01—Abstract
Summary
Summary of the 10-K filed February 28, 2002. Cited figures are marked; the original filing is the authoritative source.
This is SBC Communications Inc.'s (NYSE: T, later renamed AT&T Inc.) Form 10-K for fiscal 2001, filed February 28, 2002.
Reported 2001 results were weaker than the prior year: operating revenues fell 10.6% to $45.9 billiona, largely because wireless operations were deconsolidated into the 60%-owned Cingular joint venture, and net income declined 9.1% to $7.24 billion, or $2.13 diluted EPS. On a normalized basis, which excludes one-time items and proportionally consolidates Cingular, revenue rose 2.0% to $54.3 billion and diluted EPS before extraordinary items rose 4.0% to $2.35. Management attributes the slowdown to a weak U.S. economy, regulatory uncertainty, and competition, and expects pressure to continue in 2002.
The filing shows a company retrenching. Free cash flow improved to $3.6 billionb from $0.9 billion as capital spending fell to $11.2 billion, and 2002 capex guidance is $9.2 to $9.7 billion, reflecting a slowdown in Project Pronto, the $6 billion broadband build-out. Only 1.3 million DSL subscribers were active at year-end.
Management also cut about 17,000 employees from the payroll and took a $619 millionc restructuring charge in the fourth quarter. Shareholders benefited from about $2.1 billion in buybacks and a dividend of $1.025 per share.
Balance-sheet and accounting risks are significant: the company expects a $1.5 to $1.9 billiond pre-tax goodwill impairment on its Sterling investment in 2002 under new FAS 142 rules, and it faces regulatory exposure including up to $1.9 billion in potential merger-condition payments and an unresolved state dispute in California. Investors should note that the 2001 normalized and reported figures differ materially, and that a large share of growth depends on Cingular, international equity affiliates such as TDC and Telmex, and the outcome of pending FCC and state regulatory proceedings.
02—Key points
Key Highlights
- Reported operating revenues fell 10.6% to $45.9 billion, but normalized revenues rose 2.0% to $54.3 billion after proportionally consolidating Cingular.
- Reported net income was $7.24 billion ($2.13 diluted EPS) versus $7.97 billion ($2.32) in 2000; normalized diluted EPS before extraordinary items was $2.35, up 4.0%.
- Free cash flow rose to $3.6 billion from $0.9 billion, driven by capex cut to $11.2 billion from $13.1 billion; 2002 capex guidance is $9.2 to $9.7 billion.
- Cingular Wireless, the 60%-owned joint venture with BellSouth, served 21.6 million customers and is the second-largest U.S. wireless carrier.
- Project Pronto broadband was scaled back: $3.2 billion spent, 1.3 million DSL subscribers, and 25 million lines DSL-capable as of year-end 2001.
- Expected 2002 goodwill impairment of $1.5 to $1.9 billion pre-tax related to the Sterling investment under FAS 142, which will reduce 2002 net income.
- Shareholder returns: $1.025 per share dividend and about 47 million shares repurchased in 2001 for $2.1 billion; long-term debt stood at $17.1 billion.
03—Questions
Frequently Asked Questions
Why did reported revenue decline so sharply in 2001?
Most wireless operations were contributed to Cingular in October 2000, so Cingular's revenues are no longer consolidated; SBC instead records its 60% share of Cingular's net income as equity income. Sales of nonstrategic assets, including SecurityLink and Ameritech New Media, also reduced reported revenue. Normalized revenue, which includes Cingular on a proportional basis, grew 2.0%.
How healthy is the core wireline business?
Wireline is about 75% of normalized revenue, but access line counts fell 2.8% in 2001 as wireless, cable, and DSL substitution and competition increased. Local service revenue grew 3.1% largely from DSL and wholesale services, while long distance revenue was flat as new interLATA entry offset intraLATA dialing parity losses. Management expects revenue growth to slow further in 2002.
What regulatory and financial risks should investors watch?
Key risks include FCC and state proceedings on unbundling, reciprocal compensation, and interconnection pricing, pending a Supreme Court decision in 2002. The Ameritech merger conditions carry up to $1.9 billion in potential payments, and the California PUC audit proposes about $350 million in customer credits, which SBC disputes. The Sterling goodwill impairment and the pending Telecom Americas and Bell Canada option arrangements also add uncertainty.
What is the outlook for capital allocation and shareholder returns?
Capex is expected to decline to $9.2 to $9.7 billion in 2002, supporting free cash flow. The board authorized an additional 100 million share repurchase in November 2001 (about 99 million of the 200 million total authorized had been repurchased by January 31, 2002). The dividend was $1.025 per share in 2001, and management plans to fund capex, buybacks, and merger costs with operating cash flow and incremental borrowings.
04—Continue