T

Business Context and Reporting Period

Company: Southwestern Bell Corporation (SBC) (Note: Announced name change to SBC Communications Inc. in October 1994).

Filing Type: Form 10-Q (Quarterly Report).

Reporting Period: Three and nine months ended September 30, 1994.

Business Overview: SBC operates as a diversified telecommunications provider, including local service, network access, long-distance, directory advertising, and wireless services (Southwestern Bell Mobile Systems). The company is subject to regulatory oversight regarding rates and depreciation.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 7.9% year-over-year (YoY) for the nine-month period, driven by a 36.8% surge in wireless local service revenues and growth in network access lines.
• Profitability: Net income for the nine months ended Sept 30, 1994, was $1,224.0 million, a significant improvement from a net loss of $1,231.1 million in the same period in 1993. The 1993 loss was heavily impacted by a one-time non-cash charge of $2,127.2 million due to changes in accounting principles regarding postretirement benefits.
• Expense Management: Operating expenses rose 5.7% YoY, primarily due to increased cellular service costs and software license fees. However, Selling, General, and Administrative (SG&A) expenses were lower in the third quarter of 1994 compared to 1993, which included a one-time restructuring charge of approximately $35 million.
• Interest Expense: Decreased 8.6% YoY due to lower interest rates on debt refinanced in 1993.
• Long-Distance Decline: Long-distance service revenues decreased 5.9% YoY due to lower demand and rate reductions.

Guidance, Outlook, and Risks

• Strategic Alliances: In October 1994, SBC formed a strategic alliance with Compagnie Generale des Eaux (CGE) and Vodafone Group PLC, investing $626 million for a 10% stake in France's SFR and other minority positions.
• Regulatory Environment: SBC reached an agreement with the Missouri Public Service Commission to resolve rate reduction appeals, committing to annual rate reductions of $69.6 million starting October 1994 and investing $275 million annually in capital expenditures through 1998.
• Accounting Risk (FAS 71): Management continues to apply Statement of Financial Accounting Standards No. 71 (regulatory accounting). However, they warn that if competition or technological changes make it unreasonable to assume rates can recover costs, SBC would be required to eliminate regulatory assets and liabilities, potentially resulting in a material, non-cash extraordinary charge.
• Liquidity: The company maintains $780 million in unused lines of credit to support commercial paper borrowings. Commercial paper outstanding was $1,610.9 million as of September 30, 1994.

Investor Verification Checklist

• Wireless Growth Sustainability: Verify if the 36.8% revenue growth in wireless services is sustainable given the noted decline in average revenue per customer.
• Regulatory Asset Valuation: Assess the risk of a potential write-down of regulatory assets if FAS 71 applicability is challenged due to increased competition.
• Debt Refinancing Impact: Confirm the long-term interest rate environment and the impact of the 1993 refinancing on future cash flows.
• International Exposure: Review the performance of the Telmex investment (equity in net income of affiliates) and the new French cellular alliance, noting the impact of foreign currency fluctuations (Mexican peso).
• Capital Expenditures: Monitor the $1,674 million in capital expenditures for the nine-month period to ensure alignment with the Missouri agreement commitments and network modernization needs.