01—Abstract
Summary
Summary of the 10-K filed March 11, 2005. Cited figures are marked; the original filing is the authoritative source.
SBC Communications' 2004 Form 10-K (filed March 11, 2005) shows a company in transition: consolidated operating revenues were essentially flat at $40.8 billiona (up 0.7%), while operating income fell 6.1% to $5.9 billion and diluted EPS was $1.77 (including $1.77 from discontinued operations and a $0.27 contribution from the Illinois/northwest Indiana directory sale).
Income from continuing operations declined 15% to $4.98 billionb. The decline was driven by a 2.0% rise in operating expenses, including growth-initiative costs, a labor strike and settlements, and a higher cost of sales, partly offset by lower pension and retiree medical costs. Wireline voice revenue fell 5.4% as retail access lines declined 4.3% to 52.4 million, while data revenue rose 8.2% on DSL growth to 5.1 million lines and long-distance voice grew 28.7%.
Wireline segment income fell 10.3% and its operating margin dropped to 9.8%. The defining 2004 event was the October closing of Cingular's $41 billionc acquisition of AT&T Wireless, which SBC funded with roughly $21.6 billion of equity contributions. That funding was largely financed by new debt and proceeds from the sale of Belgacom, TDC, and Telkom.
Consolidated total assets rose to $108.8 billion, long-term debt rose to $21.2 billiond, and the debt-to-total-capital ratio increased to 40.0% from 32.0%. Management expects 2005 operating margin to improve slightly and capital expenditures to rise to $5.4–5.7 billion to fund Project Lightspeed fiber deployment. Management also expects combined pension and retiree costs of $1.4–1.55 billion.
The most important subsequent event is the January 30, 2005 agreement to acquire AT&T Corp. in a stock-for-stock deal valued at about $16 billion, with management estimating more than $15 billion in net synergy value. Closing is expected in late 2005 or early 2006 and is subject to shareholder, DOJ, and FCC approval.
Management expects the deal to slow near-term revenue growth but to be accretive to EPS beginning in 2008. Regulatory uncertainty remains significant, particularly the December 2004 FCC unbundling rules that eliminated mandatory UNE-P access for mass-market customers, which SBC has challenged in court.
02—Key points
Key Highlights
- Revenue flat at $40.8B (+0.7%), but operating income down 6.1% to $5.9B and diluted EPS of $1.77 included $0.27 from discontinued directory operations
- Cingular Wireless closed its $41B acquisition of AT&T Wireless in October 2004; SBC contributed about $21.6B of equity, pushing debt-to-capital to 40.0% from 32.0%
- Retail access lines fell 4.3% to 52.4M, but DSL lines grew to 5.1M and wireline data revenue rose 8.2%, while long-distance voice revenue jumped 28.7%
- Agreed in January 2005 to acquire AT&T Corp. in a roughly $16B stock deal, with management projecting over $15B in net synergies and EPS accretion from 2008
- Dec. 2004 FCC rules eliminated mandatory UNE-P access for mass-market customers, with a 12-month transition, though SBC is challenging the rules in court
- Project Lightspeed fiber build targets about 18M households by 2007, with roughly $5B of planned spend and 2005 capex guided to $5.4–5.7B
- Quarterly dividend raised 3.2% to $0.3225; $1.26 declared for 2004, and the company repurchased 17.25M shares for $448M
03—Questions
Frequently Asked Questions
Why did operating income decline in 2004 despite flat revenue?
Operating expenses rose 2.0%, driven by growth-initiative costs such as large-business equipment sales and network integration (about $603M), strike preparation and labor settlements (about $263M), a $90M noncash pension charge, and higher traffic compensation (about $122M). These increases outweighed lower pension and postretirement costs, which fell about $548M, and lower depreciation.
What is the financial impact of the Cingular/AT&T Wireless acquisition on SBC?
SBC holds a 60% economic interest in Cingular, which is accounted for under the equity method, so Cingular's revenue is not consolidated. SBC contributed about $21.6B of equity to fund its share of the $41B purchase, financed with an $8.75B bridge loan repaid through commercial paper, $5B of new long-term notes, and asset sale proceeds. Equity income from Cingular was $390M lower on a segment basis, and the Q4 2004 result included a $105M noncash lease-accounting correction. Management expects Cingular's integration to weigh on results before margins improve beginning in 2007.
What are the main risks from the pending AT&T acquisition?
Key risks include obtaining DOJ and FCC approval on the proposed terms, AT&T stockholder approval, integration execution, achieving the expected synergies on time, and disruption to customer, employee, and supplier relationships. Management also expects the deal to slow revenue growth near term. The stock consideration equals about 19% of SBC's outstanding shares, so dilution is a factor for existing holders.
How is the regulatory environment affecting SBC's wireline business?
The D.C. Circuit's March 2004 decision vacated parts of the FCC's unbundling rules. The FCC's December 2004 replacement rules eliminated the obligation to provide UNE-P to new mass-market customers, with a 12-month transition period during which SBC may raise the UNE-P rate by $1. SBC expects the rules to reduce pressure from competitors on its access lines over time. Because it believes the rules do not fully comply with the court's ruling, SBC has petitioned the D.C. Circuit to challenge them, so the outcome remains uncertain.
How is SBC's balance sheet positioned after the 2004 transactions?
Long-term debt rose to $21.2B from $16.1B, and total debt including current maturities reached about $27B. Cash fell to $760M from $4.8B. Management plans to use 2005 free cash flow primarily to repay debt, including $1.3B of maturities and $4.4B of commercial paper. Stockholders' equity rose to $40.5B, and the company remains investment-grade with a $6B 3-year credit facility and no outstanding borrowings under committed lines.
04—Continue