01—Abstract
Summary
Summary of the 10-K/A filed June 29, 1998. Cited figures are marked; the original filing is the authoritative source.
Bell Atlantic's 1997 10-K reflects a transformative year, anchored by the August 14, 1997 merger with NYNEX, accounted for as a pooling of interests, so all prior periods are restated.
Reported 1997 net income was $2,454.9 milliona, or $1.56 diluted EPS (post-split), down from $3,402.0 million in 1996, which included a $273.1 million cumulative accounting benefit. Excluding special items, management cites net income of $3,846.8 million ($2.45 diluted EPS) for 1997, versus $3,474.2 million ($2.23) in 1996. Operating revenues grew 3.6% to $30.19 billion, led by wireless services (up 22.7%) and local services, while operating income declined to $5.34 billion from $6.08 billion, weighed down by roughly $1.56 billion in merger-related costs, retirement incentive charges, and asset write-downs.
Financial position improved in some respects but tightened in others. Long-term debt fell to $13.27 billionb from $15.29 billion, but short-term debt rose sharply to $6.34 billion, largely due to commercial paper, and the debt ratio rose to 60.5% from 58.3%. Operating cash flow was strong at $8.86 billion, covering dividends of about $2.34 billion and capital expenditures of $6.64 billion, though 1998 capex is guided to about $7.0 billion.
Management targets 1998 earnings growth of 10% to 12% excluding merger transition costs, merger savings of $450 million in 1998 rising to $1.1 billionc by 2000, and in-region long distance entry in the second half of 1998, which remains subject to FCC approval and pending court appeals. Investors should weigh the upside of merger synergies and wireless growth against execution risk, including ongoing retirement incentive costs, Telecommunications Act uncertainty, competitive pressures in intraLATA toll and local markets, Asian market exposure in cost investments, and a Year 2000 remediation program estimated at $200 million to $300 million. The June 1998 two-for-one stock split and a dividend of $1.51 per share (split-adjusted) for 1997 are also relevant to per-share comparisons.
02—Key points
Key Highlights
- 1997 diluted EPS of $1.56 (split-adjusted), down from $2.18 in 1996 as reported; excluding special items, EPS was $2.45 versus $2.23 in 1996
- Operating revenues rose 3.6% to $30.19 billion; wireless services grew 22.7% to $3.33 billion, driven by 21.4% domestic cellular customer growth
- Operating income fell 12.1% to $5.34 billion, reflecting about $519 million in merger costs, $1.04 billion in other charges and special items, and $513 million in retirement incentive costs
- Long-term debt reduced to $13.27 billion, but debt maturing within one year rose to $6.34 billion, lifting the debt ratio to 60.5% from 58.3%
- Operating cash flow of $8.86 billion funded $6.64 billion in capital expenditures and $2.34 billion in dividends; 1998 capex guided to about $7.0 billion
- Targeted merger savings of $450 million in 1998, $750 million by 1999, and $1.1 billion by 2000, plus 1998 earnings growth target of 10% to 12%
- Quarterly dividend raised to $0.385 per share (split-adjusted), an annualized $1.54, with 1997 dividends declared of $1.51 per share
03—Questions
Frequently Asked Questions
How did the NYNEX merger affect Bell Atlantic's reported results?
The merger, completed August 14, 1997, was accounted for as a pooling of interests, so prior periods were restated as if the companies had always been combined. Reported 1997 results include about $1.56 billion in pre-tax merger-related costs, special charges, and retirement incentive costs, which depressed reported EPS. Management's adjusted figures exclude these items, showing 1997 diluted EPS of $2.45 versus $2.23 in 1996.
Why did reported net income decline in 1997 despite revenue growth?
1996 net income included a one-time $273.1 million cumulative effect benefit from a directory publishing accounting change. Operating income also fell because of merger costs, a $297 million write-down of obsolete fixed assets, video-related charges, and higher other operating expenses, including about $290 million in costs for opening the network to competitors.
What is the outlook for Bell Atlantic's long distance and wireless businesses?
Management expects to petition the FCC to enter the in-region long distance market in New York in the second half of 1998 and anticipates entry in at least one jurisdiction during that period, though approval is not assured. Wireless revenue growth is expected to continue, supported by customer growth, but was affected by competition and lower average revenue per subscriber.
What are the main risks highlighted in the filing?
Key risks include the outcome of Telecommunications Act appeals and FCC rulemakings on access charges and universal service, competition in local and intraLATA toll markets, possible other-than-temporary impairment of Asian cost investments in Thailand and Indonesia, the timing and profitability of long distance entry, and Year 2000 remediation costs of $200 million to $300 million over 1998 and 1999. The company also has a contingent FLAG sponsor obligation that was released in 1998 after refinancing.
How secure is the dividend and what are the capital allocation priorities?
Dividends were $1.51 per share in 1997 (split-adjusted) and the quarterly rate was raised to $0.385. Operating cash flow of $8.86 billion comfortably covered dividends and capex. Priorities include network investment, wireless and international investments such as PrimeCo, FLAG, and Omnitel, and debt management, with the company expecting presently foreseeable capital needs to be financed primarily from internal cash flow.
04—Continue