The United States Supreme Court has agreed to review various issues regarding this auction and if the auction is upheld, participants will be responsible for payment of the total amount bid at auction. It is unclear how a resolution of these proceedings will affect Cingular.
California Marketing Proceeding In February 2002, the California Public Utilities Commission issued a decision on rehearing of its September 2001 ruling on our marketing practices in which it (1) reduced the penalties to $15 from $26, and (2) vacated the portions of the decision dealing with the cap on incentive compensation. We continue to believe this decision is unlawful on a number of grounds and have filed legal challenges to the decision.
Out-of-Region Competition In conjunction with the FCC’s approval of our acquisition of Ameritech Corporation, the FCC required us to enter 30 new markets across the country as a provider of local services by April 2002. As of March 31, 2002, we have entered all 30 markets. We are also required to satisfy additional service and collocation requirements in 14 of these markets, which we anticipate satisfying in accordance with various merger requirements. Failure to meet these FCC condition requirements could result in a payment of up to $36 for each of those 14 markets. Fulfillment of the remaining requirements is not expected to have a material effect on our results of operations or financial position.
New Accounting StandardsOn January 1, 2002, we were required to adopt Statement of Financial Accounting Standards No. 141, “Business Combinations” (FAS 141) and FAS 142. FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Adoption of FAS 142 means that we stop amortizing goodwill, and at least annually test the remaining book value of goodwill for impairment. Future impairments will be recorded in operating expenses. During the first quarter of 2002 we performed the initial impairment test of goodwill under FAS 142 and determined that goodwill related to our investment in Sterling was impaired by $1,791 (see Note 1).
We had $830 in cash and cash equivalents available at March 31, 2002. During the first three months of 2002 and 2001 our primary source of funds continued to be cash provided by operating activities. We have entered into agreements with several banks for committed lines of credit totaling $3,700, 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, 2002.
Our commercial paper borrowings increased $539 during the first three months of 2002, and at March 31, 2002 totaled $6,578, of which $5,342 was due within 90 days and $1,236 was due thereafter. In the first quarter of 2002 SBC International initiated a commercial paper borrowing program in order to simplify intercompany borrowing arrangements. Our total commercial borrowings include borrowings under this program of $2,503 at March 31, 2002.
Our investing activities during the first three months of 2002 consisted of $1,765 in construction and capital expenditures, primarily in the wireline segment. Investing activities during the first three months of 2002 also include proceeds of $93 relating to the sale of Amdocs shares. Cash paid for asset acquisitions in 2002 include approximately $300 for our Yahoo! investment and $106 in payments to América Móvil for our purchase of a 50% non-controlling interest in Cellular Communications of Puerto Rico. We currently expect our capital spending for 2002 to be between $8,000 and $9,000, reflecting a previously announced reduction in order to reduce expenses in response to the U.S. economic decline and our lower revenue expectations.
Short-term borrowings with original maturities of three months or less decreased $705 due to the repayment of short-term notes and commercial paper. We also spent $593 on the repurchase of shares of our common stock under the repurchase plans announced in January 2000 and in November 2001. As of March 31, 2002, we had repurchased a total of approximately 113 million shares of our common stock of the 200 million shares authorized to be repurchased. Cash paid for dividends in the first thee months of 2002 was $860, approximately equal to the amount paid for the first three months of 2001. We expect cash paid for dividends to increase in 2002 due to the March 2002 announcement of a 5.4% increase in dividends.
We did not redeem, prior to maturity, any debt obligations during the first three months of 2002.
There has been no material change in the disclosures about our sensitivities to market risks related to financial instruments since December 31, 2001.
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.
During the first quarter of 2002, 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 3,330 SBC shares and DSUs were acquired by non-employee directors at prices ranging from $35.52 to $38.50, 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Exhibit 12
SBC COMMUNICATIONS INC.COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGESDollars in Millions
*Undistributed earnings on investments accounted for under the equity method have been excluded.