10-QPeriod: Q3 FY2002

AT&T INC. Quarterly Report for Q3 Ended Sep 30, 2002

Filed November 13, 2002For Securities:TT-PCTBBT-PA

Summary

SBC Communications Inc. (SBC) reported a decrease in operating revenues for both the third quarter and the first nine months of 2002 compared to the previous year, driven by increased competition, particularly from Unbundled Network Element-Platform (UNE-P) offerings, and a challenging economic environment. Despite revenue declines, operating expenses saw a slight decrease due to workforce reductions and the adoption of new accounting standards (FAS 142). This led to a significant drop in operating income and net income year-over-year. Key financial events during the period include the adoption of FAS 142, resulting in a substantial goodwill impairment charge related to Sterling Commerce Inc. and Cingular Wireless. The company also made progress on strategic divestitures, notably the pending sale of its interest in Cegetel S.A. and the expected completion of the sale of its remaining interest in Bell Canada. SBC continues to manage its capital structure, with plans to use proceeds from asset sales to reduce debt and a focus on reducing capital expenditures for 2003.

Key Highlights

  • 1Total operating revenues decreased by 6.9% to $10.6 billion for the third quarter and by 6.1% to $31.9 billion for the first nine months of 2002 compared to the prior year.
  • 2Net income decreased significantly by 14.6% to $1.8 billion for the third quarter and by 41.4% to $3.5 billion for the first nine months of 2002, impacted by lower operating income and a cumulative effect of accounting change.
  • 3The company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), leading to a goodwill impairment charge of $1.79 billion for Sterling Commerce Inc. and $19 million for Cingular Wireless.
  • 4Divestiture activities included entering into an agreement to sell its 15% interest in Cegetel S.A. for approximately $2.27 billion and completing the sale of a portion of its Bell Canada interest, with the remaining interest expected to close in Q4 2002.
  • 5Network access lines in service decreased to 57.6 million as of September 30, 2002, down from 60.2 million at the same time in 2001, reflecting competitive pressures and regulatory challenges like UNE-P.
  • 6Capital expenditures are being reduced, with expected spending of less than $8 billion for 2002 and a target of approximately $5 billion for 2003.
  • 7The company expects to recognize a substantial direct charge to equity during Q4 2002 if certain pension plans' Accumulated Benefit Obligation (ABO) exceeds plan assets due to market conditions.

Frequently Asked Questions

SBC's revenues declined primarily due to increased competition, particularly from Unbundled Network Element-Platform (UNE-P) offerings, which require SBC to lease network elements to competitors at below-cost rates. Additionally, a weak U.S. economy and technology substitution contributed to the revenue decrease.

The adoption of FAS 142, which eliminated the amortization of goodwill, resulted in SBC ceasing to amortize goodwill. The company recorded a significant goodwill impairment charge of $1.79 billion for Sterling Commerce Inc. and $19 million for Cingular Wireless during the period, impacting net income and balance sheet values related to goodwill.

SBC is actively managing its debt by planning to use proceeds from anticipated asset sales (Cegetel and Bell Canada) to pay down debt. The company is also reducing capital expenditures significantly for 2003, indicating a focus on financial discipline and strengthening its balance sheet in response to economic and regulatory pressures.

The wireline segment faces significant challenges from below-cost UNE-P regulations, which drive customer losses and reduce revenues. Competition, including from DSL and wireless services, along with the weak U.S. economy, further pressures revenue and operating margins in this segment.